Document:

Exhibit 10.50

 

NOTE:  THIS DOCUMENT IS THE SUBJECT OF A
CONFIDENTIAL TREATMENT REQUEST PURSUANT TO RULE 24b-2 UNDER THE SECURITIES
EXCHANGE ACT OF 1934.  PORTIONS OF THIS
DOCUMENT FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED HAVE BEEN REDACTED
AND ARE MARKED HEREIN BY “***”.  SUCH
REDACTED INFORMATION HAS BEEN FILED SEPARATELY WITH THE COMMISSION PURSUANT TO
THE CONFIDENTIAL TREATMENT REQUEST.

 

 

SECOND AMENDED AND RESTATED

 

PROJECT AND

APPROVED SUPPLIER AGREEMENT

 

As of

 

April 28, 2002

 

among

 

NEW WORLD RESTAURANT GROUP, INC.,

 

EINSTEIN AND NOAH CORP.,

 

MANHATTAN BAGEL COMPANY, INC.,

 

HARLAN BAGEL SUPPLY COMPANY, LLC,

 

HARLAN BAKERIES, INC.,

 

HAL P. HARLAN

 

HUGH P. HARLAN

 

and

 

DOUG H. HARLAN

 

 

SECOND AMENDED AND RESTATED

PROJECT AND

APPROVED SUPPLIER AGREEMENT

 

This amended
and restated project and approved supplier agreement (the “Agreement”) is made
and entered into as of this 28th day of April, 2002 by and among New World
Restaurant Group, Inc., a Delaware corporation (“NWRG”), Einstein and Noah Corp.,
a Delaware corporation (“ENC”), Manhattan Bagel Company, Inc., a New Jersey
corporation (“MBC”), Harlan Bagel Supply Company, LLC, an Indiana limited
liability company (the “Supplier”), Harlan Bakeries, Inc., an Indiana
corporation (“Harlan”), Hal P. Harlan, Hugh P. Harlan and Doug H. Harlan.  The Supplier and Harlan are herein sometimes
collectively referred to as the “Harlan Companies”, and Hal P. Harlan, Hugh P.
Harlan and Doug H. Harlan are herein sometimes collectively referred to as the “Harlans.”

 

Recitals

 

A.            On May 1, 1998, the
Harlan Companies and the Harlans entered into a certain Amended and Restated
Project and Approved Supplier Agreement (the “Prior Project Agreement”) with
Einstein/Noah Bagel Corp. (“ENBC”).  ENBC
subsequently filed for bankruptcy under Chapter 11 of the United States
Bankruptcy Code and ENC (a wholly-owned subsidiary of NWRG) acquired the assets
of ENBC, including its rights and obligations under the Prior Project Agreement
and ancillary documents.  Accordingly,
prior to the date hereof, ENC, the Harlan Companies and the Harlans have
performed in accordance with the terms of the Prior Project Agreement.

 

B.            NWRG, directly and
through its wholly-owned subsidiaries and affiliates, owns and operates retail
bagel stores and “quick casual” restaurants.  In addition, NWRG, directly and through its
wholly owned subsidiaries and affiliates, has granted or intends to grant
franchise and licensing rights to franchisees and licensees that own and
operate (or, shall own and operate) retail bagel stores or “quick casual”
restaurants using NWRG’s and its subsidiaries’ and affiliates’ respective
proprietary operating systems and products, including but not limited to
proprietary bagel recipes, formulations and manufacturing processes.  The parties desire to amend and restate the
Prior Project Agreement in its entirety, all as hereinafter set forth.

 

Covenants

 

In
consideration of the premises and the mutual covenants and agreements herein
contained, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:

 

Article 1.0            Definitions

 

1.1          As
used herein the following terms shall have the meanings given them below: “Accounting
Period” shall mean one of twelve (12) periods of four or five consecutive weeks
in each fiscal year of the Supplier during the Term that is designated by the
Supplier as an accounting period.

 

 

“Authorized
Recipients” shall have the meaning ascribed to it ‘in Section 6.11.

 

“Bagel Lines”
shall mean the Original Bagel Line and the Second Bagel Line.

 

“Case” shall mean one hundred twenty bagels.

 

“Category A
Products” shall mean all Products produced by Supplier that are intended for
resale under any brand name now or hereafter owned by New World, including
Products co-branded, and produced using Formulations, Specifications,
Procedures, technology (patented or otherwise) or other trade secrets developed
or owned by New World.

 

“Category B
Products” shall mean all Products produced by Supplier on the Bagel Lines that
are not Category A Products.

 

“Encumbrances”
shall mean liens, mortgages, pledges, charges, encumbrances, assessments,
restrictions, covenants, easements or title defects of any nature whatsoever.

 

“Equipment
Financing Documents” shall mean the Equipment Lease, together with all other
agreements, instruments and documents executed in connection with the Equipment
Lease, true copies of which are annexed hereto as Exhibit A.

 

“Equipment
Lease” shall mean that certain amended and restated lease agreement between the
Supplier and ENC (as successor in interest to ENBC) dated May 1, 1998, as
amended on the date hereof (including any equipment schedule thereto).

 

“Financing
Documents” shall mean the Equipment Financing Documents and the Working Capital
Financing Documents.

 

“Formulations”
shall have the meaning ascribed to it in Section 6.5.

 

“Lease” shall
mean that certain Lease Agreement dated August 27, 1996 between Harlan and the
Supplier.

 

“Leasehold
Premises” shall have the meaning ascribed to it in Section 3.6.

 

“Manhattan
Bagels” shall mean Category A Products produced by Supplier in accordance with
New World’s specifications therefor and which are to be sold to the public by
and through a New World Subsidiary under the trademarks and proprietary rights
owned, franchised and/or licensed by MBC.

 

“Materials
Cost” shall mean the Supplier’s cost of ingredients and packaging used in
manufacturing the Products during each Quarterly Period, determined in the
manner set forth in Exhibit B hereto. For this purpose, ingredients shall
include corn meal used in manufacturing the Products.

 

2

 

“Mortgage”
shall mean the existing mortgage loan on the land and buildings owned by
Harlan, consisting of the Production Facility and the facility adjacent
thereto, made by the Mortgage Holders.

 

“Mortgage
Holders” shall mean Bank of America, N.A., LaSalle Bank National Association
and KeyBank National Association.

 

“New World”
shall mean, collectively, NWRG and all New World Subsidiaries, regardless of whether
now existing or hereafter acquired or created.

 

“New World
Allocated Charges” shall mean those costs of New World charged to the Supplier
as described in Section 7.7.

 

“New World
Franchisee” shall mean a franchisee or licensee of NWRG or of a New World
Subsidiary.

 

“New World
Subsidiary” shall mean a subsidiary of NWRG, including, specifically, without
limitation, ENC and MBC.

 

“Occupancy
Cost” shall mean building rental expense, real estate taxes, utilities,
maintenance and repair and property casualty insurance.

 

“Option
Agreement” shall mean that certain amended and restated option agreement dated
May 1, 1998 among ENC (as successor in interest to ENBC), the Supplier and the
Harlans.

 

“Original Bagel
Line” shall mean the first Winkler bagel line owned by ENC (as successor in
interest to ENBC) and leased to and operated by the Supplier, together with the
other components of the bagel production line installed in the Production
Facility, including without limitation mixers, bagel cooking unit, proofer,
retarder, blast freezer, and packaging equipment and improvements and additions
thereto.

 

“Par Baked
Bagels” shall mean bagels which are to be partially baked by Supplier before
freezing, as specified and directed by NWRG, ENC or MBC.

 

“Procedures”
shall have the meaning ascribed to it in Section 6.5.

 

“Production
Facility” shall mean the 75,000 square foot production facility in Avon,
Indiana as described in the Lease.

 

“Products” shall mean frozen bagel dough products.

 

“Proprietary
Information” shall have the meaning ascribed to it in Article 12.0.

 

“Quarterly
Period” shall mean the first three Accounting Periods of the Supplier during
each fiscal year of the Supplier during the Term and each subsequent period of
three Accounting Periods thereafter during said fiscal year.

 

3

 

“Second Bagel
Line” shall mean the second Winkler bagel line owned by ENC (as successor in
interest to ENBC) and leased to and operated by the Supplier, together with the
other components of such bagel production line installed in the Production
Facility, including without limitation, mixers, bagel cooking unit, additional
components for the proofer and retarder constituting a portion of the Original
Bagel Line, modifications to the blast freezer constituting a portion of the
Original Bagel Line and packaging equipment and improvements and additions
thereto.

 

“Specifications”
shall have the meaning ascribed to it in Section 6.5.

 

“Term” shall
mean the period commencing on the date hereof and continuing until the date
this Agreement expires or is terminated pursuant to Article 13.0 hereof.

 

“Title Policy”
shall mean that certain Leasehold Loan Policy dated August 30, 1996 issued by
Chicago Title Insurance Company (Policy No. 15-0140-109-0000001).

 

“Working
Capital Financing” shall mean the loan by the Working Capital Lenders to the Supplier.

 

“Working
Capital Financing Documents” shall mean the revolving credit agreement between
the Working Capital Lenders and the Supplier, as the same may have been
amended, together with all other agreements, instruments and documents executed
in connection with such agreement.

 

“Working
Capital Lenders” shall mean Bank of America, N.A., LaSalle Bank National Association
and KeyBank National Association.

 

Article 2.0            Closing
of the Agreement

 

2.1          On
the date hereof, Supplier and ENC shall enter into an amendment to the
Equipment Lease to extend its term and to change the references therein to the
Prior Project Agreement to this Agreement. The amended Equipment Lease is
attached hereto as Exhibit D.

 

2.2          The
parties acknowledge and agree that the recitals to this Agreement are true,
accurate, and constitute a portion of their understanding and agreements as set
forth herein.

 

Article 3.0            Representations
and Warranties of the Harlan Companies

 

In order to
induce NWRG, ENC and MBC to enter into this Agreement and to perform their
obligations hereunder, the Harlan Companies jointly and severally represent and
warrant to NWRG, ENC and MBC that:

 

3.1          Each
of the Harlan Companies is duly organized and validly existing under the laws
of the jurisdiction of its incorporation or formation, with full corporate or
limited liability company power and authority to enter into this Agreement and
to carry out the transactions and agreements contemplated hereby. The
execution, delivery and performance of this Agreement

 

4

 

and the consummation of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action of each of the Harlan Companies.

 

3.2          This
Agreement has been duly executed and delivered by each of the Harlan Companies
and is a valid and binding obligation of each of them, enforceable in accordance
with its terms. Neither the execution and delivery of this Agreement by the
Harlan Companies nor the consummation of the transactions contemplated hereby
will: (a) conflict with or violate any provision of its organizational
documents, or of any law, ordinance or regulation or any decree or order of any
court or administrative or other governmental body which is either applicable
to, binding upon or enforceable against either of the Harlan Companies or (b)
result in a breach of, constitute a default under, result in the acceleration
of, create in any party the right to accelerate, terminate, modify or cancel,
or require any notice under, any mortgage, contract, agreement, indenture,
will, trust or other instrument which is either binding upon or enforceable
against either of the Harlan Companies or the assets and properties of either
of them, except pursuant to the Working Capital Financing Documents and the
Mortgage. No permit, consent, approval or authorization of, or declaration to
or filing with, any regulatory or other governmental authority is required in
connection with the execution and delivery of this Agreement by the Harlan
Companies and the consummation by them of the transactions contemplated hereby.

 

3.3

 

(a)           Schedule
3.3(a) attached hereto accurately and completely sets forth, with respect to
each of the Harlan Companies: (i) the number of shares of each class of its
capital stock or other units of equity interest which are issued and
outstanding and (ii) the name and address of, and the number of shares of each
class of capital stock or other units of equity interest owned by, each of its
shareholders or other equity owners.

 

(b)           All
voting rights in each of the Harlan Companies are vested exclusively in its
shares of capital stock, in the case of Harlan, and in units of equity
interest, in the case of the Supplier, and other than shareholder agreements or
operating agreements which have been provided to NWRG (the “Shareholder
Agreements”), there are no voting trusts, proxies or other agreements or
understandings with respect to the voting of the capital stock or other units
of equity interest of either of the Harlan Companies. A true copy of the
Shareholder Agreements is attached hereto as Schedule 3.3(b). Except pursuant
to the Shareholder Agreements and the right of first refusal granted to ENC (as
successor in interest to ENBC) pursuant to that certain Right of First Refusal
Agreement dated as of August 27, 1996 among ENC (as successor in interest to
ENBC) and the Harlans, there are no outstanding warrants, options or rights of
any kind to acquire from either of the Harlan Companies, or from the
shareholders or other equity owners of either of the Harlan Companies, any
shares of capital stock or other units of equity interest of either of the
Harlan Companies, and neither of the Harlan Companies has any obligation to
acquire any of its issued and outstanding shares of capital stock or other
units of equity interest from any holder thereof.

