-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, F6nX5iVE0udbuwM8fVHHS/3uCMVm2VmOvbTM1/Gm6Rc2vPvVxXuX5glLSwJtaegh Kr5cjM8oGC57RszuPPNKyw== 0000825324-97-000002.txt : 19970114 0000825324-97-000002.hdr.sgml : 19970114 ACCESSION NUMBER: 0000825324-97-000002 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19970113 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: GOOD TIMES RESTAURANTS INC CENTRAL INDEX KEY: 0000825324 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 841133368 STATE OF INCORPORATION: NV FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-18590 FILM NUMBER: 97504768 BUSINESS ADDRESS: STREET 1: 8620 WOLFF CT STE 330 CITY: WESTMINSTER STATE: CO ZIP: 80030 BUSINESS PHONE: 3034274221 MAIL ADDRESS: STREET 1: 8620 WOLFF COURT STREET 2: SUITE 330 CITY: WESTMINSTER STATE: CO ZIP: 80030 FORMER COMPANY: FORMER CONFORMED NAME: PARAMOUNT VENTURES INC DATE OF NAME CHANGE: 19900205 10KSB 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB (Mark One) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended September 30, 1996 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from __________________ to ___________________ Commission File Number: 0-18590 GOOD TIMES RESTAURANTS INC. (Exact name of small business issuer in its charter) Nevada 84-1133368 (State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.) 8620 Wolff Court, Suite 330, Westminster 80030 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (303) 427-4221 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered NONE _______________________________________ Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par value (Title of class) Common Stock Purchase Warrants (Title of class) Indicate by check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-KSB is not contained herein, and will not 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. Registrant's revenues for the most recent fiscal year were $12,826,000. As of January 6, 1997, the aggregate market value of voting stock held by non- affiliates was $3,305,324. As of January 6, 1997, the Registrant had 6,397,778 shares of common stock outstanding. Transitional Small Business Disclosure Format Yes No X PART I ITEM 1. BUSINESS Background Good Times Restaurants Inc. (the "Company") was organized under Nevada law in 1987 and is the holding company for a wholly-owned subsidiary that is engaged in the business of developing, owning, operating and franchising restaurants under the name Good Times Drive Thru BurgersSM. Good Times Drive Thru Burgers SM restaurants are owned, operated and franchised by the Company's subsidiary, Good Times Drive Thru Inc. (Good Times Drive Thru Burgers SM and Good Times Drive Thru Inc. are interchangeably referred to herein as "Good Times" or "Drive Thru"). Round The Corner restaurants are owned and operated by the Company's former subsidiary, Round The Corner Restaurants, Inc. (Round The Corner and Round The Corner Restaurants, Inc. are interchangeably referred to herein as "RTC"). With RTC's restaurant sales significantly declining in 1994 and 1995 and RTC incurring significant losses, the Company decided to divest itself of RTC and focus all of its resources on development of the Good Times concept. On September 30, 1995, the Company sold 100% of the stock of RTC to Hot Concepts Management Group, L.L.C. ("Hot Concepts"). RTC was established in 1968 and developed a chain of sit-down gourmet hamburger restaurants. In 1986, RTC, then a closely-held corporation, formed Drive Thru in order to explore and develop the "Good Times! Drive Thru Burgers"SM double drive through concept. Drive Thru was expected to take advantage of the emerging industry and demographic trends that favor drive- through and take-out patronage and to take advantage of RTC's experienced management in site location, marketing, quality assurance programs, training, accounting systems and distribution and purchasing networks. In 1988, RTC distributed Drive Thru stock to its shareholders after which Drive Thru operated as an independent company. Between 1990 and 1992, Drive Thru entered into a series of transactions resulting in Drive Thru becoming a public company and merging with RTC. Prior to the merger, Drive Thru had maintained a close working relationship with RTC through a management agreement, shared employees, certain common officers and directors and shared administrative offices. The relationship of Drive Thru with RTC enabled Drive Thru to benefit from the years of testing for food and paper products and dependable suppliers by RTC. Drive Thru also benefited from joint purchasing economies through RTC's established network of suppliers and manufacturers and from joint marketing expertise. These synergies were enhanced with the completion of the merger. As the number of Good Times units increased, Drive Thru was able to function autonomously and these synergies were no longer applicable. This, combined with RTC's restaurant sales significantly declining in 1994 and 1995 and RTC incurring significant losses, led the Company to divest itself of RTC and focus all of its resources on development of the Good Times concept. On September 30, 1995, the Company sold 100% of the stock of RTC to Hot Concepts (see page 9). Corporate Operations In February 1993, the Company restructured the operations and management of Drive Thru and RTC as separately accountable wholly-owned subsidiaries of the Company to allow their managements to focus exclusively on their respective businesses. The Company currently leases approximately 5,600 square feet of space for its executive offices in Westminster, Colorado for $67,896 per year. The lease is for a five year period commencing in April 1993, with an additional five year renewal option. Through fiscal 1995, the Company provided administrative and accounting support to Drive Thru and RTC and charged monthly management fees for such services. With the sale of RTC, the Company no longer provides such services to RTC and has consolidated its operations with Drive Thru. The Company is a holding company and its officers are the President and Chief Executive Officer of the Company and the Controller, Secretary and Treasurer. Officers of the Company hold the same position with Drive Thru and all personnel associated with the Company are employees of Drive Thru. For 1997, Drive Thru plans to concentrate its efforts and capital on the growth of the Good Times restaurant chain in Colorado through additional company-owned, joint-venture and franchised restaurants. Good Times Good Times Drive Thru Inc. is engaged in the operation and development of the Good Times Drive Thru BurgersSM restaurants, featuring extremely fast service and a limited, high quality menu for drive-through and walk-up customers. Drive Thru currently operates and franchises twenty-three Good Times restaurants in the State of Colorado, of which nineteen are located in metropolitan Denver, one in Boulder, one in Longmont, one in Grand Junction, and one in Greeley. There is also one franchised Good Times restaurant in Boise, Idaho. Pursuant to the co-development provisions in its development agreements with two Drive Thru franchisees, seven of these units in Colorado are owned jointly with such franchisees. Ten Good Times units are franchised restaurants with six operating in the Denver metropolitan area, one in Grand Junction, Colorado, one in Greeley, Colorado, one in Longmont, Colorado and one in Boise, Idaho. Good Times is offering franchises for the development of additional Good Times restaurants. In fiscal 1996, Drive Thru focused on the disposition or relocation of under-performing restaurants, reductions in corporate overhead and solidifying its working capital position and franchise partners for continued development of the Colorado market. The hamburger fast food market remains intensely competitive with the major competitors aggressively discounting menu prices, which has had an adverse impact on Drive Thru's sales and operating profits. The Company believes it has an advantage in providing a superior level of service and quality based upon consumer research studies, but is limited in its ability to effectively advertise and communicate those advantages until "critical mass" in restaurant sales are achieved in the Colorado market for consistent television and radio advertising, which the Company estimates to be over $30,000,000 in system-wide restaurant sales in Colorado, or approximately 30-35 restaurants. The Company's objectives for fiscal 1997 are to continue to build additional company-owned, joint-venture and franchised restaurants in Colorado and add indoor seating to select existing restaurants to mitigate the adverse impact of inclement weather and to increase sales during the dinner daypart. Additionally, the Company will introduce limited new menu offerings and advertise what it believes to be attractive price points for its products. Colorado is divided into two primary television markets--Denver and Colorado Springs/Pueblo. It is the Company's intent to fully develop the Denver market to "critical mass" and then develop the Colorado Springs market over the next three to four years, depending on availability of financing and suitable sites. Management estimates the Denver market will support 40-50 Good Times restaurants and the Colorado Springs market will support 8-10 restaurants. Drive Thru's goals in fiscal 1995 were to continue to develop the Colorado market and to expand the Good Times concept into an out-of-state market. In the spring of 1995, Drive Thru reached an agreement with a franchisee of four Rally's Hamburger restaurants in Las Vegas, Nevada to acquire those four units. It was management's intent to convert those units into Good Times restaurants and to develop an additional six Good Times restaurants in Las Vegas over a twelve month period. Management believed that with ten units operating in the Las Vegas market, Good Times would have "critical mass" in the Las Vegas Area of Dominant Influence ("ADI"), or television market. ("Critical mass" is defined by the Company as having a sufficient number of restaurants in a market to economically advertise on television and to take advantage of operational and distribution economies of scale.) Drive Thru opened the first two converted Rally's units in June 1995 and the other two restaurants in August 1995. However, Drive Thru experienced unexpected difficulty in securing suitable locations at reasonable cost in the Las Vegas market and suitable financing for new stores and realized that critical mass could not be achieved within an acceptable period of time. During the same time period, media advertising costs in Denver increased dramatically, requiring a higher level of store penetration in Colorado to support the Company's advertising campaign. Since four units would continue to operate at a significant loss until Drive Thru could effectively advertise in the Las Vegas market, it was decided to cease operations in Las Vegas and sell the stores. The four Las Vegas units were closed on October 31, 1995 and sold as of November 30, 1995. Drive Thru will focus its development efforts on new Colorado locations until full penetration and critical mass is achieved of 30-35 restaurants. The Concept. The concept of drive-through only restaurants has existed for over 40 years. It addresses both changing consumer profiles and continuing restaurant industry concerns. The simplicity and relatively low capital requirements of the concept provide the opportunity for growth and profitability. Management believes, based upon its experience in the restaurant industry and research reports, that the Company's hamburger restaurant concept has proven to be successful because of the following principal factors: ... Consistently providing high perceived value, friendly and quick service and a high quality product as rated by consumers. ... Capital investment of 1/2 to 2/3 that of a major fast-food restaurant with seating and parking facilities. ... Ratio of sales to capital investment higher than a major fast-food restaurant. ... Margins of sales to operating costs comparable to major fast-food restaurants. ... Cost of menu items to the consumer comparable or lower than those of large hamburger chains, yet providing similar or higher quality products than those chains. Good Times' unique 880 square foot "double drive-thru" modular buildings are designed to serve a growing segment of the fast-food market (off-premise consumption) that finds traditional sit-down dining too slow, too inconvenient or too expensive for their needs. The Company plans to develop additional restaurants with seating and a single drive thru lane in fiscal 1997 in select locations to take advantage of conversion opportunities and to mitigate effects of inclement weather. Good Times' food preparation and service systems deliver a quality meal with a faster order-delivery response time and have the capacity to reach the same sales levels as traditional hamburger chains. Typically, a customer receives an order 30 to 45 seconds after his vehicle reaches the take-out window. The simplicity of the menu, the relatively low capital investment, and the efficient design of the building and equipment allow Good Times to sell its products at comparable or lower prices than the major fast food hamburger chains. The limited menu allows maximum attention to be devoted to food quality and speed of service. Menu. The menu of a Good Times restaurant is limited to hamburgers, cheeseburgers, chicken sandwiches, french fries, milk shakes and soft drinks. Each sandwich is made to order at the time the customer places the order and is not pre-prepared. The hamburger patty is 4.0 ounces of 100% USDA approved beef, served on a four-inch sesame seed bun. Hamburgers and cheeseburgers are garnished with fresh lettuce, fresh sliced, sweet red onions, mayonnaise, mustard, ketchup, pickles and fresh sliced tomato. The cheese is 100% pure sharp American thickly sliced. The chicken sandwiches include a spiced, battered deep-fried breast patty and a 3-1/2 ounce grilled spicy breast patty, both served with mayonnaise, lettuce and tomato. Fryers are equipped with compensating computers to deliver a consistent product and minimize the skills required of employees. As of January 7, 1997, the price of the deluxe Good Times hamburger was $1.10, the deluxe cheeseburger $1.39, the deluxe double cheeseburger $2.19, the deluxe bacon-cheeseburger $1.89, the chicken sandwiches $2.19, the chicken club sandwich $2.79, french fries $.79 and $.99 and a 16-ounce soft drink $.79. All cups, sandwich bags and serving bags carry the Good Times Drive Thru BurgersSM logo. Good Times restaurants are generally open 14 to 16 hours per day, seven days a week, for lunch, dinner and late-night snacks and meals. The Building. The existing Good Times restaurants are less than one-third the size of the typical restaurants of the four largest hamburger chains and require approximately one-half the land area based upon management's experience in the restaurant industry and research reports. The current standard Good Times restaurant building is a double drive-through and walk-up style structure containing approximately 880 square feet built on 18,000 to 30,000 square-foot lots. All existing restaurants utilize a double drive-thru concept that allows simultaneous service from opposite sides of the restaurant and one or two walk-up windows. There is currently no inside seating area although most have a patio for outdoor eating. Management of Drive Thru believes that the building form, design and aesthetic appeal address key issues and concerns of the consumer: speed, cleanliness, security, eye appeal and low maintenance. The building is modular in construction with a reinforced concrete slab and welded tubular steel structural members. The exterior consists of a cream-colored dry-vit system with an enclosed glass vestibule at the front for walk-up service and to exhibit the fast system of service. A brightly lit multi-colored fascia band runs the entire length on both sides of the building in addition to product and Good Times proprietary signage. The rest rooms and walk-in refrigerators are modular components of the building. The buildings are transportable and therefore can be moved from an unsuccessful site to a better location. Though management does extensive site evaluation and expects a minimum number of buildings will ever have to be moved, one under-performing Good Times unit was relocated in 1996 and one will be relocated in 1997. As a result of the relatively small size of the restaurant building, Good Times restaurants require significantly less capital investment and have substantially lower operating costs per unit than recently constructed full- service fast food restaurants. The cost of a fully equipped Good Times restaurant is one-half to two-thirds the cost for a major fast-food restaurant with seating and parking facilities. Because Good Times restaurants are small, Good Times can take advantage of smaller and odd-sized lots that have little or no development value or small pads and out lots of shopping centers and malls. Plan of Operation. The first objective of Drive Thru has been to develop critical mass in the Denver television market (referred to as the Denver ADI which includes Boulder, Greeley, Longmont and other communities in northern Colorado.) In the past, Management believed that, in Denver, critical mass required approximately 20 restaurants to be operating, which was the number of Good Times operating in the Denver ADI when the decision was made to open the Las Vegas Good Times restaurants. However, increased advertising by its competitors and significant increases in the cost of advertising in Denver has caused management to reevaluate critical mass as requiring 30 to 35 Good Times restaurants in the Denver ADI. Good Times currently has seven company-owned, eight franchised and seven joint venture stores in the Denver ADI. Drive Thru also has one franchised restaurant in Boise, Idaho and has one franchised restaurant in Grand Junction, Colorado. At January 6, 1997, the Company operated 14 company-owned and joint-venture Good Times restaurants and had nine franchised restaurants open in Colorado. Drive Thru acquired four former Rally's Hamburger restaurants in Las Vegas, Nevada which were converted to Good Times units, but were sold as of November 30, 1995. These units are not included in this total. September 30, 1995 September 30, 1996 Company-owned restaurants 9 7 Joint venture restaurants 8 7 Franchise operated restaurants 7 10 Total restaurants 24 24 Drive Thru currently has in place nine franchise agreements; five are in the Denver ADI and one is on the Western Slope of Colorado. During 1996, Drive Thru sold one company-owned restaurant and one joint-venture restaurant to franchisees, closed two company-owned restaurant, which is anticipated to reopen in 1997 after remodeling with indoor seating, closed one joint-venture restaurant, which will be relocated to a new site in 1997, and opened two joint-venture restaurants and one franchised restaurant. Subsequent to September 30, 1996, Drive Thru transferred its joint-venture partnership interest in the Boise, Idaho restaurant to the joint-venture partner who will operate the restaurant as a franchisee. Management anticipates that Drive Thru and its existing franchisees will develop a total of five to eight Good Times units in the Denver ADI in calendar 1997. One of those units is anticipated to be a joint venture unit, two to three of these are to be company-owned and the remainder are to be franchised units. The implementation of the development schedule set forth above for the Denver ADI during fiscal 1997 will help Drive Thru move toward the "critical mass" for media advertising necessary to effectively compete in the Denver market. Reaching such critical mass increases media advertising and supervision efficiencies thereby creating greater consumer awareness so as to increase average restaurant sales volumes and decrease general and administrative expenses as a percentage of revenues. Drive Thru's ongoing objective is to continue to increase average restaurant sales through increased customer counts in each daypart (lunch, dinner and late-night), selective menu and price promotions and effective marketing of Good Times competitive attributes of high quality products, quick service and competitive prices. The Company anticipates modest price increases in 1997 in anticipation of higher hourly wages and to reduce cost of sales. Operations and Management. Good Times has defined three ingredients essential to its success: (i) consistent delivery of high quality products; (ii) speed of service; and (iii) value pricing. The order system at each Good Times restaurant is equipped with an internal timing device that displays and records the time each order takes to prepare and deliver. The total transaction time for the delivery of food at the window is approximately 30 to 45 seconds during peak times. Each Good Times unit employs a general manager, one to two assistant managers and approximately 25 employees most of whom work part-time during three shifts. Operating systems and training materials are utilized to ensure consistent performance to Good Times' standards. An eight to ten week training program is utilized to train restaurant managers on all phases of the operation. Ongoing training is provided as necessary. Management of Drive Thru believes that incentive compensation of its restaurant managers is essential to the success of its business. Accordingly, in addition to a salary, managerial employees may be paid a bonus based upon proficiency in meeting financial and performance objectives. Drive Thru provides a medical and dental insurance plan to management with a portion of the cost contributed by the participating employee. Drive Thru presently purchases its products from independent food processors and distributors and does not anticipate any difficulty in continuing to obtain an adequate quantity of food products of acceptable quality and at acceptable prices. Financial and management control is maintained through the use of data processing and centralized accounting and management information systems which are provided by the Company. Restaurant managers forward sales reports, vendor invoices, payroll data and other operating information to Drive Thru's headquarters. Management receives daily, weekly and monthly reports identifying food, labor and operating expenses and other significant indicators of restaurant performance. Management of Drive Thru believes that such reporting requirements enhance its ability to control and manage its expanding operations. Drive Thru employs a full-time Director of Human Resources whose principal responsibility is to recruit and coordinate the training of management personnel required for continued expansion of Good Times units in the Denver ADI. Marketing and Advertising. Marketing activities to date have focused on radio advertising and restaurant level promotions in the immediate trade area around each location. Within the Denver market the ultimate objective is to develop adequate market penetration by establishing a sufficient number of Good Times restaurants to support radio and television advertising. In April 1993, Good Times initiated its first radio advertising campaign. Management believes that the implementation of radio advertising and continued complimentary "word of mouth" was the principal reason that same store sales showed increases of 19.6% for fiscal 1994 over fiscal 1993 and 15.4% for the first six months of fiscal 1995 over fiscal 1994. However, in the second half of fiscal 1995, Good Times' competitors increased their advertising, focusing on price promotions and tie-ins with major motion pictures. This aggressive price promotion and expanded advertising has adversely impacted Drive Thru's awareness and usage resulting in same store sales declines. The cost of effective television advertising has also increased significantly and Drive Thru does not anticipate consistent television advertising until annualized sales trends approach $30,000,000. It is anticipated that with the fulfillment of the 1997 development schedule, Good Times will advertise on television in 1998. The marketing efforts of Good Times focus on building "brand awareness" of the Good Times concept, combined with product and pricing messages, which is important as hamburger operators compete against one another based on price. Drive Thru believes that it has a higher quality product, delivered to the customer faster, at an equal or better value than its competitors. Signage is one of the most important elements for establishing identity at each location. The Good Times restaurant sign package that has been developed offers flexibility based on local codes, site layout and surrounding property. The free-standing sign can be dimensionally increased or decreased while maintaining the same look and can be pole-mounted for high traffic areas where allowed. Franchise Program. Drive Thru has prepared prototype area rights and franchise agreements, a Uniform Franchise Offering Circular and advertising material to be utilized in soliciting prospective franchisees. Drive Thru seeks to attract franchisees having experience as restaurant operators, that are well-capitalized and have demonstrated the ability to develop multi-unit franchises. Drive Thru will carefully review sites selected for franchises and will monitor performance of franchise units. Good Times is currently working with potential franchisees only for development of units in Colorado. Drive Thru estimates that it will cost a franchisee on average approximately $475,000 to $575,000 to open a Good Times restaurant, including pre-opening costs and working capital and assuming the land is leased. A franchisee typically will pay a royalty of 4% of net sales, an advertising fee of at least .5% of net sales, plus participation in regional or national advertising when developed up to 4% of net sales, and initial development and franchise fees aggregating $20,000 per unit. Among the services and materials which Drive Thru provides to franchisees are site selection assistance, plans and specifications for construction of the Good Times restaurants, an operating manual which includes product specifications and quality control procedures, training, on-site pre-opening supervision and advice from time to time relating to operation of the franchised restaurant. Drive Thru has entered into five franchise development agreements in the Denver ADI. Eight franchise restaurants and seven joint-venture restaurants are operating under the development agreements for the Denver ADI. One franchise restaurant in Grand Junction, Colorado has been open pursuant to the development agreement for the Western Slope of Colorado and an additional restaurant in Silverthorne, Colorado is anticipated to open by the franchisee in January, 1997. One joint-venture restaurant opened in Boise, Idaho in 1995, and effective November 1, 1996, that restaurant has been sold as a franchise restaurant. In 1996, Drive Thru signed a franchise agreement and $1,000,000 Series A Convertible Preferred Stock Purchase Agreement with The Bailey Company ("TBC"), a 64 unit franchisee of Arby's (see "Bailey Preferred Stock Investment"). It is anticipated that TBC will develop additional joint-venture or franchise Drive Thru restaurants in 1997. Development agreements provide for payment of development fees to Drive Thru by the developer and require that the developer enter into a franchise agreement covering each franchised restaurant. The franchise agreements generally provide for payment of franchise fees and royalties of 4% of annual sales. Under certain circumstances, Drive Thru has allowed a sliding scale of royalty payments based on sales volumes. Operations to Date. The first Good Times prototype unit was opened in Boulder, Colorado, in September 1987. Operations were refined at that restaurant so as to achieve greater efficiency and quality of products. The next two Good Times Drive Thru BurgersSM restaurants were opened in 1988, one in Denver and one in Thornton, Colorado. Subsequently, after it was determined the Thornton location was not generating a desirable sales volume, the building was dismantled and reassembled on a site in Denver. Management believes that this relocation of the structure validated Drive Thru's subsequent decision to use a modular building which can be economically dismantled and moved to a more attractive site. In August 1991, Drive Thru formed Good Times Limited Partnership I, of which Drive Thru was the sole general partner. The Partnership opened a Good Times restaurant in Greeley, Colorado, in August 1991. Effective October 1, 1992 all of the limited partners agreed to convert their limited partnership interests into a total of 114,306 shares of common stock of the Company and warrants to purchase 57,153 shares of common stock at $3.50 per share, such warrants expiring July 15, 1995. The expiration date of the warrants was subsequently extended to February 10, 1997 and recently to February 10, 1999. In March 1992, Drive Thru opened a fifth Good Times restaurant in Denver. The site was previously utilized for a Rally's double drive-through restaurant which had been closed. The building was remodeled to generally conform to the format, including signage, of Good Times units. In November 1992 and March 1993, Drive Thru opened its sixth and seventh restaurants in the Denver metropolitan area. These units were subsequently sold to the franchisee for the south Denver metropolitan area pursuant to the development agreement between Drive Thru and the franchisee. Drive Thru opened its eighth unit on October 19, 1993, 50% of which was sold to an existing franchisee on February 1, 1994, and opened twelve additional restaurants during calendar 1994. Six of these were co-developed with the same franchisee, two were franchises and four were company-owned. In calendar 1995, Drive Thru opened six new restaurants, including four units in the Denver ADI of which one was company-owned, two were joint-venture units and one was a franchised unit. Drive Thru opened one franchised unit in Grand Junction, Colorado and one joint-venture unit in Boise, Idaho. In calendar 1996, Good Times opened one new franchised restaurant and converted the Boise Idaho restaurant to a franchised (from a joint venture) restaurant. Also in 1996, two Denver restaurants were subleased to a philly cheesesteak restaurant company and later repossessed by Drive Thru as a result of such company's breach of its contractual obligations to Drive Thru. One of these restaurants is to be relocated to a new site in 1997 and one is to be reconverted to Good Times with the addition of inside seating. Good Times opened two restaurants in June 1995 and two restaurants in August 1995 in Las Vegas, Nevada. These units were previously owned by a franchisee of Rally's Hamburgers, Inc. However, Drive Thru experienced unexpected difficulty in securing suitable locations on which it could develop new units at reasonable cost in the Las Vegas market and realized that critical mass could not be achieved within an acceptable period of time. Since the four units would continue to operate at a significant loss until Drive Thru could effectively advertise in the Las Vegas market, management decided to cease operations in Las Vegas and sell the stores. The four Las Vegas units were closed on October 31, 1995 and sold as of November 30, 1995. Employees. At January 6, 1997, Drive Thru employed approximately 449 persons (including approximately 379 hourly restaurant employees), of whom 19 were management and staff personnel and 51 were restaurant management. Drive Thru considers its employee relations to be good. None of its employees is covered by a collective bargaining agreement. Round The Corner On September 30, 1995, the Company completed the sale of Round The Corner Restaurants, Inc. ("RTC") to Hot Concepts in consideration for $100,000 in cash, a note in the amount of $291,394, and the assumption of all of RTC's liabilities. The sale of RTC by the Company resulted in a deferred gain of $66,000. The Company was notified in August, 1996 of financial difficulties at RTC and of its Chapter 11 bankruptcy filing in October, 1996. In addition to the write-off of the note receivable, the Company recorded a reserve of $333,000 for potential losses associated with its guarantee of two restaurant leases and a note payable. One of such restaurants is now closed and the other does not generate sufficient cash flow to cover the lease payments. The Company is RTC's only secured creditor and holds a lien on the assets of a profitable RTC restaurant. RTC has not yet proposed a plan of reorganization in its bankruptcy and accordingly it is not yet possible to assess the ultimate financial effect on the Company. Bailey Preferred Stock Investment On May 31, 1996, the Company entered into a Series A Convertible Preferred Stock Purchase Agreement with The Bailey Company ("TBC") for the purchase by TBC of one million shares of Series A Convertible Preferred Stock. The aggregate purchase price for such shares is $1 million. The first installment sale took place on October 1, 1996, for 500,000 shares in consideration of $250,000 cash and the cancellation of a promissory note of the Company payable to TBC in the amount of $250,000 arising out of a loan in that amount made by TBC to the Company on March 1, 1996. The second installment of 250,000 shares occurred on January 1, 1997, in consideration of $250,000 cash and the third installment of 250,000 shares will occur on April 1, 1997, in consideration of $250,000 cash. The Company intends to use the funds received for the development of additional Good Times restaurants. The Series A Convertible Preferred Stock was authorized by the stockholders of the Company at a special meeting held September 12, 1996. At such meeting, the stockholders approved an amendment to the Company's Articles of Incorporation authorizing five million shares of preferred stock, $.01 par value. One million of such shares are designated as Series A Convertible Preferred Stock with rights, designations, powers, preferences and restrictions set forth in the amendment. The remaining four million shares may be issued from time to time in one or more series, as determined by the Board of Directors, but the Board of Directors may not authorize the issuance of additional shares of preferred stock without the concurrence of TBC so long as TBC holds two-thirds of the Series A Convertible Preferred Stock and/or the Common Stock acquired by the conversion thereof. The shares of Series A Convertible Preferred Stock are entitled to a dividend of $.08 per share per annum, payable at the option of the holder in cash or in Common Stock, valued for such purpose at 75 percent of the average market value of the Common Stock for the fourteen trading days preceding the dividend payment date. The one million shares of Series A Convertible Preferred Stock are convertible into a maximum of 2,133,333 shares of Common Stock in staggered intervals beginning October 1, 1997. The shares of Series A Convertible Preferred Stock are entitled to vote together with the Common Stock to the extent that such shares are convertible into Common Stock at the time of the vote. The Company may redeem the outstanding Series A Preferred Stock upon at least thirty days written notice at any time after October 1, 1998 by paying to the holders the original purchase price plus any accrued but unpaid dividends. The holders of the Series A Convertible Preferred Stock also have the right to elect two directors to the Board of Directors, one of which will have the right to serve as Chairman of the Board. David E. Bailey and Geoffrey R. Bailey are the current directors elected by TBC to the Board of Directors, and Geoffrey R. Bailey serves as Chairman of the Board. Government Regulation Each of the Good Times restaurants is subject to the regulations of various health, sanitation, safety and fire agencies in the jurisdiction in which the restaurant is located. Difficulties or failures in obtaining the required licenses or approvals could delay or prevent the opening of a new Good Times restaurant. Federal and state environmental regulations have not had a material effect on Good Times' operations. More stringent and varied requirements of local governmental bodies with respect to zoning, land use and environmental factors could delay or prevent development of new restaurants in particular locations. The Company and Drive Thru are subject to the Fair Labor Standards Act which governs such matters as minimum wages, overtime and other working conditions. In addition, the Company and Drive Thru are subject to the Americans With Disabilities Act (the "ADA") which requires restaurants and other facilities open to the public to provide for access and use of facilities by the handicapped. Management believes that the Company and Drive Thru are in compliance with the ADA. The Company and Drive Thru are also subject to federal and state laws regulating franchise operations, which vary from registration and disclosure requirements in the offer and sale of franchises to the application of statutory standards regulating franchise relationships. Competition The restaurant industry, including the fast food segment, is highly competitive. Drive Thru competes with a large number of other hamburger oriented, fast food restaurants in the areas in which it operates. Many of these restaurants are owned and operated by regional and national restaurant chains, many of which have greater financial resources and experience than does the Company. Restaurant companies that currently compete with Good Times in the Denver market include McDonald's, Burger King, Wendy's and Hardee's. Double drive through restaurant chains such as Rally's Hamburgers, Inc. and Checker's Drive-In Restaurants, Inc., currently operating a total of over 900 double drive through restaurants in various markets in the United States, are not currently operating in Colorado. Management of Drive Thru believes that such double drive through restaurant chains will not expand into Colorado; however, such possibility exists and would result in significant competition for Drive Thru. Management of Drive Thru believes that it may have a competitive advantage in terms of quality of product and price-value compared to traditional fast food hamburger chains. However, recent price discounting by the major fast food hamburger chains has had a detrimental effect on Good Times' sales. Early development of its double drive through concept in Colorado has given Drive Thru an advantage over other double drive through chains that may seek to expand into Colorado because of Good Times' brand awareness and present restaurant locations. In addition, management of Drive Thru believes Drive Thru has a competitive advantage in the areas of purchasing and distribution, financial systems, marketing, construction, site selection, quality assurance and training. Nevertheless, Drive Thru may be at a competitive disadvantage with other restaurant chains with greater name recognition and marketing capability. Furthermore, most of Drive Thru's competitors in the fast-food business operate more restaurants, have been established longer and have greater financial resources and name recognition than Good Times. There is also active competition for management personnel, as well as for attractive commercial real estate sites suitable for restaurants. Trademarks - Colorado Drive Thru has registered its mark "Good Times! Drive Thru Burgers"SM in the state of Colorado and will endeavor to register such mark in each state it or a franchisee intends to open a restaurant. At present, Drive Thru relies solely upon common law trademark protection and state registration. Such reliance will not protect Drive Thru against a prior user of the mark and, if prior use is established, Drive Thru may not be able to use the mark in the area of such use. While the mark is important to Drive Thru, unavailability of the mark in any particular geographic area into which it desires to expand operations may not necessarily be materially adverse. Such name non- availability may, however, preclude the economies and other advantages which may be available through nationwide or regional marketing and advertising. ITEM 2. PROPERTIES As of January 6, 1997, Drive Thru has an ownership interest in 14 Good Times units, all of which are located in Colorado. Seven are held in limited partnerships of which Drive Thru is a general partner and has a 50% interest in the partnership. There are seven Good Times units wholly-owned by Drive Thru. Each of the existing Good Times restaurants is a free-standing structure containing approximately 880 square feet situated on lots of approximately 18,000 to 30,000 square feet. The land is leased at all of these locations. Drive Thru intends to enter into ground leases wherever possible. However, there is no assurance that leasing will be available for desirable sites and Drive Thru may be required to purchase such sites. In the event financing is not available for such acquisitions, Drive Thru may have to utilize cash that could otherwise be used to develop additional Good Times restaurants. In such event, Drive Thru will endeavor to enter into sale/leaseback transactions or mortgage financing for such real estate. All of the restaurants are regularly maintained by the Company's repair and maintenance staff as well as by outside contractors, when necessary. Management believes that all of its properties are in good condition and that there will not be a need for significant capital expenditures to maintain the operational and aesthetic integrity of the properties for the foreseeable future. ITEM 3. LEGAL PROCEEDINGS GGP Limited Partnership v. Good Times Drive Thru Inc. and Good Times Restaurants Inc. On October 2, 1996, GGP Limited Partnership ("GGP") filed a complaint in the Colorado District Court for El Paso County alleging that Drive Thru's termination of its September 1995 lease agreement with GGP for an unimproved parcel of land located in the Chapel Hills Mall in Colorado Springs, Colorado was invalid and constituted a breach of the lease agreement. GGP is seeking an order of specific performance of the lease by the Company, whereby the Company would be compelled to construct and operate a restaurant on the parcel of land as contemplated by the lease, damages of $801,935.93 representing the value of the lease allegedly lost by GGP in the event that the Company does not perform the lease, plus interest, attorney fees and costs. Since the title commitment for the premises received by Drive Thru after execution of the lease revealed certain title defects unacceptable to Drive Thru, which defects were not cured by GGP within the required time period under the lease, and since the lease agreement provided for the termination of the lease by Drive Thru in the event of such uncured title defects, the Company intends to vigorously defend the claims and it is the opinion of the Company's legal counsel that it is probable that the Company will prevail. Corporate Property Investors v. Round the Corner Restaurants, Inc., a Colorado corporation, Good Times Restaurants Inc., Hot Concepts Management Company and Hot Concepts Management Group LLC. On October 1, 1996, Corporate Property Investors ("CPI") filed a complaint in the Colorado District Court for Arapahoe County alleging that the defendants, including the Company, are liable for an unspecified amount of damages arising from defaults associated with a ten-year lease entered into in October 1994 between CPI and Round the Corner Restaurants Inc., a Colorado corporation ("RTC Colorado"), for a restaurant in the Aurora Mall Shopping Center in Aurora, Colorado. The restaurant was vacated by RTC Colorado in August 1996. The Company's liability associated with the lease is limited to a guaranty of repayment by RTC Colorado of a $150,000 renovation construction allowance provided by CPI less amortization in the form of credits from a portion of the rental payments made, which credits through August 1996 amounted to approximately $89,000, and less certain other items which may reduce the net guarantee liability to CPI. It is the intention of the Company to vigorously defend any claim against it in excess of such net amount guaranteed and it is the opinion of the Company's legal counsel that it is probable that the Company will prevail in that defense. Heather Hotchkiss v. Good Times Restaurants, Inc. and Mark Modester. On June 28, 1996, Heather Hotchkiss, a former employee of the Company, filed a complaint in the Colorado District Court for Boulder County alleging that the defendants, including the Company, are liable for an unspecified amount of damages arising from the alleged sexual harassment of Ms. Hotchkiss at the Company's restaurant in Boulder, Colorado by Mark Modester, a former employee of the Company. On November 12, 1996, the Company filed an answer denying any liability on its part. Due to the early stage of the litigation, the Company's legal counsel is unable to express an opinion as to the ultimate outcome of this matter. Lester Gold, The Estate of Harry Cohen, Jess Kortz, The Estate of Rose Kortz for the benefit of The Trust under The Will of Rose Kortz, Seymour G. Laff and Pearle Rae Kortz v. Round the Corner Restaurants, Inc, a Colorado corporation, and Round the Corner Restaurants, Inc., a Delaware corporation. On February 22, 1996, a complaint was filed in the Colorado District Court for the City and County of Denver by which the plaintiffs, who are collectively doing business as Parkhampden Center in Denver, Colorado, seek a declaratory judgment that the defendants are liable for an unspecified amount of increased rental payments under a Parkhampden Center ground lease rental escalation clause allegedly triggered by an assignment of the lease by a partnership to RTC Colorado in July 1992 and a sublease of the premises in September 1995. Under an indemnification agreement related to the September 1995 sale by the Company of all of the issued and outstanding stock of Round the Corner Restaurants Inc., a Delaware corporation ("RTC Delaware"), which owns all of the issued and outstanding stock of RTC Colorado, the Company has agreed to indemnify and hold harmless the defendants with respect to any losses, liabilities, claims, costs or expenses as a result of the above ground lease and sublease. Since the rental escalation clause does not apply to subleases, but rather applies only to assignments approved by the landlord, which approval is not required if the assignor has at least a fifty percent financial interest in the assignee, and since the partners of the partnership which assigned the lease to RTC Colorado in July 1992 had more than a fifty percent financial interest in RTC Colorado, it is the intention of the defendants to vigorously defend the allegations that any increased rental payments are due to the plaintiffs, and it is the opinion of the Company's legal counsel that it is probable that the Company will prevail in this defense. On October 25, 1996, RTC Colorado filed a bankruptcy petition in the United States Bankruptcy Court for the District of Colorado. On November 22, 1996, RTC Colorado filed in this matter a notice of such bankruptcy petition and thus this litigation is automatically stayed during the pendency of the bankruptcy. