<PAGE>
UNITED STATES
CONFORMED
SECURITY AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
For the Quarterly period ended June 30, 1996 or
-----------------
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to ___________________
Commission file number 0-19548_________________________________
KOO KOO ROO, INC.
- -------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 22-3132583
- ---------------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
11075 Santa Monica Boulevard, Suite 225, Los Angeles, CA 90025
- -------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(310) 479-2080
- -------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Not Applicable
- -------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------- -------
As of July 30, 1996, the registrant had outstanding 14,848,740 shares of
common stock, $.01 par value per share (excluding 72,512 shares held in the
Treasury), and 1,200,000 shares of 5% Convertible Preferred Stock, liquidation
preference $25.00 per share.
Page 1 of 13
<PAGE>
KOO KOO ROO, INC. AND SUBSIDIARIES
INDEX FORM 10-Q
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
PART I. FINANCIAL INFORMATION
Condensed Consolidated Statements of
Operations for the Six and
Three Months Ended June 30, 1995 and 3
June 30, 1996
Condensed Consolidated Balance Sheets
as of December 31, 1995 and June 30, 1996 4
Condensed Consolidated Statements of
Cash Flows for the Six Months Ended
June 30, 1995 and June 30, 1996 5
Notes to Condensed Consolidated
Financial Statements 6-7
Management's Discussion and Analysis
of Financial Condition and Results of
Operation 8-11
PART II. OTHER INFORMATION
Item 4. Submission of matters to
a vote of security holders 12
Item 6. Exhibits required under Rule 601 12
Exhibits and Reports on Form 8-K
Signatures 13
</TABLE>
Page 2 of 13
<PAGE>
KOO KOO ROO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED SATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Six Six Three Three
Months Ended Months Ended Months Ended Months Ended
June 30, June 30, June 30, June 30,
1995 1996 1995 1996
--------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Revenues:
Sales $8,161,568 $16,019,263 $4,510,836 $8,661,890
Interest and other 140,922 833,591 91,182 714,959
--------------- ---------------- --------------- ----------------
Total revenues 8,302,490 16,852,854 4,602,018 9,376,848
Cost of Sales 5,759,276 11,055,763 3,051,548 5,910,355
--------------- ---------------- --------------- ----------------
Gross profit 2,543,214 5,797,091 1,550,470 3,466,494
Operating Expenses 5,598,869 9,206,354 3,426,206 5,099,234
--------------- ---------------- --------------- ----------------
Loss before minority interest (3,055,655) (3,409,263) (1,875,736) (1,632,740)
Minority interest in loss 89,135 111,256 14,822 37,301
--------------- ---------------- --------------- ----------------
Net loss (2,966,520) (3,298,007) (1,860,914) (1,595,439)
Preferred Dividends ------ (424,200) ------ (375,000)
--------------- ---------------- --------------- ----------------
Net Loss Applicable to Common Stockholders $(2,966,520) $(3,722,207) $(1,860,914) $(1,970,439)
============== =============== ============== ===============
Net loss per common share: $(0.29) $(0.26) $(0.17) $(0.13)
============== =============== ============== ===============
Weighted average number of common and
common equivalent shares 10,196,105 14,571,560 10,804,999 14,785,915
============== =============== ============== ===============
</TABLE>
Page 3 of 13
<PAGE>
KOO KOO ROO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
December 31, June 30,
ASSETS 1995 1996
---------------- ----------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $3,501,815 $18,547,542
Marketable securities 3,663,111 8,294,433
Inventories 186,742 267,046
Prepaid expense and other 680,703 868,770
---------------- ----------------
Total current assets 8,032,371 27,977,791
Property and equipment 14,270,703 21,098,303
Lease Acquisition costs 1,511,328 1,980,177
Pre-opening costs 840,891 897,070
Investment in international joint ventures ------- 221,108
Intangibles and other assets 1,899,367 2,259,804
---------------- ----------------
$26,554,660 $54,434,254
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $1,660,899 $1,598,515
Accrued payroll 491,169 866,097
Accrued store closing costs 546,463 525,942
Notes and loans payable - short term 13,823 125,118
Other accrued liabilities 1,402,413 1,497,441
---------------- ----------------
Total current liabilities 4,114,767 4,613,113
---------------- ----------------
Notes and loans payable - long term 178,646 138,889
---------------- ----------------
Minority interest 718,109 875,267
---------------- ----------------
Stockholder's Equity
Preferred stock, $.01 par value, 5,000,000
shares authorized; 1,200,000 shares of
5% Convertible Preferred Stock issued and
outstanding (liquidation preference
$30,000,000) ------- 12,000
Common stock, $.01 par value, 50,000,000
shares authorized; 14,329,851 and 14,879,351
shares issued and outstanding 143,299 148,794
Additional paid-in capital 40,467,687 71,357,377
Accumulated deficit (18,274,719) (21,996,926)
Treasury stock, 84,352 and 72,512 shares
at cost (2,242) (2,124)
Common stock issued for unearned compensation (790,887) (712,137)
---------------- ----------------
Total stockholders' equity 21,543,138 48,806,984
---------------- ----------------
$26,554,660 $54,434,254
=============== ===============
</TABLE>
Page 4 of 13
<PAGE>
KOO KOO ROO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Six
Months Ended Months Ended
June 30, June 30,
1995 1996
---------------- ---------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss $(2,966,520) $(3,298,007)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,014,892 1,780,306
Deferred franchise revenue (80,000) -------
Minority interest in net loss (89,135) (111,256)
Assets written off or abandoned 199,959 278,285
Common stock issued for expenses and other 111,000 75,750
Changes in operating assets and liabilities:
Inventories (3,699) (80,304)
Prepaid expenses & other current assets (237,106) (303,067)
Accounts payable 440,513 256,616
Accrued expenses and other liabilities 307,123 194,472
---------------- ---------------
Net cash used in operating activities (1,302,973) (1,207,205)
---------------- ---------------
Cash Flows From Investing Activities:
Sale of marketable securities (6,158,040) (4,631,322)
Acquisition of property and equipment (3,314,406) (8,284,720)
Lease acquisition and other assets (90,416) (709,579)
Investment in international joint ventures ------ (221,108)
Pre-opening costs (686,003) (657,607)
---------------- ---------------
Net cash used in investing activities (10,248,865) (14,504,336)
---------------- ---------------
Cash Flows From Financing Activities:
Minority capital contributions 114,664 268,414
Proceeds from private placements, net 17,661,625 30,465,492
Distributions to shareholders (45,781) (49,200)
Exercise of common stock options and warrants 1,578,794 72,562
---------------- ---------------
Net cash provided by financing activities 19,309,302 30,757,268
---------------- ---------------
Net Increase in Cash and Cash Equivalents 7,757,464 15,045,727
Cash and Cash Equivalents, beginning of period 544,185 3,501,815
---------------- ---------------
Cash and Cash Equivalents, end of period $8,301,649 $18,547,542
=============== ==============
</TABLE>
Page 5 of 13
<PAGE>
KOO KOO ROO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The consolidated financial statements include the accounts of the Company,
its majority-owned subsidiaries and two limited partnerships in which the
Company has a controlling interest. All significant inter-company
transactions and balances have been eliminated.
2. In the first quarter of 1996, the Company acquired 90% of the outstanding
stock of Color Me Mine, Inc. ("Color Me Mine") a chain of paint-your-own
ceramics studios. The consideration consisted solely of 377,000 shares of
restricted, unregistered shares of Koo Koo Roo Common Stock. Of this
total, shares aggregating $900,000 in value are subject to registration at
the end of one year, and 100,000 shares are subject to a lock-up to be
released at the end of three years. The founders of Color Me Mine will
continue to manage the concept with their own separate management team and
will develop it through area development agreements and Company-owned
stores. The founders of Color Me Mine have five-year employment contracts.
The acquisition has been accounted for utilizing the pooling of interest
accounting method and, accordingly; prior period financial statements have
been restated to include Color Me Mine.
Through their wholly-owned subsidiary Color Me Mine is in the business of
entering into area development agreements to establish Color Me Mine
franchises. During the current quarter Color Me Mine completed the sale of
three area development territories. Revenue from these sales amounting to
$255,000 has been recognized on the accompanying Consolidated Statement of
Operations in accordance with Statement of Financial Accounting Standards
No. 45.
3. On June 7, 1996 the Company entered into definitive agreements with a group
of investors in Toronto, Canada, to form a Canadian Limited Partnership,
Koo Koo Roo Canada Holdings, which plans to develop the Koo Koo Roo
California Kitchen restaurant and Arrosto Coffee Company concepts in
Canada. The partnership is 40% owned by Koo Koo Roo, Inc. and the
remaining 60% is owned by the group of investors based in Toronto.
4. On May 8, 1996 the Company entered into a business development agreement
with an entity associated with its Florida joint venture partner to
provide business development services similar to those provided in
connection with the Canadian joint venture. In consideration for the
agreement, the Company issued options to purchase 1.0 million shares of
common stock with an exercise price of $8.00 per share. The options will
become exercisable ratably over a three-year period beginning on the first
anniversary of the date of issuance, so long as the business development
agreement remains in place. The business development agreement
Page 6 of 13
<PAGE>
may be canceled with six months notice by the Company's CEO in his sole
discretion. The options also will vest upon a change in control (as
defined).
5. On May 8, 1996 the Company amended its area development agreement covering
Florida and certain counties in Southern Georgia. Under this amendment,
the area developer's rights to open franchise restaurants were terminated,
and all stores will be developed as joint ventures through newly-formed
partnerships of which the Company will own a 50% interest. In
consideration for this amendment, the Company granted the area developer
options to purchase 350,000 shares of the Company's common stock at $8.00
per share. The options vested and became exercisable immediately upon
grant.