 

3.4          Attached
to this Agreement as Schedule 3.4 are the following financial statements of the
Harlan Companies:

 

5

 

3.4.1       audited balance sheets of (a) Harlan at
December 31, 2000 and December 31, 2001; and (b) the Supplier at December
31, 2000, and December 31, 2001; and

 

3.4.2       the related statements of operations and
cash flow of (a) Harlan for the years ended December 31, 2000 and December
31, 2001; and (b) the Supplier for the years ended December 31, 2000 and
December 31, 2001, in each case, with the audit report of Ernst & Young,
LLP thereon.

 

Such financial statements
present fairly in all material respects the financial position of each of the
Harlan Companies covered thereby at said balance sheet dates and the results of
operations and cash flows of each of the Harlan Companies for each of the said
periods covered, and they have been prepared in conformity with generally
accepted accounting principles applied on a consistent basis. The balance sheet
of Harlan at December 31, 2001, is herein sometimes referred to as the “Harlan
Balance Sheet,” and the balance sheet of the Supplier at December 31, 2001 is
herein sometimes referred to as the “Supplier Balance Sheet.”

 

3.5          Neither
of the Harlan Companies has any liabilities or obligations, accrued, absolute,
contingent or otherwise, except: (a) to the extent reflected or taken into
account in determining net worth in the Harlan Balance Sheet or the Supplier Balance
Sheet and not heretofore paid or discharged; (b) contractual obligations
of the Harlan Companies incurred in the ordinary course of business; (c)
liabilities of the Harlan Companies incurred in the ordinary course of business
since the date of the Harlan Balance Sheet and the Supplier Balance Sheet; and
(d) obligations of the Harlan Companies under this Agreement and the other
documents now or hereafter executed in connection therewith.

 

3.6          The
premises covered by the Lease (the “Leasehold Premises”): (a) have direct
access to public roads or access to public roads by means of a perpetual access
easement, such access being sufficient to satisfy the reasonably anticipated
transportation requirements of the Supplier’s business to be conducted at the
Leasehold Premises; and (b) are served by all utilities, including but not
limited to water, electricity, natural gas, sewer and telephone, in such
quantity and quality as are sufficient to satisfy the reasonably anticipated
production levels and business activities of the Supplier’s business to be
conducted at the Leasehold Premises. Neither of the Harlan Companies has
received notice of: (a) any condemnation proceeding with respect to any portion
of the Leasehold Premises, and, to the best of their knowledge, no such
proceeding is contemplated by any governmental authority; or (b) any special
assessment which may affect the Leasehold Premises and to the best of their
knowledge, no such special assessment is contemplated by any governmental
authority. All of the buildings or structures leased by the Harlan Companies
are in good repair and operating condition, subject to normal wear and tear,
and are adequate and suitable for their present use and purposes.

 

3.7          The
Supplier has good and marketable title to all of its assets and properties,
free and clear of all Encumbrances, except as set forth in the Financing
Documents or the Title Policy or on Schedule 3.7 attached hereto.

 

3.8          Each
of the Harlan Companies possesses all licenses and other required governmental
or official approvals, permits or authorizations, the failure to possess which
would,

 

6

 

individually or in the
aggregate, have a material adverse effect on its business, assets, financial
condition or results of operations. All such licenses, approvals, permits and
authorizations are in full force and effect, each of the Harlan Companies is in
material compliance with its requirements, and no proceeding is pending or to
the best of the knowledge of the Harlan Companies, threatened to revoke or
amend any of them. Schedule 3.8 attached hereto contains an accurate and
complete list of all such licenses, approvals, permits and authorizations. None
of such licenses, approvals, permits and authorizations are or will be impaired
or in any way affected by the execution and delivery of this Agreement or the
Equipment Lease or the consummation of the transactions contemplated hereby.

 

3.9          [Intentionally
omitted.]

 

3.10        Except
as set forth on Schedule 3.10 attached hereto, there are no actions, suits,
claims, governmental investigations or arbitration proceedings (“Actions”) pending
or, to the best of the knowledge of the Harlan Companies, threatened against or
affecting either of the Harlan Companies or any of their respective assets or
properties and, to the best of the knowledge of the Harlan Companies, there is no
basis for any of the foregoing. There are no outstanding orders, decrees or
stipulations issued by any federal, state, local or foreign judicial or administrative
authority in any proceeding to which either of the Harlan Companies is or was a
party.

 

3.11        Each
of the Harlan Companies is in material compliance with all laws, regulations
and orders applicable to it, its assets, properties and business. Except as set
forth on Schedule 3.11 attached hereto, neither of the Harlan Companies has
received notification of any asserted past or present failure to comply with
any laws, and to the best of their knowledge, no proceeding with respect to any
such violation is contemplated.

 

3.12

 

3.12.1     Except as set forth on Schedule 3.12 attached
hereto, neither of the Harlan Companies has transported, stored, treated or
disposed, nor has either of them allowed or arranged for any third parties to
transport, store, treat or dispose of Hazardous Substances or other waste to or
at any location other than a site lawfully permitted to receive such Hazardous
Substances or other waste for such purposes, nor has either of them performed,
arranged for or allowed by any method or procedure such transportation,
storage, treatment or disposal in contravention of any laws or regulations.
Neither of the Harlan Companies has disposed, or allowed or arranged for any
third parties to dispose, of Hazardous Substances or other waste upon the
Leasehold Premises, except as permitted by law. For purposes of this Section
3.12, the term “Hazardous Substances” shall have the meaning given it in the
Comprehensive Environmental Response, Compensation and Liability Act (42 U.S.C.
Sections 9601, et seq.), as amended, and the regulations promulgated pursuant
thereto (“CERCLA”), or any similar state law.

 

3.12.2     Except as set forth on Schedule 3.12 attached
hereto, since the acquisition of the Leasehold Premises, Harlan has not
permitted to occur, nor is there presently occurring, a Release of any
Hazardous Substance on, into or beneath the surface of the Leasehold Premises,

 

7

 

except that the parties acknowledge that Harlan discharges wastewater
into the sewage treatment plant of the West Central Conservancy District. For
purposes of this Section 3.12.2, the term “Release” shall mean releasing,
spilling, leaking, pumping, pouring, emitting, emptying, discharging,
injecting, escaping, leaching, disposing or dumping.

 

3.12.3     Neither of the Harlan Companies has
transported or disposed, nor has it allowed or arranged for any third parties
to transport or dispose, any Hazardous Substance or other waste to or at a site
which, pursuant to CERCLA or any similar state law: (a) has been placed on the
National Priorities List or its state equivalent, or (b) the Environmental
Protection Agency or the relevant state agency has proposed or is proposing to
place on the National Priorities List or its state equivalent. Neither of the
Harlan Companies has received notice, or has any knowledge of any facts which
could give rise to any notice, that either of the Harlan Companies is a
potentially responsible party for a federal or state environmental cleanup site
or for corrective action under CERCLA or any other applicable law or
regulation. Neither of the Harlan Companies has submitted nor was either of
them required to submit any notice pursuant to Section 103(c) of CERCLA with
respect to the real estate that is covered by the Lease. Neither of the Harlan
Companies has received any written or oral request for information in connection
with any federal or state environmental cleanup site. Neither of the Harlan
Companies has undertaken (or been requested to undertake) any response or
remedial actions or clean-up action of any kind at the request of any federal,
state or local governmental entity, or at the request of any other person or
entity.

 

3.12.4     Neither of the Harlan Companies uses, or has
used, any Underground Storage Tanks, and, except as set forth in Schedule 3.12
attached hereto, the Harlan Companies are not aware of any Underground Storage
Tanks previously or currently on or under the Leasehold Premises. For purposes
of this Section 3.12.4, the term “Underground Storage Tanks” shall have the
meaning given it in the Resource Conservation and Recovery Act (42 U.S.C. Sections
6901 et seq.).

 

Article 4.0            Representations
and Warranties of NWRG

 

In order to induce the Harlan Companies to enter into this Agreement
and to perform their obligations hereunder, NWRG, ENC and MBC jointly and
severally represent and warrant to the Harlan
Companies that:

 

4.1          They
are each duly organized and legally existing under the laws of their
incorporation, with full corporate power and authority to enter into this
Agreement and to carry out the transactions and agreements contemplated hereby.
The execution, delivery and performance of this Agreement and the consummation
of the transactions contemplated hereby have been duly authorized by all
necessary corporate action.

 

4.2          This
Agreement has been duly executed and delivered by NWRG, ENC and MBC and is a
valid and binding obligation of each corporation, enforceable in accordance
with its terms. Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will: (a) conflict with or
violate any provision of the certificate of incorporation of bylaws of NWRG,
ENC or MBC or of any decree or order of any court or

 

8

 

administrative or other
governmental body which is either applicable to, binding upon or enforceable
against NWRG, ENC or MBC; or (b) result in a breach of, constitute a default
under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify or cancel, or require any notice under, any
mortgage, contract, agreement, indenture or other instrument which is either
binding upon or enforceable against NWRG, ENC or MBC, except for any conflicts,
breaches, terminations or defaults that would not, individually or in the
aggregate have a material adverse affect on the financial condition, business
or assets of NWRG, ENC or MBC. No permit, consent, approval or authorization
of, or declaration to or filing with, any regulatory or other government
authority is required in connection with the execution and delivery of this
Agreement by NWRG, ENC or MBC and the consummation of the transactions
contemplated hereby.

 

4.3          Except as disclosed in NWRG’s annual report on Form 10-K for the year
ending January 1, 2002, in NWRG’s quarterly report on Form 10-Q for the quarter
ended April 2, 2002 or on Schedule 4.3 attached hereto, there are no Actions
pending or, to the best of the knowledge of NWRG, ENC or MBC, threatened
against or affecting New World or any of its assets or properties which if
adversely determined could, individually or in the aggregate have a material
adverse effect on New World’s financial condition, business or assets or NWRG’s,
ENC’s or MBC’s obligations hereunder. There are no outstanding orders, decrees
or stipulations issued by any federal, state, local or foreign judicial or
administrative authority in any proceeding to which New World is or was a party
which could, individually or in the aggregate, have a material adverse effect
on New World’s financial condition, assets or business or NWRG’s, ENC’s or MBC’s
obligations under this Agreement.

 

4.4          NWRG,
ENC and MBC are in material compliance with all laws, regulations and orders
applicable to their performance under this Agreement, and they have received no
notification of any asserted past or present failure to comply with any such
laws, and to the best of their knowledge, no proceeding with respect to any
such violation is contemplated.

 

4.5          NWRG
has delivered to the Harlan Companies true and complete copies of the following
financial statements, all of which are complete and correct, have been prepared
from the books and records of NWRG in accordance with generally accepted
accounting principles, consistently applied, which statements fairly present
the financial condition of NWRG as at their respective dates and the results of
its operations for the periods covered thereby:

 

(a)           The
audited balance sheets and statements of income, cash flow and shareholders’
equity contained within NWRG’s Form 10-K for the fiscal year ended January 1,
2002; and

 

(b)           The
unaudited balance sheets and statements of income, cash flow and shareholders’
equity contained within NWRG’s Form 10-Q for the fiscal quarter ended April 2,
2002.

 

9

 

Article 5.0            Certain
Covenants of the Harlan Companies

 

5.1          The
Harlan Companies agree that the use of the Bagel Lines for production of any
products for persons other than Authorized Recipients shall be subject to ENC’s
prior written approval, which shall not be unreasonably withheld. The parties
agree that ENC’s approval will be deemed to be unreasonably withheld if all of
the following conditions are met: (i) NWRG or ENC has consented to the waiver
of its rights under Section 6.2 hereof (which NWRG and ENC may grant or
withhold in their sole discretion), (ii) it is demonstrated to NWRG’s
satisfaction that Proprietary Information or other intellectual property
(including patent rights) of New World will not be subject to a risk of
unauthorized use or disclosure by reason of such use of the Bagel Lines, and
(iii) it is demonstrated to NWRG’s satisfaction (on behalf of ENC and other New
World Subsidiaries) that such use of the Bagel Lines will not interfere with or
otherwise adversely effect the use of the Bagel Lines to timely produce and
deliver Category A Products under this Agreement, it being understood that ENC
may condition its consent to any such production on the terminability of such
production, upon not less than six (6) months prior written notice, by ENC, if
ENC determines that such termination is required to accommodate the needs of
NWRG, New World Subsidiaries, New World Franchisees, and/or Authorized Recipients
for Category A Products.