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On September 12, 1996, the Registrant held a special meeting of shareholders pursuant to notice to act on management's proposal to amend the Registrant's Articles of Incorporation to authorize the issuance of 5,000,000 shares of preferred stock, $.01 par value, 1,000,000 shares of which are to be designated as Series A Convertible Preferred Stock to be sold to an investor, 4,000,000 shares of which are to be reserved for future issuance at the discretion of the Board of Directors. A quorum was present, 3,481,451 shares were voted in favor of the proposal, 253,233 shares voted against the proposal, 92,983 shares specifically abstained, and an additional 239,211 shares were represented by signed proxies, but not specifically voted. Management determined not to utilize its option to vote those shares as it was unnecessary for the passage of the proposal. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's outstanding shares of Common Stock (the "Common Stock") and Common Stock Purchase Warrants (the "Warrants") are traded in the over-the- counter market. The following table sets forth the quarterly high and low bid prices as reported by the National Quotation Bureau Incorporated and NASDAQ from December 31, 1994 through December 31, 1996, as adjusted for the one-for- four reverse stock split in May 1992. The quotations represent prices quoted between dealers and do not include commissions, mark-ups or mark-downs and thus may not represent actual transactions. Common Stock Series A Warrants Series B Warrants Bid Prices Bid Prices Bid Prices Quarter Ended High Low High Low High Low December 31, 1994 1.63 1.25 .22 .19 .37 .25 March 31, 1995 1.62 1.19 .19 .09 .28 .13 June 30, 1995 1.94 1.25 .16 .13 .38 .19 September 30, 1995 1.31 .94 .13 .06 .19 .06 December 30, 1995 1.03 .47 .06 .03 .09 .03 March 31, 1996 .69 .31 .03 .03 .06 .03 June 30, 1996 .69 .50 .03 .03 .06 .03 September 30, 1996 .63 .44 .09 .03 .06 .03 December 31, 1996 .56 .32 .06 .03 .06 .03 As of January 6, 1997, there were approximately 388 holders of record of Common Stock and 114 holders of Warrants. However, management estimates that there are not fewer than 3,200 beneficial owners of the Company's Common Stock. The NASDAQ symbols for the Common Stock and the outstanding Series A warrants and Series B warrants are "GTIM", "GTIMW," and "GTIMZ", respectively. In January 1997, the Company gave notice to the holders of the Series A and Series B warrants that the expiration date of such warrants had been extended from February 10, 1997 to February 10, 1999 and the exercise price of such warrants had been reduced to $2.00 per share. DIVIDEND POLICY The Company has never paid dividends on its Common Stock and does not anticipate paying dividends in the foreseeable future. The Company's ability to pay future dividends will necessarily depend upon its earnings and financial condition. However, since restaurant development is capital intensive, it is the intention of the Company to retain earnings, if any, for that purpose. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE COMPANY, GOOD TIMES AND RTC On July 27, 1992, the stockholders of the Company approved a merger with RTC. For financial statement purposes, RTC was considered the acquiring company and the transaction was treated as a purchase by RTC of the Company, effective August 1, 1992. For legal purposes, however, the Company remained the surviving entity and the combined entity retained the Company's capital structure. In February 1993, the Company's operations and management were reorganized to allow Drive Thru and RTC to function as separately accountable entities and to allow RTC's and Drive Thru's managements to focus exclusively on their respective businesses. The Company provided administrative and accounting support to Drive Thru and RTC in fiscal 1995 and charged monthly management fees of $70,000 and $35,000, respectively, for such services. On September 29, 1995, the Company completed the sale of RTC to Hot Concepts and ceased providing these services to RTC. Beginning in fiscal 1996, the administrative and accounting functions of the Company were consolidated with Drive Thru's operations and no management fees were charged to Drive Thru. The following selected financial data is derived from the companies' historical financial statements and is qualified in its entirety by such financial statements which are included in Item 7. GOOD TIMES RESTAURANTS INC. AND SUBSIDIARIES The following presents certain historical financial information of the Company. This financial information includes the combined operations of the Company, Drive Thru and RTC for the fiscal years ended September 30, 1995 and the combined operations of the Company and Drive Thru for the fiscal year ended September 30, 1996. Year Ended September 30, Operating Data: 1995 1996 Net Revenues $17,522,000 $12,826,000 Restaurant Operating Costs: Food and paper costs 6,090,000 4,700,000 Labor, occupancy and other 9,169,000 6,520,000 Depreciation and amortization 700,000 770,000 Total restaurant operating costs 15,959,000 11,990,000 Income From Restaurant Operations 1,563,000 836,000 Other Operating Expenses: Selling, General and Administrative Expense 2,343,000 1,905,000 Loss on disposal of restaurants and equipment 360,000 206,000 Loss on planned exit of certain market areas 710,000 183,000 Total Other Operating Expenses 3,413,000 2,294,000 Income (Loss) from Operations (1,850,000) (1,458,000) Other Income and (Expenses) Minority income (expense), net (131,000) 181,000 Interest, net (10,000) (71,000) Other, net (99,000) (109,000) Losses from RTC bankruptcy - (564,000) Total other income and (expenses) (240,000) (563,000) Net Loss $ (2,090,000) $ (2,021,000) Net Loss Per Share $ (.30) $ (.31) Weighted Average Shares Outstanding 6,863,000 6,549,000 September 30, 1995 1996 Balance Sheet Data: Working Capital (deficit) $ (795,000) $ (732,000) Total assets 9,285,000 7,162,000 Minority Interest 1,735,000 1,653,000 Long-term debt and long-term capital leases 378,000 479,000 Stockholders' equity $ 4,986,000 $ 3,007,000 Results of Operations The operating results for fiscal 1995 include a full year of operations for Drive Thru and the operations of RTC only for the first six months of fiscal 1995. Operating results of RTC from April 1, 1995 to September 30, 1995 are included in loss on disposal of restaurants and equipment in the consolidated statement of operations as a result of the Company's formal plan of disposal of RTC adopted on March 31, 1995. Therefore, in the following discussion and analysis, management has limited its discussion of RTC's operating results to the net revenues and the net losses of the Company attributable to RTC. Fiscal Years 1996 and 1995 Net Revenues. Net revenues for the year ended September 30, 1996 decreased $4,696,000 (26.8%) to $12,826,000 from $17,522,000 for the year ended September 30, 1995. This decrease is primarily attributable to the sale of RTC and sale and disposition of four Good Times units in Colorado during fiscal 1996 and the disposition of four units in Las Vegas as of October 1, 1995. The Company ceased reporting results from RTC as of April 1, 1995. Drive Thru sold one company-owned restaurant to a franchisee in February 1996, sold one joint-venture restaurant to a franchisee in May 1996 and sub-let one company-owned and one joint-venture restaurant in April and June 1996, respectively. Net revenues decreased $1,585,000 for the year ended September 30, 1996 from the same prior year period as a result of these dispositions. Net revenues decreased $316,000 for the year ended September 30, 1996 from the same prior year period from the disposition of the Las Vegas restaurants. Net revenues increased $840,000 for the year ended September 30, 1996 from the same prior year period from the opening of two joint-venture restaurants in October and December 1995. Net revenues increased $746,000 for the year ended September 30, 1996 from the same prior year period from four restaurants opened during fiscal 1995 that were not open the entire fiscal 1995 year. Net revenues decreased $784,000 or 9.3% during fiscal 1996 in same store sales for restaurants that have been open for the full fiscal 1995 and 1996 periods . However, same store sales decreased 14.4% in the first six months of fiscal 1996 and 4.3% in the last six months of fiscal 1996 for restaurants open for the full fiscal 1995 and 1996 periods . Average unit revenues for company- owned and joint-venture restaurants open all of fiscal 1996 were $847,000. There were seven franchised restaurants open for the full 1996 fiscal year generating $707,000 average unit revenues. Net revenues from Drive Thru and its franchisees were $18,300,000 for the fiscal year ended September 30, 1996. Food and Paper Costs. In fiscal 1996, Drive Thru's food and paper costs were 37.3% of net restaurant sales compared to 36.5% of net restaurant sales in fiscal 1995. The increase in Drive Thru's food and paper costs is primarily attributable to increased paper goods costs and an increase in promotional and discounted sales. Income From Restaurant Operations. For the year ended September 30, 1996 the Company's income from restaurant operations was $836,000 compared to $1,563,000 (including $245,000 in income from restaurant operations of RTC through March 31, 1995) in fiscal 1995. Drive Thru's income from operations was negatively impacted in fiscal 1996 by decreased average unit volumes and increased promotional sales in response to heavy discounting by the major fast food hamburger chains. Net franchise development fees and royalties increased from $209,000 in fiscal 1995 to $216,000 in fiscal 1996. Loss from Operations Drive Thru's loss from operations before other income and expenses was ($1,458,000) in fiscal 1996 compared to a loss from operations of ($1,850,000) in fiscal 1995. Income from operations was negatively impacted by ($389,000) of write-offs associated with the closing of one under-performing Colorado restaurant and the planned disposition of one joint-venture restaurant in Boise, Idaho to a franchisee. Selling, general and administrative expenses decreased from $2,343,000 (13.4% of net revenues) to $1,905,000 (14.9% of net revenues)in fiscal 1996. Management of the Company believes that selling, general and administrative expenses will be reduced in fiscal 1997 by approximately $200,000, which represents savings associated with a downsizing that occurred in fiscal 1996. Net Loss The net loss for Drive Thru was (2,021,000) for the fiscal year ended September 30, 1996 compared to a net loss of ($2,090,000) for the fiscal year ended September 30, 1995. Of this amount, ($389,000) is attributable to the closure of one Colorado restaurant and the planned disposition of a restaurant in Boise, Idaho, and ($564,000) is attributable to costs associated with the RTC bankruptcy, of which ($231,000) is a write-off of a note receivable net of a deferred gain and ($333,000) is other anticipated costs (including guaranteed rents, property taxes, legal fees and performance under a guarantee of a note payable). Liquidity and Capital Resources As of September 30, 1996, the Company had $540,000 of cash and cash equivalents on hand. This amount is believed sufficient to cover working capital needs of the Company for the 1997 fiscal year. The Company had a working capital deficit of ($732,000). Because restaurant sales are collected in cash and accounts payable for food and paper products are paid two to four weeks later, restaurant companies often operate with working capital deficits. It is anticipated that working capital deficits will expand as new Drive Thru restaurants are opened. Subsequent to September 30, 1996, the Company closed the sale of $1 million of preferred stock, $250,000 of which was the conversion of a note payable and $250,000 in cash on October 1, 1996. The balance of the preferred stock investment is due in installments of $250,000 on January 1, 1997 and April 1, 1997. The proceeds of the preferred stock sale are required to be used for the development of new Good Times restaurants by December 31, 1997. Subsequent to September 30, 1996, Drive Thru completed the transfer of its partnership interest in the Boise, Idaho restaurant. The agreement includes indemnification of the Company on $296,000 of notes payable and the assumption of all liabilities, obligations and operating losses by the limited partner. As a part of the agreement, the Company paid $75,000 to the partnership. Net cash used in operating activities of the Company was ($893,000) for fiscal 1996 compared to net cash used in operating activities of the Company of ($451,000) in fiscal 1995. This was the result of a net loss of ($2,021,000) for fiscal 1996, non-cash reconciling items totaling $1,128,000 (comprised principally of depreciation and amortization of $773,000, minority interest of ($181,000), losses associated with the RTC bankruptcy of $564,000, the closure and disposition of two restaurants of $389,000, and decreases in operating assets and liabilities totaling $384,000). Net cash provided by investing activities by the Company in fiscal 1996 was $418,000, which includes proceeds from the sale of assets of $819,000, and the purchase of property and equipment of $401,000. Drive Thru utilizes all cash provided by investing activities for capital expenditures consisting primarily of expenditures for the development of new Good Times restaurants and refurbishment of existing restaurants. In fiscal 1995 and 1996, Drive Thru developed two company-owned Good Times restaurants and five co-developed units. Net cash provided by investing activities by the Company in fiscal 1995 was $1,041,000, which included proceeds from the sale of assets of $2,792,000, the net sale of marketable securities for $1,024,000, and the purchase of property and equipment of $2,775,000. Net cash provided by financing activities by the Company in fiscal 1996 was $248,000, which includes principal payments on notes payable and capital leases of $99,000, borrowings on notes payable and long-term debt of $250,000, distributions to minority interests in partnerships of $227,000, and contributions from minority interests in partnerships of $324,000. The Company has negotiated the restructuring of its existing lease financing and does not anticipate entering into additional equipment leases pursuant to a lease line of credit. Net cash used in financing activities by the Company in fiscal 1995 was $345,000 which includes principal payments on notes payable and long-term debt of $630,000, borrowings on notes payable and long-term debt of $56,000, distributions to minority interests in partnerships of $414,000, and contributions from minority interests in partnerships of $643,000. Neither the Company nor Drive Thru currently have any bank lines of credit. The Company intends to use its cash resources and cash generated from operations for working capital, two to three new restaurants and the remodel and addition of inside seating to select existing restaurants. Drive Thru will require additional capital in order to develop additional company-owned Good Times Drive Thru restaurants in the future. In the event Drive Thru is not successful in obtaining additional capital, management intends to continue to develop Good Times Drive Thru restaurants through franchising and joint development activities with existing and new franchisees. Statements in this Filing that are not historical facts may be forward- looking statements. Actual events may differ materially from those projected in any forward-looking statement. There are a number of important factors beyond the control the Company that could cause actual events to differ materially from those anticipated by any forward-looking information. A description of risks and uncertainties attendant to the Company and its industry and other factors which could affect the Company's financial results are included in this Filing. Impact of Recently Issued Accounting Standards In March 1995, the Financial Accounting Standards Board issued a new statement titled "Accounting for Impairment of Long-Lived Assets." This new standard is effective for years beginning after December 15, 1995 and would change the Company's method of determining impairment of long-lived assets. Although the Company has not performed a detailed analysis of the impact of this new standard on the Company's financial statements, the Company does not believe that adoption of the new standard will have a material effect on the financial statements. In October 1995, the Financial Accounting Standards Board issued a new statement titled "Accounting for Stock-Based Compensation (FAS 123). The new statement is effective for fiscal years beginning after December 15, 1995. FAS 123 encourages, but does not require, companies to recognize compensation expense for grants of stock, stock options and other equity instruments to employees based on fair value. Companies that do not adopt the fair value accounting rules must disclose the impact of adopting the new method in the notes to the financial statements. Transactions in equity instruments with non- employees for goods or services must be accounted for on the fair value method. The Company currently does not intend to adopt the fair value accounting rules of FAS 123 for its employees, and will be subject only to the disclosure requirements. However, the Company intends to continue its analysis of FAS 123 and may elect to adopt its provisions in the future. The Company does not believe that adoption of the new standard will have a material effect on the financial statements. ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA GOOD TIMES RESTAURANTS INC. AND SUBSIDIARIES: Independent Auditor's Report Consolidated Balance Sheet - September 30, 1996 Consolidated Statements of Operations - For the Years Ended September 30, 1995 and 1996 Consolidated Statement of Stockholders' Equity - For the Period from October 1, 1994 to September 30, 1996 Consolidated Statements of Cash Flows - For the Years Ended September 30, 1995 and 1996 Notes to Consolidated Financial Statements INDEX TO FINANCIAL STATEMENTS PAGE Good Times Restaurants Inc. and Subsidiaries: Independent Auditor's Report . . . . . . . . . . . . . . . . .F-2 Consolidated Balance Sheet - September 30, 1996. . . . . . . .F-3 Consolidated Statements of Operations - For the Years Ended September 30, 1995 and 1996 . . . . . . . . . . . . . . .F-5 Consolidated Statement of Changes of Stockholders' Equity - For the Period from October 1, 1994 through September 30, 1996. . . . . . . . . . . . . . . .F-6 Consolidated Statements of Cash Flows - For the Years Ended September 30, 1995 and 1996 . . . . . . . . . . . . . . .F-8 Notes to Consolidated Financial Statements . . . . . . . . . F-10 INDEPENDENT AUDITOR'S REPORT To the Stockholders and Board of Directors Good Times Restaurants Inc. Westminster, Colorado We have audited the accompanying consolidated balance sheet of Good Times Restaurants Inc. and subsidiaries as of September 30, 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for the years ended September 30, 1995 and 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Good Times Restaurants Inc. and subsidiaries as of September 30, 1996, and the results of their operations and their cash flows for the years ended September 30, 1995 and 1996, in conformity with generally accepted accounting principles. Hein + Associates LLP Denver, Colorado December 2, 1996 GOOD TIMES RESTAURANTS INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET SEPTEMBER 30, 1996 ASSETS Current Assets: Cash and cash equivalents $ 540,000 Receivables 211,000 Inventories 48,000 Prepaid expenses and other 19,000 Total current assets 818,000 Property and Equipment, at cost: Land and building 2,211,000 Leasehold improvements 2,424,000 Fixtures and equipment 2,879,000 7,514,000 Less accumulated depreciation and amortization (1,819,000) 5,695,000 Other Assets: Net assets held for sale 98,000 Note receivables 435,000 Other 116,000 649,000 Total Assets $7,162,000 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current portion of capital lease obligations $ 109,000 Accounts payable 368,000 Accrued wages and salaries 157,000 Accrued losses for closed/sold stores 226,000 Accrued losses associated with RTC bankruptcy 278,000 Accrued property taxes 130,000 Accrued and other liabilities 282,000 Total current liabilities 1,550,000 Long-Term Capital Lease Obligations, net of current portion 179,000 Long-term Debt 300,000 Convertible Note Payable (Notes 5 and 10) 250,000 Deferred Liabilities 223,000 Minority Interests in Partnerships 1,653,000 Commitments and Contingencies (Notes 2, 3 and 6) Stockholders' Equity: Preferred stock, .01 par value, 5,000,000 shares authorized, none issued and outstanding - Common stock, $.001 par value; 50,000,000 shares authorized, 6,314,820 shares issued and outstanding 6,000 Capital contributed in excess of par value 10,845,000 Accumulated deficit (7,844,000) Total stockholders' equity 3,007,000 Total Liabilities and Stockholders' Equity $ 7,162,000 See accompanying notes to these consolidated financial statements. GOOD TIMES RESTAURANTS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the Years Ended September 30, 1995 1996 Net Revenues: Restaurant sales $17,313,000 $12,610,000 Area development & franchise fees 55,000 40,000 Franchise royalties 154,000 176,000 17,522,000 12,826,000 Restaurant Operating Costs: Food and paper costs 6,090,000 4,700,000 Restaurant labor costs 6,071,000 4,510,000 Restaurant occupancy costs 1,947,000 1,356,000 Accretion of deferred rent 60,000 57,000 Other restaurant operating costs 1,091,000 597,000 Depreciation and amortization 700,000 770,000 Total restaurant operating costs 15,959,000 11,990,000 Income from Restaurant Operations 1,563,000 836,000 Other Operating Expenses: General and administrative 1,549,000 1,184,000 Advertising 794,000 721,000 Loss on disposal of restaurants and equipment 360,000 206,000 Loss on planned exit of certain market areas 710,000 183,000 Total other operating expenses 3,413,000 2,294,000 Other Income (Expenses): Interest income 90,000 71,000 Interest expense (100,000) (142,000) Minority interest in income (loss) of partnerships (131,000) 181,000 Losses associated with RTC bankruptcy - (564,000) Other, net (99,000) (109,000) Total other expenses, net (240,000) (563,000) Net Loss $(2,090,000) $(2,021,000) Net Loss per Share $ (.30) $ (.31) Weighted Average Shares Outstanding 6,863,000 6,549,000 See accompanying notes to these consolidated financial statements. GOOD TIMES RESTAURANTS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE PERIOD FROM OCTOBER 1, 1994 THROUGH SEPTEMBER 30, 1996 Common Stock Preferred Stock Issued Par Issue Par Shares Value Shares Value Balances, October 1, 1994 6,251,072 $ 6,000 - - Additional cost incurred for Good Times public offering - - - - Stock issued to employee benefit plan 22,080 - - - Stock purchased by officers 625,000 1,000 - - Notes receivable from officers for stock purchase - - - - Net loss - - - - Balances, September 30, 1995 6,898,152 7,000 - - Cancellation of note from stockholders (625,000) (1,000) - - Stock issued to employee benefit plan 41,668 - - - Net loss - - - - Balances, September 30, 1996 6,314,820 $ 6,000 - $ - See accompanying notes to these consolidated financial statements. GOOD TIMES RESTAURANTS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE PERIOD FROM OCTOBER 1, 1994 THROUGH SEPTEMBER 30, 1996 (Continued from previous page) Capital in Officers Excess of Notes Accumulated Par Value Receivables Deficit Total Balances, October 1, 1994 $10,777,000 $ - $(3,733,000) $7,050,000 Additional cost incurred for Good Times public offering (7,000) - - (7,000) Stock issued to employee benefit plan 33,000 - - 33,000 Stock purchased by officers 880,000 - - 881,000 Notes receivable from officers for stock purchase - (881,000) - (881,000) Net loss - - (2,090,000) (2,090,000) Balances, September 30, 1995 11,683,000 (881,000) (5,823,000) 4,986,000 Cancellation of note from stockholders (880,000) 881,000 - - Stock issued to employee benefit plan 42,000 - - 42,000 Net loss - - (2,021,000) (2,021,000) Balances, September 30, 1996 $10,845,000 $ - $(7,844,000) $3,007,000 See accompanying notes to these consolidated financial statements. GOOD TIMES RESTAURANTS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended September 30, 1995 1996 Cash Flows from Operating Activities: Net loss $(2,090,000) $(2,021,000) Adjustments to reconcile net loss to net cash from operating activities: Depreciation & amortization 700,000 773,000 Minority interest 131,000 (181,000) Loss on planned exit of certain market areas 710,000 183,000 Loss on disposal of restaurants and equipment - 206,000 Losses associated with RTC bankruptcy - 564,000 Gain on sale of property, net - (75,000) Cash transferred in sale of subsidiary (7,000) - Common stock for services 26,000 42,000 Changes in operating assets and liabilities: (Increase) decrease in: Receivables 287,000 130,000 Inventories (44,000) 19,000 Prepaid expenses and other 154,000 (130,000) (Decrease) increase in: Accounts payable (217,000) (241,000) Accrued & other liabilities (101,000) (162,000) Net cash provided by (used in) operating activities (451,000) (893,000) Cash Flows from Investing Activities: Payments for the purchase of property and equipment (2,775,000) (401,000) Proceeds from sale of assets 2,792,000 819,000 Purchase of marketable securities (1,517,000) - Sale of marketable securities 2,541,000 - Net cash (used in) provided by investing activities 1,041,000 418,000 Cash Flows from Financing Activities: Principal payments on notes payable and long-term debt (630,000) (99,000) Borrowings on notes payable and long-term debt 56,000 250,000 Distributions paid to minority interests in partnerships (414,000) (227,000) Contributions from minority interest in partnerships 643,000 324,000 Net cash provided by (used in) financing activities (345,000) 248,000 Increase (Decrease) in Cash 245,000 (227,000) Cash and Cash Equivalents, beginning of period 522,000 767,000 Cash and Cash Equivalents, end of period $ 767,000 $ 540,000 Supplemental Disclosures of Cash Flow Information: Cash paid for interest $ 100,000 $ 142,000 Purchase of land, building, and equipment through long-term debt and stock $ 351,000 $ - Stock issued to officers for notes receivable $ 881,000 $ - Sale of land, building, and equipment for notes receivable $ 450,000 $ 20,000 Stock issued to employee 401(k) plan $ 26,000 $ 42,000 Sale of RTC for notes receivable $ 391,000 $ - Forgiveness of shareholder notes for the return of stock $ - $ 881,000 See accompanying notes to these consolidated financial statements. GOOD TIMES RESTAURANTS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Organization and Summary of Significant Accounting Policies: Organization - Good Times Restaurants Inc. (Good Times or the Company) is a Nevada corporation. In July 1992, Good Times merged with Round the Corner Restaurants, Inc. (RTC). The Company operates through its subsidiary Good Times Drive Thru Inc. (Drive Thru). All of the stock of RTC was sold as of September 30, 1995. Drive Thru commenced operations in 1986 and, as of September 30, 1996, operates 15 company-owned and joint venture double drive-thru fast food hamburger restaurants. The Company's restaurants are primarily in Colorado. In addition, Drive Thru has nine franchises operating in Colorado, and is offering franchises for development of additional Drive Thru restaurants. Principles of Consolidation - The consolidated financial statements include the accounts of Good Times and its subsidiaries, including certain 50% owned limited partnerships in which the Company exercises control as general partner. All intercompany accounts and transactions are eliminated. The unrelated limited partners' equity of each partnership has been recorded as minority interest in the accompanying consolidated financial statements. Deferred Opening Costs - The Company has deferred certain direct incremental costs in connection with the opening of new restaurants. The net pre-opening costs included in prepaid expenses is $16,000 at September 30, 1996. The pre-opening costs are amortized over a one year period. Inventories - Inventories are stated at the lower of cost or market, determined by the first-in, first-out method, and consist of restaurant food items and related paper supplies. Property and Equipment - Depreciation is recognized on the straight-line method over the estimated useful lives of the assets or the lives of the related leases, if shorter, as follows: Building 15 years Leasehold improvements 7-15 years Fixtures and equipment 3-8 years Maintenance and repairs are charged to expense as incurred, and expenditures for major improvements are capitalized. When assets are retired, or otherwise disposed of, the property accounts are relieved of costs and accumulated depreciation with any resulting gain or loss credited or charged to income. Sales of Restaurants and Restaurant Equity Interests - Sales of restaurants or non-controlling equity interests in restaurants developed by the Company are accounted for under the full accrual method or the installment method. Under the full accrual method, gain is not recognized until the collectibility of the sales price is reasonably assured and the earnings process is virtually complete without further contingencies. When a sale does not meet the requirements for income recognition, gain is deferred until those requirements are met. Under the installment method, gain is recognized as principal payments on the related notes receivable are collected. Deferred Liabilities - Rent expense is reflected on a straight-line basis over the term of the lease for all leases containing step-ups in base rent. An obligation representing future payments (which totaled $143,000 as of September 30, 1996) has been reflected in the accompanying consolidated balance sheet as a deferred liability. The remaining balance includes a deferred gain of $53,000 on the sale of a restaurant. Advertising - The Company incurs advertising expense in connection with marketing of its restaurant operations. Advertising costs are expensed the first time the advertising takes place. Franchise and Area Development Fees - Individual franchise fee revenue is deferred when received and is recognized as income when the Company has substantially performed all of its obligations under the franchise agreement and the franchisee has commenced operations. Area development fees and related direct expenses are recognized ratably upon opening of the applicable restaurants. Continuing royalties from franchisees, which are a percentage of the gross sales of franchised operations, are recognized as income when earned. Franchise development expenses, which consist primarily of legal costs associated with developing and executing master franchise agreements, are expensed as incurred. Statement of Cash Flows - For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Income Taxes - Income taxes are provided for in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." SFAS No. 109 requires an asset and liability approach in the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of the Company's assets and liabilities. Net Loss per Common Share - The computations of loss per share are based on the weighted average number of common shares outstanding during each fiscal period. Warrants and options outstanding are not included in the computations in loss years because their effect would be antidilutive. Financial Instruments and Concentrations of Credit Risk - Credit risk represents the accounting loss that would be recognized at the reporting date if counter parties failed completely to perform as contracted. Concentrations of credit risk (whether on or off balance sheet) that arise from financial instruments exist for groups of customers or counter parties when they have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly effected by changes in economic or other conditions. Financial instruments with off-balance-sheet risk to the Company include lease guarantees whereby the Company is contingently liable as a guarantor of certain leases that were assigned to third parties in connection with various store closures (see Note 6). Financial instruments which potentially subject the Company to concentration of credit risk consist principally of cash and cash equivalents and receivables. At September 30, 1996, the Company maintained cash balances with a commercial bank, which were approximately $168,000 in excess of FDIC limits and maintained a government fund balance of $219,000. At September 30, 1996, notes receivable totaled $466,000 and were from four entities. The notes receivables are generally collateralized by buildings and equipment and guaranteed by certain individuals. Additionally, the Company has receivables of $180,000, which consists principally of recurring rebates from vendors, current franchise receivables, and amounts due from a restaurant co-developer. The Company purchases 100% of its restaurant food and paper from one vendor. The Company believes that there are a sufficient number of other suppliers from which food and paper could be purchased to prevent any long-term adverse consequences. The Company operates in one industry segment, restaurants. A geographic concentration exists because the Company's customers are generally located in the State of Colorado. The estimated fair values for financial instruments are determined at discrete points in time based on relevant market information. These estimates involve uncertainties and cannot be determined with precision. The carrying amounts of cash, receivables, notes receivables, long-term debt, capital lease obligations, accounts payable, and accrued liabilities approximate fair value as a result of the short-term maturities or interest rates that approximate the Company's current expected borrowing and lending rates. Accounting Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in these financial statements and the accompanying notes. The actual results could differ from those estimates. Significant estimates include accrued losses for RTC contingencies and for a store closure and sale. Due to the nature of these estimates, it is at least reasonably possible that they could change in the near term, and that such a change could be material. Reclassifications - Certain reclassifications have been made to conform 1995 financial statements to the presentation in 1996. The reclassifications had no effect on net income. Impact of Recently Issued Accounting Standards - In March 1995, the Financial Accounting Standards Board issued a new statement titled "Accounting for Impairment of Long-Lived Assets." This new standard is effective for years beginning after December 15, 1995 and would change the Company's method of determining impairment of long-lived assets. Although the Company has not performed a detailed analysis of the impact of this new standard on the Company's financial statements, the Company does not believe that adoption of the new standard will have a material effect on the financial statements. In October 1995, the Financial Accounting Standards Board issued a new statement titled "Accounting for Stock-Based Compensation" (FAS 123). The new statement is effective for fiscal years beginning after December 15, 1995. FAS 123 encourages, but does not require, companies to recognize compensation expense for grants of stock, stock options and other equity instruments to employees based on fair value. Companies that do not adopt the fair value accounting rules must disclose the impact of adopting the new method in the notes to the financial statements. Transactions in equity instruments with non-employees for goods or services must be accounted for on the fair value method. The Company currently does not intend to adopt the fair value accounting rules of FAS 123 for its employees, and will be subject only to the disclosure requirements. However, the Company intends to continue its analysis of FAS 123 and may elect to adopt its provisions in the future. 2. Liquidity and Continued Operations: As reflected in the accompanying financial statements, the Company has incurred net losses the past two years and has negative cash flows from operations. Management has taken the following actions to improve the Company's cash flow and operating results: Sold, or closed for relocation, certain restaurants that were underpforming and had negative cash flow associated with them (see Note 3). Continued the pursuit of adding company owned restaurants and franchises, which is expected to improve the Company's operating results. Entered into an agreement to sell $1,000,000 shares of Series A preferred stock to help assist in the Company's restaurant and franchisee expansion program (see Note 10). Management believes that the actions taken to improve operating results will provide adequate cash flow to meet the Company's operating needs and provide the capital needed to fund the Company's fiscal 1997 restaurant and franchisee expansion program. The results of the actions taken above has enabled the Company to record positive cash flows from operations in the third and fourth quarter of 1996. Although there can be no assurances that the Company will be successful in generating sufficient cash flow to meet its operating needs, management believes that the actions taken will be adequate to enable the Company to continue its operations. 3. Sale of Restaurants: On September 30, 1995, the Company sold all its stock in RTC, a 100% owned subsidiary, for $100,000 cash and a $291,000 note. The note has an interest rate of prime minus 2% and is payable quarterly based on an amortization period of 20 years, with a balloon payment at the end of 5 years. The Company elected to report the gain on sale under the installment method and originally deferred the unrealized gain of $66,000 on the $291,000 note. The buyers of RTC were, in part, members of the management of RTC before the sale. An officer of Drive Thru is also an investor in the entity that purchased RTC. Prior to the sale of RTC, Good Times retained certain assets and liabilities of RTC, including a $150,000 note payable and a $50,000 investment in a real estate joint venture. In conjunction with the sale certain RTC employees, who owned Incentive Stock Options, received new Non-statutory Options with the same terms and conditions as the old options, which were canceled. In 1996, the purchaser of RTC declared bankruptcy. In connection with the bankruptcy of RTC, the Company recorded $231,000 associated with the write-off of the RTC note receivable (net of deferred gain) and a $333,000 loss associated with RTC leases and a note payable (net of estimated recoveries) guaranteed by the Company. The Company is currently managing certain RTC restaurants in order to minimize future losses associated with its lease guarantees, however, no future restaurant revenues will be recognized by the Company from the RTC operations. Included in restaurant sales for the year ended September 30, 1995 are revenues of $3,563,000 related to RTC prior to its sale. A net loss of $614,000 was attributable to RTC operations for the year ended September 30, 1995. The 1995 financial statements only reflect RTC net revenues and operating costs for the six months ended March 31, 1995, the date that a formal plan of disposition was approved. Included in the net losses of RTC, is an operating loss of approximately $229,000 from RTC operations from April 1, 1995 through September 30, 1995 (the effective sale date), which is included in loss on disposal of restaurants. In 1995, the Company adopted a plan to move a building and equipment currently utilized by one of its restaurants to a new location in 1996. Certain costs associated with the building, in the amount of approximately $66,000 were expensed in the prior year in loss on disposal of restaurants. These costs mainly consisted of the write-off of leasehold improvements and a land lease termination provision. Additional losses in the amount of $10,000 were expensed in 1996. In 1995, the Company opened four stores in Las Vegas, and operated the stores for approximately four months. In 1995, the Company adopted a formal plan to exit from the Las Vegas market. The Company entered into an agreement to sell all of the Las Vegas stores, including certain items of furniture, fixtures, and equipment, for approximately $120,000, and assign its rights and obligations under the land and building leases to the purchaser. The Company recognized a loss on the exit of approximately $710,000 in 1995. Revenues of $332,000 and net loss of $315,000 are attributable to the Las Vegas restaurants' operations during the year ended September 30, 1995. During the year ended September 30, 1996, the Company closed two of its restaurants and leased the land and building to an entity owned by the purchaser of the Las Vegas restaurants. One of these restaurant sites was closed by the lessee in September 1996 at which time, the Company adopted a plan to move the building and equipment to a new location in fiscal 1997. During the year ended September 30, 1996, the Company recorded a loss, net of minority interest, of approximately $103,000 as a result of the plan. These costs mainly consist of the write-off of leasehold improvements and estimated future lease payments and termination penalties. In October 1996, the Company took over the second site from the purchaser, and intends to convert this restaurant back to a Drive-Thru concept restaurant in fiscal 1997. During the year ended September 30, 1996, the Company approved the sale of its interest in one of its managed limited partnerships to the limited partner. The effective date of the sale was November 1, 1996. The agreement provides for the limited partner to assume all liabilities, obligations, and operating losses, and the Company agreed to pay the purchaser $75,000 and surrender its interest in the limited partnership. As of September 30, 1996, the Company recorded approximately $184,000 in losses as a result of this transaction. The Company remains a guarantor on $296,000 of notes payable. However, the purchaser and an additional guarantor have personally agreed to indemnify the Company for any payments made on the note by the Company. During the year ended September 30, 1996, the Company sold a restaurant to a franchisee for $480,000 cash and a $20,000 note. The Company recognized a gain on the sale in the amount of approximately $95,000, which is included in other income and expenses. 4. Notes Receivable: Notes receivable consist of the following as of September 30, 1996: Notes receivable, 10%, due March 1, 1997, monthly payments of interest only, collateralized by a building and guaranteed by an individual, classified as long-term due to expectation of refinancing. $315,000 Note receivable, 12%, due October 1, 1997, monthly payments of interest only, collateralized by a building and guaranteed by an individual. 78,000 Note receivable, 9%, monthly payments of principal and interest in the amount of approximately $1,000, with final payment on September 1, 2000 collateralized by building and equipment. 