U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO ________
Commission File Number 000-23174
THE QUIZNO'S CORPORATION
(Name of small business issuer as specified in its charter)
COLORADO 84-1169286
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(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer
Identification No.)
1099 18TH STREET, SUITE 2850
DENVER, COLORADO 80202
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(Address of Principal Executive Offices) (Zip Code)
(303) 291-0999
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(ISSUER'S TELEPHONE NUMBER INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $.001 par value
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Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 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 [ ]
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
The registrant's revenue for the fiscal year ending December 31, 1997 was
$12,107,662.
The aggregate market value of the registrant's common stock held by
non-affiliates of the registrant as of March 23, 1998 was approximately
$7,798,000 (for purposes of the foregoing calculation only, each of the
registrant's officers and directors is deemed to be an affiliate).
There were 2,934,224 shares of registrant's common stock outstanding as of
March 23, 1998.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the registrant's Proxy
Statement that will be filed with the Securities and Exchange Commission in
connection with the registrant's annual meeting of stockholders are
incorporated by reference in Part III of this Form 10-KSB.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE): Yes [ ] No [X]
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-B. The Company
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will furnish to its shareholders of record as of the record date for its 1998
Annual Meeting of Stockholders, a copy of any of the exhibits listed below
upon payment of $.25 per page to cover the costs of the Company of furnishing
the exhibits.
Item No. Exhibit Description
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2.1 Articles of Merger Merging Schaden & Schaden into The
Quizno's Operating Company, incorporated by reference to
Exhibit 2(ii) to the Company's Form 8-K, filed November 4,
1994.
2.2 Asset Purchase Agreement, among The Quizno's Acquisition
Company, Bain's Deli Franchise Associates, through its
General Partner, Gemini Enterprises, Ltd., Gemini One,
Inc. And Jolles #4 Partnership, dated November 12, 1997,
incorporated by reference to Exhibit 2.1 to Form 8-K, filed
by the Company with the SEC on November 26, 1997.
3.1 Amended and Restated Articles of Incorporation of the
Company, incorporated by reference to Exhibit 3(a) to
the Company's Registration Statement on Form SB-2 (Reg.
No. 33-72378-D).
3.2 Articles of Amendment to the Articles of Incorporation of
the Company authorizing 146,000 shares of Class A Cumulative
Convertible Preferred Stock, incorporated by reference to
Exhibit 3.2 to the Company's Form 10-KSB, dated
March 28, 1997.
3.3 Articles of Amendment changing the Company name,
incorporated by reference to Exhibit 3.3 to the Company's
Form 10-KSB, dated March 28, 1997.
3.4 By-laws of the Company, incorporated by reference to Exhibit
3.4 to the Company's Form 10-KSB, dated March 28, 1997.
3.5 Articles of Amendment to Articles of Incorporation of the
Company authorizing 100,000 shares of Class B Preferred
Stock and 200,000 shares of Class C Cumulative Convertible
Preferred Stock.
4.1 Form of certificate evidencing Common Stock, $.001 par value,
of the Company, incorporated by reference to Exhibit
4.1 to the Company's Registration Statement on Form
S-3 (Reg. No. 333-38691).
4.2 Form of Representative's Warrant, incorporated by reference
to Exhibit 4(b) to the Company's Registration Statement
on Form SB-2 (Reg. No. 33-72378-D).
9.1 Voting Trust Agreement between Richard E. Schaden and
Richard F. Schaden, dated July 14, 1994, incorporated by
reference to Exhibit A to the Schedule 13-D, dated July 14,
1994, filed by Richard E. Schaden and Richard F. Schaden.
9.2 First Amendment to Voting Trust Agreement dated November 4,
1994, incorporated by reference to Exhibit a to the
Amendment No. 1 to Schedule 13-D, dated November 4, 1994,
filed by Richard E. Schaden and Richard F. Schaden.
9.3 Second Amendment to Voting Trust Agreement dated September 5,
1996, incorporated by reference to Exhibit 9.3 to the
Company's Form 10-KSB, dated March 28, 1997.
10.1 Employment Agreement of Mr. Richard E. Schaden, incorporated
by reference to Exhibit 10(a) to the Company's
Registration Statement on Form SB-2 (Reg. No. 33-72378-D).
10.2 Employment Agreement of Mr. Richard F. Schaden, incorporated
by reference to Exhibit 10(b) to the Company's
Registration Statement on Form SB-2 (Reg. No. 33-72378-D).
10.3 Employee Stock Option Plan, incorporated by reference to
Exhibit 99.1 to the Company's Registration Statement on
Form S-8 (Reg. No. 333-45549).
10.4 Amended and Restated Stock Option Plan for Non-Employee
Directors and Advisors incorporated by reference to
Exhibit 99.2 to the Company's Registration Statement
on Form S-8 (Reg. No. 333-45549).
10.5 Indemnity Agreement between the Company and Richard E.
Schaden, incorporated by reference to Exhibit 10(e) to
the Company's Registration Statement on Form SB-2 (Reg.
No. 33-72378-D).
10.6 Indemnity Agreement between the Company and Richard F.
Schaden, incorporated by reference to Exhibit 10(f) to
the Company's Registration Statement on Form SB-2 (Reg.
No. 33-72378-D).
10.7 Indemnity Agreement between the Company and Patrick E.
Meyers, incorporated by reference to Exhibit 10(g) to
the Company's Registration Statement on Form SB-2 (Reg.
No. 33-72378-D).
10.8 Indemnity Agreement between the Company and Brownell M.
Bailey, incorporated by reference to Exhibit 10(h) to
the Company's Registration Statement on Form SB-2 (Reg.
No. 33-72378-D).
10.9 Indemnity Agreement between the Company and Frederick H.
Schaden, incorporated by reference to Exhibit 10(i) to
the Company's Registration Statement on Form SB-2 (Reg.
No. 33-72378-D).
10.10 Indemnity Agreement between the Company and J. Eric Lawrence.
10.11 Indemnity Agreement between the Company and Mark L. Bromberg.
10.12 Form of Franchise Agreement.
10.13 Form of Area Director Marketing Agreement, incorporated by
reference to Exhibit 10.12 to the Company's 10-KSB
dated March 28, 1997.
10.14 Office Lease for the Company, incorporated by reference to
Exhibit 10.14 to the Company's Form 10-KSB, dated
March 28, 1997.
10.15 Amendment to Employment Agreement between the Company and
Mr. Richard E. Schaden, dated February 29, 1996,
incorporated by reference to Exhibit 10.15 to the
Company's 10-KSB, dated March 29, 1996.
10.16 Amendment to Employment Agreement between the Company and
Mr. Richard F. Schaden, dated February 29, 1996,
incorporated by reference to Exhibit 10.16 to the
Company's 10-KSB, dated March 29, 1996.
10.17 Deferment Agreement between the Company and Illinois
Food Management, Inc., dated February 27, 1996,
incorporated by reference to Exhibit 10.17 to the
Company's 10-KSB, dated March 29, 1996.
10.18 Investment Agreement between the Company and Retail and
Restaurant Growth Capital, L.P. ("RRGC"), a Delaware
limited partnership, dated as of December 31, 1996,
incorporated by reference to Exhibit 10.18 to the Company's
Form 10-KSB, dated March 28, 1997.
10.19 Senior Subordinated Convertible Promissory Note (with Form
of Warrant attached) issued by the Company to RRGC,
dated December 31, 1996, incorporated by reference to
Exhibit 99(a) to Schedule 13D filed by RRGC with the SEC
on January 9, 1997.
10.20 Security Agreement between the Company and RRGC, dated as
of December 31, 1996, incorporated by reference to Exhibit
10.20 to the Company's Form 10-KSB, dated March 28, 1997.
10.21 Stockholders' Agreement between the Company and RRGC, dated
as of December 31, 1996, incorporated by reference to
Exhibit 99(b) to Schedule 13D filed by RRGC, filed with
the SEC on January 9, 1997.
10.22 Amended and Restated Senior Subordinated Convertible
Promissory Note issued by the Company to RRGC, incorporated
by reference to Exhibit 99(c) to Schedule 13D/A filed by
RRGC with the SEC on December 4, 1997.
10.23 First Amendment to Investment Agreement between RRGC and
the Company, dated October 8, 1997.
10.24 Warrant to Purchase Shares of Common Stock of The
Quizno's Corporation, dated as of November 11, 1997
and issued to RRGC.
10.25 First Amendment to Security Agreement between the Company
and RRGC, dated as of November 11, 1997.
10.26 Amended and Restated Security Agreement among the Company,
The Quizno's Operating Company and RRGC, dated as of
December 31, 1996.
10.27 License Agreement between The Quizno's's Acquisition Company
and Jolles #4 Partnership, dated as of November 12,
1997, incorporated by reference to Exhibit 99.1 to
Form 8-K, filed by the Company with the Sec in
November 26, 1997.
20.1 Risk Factors Section from the Company's Prospectus dated
January 9, 1998 included in the Registration Statement on
Form S-3 filed by the Company (Registration No. 333-38691).
23.1 Independent Auditors' Consent from Ehrhardt Keefe Steiner
& Hottman PC
21.1 List of Company subsidiaries.
27 Financial Data Schedule
(b) Reports on Form 8-K. The Company filed one Report on Form 8-K during
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the last quarter of 1997. Such filing was made on November 26, 1997, and
amended by a Form 8-K/A filed on December 31, 1997 and related to the
acquisition of the assets and business of Bain's Deli by the Company.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized on March 26, 1998.
THE QUIZNO'S CORPORATION
By: /s/ Richard E. Schaden
Richard E. Schaden,
President and Chief Executive
Officer
In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities indicated and on the dates indicated.
Signature Title Date
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/s/ Richard E. Schaden President, Chief Executive April 1, 1998
Officer and Director
Richard E. Schaden (Principal Executive Officer)
/s/ Richard F. Schaden Vice President, Secretary April 1, 1998
Richard F. Schaden and Director
/s/ Brownell M. Bailey Director April 1, 1998
Brownell M. Bailey
/s/ Mark L. Bromberg Director April 1, 1998
Mark L. Bromberg
/s/ J. Eric Lawrence Director April 1, 1998
J. Eric Lawrence
/s/ Frederick H. Schaden Director April 1, 1998
Frederick H. Schaden
<PAGE>
/s/ John L. Gallivan Chief Financial Officer April 1, 1998
John L. Gallivan and Treasurer (Principal
Financial and Accounting
Officer)
Exhibit 3.5
SS: Form D-4
Submit in Duplicate
Filing Fee: $25.00
This document must be typewritten
MAIL TO:
COLORADO SECRETARY OF STATE
CORPORATIONS OFFICE
1560 Broadway, Suite 200
Denver, Colorado 80202
(303) 894-2251
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
Pursuant to the provisions of the Colorado Business Corporation Act, the
undersigned corporation adopts the following Articles of Amendment to its
Articles of Incorporation:
FIRST: The name of the Corporation is The Quizno's Corporation.
SECOND: The following amendment to the Amended and Restated Articles of
Incorporation was duly adopted by the Board of Directors without shareholder
action effective October 15, 1997, in accordance with the provisions of
Section 7-106-102 of the Colorado Business Corporation Act.
"RESOLVED, that Article II of the Amended and Restated Articles of
Incorporation is hereby amended by adding the following paragraphs to Article
II:
"Class B Cumulative Preferred Stock.
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a. General. One Hundred Thousand (100,000) shares of authorized preferred
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stock is hereby designed as the Class B Cumulative Preferred Stock (the "Class
B Preferred Stock").
b. Conversion.
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(i) Subject to the following paragraph, and after October 15, 2002, each
share of Class B Preferred Stock shall be convertible on any of the monthly
dividend payment dates set forth in paragraph d. below into the number of
shares (which may be a number less than one (1) and may result in fractional
shares) of the Corporation's common stock, par value $.001 per share (the
"Common Stock") that is equal to the quotient determined by dividing $5.00 by
the then current market price of a share of the Common Stock determined
pursuant to the Valuation Procedure in the Investment Agreement after such
date.
<PAGE>
(ii) If at any time the Corporation reorganizes, consolidates, merges,
exchanges shares, or sells, leases, exchanges or transfers all or
substantially all of its assets, then as a part of such reorganization,
consolidation, merger, share exchange or sale, lease, exchange or transfer,
provision shall be made so that each holder of shares of Class B Preferred
Stock will thereafter be entitled to receive upon conversion of his shares of
Class B Preferred Stock, the number of shares of stock or other securities or
property of the Corporation, or successor corporation resulting from such
reorganization, consolidation, merger, share exchange or sale, lease, exchange
or transfer, which the holder would have received had he converted his shares
of Class B Preferred Stock immediately prior to the effective time of such
reorganization, consolidation, merger, share exchange or sale, lease, exchange
or transfer. In the event of a distribution, including a stock dividend, in
shares of Common Stock, or any reclassification, subdivision (stock split) or
combination (reverse stock split) of Common Stock, the conversion rate set
forth in clause (i) above shall be adjusted so that the holder of Class B
Preferred Stock shall receive the kind and amount of shares of Common Stock,
or other securities or property, which the holder would have received had he
converted his shares of Class B Preferred Stock immediately prior to such
distribution, reclassification, subdivision or combination.
c. Redemption. At the option of the Corporation, shares of Class B
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Preferred Stock may be redeemed, in whole or in part, on any of the monthly
dividend payment dates set forth in paragraph c. below, at a redemption price
of $5.00 per share, plus an amount equal to unpaid cumulative dividends
accrued to the date of redemption as provided in paragraph c. below, if the
holders of such shares of Class B Preferred Stock are given thirty (30) days
notice of such redemption. The Corporation may not redeem any of the
Corporation's common stock (the "Common Stock"), any Class A Preferred Stock,
or any Class C Preferred Stock or any other capital stock of equal or lesser
priority to the Class B Preferred Stock unless and until the Corporation has
redeemed all outstanding shares of the Class B Preferred Stock or
substantially all such share have been converted as provided in paragraph b.
above.
<PAGE>
d. Dividends. The holder of record of each share of Class B Preferred
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Stock shall receive a cumulative monthly dividend of $0.053125 per share of
Class B Preferred Stock. Dividends on the Class B Preferred Stock shall be
payable, out of funds at the time legally available for payment of dividends,
in equal monthly amounts on the first business day of each month in each year
beginning with November 1997 for so long as shares of the Class B Preferred
Stock are outstanding, except that dividends on the shares of Class B
Preferred Stock payable on the first dividend payment date shall commence to
accrue and shall be cumulative from and including October 15, 1997. If such
dividend is not paid as of any such monthly dividend payment date, the right
to such payment shall accrue to the holders of the shares of the Class B
Preferred Stock and become an obligation of the Corporation until paid in
full. Such unpaid dividends shall compound monthly until paid, and shall be
paid as soon as dividends are legally able to be paid under the Colorado
Business Corporation Act. No dividends shall be paid or set apart for payment
on any Common Stock, any Class A Preferred Stock, any Class C Preferred Stock,
or any other capital stock of the Corporation of equal or lessor priority to
the Class B Preferred Stock, unless and until all accrued and unpaid dividends
on the Class B Preferred Stock shall have been paid. The Corporation shall
not issue any class of stock with rights to receive dividends or rights to be
redeemed or rights to receive payment on liquidation of equal or superior
priority to the Class B Preferred Stock without the affirmative vote of the
holders of a majority of the shares of the Class B Preferred Stock. Class B
Preferred Stock shall be ranked senior to the Class A Preferred Stock and the
Class C Preferred Stock of the Corporation.
e. Liquidation or Dissolution. In the event of any voluntary or
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involuntary liquidation, or winding up of the affairs of the Corporation, the
--
holders of the issued and outstanding Class B Preferred Stock shall be
entitled to receive for each share of Class B Preferred Stock a dollar amount
equal to $5.00 plus all then accrued and unpaid cumulative dividends, before
any distribution of the assets of the Corporation shall be made to the holders
of any other capital stock. The Corporation may not pay any amount in the
event of a liquidation or winding up of the Corporation, to the holders of any
Common Stock, any Class A Preferred Stock, or any Class C Preferred Stock or
any other capital stock of equal or lesser priority to the Class B Preferred
Stock, unless and until the Corporation has redeemed the Class B Preferred
Stock or the holders of Class B Preferred Stock have received their full
liquidation preferences as provided herein. A reorganization, consolidation
or merger of the Corporation, a share exchange, a sale, lease, exchange or
transfer of all or substantially all of its assets as an entirety, or any
purchase or redemption of stock of the Corporation of any class, shall not be
regarded as a "liquidation, dissolution, or winding up of the affairs of the
Corporation" within the meaning of this paragraph d.
<PAGE>
f. Voting Rights. Except as otherwise expressly provided in the Colorado
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Business Corporation Act, holders of Class B Preferred Stock shall have no
right to vote for the election of directors or for any other purpose,
provided, however, that holders of a majority of the Class B Preferred Stock
shall be required to vote in favor of any proposal to issue a series of
preferred stock of the Corporation which is to be senior or substantially
equal as to dividends or liquidation preferences to the Class B Preferred
Stock before such preferred stock may be issued by the Corporation.
Class C Cumulative Convertible Preferred Stock.
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a. General. Two hundred thousand (200,000) shares of authorized preferred
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stock is hereby designed as the Class C Cumulative Convertible Preferred Stock
(the "Class C Preferred Stock").
b. Conversion.
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(i) Subject to the following paragraph, each share of Class C Preferred Stock
shall be convertible into one (1) share of the Corporation's common stock (the
"Common Stock") on any of the monthly dividend payment dates set forth in
paragraph d. below, at any time prior to the redemption date after the notice
of redemption provided for in paragraph c. below has been delivered.
(ii) If at any time the Corporation reorganizes, consolidates, merges,
exchanges shares, or sells, leases, exchanges or transfers all or
substantially all of its assets, then as a part of such reorganization,
consolidation, merger, share exchange or sale, lease, exchange or transfer,
provision shall be made so that each holder of shares of Class C Preferred
Stock will thereafter be entitled to receive upon conversion of his shares of
Class C Preferred Stock, the number of shares of stock or other securities or
property of the Corporation, or successor corporation resulting from such
reorganization, consolidation, merger, share exchange or sale, lease, exchange
or transfer, which the holder would have received had he converted his shares
of Class C Preferred Stock immediately prior to the effective time of such
reorganization, consolidation, merger, share exchange or sale, lease, exchange
or transfer. In the event of a distribution in shares of Common Stock, or any
reclassification, subdivision or combination of Common Stock, the conversion
rate set forth in clause (i) above shall be adjusted so that the holder of
Class C Preferred Stock shall receive the kind and amount of shares of Common
Stock, or other securities or property, which the holder would have received
had he converted his shares of Class C Preferred Stock immediately prior to
such distribution, reclassification, subdivision or combination.
<PAGE>
c. Redemption. At the option of the Corporation, shares of Class C
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Preferred Stock may be redeemed, in whole or in part, on any of the monthly
dividend payment dates set forth in paragraph d. below, on or after October 8,
2000, at a redemption price of $5.00 per share, plus an amount equal to unpaid
cumulative dividends accrued to the date of redemption as provided in
paragraph d. below, so long as the holder of such shares of Class C Preferred
Stock is given sixty (60) days notice of such redemption. The Class C
Preferred Stock cannot be redeemed prior to the redemption of the Class B
Preferred Stock. If the Class C Preferred Stock is redeemed, the Class B
Preferred Stock must be redeemed simultaneously.
d. Dividends. The holder of record of each share of Class C Preferred
---------
Stock shall receive a cumulative monthly dividend of $0.05 per share of Class
C Preferred Stock. Dividends on the Class C Preferred Stock shall be payable,
out of funds at the time legally available for payment of dividends, in equal
monthly amounts on the first business day of each month in each year beginning
with November 1997 for so long as shares of the Class C Preferred Stock are
outstanding, except that dividends on the shares of Class C Preferred Stock
payable on the first dividend payment date shall commence to accrue and shall
be cumulative from and including October 8, 1997. Dividends shall be paid as
provided above, unless the Board of Directors of the Corporation determine as
to a specific dividend that it is in the best interests of the Corporation to
put such funds to other use. Dividends shall not be paid to the holders of
the Class C Preferred Stock, unless all cumulative dividends due and owing to
the holders of Class B Preferred Stock or any other capital stock of greater
priority have been paid in full. If such dividend is not paid as of any such
monthly dividend payment date, the right to such payment shall accrue to the
holders of the shares of the Class C Preferred Stock and become an obligation
of the Corporation until paid in full. No dividends, other than dividends
payable solely in shares ranking junior to the Class C Preferred Stock, shall
be paid or set apart for payment on any shares ranking junior to the Class C
Preferred Stock unless and until all accrued and unpaid dividends on the Class
C Preferred Stock, shall have been paid or a sum sufficient for payment
thereof set apart. Whether another series of preferred stock is senior,
substantially equal or junior to the Class C Preferred Stock will be
determined by the Corporation's Board of Directors, subject to the voting
requirements of the Colorado Business Corporation Act. However, Class C
Preferred Stock shall be ranked junior to both the Class A Preferred Stock and
the Class B Preferred Stock of the Corporation.
<PAGE>
e. Liquidation or Dissolution. In the event of any voluntary or
----------------------------
involuntary liquidation, or winding up of the affairs of the Corporation, the
holders of the issued and outstanding Class C Preferred Stock shall be
entitled to receive for each share of Class C Preferred Stock a dollar amount
equal to $5.00 plus all then accrued and unpaid cumulative dividends, before
any distribution of the assets of the Corporation shall be made to the holders
of any other capital stock, except for holders of Class A Preferred Stock and
Class B Preferred Stock, which Classes shall be ranked senior to Class C
Preferred stock in connection with liquidation preferences under this
paragraph e. No funds can be paid on liquidation or dissolution of the
Corporation to the holders of Class C Preferred Stock, unless all amounts due
and owing upon liquidation or dissolution of the Corporation to the holders of
the Class B Preferred Stock and any other capital stock of greater priority to
the Class C Preferred Stock shall have been paid in full. A reorganization,
consolidation or merger of the Corporation, a share exchange, a sale, lease,
exchange or transfer of all or substantially all of its assets as an entirety,
or any purchase or redemption of stock of the Corporation of any class, shall
not be regarded as a "liquidation, dissolution, or winding up of the affairs
of the Corporation" within the meaning of this paragraph e.
f. Voting Rights. Except as otherwise expressly provided in the Colorado
-------------
Business Corporation Act, holders of Class C Preferred Stock shall have no
right to vote for the election of directors or for any other purpose,
provided, however, that holders of a majority of the Class C Preferred Stock
shall be required to vote in favor of any proposal to issue a series of
preferred stock of the Corporation which is to be senior or substantially
equal as to dividends or liquidation preferences to the Class C Preferred
Stock before such preferred stock may be issued by the Corporation, other than
the Class A Preferred Stock and the Class B Preferred Stock.
<PAGE>
g. Registration Under the Securities Act of 1933.
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(i) If at any time after the Class C Preferred Stock becomes convertible
into Common Stock, the Corporation files a registration statement with the
United States Securities and Exchange Commission pursuant to the Securities
Act of 1933, as amended (the "Act"), or pursuant to any other act passed after
the date hereof, which filing provides for the sale of securities by the
Corporation to the public, or files a Regulation A Offering Statement under
the Act, and, if such filing is upon the demand of other shareholders of the
Corporation, such shareholders do not object to participation in the offering
by the holders of the Class C Preferred Stock, the Corporation shall offer to
the holders of the Class C Preferred Stock or of any shares issued upon
conversion of the Class C Preferred Stock, the opportunity to register or
qualify the shares issued or to be issued upon conversion of the Class C
Preferred Stock at the holders' sole expense, regardless of whether the holder
or holders of the Class C Preferred Stock may have previously availed
themselves of any of the registration rights described in this Section g.;
provided, however, that in the case of a Regulation A offering, the
opportunity to qualify shall be limited to the amount of the available
exemption after taking into account the securities that the Corporation wishes
to qualify. However, if an underwriter or sales agent determines in good
faith that the then current market conditions make it inadvisable to offer
selling shareholder shares to the public or to limit the amount of such
shares, the holders shall comply with such determination. Notwithstanding
anything to the contrary, this subsection (i) shall not be applicable to a
registration statement on Forms S-4, S-8 or their successors or any other
inappropriate forms filed by the Corporation with the United States Securities
and Exchange Commission.
<PAGE>
The Corporation shall deliver written notice to the holders of the Class C
Preferred Stock and to any holders of the shares issued upon conversion of the
Class C Preferred Stock of its intention to file a registration statement or
Regulation A Offering Statement under the Act at least 60 days prior to the
filing of such registration statement or offering statement, and the holder or
holders shall have 30 days thereafter to request in writing that the
Corporation register or qualify the shares of Common Stock to be issued upon
conversion in accordance with this subsection (i). Upon the delivery of such
a written request within the specified time, the Corporation shall be
obligated to include in its contemplated registration statement or offering
statement all information necessary or advisable to register or qualify the
shares issuable upon conversion for a public offering, if the Corporation does
file the contemplated registration statement or offering statement; provided,
however, that neither the delivery of the notice by the Corporation nor the
delivery of a request by a holder shall in any way obligate the Corporation to
file a registration statement or offering statement. Furthermore,
notwithstanding the filing of a registration statement or offering statement,
the Corporation may, at any time prior to the effective date thereof,
determine not to offer the securities to which the registration statement or
offering statement relates, including the shares to be issued upon conversion.
Holders exercising their rights hereunder shall pay all expenses relating to
their shares being sold pursuant to the registration statement, including
their pro rata share of legal, accounting, consulting, printing, federal and
state filing fees, NASD fees, out-of-pocket expenses incurred by counsel,
underwriting commissions, transfer taxes and the underwriter's accountable and
nonaccountable expense allowances attributable to the offer and sale of the
shares to be issued upon conversion, accountants and consultants retained by
the Corporation, and miscellaneous expenses directly related to the
registration statement or offering statement and the offering.
(ii) In the event that the Corporation registers or qualifies the shares
issuable upon conversion pursuant to subsection (i) above, the Corporation
shall include in the registration statement or qualification, the prospectus
included therein, all information and materials necessary or advisable to
comply with the applicable statutes and regulations so as to permit the public
sale of the shares issuable upon conversion. As used in subsection (i) of
this Section g., reference to the Corporation's securities shall include, but
not be limited to, any class or type of the Corporation's securities or the
securities of any of the Corporation's subsidiaries or affiliates."
<PAGE>
The Quizno's Corporation
By:____________________________
Its: Vice President
and____________________________
Its: Assistant Secretary
Exhibit 10.10
INDEMNIFICATION AGREEMENT
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This Agreement, is made and entered into this 6th day of February, 1997
("Agreement"), by and between The Quizno's Corporation, a Colorado corporation
("Company"), and J. Eric Lawrence ("Indemnitee"):
WHEREEAS, highly competent persons are becoming more reluctant to serve
corporations as directors or in other capacities unless they are provided with
adequate protection through insurance or adequate indemnification against
inordinate risks of claims and actions against them arising out of their
service to and activities on behalf of the corporation;
WHEREAS, the Board of Directors of the Company has determined that the
inability to attract and retain such persons is detrimental to the best
interests of the Company's stockholders and that the Company should act to
assure such persons that there will be increased certainty of such protection
in the future;
WHEREAS, it is reasonable, prudent and necessary for the Company
contractually to obligate itself to indemnify such persons to the fullest
extent permitted by applicable law so that they will serve or continue to
serve the Company free from undue concern that they will not be so
indemnified; and
WHEREAS, Indemnitee is willing to serve, continue to serve and to take on
additional service for or on behalf of the Company on the condition that he be
so indemnified;
NOW, THEREFORE, in consideration of the premises and the covenants
contained herein, the Company and Indemnitee do hereby covenant and agree as
follows:
SECTION 1. Services by Indemnitee. Indemnitee has agreed to serve, or
-----------------------
presently serves, the Company and/or its subsidiaries in one or more positions
of significant responsibility and importance to the Company, and Indemnitee
may serve the Company in additional positions in the future. Indemnitee may
at any time and for any reason resign from such position and the Company shall
have no obligation under this Agreement to continue Indemnitee in such
position unless otherwise obligated by contract or law.
Section 2. Indemnification General. The Company shall indemnify, and
------------------------
advance Expenses (as defined in Section 16) to, Indemnitee (a) as provided in
this Agreement, and (b) to the fullest extent permitted by applicable law in
effect on the date hereof and as amended from time to time. The rights of
Indemnitee provided under the preceding sentence shall include, but shall not
be limited to, the rights set forth in the other Sections of this Agreement.
The indemnity and prepayment obligations of the Company and the standards
for indemnification set forth in this Agreement shall apply in all cases, even
if the conduct, act or omission in question occurred prior to the date of this
Agreement.
Section 3. Indemnification. Indemnitee shall be entitled to the rights
---------------
of indemnification provided in this Section 3 if, by reason of his Corporate
Status (as defined in Section 16), he is, or is threatened to be made, a party
to any threatened, pending, or completed Proceeding (as defined in Section
16). Indemnitee shall be entitled to such rights regardless of whether the
Proceeding relates to periods prior to or after execution of this Agreement.
Pursuant to this Section 3, Indemnitee shall be indemnified against all
Expenses, judgments, penalties, fines and amounts paid in settlement actually
and reasonably incurred by him or on his behalf in connection with such
Proceeding or any claim, issue or matter therein, if he acted in good faith
and he reasonably believed, in the case of conduct in his official capacity
with the Company, that his conduct was in the best interests of the Company;
or in all other cases, that his conduct was at least not opposed to the best
interests of the Company and, with respect to any criminal Proceeding, had no
reasonable cause to believe his conduct was unlawful. Notwithstanding
anything herein to the contrary, no indemnification against such Expenses,
judgments, penalties, fines or amounts paid in settlement shall be made in
respect of any claim, issue or matter which has been determined, by final
adjudication by a court of competent jurisdiction, to constitute an Excluded
Claim (as defined in Section 16).
Section 4. Indemnification for Expenses of a Partly Who is Wholly or
------------------------------------------------------------
Partly Successful. Notwithstanding any other provision of this Agreement, to
--------------
the extent that Indemnitee is, by reason of his Corporate Status, a party to
and is wholly successful, on the merits or otherwise, in any Proceeding, he
shall be indemnified against all Expenses actually and reasonably incurred by
him or on his behalf in connection therewith. If Indemnitee is not wholly
successful in such Proceeding but is successful, on the merits or otherwise,
as to one or more but less than all claims, issues or matters in such
Proceeding, the Company shall indemnify Indemnitee against all Expenses
actually and reasonably incurred by him or on his behalf, as determined by the
Board of Directors, in connection with each successfully resolved claim, issue
or matter. For purposes of this Section and without limitation, the
termination of any claim, issue or matter in such a Proceeding by dismissal,
with or without prejudice, shall be deemed to be a successful result as to
such claim, issue or matter.
Section 5. Indemnification for Expenses of a Witness. Notwithstanding
------------------------------------------
any other provision of this Agreement, to the extent that Indemnitee, by
reason of his Corporate Status, appears as a witness at a Proceeding or at a
deposition related to any Proceeding to which Indemnitee is not a Party, he
shall be indemnified against all Expenses actually and reasonably incurred by
him or on his behalf in connection with such appearance, or in preparation for
such appearance.
Section 6. Advancement of Expenses. The Company shall advance all
-------------------------
reasonable Expenses incurred by or on behalf of Indemnitee in connection with
any Proceeding within ten days after the receipt by the Company of a statement
or statements from Indemnitee requesting such advance or advances from time to
time, whether prior to or after final disposition of such Proceeding. Such
statement or statements shall reasonably evidence the Expenses incurred by
Indemnitee, shall include or be preceded by (i) an undertaking by Indemnitee
to repay any Expenses advanced if it shall ultimately be determined that
Indemnitee is not entitled to be indemnified against such Expenses, (ii) a
written affirmation by the Indemnitee of his good faith belief that he has met
the standard of conduct described in Section 3, and (iii) evidence of a
determination, made in accordance with Section 7 hereof, that the facts then
known to those making the determination would not preclude indemnification.
Section 7. Procedure for Determination of Entitlement to Indemnification.
----------------------------------------------------------------
(a) To obtain indemnification under this Agreement, Indemnitee shall
submit to the Company a written request, including therein or therewith such
documentation and information as is reasonably available to Indemnitee and is
reasonably necessary to determine whether and to what extent Indemnitee is
entitled to indemnification or whether he is seeking indemnification for an
Excluded Claim and therefore not entitled to indemnification. The Secretary
of the Company shall, promptly upon receipt of such a request for
indemnification, advise the Board of Directors in writing that Indemnitee has
requested indemnification.
(b) Upon written request by Indemnitee for indemnification pursuant
to the first sentence of Section 7(a) hereof, the appropriate entity, as
mandated by this Section 7(b), shall determine whether Indemnitee is entitled
to indemnification and whether he is seeking indemnification for an Excluded
Claim. Such determination shall be made: (i) by Independent Counsel (as
defined in Section 16) in writing to the Board of Directors, a copy of which
shall be delivered to Indemnitee, if a Change in Control (as defined in
Section 16) shall have occurred; or (ii) if a Change of Control shall not have
occurred, (A) by the Board of Directors by a majority vote of a quorum
consisting of Disinterested Directors (as defined in Section 16), or (B) if a
quorum of the Board of Directors consisting of Disinterested Directors is not
obtainable or, even if obtainable, such quorum of Disinterested Directors so
directs, by Independent Counsel in writing to the Board of Directors, a copy
of which shall be delivered to Indemnitee or (C) if so directed by the Board
of Directors, by the stockholders of the Company; and, if it is so determined
that Indemnitee is entitled to indemnification, payment to Indemnitee shall be
made within ten (10) days after such determination. Indemnitee shall
cooperate with the person, persons or entity making such determination with
respect to Indemnitee's entitlement to indemnification, including providing to
such person, persons or entity upon reasonable advance request any
documentation or information which is not privileged or otherwise protected
from disclosure and which is reasonably available to Indemnitee and reasonably
necessary to such determination. Any costs or expenses (including attorney's
fees and disbursements) incurred by Indemnitee in so cooperating with the
person, persons or entity making such determination shall be borne by the
Company (irrespective of the determination as to Indemnitee's entitlement to
indemnification) and the Company hereby indemnifies and agrees to hold
Indemnitee harmless therefrom.
(c) In the event the determination of entitlement to indemnification
is to be made by Independent Counsel pursuant to Section 7(b) hereof, the
Independent Counsel shall be selected as provided in this Section 7(c). If a
Change of Control shall not have occurred, the Independent Counsel shall be
selected by the Board of Directors, and the Company shall give written notice
to Indemnitee advising him of the identity of the Independent Counsel so
selected. If a Change of Control shall have occurred, the Independent Counsel
shall be selected by Indemnitee (unless Indemnitee shall request that such
selection be made by the Board of Directors, in which event the preceding
sentence shall apply), and Indemnitee shall give written notice to the Company
advising it of the identity of the Independent Counsel so selected. In either
event, Indemnitee or the Company, as the case may be, may, within 10 days
after such written notice of selection shall have been given, deliver to the
Company or to Indemnitee, as the case may be, a written objection to such
selection; provided, however, that such objection may be asserted only on the
-----------------
ground that the Independent Counsel so selected does not meet the requirements
of "Independent Counsel" as defined in Section 16 of this Agreement, and the
objection shall set forth with particularity the factual basis of such
assertion. If such written objection is so made and substantiated, the
Independent Counsel so selected may not serve as Independent Counsel unless
and until such objection is withdrawn or a court has determined that such
objection is without merit. If, within 20 days after submission by Indemnitee
of a written request for indemnification pursuant to Section 7(a) hereof, all
Independent Counsel selected have been objected to, either the Company or
Indemnitee may petition a court of competent jurisdiction, subject to the
provisions of Section 21, for resolution of any objection which shall have
been made by the Company or Indemnitee to the other's selection of Independent
Counsel and/or for the appointment as Independent Counsel of a person selected
by the Court or by such other person as the Court shall designate, and the
person with respect to whom all objections are so resolved or the person so
appointed shall act as Independent Counsel under Section 7(b) hereof The
Company shall pay any and all reasonable fees and expenses of Independent
Counsel incurred by such Independent Counsel in connection with acting
pursuant to Section 7(b) hereof, and the Company shall pay all reasonable fees
and expenses incident to the procedures of this Section 7(c), regardless of
the manner in which such Independent Counsel was selected or appointed. Upon
the due commencement of any judicial proceeding or arbitration pursuant to
Section 9(b) or (c) of this Agreement, Independent Counsel shall be discharged
and relieved of any further responsibility in such capacity (subject to the
applicable standards of professional conduct then prevailing).
(d) Indemnitee agrees that he will reimburse the Company for all
Expenses paid by the Company in connection with any action, suit or proceeding
against Indemnitee in the event and only to the extent that a determination
shall have been made by a court in a final adjudication from which there is no
further right of appeal that the Indemnitee is not entitled to be indemnified
by the Company for such Expenses because the claim is an Excluded Claim or
because Indemnitee is otherwise not entitled to payment under this Agreement.
SECTION 8. PRESUMPTIONS AND EFFECTof CERTAIN PROCEEDINGS-.
------------------------- ----------------------
(a) If a Change of Control shall have occurred, in making a
determination with respect to entitlement to indemnification hereunder, the
person or persons or entity making such determination shall presume that
Indemnitee is entitled to indemnification under this Agreement if Indemnitee
has submitted a request for indemnification in accordance with Section 7(a) of
this Agreement, and the Company shall have the burden of proof to overcome
that presumption in connection with the making by any person, persons or
entity of any determination contrary to that presumption.
(b) The termination of any Proceeding or of any claim, issue or
matter therein, by judgment, order, settlement or conviction, or upon a plea
of nolo contender or its equivalent, shall not (except as otherwise expressly
--------------
provided in this Agreement) of itself adversely affect the right of Indemnitee
to indemnification or create a presumption that Indemnitee did not act in good
faith and in a manner which he reasonably believed to be in or not opposed to
the best interests of the Company or, with respect to any criminal Proceeding,
that Indemnitee had reasonable cause to believe that his conduct was unlawful.
SECTION 9. REMEDIES OF INDEMNITEE. Indemnitee shall commence any
----------------------
proceeding seeking an adjudication or an award in arbitration under this
Section 9 within 180 days following the date on which Indemnitee first has the
right to commence such proceeding pursuant to this Section 9; provided,
---------
however, that the foregoing clause shall not apply in respect of a proceeding
-
brought by Indemnitee to enforce his rights under Section 4 of this Agreement.
(a) Except as provided by Section 9(c), the parties agree that venue
and jurisdiction, with respect to any matter arising under the Agreement,
shall be exclusively in the state or federal courts, as applicable, located in
the State of Colorado. Each party submits to the jurisdiction of such courts
in Colorado with respect to any claim or controversy arising under this
Agreement.
(b) In the event that: (i) a determination is made pursuant to
Section 7 of this Agreement that Indemnitee is not entitled to indemnification
under this Agreement; (ii) advancement of Expenses is not timely made pursuant
to Section 6 of this Agreement; (iii) no determination of entitlement to
indemnification shall have been made pursuant to Section 7(b) of this
Agreement within 90 days after receipt by the Company of the request for
indemnification; (iv) payment of indemnification is not made pursuant to
Section 4 or 5 of this Agreement within ten (10) days after receipt by the
Company of a written request therefor; or (v) payment of indemnification is
not made within ten (10) days after a determination has been made that
Indemnitee is entitled to indemnification, Indemnitee shall be entitled to an
adjudication in an appropriate court of the State of Colorado of his
entitlement to such indemnification or advancement of Expenses.
(c) Alternatively, if one of the events set forth in Section 9(b) has
occurred, Indemnitee, at his option, may seek an award in arbitration to be
conducted by a single arbitrator, in the State of Colorado, pursuant to the
Commercial Arbitration Rules of the American Arbitration Association.
(d) In the event that a determination shall have been made pursuant
to Section 7(b) of this Agreement that Indemnitee is not entitled to
indemnification, any judicial proceeding or arbitration commenced pursuant to
this Section 9 shall be conducted in all respects as a de novo trial, or
-------
arbitration, on the merits and Indemnitee shall not be prejudiced by reason of
that adverse determination. If a Change of Control shall have occurred, in
any judicial proceeding or arbitration commenced pursuant to this Section 9
the Company shall have the burden of proving that Indemnitee is not entitled
to indemnification or advancement of Expenses, as the case may be.
(e) If a determination shall have been made pursuant to Section 7(b)
of this Agreement that Indemnitee is entitled to indemnification, the Company
shall be bound by such determination in any judicial proceeding or arbitration
commenced pursuant to this Section 9, absent (i) a misstatement by Indemnitee
of a material fact, or an omission of a material fact necessary to make
Indemnitee's statement not materially misleading, in connection with the
request for indemnification, or (ii) a prohibition of such indemnification
under applicable law.