6. The accompanying unaudited consolidated financial statements were prepared
on the accrual basis of accounting. In the opinion of management, all
adjustments (consisting only of normal, recurring accruals) which are
necessary for a fair presentation of the financial results for the periods
presented have been made. The interim period results of operations are not
necessarily indicative of the results of operation for the full year.
Page 7 of 13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
HIGHLIGHTS FOR THE QUARTER ENDED JUNE 30, 1996
In accordance with the Company's business plan to rapidly replicate the Koo
Koo Roo California Kitchen(TM) concept, nationally and internationally, three
new Koo Koo Roo restaurants were opened during the period and a new entity, Koo
Koo Roo Canada Holdings, was formed with a group in Toronto, Canada. The joint
venture, which is 40% owned by Koo Koo Roo and 60% owned by a group of Canadian
business and civic leaders, will develop the Koo Koo Roo California Kitchen(TM)
restaurant concept and Arrosto Coffee Company outlets in Canada. During the
three months ended June 30, 1996, Koo Koo Roo restaurants were opened in Beverly
Hills and Yorba Linda, California and in North Miami, Florida.
In addition, two Color Me Mine ceramics studios were opened and three Color
Me Mine Area Development Agreements for the development of up to 36 stores were
signed. Color Me Mine ceramics studios were opened in Malibu and Beverly Hills,
California.
The Company distributed a quarterly dividend to the holders of its 5%
Convertible Preferred Stock in accordance with its purchase agreement. This
dividend, amounting to $375,000, was paid in July 1996 through the issuance of
41,401 shares of the Company's Common Stock.
RESULTS OF OPERATIONS
The Company incurred an operating loss for the quarter and six month
period ended June 30, 1996 in accordance with the Company's strategy of building
the infrastructure to support future growth. The Company's corporate overhead
contemplates a greater number of stores than is currently open and will support
a greater rate of new store development than is presently occurring.
The net loss for the six month period ended June 30, 1996 was $3,298,007
(before dividends on preferred stock) compared to a net loss of $2,966,520 for
the six month period ended June 30, 1995. The net loss for the quarter ended
June 30, 1996 was $1,595,439 (before dividends on preferred stock) compared to
$1,860,914 for the quarter ended June 30, 1995.
Revenues for the six month period ended June 30, 1996 were $16,852,854
compared to $8,302,490 for the six month period ended June 30,1995, an increase
of 103%. Revenues for the three month period ended June 30, 1996 were
$9,376,848 compared to $4,602,018 for the three month period ended June 30,
1995, an increase of 104%.
Sales for the current quarter were produced by 10 Koo Koo Roo restaurants,
which were operating during the current quarter and a portion of the same period
of the prior year and 11 additional restaurants opened subsequent to June 30,
1995. Three new restaurants were opened during the current quarter, including
owned restaurants in Beverly Hills and Yorba Linda, California and a joint-
venture restaurant in North Miami, Florida. Sales for the quarter also include
revenues produced by four Color Me Mine studios, two of which were open during
the same period of the prior year.
Page 8 of 13
<PAGE>
Average weekly sales for the eight Koo Koo Roo restaurants open the full 13
weeks of the second quarter of both the current and prior year increased 16.0%
for the quarter. Four Arrosto locations open in both periods generated $205,838
in revenues for the current period and $186,488 during the same period of the
prior year, an increase of 10.4%. Management believes that these improvements
are due to a number of factors, including new customers generated by greater
awareness of the Company's operation, high frequency visits of a growing group
of customers, upgraded restaurant management through recruitment of more
experienced managerial personnel, improved training programs and the addition of
new products late in 1995 including hand-tossed, gourmet salads offered at
restaurants retrofitted with The Vegetable Stand. As of June 30,1996, all but
two of the 21 Koo Koo Roo locations had been retrofitted with The Vegetable
Stand.
Interest and other revenues include $378,860 in interest income for the
current quarter compared with $70,632 for the same period last year and $255,000
in Color Me Mine area development fees.
Cost of sales were $5,910,355 in the current quarter compared to $3,051,548
in the same period of the prior year. These costs increased to 68.2% of sales
compared to 67.6% in the same period last year due to higher costs associated
with new stores.
Gross profit for the quarter ended June 30, 1996 as a percentage of
revenues, increased to 37.0% compared with 34.4% in the same period of the prior
year. These results are due to $255,000 in Color Me Mine area development fees
and to the higher interest income mentioned above.
Operating expenses amounted to $5,099,234 for the current year's quarter
compared to $3,426,206 for the prior year's quarter. This increase was
primarily due to the Company's expansion of the Koo Koo Roo and Arrosto concepts
and partially to establishing the infrastructure needed to rapidly develop the
Color Me Mine concept. The current quarter also includes start-up costs to
develop a professional marketing capability. Operating expenses as a percentage
of revenues decreased to 54.4% from 74.5% in the same period of the prior year
due to increased store sales and higher per store volumes. Management expects
overall operating expenses to continue to decline as a percentage of revenues.
Personnel and corporate expense increased due to infrastructure added in
preparation for the Company's planned growth. Management expects the growth of
corporate overhead to continue, but at a significantly slower rate.
Approximately $220,000 in expenses associated with prospective restaurant sites,
which had been selected earlier and were abandoned after it was determined the
sites did not meet the Company's current site selection criteria, are also
included in the current quarter's operating expenses.
Page 9 of 13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY. Total cash, cash equivalents, and marketable securities at June
30, 1996 amounted to $26,841,975. The Company has been expending cash resources
to build income producing assets in the form of new and remodeled Koo Koo Roo
California Kitchen and Color Me Mine stores. The Company completed the
construction of three restaurants and two ceramics studios during the quarter.
Purchases of property, equipment and computer hardware and software together
with costs for acquiring certain locations amounted to $5,277,014 compared with
$2,181,533 during the same quarter last year.
Corporate expenses for the development of the Koo Koo Roo California
Kitchen and Color Me Mine concepts, real estate development, and the
infrastructure necessary to manage store growth have resulted, to date, in
overall net operating losses. The Company's strategy is to build sufficient new
stores to generate positive overall operating cash flow as quickly as possible.
Management presently believes that it has sufficient resources for this
expansion and expects the cash used in operations to decrease during the next
six month period, and to become positive by the fourth quarter of 1996.
This strategy requires acquisition and development of successful new sites, and
while management has been successful in opening new Koo Koo Roo California
Kitchen restaurants and Color Me Mine ceramics studios in the past, there can be
no assurance that this success will continue in the future.
CAPITAL RESOURCES. During the current quarter the Company received $72,562
from the exercise of common stock options and warrants. During the first
quarter the Company received $33.2 million before expenses of $2.7 million from
two private placements relating to the issuance of 450,000 shares of Common
Stock for $7.245 per share (subject to adjustment) and 1,200,000 shares of a
newly-designated class of 5% Convertible Preferred Stock for $25.00 per share as
well as related warrants issued to its placement agents. The number of shares
of Common Stock issuable in connection with such transactions is subject to
adjustment and will depend upon factors which cannot be predicted by the Company
at this time including, primarily, the future market price of the Common Stock.
The Company is also a partner in two limited partnerships formed to
establish new Koo Koo Roo restaurants in Florida which are controlled by the
Company. Financial results of these partnerships has been consolidated into
those of the Company. During the current quarter, $268,414 was contributed to
these partnerships by outside partners.
The Company has approximately $139,000 of long term notes and loans payable
which were assumed with the acquisition of Color Me Mine, Inc. and has no other
long term debt or store level debt financing as of June 30, 1996. In order to
achieve its present goal of 45 to 50 Koo Koo Roo restaurants open or under
construction by December 31, 1996, management estimates that an investment of
approximately $18 million will be required. Approximately $900,000 will be
required to open additional Company-owned Color Me Mine ceramics studios by
December 31, 1996. The Company plans to fund these investments through the use
of existing cash and marketable securities. In addition, the company intends to
investigate store-level, asset-based financing of fixtures, equipment and
leasehold improvements as its expansion continues.
The timing of future capital requirements will be affected by the number of
restaurants and ceramics studios opened, operational results, real-estate
development and potential other
Page 10 of 13
<PAGE>
corporate opportunities, including joint ventures in the United States and
internationally, and acquisitions of small entities with the objective of
converting locations to the Koo Koo Roo California Kitchen concept, the Color Me
Mine concept or dual branding. To achieve management's high growth strategic
goal for calendar 1997, the Company will need to raise additional funds. As the
Company's capital requirements increase, the Company may seek additional funds
from public or private offerings of debt or equity, or may seek bank financing
facilities. There can be no assurance, however, that the Company will be able to
raise such capital on acceptable terms when needed.
The forward-looking statements and comments contained in this Report concerning,
among other things, the prospects for the company to grow rapidly and attain
profitable operations, are necessarily subject to risks and uncertainties some
of which are significant in scope and nature. Actual results will be dependent
upon many factors the outcome of which cannot be predicted as of the date of
this Report. In addition to the matters discussed herein, factors that should
be considered are included under the caption "Business Risks" in the Company's
most recent Form 10-K and "Risk Factors" in its most recent Form S-1, each of
which has been filed with the Securities and Exchange Commission.
Page 11 of 13
<PAGE>
PART II. OTHER INFORMATION
--------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
(a) The annual meeting of Stockholders was held on May 15,1996.
(b) At the meeting the following nine individuals were elected as
Directors.
Kenneth Berg Kory L. Berg
Donna S. Guido Lee A. Iacocca
Robert F. Kautz Michael D. Mooslin
Jess M. Ravich Morton J. Wall
Don Wohl
(c) The Stockholders approved a resolution to reserve for issuance
shares of Common Stock (including shares issuable upon the
conversion of shares of the Copany's 5% Convertible Preferred
Stock, as dividends thereon and upon exercise of related warrants)
issued in a March 1996 Private Placement which received an
affirmative vote of 8,105,261. There were 486,786 negative votes
and 87,867 abstentions. In addition, 4,208,134 shares were not
voted.