50,000 Other notes, various terms. 23,000 466,000 Less current portion 31,000 $435,000 5. Notes Payable and Long-Term Debt: In March 1996, the Company signed a $250,000 promissory note. The interest rate on the note was at prime plus 2% points. On October 1, 1996, this note was converted to 250,000 shares of preferred stock (see Note 10). Also included in long-term debt is a $300,000 note payable to an individual and his pension plan with interest at 12%, pay- able quarterly, principal due in May 2000. See Note 3 for additional note payable disclosures. 6. Commitments and Contingencies: The Company's office space, and the land underlying the Drive Thru restaurant facilities, are leased under operating leases. Certain leases include provisions for additional contingent rental payments if sales volumes exceed specified levels. Property and equipment at September 30, 1996 includes equipment under capital leases of approximately $440,000, less accumulated depreciation of approximately $97,000. Depreciation of leased equipment is included in depreciation and amortization expense. Following is a summary of operating lease activities: Operating Leases 1996 Minimum rentals $968,000 Less sublease rentals (334,000) Net rent expense $634,000 As of September 30, 1996, future minimum rental commitments required under Good Times and Drive Thru capital and operating leases that have initial or remaining noncancellable lease terms in excess of one year are as follows: Capital Operating Leases Leases 1997 $143,000 $1,030,000 1998 131,000 1,000,000 1999 58,000 934,000 2000 - 908,000 2001 - 888,000 Thereafter - 7,626,000 332,000 12,386,000 Less sublease rentals - (4,570,000) 332,000 $7,816,000 Less amount representing interest (44,000) Present value of net minimum lease payments $ 288,000 The Company remains contingently liable on several leases of restaurants that were previously sold. The future minimum rental commitments relating to these leases totaled $481,000 at September 30, 1996, and have not been included in the future minimum rental commitment schedule above. The Company is also a guarantor on a RTC mortgage payable of approximately $750,000 and a Small Business Administration loan to a franchisee for approximately $400,000. The Company is subject to various lawsuits in the normal course of business. These lawsuits are not expected to have a material impact to the Company. 7. Franchise and Area Development Agreements: The Company has two area development agreements which give the rights to franchise an additional two Drive Thru restaurants in Colorado and two in Boise, Idaho. Under the area development agreements, the Company generally has the right to build restaurants within the specified geographical areas. 8. Managed Limited Partnerships: Drive Thru is the general partner of certain limited partnerships. These partnerships were entered into during the years ended September 30, 1994 and 1996, and were formed to develop Drive Thru restaurants. Limited partner contributions have been used to construct new restaurants. Drive Thru, as a general partner, receives an allocation of 50% of the profit and losses and a fee for its management services. The limited partners' equity has been recorded as a minority interest in the accompanying consolidated financial statements. During the year ended September 30, 1996, the Company approved the sale of its interest in one of the limited partnerships to the limited partner. The sale was effective November 1, 1996, at which time the limited partner became a franchise (see Note 3). 9. Income Taxes: Deferred tax assets (liabilities) are comprised of the following at September 30, 1996: Long-Term Deferred assets (liabilities): Partnership basis difference $ 776,000 Net operating loss carryforward 1,902,000 Property and equipment basis differences (1,499,000) Net deferred tax assets 1,179,000 Less valuation allowance* 1,179,000 Net deferred tax assets $ - ________________________ * The valuation allowance increased by $337,000 during the year ended September 30, 1996. The Company has had no taxable income under Federal and state tax laws. Therefore, no provision for income taxes was included. The Company has net operating loss carryforwards of approximately $5,100,000 for income tax purposes which expire from 2002 through 2011. The use of these losses may be restricted in the future due to changes in ownership 10. Stockholders' Equity: The Company has the authority to issue 5,000,000 shares of preferred stock. The Board of Directors has the authority to issue such preferred shares in series and determine the rights and preferences of the shares as may be determined by the Board of Directors. As of September 30, 1996, 1,000,000 shares have been authorized as described below. During the year ended September 30, 1996, the Company entered into an agreement to sell 1,000,000 shares of Series A preferred stock for $1.00 a share to a private company. The sale of the preferred stock was scheduled in three installments as follows: $500,000 closed October 1, 1996, $250,000 to close on January 1, 1997, and $250,000 to close on April 1, 1997. On October 1, 1996, the Company received $250,000 in cash and the buyer's canceled a previously issued note for $250,000. The preferred stock has a cumulative dividend rate of 8% and a liquidation preference of $.46875, plus all accrued but unpaid dividends. The dividend may be paid out, at the option of the holder, in cash or common stock. If paid in stock, the value of the stock will be determined based on 75% of the average of the last 14 days trading prices but not less than .46875 per share. 500,000 of the shares are convertible to common stock on October 1, 1997, 750,000 shares are convertible on January 1, 1998, and the full 1,000,000 shares are convertible on April 1, 1998. The conversion prices range from $.46875 to $.56875 through April 30, 1999. Any shares that have not been converted as of May 1, 1999, are convertible at the greater of the dividend conversion rate described above at the time of conversion or $.46875. The preferred shareholders also have the right of participation on additional security issuances, except for a straight debt issuance, with no equity feature, and have certain registration rights. The preferred shareholders can also appoint two Board members, and one member of the compensation committee. Among other restrictions and requirements, the preferred stock agreement requires the Company to restrict future long-term borrowings based on percentage of earnings and requires the Company to spend $1,000,000 for the development of new restaurants before December 31, 1997 unless the board of directors unanimously directs otherwise. During 1995, the Board of Directors approved an executive stock purchase plan. Under the plan, executive management acquired 625,000 restricted shares of the Company's common stock at $1.41 per share, which was the market price of the Company's publicly traded common stock on the date of grant. The Company agreed to allow the purchase of the common stock through interest bearing notes. The notes and accrued interest were payable in October 1999 and could be prepaid anytime. In 1996, the Company's board of directors approved the forgiveness of the executive management notes for the return and cancellation of the 625,000 shares of the Company's common stock. The Company has an incentive stock option plan (the ISO) and a non-statutory stock option plan (the NSO) whereby 750,000 shares and 300,000 shares, respectively, are reserved for issuance. As of September 30, 1996, options for the purchase of 366,300 and 105,602 shares of common stock are outstanding under these plans, respectively, and no options have been exercised. The following is a table of activity under these plans: Non- Incentive Qualified Stock Option Stock Exercise Plan Options Price Options outstanding October 1, 1994 542,500 120,602 $1.25-$3.12 Options granted 25,000 - $1.44 Options canceled or expired (15,000) - $3.12 Options canceled or expired (15,000) - $1.75 Options outstanding September 30, 1995 537,500 120,602 $1.25-$3.12 Options granted 10,000 $1.75 Options granted 10,000 $3.12 Options canceled or expired (101,250) - $3.12 Options granted 56,300 - $1.25 Options canceled or expired (101,250) (35,000) $1.75 Options canceled or expired (15,000) - $1.25 Options canceled or expired (10,000) - $1.44 Options outstanding September 30, 1996* 366,300 105,602 $1.25-$3.12 ________________________ * All incentive stock options outstanding at September 30, 1996 were canceled subsequent to September 30, 1996. The Company issued new incentive stock options to its employees for the purchase of 342,000 shares of common stock. All options are subject to vesting schedules and have an exercise price of $.50 per share and expire on October 1, 2006. Non-qualified stock options expire from 1997 to 1999. On October 1, 1995, the Company exchanged 10,000 incentive stock options with an exercise price of $3.12 and 10,000 incentive stock options with an exercise price of $1.75 for an equal number of non-qualified stock options with the same terms. The exchange was made to enable former employees of RTC to maintain their options to buy Good Times stock. In 1996, the Company also issued 56,300 incentive stock options to certain employees with an exercise price of $1.25. In connection with Good Times' prior public offerings and other debt financing arrangements of Drive Thru and RTC, various warrants have been granted. The following is a summary of shares reserved for possible future issuance: Shares Price Expiration Public offerings: 1994 offering* 1,608,000 $2.50 February 1997 1992 offering* 987,500 $3.50 February 1997 Underwriters 689,400 $2.10-$5.78 July 1997 - February 1999 Converted partnerships* 87,513 $3.50 February 1997 Employment termination 52,063 $1.75-3.12 October 1997- April 1999 Franchisees and co- development partners 107,296 $1.67-$2.44 January 1997 - August 1998 Commission to broker 37,500 $1.17 August 1998 Consideration for sales leaseback 10,000 $1.75 March 1998- July 1998 Other 70,000 $3.50 February 1997 Consideration for various loans: 50,000 $1.40 May 2000 Warrants outstanding at September 30, 1996 3,699,272 _______________________ * In December 1996, the expiration of these warrants were extended to February 1999 and the exercise price reduced to $2.00 per share. 11. Retirement Plan: The Company has implemented a 401(k) profit sharing plan (the Plan). Eligible employees may make voluntary contributions to the Plan, which are matched by the Company, using the Company's common stock in an amount equal to 50%of the employees contribution up to 6% of their compensation. The amount of employee contributions is limited as specified in the Plan. The Company may, at its discretion, make additional contributions to the Plan. The Company has accrued for contributions of $50,000, at September 30, 1996. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS -- GOOD TIMES RESTAURANTS INC. The executive officers and directors of the Company and Drive Thru are as follows: Name Age Positions Date Began With Company Geoffrey R. Bailey 45 Chairman of the Board October 1996 Dan W. James II 48 Director August 1989 Boyd E. Hoback 41 President, Chief September 1987 Executive Officer and Director Robert D. Turrill 48 Vice President of October 1990 Marketing Scott G. LeFever 38 Vice President of September 1987 Operations Richard J. Stark 56 Director July 1990 Thomas P. McCarty 43 Director April 1994 Alan A. Teran 51 Director April 1994 David E. Bailey 41 Director October 1996 All directors of the Company hold office until their successors have been elected and qualified. Officers serve at the discretion of the Board of Directors. The Company does not currently have standing audit or, nominating committees of the Board of Directors or committees performing similar functions. The Board of Directors established a compensation committee of the Board of Directors consisting of Directors Stark, Teran, McCarty and Geoff Bailey There are no family relationships among the directors or executive officers except for Geoff and David Bailey who are brothers and principals of The Bailey Company, a franchisee of Drive Thru and the purchaser under the Series A Convertible Preferred Stock Purchase and Sale Agreement (see page 9). There are no arrangements or understandings between any director and any other person pursuant to which that director was elected except for David and Geoff Bailey who were elected pursuant to the Series A Convertible Preferred Stock Purchase and Sale Agreement (see "Bailey Preferred Stock Investment"). Eleven meetings of the Board of Directors of the Company (including regularly scheduled and special meetings) were held during the last full fiscal year. No member of the Board of Directors attended fewer than 75% of the aggregate of the total number of meetings of the Board of Directors. Geoffrey R. Bailey. Mr. Bailey is a director and executive vice president of the Erie County Investment Company ("Erie"). He is responsible for the Arby's operations and development of 64 restaurants owned by The Bailey Company, a subsidiary of Erie. Mr. Bailey is a graduate of the University of Denver with a Bachelor's Degree in Business Administration. He joined Erie in 1979 and become Chairman of the Board of Good Times Restaurants Inc. in October 1996. Dan W. James II. Mr. James became a Director of the Company on December 18, 1990 and served as Chairman from December 16, 1992 to October 1, 1996. Mr. James is one of the co-founders of RTC, the Company's former subsidiary, and had served as a Director of RTC since 1968 until 1992. Mr. James devotes the majority of his time to the management of private investments. Mr. James is also a director of Drive Thru. Boyd E. Hoback. Mr. Hoback had served as Vice President, Chief Operating Officer and Treasurer of the Company since the Paramount Merger with Drive Thru on December 18, 1990, and as a Director since February 1992. Prior to that merger, Mr. Hoback held similar positions with Drive Thru from its inception in December 1986. On December 16, 1992, Mr. Hoback was elected President and Chief Executive Officer of the Company. He is also Chairman, President and Chief Executive Officer of Drive Thru. Prior to assuming his positions with Drive Thru, Mr. Hoback served as Executive Vice President of Finance and Development of RTC since 1983. Mr. Hoback is also on the Board of Drive Thru. Robert D. Turrill. Mr. Turrill has been involved in all phases of operations with direct responsibility for menu development, purchasing and cost control, research and multi-media advertising for RTC. Subsequent to the merger of the Company and RTC, Mr. Turrill devoted a portion of his time to the development of a marketing program for Good Times. As Good Times continued to expand, Mr. Turrill's time devoted to Good Times increased significantly. Therefore, Mr. Turrill was transferred from RTC to the newly created Company position of Vice President of Marketing, effective October 1, 1994. Mr. Turrill is also a principal in Great Burgers, Inc., the franchisee of the RTC food court in Dallas, Texas. Scott G. LeFever. Mr. LeFever has been involved in all phases of operations with direct responsibility for unit service performance, personnel and cost controls. Mr. LeFever was Director of Operations for Round The Corner from 1983 to 1987. He then became Director of Operations for Good Times from 1987 to 1992 during which time he helped develop the Good Times operating systems. Mr. LeFever was reassigned to the position of Drive Thru's Vice President of Operations in August 1995 and devotes his time to the operational management of Drive Thru. Mr. LeFever continues as a Director of RTC and a principal in Great Burgers, Inc., the franchisee of the RTC food court in Dallas, Texas. Richard J. Stark, CFA. Mr. Stark is President of Boulder Asset Management, a firm advising several large individual investors. Prior to forming Boulder Asset Management in 1984, Mr. Stark served as Chief Investment Officer of InterFirst Investment Management in Dallas. Previously he was responsible for all individual money management at Standard & Poor's/Intercapital in New York. Thomas P. McCarty. Mr. McCarty has spent the last 26 years in the food service industry including eleven years owning and operating his own group of restaurants, working for a major food service distributor, working for and eventually owning a real estate brokerage company which specialized in restaurant real estate and consulting, and he is currently the vice president for development of Rock Bottom Restaurants, Inc. Mr. McCarty also serves as the Vice President for Publications and Public Relations for the Colorado Restaurant Association and serves on its Executive Committee and as a member of its Board of Directors. Mr. McCarty has two degrees from the University of Colorado including a B.S. in Accounting and a B.S. in Journalism. Alan A. Teran. Mr. Teran has spent the past 26 years working in the restaurant industry, beginning in 1969 as restaurant manager at Cork & Cleaver. In 1971 Mr. Teran was a regional manager for Cork & Cleaver, in 1973 was promoted to Vice President of Operations and in 1976 became President of the company. In October 1981, Mr. Teran acquired the Cork & Cleaver in Boulder, Colorado. He went on to become one of the first franchisees of Le Peep Restaurants in 1983. Mr. Teran currently holds a seat on three different corporation's board of directors including Boulder Valley Bank and Trust, Quantum Restaurant Group, operator of Morton Steak Houses, Micks and Peasants restaurant concepts, and Good Times Restaurants Inc. Mr. Teran graduated from the University of Akron in 1968 with a degree in business. David E. Bailey. Mr. Bailey is a director and President of the Erie County Investment Company ("Erie") (of which The Bailey Company is a subsidiary). He is also the president of InverWest Development Corporation, a subsidiary of Erie. Mr. Bailey is responsible for managing the day to day operations of Erie and its subsidiaries with primary focus on Erie's real estate, software development and energy businesses. Mr. Bailey has directed the construction of Arby's restaurants, single family residences, apartment buildings and numerous building renovations and additions. He received his Bachelor of Finance Degree from the University of Colorado and his Masters Degree in Business Administration in Construction Management and Real Estate from the University of Denver in 1993. Mr. Bailey joined Erie in 1980 and became a Director on the Board of Good Times Restaurants Inc. in October 1996. Effective as of March 1, 1996, Thomas Gordon resigned from the Board of Directors of the Company and as of June 6, 1996, B. Edwin Massey resigned from the Board of Directors of the Company. Compliance with Section 16(a) of the Exchange Act of 1934 Section 16(a) of the Securities Exchange Act of 1934 requires the Company's officers and directors, and persons who own more than ten percent of a registered class of the Company's equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission (the "SEC"). Officers, directors and greater than ten-percent shareholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file. Based solely on its review of the copies of such forms received by it, or written representations from certain reporting person, the Company believes that, during the fiscal year ended September 30, 1996, all filing requirements applicable to its officers, directors, and greater than ten-percent beneficial owners were complied with. ITEM 10. EXECUTIVE COMPENSATION Cash Compensation The following table shows all cash compensation paid by the Company or any of its subsidiaries, as well as other compensation paid or accrued during the fiscal years indicated, to the Chief Executive Officer and the next highest paid executive officer of the Company as of the end of the Company's last fiscal year (the "Named Executive Officers"). No other executive officers of the Company received cash compensation for such period in all capacities in which the executive officer served in excess of $100,000. SUMMARY COMPENSATION TABLE Long-Term Annual Compensation Compensation Name & Principal Fiscal Other Annual Position Year Salary Bonus(2) Compensation(3) Options Other(5) Boyd E. Hoback, 1996 $110,000 -0- $10,000 -0- 3,364 President & CEO(1) 1995 $110,000 -0- $10,000 -0- _____ 1994 $97,500 $30,000 $10,000 175,000(4) _____ Robert D. Turrill 1996 $75,000 -0- $8,000 -0- 380 Vice President, 1995 $75,000 -0- $8,000 -0- _____ Marketing 1994 $68,250 $10,000 $8,000 60,000(4) _____ (1) Elected to these positions on December 16, 1992. During the last three fiscal years he served continuously as an executive officer of Drive Thru. (2) The Board of Directors approved a bonus plan in fiscal 1995 for Mr. Hoback that was contingent upon certain performance criteria. The plan provided for a bonus of up to 50% of salary for Mr. Hoback. Due to the Company's losses in fiscal 1995 and 1996, no bonuses were awarded to Mr. Hoback. (3) Consists of an officers' expense allowance. (4) Includes previously granted options, a portion of which were repriced during the fiscal year ended September 30, 1994, from an exercise price of $3.12 per share to $1.75 per share and which were extended to expire on October 26, 1999. (5) Consists of 401(k) stock grants to match 50% employee contribution. Option Grants There were no grants of stock options made during the last fiscal year to any of the Named Executive Officers. Options Exercises and Values None of the Named Executive Officers exercised stock options during the last fiscal year of the Company. The fiscal year end value of unexercised options follows: AGGREGATED OPTIONS EXERCISED IN LAST FISCAL YEAR AND FY-END OPTION VALUES Value Number Unexercised Unexercised In-the-Money Options at Options at Shares Fiscal Year End (#) Fiscal Year End($) Acquired Value Exercisable/ Exercisable/ Name on Exercise (#) Realized Unxercisable Unexercisable Boyd E. Hoback N/A N/A 175,000/0 None (1) Robert D. Turrill N/A N/A 60,000/0 None (1) (1) The average market value of the Common Stock over the past 30 days was approximately $.41 per share. Subsequent to September 30, 1996, the Company's Board of Directors approved the cancellation of the existing stock options and reissuance of the options at an exercise price of $.50 per share. Stock Options On April 23, 1992, the Board of Directors of the Company adopted an incentive stock option plan (the "1992 ISO") covering 300,000 shares of the Company's Common Stock and a non-statutory stock option plan (the "1992 NSO") covering 150,000 shares of the Company's Common Stock less outstanding options for the purchase of 83,750 shares of such stock. The optionees under the plans will not recognize income upon grant of the options. Holders of non-statutory stock options will have income on the date of exercise of the options equal to the then value of the Company's Common Stock less the option exercise price. The holders of incentive stock options will not be required to recognize income upon exercise of the options so long as the Company's Common Stock issued upon option exercise is not sold until the later of one year after the date of exercise or two years after the date of grant of the option. If these requirements are satisfied, then the optionee will realize capital gain upon sale of the Company's Common Stock in an amount equal to the sale price less the option exercise price. If these requirements are not satisfied, the optionee must recognize ordinary compensation income equal to the excess of the fair market value of the stock on the date of exercise over the price paid for such stock, and capital gain equal to the sale proceeds (or fair market value if not disposed of for cash) in excess of the optionee's tax basis (fair market value on exercise date); provided, however, such compensation income will not exceed the amount of the sale proceeds over the price paid for the stock on exercise of the option. For federal income tax purposes, the Company will be allowed a deduction for the foregoing compensatory element. For financial accounting purposes, so long as the exercise price is equal to or in excess of fair market value of the Company's Common Stock on the date of grant of the option, the Company will not be required to recognize any related compensation expense upon either option grant or exercise. It has been proposed that applicable accounting requirements be changed so as to require the issuer of stock options to realize related compensation expense. However, it is unknown when, if ever, such changes will be effective. The spread between fair market value and exercise price as of the date of exercise of an incentive stock option is an adjustment to income for alternative minimum tax purposes, which, under certain conditions, may result in application of the alternative minimum tax rate to such spread. On May 18, 1993 the Board of Directors of the Company voted to increase the number of shares authorized in the 1992 ISO from 300,000 to 550,000 shares of the Company's Common Stock and on January 20, 1994, voted to increase the number of shares authorized in the 1992 NSO from 150,000 to 300,000. Additional options were granted to key management personnel and options were granted to management of the Company, Drive Thru and RTC who previously had not been participants in the 1992 ISO or in the 1992 NSO. The increase in the number of shares authorized under the stock option plans and the granting of the additional options reflected the changing responsibilities of executive management as a result of the restructuring of the Company approved in December 1992, the need of the Company, Drive Thru and RTC to limit cash compensation to its key employees and the desire of the Board of Directors to retain and motivate key employees by providing quasi-equity participation in the Company. At the 1993 annual meeting held in March 1994, the shareholders approved an increase in the number of shares authorized under the 1992 ISO to 750,000 shares. In April 1994, the Board of Directors repriced one-half of the incentive stock options granted to employees to $1.75 per share, initiated a new three year vesting period for such options and extended the expiration date of the repriced options to April 1999. On November 22, 1996, the Board of Directors approved the cancellation of the Company's incentive stock options outstanding at September 30, 1996. The Company issued new incentive stock options to its employees for the purchase of 342,000 shares of common stock. All options are subject to vesting schedules, are exercisable at $.50 per share and expire on October 1, 2001. The following table summarizes outstanding options granted to executive and other officers and current directors of the Company and Drive Thru as of September 30, 1996: Incentive Stock Options Options Options Option Expiration Name Issue (1) Vested Price (2) Date (3) Boyd E. Hoback 70,000 70,000 $3.12 10/26/97 70,000 70,000 $1.75 4/26/99 Robert D. Turrill 30,000 30,000 $3.12 10/26/97 30,000 30,000 $1.75 4/26/99 Scott G. LeFever 36,250 36,250 $3.12 10/26/97 36,250 36,250 $1.75 4/26/99 10,000 6,667 $1.25 10/01/20 Sue Knutson 12,500 12,500 $3.12 10/26/97 12,500 12,500 $1.75 4/26/99 10,000 6,667 $1.25 10/01/20 (1) Pursuant to the cancellation and repricing of the Company's incentive stock options outstanding at September 30, 1996, 150,000 options were issued to Mr. Hoback; 50,000 options were issued to Mr. Turrill; 50,000 options were issued to Mr. LeFever; and 25,000 options were issued to Ms. Knutson. (2) The exercise price of the new options is $.50 per share. (3) The new expiration date of the options is October 1, 2001. Non-Statutory Stock Options Options Options Option Expiration Name Issued Vested Price Date Boyd E. Hoback 35,000 35,000 $1.75 10/26/97 Thomas P. McCarty 5,000 5,000 $1.75 4/26/99 Alan A. Teran 5,000 5,000 $1.75 4/26/99 Richard J. Stark 4,996 4,996 $1.75 4/26/99 The options are non-transferable other than by will or by the laws of descent and distribution and may be exercised during the optionee's lifetime only by the optionee. Neither the options nor the shares of Common Stock issuable upon exercise thereof have been registered for public sale under the Securities Act of 1933, although the Company reserves the right to do so at any time. Unless registered, the shares of Common Stock issued upon option exercise will be restricted securities as defined in Rule 144 under the Securities Act. Report of Board of Directors Regarding Repricing of Options Effective April 26, 1994, the Board of Directors authorized an adjustment to the exercise price of one-half of the incentive stock options granted under the 1992 ISO to $1.75 per share. In addition, the Board of Directors approved a new three year vesting period for such options and extended the expiration date of the repriced options to April 26, 1999. On November 22, 1996, the Board of Directors approved the cancellation of the Company's incentive stock options outstanding at September 30, 1996. The Company issued new incentive stock options to its employees for the purchase of 342,000 shares of common stock. All options are subject to vesting schedules, are exercisable at $.50 per share and expire on October 1, 2001. Over the past several years, the trading price of the Company's Common Stock has declined significantly. Accordingly, the previously granted options, whose exercise prices initially exceeded the trading prices of the Company's shares, no longer provided the incentives to directors and employees that were intended by the issuance thereof. For this reason, the Board of Directors accepted management's recommendation that the outstanding options be repriced as noted above. Board of Directors Geoffrey R. Bailey David E. Bailey Dan W. James II Boyd E. Hoback Richard J. Stark Thomas P. McCarty Alan A. Teran ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth as of January 6, 1997, certain information with respect to the record and beneficial ownership of the Company's Common Stock and Series A Preferred Stock by all stockholders known by the Company to own more than 5% of its outstanding Common Stock, and by directors and officers individually and as a group. Number of Number of Series A Common Preferred Shares Shares Name, Address and Beneficially % Beneficially % Position Held Owned of Class Owned** of Class The Bailey Company, LP(1) - 0 - 750,000 100% 601 Corporate Circle Golden, CO 80401 The Erie Co. Investment Co.(1) 90,000 1.4% 750,000 100% 601 Corporate Circle Golden, CO 80401 David E. Bailey 5,000 * 601 Corporate Circle Golden, CO 80401 Geoffrey R. Bailey 52,550 * - 0 - * 601 Corporate Circle Golden, CO 80401 Chairman, Director Dan W. James II 198,508(2) 3.1% - 0 - * 8620 Wolff Court, Suite 330 Westminster, CO 80030 Director First Registration Corp. 114,502 1.8% - 0 - * of Oklahoma City 120 N. Robinson Ave. P.O. Box 25189 Oklahoma City, OK 73125 Shareholder Boyd E. Hoback 166,248(3) 2.5% - 0 - * 8620 Wolff Court, Suite 330 Westminster, CO 80030 Officer and Director Richard J. Stark - 0 - * - 0 - * 6075 South Quebec Suite 103 Englewood, CO 80111 Director Thomas P. McCarty 500 * - 0 - * 8779 Johnson Street Arvada, CO 80005 Director Alan A. Teran - 0 - * - 0 - * 2126 Knollwood Drive Boulder, CO 80302 Director Robert D. Turrill 63,895(4) * - 0 - * 8620 Wolff Court, Suite 330 Westminster, CO 80030 Officer Scott G. LeFever 54,210(5) * - 0 - * 8620 Wolff Court, Suite 330 Westminster, CO 80030 All officers and directors as a group (9 persons) 745,413 11.3% * Less than one percent ** Rule 13-d under the Securities Exchange Act of 1934, involving the determination of beneficial owners of securities, includes as beneficial owners of securities, among others, any person who directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise has or shares voting power and/or investment power with respect to such securities; and, any person who has the right to acquire beneficial ownership of such security within sixty days through means, including, but not limited to, the exercise of any option, warrant, right or conversion of a security. Any securities not outstanding that are subject to such options, warrants, rights or conversion privileges shall be deemed to be outstanding for the purpose of computing the percentage of outstanding securities of the class owned by such person, but shall not be deemed to be outstanding for the purpose of computing the percentage of the class by any other person. All shares held by the Officers, Directors and Principal Shareholders listed above are "restricted securities" and are such are subject to limitations on resale. The shares may be sold pursuant to Rule 144 under certain circumstances. (1) On October 1, 1996 and again on January 1, 1997, the Company issued a total of 750,000 shares of its Series A Convertible Preferred Stock to The Bailey Company, L.P., which is a wholly owned subsidiary of The Erie County Investment Co. that should be deemed the beneficial owner. (2) Includes 7,602 shares owned by the son of Mr. James, an aggregate of 6,966 shares owned by the Kent B. Hayes Trust, for the benefit of Mr. James. (3) Includes an aggregate of 150,000 shares of presently exercisable options. (4) Includes an aggregate of 50,000 shares of presently exercisable options. (5) Includes an aggregate of 50,000 shares of presently exercisable options. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Drive Thru and RTC historically have been under-capitalized and have found it difficult to obtain required financing without the assistance of certain of their officers and directors, primarily in the form of guarantees of payment of restaurant leases by Messrs. Massey (a former director of the Company) and James. These principally involved obligations of RTC. Neither Mr. Massey nor Mr. James receive any compensation in connection with these guarantees. While none of the related party transactions may be deemed to have been negotiated at arms' length, all such transactions were approved by the independent members of the RTC Board of Directors and, in the opinion of Company management, all such transactions were fair and are upon terms which were at least as favorable as could have been obtained from independent third parties. To the extent that Messrs. Massey and James continue to be guarantors of such obligations, the Company has agreed to indemnify each of them from any losses that they may incur resulting from such guarantees. The infusion of capital provided by net proceeds from the public offering of the Company's stock in July 1992 and the subsequent merger of the Company and RTC in July 1992 substantially reduced or eliminated many actual and potential conflicts of interest as financial assistance from related parties was no longer required and the effect of existing financial arrangements with related parties (primarily guaranteed leases and loans) was diminished due to the enhanced ability of Drive Thru and RTC to pay the guaranteed obligations. Also, consummation of the merger eliminated many actual and potential conflicts which arose as a result of the two companies being engaged in the same general business and from having common directors and officers. Mr. Hoback entered into an employment agreement with the Company in May, 1996 that provides for his employment as president and chief executive officer for three years from the date of the agreement at a salary of $110,000 per year, terminable by the Company only for cause. In February 1996, the Company repurchased 412,500 shares in the aggregate of its common stock from Messrs. Hoback and Turrill in consideration for the cancellation of their indebtedness to the corporation, plus accrued interest thereon, resulting from their initial purchases of such stock pursuant to an executive stock purchase plan. Additionally, in February 1996, the Company repurchased 212,500 shares of its common stock from Thomas Gordon in connection with the termination of his employment as Executive Vice President and Chief Financial Officer of the Company. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. Exhibit Number Description Location 2.1 Acquisition Agreement between Registrant and RTC, as amended (6) - Exhibit 2.1 3.1 Articles of Incorporation of the Registrant (1) - Exhibit 3.1 3.2 Amendment to Articles of Incorporation of the Registrant dated January 23, 1990 (2) - Exhibit 3.1 3.4 Restated Bylaws of Registrant dated June 10, 1996 * 3.5 Certificate of Amendment of Articles of Incorporation * 4.1. Form of Warrant Certificate for the purchase of an aggregate of 920,000 shares of Registrant's Common Stock issued in 1990 public offering (3) - Exhibit 4.2 4.2. Form of Underwriters' Warrant for the purchase of 80,000 shares issued in connection with 1990 public offering (3) - Exhibit 1.4 4.3. Form of Underwriters' Warrant for the purchase of 69,000 units issued in connection with 1992 public offering (6) - Exhibit 1.4 4.4. Form of Warrant Certificate for the purchase of an aggregate of 720,000 shares of Registrant's common stock issued in 1992 public offering (6) - Exhibit 4.4 4.5. Amended and Restated Warrant Agreement (6) - Exhibit 4.3 4.6. Form of Warrant Certificate to purchase an aggregate of 105,000 shares of Registrant's common stock issued in November 1991 Private Offering (5) - Exhibit 4.2 4.7. Form of registration rights agreement relating to 105,000 shares of the Registrant's common stock issuable upon exercise of warrants issued in November 1991 Private Offering (5) - Exhibit 4.3 4.8. Form of Warrant Certificate for the purchase of an aggregate 50,000 shares of Registrant's Common Stock issued to limited partners of Good Times Limited Partnership I (6) - Exhibit 4.14 4.9. Incentive Stock Option Plan of Registrant (6) - Exhibit 4.9 4.10. Non-Statutory Stock Option Plan of Registrant (6) - Exhibit 4.10 4.11. 1992 Incentive Stock Option Plan of Registrant (6) - Exhibit 4.18 4.12. 1992 Incentive Stock Option Plan of Registrant, as amended (7) - Exhibit 4.20 4.13. 1992 Non-Statutory Stock Option Plan of Registrant (6) - Exhibit 4.19 4.14. 1992 Non-Statutory Stock Option Plan of Registrant, as amended (7) - Exhibit 4.22 4.15. Form of warrant dated June 1, 1995 for the purchase of 50,000 shares of Registrant's Common Stock at an exercise price of $1.40 per share issued to Boulder Radiologists Inc., Defined Benefit Plan - Dubach, of indebtedness by Registrant to Dr. Kenneth Dubach (9) - Exhibit 4.15 4.16 First Amended and Restated Series B Warrant Agreement * 4.17 Third Amended and Restated Warrant Agreement * 10.1 Underwriting Agreement between Registrant and Cohig & Associates, Inc. dated June 15, 1992 (6) - Exhibit 1.1 10.2 Form of Agreement of Limited Partnership of Good Times Limited Partnership I (5) - Exhibit 10.16 10.3 Promissory Note made by Fast Restaurants, Inc. and Colfax & Krameria Inc. to Good Times in the principal amount of $280,000 (7) - Exhibit 10.49 10.4 Master Equipment Lease Agreement dated March 16, 1993, between Community Bank of Parker and Good Times (7) - Exhibit 10.54 10.5 Form of Promissory Note dated June 1, 1995 by and between Good Times Restaurants Inc. and Boulder Radiologist Inc. Pension Plan FBO Dubach in the amount of $300,000 due and payable on May 31, 2000 (9) - Exhibit 10.28 10.6 Lease by and between Sheridan Park 7 Partners, a Colorado limited partnership, and Good Times Restaurants Inc. in consideration for the payment of rent for office space in the aggregate amount of $350,796, commencing April 1, 1993 through April 1998 (9) - Exhibit 10.29 10.7 Master Lease Agreement in the aggregate amount of $2,000,000 between Capital Associates International, Inc., as Lessor, and Good Times Drive Thru Inc. as Lessee (9) - Exhibit 10.30 10.8 Purchase letter agreement dated November 13, 1995 between Steakout, King of Steaks and Good Times Drive Thru Inc. for the purchase of assets of four Las Vegas Good Times restaurants (without exhibits) (9) - Exhibit 10.31 10.9 Employment Agreement agreed to September 14, 1994 between Registrant and Boyd E. Hoback (9) - Exhibit 10.32 10.10 Employment Agreement agreed to July 14, 1994 between Registrant and Thomas A. Gordon (9) - Exhibit 10.33 10.11 Form of Promissory Note dated November 3, 1995 by and between AT&T Commercial Finance Corporation, Boise Co-Development Limited Partnership, Good Times Drive Thru Inc. as general partner, and Good Times Restaurants Inc. as guarantor in the amount of $254,625 (9) - Exhibit 10.34 10.12 Form of Promissory Note dated November 3, 1995 by and between AT&T Commercial Finance Corporation, Boise Co-Development Limited Partnership, Good Times Drive Thru Inc. as general partner, and Good Times Restaurants Inc. as guarantor in the amount of $104,055 (9) - Exhibit 10.35 10.13 Series A Convertible Preferred Stock Purchase Agreement dated as of May 31, 1996 by and among Good Times Restaurants Inc. and The Bailey Company * 10.14 First Amendment to Series A Convertible Preferred Stock Purchase Agreement effective as of May 31, 1996 by and between Good Times Restaurants Inc. and The Bailey Company * 10.15 Registration Rights Agreement dated May 31, 1996 regarding registration rights of the common stock issuable upon conversion of the Series A Convertible Preferred Stock * 10.16 Letter Agreement between Good Times Restaurants Inc. and Steakout, King of Steaks Restaurants, Inc. dated March 29, 1996 (10) - Exhibit A (10.1) 10.17 Employment Agreement dated May 3, 1996 between Registrant and Boyd E. Hoback * 22.1 Subsidiaries of Registrant (8)- Exhibit 22.1 23.1 Consent of HEIN + ASSOCIATES LLP * (1) Incorporated by reference from Registrant's Registration Statement on Form S-18 as filed with the Commission on November 30, 1988 (File No. 33-25810-LA). (2) Incorporated by reference from Registrant's current report on Form 8-K dated January 18, 1990 (File No. 33-25810-LA). (3) Incorporated by reference from Registrant's Registration Statement on Form S-1 as filed with the Commission on March 26, 1990 (File No. 33-33972). (4) Incorporated by reference from Registrant's Form 10-K for the fiscal year ended September 30, 1990 (5) Incorporated by reference from Registrant's Form 10-K for the fiscal year ended September 30, 1991 (6) Incorporated by reference from Registrant's Registration Statement on Form S-1 as filed with the Commission on March 27, 1992 (File No. 33-46813). (7) Incorporated by reference from Registrant's Form 10-K for the fiscal year ended September 30, 1993 (8) Incorporated by reference from Registrant's Form 10-KSB for the fiscal year ended September 30, 1994. (9) Incorporated by reference from Registrant's Form 10-KSB/A for the fiscal year ended September 30, 1995. (10) Incorporated by reference from Registrant's Form 10-QSB for the quarter ended March 31, 1996. (b) Current Reports on Form 8-K. None. * Filed herewith. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: January ____, 1997 GOOD TIMES RESTAURANTS INC. By: Boyd E. Hoback, President Pursuant to the requirements of Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE /s/ Geoffrey R. Bailey Chairman January 13, 1997 Geoffrey R. Bailey /s/ Dan W. James, II Director January 13, 1997 Dan W. James, II /s/ Boyd E. Hoback President, Chief January 13, 1997 Boyd E. Hoback Executive Officer and Director /s/ David E. Bailey Director January 13, 1997 David E. Bailey /s/ Thomas P. McCarty Director January 13, 1997 Thomas P. McCarty /s/ Alan A. Teran Director January 13, 1997 Alan A. Teran /s/ Richard J. Stark Director January 13, 1997 Richard J. Stark EX-3.4 2 RESTATED BYLAWS OF GOOD TIMES RESTAURANTS INC. June 10, 1996 RESTATED BYLAWS OF GOOD TIMES RESTAURANTS INC. TABLE OF CONTENTS PAGE ARTICLE I. NAME, REGISTERED OFFICE AND REGISTERED AGENT Section 1. Name. . . . . . . . . . . . . . . . . . . . . .1 Section 2. Registered Office and Registered Agent. . . . .1 ARTICLE II. SHAREHOLDERS MEETINGS Section 1. Annual Meetings . . . . . . . . . . . . . . . .1 Section 2. Special Meetings. . . . . . . . . . . . . . . .1 Section 3. Notice of Shareholders Meetings . . . . . . . .2 Section 4. Place of Meeting. . . . . . . . . . . . . . . .2 Section 5. Record Date . . . . . . . . . . . . . . . . . .2 Section 6. Quorum. . . . . . . . . . . . . . . . . . . . .2 Section 7. Voting. . . . . . . . . . . . . . . . . . . . .2 Section 8. Proxies . . . . . . . . . . . . . . . . . . . .3 ARTICLE III. BOARD OF DIRECTORS Section 1. General Powers. . . . . . . . . . . . . . . . .3 Section 2. Election of Directors . . . . . . . . . . . . 