(f) In the event that Indemnitee, pursuant to this Section 9, seeks a
judicial adjudication of or an award in arbitration to enforce his rights
under, or to recover damages for breach of this Agreement, Indemnitee shall be
entitled to recover from the Company, and shall be indemnified by the Company
against, any and all expenses (of the types described in the definition of
Expenses in Section 16 of this Agreement) actually and reasonably incurred by
him in such judicial adjudication or arbitration, but only if he prevails
therein. If it shall be determined in said judicial adjudication or
arbitration that Indemnitee is entitled to receive part but not all of the
indemnification or advancement of expenses sought, the expenses incurred by
Indemnitee in connection with such judicial adjudication or arbitration shall
be appropriately prorated by the court or arbitrator.
Section 10. Non-exclusivity: Survival of Rights: Insurance: Subrogation.
-------------------------------------------------------------
(a) The rights of indemnification and to receive advancement of
Expenses as provided by this Agreement shall not be deemed exclusive of any
other rights to which Indemnitee may at any time be entitled under applicable
law, the Articles of Incorporation, the Bylaws, any agreement, a vote of
stockholders or a resolution of directors, or otherwise. Indemnitee shall be
entitled to such rights regardless of whether the subject Proceeding relates
to periods prior to or after execution of this Agreement. No amendment,
alteration or repeal of this Agreement or of any provision hereof shall limit
or restrict any right of Indemnitee under this Agreement in respect of any
action taken or omitted by such Indemnitee in his Corporate Status prior to
such amendment, alteration or repeal.
(b) To the extent that the Company maintains an insurance policy or
policies providing liability insurance for directors, officers, employees, or
agents of the Company or of any other corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise in which position such person
serves at the request of the Company, Indemnitee shall be named as an insured
in such manner as to provide Indemnitee the same rights and benefits, subject
to the same limitations, as are accorded to the Company's directors or
officers most favorably insured by such policy.
(c) In the event of any payment under this Agreement, the Company
shall be subrogated to the extent of such payment to all of the rights of
recovery of Indemnitee, who SHALL execute all papers required and take all
action necessary to secure such rights, including execution of such documents
as are necessary to enable the Company to bring suit to enforce such rights.
(d) The Company shall not be liable under this Agreement to make any
payment of amounts otherwise indemnifiable hereunder if and to the extent that
Indemnitee has otherwise actually received such payment under any insurance
policy, contract, agreement or otherwise.
SECTION 11. Duration of AGREEMENT.This Agreement shall continue until and
-------- ----------
terminate upon the later of (a) 10 years after the date that Indemnitee
shall have ceased to serve as a DIRECTOR, officer, employee, or agent of the
Company or of any other corporation, partnership, joint VENTURE, trust,
employee benefit plan or other enterprise which Indemnitee served at the
request of THE Company; or (b) the final termination of any Proceeding then
pending in respect of which Indemnitee is granted rights of indemnification or
advancement of expenses hereunder and of any proceeding commenced by
Indemnitee pursuant to Section 9 of this Agreement relating thereto. This
Agreement shall be binding upon the Company and its successors and assigns and
shall inure to the benefit of Indemnitee and his heirs, executors and
administrators.
SECTION 12. Severability. If any provision or provisions of this
------------
Agreement shall be held to be invalid, illegal or unenforceable for any reason
whatsoever: (a) the validity, legality and enforceability of the remaining
provisions of this Agreement (including without limitation, each portion of
any Section of this Agreement containing any such provision held to be
invalid, illegal or unenforceable, that is not itself invalid, illegal or
unenforceable) shall not in any way be AFFECTED or impaired thereby; and (b)
to the fullest extent possible, the provisions of this Agreement (including,
without limitation, each portion of any Section of this Agreement containing
any such provision held to be invalid, illegal or unenforceable, that is not
itself invalid, illegal or unenforceable) shall be construed so as to give
effect to the intent manifested thereby.
SECTION 13. Exception to RIGHT of INDEMNIFICATION OR ADVANCEMENT OF
-----------------------------------------------------------
EXPENSES Notwithstanding any other provision of this Agreement, Indemnitee
- --------
shall not be entitled to indemnification or advancement of Expenses under this
Agreement with respect to any Proceeding initiated by Indemnitee prior to a
Change in Control, unless the initiation of such Proceeding shall have been
approved by the Board of Directors.
SECTION 14. Identical Counterparts. This Agreement may be executed in
-----------------------
one or more counterparts, each of which shall for all purposes be deemed to be
an original but all of which together shall constitute one and the same
Agreement. Only one such counterpart signed by the party against whom
enforceability is sought needs to be produced to evidence the existence of
this Agreement. Signatures may be exchanged by telecopy, with original
signatures to follow. The Company and the Indemnitee agree that they will
each be bound by its own telecopied signature and that it accepts the
telecopied signatures of the other party.
Section 15. Headings. The headings of the paragraphs of this Agreement
--------
are inserted for convenience only and shall not be deemed to constitute part
of this Agreement or to affect the construction thereof.
Section 16. Definitions For purposes of this Agreement:
(a) "Change in Control" means a change in control of the Company
occurring after the Effective Date of a nature that would be required to be
reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or in
response to any similar item on any similar schedule or form) promulgated
under the Securities Exchange Act of 1934 (the "Act"), whether or not the
Company is then subject to such reporting requirement; provided, however,
that, without limitation, such a Change in Control shall be deemed to have
occurred if after the Effective Date (i) any "person" (as such term is used in
Sections 13(d) and 14(d) of the Act) becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Act), directly or indirectly, of securities of
the Company representing 51 % or more of the combined voting power of the
Company's then outstanding securities without the prior approval of at least
two-thirds of the members of the Board of Directors in office immediately
prior to such person attaining such percentage interest; (ii) there occurs a
proxy contest, or the Company is a party to a merger, consolidation, sale of
assets, plan of liquidation or other reorganization not approved by at least
two-thirds of the members of the Board of Directors then in office, as a
consequence of which members of the Board of Directors in office immediately
prior to such transaction or event constitute less than a majority of the
Board of Directors thereafter; or (iii) during any period of two consecutive
years, other than as a result of an event described in clause (a)(ii) of this
Section 16, individuals who at the beginning of such period constituted the
Board of Directors (including for this purpose any new director whose election
or nomination for election by the Company's stockholders was approved by a
vote of at least two-thirds of the directors then still in office who were
directors at the beginning of such period) cease for any reason to constitute
at least a majority of the Board of Directors.
(b) "Corporate Status" describes the status of a person who is or was
a director or officer of the Company or a director, officer, employee or agent
of any other corporation, partnership, joint venture, trust, employee benefit
plan or other enterprise to the extent such person is or was serving in such
position at the request of the Company.
(c) "Disinterested Director" means a director of the Company who is
not and was not a party to the Proceeding in respect of which indemnification
is sought by Indemnitee.
(d) "Effective Date" means the date on which Indemnitee became an
officer or director of the Company or otherwise accepted a position with the
Company of the type described in Section I above.
(e) "Excluded Claim" means any claim:
(i) In connection with a Proceeding by or in the right of the Company
in which the Indemnitee was adjudged liable to the Company; or
(ii) In connection with any Proceeding charging improper personal benefit
to the indemnity, whether or not involving action in his official capacity, in
which the Indemnitee was adjudged liable on the basis that personal benefit
was improperly received by him.
(f) "Expenses" shall include all reasonable attorneys' fees,
retainers, court costs, transcript costs, fees of experts, witness fees,
travel expenses, duplicating costs, printing and binding costs, telephone
charges, postage, delivery service fees, and all other disbursements or
expenses of the types customarily incurred in connection with prosecuting,
defending, preparing to prosecute or defend, investigating, or being or
preparing to be a witness in a Proceeding.
(g) "Independent Counsel" means a law firm, or a member of a law
firm, that is experienced in matters of corporation law and neither presently
is, nor in the past five years has been, retained to represent: (i) the
Company or Indemnitee in any matter material to either such party, or (ii) any
other party to the Proceeding giving rise to a claim for indemnification
hereunder. Notwithstanding the foregoing, the term "Independent Counsel"
shall not include any person who, under the applicable standards of
professional conduct then prevailing, would have a conflict of interest in
representing either the Company or Indemnitee in an action to determine
Indemnitee's rights under this Agreement.
(h) "Proceeding" includes any action suit, arbitration, alternative
dispute resolution mechanism, investigation, administrative hearing or any
other proceeding, whether civil, criminal, administrative or investigative
based on or in relation to the Indemnitee's acts or omissions occurring on or
after the Effective Date, except one (i) initiated by an Indemnitee pursuant
to Section 9 of this Agreement to enforce his rights under this Agreement or
(ii) pending on or before the Effective Date.
Section 17. Modification and Waiver. No supplement, modification or
------------------------
amendment of this Agreement shall be binding unless executed in writing by
both of the parties hereto. No waiver of any of the provisions of this
Agreement shall be deemed or shall constitute a waiver of any other provisions
hereof (whether or not similar) nor shall such waiver constitute a continuing
waiver.
Section 18. Notice by Indemnitee. (a) Indemnitee agrees promptly to
----------------------
notify the Company in writing upon being served with any summons, citation,
subpoena, complaint, indictment, information or other document relating to any
Proceeding or matter which may be subject to indemnification or advancement of
Expenses covered hereunder.
(a) If, at the time of the receipt of such notice, the Company has
director's and officer's liability insurance ("D&O Insurance") in effect, the
Company shall give prompt notice of the commencement of such action, suit or
proceeding to the insurers in accordance with the procedures set forth in the
respective policies in favor of Indemnitee. The Company shall thereafter take
all necessary or desirable action to cause such insurers to pay, on behalf of
Indemnitee, Expenses, judgments, penalties, fines and amounts paid in
settlement or payable as a result of such action, suit or Proceeding in
accordance with the terms of such policies.
(b) To the extent the Company does not, at the time of the
commencement of or the threat of commencement of such action, suit or
Proceeding, have applicable D&O Insurance, or if a determination is made that
any Expenses, judgments, penalties, fines and amounts paid in settlement
arising out of such action, suit or Proceeding will not be payable under the
D&O Insurance then in effect, the Company, if appropriate, shall be entitled
to assume the defense of such action, suit or Proceeding, with counsel
satisfactory to Indemnitee, upon the delivery to Indemnitee of written notice
of its election so to do. After delivery of such notice, the Company will not
be liable to Indemnitee under this Agreement for any legal or other Expenses
subsequently incurred by the Indemnitee in connection with such defense, other
than reasonable Expenses of investigation, provided that Indemnitee shall have
the right to employ counsel in any such action, suit or Proceeding, but the
fees and expenses of such counsel incurred after delivery of notice from the
Company of its assumption of such defense shall be at the Indemnitee's
expense, provided further that if (i) the employment of counsel by Indemnitee
has been previously authorized by the Company; (ii) Indemnitee shall have
reasonably concluded that there may be a conflict of interest between the
Company and Indemnitee in the conduct of any such defense; or (iii) the
Company shall not, in fact, have employed counsel to assume the defense of
such action, the fees and expenses of counsel shall be at the expense of the
Company.
Section 19. Settlement. The Company shall have no obligation to
----------
indemnify Indemnitee under this Agreement for any amounts paid in settlement
of any action, suit or Proceeding effected without the Company's prior written
consent. The Company shall not settle any claim in any manner which would
impose any obligation on Indemnitee without Indemnitee's written consent.
Neither the Company nor Indemnitee shall unreasonably withhold their consent
to any proposed settlement.
Section 20. Notices. All notices, requests, demands and other
-------
communications hereunder shall be in writing and shall be deemed to have been
duly given if (i) delivered by hand and receipted for by the party to whom
said notice or other communication shall have been directed, or (ii) mailed by
certified or registered mail with postage prepaid, on the third business day
after the date on which it is so mailed:
(a) If to Indemnitee, to:
J. Eric Lawrence
10000 N. Central Expressway, Suite 1060
Dallas, Texas 75231
(b) If to the Company to:
Patrick E. Meyers
Vice President and General Counsel The Quizno's Corporation 1099 18th Street,
Suite 2850 Denver, Colorado 80202
or to such other address as may have been furnished to Indemnitee by the
Company or to the Company by Indemnitee , as the case may be.
Section 21. Governing Law. This Agreement shall be governed by, and
--------------
construed and enforced in accordance with, the laws of the State of Colorado
applicable to contracts made and to be performed therein. The parties agree
that venue and jurisdiction with respect to any matter arising hereunder shall
be exclusively in the state and federal courts, as applicable, located in the
State of Colorado. Each party submits to the jurisdiction of such courts in
Colorado with respect to any claims or controversies arising hereunder.
SECTION 22. Miscellaneous. Use of the masculine pronoun shall be deemed to
-------------
include usage of the feminine pronoun where appropriate.
SECTION 23. Expenses. In any action brought to enforce the terms of this
--------
Agreement or pursuant to this Agreement, the costs, expenses and fees
(including attorneys' fees) incurred by the prevailing party will be paid by
the nonprevailing party. If each party prevails in part, the parties agree
that the court will determine their respective responsibilities for legal fees
in a manner consistent with this provision.
IN WITNESS WHEREOF, the parties hereto have, executed this Agreement on
the day and year first above written.
THE QUIZNO'S CORPORATION
By: /s/ Richard E. Schaden
Name: Richard E. Schaden
President and Chief Executive Officer
INDEMNITEE
By: /s/ J. Eric Lawrence
Name J. Eric Lawrence
Title: Director
Exhibit 10-11
INDEMNIFICATION AGREEMENT
-------------------------
This Agreement, is made and entered into this 3rd day of September, 1997
("Agreement"), by and between The Quizno's Corporation, a Colorado corporation
("Company"), and Mark L. Bromberg ("Indemnitee"):
WHEREAS, highly competent persons are becoming more reluctant to serve
corporations as directors or in other capacities unless they are provided with
adequate protection through insurance or adequate indemnification against
inordinate risks of claims and actions against them arising out of their
service to and activities on behalf of the corporation;
WHEREAS, the Board of Directors of the Company has determined that the
inability to attract and retain such persons is detrimental to the best
interests of the Company's stockholders and that the Company should act to
assure such persons that there will be increased certainty of such protection
in the future;
WHEREAS, it is reasonable, prudent and necessary for the Company
contractually to obligate itself to indemnify such persons to the fullest
extent permitted by applicable law so that they will serve or continue to
serve the Company free from undue concern that they will not be so
indemnified; and
WHEREAS, Indemnitee is willing to serve, continue to serve and to take on
additional service for or on behalf of the Company on the condition that he be
so indemnified;
NOW, THEREFORE, in consideration of the premises and the covenants
contained herein, the Company and Indemnitee do hereby covenant and agree as
follows:
SECTION 1. Services by Indemnitee. Indemnitee has agreed to serve, or
-----------------------
presently serves, the Company and/or its subsidiaries in one or more positions
of significant responsibility and importance to the Company, and Indemnitee
may serve the Company in additional positions in the future. Indemnitee may
at any time and for any reason resign from such position and the Company shall
have no obligation under this Agreement to continue Indemnitee in such
position unless otherwise obligated by contract or law.
SECTION 2. Indemnification - General. The Company shall indemnify, and
-------------------------
advance Expenses (as defined in Section 16) to, Indemnitee (a) as provided in
this Agreement, and (b) to the fullest extent permitted by applicable law in
effect on the date hereof and as amended from time to time. The rights of
Indemnitee provided under the preceding sentence shall include, but shall not
be limited to, the rights set forth in the other Sections of this Agreement.
The indemnity and prepayment obligations of the Company and the standards
for indemnification set forth in this Agreement shall apply in all cases, even
if the conduct, act or omission in question occurred prior to the date of this
Agreement.
SECTION 3. Indemnification . Indenmitee shall be entitled to the rights
---------------
of indemnification provided in this Section 3 if, by reason of his Corporate
Status (as defined in Section 16), he is, or is threatened to be made, a party
to any threatened, pending, or completed Proceeding (as defined in Section
16). Indenmitee shall be entitled to such rights regardless of whether the
Proceeding relates to periods prior to or after execution of this Agreement.
Pursuant to this Section 3, Indemnitee shall be indemnified against all
Expenses, judgments, penalties, fines and amounts paid in settlement actually
and reasonably incurred by him or on his behalf in connection with such
Proceeding or any claim, issue or matter therein, if he acted in good faith
and he reasonably believed, in the case of conduct in his official capacity
with the Company, that his conduct was in the best interests of the Company;
or in all other cases, that his conduct was at least not opposed to the best
interests of the Company and, with respect to any criminal Proceeding, had no
reasonable cause to believe his conduct was unlawful. Notwithstanding
anything herein to the contrary, no indemnification against such Expenses,
judgments, penalties, fines or amounts paid in settlement shall be made in
respect of any claim, issue or matter which has been determined, by final
adjudication by a court of competent jurisdiction, to constitute an Excluded
Claim (as defined in Section 16).
Section 4. Indemnification for Expenses of a Party Who is Wholly or
------------------------------------------------------------
Partly Successful. Notwithstanding any other provision of this Agreement, to
-------------
the extent that Indemnitee is, by reason of his Corporate Status, a party to
and is wholly successful, on the merits or otherwise, in any Proceeding, he
shall be indemnified against all Expenses actually and reasonably incurred by
him or on his behalf in connection therewith. If Indemnitee is not wholly
successful in such Proceeding but is successful, on the merits or otherwise,
as to one or more but less than all claims, issues or matters in such
Proceeding, the Company shall indemnify Indemnitee against all Expenses
actually and reasonably incurred by him or on his behalf, as determined by the
Board of Directors, in connection with each successfully resolved claim, issue
or matter. For purposes of this Section and without limitation, the
termination of any claim, issue or matter in such a Proceeding by dismissal,
with or without prejudice, shall be deemed to be a successful result as to
such claim, issue or matter.
Section 5. Indemnification for Expenses of a Witness. Notwithstanding
------------------------------------------
any other provision of this Agreement, to the extent that Indemnitee, by
reason of his Corporate Status, appears as a witness at a Proceeding or at a
deposition related to any Proceeding to which Indemnitee is not a party, he
shall be indemnified against all Expenses actually and reasonably incurred by
him or on his behalf in connection with such appearance, or in preparation for
such appearance.
Section 6. Advancement of Expenses. The Company shall advance all
-------------------------
reasonable Expenses incurred by or on behalf of Indemnitee in connection with
any Proceeding within ten days after the receipt by the Company of a statement
or statements from Indemnitee requesting such advance or advances from time to
time, whether prior to or after final disposition of such Proceeding. Such
statement or statements shall reasonably evidence the Expenses incurred by
Indemnitee, shall include or be preceded by (i) an undertaking by Indemnitee
to repay any Expenses advanced if it shall ultimately be determined that
Indemnitee is not entitled to be indemnified against such Expenses, (ii) a
written affirmation by the Indenmitee of his good faith belief that he has met
the standard of conduct described in Section 3, and (iii) evidence of a
determination, made in accordance with Section 7 hereof, that the facts then
known to those making the determination would not preclude indemnification.
Section 7. Procedure for Determination of Entitlement to Indemnification.
-------------------------------------------------------------
(a) To obtain indemnification under this Agreement, Indemnitee shall
submit to the Company a written request, including therein or therewith such
documentation and information as is reasonably available to Indemnitee and is
reasonably necessary to determine whether and to what extent Indemnitee is
entitled to indemnification or whether he is seeking indemnification for an
Excluded Claim and therefore not entitled to indemnification. The Secretary
of the Company shall, promptly upon receipt of such a request for
indemnification, advise the Board of Directors in writing that Indemnitee has
requested indemnification.
(b) Upon written request by Indemnitee for indemnification pursuant
to the first sentence of Section 7(a) hereof, the appropriate entity, as
mandated by this Section 7(b), shall determine whether Indemnitee is entitled
to indemnification and whether he is seeking indemnification for an Excluded
Claim. Such determination shall be made: (i) by Independent Counsel (as
defined in Section 16) in writing to the Board of Directors, a copy of which
shall be delivered to Indemnitee, if a Change in Control (as defined in
Section 16) shall have occurred; or (ii) if a Change of Control shall not have
occurred, (A) by the Board of Directors by a majority vote of a quorum
consisting of Disinterested Directors (as defined in Section 16), or (B) if a
quorum of the Board of Directors consisting of Disinterested Directors is not
obtainable or, even if obtainable, such quorum of Disinterested Directors so
directs, by Independent Counsel in writing to the Board of Directors, a copy
of which shall be delivered to Indenmitee or (C) if so directed by the Board
of Directors, by the stockholders of the Company; and, if it is so determined
that Indemnitee is entitled to indemnification, payment to Indemnitee shall be
made within ten (10) days after such determination. Indemnitee shall
cooperate with the person, persons or entity making such determination with
respect to Indemnitee's entitlement to indemnification, including providing to
such person, persons or entity upon reasonable advance request any
documentation or information which is not privileged or otherwise protected
from disclosure and which is reasonably available to Indemnitee and reasonably
necessary to such determination. Any costs or expenses (including attorneys'
fees and disbursements) incurred by Indemnitee in so cooperating with the
person, persons or entity making such determination shall be borne by the
Company (irrespective of the determination as to Indemnitee's entitlement to
indemnification) and the Company hereby indenmifies and agrees to hold
Indemnitee harmless therefrom.
(c) In the event the determination of entitlement to indemnification
is to be made by Independent Counsel pursuant to Section 7(b) hereof, the
Independent Counsel shall be selected as provided in this Section 7(c). If a
Change of Control shall not have occurred, the Independent Counsel shall be
selected by the Board of Directors, and the Company shall give written notice
to Indemnitee advising him of the identity of the Independent Counsel so
selected. If a Change of Control shall have occurred, the Independent Counsel
shall be selected by Indemnitee (unless Indemnitee shall request that such
selection be made by the Board of Directors, in which event the preceding
sentence shall apply), and Indemnitee shall give written notice to the Company
advising it of the identity of the Independent Counsel so selected. In either
event, Indemnitee or the Company, as the case may be, may, within 10 days
after such written notice of selection shall have been given, deliver to the
Company or to Indemnitee, as the case may be, a written objection to such
selection; provided, however, that such objection may be asserted only on the
------------------
ground that the Independent Counsel so selected does not meet the requirements
of "Independent Counsel" as defined in Section 16 of this Agreement, and the
objection shall set forth with particularity the factual basis of such
assertion. If such written objection is so made and substantiated, the
Independent Counsel so selected may not serve as Independent Counsel unless
and until such objection is withdrawn or a court has determined that such
objection is without merit. If, within 20 days after submission by Indemnitee
of a written request for indemnification pursuant to Section 7(a) hereof, all
Independent Counsel selected have been objected to, either the Company or
Indemnitee may petition a court of competent jurisdiction, subject to the
provisions of Section 2 1, for resolution of any objection which shall have
been made by the Company or Indemnitee to the other's selection of Independent
Counsel and/or for the appointment as Independent Counsel of a person selected
by the Court or by such other person as the Court shall designate, and the
person with respect to whom all objections are so resolved or the person so
appointed shall act as Independent Counsel under Section 7(b) hereof The
Company shall pay any and all reasonable fees and expenses of Independent
Counsel incurred by such Independent Counsel in connection with acting
pursuant to Section 7(b) hereof, and the Company shall pay all reasonable fees
and expenses incident to the procedures of this Section 7(c), regardless of
the manner in which such Independent Counsel was selected or appointed. Upon
the due commencement of any judicial proceeding or arbitration pursuant to
Section 9(b) or (c) of this Agreement, Independent Counsel shall be discharged
and reli5yed of any further responsibility in such capacity (subject to the
applicable standards of professional conduct then prevailing).
(d) Indemnitee agrees that he will reimburse the Company for all
Expenses paid by the Company in connection with any action, suit or proceeding
against Indemnitee in the event and only to the extent that a determination
shall have been made by a court in a final adjudication from which there is no
further right of appeal that the Indemnitee is not entitled to be indemnified
by the Company for such Expenses because the claim is an Excluded Claim or
because Indemnitee is otherwise not entitled to payment under this Agreement.
Section 8. Presumptions and Effect of Certain Proceedings.
---------------------------------------------------
(a) If a Change of Control shall have occurred, in making a
determination with respect to entitlement to indemnification hereunder, the
person or persons or entity making such determination shall presume that
Indemnitee is entitled to indemnification under this Agreement if Indemnitee
has submitted a request for indemnification in accordance with Section 7(a) of
this Agreement, and the Company shall have the burden of proof to overcome
that presumption in connection with the making by any person, persons or
entity of any determination contrary to that presumption.
(b) The termination of any Proceeding or of any claim, issue or
matter therein, by judgment, order, settlement or conviction, or upon a plea
of Nolo contendere or its equivalent, shall not (except as otherwise expressly
----------
provided in this Agreement) of itself adversely affect the right of Indemnitee
to indemnification or create a presumption that Indemnitee did not act in good
faith and in a manner which he reasonably believed to be in or not opposed to
the best interests of the Company or, with respect to any criminal Proceeding,
that Indemnitee had reasonable cause to believe that his conduct was unlawful.
Section 9. Remedies of Indemnitee. Indemnitee shall commence any
------------------------
proceeding seeking an adjudication or an award in arbitration under this
Section 9 within 180 days following the date on which Indemnitee first has the
right to commence such proceeding pursuant to this Section 9; provided,
however, that the foregoing clause shall not apply in respect of a proceeding
brought by Indemnitee to enforce his rights under Section 4 of this Agreement.
(a) Except as provided by Section 9(c), the parties agree that venue
and jurisdiction, with respect to any matter arising under the Agreement,
shall be exclusively in the state or federal courts, as applicable, located in
the State of Colorado. Each party submits to the jurisdiction of such courts
in Colorado with respect to any claim or controversy arising under this
Agreement.
(b) In the event that: (i) a determination is made pursuant to
Section 7 of this Agreement that Indemnitee is not entitled to indemnification
under this Agreement; (ii) advancement of Expenses is not timely made pursuant
to Section 6 of this Agreement; (iii) no determination of entitlement to
indemnification shall have been made pursuant to Section 7(b) of this
Agreement within 90 days after receipt by the Company of the request for
indemnification; (iv) payment of indemnification is not made pursuant to
Section 4 or 5 of this Agreement within ten (10) days after receipt by the
Company of a written request therefor; or (v) payment of indemnification is
not made within ten (10) days after a determination has been made that
Indemnitee is entitled to indemnification, Indemnitee shall be entitled to an
adjudication in an appropriate court of the State of Colorado of his
entitlement to such indemnification or advancement of Expenses.
(c) Alternatively, if one of the events set forth in Section 9(b) has
occurred, Indemnitee, at his option, may seek an award in arbitration to be
conducted by a single arbitrator, in the State of Colorado, pursuant to the
Commercial Arbitration Rules of the American Arbitration Association.
(d) In the event that a determination shall have been made pursuant
to Section 7(b) of this Agreement that Indemnitee is not entitled to
indemnification, any judicial proceeding or arbitration commenced pursuant to
this Section 9 shall be conducted in all respects as a de novo trial, or
arbitration, on the merits and Indemnitee shall not be prejudiced by reason of
that adverse determination. If a Change of Control shall have occurred, in
any judicial proceeding or arbitration commenced pursuant to this Section 9
the Company shall have the burden of proving that Indemnitee is not entitled
to indemnification or advancement of Expenses, as the case may be.
(e) If a determination shall have been made pursuant to Section 7(b)
of this Agreement that Indemnitee is entitled to indemnification, the Company
shall be bound by such determination in any judicial proceeding or arbitration
commenced pursuant to this Section 9, absent (i) a misstatement by Indemnitee
of a material fact, or an omission of a material fact necessary to make
Indemnitee's statement not materially misleading, in connection with the
request for indemnification, or (ii) a prohibition of such indemnification
under applicable law.
(f) In the event that Indemnitee, pursuant to this Section 9, seeks a
judicial adjudication of or an award in arbitration to enforce his rights
under, or to recover damages for breach of this Agreement, Indemnitee shall be
entitled to recover from the Company, and shall be indemnified by the Company
against, any and all expenses (of the types described in the definition of
Expenses in Section 16 of this Agreement) actually and reasonably incurred by
him in such judicial adjudication or arbitration, but only if he prevails
therein. If it shall be determined in said judicial adjudication or
arbitration that Indemnitee is entitled to receive part but not all of the
indemnification or advancement of expenses sought, the expenses incurred by
Indemnitee in connection with such judicial adjudication or arbitration shall
be appropriately prorated by the court or arbitrator.
Section 10. Non-exclusivity: Survival of Rights: Insurance: Subrogation
-----------------------------------------------------------
(a) The rights of indemnification and to receive advancement of
Expenses as provided by this Agreement shall not be deemed exclusive of any
other rights to which Indemnitee may at any time be entitled under applicable
law, the Articles of Incorporation, the Bylaws, any agreement, a vote of
stockholders or a resolution of directors, or otherwise. Indemnitee shall be
entitled to such rights regardless of whether the subject Proceeding relates
to periods prior to or after execution of this Agreement. No amendment,
alteration or repeal of this Agreement or of any provision hereof shall limit
or restrict any right of Indemnitee under this Agreement in respect of any
action taken or omitted by such Indemnitee in his Corporate Status prior to
such amendment, alteration or repeal.
(b) To the extent that the Company maintains an insurance policy or
policies providing liability insurance for directors, officers, employees, or
agents of the Company or of any other corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise in which position such person
serves at the request of the Company, Indemnitee shall be named as an insured
in such manner as to provide Indemnitee the same rights and benefits, subject
to the same limitations, as are accorded to the Company's directors or
officers most favorably insured by such policy.
(c) In the event of any payment under this Agreement, the Company
shall be subrogated to the extent of such payment to all of the rights of
recovery of Indemnitee, who shall execute all papers required and take all
action necessary to secure such rights, including execution of such documents
as are necessary to enable the Company to bring suit to enforce such rights.
(d) The Company shall not be liable under this Agreement to make any
payment of amounts otherwise indemnifiable hereunder if and to the extent that
Indemnitee has otherwise actually received such payment under any insurance
policy, contract, agreement or otherwise.
SECTION 11. Duration of Agreement. This Agreement shall continue until
---------------------
and terminate upon the later of. (a) 10 years after the date that Indemnitee
shall have ceased to serve as a officer, employee, or agent of the Company or
of any other corporation, partnership, joint venture, trust, employee benefit
plan or other enterprise which Indemnitee served at the request of the
Company; or (b) the final termination of any Proceeding then pending in
respect of which Indemnitee is granted rights of indemnification or
advancement of expenses hereunder and of any proceeding commenced by
Indemnitee pursuant to Section 9 of this Agreement relating thereto. This
Agreement shall be binding upon the Company and its successors and assigns and
shall inure to the benefit of Indemnitee and his heirs, executors and
administrators.
Section 12. Severability. If any provision or provisions of this
------------
Agreement shall be held to be invalid, illegal or unenforceable for any reason
whatsoever: (a) the validity, legality and enforceability of the remaining
provisions of this Agreement (including without limitation, each portion of
any Section of this Agreement containing any such provision held to be
invalid, illegal or unenforceable, that is not itself invalid, illegal or
unenforceable) shall not in any way be affected or impaired thereby; and (b)
to the fullest extent possible, the provisions of this Agreement (including,
without limitation, each portion of any Section of this Agreement containing
any such provision held to be invalid, illegal or unenforceable, that is not
itself invalid, illegal or unenforceable) shall be construed so as to give
effect to the intent manifested thereby.
Section 13. Exception to Right of Indemnification or Advance
----------------------------------------------------
Notwithstanding any other provision of this Agreement, Indemnitee shall not be
entitled to indemnification or advancement of Expenses under this Agreement
with respect to any Proceeding initiated by Indemnitee prior to a Change in
Control, unless the initiation of such Proceeding shall have been approved by
the Board of Directors.
SECTION 14. Identical Counterparts. This Agreement may be executed in
----------------------
one or more counterparts, each of which shall for all purposes be deemed to be
an original but all of which together shall constitute one and the same
Agreement. Only one such counterpart signed by the party against whom
enforceability is sought needs to be produced to evidence the existence of
this Agreement. Signatures may be exchanged by telecopy, with original
signatures to follow. The Company and the Indemnitee agree that they will
each be bound by its own telecopied signature and that it accepts the
telecopied signatures of the other party.
SECTION 15. Headings. The headings of the paragraphs of this Agreement
--------
are inserted for convenience only and shall not be deemed to constitute part
of this Agreement or to affect the construction thereof.
SECTION 16. Definitions. For purposes of this Agreement:
-----------
(a) "Change in Control" means a change in control of the Company
occurring after the Effective Date of a nature that would be required to be
reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or in
response to any similar item on any similar schedule or form) promulgated
under the Securities Exchange Act of 1934 (the "Act"), whether or not the
Company is then subject to such reporting requirement; provided, however,
that, without limitation, such a Change in Control shall be deemed to have
occurred if after the Effective Date (i) any "person" (as such term is used
in Sections 13(d) and 14(d) of the Act) becomes the "beneficial owner" (as
defined in Rule 13 d-3 under the Act), directly or indirectly, of securities
of the Company representing 51 % or more of the combined voting power of the
Company's then outstanding securities without the prior approval of at least
two-thirds of the members of the Board of Directors in office immediately
prior to such person attaining such percentage interest; (ii) there occurs a
proxy contest, or the Company is a party to a merger, consolidation, sale of
assets, plan of liquidation or other reorganization not approved by at least
two-thirds of the members of the Board of Directors then in office, as a
consequence of which members of the Board of Directors in office immediately
prior to such action or event constitute less than a majority of the Board of
Directors thereafter; or (iii) during any period of two consecutive years,
other than as a result of an event described in clause (a)(ii) of this Section
16, individuals who at the beginning of such period constituted the Board of
Directors (including for this purpose any new director whose election or
nomination for election by the Company's stockholders was approved by a vote
of at least two-thirds of the directors then still in office who were
directors at the beginning of such period) cease for any reason to constitute
at least a majority of the Board of Directors.
(b) "Corporate Status" describes the status of a person who is or was
a director or officer of the Company or a director, officer, employee or agent
of any other corporation, partnership, joint venture, trust, employee benefit
plan or other enterprise to the extent such person is or was serving in such
position at the request of the Company.
(c) "Disinterested Director" means a director of the Company who is not
and was not a party to the Proceeding in respect of which indemnification is
sought by Indemnitee.
(d) "Effective Date" means the date on which Indemnitee became an
officer or director of the Company or otherwise accepted a position with the
Company of the type described in Section I above.
(e) "Excluded Claim" means any claim:
(i) In connection with a Proceeding by or in the right of the Company
in which the Indemnitee was adjudged liable to the Company; or
<PAGE>
(ii) In connection with any Proceeding charging improper personal benefit
to the Indemnitee, whether or not involving action in his official capacity,
in which the Indemnitee was adjudged liable on the basis that personal benefit
was improperly received by him.
(f) "Expenses" shall include all reasonable attorneys' fees,
retainers, court costs, transcript costs, fees of experts, witness fees,
travel expenses, duplicating costs, printing and binding costs, telephone
charges, postage, delivery service fees, and all other disbursements or
expenses of the types customarily incurred in connection with prosecuting,
defending, preparing to prosecute or defend, investigating, or being or
preparing to be a witness in a Proceeding.
(g) "Independent Counsel" means a law firm, or a member of a law
firm, that is experienced in matters of corporation law and neither presently
is, nor in the past five years has been, retained to represent: (i) the
Company or Indemnitee in any matter material to either such party, or (ii) any
other party to the Proceeding giving rise to a claim for indemnification
hereunder. Notwithstanding the foregoing, the term "Independent Counsel"
shall not include any person who, under the applicable standards of
professional conduct then prevailing, would have a conflict of interest in
representing either the Company or Indemnitee in an action to determine
Indemnitee's rights under this Agreement.
(h) "Proceeding" includes any action, suit, arbitration, alternative
dispute resolution mechanism, investigation, administrative hearing or any
other proceeding, whether civil, criminal, administrative or investigative
based on or in relation to the Indemnitee's acts or omissions occurring on or
after the Effective Date, except one (i) initiated by an Indemnitee pursuant
to Section 9 of this Agreement to enforce his rights under this Agreement or
(ii) pending on or before the Effective Date.
Section 17. Modification and Waiver. No supplement, modification or
------------------------
amendment of this Agreement shall be binding unless executed in writing by
both of the parties hereto. No waiver of any of the provisions of this
Agreement shall be deemed or shall constitute a waiver of any other provisions
hereof (whether or not similar) nor shall such waiver constitute a continuing
waiver.
Section 18. Notice by Indemnitee. (a) Indemnitee agrees promptly to
----------------------
notify the Company in writing upon being served with any summons, citation,
subpoena, complaint, indictment, information or other document relating to any
Proceeding or matter which may be subject to indemnification or advancement of
Expenses covered hereunder.
(a) If, at the time of the receipt of such notice, the Company has
director's and officer's liability insurance ("D&O Insurance") in effect, the
Company shall give prompt notice of the commencement of such action, suit or
proceeding to the insurers in accordance with the procedures set forth in the
respective policies in favor of Indemnitee. The Company shall thereafter take
all necessary or desirable action to cause such insurers to pay, on behalf of
Indemnitee, Expenses, judgments, penalties, fines and amounts paid in
settlement or payable as a result of such action, suit or Proceeding in
accordance with the terms of such policies.
(b) To the extent the Company does not, at the time of the
commencement of or the threat of commencement of such action, suit or
Proceeding, have applicable D&O Insurance, or if a determination is made that
any Expenses, judgments, penalties, fines and amounts paid in settlement
arising out of such action, suit or Proceeding will not be payable under the
D&O Insurance then in effect, the Company, if appropriate, shall be entitled
to assume the defense of such action, suit or Proceeding, with counsel
satisfactory to Indemnitee, upon the delivery to Indemnitee of written notice
of its election so to do. After delivery of such notice, the Company will not
be liable to Indemnitee under this Agreement for any legal or other Expenses
subsequently incurred by the Indemnitee in connection with such defense, other
than reasonable Expenses of investigation, provided that Indemnitee shall have
the right to employ counsel in my such action, suit or Proceeding, but the
fees and expenses of such counsel incurred after delivery of notice from the
Company of its assumption of such defense shall be at the Indemnitee's
expense, provided further that if: (i) the employment of counsel by
Indemnitee has been previously authorized by the Company; (ii) Indemnitee
shall have reasonably concluded that there may be a conflict of interest
between the Company and Indemnitee in the conduct of any such defense; or
(iii) the Company shall not, in fact, have employed counsel to assume the
defense of such action, the fees and expenses of counsel shall be at the
expense of the Company.
Section 19. Settlement. The Company shall have no obligation to
----------
indemnify Indemnitee under this Agreement for any amounts paid in settlement
of any action, suit or Proceeding effected without the Company's prior written
consent. The Company shall not settle any claim in any manner which would
impose any obligation on Indemnitee without Indemnitee's written consent.
Neither the Company nor Indemnitee shall unreasonably withhold their consent
to any proposed settlement.
Section 20. Notices. All notices, requests, demands and other
-------
communications hereunder shall be in writing and shall be deemed to have been
duly given if (i) delivered by hand and receipted for by the party to whom
said notice or other communication shall have been directed, or (ii) mailed by
certified or registered mail with postage prepaid, on the third business day
after the date on which it is so mailed:
(a) If to Indemnitee, to:
Mark L. Bromberg 1801 Kings Isle Drive Plano, Texas 75093
(b) If to the Company to:
Patrick E. Meyers
Vice President and General Counsel The Quizno's Corporation 1099 18th Street,
Suite 2850 Denver, Colorado 80202
or to such other address as may have been furnished to Indemnitee by the
Company or to the Company by Indemnitee, as the case may be.
Section 21. Governing Law. This Agreement shall be governed by, and
--------------
construed and enforced in accordance with, the laws of the State of Colorado
applicable to contracts made and to be performed therein. The parties agree
that venue and jurisdiction with respect to any matter arising hereunder shall
be exclusively in the state and federal courts, as applicable, located in the
State of Colorado. Each party submits to the jurisdiction of such courts in
Colorado with respect to any claims or controversies arising hereunder.
Section 22. Miscellaneous. Use of the masculine pronoun shall be deemed to
-------------
include usage of the feminine pronoun where appropriate.
Section 23. Expenses. In any action brought to enforce the terms of
--------
this Agreement or pursuant to this Agreement, the costs, expenses and fees
(including attorneys' fees) incurred by the prevailing party will be paid by
the nonprevailing party. If each party prevails in part, the parties agree
that the court will determine their respective responsibilities for legal fees
in a manner consistent with this provision.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the day and year first above written.