The Stockholders ratified the appointment of BDO Seidman, LLP
as independent accountants for the Company for the fiscal year
ending December 31, 1996 with an affirmative vote of 12,824,049.
There were 21,472 negative votes cast and 42,527 abstentions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) 10.76 Color Me Mine Area Development Agreement.
(b) There were no reports on Form 8-K filed for the three months
ended June 30, 1996.
Page 12 of 13
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KOO KOO ROO, INC.
-----------------
Date: August 13, 1996 /s/ KENNETH BERG
------------------ ----------------------------------------------
KENNETH BERG, CHAIRMAN OF THE BOARD
Date: August 13, 1996 /s/ ROBERT KAUTZ
------------------- ----------------------------------------------
ROBERT KAUTZ, CHIEF FINANCIAL OFFICER
Page 13 of 13
<PAGE>
EXHIBIT 10.76
AREA DEVELOPMENT AGREEMENT
THIS AREA DEVELOPMENT AGREEMENT (the "Agreement") is made and entered into
as of __________ (the "Effective Date"), by and between Color Me Mine
Franchising, Inc., a California corporation, with its principal office at 11075
Santa Monica Boulevard, Suite 225, Los Angeles, California 90025 ("Company"),
and Under Fire, Inc., a California corporation, whose principal office is at
5269 East Second Street, Long Beach, California 90813 ("Developer"), with
reference to the following facts:
A. Company and its affiliates have developed a distinctive system for a
"paint your own" ceramics studio, and the sale and promotion of related products
and services, under the name "Color Me Mine."
B. Company grants to certain qualified persons or entities who meet the
Company's qualifications, and who are willing to undertake the investment and
effort, the right to develop "Color Me Mine" stores within a defined
geographical area.
C. Developer has requested that the Company grant it the right to develop
"Color Me Mine" Stores within a defined geographical area, and Company has
agreed to do so, upon the terms and conditions set forth herein.
NOW, THEREFORE, on the basis of the foregoing recitals, in consideration of
the mutual promises, covenants, agreements and conditions contained in this
Agreement, and other good and valuable consideration, Company and Developer
hereby agree as follows:
ARTICLE I. DEFINITIONS
When used in this Agreement, the following terms shall have the meanings
set forth below when they appear capitalized (all terms used in this Agreement
that are not defined in this Article I shall have the meanings set forth
elsewhere in this Agreement):
1.1 "Acting as a 'Paint Your Own' Ceramic Studio" shall mean all acts
-------------------------------------------
involving ceramic instruction, training, and ceramic materials provided to any
consumer, together with the retail sale of prefabricated ceramic products and
the firing of these products after they have been painted by the consumer.
1.2 "Approved Site" shall mean a site, and Business Plan for such site,
-------------
approved by Company in accordance with Section 3.4 for the establishment of a
Store.
1.3 "Business Plan" shall mean a detailed business plan for the
-------------
establishment and operation of a Store at a proposed site, which plan shall
contain a construction budget, pre-opening expenditure budget, post-opening
capital budget, an operating budget, cash flow projections, sources of cash
analysis (including analysis of any intended borrowings or financings), an
operating plan (including plans related to the strategic business plan), and
de-
<PAGE>
tailed quantifiable goals for the first year of such Store's operation. Such
business plan shall specify the cash needs of the Store as of the last day of
each calendar quarter. The cash needs of the Store shall include all cash needed
for day-to-day operations, for capital goods replacement and acquisition, for
reserves, and for expansion purposes. All cash flow projections shall be on a
twelve (12) month basis.
1.4 "Confidential Information" shall have the meaning assigned to it in
------------------------
Section 5.1.
1.5 "Confidentiality and Non-Competition Agreement" shall mean a
---------------------------------------------
confidentiality and non-competition agreement in the form of Exhibit D.
1.6 "Certificate of Formation" shall mean a Certificate of Formation
------------------------
substantially in the form of Exhibit E.
1.7 "Development Manual" shall mean the confidential manual or manuals
------------------
containing policies and procedures to be adhered to by Developer in the
development and operation of Stores, which may consist of one or more volumes,
handbooks, manuals, written materials, video or audio cassette tapes, computer
diskettes, and other materials and intangibles, as may be modified, added,
replaced or supplemented by Company from time to time in its sole discretion,
whether by way of supplements, replacement pages, franchise bulletin,
disclosure, or other official pronouncements or means. The Development Manual
may contain specifications, standards, policies and procedures prescribed from
time to time by Company for developers of Stores and information relative to
other obligations of Developer hereunder and the operation of Stores. The
Development Manual may be modified from time to time in Company's sole
discretion to reflect changes in the System or specifications, standards,
policies and procedures for Stores or such other changes or additions as Company
deems necessary or advisable.
1.8 "Equity Interest" shall mean any stock, partnership or limited
---------------
liability company interest or other direct or indirect beneficial interest in
such entity (whether partnership, limited liability company, corporation, trust
or otherwise), or in the economic benefits derived therefrom, and if the holder
of such Equity Interest is not a natural person, "Equity Interest" shall also
include any stock, partnership or limited liability company interest or other
direct or indirect beneficial interest in, or in the economic benefits derived
from, such holder. "Equity Interest" in Developer shall also include any direct
or indirect interest in this Agreement or in the economic benefits derived
therefrom.
1.9 "Equity Holder" shall mean any holder of an Equity Interest in
-------------
Developer and shall not include Developer itself.
1.10 "Development Schedule" shall mean the development schedule set forth
--------------------
on Exhibit C.
1.11 "Form Store Lease" shall mean a standard form lease prepared by
----------------
Company, as it may be modified from time to time, for the lease of an Approved
Site.
2
<PAGE>
1.12 "Franchise Agreement" shall mean a franchise agreement in
-------------------
substantially the form of Exhibit G to be entered into between Company as
franchisor and a Franchisee as franchisee for the operation of a Store at an
Approved Site.
1.13 "Franchisee" shall mean a limited liability company to be owned by
----------
Developer and Company to operate a single Store at a single Approved Site.
1.14 "Operating Agreement" shall mean a limited liability company operating
-------------------
agreement in substantially the form of Exhibit F to be entered into between
Developer and Company.
1.15 "Service Marks" shall mean those proprietary marks registered with the
-------------
United States Patent and Trademark Office, and common law trademarks and service
marks, trade names, logo types, insignias, designs and other commercial symbols
which Company now or hereafter is authorized to use and does use or authorizes
others to use to identify the Store.
1.16 "Site Agreement" shall mean the lease, sublease or assignment of lease
--------------
to be entered into between a Franchisee and a lessor or sublessor of an Approved
Site.
1.17 "Site Package" shall mean a complete site approval request package and
------------
location feasibility analysis on Company's specified forms (containing such
demographic, commercial, and other information and photographs as Company may
require from time to time) for each site at which Developer proposes and intends
in good faith to establish and operate a Store.
1.18 "Store" shall mean Acting as a "Paint Your Own" Ceramic Studio from an
-----
Approved Site utilizing the Service Marks.
1.19 "Term" shall have the meaning assigned to it in Section 2.5.
----
1.20 "Territorial Requirements" shall mean all of the following: (a)
------------------------
Developer is satisfying its obligations under the Development Schedule on a
timely basis, (b) Developer is in full compliance with its other obligations
under this Agreement, (c) each Franchisee is in full compliance with its
obligations under each Franchise Agreement, (d) Developer is in full compliance
with its obligations under each Operating Agreement, and (e) no event of default
has occurred under any other instrument, agreement or document between Developer
or its Equity Holders and Company.
1.21 "Territory" shall mean the geographical area described on Exhibit B.
---------
1.22 "Transfer" shall mean to sell, assign, transfer, convey, pledge,
--------
mortgage, encumber, abandon, eliminate or give away, voluntarily or
involuntarily, by operation of law or otherwise.
3
<PAGE>
ARTICLE II. GRANT OF AREA DEVELOPMENT RIGHTS
2.1 Grant of Area Development Rights. Subject to the terms and
--------------------------------
conditions contained herein, Company hereby grants to Developer, and Developer
hereby accepts from Company, the exclusive right, through a joint venture with
Company as described in Section 3.6 that will act as the Franchisee of a Store,
to establish, own and operate twelve (12) Stores in the Territory under a
separate Franchise Agreement for each Store. SUCH GRANT BY COMPANY IS IN
RELIANCE UPON ALL REPRESENTATIONS MADE BY DEVELOPER AND ITS OWNERS IN THE
DEVELOPER ACKNOWLEDGEMENTS AND REPRESENTATION STATEMENT, A COPY OF WHICH IS
ATTACHED TO THIS AGREEMENT AS EXHIBIT A AND WHICH SHALL BE EXECUTED BY DEVELOPER
CONCURRENTLY WITH THIS AGREEMENT.
2.2 Territory. Except as otherwise provided in Section 2.4 and provided
---------
that the Territorial Requirements have been, and at all times continue to be,
satisfied in full, Company will not operate or allow any other party to operate
a Store within the Territory during the Term. As provided in Section 2.4 or upon
either the Territorial Requirements not being satisfied or the termination or
expiration of the Term, Company and its affiliates shall have the right to
develop and operate, and to grant to others development rights and franchises to
develop and operate, Stores within the Territory.
2.3 Rights Retained by Company. Except as expressly limited by Section
--------------------------
2.2, Company (on behalf of itself, its affiliates and its designees) retains all
rights with respect to Stores, the Service Marks, and the sale of any other
product and services, anywhere in the world, including, without limitation:
(a) the right to operate or grant to others the right to operate
similar businesses, including, without limitation, Stores, at such
locations within and/or outside the Territory and on such terms and
conditions as Company, in its sole discretion, deems appropriate;
(b) the right, and the right to grant others the right, to develop,
manufacture, market, distribute and/or sell products or services within
and/or outside the Territory through any channel of distribution, whether
wholesale, retail or otherwise, under or in association with the Service
Marks or any other trademarks and/or to own or operate any other business
under the Service Marks or any other trademarks; and
(c) the right to acquire and operate any business, including, without
limitation, a business which is Acting as a "Paint Your Own" Ceramic Studio
located or operating within and/or outside the Territory.