3 Section 3. Number, Tenure and Qualifications . . . . . . .3 Section 4. Regular Meetings. . . . . . . . . . . . . . . .3 Section 5. Special Meetings. . . . . . . . . . . . . . . .3 Section 6. Meetings by Telephone . . . . . . . . . . . . .4 Section 7. Quorum. . . . . . . . . . . . . . . . . . . . .4 Section 8. Manner of Acting. . . . . . . . . . . . . . . .4 Section 9. Vacancies . . . . . . . . . . . . . . . . . . .4 Section 10. Removals. . . . . . . . . . . . . . . . . . . .4 Section 11. Resignations. . . . . . . . . . . . . . . . . .5 Section 12. Presumption of Assent . . . . . . . . . . . . .5 Section 13. Compensation. . . . . . . . . . . . . . . . . .5 Section 14. Informal Action by Directors. . . . . . . . . .5 Section 15. Chairman. . . . . . . . . . . . . . . . . . . .5 ARTICLE IV. DIVISIONS OF THE CORPORATION Section 1. Operation of Divisions. . . . . . . . . . . . .6 Section 2. Advisory Board. . . . . . . . . . . . . . . . .6 Section 3. Officers of the Divisions . . . . . . . . . . .6 Section 4. Duties of Officers of Divisions . . . . . . . .6 Section 5. Term of Office, Resignation and Removal . . . .7 Section 6. Authorized Signatures and Checking Accounts . .7 ARTICLE V. OFFICERS Section 1. Number. . . . . . . . . . . . . . . . . . . . .7 Section 2. Election and Term of Office . . . . . . . . . .7 Section 3. Resignations. . . . . . . . . . . . . . . . . .8 Section 4. Removals. . . . . . . . . . . . . . . . . . . .8 Section 5. Vacancies . . . . . . . . . . . . . . . . . . .8 Section 6. President . . . . . . . . . . . . . . . . . . .8 Section 7. Executive Vice-President. . . . . . . . . . . .8 Section 8. Vice-Presidents . . . . . . . . . . . . . . . .9 Section 9. Secretary . . . . . . . . . . . . . . . . . . .9 Section 10. Treasurer . . . . . . . . . . . . . . . . . . .9 Section 11. Assistant Secretaries and Assistant Treasurers . . . . . . . . . . . . . . . . 10 Section 12. General Manager . . . . . . . . . . . . . . . 10 Section 13. Other Officers. . . . . . . . . . . . . . . . 11 Section 14. Salaries. . . . . . . . . . . . . . . . . . . 11 Section 15. Surety Bonds. . . . . . . . . . . . . . . . . 11 ARTICLE VI. COMMITTEES Section 1. Executive Committee . . . . . . . . . . . . . 11 Section 2. Other Committees. . . . . . . . . . . . . . . 11 ARTICLE VII. CONTRACTS, LOANS, DEPOSITS AND CHECKS Section 1. Contracts . . . . . . . . . . . . . . . . . . 12 Section 2. Loans . . . . . . . . . . . . . . . . . . . . 12 Section 3. Deposits. . . . . . . . . . . . . . . . . . . 12 Section 4. Checks and Drafts . . . . . . . . . . . . . . 12 Section 5. Bonds and Debentures. . . . . . . . . . . . . 12 ARTICLE VIII. CAPITAL STOCK Section 1. Certificates of Shares. . . . . . . . . . . . 13 Section 2. Transfers of Shares . . . . . . . . . . . . . 13 Section 3. Transfer Agent and Registrar. . . . . . . . . 13 Section 4. Lost or Destroyed Certificates. . . . . . . . 14 Section 5. Consideration for Shares. . . . . . . . . . . 14 Section 6. Registered Shareholders . . . . . . . . . . . 14 ARTICLE IX. INDEMNIFICATION Section 1. Indemnification Against Third Party Claims. . 14 Section 2. Indemnification Against Derivative Claims . . 15 Section 3. Rights to Indemnification . . . . . . . . . . 15 Section 4. Authorization of Indemnification. . . . . . . 15 Section 5. Advancement of Expenses . . . . . . . . . . . 16 Section 6. Indemnification by Court Order. . . . . . . . 16 Section 7. Insurance . . . . . . . . . . . . . . . . . . 16 Section 8. Settlement by Corporation . . . . . . . . . . 17 ARTICLE X. WAIVER OF NOTICE. . . . . . . . . . . . . . . . 17 ARTICLE XI. AMENDMENTS. . . . . . . . . . . . . . . . . . . 17 ARTICLE XII. FISCAL YEAR . . . . . . . . . . . . . . . . . . 17 ARTICLE XIII. DIVIDENDS . . . . . . . . . . . . . . . . . . . 18 ARTICLE XIV. CORPORATE SEAL. . . . . . . . . . . . . . . . . 18 RESTATED BYLAWS OF GOOD TIMES RESTAURANTS INC. ARTICLE I NAME, REGISTERED OFFICE AND REGISTERED AGENT Section 1. Name. The name of this corporation is Good Times Restaurants Inc. Section 2. Registered Office and Registered Agent. The address of the registered office of this corporation is One East First, Suite 1600, Reno, Nevada 89501. The name of the registered agent of this corporation at that address is Corporation Trust Company. The corporation shall at all times maintain a registered office. The locations of the registered office may be changed by the Board of Directors. The corporation may also have offices in such other places within or without the State of Nevada as the Board may from time to time designate. ARTICLE II SHAREHOLDERS MEETINGS Section 1. Annual Meetings. The annual meeting of the shareholders of the corporation shall be held at such place within or without the State of Nevada and at such time as the Board of Directors shall determine in compliance with these Bylaws. If such day is a legal holiday, the meeting shall be on the next business day. This meeting shall be for the election of Directors and for the transaction of such other business as may properly come before it. Section 2. Special Meetings. Special meetings of shareholders, other than those regulated by statute, may be called at any time by the Chairman of the Board, the President, any two Directors or the holder or holders of at least 25 percent of the outstanding shares of Series A Convertible Preferred Stock, and must be called by the President upon written request of the holders of ten percent of the outstanding shares of capital stock entitled to vote at such special meeting. Written notice of such meeting stating the place, the date and hour of the meeting, the purpose or purposes for which it is called, and the name of the person by whom or at whose direction the meeting is called shall be given. Such notice shall be given to each shareholder of record in the same manner as notice of the annual meeting. No business other than that specified in the notice of the meeting shall be transacted at any such special meeting. Section 3. Notice of Shareholders Meetings. The Secretary shall give written notice stating the place, date and hour of the meeting and, in the case of a special meeting, the purpose(s) for which the meeting is called, which shall be delivered not less than ten nor more than fifty days prior to the date of the meeting, either personally or by mail to each shareholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail, addressed to the shareholder at his address as it appears on the stock transfer books of the corporation, with postage thereon prepaid. Section 4. Place of Meeting. The Board of Directors may designate any place, either within or without the State of Nevada, as the place of meeting for any annual meeting or for any special meeting called by the Board of Directors. A waiver of notice signed by all shareholders entitled to vote at a meeting may designate any place, either within or without the State of Nevada, as the place for the holding of such meeting. If no designation is made, or if a special meeting is called by other than the Board of Directors, the place of meeting shall be the principal business office of the corporation. Section 5. Record Date. The Board of Directors may fix a date not less than ten nor more than fifty days prior to any meeting as the record date for the purpose of determining shareholders entitled to notice of and to vote at any such meeting of the shareholders. The stock transfer books may be closed by the Board of Directors for a stated period not to exceed fifty days for the purpose of determining shareholders entitled to receive payment of any dividend, or in order to make a determination of shareholders for any other purpose. Section 6. Quorum. Except as otherwise provided in these Bylaws or the Articles of Incorporation, a majority of the votes represented by the outstanding shares of the corporation entitled to vote, represented in person or by proxy, shall constitute a quorum at any meeting of shareholders. If less than a majority of such votes are represented at any such meeting, a majority of the votes so represented may adjourn the meeting from time to time without further notice. At a meeting resumed after any such adjournment at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally noticed. The shareholders present at any duly assembled meeting at which a quorum is present may continue to transact business until adjournment, notwithstanding the withdrawal of shareholders in such number that less than a quorum remain. Section 7. Voting. The holder of an outstanding share entitled to vote at any meeting may vote at such meeting in person or by proxy. Every shareholder of Common Stock shall be entitled to one vote for each share standing in his name on the records of the corporation upon each matter submitted to a vote at a meeting of shareholders. Every holder of Series A Convertible Preferred Stock shall have such number of votes per share on each matter submitted to a vote at a meeting of shareholders as shall equal the number of shares of Common Stock (including fractions of a share) into which each share of Series A Convertible Preferred Stock would be convertible based on the conversion price then in effect, as provided in the terms of the Series A Preferred Stock set forth in the Articles of Incorporation. All shareholder actions shall be determined by a majority of the votes cast at any meeting of shareholders by the holders or proxies of shares entitled to vote thereon. Section 8. Proxies. At all meetings of shareholders, a shareholder may vote in person or by proxy executed in writing by the shareholder or by his duly authorized attorney-in-fact. Such proxy shall be filed with the Secretary of the corporation before or at the time of the meeting. No proxy shall be valid after eleven months from the date of its execution, unless otherwise provided in the proxy. ARTICLE III BOARD OF DIRECTORS Section 1. General Powers. The business and affairs of the corporation shall be managed by its Board of Directors. The Board of Directors may adopt such rules and regulations for the conduct of its meetings and the management of the corporation as it deems proper. Section 2. Election of Directors. The Board of Directors shall be elected by the shareholders at the annual meeting, or if not so elected, at a special meeting called for such purpose. Notwithstanding the foregoing, the holders of the Series A Convertible Preferred Stock voting together, separately as a class, shall have the right to elect two Directors to the Board of Directors, one of whom shall have the right to serve as the Chairman of the Board at his or her discretion. At any meeting (or in a written consent in lieu thereof) held for the purpose of electing Directors, the presence in person or by proxy (or the written consent) of the holders of a majority of the shares of Series A Convertible Preferred Stock then outstanding shall constitute a quorum of the Series A Convertible Preferred Stock for the election of Directors to be elected solely by the holders of the Series A Convertible Preferred Stock or jointly by the holders of the Series A Convertible Preferred Stock and the Common Stock. Section 3. Number, Tenure and Qualifications. The number of Directors of the corporation shall be as determined by the Board of Directors in accordance with the Articles of Incorporation, but shall not be greater than seven unless an increase in such number is approved by the holders of two-thirds of the outstanding shares of Series A Convertible Preferred Stock. Each Director shall hold office until the next annual meeting of shareholders and until his successor shall have been duly elected and qualified. Directors need not be residents of the State of Nevada or shareholders of the corporation. Section 4. Regular Meetings. A regular meeting of the Board of Directors shall be held without other notice than by this Bylaw, immediately following and at the same place as the annual meeting of shareholders. The Board of Directors may provide, by resolution, the time and place for the holding of additional regular meetings without other notice than such resolution. Section 5. Special Meetings. Special Meetings of the Board of Directors may be called by order of the Chairman of the Board, the President, any two Directors or the holder or holders of at least 25 percent of the outstanding shares of Series A Convertible Preferred Stock. The Secretary shall give notice of the time and place of each special meeting by mailing the same at least two days before the meeting or by telephoning or telegraphing the same at least one day before the meeting to each Director. Section 6. Meetings by Telephone. Any meeting of the Board of Directors, regular or special, may be held by conference telephone call. Section 7. Quorum. A majority of the members of the Board of Directors shall constitute a quorum for the transaction of business, but less than a quorum may adjourn any meeting from time to time until a quorum shall be present, whereupon the meeting may be held, as adjourned, without further notice. At any meeting at which every Director shall be present, even though without any notice, any business may be transacted. Section 8. Manner of Acting. At all meetings of the Board of Directors, each Director shall have one vote. The act of a majority present at a meeting shall be the act of the Board of Directors, provided a quorum is present. Section 9. Vacancies. A vacancy in any directorship elected solely by the holders of the Series A Convertible Preferred Stock shall be filled only by vote or written consent of the holders of the Series A Convertible Preferred Stock in accordance with Section 2 hereof, and any vacancy in any directorship elected jointly by the holders of the Series A Convertible Preferred Stock and the Common Stock shall be filled only by vote or written consent of holders of the Series A Convertible Preferred Stock and the Common Stock in accordance with Section 2 hereof. Section 10. Removals. Directors may be removed at any time with or without cause by vote of the shareholders holding a majority of the shares outstanding which are at the time entitled to vote on the election of the Director to be removed. Thus, the Directors elected by the holders of the Series A Convertible Preferred Stock may be removed only by a vote of the majority of the outstanding shares of such stock and such vacancy shall be filled in the manner specified in Section 9 above. No reduction of the authorized number of Directors shall have the effect of removing any Director prior to the expiration of his term of office. Notwithstanding the foregoing, the holders of the Series A Convertible Preferred Stock, voting as a separate class, shall be entitled to remove with or without cause any or all of the Directors and to elect four Directors to the Board of the corporation if the following events occur: (1) the Board shall fail to declare an Accruing Dividend (as such term is defined in the terms of the Series A Convertible Preferred Stock set forth in the Articles of Incorporation) when due if there is adequate surplus to do so, unless the Board of Directors reasonably determines that the payment of a cash dividend would jeopardize the corporation's ability to meet its current and reasonably foreseeable obligations, including reasonable reserves therefor; (2) the corporation files a petition in bankruptcy, is adjudged bankrupt or insolvent, makes an assignment for the benefit of creditors, applies to or petitions any tribunal for the appointment of a receiver, intervenor or trustee for all or a substantial part of its assets, or a proceeding under any bankruptcy law or statute shall have commenced and not been dismissed within sixty days; or (3) if there has been a material breach of any agreement between the corporation and the holders of the Series A Convertible Preferred Stock and the corporation fails to remedy such breach within 14 days after receiving notice of such breach or, if such breach cannot reasonably be cured and the corporation continuously and diligently proceeds to remedy such breach, within thirty days after receiving notice of such breach. Section 11. Resignations. A Director may resign at any time by delivering written notification thereof to the President or Secretary of the corporation. Resignation shall become effective upon its acceptance by the Board of Directors; provided, however, that if the Board of Directors has not acted thereon within ten days after the date of its delivery, the resignation shall be deemed accepted upon the tenth day. Section 12. Presumption of Assent. A Director of the corporation who is present at a meeting of the Board of Directors at which action on any corporate matter is taken shall be presumed to have assented to the action taken unless his dissent shall be entered in the minutes of the meeting or unless he shall file his written dissent to such action with the person acting as the secretary of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the Secretary of the corporation immediately after adjournment of the meeting. Such right of dissent shall not apply to a Director who voted in favor of such action. Section 13. Compensation. By resolution of the Board of Directors, the Directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors, and may be paid a fixed sum for attendance at each such meeting or a stated salary as Director. No such payment shall preclude any Director from serving the corporation in any other capacity and receiving compensation therefor. Section 14. Informal Action by Directors. Any action required to be taken at a meeting of Directors or any action which may be taken at a meeting of Directors may be taken without a meeting by a written consent, setting forth the action so taken, signed by all of the Directors of the corporation. Section 15. Chairman. If one of the Directors elected solely by the holders of the Series A Convertible Preferred Stock does not elect to serve as Chairman of the Board, the Board may elect from its own number a Chairman of the Board. The Chairman of the Board shall preside at all meetings of the Board of Directors and shall perform such other duties as may be prescribed from time to time by the Board of Directors. ARTICLE IV DIVISIONS OF THE CORPORATION Section 1. Operation of Divisions. The Board of Directors shall have power to establish one or more operating divisions of the corporation. Each division of the corporation shall have such authority, responsibilities, and duties as may be delegated to it from time to time by the Board of Directors. Each division of the corporation shall adopt Rules of Procedure for the conduct of its affairs not inconsistent with the Articles of Incorporation and Bylaws of the corporation. Such Rules of Procedure shall become effective when approved by the Board of Directors. Section 2. Advisory Board. The Board of Directors of the corporation may appoint individuals who may, but need not, be Directors, officers or employees of the corporation, to serve as members of an Advisory Board to one or more of the divisions of the corporation. The members of any such Advisory Board shall keep minutes of their meetings which shall be submitted to the Board of Directors of the corporation. The term of office of any member of the Advisory Board shall be at the pleasure of the Board of Directors of the corporation. The function of such Advisory Board shall be to advise with respect to the affairs of the operating divisions of the corporation to which it is appointed. Section 3. Officers of the Divisions. The divisions of the corporation shall each have a President and such Vice-Presidents as the Board of Directors may appoint. The Secretary and Treasurer of the corporation shall also be deemed the Secretary and Treasurer of each division. Section 4. Duties of Officers of Divisions. Any employee designated as an officer of a division shall have such authority, responsibilities, and duties with respect to the applicable division corresponding to those normally vested in the comparable officer of the corporation by these Bylaws, subject to such limitations as may be imposed by the Board of Directors, the Articles of Incorporation or by these Bylaws. The President of a division may sign, execute and deliver in the name of such division only such contracts, agreements or other documents as may be prescribed from time to time by the President of the corporation or the Board of Directors. The designation of any individual as President or Vice-President of any division of the corporation shall not be permitted to conflict in any way with any executive or administrative authority of any officer of the corporation established from time to time by the Board of Directors of the corporation. The President of each division shall report directly to the President and Chief Executive Officer of the corporation. The President of a division, upon written approval of the President of the corporation, may appoint or remove such agents or employees of a division as may, from time to time, become necessary or useful to the operation of such division. Section 5. Term of Office, Resignation and Removal. Each officer of a division shall hold office until his successor shall have been duly appointed by the Board of Directors, or until his death, or until he shall resign. Any officer of a division may resign at any time by delivery of a written resignation either to the President of the corporation, the Secretary of the corporation or to the Board of Directors. Such resignation shall take effect upon delivery. Any officer of the division may be removed from office only by the Board of Directors. Such officer shall be removed when in the sole judgment of the Board of Directors the best interests of the division or the corporation will be served thereby. Any such removal shall require a majority vote of the Board of Directors. Section 6. Authorized Signatures and Checking Accounts. The Board of Directors may authorize each division to have a separate checking account. Any check issued by or for the benefit of any division shall require at least two signatures. The corporate or divisional officers authorized to sign such checks of any division shall be the President of such division, the President of the corporation and the Secretary of the corporation. ARTICLE V OFFICERS Section 1. Number. The corporate officers shall be a President, no Vice-Presidents or one or more Vice-Presidents as determined from time to time by the Board of Directors, a Secretary and a Treasurer, each of whom shall be elected by a majority of the Board of Directors. Such other corporate officers and assistant officers as may be deemed necessary may be elected or appointed by the Board of Directors. In its discretion, the Board of Directors may leave unfilled for any such period as it may determine any corporate office except those of President and Secretary. Any two or more corporate offices may be held by the same person, except the offices of President and Secretary. Corporate officers need not be Directors or shareholders of the corporation. Section 2. Election and Term of Office. The corporate officers to be elected by the Board of Directors shall be elected annually by the Board of Directors at the first meeting of the Board of Directors held after each annual meeting of the shareholders. If the election for corporate officers shall not be held at such meeting, such election shall be held as soon thereafter as convenient. Each corporate officer shall hold office until his successor shall have been duly elected and shall have qualified or until his death or until he shall resign or shall have been removed in the manner hereinafter provided. Section 3. Resignations. Any corporate officer may resign at any time by delivering a written resignation either to the corporate President or to the corporate Secretary. Unless otherwise specified therein, such resignation shall take effect upon delivery. Section 4. Removals. Any corporate officer or agent may be removed by the Board of Directors, with or without cause, whenever in its judgment the best interests of the corporation would be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Election or appointment of a corporate officer or agent shall not of itself create contract rights. Any such removal shall require a majority vote of the Board of Directors, exclusive of the corporate officer in question if he is also a Director. Section 5. Vacancies. A vacancy in any corporate office because of death, resignation, removal, disqualification or otherwise, or if a new corporate office shall be created, may be filled by the Board of Directors for the unexpired portion of the term. Section 6. President. The President shall be the chief executive and administrative officer of the corporation. He shall preside at all meetings of the shareholders and, in the absence of the Chairman of the Board, at meetings of the Board of Directors. He shall exercise such duties as customarily pertain to the office of President and shall have general and active supervision of the property, business, offices and affairs of the corporation and each division. He may appoint officers, agents, or employees on the corporate or division level other than those appointed by the Board of Directors. He may sign, execute and deliver in the name of the corporation powers of attorney, contracts, bonds and other obligations, and shall perform such other duties as may be prescribed from time to time by the Board of Directors or by these Bylaws. Section 7. Executive Vice-President. The Executive Vice-President shall be the chief executive and administrative officer of the corporation in the absence of the President, and in such absence shall be vested with all rights, powers, privileges and obligations of the President as more fully set forth in Section 6 of this Article V. In addition, he may sign, execute and deliver in the name of the corporation, powers of attorney, contracts, bonds and other obligations when the President is present but unavailable for the execution of such documents, and he shall perform such other duties as may be prescribed from time to time by the Board of Directors, the President or the Bylaws. Section 8. Vice-Presidents. Vice-Presidents shall have such powers and perform such duties as may be assigned to them by the Board of Directors or by the President. In the absence or disability of the President, the Vice-President designated by the Board or by the President shall perform the duties and exercise the powers of the President. A Vice-President may sign and execute contracts and other obligations pertaining to the regular course of his duties. Section 9. Secretary. The Secretary shall also be deemed the Secretary of each of the divisions. The Secretary shall, subject to the direction of the President, Executive Vice-President, or a designated Vice-President, keep the minutes of all meetings of the shareholders and of the Board of Directors and, to the extent ordered by the Board of Directors or the President, the minutes of meetings of all divisions and committees. He shall cause notice to be given of meetings of shareholders, of the Board of Directors and of any committee appointed by the Board. He shall have custody of the corporate seal and general charge of the records, documents and papers of the corporation and each division not pertaining to the performance of the duties vested in other officers, which records, documents and papers shall at all reasonable times be open to examination by any Director. He may sign or execute contracts with the President, Executive Vice-President or Vice- Presidents thereunto authorized in the name of the corporation and affix the seal of the corporation thereto, provided, however, that he may not simultaneously act both in the capacity of Secretary and that of Executive Vice-President or Vice-President upon the execution of such documents. He shall perform such other duties as may be prescribed from time to time by the Board of Directors or by these Bylaws. He shall be sworn to the faithful discharge of his duties. If necessary, Assistant Secretaries shall assist the Secretary and shall keep and record such minutes of meetings as shall be directed by the Board of Directors. Section 10. Treasurer. The Treasurer shall, subject to the direction of the President, Executive Vice-President or a designated Vice-President, have general custody and control of the collection and disbursement of funds of the corporation and each division. He shall endorse on behalf of the corporation and each division for collection checks, notes and other obligations, and shall deposit the same to the credit of the corporation or the division in such bank(s) or depositories as the Board of Directors may designate. He may sign, with the President or such other persons as may be designated for the purpose by the Board of Directors, all bills of exchange or promissory notes of the corporation or any division, provided, however, that he may not simultaneously act both in the capacity of Treasurer and that of Executive Vice-President or Vice-President upon the execution of such documents. He shall enter or cause to be entered regularly in the books of the corporation or any division a full and accurate account of all monies received and paid by him or under his direction on account of the corporation or such division. He shall at all reasonable times exhibit his books and accounts to any Director of the corporation upon timely application at the office of the corporation during business hours, and whenever required by the Board of Directors or the President, he shall render a statement of his accounts. He shall perform such other duties as may be prescribed from time to time by the Board of Directors or by the Bylaws. If necessary, Assistant Treasurers shall assist the Treasurer and shall perform such duties as shall be directed by the Board of Directors. He shall give bond for the faithful performance of his duties in such sum and with or without such surety as shall be required by the Board of Directors. Section 11. Assistant Secretaries and Assistant Treasurers. The Board of Directors may appoint such Assistant Secretaries and Assistant Treasurers as may be necessary for the expedient discharge of the affairs of the corporation or any division. The Assistant Secretaries and Assistant Treasurers shall be authorized to perform any of the duties of the Secretary or Treasurer, respectively, in the absence of the Secretary or Treasurer, or in any situation where the Secretary or Treasurer may be acting in another capacity such as Executive Vice-President or Vice-President. Section 12. General Manager. The Board of Directors may employ and appoint a General Manager who may or may not be one of the officers or Directors of the corporation. He shall be the chief operating officer of the corporation, and subject to the direction of the Board of Directors and of the President, shall have general charge of the business operations of the corporation and general supervision over its employees and agents. He may be given the exclusive management of the business of the corporation in any or all of its dealings, but at all times he shall be subject to the control of the Board of Directors or of the Executive Committee. He may employ all employees of the corporation, or delegate such employment to subordinate officers or division chiefs, and he may have the authority to discharge any person so employed. He shall make a report to the President and to the Board of Directors quarterly, or more often if required to do so, setting forth the result of the operations under his charge, together with suggestions looking to the improvement and betterment of the condition of the corporation. He may perform such other duties as the Board of Directors shall require. Section 13. Other Officers. Other officers shall perform such duties and have such powers as may be assigned to them by the Board of Directors. Section 14. Salaries. Salaries or other compensation of the corporate officers and the officers of any division of the corporation shall be fixed from time to time by the Board of Directors, except that the Board of Directors may delegate to any person or group of persons the power to fix the salaries or other compensation of any such subordinate officers or agent. No officer shall be prevented from receiving any such salary or compensation because he is also a Director of the corporation. Section 15. Surety Bonds. If the Board of Directors shall so require, any corporate or division officer or agent shall execute to the corporation a bond in such sums and with such surety or sureties as the Board of Directors may direct, conditioned upon the faithful performance of his duties to the corporation or the applicable division, including his responsibility for negligence and the accounting for all property, monies or securities of the corporation or a division which may come into his hands. ARTICLE VI COMMITTEES Section 1. Executive Committee. The Board of Directors may appoint from among its members an Executive Committee of not less than two nor more than five members, one of whom shall be the President, and shall designate one of such members as Chairman. The Board may also designate one or more of its members as alternates to serve as members on the Executive Committee in the absence or disability of a regular member(s). The Board of Directors reserves to itself alone the power to declare dividends, issue stock, recommend to shareholders any action requiring their approval, change the membership of any committee at any time, fill vacancies therein and disband any committee either with or without cause at any time. Subject to the foregoing limitations, the Executive Committee shall possess and exercise all other powers of the Board of Directors during the intervals between meetings. Section 2. Other Committees. The Board of Directors may also appoint from among its own members such other committees as the Board of Directors may determine. Such committees shall in each case consist of not less than two Directors, and shall have such powers and duties and shall from time to time be prescribed by the Board. The President shall be a member ex officio of each committee appointed by the Board of Directors. A majority of the members of any committee may fix its rules of procedure. ARTICLE VII CONTRACTS, LOANS, DEPOSITS AND CHECKS Section 1. Contracts. The Board of Directors may authorize any officer(s) or agent(s) to enter into any contract or execute and deliver any instrument in the name and on behalf of the corporation, and such authority may be either general or confined to specific instances. Section 2. Loans. No loan(s) or advance(s) shall be contracted on behalf of the corporation, no negotiable paper or other evidence of its obligation under any loan or advance shall be issued in its name, and no property of the corporation shall be mortgaged, pledged, hypothecated or transferred as security for the payment of any loan, advance, indebtedness or liability of the corporation unless and except as authorized by the Board of Directors. Any such authorization may be either general or confined to specific instances. Section 3. Deposits. All funds of the corporation not otherwise employed shall be deposited from time to time to the credit of the corporation in such banks, trust companies or other depositories as the Board of Directors may select, or as may be selected by any officer or agent so authorized by the Board of Directors. Section 4. Checks and Drafts. All notes, drafts, acceptances, checks, endorsements and evidences of indebtedness of the corporation shall be signed by such officer(s) or such agent(s) of the corporation and in such manner as the Board of Directors from time to time may determine. Endorsements for deposit to the credit of the corporation in any of its duly authorized depositories shall be made in such manner as the Board of Directors from time to time may determine. Section 5. Bonds and Debentures. Every bond or debenture issued by the corporation shall be evidenced by an appropriate instrument which shall be signed by the President or a Vice-President and by the Treasurer or by the Secretary. The seal may be a facsimile, engraved or printed. Where such bond or debenture is to be authenticated with the manual signature of an authorized officer of the corporation or other trustee designated by the indenture of trust or other agreement under which such security is issued, the signature of any of the corporation's officers named thereon may be facsimile. In case any officer who signed, or whose facsimile signature has been used on any such bond or debenture, shall cease to be an officer of the corporation, such bond or debenture may nevertheless be adopted by the corporation and issued and delivered as though the person who signed it or whose facsimile signature has been used thereon had not ceased to be such officer. ARTICLE VIII CAPITAL STOCK Section 1. Certificates of Shares. The shares of the corporation shall be represented by certificates prepared by the Board of Directors and signed by the President or the Vice-President and by the Secretary, and sealed with the seal of the corporation or a facsimile. The signatures of such officers upon a certificate may be facsimiles if the certificate is countersigned by a transfer agent or registered by a registrar other than the corporation itself or one of its employees. All certificates for shares shall be consecutively numbered or otherwise identified. The name and address of the person to whom the shares are issued, with the number of shares and the date of issue, shall be entered on the stock transfer books of the corporation. All certificates surrendered to the corporation for transfer shall be cancelled. No new certificates shall be issued until the former certificate for a like number of shares shall have been surrendered and cancelled, except that in case of a lost, destroyed or mutilated certificate, a new one may be issued therefor upon such terms of indemnity to the corporation as the Board of Directors may prescribe. Section 2. Transfers of Shares. Transfers of shares of the corporation shall be made only on the stock transfer books of the corporation by the holder of record thereof or by his legal representative, or by his attorney thereunto authorized by a power of attorney duly executed and such representative or attorney shall furnish proper evidence of his authority to so transfer the shares to the Secretary of the corporation upon the surrender for cancellation of the certificate for such shares. The person in whose name shares stand on the stock transfer books of the corporation shall be deemed by the corporation to be the owner thereof for all purposes. Section 3. Transfer Agent and Registrar. The Board of Directors shall have power to appoint one or more transfer agents and registrars, who may also be employees of the corporation, for the transfer and registration of certificates of stock of any class, and may require that stock certificates shall be countersigned and registered by one or more of such transfer agents and registrars. Section 4. Lost or Destroyed Certificates. The Board of Directors may direct a new certificate to be issued to replace any certificate theretofore issued by the corporation and alleged to have been lost or destroyed if the new owner makes an affidavit that the certificate is lost or destroyed. The Board of Directors may, at its discretion, require the owner of such certificate or his legal representative to give the corporation a bond in such sum and with such sureties as the Board of Directors may direct to indemnify the corporation and transfer agents and registrars, if any, against claims that may be made on account of the issuance of such new certificates. A new certificate may be issued without requiring any bond. Section 5. Consideration for Shares. The capital stock of the corporation shall be issued for such consideration as shall be fixed from time to time by the Board of Directors, but in no event shall such value be less than the par value of such shares. In the absence of fraud, the determination of the Board of Directors as to the value of any property or services received in full or partial payment for shares shall be conclusive. Section 6. Registered Shareholders. The corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder thereof in fact and shall not be bound to recognize any equitable or other claim to or interest in the shares. ARTICLE IX INDEMNIFICATION Section 1. Indemnification Against Third Party Claims. The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, except an action by or in the right of the corporation, by reason of the fact that he is or was a Director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a Director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses, including attorneys' fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with the action, suit or proceeding if he acted in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests if the corporation, and, with respect to any criminal action or proceeding, has no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, does not, of itself, create a presumption that the person 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 corporation, and that, with respect to any criminal action or proceeding, he had reasonable cause to believe that his conduct was unlawful. Section 2. Indemnification Against Derivative Claims. The corporation shall further indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a Director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a Director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses, including amounts paid in settlement and attorneys' fees actually and reasonably incurred by him in connection with the defense or settlement of the action or suit if he acted in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation; provided that indemnification shall not be made for any claim, issue or matter as to which such a person has been adjudged by a court of competent jurisdiction, after exhaustion of all appeals therefrom, to be liable to the corporation or for amounts paid in settlement to the corporation, unless and only to the extent that the court in which the action or suit was brought or other court of competent jurisdiction determines upon application that in view of all the circumstances of the case, the person is fairly and reasonably entitled to indemnity for such expenses as the court deems proper. Section 3. Rights to Indemnification. To the extent that a Director, officer, employee or agent of the corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsections 1 and 2, or in defense of any claim, issue or matter therein, he shall be indemnified by the corporation against expenses, including attorneys' fees, actually and reasonably incurred by him in connection with the defense. Section 4. Authorization of Indemnification. Any indemnification under subsections 1 and 2, unless ordered by a court or advanced pursuant to subsection 5, shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the Director, officer, employee or agent is proper in the circumstances. The determination shall be made: (a) by the shareholders, (b) by the Board of Directors by majority vote of a quorum consisting of Directors who were not parties to the act, suit or proceeding, (c) if a majority vote of a quorum consisting of Directors who were not parties to the act, suit or proceeding so orders, by independent legal counsel in a written opinion, or (d) if a quorum consisting of Directors who were not parties to the act, suit or proceeding cannot be obtained, by independent legal counsel in a written opinion. Section 5. Advancement of Expenses. The expenses of officers and Directors incurred in defending a civil or criminal action, suit or proceeding, by reason of the fact that he was a Director or officer of the corporation, shall be paid by the corporation as they are incurred and in advance of the final disposition of the action, suit or proceeding, upon receipt of an undertaking by or on behalf of the Director or officer to repay the amount if it is ultimately determined by a court of competent jurisdiction that he is not entitled to be indemnified by the corporation. The provisions of this subsection 5 do not affect any rights to advancement of expenses to which corporate personnel other than Directors and officers may be entitled under any contract or otherwise by law. Section 6. Indemnification by Court Order. The indemnification and advancement of expenses authorized in or ordered by a court pursuant to this section (a) does not exclude any other rights to which a person seeking indemnification or advancement of expenses may be entitled under these Articles of Incorporation or the Bylaws of the corporation, or any other agreement, vote of shareholders or disinterested Directors or otherwise, for either an action in his official capacity or an action in another capacity while holding his office, except that indemnification, unless ordered by a court pursuant to subsection 2 hereof or for the advancement of the expenses made pursuant to subsection 5 hereof, may not be made to or on behalf of any Director or officer if a final adjudication establishes that his acts or omissions involved intentional misconduct, fraud or a knowing violation of the law and was material to the cause of action and (b) continues for a person who has ceased to be a Director, officer, employee or agent and inures to the benefit of the heirs, executors and administrators of such a person. Section 7. Insurance. The Board of Directors may, in its discretion, direct that the corporation purchase and maintain insurance on behalf of any person who is or was a Director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a Director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against liability under the provisions of this Section. Section 8. Settlement by Corporation. The right of any person to be indemnified shall be subject always to the right of the corporation by the Board of Directors, in lieu of such indemnification, to settle any such claim, action, suit or proceeding at the expense of the corporation by the