THE QUIZNOIS CORPORATION
By:/s/ Richard E. Schaden
Richard E. Schaden
President and
Chief Executive Officer
INDEMNITEE
By: /s/ Mark L. Bromberg
Title: Director
Exhibit 10.12
(TO FRANCHISE OFFERING CIRCULAR)
FRANCHISE AGREEMENT
<PAGE>
THE QUIZNO'S CORPORATION
FRANCHISE AGREEMENT
Franchisee:
Date:
Franchised Location:
THE QUIZNO'S CORPORATION
FRANCHISE AGREEMENT
TABLE OF CONTENTS
Page
----
1. PURPOSE 1
2. GRANT OF FRANCHISE 1
2.1. GRANT OF FRANCHISE 1
2.2. SCOPE OF FRANCHISE OPERATIONS 1
3. FRANCHISED LOCATION AND DESIGNATED AREA 1
3.1. FRANCHISED LOCATION 1
3.2. LIMITATION ON FRANCHISE RIGHTS 2
3.3. EXPRESS RESTAURANTS. 2
3.4. TERRITORIAL DEVELOPMENT PROGRAM. 2
3.5. SPECIAL PRODUCTS. 2
3.6. FRANCHISOR'S RESERVATION OF RIGHTS 2
4. INITIAL FRANCHISE FEE 2
4.1. INITIAL FRANCHISE FEE 2
5. ROYALTIES 2
5.1. ROYALTY 2
5.2. GROSS SALES 2
5.3. ROYALTY PAYMENTS 2
5.4. APPLICATION OF PAYMENTS 3
6. DEVELOPMENT OF FRANCHISED LOCATION 3
6.1. APPROVAL OF FRANCHISED LOCATION. 3
6.2. LEASE APPROVAL 3
6.3. LEASE ASSISTANCE PROGRAM 3
6.4. SCHEDULE 3
6.5. CONVERSION AND DESIGN 3
6.6. SIGNS 3
6.7. EQUIPMENT 3
6.8. PERMITS AND LICENSES 4
6.9. COMMENCEMENT OF OPERATIONS 4
7. TRAINING 4
7.1. INITIAL TRAINING PROGRAM 4
7.2. ADDITIONAL TRAINING PROGRAMS 4
8. OPERATIONS MANUAL 4
8.1. OPERATIONS MANUAL 4
8.2. CHANGES TO OPERATIONS MANUAL 5
9. DEVELOPMENT ASSISTANCE 5
9.1. FRANCHISOR'S DEVELOPMENT ASSISTANCE 5
9.2. RESPONSIBILITIES OF AREA DIRECTOR 5
10. OPERATING ASSISTANCE 5
10.1. FRANCHISOR'S ASSISTANCE 5
11 FRANCHISEE'S OPERATIONAL COVENANTS 6
11.1. BUSINESS OPERATIONS 6
12. ADVERTISING 7
12.1. APPROVAL OF ADVERTISING 7
12.2. GRAND OPENING. 7
12.3. MARKETING AND PROMOTION FEE 7
12.4. LOCAL ADVERTISING. 8
12.5. REGIONAL ADVERTISING PROGRAMS 8
13. QUALITY CONTROL 8
13.1. STANDARDS AND SPECIFICATIONS 8
13.2. INSPECTIONS 8
13.3. RESTRICTIONS ON SERVICES AND PRODUCTS 8
13.4. APPROVED SUPPLIERS 8
13.5. REQUEST FOR CHANGE OF SUPPLIER 8
14. MARKS, TRADE NAMES AND PROPRIETARY INTERESTS 9
14.1. MARKS 9
14.2. LICENSED METHODS 9
14.3. TRADEMARK INFRINGEMENT 9
14.4. FRANCHISEE'S BUSINESS NAME 9
14.5. CHANGE OF MARKS 9
15. REPORTS, RECORDS AND FINANCIAL STATEMENTS 9
15.1. FRANCHISEE REPORTS 9
15.2. FINANCIAL RECORDS USE AND ACCESS. 10
15.3. BOOKS AND RECORDS 10
15.4. AUDIT OF BOOKS AND RECORDS 10
16. TRANSFER 10
16.1. TRANSFER BY FRANCHISEE 10
16.2. PRE-CONDITIONS TO FRANCHISEE'S TRANSFER 10
16.3. FRANCHISOR'S APPROVAL OF TRANSFER 10
16.4. RIGHT OF FIRST REFUSAL 11
16.5. TYPES OF TRANSFERS 11
16.6. TRANSFER BY FRANCHISOR 11
16.7. FRANCHISEE'S DEATH OR DISABILITY 11
17. TERM AND RENEWAL 11
17.1. TERM 11
17.2. RENEWAL 11
17.3. EXERCISE OF RENEWAL 12
18. DEFAULT AND TERMINATION 12
18.1. TERMINATION BY FRANCHISEE 12
18.2. TERMINATION BY FRANCHISOR - EFFECTIVE
UPON NOTICE 12
18.3. TERMINATION BY FRANCHISOR - THIRTY DAYS NOTICE 13
18.4. LATE FEE 13
18.5. FAILURE TO COMPLY WITH REPORTING REQUIREMENTS 13
18.6. RIGHT TO REPURCHASE. 13
18.7. OBLIGATIONS OF FRANCHISEE UPON TERMINATION OR
EXPIRATION 14
18.8. STATE AND FEDERAL LAW 14
19. BUSINESS RELATIONSHIP 14
19.1. INDEPENDENT BUSINESSPERSONS 14
19.2. PAYMENT OF THIRD PARTY OBLIGATIONS 15
19.3. INDEMNIFICATION 15
20. RESTRICTIVE COVENANTS 15
20.1. NON-COMPETITION DURING TERM 15
20.2. "BRANDED BUSINESS" 15
20.3. POST-TERMINATION COVENANT NOT TO COMPETE 16
20.4. ADDITIONAL REMEDIES FOR BREACH 16
20.5. CONFIDENTIALITY OF PROPRIETARY INFORMATION 16
20.6. CONFIDENTIALITY AGREEMENT 16
21. DISPUTES 16
21.1. GOVERNING LAW/CONSENT TO VENUE AND
JURISDICTION. 16
21.2. WAIVER OF JURY TRIAL. 16
21.3. REMEDIES. 16
22. SECURITY INTEREST 17
22.1. COLLATERAL. 17
22.2. INDEBTEDNESS SECURED. 17
22.3. ADDITIONAL DOCUMENTS. 17
22.4. POSSESSION OF COLLATERAL. 17
22.5. REMEDIES OF FRANCHISOR IN EVENT OF DEFAULT. 17
22.6. SPECIAL FILING AS FINANCING STATEMENT. 18
23. MISCELLANEOUS PROVISIONS 18
23.1. MODIFICATION 18
23.2. ENTIRE AGREEMENT 18
23.3. DELEGATION BY FRANCHISOR 18
23.4. AGREEMENT EFFECTIVE 18
23.5. REVIEW OF AGREEMENT 18
23.6. ATTORNEYS' FEES 18
23.7. INJUNCTIVE RELIEF 18
23.8. NO WAIVER 18
23.9. NO RIGHT TO SET OFF 18
23.10. INVALIDITY 18
23.11. NOTICES 19
23.12. ACKNOWLEDGMENT 19
EXHIBITS
--------
B-1 Addendum -- Location and Initial Franchise Fee
B-2 Addendum -- QUIZNO'S Classic Subs Express Facility
B-3 Addendum -- Special Products Program
B-4 Authorization Agreement for Prearranged Payments
B-5 Statement of Ownership
B-6 Guaranty and Assumption of Franchisee's Obligations
B-7 Addendum -- Bookkeeping Services
B-8 Addendum -- Territorial Development Program
FRANCHISEE:
ADDRESS:
EFFECTIVE
DATE: , 19
THIS AGREEMENT (the "AGREEMENT") is between THE QUIZNO'S CORPORATION, a
Colorado corporation, located at Denver Place, Plaza Tower, 1099 18th Street,
Suite 2850, Denver, Colorado 80202 ("FRANCHI-SOR") and the franchisee listed
above ("FRANCHISEE"), who agree as follows:
1. PURPOSE
1.1. Franchisor has developed methods for establishing, operating and
promoting restaurants offering submarine sandwiches, salads, other food
products and beverages and related restaurant and carry out services
("QUIZNO'S RESTAURANTS" or "RESTAU-RANTS") which include the use and license
of proprietary rights in certain valuable trade names, service marks and
trade-marks owned by Franchisor (the "MARKS"), including the service mark
"QUIZNO'S," and Franchisor's distinctive techniques, expertise and knowledge
in the establishment, operation and promotion of restaurants and related
licensed methods of doing business (the "LICENSED METHODS").
1.2. Franchisor grants the right to others to establish and operate
Restaurants, under the Marks and pursuant to the Licensed Methods.
1.3. Franchisee recognizes and acknowledges the benefits to be
derived from being identified and associated with Franchisor and being able to
utilize the Restaurant system and concepts, and therefore desires to establish
a Restaurant at a location identified herein or to be later identified.
Franchisor is willing to grant Franchisee the right to operate a Restaurant
under the terms and condi-tions which are contained in this Agreement.
2. GRANT OF FRANCHISE
2.1. GRANT OF FRANCHISE. Franchisor
-------------------
grants to Franchisee, and Franchisee accepts from Franchisor, the right to use
the Marks and Licensed Methods in connection with the establishment and
operation of a Restaurant, at the location described in Section 3. Franchisee
agrees to use the Marks and Licensed Methods, as they may be changed,
improved, and further developed by Franchisor from time to time, only in
accordance with the terms and conditions of this Agreement.
2.2. SCOPE OF FRANCHISE OPERATION.
-------------------------------
OPERATIONS. Franchisee agrees at all times to faithfully, honestly and
diligently perform Franchisee's obligations hereunder, to use best efforts to
promote its Restaurant and to not engage in any other business or activity
that conflicts with the operation of the Restaurant in compliance with this
Agreement. Franchisee agrees to utilize the Marks and Licensed Methods to
operate all aspects of Franchisee's Restaurant in accordance with the methods
and systems developed and prescribed from time to time by Franchisor, all of
which are a part of the Licensed Methods. Franchisee's Restaurant shall offer
all products and services designated by Franchisor, which may include, without
limitation, restaurant services offered in conjunction with a distinctive
theme and decor and a uniform menu offering specialty submarine and other
sandwiches, salads and other food and beverages. Franchisee shall implement
any additions and changes to the products and services offered by its
Restaurant required by Franchisor.
3. FRANCHISED LOCATION AND DESIGNATED AREA
3.1. FRANCHISED LOCATION. Franchisee is
-------------------
granted the right to own and operate a Restaurant at the address and location
("FRANCHISED LOCATION") set forth in the Addendum attached as Exhibit B-1.
If, at the time of execution of this Agreement, the Franchised Location has
not been selected by Franchisee and approved by Franchisor, then Franchisee
shall choose and acquire a location for its Restaurant within the nonexclusive
Designated Area set forth in Exhibit B-1. In such circumstances, Franchisee
shall select and propose to Franchisor for approval a specific site for the
Franchised Location in the Designated Area which, which Franchisor shall have
the right to approve in accordance with the terms set forth herein. During
the term of this Agreement, the Franchised Location shall be used exclusively
for the purpose of operating a Restaurant.
3.2. LIMITATION ON FRANCHISE RIGHTS.
------------------------------
RIGHTS. The rights granted to Franchisee are for the specific Franchised
Location and cannot be transferred to any other location, except with the
prior written approval of Franchisor. The Marks and Licensed Methods are
licensed from the Franchised Location only in the manner and within the
geographic boundaries prescribed by Franchisor.
3.3. EXPRESS RESTAURANTS.Franchisee may
-------------------
not operate a Restaurant located within a host facility such as a gas station
and convenience store facility or a hotel (all referred to as "EXPRESS
RESTAURANTS") using the Marks and Licensed Methods, except with the prior
written consent of Franchisor, in which case Franchisor and Franchisee shall
execute Exhibit B-2 (if this Agreement governs the operation of a traditional
Restaurant, the Express Restaurant(s) shall be governed by separate Franchise
Agreements).
3.4. TERRITORIAL DEVELOPMENT PROGRAM.
-------------------------------
PROGRAM. Franchisor may offer the "TERRITORIAL DEVELOPMENT PROGRAM ," in
which Franchisee is granted the right to develop a certain number of
Restaurants within a defined territory. Franchisee may not participate in the
Territorial Development Program except with the prior written permission of
Franchisor, in which case Franchisor and Franchisee shall execute Exhibit B-8.
3.5. SPECIAL PRODUCTS. From time to time,
----------------
Franchisor may offer supplemental programs to be incorporated in certain
Restaurants ("SPECIAL PRODUCTS"). Franchisee may not offer a Special Product
except with the prior written permission of Franchisor, in which case
Franchisor and Franchisee shall execute Exhibit B-3.
3.6. FRANCHISOR'S RESERVATION OF RIGHTS.
-------------------------------------
RESERVATION OF RIGHTS. Franchisee acknowledges that the franchise granted
hereunder is nonexclusive and that Franchisor retains the right, among others:
(1) to use, and to license others to use, the Marks and Licensed Methods for
the operation of Restaurants at any location other than the Franchised
Location; (2) to use the Marks and Licensed Methods in connection with other
services and products, promotional and marketing efforts or related items, or
in alternative channels of distribution, without regard to location; and (3)
to use and license the use of alternative proprietary marks or methods in
connection with the operation of restaurant businesses under names which are
not the same as or confusingly similar to the Marks, which businesses may be
the same as, or similar to, or different from Restaurants.
4. INITIAL FRANCHISE FEE
4.1. INITIAL FRANCHISE FEE. Franchisee
----------------------
agrees to pay to Franchisor, concurrently with the execution of this
Agreement, an initial franchise fee ("INITIAL FRANCHISE FEE") in the amount
set forth in Exhibit B-1. Franchisee acknowledges and agrees that the Initial
Franchise Fee represents payment for the initial grant of the rights to use
the Marks and Licensed Methods, that Franchisor has earned the Initial
Franchise Fee upon receipt, and that the Initial Franchise Fee is not
refundable to Franchisee after it is paid.
5. ROYALTIES ROYALTIES
5.1. ROYALTY. Franchisee agrees to pay to Franchisor
--------
a weekly royalty ("ROYALTY") equal to 7% of the total amount of its Gross
Sales, defined in Section 5.2 , generated from or through its Restaurant.
5.2. GROSS SALES "GROSS SALES" shall be defined as
-----------
sales of any kind for all services or products from or through the Restaurant,
including any such sale of services or products made for cash or upon credit,
or partly for cash and partly for credit, regardless of collection of charges
for which credit is given, regardless of whether such sale is conducted in
compliance with or in violation of the terms of this Agreement and regardless
of whether such sale is at the Franchised Location or off-site, but exclusive
of discounts, sales taxes or other similar taxes and credits. Gross Sales
shall also include the fair market value of any services or products received
by Franchisee in barter or exchange for its services and products.
5.3. ROYALTY PAYMENTS. Franchisee agrees that
----------------
Royalty payments shall be paid weekly and sent to Franchisor by electronic
funds transfer, due on Thursday (for the preceding Monday through Sunday
period), or such other specific day of the week which Franchisor will
designate from time to time ("DUE DATE"). Upon the request of Franchisor and
in no event later than 30 days prior to the opening of the Restaurant,
Franchisee shall execute an Authorization Agreement for preauthorized payment
of Royalty payments by electronic transfer of funds from Franchisee's bank
account to Franchisor's bank account, in the form attached to this Agreement
as Exhibit B-4. On the Due Date of each week, Franchisee shall report to
Franchisor by telephone, electronic means or in written form, as may be
reasonably directed by Franchisor, in a manner more fully described in Section
15, with such information and pursuant to such standard transmittal procedures
regarding Franchisee's Gross Sales and such additional information as may be
requested by Franchisor. Franchisor shall have the right to verify such
Royalty payments from time to time as it deems necessary, in any reasonable
manner. In the event that Franchisee fails to have sufficient funds in its
account or otherwise fails to pay any Royalties due as of the Due Date,
Franchisee shall owe, in addition to such Royalties, a late charge equivalent
to 2% per month, of any late Royalty payment; provided, however, in no event
shall Franchisee be required to pay a late payment at a rate greater than the
maximum interest rate permitted by applicable law.
5.4. APPLICATION OF PAYMENTS.
-------------------------
Notwithstanding any designation Franchisee might make, Franchisor has the
discretion to apply any payments made by Franchisee to any of Franchisee's
past due indebtedness to Franchisor. Franchisee acknow-ledges that Franchisor
has the right to set-off any amounts Franchisee may owe to Franchisor against
any amounts Franchisor might owe to Franchisee.
6. DEVELOPMENT OF FRANCHISED LOCATION
6.1. APPROVAL OF FRANCHISED LOCATION.
-------------------------------
LOCATION. Franchisee may only operate a QUIZNO'S Restaurant at a site
approved by Franchisor, which approval will not be unreasonably withheld so
long as the site meets Franchisor's site selection criteria. Franchisee shall
follow Franchisor's site selection procedures in locating a Franchised
Location for the Restaurant. Franchisee shall submit a completed site
submittal package, including demographics and other materials requested by
Franchisor, containing all information reasonably required by Franchisor to
assess a proposed Franchised Location.
6.2. LEASE APPROVAL. Franchisee shall obtain
--------------
Franchisor's prior written approval before executing any lease or purchase
agreement for the Franchised Location. Prior to its execution, Franchisee's
proposed Franchised Location lease shall be reviewed and certified acceptable
by Franchisor. Such review is for the benefit of Franchisor, and Franchisee
acknowledges that review and approval of a lease for the Franchised Location
by Franchisor does not constitute a recommendation, endorsement or guarantee
by Franchisor of the suitability of the Franchised Location or the lease and
Franchisee should take all steps necessary to ascertain whether such
Franchised Location and lease are acceptable to Franchisee. Upon submission
of a proposed Franchised Location for the Restaurant, Franchisee shall pay
Franchisor or its designated supplier a lease review fee of $1,450 ("LEASE
REVIEW FEE"). The Lease Review Fee pays the expenses incurred to negotiate
the lease. Franchisee is not a third-party beneficiary of the lease
negotiation or review. Franchisee agrees that while Franchisor will attempt
to negotiate the most favorable terms possible under the Master Lease,
Franchisor does not guaranty that the terms, including rent, will represent
the most favorable terms available in that market.
6.3. LEASE ASSISTANCE PROGRAM. If
-------------------------
Franchisee participates in the "LEASE ASSISTANCE PROGRAM," once Franchisor has
approved the Franchised Location, Franchisor will enter into negotiations with
the Franchised Location's landlord ("MASTER LANDLORD") and, assuming such
negotiations are successful, enter into a lease for the Franchised Location
("MASTER LEASE"). The Lease Review Fee will be $2,200. Franchisee agrees to
then enter into a sublease with Franchisor or its designated subsidiary
("SUBLEASE") in substantially the same form as attached to Franchisor's
Uniform Franchise Offering Circular ("UFOC") as Exhibit H. The Sublease shall
incorporate the terms and conditions of the Master Lease, including rent and
other charges payable thereunder. Default of the Sublease will constitute
default of this Agreement, and default of this Agreement will constitute
default of the Sublease. Franchisee acknowledges that approval of a lease for
the Franchised Location by Franchisor and execution of the Sublease does not
constitute a recommendation, endorsement or guarantee by Franchisor of the
suitability of the Franchised Location or the terms of the Master Lease and
Franchisee should take all steps necessary to ascertain whether such
Franchised Location and lease terms are acceptable to Franchisee.
6.4. SCHEDULE. Franchisee shall execute a lease no
--------
later than one year from the date of execution of this Agreement. Franchisor
will extend the time in which Franchisee has to obtain an executed lease for
the Franchised Location for one three-month period, in the event factors
beyond Franchisee's reasonable control prevent Franchisee from meeting this
deadline, so long as Franchisee has made reasonable and continuing efforts to
obtain and submit for approval an acceptable site and Franchisee requests, in
writing, an extension of time in which to have an executed lease for the
Franchised Location before the end of the one-year period. Any lease for the
Franchised Location shall, at Franchisor's option, be collaterally assigned to
Franchisor as security for performance of Franchisee's obligations hereunder.
Franchisee shall deliver a copy of the signed lease for the Franchised
Location to Franchisor within five days of execution thereof.
6.5. CONVERSION AND DESIGN. Franchisee
---------------------
acknowledges that the layout, design, decoration and color scheme of the
Restaurants are an integral part of Franchisor's proprietary Licensed Methods
and accordingly, Franchisee shall convert and decorate the Franchised Location
in accordance with Franchisor's plans, designs and specifications. Franchisee
shall also obtain Franchisor's written consent to any conversion, design or
decoration of the Franchised Location before remodeling or decorating begins,
recognizing that such remodeling, decoration and any related costs are
Franchisee's sole respon-sibility.
6.6. SIGNS. Franchisee shall purchase or otherwise obtain
-----
for use at the Franchised Location and in connection with the Restaurant the
maximum number and size signs allowed by applicable building codes, which
signs shall comply with the standards and specifications of Franchisor. It is
Franchisee's sole responsibility to ensure that all signs comply with
applicable local ordinances, building codes and zoning regulations. Any
modifications to Franchisor's standards and specifications for signs which
must be made due to local ordinances, codes or regulations shall be submitted
to Franchisor for prior written approval. Franchisee acknowledges the Marks,
or any other name, symbol or identifying marks on any signs shall only be used
in accordance with Franchisor's standards and specifications and only with the
prior written approval of Franchisor.
6.7. EQUIPMENT. Franchisee shall purchase or otherwise
---------
obtain for use in connection with the Restaurant such equipment, including
delivery vehicles (if utilized) and computer hardware and software, of a type
and in an amount which complies with the standards and specifica-tions of
Franchisor, and only from suppliers or other sources approved by Franchisor.
Franchisee acknowledges that the type, quality, configuration, capability and
performance of the Restaurant equipment are all standards and specifications
which are a part of the Licensed Methods. Franchisee shall purchase or lease
for use in the operation of the Restaurant an electronic cash register or
computer system ("SYSTEM") approved by Franchisor that accurately records
every sale or other transaction. Franchisee shall purchase, or Franchisor
may, in its sole discretion, license to Franchisee for such license fee as it
may determine, software which shall be used by Franchisee in conjunction with
the System. Franchisee shall submit any required reports hereunder in a
format designated from time to time by Franchisor. Franchisee hereby grants
Franchisor the right to access the System and authorizes Franchisor to obtain
sales, sales mix and revenue information directly by modem or otherwise.
Franchisee acknowledges that Franchisor will use information from required
reports primarily to make business and marketing decisions. Franchisee shall
be obligated to upgrade or update the System and the software, at Franchisee's
sole cost, to meet Franchisor's then-current standards and specifications.
6.8. PERMITS AND LICENSES. Franchisee
---------------------
agrees to obtain all permits and licenses required for the lawful construction
and operation of its Restaurant together with all certifications from
government authorities having jurisdiction over the site that all requirements
for construction and operation have been met, including without limitation,
zoning, access, sign, health, fire and safety requirements, building and other
required construction permits, licenses to do business and fictitious name
registrations, sales tax permits, health and sanitation permits and ratings
and fire clearances. Franchisee agrees to obtain all customary contractors'
sworn statements and partial and final lien waivers for construction,
remodeling, decorating and installation of equipment at the Franchised
Location. Franchisee shall keep copies of all health department, fire
department, building department and other similar reports of inspections on
file and available for inspection by Franchisor. Franchisee shall immediately
forward to Franchisor any such reports or inspections in which Franchisee has
been found not in compliance with the underlying regulation.
6.9. COMMENCEMENT OF OPERATIONS.
---------------------------
Unless otherwise agreed in writing by Franchisor and Franchisee, Franchisee
has 12 months from the date of this Agreement (which may extended 3 months as
provided by Section 6.4) within which to complete the initial training
program, described in Section 7.1, and commence operation of the Restaurant.
Franchisee shall obtain the written consent of Franchisor prior to commencing
operation of the Restaurant, which consent shall not be unreasonably withheld
but cannot be granted until Franchisor has approved the Franchised Location,
and Franchisee has: (1) successfully completed the initial training program;
(2) paid all fees and other amounts due to Franchisor; (3) furnished copies of
all insurance policies required by this Agreement; (4) built out and equipped
the Franchised Location in accordance with Franchisor's standards and
specifications, and received a QUIZNO'S certificate of occupancy from
Franchisor; (5) purchased an inventory of approved products and supplies; and
(6) otherwise completed all other aspects of development of the Restaurant as
Franchisor shall have reasonably required.
7. TRAINING
7.1. INITIAL TRAINING PROGRAM.
------------------------
Franchisee or, if Franchisee is not an individual, the person designated by
Franchisee to assume primary responsibility for the management of the
Restaurant ("DESIGNATED MANAGER"), is required to attend and successfully
complete the initial training program which is offered by Franchisor at one of
Franchisor's designated training facilities. Up to three individuals are
eligible to participate in Franchisor's initial training program without
charge of a tuition or fee. Franchisee shall be responsible for any and all
traveling and living expenses incurred in connec-tion with attendance at the
training program, as well as wages or salaries, if any, of the person(s)
receiving such training. At least one individual must successfully complete
the initial training program prior to Franchisee's commencement of operation
of its Restaurant. Franchisor reserves the right to waive all or a portion of
the training program or alter the training schedule, if in Franchisor's sole
discretion, Franchisee or its Designated Manager has sufficient prior
experience in operating Restaurants.
7.2. ADDITIONAL TRAINING PROGRAMS.
----------------------------
Franchisor reserves the right to conduct, at its sole discretion, one training
program or seminar annually at a location to be determined by Franchisor to
discuss relevant business trends and share new information relating to the
Restaurant business. Attendance at the seminar is optional unless Franchisor
gives Franchisee at least 60 days prior written notice that the seminar shall
be mandatory, in which case Franchisee or its Designated Manager shall be
required to attend. Franchisor shall not require that Franchisee attend any
on-going training program or seminar more than once a year. Mandatory
training programs and seminars shall not last more than three days. All such
mandatory training will be offered without charge of a tuition or fee;
provided, however, Franchisee will be responsible for any and all
transportation and living expenses, which are incurred in connection with
attendance at such additional training programs or seminars.
8. OPERATIONS MANUAL
8.1. OPERATIONS MANUAL. Franchisor agrees
------------------
to loan to Franchisee one or more manuals, technical bulletins or other
written or videotaped materials (collectively referred to as "OPERATIONS
MANUAL") covering the proper operating and marketing techniques of the
Restaurant and for any Special Product(s) applicable to the Restaurant.
Franchisee agrees that it shall comply with the Operations Manual as an
essential part of its obligations under this Agreement. Franchisee shall at
all times be responsible for assuring that its employees and all other persons
under its control comply with the Operations Manual in all respects.
Franchisee shall not duplicate the Operations Manual nor disclose its contents
to persons other than its employees or officers who need the information to
perform their jobs.
8.2. CHANGES TO OPERATIONS MANUAL.
-----------------------------
MANUAL. Franchisor reserves the right to revise the Operations Manual from
time to time as it deems necessary to update operating and marketing
techniques or standards and specifications in any manner, including updates
contained in monthly newsletters. Franchisee, within 30 days of receiving any
updated information, shall in turn update its copy of the Operations Manual as
instructed by Franchisor and shall conform its operations with the updated
provisions. Franchisee acknowledges that a master copy of the Operations
Manual maintained by Franchisor at its principal office shall be controlling
in the event of a dispute relative to the content of any Operations Manual.
9. DEVELOPMENT ASSISTANCE
9.1. FRANCHISOR'S DEVELOPMENT ASSISTANCE.
-------------------------------------
DEVELOPMENT ASSISTANCE. To assist Franchisee in the initial establishment of
the Restaurant, Franchisor shall provide the following:
(A) Assistance related to the acceptance of a site for the
Restaurant, although Franchisee acknowl-edges that Franchisor shall have no
obligation to select or acquire a site on behalf of Franchisee. Franchisor's
assistance will consist of, at a minimum, the provision of general criteria
for a satisfactory site and a determination of whether a proposed site
fulfills the requisite criteria prior to formal acceptance of a site selected
by Franchisee. Site selection, acquisition and development shall be the sole
obligation of Franchisee, except as may be set forth in this Agreement or any
other written agree-ment executed by Franchisor. Franchisee acknowledg-es
that Franchisor is under no obligation to provide additional site selection
services other than as may be set forth in a written, executed agreement and
that Franchisor's acceptance of the site does not imply or guarantee the
success or profitability of the site in any manner whatsoever.
(B) Standards and specifications for the build out, interior design,
layout, floor plan, signs, designs, color and decor of the Restaurant.
(C) Advice regarding the standards and specifications for the
equipment, supplies and materials used in, and the menu items offered for sale
by, the Restaurant and advice regarding the selection of suppliers for and the
purchasing of such items.
(D) Guidance in implementing advertising and marketing programs,
operating and sales procedures and bookkeeping and accounting programs.
(E) The initial training in accordance with Section 7.1.
(F) Opening assistance consisting of one or more representatives of
Franchisor on site at the Franchised Location for not less than five days to
assist Franchisee in opening the Restaurant; provided, however, that
Franchisee shall hire and be exclusively responsible for the training,
compensation and control of its employees.
(G) One copy of the Operations Manual, as defined and described in
Section 8 , which shall be loaned to Franchisee during the term of this
Agreement.
9.2. RESPONSIBILITIES OF AREA DIRECTOR.
---------------------------------
Franchisor reserves the right to retain the services of an
area director ("AREA DIRECTOR") in the geographic area in which Franchisee's
Restaurant will be located. In such event, the Area Director, on behalf of
Franchisor, will perform certain sales, site assistance and supervisory
services, as may be directed by Franchisor. Franchisee agrees in advance to
any such delegation and assignment by Franchisor of any portion or all of
Franchisor's obligations and rights under this Agreement.
10. OPERATING ASSISTANCE
10.1. FRANCHISOR'S ASSISTANCE.
------------------------
Franchisor agrees that, during Franchisee's operation of the Restaurant,
Franchisor, or its designated representatives, shall make available to
Franchisee the following assistance:
(A) Upon the reasonable request of Franchisee, consultation by
telephone regarding the continued operation and management of a Restaurant and
advice regarding Restaurant services, product quality control, menu items and
customer relations issues.
(B) Access to advertising and promotional materials as may be
developed by Franchisor through the Marketing and Promotion Fund (as defined
below).
(C) On-going updates of information and programs regarding menu items
and their preparation, the Restaurant business and related Licensed Methods,
including information about special or new services or products that may be
developed and made available to franchisees of Franchisor.
(D) The initial training program to replacement or additional
Designated Managers during the term of this Agreement. Although Franchisor
does not currently charge a tuition or fee, Franchisor reserves the right to
charge a tuition or fee in an amount payable in advance, commensurate with the
then-current published prices of Franchisor for such training. Franchisee
shall be responsible for all travel and living expenses incurred by its
personnel during the training program.
11. FRANCHISEE'S OPERATIONAL COVENANTS
11.1. BUSINESS OPERATIONS. Franchisee
-------------------
acknowledges that it is solely respon-sible for the successful operation of
its Restaurant and that the continued successful operation thereof is
partially dependent upon Franchisee's compliance with this Agreement and the
Operations Manual. In addition to all other obligations contained herein and
in the Operations Manual, Franchisee covenants that:
(A) Franchisee shall maintain a clean, safe, and high quality
Restaurant operation and shall promote and operate the business in accordance
with the Operations Manual and in such a manner as not to detract from or
adversely reflect upon the name and reputation of Franchisor and the goodwill
associated with the QUIZNO'S name and Marks-.
(B) Franchisee will conduct itself and operate its Restaurant in
compliance with all applicable laws, regulations and other ordinances and in
such a manner so as to promote a good public image in the business community.
In connection therewith, Franchisee will be solely and fully responsible for
obtaining any and all licenses to operate the Restaurant. Franchisee shall
keep copies of all health department, fire department, building department and
other similar reports of inspections on file and available for inspection by
Franchisor. Franchisee shall immediately forward to Franchisor any such
reports or inspections in which Franchisee has been found not in compliance
with the underlying regulation.
(C) Franchisee acknowledges that proper management of the Restaurant
is important and shall ensure that Franchisee or a Designated Manager who has
completed the initial training program will be responsible for management of
the Restaurant after commencement of operations and will be present at the
Franchised Location during operation of the Restaurant.
(D) Franchisee acknowledges that the franchise granted hereunder
requires and authorizes Franchisee to offer only authorized products and
services as are more fully described in the Operations Manual, which may
include, without limitation, submarine and other sandwiches, salads and other
authorized food and beverage products and related restaurant and carry out or
delivery services. Franchisee shall maintain at all times a sufficient supply
of all menu items and related food and paper products to ensure, insofar as
possible, that such items are at all times available to its customers.
Franchisee shall offer all types of services and products as from time to time
may be prescribed by Franchisor and shall not offer any other types of
services or products, or operate or engage in any other type of business or
profession, from or through the Restaurant, unless Franchisor's written
consent is first obtained.
(E) Franchisee shall promptly pay when due all taxes and other
obligations owed to third parties, including without limitation, all federal,
state and local taxes, and any and all accounts payable or other indebtedness
of every kind, incurred by Franchisee in the conduct of the Restaurant.
(F) Franchisee shall comply with all agreements with third parties
related to the Restaurant including, in particular, all provisions of any
premises lease or Sublease.
(G) Franchisee agrees to renovate, refurbish, remodel or replace, at
its own expense, the real and personal property and equipment used in the
operation of the Restaurant, when reasonably required by Franchisor in order
to comply with the image, standards of operation and performance capability
established by Franchisor from time to time. If Franchisor changes its image
or standards of operation, it shall give Franchisee a reasonable period of
time within which to comply with such changes.
(H) Franchisee shall at all times during the term of this Agreement
own and control the Restaurant authorized hereunder. Upon request of
Franchisor, Franchisee shall promptly provide satisfactory proof of such
ownership to Franchisor. Franchisee represents that the Statement of
Ownership, attached hereto as Exhibit B-5, is true, complete, accurate and not
misleading. Franchisee shall promptly provide Franchisor with a written
notification if the information contained in the Statement of Ownership
changes at any time during the term of this Agreement and shall comply with
the applicable transfer provisions contained in Section 16. Franchisee
acknowledges that, if Franchisee is other than an individual(s), -Franchisor
may require that the individual members of Franchisee guarantee the
performance of Franchisee hereunder and sign the Guaranty and Assumption of
Franchisee's Obligations which is attached to this Agreement as Exhibit B-6.
(I) Franchisee shall at all times during the term of this Agreement
keep its Restaurant open during the business hours as may be designated by
Franchisor from time to time in the Operations Manual. Any deviations from
the required hours must be approved in writing by Franchisor.
(J) Franchisee shall procure, maintain and provide evidence of
insurance for the Restaurant and its operations, of the types, in the amounts,
and with such terms and conditions as Franchisor may from time to time
reasonably prescribe, in the Operations Manual or otherwise. All of the
required policies of insurance shall name Franchisor as an additional named
insured and shall provide for a 30-day advance written notice to Franchisor of
cancellation. If Franchisee participates in the Lease Assistance Program, it
shall use an insurance carrier approved by Franchisor.
(K) Franchisee will provide proof of insurance to Franchisor prior to
commencement of operations at its Restaurant. This proof will show that the
insurer has been authorized to inform Franchisor in the event any policies
lapse or are cancelled. Franchisor has the right to change the minimum amount
of insurance Franchisee is required to maintain by giving Franchisee prior
reasonable notice, giving due consideration to what is reasonable and
customary in the similar business. Noncompli-ance with the insurance
provi-sions set forth herein shall be deemed a material breach of this
Agreement; in the event of any lapse in insurance coverage, in addition to all
other remedies, Franchisor shall have the right to demand that Franchisee
cease operations of the Restaurant until coverage is reinstated or,
alterna-tively, pay any delinquencies in premium payments and charge the same
to Franchisee.
12. ADVERTISING
12.1. APPROVAL OF ADVERTISING.
------------------------
Franchisee shall obtain Franchisor's prior written ap-proval of all written
advertising or other marketing or promotional programs not previously approved
by Franchisor regarding the Restaurant, including, without limitation, "Yellow
Pages" advertising, newspaper ads, flyers, brochures, coupons, direct mail
pieces, specialty and novelty items, radio and television advertising, and
Internet "web" pages. Any proposed written advertising or a description of a
marketing or promotional program not previously approved by Franchisor shall
be submitted to Franchisor at least ten days prior to publication, broad-cast
or use. Franchisee ack-nowledges that advertising and promoting the
Restaurant in accordance with Franchisor's standards and specifications is an
essential aspect of the Licensed Methods, and Franchisee agrees to comply with
all advertising standards and specifica-tions.
12.2. GRAND OPENING. Franchisee agrees to
-------------
conduct a grand opening advertising and promotional program for the Restaurant
not earlier than 30 days before opening and within 75 days after the
Restaurant opens (or as may be otherwise specified by Franchisor) and agrees
to spend a minimum of $5,000 for the grand opening program. Franchisee agrees
to provide Franchisor with a summary of grand opening program expenditures
within 120 days after the Restaurant opens. Franchisee's grand opening
program will utilize the marketing and public relations programs and media and
advertising materials that Franchisor has either developed or approved.
12.3. MARKETING AND PROMOTION FEE
---------------------------
Franchisee agrees to pay to Franchisor, in addition to Royalties, a Marketing
and Promotion fee ("MARKETING AND PROMOTION FEE") of 1% of the total amount of
Franchisee's Gross Sales. The Marketing and Promotion Fee shall be in
addition to and not in lieu of Franchisee's Local Advertising Fee. The
following terms and conditions will apply to the Marketing and Promotion Fee
payment:
(A) The Marketing and Promotion Fee shall be payable weekly,
concurrently with the payment of the Royalties, based on Gross Sales (as
defined in Section 5.2) for the immediately preceding reporting period.
Franchisee shall execute an Authorization Agreement for preauthorized payment
of Marketing and Promotion Fees by electronic transfer of funds from
Franchisee's bank account to the bank account designated by Franchisor. Any
Marketing and Promotion Fee collected by Franchisor will be deposited by
Franchisor in one or more separate accounts (referred collectively as the
"FUND"), all designated as "QUIZNO'S MARKETING AND PROMOTION FUND." The
Marketing and Promotion Fees will be subject to the same late charges as the
Royalties. Upon written request by Franchisee, Franchisor will make available
to Franchisee, no later than 120 days after the end of each calendar year, an
annual financial statement for the Fund which indicates how deposits to the
Fund have been spent.
(B) The Fund will be adminis-tered by Franchisor, in its sole
discretion, and may be used for production and placement of media advertising,
direct response literature, direct mailings, brochures, collateral material
advertising, surveys of advertising effectiveness, or other advertising or
public relations expenditures relating to advertising Franchisee's services
and products and providing professional services, materials and personnel to
support the marketing function. Franchisor may reimburse itself for
administrative costs, independent audits, reasonable accounting, bookkeeping,
reporting and legal expenses, taxes and other reasonable direct and indirect
expenses as may be incurred by Franchisor or its authorized representa-tives
in connection with the programs funded by the Fund. Franchisor will not be
liable for any act or omission with respect to such Fund that is consistent
with this Agreement and is done in good faith. Franchisor may spend in any
fiscal year an amount greater or less than the aggregate contribution of all
Restaurants to the Fund in that year, and the Fund may borrow from Franchisor
or others to cover deficits or to invest in any surplus for future use. All
interest earned on monies contributed to the Fund will be used to pay
advertising costs before other assets of the Fund are expended. Franchisor
may cause the Fund to be incorporated or operated through a separate entity,
at such time as Franchisor deems appropriate, and such successor entity, if
established, will have all rights and duties of Franchisor with respect to the
Fund as specified in this Section. Franchisor undertakes no obligation to
ensure that the Fund benefits each Restaurant in proportion to its respective
contributions. The Fund's primary purpose is to support sales by the entire
QUIZNO'S System and to build brand identity.
12.4. LOCAL ADVERTISING. Franchisee
-----------------
agrees to spend not less than 3% of the total amount of its Gross Sales each
calendar quarter for local advertising ("LOCAL ADVERTISING FEE"). Franchisor
may request that Franchisee prepare and submit a quarterly report to
Franchisor which accounts for the use of the Local Advertising Fee no later
than 10 days following the end of each calendar quarter during the term of
this Agreement. Franchisor may collect and designate all or a portion of the
Local Advertising Fee to the Marketing and Promotion Fund.
12.5. REGIONAL ADVERTISING PROGRAMS.
-----------------------------
Although not obligated to do so, Franchisor may create a regional
advertising program ("REGIONAL ADVERTISING") for the benefit of the
Restaurants located within a particular region. Franchisor has the right to
(i) allocate any portion of the Marketing and Promotion Fund to the Regional
Advertising program; and (ii) collect and designate all or a portion of the
Local Advertising Fee to a Regional Advertising program. If a Regional
Advertising program is established, Franchisor may increase the Local
Advertising Fee by 1%; provided that in no event shall Franchisee be required
to spend more than a total of 5% of its Gross Sales, in the aggregate, for
Local Advertising Fee, Regional Advertising and Marketing and Promotion Fee
contributions, inclusive of Yellow Pages advertising. Franchisor has the
right, in its sole discretion, to determine the composition of all geographic
territories and market areas for the implementation of Regional Advertising
and promotion campaigns and to require that Franchisee participate in such
Regional Advertising programs as and when they may be established by
Franchisor. If a Regional Advertising program is implemented on behalf of a
particular region. Franchisor reserves the right to establish an advertising
cooperative for a particular region to enable the cooperative to
self-administer the Regional Advertising program, and Franchisee agrees to
participate in such cooperative.