The foregoing reserved rights are in addition to all rights of CMM
described in Section 2.4.
2.4 Developer's Option to Develop Company Sites. If during the Term
-------------------------------------------
Company locates a site suitable for a Store in the Territory (a "Company Site"),
Company shall notify
4
<PAGE>
Developer in writing of such Company Site (including any relevant site-related
materials in Company's possession). Within ten (10) days after Developer's
receipt of Company's notice regarding such Company Site, Developer shall notify
Company if Developer desires to develop and operate a Store at such Company
Site. If Developer fails to so notify Company within such time period, then
Company or its designee shall have the right to develop and operate a Store at
such Company Site.
If Developer timely notifies Company in writing that Developer desires to
develop and operate a Store at such Company Site, then Developer will have
thirty (30) days in which to negotiate and deliver to Company for its approval a
lease or sublease for such Company Site in form for execution. If Company
disapproves the lease for failure to meet Company's requirements, Developer will
have ten (10) business days within which to negotiate and deliver to Company a
revised lease for such Company Site in form for execution. If Company approves
the lease or sublease for such Company Site, then Developer will (a) take all
actions described in Section 3.6 to form the Franchisee for such Company Site,
(b) cause the Franchisee to execute such lease or sublease, as applicable, (c)
subject to Section 3.7, cause the Franchise to execute the Franchise Agreement
with respect to such Company Site, and (d) if such Company Site is located at,
adjacent to, or in the immediate proximity of a Koo Koo Roo restaurant which is
being developed, cause the Store to be opened at such Company Site upon the
opening of such Koo Koo Roo restaurant.
If the revised lease or sublease fails to meet Company's requirements, or
if Developer fails to negotiate and deliver to Company a lease or sublease
within such thirty (30) day period, then Company or its designee may develop and
operate a Store at such Company Site. In addition, if Developer (or Franchisee)
fails to timely execute the lease or sublease agreement and other documents with
respect to such Company Site or, if applicable, otherwise fails to open a Store
at a Company Site upon the opening of such Koo Koo Roo restaurant, then Company
or its designee may develop and operate a Store at such Company Site.
2.5 Term of Agreement. The term ("Term") of this Agreement shall be until
-----------------
the earlier of (a) three (3) years from the Effective Date or (b) the date that
Developer opens twelve (12) Stores pursuant to this Agreement, unless sooner
terminated pursuant to the provisions of this Agreement.
ARTICLE III. DEVELOPMENT OF STORES
3.1 Development Obligations. Developer agrees that, during the Term, it
-----------------------
will continuously exert its best efforts to promote and enhance the development
of Stores within the Territory. Without limiting the foregoing obligation,
Developer agrees to cause to have open and in operation the number of Stores set
forth in the Development Schedule by the opening dates specified therein or as
otherwise permitted by Section 8.2(a). Developer acknowledges and agrees that a
Store that closes for a period of seven (7) consecutive days without Company's
prior written consent or a repeated pattern of closures of a Store for periods
of less than seven (7) consecutive days shall not be counted as open and in
operation as of the next Store opening date after such closing for purposes of
determining Developer's compliance with
5
<PAGE>
Development Schedule. Developer also agrees that it will at all times
faithfully, honestly and diligently perform its obligations under this
Agreement. Developer acknowledges that Company makes no representations or
warranties that the Territory can support, or there are sufficient sites for,
the number of Stores specified in the Development Schedule.
3.2 Site Review. Developer shall comply with Company's specifications and
-----------
requirements regarding site selection, development and construction, including,
without limitation, those concerning relations and with and use of approved
general contractors, subcontractors, real estate developers and lessors and, if
requested by Company, real estate broker(s). Developer shall submit to Company
a Site Package for each site at which Developer proposes and intends in good
faith to establish and operate a Store and which Developer reasonably believes
to conform to certain minimum site selection criteria established by Company
from time to time in its sole discretion.
3.3 Business Plan Review. Developer shall also submit to Company a
--------------------
Business Plan for each site at which Developer proposes and intends in good
faith to establish and operate a Store and which Developer reasonably believes
to conform to certain financial criteria established by Company from time to
time in its sole discretion.
3.4 Approval Process. In approving or disapproving any proposed site or
----------------
Business Plan, Company may consider such matters as it deems material from time
to time, which factors may (but are not required) to include, without
limitation, demographic characteristics, traffic patterns, parking, visibility,
allowed signage, the predominant character of the neighborhood, competition from
other businesses providing similar services within the area (including other
Stores), the proximity to other businesses, the exclusivity granted to other
franchise owners or developers of Stores, the nature of other businesses in
proximity to the site, and other commercial characteristics (including the
rental obligations, other lease terms for the proposed site), the size,
appearance, and other physical characteristics of the proposed site, budgeted
costs, required investments, source of funds and other financial budgetary
concerns. Developer acknowledges and agrees that Company may alter the criteria
or impose additional criteria for acceptable sites or Business Plans for Stores
at any time from time to time in its sole discretion, that Developer shall abide
by such site or Business Plan criteria as they exist from time to time and
comply with its development obligations hereunder (including, but not limited
to, the Development Schedule), and that no extension or alteration of the
required opening date of any Store shall arise by reason of such altered or
additional site or Business Plan criteria.
Company will approve or disapprove sites and Business Plans by delivery of
written notice to Developer. Company agrees to exert its reasonable best efforts
to deliver such notification to Developer within thirty (30) days after receipt
by Company of a complete Site Package and Business Plan and such other materials
requested by Company from time to time, containing all information required by
Company. Company shall have the right in its sole discretion to approve or
disapprove a site or Business Plan or require modifications to the Business
Plan, and Developer acknowledges and agrees that Company shall have no liability
therefor. Notwithstanding any other provision of this Agreement, Company's
failure to provide
6
<PAGE>
Developer with notice of its approval or disapproval of one or more proposed
sites or Business Plans shall in no event constitute an approval of such sites
or Business Plans, a waiver of Company's right to approve or disapprove such
sites or Business Plans or to require modifications, or cause any extension of
the applicable Development Schedule.
If Company approves a site and Business Plan, Company also will designate
an area around such site in which Company shall not open, or permit any other
party to open, a Store during the term of the franchise for the Store which will
be opened at the Approved Site.
3.5 Lease of Approved Sites. Developer acknowledges that Company has
-----------------------
developed a standard Form Store Lease. Company will furnish Developer with a
copy of the current Form Store Lease and Developer acknowledges that Company may
modify such form from time to time in its sole discretion. Developer shall
present the Form Store Lease to the lessor of an Approved Site and use its best
efforts to cause the lessor of such Approved Site to execute the Form Store
Lease as the Site Agreement for such Approved Site. If Developer fails to obtain
the lessor's agreement to use the Form Store Lease as the Site Agreement,
Developer shall cause the lessor to include in the Site Agreement the standard
terms which Company requires from time to time in its sole discretion, and such
other terms as Company may require or as it may specifically approve in writing.
After receiving a copy of a proposed Site Agreement in form for execution,
Company shall have the right, in its sole discretion, to approve, approve with
modification or disapprove such proposed Site Agreement, and Developer
acknowledges and agrees that Company shall have no liability therefor. Company
agrees to exert its best efforts to deliver such notification to Developer
within thirty (30) days after receipt by Company of the proposed Site Agreement.
Notwithstanding any other provision of this Agreement, Company's failure to
provide Developer with notice of its approval of one or more proposed Site
Agreements shall in no event constitute an approval of such Site Agreements, a
waiver of Company's right to approve or disapprove such Site Agreements or cause
any extension of the applicable Development Schedule. Developer agrees that it
will not execute (or cause to be executed) a Site Agreement without the prior
written approval of Company, that any such Site Agreement shall be in the name
of the Franchisee for such Approved Site and that any such Site Agreement shall
contain the express condition precedent of Company's prior written approval
thereof. Developer shall deliver to Company a copy of the fully signed Site
Agreement as previously approved within fifteen (15) days after its full
execution. Developer further agrees that it will not execute (or cause to be
executed) or agree to any modification of the Site Agreement which would affect
Company's rights without the prior written approval of Company. If the
Franchisee fails to obtain lawful possession of an Approved Site (through lease,
sublease or assignment) within sixty (60) days after delivery of Company's
approval of the Approved Site, Company may, in its sole discretion, withdraw
approval of such site at any time.
At the request of Company, if Developer owns an Approved Site, Developer
will enter into a lease with Company under Company's then-current form of lease
for a term equal to the term of the Franchise Agreement with lease options for
any renewal terms described in the Franchise Agreement, and for a rental equal
to the Approved Site's fair market rental value,
7
<PAGE>
and will cause the Franchisee to sublease the Approved Site from Company on the
same terms as the prime lease. If Developer and Company cannot agree on the fair
market rental value for such Approved Site, then such rental value shall be
determined by an independent appraiser selected by Company, an independent
appraiser selected by Developer, and a third independent appraiser selected by
the other appraisers. The fair market rental value shall be deemed to be the
average of the three (3) independent appraisals made by such appraisers.
3.6 Organization of Franchisee. Each time that Company approves a Site
--------------------------
Package, Business Plan and a Site Agreement for an Approved Site, Developer
shall, within ten (10) days of such approval, cause a new Delaware limited
liability company to be formed by filing a Certificate of Formation and shall
also enter into an Operating Agreement with Company for the limited liability
company so formed. Each company shall be a Franchisee and shall be the entity
that enters into the Site Agreement and the Franchise Agreement for a Store at
the Approved Site. Developer acknowledges that no Franchisee will operate more
than one (1) Store and that a new Franchisee is to be formed for each Store to
be established by Developer pursuant to this Agreement.