payment of the amount of such settlement and the costs and expenses incurred in connection therewith. ARTICLE X WAIVER OF NOTICE Whenever any notice is required to be given to any shareholder or Director of the corporation under the provision of these Bylaws or under the provisions of the Articles of Incorporation or under the provisions of the laws of the State of Nevada, a waiver thereof in writing signed by the person(s) entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. Attendance at any meeting shall constitute a waiver of notice of such meetings, except where attendance is for the express purpose of objecting to the legality of that meeting. ARTICLE XI AMENDMENTS These Bylaws may be altered, amended, repealed, or new bylaws adopted by a majority vote of the entire Board of Directors at any regular or special meeting. Any bylaw adopted by the Board of Directors may be repealed or changed by a majority vote of the shareholders. ARTICLE XII FISCAL YEAR The fiscal year end of the corporation shall be fixed and may be varied by resolution of the Board of Directors. ARTICLE XIII DIVIDENDS The Board of Directors may at any regular or special meeting, as it deems advisable, declare dividends payable out of the surplus of the corporation. ARTICLE XIV CORPORATE SEAL The corporation shall have an official seal which shall bear the name of the corporation and the state and year of incorporation. These Restated Bylaws were adopted for the corporation by the Board of Directors on the 10th day of June, 1996. EX-3.5 3 CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION Good Times Restaurants Inc., a corporation organized under the laws of the State of Nevada (the "Corporation"), by its President and Secretary does hereby certify: I. That the Board of Directors of the Corporation at a meeting duly held on the 10th day of June, 1996, passed a resolution declaring that the following change and amendment to the Corporation's Articles of Incorporation is advisable. RESOLVED, that the Articles of Incorporation of the Corporation be amended by deleting Article Fourth thereof and substituting therefor the following: ARTICLE IV - AUTHORIZED CAPITAL STOCK The total number of shares of all classes of stock which the Corporation shall have the authority to issue is 55,000,000 shares, consisting of 50,000,000 shares of common stock, $.001 par value per share ("Common Stock"), and 5,000,000 shares of preferred stock, $.01 par value per share ("Preferred Stock"). The designations, powers, preferences and rights and the qualifications, limitation or restrictions of the Preferred Stock shall be as follows: a. Series A Convertible Preferred Stock. One million shares of Preferred Stock shall be designated as Series A Convertible Preferred Stock and shall have the following designations, powers, preferences and rights and the qualifications, limitations or restrictions as follows: i. Number of Shares. The series of Preferred Stock designated and known as "Series A Convertible Preferred Stock" shall consist of 1,000,000 shares. ii. Voting. (1) General. Except as may be otherwise provided in these terms of the Series A Convertible Preferred Stock or by law, the Series A Convertible Preferred Stock shall vote together with all other classes and series of stock of the Corporation as a single class on all actions to be taken by the stockholders of the Corporation. Each share of Series A Convertible Preferred Stock shall entitle the holder thereof to such number of votes per share on each action as shall equal the number of shares of Common Stock (including fractions of a share) into which each share of Series A Convertible Preferred Stock would be convertible based on the Conversion Price then in effect. (2) Board Size. The Corporation shall not, without the written consent or affirmative vote of the holders of at least two-thirds of the then outstanding shares of Series A Convertible Preferred Stock, given in writing or by vote at a meeting, consenting or voting (as the case may be) separately as a series, increase the maximum number of Directors constituting the Board of Directors to a number in excess of seven. (3) Board Seats. The holders of the Series A Convertible Preferred Stock voting together separately as a class shall have the right to elect two Directors to the Board of Directors of the Corporation, one of whom shall have the right to serve as the Chairman of the Board at their discretion. Notwithstanding the foregoing or anything else to the contrary provided in these Articles of Incorporation, the holders of Series A Convertible Preferred Stock, voting as a separate series, shall be entitled to remove with or without cause any or all of the Directors and to elect four Directors to the Board of the Corporation if the following events occur: (1) the Board shall fail to declare an Accruing Dividend when due if there is adequate surplus to do so, unless the Board of Directors reasonably determines that the payment of a cash dividend would jeopardize the Corporation's ability to meet its current and reasonably foreseeable obligations, including reasonable reserves therefor; (2) the Corporation files a petition in bankruptcy, is adjudged bankrupt or insolvent, makes an assignment for the benefit of creditors, applies to or petitions any tribunal for the appointment of a receiver, intervenor or trustee for all or a substantial part of its assets, or a proceeding under any bankruptcy law or statute shall have commenced and not been dismissed within 60 days; or (3) if there has been a material breach of any agreement between the Corporation and the holders of the Series A Convertible Preferred Stock and the Company fails to remedy such breach within 14 days after receiving notice of such breach or, if such breach cannot reasonably be cured and the Company continuously and diligently proceeds to remedy such breach, within 30 days after receiving notice of such breach. At any meeting (or in a written consent in lieu thereof) held for the purpose of electing Directors, the presence in person or by proxy (or the written consent) of the holders of a majority of the shares of Series A Convertible Preferred Stock then outstanding shall constitute a quorum of the Series A Convertible Preferred Stock for the election of Directors to be elected solely by the holders of the Series A Convertible Preferred Stock or jointly by the holders of the Series A Convertible Preferred Stock and the Common Stock. A vacancy in any directorship elected solely by the holders of the Series A Convertible Preferred Stock shall be filled only by vote or written consent of the holders of the Series A Convertible Preferred Stock, and a vacancy in the directorship elected jointly by the holders of the Series A Convertible Preferred Stock and the Common Stock shall be filled only by vote or written consent of holders of the Series A Convertible Preferred Stock and the Common Stock as provided above. iii. Dividends. The holders of the Series A Convertible Preferred Stock shall be entitled to receive, out of funds legally available therefor, when and as declared by the Board of Directors, cumulative cash dividends on each share of Preferred Stock equal to 8% of the purchase price paid for such share per annum (the "Accruing Dividend"). The Accruing Dividend shall accrue with respect to each share of Series A Convertible Preferred Stock issued and outstanding from day to day from the date of original issuance of such shares and shall be payable quarterly on January 1, April 1, July 1 and October 1 of each year (each a "Payment Date") commencing July 1, 1997, whether or not earned or declared, and such dividends shall be cumulative if not paid. The Accruing Dividend shall be paid, at the option of the holder of the Series A Convertible Preferred Stock, in cash or in Common Stock. If a holder elects to receive an Accruing Dividend in cash, the Company shall promptly pay such Accruing Dividend unless the Board of Directors reasonably determines that the payment of such dividend would jeopardize the Corporation's ability to meet its current and reasonably foreseeable obligations, including the establishment of reasonable reserves therefor, in which case the payment of such cash dividend will be deferred until such time as the payment of the dividend, in the reasonable discretion of the Board of Directors, would not jeopardize the Corporation's ability to meet such obligations. If a holder elects to receive a dividend of Common Stock, the Corporation shall issue to such holder, within 30 days after the date on which such dividend was due, the number of shares of Common Stock calculated by dividing (i) the dollar value of the dividend, by (ii) 75% of the Dividend Conversion Rate. The "Dividend Conversion Rate" shall be equal to the average of the prices set forth in the "Last Price" column in the NASDAQ Small-Cap issues for the 14 business days immediately preceding the applicable Dividend Payment Date. Notwithstanding the foregoing, if on the July 1, 1997 Payment Date, 75% of the Dividend Conversion Rate is less than $0.46875, then the Dividend Conversion Rate used on that Payment Date shall be $0.46875. If a holder or holders of Series A Convertible Preferred Stock elect to receive a dividend in cash, such holders shall have the right, until such time as the cash dividend is actually paid, to change their election and receive such dividend in the form of Common Stock as provided above; provided, that the size of such Common Stock dividend shall be calculated using the Dividend Conversion Rate applicable at the time the dividend was declared. iv. Liquidation. Upon any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the holders of the shares of Series A Convertible Preferred Stock shall first be entitled, before any distribution or payment is made upon any stock ranking on liquidation junior to the Series A Convertible Preferred Stock, to be paid an amount equal to $0.46875 per share plus, in the case of each share, an amount equal to all Accruing Dividends accrued but unpaid thereon (whether or not declared) computed to the date payment thereof is made available (such amount payable with respect to one share of Series A Convertible Preferred Stock being sometimes referred to as the "Liquidation Preference Payment" and with respect to all shares of Series A Convertible Preferred Stock being sometimes referred to as the "Liquidation Preference Payments"). If upon such liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the assets to be distributed among the holders of Series A Convertible Preferred Stock shall be insufficient to permit payment in full to the holders of Series A Convertible Stock of the Liquidation Preference Payments, then the entire assets of the Corporation to be so distributed shall be distributed ratably among the holders of Series A Convertible Preferred Stock. Upon any such liquidation, dissolution or winding up of the Corporation, immediately after the holders of Series A Convertible Preferred Stock shall have been paid in full the Liquidation Preference Payments, the remaining net assets of the Corporation available for distribution shall be distributed ratably among the holders of Common Stock. Written notice of such liquidation, dissolution or winding up, stating a payment date, the amount of the Liquidation Preference Payments and the place where said Liquidation Preference Payments shall be payable, shall be delivered in person, mailed by certified or registered mail, return receipt requested, or sent by telecopier or telex, not less than 20 days prior to the payment date stated therein, to the holders of record of Series A Convertible Preferred Stock, such notice to be addressed to each such holder at its address as shown by the records of the Corporation. The consolidation or merger of the Corporation into or with any other entity or entities which results in the exchange of outstanding shares of the Corporation for securities or other consideration issued or paid or caused to be issued or paid by any such entity or affiliate thereof (other than a merger to reincorporate the Corporation in a different jurisdiction), and the sale, lease, abandonment, transfer or other disposition by the Corporation of all or substantially all its assets, shall be deemed to be a liquidation, dissolution or winding up of the Corporation within the meaning of the provisions of this paragraph 4. For purposes hereof, except as provided herein, the Common Stock shall rank on liquidation junior to the Series A Convertible Preferred Stock. v. Restrictions. At any time when shares of Series A Convertible Preferred Stock are outstanding, without the unanimous consent of both Directors of the Corporation that are elected by the holders of the Series A Convertible Stock, consenting or voting separately as a class, the Corporation will not: (1) (1) Consent to any liquidation, dissolution or winding up of the Corporation, (2) consolidate or merge into or with any other entity or entities, (3) consent to any acquisition of stock or assets of another person or entity (except for Steak Out, King of Steaks, Inc.), (4) sell, lease, abandon, transfer or otherwise dispose of in excess of 51% of the Corporation's total assets (including intellectual property rights), or (5) incur any additional long term debt (i.e., debt that is payable over a period of longer than one year) at any time at which the Corporation's earnings before interest, taxes, depreciation and amortization ("EBITDA"), excluding extraordinary items of gain or loss, is less than 120% of the aggregate interest and principal payments on long term debt that the Corporation reasonably expects to be obligated for over the subsequent 12-month period. (2) Amend, alter or repeal its Certificate of Incorporation or By-laws; (3) Purchase or set aside any sums for the purchase of, or pay any dividend or make any distribution on, any shares of stock other than the Series A Convertible Preferred Stock, except for dividends or other distributions payable on the Common Stock solely in the form of additional shares of Common Stock and except for the purchase of shares of Common Stock from former employees of the Corporation who acquired such shares directly from the Corporation, if each such purchase is made pursuant to contractual rights held by the Corporation relating to the termination of employment of such former employee and the purchase price does not exceed the original issue price paid by such former employee to the Corporation for such shares; or (4) Redeem or otherwise acquire any shares of Series A Convertible Preferred Stock except as expressly authorized in paragraph 7 hereof or pursuant to a purchase offer made pro rata to all holders of the shares of Series A Convertible Preferred Stock on the basis of the aggregate number of outstanding shares of Series A Convertible Preferred Stock held by each such holder. vi. Conversion. The holders of shares of Series A Convertible Preferred Stock shall have the following conversion rights: (1) Right to Convert. Subject to the terms and conditions of this paragraph 6, the holders of Series A Convertible Preferred Stock shall have the right at any time during each Conversion Period shown on the table below (each a "Conversion Period"), to convert up to the Maximum Number of Shares of Series A Convertible Preferred Stock shown on such table for that Conversion Period into such number of fully paid and nonassessable shares of Common Stock as is obtained by dividing the number of shares of Series A Convertible Preferred Stock to be converted by the applicable Conversion Price as set forth in the following table: Maximum Conversion Period Number of Shares Conversion Price October 1, 1997 - 500,000 $0.46875 October 31, 1997 November 1, 1997 - 500,000* $0.56875 December 31, 1997 January 1, 1998 - 250,000 $0.46875 January 31, 1998 500,000* $0.56875 February 1, 1998 - 750,000* $0.56875 March 31, 1998 April 1, 1998 - 250,000 $0.46875 April 30, 1998 750,000* $0.56875 May 1, 1998 - April 30, 1999 1,000,000* $0.56875 May 1, 1999, and thereafter 1,000,000* the greater of (i) the Dividend Conversion Rate at the time of such conversion, and (ii) $0.46875 * To the extent not previously converted. Such rights of conversion shall be exercised by the holder thereof by giving written notice to the Corporation during the applicable Conversion Period stating that the holder elects to convert a stated number of shares of Series A Convertible Preferred Stock into Common Stock and by surrender of a certificate or certificates for the shares so to be converted to the Corporation at its principal office (or such other office or agency of the Corporation as the Corporation may designate by notice in writing to the holders of the Series A Convertible Preferred Stock) at any time during its usual business hours on the date set forth in such notice, together with a statement of the name or names (with address) in which the certificate or certificates for shares of Common Stock shall be issued; provided, however, that following each Conversion Period, no more than the Maximum Number of Shares in the aggregate shall be converted. If holders of the Series A Convertible Preferred Stock desire to convert in excess of the Maximum Number of Shares for a particular Conversion Period, such holders shall have the right to convert up to their pro rata share of the Maximum Number of Shares, unless otherwise agreed by the holders desiring to convert their shares hereunder. (2) Issuance of Certificate; Time Conversion Effected. Promptly after the receipt of the written notice referred to in subparagraph 6(a) and surrender of the certificate or certificates for the share or shares of Series A Convertible Preferred Stock to be converted, the Corporation shall issue and deliver, or cause to be issued and delivered, to the holder, registered in such name or names as such holder may direct, a certificate or certificates for the number of whole shares of Common Stock issuable upon the conversion of such share or shares of Series A Convertible Preferred Stock. To the extent permitted by law, such conversion shall be deemed to have been effected as of the close of business on the date on which such written notice shall have been received by the Corporation and the certificate or certificates for such share or shares shall have been surrendered as aforesaid, and at such time the rights of the holder of such share or shares of Series A Convertible Preferred Stock shall cease, and the person or persons in whose name or names any certificate or certificates for shares of Common Stock shall be issuable upon such conversion shall be deemed to have become the holder or holders of record of the shares represented thereby. (3) Fractional Shares; Dividends; Partial Conversion. No fractional shares shall be issued upon conversion of Series A Convertible Preferred Stock into Common Stock and no payment or adjustment shall be made upon any conversion on account of any cash dividends on the Common Stock issued upon such conversion. At the time of each conversion, the Corporation shall pay in cash an amount equal to all dividends accrued and unpaid on the shares of Series A Convertible Preferred Stock surrendered for conversion to the date upon which such conversion is deemed to take place as provided in subparagraph 6(b). In case the number of shares of Series A Convertible Preferred Stock represented by the certificate or certificates surrendered pursuant to subparagraph 6(a) exceeds the number of shares converted, the Corporation shall, upon such conversion, execute and deliver to the holder, at the expense of the Corporation, a new certificate or certificates for the number of shares of Series A Convertible Preferred Stock represented by the certificate or certificates surrendered which are not to be converted. If any fractional share of Common Stock would, except for the provisions of the first sentence of this subparagraph 6(c), be delivered upon such conversion, the Corporation, in lieu of delivering such fractional share, shall pay to the holder surrendering the Series A Convertible Preferred Stock for conversion an amount in cash equal to the current market price of such fractional share as determined in good faith by the Board of Directors of the Corporation. (4) Subdivision or Combination of Common Stock. In case the Corporation shall at any time subdivide (by stock split, stock dividend or otherwise) its outstanding shares of Common Stock into a greater number of shares, the Conversion Price in effect immediately prior to such subdivision shall be proportionately reduced and, conversely, in case the outstanding shares of Common Stock shall be combined into a smaller number of shares, the Conversion Price in effect immediately prior to such combination shall be proportionately increased. (5) Reorganization or Reclassification. If any capital reorganization or reclassification of the capital stock of the Corporation shall be effected in such a way that holders of Common Stock shall be entitled to receive stock, securities or assets with respect to or in exchange for Common Stock, then, as a condition of such reorganization or reclassification, lawful and adequate provisions shall be made whereby each holder of a share or shares of Series A Convertible Preferred Stock shall thereupon have the right to receive, upon the basis and upon the terms and conditions specified herein and in lieu of the shares of Common Stock immediately therefor receivable upon the conversion of such share or shares of Series A Convertible Preferred Stock, such shares of stock, securities or assets as may be issued or payable with respect to or in exchange for a number of outstanding shares of Common Stock equal to the number of shares of such Common Stock immediately therefore receivable upon such conversion had such reorganization or reclassification not taken place. In any such case, appropriate provisions shall be made with respect to the rights and interests of such holder to the end that the provisions hereof (including without limitation provisions for adjustments of the Conversion Price) shall thereafter be applicable, as nearly as may be, in relation to any shares of stock, securities or assets thereafter deliverable upon the exercise of such conversion rights. (6) Other Notices. In case at any time: (a) the Corporation shall declare any dividend upon its Common Stock payable in cash or stock or make any other distribution to the holders of its Common Stock; (b) the Corporation shall offer for subscription pro rata to the holders of its Common Stock any additional shares of stock of any class or other rights; (c) there shall be any capital reorganization or reclassification of the capital stock of the Corporation, or a consolidation or merger of the Corporation with or into another entity or entities, or a sale, lease, abandonment, transfer or other disposition of all or substantially all its assets; or (d) there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Corporation; then, in any one or more of such cases, the Corporation shall give, by delivery in person, certified or registered mail, return receipt requested, telecopier or telex, addressed to each holder of any shares of Series A Convertible Preferred Stock at the address of such holder as shown on the books of the Corporation, (a) at least 20 days' prior written notice of the date on which the books of the Corporation shall close or a record shall be taken for such dividend, distribution or subscription rights or for determining rights to vote in respect of any such reorganization, reclassification, consolidation, merger, disposition, dissolution, liquidation or winding up, and (b) in the case of any such reorganization, reclassification, consolidation, merger, disposition, dissolution, liquidation or winding up, at least 20 days' prior written notice of the date when the same shall take place. Such notice in accordance with the foregoing clause (a) shall also specify, in the case of any such dividend, distribution or subscription rights, the date on which the holders of Common Stock shall be entitled thereto and such notice in accordance with the foregoing clause (b) shall also specify the date on which the holders of Common Stock shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, disposition, dissolution, liquidation or winding up, as the case may be. (7) Stock to be Reserved. The Corporation will at all times reserve and keep available out of its authorized Common Stock, solely for the purpose of issuance upon the conversion of Series A Convertible Preferred Stock as herein provided, such number of shares of Common Stock as shall then be issuable upon the conversion of all outstanding shares of Series A Convertible Preferred Stock. The Corporation covenants that all shares of Common Stock which shall be so issued shall be duly and validly issued and fully paid and nonassessable and free from all taxes, liens and charges with respect to the issue thereof, and, without limiting the generality of the foregoing, the Corporation covenants that it will from time to time take all such action as may be requisite to assure that the par value per share of the Common Stock is at all times equal to or less than the Conversion Price in effect at the time. The Corporation will take all such action as may be necessary to assure that all such shares of Common Stock may be so issued without violation of any applicable law or regulation, or of any requirement of any national securities exchange upon which the Common Stock may be listed. The Corporation will not take any action which results in any adjustment of the Conversion Price if the total number of shares of Common Stock issued and issuable after such action upon conversion of the Series A Convertible Preferred Stock would exceed the total number of shares of Common Stock then authorized by the Certificate of Incorporation. (8) No reissuance of Series A Convertible Preferred Stock. Shares of Series A Convertible Preferred Stock which are converted into shares of Common Stock as provided herein shall not be reissued. (9) Issue Tax. The issuance of certificates for shares of Common Stock upon conversion of Series A Convertible Preferred Stock shall be made without charge to the holders thereof for any issuance tax in respect thereof, provided that the Corporation shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any certificate in a name other than that of the holder of the Series A Convertible Preferred Stock which is being converted. (10) Closing of Books. The corporation will at no time close its transfer books against the transfer of any Series A Convertible Preferred Stock or of any shares of Common Stock issued or issuable upon the conversion of any shares of Series A Convertible Preferred Stock in any manner which interferes with the timely conversion of such Series A Convertible Preferred Stock, except as may otherwise be required to comply with applicable securities laws. (11) Definition of Common Stock. As used in this paragraph 6, the term "Common Stock" shall mean and include the Corporation's authorized Common Stock, par value $0.01 per share, as constituted on the date of filing of these terms of the Series A Convertible Preferred Stock, and shall also include any capital stock of any class of the Corporation thereafter authorized which shall not be limited to a fixed sum or percentage in respect of the rights of the holders thereof to participate in dividends or in the distribution of assets upon the voluntary or involuntary liquidation, dissolution or the distribution of assets upon the voluntary or involuntary liquidation, dissolution or winding up of the Corporation; provided that the shares of Common Stock receivable upon conversion of shares of Series A Convertible Preferred Stock shall include only shares designated as Common Stock of the Corporation on the date of filing of this instrument, or in case of any reorganization or reclassification of the outstanding shares thereof, the stock, securities or assets provided for in subparagraph 6(g). vii. Redemption. The shares of Series A Convertible Preferred Stock may be redeemed by the Corporation, at its option, as follows: (1) Optional Redemption. The Corporation shall have the right at any time after October 1, 1998, at its option, to redeem all of the then-outstanding shares of Series A Convertible Preferred Stock, or any portion thereof, in blocks of 100,000 shares; provided, however, that such right is contingent upon all accrued and unpaid Accruing Dividends being fully paid prior to the Corporation's exercise of its redemption rights hereunder; and provided, further, however, that for so long as a holder of Series A Convertible Preferred Stock and its affiliates, in the aggregate, own at least 66.67% of the Series A Convertible Preferred Stock and Conversion Shares, the Corporation shall not have the right to redeem any shares hereunder to the extent that (i) there are fewer than 1,000 shares of Series A Convertible Preferred Stock outstanding, or (ii) such redemption would result in fewer than 1,000 shares of Series A Convertible Preferred Stock remaining outstanding. (2) Redemption Price and Payment. The shares of Series A Convertible Preferred Stock to be redeemed hereunder shall be redeemed by paying in cash an amount equal to $1.00 per share plus, in the case of each share, an amount equal to all Accruing Dividends declared but unpaid thereon, computed to the date of such redemption, such amount being referred to as the "Redemption Price." Such payment shall be made in full on the date such shares are redeemed to the holders entitled thereto. (3) Redemption Mechanics. At least 30 but not more than 40 days prior to the date on which the Corporation proposes to redeem such shares (the "Redemption Date"), written notice (the "Redemption Notice") shall be given by the Corporation by delivery in person, certified or registered mail, return receipt requested, telecopier or telex, to each holder of record (at the close of business on the business day next preceding the day on which the Redemption Notice is given) of shares of Series A Convertible Preferred Stock notifying such holder of the redemption and specifying the Redemption Price, such Redemption Date, the number of shares of Series A Convertible Preferred Stock to be redeemed from such holder (computed on a pro rata basis in accordance with the number of such shares held by all holders thereof) and the place where such Redemption Price shall be payable. The Redemption Notice shall be addressed to each holder at his address as shown by the records of the Corporation. Notwithstanding anything to the contrary contained herein, holders of Series A Convertible Preferred Stock receiving such Redemption Notice shall have the right to convert their shares of Series A Convertible Preferred Stock subject to such Redemption Notice into Common Stock pursuant to paragraph 6 above. From and after the close of business on a Redemption Date, unless there shall have been a default in the payment of the Redemption Price, all rights of holders of shares of Series A Convertible Preferred Stock (except the right to receive the Redemption Price) shall cease with respect to the shares to be redeemed on such Redemption Date, and such shares shall not thereafter be transferred on the books of the Corporation or be deemed to be outstanding for any purpose whatsoever. If the funds of the Corporation legally available for redemption of shares of Series A Convertible Preferred Stock on a Redemption Date are insufficient to redeem the total number of shares of Series A Convertible Preferred Stock to be redeemed on such Redemption Date, the holders of such shares shall share ratably in any funds legally available for redemption of such shares according to the respective amounts which would be payable to them if the full number of shares to be redeemed on such Redemption Date were actually redeemed. The shares of Series A Convertible Preferred Stock required to be redeemed but not so redeemed shall remain outstanding and entitled to all rights and preferences provided herein. At any time thereafter when additional funds of the Corporation are legally available for the redemption of such shares of Series A Convertible Preferred Stock, such funds shall be used, at the end of the next succeeding fiscal quarter, to redeem the balance of such shares, or such portion thereof for which funds are then legally available, on the basis set forth above. (4) Redeemed or Otherwise Acquired Shares to be Retired. Any shares of Series A Convertible Preferred Stock redeemed pursuant to this paragraph 7 or otherwise acquired by the Corporation in any manner whatsoever shall be canceled and shall not under any circumstances be reissued; and the Corporation may from time to time take such appropriate action as may be necessary to reduce accordingly the number of authorized shares of Series A Convertible Preferred Stock. viii. Amendments. No provision of these terms of the Series A Convertible Preferred Stock may be amended, modified or waived without the written consent or affirmative vote of the holders of at least two-thirds of the then outstanding shares of Series A Convertible Preferred Stock. b. Other Preferred Stock. The Preferred Stock other than the Series A Convertible Preferred Stock may be issued from time to time in one or more series and for such consideration as the Board of Directors shall determine. Subject to the limitations set forth herein and any limitations then prescribed by law, authority is hereby expressly granted to the Board of Directors to fix by resolution from time to time the designation of such series and the powers, preferences and rights of the shares of such series, and the qualifications, limitations or restrictions thereof, including, without limitation, the following: (a) the designation and number of shares comprising such series, which number may from time to time be decreased by the Board of Directors (but not below the number of such shares then outstanding) or may be increased (unless prohibited by action of the Board of Directors in resolutions creating such series); (b) the rate, amount and times at which, and the preferences and conditions under which, dividends shall be payable on shares of such series, including, without limitation, whether such dividends are cumulative or noncumulative and whether the shares of such series participate or do not participate in additional dividends after the payment of preferential dividends with respect to such shares; (c) any rights and preferences of the holders of shares of such series upon the liquidation, dissolution or winding up of the affairs of, or upon any distribution of the assets of, the Corporation, and whether such amounts vary depending upon whether such liquidation, dissolution or winding up is voluntary or involuntary; (d) the full or limited voting rights, if any, of the shares of any such series, in addition to voting rights provided by law; and whether or not, under what conditions and with respect to what subject matters, the shares of such series shall be entitled to vote separately as a class; (e) any times, terms and conditions upon which the shares of such series may be subject to redemption and the amount, terms, conditions and manner of operation of any purchase, retirement or sinking fund to be provided with respect to the redemption of such shares; (f) any rights to convert such shares into, or to exchange such shares for, shares of any other class or classes of capital stock or of any other series of the same class, including, without limitation, the prices, rates, conversion or exchange and any other terms or conditions applicable to such conversion or exchange; (g) any limitations upon the payment of dividends or the making of distributions on or the acquisition or redemption of Common Stock or any other class of shares subordinate to the shares of such series with respect to the payment of dividends; (h) any conditions or restrictions upon the issue of any additional shares on a parity with or superior to the shares of such series other than the Series A Convertible Preferred Stock; and (i) any other relative powers, preferences or rights and any other qualifications, limitations or restrictions with respect to the shares of such series as the Board of Directors may deem advisable and as shall not be inconsistent with the provisions of this Article IV. Except as specified by the Board of Directors, all shares of Preferred Stock shall be identical to and of equal rank with all shares of any other series of Preferred Stock, except as to the terms from which cumulative dividends, if any, shall accumulate. II. That at a duly held Special Meeting of Stockholders held on September 12, 1996, the foregoing amendment was adopted by the affirmative vote of a majority of the total number of shares outstanding and entitled to vote on the amendment. IN WITNESS WHEREOF, the Corporation has caused this Certificate of Amendment to be signed by its President and its Secretary and its corporate seal to be hereto affixed this 23rd day of September, 1996. GOOD TIMES RESTAURANTS INC. By: /s/ Boyd E. Hoback, President Boyd E. Hoback, President By: /s/ Susan Knutson, Secretary Susan Knutson, Secretary (Seal) STATE OF COLORADO ) ) ss. COUNTY OF Adams ) On September 23, 1996 personally appeared before me, a Notary Public, Boyd E. Hoback and Susan Knutson, who acknowledged that they executed the above instrument. My commission expires: 7/13/99 /s/ Robin L. Boeff Notary Public EX-4.16 4 FIRST AMENDED AND RESTATED SERIES B WARRANT AGREEMENT THIS FIRST AMENDED AND RESTATED SERIES B WARRANT AGREEMENT (this "Agreement"), dated effective as of February 10, 1997, is between GOOD TIMES RESTAURANTS INC., a Nevada corporation (the "Company") and AMERICAN SECURITIES TRANSFER & TRUST, INCORPORATED, an independent stock transfer company (called, as well as any successor acting as warrant agent under this Agreement, the "Warrant Agent"), RECITALS: A. This Agreement amends and restates the Series B Warrant Agreement dated as of February 10, 1994 between the Company and the Warrant Agent. B. In connection with a public offering by the Company in 1994, the Company issued 1,608,000 Series B Redeemable Common Stock Purchase Warrants (the "Warrants") to purchase in the aggregate up to 1,608,000 shares of common stock, par value $.001 per share ("Common Stock") (all shares to be purchased upon the exercise of the Warrants being called the "Warrant Stock"). C. The Common Stock and Warrants were issued in units (the "Units"), each Unit consisting of two shares of Common Stock and one Warrant, with each Warrant being exercisable for the purchase of one share of Common Stock. The Units were offered and sold pursuant to a Registration Statement on Form SB-2, as amended (Registration No. 33-72052), filed with the Securities and Exchange Commission on November 23, 1993. D. The Company desires to enter into this Agreement to establish the terms and conditions of the Warrants, to set forth the rights of the registered holders of the Warrants (the "Warrant Holders"), and to provide for the issuance, transfer and exercise of the Warrants and other matters; and E. The Company desires the Warrant Agent to act on behalf of the Company with respect to the Warrants and the Warrant Agent is willing so to act under the terms of this Agreement. AGREEMENT: NOW, THEREFORE, in consideration of the mutual agreements stated in this Agreement, the Company and the Warrant Agent agree: Section 1. Warrants. Subject to the provisions of this Agreement, a Warrant shall entitle the Warrant Holder by exercising such Warrant to purchase from the Company one share of Common Stock at a price of $2.00 per Share for each Warrant (called the "Exercise Price"). The Warrants will be exercisable at any time and will expire at 3:00 p.m., Denver, Colorado time, on February 10, 1999, or, if such day in Denver, Colorado shall be either a holiday or a day on which banks are authorized or obligated by law to be closed, then at 3:00 p.m., Denver, Colorado time, on the next following day which in Denver, Colorado, shall not be either a holiday or a day on which banks are authorized or obligated by law to be closed (the actual time of expiration of the Warrants being called the "Expiration Date"). At the time of expiration of the Warrants, any unexercised Warrants will become void and all rights of the Warrant Holders under the terms of the Warrant Certificates, this Agreement and otherwise shall cease. Section 2. Warrant Certificates. The Warrant Certificates shall be in registered form only. The text of the Warrant Certificates, including the forms of exercise and assignment to be printed on the reverse side of the Warrant Certificate, shall be substantially in the form set forth in Exhibit A attached to this Agreement. Warrant Certificates shall be signed by, or shall bear the facsimile signatures of the President or a Vice President of the Company and the Secretary or an Assistant Secretary of the Company, and shall bear a facsimile of the Company's seal. If any person whose facsimile signature has been placed upon any Warrant Certificates as the signature of an officer of the Company shall have ceased to be such officer before such Warrant Certificate is countersigned, issued and delivered, such Warrant Certificate may be countersigned, issued and delivered with the same effect as if such person had not ceased to be such officer. Any Warrant Certificate may be signed by, or may bear the facsimile signature of, any person who at the actual date of the preparation of such Warrant Certificate shall be a proper officer of the Company to sign such Warrant Certificate even though such person was not such an officer upon the date of this Agreement. Warrant Certificates shall be manually countersigned by the Warrant Agent and shall not be valid for any purpose unless so countersigned. The Warrant Agent is hereby authorized to countersign and deliver to, or in accordance with the instructions of, any Warrant Holder any Warrant Certificate which is properly issued under the terms of this Agreement. Section 3. Registration of Transfers and Exchanges. a. The Warrant Agent shall from time to time register the transfer of any outstanding Warrant Certificate upon records to be maintained by the Warrant Agent for such purpose upon surrender of such Warrant Certificate to the Warrant Agent for transfer, accompanied by appropriate instruments of transfer in form satisfactory to the Company and the Warrant Agent and duly executed by the Warrant Holder or a duly authorized attorney. Upon any such registration of transfer, a new Warrant Certificate shall be issued in the name of and to the transferee and the surrendered Warrant Certificate shall be cancelled. b. Any outstanding Warrant Certificate may be surrendered by the Warrant Holder to the Warrant Agent in exchange for other Warrant Certificates of like tenor and representing in the aggregate the same number of Warrants. Warrant Certificates so surrendered for exchange shall be cancelled. Section 4. Exercise of Warrants. a. Warrants may be exercised at any time on or before the Expiration Date. Warrants shall be exercised by the Warrant Holder by surrendering to the Warrant Agent the Warrant Certificate evidencing such Warrants with the exercise form on the reverse of such Warrant Certificate duly completed and executed and paying to the Warrant Agent, in lawful money of the United States of America in cash or by good check (either certified or a bank cashier's check) payable to the order of the Company, the Exercise Price for the Shares to be purchased. In order for the exercise of a Warrant to be valid, a properly executed Warrant with the appropriate payment must be received by the Warrant Agent prior to the Expiration Date. b. Upon receipt of a Warrant Certificate with the exercise form thereon duly executed together with payment in full of the Exercise Price for the Shares for which Warrants are then being exercised, the Warrant Agent shall requisition from any transfer agent for the Shares, and upon receipt shall make delivery of, certificates evidencing the total number of whole Shares for which Warrants are then being exercised in such names and denomination as are required for delivery to, or in accordance with the instructions of, the Warrant Holder. The Warrant Agent shall promptly deliver to the Company cash or checks received in payment of the Exercise price, and shall establish such procedures as the Company reasonably requests to assure collection of such payments before delivering such certificates. Such certificates for the Shares shall be deemed to be issued, and the person to whom such Shares are issued of record shall be deemed to have become a holder, of record of such Shares, as of the date of the surrender of such Warrant Certificate and payment of the Exercise Price, whichever shall last occur, provided that if the books of the Company with respect to the Shares shall be closed as of such date, the certificates for such Shares shall be deemed to be issued, and the person to whom such Shares are issued of record shall be deemed to have become a holder of record of such Shares, as of the date on which such books shall next be open (whether before, on or after the Expiration Date). c. If less than all of the Warrants evidenced by a Warrant