13. QUALITY CONTROL
13.1. STANDARDS AND SPECIFICATIONS
----------------------------
Franchisor will make available to Franchisee standards and specifications for
services and products offered at or through the Restaurant and the uniforms,
recipes, materials, forms, menus, items and supplies used in connection with
the franchised business. Franchisor reserves the right to change standards
and specifica-tions for services and products offered at or through the
Restaurant or for the uniforms, recipes, materials, forms, items and supplies
used in connection with the franchised business upon 30 days prior written
notice to Franchisee.
13.2. INSPECTIONS. Franchisor shall have the right
-----------
to interview customers or examine the Franchised Location and to examine and
copy its books, records, and documents, including without limitation the
inventory, products, equipment, materials or supplies, to ensure compliance
with all standards and specifications set by Franchisor. Franchisor shall
conduct such inspections during regular business hours without prior notice to
Franchisee.
13.3. RESTRICTIONS ON SERVICES AND PRODUCTS
--------------------------------------
Franchisee is prohibited from offering or selling any
services or products from or through the Restaurant that have not been
previously authorized by Franchisor. However, if Franchisee proposes to
offer, conduct or utilize any services, products, materials, forms, items or
supplies for use in connection with or sale through the Restaurant that are
not approved by Franchisor, Franchisee shall first notify Franchisor in
writing requesting approval. Franchisor may, at its sole discretion, elect to
withhold such approval; however, in order to make such determination,
Franchisor may require submission of specifica-tions, informa-tion, or samples
of such services, products, materials, forms, items or supplies. Franchisor
will advise Franchisee within a reasonable time whether such products,
supplies or services meet its specifications.
13.4. APPROVED SUPPLIERS Franchisee shall
------------------
purchase all equipment, products, services, supplies and materials required
for the operation of the Restaurant licensed herein, from manufacturers,
suppliers or distributors designated by Franchisor or, if there is no
designated supplier for a particular product, service, supply or material,
from such other suppliers who meet all of Franchisor's specifications and
standards as to quality, composi-tion, finish, appearance and service, and who
shall adequately demonstrate their capacity and facilities to supply
Franchisee's needs in the quantities, at the times, and with the reliabil-ity
requisite to an efficient operation. Franchisor reserves the right to
designate, from time to time, a single supplier for any services, products,
equipment, supplies or materials and to require Franchisee to use such a
designated supplier exclusively.
13.5. REQUEST FOR CHANGE OF SUPPLIER
--------------------------------
In the event Franchisee desires to purchase products, services,
supplies or materials from manufacturers, suppliers or distributors other than
those previously approved by Franchisor, Franchisee shall, prior to purchasing
any such products, services, supplies or materials, give Franchisor a written
request to change supplier. Franchisor shall notify Franchisee in writing of
its approval or rejection of the proposed supplier within a reasonable time
after Franchisor's completion of its investigation of the proposed supplier.
Franchisor may from time to time inspect any manufacturer's, suppliers, or
distributor's facilities and products to assure proper production, processing,
storing and transportation of products, services, supplies or materials to be
purchased from the manufacturer, supplier or distributor by Franchisee.
Permission for such inspection shall be a condition of the continued approval
of such manufacturer, supplier or distributor. Franchisor may at its sole
discretion, for any reason whatsoever, elect to withhold approval of the
manufacturer, supplier or distributor; however, in order to make such
determination, Franchisor may require that samples from a proposed new
supplier be delivered to Franchisor for testing prior to approval and use. A
charge not to exceed the actual cost of the test may be made by Franchisor and
shall be paid by Franchisee.
14. MARKS, TRADE NAMES AND PROPRIETARY INTERESTS
14.1. MARKS. Franchisee hereby acknowledges that
-----
Franchisor has the sole right to license and control Franchisee's use of the
QUIZNO'S service mark, design and other of the Marks, and that such Marks
shall remain under the sole and exclusive ownership and control of Franchisor.
Franchisee acknowledges that it has not acquired any right, title or interest
in the Marks except for the right to use the Marks in the operation of its
Restaurant as it is governed by this Agreement. Franchisee shall display the
Marks prominently at the Restaurant and on packaging and serving materials and
in connection with forms, advertising and marketing, all in a manner as
Franchisor shall reasonably prescribe. Franchisee further agrees that no
Marks other than "QUIZNO'S," "QUIZNO'S CLASSIC SUBS" or such other trademarks
as may be specified by Franchisor shall be used in the marketing, promotion,
identification or operation of the Restaurant, except with Franchisor's prior
written consent.
14.2. LICENSED METHODS. Franchisee hereby
-----------------
acknowledges that Franchisor owns and controls the distinctive plan for the
es-tablishment, operation and promotion of Restaurants and all related
licensed methods of doing business, previously defined as the Licensed
Methods, which include, but are not limited to, recipes, menu items and
cooking methods, technical restaurant equipment standards, order and take-out
fulfillment methods and customer relations, marketing techniques, written
promotional materials and Operations Manual contents, advertising, and
accounting systems, all of which constitute trade secrets of Franchisor, and
Franchisee acknowledges that Franchisor has valuable rights in and to such
trade secrets. Franchisee further ack-nowledges that it has not acquired any
right, title or interest in the Licensed Methods, except for the right to use
the Licensed Methods in the operation of the Restaurant, and that any and all
innovations, additions or improvements made to the Licensed Methods, even if
by Franchisee, shall be owned by and inure to the benefit of Franchisor.
14.3. TRADEMARK INFRINGEMENT. Franchisee
----------------------
agrees to notify Franchisor in writing of any possible infringement or illegal
use by others of a trademark the same as or confusingly similar to the Marks
which may come to its attention. Franchisee acknowledges that Franchisor
shall have the right, in its sole discretion, to determine whether any action
will be taken in response to any possible infringement or illegal use and
agrees to fully cooperate with Franchisor in any such litiga-tion.
14.4. FRANCHISEE'S BUSINESS NAME.
--------------------------
Franchisee acknowledg-es that Franchisor has a prior and superior claim to the
QUIZNO'S trade name. Franchisee shall not use the word "QUIZNO'S" in the legal
name of its corporation, partnership or any other business entity used in
conducting the business provided for in this Agree-ment. Franchisee also
agrees not to register or attempt to register a trade name using the word
"QUIZNO'S" or any portions thereof in Franchisee's name or that of any other
person or business entity, without prior written consent of Franchisor.
14.5. CHANGE OF MARKS. In the event Franchisor,
----------------
in its sole discretion, decides to modify or discontinue use of any
proprietary Marks, or to develop additional or substitute marks, Franchisee
shall, within a reasonable time after receipt of written notice thereof, -take
such action, at Franchisee's sole expense, as may be necessary to comply with
such modification, discontinuation, addition or substitution.
15. REPORTS, RECORDS AND FINANCIAL STATEMENTS
15.1. FRANCHISEE REPORTS. Franchisee shall
------------------
use the bookkeeping services described in and shall execute Exhibit B-7 for
the first 12 months Franchisee's first Restaurant is operating. After that,
Franchisee may discontinue the bookkeeping service 90 days following
completion of the following : Franchisee retains a full time professional
accountant (approved in writing by Franchisor) to provide bookkeeping services
(at Franchisee's expenses) and that accountant agrees in writing (on a form
acceptable to Franchisor) to provide timely financial statements required by
this Section 15. If Franchisee fails to provide such financial statements
more than 2 times in any 12-month period, in addition to any other remedies,
Franchisor may require Franchisee to use Franchisor's bookkeeping services at
the then-current fee. Franchisee shall also provide to Franchisor financial
and accounting reports in a manner and form as Franchisor may reasonably
require, including:
(A) Weekly summary reports, submitted by no later than the Due Date
each week (defined in Section 5.3) and containing information relative to the
previous weekly reporting period operations;
(B) Any other data, information and supporting records reasonably
requested by Franchisor from time to time (including without limitation daily
and weekly reports of product sales by category);
(C) Within 15 days after the end of each month, an income statement
of Franchisee's Restaurant for such month and for the fiscal year to date,
prepared in accordance with generally accepted accounting principles ("GAAP")
consistently applied, in Franchisor's recommended format; and
(D) Within 90 days after the end of Franchisee's fiscal year, which
shall be the calendar year, an income statement and balance sheet of
Franchisee's Restaurant for such fiscal year (reflecting all year-end
adjustments), and a statement of changes in cashflow of the Restaurant,
prepared in accordance with GAAP, consistently applied, and in Franchisor's
recommended format. Franchisor reserves the right to require that Franchisee
have reviewed financial statements prepared on an annual basis.
15.2. FINANCIAL RECORDS USE AND ACCESS.
--------------------------------
Franchisor reserves the right to disclose data derived from all
financial and accounting reports received from Franchisee, without identifying
Franchisee by name or by Restaurant. Franchisee reserves the right to require
that Franchisee install and maintain, as a part of the System, (defined in
Section 6.6), a telephone modem and dedicated line at the Restaurant which
Franchisor may access to obtain sales information and data of the System and
Franchisee agrees to cooperate with Franchisor's procedures regarding such
System. With respect to the operation and financial condition of the
Restaurant, Franchisee agrees to furnish Franchisor the financial and
accounting reports required hereunder in a form reasonably prescribed by
Franchisor which may include, without limitation, computer diskette,
electronic mail and facsimile transmission.
15.3. BOOKS AND RECORDS. Franchisee shall
-----------------
maintain all books and records for its Restaurant in accordance with generally
accepted accounting principles, consistently applied, and preserve such
records, including cash register tapes, shift reports, weekly operating
summaries and sales tax returns, for at least three years after the fiscal
year to which they relate.
15.4. AUDIT OF BOOKS AND RECORDS.
--------------------------
Franchisee shall permit Franchisor or its representatives to inspect and audit
the books and records of the Restaurant at any reasonable time, at
Franchisor's expense. If any audit discloses a deficiency in amounts owed to
Franchisor, then such amounts shall become immediately payable to Franchisor
by Franchisee, with interest from the date such payments were due at the
lesser of 2% per month or the maximum rate allowed by law. In addition, if
such audit discloses that the Gross Sales of the Restaurant have been
understated by 2% or more during the audit period, Franchisee shall pay all
reasonable costs and expenses Franchisor incurred in connection with such
audit.
16. TRANSFER
16.1. TRANSFER BY FRANCHISEE. The
------------------------
franchise granted herein is personal to Franchisee and, except as stated
below, Franchisor shall not allow or permit any transfer, assignment,
subfranchise or conveyance of this Agreement or any interest hereunder. As
used in this Agreement, the term "TRANSFER" includes Franchisee's voluntary,
involuntary, direct or indirect assignment, sale, gift or other disposition of
any interest in: (1) this Agreement; (2) the Franchisee entity; (3) the
Restaurant governed by this Agreement; or (4) all or a substantial portion of
the assets of the Restaurant.
16.2. PRE-CONDITIONS TO FRANCHISEE'S TRANSFER
---------------------------------------
Franchisee shall not engage in a transfer unless
Franchisee obtains Franchisor's written consent, and Franchisee and the
proposed transferee comply with the following requirements: (a) All amounts
due and owing pursuant to this Agreement by Franchisee to Franchisor or its
affiliates or to third parties whose debts or obligations Franchisor has
guaranteed on behalf of Franchisee, if any, are paid in full; (b) the proposed
transferee agrees to operate the Restaurant as a QUIZNO'S Restaurant and
agrees to sign the then-current form of franchise agreement and
satisfac-torily complete the initial training program, which training may be
completed by the transferee either prior to or immediately after the transfer
is effective; (c) Franchisee provides written notice to Franchisor at least 30
days prior to the proposed effective date of the transfer, and includes
information reasonably detailed to enable Franchisor to evaluate the terms and
conditions of the proposed transfer, and which at a minimum includes a written
offer from the proposed transferee; (d) the proposed transferee provides
informa-tion to Franchisor sufficient for Franchisor to assess the proposed
transferee's business experience, aptitude and financial qualification, and
Franchisor approves -the proposed transferee as a franchisee; (e) Franchisee
executes a general release, in a form satisfactory to Franchisor, of any and
all claims against Franchisor, its affiliates and their respective officers,
directors, employees and agents; (f) Franchisee or the proposed transferee
pays a transfer fee in an amount equal to 25% of the then-current Initial
Franchise Fee for the type of Restaurant being transferred, which fee is
required to cover Franchisor's reasonable expenses related to the transfer,
including training; provided, however, that no transfer fee will be charged
for a transfer by Franchisee to a corporation wholly-owned by Franchisee,
between partners of a partnership Franchisee or to a spouse of a Franchisee
upon the death or disability of Franchisee; and (g) Franchisee agrees to abide
by all post-termination covenants set forth herein, including without
limitation the covenant not to compete set forth in Section 20.3.
16.3. FRANCHISOR'S APPROVAL OF TRANSFER
---------------------------------
Franchisor has 30 days from the date of the written notice to
approve or disapprove, in writing, Franchisee's proposed transfer. Franchisee
acknowledges that the proposed transferee shall be evaluated for approval by
Franchisor based on the same criteria as is currently being used to assess new
franchisees of Franchisor and that the proposed transferee shall be provided
with such disclosures as may be required by state or federal law.
16.4. RIGHT OF FIRST REFUSAL. In the event
----------------------
Franchisee wishes to engage in a transfer, Franchisee agrees to grant to
Franchisor a 30-day right of first refusal to purchase such rights, interest
or assets on the same terms and conditions as are contained in the written
notice set forth in Section 16.2(c); provided, however, the following
additional terms and conditions shall apply: (a) the right of first refusal
will be effective for each proposed transfer and any material change in the
terms or conditions of the proposed transfer shall be deemed a separate offer
on which Franchisor shall have a new 30-day right of first refusal; (b) the
30-day right of first refusal period will run concurrently with the period in
which the Franchisor has to approve or disapprove the proposed transferee; (c)
if the consideration or manner of payment offered by a proposed
transferee is such that Franchisor may not reasonably be required to furnish
the same, then Franchisor may purchase the interest which is proposed to be
sold for the reasonable cash equivalent. If the parties cannot agree within a
reasonable time on the cash consideration, an independent appraiser shall be
designated by Franchisor, whose determi-nation will be binding upon the
parties; all expenses of the appraiser shall be paid for equally by Franchisor
and Franchisee; and (d) if Franchisor chooses not to exercise its right of
first refusal, Franchisee shall be free to complete the transfer subject to
compliance with Sections 16.2 and 16.3.
16.5. TYPES OF TRANSFERS. Franchisee
--------------------
acknowledges that Franchisor's right to approve or disapprove a proposed
transfer as provided for above shall apply (1) if Franchisee is a partnership,
corporation or other business association, (i) to the addition or deletion of
a partner, shareholder or members of the association or the transfer of any
ownership interest among existing partners, shareholders or members; (ii) to
any proposed transfer of 25% or more of the interest (whether stock,
partnership interest, or membership interest) to a third party, whether such
transfer occurs in a single transaction or several transactions; and (2) if
Franchisee is an individual, to the transfer from such individual or
individuals to a corporation or entity controlled by them, in which case
Franchisor's approval will be conditioned upon: (i) the continuing personal
guarantee of the individual (or individuals) for the performance of
obligations under this Agreement; and (ii) a limitation on the corporation's
or other entity's business activity to that of operating the Restaurant and
related activities; provided that with respect to such transfer, Franchisor's
right of first refusal to purchase shall not apply and Franchisor shall not
charge a transfer fee
16.6. TRANSFER BY FRANCHISOR. This
------------------------
Agreement is fully assignable by Franchisor and shall inure to the benefit of
any assignee or other legal successor in interest.
16.7. FRANCHISEE'S DEATH OR DISABILITY
--------------------------------
Upon the death or permanent disability of Franchisee (or an
individual owning 25% or more of, or controlling, a Franchisee entity), the
personal representa-tive of such person shall transfer Franchisee's interest
in this Agreement or such interest in the Franchisee entity to an approved
third party. Such disposition of this Agreement or such interest (including,
without limitation, transfer by bequest or inheritance) shall be completed
within a reasonable time, not to exceed 120 days from the date of death or
permanent disability (unless extended by probate proceedings), and shall be
subject to all terms and conditions applicable to transfers contained in this
Section 16; provided, however, that for purposes of this Section, there shall
be no transfer fee charged by Franchisor. Failure to transfer the interest
within said period of time shall constitute a breach of this Agreement. For
the purposes hereof, the term "PERMANENT DISABILITY" shall mean a mental or
physical disability, impairment or condition that is reasonably expected to
prevent or actually does prevent Franchisee (or the owner of 25% or more of,
or controlling, a Franchisee entity) from supervising the management and
operation of the Restaurant for a period of 120 days from the onset of such
disability, impairment or condition.
17. TERM AND RENEWAL
17.1. TERM. The primary term of this Agreement is for a
----
period of 15 years from the Effective Date, unless sooner terminated as
provided herein.
17.2. RENEWAL At the end of the primary term,
-------
Franchisee shall have the option to renew its franchise rights for an
additional 15-year term, so long as Franchisee:
(A) Has -complied with all provisions of this Agreement during the
primary term, including the payment on a timely basis of all Royalties and
other fees. "COMPLI-ANCE" shall mean, at a minimum, that Franchisee has not
received any written notification from Franchisor of breach hereunder more
than four times during the primary term;
(B) Is not in default or under notification of breach of this
Agreement at the time it gives notice under Section 17.3;
(C) Agrees to upgrade and remodel the Restaurant at Franchisee's sole
expense (the necessity of which shall be at the sole discretion of Franchisor)
to conform with the then-current Operations Manual;
(D) Executes a general release, in a form satisfactory to
Franchisor, of any and all claims against Franchisor and its affiliates, and
their respective officers, directors, employees and agents arising out of or
relating to this Agreement; and
(E) Executes the then-current form of Franchise Agreement, which
agreement may contain terms materially different than those in this Agreement
including terms changing the Royalty and other fee amounts; provided that
Franchisee shall not be required to pay a new Initial Franchise Fee. For
purposes of this Section, the renewed franchised rights shall constitute
successor franchise rights.
17.3. EXERCISE OF RENEWAL. Franchisee may
-------------------
exercise its option to renew by giving written notice of such exercise to
Franchisor not more than one year nor less than 180 days prior to the
expiration of the primary term. Franchisee must also pay a $1,000 renewal fee
to Franchisor concurrently with the execution of the then-current Franchise
Agreement, to cover Franchisor's expenses related to reviewing Franchisee's
operations and approving the renewal. If Franchisee fails to comply with any
of the conditions listed above (other than execution of the new Franchise
Agreement or payment of the renewal fee), Franchisor shall give notice to that
effect to Franchisee no later than 90 days before expiration of the primary
term.
18. DEFAULT AND TERMINATION
18.1. TERMINATION BY FRANCHISEE.
---------------------------
Franchisee shall have the right to terminate this Agreement, if Franchisor
materially fails to comply with this Agreement and fails to cure its default
within 30 days after written notice of the default from Franchisee.
Notwithstanding the foregoing, if the breach is curable, but is of a nature
which cannot be reasonably cured within such 30-day period and Franchisor has
commenced and is continuing to make good faith efforts to cure the breach
during such 30-day period, Franchisor shall be given an additional reasonable
period of time to cure the same, and this Agreement shall not terminate.
18.2. TERMINATION BY FRANCHISOR - EFFECTIVE UPON NOTICE
-------------------------------------------------------
Franchisor shall have the
right, at its option, to terminate this Agreement and all rights granted
Franchisee hereunder, without affording Franchisee any opportunity to cure any
default (subject to any state laws to the contrary, where state law shall
prevail), effective upon receipt of notice by Franchisee, upon the occurrence
of any of the following events:
(A) UNAUTHORIZED DISCLOSURE. If Franchisee or any person under
------------------------
Franchisee's control intention-ally or negligently discloses to any
unauthorized person, or copies or reproduces, the contents of or any part of
the Operations Manual or any other trade secrets or confidential information
of Franchisor;
(B) FRAUD OR CONDUCT EFFECTING THE MARKS. If Franchisee commits
------------------------------------
fraud in connection with the purchase or operation of the Restaurant or
otherwise engages in conduct that, in the sole judgment of Franchisor,
materially impairs the goodwill associated with the Marks.
(C) ABANDONMENT. If Franchisee ceases to operate the Restaurant or
-----------
otherwise abandons the Restaurant for a period of 5 consecutive days, or any
shorter period that indicates an intent by Franchisee to discontinue operation
of the Restaurant, unless and only to the extent that full operation of the
Restaurant is suspended or terminated due to fire, flood, earthquake or other
similar causes beyond Franchisee's control and not related to the availability
of funds to Franchisee;
(D) INSOLVENCY; ASSIGNMENTS. If Franchisee becomes insolvent or is
-----------------------
adjudicated a bankrupt; or any action is taken by Franchisee, or by others
against Franchisee under any insolvency, bankruptcy or reorganization act,
(this provision may not be enforceable under federal bankruptcy law, 11 U.S.C.
101 et seq.), or if Franchisee makes an assignment for the benefit of
creditors, or a receiver is appointed by Franchisee;
(E) UNSATISFIED JUDGMENTS; LEVY; FORECLOSURE. If any material
------------------------------------------
judgment (or several judgments which in the aggregate are material) is
obtained against Franchisee and remains unsatisfied or of record for 30 days
or longer (unless a supersedeas or other appeal bond has been filed); or if
execution is levied against Franchisee's business or any of the property used
in the operation of the Restaurant and is not discharged within 5 days; or if
the real or personal property of Franchisee's business shall be sold after
levy thereupon by any sheriff, marshall or constable;
(F) CRIMINAL CONVICTION. If Franchisee (or any of its shareholders,
-------------------
partners, or members) is convicted of a felony, a crime involving moral
turpitude, or any crime or offense reasonably likely, in the sole opinion of
Franchisor, to materially and unfavorably affect the Licensed Methods, Marks,
and the associated goodwill and reputation thereof;
(G) FAILURE TO MAKE PAYMENTS. If Franchisee fails to pay any amounts
------------------------
due Franchisor or affiliates within 10 days after receiving notice that such
fees or amounts are overdue;
(H) FINANCIAL REPORTING. If Franchisee intentionally under reports
-------------------
Gross Sales in any amount, or negligently under reports Gross Sales by 5% or
more during any reporting period;
(I) FAILURE TO COMPLETE TRAINING OR OPEN. If Franchisee fails to
------------------------------------
complete the initial training program to Franchisor's satisfaction or to
commence operations of the Restaurant within the time specified herein;
(J) MISUSE OF MARKS. If Franchisee misuses or fails to follow
-----------------
Franchisor's directions and guidelines concerning use of the Marks and fails
to correct the misuse or failure within 10 days after notification from
Franchisor;
(K) REPEATED NONCOMPLIANCE. If Franchisee has received three notices
----------------------
of default from Franchisor within a 12-month period, regardless of whether the
defaults were cured by Franchisee;
(L) RIGHT TO POSSESSION OF PROPERTY. If Franchisee loses the right
-------------------------------
to occupy the Restaurant's premises because of a default under the
Franchisee's lease or Sublease, or defaults under any other agreement related
to use or operation of the Restaurant; or
(M) UNAUTHORIZED TRANSFER. If Franchisee sells, transfers or
----------------------
otherwise assigns the franchise, an interest in the franchise or Franchisee
entity, this Agreement, the Restaurant or a substantial portion of the assets
of the Restaurant owned by Franchisee without complying with the provisions of
Section 16.
18.3. TERMINATION BY FRANCHISOR - THIRTY DAYS NOTICE
----------------------------------------------
Franchisor shall have the right to
terminate this Agreement (subject to any state laws to the contrary, where
state law shall prevail), effective upon 30 days written notice to Franchisee,
if Franchisee breaches any other provision of this Agreement, including but
not limited to, if Franchisee fails to substantially comply with the
Operations Manual, and fails to cure the default during such 30 day period.
In that event, this Agreement will terminate without further notice to
Franchisee, effective upon expiration of the 30 day period. Notwithstanding
the foregoing, if the breach is curable, but is of a nature which cannot be
reasonably cured within such 30 day period and Franchisee has commenced and is
continuing to make good faith efforts to cure the breach during such 30 day
period, Franchisee shall be given an additional reasonable period of time to
cure the same, and this Agreement shall not terminate.
18.4. LATE FEE. In addition to its other rights and
--------
remedies hereunder, Franchisor may charge Franchisee a late fee of $100 per
violation by Franchisee of any term or condition of this Agreement, including
without limitation failure to pay (or to have adequate amounts available for
electronic transfer for) amounts owed Franchisor, or failure to timely provide
required reports. This fee may be changed or eliminated by Franchisor, in its
sole discretion, in the future.
18.5. FAILURE TO COMPLY WITH REPORTING REQUIREMENTS.
---------------------------------------------
If Franchisee fails to prepare and submit
any statement or report as required under Section 15, then Franchisor shall
have the right to treat Franchisee's failure as good cause for termina-tion of
this Agreement. In addition to all other remedies available to Franchisor, in
the event that Franchisee fails to prepare and submit any statement or report
required under Section 15 for two consecutive reporting periods, Franchisor
shall be entitled to make an audit, at the expense of Franchisee, of
Franchisee's books, records and accounts, including Franchisee's bank
accounts, which in any way pertain to the Gross Sales of the Restaurant. The
statements or reports not previously submitted shall be prepared by or under
the direction and supervi-sion of an independent certified public accountant
selected by Franchisor. In addition to its other rights and remedies, if
Franchisee fails to comply with the reporting requirements under Section 15,
Franchisor shall have the right to collect, in addition to the late fee, $500
per week for royalty payments and $100 per week for advertising payment (or a
greater amount if Franchisor reasonably estimates that the Restaurant is
generating higher Gross Sales), provided that any amounts will be reconciled
and adjusted as needed when Franchisor receives actual Gross Sales amounts.
18.6. RIGHT TO REPURCHASE. Except in
-------------------
the case of a renewal under Section 17, upon termination or expiration of this
Agreement for any reason, Franchisor shall have the option to purchase the
Restaurant, or a portion of the assets of the Restaurant, which may include,
at Franchisor's option, all of Franchisee's interest, leasehold or otherwise,
in and to the real estate upon which the Restaurant is located, and all
buildings and other improvements related thereto. The purchase price for the
assets to be transferred will be 30% of the Gross Sales of the Restaurant
during the 12 calendar months immediately proceeding the date of termination
or expiration, and will be adjusted by setting off any amount then owing by
Franchisee to Franchisor, including any amounts paid by Franchisor to cure
Franchisee's defaults with third parties such as landlords (the decision to
pay such cure amounts to be in the sole and absolute discretion of
Franchisor). The following additional terms shall apply to Franchisor's
exercise of this option:
(A) Franchisor's option hereunder shall be exercisable by providing
Franchisee with written notice of its inten-tion to exercise the option no
later than the effective date of termination, in the case of termina-tion
(unless Franchisee terminates without notice or Franchisor terminates for
cause, in which case Franchisor shall have 30 days after receipt of actual
notice of the termination or such additional time as is reasonably necessary
given the circumstances), or at least 30 days prior to the expiration of the
term of the franchise, in circumstances where no successor franchise is
granted.
(B) Franchisor and Franchisee agree that the terms and conditions of
this right and option to purchase may be recorded, if deemed appropriate by
Franchisor, in the real property records and Franchisor and Franchisee further
agree to execute such additional documentation as may be necessary and
appropriate to effectuate such recording; and
(C) The closing for the purchase of the Restaurant will take place no
later than 60 days after written notice of Franchisor's exercise of its option
is given to Franchisee. Franchisor has the unrestricted right to assign this
option to purchase at any time prior to such closing. Franchisor will pay the
purchase price in full at the closing, or, at its option, in 24 equal
consecutive monthly installments with interest at a rate equal to the prime
lending rate as of the closing at Franchisor's primary bank. Franchisee must
sign all documents of transfer as are reasonably necessary for purchase of the
Restaurant by Franchisor, which documents shall include all customary
representations and warranties from Franchisee as to ownership, condition of
and title to the assets of the Restaurant being transferred.
In the event that Franchisor does not exercise Franchisor's right to
repurchase Franchisee's Restaurant as set forth above, Franchisee will be free
to keep or to sell, after such termination or expiration, to any third party,
all of the physical assets of its Restaurant; provided, however, that all
appearances of the Marks are first removed in a manner approved in writing by
Franchisor.
18.7. OBLIGATIONS OF FRANCHISEE UPON TERMINATION OR EXPIRATION
----------------------------------------------------------
Franchisee is obligated upon termination or expiration of this Agreement
to immediately:
(A) Pay Franchisor all Royalties, other fees, and any and all amounts
or accounts payable then owed Franchisor or its affiliates pursuant to this
Agreement, or pursuant to any other agreement between the parties;
(B) Cease to identify itself as a QUIZNO'S franchi-see or use any
Marks, trade secrets, signs, symbols, devices, trade names, or other materials
of Franchisor;
(C) Immediately cease to identify the Franchised Location as being,
or having been, associated with Franchisor, and immediately cease using any
proprietary mark of Franchisor or any mark in any way associated with the
Marks- and Licensed Methods;
(D) Deliver to Franchisor all signs, sign-faces, advertising
materials, forms and other materials bearing any of the Marks or otherwise
identified with Franchisor and obtained by and in connection with this
Agreement;
(E) Immediately deliver to Franchisor the Operations Manual and all
other information, documents and copies thereof which are proprietary to
Franchisor;
(F) Promptly take such action as may be required to cancel all
fictitious or assumed names or equivalent registrations relating to its use of
any Marks which are under the exclusive control of Franchisor or, at the
option of Franchisor, assign the same to Franchisor;
(G) Notify the telephone company and all telephone directory
publishers of the termination or expiration of Franchisee's right to use any
telephone number and any regular, classified or other telephone directory
listings associated with any Mark and to authorize transfer thereof to
Franchisor or its designee. Franchisee acknowledg-es that, as between
Franchisee and Franchisor, Franchisor has the sole rights to and interest in
all telephone, telecopy or facsimile machine numbers and directory listings
associated with any Mark. Franchisee authorizes Franchisor, and hereby
appoints Franchisor and any of its officers as Franchisee's attorney-in-fact,
to direct the telephone company and all telephone directory publishers to
transfer any telephone, telecopy or facsimile machine numbers and directory
listings relating to the Restaurant to Franchisor or its designee, should
Franchisee fail or refuse to do so, and the telephone company and all
telephone directory publishers may accept such direction or this Agree-ment as
conclusive of Franchisor's exclusive rights in such telephone numbers and
directory listings and Franchisor's authority to direct their transfer; and
(H) Abide by all restrictive covenants set forth in Section 20 of
this Agreement.
18.8. STATE AND FEDERAL LAW. THE PARTIES
---------------------
ACKNOWLEDGE THAT IN THE EVENT THAT THE TERMS OF THIS AGREEMENT REGARDING
TERMINATION OR EXPIRATION ARE INCONSISTENT WITH APPLICABLE STATE OR FEDERAL
LAW, SUCH LAW SHALL GOVERN FRANCHISEE'S RIGHTS REGARDING TERMINA-TION OR
EXPIRATION OF THIS AGREEMENT.
19. BUSINESS RELATIONSHIP
19.1. INDEPENDENT BUSINESS PERSONS.
---------------------------
The parties agree that each of them are independent businesspersons, their
only relation-ship is by virtue of this Agreement and that no fiduciary
relation-ship is created hereunder. Neither party is liable or responsible
for the other's debts or obligations, nor shall either party be obligated for
any damages to any person or property directly or indirectly arising out of
the operation of the other party's business authorized by or conducted
pursuant to this Agreement. Franchisor and Franchisee agree that neither of
them will hold themselves out to be the agent, employer or partner of the
other and that neither of them has the authority to bind or incur liability on
behalf of the other.
19.2. PAYMENT OF THIRD PARTY OBLIGATIONS
----------------------------------
Franchisor shall have no liability for Franchisee's obligations
to pay any third parties, including without limitation, any product vendors,
or any sales, use, service, occupation, excise, gross receipts, income,
property or other tax levied upon Franchisee, Franchisee's property, the
Restaurant or upon Franchisor in connection with the sales made or business
conducted by Franchisee (except any taxes Franchisor is required by law to
collect from Franchisee with respect to purchases from Franchisor).
19.3. INDEMNIFICATION. Franchisee agrees to
---------------
indemnify, defend and hold harmless Franchisor, its subsidiaries and
affiliates, and their respective shareholders, directors, officers, employees,
agents, successors and assignees, (the "INDEMNIFIED PARTIES") against, and to
reimburse them for all claims, obligations and damages described in this
Section 19.3, any and all third party obligations described in Section 19.2
and any and all claims and liabilities directly or indirectly arising out of
the operation of the Restaurant or arising out of the use of the Marks and
Licensed Methods in any manner not in accordance with this Agreement. For
purposes of this indemnifica-tion, claims shall mean and include all
obligations, actual and consequential damages and costs reasonably incurred in
the defense of any claim against the Indemnified Parties, including, without
limitation, reasonable accountants', attorneys' and expert witness fees, costs
of investigation and proof of facts, court costs, other litigation expenses
and travel and living expenses. Franchisor shall have the right to defend any
such claim against it. This indemnity shall continue in full force and effect
subsequent to and notwithstanding the expiration or termination of this
Agreement.
20. RESTRICTIVE COVENANTS
20.1. NON-COMPETITION DURING TERM.
---------------------------
Franchisee acknowl-edges that, in addition to the license of the Marks
hereunder, Franchisor has also licensed commercially valuable information
which comprises and is a part of the Licensed Methods, including without
limitation operations, marketing, advertising and related information and
materials, and that the value of this information derives not only from the
time, effort and money which went into its compilation, but from the usage by
all franchisees of Franchisor using the Marks and Licensed Methods.
Franchisee therefore agrees that other than the Restaurant licensed herein,
neither Franchisee nor any of Franchisee's officers, directors, shareholders
or partners, nor any spouse of Franchisee or any of these individuals ("BOUND
PARTIES"), shall during the term of this Agreement:
(A) have any direct or indirect controlling interest as a disclosed
or beneficial owner in a "Competitive Business" as defined below;
(B) perform services as a director, officer, manager, employee,
consultant, representative, agent or otherwise for a Competitive Business;
(C) divert or attempt to divert any business related to, or any
customer or account of the Restaurant, Franchisor's business or any other
QUIZNO'S franchi-see's business, by direct inducement or otherwise, or
diverting or attempting to divert the employment of any employee of Franchisor
or another franchisee licensed by Franchisor to use the Marks and Licensed
Methods, to any Competitive Business by any direct inducement or otherwise; or
(D) directly or indirectly solicit or employ any person who is
employed by Franchisor or any other franchisee licensed by Franchisor to use
the Marks and Licensed Methods.
The term "COMPETITIVE BUSINESS" as used in this Agreement shall mean any
business operating, or granting franchises or licenses to others to operate, a
restaurant or other food service business deriving more than 10% of its gross
receipts, excluding gross receipts relating to the sale of alcoholic
beverages, from the sale of submarine, hoagie, hero-type and/or deli-style
sandwiches (other than another QUIZNO'S Restaurant operated by you); provided,
however, neither Franchisee nor the Bound Parties shall be prohibited from
owning securities in a Competitive Business if such securities are listed on a
stock exchange or traded on the over-the-counter market and represent 5% or
less of that class of securities issued and outstanding. Franchisee agrees
that nothing in this Section 20 shall be construed to grant Franchisee any
protected territory.
20.2. "BRANDED BUSINESS". During the term of
------------------
this Agreement, neither Franchisee nor any other Bound Party will operate,
directly or indirectly, any Branded Business within a mile radius of the
Restaurant without the written consent of Franchisor, which consent shall not
be unreasonably withheld. The term "BRANDED BUSINESS" is defined as any
business marketed by a franchisor or chain under a locally, regionally, or
nationally known or registered trademark or service mark.
20.3. POST-TERMINATION COVENANT NOT TO COMPETE
------------------------------------------
For a period of two years from termination or
expiration of this Agreement for any reason, or the date on which Franchisee
ceases to conduct business, whichever is later, neither Franchisee nor any
Bound Party shall have any direct or indirect interest as a disclosed or
beneficial owner, investor, partner, director, officer, employee, consultant,
representative or agent or in any other capacity in any Competitive Business
located or operating within a five-mile radius of the former Franchised
Location or within a five-mile radius of any other QUIZNO'S franchised or
company-owned restaurant. The restrictions of this Section 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 that represent 5% or
less of the number of shares of that class of securities issued and
outstanding. Franchisee and the Bound Parties expressly acknowledge that they
possess skills and abilities of a general nature and have other
opportunities for exploiting such skills. Consequently, enforcement of the
covenants made in this Section will not deprive them of their personal
goodwill or ability to earn a living.
20.4. ADDITIONAL REMEDIES FOR BREACH
------------------------------
In addition to any other remedies or damages allowed hereunder, if
Franchisee breaches the covenants set forth in Sections 20.1, 20.2, or 20.3,
Franchisee shall pay Franchisor a fee equal to Franchisor's then-current
Initial Franchise Fee for each Competitive Business or Branded Business opened
in violation of the covenants, and eight percent of such Business' gross sales
until expiration of the noncompetition period set forth in Section 20.3.
20.5. CONFIDENTIALITY OF PROPRIETARY INFORMATION
------------------------------------------
Franchisee shall treat all information it
receives which comprises or is a part of the Licensed Methods licensed
hereunder (including without limitation the Operations Manual) as propri-etary
and confidential and will not use such information in an unautho-rized manner
or disclose the same to any unauthorized person without first obtaining
Franchisor's written consent. Franchisee agrees that all such material is the
sole property of Franchisor. Franchisee acknowledges that the Marks and the
Licensed Methods have valuable goodwill attached to them, that the protection
and maintenance thereof is essential to Franchisor and that any unauthorized
use or disclosure of the Marks and Licensed Methods will result in irreparable
harm to Franchisor. All ideas, concepts, techniques or materials concerning a
Quizno's Restaurant, whether or not protectable intellectual property and
whether created by or for Franchisee or its owners or employees, must be
promptly disclosed to Franchisor and will be deemed Franchisor's sole and
exclusive property, part of the Quizno's system, and works made-for-hire for
Franchisor. To the extent any item does not qualify as a "work made-for-hire"
for Franchisor, Franchisee assigns ownership of that item, and all related
rights to that item, to Franchisor and must sign whatever assignment or other
documents Franchisor requests to show ownership or to help Franchisor obtain
intellectual property rights in the item.
20.6. CONFIDENTIALITY AGREEMENT.
--------------------------
Franchisor reserves the right to require that Franchisee cause each of its
officers, directors, partners, shareholders, and Designated Manager, and, if
applicable, the spouse of Franchisee and any of these named individuals, to
execute a Nondisclosure and Noncompetition Agreement containing the above
restrictions, in a form approved by Franchisor.
21. DISPUTES
21.1. GOVERNING LAW/CONSENT TO VENUE AND JURISDICTION.
--------------------------------------------------
Except to the extent
governed by the United States Trademark Act of 1946 (Lanham Act, 15 U.S.C.
1051 et seq.) or other federal law, this Agreement shall be interpreted under
-- ---
the laws of the State of Colorado and any dispute between the parties shall be
governed by and determined in accordance with the substantive laws of the
State of Colorado, which laws shall prevail in the event of any conflict of
law. The Franchisee and the Franchisor have negotiated regarding a forum in
which to resolve any disputes which may arise between them and have agreed to
select a forum in order to promote stability in their relationship.
Therefore, if a claim is asserted in any legal proceeding involving the
Franchisee or any Bound Party and the Franchisor, the parties agree that the
exclusive venue for disputes between them shall be in the District Court for
the City & County of Denver, Colorado, or the United States District Court for
the District of Colorado, and the parties each waive any objection they may
have to the personal jurisdiction of or venue in such courts.
21.2. WAIVER OF JURY TRIAL. 21.2. WAIVER OF JURY TRIAL.
----------------------- --------------------
Franchisor, Franchisee and the Bound Parties each waive their right to a trial
by jury. Franchisee and Franchisor acknowledge that the parties' waiver of
jury trail rights provides the parties with the mutual benefit of uniform
interpretation of this Agreement and any dispute arising out of this Agreement
or the parties' relationship created by this Agreement. Franchisee and
Franchisor further acknowledge the receipt and sufficiency of mutual
consideration for such benefit.
21.3. REMEDIES. REMEDIES. Except as set forth in Section 21.4,
-------- --------
the court will have the right to award any relief which it deems proper in the
circumstances, including without limitation money damages (with interest on
unpaid amounts from the date due), lost profits, specific performance,
injunctive relief and attorneys' fees and costs. The parties agree that any
claim for lost earnings or profits by Franchisee shall be limited to a maximum
amount equal to the net profits of the Restaurant for the prior year as shown
on Franchisee's federal income tax return. The parties further agree that, in
addition to such other damages as may be awarded by the court, if this
Agreement is terminated because of a Franchisee default, Franchisee shall be
liable to Franchisor for a lump sum amount equal to the Royalties and
Marketing and Promotion Fees that would have become due following termination
of this Agreement for the period this Agreement would have remained in effect
but for the Franchisee's default. Royalties and Marketing and Promotion Fees
for purposes of this Section shall be calculated based on the Restaurant's
average monthly Gross Sales for the prior year.