3.7 Franchise Agreements. Provided that (a) Developer is then in full
--------------------
compliance with all of the terms and conditions of this Agreement, (b) Developer
and all Franchisees are in full compliance with all of the terms and conditions
of each Franchise Agreement they have entered into, (c) Developer is then in
full compliance with all of the terms and conditions of each Operating Agreement
it has entered into, (d) a Franchisee has obtained legal possession of an
Approved Site, and (e) no event of default has occurred under other instrument,
agreement or document between Developer or its Equity Holders and Company,
Company agrees to offer to such Franchisee the right to operate a Store at such
Approved Site by delivering to Developer a Franchise Agreement in form for
execution by Franchisee. Such Franchise Agreement shall be executed and returned
to Company at the earlier of fifteen (15) days after Company's delivery thereof,
or prior to the opening of the Store, together with the fees required to be paid
upon execution thereof. In addition, Developer and, if Developer is a legal
entity, its Equity Holders and their spouses must guarantee all obligations of
the Franchisee under the Franchise Agreement and its Equity Holders and their
spouses must guarantee the obligations of Developer under any Operating
Agreement entered into by Developer, in a form substantially similar to the
Guaranty. In no event may a Store be opened for business prior to Developer's
receipt of written notice from Company authorizing the opening of such Store.
Developer acknowledges that Company, in its sole discretion, may from time to
time modify or amend its standard form of area development agreement, franchise
agreement, certificate of formation or operating agreement used in connection
with the establishment of a Store.
3.8 Applicability of Franchise Agreement. All rights, duties and
------------------------------------
obligations of a Franchisee to operate a Store as a Color Me Mine franchisee
shall be governed exclusively by the Franchise Agreement for the Store. Except
for the rights, duties and obligations incident to development of the Territory
granted or imposed by this Agreement, or as otherwise specifically modified
hereby, no term or provision of the Franchise Agreements shall be deemed
superseded or modified by this Agreement.
8
<PAGE>
3.9 Developer Salaries. Provided that Developer is acting as a manager of
------------------
the Franchisees, Michelle Ifland and Anne Krizman shall be entitled to receive
an aggregate salaries of $48,000 and $36,000, respectively, from the
Franchisees, with each Franchisee paying a pro rata portion of such aggregate
salaries. The salary payable to Ifland shall begin accruing as of June 25, 1996
and the salary payable to Krizman shall begin accruing only upon the date that a
Franchisee opens a Store for business.
ARTICLE IV. COVENANTS AND OBLIGATIONS OF DEVELOPER
4.1 Promotion of Sales. Developer at all times shall cause its authorized
------------------
employees and those of each Franchisee to actively promote the sale of Color Me
Mine products and services under the Franchise Agreements. Developer shall not
allow the development of the Territory to interfere with the operations of any
Franchisee as a Color Me Mine franchisee under the Franchise Agreements.
4.2 Standards of Operation. Developer shall cause each Franchisee to at
----------------------
all times give prompt, courteous, and efficient service to the public; perform
work competently and in a workerlike manner; and in all business dealings with
members of the public be governed by the highest standards of honesty,
integrity, fair dealing, and ethical conduct. Developer will do nothing, and
will cause each Franchisee to do nothing, which would tend to discredit,
dishonor, reflect adversely upon, or in any manner injure the reputation of
Company, and/or Developer or any other franchisee of Company.
4.3 Submission of Financial Data. In addition to the reports required
----------------------------
pursuant to the Franchise Agreements, Developer agrees to submit to Company,
within sixty (60) days after the end of each fiscal year of Developer, complete
financial statements, including balance sheets, profit and loss statements, and
statements of source and disposition of funds in accordance with such accounting
principles consistently applied from period to period, with respect to the
operations of each Store opened pursuant to this Agreement.
4.4 Payment of Bills. Developer will pay, or cause each Franchisee to
----------------
pay, when due all bills and other amounts owed to third parties under any
purchasing arrangement in which Company or its affiliates may or may not be
involved. Company shall not, by virtue of this Agreement or any Operating
Agreement or Franchise Agreement, become liable to any such third party.
4.5 Compliance with Laws. Developer shall, and shall cause each
--------------------
Franchisee to, comply with all applicable statutes, laws, ordinances,
regulations, rules, orders, or suggestions of any governmental or quasi-
governmental entity, body, agency, commission, board, or official applicable to
Developer's or Franchisee's business. Nothing herein shall prevent Developer or
any Franchisee from engaging in a bona fide contest of the validity or
applicability thereof in any manner permitted by law.
4.6 Employment Practices. During the Term, and for a period of six (6)
--------------------
months thereafter, Developer shall, and shall cause each Franchisee to, not
employ or attempt to
9
<PAGE>
employ any person, without the written consent of such person's employer, who is
at the time employed by Company or by any other franchisee of Company during
such period, and Developer shall not, and shall cause each Franchisee to not,
otherwise directly or indirectly induce or attempt to induce any such person to
leave his employment as aforesaid.
4.7 Service Marks. Developer acknowledges that Developer has no rights to
-------------
use any Service Marks or any copyright or copyrighted works owned by Company,
under this Agreement. The right to use such Service Marks and copyrights will be
granted by Company to a Franchisee solely pursuant to a Franchise Agreement.
4.8 Development Manual. Company will loan to Developer for Developer's
------------------
sole use during the Term one (1) copy of the Development Manual. Developer shall
keep its copy of the Development Manual current by immediately inserting all
modified pages or materials furnished by Company. In the event of a dispute
about the contents of the Development Manual, the master copies maintained by
Company at its principal office shall be controlling. Developer acknowledges
that the Development Manual is proprietary and confidential and, therefore,
agrees that it will not, at any time, disclose, copy or distribute any part of
the Development Manual.
ARTICLE V. CONFIDENTIALITY; NON-COMPETITION
5.1 Confidential Information. Company possesses, and will further develop
------------------------
and acquire, certain confidential and proprietary information and trade secrets,
including, but not limited to, the following categories of information, methods,
techniques, procedures and knowledge developed or to be developed by Company or
its affiliates or their consultants, contractors or designees, and/or franchise
owners and developers (the "Confidential Information"):
(a) methods, techniques, equipment, specifications, standards,
policies, procedures, information, concepts and systems relating to and
knowledge of and experience in the development, operation and franchising
of Stores;
(b) marketing and promotional programs for Stores;
(c) knowledge concerning the logic, structure and operation of
computer software programs which Company authorizes for use in connection
with the operation of Stores, and all additions, modifications and
enhancements thereof, and all data generated from use of such programs,
including, without limitation, the logic, structure and operation of
database file structures containing such date and all additions,
modifications and enhancements thereof;
(d) sales data and information concerning consumer preferences and
inventory requirement for products, materials and supplies, and
specifications for and suppliers of certain materials, equipment and
fixtures for Stores;
10
<PAGE>
(e) the Development Manual;
(f) information concerning product sales, operating results, financial
performance and other financial data of Stores;
(g) customer lists and product sales of the Stores; and
(h) employee selection procedures, training and staffing levels.
5.2 Disclosure By Company to Developer. Company will disclose to
----------------------------------
Developer such parts of the Confidential Information as Company deems necessary
or advisable from time to time in its sole discretion for the development of the
Stores. Developer acknowledges and agrees that neither Developer nor any other
person or entity will acquire by or through Developer any interest in or right
to use the Confidential Information, other than the right to use it in the
development of the Stores pursuant to this Agreement, and that the use or
duplication of the Confidential Information in any other business would
constitute an unfair method of competition with Company and with other Store
developers and franchise owners. Developer agrees to disclose the Confidential
Information to its Equity Holders and to its employees only to the extent
reasonably necessary for the development of Stores pursuant to this Agreement
and such individuals have agreed to maintain such information in confidence as
described in Section 5.3.
5.3 Non-Disclosure Obligations. Developer acknowledges and agrees that
--------------------------
the Confidential Information is confidential to and a valuable asset of Company,
is proprietary, includes trade secrets of Company and is disclosed to Developer
solely on the condition that Developer, its Equity Holders and employees who
have access to the Confidential Information agree, and Developer does hereby
agree that, during and after the Term, Developer, its Equity Holders and such
employees:
(a) will not use the Confidential Information in any other business or
capacity;
(b) will maintain the absolute confidentiality of the Confidential
Information;
(c) will not make unauthorized copies of any portion of the
Confidential Information disclosed in written or other tangible form; and
(d) will adopt and implement all reasonable procedures prescribed from
time to time by Company to prevent unauthorized use of disclosure of the
Confidential Information, including, without limitation, requiring
employees and others who will have access to such information to execute
Confidentiality and Non-Competition Agreements. Developer shall provide
Company, at its request, executed originals of each such Confidentiality
and Non-Competition Agreement.
11
<PAGE>
5.4 Permitted Use of Confidential Information. Nothing contained in this
-----------------------------------------
Agreement shall be construed to prohibit Developer from using the Confidential
Information in connection with the operation of any Store pursuant to a
Franchise Agreement. Notwithstanding anything to the contrary contained in this
Agreement and provided Developer shall have obtained Company's prior written
consent, the restrictions on Developer's disclosure and use of the Confidential
Information shall not apply to the following:
(a) information, methods, procedures, techniques and knowledge which
are or become generally known to persons or entities Acting as a "Paint
Your Own" Ceramics Studio, other than through disclosure (whether
deliberate or inadvertent) by Developer or any party obtaining such
Confidential Information from Developer; and
(b) the disclosure of the Confidential Information in judicial or
administrative proceedings to the extent that Developer is legally
compelled to disclose such information, provided Developer has notified
Company prior to disclosure and shall have used its best efforts to obtain,
and shall have afforded Company the opportunity to obtain, an appropriate
protective order or other assurance satisfactory to Company of confidential
treatment for the information required to be so disclosed.