 

5.2          The
parties agree to use reasonable efforts to notify each other of opportunities
for frozen bagel dough production business available within the geographic
markets they are able to service from their existing production capacity (e.g.,
New World will notify Supplier of-available business east of the eastern
boundaries of Montana, Wyoming, Colorado and New Mexico, and Supplier will
notify New World of available business west of such boundaries).

 

5.3

 

5.3.1       On the terms and subject to the conditions
set forth herein, in the event that Category A Products shipped by Supplier are
less than the Contract Minimums (as hereinafter defined) described below during
the periods provided below, then, NWRG (or such New World Subsidiaries, New
World Franchisees or Authorized Recipients as NWRG shall select) shall make a
payment (“Make-Whole Payment”) as hereinafter provided. For these purposes, the
“Contract Minimums” are those contract minimums described in the table set
forth in Section 5.3.5 below, which shall be more particularly determined in
accordance with Section 5.3.5 below.

 

(a)           Category
A Products equal to 24.5% of the relevant Contract Minimum during the first
Quarterly Period of each year during the term of this Agreement;

 

(b)           Category
A Products equal to 25.5% of the relevant Contract Minimum during the second
Quarterly Period of each year during the term of this Agreement (such amount to
be prorated for the Quarterly Period in calendar year 2002, based on the
effectiveness of this provision as of April 28, 2002);

 

(c)           Category
A Products equal to 25.5% of the relevant Contract Minimum during the third
Quarterly Period of each year thereafter; and

 

10

 

(d)           Category
A Products equal to 24.5% of the relevant Contract Minimum for the fourth
Quarterly Period of each year thereafter.

 

5.3.2       Notwithstanding the terms of Section 5.3.1,
if the minimum volume requirements in Section 5.3.1 are not satisfied for any
Quarterly Period (the “Measuring Quarter”), no Make-Whole Payment will be
payable by NWRG if the aggregate production of Category A Products and Category
B Products for such Measuring Quarter exceeds 10,176,000 dozen bagels in the
aggregate.

 

5.3.3       In the event the minimum volume requirements
provided for in Section 5.3.1 are not satisfied for any Measuring Quarter,
then the Make-Whole Payment shall be equal to the excess of the minimum amounts
for the Measuring Quarter over the amounts actually shipped during the
Measuring Quarter, multiplied by ***¢ per bagel. Such Make-Whole Payment shall
be made within the Quarterly Period following the Measuring Quarter.

 

5.3.4       In the event production of Category A
Products for any Measuring Quarter exceeds 7,140,000 dozen bagels, then
Supplier shall pay to NWRG (or its designee), within the Quarterly Period
following the Measuring Quarter, an amount equal to the excess of the
production of Category A Products shipped for the Measuring Quarter over the
minimum amounts for the Measuring Quarter, multiplied by ***¢ per bagel.

 

5.3.5       The parties acknowledge that after Contract
Year 1, NWRG will select the amount of bagels it (and other Authorized
Recipients) will purchase in a given Contract Year (the “Contract Minimum”),
which selection will determine the precise amount of bagels to be purchased by
Authorized Recipients for purposes of Section 5.3.1 and the amount of the
licensing fees to which NWRG (or its designees) will be entitled pursuant to
Section 7.5.1 below. The parties agree that for Contract Year 1, the Contract
Minimum shall equal 1,512,153 Cases of Category A Products (pro rated
calculation based on an assumed annual Contract Minimum of 2,235,258 Cases).
For these purposes, Contract Year 1 shall commence on April 28, 2002 and shall
end at the end of the fourth Quarterly Period in the year 2002 (“Contract Year
1”). Subsequent Contract Years will commence on the first day of the first
Quarterly Period of such subsequent years and end at the end of the fourth
Quarterly Period of such subsequent years. The relevant Contract Minimums for
Contract Years after Contract Year 1 will be determined by NWRG by December 15
of each calendar year by providing written notice to Supplier of the selected
level of Contract Minimums for the following year, which must be one of the
five Contract Minimum options set forth in the table below.

 

Contract
Minimum Level Options (in Cases) to be selected by NWRG:

 

	
  2,543,962

  
	
  2,798,358

  
	
  3,052,754

  
	
  3,391,949

  
	
  4,070,339

  

 

11

 

In addition,
the parties have agreed that Supplier will produce cookies and muffins for sale
to Authorized Recipients, which production, Supplier agrees, will result in a
credit against the Contract Minimums. In addition, NWRG, ENC and MBC will give
Supplier the opportunity to bid on coffee production, which if awarded Supplier
agrees will result in a credit against the Contract Minimums. For purposes of
meeting the Contract Minimum requirements, every two (2) cookies and/or muffins
shipped by Supplier will equate to one Category A Product, and every pound of
coffee shipped by Supplier will equate to two and one half (2 1⁄2) Category A Products
shipped by Supplier. The credit against the Contract Minimums for cookies,
muffins and coffee is based on NWRG’s, ENC’s and MBC’s current understanding of
the cookie and muffin formulation and processing and coffee roasting and
grinding process and further on the expectation that Supplier will supply cookies
at $*** per case (100 cookies per case) and muffins at $*** per case (96
muffins per case). If the actual formulas for cookies and muffins are
materially different than Supplier’s assumptions as to the current formulas,
then a change in the cost per case of cookies and muffins will be appropriate.
To the extent not otherwise specifically addressed in this Section of this
Agreement, the provisions of Sections 6.3 through 6.11 shall apply to the supply
of cookies and muffins by Supplier to Authorized Recipients, except that
Section 6.4 shall not apply. The parties acknowledge that if/when Supplier
commences supplying coffee to Authorized Recipients, the pricing will be
memorialized in an amendment to this Agreement.

 

Further, if
Supplier has commenced producing all of New World’s requirements for Manhattan
Bagels by August 26, 2002, Supplier agrees that NWRG will receive a credit
against its Contract Minimums pursuant to Section 5.3.1 hereof, in an amount
equal to 50% of the production of Manhattan Bagels for up to 90 days,
commencing retroactively as of April 28, 2002, which equates to a reduction in
Contract Minimums of up to 84,750 Cases.

 

5.4

 

5.4.1       Authorized Recipients shall have the right
to purchase Category B Products from Supplier for resale to purchasers of
Category B Products for a price per bagel equivalent to that otherwise charged
under this Agreement (but with a Toll Charge of ***¢ per bagel adjusted in the
manner provided in Section 7.3). Products purchased by Authorized Recipients
pursuant to this Section 5.4 shall be purchased pursuant to this Agreement and
otherwise subject to its terms as they relate to Products or Category A
Products generally, but shall constitute Category B Products.

 

5.4.2       Notwithstanding anything contained herein to
the contrary, in allocating available production on the Bagel Lines, the
parties acknowledge that, subject to the terms of Section 5.1, production of
Category A Products shall take priority, meaning that production of Category B
Products shall in no matter hinder, delay or otherwise detrimentally affect
production or timeliness of production or delivery of Category A Products.
Notwithstanding the terms of Section 5.4.1, production by the Harlan Companies
of Category B Products shall take priority over production for Authorized
Recipients of Category B Products pursuant to Section 5.4.1.

 

5.5          Commencing
on the date hereof, and continuing until the later of any exercise of the
option by ENC pursuant to the Option Agreement or the termination or expiration
of this

 

12

 

Agreement, the Harlan Companies
agree to deliver to ENC at the addresses set forth herein, upon request, all
financial statements required to be provided to the Mortgage Holders and
Working Capital Lenders under their respective credit agreements with said
Mortgage Holders and Working Capital Lenders as in effect on the date hereof
(whether or not such credit agreements hereafter remain in effect or are
amended or modified), together with any copies of any amendments or
modifications to such credit agreements promptly upon their becoming effective.

 

Article 6.0            Designation
of the Supplier as an Approved Supplier; Purchase and Sale of the Products

 

6.1          NWRG,
ENC and MBC hereby designate the Supplier as an approved supplier of Products,
cookies and muffins, but only to Authorized Recipients. On the terms and
subject to the conditions set forth herein, and during the Term hereof, the
Supplier agrees to sell to Authorized Recipients those Products, cookies and
muffins, produced by the Supplier at the Production Facility, in such quantity
as they may order from time to time. NWRG, ENC and MBC shall have the right, at
any time to direct the Harlan Companies in writing not to sell Products,
cookies and/or muffins to any Authorized Recipient. The Harlan Companies agree
not to sell Products to any person other than Authorized Recipients as
then-currently approved.

 

6.2          The
Harlan Companies and the Harlans jointly and severally agree that during the
Term, and for a period of one year thereafter, none of the Harlan Companies or
any of the Harlans or any Affiliate of the Harlan Companies or any direct or
indirect designee of the Harlans shall, without the prior written consent of
ENC, produce any bagels or bagel dough on the Bagel Lines for sale or
distribution to any Specialty Retailer (as hereinafter defined). For this
purpose, a “Specialty Retailer” shall mean (A) any food service establishment
that prepares, serves or sells, and derives more than 30% of its revenues from,
bagels and/or bagel-related products (including but not limited to cream cheese
and other spreads, bagel sandwiches and bagel chips), other than delicatessens
located in supermarkets, convenience stores or grocery stores that do not use a
brand name of a Specialty Retailer, or (B) any food service establishment, at
least 30% of the revenue of which is derived from coffee and related products
(e.g., whole bean coffee and specialty coffee drinks). For purposes of this
Section 6.2, an “Affiliate” shall mean any person or entity that controls or is
controlled by, or is under common control with, such person, and the term “control”
(including the terms “controlling,” “controlled by” and “under common control
with”) shall mean the possession, direct or indirect, of the power to direct or
cause the direction of the management and policies of a person, whether through
the ownership of voting shares, by contract, or otherwise. Notwithstanding the
first sentence of this Section 6.2, in the event any of the Harlan Companies or
their Affiliates is producing bagels or bagel dough for a Specialty Retailer at
the end of the Term pursuant to a written consent of ENC given prior to such
time, the restriction set forth herein shall not apply to continued sales to
such Specialty Retailer after the Term hereof. Within 30 days of Supplier’s
written request, ENC shall advise Supplier in writing of the identity of the
persons ENC considers to constitute Specialty Retailers under this Section 6.2
as of the time of such request; Supplier may rely upon such notification for
one (1) year from the date of ENC’s response; provided, however, that Supplier
may continue to supply a Specialty Retailer as to which it has established a
relationship after non-objection from ENC (by virtue of such Specialty Retailer
not appearing on a prior list of ENC designating Specialty Retailers under this
Section 6.2 or

 

13

 

otherwise with ENC’s prior
written consent), even though such Specialty Retailer is subsequently added to
a list provided by ENC to Supplier pursuant to a subsequent request by
Supplier.

 

6.3          Notwithstanding any other provision of this Agreement to the contrary:

 

6.3.1       Orders may be placed with the Supplier by
Authorized Recipients. Authorized Recipients shall notify the Supplier from
time to time of the quantity of Products they wish to purchase from the
Supplier by placing purchase orders with the Supplier. Each order shall be filled
by the Supplier within Seven (7) days after the Supplier’s receipt of the
order.

 

6.3.2       The provisions of this Article 6.0 shall
govern the purchase and sale of, and terms of billing and payment on purchase
orders for, Products and cookies and muffins.

 

6.3.3       The provisions of Article 7.0 shall govern
the pricing of the Products to Authorized Recipients, subject to the provisions
of Section 5.4.1 as to Category B Products.

 

6.3.4       The product warranties in Article 9.0, the
covenants in Sections 10.1 and 10.2, and the indemnification and insurance
provisions in Article 11.0 shall be made for the benefit of NWRG or the New
World Subsidiary or New World Franchisee that ultimately purchases the
Products, as well as for the benefit of the Authorized Recipient.