Certificate are exercised upon a single occasion, a new Warrant Certificate for the balance of the Warrants not so exercised shall be issued and delivered to, or in accordance with transfer instructions properly given by, the Warrant Holder. d. The Company may, in whole or in part and at any time and from time to time, on not less than 45 days' written notice, call the Warrants for redemption at a price of $.05 per share covered thereby at any time after the closing high bid price of the Common Stock (if then traded on the over-the-counter market other than on the National Market System of NASDAQ) or the closing price of the Common Stock (if then traded on the National Market System of NASDAQ or on a national securities exchange) exceeds 150% of the Exercise Price for a period of 20 of the 30 consecutive trading days immediately preceding the date of mailing of the notice of redemption. Notice of any redemption will be mailed to the Warrant Holders at their addresses of record. The Warrants may be exercised any time prior to the specified redemption date set forth in such notice; provided, however, that in the event exercise of the Warrants is not made prior to the redemption date, then the right to purchase the shares of Common Stock underlying such Warrants shall be forfeited. e. All Warrant Certificates surrendered upon exercise of Warrants shall be cancelled. Section 5. Reduction of Exercise Price and/or Extension of Expiration Date. At any time prior to the Expiration Date, the Company may reduce the Exercise Price and/or extend the Expiration Date effective on thirty days' prior written notice to the Warrant Holders. A copy of the resolution of the Board of Directors of the Company authorizing such extension shall be made available by the Company for inspection by the Warrant Holders and the Warrant Agent during such 30-day notice period. Section 6. Payment of Taxes. The Company will pay all taxes attributable to the initial issuance of Warrant Stock upon exercise of Warrants. The Company shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue of any Warrant Certificates or in the issue of any certificates for Warrant Stock in a name other than that of the Warrant Holder upon the exercise of any Warrant. Section 7. Mutilated or Missing Warrant Certificates. If any Warrant Certificate is mutilated, lost, stolen, or destroyed, the Company and the Warrant Agent may, on such terms as to indemnity or otherwise as they may in their discretion impose (which shall, in the case of a mutilated Warrant Certificate, include the surrender thereof), and upon receipt of evidence satisfactory to the Company and the Warrant Agent of such loss, theft or destruction, issue a substitute Warrant Certificate of like denomination and tenor as the Warrant Certificate so mutilated, lost, stolen or destroyed. Applicants for such substitute Warrant Certificate shall also comply with such other reasonable regulations and pay any reasonable charges as the Company or the Warrant Agent may prescribe. If any Warrant Certificate is mutilated, lost, stolen or destroyed, and the Warrant Holder desires to exercise any Warrants evidenced thereby, the Company and the Warrant Agent may authorize such exercise upon receipt of such evidence and indemnity in lieu of issuing any substitute Warrant Certificate to evidence the Warrants so exercised. Section 8. Reservation of Shares. a. The Company will at all times reserve and keep available, free from preemptive rights, out of the aggregate of its authorized but unissued shares of Common Stock, for the purpose of enabling it to satisfy any obligation to issue Warrant Stock upon exercise of Warrants, the full number of shares issuable upon the exercise of all outstanding Warrants. b. The Company covenants that all Warrant Stock which may be issued upon exercise of Warrants will upon issue be fully paid and nonassessable by the Company and free from all taxes, liens, charges and security interests with respect to the issue thereof. Section 9. Obtaining of Governmental Approvals and Stock Exchange Listings. If any Warrant Stock issuable upon the exercise of Warrants require registration or approval of any governmental authority or the taking of any other action under the laws of the United States of America, any state or any political subdivision thereof before such Warrant Stock may be validly and lawfully issued, the Company will in good faith and as expeditiously as possible after surrender of the Warrant Certificates to the Warrant Agent for exercise of Warrants evidenced thereby endeavor to secure such registration or approval or to take such other action, provided that in no event shall such Warrant Stock be issued, and the Company shall have the authority to suspend the exercise of all Warrants, until such registration or approval shall have been obtained or such other action shall have been taken, but all Warrants the exercise of which is requested during any such suspension shall be exercisable at the Exercise Price and upon the other conditions in effect on the date of surrender of the Warrant Certificate and payment of the Exercise Price. If the Company is unable to obtain such registration or approval within a reasonable time, the Company may direct the Warrant Agent to return the Warrant to the Warrant Holder and inform him that such Warrant may not be exercised in such jurisdiction, and the Warrant Agent shall comply with such directions. Section 10. Adjustments of Exercise Price and Either Shares Purchasable or Number of Warrants. The Exercise Price and either the number of Shares purchasable upon exercise of each Warrant or the number of Warrants outstanding shall be subject to adjustment from time to time as provided herein. a. Adjustment of Number of Shares. In case the Company shall at any time issue shares of Common Stock by way of dividend or other distribution to the holders of the outstanding shares of Common Stock of the Company or subdivide or combine the outstanding shares of Common Stock, the Exercise Price shall be proportionately decreased in the case of such issuance (on the day following the date fixed for determining shareholders entitled to receive such dividend or other distribution) or decreased in the case of such subdivision or increased in the case of such combination (on the date that such subdivision or combination shall become effective). b. No Adjustment for Small Amounts. The Company shall not be required to give effect to any adjustment in the Exercise Price unless and until the net effect of one or more adjustments, determined as above provided, shall have required a change of the Exercise Price by at least one cent, but when the cumulative net effect of more than one adjustment so determined shall be to change the actual Exercise Price by at least one cent, such change in the Exercise Price shall thereupon be given effect. c. Number of Shares Adjusted. Upon any adjustment of the Exercise Price, the holder of this Warrant shall thereafter (until another such adjustment) be entitled to purchase, at the new Exercise Price, the number of Shares of Common Stock, calculated to the nearest full share, obtained by multiplying the number of Shares initially issuable upon exercise of this Warrant by the Exercise Price in effect on the date hereof and dividing the product so obtained by the new Exercise Price. d. Officer's Certificate. Whenever the Exercise Price shall be adjusted as required herein, the Company shall forthwith file in the custody of its Secretary or an Assistant Secretary at its principal office, and with its Warrant Agent, an officer's certificate showing the adjusted Exercise Price determined as herein provided and setting forth in reasonable detail the facts requiring such adjustment. Each such officer's certificate shall be made available at all reasonable times for inspection by the Holder and the Company shall, forthwith after each such adjustment, give notice thereof to the Holder. Such certificate shall be conclusive as to the correctness of such adjustment. Section 11. Notices to Warrant Holders. So long as this Warrant shall be outstanding and unexercised (i) if the Company shall pay any dividend or make any distribution upon the Common Stock; or (ii) if the Company shall offer to the holders of Common Stock for subscription or purchase by them any shares of stock of any class or any other rights; or (iii) if any capital reorganization of the Company; reclassification of the capital stock of the Company; or voluntary or involuntary dissolution, liquidation or winding up of the Company shall be effected, then, in any such case, the Company shall cause to be given to the Holder, at least ten calendar days prior to the date specified in (x) or (y) below, as the case may be, a notice containing a brief description of the proposed action and stating the date on which (x) a record is to be taken for the purpose of such dividend, distribution or rights, or (y) such reclassification, reorganization, consolidation, dissolution, liquidation or winding up is to take place and the date, if any is to be fixed, as of which the holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities or other property deliverable upon such reclassification, reorganization, consolidation, merger, conveyance, dissolution, liquidation or winding up. Section 12. Reclassification, Reorganization or Merger. In case of (i) any reclassification, capital reorganization or other change of outstanding shares of Common Stock of the Company (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of an issuance of Common Stock by way of dividend or other distribution or of a subdivision or combination); or (ii) in case the Company should spin-off a subsidiary by distributing to the shareholders of the Company, as a dividend or otherwise, the capital stock of the subsidiary, the Company shall cause effective provision to be made so that the Holder shall have the right thereafter, by exercising this Warrant prior to the Expiration Date, to purchase or acquire the kind and amount of shares of stock and other securities and property receivable upon such reclassification, capital reorganization or other change, consolidation, as if the Holder had exercised this Warrant prior to such transaction. Any such provision shall include provision for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Warrant. The foregoing provisions of this Section shall similarly apply to successive reclassification, capital reorganizations and changes of shares of Common Stock and to successive consolidations, mergers, sales or conveyances. Section 13. Merger or Sale. In case of (i) any consolidation or merger of the Company with or into another corporation (other than a merger with a subsidiary in which merger the Company is the continuing corporation) or (ii) any sale, lease, exchange or other disposition of all or substantially all of the property and assets of the Company not in the usual and regular course of the Company's business and in a transaction or series of transactions requiring shareholder approval under the laws of the State of Colorado, the Company shall cause notice thereof to be given to the Holder at least 30 calendar days prior to the anticipated date of closing of such transaction and, notwithstanding any other provisions of this Agreement, the Warrant shall expire upon the completion of such transaction to the extent not exercised prior to such transaction closing. Section 14. No Fractional Shares. No fractional shares or scrip representing fractional shares will be issued upon exercise of this Warrant. With respect to any fraction of a share called for upon exercise hereof, the Company shall pay to the Holder an amount in cash equal to such fraction multiplied by the then current fair market value per Share determined by the Company. Section 15. Notice to Warrant Holders. Any notice required to be given to the Holder shall be deemed to have been given if in writing and upon deposit in the United States mail, with postage fully prepaid, and addressed to the Holder at the registered address maintained on the books of the Company or the Warrant Agent. Any notice or other communication to the Company shall be deemed to have been given or to be effective for any purpose only upon actual receipt thereof by the Company at its principal office or by the Warrant Agent, as the case may be. The form of Warrant Certificate need not be changed because of any adjustment in the Exercise Price, the number of Shares purchasable upon the exercise of a Warrant or the number of Warrants outstanding and Warrant Certificates issued after any such adjustment may state the same Exercise Price, the same number of Warrants and the same number of Shares purchasable upon exercise of a Warrant as are stated in the Warrant Certificates issued before such adjustment as if such adjustment had not occurred. However, the Company may at any time with the approval of the Warrant Agent make any change in the form of Warrant Certificate that it may deem appropriate and that does not affect the substance thereof and any Warrant Certificates thereafter issued or countersigned, whether in exchange or substitution for an outstanding Warrant Certificate or otherwise, may be in the form as so changed. Section 16. Rights of Warrant Holders. a. No Warrant Holder, as such, shall have any rights of a stockholder of the Company, either at law or equity, and the rights of the Warrant Holders, as such, are limited to those rights expressly provided in this Agreement or in the Warrant Certificates. b. The Company and the Warrant Agent may treat the registered Warrant Holder in respect of any Warrant Certificate as the absolute owner thereof for all purposes notwithstanding any notice to the contrary. Section 17. Warrant Agent. a. The Company hereby appoints the Warrant Agent to act as the agent of the Company in accordance with this Agreement and the Warrant Agent hereby accepts such appointment. b. The Warrant Agent undertakes the duties and obligations imposed by this Agreement upon the following terms and conditions by all of which the Company and every Warrant Holder, by acceptance of any Warrants, shall be bound: (1) The statements contained in this Agreement and in the Warrant Certificates shall be taken as statements of the Company and the Warrant Agent assumes no responsibility for the correctness of any of the same except such as describe the Warrant Agent or action taken or to be taken by it. (2) The Warrant Agent shall not be responsible for any failure of the Company to comply with any of the covenants contained in this Agreement or in the Warrant Certificates to be complied with by the Company. (3) The Warrant Agent may consult at any time with counsel satisfactory to it (who may be counsel for the Company) and the Warrant Agent shall incur no liability or responsibility to the Company or to any Warrant Holder in respect of any action taken, suffered or omitted by it hereunder in good faith and in accordance with the opinion or the advice of such counsel, provided the Warrant Agent shall have exercised reasonable care in the selection and continued employment of such counsel. (4) The Warrant Agent shall incur no liability or responsibility to the Company or to any Warrant Holder for any action taken in reliance on any notice, resolution, waiver, consent, order, certificate or other paper, document or instrument believed by it to be genuine and to have been signed, sent or presented by the proper party or parties. (5) The Company agrees to pay to the Warrant Agent reasonable compensation for all services rendered by the Warrant Agent in the execution of this Agreement including fees for exercise of the Warrants, to reimburse the Warrant Agent for all expenses, taxes and governmental charges and other charges of any kind and nature incurred by the Warrant Agent in the execution of this Agreement and to indemnify the Warrant Agent and save it harmless against any and all liabilities, including judgments, costs and counsel fees, for anything done or omitted by the Warrant Agent in the execution of this Agreement except as a result of the Warrant Agent's negligence, bad faith or willful misconduct. (6) The Warrant Agent shall be under no obligation to institute any action, suit or legal proceeding or to take any other action likely to involve expense unless the Company or one or more Warrant Holders shall furnish the Warrant Agent with reasonable security and indemnity for any costs and expenses which may be incurred, but this provision shall not affect the power of the Warrant Agent to take such action as the Warrant Agent may consider proper, whether with or without any such security or indemnity. All rights of action under this Agreement or under any of the Warrants may be enforced by the Warrant Agent without the possession of any of the Warrant Certificates or the production thereof at any trial or other proceeding relative thereto, and any such action, suit or proceeding instituted by the Warrant Agent shall be brought in its name as Warrant Agent, and any recovery of judgment shall be for the ratable benefit of the Warrant Holders as their respective rights or interests may appear. (7) The Warrant Agent and any stockholder, director, officer or employee of the Warrant Agent may buy, sell or deal in any of the Warrants or other securities of the Company or become pecuniarily interested in any transaction in which the Company may be interested, or contract with or lend money to the Company or otherwise as fully and freely as though it were not Warrant Agent under this Agreement. Nothing herein shall preclude the Warrant Agent from acting in any other capacity for the Company or for any other legal entity. (8) The Warrant Agent shall act hereunder solely as agent for the Company, and its duties shall be determined solely by the provisions hereof. Section 18. Merger, Consolidation or Change of Name of Warrant Agent. a. Any corporation into which the Warrant Agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Warrant Agent shall be a party, or any corporation succeeding to the transfer agency business of the Warrant Agent, shall be the successor to the Warrant Agent hereunder without the execution or filing of any paper or any further act on the part of the parties hereto, except that the prior written consent thereto of the Company shall first be obtained. In case at the time such successor to the Warrant Agent shall succeed to the agency created by this Agreement, and in case at that time any of the Warrant Certificates shall have been countersigned but not delivered, any such successor to the Warrant Agent may adopt the countersignature of the original Warrant Agent; and in case at that time any of the Warrant Certificates shall not have been countersigned, any successor to the Warrant Agent may countersign such Warrant Certificates either in the name of the predecessor Warrant Agent or in the name of the successor Warrant Agent; and in all such cases such Warrant Certificates shall have the full force provided in the Warrant Certificates and in this Agreement. b. In case at any time the name of the Warrant Agent shall be changed and at such time any of the Warrant Certificates shall have been countersigned but not delivered, the Warrant Agent may adopt the countersignature under its prior name; and in case at that time any of the Warrant Certificates shall not have been countersigned, the Warrant Agent may countersign such Warrant Certificates either in its prior name or in its changed name; and in all such cases such Warrant Certificates shall have the full force provided in the Warrant Certificates and in this Agreement. Section 19. Change of Warrant Agent. The Warrant Agent may resign and be discharged from its duties under this Agreement by giving to the Company notice in writing, and by giving notice in writing to each Warrant Holder at his address appearing in the Warrant register, specifying a date when such resignation shall take affect, which notice shall be sent at least 30 days prior to the date so specified and which notice shall be paid for by the Company. If the Warrant Agent shall resign or shall otherwise become incapable of acting, the Company shall appoint a successor to the Warrant Agent. If the Company shall fail to make such appointment within a period of 30 days after it has been notified in writing of such resignation or incapacity by the resigning or incapacitated Warrant Agent or by any Warrant Holder, then any Warrant Holder may apply to any court of competent jurisdiction for the appointment of a successor to the Warrant Agent. Pending appointment of a successor to the Warrant Agent, either by the Company or by such court, the duties of the Warrant Agent shall be carried out by the Company. Any successor Warrant Agent, whether appointed by the Company or by such a court, shall be a transfer agent registered pursuant to Section 17A(c) of the Securities Exchange Act of 1934, as amended. After appointment the successor Warrant Agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named as Warrant Agent without further act or deed and the former Warrant Agent shall deliver and transfer to the successor Warrant Agent any property at the time held by it hereunder, and execute and deliver any further assurance, conveyance, act or deed necessary for the purpose. Failure to give any notice provided for in this Section, however, or any defect therein, shall not affect the legality or validity of the resignation or removal of the Warrant Agent or the appointment of the successor Warrant Agent, as the case may be. Section 20. Notices. Any notice or demand authorized by this Agreement to be given or made by the Warrant Agent or by any Warrant Holder to or on the Company shall be sufficiently given or made only if in writing and upon actual receipt at the following address (until another address is filed in writing by the Company with the Warrant Agent): Good Times Restaurants Inc. 8620 Wolff Court, Suite 330 Westminster, CO 80030 Attention:____________________ Any notice or demand authorized by this Agreement to be given or made by any Warrant Holder or by the Company to or on the Warrant Agent shall be sufficiently given or made if sent by mail, certified or registered, postage prepaid, addressed (until another address is filed in writing by the Warrant Agent with the Company), as follows: American Securities Transfer & Trust, Incorporated 938 Quail Street, Suite 101 Lakewood, CO 80215 Attention:_____________________ Any distribution, notice or demand required or authorized by this Agreement to be given or made by the Company or the Warrant Agent to or on the Warrant Holders shall be sufficiently given or made if in writing and upon deposit in the United States mail, first-class or registered, postage prepaid, addressed to the Warrant Holders at their last known addresses as they shall appear on the registration books for the Warrant Certificates maintained by the Warrant Agent. Section 21. Supplements and Amendments. The Company and the Warrant Agent may from time to time supplement or amend this Agreement without the approval of any Warrant Holders in order to cure any ambiguity or to correct or supplement any provision contained herein which may be defective or inconsistent with any other provision herein, or to make any other change which the Company and the Warrant Agent may deem necessary or desirable and which shall not adversely affect the interests of the Warrant Holders. Section 22. Successors. All the covenants and provisions of this Agreement by or for the benefit of the Company or the Warrant Agent shall bind and inure to the benefit of their respective successors and assigns hereunder. Section 23. Termination. This Agreement shall terminate at the close of business on the Expiration Date or such earlier date upon which all Warrants have been exercised. The provisions of Section 11 shall survive such terminations. Section 24. Governing Law. This Agreement and each Warrant Certificate issued hereunder shall be deemed to be a contract made under the laws of the State of Colorado and for all purposes shall be construed in accordance with the laws of said State. Section 25. Benefits of This Agreement. Nothing in this Agreement shall be construed to give to any person or corporation other than the Company, the Warrant Agent and the Warrant Holders any legal or equitable right, remedy or claim under this Agreement; but this Agreement shall be for the sole and exclusive benefit of the Company, the Warrant Agent and the Warrant Holders. Section 26. Agreement Available to Warrant Holders. A copy of this Agreement shall be available at all reasonable times at the office of the Warrant Agent for inspection by any Warrant Holder. As a condition of such inspection, the Warrant Agent may require any Warrant Holder to submit his Warrant Certificate for inspection. Section 27. Counterparts. This Agreement may be executed in any number of counterparts, each of such counterparts shall for all purposes be deemed to be an original and all such counterparts shall together constitute but one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, all as of the day and year first above written. GOOD TIMES RESTAURANTS INC., [seal] a Nevada corporation By: /s/ Boyd E. Hoback, President Boyd E. Hoback, President ATTEST: /s/ Sue Knutson , Secretary AMERICAN SECURITIES TRANSFER & TRUST, INCORPORATED, an independent stock transfer company [seal] By: /s/ Gregory D. Tubbs, Vice President Gregory D. Tubbs, Vice President ATTEST: /s/ Lori S. Zimmerman , Assistant Secretary EX-4.17 5 THIRD AMENDED AND RESTATED WARRANT AGREEMENT THIS THIRD AMENDED AND RESTATED WARRANT AGREEMENT (this "Agreement"), dated effective as of February 10, 1997, is between GOOD TIMES RESTAURANTS INC., a Nevada corporation (the "Company") and AMERICAN SECURITIES TRANSFER & TRUST, INCORPORATED, an independent stock transfer company (called, as well as any successor acting as warrant agent under this Agreement, the "Warrant Agent"), RECITALS: A. This Agreement supersedes the Warrant Agreement made effective June 21, 1990, the Amended and Restated Warrant Agreement made effective June 15, 1992, and the Second Amended and Restated Warrant Agreement dated as of March 8, 1994, between the Company and the Warrant Agent. B. The Company has previously issued warrants for the purchase of shares of Common Stock, for which the Warrant Agent presently serves as registrar and warrant agent, as follows: 1. 87,513 warrants (the "S-3 Warrants") for the purchase of up to an aggregate of 87,513 shares of the Company's common stock, par value $.001 per share (the "Common Stock") pursuant to a Form S-3 Registration Statement, as thereafter amended (Registration No. 33-73062), filed with the Securities and Exchange Commission on December 20, 1993; 2. 720,000 warrants (the "1992 Warrants") for the purchase of up to an aggregate of 720,000 shares of Common Stock issued pursuant to the Company's public offering of its securities in June 1992; 3. 230,000 warrants (the "1990 Warrants") for the purchase of up to an aggregate of 230,000 shares of Common Stock issued pursuant to the Company's public offering of its securities in 1990; and 4. 37,500 warrants (the "1989 Warrants") for the purchase of up to an aggregate of 37,500 shares of Common Stock issued pursuant to the Company's public offering of its securities in 1989. The S-3 Warrants, 1992 Warrants, 1990 Warrants and 1989 Warrants may be collectively referred to herein as a "Warrant" or the "Warrants". C. The Company desires to enter into this Agreement to establish the terms and conditions of the Warrants, to set forth the rights of the registered holders of the Warrants (the "Warrant Holders"), and to provide for the issuance, transfer and exercise of the Warrants and other matters; and D. The Company desires the Warrant Agent to act on behalf of the Company and the Warrant Agent is willing so to act under the terms of this Agreement. AGREEMENT: NOW, THEREFORE, in consideration of the mutual agreements stated in this Agreement, the Company and the Warrant Agent agree: Section 1. Warrants. Subject to the provisions of this Agreement, a Warrant shall entitle the Warrant Holder by exercising such Warrant to purchase from the Company one share of Common Stock at a price of $2.00 per Share for each Warrant (called the "Exercise Price"). The Warrants will be exercisable at any time and will expire at 3:00 p.m., Denver, Colorado time, on February 10, 1999, or, if such day in Denver, Colorado shall be either a holiday or a day on which banks are authorized or obligated by law to be closed, then at 3:00 p.m., Denver, Colorado time, on the next following day which in Denver, Colorado, shall not be either a holiday or a day on which banks are authorized or obligated by law to be closed (the actual time of expiration of the Warrants being called the "Expiration Date"). At the time of expiration of the Warrants, any unexercised Warrants will become void and all rights of the Warrant Holders under the terms of the Warrant Certificates, this Agreement and otherwise shall cease. Section 2. Warrant Certificates. The Warrant Certificates shall be in registered form only. The text of the Warrant Certificates, including the forms of exercise and assignment to be printed on the reverse side of the Warrant Certificate, shall be substantially in the form set forth in Exhibit A attached to this Agreement. Warrant Certificates shall be signed by, or shall bear the facsimile signatures of the President or a Vice President of the Company and the Secretary or an Assistant Secretary of the Company, and shall bear a facsimile of the Company's seal. If any person whose facsimile signature has been placed upon any Warrant Certificates as the signature of an officer of the Company shall have ceased to be such officer before such Warrant Certificate is countersigned, issued and delivered, such Warrant Certificate may be countersigned, issued and delivered with the same effect as if such person had not ceased to be such officer. Any Warrant Certificate may be signed by, or may bear the facsimile signature of, any person who at the actual date of the preparation of such Warrant Certificate shall be a proper officer of the Company to sign such Warrant Certificate even though such person was not such an officer upon the date of this Agreement. Warrant Certificates shall be manually countersigned by the Warrant Agent and shall not be valid for any purpose unless so countersigned. The Warrant Agent is hereby authorized to countersign and deliver to, or in accordance with the instructions of, any Warrant Holder any Warrant Certificate which is properly issued under the terms of this Agreement. Section 3. Registration of Transfers and Exchanges. a. The Warrant Agent shall from time to time register the transfer of any outstanding Warrant Certificate upon records to be maintained by the Warrant Agent for such purpose upon surrender of such Warrant Certificate to the Warrant Agent for transfer, accompanied by appropriate instruments of transfer in form satisfactory to the Company and the Warrant Agent and duly executed by the Warrant Holder or a duly authorized attorney. Upon any such registration of transfer, a new Warrant Certificate shall be issued in the name of and to the transferee and the surrendered Warrant Certificate shall be cancelled. b. Any outstanding Warrant Certificate may be surrendered by the Warrant Holder to the Warrant Agent in exchange for other Warrant Certificates of like tenor and representing in the aggregate the same number of Warrants. Warrant Certificates so surrendered for exchange shall be cancelled. Section 4. Exercise of Warrants. a. Warrants may be exercised at any time on or before the Expiration Date. Warrants shall be exercised by the Warrant Holder by surrendering to the Warrant Agent the Warrant Certificate evidencing such Warrants with the exercise form on the reverse of such Warrant Certificate duly completed and executed and paying to the Warrant Agent, in lawful money of the United States of America in cash or by good check (either certified or a bank cashier's check) payable to the order of the Company, the Exercise Price for the Shares to be purchased. In order for the exercise of a Warrant to be valid, a properly executed Warrant with the appropriate payment must be received by the Warrant Agent prior to the Expiration Date. b. Upon receipt of a Warrant Certificate with the exercise form thereon duly executed together with payment in full of the Exercise Price for the Shares for which Warrants are then being exercised, the Warrant Agent shall requisition from any transfer agent for the Shares, and upon receipt shall make delivery of, certificates evidencing the total number of whole Shares for which Warrants are then being exercised in such names and denomination as are required for delivery to, or in accordance with the instructions of, the Warrant Holder. The Warrant Agent shall promptly deliver to the Company cash or checks received in payment of the Exercise price, and shall establish such procedures as the Company reasonably requests to assure collection of such payments before delivering such certificates. Such certificates for the Shares shall be deemed to be issued, and the person to whom such Shares are issued of record shall be deemed to have become a holder, of record of such Shares, as of the date of the surrender of such Warrant Certificate and payment of the Exercise Price, whichever shall last occur, provided that if the books of the Company with respect to the Shares shall be closed as of such date, the certificates for such Shares shall be deemed to be issued, and the person to whom such Shares are issued of record shall be deemed to have become a holder of record of such Shares, as of the date on which such books shall next be open (whether before, on or after the Expiration Date). c. If less than all of the Warrants evidenced by a Warrant Certificate are exercised upon a single occasion, a new Warrant Certificate for the balance of the Warrants not so exercised shall be issued and delivered to, or in accordance with transfer instructions properly given by, the Warrant Holder. d. The Company may, in whole or in part and at any time and from time to time, on not less than 60 days' written notice, call the Warrants for redemption at a price of $.05 per share covered thereby at any time after the closing high bid price of the Common Stock (if then traded on the over-the-counter market other than on the National Market System of NASDAQ) or the closing price of the Common Stock (if then traded on the National Market System of NASDAQ or on a national securities exchange) exceeds 120% of the Exercise Price for a period of 20 consecutive trading days prior to such call for redemption. Notice of any redemption will be mailed to the Warrant Holders at their addresses of record. The Warrants may be exercised any time prior to the specified redemption date set forth in such notice; provided, however, that in the event exercise of the Warrants is not made prior to the redemption date, then the right to purchase the shares of Common Stock underlying such Warrants shall be forfeited. e. All Warrant Certificates surrendered upon exercise of Warrants shall be cancelled. Section 5. Reduction of Exercise Price and/or Extension of Expiration Date. At any time prior to the Expiration Date, the Company may reduce the Exercise Price and/or extend the Expiration Date effective on thirty days' prior written notice to the Warrant Holders. A copy of the resolution of the Board of Directors of the Company authorizing such extension shall be made available by the Company for inspection by the Warrant Holders and the Warrant Agent during such 30-day notice period. Section 6. Payment of Taxes. The Company will pay all taxes attributable to the initial issuance of Warrant Stock upon exercise of Warrants. The Company shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue of any Warrant Certificates or in the issue of any certificates for Warrant Stock in a name other than that of the Warrant Holder upon the exercise of any Warrant. Section 7. Mutilated or Missing Warrant Certificates. If any Warrant Certificate is mutilated, lost, stolen, or destroyed, the Company and the Warrant Agent may, on such terms as to indemnity or otherwise as they may in their discretion impose (which shall, in the case of a mutilated Warrant Certificate, include the surrender thereof), and upon receipt of evidence satisfactory to the Company and the Warrant Agent of such loss, theft or destruction, issue a substitute Warrant Certificate of like denomination and tenor as the Warrant Certificate so mutilated, lost, stolen or destroyed. Applicants for such substitute Warrant Certificate shall also comply with such other reasonable regulations and pay any reasonable charges as the Company or the Warrant Agent may prescribe. If any Warrant Certificate is mutilated, lost, stolen or destroyed, and the Warrant Holder desires to exercise any Warrants evidenced thereby, the Company and the Warrant Agent may authorize such exercise upon receipt of such evidence and indemnity in lieu of issuing any substitute Warrant Certificate to evidence the Warrants so exercised. Section 8. Reservation of Shares. a. The Company will at all times reserve and keep available, free from preemptive rights, out of the aggregate of its authorized but unissued shares of Common Stock, for the purpose of enabling it to satisfy any obligation to issue Warrant Stock upon exercise of Warrants, the full number of shares issuable upon the exercise of all outstanding Warrants. b. The Company covenants that all Warrant Stock which may be issued upon exercise of Warrants will upon issue be fully paid and nonassessable by the Company and free from all taxes, liens, charges and security interests with respect to the issue thereof. Section 9. Obtaining of Governmental Approvals and Stock Exchange Listings. If any Warrant Stock issuable upon the exercise of Warrants require registration or approval of any governmental authority or the taking of any other action under the laws of the United States of America, any state or any political subdivision thereof before such Warrant Stock may be validly and lawfully issued, the Company will in good faith and as expeditiously as possible after surrender of the Warrant Certificates to the Warrant Agent for exercise of Warrants evidenced thereby endeavor to secure such registration or approval or to take such other action, provided that in no event shall such Warrant Stock be issued, and the Company shall have the authority to suspend the exercise of all Warrants, until such registration or approval shall have been obtained or such other action shall have been taken, but all Warrants the exercise of which is requested during any such suspension shall be exercisable at the Exercise Price and upon the other conditions in effect on the date of surrender of the Warrant Certificate and payment of the Exercise Price. If the Company is unable to obtain such registration or approval within a reasonable time, the Company may direct the Warrant Agent to return the Warrant to the Warrant Holder and inform him that such Warrant may not be exercised in such jurisdiction, and the Warrant Agent shall comply with such directions. Section 10. Adjustments of Exercise Price and Either Shares Purchasable or Number of Warrants. The Exercise Price and either the number of Shares purchasable upon exercise of each Warrant or the number of Warrants outstanding shall be subject to adjustment from time to time as provided herein. a. Adjustment of Number of Shares. In case the Company shall at any time issue shares of Common Stock by way of dividend or other distribution to the holders of the outstanding shares of Common Stock of the Company or subdivide or combine the outstanding shares of Common Stock, the Exercise Price shall be proportionately decreased in the case of such issuance (on the day following the date fixed for determining shareholders entitled to receive such dividend or other distribution) or decreased in the case of such subdivision or increased in the case of such combination (on the date that such subdivision or combination shall become effective). b. No Adjustment for Small Amounts. The Company shall not be required to give effect to any adjustment in the Exercise Price unless and until the net effect of one or more adjustments, determined as above provided, shall have required a change of the Exercise Price by at least one cent, but when the cumulative net effect of more than one adjustment so determined shall be to change the actual Exercise Price by at least one cent, such change in the Exercise Price shall thereupon be given effect. c. Number of Shares Adjusted. Upon any adjustment of the Exercise Price, the holder of this Warrant shall thereafter (until another such adjustment) be entitled to purchase, at the new Exercise Price, the number of Shares of Common Stock, calculated to the nearest full share, obtained by multiplying the number of Shares initially issuable upon exercise of this Warrant by the Exercise Price in effect on the date hereof and dividing the product so obtained by the new Exercise Price. d. Officer's Certificate. Whenever the Exercise Price shall be adjusted as required herein, the Company shall forthwith file in the custody of its Secretary or an Assistant Secretary at its principal office, and with its Warrant Agent, an officer's certificate showing the adjusted Exercise Price determined as herein provided and setting forth in reasonable detail the facts requiring such adjustment. Each such officer's certificate shall be made available at all reasonable times for inspection by the Holder and the Company shall, forthwith after each such adjustment, give notice thereof to the Holder. Such certificate shall be conclusive as to the correctness of such adjustment. Section 11. Notices to Warrant Holders. So long as this Warrant shall be outstanding and unexercised (i) if the Company shall pay any dividend or make any distribution upon the Common Stock; or (ii) if the Company shall offer to the holders of Common Stock for subscription or purchase by them any shares of stock of any class or any other rights; or (iii) if any capital reorganization of the Company; reclassification of the capital stock of the Company; or voluntary or involuntary dissolution, liquidation or winding up of the Company shall be effected, then, in any such case, the Company shall cause to be given to the Holder, at least ten calendar days prior to the date specified in (x) or (y) below, as the case may be, a notice containing a brief description of the proposed action and stating the date on which (x) a record is to be taken for the purpose of such dividend, distribution or rights, or (y) such reclassification, reorganization, consolidation, dissolution, liquidation or winding up is to take place and the date, if any is to be fixed, as of which the holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities or other property deliverable upon such reclassification, reorganization, consolidation, merger, conveyance, dissolution, liquidation or winding up. Section 12. Reclassification, Reorganization or Merger. In case of (i) any reclassification, capital reorganization or other change of outstanding shares of Common Stock of the Company (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of an issuance of Common Stock by way of dividend or other distribution or of a subdivision or combination); or (ii) in case the Company should spin-off a subsidiary by distributing to the shareholders of the Company, as a dividend or otherwise, the capital stock of the subsidiary, the Company shall cause effective provision to be made so that the Holder shall have the right thereafter, by exercising this Warrant prior to the Expiration Date, to purchase or acquire the kind and amount of shares of stock and other securities and property receivable upon such reclassification, capital reorganization or other change, consolidation, as if the Holder had exercised this Warrant prior to such transaction. Any such provision shall include provision for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Warrant. The foregoing provisions of this Section shall similarly apply to successive reclassification, capital reorganizations and changes of shares of Common Stock and to successive consolidations, mergers, sales or conveyances. Section 13. Merger or Sale. In case of (i) any consolidation or merger of the Company with or into another corporation (other than a merger with a subsidiary in which merger the Company is the continuing corporation) or (ii) any sale, lease, exchange or other disposition of all or substantially all of the property and assets of the Company not in the usual and regular course of the Company's business and in a transaction or series of transactions requiring shareholder approval under the laws of the State of Colorado, the Company shall cause notice thereof to be given to the Holder at least 30 calendar days prior to the anticipated date of closing of such transaction and, notwithstanding any other provisions of this Agreement, the Warrant shall expire upon the completion of such transaction to the extent not exercised prior to such transaction closing. Section 14. No Fractional Shares. No fractional shares or scrip representing fractional