5.5 Disclosure by Developer to Company. Developer agrees to disclose to
----------------------------------
Company all ideas, concepts, methods, techniques and products conceived or
developed by Developer and its Equity Holders, or employees thereof during the
Term relating to the development and operation of Stores, provided that the
aforementioned parties will not be obligated to make such disclosures if doing
so would violate any contractual obligations of Developer which: (a) arose prior
to Developer's execution of this Agreement; and (b) Developer disclosed to
Company in writing prior to the Effective Date. Developer hereby grants, and
shall cause each Franchisee to grant, to Company and agrees to procure, or cause
to be procured, from its Equity Holders, affiliates and employees a perpetual,
non-exclusive and worldwide right to use same in all similar businesses operated
by Company, its affiliates, franchise owners and designees. Company shall have
no obligation to make any lump sum or on-going payments to Developer with
respect to any such idea, concept, method, technique or product. Developer
agrees that Developer will not use nor will it allow any other person or entity
(other than Franchisee, Company or its franchisees) to use any such concept,
method, technique or product without obtaining Company's prior written approval.
5.6 Non-Competition. Developer acknowledges and agrees that Company would
---------------
be unable to encourage a free exchange of ideas and information among franchise
owners and developers of Stores, if developers, franchise owners and their
principal owners or beneficiaries (and members of their immediate families) were
permitted to engage in, hold interests in or perform services for Competitive
Businesses (as defined herein). Developer further acknowledges and agrees that
the restrictions contained in this Article V will not hinder its activities or
the activities of its Equity Holders under this Agreement or in general. Company
has entered into this Agreement with Developer on the express condition that,
with respect to the development and operation of "paint your own" ceramics
businesses, Developer and its Equity Holders and members of their respective
immediate families will deal exclusively with
12
<PAGE>
Company. Developer therefore agrees that, during the Term and the term of any
Franchise Agreement, neither Developer nor any Equity Holder of Developer, nor
any member of the immediate family of Developer or an Equity Holder of Developer
shall directly or indirectly:
(a) have any interest as a record or beneficial owner in any business,
other than a Store, which offers products or services which are the same as
or similar to products or services offered at Stores, or grants franchises
or licenses or establishes joint ventures for the development or operation
of such business, or is otherwise Acting as a "Paint Your Own" Ceramics
Studio (collectively, "Competitive Business") (this restriction shall not
be applicable to the ownership of shares of a class of securities listed on
a stock exchange or traded on the over-the-counter market and quoted by a
national inter-dealer quotation system that represent less than three
percent (3%) of the number of shares of that class of securities issued and
outstanding);
(b) divert or attempt to divert any business or any customers of any
Stores to any Competitive Business; or
(c) perform services as a director, officer, manager, employee,
consultant, representative, agent, or otherwise for any Competitive
Business.
Developer furthermore agrees that, during the Term and the term of any Franchise
Agreement, neither Developer nor any Equity Holder of Developer, nor any member
of the immediate family of Developer or an Equity Holder of Developer shall
directly or indirectly employ or seek to employ any person who is employed by
Company, its affiliates or by any other developer or franchise owner of Stores,
nor induce nor attempt to induce any such person to leave said employment
without the prior written consent of such person's employer. Furthermore, if
Developer is a corporation, partnership or limited liability company, it will
not engage in any business or other activity, directly or indirectly, other than
the development and operation of Stores.
Developer acknowledges and agrees that the failure of any person or entity
restricted pursuant to this Article V to comply with the restrictions of this
Article V (regardless of whether that person or entity actually has executed
this Agreement) or a Confidentiality and Non-Competition Agreement shall
constitute a breach of this Agreement.
The restrictions of this Article V shall not be construed to prohibit
Developer, any Equity Holder of Developer, or any member of the immediate family
of Developer or its Equity Holders from having a direct or indirect ownership
interest in any Stores, development agreements or franchise agreements for the
development or operation of Stores, or any entity owning, controlling or
operating Stores, or from providing services to any such Stores pursuant to
other agreements with Company.
ARTICLE VI. FEES AND PAYMENTS
13
<PAGE>
6.1 Area Development Fee. For the right to develop the Territory granted
--------------------
hereunder, Developer shall pay to Company on the Effective Date a separate and
one-time area development fee (in addition to any fees due under the Franchise
Agreements) of Eighty-Five Thousand Dollars ($85,000), which shall not be
refundable by Company under any circumstances.
6.2 Franchise Fee. No initial franchise fee shall be payable by a
-------------
Franchisee to Company with respect to the first Franchise Agreement entered.
The initial franchise fee payable by a Franchisee to Company shall be Twenty-
Five Thousand Dollars ($25,000) for each of the next eleven (11) Franchise
Agreements during the Term, with such fee payable upon the opening of the Store
which is the subject of such Franchise Agreement.
6.3 Other Fees and Payments. All other fees and payments to Company by
-----------------------
Developer or a Franchisee shall be made pursuant to the Franchise Agreements.
ARTICLE VII. TRANSFER OR ASSIGNMENT
7.1 Assignment by Company. Company shall have the right to Transfer any
---------------------
or all of its direct or indirect interest in this Agreement (including, without
limitation, the economic benefits derived from this Agreement), and any or all
of its rights and privileges hereunder to any other person, firm or corporation
("Assignee of Company"); provided that, in respect to any Transfer ("Assignment
by Company") resulting in the subsequent performance by such Assignee of Company
of the functions of the Company: (i) at the time of Assignment by Company, the
Assignee of Company is financially responsible and economically capable of
performing the obligations of Company hereunder; and (ii) the Assignee of
Company expressly assumes and agrees to perform such obligations. In the event
of such Assignment by Company, Company shall be relieved of all obligations or
liabilities then existing or thereafter assertable under this Agreement.
7.2 Assignment by Developer.
-----------------------
(a) Restriction on Transfer. This Agreement is being entered into in
-----------------------
reliance upon and in consideration of the singular personal skills and
qualifications of Developer and its Equity Holders and the trust and confidence
reposed in Developer by Company, or, in the case of a corporate Developer, the
principal officers thereof who will actively and substantially participate in
the ownership, development and operation of the Stores or, in the case of a
partnership or limited liability company Developer, the partners, managers or
members thereof who will actively and substantially participate in the
ownership, development and operation of the Stores. Therefore, neither Developer
nor any immediate or remote successor to Developer, nor any individual,
partnership, corporation, limited liability company or other legal entity which
directly or indirectly owns an Equity Interest in Developer, shall Transfer any
direct or indirect interest in this Agreement, or any Equity Interest in
Developer, in whole or in part, in any manner, except as permitted by this
Agreement. Any purported Transfer of any interest in this Agreement, or an
Equity Interest in Developer not in accordance with this Agreement shall be null
and void and shall constitute a material breach of this Agreement, for which
14
<PAGE>
Company may terminate this Agreement upon notice without opportunity to cure
pursuant to Section 8.2(b).
(b) Transfers to Family Members. Developer or an Equity Holder, if a
---------------------------
natural person, may with Company's consent, which will not be unreasonably
withheld, Transfer an Equity Interest in Developer to such person's spouse,
parent, sibling, niece, nephew, descendant or spouse's descendant provided that
the transferor guarantees, in form and substance satisfactory to Company, the
performance of the transferee's obligations under this Agreement.
(c) Transfers to Affiliated Corporations. Developer or an Equity Holder,
------------------------------------
if a natural person, a sole proprietorship, a partnership or a limited liability
company, may without the consent of Company, upon thirty (30) days prior written
notice to Company, Transfer its rights hereunder or an Equity Interest in
Developer to a corporation entirely owned by such natural person, sole
proprietorship, partnership or limited liability company, as the case may be, in
the same proportionate amount of ownership as prior to such Transfer, provided
that the transferor guarantees, in form and substance satisfactory to Company,
the performance of the transferee's obligations under this Agreement.
(d) Transfers Upon Death, Incapacity. Notwithstanding any of the
--------------------------------
foregoing, in the event of the death or legal incapacity of Developer or an
Equity Holder, if a natural person, such person's interest in this Agreement or
his or her Equity Interest in the Developer will Transfer in accordance with
such person's will or, if such person dies intestate, in accordance with laws of
intestacy governing the distribution of such person's estate, provided that
adequate provision is made for the performance of Developer's obligations under
this Agreement and the transferee is one or more of the decedent's spouse,
parents, siblings, nieces, nephews, descendants or spouse's descendants.
(e) Restrictions on Granting Security Interests and Subfranchising. Except
--------------------------------------------------------------
as otherwise set forth below, Developer shall not in any event have the right to
pledge, encumber, hypothecate or otherwise give any third party a security
interest in this Agreement in any manner whatsoever, nor subfranchise or
otherwise Transfer, or attempt to subfranchise or otherwise Transfer the
Territory or to Transfer or subfranchise a portion but not all of Developer's
rights hereunder without the express prior written permission of Company, which
permission may be withheld for any reason whatsoever in Company's sole
discretion.
(f) Transfer and Processing Fees. In the event of a Transfer pursuant to
----------------------------
Section 7.2(d), Developer shall not be required to pay to Company any transfer
or processing fee. In the event of any other Transfer pursuant to this Article
VII, Developer shall pay to Company a non-refundable transfer and processing fee
of $500.
(g) Assumption of Obligations. Prior to any Transfer by Developer or an
-------------------------
Equity Holder of an Equity Interest in Developer permitted hereunder, if the
transferor thereof is a party to any agreement or understanding with Company,
including, without limitation, a guarantee of Developer's obligations hereunder,
such transferor shall give Company thirty (30) days prior written notice of the
Transfer (except under Section 7.2(d) hereof) and (i) shall
15
<PAGE>
cause the transferee to enter into an equivalent agreement or understanding with
Company prior to such Transfer in form and substance satisfactory to Company;
and (ii) in any event, shall cause the transferee and each Equity Holder of such
transferee to expressly assume in writing for the benefit of Company all of the
respective obligations of Developer and its Equity Holders under this Agreement.