- - 21.4. LIMITATION OF CLAIMS. Franchisee and the Bound Parties agree
--------------------
not to bring any claim asserting that any of the Marks are generic or
otherwise invalid. Any claims between the parties must be commenced within
one year from the occurrence of the facts giving rise to such claim, or such
claim shall be barred. The parties understand that such time limit may be
shorter than otherwise allowed by law. Franchisee agrees that its sole
recourse for claims arising between the parties shall be against Franchisor or
its successors and assigns. Franchisee agrees that the shareholders,
directors, officers, and employees and agents of the Franchisor and its
affiliates shall not be personally liable nor named as a party in any action
between the Franchisor and Franchisee; provided that this shall not preclude
claims Franchisee may have directly against an Area Director. Franchisor and
Franchisee further agree that, in connec-tion with any such proceeding, each
must submit or file any claim which would constitute a compulsory counterclaim
(as defined by rule 13 of the Federal Rules of Civil Procedure) within the
same proceeding as the claim to which it relates. Any such claim which is not
submitted or filed as described above will be forever barred. Franchisor and
Franchisee agree that any proceeding will be conducted on an individual, not a
class-wide, basis, and that a proceeding between Franchisor -and Franchisee or
the Bound Parties -may not be consolidated with any other proceeding between
Franchisor and any other person or entity. No party will be entitled to an
award of punitive or exemplary damages (provided that this limitation shall
not apply to statutory penalties such as those set forth in 15 U.S.C.
1117(a)). No previous course of dealing shall be admissible to explain,
modify, or contradict the terms of this Agreement. No implied covenant of
good faith and fair dealing shall be used to alter the express terms of this
Agreement.
22. SECURITY INTEREST 22. SECURITY INTEREST
22.1. COLLATERAL. 22.1. COLLATERAL. Franchisee hereby grants
---------- ----------
Franchisor a security interest ("SECURITY INTEREST") in all of the furniture,
fixtures, equipment, signage, and realty (including Franchisee's interests
under all real property and personal property leases) and together with all
similar property now owned or hereafter acquired, additions, substitutions,
replacements, proceeds and products thereof, wherever located and used in
connection with the Restaurant. All items in which a security interest is
granted hereby are referred to as the "COLLATERAL."
22.2. INDEBTEDNESS SECURED. The
--------------------
Security Interest is to secure payment of the following (the "INDEBTEDNESS"):
(A) All amounts due under this Agreement including without limitation
Royalty Fees and Marketing and Promotion Fees, together with interest, fees
and other charges provided for herein;
(B) All sums which Franchisor may, at its option, expend or advance
for the maintenance, preservation and protection of the Collateral, including
without limitation, payment of rent, taxes, levies, assessments, insurance
premiums and discharge of liens, together with interest thereon, or in any
other property given as security for payment of the Indebted-ness;
(C) All expenses, including reasonable attor-neys' fees, which
Franchisor incurs in connection with collection of any or all Indebtedness
secured hereby or in enforcement or protection of its rights hereunder; and
(D) All other present or future, direct or indirect, absolute or
contingent, liabilities, obligations and indebted-ness of Franchisee to
Franchisor or third-parties under this Agreement, however created, and
specifically including all or part of any renewal or extension of this
Agreement whether or not Franchisee executes any extension agreement or
renewal instruments.
22.3. ADDITIONAL DOCUMENTS.
---------------------
Franchisee will from time to time as re-quired by Franchisor join with
Franchisor in executing any additional documents and one or more financing
statements pursuant to the Uniform Commercial Code (and any assignments,
exten-sions or modifica-tions thereof) in form satisfactory to Franchisor.
22.4. POSSESSION OF COLLATERAL.
------------------------
Upon default and termination of Franchisee's rights hereunder, Franchisor
shall have the immediate right to possession and use of the Collateral.
22.5. REMEDIES OF FRANCHISOR IN EVENT OF DEFAULT.
------------------------------------------
Franchisee agrees that upon the occurrence
of any default set forth above, the full amount remaining unpaid on the
Indebtedness secured hereby shall, at the option of Franchisor and without
notice, be and become due and payable forthwith, and Franchisor shall then
have the rights, options, duties and remedies of a secured party under, and
Franchisee shall have the rights and duties of a debtor under, the Uniform
Commercial Code of Colorado, including without limitation Franchisor's right
to take possession of the Collateral and of anything found therein, and the
right without legal process to enter any premises where the Collateral may be
found. Any sale of the Collateral may be conducted in the Franchisor's sole
discretion, and the conduct of such sale is agreed to be commercially
reasonable. Reasonable notification of the time and place of any sale shall
be satisfied by mailing to Franchisee pursuant to the notice provisions set
forth below.
22.6. SPECIAL FILING AS FINANCING STATEMENT.
--------------------------------------
This Agreement shall be a deemed a Security
Agreement and a Financing Statement. This Agreement may be filed for record
in the real estate records of each county in which the Collateral, or any part
thereof, is situated, and may also be filed as a Financing Statement in the
counties or in the office of the Secretary of State, as appropriate, in
respect of those items of Collateral of a kind or character defined in or
subject to the applicable provisions of the Uniform Commercial Code, as in
effect in the appropriate jurisdiction.
23. MISCELLANEOUS PROVISIONS
23.1. MODIFICATION. No amendment, waiver or
------------
modifi-cation of this Agreement shall be effective unless it is in writing and
signed by the Franchisor and Franchisee. Franchisee acknowledges that
Franchisor may modify its standards and specifications and operating and
marketing techniques set forth in the Operations Manual unilaterally under any
conditions and to the extent in which Franchisor, in its sole discretion,
deems necessary to protect, promote, or improve the Marks and the quality of
the Licensed Methods, but under no circumstances will such modifications be
made arbitrarily without such determina-tion.
23.2. ENTIRE AGREEMENT. This Agreement contains
----------------
the entire agreement between the parties and supersedes any and all prior
agreements concern-ing the subject matter hereof. Franchisee agrees and
understands that Franchisor shall not be liable or obligated for any oral
representations or commitments made prior to the execution hereof or for
claims of negligent or fraudulent misrepresentation and that no modifica-tions
of this Agreement shall be effective except those in writing and signed by
both parties. Franchisor does not authorize and will not be bound by any
representation of any nature other than those expressed in this Agreement.
Franchisee further acknowledges and agrees that no representations have been
made to it by Franchisor regarding projected sales volumes, market potential,
revenues, profits of Franchisee's Restaurant, or operational assistance other
than as stated in this Agreement or in any disclosure document provided by
Franchisor or its representatives.
23.3. DELEGATION BY FRANCHISOR. From
------------------------
time to time, Franchisor shall have the right to delegate the performance of
any portion or all of its obligations and duties hereunder to third parties,
whether the same are agents of Franchisor or Area Directors or indepen-dent
contractors which Franchisor has contracted with to provide such services.
Franchisee agrees in advance to any such delegation by Franchisor of any
portion or all of its obliga-tions hereunder. Franchisee acknowledges and
agrees that Franchisor may not be bound and this Agreement may not be modified
by any Area Director without Franchisor's prior written consent. Franchisee
acknowledges and agrees that any such delegation of Franchisor's duties and
obligations to Area Directors does not assign or confer any rights under this
Agreement upon Area Directors and that Area Directors are not third party
beneficiaries of this Agreement.
23.4. AGREEMENT EFFECTIVE. This Agreement
-------------------
shall not be effective until accepted by Franchisor as evidenced by dating and
signing by an officer of Franchisor.
23.5. REVIEW OF AGREEMENT. Franchisee
---------------------
acknowledges it had a copy of Franchisor's Uniform Franchise Offering Circular
in its possession for not less than 10 full business days, and this Agreement
in its possession for not less than 5 full business days, during which time
Franchisee has had the opportunity to submit same for professional review and
advice of Franchisee's choosing prior to freely executing this Agreement.
23.6. ATTORNEYS' FEES. In the event of any
----------------
default on the part of either party to this Agreement, in addition to all
other remedies, the party in default will pay the prevailing party all amounts
due and all damages, costs and expenses, including reason-able attorneys'
fees, incurred by the aggrieved party in any legal action or other proceeding
as a result of such default, plus interest at the lesser of 2% per month or
the highest rate allowable by law, accruing from the date of such default.
Additionally, if Franchisee withholds any amounts due Franchisor, Franchisee
shall reimburse Franchisor's costs of collecting such amounts including
reasonable attorney fees and expenses.
23.7. INJUNCTIVE RELIEF. Nothing herein shall
------------------
prevent Franchisor or Franchisee from seeking injunctive relief to prevent
irreparable harm, in addition to all other remedies.
23.8. NO WAIVER. No waiver of any condition or
----------
covenant contained in this Agreement or failure to exercise a right or remedy
by Franchisor or Franchisee shall be considered to imply or constitute a
further waiver by Franchisor or Franchisee of the same or any other condition,
covenant, right, or remedy.
23.9. NO RIGHT TO SET OFF. Franchisee shall
-------------------
not be allowed to set off amounts owed to Franchisor for Royalties, fees or
other amounts due hereunder, against any monies owed to Franchi-see, which
right of set off is hereby expressly waived by Franchisee.
23.10. INVALIDITY. If any provision of this Agreement
----------
is held invalid by any tribunal in a final decision from which no appeal is or
can be taken, such provision shall be deemed modified to eliminate the invalid
element and, as so modified, such provision shall be deemed a part of this
Agreement as though originally included. The remaining provisions of this
Agreement shall not be affected by such modification.
23.11. NOTICES. All notices required to be given under
-------
this Agreement shall be given in writing, by certified mail, return receipt
requested, or by an overnight delivery service providing documentation of
receipt, at the address set forth in the first paragraph of this Agreement or
at such other addresses as Franchisor or Franchisee may designate from time to
time, and shall be effectively given when deposited in the United States
mails, postage prepaid, or when received via overnight delivery, as may be
applicable.
23.12. ACKNOWLEDGMENT. BEFORE SIGNING THIS
--------------
AGREEMENT, FRANCHISEE SHOULD READ IT CAREFULLY WITH THE ASSISTANCE OF LEGAL
COUNSEL. FRANCHISEE ACKNOWLEDGES THAT:
(A) THE SUCCESS OF THE BUSINESS VENTURE CONTEMPLATED HEREIN INVOLVES
SUBSTANTIAL RISKS AND DEPENDS UPON FRANCHISEE'S ABILITY AS AN INDEPENDENT
BUSINESS PERSON AND ITS ACTIVE PARTICI-PATION IN THE DAILY AFFAIRS OF THE
BUSINESS, AND
(B) NO ASSURANCE OR WARRANTY, EXPRESS OR IMPLIED, HAS BEEN GIVEN AS
TO THE POTENTIAL SUCCESS OF SUCH BUSINESS VENTURE OR THE EARNINGS LIKELY TO BE
ACHIEVED, AND
(C) NO STATEMENT, REPRESENTATION OR OTHER ACT, EVENT OR
COMMUNICATION, EXCEPT AS SET FORTH IN THIS DOCUMENT, AND IN ANY OFFERING
CIRCULAR SUPPLIED TO FRANCHISEE IS BINDING ON FRANCHISOR IN CONNECTION WITH
THE SUBJECT MATTER OF THIS AGREEMENT.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above set forth.
THE QUIZNO'S CORPORATION
By:
Its:
Date:
FRANCHISEE:
Individually
Date:
OR:
(if a corporation, limited liability company, or partnership)
Company Name
By:
Its:
Date:
EXHIBIT B-1 TO
FRANCHISE AGREEMENT
ADDENDUM TO QUIZNO'S
FRANCHISE AGREEMENT
1. FRANCHISED LOCATION. The Franchised Location set forth in Section
-------------------
3.1 of the Agreement shall be:
OR if the Franchised Location is not determined as of this date, then the
DESIGNATED AREA, referred to in Section 3.1 of the Agreement, shall be:
If the Franchised Location is not determined as of this date, the
Franchised Location shall be deemed approved upon approval by Franchisor of
the site and Sublease pursuant to Section 6 of the Agreement.
By execution hereof, Franchisor approves the above-stated Franchised
Location, or the Designated Area for the Franchised Location, and Franchisee
acknowledges and warrants that (1) Franchisor's approval does not constitute a
guarantee, recommenda-tion or endorsement of the Franchised Location or
Designated Area and that the success of the Restaurant to be operated at a
Franchised Location is dependent upon Franchisee's abilities as an independent
businessperson; and, if a Franchised Location is designated, (2) that
Franchisor has complied with its obligations under the Agreement to assist
Franchisee by provision of criteria for the Franchised Location and
determination of fulfillment of the requisite criteria for the Franchised
Location, such determination based on information provided by Franchisee.
2. INITIAL FRANCHISE FEE. Franchisee shall pay to Franchisor an
---------------------
Initial Franchise Fee, referenced in Section 4.1 of the Agreement, of: $.
3. LEASE ASSISTANCE PROGRAM. (Referenced in Section 6.3 of the
-------------------------
Agreement). Check One:
Not Participating
Participating (Lease Review Fee: $2,200; Franchisee required to
execute Sublease)
4. TRAINING. The following individuals shall attend Franchisor's
--------
initial training program, as described in Section 7.1 of the Agreement:, and,
of these individuals, the DESIGNATED MANAGER shall be:.
5. ACKNOWLEDGMENT. Franchisee acknowledges receiving an execution
--------------
copy of the Franchise Agreement, including this Addendum, all other addenda
and all other documents related to the purchase of the franchise, at least
five business days prior to signing the Franchise Agreement or paying any
funds to Franchisor.
THE QUIZNO'S CORPORATION
By:
Its:
FRANCHISEE
By:
Its:
EXHIBIT B-2 TO
FRANCHISE AGREEMENT
ADDENDUM TO
FRANCHISE AGREEMENT --
QUIZNO'S CLASSIC SUBS
EXPRESS FACILITY
THIS ADDENDUM to the Franchise Agreement dated of even date herewith
("AGREEMENT") is made on ________________________, between The Quizno's
Corporation ("FRANCHISOR") and the undersigned "FRANCHISEE." The following
amends and shall be incorporated into the Agreement. In the event of any
conflict between the terms of the Agreement and the terms of this Addendum,
the terms of this Addendum shall control. All capitalized terms not defined
in this Addendum have the respective meanings set forth in the Agreement.
Franchisor and Franchisee agree as follows:
1. EXPRESS RESTAURANT. All references in the Agreement to the
-------------------
"RESTAURANT," as defined in Section 1.1 of the Agreement, are deleted and the
reference "EXPRESS RESTAURANT" is inserted in place thereof. Except as may be
otherwise noted herein or in the Agreement, all applicable terms, conditions
and requirements set forth in the Agreement applicable to the Restaurants
apply to the Express Restaurants. Franchisor's approval of the development
and operation of an Express Restaurant, as required pursuant to Section 3.3 of
the Agreement, is hereby granted. The terms of the Agreement and of this
Addendum apply only to the Express Restaurant operations and products offered
or sold from or through the Express Restaurant and not to the other business
of Franchisee located in the Host Facility (defined below) except as
specifically set forth herein.
2. FRANCHISED LOCATION. The Franchised Location shall be within or
-------------------
adjacent to the following facility (also referred to as the "HOST FACILITY"):
If the placement and operation of the Express Restaurant in or in connection
with the Host Facility requires the consent of the owner, franchisor or
licensor of the Host Facility, Franchisee hereby represents and warrants that
such consent has been obtained in writing, and such representation is a
condition precedent to the grant of Franchisee's right to establish and
operate the Express Restaurant.
3. ROYALTY. Section 5.1 is deleted and replaced with the following:
-------
Franchisee agrees to pay to Franchisor a weekly royalty ("ROYALTY") equal to
8% of the total amount of its Gross Sales, defined hereinafter, generated from
or through the Express Restaurant.
4. BEVERAGES. Check either (a), (b), (c), or (d):
---------
_____ (a) All fountain drink sales that occur within the Express
Restaurant or in a QUIZNO'S logoed cup will be included in the Gross Sales.
Franchisee may either have a separate fountain for the Express Restaurant or
the Express Restaurant may share a common self-service fountain with the rest
of the Host Facility.
_____ (b) 25% of all fountain drink sales made at the Host Facility will
be included in the Gross Sales.
_____ (c) 25% of all QUIZNO'S units sold will be considered to have been
made with the sale of the averaged size beverage for Host Facility. The price
of the beverage will be the average price of all beverages sold at the Host
Facility for that month. (For example: if 100 units are sold and the average
beverage price is $1.00, then 25 units will be considered to have been sold
with a soda and $25.00 will be included in Gross Sales as sales from fountain
drinks and subject to royalty and advertising charges.)
_____ (d) Gross Sales shall be increased by 13% of recorded Gross Sales
for the purposes of the Agreement.
5. APPROVAL OF FRANCHISED LOCATION. Franchisor hereby approves the
-------------------------------
above-stated location as the Franchised Location. Franchisee acknowledges and
warrants that (1) Franchisor's approval does not constitute a guarantee,
recommenda-tion or endorsement of the Franchised Location and that the success
of the Express Restaurant is dependent upon Franchisee's abilities as an
independent businessperson; and (2) Franchisor has complied with its
obligations under the Agreement to assist Franchisee with respect to criteria
for the Franchised Location and determination of fulfillment of the requisite
criteria for the Franchised Location, such determination based on information
provided by Franchisee.
6. SIGNS. Section 6.5 of the Agreement is supplemented by adding the
-----
following:
Franchisee agrees to use best efforts to maximize the use of Franchisor's
Marks on pre-existing and new signs as may be placed at the Franchised
Location and on the premises of the Host Facility. All signs and the
placement configuration thereof shall be approved by both Franchisee and
Franchisor, which approval shall not be unreasonably withheld and shall be
based on parameters which shall best maximize sign usage to the extent
allowable under any landlord restrictions and any applicable local laws,
zoning ordinances and other similar requirements. Franchisor hereby approves
all uses by Franchisee of the marks, symbols, names and identifying marks of
at the Franchised Location.
7. EQUIPMENT. Section 6.6 is deleted and replaced by the following:
---------
Franchisee shall purchase, lease or otherwise obtain for use in connection
with the Express Restaurant such equipment of a type and in an amount which
complies with the standards and specifications of Franchisor. Franchisee
acknowledges that the type, quality, configuration, capability, and/or
performance of the Restaurant equipment are all standard and specifications
which are a part of the Licensed Methods and therefore such equipment must be
purchased, leased, or otherwise obtained in accordance with Franchisor's
standards and specifications and only from suppliers or other sources approved
by Franchisor. Franchisee shall configure its computer cash register system
in use in the Host Facility ("SYSTEM") to accurately record every sale or
other transaction. Franchisee shall submit any required reports hereunder in
a format designated from time to time by Franchisor. Franchisee hereby grants
Franchisor reasonable access to its records only on the System and authorizes
Franchisor to obtain its sales, sales mix and revenue information therefrom.
Franchisee acknowledges that Franchisor will use information from required
reports primarily to make business and marketing decisions.
8. EXPRESS RESTAURANT OPERATIONS. Section 11.1(d) of the Agreement
-----------------------------
is supplemented by adding the following:
Franchisor and Franchisee acknowledge and agree that the products and services
offered for sale from the Express Restaurant, and the standards and
specifications of Franchisor related thereto, may differ from that of a
traditional QUIZNO'S Restaurant and will be subject to alternative standards
and specifications as may be developed and made available by Franchisor.
9. GRAND OPENING. Section 12.2 is amended to require Franchisee to
-------------
spend a minimum of $3,000 for the grand opening program. All other terms of
Section 12.2 remain the same.
10. LOCAL ADVERTISING. Section 12.4 of the Agreement is deleted.
-----------------
11. REGIONAL ADVERTISING PROGRAMS. The following is added at the end
-----------------------------
of Section 12.5:
Notwithstanding the provisions of Section 12.5, Franchisee will not be
required to contribute any funds to a Regional Advertising program or to
participate in either a Regional Advertising program or a Regional Advertising
cooperative.
12. RESTRICTIONS ON SERVICES AND PRODUCTS. The following is added at
-------------------------------------
the end of Section 13.3:
Franchisee agrees that, during the term of the Agreement, it will not offer
or sell any Sub-Sandwiches or any type of Branded Sandwich from or through the
Host Facility other than from or through the Express Restaurant.
"SUB-SANDWICH" is defined as a submarine, hoagie, hero-type or deli-style
sandwich. "BRANDED SANDWICH" is defined as any sandwich marketed by a fast
food franchisor or chain, whose primary menu items consist of sandwiches,
under a locally, regionally, or nationally known or registered trade name,
trademark, or service mark. Except for Sub-Sandwich or Branded Sandwich
products, Franchisee may sell other food products from or through the portion
of the Host Facility that does not comprise the Express Restaurant.
13. MARKS. Section 14.1. of the Agreement is supplemented by adding
-----
the following:
Franchisor and Franchisee acknowledge and agree that the primary Mark to be
used to identify market and promote the Express Restaurant will be "QUIZNO'S
EXPRESS CLASSIC SUBS." All other references to the Marks as set forth in the
Agreement are inclusive of this primary Mark.
14. FINANCIAL REPORTS. The second sentence of Section 15.1 is
------------------
deleted. The following new Section 15.1(e) is added:
The point-of-sale system used at the Host Facility shall differentiate sales
of the Express Restaurant from sales of the rest of the Host Facility by the
use of "price look up" ("PLU") or other keys that track and tally sales of the
Express Restaurant separately and shall report Express Restaurant Gross Sales
by item type.
15. FINANCIAL RECORDS USE AND ACCESS. The second sentence of Section
--------------------------------
15.2 is deleted.
16. TERM. Section 17.1 is deleted and replaced with the following:
----
The primary term of this Agreement is for a period of 5 years from the
Effective Date, unless sooner terminated as provided herein.
17. RENEWAL. Section 17.2 is amended to provide that the term of
-------
Franchisee's option to renew is 5 years. All other terms of Section 17.2
remain the same.
18. DEFAULT AND TERMINATION. The following new Section 18.2(n) is
-----------------------
added:
(M) LOSS OF RIGHT TO OPERATE HOST FACILITY. If Franchisee loses the right
--------------------------------------
for whatever reason to operate the Host Facility.
19. RIGHT TO REPURCHASE. The first sentence of 18.6 is deleted and
-------------------
replaced with the following:
Upon termination or expiration of this Agreement for any reason, the
Franchisor shall have the option to purchase the assets used in the operation
of the QUIZNO'S Express Restaurant, or a portion thereof, which option shall
not include the right to purchase any fixtures or real property interest,
however.
Section 18.5(b) is deleted.
20. NON-COMPETITION DURING TERM. Section 20.1 is amended to provide
---------------------------
that the term "COMPETITIVE BUSINESS" shall mean any business operating, or
granting franchises or licenses to others to operate, a restaurant or other
food service business deriving more than 10% of its gross receipts, excluding
gross receipts relating to the sale of alcoholic beverages, from the sale of
Sub-Sandwiches (as defined above). The offer or sale of food products other
than Sub-Sandwiches or Branded Sandwiches through or from the portion of the
Host Facility that does not comprise the Express Restaurant shall not be
considered a Competitive Business.
21. "BRANDED BUSINESS". Section 20.2 is deleted.
-------------------
22. POST TERMINATION COVENANT NOT TO COMPETE. Section 20.3 is
------------------------------------------
deleted and replaced with the following:
For a period of two years from termination or expiration of this Agreement for
any reason, or the date on which Franchisee ceases to conduct business of the
Express Restaurant, whichever is later, neither Franchisee or its officers,
directors, shareholders, nor partners (through a spouse or otherwise) shall
have any direct or indirect interest as a disclosed or beneficial owner,
investor, partner, director, officer, employee, consultant, representative or
agent or in any other capacity in any Branded Sandwich franchise or chain
located at the Host Facility or located within a five-mile radius of the Host
Facility or within a five-mile radius of any other QUIZNO'S franchised or
company-owned restaurant. The restrictions of this Section 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 that represent 5% or
less of the number of shares of that class of securities issued and
outstanding. Franchisee and its officers, directors, shareholders, and
partners expressly acknowledge that they possess skills and abilities of a
general nature and have other opportunities for exploiting such skills.
Consequently, enforcement of the covenants made in this Section will not
deprive them of their personal goodwill or ability to earn a living.
23. ADDITIONAL REMEDIES FOR BREACH. Section 20.4's reference to
------------------------------
Section 20.2 is deleted.
24. CONFIDENTIALITY OF PROPRIETARY INFORMATION. The following is
------------------------------------------
added to the end of Section 20.5:
Franchisee shall not use Franchisor's Licensed Methods, including without
limitation Franchisor's recipes, materials, forms, menus, items, supplies,
business forms or business policies, as stated in the Operations Manual or
otherwise, except for the benefit of Franchisor and in operation of the
Franchisee's Express Restaurant.
25. SECURITY INTEREST. Section 22 is deleted.
------------------
THE QUIZNO'S CORPORATION FRANCHISEE
By: By:
Its: Its:
EXHIBIT B-3 TO
FRANCHISE AGREEMENT
ADDENDUM TO FRANCHISE AGREEMENT
SPECIAL PRODUCTS PROGRAM FOR
_______________________________
("SPECIAL PRODUCT")
THIS ADDENDUM to the Franchise Agreement ("AGREEMENT") dated, 19, is made
effective as of, 19 by and between The Quizno's Corporation ("FRANCHISOR") and
("FRANCHISEE"), to amend and supplement the terms and conditions contained in
the Agreement to allow Franchisee to offer and sell the Special Product listed
above at its QUIZNO'S restaurant ("RESTAURANT"), which is operated pursuant to
the Agreement (the "SPECIAL PRODUCT PROGRAM"). Capitalized terms not defined
herein shall be as defined in the Agreement.
The parties therefore agree as follows:
1. LICENSED METHODS. The "Licensed Methods" shall be deemed to
-----------------
include the Special Product and all products and services offered pursuant to
the Special Product Program. The "Marks" shall be deemed to include all
trademark and service mark designating the Special Program Products ("SPECIAL
PRODUCT TRADEMARKS"). Except as otherwise noted herein, the terms of the
Agreement, including any and all exhibits and addendums to the Agreement,
shall apply to the Special Product Program.
2. MARKS. Franchisee acknowledges that Article 14 of the Agreement
-----
also governs the Special Product Trademarks, which during the term of this
Addendum shall be considered "Marks" under the Agreement. Franchisee also
acknowledges and agrees that no Marks other than Special Product Trademark or
such other trademarks as may be specified by Franchisor shall be used in the
marketing, promotions, identification of the Special Products and the
operation of the Special Product Program, except with Franchisor's prior
written consent.
3. TRAINING FEE. Franchisee agrees to pay to Franchisor,
-------------
concurrently with the execution of this Addendum, a training fee of $600 to
compensate Franchisor for its costs and expenses in providing initial training
to Franchisee in connection with Franchisee's participation in the Special
Product Program. Franchisee acknowledges and agrees the training fee
represents payment for the initial grant of the rights to use the Special
Product Trademarks and Licensed Methods relating to the Special Product
Program, Franchisor has earned the training fee upon receipt and the training
fee is not refundable to Franchisee after it is paid.
4. TERM. Unless terminated early pursuant to Section 5, this
----
Addendum shall be effective on the date listed above and shall remain in
effect until termination (for any reason) or expiration of the Agreement.
Upon the termination or the expiration of the term of this Addendum, or any
extension hereof, Franchisee must cease offering the Special Product Products
at or through the Franchised Location in accordance with the post-termination
obligations of Franchisee under the Agreement.
5. EARLY TERMINATION. This Addendum may be terminated by Franchisor,
-----------------
with or without a termination of the Agreement: (a) if Franchisee breaches
any provision of this Addendum, provided, however, state laws may apply which
will supersede this provision; or (b) if Franchisee is in default of the
Agreement and fails to cure such default pursuant to the terms of the
Agreement; or (c) if Franchisor determines it to be in the best interests of
Franchisor and its franchise system to discontinue the sale of the Special
Products through the Restaurant, in which case termination shall be effective
90 days after notice from Franchisor. Franchisee may only terminate this
Addendum if Franchisor has committed a material breach of any of Franchisor's
obligations under this Addendum and has failed to cure such breach pursuant to
the terms of the Agreement.
6. CONDITIONAL BASIS OF PROGRAM. Franchisee acknowledges and
-------------------------------
understands (a) that the Special Product Program may be an initial development
program to determine whether the Special Products can and will be licensed for
use and sale by other QUIZNO'S Restaurants and that Franchisor may still be in
the development stage of creating and implementing manuals, programs, and
related policies and procedures, if any, with regard to the sale of the
Special Products at QUIZNO'S Restaurants; and (b) if the Special Product
Program is in the nature of a test program, it is being established and
implemented to, among other things, research and evaluate the feasibility of
offering the Special Products in other Restaurants, so that Franchisee shall
freely share with Franchisor operational results, information, technology and
ideas regarding the sale of the Special Products during the term of this
Addendum.
7. INITIAL TRAINING PROGRAM. Franchisee, or if Franchisee is not an
------------------------
individual, the Designated Manager, shall attend and successfully complete the
Special Product Program initial training offered by Franchisor at one of
Franchisor's designated training facilities. Franchisee shall be responsible
for all travel and living expenses incurred in connection with attendance at
the initial training program as well as wages or salaries, if any, of the
persons receiving the training. One individual must successfully complete the
Special Product Program initial training program prior to Franchisee's
commencement of operation of the Special Product Program at its QUIZNO'S
Restaurant, but Franchisee may designate up to 2 people to attend such
training.
8. AUTHORIZED SPECIAL PRODUCTS. For the term of this Addendum,
----------------------------
Franchisee shall use best efforts to offer, promote, market and sell Special
Product as specified by the Special Product Program. The Special Products
shall be offered for retail sale at the Restaurant in accordance with the
written standards and specifications of Franchisor, many of which will be
contained in the Operations Manual or in technical bulletins or other written
materials specific to the Special Product Program, all of which may be changed
or supplemented by Franchisor in accordance with the terms of the Agreement.
By execution of this Addendum, Franchisor approves the Special Products as
products and services authorized to be sold at and through the Restaurant, in
accordance with the Agreement.
9. IMPLEMENTATION OF THE SPECIAL PRODUCT PROGRAM. Franchisee shall
---------------------------------------------
commence implementation of the Special Product Program and begin offering and
selling Special Products on the same day that Franchisee commences operation
of its Restaurant, or the date of this Addendum, whichever is later.
10. ROYALTY. Any revenues derived by Franchisee from the sale of the
-------
Special Product Products shall be included in the Gross Sales of the
Restaurant for purposes of determining the Royalty, Local Advertising Fee,
and the Marketing and Promotion Fee, which are paid to Franchisor by
Franchisee pursuant to the Agreement. The Gross Sales of the Restaurant
attributable to the Special Product Program shall be accounted for and
reported to Franchisor separate and apart from Gross Sales attributable to the
remainder of the products and services offered by and through the Restaurant.
11. MARKETING AND ADVERTISING FOR SPECIAL PRODUCT PRODUCTS.
-----------------------------------------------------------
(a) Franchisee shall only use designated marketing materials as
provided to Franchisee by Franchisor and will not produce any of its own
marketing materials unless given written approval to do so by Franchisor with
respect to marketing the Special Products or the Special Product Program.
(b) At no time will Franchisee display or use in any manner any of
the Special Product Trademarks which have been designated for use in selling
Special Products in the offer or sale of any other products or services,
including sandwiches, offered at or through the QUIZNO'S Restaurant, without
written permission of Franchisor.
(c) Franchisee shall implement and maintain during the term of this
Addendum any promotional campaign for the sale of the Special Product Products
and/or the Special Product Program in an amount and manner as set forth in the
Operations Manual or otherwise by written notice.
12. COMPETITIVE BUSINESS. Franchisee acknowledges that the Special
--------------------
Product Program is a "Competitive Business" for purposes for the restrictive
covenants set forth in the Agreement.
13. REPORTS, BOOKS AND RECORDS. Franchisee agrees to prepare and
--------------------------
submit certain weekly reports regarding the sale of the Special Products in a
form which will be designated by Franchisor. Franchisee agrees to provide
Franchisor with full access to the results of its operations in connection
with the sale of the Special Products and shall allow Franchisor's designated
representa-tives to inspect its Franchised Location and operations to observe
and assess the sale of the Special Products at any time during regular
business hours. Franchisor or its representative shall be permitted to copy
and retain copies of all relevant invoices, records, customer lists and other
documents related to the sale of the Special Products. Franchisee shall
maintain and submit to Franchisor separate accounting records with regard to
the income, expenses and costs which are incurred in connection with the sale
of the Special Products.
14. COMPLIANCE WITH LAWS. Franchisee shall comply with any
----------------------
applicable federal, state and local laws, rules and regulations and shall
obtain any and all permits, certificates and licenses which may be required in
order to offer and sell the Special Products at and through the Franchised
Location.
15. LANDLORD APPROVAL. If Franchisee leases the premises of its
-----------------
Franchised Location, Franchisee represents and warrants that operation of the
Special Product Program at the Franchised Location does not violate the terms
and conditions of Franchisee's lease.
16. OWNERSHIP OF PROGRAM. Franchisor and Franchisee agree that
---------------------
Franchisor shall have the right to offer participation in the Special Product
Program to other Restaurants throughout the QUIZNO'S Restaurant system without
compensation to Franchisee. Franchisee shall have no right, title or interest
in or to any proprietary methods, service marks, trademarks, confidential
systems or information arising out of or developed through the implementation
of the Special Product Program, and Franchisee's implementation and use of the
same shall inure to the benefit of Franchisor.
17. TRADEMARKS; COMPANY AUTHORIZATION. In the event and to the
----------------------------------
extent that any of the Special Products Trademarks are owned and licensed by a
company other than Franchisor, Franchisee shall comply with all specifications
and standards required by such third-party and that are disclosed to
Franchisee by Franchisor. The terms of all agreements between Franchisor and
the owners or licensors of Special Products Trademarks shall be deemed to be
incorporated herein by this reference.
18. POST-TERMINATION COVENANT NOT TO COMPETE. In addition to the
----------------------------------------
post-termination covenants not to compete provided in the Agreement, for a
period of two years from termination or expiration of the Agreement for any
reason, or the date on which Franchisee ceases to conduct business, whichever
is later, neither Franchisee nor any Bound Party shall have any direct or
indirect interest as a disclosed or beneficial owner, investor, partner,
director, officer, employee, consultant, representative or agent or in any
other capacity in any business operating, or granting franchises or licenses
to others to operate, a restaurant or other food service business deriving
more than 10% of its gross receipts from the sale of products substantially
similar to the Special Product designated herein and related food products and
services (which shall be considered a Competitive Business both for purposes
of the post-termination covenant not to compete and Section 20.1 of the
Agreement) located or operating within a five-mile radius of the former
Franchised Location or within a five-mile radius of any other QUIZNO'S
franchised or company-owned restaurant. The restrictions of this Section
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 that
represent 5% or less of the number of shares of that class of securities
issued and outstanding. Franchisee and the Bound Parties expressly
acknowledge that they possess skills and abilities of a general nature and
have other opportunities for exploiting such skills. Consequently,
enforcement of the covenants made in this Section will not deprive them of
their personal goodwill or ability to earn a living.
19. INCONSISTENT TERMS. To the extent that the terms of this
-------------------
Addendum are inconsistent with the Agreement, the terms of this Addendum shall
prevail in connection with the implementation of the Special Product Program
and the sale of the Special Products and shall supersede any inconsistent
terms in the Agreement. Except as modified herein, the other terms and
conditions of the Agreement shall govern and remain in full force and effect
between Franchisor and Franchisee.
IN WITNESS WHEREOF, the parties have executed this Addendum to Franchise
Agreement to be effective as of the date first set forth above.
THE QUIZNO'S CORPORATION
By:
Its:
FRANCHISEE:
By:
Its:
EXHIBIT B-4
TO FRANCHISE AGREEMENT
AUTHORIZATION AGREEMENT FOR PREARRANGED PAYMENTS
(DIRECT DEBITS)
The undersigned depositor ("DEPOSITOR") hereby (1) authorizes The Quizno's
Corporation ("COMPANY") to initiate debit entries and/or credit correction
entries to the undersigned's checking and/or savings account indicated below
and (2) authorizes the depository designated below ("DEPOSITORY") to debit
such account pursuant to Company's instructions.
Depository Branch
City State Zip Code
Bank Transit/ABA Number Account Number
This authority is to remain in full force and effect until Depository has
received joint written notification from Company and Depositor of the
Depositor's termination of such authority in such time and in such manner as
to afford Depository a reasonable opportunity to act on it. Notwithstanding
the foregoing, Depository shall provide Company and Depositor with 30 days'
prior written notice of the termination of this authority. If an erroneous
debit entry is initiated to Depositor's account, Depositor shall have the
right to have the amount of such entry credited to such account by Depository,
if (a) within 15 calendar days following the date on which Depository sent to
Depositor a statement of account or a written notice pertaining to such entry
or (b) 45 days after posting, whichever occurs first, Depositor shall have
sent to Depository a written notice identifying such entry, stating that such
entry was in error and requesting Depository to credit the amount thereof to
such account. These rights are in addition to any rights Depositor may have
under federal and state banking laws.
DEPOSITOR (Print Name) DEPOSITORY (Print Name)
By: By:
Its: Its:
Date: Date:
EXHIBIT B-5
TO FRANCHISE AGREEMENT
STATEMENT OF OWNERSHIP
FRANCHISEE:
TRADE NAME (if different from above):
Form of Ownership
(Check One)
__________ Individual __________ Partnership __________
Corporation __________ Limited Liability Company
If a Partnership, provide name and address of each partner showing
percentage owned, whether active in management, and indicate the state in
which the partnership was formed.
If a Corporation or Limited Liability Company, give the state and date of
incorporation or organization, the names and addresses of each officer and
director or manager, and list the names and addresses of every shareholder or
member showing what percentage of stock or interest is owned by each.
Provide the address where Franchisee's financial records, and
partnership, corporate or company records, as applicable, are maintained
(Restaurant location will be deemed to be the address unless otherwise stated
below):
Franchise acknowledges that this Statement of Ownership applies to the
Restaurant authorized under the Franchise Agreement.
Use additional sheets if necessary. Any and all changes to the above
information must be reported to Franchisor in writing.
Date Name
EXHIBIT B-6
TO FRANCHISE AGREEMENT
GUARANTY AND ASSUMPTION OF FRANCHISEE'S OBLIGATIONS
--------------------------------------------------------
In consideration of, and as an inducement to, the execution of the above
Franchise Agreement (the "AGREEMENT") by The Quizno's Corporation
("FRANCHISOR"), each of the undersigned hereby personally and unconditionally:
(a) Guarantees to Franchisor and its successors and assigns, for the term
of this Agreement, including renew-als thereof, that Franchisee as that term
is defined in the Agreement ("FRANCHI-SEE") shall punctually pay and perform
each and every undertaking, agreement and covenant set forth in the
Agree-ment; and
(b) Agrees to be personally bound by, and personally liable for the breach
of, each and every provision in the Agree-ment.
Each of the undersigned waives the following:
1. Acceptance and notice of acceptance by Franchisor of the foregoing
undertaking;
2. Notice of demand for payment of any indebtedness or nonperformance of
any obligations hereby guaranteed;
3. Protest and notice of default to any party with respect to the
indebtedness or nonperformance of any obligations hereby guaranteed; and
4. Any right he or she may have to require that any action be brought
against Franchisee or any other person as a condition of liability.
Each of the undersigned consents and agrees that:
5. His or her direct and immediate liability under this guaranty shall be
joint and several;
6. He or she shall render any payment or performance required under the
Agreement upon demand if Franchisee fails or refuses punctually to do so;
7. Such liability shall not be contingent or conditioned upon pursuit by
Franchisor of any remedies against Fran-chisee or any other person; and
8. Such liability shall not be diminished, relieved or otherwise affected
by any extension of time, credit or other indulgence which Franchisor may from
time to time grant to Franchisee or to any other person, including without
limitation the acceptance of any partial payment or performance, or the
compromise or release of any claims, none of which shall in any way modify or
amend this guaranty, which shall be continuing and irrevocable during the term
of the Agreement, including renewals thereof.
IN WITNESS WHEREOF, each of the undersigned has affixed his or her
signature effective on the same day and year as the Agreement was executed.
GUARANTOR(S)
SIGNATURE SIGNATURE
NAME - TYPED OR PRINTED NAME - TYPED OR PRINTED
SIGNATURE
NAME - TYPED OR PRINTED
EXHIBIT B-7 TO
FRANCHISE AGREEMENT
ADDENDUM TO
TO FRANCHISE AGREEMENT --
BOOKKEEPING SERVICES
AND DIRECT DEBIT AUTHORIZATION
THIS ADDENDUM to the Franchise Agreement dated as of even date herewith
- -by and between The Quizno's Corporation ("FRANCHISOR") and
________________________________ ("FRANCHISEE") is made as of the same date to
supplement certain terms and conditions of the Agreement. In the event of any
conflict between the terms of the Agreement and the terms of this Addendum,
the terms of this Addendum shall control. All capitalized terms not otherwise
defined in this Addendum shall have their respective meanings set forth in the
Agreement. Franchisor and Franchisee agree as follows:
1. BOOKKEEPING SERVICES. The following shall be added to supplement
--------------------
Section 15 of the Agreement:
A. SERVICES. Franchisee shall use Franchisor or Franchisor's
--------
designated vendor to provide payroll and bookkeeping services to Franchisee
and Franchisee agrees to comply with all requirements Franchisor prescribes
with regard to said services. Franchisor's bookkeeping service does not
include cash management.