 

6.3.5       Supplier may cease the supply of Products to
NWRG or any New World Subsidiary (if designated as an Authorized Recipient),
New World Franchisee (if designated as an Authorized Recipient) or Authorized
Recipient, as the case may be, if any balance owed to the Supplier by such
entity is not paid within 30 days after the date of invoice. In the event that
the entity which has not paid Supplier in accordance with the prior sentence is
NWRG, a New World Subsidiary or a New World Franchisee (if any such New World
Franchisee after the date hereof becomes an Authorized Recipient with payment
responsibility for the Products), the cessation of supply by Supplier, at
Supplier’s sole option, may extend to NWRG, all New World Subsidiaries and all
New World Franchisees. Upon payment in full of all amounts due, Supplier shall
resume supply to such entity in accordance with the terms of this Agreement.
NWRG, ENC and MBC will cooperate with Supplier to seek to resolve any disputes
with New World Subsidiaries, New World Franchisees or Authorized Recipients.

 

6.4          During
the Term hereof, the Supplier shall sell to Authorized Recipients the Products
ordered by them, up to a maximum aggregate of (a) *** dozen bagels per
Accounting Period which consists of four weeks, and (b) *** dozen bagels per
Accounting Period which consists of five weeks. NWRG agrees to use reasonable
best efforts to provide the Supplier, at the beginning of each Accounting
Period, with rolling good faith estimates of the volume of Products it expects
to be ordered from the Supplier under this Section 6.4 in such Accounting
Period and the five succeeding Accounting Periods, but such estimates shall be
used for planning purposes only and shall not be deemed orders or otherwise
create any commitment whatsoever on the part of NWRG, ENC or MBC.

 

6.5          The
Category A Products shall be produced (a) using such formulations as New World
shall specify from time to time in writing (the “Formulations”), (b) in
accordance with

 

14

 

such size, weight and other
specifications as New World shall establish from time to time in writing (the “Specifications”),
and (c) in accordance with such manufacturing procedures as New World shall
specify from time to time in writing (the “Procedures”), all of which, the
Harlan Companies expressly acknowledge, constitute Proprietary Information. The
Supplier agrees that it shall not analyze or reverse engineer any such
Formulations, Specifications and Procedures or any ingredients supplied for use
therein. All Formulations, Specifications and Procedures are subject to change
upon reasonable written notice from NWRG (or through a New World Subsidiary) to
the Supplier at any time, except that (x) the Supplier shall have such time as
may be reasonably necessary for the Supplier to implement such changed
Formulations, Specifications and Procedures in its production of the Products,
and (y) certain changes in Formulations, Specifications and Procedures may
result in an adjustment to the Toll Charge, as provided in Section 7.4.  All Formulations, Specifications and
Procedures shall be owned exclusively by New World but the Supplier shall have
a nonexclusive license, without the right to grant sublicenses, to use such
Formulations, Specifications and Procedures and other intellectual property of
New World (including U.S. patent No. 5,707,676) to produce Category A Products
for sale to Authorized Recipients under the terms and conditions of this
Agreement, and the Supplier shall have a license to use the Formulations,
Specifications and Procedures and other intellectual property of New World
(including U.S. patent No. 5,707,676 owned by ENC as successor to ENBC) to
produce Category B Products, to the extent and on the terms granted by NWRG,
ENC or MBC, it being understood that any such license may be granted or
withheld in the sole discretion of NWRG, ENC or MBC. Within a reasonable time
after receipt of Supplier’s written request, NWRG (on behalf of itself and, as
the case may be, ENC and MBC) shall advise Supplier in writing of the
Formulations, Specifications, Procedures and other production-related
Proprietary Information of New World used to produce Category A Products.

 

6.6          NWRG,
ENC and MBC shall have the right to have one or more of their employees or
representatives who are engaged in New World’s product development present at
the Production Facility at any time that the Supplier is producing the Products
and all such individuals will comply with the Supplier’s established policies
and procedures applicable to similarly situated employees and will be bound by
the confidentiality provisions of Article 12.0 hereof.

 

6.7          The
Category A Products shall be packaged using such packaging materials and
labeling as shall be determined by NWRG or by its designated New World
Subsidiary. The Supplier agrees to maintain an inventory of such packaging
materials and labels which shall be consistent with the quantity of Category A
Products estimated in the rolling good faith estimates made by NWRG pursuant to
Section 6.4 above or as otherwise reasonably directed by NWRG. All trademarks,
trade names and trade dress (together, the “Marks”) appearing on or in
packaging and labeling are and shall remain New World’s exclusive property, but
the Supplier shall have a royalty-free nonexclusive license, without the right
to grant sublicenses; to use such Marks solely to package and label the
Category A Products manufactured in accordance with the provisions of this
Agreement for sale to Authorized Recipients under this Agreement; provided
that:

 

(a)           Supplier
shall submit to NWRG, for NWRG’s prior review, a copy of all proposed uses of
the Marks, advertising material, promotional plans, POS material,

 

15

 

packaging, containers, labels, and any other marketing materials
whatsoever for the Products. NWRG shall have the right to approve or reject, in
writing, any proposed item. If NWRG does not give Supplier its written approval
within fifteen (15) days of the date of receipt by NWRG of such materials, NWRG
shall be deemed to have approved them; and

 

(b)           Supplier
agrees to have a legend legibly and conspicuously printed on all shipping
cartons of Products in substantially the following form, unless otherwise
required by NWRG:

 

NOTICE:                This product is
sold by Harlan Bagel Supply Company, LLC under a trademark license from New
World Restaurant Group, Inc. for distribution only to authorized parties
designated by New World Restaurant Group, Inc. Any other distribution is a violation
of this trademark license.

 

6.8          NWRG,
ENC or MBC shall have the discretion to arrange for the procurement of all
ingredients and raw materials used to produce the Category A Products on
standard vendor terms, provided however, that, at NWRG’s, ENC’s or MBC’s
option, NWRG, ENC, MBC may require Supplier to procure certain ingredients, so
long as the same are available on standard and customary vendor terms
reasonably satisfactory to Supplier.

 

6.9          Products
supplied hereunder shall be shipped F.O.B. the Production Facility, and
ownership and risk of loss with respect to the Products supplied hereunder
shall pass to the Authorized Recipient when delivered to a carrier at the
F.O.B. point, except that Products supplied to Costco are currently shipped
F.O.B. destination.  New World agrees
that it and its Authorized Recipients will have the sole responsibility to
coordinate the shipment of Products from the Production Facility in a manner to
ensure that each shipment contains a load of Products to maximize the use of
space within a given truck. New World expressly acknowledges and agrees that
the Harlan Companies will not be responsible for any delays in shipment or
increased freight costs caused by New World’s failure to coordinate such
shipments.

 

6.10        Payment;
Billing.

 

6.10.1     Payment terms shall be (a) net *** days,
together with interest at a rate of 12% per annum from the date any amounts are
past due or (b) such other terms as are mutually agreed by the seller and
buyer, respectively, of the goods manufactured and shipped pursuant to this
Agreement; provided, however, that amounts due from MBC to Supplier will be
paid by wire transfer within the net *** day terms provided above. The parties
agree that any amounts owed by either party under Section 5.3 hereof shall bear
interest at a rate of 12% per annum during any period such amounts are due and
remain unpaid.

 

6.10.2     The Harlan Companies expressly acknowledge and
agree that NWRG may delegate to an Authorized Recipient all rights and
obligations to place, receive and/or otherwise account for (i.e., proof of
shipment, shortages, overages, damages, inventory tracking/control, etc.)
orders placed by Authorized Recipients, yet accept payment responsibility on
the part of

 

16

 

NWRG or the respective New World Subsidiary as to Manhattan Bagels sold
to MBC or, as to other Products sold to NWRG or such other New World
Subsidiaries, if the parties subsequently mutually agree that NWRG or such
other New World Subsidiaries may accept payment responsibility, so ordered and
delivered or on behalf of which the order was placed. Thus, NWRG or a New World
Subsidiary, as the case may be, may serve as a vendor only as to Manhattan
Bagels sold to MBC or, as to other Products sold to NWRG or such other New
World Subsidiaries, if the parties subsequently mutually agree that NWRG or
such other New World Subsidiaries may accept payment responsibility, for
billing/payment purposes only, with all such other purchasing functions
fulfilled by or through distributors (or others) designated by NWRG as
Authorized Recipients.

 

6.10.3     New World expressly agrees that the Harlan
Companies may exercise a right of offset against license fees that would
otherwise be due New World hereunder, but only to the extent that: (a) an
invoice has not been paid in accordance with the terms set forth in Section
6.10.1 above (or as otherwise mutually agreed), (b) NWRG (or a New World
Subsidiary) is the direct account debtor on the subject invoice and (c) the
invoice was issued by the Harlan Companies for finished Products (including,
for this purpose, cookies and muffins and Par Baked Bagels) as to which there
are no valid credits, reductions or other deductions. In addition, New World
acknowledges that the Equipment Lease permits Supplier to exercise a right of
offset as to amounts due hereunder from New World against rent and other
amounts that would otherwise be due from Supplier to ENC under the Equipment
Lease.

 

6.11        “Authorized
Recipients” shall mean any person or entity approved in advance in writing by
an Executive Officer of NWRG (i.e., Chief Executive Officer, Chief Financial
Officer or Chief Supply Officer, or such other person designated by any one of
them in writing) to receive deliveries from either of the Harlan Companies of
Products, cookies and/or muffins produced by Supplier. At any time, NWRG may
retract or curtail its approval of any particular person or entity as an
Authorized Recipient, after which retraction or curtailment such person or
entity shall no longer qualify as an Authorized Recipient or their
authorization may be restricted as designated by NWRG, as the case may be.
Notwithstanding any provision of this Agreement to the contrary, and absent
retraction of such designation in the future, the following persons/entities
shall constitute Authorized Recipients: NWRG, ENC (a New World Subsidiary), MBC
(a New World Subsidiary), Costco, and Marriott Distribution Services, a
division of Marriott International, Inc.

 

Article 7.0            Pricing

 

7.1          The
price charged by Supplier for Products supplied hereunder shall be equal to the
Materials Cost plus the Loss Factor, plus a toll charge per bagel (the “Toll
Charge”). The Toll Charge for Category A Products will be ***¢ per bagel from
the date hereof through the balance of the Term hereof. The Toll Charge shall
be subject to adjustment as provided in Sections 7.3 and 7.4 hereof. The Loss
Factor will be equal to *** multiplied by the Materials Cost. Subject to
Section 5.3.5, the price charged for cookies shall be $*** per case (100
cookies per case) and the price charged for muffins shall be $*** per case (96
muffins per case).

 

17

 

7.2          The
Materials Cost shall be determined based upon a Statement of Materials Cost for
each Accounting Period which shall be prepared by the Supplier in accordance
with the provisions of Exhibit B. The Materials Cost shall be redetermined as
of the end of each Accounting Period during the Term as set forth in this
Section 7.2 hereof and the prices based upon such redetermination shall take
effect beginning with products shipped on or after the first business day of
the Accounting Period following the redetermination. Each Statement of
Materials Cost shall be delivered to NWRG within ten business days after the
end of the Accounting Period to which it relates and shall include the
information required by Exhibit B. Within 90 days after the end of each
calendar year during the Term, the Supplier shall cause to be delivered the
Statement of Materials Cost for the last Accounting Period in each of the
Calendar Quarters during which this Agreement was in effect during such
calendar year, accompanied by a report of Ernst & Young, or such other
independent accountants as the Supplier may select from time to time to do the
regular annual audit of its financial statements and who may be approved by
NWRG (such approval not to be unreasonably withheld), in the form set forth in
Exhibit C. The fees and expenses of such independent accountants shall be borne
by the Supplier. The Supplier acknowledges that a copy of each Statement of
Materials Cost (and each report of independent accountants thereon) may be
provided by NWRG to any New World Subsidiary or New World Franchisee.

 

7.3          The
Toll Charge shall be adjusted, effective as of the first day of the third
Quarterly Period of each fiscal year during the Term hereof. The amount of the
adjustment shall equal the Toll Charge in effect immediately before such
adjustment minus 0.25¢ minus the Fixed Costs, and then multiplying such result
by the percentage increase in the Consumer Price Index for the urban area
including Indianapolis, Indiana, published by the Department of Labor for the
12 month period ending on March 31 of the year in which the Toll Charge
adjustment is to take place. For this purpose, “Fixed Costs” shall mean the
building rental expense for the 12 previous Accounting Periods ending on the
last day of the third Accounting Period of the fiscal year divided by ***. In
the event the Consumer Price Index ceases to be published for any reason, the
parties shall select another index designed to approximate as closely as
practicable the Consumer Price Index.