No such Transfer shall be effective unless and until such transferee and each
Equity Holder of such transferee complies fully with the terms of this Section,
notwithstanding any other provision of this Agreement.
(h) No Waiver. Developer acknowledges (i) that any consent granted or
---------
withheld by Company under this Article VII shall not serve to waive Company's
right to grant or withhold consents thereafter, and (ii) that Company may
consider the effect (cumulative or otherwise) of prior transfers in determining
whether to grant or withhold its consent to any Transfer.
(i) Notice. If a Transfer occurs that is permitted without Company's prior
------
written consent pursuant to this Section 7.2, Developer and the transferor shall
give Company notice of such Transfer within ten (10) days after such Transfer
and shall provide all related information reasonably requested by Company.
ARTICLE VIII. TERMINATION OF AGREEMENT
8.1 By Developer. If Developer and all Franchisees are in full compliance
------------
with all of the terms and conditions of this Agreement, all Operating Agreements
and all Franchise Agreements and Company materially breaches this Agreement,
Developer may terminate this Agreement effective thirty (30) days after
Company's receipt of written notice of termination if Developer gives written
notice of such breach to Company and Company does not:
(a) correct such breach within thirty (30) days after Company's
receipt of such notice of material breach; or
(b) if such breach cannot reasonably be cured within thirty (30) days
after Company's receipt of such notice, undertake within thirty (30) days
after Company's receipt of such notice, and continue until completion,
reasonable efforts to cure such breach.
Any termination of this Agreement by Developer other than as provided in this
Section 8.1 shall be deemed a termination by Developer without cause.
8.2 By Company. Company may terminate this Agreement, effective upon
----------
delivery of notice of termination to Developer or, where expressly applicable,
upon failure to cure to Company's satisfaction any breach of this Agreement
before the expiration of any period of time within which such breach may be
cured in accordance with the provisions set forth below, if:
(a) Developer fails to satisfy the development obligations set forth
in this Agreement; provided, however, that if (i) the next Store to be
opened has not been
16
<PAGE>
approved by Company pursuant to Section 3.4 within sixty (60) days after
the most current Store opening has occurred, and (ii) Developer has been
afforded no more than one (1) cure right hereunder, then Developer will
have a forty-five (45) day cure period to timely open the next Store;
(b) A Transfer of an Equity Interest or any direct or indirect
interest in this Agreement occurs;
(c) Developer (or any of its Equity Holders) has made any material
misrepresentation or omission in its application for this Agreement or in
connection with any transfer hereunder or is convicted by a trial court of
or pleads guilty or no contest to a felony, or to any other crime or
offense that may adversely affect the reputation of Stores or the goodwill
associated with the Service Marks, or engages in any misconduct which may
adversely affect the reputation of Stores or the goodwill associated with
the Service Marks;
(d) Developer (or any of its Equity Holders) makes any unauthorized
use of the Service Marks, or unauthorized use, disclosure or duplication of
the Confidential Information, or challenges or seeks to challenge the
validity of the Service Marks;
(e) Developer, its Equity Holders or members of their immediate
families violate the restrictions on the operation of Competitive
Businesses during the Term, or violate the covenants concerning competition
and confidentiality (regardless of whether any such party has executed this
Agreement or a Confidentiality and Non-Competition Agreement);
(f) Developer (or any of its Equity Holders) or any Franchisee fails:
(i) to comply with any other provision of this Agreement, any Operating
Agreement, any Franchise Agreement or any other instrument, agreement or
document with Company or its affiliates and does not correct such failure
within thirty (30) days after Developer's or such Franchisee's receipt of
Company's written notice of such failure to comply; or (ii) if such failure
cannot reasonably be corrected within the aforesaid thirty (30) day period
but can be corrected within a reasonably short time (not to exceed an
additional thirty (30) days), undertake within ten (10) days after
Developer's or such Franchisee's receipt of Company's written notice, and
continue until completion, best efforts to correct such failure within such
reasonably short time (not to exceed an additional thirty (30) days) and
furnish proof acceptable to Company, upon its request, of such efforts and
the date full compliance will be achieved;
(g) Developer (or any of its Equity Holders) fails on three (3) or
more separate occasions within any period of twenty-four (24) consecutive
months to comply with this Agreement, whether or not such failures to
comply are corrected after written notice thereof is delivered to
Developer;
17
<PAGE>
(h) Company has delivered a notice of termination of a Franchise
Agreement executed pursuant to this Agreement in accordance with its terms
and conditions or a Franchisee had terminated a Franchise Agreement without
cause; or
(i) Developer becomes insolvent in the sense that Developer is unable
to pay its bills as they become due.
8.3 Termination of Certain Rights of Developer. In the event Company is
------------------------------------------
entitled to terminate this Agreement in accordance with Section 8.2, Company, in
its sole discretion, shall have the option, to terminate any one or more of the
following instead of terminating this Agreement:
(a) Developer's right to develop Stores for which no Franchise
Agreement has been executed; or
(b) Developer's territorial rights in some or all of the Territory;
effective ten (10) days after delivery of written notice thereof to Developer.
If any of such rights, options or arrangements are terminated in accordance with
this Section, such termination shall be without prejudice to Company's right to
terminate this Agreement or other such rights, options or arrangements at any
time thereafter as a result of additional defaults of this Agreement in
accordance with Section 8.2.
8.4 Effects of Termination. Except to the extent provided herein, the
----------------------
termination of this Agreement will not affect the status of any Operating
Agreement or Franchise Agreement then in effect. Notwithstanding the
termination or expiration of this Agreement, the terms and conditions of
Articles V, IX and X shall survive the termination or expiration of this
Agreement.
ARTICLE IX. INDEPENDENT CONTRACTORS; INDEMNIFICATION
9.1 Independent Contractors. Company and Developer are independent
-----------------------
contractors. Neither Company nor Developer shall be obligated by or have any
liability under any agreements, representations, or warranties made by the other
that are not expressly authorized hereunder, nor shall Company be obligated for
any damages to any person or property directly or indirectly arising out of the
operation of Developer's business conducted pursuant to this Agreement or the
operation of Stores by Developer or Franchisees, whether or not caused by
Developer's negligent or willful action or failure to act. Company shall have no
liability for any value added, sales, service, use, excise, income, gross
receipts, property, payroll, employee withholding or other taxes levied upon
Developer or Franchisees or their assets or upon Company in connection with the
business conducted by Developer (other than to the extent Company has liability
as a member of a Franchisee).
9.2 Indemnification. Developer shall defend and hold Company, its
---------------
affiliates and their respective shareholders, directors, officers, employees,
agents or assignees harmless against and to reimburse them for:
18
<PAGE>
(a) all claims, losses, obligations and damages described in this
Section, any and all claims and liabilities of customers and others
directly or indirectly arising out of this Agreement, the development or
operation of any Stores pursuant to this Agreement (including, without
limitation, breach or violation of any agreement, contract or commitment by
Developer resulting from Developer's execution and delivery of this
Agreement or performance of any of its obligations hereunder or liabilities
asserted by Equity Holders, employees, agents or other representatives of
Developer arising in connection with training provided by Company or its
affiliates or designees or otherwise), unauthorized activities conducted in
association with the Service Marks, the transfer of any interest in this
Agreement, any Stores, or any Franchisee, to the extent that such claims,
obligations, damages, losses or liabilities do not arise solely from the
gross negligence or wrongful conduct of Company; and
(b) all value added, sales, use, service, occupation, excise, gross
receipts, income, property, payroll, employee withholding or other taxes,
whether levied upon Developer, any Franchisee or Store or Developer's or
any Franchisee's property or upon Company in connection with the sales made
or business conducted by Developer or any Franchisee (except any taxes
Company is required by law to collect from Developer with respect to
purchases from Company or is required by law to pay by reason of being a
member of Franchisee).
For purposes of this indemnification, "claims" shall mean and include all
obligations, actual, consequential, special, exemplary and punitive damages and
costs reasonably incurred in the defense of any such claim against Company,
including, without limitation, reasonable accountants', attorneys', attorney
assistants', arbitrators' and expert witness fees, costs of investigation and
proof of facts, court costs, other litigation expenses, and travel and living
expenses. Company shall have the right to defend any such claim against it in
such manner as Company deems appropriate or desirable in its sole discretion.
This indemnity shall continue in full force and effect subsequent to and
notwithstanding the expiration or termination of this Agreement.
ARTICLE X. MISCELLANEOUS PROVISIONS
10.1 Arbitration.
-----------
(a) Except as specifically modified by this Article X, and excepting
matters involving provisional remedies as set forth in Section 10.2, any dispute
between on the one hand, Company and affiliated entities, and on the other hand,
Developer, Equity Holders or affiliated entities, arising out of or relating to
this Agreement or its breach, including without limitation, any claim that this
Agreement or any of its parts, is invalid, illegal or otherwise voidable or
void, will be resolved by submission to binding arbitration by JAMS/ENDISPUTE
("JAMS").
(b) The arbitrators of any dispute hereunder are hereby affirmatively
instructed to apply the law of the State of California to this Agreement and the
totality of the legal relations among the parties. Notwithstanding this Section,
and specifically excepting the location of the
19
<PAGE>
arbitration (which shall be Los Angeles County, California, as described below),
all issues relating to the arbitrability or the enforcement of the agreement to
arbitrate contained herein shall be governed by California law. California
discovery law will apply to provide all discovery available in California
Superior Court cases, and California evidence law shall apply. All hearings and
other proceedings shall take place in Los Angeles County, California, or if
Company so elects, in the county where the principal place of business of
Developer is then located.