Franchisor or Franchisor's designated vendor will provide the following
accounting services on a period basis for franchised Restaurants:
Period End Financial Statements: . Balance Sheet
. Profit and Loss Statement
Detailed General Ledger: . Unpaid Invoice Register
. Bank Reconciliation
. Check Register
. Printed Period Accounts Payable Checks
. Prepare necessary sales tax reports
. Prepare necessary personal property tax
reports
. Prepare necessary use tax reports
. Payroll Register, Payroll tax reports and
all necessary filings
A department manager will personally review all period end financial
information before issuance. A complete Franchise Bookkeeping Department
Procedures Manual will be provided to Franchisee. This manual will outline in
detail all procedures and checklists followed by Franchise Bookkeeping
Department personnel.
A complete Franchise Restaurant Accounting Procedures Manual will be
provided to Franchisee. This manual will outline in detail all accounting
procedures that are the Restaurants' managers' responsibility.
B. SUBMISSION OF RESTAURANT RELATED ITEMS. In order for the
------------------------------------------
Franchise Bookkeeping Department to provide the most timely and useful
information to individual Restaurants or companies, it is essential that the
accounting department receive information as soon as possible after the period
closes.
The Franchise Bookkeeping Department will provide the above services to
Franchisee within 10 working days upon receiving the last information for the
period.
Each week, in accordance with our procedures, Franchisee agrees to submit
to Franchisor: (a) completed Profit Planners worksheets; (b) Payroll changes
and current hours worked; (c) Bank statements; (d) Manual check stubs with
invoice copies; (e) Invoices to be paid; and (f) Any other documents as may be
required to properly record all transactions affecting the Restaurant's
financial activity.
C. FEES FOR BOOKKEEPING SERVICES. In consideration for the services
-----------------------------
Franchisor provides to Franchisee pursuant to this Addendum, Franchisee shall
pay to Franchisor the sum of $85 per Restaurant per week. Franchisor may, in
its sole discretion, increase the fee after 12 months following the date
Franchisee's Restaurant commences operation, and thereafter annually to an
amount equal to the market rate for similar services as determined by
Franchisor.
D. TERMINATION.
-----------
(a) By Franchisor. If Franchisee fails to (i) submit restaurant
-------------
related items when required pursuant to this Section, or (ii) pay fees due to
Franchisor for these services, Franchisor shall have the right to terminate
the Agreement as provided in Section 18.2 of the Agreement.
(b) By Franchisee. At any time after 12 months following the date
-------------
Franchisee's Restaurant commences operation, Franchisee may terminate the
bookkeeping services service 90 days following completion of the following :
Franchisee retains a full time professional accountant (approved in writing by
Franchisor) to provide bookkeeping services (at Franchisee's expenses) and
that accountant agrees in writing (on a form acceptable to Franchisor) to
provide timely financial statements required by Section 15 of the Agreement.
If Franchisee fails to provide such financial statements more than 2 times in
any 12-month period, in addition to any other remedies, Franchisor may require
Franchisee to use Franchisor's bookkeeping services at the then-current fee.
2. DIRECT DEBITS. If required by Franchisor, Franchisee shall
--------------
complete Exhibit B-4 to authorize Franchisor to initiate debit entries and/or
credit correction entries to Franchisee's checking or savings account for the
payment of Royalties, Marketing and Promotion Fees or any other payment owed
by Franchisee to Franchisor under the terms of the Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Addendum to be
executed on the date first set forth above.
THE QUIZNO'S CORPORATION FRANCHISEE:
By: By:
Its: Its:
EXHIBIT B-8 TO
FRANCHISE AGREEMENT
ADDENDUM TO
TO FRANCHISE AGREEMENT --
DEVELOPMENT RIGHTS ADDENDUM
TO
THE QUIZNO'S CORPORATION
FRANCHISE AGREEMENT
1. BACKGROUND. This Development Rights Rider (the "Rider") is
----------
between The Quizno's Corporation ("we," "us" or "our") and ("you" or "your").
This Rider is attached to, and intended to be part of, the Franchise Agreement
signed simultaneously with this Rider for the operation of a specific Quizno's
Restaurant (the "Franchise Agreement"). We and you are signing this Rider
because you want the right to develop a multiple number of Restaurants within
a certain geographic area over a certain period of time, and we are willing to
grant you these development rights if you comply with this Rider.
2. GRANT OF DEVELOPMENT RIGHTS. Subject to your compliance with this
---------------------------
Rider, we grant you the right to develop Restaurants, according to the
mandatory schedule (the "Schedule") on Exhibit A to this Rider, within the
following geographic area (the "Territory"):
If you are fully complying with all of your obligations under this Rider,
the Franchise Agreement, and all other franchise agreements then in effect
between us and you (or your affiliated entities) for the operation of
Restaurants, then during this Rider's term only, we (and our affiliates) will
not establish, or allow another franchise owner to establish, Restaurants to
be located within the Territory (except franchises we grant you pursuant to
this Rider).
3. DEVELOPMENT OBLIGATIONS. To maintain your rights under this
------------------------
Rider, you must have Restaurants open and operating within the Territory by
the dates set forth on the Schedule. You will operate each Restaurant under a
separate franchise agreement with us. The franchise agreement that you sign
for each additional Restaurant will be our then-current form of franchise
agreement, any or all of the terms of which may be materially different than
the terms of the Franchise Agreement. Despite any contrary provision
contained in any such franchise agreement, you must have your additional
Restaurants open and operating by the dates contained on the Schedule. To
retain your rights under this Rider, each Restaurant opened pursuant to this
Rider must operate continuously throughout this Rider's term.
4. SUBFRANCHISING RIGHTS. This Rider does not give you any right to
---------------------
license others to operate Restaurants. Only you (or affiliated entities you
establish and we approve) any open Restaurants pursuant to this Rider.
5. DEVELOPMENT FEES. As consideration for the rights we grant you in
----------------
this Rider, you must pay us, at the same time you sign this Rider, a total of
________________________ ($________) (the "Development Fee"), which equals one
hundred percent (100%) of the first two (2) initial franchise fees and fifty
percent (50%) of the aggregate initial franchise fees due for all of the
Restaurants that you must develop under the Schedule. Each time you sign a
franchise agreement for a Restaurant to be developed within the Territory, we
will apply the Development Fee in increments equal to fifty percent (50%) of
the initial franchise fee due for that Restaurant to reduce the additional
amount you must pay. We fully earn the Development Fee when you sign this
Rider. The Development Fee is not refundable if you do not satisfy the
Schedule.
6. GRANT OF FRANCHISES. You must submit a separate application for
-------------------
each Restaurant location you wish to develop in the Territory. You agree to
give us all information and materials we request to assess the proposed site.
We will not unreasonably withhold approval of any site you propose if that
site meets our then-current site criteria. We agree to use our best
reasonable efforts to review and approve sites you propose within thirty (30)
days after we receive all requested information and materials. If we approve
the proposed site, you agree, within the time period we specify, to sign a
separate franchise agreement for that site and to pay the initial franchise
fee due. If you do not do so, or are unable to obtain lawful possession of
the proposed site, we may withdraw our approval of the proposed site. After
you sign the franchise agreement, its terms and conditions will control your
development and operation of the Restaurant (except for the required opening
date, as provided in Section 3 above).
7. TERM. This Rider's term begins on the date we and you sign it and
----
ends on the date when (a) the final Restaurant is to open under the Schedule,
or (b) this Rider is otherwise terminated.
8. TERMINATION. We may terminate this Rider and your right to
-----------
develop additional Restaurants at any time, effective upon delivery of written
notice of termination if (a) you fail to satisfy your obligations under the
Schedule, which defaults you have no right to cure; or (b) the Franchise
Agreement, or any other franchise agreement between us and you (or your
affiliated entity) for a Restaurant, is terminated by us or you for any or no
reason.
9. ASSIGNMENT. This Rider and all related rights are not assignable
----------
except in connection with the assignment of the Franchise Agreement and all
other franchise agreements to which you (and your affiliated entities) then
are a party, provided that the Franchise Agreement and all such other
franchise agreements are assigned to the same entity and the conditions for
assignment in all such documents are satisfied.
10. RIDER TO CONTROL. Except as provided in this Rider, the
------------------
Franchise Agreement remains in full force and effect as originally written.
If there is any inconsistency between the Franchise Agreement and this Rider,
the terms of this Rider will control.
Dated this day of, 19.
THE QUIZNO'S CORPORATION FRANCHISEE:
By: By:
Its: Its:
Exhibit 10.24
THIS WARRANT (AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT) ARE
SUBJECT TO AN INVESTMENT AGREEMENT DATED DECEMBER 31, 1996, AS AMENDED AND A
STOCKHOLDERS AGREEMENT DATED AS OF DECEMBER 31, 1996, COPIES OF WHICH ARE ON
FILE AT THE PRINCIPAL OFFICE OF THE CORPORATION AND WILL BE FURNISHED TO THE
HOLDER ON REQUEST TO THE SECRETARY OF THE CORPORATION. SUCH INVESTMENT
AGREEMENT AND STOCKHOLDERS AGREEMENT PROVIDE, AMONG OTHER THINGS, FOR CERTAIN
RESTRICTIONS ON VOTING, SALE, TRANSFER, PLEDGE, HYPOTHECATION OR OTHER
DISPOSITION OF THE SECURITIES EVIDENCED BY THIS WARRANT AND THAT THE HOLDER
HAS RIGHTS TO REQUIRE REPURCHASE BY THE CORPORATION UPON THE OCCURRENCE OF
CERTAIN EVENTS. THE SECURITIES EVIDENCED BY THIS WARRANT HAVE NOT BEEN
REGISTERED PURSUANT TO THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR
ANY STATE SECURITIES LAW, AND SUCH SECURITIES MAY NOT BE SOLD, TRANSFERRED OR
OTHERWISE DISPOSED OF UNLESS THE SAME ARE REGISTERED AND QUALIFIED IN
ACCORDANCE WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR IN THE
OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION, SUCH
REGISTRATION AND QUALIFICATION ARE NOT REQUIRED.
WARRANT TO PURCHASE SHARES
OF COMMON STOCK OF THE QUIZNO'S CORPORATION
-------------------------------------------------
Issued Date: October 31, 1997
THIS CERTIFIES THAT, for value received, Retail & Restaurant Growth
Capital, L.P., a Delaware limited partnership ("Holder"), is entitled, subject
to the provisions and upon the terms and conditions hereinafter set forth, to
subscribe for and purchase up to 42,209 shares (as adjusted pursuant to the
provisions hereof), (the "Number") of the fully paid and nonassessable Common
Stock, par value $.001, of THE QUIZNO'S CORPORATION, a Colorado corporation
(the "Company" or the "Corporation"), for a price per share (the "Warrant
Price") equal to $5.00 (as adjusted, pursuant to the provisions hereof).
As used herein, the term "Shares" shall mean the Company's presently
authorized Common Stock, or any stock into or for which such Common Stock
shall have been or may hereafter be converted or exchanged pursuant to the
Amended and Restated Articles of Incorporation of the Company as from time to
time amended as provided by law and in such Articles (hereinafter the
"Charter"), the term "Note" shall mean that certain Amended and Restated
Senior Subordinated Convertible Note due 2001 issued by the Corporation to
Retail & Restaurant Growth Capital, L.P. as of December 31, 1996, and the term
"Grant Date" shall mean October 31, 1997. Capitalized terms used and not
defined herein shall have the meanings set forth in a certain Investment
Agreement dated as of December 31, 1996 by and between the Company and Retail
& Restaurant Growth Capital, L.P., as amended (the "Investment Agreement").
1. Method of Exercise.
--------------------
1.1 Standard Method. The purchase right represented by this Warrant
---------------
may be exercised by the holder hereof, in whole or in part and from time to
time, by either, at the election of the holder hereof, (a) the surrender of
this Warrant (with the notice of exercise form attached hereto as Exhibit A-1
duly executed) at the principal office of the Company and by the payment to
the Company, by check or by wire transfer, of an amount equal to the then
applicable Warrant Price per share multiplied by the number of Shares then
being purchased or (b) if in connection with a registered public offering of
the Company's securities (provided that such offering includes Shares and that
the holder shall have elected to participate therein pursuant to the exercise
of the registration rights referred to in Section 6 hereof), the surrender of
this Warrant (with the notice of exercise form attached hereto as Exhibit A-2
duly executed) at the principal office of the Company together with notice of
arrangements reasonably satisfactory to the Company and any underwriter, in
the case of an underwritten registered public offering, for payment to the
Company either by certified or bank check or by wire transfer from the
proceeds of the sale of Shares to be sold by the holder in such public
offering of an amount equal to the then applicable Warrant Price per Share
multiplied by the number of Shares then being purchased; however,
notwithstanding the cash payment requirements set forth in this Section 1.1,
the Holder shall be entitled to use the net issue exercise option as
hereinafter provided in Section 1.2. The person or persons in whose name(s)
any certificate(s) representing Shares shall be issuable upon exercise of this
Warrant shall be deemed to have become the holder(s) of record of, and shall
be treated for all purposes as the record holder(s) of, the Shares represented
thereby (and such Shares shall be deemed to have been issued) immediately
prior to the close of business on the date or dates upon which this Warrant is
exercised and the then applicable Warrant Price paid. In the event of any
exercise of the rights represented by this Warrant, certificates for the
Shares of stock so purchased shall be delivered to the holder hereof as soon
as possible and in any event within ten days of receipt of such notice and
payment of the then applicable Warrant Price and, unless this Warrant has been
fully exercised or expired, a new Warrant representing the portion of the
Shares, if any, with respect to which this Warrant shall not then have been
exercised and containing the same terms and conditions of this Warrant shall
also be issued to the holder hereof as soon as possible and in any event
within such ten-day period.
1.2 Net Issue Exercise. In lieu of exercising this Warrant for cash,
------------------
holder may elect to receive Shares equal to the value of this Warrant (or the
portion thereof being canceled) by surrender of this Warrant at the principal
office of the Company together with notice of such election in which event the
Company shall issue to Holder that number of Shares computed using the
following formula:
X= Y(A-B) A
------
Where
X = the number of Shares to be issued to Holder.
Y = the number of Shares purchasable under this Warrant (or such lesser
amount as equals the number of Shares which could be purchased with the
portion of this Warrant being canceled).
A = the Current Market Price (as defined below) of one Share.
B = the Warrant Price (as adjusted to the date of such calculations).
2. Adjustment in Number Upon Payment of Dividends and Realization of
-----------------------------------------------------------------
Financial Requirements.
- -----------------------
2.1 Adjustments in Months 1 through 12
---------------------------------------
(a) Subject to the provisions of clause (b) below, on the first
business day of each month in the period beginning November 1, 1997 and ending
October 31, 1998 ("Year 1"), if and only if, on that date, all monthly
dividends (the "Class B Dividends") are paid to Holder as a holder of the
Company's Class B Cumulative Preferred Stock ("Class B Stock"), then the
Number shall be reduced by 787 shares for such month;
(b) All reductions in the Number made under Section 2.1(a) shall be
rescinded and annulled, and the Number shall immediately be increased to the
Number as of October 31, 1997, as adjusted pursuant to Section 4 below, if
(i) within five (5) days of any dividend payment date during Year 1 the
dividend payment is not made; or
(ii) on December 31, 1998 the Company's net income allocable to common
stockholders does not exceed $900,000.
2.2 Adjustments in Months 13 through 24
----------------------------------------
(a) Subject to the provisions of clause (b) below, on the first
business day of each month in the period beginning November 1, 1998 and ending
October 31, 1999 ("Year 2"), if and only if, on that date, all Class B
Dividends are paid to Holder as a holder of the Company's Class B Stock, then
the Number shall be reduced by 583 shares for such month;
(b) All reductions in the Number made under Section 2.2(a) shall be
rescinded and annulled, and the Number shall immediately be increased to the
Number as of October 31, 1998, as adjusted pursuant to Section 4 below, if
(i) within five (5) days of any dividend payment date during Year 2 the
dividend payment is not made; or
(ii) on December 31, 1999 the Company's net income allocable to common
stockholders does not exceed $1,500,000.
2.3 Adjustments in Months 25 through 36
----------------------------------------
(a) Subject to the provisions of clause (b) below, on the first
business day of each month in the period beginning November 1, 1999 and ending
October 31, 2000 ("Year 3"), if and only if, on that date, all Class B
Dividends are paid to Holder as a holder of the Company's Class B Stock, then
the Number shall be reduced by 431 shares for such month;
(b) All reductions in the Number made under Section 2.3(a) shall be
rescinded and annulled, and the Number shall immediately be increased to the
Number as of October 31, 1999, as adjusted pursuant to Section 4 below, if
(i) within five (5) days of any dividend payment date during Year 3 the
dividend payment is not made; or
(ii) on December 31, 2000 the Company's net income allocable to common
stockholders does not exceed $2,000,000.
2.4 Reporting of Adjustments under this Section. Within three
---------------------------------------------
business days of the Company's Form 10-K or Form 10-KSB is due for filing with
the Securities and Exchange Commision, and at any time upon the Holder's
request, the Company shall issue to the Holder a notice (the "Notice"),
certified by the Company's chief financial officer, (i) indicating the
Company's net income to stockholders for the fiscal year just ended, (ii)
stating whether or not all monthly Class B Dividends were paid to the Holder,
and (iii) indicating the reduction to the Number, if any, made to date
pursuant to this Section 2. The obligations under this Section shall expire
after the Corporation delivers the Notice for the fiscal year ended December
31, 2000.
3. Stock Fully Paid; Reservation of Shares. All Shares that may be
---------------------------------------
issued upon the exercise of the rights represented by this Warrant, and all
shares into which such Shares are convertible will, upon issuance, be fully
paid and nonassessable, and free from all taxes, liens and charges with
respect to the issue thereof. During the period within which the rights
represented by the Warrant may be exercised, the Company will at all times
have authorized and reserved for the purpose of issuance upon exercise of the
purchase rights evidenced by this Warrant, a sufficient number of Shares to
provide for the exercise of the unexercised rights represented by this
Warrant.
4. Adjustment of Warrant Price and Number of Shares. The number and
------------------------------------------------
kind of securities purchasable upon the exercise of this Warrant and the
Warrant Price shall be subject to adjustment from time to time upon the
occurrence of certain events, as follows: The "Warrant Price" shall initially
be $5.00 and shall be adjusted and readjusted from time to time as provided in
this Warrant.
(a) Adjustments to Warrant Price.
-------------------------------
(i) Stock Dividends, Subdivisions and Combinations, Non Pro-Rata
------------------------------------------------------------
Repurchases. In case at any time or from time to time the Corporation shall:
-------
(A) take a record of the holders of its Other Stock (as defined
below) for the purpose of entitling them to receive a dividend payable in, or
other distribution of, Other Stock (other than Common Stock), or
(B) subdivide its outstanding shares of Other Stock into a larger
number of shares of Other Stock, or
(C) combine its outstanding shares of Other Stock into a smaller
number of shares of Other Stock,
then the Warrant Price in effect immediately after the happening of any such
event shall be proportionately decreased, in case of the happening of events
described in subparagraphs A or B above, or proportionately increased, in case
of the happening of events described in subparagraph C above. "Other Stock"
shall mean the Common Stock and shall also include all other stock of the
Corporation of any other class other than Convertible Stock. A
reclassification of the Other Stock into shares of Other Stock and shares of
any other class of stock shall be deemed a distribution by the Corporation to
the holders of its Other Stock of such shares of such other class of stock
within the meaning of this Subsection and, if the outstanding shares of Other
Stock shall be changed into a larger or smaller number of shares of Other
Stock as a part of such reclassification, shall be deemed a subdivision or
combination, as the case may be, of the outstanding shares of Other Stock
within the meaning of this Subsection a(i).
(ii) Repurchase of Other Stock. In case at any time or from time to
-------------------------
time, the Corporation shall (except as hereinafter provided) repurchase any
Other Stock (the "Repurchased Stock"), then upon the consummation of such
repurchase the Warrant Price then in effect shall be decreased to an amount
determined by multiplying the Warrant Price in effect immediately prior to
such adjustment by a fraction, (x) the numerator of which is the price paid
per share of the Repurchased Stock, and (y) the denominator of which is the
Current Market Price per share of Common Stock on the date immediately prior
to such repurchase (after giving effect to any stock splits, stock dividends
or other stock repurchases between the date of such repurchase and the date on
which such calculation is made); provided, however, that if the numerator of
-------- -------
such fraction is greater than the denominator of such fraction, then no
adjustment to the Warrant Price shall be made. No adjustment of the Warrant
Price shall be made under this Subsection upon the repurchase of the
Repurchased Stock if such repurchase, together with all repurchases during the
previous twelve (12) calendar months, is a repurchase of less than the sum of
(1) 5% of the issued and outstanding Other Stock determined as of the date of
such repurchase, plus (2) repurchases of stock options and Other Stock
----
underlying such stock options in a transaction or series of transactions
during such twelve (12) month period not exceeding $50,000 in the aggregate.
(iii) Issuance of Additional Shares of Other Stock. "Additional
--------------------------------------------
Shares of Other Stock" shall mean all shares of Other Stock issued by the
Corporation after October 31, 1997 other than (i) the shares of Common Stock
issued to a holder of Convertible Stock upon conversion of such Convertible
Stock, and (ii) Permitted Common Stock Issuances. In case at any time or from
time to time, the Corporation shall (except as hereinafter provided) issue,
whether in connection with the merger of a corporation into the Corporation or
otherwise, any Additional Shares of Other Stock for a consideration per share
less than the Warrant Price then in effect (as so adjusted from time to time
for additional issuances, reductions and other adjustments to the number of
shares of Common Stock outstanding, including without limitation stock splits,
stock dividends, reverse stock splits, pro rata repurchases, and any other
good faith transfer of securities or other transaction which results in an
increase or decrease in the number of shares of Common Stock outstanding,
(such amount per share, the "Minimum Issue Price") on the Computation Date
(determined as set forth below), then the Warrant Price shall be adjusted to
be that number determined by multiplying the Warrant Price in effect
immediately prior to such adjustment by a fraction (x) the numerator of which
shall be the number of shares of Other Stock outstanding prior to the issuance
of the Additional Shares of Other Stock, plus the number of shares of Other
Stock which the aggregate consideration for the total number of such
Additional Shares of Other Stock so issued would purchase at the Minimum Issue
Price per share of Common Stock and (y) the denominator of which shall be the
number of shares of Other Stock outstanding after giving effect to the
issuance of such Additional Shares of Other Stock so issued. The provisions
of this Subsection shall not apply to any issuance of Additional Shares of
Other Stock for which an adjustment is provided under Subsection 4(a)(i). No
adjustment of the Warrant Price shall be made under this Subsection upon the
issuance of any Additional Shares of Other Stock which are issued pursuant to
the exercise of any warrants, options or other subscription or purchase rights
or pursuant to the exercise of any conversion or exchange rights in any
Convertible Securities, if any such adjustment shall previously have been made
upon the issuance of such warrants, options or other rights or upon the
issuance of such Convertible Securities (or upon the issuance of any warrant
or other rights therefor) pursuant to Subsection (iv) or (v) of Subsection
4(a). "Convertible Securities" shall mean evidences of indebtedness, shares
of stock or other securities, which are convertible into or exchangeable for
Additional Shares of Other Stock, either immediately or upon the arrival of a
specified date or the happening of a specified event. For purposes of this
Subsection, the "Computation Date" shall be the earlier of (x) the date on
which the Corporation shall enter into a firm contract for the issuance of
such Additional Shares of Other Stock, or (y) the date of actual issuance of
such Additional Shares of Other Stock.
(iv) Issuance of Warrants, Options or Other Rights. In case at any
---------------------------------------------
time or from time to time, the Corporation shall take a record of the holders
of its Other Stock for the purpose of entitling them to receive a distribution
of, or shall otherwise issue, any warrants, options or other rights to
subscribe for or purchase any Additional Shares of Other Stock or any
Convertible Securities (other than Permitted Common Stock Issuances and Common
Stock issuable upon conversion of Convertible Stock), and the consideration
per share for which Additional Shares of Other Stock may at any time
thereafter be issuable pursuant to such warrants, options or other rights or
pursuant to the terms of such Convertible Securities shall be less than the
Minimum Issue Price then in effect on the Computation Date (as determined
below), then the Warrant Price shall be adjusted as provided in the second
sentence of Subsection 4(a)(iii). Such adjustment shall be made on the basis
that (i) the consideration per share for which such Additional Shares of Other
Stock may be issued equals a fraction, (x) the denominator of which is the
maximum number of Additional Shares of Other Stock issuable pursuant to all
such warrants, options or other rights or necessary to effect the conversion
or exchange of all such Convertible Securities, and (y) the numerator of which
is the minimum consideration received and receivable by the Corporation for
such Additional Shares of Other Stock pursuant to such warrants, options or
other rights or pursuant to the terms of such Convertible Securities, (ii) the
maximum number of Additional Shares of Other Stock issuable pursuant to all
such warrants, options or other rights or necessary to effect the conversion
or exchange of all such Convertible Securities shall be deemed to have been
issued as of the Computation Date (determined as set forth in the last
sentence of this Subsection), and (iii) the aggregate consideration for such
maximum number of Additional Shares of Other Stock shall be deemed to be the
minimum consideration received and receivable by the Corporation for the
issuance of such Additional Shares of Other Stock pursuant to such warrants,
options or other rights or pursuant to the terms of such Convertible
Securities.
For purposes of this Subsection, the "Computation Date" shall be the
earliest of (a) the date on which the Corporation shall take a record of the
holders of its Other Stock for the purpose of entitling them to receive any
such warrants, options or other rights, (b) the date on which the Corporation
shall enter into a firm contract for the issuance of such warrants, options or
other rights, and (c) the date of actual issuance of such warrants, options or
other rights.
(v) Issuance of Convertible Securities. In case at any time or from
----------------------------------
time to time, the Corporation shall take a record of holders of the Other
Stock for the purpose of entitling them to receive a distribution of, or shall
otherwise issue, any Convertible Securities (other than Permitted Common Stock
Issuances, and Convertible Stock) and the consideration per share for which
additional shares of other stock may at any time thereafter be issuable
pursuant to the terms of such Convertible Securities shall be less than the
Minimum Issue Price then in effect on the Computation Date (as determined
below), then the Warrant Price shall be adjusted as provided in the second
sentence of Subsection 4(a)(iii). Such adjustment shall be made on the basis
that (i) the amount of consideration per share for which such Additional
Shares of Other Stock may be issued equals a fraction (x) the denominator of
which is the maximum number of Additional Shares of Other Stock necessary to
effect the conversion or exchange of all such Convertible Securities, and (y)
the numerator of which shall be the minimum consideration received and
receivable by the Corporation for the issuance of such Additional Shares of
Other Stock pursuant to the terms of such Convertible Securities, (ii) the
maximum number of Additional Shares of Other Stock necessary to effect the
conversion or exchange of all such Convertible Securities shall be deemed to
have been issued as of the Computation Date (determined as set forth in the
penultimate sentence of this Subsection), and (iii) the aggregate
consideration for such maximum number of Additional Shares of Other Stock
shall be deemed to be the minimum consideration received and receivable by the
Corporation for issuance of such Additional Shares of Other Stock pursuant to
the terms of such Convertible Securities.
For purposes of this Subsection, the "Computation Date" shall be the
earliest of (a) the date on which the Corporation shall take a record of the
holders of its Other Stock for the purpose of entitling them to receive any
such Convertible Securities, (b) the date on which the Corporation shall enter
into a firm contract for the issuance of such Convertible Securities, and (c)
the date of actual issuance of such Convertible Securities. No adjustment of
the Warrant Price shall be made under this Subsection upon the issuance of any
Convertible Securities which are issued pursuant to the exercise of any
warrants, options or other subscription or purchase rights therefor, if any
such adjustment shall previously have been made upon the issuance of such
warrants, options or other rights pursuant to Subsection 4(a)(iv).
(vi) Superseding Adjustment of Warrant Price. If at any time after
---------------------------------------
any adjustment of the Warrant Price shall have been made pursuant to the
foregoing Subsections 4(a)(iv) or 4(a)(v) on the basis of the issuance of
warrants, options or other rights or the issuance of other Convertible
Securities or after any new adjustment of the Warrant Price shall have been
made pursuant to this Subsection 4(a)(vi),
(A) such warrants, options or other rights or the right of conversion
or exchange in such other Convertible Securities shall expire, and a portion
of such warrants, options or rights, or the right of conversion or exchange in
respect of a portion of such other Convertible Securities, as the case may be,
shall not have been exercised, or
(B) the consideration per share for which Additional Shares of Other
Stock are issuable pursuant to such warrants, options, or rights or the terms
of such other Convertible Securities, shall be increased solely by virtue of
provisions therein contained for an automatic increase in such consideration
per share upon the arrival of a specified date or the happening of a specified
event,
such previous adjustment shall be rescinded and annulled and the Additional
Shares of Other Stock which were deemed to have been issued by virtue of the
computation made in connection with the adjustment so rescinded and annulled
shall no longer be deemed to have been issued by virtue of such computation.
Thereupon, a recomputation shall be made of the effect of such warrants,
options or other rights, or other Convertible Securities on the basis of:
(1) treating the number of Additional Shares of Other Stock, if any,
theretofore actually issued or issuable pursuant to the previous exercise of
such warrants, options or other rights or such right of conversion or
exchange, as having been issued on the date or dates of such issuance as
determined for purposes of such previous adjustment and for the consideration
actually received therefor, and
(2) treating any such warrants, options or other rights or any such
other Convertible Securities which then remain outstanding as having been
granted or issued immediately after the time of such increase of the
consideration per share for such Additional Shares of Other Stock issuable
under such warrants, options or other rights or other Convertible Securities,
and, if and to the extent called for by the foregoing provisions of this
Subsection 4(a) on the basis aforesaid, a new adjustment of the Warrant Price
shall be made, and such new adjustment shall supersede the previous adjustment
so rescinded and annulled. If any such superseding adjustment of the Warrant
Price is made after the exercise of this Warrant by a former Holder of this
Warrant in lieu of such adjustment, if, and only if, such former Holder owns
shares of Common Stock of the Corporation obtained upon exercise of this
Warrant, the Corporation shall have the option to purchase the number of
shares of Common Stock from such former Holder equal to the difference between
(x) the number of shares of Common Stock which such former Holder received
upon exercise prior to the adjustment, and (y) the number of shares of Common
Stock which such former Holder would have received on exercise had such
adjustment been made prior to exercise. The purchase price per share of such
stock shall be $0.01 per share.
(vii) Other Provisions Applicable to Adjustments Under this Section.
-------------------------------------------------------------
The following provisions shall be applicable to the making of adjustments of
the Warrant Price hereinbefore provided for in this Subsection 4(a):
(A) Treasury Stock. The sale or other disposition of any issued
--------------
shares of Other Stock owned or held by or for the account of the Corporation
shall be deemed an issuance thereof for purposes of this Subsection 4(a).
(B) Computation of Consideration. To the extent that any Additional
----------------------------
Shares of Other Stock or any Convertible Securities or any warrants, options
or other rights to subscribe for or purchase any Additional Shares of Other
Stock or any Convertible Securities shall be issued solely for cash
consideration, the consideration received by the Corporation therefor shall be
deemed to be the amount of cash received by the Corporation therefor, or, if
such Additional Shares of Other Stock or Convertible Securities are offered by
the Corporation for subscription, the subscription price, or, if such
Additional Shares of Other Stock or Convertible Securities are sold to
underwriters or dealers for public offering without a subscription offering,
the initial public offering price, in any such case excluding any amounts paid
or receivable for accrued interest or accrued dividends, and after deductions
for any compensation, underwriting discounts, placement fees or funding or
financing commitment fees (but before deduction for any other expenses) paid
or incurred by the Corporation for and in the underwriting of, or otherwise in
connection with, the issue thereof. To the extent that such issuance shall be
for a consideration other than solely for cash, then, except as herein
otherwise expressly provided, the amount of such consideration shall be deemed
to be the fair value of such consideration at the time of such issuance as
determined in good faith by the Corporation's Board of Directors. The
consideration for any Additional Shares of Other Stock issuable pursuant to
any warrants, options or other rights to subscribe for or purchase the same
shall be the consideration received or receivable by the Corporation for
issuing such warrant, options or other rights, plus the additional
consideration payable to the Corporation upon the exercise of such warrants,
options or other rights. The consideration for any Additional Shares of Other
Stock issuable pursuant to the terms of any Convertible Securities shall be
the consideration received or receivable by the Corporation for issuing any
warrants, options or other rights to subscribe for or purchase such
Convertible Securities, plus the consideration paid or payable to the
Corporation in respect of the subscription for or purchase of such Convertible
Securities, plus the additional consideration, if any, payable to the
Corporation upon the exercise of the right of conversion or exchange in such
Convertible Securities.
(C) When Adjustments to be Made. The adjustments required by the
---------------------------
preceding Subsections of this Subsection 4(a) shall be made whenever and as
often as any specified event requiring an adjustment shall occur, except that
no adjustment of the Warrant Price that would otherwise be required shall be
made (except in the case of a subdivision or combination of shares of the
Other Stock, as provided for in Subsection 4(a)(i)) unless and until such
adjustment, either by itself or with other adjustments not previously made,
adds or subtracts at least 1% to the Warrant Price, as determined in good
faith by the Board of Directors of the Corporation. Any adjustment
representing a change of less than such minimum amount shall be carried
forward and made as soon as such adjustment, together with other adjustments
required by this Subsection 4(a) and not previously made, would result in a
minimum adjustment. For the purpose of any adjustment, any specified event
shall be deemed to have occurred at the close of business on the date of its
occurrence, All calculations made under this Subsection shall be made to the
nearest cent. Notwithstanding any other provision of this Warrant, and except
for a combination of shares or other adjustment pursuant to Section 4(c)(i),
no adjustment to the Warrant Price shall be made which causes the Warrant
Price to be increased; and once the Warrant Price is adjusted downward, it
shall not be readjusted upward except as provided in Section 4(a)(vi).
(D) Fractional Interests. In computing adjustments under this
---------------------
Subsection 4(a), fractional interests in Other Stock shall be taken into
account to the nearest one-thousandth of a share.
(E) When Adjustment not Required. If the Corporation shall take a
----------------------------
record of the Holders of its Other Stock for the purpose of entitling them to
receive a dividend or distribution or subscription or purchase rights and
shall, thereafter and before the distribution thereof to shareholders, legally
abandon its plan to pay or deliver such dividend, distribution, subscription
or purchase rights, then (i) thereafter no adjustment shall be required by
reason of the taking of such record and any such adjustment previously made in
respect thereof shall be rescinded and annulled, or (ii) in the event that any
such adjustment previously made in respect of such taking of record cannot be
rescinded or annulled as a result of the conversion of this Warrant after the
taking of such record occurs, in lieu of such recision or annulment of the
adjustment, if the Warrant was exercised by such former Holder, and if such
former Holder owns shares of Common Stock of the Corporation obtained upon
exercise of this Warrant, the Corporation shall have the option to purchase
the number of shares of Common Stock from such former Holder equal to the
difference between (x) the number of shares of Common Stock which such former
Holder had received upon conversion after such record date, and (y) the number
of shares of Common Stock which such former Holder would have received on
conversion had such adjustment been annulled or rescinded prior to conversion.
The purchase price per share of such Common Stock shall be $.01 per share.
(viii) Merger, Consolidation or Disposition of Assets. In case the
----------------------------------------------
Corporation shall merge or consolidate into another corporation, and such
transaction does not constitute an Event of Default (or the Payee waives its
right to accelerated payment under the Investment Agreement) or shall sell,
transfer or otherwise dispose of all or substantially all of its property,
assets or business to another corporation and pursuant to the terms of such
merger, consolidation or disposition, shares of common stock of the successor
or acquiring corporation (or any parent thereof) are to be received by or
distributed to the holders of Other Stock of the Corporation, then the Holder
of this Warrant shall have the right thereafter to receive, upon conversion of
this Warrant, shares of common stock equal to the number of shares of common
stock of the successor or acquiring corporation receivable upon or as a result
of such merger, consolidation or disposition of assets had the Holder of this
Warrant converted it into Common Stock of the Corporation immediately prior to
such event. If, pursuant to the terms of such merger, consolidation or
disposition of assets, any cash, shares of stock or other securities or
property of any nature whatsoever (including warrants, options or other
subscription or purchase rights) are to be received by or distributed to the
holders of Other Stock of the Corporation (whether in addition to common stock
of the successor or acquiring corporation, or any parent thereof, or
otherwise) the Warrant Price in effect shall be adjusted to that number
determined by multiplying the Warrant Price then in effect by a fraction (x)
the numerator of which shall be the Current Market Price per share of Common
Stock immediately prior to the closing of such merger, consolidation or
disposition minus the portion applicable to one share of Common Stock of any
such cash so distributable and of the fair value of any such shares of stock
or other securities or property so received or distributed, and (y) the
denominator of which shall be the Current Market Price per share of Common
Stock immediately prior to the closing of such merger, consolidation or
disposition. The fair value of any such shares of stock or other securities
or property shall be determined pursuant to the Valuation Procedure. In case
of any such merger, consolidation or disposition of assets, the successor or
acquiring corporation shall expressly assume the due and punctual observance
and performance of each and every covenant and condition hereof to be
performed and observed by the Corporation and all of the obligations and
liabilities hereunder, subject to such modification as shall be necessary to
provide for adjustments to the Warrant Price which shall be as nearly
equivalent as practicable to the adjustments provided for in this Subsection
4(a). For the purposes of this Subsection 4(a)(viii), "common stock of the
successor or acquiring corporation" shall include stock of such corporation of
any class, which is not preferred as to dividends or assets over any other
class of stock of such corporation and which is not subject to redemption, and
shall also include any evidences of indebtedness, shares of stock or other
securities which are convertible into or exchangeable for any such stock,
either immediately or upon the arrival of a specified date or the happening of
a specified event, and any warrants, options or other rights to subscribe for
or purchase any such stock. The foregoing provisions of this Subsection shall
similarly apply to the successive mergers, consolidations or dispositions of
assets.
(b) Adjustment to Number. At the time the Warrant Price is adjusted,
--------------------
the Number shall also be adjusted by multiplying the Number immediately prior
to the adjustment by a fraction the numerator of which is the Warrant Price
immediately prior to the adjustment and the denominator of which is the
adjusted Warrant Price.
(c) No Impairment. The Corporation will not through any
--------------
reorganization, transfer of assets, consolidation, merger, dissolution, issue
or sale of securities or any other voluntary action, avoid the observance or
performance of any of the terms to be observed or performed hereunder by the
Corporation but will at all times in good faith assist in the carrying out of
all the provisions of this Section 4 and in the taking of all such action as
may be necessary or appropriate in order to protect the conversion rights of
the Holder of this Warrant against impairment. Without limiting the
generality of the foregoing, the Corporation (i) will not permit the par value
of any shares of stock at the time receivable upon the exercise of this
Warrant to exceed the Warrant Price then in effect, (ii) will take all such
action as may be necessary or appropriate in order that the Corporation may
validly and legally issue fully paid nonassessable shares of stock on the
exercise of this Warrant, and (iii) will not take any action which results in
any adjustment of the Warrant Price if the total number of shares of Common
Stock issuable after the action upon the exercise of this Warrant and all
other warrants, options and other right to acquire Common Stock will exceed
the total number of shares of Common Stock then authorized by the Charter and
available for the purpose of issue upon such exercise.
(d) Certificate as to Adjustments. Upon the occurrence of each
------------------------------
adjustment or readjustment of the Warrant Price and the Number pursuant to
this Section 4, the Corporation at its expense shall promptly compute such
adjustment or readjustment in accordance with the terms hereof and furnish to
the Holder a certificate setting forth such adjustment or readjustment and
showing in detail the facts upon which such adjustment or readjustment is
based, including a statement of (i) the consideration received or to be
received by the Corporation for any Additional Shares of Other Stock issued or
sold or deemed to have been issued, (ii) the number of shares of Other Stock
then outstanding or deemed to be outstanding, and (iii) the Warrant Price and
the Number in effect immediately prior to such issue or sale and as adjusted
and readjusted on account thereof, showing how each was calculated. The
Corporation shall, as promptly as practicable following its receipt of the
written request, but in any event within five Business Days after receipt of
such written request, of the Holder furnish or cause to be furnished to the
Holder a like certificate setting forth (i) the Warrant Price and Number at
the time in effect, showing how each was calculated, and (ii) the number of
shares of Common Stock and the amount, if any, of other property which at the
time would be received upon the conversion of this Warrant.