 

7.4          In
the event that changes in Formulations, Specifications or Procedures result in
additional costs or savings to Harlan or the Supplier that are not reflected in
Materials Cost, the parties shall make appropriate adjustments in the Toll
Charge and/or the Loss Factor to reflect such costs or savings. In addition,
the parties agree that New World shall bear as part of its research and
development, the cost of Product losses and production related costs that arise
from the development of Category A Products (or Category B Products purchased
pursuant to Section 5.4.1) or test runs of the Category A Products (or Category
B Products purchased pursuant to Section 5.4.1). The Supplier shall invoice New
World for each such cost in a timely manner, and in any event no later than
sixty (60) days from the date on which such cost first arose. Costs associated
with such research and development shall be reimbursed within 30 days of
invoice.

 

7.5          Subject
to the terms of Section 7.5.2 below and to compensate New World, in part, for
the license granted in Section 6.5 hereof, Supplier hereby agrees to pay a
licensing fee to New World for the license from New World to Supplier of New
World’s Proprietary Information

 

18

 

and the Marks (allocated as
directed by NWRG by and among NWRG and New World Subsidiaries, to fairly
allocate the licensing fees to those entities owning the brands of Category A
Products shipped), as provided below:

 

7.5.1       Supplier shall pay licensing fees to New
World, determined and payable as follows. All licensing fees shall be payable
to New World within thirty (30) days after the end of each Quarterly Period.
Determination of the amount of the licensing fees payable by Supplier shall be
based on Category A Products shipped in such Quarterly Period. The amount of
the licensing fee will be *** as reflected in the table below. ***

 

19

 

	
  If the Applicable Contract

  Minimum (in Cases) is:

  	
   

  	
  The Adjusted Toll Charge

  Will Be:

  	
   

  	
  *** the Licensing Fee Per

  Bagel Will Be:

  	
   

  
	
  2,235,258
  (Contract Year 1)

  	
   

  	
  $

  	
  ***

  	
   

  	
  $

  	
  ***

  	
   

  
	
  2,543,962

  	
   

  	
  $

  	
  ***

  	
   

  	
  $

  	
  ***

  	
   

  
	
  2,798,358

  	
   

  	
  $

  	
  ***

  	
   

  	
  $

  	
  ***

  	
   

  
	
  3,052,754

  	
   

  	
  $

  	
  ***

  	
   

  	
  $

  	
  ***

  	
   

  
	
  3,391,949

  	
   

  	
  $

  	
  ***

  	
   

  	
  $

  	
  ***

  	
   

  
	
  4,070,339

  	
   

  	
  $

  	
  ***

  	
   

  	
  $

  	
  ***

  	
   

  

 

*subject to decrease
pursuant to Section 7.5.2 below.

 

7.5.2       For Contract Year 1, Supplier will provide
to New World 65% of the above licensing fees, effective as of April 28, 2002.
After such time as New World has transferred all production of Manhattan Bagels
to Supplier, New World will receive 100% of the licensing fees in Contract Year
1. In addition, the Adjusted Toll Charges set forth in the table in Section
7.5.1 above for the Contract Minimum levels of 2,543,962, 2,798,358 and
3,052,754 will increase by $*** if for any reason Supplier (through no fault of
or delay caused by New World) is not supplying all of New World’s muffins and
cookies requirements by December 15, 2002, and thereafter if Supplier ceases
supplying muffins and cookies to New World for any reason, which means that, in
such events, the respective amounts of the licensing fees for those Contract
Minimum levels will decrease by $*** (i.e., the licensing fees reflected in the
right-hand column of the table in Section 7.5.1 above shall be reduced by $***
for the three “asterisked” rows only).

 

7.6          The
Supplier shall provide to NWRG and the accountants referred to in Section 7.2
all information requested by them in order to permit (a) the preparation of
each report referred to in Section 7.2 and the determination of the Materials
Cost therefrom, and (b) each adjustment to the Toll Charge provided for herein.
The Supplier shall also permit NWRG (and its representatives) and such
accountants to have access to its books and records, and to meet with members
of the Supplier’s management, at any time upon reasonable notice during normal
business hours. The Supplier shall also permit accountants selected by NWRG to
have access to its books and records, and to meet with members of the Supplier’s
management, at any time upon reasonable notice during normal business hours,
provided, however, that (a) the fees and expenses of such accountants shall be
borne by NWRG, and (b) it shall be a condition to the covenant of the Supplier
in this Section 7.6 to give such accountants access to the Supplier’s books and
records that such accountants shall agree in writing to be bound by the
confidentiality provisions of Article 12.0 hereof.

 

7.7          NWRG
may charge the Supplier for various costs incurred by New World in connection
with research and development, product development, procurement or other costs
related to the development, production, distribution and sale of the Category A
Products, and such costs shall result in an addition to the purchase price for
the Category A Products over a negotiated period to enable the Supplier to
recover such costs.

 

20

 

Article 8.0            Designation
of Harlan as an Approved Supplier of Par Baked Bagels.

 

8.1          NWRG
hereby designates Harlan as an approved supplier of Par Baked Bagels to
Authorized Recipients for the Term of this Agreement. On the terms and subject
to the conditions set forth herein, and during the Term hereof, Harlan agrees
to sell to Authorized Recipients, Par Baked Bagels produced by Harlan at prices
which shall be no less than NWRG’s current prices, based on current
specifications and formulations. For each Par Baked Bagel shipped by Harlan for
Authorized Recipients on an annual basis, Harlan will pay quarterly to NWRG a
licensing fee based on the following levels:

 

(a)           $***
multiplied by the actual number of Par Baked Bagels shipped up to ***;

 

(b)           $***
multiplied by the actual number of Par Baked Bagels shipped over *** and up to ***;
and

 

(c)           $***
multiplied by the actual number of Par Baked Bagels shipped over ***.

 

The licensing
fees will be effective for Par Baked Bagels shipped on or after April 28,
2002 and will be calculated and paid within thirty days after the end of the
applicable Quarterly Period based on bagels shipped in the relevant Quarterly
Period. These licensing fees will remain in effect until December 31, 2004, at
which time NWRG (on behalf of New World) and Harlan will agree to review and
evaluate this program for possible additional savings.

 

To the extent
not otherwise specifically addressed in this Agreement, the provisions of
Sections 6.3, 6.5 through 6.7 and 6.9 through 6.11, and Article 9.0, shall
apply to the supply of Par Baked Bagels by Harlan to Authorized Recipients.

 

Article 9.0            Product
Warranties

 

9.1          The
Harlan Companies warrant to NWRG and all New World Subsidiaries, New World
Franchisees and other Authorized Recipients that purchase Products (including,
for this purpose, cookies and muffins and Par Baked Bagels) from the Harlan
Companies that:

 

9.1.1       each shipment of Products (including, for
this purpose, cookies and muffins and Par Baked Bagels) supplied hereunder
shall be manufactured in accordance with the provisions of Section 6.5 hereof,
shall be of good and merchantable quality and shall be fit for the purposes for
which they are intended to be used, except to the extent any lack of
merchantability or lack of fitness for the intended purposes is attributable to
the proper and correct use by the Supplier of the Formulations, Procedures,
Specifications and other production-related Proprietary Information of New
World;

 

9.1.2       none of the Products (including, for this
purpose, cookies and muffins and Par Baked Bagels) supplied hereunder shall be
adulterated or misbranded within the meaning of the Federal Food Drug and
Cosmetics Act, as amended, except to the extent misbranding is attributable to
the proper and correct use of the Formulations, Procedures or Specifications,
and

 

21

 

none of the Products (including, for this purpose, cookies and muffins
and Par Baked Bagels) will be an article which may not be introduced into
interstate commerce under the provisions of Section 404, 409 or 706 of that
Act;

 

9.1.3       none of the Products (including, for this
purpose, cookies and muffins and Par Baked Bagels) supplied hereunder shall be
adulterated or misbranded within the meaning of any applicable provision of any
state or municipal law, which provision is similar to any provision of the
Federal Food, Drug and Cosmetics Act, as amended, except to the extent
misbranding is attributable to the proper and correct use of the Formulations,
Procedures or Specifications or other production-related Proprietary
Information of New World or the proper and correct use of the Marks or other
packaging or labeling required by NWRG; and

 

9.1.4       the manufacture and production of the
Products (including, for this purpose, cookies and muffins and Par Baked
Bagels) shall comply with all applicable federal and state laws, regulations,
and orders (including without limitation those enforced or issued by the United
States Department of Agriculture, the Food and Drug Administration, and the
Federal Trade Commission and their counterpart departments and agencies of
state government); except to the extent the same is attributable to the proper
and correct use of the Formulations, Procedures, Specifications and other
production-related Proprietary Information of New World or the proper and
correct use of the Marks or other packaging or labeling required by NWRG.

 

The foregoing warranties
shall survive inspection and acceptance of any of the Products (including, for
this purpose, cookies and muffins and Par Baked Bagels), and payment therefor,
by NWRG, New World Subsidiaries, New World Franchisees and Authorized
Recipients.

 

Article 10.0          Other
Covenants of the Parties

 

10.1        Each
party shall comply with all governmental laws, regulations and orders
applicable to its operations under this Agreement, and to bear any and all
taxes, fees or other governmental charges applicable to its operations. Harlan
and the Supplier shall comply with the Lease.

 

10.2        The
Harlan Companies shall permit representatives of NWRG to inspect the Leasehold
Premises and/or the Production Facility at any time to assure compliance with
the terms of this Agreement and all such individuals will comply with the
Harlan Companies’ established policies and procedures applicable to similarly
situated employees and will be bound by the confidentiality provisions of
Article 12.0 hereof.

 

10.3        Harlan
and the Supplier shall not, without the prior written consent of ENC, amend or
modify the Lease. The Supplier also agrees that it shall not, without the prior
written consent of ENC, agree to amend or modify the Subordination and
Nondisturbance Agreement dated August 27, 1996.

 

10.4        Except
as may be contemplated by the Option Agreement, each of NWRG, ENC and MBC, on
the one hand, and the Supplier and Harlan, on the other hand, shall not at any
time prior to the first anniversary of the expiration of the Lease, solicit or
hire any employee of any other party, unless such employee has been terminated
by the other party, or unless such

 

22

 

employee terminated his or her
employment with the other party at least one year prior to the date of the
first such solicitation or hiring.

 

10.5        Harlan
shall devote to Supplier such of its resources as may be necessary to assist
Supplier in timely and completely performing all of the Supplier’s obligations
under this Agreement. Supplier shall ensure it has adequate access to financial
and human resources to allow it to timely and completely perform all of its
obligations within this Agreement.

 

10.6        The
Harlan Companies agree to consider the establishment of a re-distribution
center for the Products to help to assist in the reduction of freight costs,
provided that the benefits to the Harlan Companies and NWRG justify such
arrangement.

 

10.7        The
Harlan Companies have assessed the feasibility of constructing a rail spur for
the supply of flour and if Harlan and NWRG mutually agree to construct such
spur the parties will agree on the manner in which NWRG will participate on an
equitable basis in financing such spur, the intent being that the use of such
spur would result in a reduction in Materials Costs. The foregoing is not
intended to preclude the Harlan Companies from constructing such spur without
NWRG’s agreement, if they wish to do so during the Term.

 

10.8        New
World shall purchase bulk packaging equipment for installation at the
Production Facility. In connection with such purchase and installation, the
parties shall enter into a lease agreement (NWRG or a New World Subsidiary as
the titled owner and the lessor, as NWRG may elect) containing the terms set
forth in this Section 10.8 and such other terms as shall be mutually agreed
upon by the parties. The purchase by New World and installation of such
equipment at the Production Facility shall be fully financed by the Harlan
Companies, such financing to have a term of not more than twenty-four (24)
months and an interest rate (floating) at prime plus one (1%) percent. New World
may repay the financed cost of purchase and installation through the grant of
cost savings to the Harlan Companies. Specifically, to the extent that the
Harlan Companies obtain savings in their labor and/or packaging costs as a
result of such purchase of the bulk packaging equipment, fifty (50%) percent of
any such savings shall be applied against the aforesaid financing cost to
thereby repay such debt. The other fifty (50%) percent of such savings shall be
passed through, at New World’s option, as a reduction to the Materials Cost or
as a supplement to licensing fees otherwise due hereunder. If the
labor/packaging savings applied against the debt have not resulted in full
repayment (including interest accruals) of the indebtedness by the earlier of
the end of two (2) years after the installation of such equipment or the termination
of this Agreement as provided in Section 13.3 hereof, New World will pay to the
Harlan Companies at that time the balance remaining as to such financing. It is
the intent of the parties that New World shall bear one hundred percent (100%)
of all costs of the Harlan Companies in obtaining and installing such
equipment, provided however, New World shall have no obligation to make cash
payments unless and until, after two years, the financing has not been fully
repaid by application of half of the labor/packaging savings against the
indebtedness; provided, however, that if this Agreement is terminated prior to
the conclusion of such two years, any remaining unpaid balance will be paid at
that time by New World to the Harlan Companies, as provided in Section 13.3
hereof.