(c) If the dispute exceeds $100,000 in controversy, a panel of three
arbitrators will be selected to arbitrate the dispute. Otherwise, one arbitrator
may be selected to arbitrate the dispute. Each of the arbitrators must have been
duly licensed to practice law in California for at least ten (10) years. To
select arbitrators, JAMS will mail simultaneously to each party to the dispute
an identical list of all qualified arbitrators in the organization who are
willing to arbitrate the dispute in Los Angeles County, California. This list
may be limited to twenty (20) arbitrators. Each side to the dispute may then
strike off the list those arbitrators who are not preferred. The maximum number
of arbitrators which may be stricken by one side shall be two (2) less than half
of the number of arbitrators on the list. Each side shall number the remaining
arbitrators on its list in order of preference, and return its list to the
arbitration organization within twenty (20) days from the date the list was
mailed to the parties. If a party does not return the list within the time
specified, all arbitrators named therein shall be acceptable to that party.
(d) Judgment upon an arbitration award may be entered in any court having
competent jurisdiction and shall be binding, final and non-appealable except for
mistakes of law or an award in excess of that permitted by this Agreement. No
punitive or exemplary damages shall be awarded against either Company or
Developer, or entities affiliated with either of them, in an arbitration
proceeding or otherwise, and are hereby waived.
(e) Prior to any arbitration proceeding taking place, either party may, at
its option, elect (i) to have the arbitrator conduct, in a separate proceeding
prior to the actual arbitration, a preliminary hearing, at which hearing
testimony and other evidence may be presented and briefs may be submitted,
including without limitation a brief setting forth the then applicable statutory
or common law methods of measuring damages in respect of the controversy or
claim being arbitrated, or (ii) to conduct non-binding mediation before JAMS in
Los Angeles County, California, in which event the parties shall execute a
confidentiality agreement.
(f) This arbitration provision shall be deemed to be self-executing and
shall remain in full force and effect after expiration or termination of this
Agreement. If either party fails to appear at any properly noticed arbitration
proceeding, an award may be entered against such party by default or otherwise
notwithstanding said failure to appear.
(g) Company and Developer agree that no arbitration and no other form of
proceeding permitted hereby will be maintained by any party to enforce any
liability or obligation of the other party, whether arising from this Agreement
or otherwise, unless brought
20
<PAGE>
before the expiration of the earlier of (i) one (1) year after the date of
discovery of the facts resulting in such alleged liability or obligation or (ii)
two (2) years after the date of the first act or omission giving rise to such
alleged liability or obligation, except that where state or federal law mandates
or makes possible by notice or otherwise a shorter period, such shorter period
shall apply; provided that an action to enforce a judgment obtained in any
arbitration or other proceeding permitted hereby may be brought as permitted by
law.
(h) The provisions of this Section 10.1 shall be construed as independent
of any other covenant or provision of this Agreement; provided, however, that if
a court of competent jurisdiction determines that any such provisions are
unlawful in any way, such court shall modify or interpret such provisions to the
minimum extent necessary to have them comply with the law.
10.2 Injunctive or Extraordinary Remedies. All claims by Company or
------------------------------------
Developer seeking temporary, preliminary, permanent or any other form of
mandatory or prohibitory injunctive relief or any other extraordinary remedy
shall be submitted to a court of competent jurisdiction in Los Angeles,
California, without the necessity of posting any bond (and if a bond shall be
required by a court of competent jurisdiction, the parties agree that the sum of
$100 shall be sufficient bond). This covenant shall be independent, severable
and enforceable notwithstanding any other rights or remedies which Company may
have.
10.3 References to Developer. Upon any effective assignment of Developer's
-----------------------
interest in this Agreement, any and all references herein to "Developer" shall,
unless the context otherwise requires, mean and refer to such assignee.
10.4 Cost of Enforcement or Defense. In the event that any dispute arises
------------------------------
between the parties hereto relating to the interpretation, enforcement or
performance of this Agreement, then the prevailing party in any arbitration or
litigation shall be entitled to recover from the losing party the amount of all
reasonable attorney's fees of such counsel and all other expenses incurred by
the prevailing party in connection therewith, whether incurred prior to or in
preparation for or contemplation of the filing of such action or thereafter.
10.5 Remedies Cumulative. All rights and remedies conferred upon Company
-------------------
by this Agreement and by law shall be cumulative of each other, and neither the
exercise nor the failure to exercise any such right or remedy shall preclude the
exercise of any other such right or remedy.
10.6 Non-Waiver. No failure by either party to take action on account of
----------
any default by the other party, whether in a single instance or repeatedly,
shall constitute a waiver of any such default or of the performance required by
the party. No express waiver by either party of any provision or performance
hereunder or of any default by the other party shall be construed as a waiver of
any other or future provision, performance, or default.
10.7 Invalidity and Severability. If any provision of this Agreement shall
---------------------------
be held to be invalid, illegal, or unenforceable, for any reason, the remaining
portions of this Agreement
21
<PAGE>
shall be unimpaired; and any invalid, illegal or unenforceable provisions shall
be replaced by a mutual acceptable provision, which, being valid, legal and
enforceable, comes closest to the intention of the parties underlying the
invalid, illegal or unenforceable provision.
10.8 Force Majeure. Neither Company nor Developer shall be liable for
-------------
loss or damage or deemed to be in breach of this Agreement if its failure to
perform its obligations results from any of the following and is not caused by
the non-performing party:
(a) acts of God; or
(b) acts of war, civil unrest or insurrection; or
(c) strikes, lockouts, boycotts, earthquakes, floods, storms, fire
and other casualties.
Any delay resulting from any of said causes shall extend the time allowed for
performance accordingly or excuse performance, in whole or in part, as may be
reasonable for the Store(s) directly affected thereby, except that such causes
shall not excuse payment of amounts owed at the time of such occurrence or
payment of any fees thereafter nor otherwise affect the Development Schedule or
the development of other Stores to be developed under this Agreement, and as
soon as performance is possible the non-performing party shall immediately
resume performance and, in no event, shall non-performance be excused for more
than six (6) months.
10.9 Construction. The recitals and exhibits are a part of this
------------
Agreement, which constitutes the entire agreement of the parties, and supersedes
any and all prior oral or written understandings or agreements between Company
and Developer relating to the subject matter of this Agreement. Except as
otherwise set forth herein, nothing in this Agreement is intended, nor shall be
deemed, to confer any rights or remedies upon any person or legal entity not a
party hereto. The headings of the sections and articles hereof are for
convenience only and do not define, limit, or construe the contents of such
sections or articles. Numbered or lettered articles or sections contained herein
refer to articles or sections of this Agreement unless otherwise expressly
stated. The term "Developer" as used in this Agreement is applicable to one or
more persons, a corporation, a partnership, or a limited liability company, as
the case may be, and the singular usage includes the plural and the masculine
and neuter usages include each other and the feminine. If two or more persons
are at any time the Developer hereunder, whether or not as partners, members, or
joint venturers, their obligations and liabilities to Company shall be joint and
several. This Agreement may be executed in multiple copies, each of which shall
be deemed an original.
10.10 Notices. All written notices and reports permitted or required to
-------
be delivered by the provisions of this Agreement or of the Development Manual
shall be deemed so delivered at the time delivered by hand, one (1) business day
after transmission by telegraph or telex or by telefacsimile with proof of
receipt, one (1) business day after being placed in the hands of a commercial
courier service for overnight delivery, or three (3) business days after
22
<PAGE>
placement in the United States Mail by registered or certified mail, return
receipt requested, postage prepaid and addressed to Company at 11075 Santa
Monica Boulevard, Suite 225, Los Angeles, California 90025, to the attention of
the Legal Department, or its most current principal business address of which
Developer has been notified, or to Developer at Developer's most current
principal business address of which Company has been notified, as applicable.
10.11 Binding Effect. Subject to all the provisions of Article VII, this
--------------
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto (including the parties whose signatures follow those of Company and
Developer) and their respective heirs, executors, administrators, personal
representatives, successors, and assigns, an shall not be modified except by a
written agreement signed by Company and Developer.
10.12 Controlling Law. To the extent applicable, any issue involving the
---------------
Service Marks shall be governed by the Lanham Act (15 U.S.C. 1051 et seq.).
Except as otherwise provided in this Section 10.12, this Agreement and the
totality of the legal relations among the parties hereto shall be governed by
and construed in accordance with the laws of the State of California.
IN WITNESS WHEREOF, the parties have executed this Area Development
Agreement as of the Effective Date.
COMPANY: DEVELOPER:
COLOR ME MINE FRANCHISING, INC. UNDER FIRE, INC.
By: By:
--------------------------- ------------------------------
Its: Anne Krizman, [title]
--------------------------- ----------------
By:
------------------------------
Michelle Ifland, [title]
-------------
23
<PAGE>
EXHIBITS
EXHIBIT A - Developer Acknowledgments and Representations Statement
EXHIBIT B - Territory
EXHIBIT C - Development Schedule
EXHIBIT D - Confidentiality and Non-Competition Agreement
EXHIBIT E - Form of Certificate of Formation
EXHIBIT F - Form of Operating Agreement
EXHIBIT G - Form of Franchise Agreement
24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> JUN-30-1995 JUN-30-1996
<CASH> 3,501,815 18,547,542
<SECURITIES> 3,663,111 8,294,433
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 186,742 267,046
<CURRENT-ASSETS> 8,032,371 27,977,791
<PP&E> 14,270,703 21,098,303
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 26,554,660 54,434,254
<CURRENT-LIABILITIES> 4,114,767 4,613,113
<BONDS> 0 0
0 0
0 12,000
<COMMON> 0 0
<OTHER-SE> 21,543,138 48,794,984
<TOTAL-LIABILITY-AND-EQUITY> 0 0
<SALES> 8,161,568 16,019,263
<TOTAL-REVENUES> 8,302,490 16,852,854
<CGS> 5,759,276 11,055,763
<TOTAL-COSTS> 11,269,010 20,575,061
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 0 0
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,966,520) (3,722,207)
<EPS-PRIMARY> (.29) (.26)
<EPS-DILUTED> 0 0
</TABLE>