(e) Notices of Record Date. In the event of any taking by the
------------------------
Corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend which is the same as cash dividends paid
in previous quarters) or other distribution, or any right to subscribe for,
purchase or otherwise acquire any shares of stock of any class or any other
securities or property, or to receive any other right, the Corporation shall
mail to the Holder at least thirty days prior to the date specified therein, a
notice specifying the date on which any such record is to be taken for the
purpose of such dividend or distribution.
(f) Common Stock Reserved. The Corporation shall at all times
-----------------------
reserve and keep available out of its authorized but unissued Common Stock
such number of shares of Common Stock as shall from time to time be sufficient
to effect conversion of this Warrant.
(g) Closing of Books. The Corporation will not close its books
-----------------
against the permitted transfer of this Warrant or its exercise.
(h) Registration; Transfer Taxes. The Corporation shall keep at its
----------------------------
principal office (or such other place as the Corporation reasonably
designates) a register for the registration of this Warrant. Upon the
surrender of this Warrant at such place, the Corporation shall, at the request
of the Holder execute and deliver a new certificate or certificates in
exchange therefor representing in the aggregate the amount of this Warrant
represented by the surrendered Warrant (and the Corporation forthwith shall
cancel such surrendered Warrant), subject to the requirements of applicable
securities laws. Each such new Warrant shall be registered in such name and
shall represent such amount as shall be requested by the Holder and shall be
substantially identical in form to this Warrant. The issuance of new Warrants
shall be made without charge to the Holder for any issuance tax in respect of
any transfer involved in the issuance and delivery of any Warrant in a name of
(i) the Holder, or (ii) any affiliate of the Holder.
(i) Definitions. The following terms shall have the following
-----------
meanings, which meanings shall be equally applicable to the singular and
plural forms of such terms:
"Business Day" means any day which is not a Saturday or a Sunday or a
public holiday or a day on which banks are required or permitted to close
under the laws of the State of California.
"Common Stock" means the Common Stock of the Corporation, par value
$0.001.
"Convertible Securities" shall have the meaning assigned to it in Section
4(a)(iii).
"Convertible Stock" means the Corporation's Class A Cumulative
Convertible Preferred Stock, par value $0.001 per share, outstanding on
October 31, 1997, the Corporations Class B Cumulative Preferred Stock, par
value $0.001 per share outstanding on October 31, 1997 and the Corporation's
Class C Cumulative Convertible Preferred Stock, par value $0.001 per share,
outstanding on October 31, 1997.
"Current Market Price" per share of Common Stock at the date herein
specified, shall be deemed to be the average of the Closing Prices for ten
consecutive Business Days immediately prior to the day in question or, if no
Closing Price is reported, the average of the closing bid and asked prices.
"Closing Prices" for each such Business Day shall be the last sale price
reported on the National Association of Securities Dealers Automated
Quotations System ("NASDAQ") on the preceding Business Day or, if the Common
Stock is an issue for which last sale prices are not reported on NASDAQ, the
closing bid quotation on such day (the closing bid quotation for a given day
shall be the highest bid quotation as quoted in any of The Wall Street
Journal, the national Quotation Bureau pink sheets, quotation sheets of
registered market makers and, if necessary, dealer's telephone quotations),
but, in each of the preceding two cases, if the relevant NASDAQ price or
quotation did not exist on such day, then the price or quotation on the next
preceding Business Day in which there was such a price or quotation.
"Other Stock" shall have the meaning assigned to it in Section 4(a)(i).
"Permitted Common Stock Issuances" means (i) shares of Common Stock or
options issuable under the Corporation's existing stock option plans and
401(k) plans, so long as such shares issued and outstanding under these plans
do not exceed fifteen percent (15%) issued and outstanding of the capital
stock of the Corporation on a fully diluted basis; (ii) shares of Common Stock
issuable upon conversion of the Note, (iii) warrants issuable upon prepayment
of the Note and Common Stock issuable upon exercise thereof; (iv) shares of
Common Stock issuable upon conversion of the Convertible Stock, and (v) shares
of Common Stock issuable upon exercise of warrants of the Corporation
outstanding on the date hereof.
"Principal Stockholders" shall mean each of the Corporation's
Stockholders owning five percent (5%) or more of the Corporation's issued and
outstanding capital stock on a fully diluted basis.
"Qualified Public Offering" means a secondary public offering of the
Corporation's stock which results in net proceeds to the Corporation of at
least $15,000,000.
"Warrants" means the warrants issued upon payment of the Note.
5. Fractional Shares. No fractional Shares will be issued in
------------------
connection with any exercise hereunder, but in lieu of such fractional shares
the Company shall make a cash payment therefor upon the basis of the Warrant
Price then in effect.
6. Other Agreements. This Warrant and the Shares, when issued,
----------------
are subject to the terms and conditions of an Investment Agreement, as amended
and a Stockholders Agreement, each dated as of December 31, 1996, among the
Company and the "Holders" identified therein, and the holder of this Warrant
and the Shares into which it is exercisable is entitled to the benefits and is
subject to the obligations set forth therein which may limit the right of the
holder to transfer this Warrant and such Shares, entitle the holder to receive
certain information from the Company, entitle the holder to certain
registration rights and other rights concerning the sale of the Warrant or
Shares in certain transactions and contain certain other rights and
restrictions.
7. Representations and Warranties. This Warrant is issued and
--------------------------------
delivered on the basis of the following representations and warranties of the
Company:
7.1 Authorization and Delivery. This Warrant has been duly
----------------------------
authorized and executed by the Company and when delivered will be the valid
and binding obligation of the Company enforceable in accordance with its
terms;
7.2 Warrant Shares. The Warrant Shares have been duly authorized and
--------------
reserved for issuance by the Company and, when issued and paid for in
accordance with the terms hereof, will be validly issued, fully paid and
nonassessable;
7.3 Rights and Privileges. The rights, preferences, privileges and
---------------------
restrictions granted to or imposed upon the Shares and the holders thereof are
as set forth herein and in the Company's Charter are true and complete copies
of which have been delivered to the original warrant holder; and
7.4 No Inconsistency. The execution and delivery of this Warrant are
----------------
not, and the issuance of the Warrant upon exercise of this Warrant in
accordance with the terms hereof will not be, inconsistent with the Company's
Charter or by-laws, do not and will not contravene any law, governmental rule
or regulation, judgment or order applicable to the Company, and do not and
will not contravene any provision of, or constitute a default under, any
indenture, mortgage, contract or other instrument of which the Company is a
party or by which it is bound or require the consent or approval of, the
giving of notice to, the registration with or the taking of any action in
respect of or by, any Federal, state or local government authority or agency
or other person.
8. Modification and Waiver. This Warrant and any provision hereof
-----------------------
may be changed, waived, discharged or terminated only by an instrument in
writing signed by the party against which enforcement of the same is sought.
9. Notice of Expiration. The Company shall give notice of expiration
--------------------
of this Warrant to Holder sixty (60) days prior to the end of the term.
10. Notices. Any notice which is required or permitted to be given
-------
pursuant hereto shall be given in the manner provided in the Investment
Agreement.
11. Binding Effect on Successors. This Warrant shall be binding upon
----------------------------
any corporation succeeding the Company by merger or consolidation, and all of
the obligations of the Company relating to the Shares issuable upon the
exercise of this Warrant shall be as set forth in the Company's Charter and
the Company's by-laws (each as amended from time to time) and shall survive
the exercise and termination of this Warrant and all of the covenants and
agreements herein and in such other documents and instruments of the Company
shall inure to the benefit of the successors and assigns of the holder hereof.
The Company will, at the time of the exercise of this Warrant, in whole or in
part, upon request of the holder hereof but at the Company's expense,
acknowledge in writing its continuing obligation to the holder hereof in
respect of any rights (including, without limitation, any right to
registration of the Shares issuable upon exercise of this Warrant) to which
the holder hereof shall continue to been titled after such exercise in
accordance with this Warrant; provided, that the failure of the holder hereof
to make any such request shall not affect the continuing obligation of the
Company to the holder hereof in respect of such rights.
12. Descriptive Headings. The descriptive headings of the several
--------------------
paragraphs of this Warrant are inserted for convenience only and do not
constitute a part of this Warrant.
13. Governing Law. This warrant shall be construed and enforced in
-------------
accordance with, and the rights of the parties shall be governed by, the laws
of the state of Texas
IN WITNESS WHEREOF, the undersigned, being duly authorized, has executed
and delivered this Warrant as of this day and year set forth at the beginning
of this Warrant.
THE QUIZNO'S CORPORATION, a Colorado corporation
By:
Its: _________________________
<PAGE>
EXHIBIT A-1
Notice of Exercise
To: The Quizno's Corporation
1. The undersigned hereby elects to purchase shares of Common
Stock of THE QUIZNO'S CORPORATION pursuant to the terms of the attached
Warrant, and tenders herewith payment of the purchase price of such shares in
full.
2. Please issue a certificate or certificates representing said
shares in the name of the undersigned or, subject to compliance with the
restrictions on transfer set forth in Section 7 of the Warrant, in such other
name or names as are specified below:
(Name)
(Address)
3. The undersigned represents that the aforesaid shares being
acquired for the account of the undersigned for investment and not with a view
to, or for resale in connection with, the distribution thereof and that the
undersigned has no present intention of distributing or reselling such shares.
Signature
(Name of Signatory)
By:
Its:
Date:
<PAGE>
EXHIBIT A-2
Notice of Exercise
To: The Quizno's Corporation
1. Contingent upon and effective immediately prior to the closing
(the "Closing") of the Company's public offering contemplated by the
Registration Statement on Form S , filed , , the
undersigned hereby elects to purchase shares of Common Stock of the
Company (or such lesser number of shares as may be sold on behalf of the
undersigned at the Closing) pursuant to the terms of the attached Warrant.
2. Please deliver to the custodian for the selling shareholders a
stock certificate representing such shares.
3. The undersigned has instructed the custodian for the selling
shareholders to deliver to the Company $ or, if less, the net
proceeds due the undersigned from the sale of shares in the aforesaid public
offering. If such net proceeds are less than the purchase price for such
shares, the undersigned agrees to deliver the difference to the Company prior
to the Closing.
__________________________
Signature
Date:
Exhibit 10.24
THIS WARRANT (AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT) ARE
SUBJECT TO AN INVESTMENT AGREEMENT DATED DECEMBER 31, 1996, AS AMENDED AND A
STOCKHOLDERS AGREEMENT DATED AS OF DECEMBER 31, 1996, COPIES OF WHICH ARE ON
FILE AT THE PRINCIPAL OFFICE OF THE CORPORATION AND WILL BE FURNISHED TO THE
HOLDER ON REQUEST TO THE SECRETARY OF THE CORPORATION. SUCH INVESTMENT
AGREEMENT AND STOCKHOLDERS AGREEMENT PROVIDE, AMONG OTHER THINGS, FOR CERTAIN
RESTRICTIONS ON VOTING, SALE, TRANSFER, PLEDGE, HYPOTHECATION OR OTHER
DISPOSITION OF THE SECURITIES EVIDENCED BY THIS WARRANT AND THAT THE HOLDER
HAS RIGHTS TO REQUIRE REPURCHASE BY THE CORPORATION UPON THE OCCURRENCE OF
CERTAIN EVENTS. THE SECURITIES EVIDENCED BY THIS WARRANT HAVE NOT BEEN
REGISTERED PURSUANT TO THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR
ANY STATE SECURITIES LAW, AND SUCH SECURITIES MAY NOT BE SOLD, TRANSFERRED OR
OTHERWISE DISPOSED OF UNLESS THE SAME ARE REGISTERED AND QUALIFIED IN
ACCORDANCE WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR IN THE
OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION, SUCH
REGISTRATION AND QUALIFICATION ARE NOT REQUIRED.
WARRANT TO PURCHASE SHARES
OF COMMON STOCK OF THE QUIZNO'S CORPORATION
-------------------------------------------------
Issued Date: October 31, 1997
THIS CERTIFIES THAT, for value received, Retail & Restaurant Growth
Capital, L.P., a Delaware limited partnership ("Holder"), is entitled, subject
to the provisions and upon the terms and conditions hereinafter set forth, to
subscribe for and purchase up to 42,209 shares (as adjusted pursuant to the
provisions hereof), (the "Number") of the fully paid and nonassessable Common
Stock, par value $.001, of THE QUIZNO'S CORPORATION, a Colorado corporation
(the "Company" or the "Corporation"), for a price per share (the "Warrant
Price") equal to $5.00 (as adjusted, pursuant to the provisions hereof).
As used herein, the term "Shares" shall mean the Company's presently
authorized Common Stock, or any stock into or for which such Common Stock
shall have been or may hereafter be converted or exchanged pursuant to the
Amended and Restated Articles of Incorporation of the Company as from time to
time amended as provided by law and in such Articles (hereinafter the
"Charter"), the term "Note" shall mean that certain Amended and Restated
Senior Subordinated Convertible Note due 2001 issued by the Corporation to
Retail & Restaurant Growth Capital, L.P. as of December 31, 1996, and the term
"Grant Date" shall mean October 31, 1997. Capitalized terms used and not
defined herein shall have the meanings set forth in a certain Investment
Agreement dated as of December 31, 1996 by and between the Company and Retail
& Restaurant Growth Capital, L.P., as amended (the "Investment Agreement").
1. Method of Exercise.
--------------------
1.1 Standard Method. The purchase right represented by this Warrant
---------------
may be exercised by the holder hereof, in whole or in part and from time to
time, by either, at the election of the holder hereof, (a) the surrender of
this Warrant (with the notice of exercise form attached hereto as Exhibit A-1
duly executed) at the principal office of the Company and by the payment to
the Company, by check or by wire transfer, of an amount equal to the then
applicable Warrant Price per share multiplied by the number of Shares then
being purchased or (b) if in connection with a registered public offering of
the Company's securities (provided that such offering includes Shares and that
the holder shall have elected to participate therein pursuant to the exercise
of the registration rights referred to in Section 6 hereof), the surrender of
this Warrant (with the notice of exercise form attached hereto as Exhibit A-2
duly executed) at the principal office of the Company together with notice of
arrangements reasonably satisfactory to the Company and any underwriter, in
the case of an underwritten registered public offering, for payment to the
Company either by certified or bank check or by wire transfer from the
proceeds of the sale of Shares to be sold by the holder in such public
offering of an amount equal to the then applicable Warrant Price per Share
multiplied by the number of Shares then being purchased; however,
notwithstanding the cash payment requirements set forth in this Section 1.1,
the Holder shall be entitled to use the net issue exercise option as
hereinafter provided in Section 1.2. The person or persons in whose name(s)
any certificate(s) representing Shares shall be issuable upon exercise of this
Warrant shall be deemed to have become the holder(s) of record of, and shall
be treated for all purposes as the record holder(s) of, the Shares represented
thereby (and such Shares shall be deemed to have been issued) immediately
prior to the close of business on the date or dates upon which this Warrant is
exercised and the then applicable Warrant Price paid. In the event of any
exercise of the rights represented by this Warrant, certificates for the
Shares of stock so purchased shall be delivered to the holder hereof as soon
as possible and in any event within ten days of receipt of such notice and
payment of the then applicable Warrant Price and, unless this Warrant has been
fully exercised or expired, a new Warrant representing the portion of the
Shares, if any, with respect to which this Warrant shall not then have been
exercised and containing the same terms and conditions of this Warrant shall
also be issued to the holder hereof as soon as possible and in any event
within such ten-day period.
1.2 Net Issue Exercise. In lieu of exercising this Warrant for cash,
------------------
holder may elect to receive Shares equal to the value of this Warrant (or the
portion thereof being canceled) by surrender of this Warrant at the principal
office of the Company together with notice of such election in which event the
Company shall issue to Holder that number of Shares computed using the
following formula:
X= Y(A-B) A
------
Where
X = the number of Shares to be issued to Holder.
Y = the number of Shares purchasable under this Warrant (or such lesser
amount as equals the number of Shares which could be purchased with the
portion of this Warrant being canceled).
A = the Current Market Price (as defined below) of one Share.
B = the Warrant Price (as adjusted to the date of such calculations).
2. Adjustment in Number Upon Payment of Dividends and Realization of
-----------------------------------------------------------------
Financial Requirements.
- -----------------------
2.1 Adjustments in Months 1 through 12
---------------------------------------
(a) Subject to the provisions of clause (b) below, on the first
business day of each month in the period beginning November 1, 1997 and ending
October 31, 1998 ("Year 1"), if and only if, on that date, all monthly
dividends (the "Class B Dividends") are paid to Holder as a holder of the
Company's Class B Cumulative Preferred Stock ("Class B Stock"), then the
Number shall be reduced by 787 shares for such month;
(b) All reductions in the Number made under Section 2.1(a) shall be
rescinded and annulled, and the Number shall immediately be increased to the
Number as of October 31, 1997, as adjusted pursuant to Section 4 below, if
(i) within five (5) days of any dividend payment date during Year 1 the
dividend payment is not made; or
(ii) on December 31, 1998 the Company's net income allocable to common
stockholders does not exceed $900,000.
2.2 Adjustments in Months 13 through 24
----------------------------------------
(a) Subject to the provisions of clause (b) below, on the first
business day of each month in the period beginning November 1, 1998 and ending
October 31, 1999 ("Year 2"), if and only if, on that date, all Class B
Dividends are paid to Holder as a holder of the Company's Class B Stock, then
the Number shall be reduced by 583 shares for such month;
(b) All reductions in the Number made under Section 2.2(a) shall be
rescinded and annulled, and the Number shall immediately be increased to the
Number as of October 31, 1998, as adjusted pursuant to Section 4 below, if
(i) within five (5) days of any dividend payment date during Year 2 the
dividend payment is not made; or
(ii) on December 31, 1999 the Company's net income allocable to common
stockholders does not exceed $1,500,000.
2.3 Adjustments in Months 25 through 36
----------------------------------------
(a) Subject to the provisions of clause (b) below, on the first
business day of each month in the period beginning November 1, 1999 and ending
October 31, 2000 ("Year 3"), if and only if, on that date, all Class B
Dividends are paid to Holder as a holder of the Company's Class B Stock, then
the Number shall be reduced by 431 shares for such month;
(b) All reductions in the Number made under Section 2.3(a) shall be
rescinded and annulled, and the Number shall immediately be increased to the
Number as of October 31, 1999, as adjusted pursuant to Section 4 below, if
(i) within five (5) days of any dividend payment date during Year 3 the
dividend payment is not made; or
(ii) on December 31, 2000 the Company's net income allocable to common
stockholders does not exceed $2,000,000.
2.4 Reporting of Adjustments under this Section. Within three
---------------------------------------------
business days of the Company's Form 10-K or Form 10-KSB is due for filing with
the Securities and Exchange Commision, and at any time upon the Holder's
request, the Company shall issue to the Holder a notice (the "Notice"),
certified by the Company's chief financial officer, (i) indicating the
Company's net income to stockholders for the fiscal year just ended, (ii)
stating whether or not all monthly Class B Dividends were paid to the Holder,
and (iii) indicating the reduction to the Number, if any, made to date
pursuant to this Section 2. The obligations under this Section shall expire
after the Corporation delivers the Notice for the fiscal year ended December
31, 2000.
3. Stock Fully Paid; Reservation of Shares. All Shares that may be
---------------------------------------
issued upon the exercise of the rights represented by this Warrant, and all
shares into which such Shares are convertible will, upon issuance, be fully
paid and nonassessable, and free from all taxes, liens and charges with
respect to the issue thereof. During the period within which the rights
represented by the Warrant may be exercised, the Company will at all times
have authorized and reserved for the purpose of issuance upon exercise of the
purchase rights evidenced by this Warrant, a sufficient number of Shares to
provide for the exercise of the unexercised rights represented by this
Warrant.
4. Adjustment of Warrant Price and Number of Shares. The number and
------------------------------------------------
kind of securities purchasable upon the exercise of this Warrant and the
Warrant Price shall be subject to adjustment from time to time upon the
occurrence of certain events, as follows: The "Warrant Price" shall initially
be $5.00 and shall be adjusted and readjusted from time to time as provided in
this Warrant.
(a) Adjustments to Warrant Price.
-------------------------------
(i) Stock Dividends, Subdivisions and Combinations, Non Pro-Rata
------------------------------------------------------------
Repurchases. In case at any time or from time to time the Corporation shall:
-------
(A) take a record of the holders of its Other Stock (as defined
below) for the purpose of entitling them to receive a dividend payable in, or
other distribution of, Other Stock (other than Common Stock), or
(B) subdivide its outstanding shares of Other Stock into a larger
number of shares of Other Stock, or
(C) combine its outstanding shares of Other Stock into a smaller
number of shares of Other Stock,
then the Warrant Price in effect immediately after the happening of any such
event shall be proportionately decreased, in case of the happening of events
described in subparagraphs A or B above, or proportionately increased, in case
of the happening of events described in subparagraph C above. "Other Stock"
shall mean the Common Stock and shall also include all other stock of the
Corporation of any other class other than Convertible Stock. A
reclassification of the Other Stock into shares of Other Stock and shares of
any other class of stock shall be deemed a distribution by the Corporation to
the holders of its Other Stock of such shares of such other class of stock
within the meaning of this Subsection and, if the outstanding shares of Other
Stock shall be changed into a larger or smaller number of shares of Other
Stock as a part of such reclassification, shall be deemed a subdivision or
combination, as the case may be, of the outstanding shares of Other Stock
within the meaning of this Subsection a(i).
(ii) Repurchase of Other Stock. In case at any time or from time to
-------------------------
time, the Corporation shall (except as hereinafter provided) repurchase any
Other Stock (the "Repurchased Stock"), then upon the consummation of such
repurchase the Warrant Price then in effect shall be decreased to an amount
determined by multiplying the Warrant Price in effect immediately prior to
such adjustment by a fraction, (x) the numerator of which is the price paid
per share of the Repurchased Stock, and (y) the denominator of which is the
Current Market Price per share of Common Stock on the date immediately prior
to such repurchase (after giving effect to any stock splits, stock dividends
or other stock repurchases between the date of such repurchase and the date on
which such calculation is made); provided, however, that if the numerator of
-------- -------
such fraction is greater than the denominator of such fraction, then no
adjustment to the Warrant Price shall be made. No adjustment of the Warrant
Price shall be made under this Subsection upon the repurchase of the
Repurchased Stock if such repurchase, together with all repurchases during the
previous twelve (12) calendar months, is a repurchase of less than the sum of
(1) 5% of the issued and outstanding Other Stock determined as of the date of
such repurchase, plus (2) repurchases of stock options and Other Stock
----
underlying such stock options in a transaction or series of transactions
during such twelve (12) month period not exceeding $50,000 in the aggregate.
(iii) Issuance of Additional Shares of Other Stock. "Additional
--------------------------------------------
Shares of Other Stock" shall mean all shares of Other Stock issued by the
Corporation after October 31, 1997 other than (i) the shares of Common Stock
issued to a holder of Convertible Stock upon conversion of such Convertible
Stock, and (ii) Permitted Common Stock Issuances. In case at any time or from
time to time, the Corporation shall (except as hereinafter provided) issue,
whether in connection with the merger of a corporation into the Corporation or
otherwise, any Additional Shares of Other Stock for a consideration per share
less than the Warrant Price then in effect (as so adjusted from time to time
for additional issuances, reductions and other adjustments to the number of
shares of Common Stock outstanding, including without limitation stock splits,
stock dividends, reverse stock splits, pro rata repurchases, and any other
good faith transfer of securities or other transaction which results in an
increase or decrease in the number of shares of Common Stock outstanding,
(such amount per share, the "Minimum Issue Price") on the Computation Date
(determined as set forth below), then the Warrant Price shall be adjusted to
be that number determined by multiplying the Warrant Price in effect
immediately prior to such adjustment by a fraction (x) the numerator of which
shall be the number of shares of Other Stock outstanding prior to the issuance
of the Additional Shares of Other Stock, plus the number of shares of Other
Stock which the aggregate consideration for the total number of such
Additional Shares of Other Stock so issued would purchase at the Minimum Issue
Price per share of Common Stock and (y) the denominator of which shall be the
number of shares of Other Stock outstanding after giving effect to the
issuance of such Additional Shares of Other Stock so issued. The provisions
of this Subsection shall not apply to any issuance of Additional Shares of
Other Stock for which an adjustment is provided under Subsection 4(a)(i). No
adjustment of the Warrant Price shall be made under this Subsection upon the
issuance of any Additional Shares of Other Stock which are issued pursuant to
the exercise of any warrants, options or other subscription or purchase rights
or pursuant to the exercise of any conversion or exchange rights in any
Convertible Securities, if any such adjustment shall previously have been made
upon the issuance of such warrants, options or other rights or upon the
issuance of such Convertible Securities (or upon the issuance of any warrant
or other rights therefor) pursuant to Subsection (iv) or (v) of Subsection
4(a). "Convertible Securities" shall mean evidences of indebtedness, shares
of stock or other securities, which are convertible into or exchangeable for
Additional Shares of Other Stock, either immediately or upon the arrival of a
specified date or the happening of a specified event. For purposes of this
Subsection, the "Computation Date" shall be the earlier of (x) the date on
which the Corporation shall enter into a firm contract for the issuance of
such Additional Shares of Other Stock, or (y) the date of actual issuance of
such Additional Shares of Other Stock.
(iv) Issuance of Warrants, Options or Other Rights. In case at any
---------------------------------------------
time or from time to time, the Corporation shall take a record of the holders
of its Other Stock for the purpose of entitling them to receive a distribution
of, or shall otherwise issue, any warrants, options or other rights to
subscribe for or purchase any Additional Shares of Other Stock or any
Convertible Securities (other than Permitted Common Stock Issuances and Common
Stock issuable upon conversion of Convertible Stock), and the consideration
per share for which Additional Shares of Other Stock may at any time
thereafter be issuable pursuant to such warrants, options or other rights or
pursuant to the terms of such Convertible Securities shall be less than the
Minimum Issue Price then in effect on the Computation Date (as determined
below), then the Warrant Price shall be adjusted as provided in the second
sentence of Subsection 4(a)(iii). Such adjustment shall be made on the basis
that (i) the consideration per share for which such Additional Shares of Other
Stock may be issued equals a fraction, (x) the denominator of which is the
maximum number of Additional Shares of Other Stock issuable pursuant to all
such warrants, options or other rights or necessary to effect the conversion
or exchange of all such Convertible Securities, and (y) the numerator of which
is the minimum consideration received and receivable by the Corporation for
such Additional Shares of Other Stock pursuant to such warrants, options or
other rights or pursuant to the terms of such Convertible Securities, (ii) the
maximum number of Additional Shares of Other Stock issuable pursuant to all
such warrants, options or other rights or necessary to effect the conversion
or exchange of all such Convertible Securities shall be deemed to have been
issued as of the Computation Date (determined as set forth in the last
sentence of this Subsection), and (iii) the aggregate consideration for such
maximum number of Additional Shares of Other Stock shall be deemed to be the
minimum consideration received and receivable by the Corporation for the
issuance of such Additional Shares of Other Stock pursuant to such warrants,
options or other rights or pursuant to the terms of such Convertible
Securities.
For purposes of this Subsection, the "Computation Date" shall be the
earliest of (a) the date on which the Corporation shall take a record of the
holders of its Other Stock for the purpose of entitling them to receive any
such warrants, options or other rights, (b) the date on which the Corporation
shall enter into a firm contract for the issuance of such warrants, options or
other rights, and (c) the date of actual issuance of such warrants, options or
other rights.
(v) Issuance of Convertible Securities. In case at any time or from
----------------------------------
time to time, the Corporation shall take a record of holders of the Other
Stock for the purpose of entitling them to receive a distribution of, or shall
otherwise issue, any Convertible Securities (other than Permitted Common Stock
Issuances, and Convertible Stock) and the consideration per share for which
additional shares of other stock may at any time thereafter be issuable
pursuant to the terms of such Convertible Securities shall be less than the
Minimum Issue Price then in effect on the Computation Date (as determined
below), then the Warrant Price shall be adjusted as provided in the second
sentence of Subsection 4(a)(iii). Such adjustment shall be made on the basis
that (i) the amount of consideration per share for which such Additional
Shares of Other Stock may be issued equals a fraction (x) the denominator of
which is the maximum number of Additional Shares of Other Stock necessary to
effect the conversion or exchange of all such Convertible Securities, and (y)
the numerator of which shall be the minimum consideration received and
receivable by the Corporation for the issuance of such Additional Shares of
Other Stock pursuant to the terms of such Convertible Securities, (ii) the
maximum number of Additional Shares of Other Stock necessary to effect the
conversion or exchange of all such Convertible Securities shall be deemed to
have been issued as of the Computation Date (determined as set forth in the
penultimate sentence of this Subsection), and (iii) the aggregate
consideration for such maximum number of Additional Shares of Other Stock
shall be deemed to be the minimum consideration received and receivable by the
Corporation for issuance of such Additional Shares of Other Stock pursuant to
the terms of such Convertible Securities.
For purposes of this Subsection, the "Computation Date" shall be the
earliest of (a) the date on which the Corporation shall take a record of the
holders of its Other Stock for the purpose of entitling them to receive any
such Convertible Securities, (b) the date on which the Corporation shall enter
into a firm contract for the issuance of such Convertible Securities, and (c)
the date of actual issuance of such Convertible Securities. No adjustment of
the Warrant Price shall be made under this Subsection upon the issuance of any
Convertible Securities which are issued pursuant to the exercise of any
warrants, options or other subscription or purchase rights therefor, if any
such adjustment shall previously have been made upon the issuance of such
warrants, options or other rights pursuant to Subsection 4(a)(iv).
(vi) Superseding Adjustment of Warrant Price. If at any time after
---------------------------------------
any adjustment of the Warrant Price shall have been made pursuant to the
foregoing Subsections 4(a)(iv) or 4(a)(v) on the basis of the issuance of
warrants, options or other rights or the issuance of other Convertible
Securities or after any new adjustment of the Warrant Price shall have been
made pursuant to this Subsection 4(a)(vi),
(A) such warrants, options or other rights or the right of conversion
or exchange in such other Convertible Securities shall expire, and a portion
of such warrants, options or rights, or the right of conversion or exchange in
respect of a portion of such other Convertible Securities, as the case may be,
shall not have been exercised, or
(B) the consideration per share for which Additional Shares of Other
Stock are issuable pursuant to such warrants, options, or rights or the terms
of such other Convertible Securities, shall be increased solely by virtue of
provisions therein contained for an automatic increase in such consideration
per share upon the arrival of a specified date or the happening of a specified
event,
such previous adjustment shall be rescinded and annulled and the Additional
Shares of Other Stock which were deemed to have been issued by virtue of the
computation made in connection with the adjustment so rescinded and annulled
shall no longer be deemed to have been issued by virtue of such computation.
Thereupon, a recomputation shall be made of the effect of such warrants,
options or other rights, or other Convertible Securities on the basis of:
(1) treating the number of Additional Shares of Other Stock, if any,
theretofore actually issued or issuable pursuant to the previous exercise of
such warrants, options or other rights or such right of conversion or
exchange, as having been issued on the date or dates of such issuance as
determined for purposes of such previous adjustment and for the consideration
actually received therefor, and
(2) treating any such warrants, options or other rights or any such
other Convertible Securities which then remain outstanding as having been
granted or issued immediately after the time of such increase of the
consideration per share for such Additional Shares of Other Stock issuable
under such warrants, options or other rights or other Convertible Securities,
and, if and to the extent called for by the foregoing provisions of this
Subsection 4(a) on the basis aforesaid, a new adjustment of the Warrant Price
shall be made, and such new adjustment shall supersede the previous adjustment
so rescinded and annulled. If any such superseding adjustment of the Warrant
Price is made after the exercise of this Warrant by a former Holder of this
Warrant in lieu of such adjustment, if, and only if, such former Holder owns
shares of Common Stock of the Corporation obtained upon exercise of this
Warrant, the Corporation shall have the option to purchase the number of
shares of Common Stock from such former Holder equal to the difference between
(x) the number of shares of Common Stock which such former Holder received
upon exercise prior to the adjustment, and (y) the number of shares of Common
Stock which such former Holder would have received on exercise had such
adjustment been made prior to exercise. The purchase price per share of such
stock shall be $0.01 per share.
(vii) Other Provisions Applicable to Adjustments Under this Section.
-------------------------------------------------------------
The following provisions shall be applicable to the making of adjustments of
the Warrant Price hereinbefore provided for in this Subsection 4(a):
(A) Treasury Stock. The sale or other disposition of any issued
--------------
shares of Other Stock owned or held by or for the account of the Corporation
shall be deemed an issuance thereof for purposes of this Subsection 4(a).
(B) Computation of Consideration. To the extent that any Additional
----------------------------
Shares of Other Stock or any Convertible Securities or any warrants, options
or other rights to subscribe for or purchase any Additional Shares of Other
Stock or any Convertible Securities shall be issued solely for cash
consideration, the consideration received by the Corporation therefor shall be
deemed to be the amount of cash received by the Corporation therefor, or, if
such Additional Shares of Other Stock or Convertible Securities are offered by
the Corporation for subscription, the subscription price, or, if such
Additional Shares of Other Stock or Convertible Securities are sold to
underwriters or dealers for public offering without a subscription offering,
the initial public offering price, in any such case excluding any amounts paid
or receivable for accrued interest or accrued dividends, and after deductions
for any compensation, underwriting discounts, placement fees or funding or
financing commitment fees (but before deduction for any other expenses) paid
or incurred by the Corporation for and in the underwriting of, or otherwise in
connection with, the issue thereof. To the extent that such issuance shall be
for a consideration other than solely for cash, then, except as herein
otherwise expressly provided, the amount of such consideration shall be deemed
to be the fair value of such consideration at the time of such issuance as
determined in good faith by the Corporation's Board of Directors. The
consideration for any Additional Shares of Other Stock issuable pursuant to
any warrants, options or other rights to subscribe for or purchase the same
shall be the consideration received or receivable by the Corporation for
issuing such warrant, options or other rights, plus the additional
consideration payable to the Corporation upon the exercise of such warrants,
options or other rights. The consideration for any Additional Shares of Other
Stock issuable pursuant to the terms of any Convertible Securities shall be
the consideration received or receivable by the Corporation for issuing any
warrants, options or other rights to subscribe for or purchase such
Convertible Securities, plus the consideration paid or payable to the
Corporation in respect of the subscription for or purchase of such Convertible
Securities, plus the additional consideration, if any, payable to the
Corporation upon the exercise of the right of conversion or exchange in such
Convertible Securities.
(C) When Adjustments to be Made. The adjustments required by the
---------------------------
preceding Subsections of this Subsection 4(a) shall be made whenever and as
often as any specified event requiring an adjustment shall occur, except that
no adjustment of the Warrant Price that would otherwise be required shall be
made (except in the case of a subdivision or combination of shares of the
Other Stock, as provided for in Subsection 4(a)(i)) unless and until such
adjustment, either by itself or with other adjustments not previously made,
adds or subtracts at least 1% to the Warrant Price, as determined in good
faith by the Board of Directors of the Corporation. Any adjustment
representing a change of less than such minimum amount shall be carried
forward and made as soon as such adjustment, together with other adjustments
required by this Subsection 4(a) and not previously made, would result in a
minimum adjustment. For the purpose of any adjustment, any specified event
shall be deemed to have occurred at the close of business on the date of its
occurrence, All calculations made under this Subsection shall be made to the
nearest cent. Notwithstanding any other provision of this Warrant, and except
for a combination of shares or other adjustment pursuant to Section 4(c)(i),
no adjustment to the Warrant Price shall be made which causes the Warrant
Price to be increased; and once the Warrant Price is adjusted downward, it
shall not be readjusted upward except as provided in Section 4(a)(vi).
(D) Fractional Interests. In computing adjustments under this
---------------------
Subsection 4(a), fractional interests in Other Stock shall be taken into
account to the nearest one-thousandth of a share.
(E) When Adjustment not Required. If the Corporation shall take a
----------------------------
record of the Holders of its Other Stock for the purpose of entitling them to
receive a dividend or distribution or subscription or purchase rights and
shall, thereafter and before the distribution thereof to shareholders, legally
abandon its plan to pay or deliver such dividend, distribution, subscription
or purchase rights, then (i) thereafter no adjustment shall be required by
reason of the taking of such record and any such adjustment previously made in
respect thereof shall be rescinded and annulled, or (ii) in the event that any
such adjustment previously made in respect of such taking of record cannot be
rescinded or annulled as a result of the conversion of this Warrant after the
taking of such record occurs, in lieu of such recision or annulment of the
adjustment, if the Warrant was exercised by such former Holder, and if such
former Holder owns shares of Common Stock of the Corporation obtained upon
exercise of this Warrant, the Corporation shall have the option to purchase
the number of shares of Common Stock from such former Holder equal to the
difference between (x) the number of shares of Common Stock which such former
Holder had received upon conversion after such record date, and (y) the number
of shares of Common Stock which such former Holder would have received on
conversion had such adjustment been annulled or rescinded prior to conversion.
The purchase price per share of such Common Stock shall be $.01 per share.
(viii) Merger, Consolidation or Disposition of Assets. In case the
----------------------------------------------
Corporation shall merge or consolidate into another corporation, and such
transaction does not constitute an Event of Default (or the Payee waives its
right to accelerated payment under the Investment Agreement) or shall sell,
transfer or otherwise dispose of all or substantially all of its property,
assets or business to another corporation and pursuant to the terms of such
merger, consolidation or disposition, shares of common stock of the successor
or acquiring corporation (or any parent thereof) are to be received by or
distributed to the holders of Other Stock of the Corporation, then the Holder
of this Warrant shall have the right thereafter to receive, upon conversion of
this Warrant, shares of common stock equal to the number of shares of common
stock of the successor or acquiring corporation receivable upon or as a result
of such merger, consolidation or disposition of assets had the Holder of this
Warrant converted it into Common Stock of the Corporation immediately prior to
such event. If, pursuant to the terms of such merger, consolidation or
disposition of assets, any cash, shares of stock or other securities or
property of any nature whatsoever (including warrants, options or other
subscription or purchase rights) are to be received by or distributed to the
holders of Other Stock of the Corporation (whether in addition to common stock
of the successor or acquiring corporation, or any parent thereof, or
otherwise) the Warrant Price in effect shall be adjusted to that number
determined by multiplying the Warrant Price then in effect by a fraction (x)
the numerator of which shall be the Current Market Price per share of Common
Stock immediately prior to the closing of such merger, consolidation or
disposition minus the portion applicable to one share of Common Stock of any
such cash so distributable and of the fair value of any such shares of stock
or other securities or property so received or distributed, and (y) the
denominator of which shall be the Current Market Price per share of Common
Stock immediately prior to the closing of such merger, consolidation or
disposition. The fair value of any such shares of stock or other securities
or property shall be determined pursuant to the Valuation Procedure. In case
of any such merger, consolidation or disposition of assets, the successor or
acquiring corporation shall expressly assume the due and punctual observance
and performance of each and every covenant and condition hereof to be
performed and observed by the Corporation and all of the obligations and
liabilities hereunder, subject to such modification as shall be necessary to
provide for adjustments to the Warrant Price which shall be as nearly
equivalent as practicable to the adjustments provided for in this Subsection
4(a). For the purposes of this Subsection 4(a)(viii), "common stock of the
successor or acquiring corporation" shall include stock of such corporation of
any class, which is not preferred as to dividends or assets over any other
class of stock of such corporation and which is not subject to redemption, and
shall also include any evidences of indebtedness, shares of stock or other
securities which are convertible into or exchangeable for any such stock,
either immediately or upon the arrival of a specified date or the happening of
a specified event, and any warrants, options or other rights to subscribe for
or purchase any such stock. The foregoing provisions of this Subsection shall
similarly apply to the successive mergers, consolidations or dispositions of
assets.
(b) Adjustment to Number. At the time the Warrant Price is adjusted,
--------------------
the Number shall also be adjusted by multiplying the Number immediately prior
to the adjustment by a fraction the numerator of which is the Warrant Price
immediately prior to the adjustment and the denominator of which is the
adjusted Warrant Price.
(c) No Impairment. The Corporation will not through any
--------------
reorganization, transfer of assets, consolidation, merger, dissolution, issue
or sale of securities or any other voluntary action, avoid the observance or
performance of any of the terms to be observed or performed hereunder by the
Corporation but will at all times in good faith assist in the carrying out of
all the provisions of this Section 4 and in the taking of all such action as
may be necessary or appropriate in order to protect the conversion rights of
the Holder of this Warrant against impairment. Without limiting the
generality of the foregoing, the Corporation (i) will not permit the par value
of any shares of stock at the time receivable upon the exercise of this
Warrant to exceed the Warrant Price then in effect, (ii) will take all such
action as may be necessary or appropriate in order that the Corporation may
validly and legally issue fully paid nonassessable shares of stock on the
exercise of this Warrant, and (iii) will not take any action which results in
any adjustment of the Warrant Price if the total number of shares of Common
Stock issuable after the action upon the exercise of this Warrant and all
other warrants, options and other right to acquire Common Stock will exceed
the total number of shares of Common Stock then authorized by the Charter and
available for the purpose of issue upon such exercise.