 

23

 

10.9        The
parties agree that Supplier will establish specific quality assurance criteria,
which shall substantially conform to industry standards and which shall be
generally based on New World’s processing quality assurance overview, the form
of which is attached hereto as Schedule 10.9. To ensure compliance with such
criteria, representatives of NWRG’s (or its applicable New World Subsidiary’s)
quality assurance department may perform or facilitate the following: plant
audits pursuant to Section 6.6 hereof for process control validation or for
cause; random product evaluations at distribution centers; product evaluations
at the support center; and distribution trailer temperature monitoring pursuant
to New World’s quality assurance requirements. Supplier agrees to reimburse
NWRG for reasonable expenses incurred only and directly to resolve confirmed
material product deviations from the Specifications, such expenses to include
but not be limited to reasonable costs for travel, product evaluation in the
New World stores, third party distribution centers or at the support center,
product disposal, product shortages and losses and supply chain re-stocking of
Products. The Harlan Companies agree to work with New World in good faith to
continue to evaluate the Formulations, Specifications and Procedures to seek to
identify methods by which costs could be reduced.

 

10.10      In addition, within sixty (60) days after the
date of execution of this Agreement, the parties agree to enter into amendments
to the Option Agreement and Right of First Refusal Agreement to (i) give effect
to the fact that ENC is the successor in interest to ENBC, (ii) add NWRG and
MBC as parties to the Option Agreement and Right of First Refusal Agreement,
(iii) provide that NWRG may purchase the Option Assets (as defined in the
Option Agreement) with shares of its common stock, (iv) provide that NWRG may
purchase the Shares (as defined in the Right of First Refusal Agreement) with
shares of its common stock and (v) provide that NWRG, ENC and MBC will be
jointly and severally liable to pay any purchase price for the Option Assets or
Shares which may be evidenced by a promissory note or otherwise is deferred and
not paid at the applicable closing. The parties will negotiate in good faith on
the form of the amendments, taking into account any other matters reasonably
related to the foregoing.

 

Article 11.0          Indemnification
and Insurance

 

11.1        The
Harlan Companies agree to indemnify NWRG and all New World Subsidiaries and New
World Franchisees for, and hold NWRG and all New World Subsidiaries and New
World Franchisees that purchase Products (including, for this purpose, cookies
and muffins and Par Baked Bagels) harmless from and against, all expenses,
losses, costs, deficiencies, liabilities and damages (including related counsel
fees) incurred or suffered by them resulting from: (a) any breach of any
representation or warranty made by the Harlan Companies in or pursuant to this
Agreement; (b) any default in the performance of any of the covenants or
agreements made by the Harlan Companies in this Agreement; (c) any claim
or action by any consumer or any other third party arising out of the
production or sale of the Products (including, for this purpose, cookies and
muffins and Par Baked Bagels) by the Harlan Companies (including any claims or
actions for bodily injury and any products liability claims or actions),
provided, however, that the Harlan Companies shall have no obligation to
indemnify NWRG or any New World Subsidiary or New World Franchisee with respect
to any claim or action to the extent such claim or action is attributable to the
alteration, handling or misbranding of Products (including, for this purpose,
cookies and muffins and Par Baked Bagels) after they have been delivered to
NWRG or any New World Subsidiary or New World Franchisee or is attributable to

 

24

 

the proper and correct use by
the Harlan Companies of the Formulations, Procedures, Specifications or the
other production-related Proprietary Information of New World or the use of the
Marks or other packaging or labeling required by NWRG; or (d) any claim or
action brought by any federal, state, local or foreign governmental agency in
connection with the production or sale of the Products (including, for this
purpose, cookies and muffins and Par Baked Bagels) by the Harlan Companies
(including without limitation any claim or action under any law or regulation
relating to public health, the sale of food and drugs, and the safe conduct of
business), provided, however, that the Harlan Companies shall have no
obligation to indemnify NWRG or any New World Subsidiary or New World
Franchisee with respect to any claim or action to the extent such claim or
action is attributable to the alteration, handling or misbranding of Products
(including, for this purpose, cookies and muffins and Par Baked Bagels) after
they have been delivered to NWRG or any New World Subsidiary or New World
Franchisee or is attributable to the proper and correct use by the Harlan
Companies of the Formulations, Procedures and Specifications or the other
production-related Proprietary Information of New World or the use of the Marks
or other packaging or labeling required by NWRG.

 

11.2        NWRG,
ENC and MBC agree to indemnify the Harlan Companies for, and to hold the Harlan
Companies harmless from and against, all expenses, losses, costs, deficiencies,
liabilities and damages (including related counsel fees) incurred or suffered
by the Harlan Companies resulting from: (a) any breach of any representation or
warranty made by NWRG, ENC or MBC in or pursuant to this Agreement; (b) any
default in the performance of any of the covenants or agreements made by New
World in this Agreement; (c) any claim or action by any consumer, governmental
agency or any other third party, including any claim of infringement or
violation of, or conflict with, any patent or trade secret of any third party,
to the extent such claim or action is attributable to the use by the Harlan
Companies of the Formulations, Procedures, Specifications or the other
production-related Proprietary Information of New World or is attributable to
the alteration, handling or misbranding of Products (including, for this
purpose, cookies and muffins and Par Baked Bagels) after they have been
delivered to NWRG, or any New World Subsidiary, New World Franchisee or
Authorized Recipient or the use of the Marks or other packaging or labeling
required by NWRG, ENC or MBC; or (d) any claim or action by any third party
alleging infringement or violation of, or conflict with, any of the Marks or
New World’s trade dress, to the extent such claim or action is attributable to
the use of the Marks or New World’s trade dress used in accordance with NWRG’s,
ENC’s or MBC’s instructions pursuant to this Agreement.

 

11.3        The
parties agree that each party shall have the exclusive right to control the
defense (and the right to establish the terms of any settlement) of any claim
or action by any third party that could result in such party having an
indemnification obligation under Section 11.1 or Section 11.2 with counsel of
such party’s selection, that each party will promptly give the other party
written notice of any claim or action of which it becomes aware that could
result in such other party having an indemnification obligation under Section
11.1 or Section 11.2, and that each party will fully cooperate with the other
party in the defense of any claim or action by the other party hereunder.

 

11.4        NWRG,
ENC and MBC, and the Harlan Companies, acknowledge and agree that NWRG, New
World Subsidiaries and New World Franchisees, on the one hand, and the Harlan

 

25

 

Companies, on the other hand,
may be required to enter into indemnity agreements with Authorized Recipients. NWRG,
ENC, MBC and the Harlan Companies agree that (a) in the event NWRG or any New
World Subsidiary or New World Franchisee is obligated to make indemnity
payments under any such agreement resulting from any of the matters described
in clauses (a) through (d), inclusive, of Section 11.1 hereof, the Harlan
Companies shall indemnify NWRG or such New World Subsidiary or New World
Franchisee for, and hold NWRG and such New World Subsidiary or New World
Franchisee harmless from and against, such payment in accordance with Section
11.1 hereof, and (b) in the event that either of the Harlan Companies is
obligated to make indemnity payments under any such agreement resulting from
any of the matters described in clauses (a) through (d), inclusive, of Section
11.2 hereof, NWRG, ENC and MBC shall indemnify the Harlan Companies, and hold
them harmless from and against, such payment in accordance with Section 11.2
hereof.

 

11.5        The
Harlan Companies represent and warrant that they carry the following types of
insurance coverage, written by insurance companies reasonably satisfactory to
New World, having a current Best’s rating of at least “A IX,” that are licensed
to do business in all relevant states, and shall include, at a minimum: (a)
policies of workers’ compensation and employers’ liability insurance that
comply with all state and federal laws, with employers’ liability limits of not
less than $500,000/500,000/500,000, (b) policies of commercial general
liability insurance written on an occurrence basis, extended to include
contractual liability, products and completed operations liability, and
personal and advertising liability, with combined bodily injury and property
damage limits of not less than $1,000,000 per occurrence, (c) policies of
business automobile liability insurance, including bodily injury and property
damage coverage, for all owned, non-owned and hired vehicles, with a combined
single limit of liability of not less than $1,000,000 per occurrence for both
bodily injury and property damage, (d) policies of commercial umbrella and/or
excess liability insurance, sitting over all primary liability coverages (namely,
employers’ liability, commercial general liability and business automobile liability)
with limits not less than $5,000,000 per occurrence; provided, however, that
the Harlan Companies will increase such $5,000,000 coverage to $9,000,000 by
February 1, 2003. Such umbrella and/or excess liability insurance will provide
at a minimum those coverages and endorsements required in the underlying
policies, and (e) policies of property insurance providing coverage for
direct physical loss or damage to real and personal property for all-risk
perils, including flood and earthquake, where applicable. Appropriate coverage
shall also be provided for boiler and machinery exposures and business
interruption/extra expense exposures. All such policies shall name New World as
an additional insured and contain endorsements (i) providing that the Harlan
Companies’ commercial general liability coverage (including products liability)
(the “CGL Coverage”) is primary relative to NWRG or any New World Subsidiary or
New World Franchisee, and that any other insurance maintained by NWRG or any
New World Subsidiary or New World Franchisee with respect to the risks covered
by the CGL Coverage is excess and non-contributing, and (ii) waiving any and
all rights of subrogation against NWRG, New World Subsidiaries and New World
Franchisees with respect to the CGL Coverage, and (iii) providing for a
continuation of the CGL Coverage beyond the expiration or termination of this
Agreement for claims made following such expiration or termination that are
attributable to the manufacture of Products by the Harlan Companies during the
Term. The Harlan Companies also represent and warrant that all premiums which
have become due on such policies have been paid, that such policies are in full
force and effect, and that such policies may not be canceled,

 

26

 

changed or allowed to lapse
through non-renewal, failure to pay premiums or otherwise except upon not less
than 60 days’ prior written notice to the Harlan Companies and NWRG, except
that such notice period need not exceed 10 days in the case of failure to pay
premiums. The Harlan Companies shall deliver to NWRG by August 21, 2002,
evidence of the foregoing insurance coverages by providing to NWRG a satisfactory
Acord Certificate of Coverage including NWRG, ENC and MBC as additional
insureds, and will hereafter provide NWRG with a satisfactory Acord Certificate
of Coverage upon the issuance of any renewal or replacement policies. The
Harlan Companies agree to maintain such policies in full force and effect, in
the amount set forth above, throughout the term of this Agreement, and to
maintain NWRG, ENC and MBC as additional insureds under such policies.

 

Article 12.0          Confidentiality

 

12.1        As
used in this Agreement, the term “Proprietary Information” shall mean any
knowledge or information, written or oral, which relates in any manner to the
respective businesses of the Harlan Companies and New World which is
confidential and proprietary information of the disclosing party, whether or
not disclosed prior to, on or after the date hereof, including, without
limitation, the business concepts, recipes, food preparation methods,
equipment, operating techniques, marketing methods, financial information,
demographic and trade area information, prospective site locations, market
penetration techniques, plans, or schedules, customer profiles, preferences, or
statistics, menu breakdowns, itemized costs, franchisee composition,
territories, and development plans, products, production techniques and all
related trade secrets or confidential or proprietary information treated as
such by the disclosing party, whether by course of conduct, by letter or
report, or by the use of any appropriate proprietary stamp or legend designating
such information or item to be confidential or proprietary. Proprietary
Information shall include all information furnished to the Harlan Companies in
writing pursuant to Section 6.1 or Section 6.5. As used in this Article 12.0,
the term “disclosing party” shall mean the party to this Agreement which
discloses or makes available Proprietary Information to the receiving party,
and the term “receiving party” shall mean the party to this Agreement to whom
Proprietary Information is disclosed or made available by the disclosing party.

 

12.2        Without
limiting the generality of Section 12.1 hereof, the parties acknowledge and
agree that the Formulations, Specifications and Procedures are the Proprietary
Information of New World and will be treated as Proprietary Information that
does not become stale with the passage of time for purposes of the last
sentence of Section 12.3 hereof.

 

12.3        The
receiving party shall hold all Proprietary Information in strict confidence,
shall use such Proprietary Information only for the benefit of the disclosing
party and shall disclose such Proprietary Information only to the receiving
party’s employees and agents who have a need to know such Proprietary
Information in order to assist the receiving party in performing its obligations
under this Agreement provided such employees and agents each have individually
entered into a confidentiality agreement in form satisfactory to the disclosing
party or are otherwise obligated by a written agreement with the receiving
party to maintain the confidence of the Proprietary Information, which
agreement the parties hereby agree may be directly enforced by the disclosing
party. The receiving party shall not disclose Proprietary

 

27

 

Information to any other person
or entity. The obligations hereunder to maintain the confidentiality of
Proprietary Information shall continue: (a) for five years from the date of
disclosure of the Proprietary Information, in the case of Proprietary
Information that by its nature becomes stale with the passage of time (e.g.,
financial information, development plans) and (b) indefinitely, in the case of
the Proprietary Information that by its nature does not become stale with the
passage of time (e.g. trade secrets, production techniques, recipes).

 

12.4        The
obligations of the parties specified in Section 12.3 shall not apply to any
Proprietary Information which (a) is disclosed in a printed publication
available to the public prior to the date of this Agreement, or becomes known
to the public through no act of the receiving party or its employees, agents or
other person or entity which has received such Proprietary Information from or
through the receiving party, provided, however, that a combination of
ingredients or processes that has not been disclosed to, or become known by,
the public shall remain subject to Section 12.3 notwithstanding the fact that
the identity of such ingredients or processes may be known, (b) is approved for
release by written authorization of an officer of the disclosing party, (c) can
be established by the receiving party by documentary evidence to have been in
the legitimate and lawful possession of the receiving party at the time
revealed by the disclosing party to the receiving party, (d) is lawfully
received by the receiving party without restriction from a third party
subsequent to this Agreement, which third party did not obtain the Proprietary
Information through improper means or disclose the Proprietary Information
without authorization, or (e) is required to be disclosed by law or regulation
or by proper order of a court of applicable jurisdiction after adequate notice
to the disclosing party, sufficient to permit the disclosing party to seek a
protective order therefor, the imposition of which protective order the
receiving party agrees to approve and support. In addition, after consultation
with the disclosing party, the receiving party may disclose only that
Proprietary Information that the receiving party believes in good faith it is
required to disclose (x) in connection with any filing that is made or
disclosure document that is prepared for the purpose of complying with federal
or state securities or franchise laws, rules or regulations or (y) to comply
with the rules of any stock exchange or quotation system or any other
regulatory requirements; provided, however, that in any event trade secrets,
production techniques, recipes and similar Proprietary Information of a
disclosing party will not be disclosed by the receiving party without the
written consent of the disclosing party.

 

12.5        The
receiving party (and each employee, agent, or other person or entity which has
received such Proprietary Information from or through the receiving party)
shall, upon the request of the disclosing party, return all documents and other
tangible manifestations of Proprietary Information received from the disclosing
party, including all copies and reproductions thereof. The receiving party will
thereafter certify in writing to the disclosing party that all Proprietary
Information has either been returned to the disclosing party or destroyed.

 

Article 13.0          Term

 

13.1        The
initial term of this Agreement shall commence on the date hereof and continue
until December 31, 2006, except that this Agreement shall terminate upon the
exercise by ENC of its option under the Option Agreement.

 

28

 

13.2        The
provisions of Articles 9.0, 10.0, 11.0 and 12.0 and any other provisions hereof
requiring performance by a party following termination shall survive the
expiration or any termination of this Agreement.

 

13.3        Upon
expiration or termination of this Agreement for any reason, NWRG, ENC and MBC
shall purchase from the Harlan Companies all finished Products (including, for
this purpose, cookies and muffins and Par Baked Bagels) in inventory, all
packaging materials and labeling in inventory purchased by the Harlan Companies
pursuant to Section 6.7 hereof, and the ingredients and raw materials in the
Harlan Companies’ inventory, at the Harlan Companies’ cost, F.O.B. the
Production Facility, and NWRG, ENC and MBC shall pay to the Supplier any
Make-Whole Payment under Section 5.3 and any amounts charged to, but not
previously recovered by, the Supplier under Section 7.7, and shall pay to the
applicable Harlan Company any amounts which may then be due attributable to the
bulk packaging equipment referenced in Section 10.8 above.

 

Article 14.0          Miscellaneous

 

14.1        The
parties hereto may amend, modify and supplement this Agreement in such manner
as may be agreed upon by them in writing.

 

14.2        Each
party to this Agreement shall pay all of the expenses incurred by it in
connection with this Agreement, including without limitation its legal and
accounting fees and expenses, and the commission, fees and expenses of any
person employed or retained by it to bring about, or to represent it in, the
transactions contemplated hereby.

 

14.3        This
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and assigns, except that the Harlan Companies
may not assign their rights or delegate their duties hereunder without the
prior written consent of NWRG (which consent shall also be deemed to be given
on behalf of ENC and MBC).

 

14.4        This
instrument and the exhibits attached hereto contain the entire agreement of the
parties hereto with respect to the purchase and sale of the Products
(including, for this purpose, cookies and muffins) from the Supplier and the
Par Baked Bagels from Harlan and the other transactions contemplated herein,
and supersede all prior understandings and agreements of the parties with
respect to the subject matter hereof. Any reference herein to this Agreement
shall be deemed to include the exhibits attached hereto. In the event of any
inconsistency between this Agreement and any purchase order, confirmation or
similar document or instrument of NWRG, any New World Subsidiary or New World
Franchisee or the Supplier, this Agreement shall govern.

 

14.5        Except
as expressly set forth in this Agreement or hereafter agreed in writing by the
Harlan Companies and NWRG, ENC and MBC, (a) neither NWRG, ENC, nor MBC are
promising, committing to or guaranteeing that any business relationship with
the Harlan Companies or the Harlan Companies’ status as an approved supplier
will continue for any specified time period, and (b) neither NWRG, ENC, nor MBC
are agreeing to reimburse the Harlan Companies for any costs, expenses,
investments or other amounts incurred or expended

 

29

 

by the Harlan Companies (and no
such amounts have been or will be incurred or expended in reliance on continued
business from NWRG or New World Subsidiaries or New World Franchisees).

 

14.6        The
descriptive headings in this Agreement are inserted for convenience only and do
not constitute a part of this Agreement.

 

14.7        This
Agreement may be executed in any number of counterparts, each of which shall be
deemed an original.

 

14.8        Any
notice, request, information or other document to be given hereunder shall be
in writing. Any notice, request, information or the document shall be deemed
duly given three business days after it is sent by registered or certified
mail, postage prepaid, to the intended recipient, addressed as follows:

 

If
to the Supplier or Harlan, addressed to such party at the following address:

 

Harlan
Bakeries, Inc.

7597
East U.S. Highway 36

Avon,
Indiana 46123

Attention:          Hugh
P. Harlan

 

with
a copy to such party at the following address:

 

Harlan
Sprague Dawley, Inc.

P.0.
Box 29176

Indianapolis,
Indiana 46229

Attention:
Hal P. Harlan

 

and
a copy to:

 

Henderson,
Daily, Withrow & DeVoe

2600
One Indiana Square

Indianapolis,
Indiana 46204

Attention:
Roberts E. Inveiss, Esq.

 

If
to NWRG, ENC or MBC, addressed as follows:

 

New
World Restaurant Group, Inc.

1687
Cole Boulevard

Golden,
CO 80401

Attention:
Chief Supply Officer, Susan Daggett

 

with
a copy to:

 

Proskauer
Rose LLP

1585
Broadway

 

30

 

New
York, NY 10036

Attention:
Kathy Rocklen, Esq.

 

Any party may send any
notice, request, information or other document to be given hereunder using any
other means (including personal delivery, courier, messenger service, fax or
ordinary mail), but no such notice, request, information or other document
shall be deemed duly given unless and until it is actually received by the
party for whom it is intended. Any party may change the address to which
notices hereunder are to be sent to it by giving written notice of such change
of address in the manner herein provided for giving notice.

 

14.9        This
Agreement shall be governed by and construed in accordance with the laws of the
State of Colorado applicable to contracts made and to be performed wholly
therein.

 

14.10      In the event of a breach or threatened breach
of any of the provisions of Section 6.2 or Article 12.0 of this Agreement, the
parties acknowledge and agree that the non-breaching party will not have an
adequate remedy at law and therefore will be entitled to enforce any such provision
by temporary or permanent injunctive or mandatory relief as a remedy for any
such breach, and that such remedy shall not be deemed to be the exclusive
remedy for any such breach but shall be in addition to all other remedies,
subject, however, to the provisions of Section 14.11 hereof.

 

14.11      In no event shall either party hereto seek, or
be liable to the other party hereto for, speculative, exemplary or punitive
damages.

 

14.12      No press release or other public or trade
announcement or statement related to this Agreement or the transactions
contemplated hereby (or the existence of any discussions or negotiations
between the parties regarding any other possible transactions) will be issued,
and no disclosure of this Agreement or the terms hereof will be made, by either
of the Harlan Companies without the prior approval of NWRG. NWRG agrees to use
reasonable best efforts to consult with the Harlan Companies prior to issuing
any press release or public or trade announcement or statement relating to this
Agreement or the transactions contemplated hereby, except to the extent
immediate disclosure is required in the opinion of NWRG’s counsel, in order for
New World to comply with applicable securities laws.

 

14.13      Nothing contained herein or done hereunder
shall be construed as creating a joint venture or partnership or as
constituting any party hereto the agent of the other.

 

14.14      The failure of any party hereto to enforce at
any time any of the provisions of this Agreement, or any rights with respect
hereto, shall in no way be considered to be a waiver of such provisions or
rights, or in any way affect the validity of this Agreement. No waiver of any
breach of this Agreement by any party shall be deemed a waiver of any preceding
or succeeding breach and no such waiver shall be valid or enforceable unless
contained in a written instrument duly signed by the parties hereto.

 

14.15      If any term or condition of this Agreement
shall be finally adjudicated to be enforceable or invalid by any court having
jurisdiction with respect thereto, all the other terms and conditions of this
Agreement shall remain in full force and effect and shall not be affected

 

31

 

thereby so long as the
remaining terms of this Agreement reflect substantially the intent of the
parties.

 

14.16      The parties agree that any action brought by
the Harlan Companies against NWRG, ENC or MBC in any court, whether federal or
state, may be brought within the State of Colorado. Any action brought by NWRG,
ENC or MBC against the Harlan Companies in any court, whether federal or state,
may be brought within the state and judicial district in which any of the
Harlan Companies has their principal place of business. The parties agree that
this Section 14.16 shall not be construed as preventing either party from
removing an action from state to federal court. The parties hereby waive all
questions of personal jurisdiction or venue for the purpose of carrying out
this provision. Any such action shall be conducted on an individual basis, and
not as part of a consolidated, common, or class action.

 

14.17      No right or remedy conferred upon or reserved
to NWRG, ENC or MBC, or the Harlan Companies, by this Agreement is intended to
be, nor shall be deemed, exclusive of any other right or remedy herein or by
law or equity provided or permitted, but each shall be cumulative of every
other right or remedy, subject, however to the provisions of Section 14.11
hereof.

 

14.18      Nothing herein contained shall bar a party’s
right to obtain injunctive relief against threatened conduct that will cause it
loss or damages, under the usual equity rules, including the applicable rules
for obtaining restraining orders and preliminary injunctions.

 

IN WITNESS
WHEREOF, the parties hereto have ca used this Agreement to be duly executed as
of the day and year first above written.

 

	
   

  	
  NEW WORLD RESTAURANT GROUP, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Anthony D. Wido

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  EINSTEIN AND NOAH CORP.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Anthony D. Wido

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  MANHATTAN BAGEL COMPANY, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Anthony D. Wido

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  HARLAN BAGEL SUPPLY COMPANY, LLC

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Doug H. Harlan

  	
   

  

 

32

 

	
   

  	
  HARLAN BAKERIES, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Hal P. Harlan

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  /s/ Hal P. Harlan

  	
   

  
	
   

  	
   

  	
  Hal P. Harlan

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  /s/ Hugh P. Harlan

  	
   

  
	
   

  	
   

  	
  Hugh P. Harlan

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  /s/ Doug H. Harlan

  	
   

  
	
   

  	
   

  	
  Doug H. Harlan

  	
   

  

 

33

 

NOTE:  THIS DOCUMENT IS THE SUBJECT OF A
CONFIDENTIAL TREATMENT REQUEST PURSUANT TO RULE 24b-2 UNDER THE SECURITIES
EXCHANGE ACT OF 1934.  PORTIONS OF THIS
DOCUMENT FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED HAVE BEEN REDACTED
AND ARE MARKED HEREIN BY “***”.  SUCH
REDACTED INFORMATION HAS BEEN FILED SEPARATELY WITH THE COMMISSION PURSUANT TO
THE CONFIDENTIAL TREATMENT REQUEST.