(d) Certificate as to Adjustments. Upon the occurrence of each
------------------------------
adjustment or readjustment of the Warrant Price and the Number pursuant to
this Section 4, the Corporation at its expense shall promptly compute such
adjustment or readjustment in accordance with the terms hereof and furnish to
the Holder a certificate setting forth such adjustment or readjustment and
showing in detail the facts upon which such adjustment or readjustment is
based, including a statement of (i) the consideration received or to be
received by the Corporation for any Additional Shares of Other Stock issued or
sold or deemed to have been issued, (ii) the number of shares of Other Stock
then outstanding or deemed to be outstanding, and (iii) the Warrant Price and
the Number in effect immediately prior to such issue or sale and as adjusted
and readjusted on account thereof, showing how each was calculated. The
Corporation shall, as promptly as practicable following its receipt of the
written request, but in any event within five Business Days after receipt of
such written request, of the Holder furnish or cause to be furnished to the
Holder a like certificate setting forth (i) the Warrant Price and Number at
the time in effect, showing how each was calculated, and (ii) the number of
shares of Common Stock and the amount, if any, of other property which at the
time would be received upon the conversion of this Warrant.
(e) Notices of Record Date. In the event of any taking by the
------------------------
Corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend which is the same as cash dividends paid
in previous quarters) or other distribution, or any right to subscribe for,
purchase or otherwise acquire any shares of stock of any class or any other
securities or property, or to receive any other right, the Corporation shall
mail to the Holder at least thirty days prior to the date specified therein, a
notice specifying the date on which any such record is to be taken for the
purpose of such dividend or distribution.
(f) Common Stock Reserved. The Corporation shall at all times
-----------------------
reserve and keep available out of its authorized but unissued Common Stock
such number of shares of Common Stock as shall from time to time be sufficient
to effect conversion of this Warrant.
(g) Closing of Books. The Corporation will not close its books
-----------------
against the permitted transfer of this Warrant or its exercise.
(h) Registration; Transfer Taxes. The Corporation shall keep at its
----------------------------
principal office (or such other place as the Corporation reasonably
designates) a register for the registration of this Warrant. Upon the
surrender of this Warrant at such place, the Corporation shall, at the request
of the Holder execute and deliver a new certificate or certificates in
exchange therefor representing in the aggregate the amount of this Warrant
represented by the surrendered Warrant (and the Corporation forthwith shall
cancel such surrendered Warrant), subject to the requirements of applicable
securities laws. Each such new Warrant shall be registered in such name and
shall represent such amount as shall be requested by the Holder and shall be
substantially identical in form to this Warrant. The issuance of new Warrants
shall be made without charge to the Holder for any issuance tax in respect of
any transfer involved in the issuance and delivery of any Warrant in a name of
(i) the Holder, or (ii) any affiliate of the Holder.
(i) Definitions. The following terms shall have the following
-----------
meanings, which meanings shall be equally applicable to the singular and
plural forms of such terms:
"Business Day" means any day which is not a Saturday or a Sunday or a
public holiday or a day on which banks are required or permitted to close
under the laws of the State of California.
"Common Stock" means the Common Stock of the Corporation, par value
$0.001.
"Convertible Securities" shall have the meaning assigned to it in Section
4(a)(iii).
"Convertible Stock" means the Corporation's Class A Cumulative
Convertible Preferred Stock, par value $0.001 per share, outstanding on
October 31, 1997, the Corporations Class B Cumulative Preferred Stock, par
value $0.001 per share outstanding on October 31, 1997 and the Corporation's
Class C Cumulative Convertible Preferred Stock, par value $0.001 per share,
outstanding on October 31, 1997.
"Current Market Price" per share of Common Stock at the date herein
specified, shall be deemed to be the average of the Closing Prices for ten
consecutive Business Days immediately prior to the day in question or, if no
Closing Price is reported, the average of the closing bid and asked prices.
"Closing Prices" for each such Business Day shall be the last sale price
reported on the National Association of Securities Dealers Automated
Quotations System ("NASDAQ") on the preceding Business Day or, if the Common
Stock is an issue for which last sale prices are not reported on NASDAQ, the
closing bid quotation on such day (the closing bid quotation for a given day
shall be the highest bid quotation as quoted in any of The Wall Street
Journal, the national Quotation Bureau pink sheets, quotation sheets of
registered market makers and, if necessary, dealer's telephone quotations),
but, in each of the preceding two cases, if the relevant NASDAQ price or
quotation did not exist on such day, then the price or quotation on the next
preceding Business Day in which there was such a price or quotation.
"Other Stock" shall have the meaning assigned to it in Section 4(a)(i).
"Permitted Common Stock Issuances" means (i) shares of Common Stock or
options issuable under the Corporation's existing stock option plans and
401(k) plans, so long as such shares issued and outstanding under these plans
do not exceed fifteen percent (15%) issued and outstanding of the capital
stock of the Corporation on a fully diluted basis; (ii) shares of Common Stock
issuable upon conversion of the Note, (iii) warrants issuable upon prepayment
of the Note and Common Stock issuable upon exercise thereof; (iv) shares of
Common Stock issuable upon conversion of the Convertible Stock, and (v) shares
of Common Stock issuable upon exercise of warrants of the Corporation
outstanding on the date hereof.
"Principal Stockholders" shall mean each of the Corporation's
Stockholders owning five percent (5%) or more of the Corporation's issued and
outstanding capital stock on a fully diluted basis.
"Qualified Public Offering" means a secondary public offering of the
Corporation's stock which results in net proceeds to the Corporation of at
least $15,000,000.
"Warrants" means the warrants issued upon payment of the Note.
5. Fractional Shares. No fractional Shares will be issued in
------------------
connection with any exercise hereunder, but in lieu of such fractional shares
the Company shall make a cash payment therefor upon the basis of the Warrant
Price then in effect.
6. Other Agreements. This Warrant and the Shares, when issued,
----------------
are subject to the terms and conditions of an Investment Agreement, as amended
and a Stockholders Agreement, each dated as of December 31, 1996, among the
Company and the "Holders" identified therein, and the holder of this Warrant
and the Shares into which it is exercisable is entitled to the benefits and is
subject to the obligations set forth therein which may limit the right of the
holder to transfer this Warrant and such Shares, entitle the holder to receive
certain information from the Company, entitle the holder to certain
registration rights and other rights concerning the sale of the Warrant or
Shares in certain transactions and contain certain other rights and
restrictions.
7. Representations and Warranties. This Warrant is issued and
--------------------------------
delivered on the basis of the following representations and warranties of the
Company:
7.1 Authorization and Delivery. This Warrant has been duly
----------------------------
authorized and executed by the Company and when delivered will be the valid
and binding obligation of the Company enforceable in accordance with its
terms;
7.2 Warrant Shares. The Warrant Shares have been duly authorized and
--------------
reserved for issuance by the Company and, when issued and paid for in
accordance with the terms hereof, will be validly issued, fully paid and
nonassessable;
7.3 Rights and Privileges. The rights, preferences, privileges and
---------------------
restrictions granted to or imposed upon the Shares and the holders thereof are
as set forth herein and in the Company's Charter are true and complete copies
of which have been delivered to the original warrant holder; and
7.4 No Inconsistency. The execution and delivery of this Warrant are
----------------
not, and the issuance of the Warrant upon exercise of this Warrant in
accordance with the terms hereof will not be, inconsistent with the Company's
Charter or by-laws, do not and will not contravene any law, governmental rule
or regulation, judgment or order applicable to the Company, and do not and
will not contravene any provision of, or constitute a default under, any
indenture, mortgage, contract or other instrument of which the Company is a
party or by which it is bound or require the consent or approval of, the
giving of notice to, the registration with or the taking of any action in
respect of or by, any Federal, state or local government authority or agency
or other person.
8. Modification and Waiver. This Warrant and any provision hereof
-----------------------
may be changed, waived, discharged or terminated only by an instrument in
writing signed by the party against which enforcement of the same is sought.
9. Notice of Expiration. The Company shall give notice of expiration
--------------------
of this Warrant to Holder sixty (60) days prior to the end of the term.
10. Notices. Any notice which is required or permitted to be given
-------
pursuant hereto shall be given in the manner provided in the Investment
Agreement.
11. Binding Effect on Successors. This Warrant shall be binding upon
----------------------------
any corporation succeeding the Company by merger or consolidation, and all of
the obligations of the Company relating to the Shares issuable upon the
exercise of this Warrant shall be as set forth in the Company's Charter and
the Company's by-laws (each as amended from time to time) and shall survive
the exercise and termination of this Warrant and all of the covenants and
agreements herein and in such other documents and instruments of the Company
shall inure to the benefit of the successors and assigns of the holder hereof.
The Company will, at the time of the exercise of this Warrant, in whole or in
part, upon request of the holder hereof but at the Company's expense,
acknowledge in writing its continuing obligation to the holder hereof in
respect of any rights (including, without limitation, any right to
registration of the Shares issuable upon exercise of this Warrant) to which
the holder hereof shall continue to been titled after such exercise in
accordance with this Warrant; provided, that the failure of the holder hereof
to make any such request shall not affect the continuing obligation of the
Company to the holder hereof in respect of such rights.
12. Descriptive Headings. The descriptive headings of the several
--------------------
paragraphs of this Warrant are inserted for convenience only and do not
constitute a part of this Warrant.
13. Governing Law. This warrant shall be construed and enforced in
-------------
accordance with, and the rights of the parties shall be governed by, the laws
of the state of Texas
IN WITNESS WHEREOF, the undersigned, being duly authorized, has executed
and delivered this Warrant as of this day and year set forth at the beginning
of this Warrant.
THE QUIZNO'S CORPORATION, a Colorado corporation
By:
Its: _________________________
<PAGE>
EXHIBIT A-1
Notice of Exercise
To: The Quizno's Corporation
1. The undersigned hereby elects to purchase shares of Common
Stock of THE QUIZNO'S CORPORATION pursuant to the terms of the attached
Warrant, and tenders herewith payment of the purchase price of such shares in
full.
2. Please issue a certificate or certificates representing said
shares in the name of the undersigned or, subject to compliance with the
restrictions on transfer set forth in Section 7 of the Warrant, in such other
name or names as are specified below:
(Name)
(Address)
3. The undersigned represents that the aforesaid shares being
acquired for the account of the undersigned for investment and not with a view
to, or for resale in connection with, the distribution thereof and that the
undersigned has no present intention of distributing or reselling such shares.
Signature
(Name of Signatory)
By:
Its:
Date:
<PAGE>
EXHIBIT A-2
Notice of Exercise
To: The Quizno's Corporation
1. Contingent upon and effective immediately prior to the closing
(the "Closing") of the Company's public offering contemplated by the
Registration Statement on Form S , filed , , the
undersigned hereby elects to purchase shares of Common Stock of the
Company (or such lesser number of shares as may be sold on behalf of the
undersigned at the Closing) pursuant to the terms of the attached Warrant.
2. Please deliver to the custodian for the selling shareholders a
stock certificate representing such shares.
3. The undersigned has instructed the custodian for the selling
shareholders to deliver to the Company $ or, if less, the net
proceeds due the undersigned from the sale of shares in the aforesaid public
offering. If such net proceeds are less than the purchase price for such
shares, the undersigned agrees to deliver the difference to the Company prior
to the Closing.
__________________________
Signature
Date:
EXHIBIT 10.26
AMENDED AND RESTATED SECURITY AGREEMENT
This AMENDED AND RESTATED SECURITY AGREEMENT is made as of December 31,
1996 by and between The Quizno's Corporation a Colorado corporation
("Quizno's") and the Quizno's Operating Company ("QOC") (Quizno's and QOC are
referred to collectively, as the "Debtors"), each with an address at 1099 18th
Street, Suite 2850, Denver, Colorado 80202, and Retail & Restaurant Growth
Capital, L.P., a Delaware limited partnership with an address at 10000 N.
Central Expressway, Suite 1060, Dallas, Texas 75231 (the "Secured Party").
RECITALS
--------
The following is a statement of facts underlying this Agreement:
A. Quizno's and the Secured Party are parties to an Investment
Agreement of even date herewith ("Investment Agreement"), as amended whereby
Secured Party loaned Quizno's $1,500,000 (the "Loan") as evidenced by an
Amended and Restated Senior Subordinated Convertible Promissory Note (the
"Note").
B. QOC is a wholly owned subsidiary of Quizno's and will benefit from
the proceeds of the Loan.
C. As a condition to making the Loan Secured Party requires that
Debtors grant to it a security interest in the Collateral, as described in
Section 3 below, to secure payment of the Loan and the Note and performance of
the other obliga-tions contained in this Agreement.
D. This Amended and Restated Security Agreement supersedes and
replaces the Security Agreement made as of December 31, 1996 between Quizno's
and Secured Party, as amended by a First Amendment to Security Agreement dated
as of November 11, 1997.
AGREEMENT
---------
NOW, THEREFORE, in consideration of the Secured Party making the Loan to
Quizno's and their mutual promises set forth herein, Debtors and the Secured
Party hereby agree as follows:
1. Security Interest. Each Debtor hereby creates and grants to the
-----------------
Secured Party a continuing security interest in the Collateral described in
Section 3 hereof, to secure the payment of the Loan and the Note and
performance of the other obligations of Debtors described in this Agreement.
Such security interest shall be subordinate to certain other liens and
security interests granted by Debtors as provided in Section 6.2 of the
Investment Agreement.
-10-
2. Obligations Secured. The security interest created and granted
-------------------
hereby secures (a) Quizno's obligation to pay, per-form and discharge all
debts, liabilities and obligations of Quizno's to the Secured Party arising
under or by virtue of the Loan and the Note and any and all extensions and
increases or decreases thereof; and (b) other indebtedness and obligations of
Quizno's arising pursuant to the provisions of this Security Agreement
(collectively, the "Obligations"). This Agreement will automatically
terminate upon payment in full of the Note.
3. Collateral. The collateral (the "Collateral") shall mean and
----------
include all right, title, estate and interest of Debtors in or to: all
tangible and intangible personal property and fixtures of Debtors which
Debtors now or at any time hereafter may acquire or in which Debtors now or
any time hereafter have any rights, including but not limited to all accounts
receivable, documents, instruments, chattel paper, general intangibles,
inventory, contract rights, choses in action, insurance policies, insurance
proceeds, tax refunds, inventory, goods, merchandise, and other personal
property now owned or hereafter acquired by Debtors which are held for sale or
lease, or are raw materials, work-in-process, supplies, or materials used or
consumed in Debtors' businesses, and all substitutions, replacements,
additions, or accessions therefore and thereto, all intellectual property,
trade copyrights, equipment, trademarks, franchises, patents, trade names,
licenses, jingles, slogans and logotypes, related common law and statutory
copyrights owned or licensed to Debtors, cash and short-term investments,
vehicles, consumer goods of every kind and descrip-tion, including, without
limitation, motor vehicles, with all present and future proceeds and products
of, increases, replace-ments and accessions thereto.
The term "accounts receivable" shall include, without limita-tion, all
accounts and any other obligations or indebtedness owed to Debtors from
whatever source arising; all rights of Debtors to receive any payments in
money or kind; all guarantees of receivables and security there-for; all of
the right, title and interest of Debtors in and with respect to the goods,
services or other property which gave rise to or which secure any of the
receivables and insurance policies and proceeds relating thereto, and all of
the rights of Debtors as an unpaid seller of goods or services, including,
without limitation, the rights of stoppage in transit, replevin, reclamation
and resale; and all of the forego-ing, whether now existing or hereafter
created or acquired.
4. Perfection of Security Interest. Debtors shall join with the
-------------------------------
Secured Party in executing and filing and refiling under the Uniform
Commercial Code such financing state-ments and other documents, such
recordings of assignments of real estate interests and such patent, trademark,
copyright or other assignment forms and such other writings in such offices as
the Secured Party may deem necessary or appropriate and wherever required or
permitted by law in order to perfect and preserve its security interest in
the Collateral, and each Debtor hereby constitutes and appoints the Secured
Party as its attorney-in--fact for the purpose of signing and filing such
financing state-ments and other documents and writings and agrees to do such
further acts and things and to execute and deliver to the Secured Party such
additional conveyances, assign-ments, agreements and instruments as the
Secured Party may require or deem advisable to carry into effect the purpose
of this Security Agreement or to better assure and confirm in the Secured
Party its rights, powers and remedies hereunder.
5. Right of Inspection. From the date hereof until the payment in
-------------------
full, including interest, of the Obligations, the Secured Party and any
authorized agent of the Secured Party shall be allowed to inspect any and all
of the premises, books and records of Debtors for any purpose related to the
Collateral, this Security Agreement or the Obligations secured hereby. Each
Secured Party will endeavor to give Debtors reasonable notice of any such
inspection, but shall not be obligated to do so. Prior to providing access to
information, Debtors reasonably consider to be trade secret or similar
confidential information, Debtors may request that the Secured Party or its
authorized agent sign a confidentiality agreement reasonably acceptable to
Debtors.
6. Representations and Warranties of Debtors. Except for "Permitted
-----------------------------------------
Encumbrances" as hereafter defined, each Debtor repre-sents and warrants to
the Secured Party that the Collate-ral is free and clear of all security
interests, restrictions, liens and encumbrances, except the security interests
herein granted or permitted, and those described in Section 3.10 of the
Investment Agreement that such Debtor has the full right and power to transfer
the Collateral to the Secured Party under this Security Agree-ment and to
enter into this Security Agreement and carry out its terms, and that each
Debtor is, or at the time each item of Collateral comes into existence will
be, the true and lawful owner of, and has, or at the time it comes into
existence will have, good and clear title thereto subject only to the Secured
Party's security interests and Permitted Encumbrances. Each Debtor further
represents and warrants that (i) all Collateral is located as set forth on
Exhibit A, and (ii) its principal place of business is located in the State
of Colorado.
"Permitted Encumbrances" shall mean all of the follow-ing: (i) liens for
taxes, assessments or governmental charges or levies not yet due or
delinquent, or which-can thereafter be paid without penalty, or which are
being contested in good faith in accordance with the Investment Agreement;
(ii) unfiled inchoate mechanics' and materialmen's liens for construction work
in progress; (iii) workmen's, repairmen's, warehousemen's and carriers' lien
and other similar liens, if any, arising in the ordinary course of business;
(iv) purchase money security interests; and (v) security interests or liens in
the Collateral granted to the holders of Senior Indebtedness as defined in the
Investment Agreement.
7. Right of Possession. Unless otherwise provided herein and subject
-------------------
to the terms and conditions of this Security Agreement, unless and until an
Event of Default (as hereinafter defined) shall occur, each Debtor shall be
entitled to the use, pos-session and quiet enjoyment of the Collateral.
8. Covenants with Respect to Collateral. From the date hereof until
------------------------------------
payment in full, including interest, or performance of all Obligations
hereunder, each Debtor shall:
(a) not sell, transfer, assign, dis-pose of, hypothe-cate or subject
to any lien or encumbrance any or all of the Collateral except for sales of
immaterial amounts of equipment or Permitted Encumbranc-es or unless the
Secured Party has consented in advance and in writing; pro-vided, however,
that this Section 8(a) shall not apply to bona fide sales of items of
Collateral in the ordinary course of business and each Debtor may grant
purchase money security interests as defined in the Colora-do Uniform
Commercial Code in the ordinary course of business and Permitted Encumbrances
(as hereafter defined);
(b) maintain in full force and effect the policy or policies of
insurance issued by insurers of recog-nized responsi-bil-ity insuring the
Collateral against such losses and risks and in such amounts as are customary
in the case of corpora-tions of established reputation engaged in the same or
a similar business and similarly situated;
(c) keep all Collateral and its prin-cipal place of business located
in the locations listed on Exhibit A unless Secured Party has received written
notice of any change at least twenty (20) days in advance of such change; and
(d) properly maintain and care for the Collateral in accordance with
the highest standards customary for businesses similar to the business of each
Debtor.
9. Rights of Secured Party. In addition to all other rights given
-----------------------
the Secured Party herein, the Secured Party may, but shall not be obligated
to, (a) discharge any or all taxes, liens, security interests or other
encumbrances at any time levied or placed upon the Collateral, (b) pay for the
insurance on the Collateral, and (c) pay for the maintenance and preserva-tion
of the Collateral. Each Debtor shall reimburse the Secured Party on demand
for any payment made, or any expense incurred, together with interest at the
lesser of an annual rate of fourteen percent (14%) or the highest rate
permitted by law, by the Secured Party pursuant to the foregoing
authorization. Any action which is required to be taken or which may be taken
or any document which is required to be executed or which may be execut-ed by
a Secured Party under this Security Agreement, including without limitation,
any modification, termination or amend-ment of this Security Agreement,
release of any or all of the Collateral, waiver of the performance of any
obligations of Debtors hereunder, exercise of the remedies provided herein
upon default by a Debtor and application of the proceeds of any sale of the
Col-lateral hereun-der, may be taken or executed by the Secured Party.
10. Events of Default. An Event of Default as used in this Security
-----------------
Agreement shall be any or all of the following:
(a) an Event of Default as defined in the Invest-ment Agreement;
(b) the failure of any Debtor to perform, observe or keep any
covenant, agreement, condition or obligation under this Security Agreement,
which failure shall continue after ten (10) days have elapsed from demand by a
Secured Party to such Debtor for performance thereof; or
(c) if any representation or warranty made herein by any Debtor shall
prove to have been false or misleading in any material respect.
11. Remedies in the Event of Default.
-------------------------------------
(a) Upon the occurrence of an Event of Default, the Secured Party
shall be entitled to proceed to enforce its rights, including, without
limitation, the right to exercise with respect to the Collateral all the
rights and remedies available to a secured party upon default under the
Colorado Uniform Commercial Code at the time, including the right to sell,
lease or otherwise dispose of the Collateral or any portion thereof at public
or private sale upon such terms as the Secured Party may determine. In
addition, the Secured Party shall have all other rights and remedies provided
for herein and in the Investment Agreement and such other rights and remedies
as may be provided by law, and may require Debtors to assemble the Collateral
and make it available to the Secured Party at a place to be designated by
Debtors which is reasonably conve-nient to all parties. The Secured Party
shall have the right, without notice or demand or legal process, to enter upon
the premises of each Debtor and take possession of the Collateral, together
with all additions and accessions thereto. Further, upon the occurrence of
an Event of Default, the Secured Party may, without notice, declare all
obligations secured hereby im-mediately due and payable.
(b) The Secured Party shall give each Debtor notice of the time and
place of any public sale of the Collateral or of the time on or after which
any private sale or other intended dispo-sition is to be consummated, which
notice shall be mailed to each Debtor in the manner set forth in Section 16(c)
hereof at least ten (10) days prior to the time of such sale or other intended
dis-position, and such notice shall be considered reasonable.
Each purchaser at any sale of the Collateral (including the Secured
Party) shall hold the property sold absolutely free from any claim or right on
the part of any Debtor, and each Debtor hereby waives to the extent permitted
by law all rights of redemption, stay and/or appraisal which it now has or may
at any time in the future have under any rule of law or statute now existing
or hereafter enacted and, to the extent permitted by law, any right which it
may have to demand a hearing or other judicial or ad-ministrative proceeding
prior to the enforcement by the Secured Party of any of their rights and
remedies hereunder. Any public or private sale of the Collateral or any party
of it shall be held at such time or times within ordinary business hours and
at such place or places as the Secured Party may fix in the notice of sale,
and at any such sale the Collateral, or the por-tion thereof to be sold, may
be sold in one lot as an entirety or in separate parcels, as the Secured Party
in its sole and absolute discre-tion may deter-mine. If permitted by law, a
Secured Party may bid (which bid may be, in whole or in part, in the form of
cancellation of indebted-ness) for the purchase of the Collateral.
The Secured Party shall not be obligated to make any sale of the
Collateral or any part of it if they determine not to do so, regardless of the
fact that notice of sale of the Col-lateral may have been given. The Secured
Party may, without notice or publication, adjourn a public or private sale of
the Collateral, or cause the same to be adjourned from time to time by
announcement at the time and place fixed for sale, and such sale may, without
further notice, be made at the time and place to which the same was so
adjourned.
(c) All demands and presentments of any kind or nature are hereby
expressly waived by Debtors. Each Debtor hereby waives the right to require
the Secured Party to proceed against any of the Collateral it may hold or
against any debtor of such Debtor, or to pursue any other remedy. All of the
Secured Party's remedies are cumulative and may be enforced successively or
concurrently and no such action shall estop or prevent the Secured Party from
pursuing any other remedies.
(d) Following an Event of Default, each Debtor hereby irrevocably
appoints the Secured Party, or any person designated by the Secured Party, its
true and lawful attorney-in-fact to receive, open and dispose of all mail
addressed to such Debtor, to endorse the name of such Debtor on any notes,
acceptances, drafts, money orders or other remittances; to notify account
debtors to direct payments directly to Secured Party at such address as
Secured Party may designate; to endorse the name of such Debtor on any
invoice, freight or expense bill or bill of lading, storage receipt,
ware-house receipt or other instrument or document in respect to any
Collater-al; to sign the names of such Debtor to drafts against such Debtor,
assign-ments or verifica-tions of accounts and notices to such Debtor; to
station a representa-tive of the Secured Party on the premises of such Debtor
for the purpose of taking any of the actions described in this paragraph
including, without limita-tion, taking possession of books and records; and to
do all other acts and things necessary to carry out the intent of this
Secur-ity Agreement. The foregoing appointment and authority shall remain in
effect until all obligations of each Debtor to the Secured Party secured
hereby have been paid in full.
12. Application of Proceeds. All proceeds of any sale of the
-------------------------
Collateral by the Secured Party pursuant to Section 11 hereof shall be applied
in favor of the Secured Party as fol-lows:
(a) first, to the payment of all fees and expenses incurred by the
Secured Party in connection with any such sale, including, but not limited to,
the expenses of taking, advertis-ing, processing, preparing and storing the
Collateral to be sold, all court costs and reasonable fees of counsel for the
Secured Party in connection therewith, and to the payment of all ad-vances
made by the Secured Party hereunder to the account of Debtors and the payment
of all costs and expenses paid or incurred by the Secured Party in connec-tion
with the exercise of any right or remedy hereunder, to the extent that such
advances, costs and expenses shall not theretofore have been reimbursed to the
Secured Party by Debtors;
(b) second, to the payment of accrued interest, if any, on the Note;
(c) third, to the payment of the outstanding prin-cipal balance of
the Note;
(d) fourth, to the payment of accrued interest, if any, on the
Obligations, other than the Note; and
(e) fifth, to the payment of the outstanding princi-pal of the
Obligations, other than the Note.
Any surplus shall be delivered to Debtors. If there is any deficiency,
Debtors shall promptly pay the deficiency to the Secured Party on demand.
13. Miscellaneous.
-------------
(a) Upon payment in full of the Note by Quizno's and any
and all other obligations secured hereby, the security interest in the
Collateral granted to the Secured Party in this Security Agreement shall
terminate, and Secured Party shall execute any required releases or
termination statements.
(b) The Secured Party may delay exercising, or omit to exercise, any
right or remedy under this Security Agree-ment without waiving that or any
past, present or future right or remedy.
(c) All notices, requests, demands and other com-munications
hereunder shall be given as required in the Investment Agreement.
(d) This Security Agreement shall bind and inure to the benefit of
the parties, their successors and assigns; pro-vided, however, that this
Security Agreement shall not be assigned by any Debtor without the prior
written consent of the Se-cured Party and any attempted assignment by any
Debtor without such consent shall be null and void.
(e) This Security Agreement and its performance shall be governed by
the internal laws of the State of Colorado.
(f) This Security Agreement and the security interest created hereby
are for the sole and exclusive benefit of the parties hereto and shall not
operate to the benefit of any third party.
(g) If any term, covenant or condition of this Security Agreement or
the application thereof shall be invalid or unenforceable, the remainder of
this Security Agreement or the application of such term, condition or covenant
to persons or circumstances other than those as to which it is held invalid or
unenforce-able shall be unaffected thereby and shall be valid and enforced to
the fullest extent permitted by law.
(h) This Agreement may be executed in counterparts, each of which
shall be deemed an original and all of which, when taken together, shall
constitute one and the same instrument.
(i) This Agreement may be amended only by the written consent of the
Secured Party. The terms of this Agreement may be waived only by a statement
signed by the party against whom enforcement of the waiver is sought.
IN WITNESS WHEREOF, the parties hereto have duly exe-cuted this Security
Agreement on the date first above written.
DEBTORS: THE QUIZNO'S CORPORATION
a Colorado corporation
By: _________________________
Its: _________________________
THE QUIZNO'S OPERATING COMPANY,
a Colorado corporation
By: _________________________
Its: _________________________
SECURED PARTY: RETAIL & RESTAURANT GROWTH CAPITAL, L.P., a Delaware
limited partnership
By: Retail & Restaurant Growth
Partners, L.P., its
General Partner
By: Retail & Restaurant Growth
Management, Inc., its
General Partner
By: _________________________
Its: _________________________
EXHIBIT 20.1
- -------------
RISK FACTOR
Each prospective investor should carefully consider the following
factors inherent in and affecting the business of the Company, and this
offering before making a decision to purchase the Common Stock offered hereby.
NO OPERATING PROFIT TO DATE
The Company began business operations in January 1991 and went
public in early 1994. The Company has not yet earned a profit in any year.
The Company had net losses applicable to common stockholders of $1,075,908 in
1996, $348,512 in 1995 and $754,031 in 1994. See "THE COMPANY - General"
COMPETITION FOR BUSINESS
The restaurant industry is highly competitive with respect to price,
service, food quality and location and there are numerous well-established
competitors possessing substantially greater financial, marketing, personnel
and other resources than the Company. Many of the Company's competitors have
achieved significant national, regional and local brand name and product
recognition and engage in extensive advertising and promotional programs, both
generally and in response to efforts by additional competitors to enter new
markets or introduce new products. The quick service industry is
characterized by the frequent introduction of new products, accompanied by
substantial promotional campaigns.
Industry data indicates that over the decade of the 1990s,
the number and frequency of Americans eating out has increased. However, such
data also indicates that the number of restaurants, and particularly QSRs,
have increased more rapidly than the number of customers during this decade.
Increasing competition has reduced margins and made consistent profitable
operations more of a challenge.
Culinary fashions among Americans will also impact the Company's
profitability. As eating habits change and types of cuisine move in and out
of fashion, the Company's challenge will be to maintain a menu within the
Company's distinctive culinary style that appeals to an increasing market
share.
In response to flat growth rates and declines in average sales per
restaurant, certain of QSR companies have adopted "value pricing" strategies.
Such strategies could have the effect of drawing customers away from companies
that do not engage in discount pricing and could also negatively impact the
operating margins of competitors that do attempt to match competitors price
reductions. Continuing or sustained price discounting in the quick service
industry could have an adverse effect on the Company.
COMPETITION FOR AND DEPENDENCE ON AREA DIRECTORS, FRANCHISEES AND LOCATIONS
The Company's future success will depend, in part, upon its ability
to attract qualified Area Directors and franchisees, who will be primarily
responsible for the development of the Quizno's concept in their regional or
local area, and upon the ability of its Area Directors and franchisees to
obtain suitable Restaurant locations and sufficient financing to successfully
develop and operate Restaurants. The market for suitable Restaurant locations
is highly competitive because both restaurant and non-restaurant retail
operations compete for prime real estate sites. The Company will train and
work with its Area Directors and franchisees to maintain the quality and
ambiance that are integral to the Quizno's concept. However, no assurance can
be given that the Company's Area Directors and franchisees will be successful.
VIABILITY OF CONCEPT NATIONWIDE
To date, most of the Company's mature franchises are located in
Colorado and Colorado is the Company's most developed market. While
franchisees of the Company have opened over 175 Restaurants in other markets,
there can be no assurance that the Company's concept of a higher quality,
health conscious food product, served in a Italian deli-like ambiance, will
appeal to consumers in other areas of the United States.
ABILITY TO ACHIEVE DESIRED EXPANSION
The Company's growth strategy is to focus on the controlled
development of additional franchised and Company-operated Restaurants in
selected markets across the United States. The Company's ability to expand
will depend on a number of factors, including the availability and cost of
suitable locations, the hiring, training and retraining of skilled management
and other personnel, the availability of adequate financing, the selection and
acceptability of franchisees and other facts, some of which are beyond the
control of the Company. There can be no assurance that the Company or its
franchisees will be able to continue to open the planned new Restaurants or
that, if opened, those Restaurants can be operated profitably. The Company
has not yet been able to institute a program with one or more financial
institutions to provide regular financing to its franchisees. The opening of
additional Restaurants in the same market areas could have the effect of
attracting customers from existing Restaurants located in that area and
thereby reduce sales volumes in existing Restaurants.
IMPACT OF NATIONAL AND REGIONAL ECONOMIES
The health of national and regional economies has a significant
impact on the restaurant industry. An expanding economy provides disposable
income, which causes customers to eat out more frequently. A national or
regional economic slow down will, in all probability, adversely impact the
operations of restaurants, including those owned and franchised by the
Company. This, in turn, will adversely impact the Company's royalty income
and income from Company-owned Restaurants. The Company's franchises are still
concentrated in a few regions of the U.S., and therefore adverse economic
conditions in those regions may have a materially adverse impact on the
Company's profitability. Finally, because many Company franchisees are in
areas affected by severe winter weather, such weather could adversely impact
the Company's royalty income.
LABOR AND OTHER COSTS
Costs of labor and employee benefits are significant expenses in the
restaurant industry. While such costs have remained stable in recent years, a
significant increase in wages throughout the country could adversely impact
the Company and other restaurant businesses. Costs of food and non-food items
are also significant factors in the restaurant industry and, finally, the cost
of marketing may negatively impact restaurant operations, particularly in
competitive markets where the brand name is not yet established.
CONFLICTS OF INTEREST
Mr. Richard F. Schaden, an officer and director of the Company, owns
interests in entities that hold two Quizno's Area Directorships. Mr.
Frederick H. Schaden, a director of the Company, also owns an interest in one
of those entities. Conflicts of interest may arise with respect to
transactions between the Company and Area Directors in which officers or
directors of the Company hold an interest, such as when loans are made by the
Company to such Area Directors. Company-owned stores will also present
conflict of interest issues, particularly with respect to the location of
Company-owned stores in relation to franchisee-owned stores and the amounts
allocated by the Company for goods and services that are also provided by the
Company to its franchisees for a fee, such as advertising services.
GENERAL LIABILITY INSURANCE
Although the Company carries general liability and commercial
insurance of up to $1,000,000 per occurrence and $2,000,000 in the aggregate,
subject to no deductible, there can be no assurance that this insurance will
be adequate to protect the Company against any general, commercial and/or
product liability claims. Any general, commercial and/or product liability
claim which is not covered by such policy, or is in excess of the limits of
liability of such policy could have a material adverse effect on the financial
condition of the Company. There can be no assurance that the Company will be
able to maintain this insurance on reasonable terms.
DEPENDENCE ON RICHARD E. SCHADEN
The success of the Company's business will be dependent upon Mr.
Richard E. Schaden, its Chief Executive Officer, who is also principal
stockholders of the Company. The Company's anticipated growth also depends
upon its ability to attract and retain skilled management personnel. The
Company has obtained key-man life insurance in the amount of $1,000,000 on Mr.
Schaden's life.
CONTROL BY EXISTING STOCKHOLDERS
Richard E. and Richard F. Schaden (the "Schadens") own an aggregate
of approximately 54% of the outstanding voting Common Stock of the Company,
and rights to purchase an additional approximately 181,000 shares in the
future. Shareholders do not have cumulative voting rights with respect to the
election of directors. The Schadens have the ability to elect all of the
directors of the Company and to thereby direct or substantially influence the
management, policies and business operations of the Company and to have the
power to control the outcome of any matter submitted to the vote of the
Company's stockholders.
NO DIVIDENDS ANTICIPATED
The Company has never paid any cash dividends on its Common Stock.
The Company anticipates that in the future, earnings, if any, will be retained
for use in the business, and it is not anticipated that cash dividends with
respect to the Common Stock will be paid in the foreseeable future.
POSSIBLE PRICE OF THE COMPANY'S COMMON STOCK
The market price of the Company's Common Stock has been highly
volatile. Factors such as the Company's operating results and the small
volume of shares of its Common Stock that are traded have a significant effect
on the market price of the Company's Common Stock. In addition, market prices
for the securities of many emerging and small capitalization companies have
experience wide fluctuations in response to variation in quarterly operating
results and general economic indicators and conditions, as well as other
factors beyond the control of the Company.
PREFERRED SHARES AVAILABLE FOR ISSUANCE
The Company has one million shares of Preferred Stock authorized.
The Company has issued 146,000 shares of Class A Preferred Stock, 100,000
shares of Class B Preferred Stock and 167,000 shares of Class C Preferred
Stock, upon which monthly dividends are paid. Such Classes of Preferred Stock
are senior to the Common Stock as to dividends and liquidation preferences.
Shares of Preferred Stock may be issued by the Company in the future without
shareholder approval and upon such terms as the Board of Directors may
determine, including the payment of dividends. The rights of the holders of
Common Stock will be subject to and may be affected adversely by the rights of
holders of shares of any Preferred Stock that may be issued in the future.
The availability of Preferred Stock, while providing desired flexibility in
connection with possible acquisitions and other corporate purposes, could have
the effect of discouraging a third party from acquiring control of the Company
through the purchase of shares of the Common Stock.
GOVERNMENT REGULATIONS
The restaurant business is subject to extensive federal, state and
local government regulations relating to the development and operation of
restaurants, including regulations relating to building and zoning
requirements and the preparation and sale of food, and laws that govern the
Company's relationship with its employees, such as minimum wage requirements,
overtime and working conditions and citizenship requirements. The failure to
obtain or retain food licenses or substantial increases in the minimum wage
could adversely affect the operation of the Restaurants. The Company is also
subject to federal regulations and certain state laws which regulate the offer
and sale of franchises to its franchisees.
CONTINUED LISTING AND PENNY STOCK REGULATIONS
The daily trading price of the Company's Common Stock has been
quoted on the Nasdaq SmallCap Market since its initial public offering. There
can be no assurance that quotation on the Nasdaq SmallCap Market will be
maintained. In August 1997, The Nasdaq Stock Market, Inc. issued new listing
maintenance requirements for the Nasdaq SmallCap Market, which may adversely
affect the ability of listed companies to maintain their Nasdaq SmallCap
listings. The Company currently meets the new Nasdaq SmallCap Market listing
maintenance requirements. If the Company fails to meet the maintenance
criteria in the future, the trading price for the Common Stock would not be
carried in many newspapers, and the shares might be subject to certain rules
of the Securities and Exchange Commission relating to "penny stocks." These
rules require that broker-dealers must apply a special suitability standard
for purchasers of stocks of companies subject to such rules and receive the
purchaser's prior written consent for the transaction. These rules, if
applied to the Company's Common Stock in the future, may inhibit the ability
of broker-dealers to sell the Company's Common Stock in the secondary market.
IMPACT OF SHARES ELIGIBLE FOR FUTURE SALE
Future sales by existing stockholders could adversely affect the
prevailing market price of the Common Stock. As of September 30, 1997 the
Company had 2,904,567 shares of Common Stock outstanding. Of these shares,
approximately 1,300,000 shares are freely transferrable without restrictions.
The remainder, principally owned by insiders, may be sold into the public
market from time to time in the future, and thereby become freely
transferrable. As of September 30, 1997, 6,989 shares had been issued and
approximately 280,000 shares were issuable upon the exercise of outstanding
options. The shareholders of the Company have authorized the Company to issue
options covering up to 460,000 shares of Common Stock. The Company intends to
register Common Stock underlying such options, which are held principally by
the Company's employees, directors and advisors, ^in early 1998. Upon
exercise of such options, the shares would be eligible for immediate sale in
the public market. In addition, 446,000 shares of Common Stock have been
reserved for issuance upon conversion of the outstanding shares of Class A,
Class B and Class C Preferred Stock of the Company, and one of the Company's
major lenders has the right to convert debt or exercise warrants for 415,056
shares of Common Stock.
FORWARD-LOOKING STATEMENTS
Certain of the information discussed in this Prospectus are
forward-looking statements that involve risks and uncertainties that might
adversely affect the Company's operating results in the future in a material
way. Such risks and uncertainties include, without limitation, the risk
factors discussed above. Many of these risks are beyond the control of the
Company.
EXHIBIT 21.1
------------
LIST OF SUBSIDIARIES OF THE QUIZNO'S CORPORATION
1. The Quizno's Operating Company, a Colorado corporation
2. The Quizno's Development Company, a Colorado corporation
3. The Quizno's Realty Company, a Colorado corporation
4. The Quizno's Arbitration Company, a Colorado corporation
Each subsidiary does business only under its corporate name.
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statements
of the Quizno's Corporation and Subsidiaries on Form S-3 (No. 333-38691) and
Forms S-8 (No. 333-45549 and 333-45205), of our report dated February 20, 1998
appearing in the annual report on Form 10-KSB of the Quizno's Corporation and
Subsidiaries for the year ended December 31, 1997 and to the reference to us
under the heading "Experts" in the Prospectus, which is part of these
Registration Statements.
/s/ Ehrhardt Keefe Steiner & Hottman PC
Ehrhardt Keefe Steiner & Hottman PC
March 31, 1998
Denver, Colorado
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