 

 

February 23, 2005

 

VIA OVERNIGHT MAIL,
FAX and E-MAIL

 

Mr. Hugh Harlan

Harlan Bakeries, Inc.

7597 East U.S. Highway 36

Avon, IN 46123

 

Re:          Second Amended and Restated Project and Approved
Supplier Agreement, dated as of April 28, 2002 (the “Agreement”) by and among
New World Restaurant Group, Inc. (“NWRG”), Einstein and Noah Corp. (“ENC”),
Manhattan Bagel Company, Inc. (“MBC”), Harlan Bagel Supply Company, LLC (“HBSC”),
Harlan Bakeries, Inc. (“HBI”), Hal P. Harlan, Hugh P. Harlan and Doug H.
Harlan; Amended and Restated Lease Agreement, dated as of May 1, 1998, as
amended by the Amendment to Amended and Restated Lease Agreement, dated as of
April 28, 2002 (collectively, the “Equipment Lease”) by and between ENC and
HBSC

 

Dear Hugh:

 

This letter agreement
memorializes certain amendments to the Agreement and the Equipment Lease
mutually agreed upon by the Harlan Companies and New World on December 14, 2004
and is effective as of December 14, 2004 (capitalized terms not defined herein
shall have the meaning ascribed to such terms in the Agreement).  Other than as set forth in this letter
agreement all other terms of the Agreement and Equipment Lease, as previously
amended, shall remain unchanged and in full force and effect:

 

Article 15.0     NWRG
and HBI acknowledge that as of January 1, 2003 HBI was not supplying 100% of
the muffins and cookies to NWRG, and therefore the licensing fee payable
pursuant to Section 7.5 of the Agreement (the “License Fee”) should have been
subject to the reduction of $*** per bagel provided in Section 7.5.2 of the
Agreement.  The parties acknowledge that
the amount of the agreed upon reduction attributable to the foregoing
acknowledged License Fee reduction for the period from January 1, 2003 through
November 30, 2004 has already been applied by the parties as an offset against
amounts otherwise owed by the Harlan Companies to New World, which offset and
application thereof is shown on the reconciliation attached hereto

 

 

as Schedule 1.  The parties agree that the amount
attributable to the License Fee reduction on account of the foregoing for the
month of December, 2004 equals $***.

 

Article 16.0            Section 5.3.5 shall be
amended as to provide for an additional Contract Minimum purchasing level of
two (2) million cases of bagels per year and, accordingly, the table in Section
5.3.5 shall be deleted in its entirety and replaced with the following table:

 

“

Contract Minimum Level Options (in Cases) to
be selected by NWRG:

 

	
  2,000,000

  
	
  2,543,962

  
	
  2,798,358

  
	
  3,052,754

  
	
  3,391,949

  
	
  4,070,339

  

 

“

 

Article 17.0            Section 7.3 shall be
amended by adding the following sentence to the end of that Section: “The Toll
Charges set forth in the table in Section 7.5.1, as modified in the letter
agreement dated February 22, 2005, reflect all adjustments made pursuant to
this Section through June 30, 2005.”

 

Article 18.0            The table in Section 7.5.1
of the Agreement shall be amended to provide for certain reductions in the
License Fee and corresponding increases in the Adjusted Toll Charge and,
accordingly, the table in this Section shall be deleted in its entirety and
replaced with the following table:

 

“

	
  If the Applicable

  Contract Minimum

  (in Cases) is:

  	
   

  	
  The Adjusted

  Toll Charge

  for 2005 Will

  Be:

  	
   

  	
  Thus the

  Licensing Fee

  Per Bagel for

  2005 Will Be:

  	
   

  	
  The Adjusted

  Toll Charge

  for 2006 Will

  Be:

  	
   

  	
  Thus the

  Licensing Fee Per

  Bagel for 2006

  Will Be:

  	
   

  
	
  2,000,000

  	
   

  	
  $

  	
  ***

  	
   

  	
  $

  	
  ***

  	
   

  	
  $

  	
  ***

  	
   

  	
  $

  	
  ***

  	
   

  
	
  2,543,962

  	
   

  	
  $

  	
  ***

  	
   

  	
  $

  	
  ***

  	
   

  	
  $

  	
  ***

  	
   

  	
  $

  	
  ***

  	
   

  
	
  2,798,358

  	
   

  	
  $

  	
  ***

  	
   

  	
  $

  	
  ***

  	
   

  	
  $

  	
  ***

  	
   

  	
  $

  	
  ***

  	
   

  
	
  3,052,754

  	
   

  	
  $

  	
  ***

  	
   

  	
  $

  	
  ***

  	
   

  	
  $

  	
  ***

  	
   

  	
  $

  	
  ***

  	
   

  
	
  3,391,949

  	
   

  	
  $

  	
  ***

  	
   

  	
  $

  	
  ***

  	
   

  	
  $

  	
  ***

  	
   

  	
  $

  	
  ***

  	
   

  
	
  4,070,339

  	
   

  	
  $

  	
  ***

  	
   

  	
  $

  	
  ***

  	
   

  	
  $

  	
  ***

  	
   

  	
  $

  	
  ***

  	
   

  

 

*     subject
to decrease pursuant to Section 7.5.2 below”

 

(Note: The table has been
adjusted to reflect the mutually agreed upon reductions to the License Fee of
$*** for the revenue neutral minimum adjustment at the new 2,000,000 Contract
Minimum level and $*** for the License Fee reduction at all Contract Minimum
levels.)

 

35

 

Article 19.0            The first sentence of
Section 6.10.3 is hereby amended and restated in its entirety as follows:

 

“The Harlan
Companies and New World expressly agree that they each may exercise a right of
offset against any amounts that would otherwise be due to the other parties
hereunder or under the Equipment Lease, but only to the extent that (x) the
amount has not been paid to the other party in accordance with the terms of
this Agreement or the Equipment Lease, (y) the party against whom a party
wishes to exercise a right of offset is the direct account debtor for such
amounts, and (z) there are no valid credits, reductions or other deductions as
to the amounts due to the party against whom a party wishes to exercise a right
of offset.”

 

Article 20.0            New World hereby agrees
that the Harlan Companies may produce bagels or bagel dough on the Bagel Lines
for sale or distribution to *** and ***, notwithstanding the terms of Section
6.2 of the Agreement.

 

Article 21.0            Section C(1)(b) of the Equipment
Schedule to the Lease Agreement is hereby deleted in its entirety and replaced
with the following paragraphs:

 

“(b)         for
the year 2005 and every year thereafter, the number of Category B Products
bagels shipped by the Harlan Companies (as defined in the Supplier Agreement)
to or on behalf of *** and *** during such Accounting Period:
(i) multiplied by $*** per bagel, up until such time as the Harlan
Companies have shipped bagels to or on behalf of *** and *** collectively in
any such year equivalent to the Base Volume (as hereinafter defined); and (ii)
multiplied by $*** per bagel, at such time as the Harlan Companies have shipped
bagels to or on behalf of *** and *** collectively in any such year equivalent
to the Base Volume. For these purposes, the term “Base Volume” means *** bagels
actually shipped by the Harlan Companies to *** during the calendar year 2004;
and

 

(c)           for
the year 2005 and every year thereafter, the number of Category B Products
bagels shipped by the Harlan Companies to or on behalf of customers other than
*** and *** during such Accounting Period multiplied by $*** per bagel;
provided, however, that no such amount will be payable for the first ***
million Category B Products bagels shipped by the Harlan Companies to or on
behalf of customers other than *** and *** in any such year.”

 

Article 22.0            Notwithstanding anything
to the contrary in the Agreement or the Equipment Lease, New World agrees to
provide to the Harlan Companies the funds necessary to complete the capital
expenditure projects identified in the attached Schedule 2 and to
also provide an additional $*** in capital expenditures during the Term of the
Agreement for other major refurbishments of the leased equipment, new equipment
that it approves in advance (except those items ordered prior to December 16,
2004 of which New World has already been notified), and any other capital
projects mutually agreed to by the parties. 
New World will only approve capital expenditures that qualify as capital
under Generally Accepted Accounting Principles.

 

36

 

If you agree that the
language above accurately reflects our agreement with respect to the changes to
the Agreement and the Equipment Lease, please sign two originals of this letter
in the space provided below and return one original to my attention.

 

Sincerely,

 

NEW WORLD RESTAURANT GROUP, INC.

EINSTEIN AND NOAH CORP.

MANHATTAN BAGEL COMPANY. INC.

 

 

	
       /s/ Paul J.B.
  Murphy, III

  	
   

  
	
  Paul J.B. Murphy, III

  
	
  President and CEO

  
	
   

  
	
   

  	
  AGREED TO AND ACKNOWLEDGED

  
	
   

  	
  this 23rd day of February, 2005:

  
	
   

  	
   

  	
   

  
	
   

  	
  HARLAN BAKERIES, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
             /s/
  Hugh P. Harlan

  	
   

  
	
   

  	
   

  	
  Hugh P. Harlan, President

  
	
   

  	
   

  	
   

  
	
   

  	
  HARLAN BAGEL SUPPLY COMPANY, LLC

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
             /s/
  Hugh P. Harlan

  	
   

  
	
   

  	
  Printed: 

  	
  Hugh P. Harlan

  
	
   

  	
  Title:

  	
  President

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  /s/ Hal P. Harlan

  	
   

  
	
   

  	
   

  	
  Hal P. Harlan

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  /s/ Hugh P. Harlan

  	
   

  
	
   

  	
   

  	
  Hugh P. Harlan

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  /s/ Doug H. Harlan

  	
   

  
	
   

  	
   

  	
  Doug H. Harlan

  	
   

  
										

 

cc:      Rick Dutkiewicz

 

37EXHIBIT 10.21  

March 9,
2004 

Irene
A. Chow, Ph.D. 

Dear
Irene: 

        The
purpose of this letter is to set forth the terms of your continued employment with Genelabs Technologies, Inc. 

	

Position Title:	
 	

Chairman of the Board of Directors.
	

Reporting:	
 	

You will report directly to the Board of Directors.
	

Effective Dates:	
 	

This change is effective beginning March 8, 2004.
	

Compensation:	
 	

Your base salary will be $16,667 per month ($200,000 annually), paid semi-monthly. Your employment status will be "exempt, regular part-time." Compensation will be reviewed by the Board of Directors at least annually in the first calendar quarter of
each year.
	

 	
 	

Upon the effective date of this change, you will no longer participate in the company's Annual and Long-Term Incentive Plan. All amounts currently granted to you under the Long-Term portion of the plan will immediately become 100% vested. You may
receive payment of those amounts at the next payroll date following the change, or on any other schedule thereafter, and in any increments, at your discretion.
	

Benefits:	
 	

You will continue to be eligible for all employee benefits programs that are applicable to regular part-time employees. In accordance with the company's regular part-time employees' benefit plan, you will no longer participate in the following
programs: group life insurance, accidental death and dismemberment insurance, and long term disability insurance.
	

 	
 	

All accrued but unused vacation as of March 8, 2004 will be paid to you at the company's next regular payroll date. You will not accrue further vacation or sick time.
	

Stock:	
 	

As long as you continue to be an employee or member of Genelabs' Board of Directors, stock options granted remain exercisable in accordance with their terms. You may receive additional stock options grants at the discretion of the Board of Directors
under the Corporation's stock option plans. As an employee of the Corporation, you are not eligible for the automatic option grants for non-employee directors under the Corporation's 2001 Stock Option Plan.
	

Change In Control:	
 	

The Agreement dated January 3, 2002 with respect to a change in control of the Corporation will remain in effect in accordance with its terms while the Chairman is an employee.
	

Board of Directors:	
 	

You will continue to serve as a member of the Board of Directors. While you are also an employee of the company, you will not receive the standard stipend for attendance at Board of Directors meetings.
	

At-Will Employment:	
 	

Your employment continues to be at will, which means you or Genelabs may terminate it at any time.

        Please
indicate your agreement to these terms by signing below. 

	 	 	Sincerely,
	

 	

 	

Lynn Hughes

Vice President, Human Resources and Corporate Services
	

AGREED TO AND ACCEPTED:	

 
	

By:	

 	

 
	 	
 Irene A. Chow, Ph.D.	 
	

Date:

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