shares will be issued upon exercise of this Warrant. With respect to any fraction of a share called for upon exercise hereof, the Company shall pay to the Holder an amount in cash equal to such fraction multiplied by the then current fair market value per Share determined by the Company. Section 15. Notice to Warrant Holders. Any notice required to be given to the Holder shall be deemed to have been given if in writing and upon deposit in the United States mail, with postage fully prepaid, and addressed to the Holder at the registered address maintained on the books of the Company or the Warrant Agent. Any notice or other communication to the Company shall be deemed to have been given or to be effective for any purpose only upon actual receipt thereof by the Company at its principal office or by the Warrant Agent, as the case may be. The form of Warrant Certificate need not be changed because of any adjustment in the Exercise Price, the number of Shares purchasable upon the exercise of a Warrant or the number of Warrants outstanding and Warrant Certificates issued after any such adjustment may state the same Exercise Price, the same number of Warrants and the same number of Shares purchasable upon exercise of a Warrant as are stated in the Warrant Certificates issued before such adjustment as if such adjustment had not occurred. However, the Company may at any time with the approval of the Warrant Agent make any change in the form of Warrant Certificate that it may deem appropriate and that does not affect the substance thereof and any Warrant Certificates thereafter issued or countersigned, whether in exchange or substitution for an outstanding Warrant Certificate or otherwise, may be in the form as so changed. Section 16. Rights of Warrant Holders. a. No Warrant Holder, as such, shall have any rights of a stockholder of the Company, either at law or equity, and the rights of the Warrant Holders, as such, are limited to those rights expressly provided in this Agreement or in the Warrant Certificates. b. The Company and the Warrant Agent may treat the registered Warrant Holder in respect of any Warrant Certificate as the absolute owner thereof for all purposes notwithstanding any notice to the contrary. Section 17. Warrant Agent. a. The Company hereby appoints the Warrant Agent to act as the agent of the Company in accordance with this Agreement and the Warrant Agent hereby accepts such appointment. b. The Warrant Agent undertakes the duties and obligations imposed by this Agreement upon the following terms and conditions by all of which the Company and every Warrant Holder, by acceptance of any Warrants, shall be bound: (1) The statements contained in this Agreement and in the Warrant Certificates shall be taken as statements of the Company and the Warrant Agent assumes no responsibility for the correctness of any of the same except such as describe the Warrant Agent or action taken or to be taken by it. (2) The Warrant Agent shall not be responsible for any failure of the Company to comply with any of the covenants contained in this Agreement or in the Warrant Certificates to be complied with by the Company. (3) The Warrant Agent may consult at any time with counsel satisfactory to it (who may be counsel for the Company) and the Warrant Agent shall incur no liability or responsibility to the Company or to any Warrant Holder in respect of any action taken, suffered or omitted by it hereunder in good faith and in accordance with the opinion or the advice of such counsel, provided the Warrant Agent shall have exercised reasonable care in the selection and continued employment of such counsel. (4) The Warrant Agent shall incur no liability or responsibility to the Company or to any Warrant Holder for any action taken in reliance on any notice, resolution, waiver, consent, order, certificate or other paper, document or instrument believed by it to be genuine and to have been signed, sent or presented by the proper party or parties. (5) The Company agrees to pay to the Warrant Agent reasonable compensation for all services rendered by the Warrant Agent in the execution of this Agreement including fees for exercise of the Warrants, to reimburse the Warrant Agent for all expenses, taxes and governmental charges and other charges of any kind and nature incurred by the Warrant Agent in the execution of this Agreement and to indemnify the Warrant Agent and save it harmless against any and all liabilities, including judgments, costs and counsel fees, for anything done or omitted by the Warrant Agent in the execution of this Agreement except as a result of the Warrant Agent's negligence, bad faith or willful misconduct. (6) The Warrant Agent shall be under no obligation to institute any action, suit or legal proceeding or to take any other action likely to involve expense unless the Company or one or more Warrant Holders shall furnish the Warrant Agent with reasonable security and indemnity for any costs and expenses which may be incurred, but this provision shall not affect the power of the Warrant Agent to take such action as the Warrant Agent may consider proper, whether with or without any such security or indemnity. All rights of action under this Agreement or under any of the Warrants may be enforced by the Warrant Agent without the possession of any of the Warrant Certificates or the production thereof at any trial or other proceeding relative thereto, and any such action, suit or proceeding instituted by the Warrant Agent shall be brought in its name as Warrant Agent, and any recovery of judgment shall be for the ratable benefit of the Warrant Holders as their respective rights or interests may appear. (7) The Warrant Agent and any stockholder, director, officer or employee of the Warrant Agent may buy, sell or deal in any of the Warrants or other securities of the Company or become pecuniarily interested in any transaction in which the Company may be interested, or contract with or lend money to the Company or otherwise as fully and freely as though it were not Warrant Agent under this Agreement. Nothing herein shall preclude the Warrant Agent from acting in any other capacity for the Company or for any other legal entity. (8) The Warrant Agent shall act hereunder solely as agent for the Company, and its duties shall be determined solely by the provisions hereof. Section 18. Merger, Consolidation or Change of Name of Warrant Agent. a. Any corporation into which the Warrant Agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Warrant Agent shall be a party, or any corporation succeeding to the transfer agency business of the Warrant Agent, shall be the successor to the Warrant Agent hereunder without the execution or filing of any paper or any further act on the part of the parties hereto, except that the prior written consent thereto of the Company shall first be obtained. In case at the time such successor to the Warrant Agent shall succeed to the agency created by this Agreement, and in case at that time any of the Warrant Certificates shall have been countersigned but not delivered, any such successor to the Warrant Agent may adopt the countersignature of the original Warrant Agent; and in case at that time any of the Warrant Certificates shall not have been countersigned, any successor to the Warrant Agent may countersign such Warrant Certificates either in the name of the predecessor Warrant Agent or in the name of the successor Warrant Agent; and in all such cases such Warrant Certificates shall have the full force provided in the Warrant Certificates and in this Agreement. b. In case at any time the name of the Warrant Agent shall be changed and at such time any of the Warrant Certificates shall have been countersigned but not delivered, the Warrant Agent may adopt the countersignature under its prior name; and in case at that time any of the Warrant Certificates shall not have been countersigned, the Warrant Agent may countersign such Warrant Certificates either in its prior name or in its changed name; and in all such cases such Warrant Certificates shall have the full force provided in the Warrant Certificates and in this Agreement. Section 19. Change of Warrant Agent. The Warrant Agent may resign and be discharged from its duties under this Agreement by giving to the Company notice in writing, and by giving notice in writing to each Warrant Holder at his address appearing in the Warrant register, specifying a date when such resignation shall take affect, which notice shall be sent at least 30 days prior to the date so specified and which notice shall be paid for by the Company. If the Warrant Agent shall resign or shall otherwise become incapable of acting, the Company shall appoint a successor to the Warrant Agent. If the Company shall fail to make such appointment within a period of 30 days after it has been notified in writing of such resignation or incapacity by the resigning or incapacitated Warrant Agent or by any Warrant Holder, then any Warrant Holder may apply to any court of competent jurisdiction for the appointment of a successor to the Warrant Agent. Pending appointment of a successor to the Warrant Agent, either by the Company or by such court, the duties of the Warrant Agent shall be carried out by the Company. Any successor Warrant Agent, whether appointed by the Company or by such a court, shall be a transfer agent registered pursuant to Section 17A(c) of the Securities Exchange Act of 1934, as amended. After appointment the successor Warrant Agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named as Warrant Agent without further act or deed and the former Warrant Agent shall deliver and transfer to the successor Warrant Agent any property at the time held by it hereunder, and execute and deliver any further assurance, conveyance, act or deed necessary for the purpose. Failure to give any notice provided for in this Section, however, or any defect therein, shall not affect the legality or validity of the resignation or removal of the Warrant Agent or the appointment of the successor Warrant Agent, as the case may be. Section 20. Notices. Any notice or demand authorized by this Agreement to be given or made by the Warrant Agent or by any Warrant Holder to or on the Company shall be sufficiently given or made only if in writing and upon actual receipt at the following address (until another address is filed in writing by the Company with the Warrant Agent): Good Times Restaurants Inc. 8620 Wolff Court, Suite 330 Westminster, CO 80030 Attention:____________________ Any notice or demand authorized by this Agreement to be given or made by any Warrant Holder or by the Company to or on the Warrant Agent shall be sufficiently given or made if sent by mail, certified or registered, postage prepaid, addressed (until another address is filed in writing by the Warrant Agent with the Company), as follows: American Securities Transfer & Trust, Incorporated 938 Quail Street, Suite 101 Lakewood, CO 80215 Attention:_____________________ Any distribution, notice or demand required or authorized by this Agreement to be given or made by the Company or the Warrant Agent to or on the Warrant Holders shall be sufficiently given or made if in writing and upon deposit in the United States mail, first-class or registered, postage prepaid, addressed to the Warrant Holders at their last known addresses as they shall appear on the registration books for the Warrant Certificates maintained by the Warrant Agent. Section 21. Supplements and Amendments. The Company and the Warrant Agent may from time to time supplement or amend this Agreement without the approval of any Warrant Holders in order to cure any ambiguity or to correct or supplement any provision contained herein which may be defective or inconsistent with any other provision herein, or to make any other change which the Company and the Warrant Agent may deem necessary or desirable and which shall not adversely affect the interests of the Warrant Holders. Section 22. Successors. All the covenants and provisions of this Agreement by or for the benefit of the Company or the Warrant Agent shall bind and inure to the benefit of their respective successors and assigns hereunder. Section 23. Termination. This Agreement shall terminate at the close of business on the Expiration Date or such earlier date upon which all Warrants have been exercised. The provisions of Section 11 shall survive such terminations. Section 24. Governing Law. This Agreement and each Warrant Certificate issued hereunder shall be deemed to be a contract made under the laws of the State of Colorado and for all purposes shall be construed in accordance with the laws of said State. Section 25. Benefits of This Agreement. Nothing in this Agreement shall be construed to give to any person or corporation other than the Company, the Warrant Agent and the Warrant Holders any legal or equitable right, remedy or claim under this Agreement; but this Agreement shall be for the sole and exclusive benefit of the Company, the Warrant Agent and the Warrant Holders. Section 26. Agreement Available to Warrant Holders. A copy of this Agreement shall be available at all reasonable times at the office of the Warrant Agent for inspection by any Warrant Holder. As a condition of such inspection, the Warrant Agent may require any Warrant Holder to submit his Warrant Certificate for inspection. Section 27. Counterparts. This Agreement may be executed in any number of counterparts, each of such counterparts shall for all purposes be deemed to be an original and all such counterparts shall together constitute but one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, all as of the day and year first above written. GOOD TIMES RESTAURANTS INC., [seal] a Nevada corporation By: /s/ Boyd E. Hoback, President Boyd E. Hoback, President ATTEST: /s/ Sue Knutson , Secretary AMERICAN SECURITIES TRANSFER & TRUST, INCORPORATED, an independent stock transfer company [seal] By:/s/ Gregory D. Tubbs, Vice President Gregory D. Tubbs, Vice President ATTEST: /s/ Lori S. Zimmerman , Assistant Secretary EX-10.13 6 SERIES A CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT by and among GOOD TIMES RESTAURANTS INC. and THE BAILEY COMPANY Dated as of May 31, 1996 TABLE OF CONTENTS Page ARTICLE ITHE PREFERRED SHARES. . . . . . . . . . . . . . . . . .1 SECTION 1.01 Issuance, Sale and Delivery of the Preferred Shares . . . . . . . . . . . . . . . . . . . . . . . .1 ARTICLE IIREPRESENTATIONS AND WARRANTIES OF THE COMPANY. . . . .2 SECTION 2.01 Organization, Qualifications and Corporate Power. . . . . . . . . . . . . . . . . . . . . . . . .2 SECTION 2.02 Authorization of Agreements, Etc. . . . . . .2 SECTION 2.03 Validity. . . . . . . . . . . . . . . . . . .3 SECTION 2.04 Authorized Capital Stock. . . . . . . . . . .3 SECTION 2.05 Litigation; Compliance with Law . . . . . . .4 SECTION 2.06 Subsidiaries. . . . . . . . . . . . . . . . .4 SECTION 2.07 Loans and Advances. . . . . . . . . . . . . .5 SECTION 2.08 Assumptions, Guaranties, Etc, of Indebtedness of Other Person. . . . . . . . . . . . . . . . . . . .5 SECTION 2.09 Governmental Approval . . . . . . . . . . . .5 SECTION 2.10 Agreements. . . . . . . . . . . . . . . . . .5 SECTION 2.11 Undisclosed Liabilities . . . . . . . . . . .6 SECTION 2.12 Disclosure. . . . . . . . . . . . . . . . . .6 SECTION 2.13 Offering of the Preferred Shares. . . . . . .6 SECTION 2.14 Brokers . . . . . . . . . . . . . . . . . . .7 ARTICLE IIIREPRESENTATIONS AND WARRANTIES OF THE PURCHASER . . .7 ARTICLE IVCONDITIONS TO THE OBLIGATIONS OF THE PURCHASER . . . .8 ARTICLE VCONDITIONS TO THE OBLIGATIONS OF THE COMPANY. . . . . 13 ARTICLE VICOVENANTS OF THE COMPANY . . . . . . . . . . . . . . 13 SECTION 6.01 Financial Statements, Reports, Etc. . . . . 13 SECTION 6.02 Right of Participation. . . . . . . . . . . 14 SECTION 6.03 Reserve for Conversion Shares . . . . . . . 15 SECTION 6.04 Corporate Existence . . . . . . . . . . . . 16 SECTION 6.05 Properties, Business, Insurance . . . . . . 16 SECTION 6.06 Inspection, Consultation and Advice . . . . 16 SECTION 6.07 Restrictive Agreements Prohibited . . . . . 16 SECTION 6.08 Transactions with Affiliates. . . . . . . . 16 SECTION 6.09 Use of Proceeds . . . . . . . . . . . . . . 17 SECTION 6.10 Board of Directors Meeting. . . . . . . . . 17 SECTION 6.11 Compensation Committee. . . . . . . . . . . 17 SECTION 6.12 Capital Expenditures. . . . . . . . . . . . 18 SECTION 6.13 Employment. . . . . . . . . . . . . . . . . 18 SECTION 6.14 Investments . . . . . . . . . . . . . . . . 18 SECTION 6.15 Maintenance of Properties . . . . . . . . . 18 SECTION 6.16 D&O Insurance . . . . . . . . . . . . . . . 18 SECTION 6.17 By-laws . . . . . . . . . . . . . . . . . . 18 SECTION 6.18 Activities of Subsidiaries. . . . . . . . . 18 SECTION 6.19 Compliance with Laws. . . . . . . . . . . . 19 SECTION 6.20 Keeping of Records and Books of Account . . 19 SECTION 6.21 Change in Nature of Business. . . . . . . . 19 ARTICLE VIIBREACH OF REPRESENTATIONS, WARRANTIES AND COVENANTS 19 SECTION 7.01 Redemption. . . . . . . . . . . . . . . . . 19 ARTICLE VIIIMISCELLANEOUS. . . . . . . . . . . . . . . . . . . 19 SECTION 8.01 Survival of Agreements. . . . . . . . . . . 19 SECTION 8.02 Brokerage . . . . . . . . . . . . . . . . . 19 SECTION 8.03 Parties in Interest . . . . . . . . . . . . 20 SECTION 8.04 Assignment. . . . . . . . . . . . . . . . . 20 SECTION 8.05 Notices . . . . . . . . . . . . . . . . . . 21 SECTION 8.06 Entire Agreement. . . . . . . . . . . . . . 21 SECTION 8.07 Counterparts. . . . . . . . . . . . . . . . 21 SECTION 8.08 Amendments. . . . . . . . . . . . . . . . . 21 SECTION 8.09 Severability. . . . . . . . . . . . . . . . 21 SECTION 8.10 Titles and Subtitles. . . . . . . . . . . . 21 SECTION 8.11 Governing Law . . . . . . . . . . . . . . . 21 SCHEDULE I Disclosure Schedule SCHEDULE II Other Securities SCHEDULE III Security Holders INDEX TO EXHIBITS Exhibit A Form of Registration Rights Agreement Exhibit B Articles and all amendments thereto THIS SERIES A CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT (this "Agreement"), dated as of May __, 1996, is by and between Good Times Restaurants Inc., a Nevada corporation (the "Company"), and The Bailey Company, a Colorado limited partnership ("Purchaser"). WHEREAS, the Company wishes to issue and sell to the Purchaser an aggregate of 1,000,000 shares (the "Preferred Shares") of the authorized but unissued Series A Convertible Preferred Stock, $0.01 par value, of the Company (the "Series A Convertible Preferred Stock"); and WHEREAS, the Purchaser wishes to purchase the Preferred Shares on the terms and subject to the conditions set forth in this Agreement; NOW, THEREFORE, in consideration of the premises and the mutual covenants contained in this Agreement, the parties agree as follows: ARTICLE I THE PREFERRED SHARES SECTION 1.01 Issuance, Sale and Delivery of the Preferred Shares. The Company agrees to issue and sell to the Purchaser, and the Purchaser hereby agrees to purchase from the Company, an aggregate of 1,000,000 Preferred Shares at the purchase price of $1.00 per share for an aggregate purchase price of $1,000,000 (the "Purchase Price"). Purchaser shall purchase from the Company, and the Company shall sell to Purchaser, the Preferred Shares in three installments (the "Installments") as follows: (i) on the later to occur of June 1, 1996 and the first day of the month immediately following the approval by the Company's shareholders of the transactions contemplated hereby (the "First Installment Date"), Purchaser shall purchase 500,000 of the Preferred Shares for $250,000 in cash by applying the proceeds from the collection of the $250,000 owed by the Company to Purchaser pursuant to that certain Promissory Note made by the Company and payable to Purchaser dated March 1, 1996 (the "Note"); (ii) on the date that is three (3) months after the First Installment Date (the "Second Installment Date"), Purchaser shall buy 250,000 of the Preferred Shares for $250,000; and (iii) on the date that is three (3) months after the Second Installment Date (the "Third Installment Date"), Purchaser shall buy 250,000 of the Preferred Shares for $250,000 (each, an "Installment Date"). On each Installment Date, the Company shall issue and deliver to the Purchaser a stock certificate or certificates in definitive form, registered in the name of the Purchaser or its designee, representing the Preferred Shares being purchased at such time. As payment in full for the Preferred Shares being purchased by Purchaser on each Installment Date and against delivery of the stock certificate or certificates therefor, the Purchaser shall transfer to the account of the Company by wire transfer or other immediately available funds the portion of the Purchase Price attributable to such Installment. ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants to the Purchaser that, except as set forth in the Disclosure Schedule attached as Schedule I (which Disclosure Schedule makes explicit reference to the particular representation or warranty as to which exception is taken, which in each case shall constitute the sole representation and warranty as to which such exception shall apply): SECTION 2.01 Organization, Qualifications and Corporate Power. (a) The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Nevada and is duly licensed or qualified to transact business as a foreign corporation and is in good standing in each jurisdiction in which the nature of the business transacted by it or the character of the properties owned or leased by it requires such licensing or qualification. The Company has the corporate power and authority to own and hold its properties and to carry on its business as now conducted and as proposed to be conducted, to execute, deliver and perform this Agreement and the Registration Rights Agreement with the Purchaser in the form attached hereto as Exhibit A (the "Registration Rights Agreement"), and all agreements ancillary thereto, to issue, sell and deliver the Preferred Shares and to issue and deliver the shares of Common Stock, $0.001 par value, of the Company ("Common Stock") issuable upon conversion of the Preferred Shares (the "Conversion Shares"). (b) Except for Good Times Drive Thru Inc. (the "Subsidiary"), the Company does not (i) own of record or beneficially, directly or indirectly, (A) any shares of capital stock or securities convertible into capital stock of any other corporation or (B) except as disclosed on Schedule II, any participating interest in any partnership, joint venture or other non-corporate business enterprise, or (ii) control, directly or indirectly, any other entity. SECTION 2.02 Authorization of Agreements, Etc. (a) Other than obtaining shareholder approval for the transactions contemplated hereby, which the Company shall make a good faith effort to obtain prior to the first Installment, the execution and delivery by the Company of this Agreement and the Registration Rights Agreement, and the performance by the Company of its obligations hereunder and thereunder, the issuance, sale and delivery of the Preferred Shares and the issuance and delivery of the Conversion Shares, have been duly authorized by all requisite corporate action and will not violate any provision of law, any order of any court or other agency of government, the Articles of Incorporation of the Company, as amended (the "Articles"), or the By-laws of the Company, as amended, or any provision of any indenture, agreement or other instrument to which the Company, or any of its properties or assets is bound, or conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under any such indenture, agreement or other instrument, or result in the creation or imposition of any lien, charge, restriction, claim or encumbrance of any nature whatsoever upon any of the properties or assets of the Company. (b) If the shareholders of the Company approve the transactions contemplated hereby, the Preferred Shares will be duly authorized and, when issued in accordance with this Agreement, will be validly issued, fully paid and nonassessable shares of Series A Convertible Preferred Stock with no personal liability attaching to the ownership thereof and will be free and clear of all liens, charges, restrictions, claims and encumbrances imposed by or through the Company except as set forth in the Registration Rights Agreement. If the shareholders of the Company approve the transactions contemplated hereby, the Conversion Shares will be duly reserved prior to the first Installment for issuance upon conversion of the Preferred Shares and, when so issued, will be duly authorized, validly issued, fully paid and nonassessable shares of Common Stock with no personal liability attaching to the ownership thereof and will be free and clear of all liens, charges, restrictions, claims and encumbrances imposed by or through the Company except as set forth in the Registration Rights Agreement. Neither the issuance, sale or delivery of the Preferred Shares nor the issuance or delivery of the Conversion Shares is subject to any preemptive right of stockholders of the Company or to any right of first refusal or other right in favor of any person. SECTION 2.03 Validity. This Agreement has been duly executed and delivered by the Company and constitutes the legal, valid and binding obligation of the Company, enforceable in accordance with its terms. The Registration Rights Agreement, when executed and delivered in accordance with this Agreement, will constitute the legal, valid and binding obligation of the Company, enforceable in accordance with its respective terms. SECTION 2.04 Authorized Capital Stock. If the shareholders of the Company approve the transactions contemplated hereby, as of the First Installment Date the authorized capital stock of the Company shall consist of (i) 10,000,000 shares of Series A Convertible Preferred Stock which is the only class of preferred stock of the Company, and (ii) 10,000,000 shares of Common Stock. As of the date hereof, 6,314,824 shares of Common Stock are validly issued and outstanding, fully paid and nonassessable with no personal liability attaching to the ownership thereof and no shares of Preferred Stock have been issued. The holders of subscriptions, warrants, options, convertible securities, and other rights (contingent or other) to purchase or otherwise acquire equity securities of the Company, and the number of shares of Common Stock and the number of such subscriptions, warrants, options, convertible securities, and other such rights held by each, are as set forth in the attached Schedule III. If the shareholders of the Company approve the transactions contemplated hereby, the designations, powers, preferences, rights, qualifications, limitations and restrictions in respect of each class and series of authorized capital stock of the Company will be, as of the First Installment Date, as set forth in the Articles, a copy of which is attached hereto as Exhibit B, and all such designations, powers, preferences, rights, qualifications, limitations and restrictions are valid, binding and enforceable and in accordance with all applicable laws. Except as set forth in the attached Schedule III, (i) no subscription, warrant, option, convertible security, or other right (contingent or other) to purchase or otherwise acquire equity securities of the Company is authorized or outstanding, and (ii) except as provided herein there is no commitment by the Company to issue shares, subscriptions, warrants, options, convertible securities, or other such rights or to distribute to holders of any of its equity securities any evidence of indebtedness or asset. Except as provided for in the Articles or as set forth in the attached Schedule III, the Company does not have any obligation (contingent or other) to purchase, redeem or otherwise acquire any of its equity securities or any interest therein or to pay any dividend or make any other distribution in respect thereof. There are no voting trusts or agreements, stockholders' agreements, pledge agreements, buy-sell agreements, rights of first refusal, preemptive rights or proxies relating to any securities of the Company. All of the outstanding securities of the Company were issued in compliance with all applicable Federal and state securities laws. SECTION 2.05 Litigation; Compliance with Law. There is no (i) action, suit, claim, proceeding or investigation pending or, to the best knowledge of the Company, threatened against or affecting the Company or any principal of any of the foregoing, at law or in equity, or before or by any Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, (ii) arbitration proceeding relating to the Company pending under collective bargaining agreements or otherwise, or (iii) governmental inquiry pending or, to the best of the knowledge of the Company, threatened against or affecting the Company (including without limitation any inquiry as to the qualification of the Company to hold or receive any license or permit), and to the best of the Company's knowledge there is no basis for any of the foregoing. The Company has not received any opinion or memorandum or legal advice from legal counsel to the effect that it is exposed, from a legal standpoint, to any liability or disadvantage which may be material to its business, prospects, financial condition, operations, property or affairs. The Company is not in default with respect to any order, writ, injunction or decree known to or served upon the Company of any court or of any Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign. There is no action or suit by the Company pending or threatened against others. The Company has complied with all laws, rules, regulations and orders applicable to its business, operations, properties, assets, products and services the noncompliance with which would have a material adverse effect on the Company; the Company has all necessary permits, licenses and other authorizations required to conduct its business as conducted and as proposed to be conducted; and the Company has been operating its business pursuant to and in compliance with the terms of all such permits, licenses and other authorizations. There is no existing law, rule, regulation or order, and the Company after due inquiry is not aware of any proposed law, rule, regulation or order, whether Federal, state, county or local, which would prohibit or restrict the Company from, or otherwise materially adversely affect the Company in, conducting its business in any jurisdiction in which it is now conducting business or in which it proposes to conduct business. SECTION 2.06 Subsidiaries. The Subsidiary is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Colorado and is duly licensed or qualified to transact business as a foreign corporation and is in good standing in each jurisdiction in which it is required to be licensed or qualified. The authorized stock of the Subsidiary consists of 10,000,000 shares of common stock, 999,900 shares of which are issued and outstanding. All of the issued and outstanding shares of its common stock have been duly authorized and are validly issued, fully paid and non-assessable. The Company owns all of the issued and outstanding shares of common stock of the Subsidiary, free and clear of any restrictions on transfer (other than restrictions under the Securities Act and state securities laws). There are no outstanding or authorized options, warrants, purchase rights, subscription rights, conversion rights, exchange rights, or other contracts or commitments that could require the Subsidiary to issue, sell, or otherwise cause to become outstanding any of its own capital stock. There are no outstanding stock appreciation, phantom stock, profit participation, or similar rights with respect to the Subsidiary. There are no voting trusts, proxies, or other agreements or understandings with respect to the voting of any capital stock of the Subsidiary. SECTION 2.07 Loans and Advances. Except as set forth in the Schedule I, the Company does not have any outstanding loans or advances to any person and is not obligated to make any such loans or advances. SECTION 2.08 Assumptions, Guaranties, Etc, of Indebtedness of Other Person. The Company has not assumed, guaranteed, endorsed or otherwise become directly or contingently liable on any indebtedness of any other person, business or entity (including, without limitation, liability by way of agreement, contingent or otherwise, to purchase, to provide funds for payment, to supply funds to or otherwise invest in the debtor, or otherwise to assure the creditor against loss), except for guaranties by endorsement of negotiable instruments for deposit or collection in the ordinary course of business. SECTION 2.09 Governmental Approval. Subject to the accuracy of the representations and warranties of the Purchaser set forth in Article III of this Agreement, no registration or filing with, or consent or approval of or other action by, any Federal, state or other governmental agency or instrumentality is or will be necessary for the valid execution, delivery and performance by the Company of this Agreement or the Registration Rights Agreement, the issuance, sale and delivery of the Preferred Shares or, upon conversion thereof, the issuance and delivery of the Conversion Shares, other than (i) filings pursuant to state securities laws (all of which filings have been made by the Company, other than those which are required to be made after the date hereof and which will be duly made on a timely basis) in connection with the sale of the Preferred Shares, and (ii) with respect to the Registration Rights Agreement, the registration of the shares covered thereby with the Securities and Exchange Commission (the "Commission") and filings pursuant to state securities laws. SECTION 2.10 Agreements. Consummation of the transactions contemplated hereby (i) will not affect the validity of any material contract, agreement, commitment, license or other understanding or arrangement (collectively, "Contracts") to which the Company is a party; and (ii) will not entitle any parties related to the Company (including without limitation officers and directors of the Company) to any payments, bonus or other benefits that may be considered "golden parachute" payments ("Golden Parachute Payments") or any payments or other benefits made or granted in connection with the transactions contemplated hereby. The payment by the Company of Golden Parachute Payments, if any, shall be subordinate to any and all payments to the holders of the Preferred Shares. Notwithstanding the foregoing, the Company shall be free to perform its obligations pursuant to its current agreement with Boyd E. Hoback if Mr. Hoback is terminated by the Company without "cause", unless such termination occurs within 60 days of a determination by the Board of Directors of the Company to dissolve the Company; provided, however, this Section 2.10 shall not in any way modify or alter the Company's agreement with Mr. Hoback. SECTION 2.11 Undisclosed Liabilities. Neither the Company or the Subsidiary has any liability (whether known or unknown, whether asserted or unasserted, whether absolute or contingent, whether accrued or unaccrued) except for (i) liabilities set forth on the Company's most recent balance sheet and (ii) liabilities which have arisen after the date of the most recent balance sheet in the ordinary course of business (none of which results from, arises out of, relates to, or was caused by any breach of contract). SECTION 2.12 Disclosure. To the best of the Company's knowledge (i) neither this Agreement, nor any Schedule or Exhibit to this Agreement, or ancillary agreements hereto or thereto (the "Acquisition Documents ") contains an untrue statement of a material fact or omits a material fact necessary to make the statements contained herein or therein not misleading, (ii) none of the statements, documents, certificates or other items prepared or supplied by the Company with respect to the transactions contemplated hereby contains an untrue statement of a material fact or omits a material fact necessary to make the statements contained therein not materially misleading, and (iii) there is no fact which the Company has not disclosed to the Purchaser and its counsel in writing and of which the Company is aware which materially and adversely affects or could materially and adversely affect the business, financial condition, operations, property or affairs of the Company. The financial projections and other estimates provided to Purchaser by the Company were prepared by the Company based on the Company's experience in the industry and on assumptions of fact and opinion as to future events which the Company, at the date of their preparation, believed to be reasonable. As of the date hereof no facts have come to the attention of the Company which would, in its opinion, require it to revise or amplify the assumptions underlying such projections and other estimates or the conclusions derived therefrom. SECTION 2.13 Offering of the Preferred Shares. Neither the Company nor any person authorized or employed by the Company as agent, broker, dealer or otherwise in connection with the offering or sale of the Preferred Shares, or any security of the Company similar to the Preferred Shares, has offered the Preferred Shares or any such similar security for sale to, or solicited any offer to buy the Preferred Shares or any such similar security from, or otherwise approached or negotiated with respect thereto with, any person or persons so as to subject the offering, issuance or sale of the Preferred Shares to the registration provisions of the Securities Act; and neither the Company nor any person acting on its behalf has taken or will take any other action (including, without limitation, any offer, issuance or sale of any security of the Company under circumstances which might require the integration of such security with Preferred Shares under the Securities Act or the rules and regulations of the Commission thereunder), so as to subject the offering, issuance or sale of the Preferred Shares to the registration provisions of the Securities Act. SECTION 2.14 Brokers. The Company does not have any contract, arrangement or understanding with any broker, finder or similar agent with respect to the sale of the Preferred Shares contemplated by this Agreement. For purposes of this Article II, "knowledge of the Company" means that nothing has come to the attention of either the Company that (i) gives the Company actual knowledge, or (ii) is sufficient to put the Company on notice of, or cause the Company to make further inquiry into, the existence or absence of any material information or fact bearing on the matter. ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE PURCHASER The Purchaser represents and warrants to the Company that: (a) it is an "accredited investor" within the meaning of Rule 501 under the Securities Act and was not organized for the specific purpose of acquiring the Preferred Shares; (b) it has sufficient knowledge and experience in investing in companies similar to the Company in terms of the Company's stage of development so as to be able to evaluate the risks and merits of its investment in the Company and it is able financially to bear the risks thereof; (c) it has had an opportunity to discuss the Company's business, management and financial affairs with the Company's management; (d) except as permitted by the Registration Rights Agreement, the Preferred Shares being purchased by it are being acquired for its own account and for the purpose of investment and not with a view to or for sale in connection with any distribution thereof; (e) it understands that (i) the Preferred Shares and the Conversion Shares have not been registered under the Securities Act by reason of their issuance in a transaction exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof or Rule 505 or 506 promulgated under the Securities Act, (ii) the Preferred Shares and, upon conversion thereof, the Conversion Shares must be held indefinitely unless a subsequent disposition thereof is registered under the Securities Act or is exempt from such registration, (iii) the Preferred Shares and the Conversion Shares will bear a legend to such effect, and (iv) the Company will make a notation on its transfer books to such effect; and (f) if it sells any Conversion Shares pursuant to Rule 144A promulgated under the Securities Act, it will take all necessary steps in order to perfect the exemption from registration provided thereby, including (i) obtaining on behalf of the Company information to enable the Company to establish a reasonable belief that the purchaser is a qualified institutional buyer and (ii) advising such purchaser that Rule 144A is being relied upon with respect to such resale. ARTICLE IV CONDITIONS TO THE OBLIGATIONS OF THE PURCHASER The obligation of the Purchaser to purchase and pay for the Preferred Shares being purchased by it on each Installment Date is, at its option, subject to the satisfaction, on or before such Installment Date, of the following conditions: (a) Opinions of Counsel. The Purchaser shall have received from counsel for the Company on or before June 5, 1996 an opinion dated as of the date hereof, in form and scope satisfactory to Purchaser and its counsel, to the effect that: (i) The Company is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation. The Company is duly licensed or qualified to transact business as a foreign corporation and is in good standing in each jurisdiction in which it owns or leases real property. The Company has the corporate power and authority to own and hold its properties and to carry on its business as currently conducted and as proposed to be conducted. The Company has the corporate power and authority to execute, deliver and perform this Agreement and the Registration Rights Agreement, to issue, sell and deliver the Preferred Shares and, upon conversion thereof, to issue and deliver the Conversion Shares. (ii) This Agreement and the Registration Rights Agreement have been duly authorized, executed and delivered by the Company and constitute the legal, valid and binding obligations of the Company, enforceable in accordance with their respective terms (subject, as to enforcement of remedies, to the discretion of courts in awarding equitable relief and to applicable bankruptcy, reorganization, insolvency, moratorium and similar laws affecting the rights of creditors generally), except that such counsel need not express any opinion as to the validity or enforceability of the indemnification and contribution provisions of the Registration Rights Agreement. (iii) The execution and delivery by the Company of this Agreement and the Registration Rights Agreement, the performance by the Company of its obligations hereunder and thereunder, the issuance, sale and delivery of the Preferred Shares and, upon conversion thereof, the issuance and delivery of the Conversion Shares, will not violate any provision of law, the Articles or By-laws, each as amended, of the Company, any order of any court or other agency of government or any indenture, agreement or other instrument known to such counsel to which the Company, or any of their respective properties or assets is bound, or conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under any such indenture, agreement or other instrument, or result in the creation or imposition of any lien, charge, restriction, claim or encumbrance of any nature whatsoever upon any of the properties or assets of the Company. In rendering the foregoing opinion, such counsel may assume full disclosure to Purchaser of all material facts and, with respect to performance by the Company of its obligations under the Registration Rights Agreement, may assume compliance by the Company at such time with the registration requirements of the Securities Act and with applicable state securities laws and may disclaim any opinion as to the validity or enforceability of the indemnification and contribution provisions of the Registration Rights Agreement. (iv) The authorized capital stock of the Company consists of (i) 10,000,000 shares of Series A Convertible Preferred Stock which is the only class of preferred stock of the Company, and (ii) 10,000,000 shares of Common Stock. As of the date hereof, 6,314,824 shares of Common Stock are validly issued, fully paid and nonassessable with no personal liability attaching to the ownership thereof and no shares of Preferred Stock have been issued, except as provided for herein. As of the date hereof, holders of record of subscriptions, warrants, options, convertible securities, and other rights (contingent or other) to purchase or otherwise acquire equity securities of the Company, and the number of shares of Common Stock and the number of such subscriptions, warrants, options, convertible securities, and other such rights held by each, are as set forth in Schedule III. The designations, powers, preferences, rights, qualifications, limitations and restrictions in respect of each class or series of authorized capital stock of the Company are as set forth in the Articles, and all such designations, powers, preferences, rights, qualifications, limitations and restrictions are valid, binding and enforceable and in accordance with all applicable laws (subject, as to enforcement, to the discretion of courts in awarding equitable relief and to applicable bankruptcy, reorganization, insolvency, moratorium and similar laws affecting the rights of creditors generally). Except as set forth in Schedule III, to the knowledge of such counsel, but without independent investigation, as of the date hereof no subscription, warrant, option, convertible security, or other right (contingent or other) to purchase or acquire equity securities of the Company is authorized or outstanding and there is no commitment by the Company to issue shares, subscriptions, warrants, options, convertible securities, or other such rights or to distribute to holders of any of its equity securities any evidence of indebtedness or asset. Except as set forth in Schedule III or as provided for in the Articles, to the knowledge of such counsel, but without independent investigation, the Company has no obligation (contingent or other) to purchase, redeem or otherwise acquire any of its equity securities or any interest therein or to pay any dividend or make any other distribution in respect thereof. (v) The Preferred Shares and the Conversion Shares have been duly authorized. The issuance, sale and delivery of the Preferred Shares and the issuance and delivery of the Conversion Shares upon conversion of the Preferred Shares have been duly authorized by all required corporate action; the Preferred Shares have been validly issued, are fully paid and nonassessable with no personal liability attaching to the ownership thereof and, to the knowledge of such counsel, are free and clear of all liens, charges, restrictions, claims and encumbrances imposed by or through the Company except as set forth in the Registration Rights Agreement; and the Conversion Shares have been duly reserved for issuance upon conversion of the Preferred Shares and, when so issued, will be validly issued, fully paid and nonassessable with no personal liability attaching to the ownership thereof and, to the knowledge of such counsel, will be free and clear of all liens, charges, restrictions, claims and encumbrances imposed by or through the Company except as set forth in the Registration Rights Agreement. Neither the issuance, sale or delivery of the Preferred Shares nor the issuance or delivery of the Conversion Shares is subject to any preemptive right of stockholders of the Company arising under law or the Articles or By-laws of the Company, each as amended, or, to the knowledge of such counsel, to any contractual right of first refusal or other right in favor of any person. (vi) Except as described in Schedule I, to the knowledge of such counsel, but without independent investigation, as of the date hereof there is no material (A) action, suit, claim, proceeding or investigation pending or threatened against or affecting the Company, at law or in equity, or before or by any Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, (B) arbitration proceeding relating to the Company pending under collective bargaining agreements, or (C) governmental inquiry pending or threatened against or affecting the Company. To the knowledge of such counsel, but without independent investigation, the Company is not in default with respect to any order, writ, injunction or decree known to such counsel of any court or of any Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign. (vii) Assuming the accuracy of the representations and warranties of the Purchaser set forth in Article II of this Agreement, no registration or filing with, and no consent or approval of, or other action by any Federal, state or other governmental agency or instrumentality is or will be necessary for the valid execution, delivery and performance by the Company of this Agreement and the Registration Rights Agreement, the issuance, sale and delivery of the Preferred Shares or, upon conversion thereof, the issuance and delivery of the Conversion Shares, other than filings pursuant to federal and state securities laws (all of which filings, other than those which are required to be made after the date hereof, have been made by the Company). In rendering the foregoing opinion with respect to performance by the Company of its obligations under the Registration Rights Agreement, such counsel may assume compliance by the Company at such time with the registration requirements of the Securities Act and with applicable state securities laws and may disclaim any opinion as to the validity or enforceability of the indemnification and contribution provisions of the Registration Rights Agreement. (b) Representations and Warranties to be True and Correct. The representations and warranties contained in Article II of this Agreement shall be true, complete and correct in all material respects on and as of the date hereof and the President and Treasurer of the Company shall have certified to such effect to the Purchaser in writing. (c) Performance. The Company shall have performed and complied in all material respects with all agreements contained herein required to be performed or complied with by it prior to or at the date hereof, and as of each Installment Date, as applicable, and the President and Treasurer of the Company shall have certified to the Purchaser in writing as of each Installment Date to such effect and to the further effect that all of the conditions set forth in this Article IV have been satisfied. (d) All Proceedings to be Satisfactory. As of the First Installment Date, all corporate and other proceedings to be taken by the Company in connection with the transactions contemplated hereby and all documents incident thereto shall be reasonably satisfactory in form and substance to the Purchaser and its counsel, and the Purchaser and its counsel shall have received all such counterpart originals or certified or other copies of such documents as they reasonably may request. (e) Supporting Documents. As of the First Installment Date, the Purchaser and its counsel shall have received copies of the following documents and all changes, amendments or modifications thereto: (i) (A) the Articles, certified as of a recent date by the Secretary of State of the State of Nevada, (B) a certificate of said Secretary dated as of a recent date as to the due incorporation and good standing of the Company, the payment of all excise taxes by the Company and listing all documents of the Company on file with said Secretary, and (C) the By-laws of the Company; (ii) a certificate of the Secretary or an Assistant Secretary of the Company dated as of the Installment Date and certifying: (A) that attached thereto is a true and complete copy of the By-laws of the Company as in effect on the date of such certification; (B) that attached thereto is a true and complete copy of all resolutions adopted by the Board of Directors or the stockholders of the Company authorizing the execution, delivery and performance of this Agreement and the Registration Rights Agreement, the issuance, sale and delivery of the Preferred Shares and the reservation, issuance and delivery of the Conversion Shares, and that all such resolutions are in full force and effect and are all the resolutions adopted in connection with the transactions contemplated by this Agreement and the Registration Rights Agreement; (C) that the Articles have not been amended since the date of the last amendment referred to in the certificate delivered pursuant to clause (i)(B) above; and (D) to the incumbency and specimen signature of each officer of the Company executing this Agreement and the Registration Rights Agreement, the stock certificates representing the Preferred Shares and any certificate or instrument furnished pursuant hereto, and a certification by another officer of the Company as to the incumbency and signature of the officer signing the certificate referred to in this clause (ii); and (iii) such additional supporting documents and other information with respect to the operations and affairs of the Company as the Purchaser or its counsel reasonably may request. (f) Certificates. As of each subsequent Installment Date, Purchaser shall have received a certificate of the Secretary or an Assistant Secretary of the Company dated as of the Installment Date and certifying that (A) neither the Articles nor the By-laws were amended, revised or modified in any way that could adversely affect the Preferred Shares since the First Installment Date; (B) that the resolutions of the Board of Directors or the stockholders of the Company authorizing the execution, delivery and performance of the Agreement and the Registration Rights Agreement, the issuance, sale and delivery of the Preferred Shares and the reservation, issuance and delivery of the Conversion Shares delivered to Purchaser are in full force and effect and have not been effectively altered or changed by subsequent action by the Board of Directors or shareholders of the Company. (g) Approval. The Board of Directors of Purchaser shall have approved the transactions contemplated hereby on or before May 31, 1996. (h) Registration Rights Agreement. The Company shall have executed and delivered the Registration Rights Agreement. (i) Articles. The Articles shall read in their entirety as set forth in Exhibit B. The Articles shall have been duly amended, if necessary, to provide that: (i) all directors of the Company shall be indemnified against, and absolved of, liability to the Company and its stockholders to the maximum extent permitted under the laws of the State of Nevada, and (ii) the number of shares of authorized Common Stock of the Company may be increased or decreased (but not below the number then outstanding) by the affirmative vote of the holders of two-thirds of the outstanding shares of capital stock of the Company entitled to vote thereon, voting together as a single class. (j) By-Laws. The Company's By-laws shall have been amended, if necessary, to provide that (i) unless otherwise required by the laws of the State of Nevada, (A) any two directors and (B) any holder or holders of at least 25% of the outstanding shares of Series A Convertible Preferred Stock, shall have the right to call a meeting of the Board of Directors or stockholders of the Company, and (ii) the number of directors fixed in accordance therewith shall in no event conflict with any of the terms or provisions of the Series A Convertible Preferred Stock as set forth in the Articles. (k) Election of Directors. The number of directors constituting the entire Board of Directors shall have been fixed at seven (7) and the following persons shall have been elected as the directors and shall each hold such position as of the date hereof: Dan W. James, III, Boyd E. Hoback, Richard J. Stark, Thomas P. McCarty, Geoffrey R. Bailey, David E. Bailey and Alan A. Teran. (l) Lenders. Purchaser's performance hereunder shall not materially conflict with or result in a breach of any of its obligations or agreements existing as of the date hereof with any of its lenders. (m) Solvency. As of the date of such performance, neither Purchaser nor the Company shall have (i) filed a voluntary petition in bankruptcy or been adjudged bankrupt or insolvent, (ii) made an assignment for the benefit of creditors, (iii) applied to or petitioned any tribunal for the appointment of a receiver, intervenor or trustee for all or a substantial part of its assets, or (iv) been involved in a proceeding under any bankruptcy law or statute which was commenced and not dismissed within 60 days. All such documents shall be reasonably satisfactory in form and substance to the Purchaser and its counsel. ARTICLE V CONDITIONS TO THE OBLIGATIONS OF THE COMPANY The obligation of the Company to sell the Preferred Shares hereunder is subject to (i) the Company receiving, on or before the First Installment Date, approval of the shareholders of the Company of the transactions contemplated hereby as required by the Articles, Bylaws or applicable law; and (ii) the approval of the Company's Board of Directors of the transactions contemplated hereby on or before June 14, 1996. ARTICLE VI COVENANTS OF THE COMPANY The Company covenants and agrees with the Purchaser that prior to the issuance of the Preferred Shares, and for as long as any of the Preferred Shares are outstanding: SECTION 6.01 Financial Statements, Reports, Etc. The Company shall furnish to the Purchaser: (a) within 105 days after the end of each fiscal year of the Company, any and all documents that the Company is required to file with the Securities and Exchange Commission; and comparative statements for the prior fiscal year and the budget for the fiscal year then ended showing comparisons on a monthly basis; (b) at the time of delivery of each annual financial statement pursuant to Section 6.01(a), a certificate executed by the President or Chief Financial Officer of the Company stating that such officer has caused this Agreement and the Series A Convertible Preferred Stock to be reviewed and has no knowledge of any default by the Company (or such subsidiary, as the case may be) in the performance or observance of any of the provisions of this Agreement or the Series A Convertible Preferred Stock or, if such officer has such knowledge, specifying such default and the nature thereof; (c) no later than sixty (60) days prior to the start of each fiscal year, consolidated capital and operating expense budgets, cash flow projections and income and loss projections for the Company and each of its subsidiaries in respect of such fiscal year, all itemized in reasonable detail and prepared on a monthly basis, and, promptly after preparation, any revisions to any of the foregoing; (d) promptly following receipt by the Company, each audit response letter, accountant's management letter and other written report submitted to the Company or any subsidiary of the Company by its independent public accountants in connection with an annual or interim audit of the books of the Company or any of its subsidiaries; (e) promptly after the commencement thereof, notice of all actions, suits, claims, proceedings, investigations and inquiries of the type described in Section 2.07 that could materially adversely affect the Company individually or any of its subsidiaries or the Company and all of its subsidiaries taken as a whole; (f) promptly upon sending, making available or filing the same, all press releases, reports and financial statements that the Company or any subsidiary of the Company sends or makes available to its stockholders or directors or files with the Commission; and (g) promptly, from time to time, such other information regarding the business, prospects, financial condition, operations, property or affairs of the Company and its subsidiaries as Purchaser reasonably may request. SECTION 6.02 Right of Participation. (a) The Company shall, prior to any proposed issuance by the Company of any of its securities (other than debt securities with no equity feature), offer to the Purchaser by written notice the right, for a period of fifteen (15) days, to purchase for cash at an amount equal to the price or other consideration for which such securities are to be issued, a number of such securities so that, after giving effect to such issuance (and the conversion, exercise and exchange into or for (whether directly or indirectly) shares of Common Stock of all such securities that are so convertible, exercisable or exchangeable), the Purchaser will continue to maintain its same proportionate equity ownership in the Company represented by the Preferred Shares and the Conversion Shares that it owns, if any, as of the date of such notice (treating the Purchaser, for the purpose of such computation, as the holder of the number of shares of Common Stock which would be issuable to the Purchaser upon conversion, exercise and exchange of all securities (including but not limited to the Preferred Shares) held by such Purchaser on the date such offer is made, that are convertible, exercisable or exchangeable into or for (whether directly or indirectly) shares of Common Stock and assuming the like conversion, exercise and exchange of all such other securities held by other persons); provided, however, that the participation rights of the Purchaser pursuant to this Section 6.02 shall not apply to securities issued (A) upon conversion of any of the Preferred Shares, (B) as a stock dividend or upon any subdivision of shares of Common Stock, provided that the securities issued pursuant to such stock dividend or subdivision are limited to additional shares of Common Stock, (C) pursuant to subscriptions, warrants, options, convertible securities, or other rights which are listed in Schedule III as being outstanding on the date of this Agreement, (D) solely in consideration for the acquisition (whether by merger or otherwise) by the Company or any of its subsidiaries of all or substantially all of the stock or assets of any other entity, (E) pursuant to a firm commitment public offering. The Company's written notice to the Purchaser shall describe the securities proposed to be issued by the Company and specify the number, price and payment terms. (The number of shares that the Purchaser is entitled to purchase under this Section 6.02 shall be referred to as its "Pro Rata Share." The total number of shares that the Purchaser is entitled to purchase under this Section 6.02 shall be referred to as "Offered Shares"). (b) The Purchaser may accept the Company's offer as to the full number of securities offered to it or any lesser number, by written notice thereof given by it to the Company prior to the expiration of the aforesaid fifteen (15) day period, in which event the Company shall sell and the Purchaser shall buy, upon the terms specified, the number of securities agreed to be purchased by Purchaser. The Company shall then be free at any time prior to ninety (90) days after the date of its notice of offer to the Purchaser, to offer and sell to any third party or parties the remainder of such securities proposed to be issued by the Company (including but not limited to the securities not agreed by the Purchaser to be purchased by it), at a price and on payment terms no less favorable to the Company than those specified in such notice of offer to the Purchaser. However, if such third party sale or sales are not consummated within such ninety (90) day period, the Company shall not sell such securities as shall not have been purchased within such period without again complying with this Section 6.02. SECTION 6.03 Reserve for Conversion Shares. The Company shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, for the purpose of effecting the conversion of the Preferred Shares and otherwise complying with the terms of this Agreement, such number of its duly authorized shares of Common Stock as shall be sufficient to effect the conversion of the Preferred Shares from time to time outstanding or otherwise to comply with the terms of this Agreement. If at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of the Preferred Shares or otherwise to comply with the terms of this Agreement, the Company will forthwith take such corporate action as may be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes. The Company will obtain any authorization, consent, approval or other action by or make any filing with any court or administrative body that may be required under applicable federal and state securities laws in connection with the issuance of shares of Common Stock upon conversion of the Preferred Shares. SECTION 6.04 Corporate Existence. The Company shall maintain, and except as otherwise permitted by Section 6.18 cause each of its subsidiaries to maintain, their respective corporate existence, rights and franchises in full force and effect. SECTION 6.05 Properties, Business, Insurance. The Company shall maintain and cause each of its subsidiaries to maintain as to their respective properties and business, with financially sound and reputable insurers, insurance against such casualties and contingencies and of such types and in such amounts as is customary for companies similarly situated, which insurance shall be deemed by the Company to be sufficient. SECTION 6.06 Inspection, Consultation and Advice. The Company shall permit and cause each of its subsidiaries to permit the Purchaser and such persons as it may designate, at Purchaser's expense, to visit and inspect any of the properties of the Company and its subsidiaries, examine their books and take copies and extracts therefrom, discuss the affairs, finances and accounts of the Company and its subsidiaries with their officers, employees and public accountants (and the Company hereby authorizes said accountants to discuss with Purchaser and its designees such affairs, finances and accounts), and consult with and advise the management of the Company and its subsidiaries as to their affairs, finances and accounts, all at reasonable times and upon reasonable notice. SECTION 6.07 Restrictive Agreements Prohibited. Neither the Company nor any of its subsidiaries shall become a party to any agreement which by its terms restricts the Company's performance of this Agreement, the Registration Rights Agreement or the Articles. The Company shall not become party to any agreement which by its terms restricts the Company's right to pay dividends on the Preferred Shares or to meet the redemption rights of the Preferred Shares. SECTION 6.08 Transactions with Affiliates. Except for transactions (i) contemplated by this Agreement, or (ii) with Purchaser or its affiliates, neither the Company nor any of its subsidiaries shall enter into any transaction with any director, officer, employee or holder of more than 5% of the outstanding capital stock of any class or series of capital stock of the Company or any of its subsidiaries, member of the family of any such person, or any corporation, partnership, trust or other entity in which any such person, or member of the family of any such person, is a director, officer, trustee, partner or holder of more than 5% of the outstanding capital stock thereof, except for transactions on customary terms related to such person's employment. SECTION 6.09 Use of Proceeds. The Company shall spend an amount equal to or greater than the proceeds from the sale of the Preferred Shares for the development of new Good Times restaurants on or before December 31, 1997, unless the Board of Directors unanimously directs otherwise. SECTION 6.10 Board of Directors Meeting. The Company shall use its best efforts to ensure that meetings of its Board of Directors are held at least once each quarter. The Company shall permit Purchaser, for so long as Purchaser holds of record or beneficially any Preferred Shares and/or Conversion Shares, or its designee to have one representative attend each meeting of the Board of Directors of the Company and each meeting of any Committee thereof and to participate in all discussions during each such meeting. The Company shall send to the Purchaser and designee the notice of the time and place of such meeting in the same manner and at the same time as it shall send such notice to its directors or committee members, as the case may be. The Company shall also provide to the Purchaser and designee copies of all notices, reports, minutes and consents at the time and in the manner as they are provided to the Board of Directors or committee, except for information reasonably designated as proprietary information by the Board of Directors. SECTION 6.11 Compensation Committee. The Company shall establish and maintain a Compensation Committee of the Board of Directors, which shall consist of three (3) directors, one of whom shall be a director elected by the holders of the Preferred Stock voting as a separate series. The Compensation Committee shall have as its functions the approval of any employee's compensation over $75,000 per year and overall approval of employee stock option grants. No compensation or other remuneration at an annual rate in excess of $75,000 (inclusive of salary and bonus arrangement) shall be paid to, and no capital stock of the Company shall be issued or granted to, any director, officer or employee of, or any consultant or adviser to, the Company or any of its subsidiaries, without the approval of the Compensation Committee. No employee stock option plan, employee stock purchase plan, employee restricted stock plan or other employee stock plan shall be established without the approval of the Compensation Committee, other than those already in existence. Notwithstanding the foregoing, the Company shall not, without the unanimous consent of the Board of Directors, (i) issue, grant or sell any stock options, warrants or other securities convertible into Common Stock to any director, officer or employee of, or a consultant or advisor to, the Company or any of its subsidiaries to the extent that such issuance, grant or sale would result in there being outstanding options and other securities convertible into Common Stock held by directors, officers and employees of, and consultants and advisors to, the Company constituting in the aggregate in excess of 15% of the outstanding capital stock of the Company (assuming for purposes of such computation the conversion, exercise and exchange of all securities of the Company that are convertible, exercisable or exchangeable into or for shares of Common Stock), or (ii) modify any terms of any options, warrants or other securities convertible into Common Stock except that, in the case of the Company's publicly held warrants and other convertible securities, the Board of Directors may extend the exercise date thereof. SECTION 6.12 Capital Expenditures. Without the prior approval of the Board of Directors, the Company shall not make any capital expenditure, including expenditures for capitalized leases, in an amount in excess of 120% of the budget for such items approved by the Board of Directors. SECTION 6.13 Employment. The Company shall not hire, or commit itself to hire, any individual whose annual compensation, in salary and benefits, is in excess of $75,000, without the prior approval of the Board of Directors. SECTION 6.14 Investments. The Company shall not make any investment in, or loans or advances to, or guarantees of the obligations of, any person or entity, except as approved by the Board of Directors. SECTION 6.15 Maintenance of Properties. The Company shall maintain its properties in good condition and operating repair. SECTION 6.16 D&O Insurance. The Company shall, if required by the stockholders holding two-thirds of the Preferred Shares and if not prohibitively expensive as determined in good faith of the Board of Directors, purchase and maintain adequate liability insurance coverage for the directors of the Company. SECTION 6.17 By-laws. The Company shall at all times cause its By-laws to provide that, (a) unless otherwise required by the laws of the State of Nevada, (i) any two directors or (ii) any holder or holders of at least 25% of the outstanding shares of Series A Convertible Preferred Stock, shall have the right to call a meeting of the Board of Directors or stockholders, and (b) the number of directors fixed in accordance therewith shall in no event conflict with any of the terms or provisions of the Series A Convertible Preferred Stock as set forth in the Articles. The Company shall at all times maintain provisions in its By-laws and/or Articles indemnifying all directors against liability and absolving all directors from liability to the Company and its stockholders to the maximum extent permitted under the laws of the State of Nevada. SECTION 6.18 Activities of Subsidiaries. The Company shall not, without the affirmative vote by holders of two-thirds of the Preferred Shares, permit any subsidiary to consolidate or merge into or with or sell or transfer all or substantially all its assets, except that any subsidiary may (i) consolidate or merge into or with or sell or transfer assets to any other subsidiary, or (ii) merge into or sell or transfer assets to the Company. The Company shall not sell or otherwise transfer any shares of capital stock of any subsidiary, except to the Company or another subsidiary, or permit any subsidiary to issue, sell or otherwise transfer any shares of its capital stock or the capital stock of any subsidiary, except to the Company or another subsidiary. The Company shall not permit any subsidiary to purchase or set aside any sums for the purchase of, or pay any dividend or make any distribution on, any shares of its stock, except for dividends or other distributions payable to the Company or another subsidiary. SECTION 6.19 Compliance with Laws. The Company shall comply, and cause each subsidiary to comply, with all applicable laws, rules, regulations and orders, noncompliance with which could materially adversely affect its business or condition, financial or otherwise. SECTION 6.20 Keeping of Records and Books of Account. The Company shall keep, and cause each subsidiary to keep, adequate records and books of account, in which complete entries will be made in accordance with generally accepted accounting principles consistently applied, reflecting all financial transactions of the Company and such subsidiary, and in which, for each fiscal year, all proper reserves for depreciation, depletion, obsolescence, amortization, taxes, bad debts and other purposes in connection with its business shall be made. SECTION 6.21 Change in Nature of Business. The Company shall not, and shall not permit any subsidiary to, engage in any business other than the restaurant business without the unanimous approval of the Board of Directors. ARTICLE VII BREACH OF REPRESENTATIONS, WARRANTIES AND COVENANTS SECTION 7.01 Redemption. In the event the Company materially breaches any of its representations, warranties or covenants contained herein and the Company (i) fails to remedy such breach within 14 days after receiving notice of such breach or (ii) if such breach cannot reasonably be cured within 14 days, and the Company commences to remedy such breach within 14 days of notice continuously and diligently proceeds to remedy such breach, fails to remedy such breach within 30 days after receiving notice thereof, the Company shall, at the election of Purchaser, redeem some or all of the Preferred Shares held by Purchaser for a price equal to the Redemption Price for each share so redeemed. The Company shall redeem such shares within 30 days after its receipt of Purchaser's notice stating the number of Preferred Shares that Purchaser desires to have redeemed pursuant to this Section 7.01. ARTICLE VIII MISCELLANEOUS SECTION 8.01 Survival of Agreements. All covenants, agreements, representations and warranties made herein or in the Registration Rights Agreement or any certificate or instrument delivered to the Purchaser pursuant to or in connection with this Agreement or the Registration Rights Agreement shall survive the execution and delivery of this Agreement and the Registration Rights Agreement, the issuance, sale and delivery of the Preferred Shares, and the issuance and delivery of the Conversion Shares, and all statements contained in any certificate or other instrument delivered by the Company hereunder or thereunder or in connection herewith or therewith shall be deemed to constitute representations and warranties made by the Company. SECTION 8.02 Brokerage. Each party hereto will indemnify and hold harmless the other against and in respect of any claim for brokerage or other commissions relative to this Agreement or to the transactions contemplated hereby, based in any way on agreements, arrangements or understandings made or claimed to have been made by such party with any third party (including, without limitation, amounts paid to any shareholder, officer, director or affiliate of such party). SECTION 8.03 Parties in Interest. All representations, covenants and agreements contained in this Agreement by or on behalf of any of the parties hereto shall bind and inure to the benefit of the respective successors and assigns of the parties hereto whether so expressed or not. Without limiting the generality of the foregoing, all representations, covenants and agreements benefiting Purchaser shall inure to the benefit of any and all subsequent holders from time to time of Preferred Shares or Conversion Shares. SECTION 8.04 Assignment. (a) Purchaser may not assign this Agreement or any of its rights and obligations hereunder (including the Preferred Shares) to any person, business or entity without the prior written approval of the Company which approval shall not be unreasonably withheld; provided, however, Purchaser may assign this Agreement, any and all of its rights and obligations hereunder and the Preferred Shares (i) to any person, business or entity that is affiliated with Purchaser or The Erie County Investment Co. and (ii) to any member of the Control Group (as defined below) if the Control Group in the aggregate is affiliated with Purchaser. For purposes of this agreement, (i) an "affiliate" of, or a person "affiliated" with, a specified person, is a person that directly, or indirectly, controls, is controlled by or is under common control with, the person specified; (ii) the term "control" (including the terms "controlling", "controlled by" and "under common control with") means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership (beneficial or otherwise) of voting securities, by contract or otherwise; and (iii) "Control Group" shall mean Paul T. Bailey, his spouse, children and grandchildren. The Company shall not assign this Agreement or any rights or obligations hereunder without the prior written consent of Purchaser. (b) Purchaser shall not offer or agree to sell or otherwise transfer any or all of its Preferred Shares to a third party (other than any person, business or entity affiliated with Purchaser, or to any officer, director, shareholder or partner of Purchaser or The Erie County Investment Co.), without first offering (the "Offer") to sell such Preferred Shares to the Company or its designee by delivering written notice thereof to the Company which notice shall include the price, terms and conditions of the Offer. The Company shall have fourteen days after its receipt thereof (the "Offer Period") to accept the Offer by delivering written notice of its acceptance thereof to Purchaser. If the Company fails to deliver its acceptance within the Offer Period, Purchaser shall be free (subject to the terms of Section 8.04(a) above) to sell or otherwise transfer such Preferred Shares to a third party for a period of 90 days after the end of the Offer Period at a price and on terms and conditions no less favorable to the Purchaser than those offered to the Company. SECTION 8.05 Notices. All notices, requests, consents and other communications hereunder shall be in writing and shall be delivered in person, mailed by certified or registered mail, return receipt requested, or sent by telecopier or telex, addressed as follows: (a) if to the Company: Good Times Restaurants Inc. 8620 Wolff Court, Suite 330 Westminster, Colorado 80030 Attn: Boyd E. Hoback, President (b) if to the Purchaser: The Erie County Investment Co. 601 Corporate Circle Golden, Colorado 80401 Attn: David E. Bailey, President SECTION 8.06 Entire Agreement. This Agreement, including the Schedules and Exhibits hereto, constitutes the sole and entire agreement of the parties with respect to the subject matter hereof. All Schedules and Exhibits hereto are hereby incorporated herein by reference. SECTION 8.07 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. SECTION 8.08 Amendments. This Agreement may not be amended or modified, and no provisions hereof may be waived, without the written consent of the Company and the holders of at least two-thirds of the outstanding shares of Common Stock issued or issuable upon conversion of the Preferred Shares. SECTION 8.09 Severability. If any provision of this Agreement shall be declared void or unenforceable by any judicial or administrative authority, the validity of any other provision and of the entire Agreement shall not be affected thereby. SECTION 8.10 Titles and Subtitles. The titles and subtitles used in this Agreement are for convenience only and are not to be considered in construing or interpreting any term or provision of this Agreement. SECTION 8.11 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Colorado. IN WITNESS WHEREOF, the Company and the Purchaser have executed this Series A Convertible Preferred Stock Purchase Agreement as of the day and year first above written. GOOD TIMES RESTAURANTS, INC. By: /s/ Boyd E. Hoback Name: Boyd E. Hoback Title: President PURCHASER: THE BAILEY COMPANY, a Colorado limited partnership By: The Erie County Investment Co., as General Partner By: /s/ David E. Bailey, President David E. Bailey, President SCHEDULE I Disclosure Schedule SCHEDULE II Other Interests SCHEDULE III Security Holders EX-10.14 7 FIRST AMENDMENT TO SERIES A CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT The First Amendment to Series A Convertible Preferred Stock Purchase Agreement (this "Amendment") dated this day of September, 1996, effective as of May 31, 1996, is by and between Good Times Restaurants Inc. (the "Company") and The Bailey Company ("Purchaser"). RECITALS A. The Company and Purchaser entered into that certain Series A Convertible Preferred Stock Purchase Agreement dated May 31, 1996 (the "Agreement"), by which Purchaser agreed to purchase 1,000,000 shares of the Company's Series A Convertible Preferred Stock (the "Preferred Shares"), and the Company agreed to issue the Preferred Shares to Purchaser, on the terms and conditions contained in the Agreement. B. The Company and Purchaser desire to modify and amend certain terms of the Agreement and certain Exhibits thereto. AMENDMENT NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and Purchaser agree that the Agreement, and certain Exhibits thereto, are hereby amended as follows: 1. Capitalized terms used herein, and not otherwise defined, shall have the meanings ascribed to such terms in the Agreement. References to Sections and paragraphs shall refer to Sections and paragraphs of the Agreement, unless the context requires otherwise. 2. The first sentence of Section 2.04, Authorized Capital Stock, is hereby deleted in its entirety and replaced with the following language: "If the shareholders of the Company approve the transactions contemplated hereby, as of the First Installment Date the authorized capital stock of the Company shall consist of (i) 5,000,000 shares of preferred stock, $.01 par value per share, of which 1,000,000 shares shall be designated as Series A Convertible Preferred Stock, and (ii) 50,000,000 shares of Common Stock. 3. The first sentence of Article IV, paragraph (a)(iv) is hereby deleted in its entirety and replaced with the following language: "The authorized capital stock of the Company consists of (i) 5,000,000 shares of preferred stock, of which only 1,000,000 shares are designated as Series A Convertible Preferred Stock, and (ii) 50,000,000 shares of Common Stock." 4. The second sentence of Article IV, paragraph (i) is hereby deleted in its entirety and replaced with the following language: The Articles shall have been duly amended, if necessary, to provide that all directors of the Company shall be indemnified against, and absolved of, liability to the Company and its stockholders to the maximum extent permitted under the laws of the State of Nevada. 5. The following language shall be added to the Agreement as Section 6.22: "Authorized Common Stock. For so long as Purchaser and its affiliates, in the aggregate, beneficially own two-thirds of the Preferred Shares (including the Common Stock into which such Preferred Shares are convertible), the number of shares of authorized Common Stock of the Company may not be increased or decreased by the Company without the approval of Purchaser." 6. The following language shall be added to the Agreement as Section 6.23: "Additional Series of Preferred Stock. Notwithstanding anything in the Articles to the contrary, for as long as Purchaser and its affiliates, in the aggregate, beneficially own two-thirds of the Preferred Shares (including the Common Stock into which such Preferred Shares are convertible), the Company shall not issue any series of preferred stock in addition to the Series A Convertible Preferred Stock without the approval of Purchaser." 7. Section A.1. to Exhibit B to the Agreement, which is entitled Series A Convertible Preferred Stock Terms, (referred to in this Amendment as "Terms") is hereby deleted in its entirety and replaced with the following language: "1. Number of Shares. The series of Preferred Stock designated and known as "Series A Convertible Preferred Stock" shall consist of 1,000,000 shares." 8. Section 5.b. of the Terms is hereby amended to replace the term "Certificate of Incorporation" with the Term "Articles of Incorporation." 9. The table in Section 6.a. of the Terms is hereby deleted in its entirety and replaced with the following table: Maximum Conversion Period Number of Shares Conversion Price October 1, 1997 - 500,000 $0.46875 October 31, 1997 November 1, 1997 - 500,000* $0.56875 December 31, 1997 January 1, 1998 - 250,000 $0.46875 January 31, 1998 500,000* $0.56875 February 1, 1998 - 750,000* $0.56875 March 31, 1998 April 1, 1998 - 250,000 $0.46875 April 30, 1998 750,000* $0.56875 May 1, 1998 - April 30, 1999 1,000,000* $0.56875 May 1, 1999, and thereafter 1,000,000* the greater of (i) the Dividend Conversion Rate at the time of such conversion, and (ii) $0.46875 * To the extent not previously converted. 10. Except as expressly set forth in this First Amendment, the Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the parties hereto have executed this First Amendment effective as of the day and year first above written. GOOD TIMES RESTAURANTS INC. By: /s/ Boyd E. Hoback Name: Boyd E. Hoback Title: President THE BAILEY COMPANY, a Colorado limited partnership By: The Erie County Investment Co., as to General Partner By: /s/ David E. Bailey, President EX-10.17 8 May 3, 1996 Boyd E. Hoback 8620 Wolff Court Suite 330 Westminster, CO 80030 Dear Boyd: This letter will set forth our agreement with respect to your continued employment by Good Times Restaurants Inc. ("Good Times"). For convenience, we shall refer to you as "Hoback." 1. Good Times shall continue to employ Hoback as President and Chief Executive Officer. Hoback shall devote his full time and best efforts to such position and in general to protecting and advancing the best interests of Good Times. 2. Hoback's compensation shall be $110,000 per annum. Such compensation shall be periodically increased to the extent, if any, determined reasonable and appropriate by the Board of Directors of Good Times. Hoback shall also have a general perquisite allowance of $10,000 per annum. Hoback shall also participate in the other fringe benefits, including vacations, accorded by Good Times to its key executives at benefit levels no less favorable than those currently accorded to him. 3. The employment of Hoback hereunder shall continue for a term of three years from the date of this agreement. Such three-year term shall be extended each year by one additional year upon the approval of such extension by the Board of Directors of Good Times. Good Times may terminate the employment of Hoback during such term only for cause consisting of a consistent and substantial failure of Hoback to discharge the responsibilities and authority of his position hereunder after notice to Hoback of such failure and a reasonable opportunity for him to remedy such failure. 4. In consideration for the efforts put forth by Hoback in enhancing the value of Good Times, upon (i) the sale of all or substantially all of the assets of Good Times to a party that is not a "Related Party" (as defined below), (ii) the sale of at least ninety percent of the capital stock of Good Times to a party which is not a Related Party, or (iii) a merger, consolidation, reorganization or similar transaction to which Good Times is a party, except for a transaction in which Good Times is the surviving corporation and, after giving effect to such transaction, the holders of Good Times' outstanding capital stock immediately before the transaction own enough of Good Times' outstanding capital stock after the transaction to elect a majority of Good Times' Board of Directors under ordinary circumstances, and in the event that within one year after any of the foregoing transactions (A) the employment of Hoback is terminated for any reason other than cause (as defined above), or (B) if the employment duties of Hoback are substantially diminished or (C) if the place of employment of Hoback is relocated outside of the Denver metropolitan area, Hoback shall be entitled to compensation equal to one years' salary plus his perquisite allowance and other fringe benefits for such year. For purposes of this paragraph 4, a "Related Party" means any of the shareholders or any entity which controls, is controlled by, or under common control with a shareholder or group of shareholders that own enough of Good Times' outstanding capital stock to elect a majority of Good Times' Board of Directors. If this letter correctly sets forth our agreement, kindly sign and return the attached copy hereof. Sincerely, GOOD TIMES RESTAURANTS INC. By: /s/ Dan W. James, II, Chairman Dan W. James II, Chairman AGREED to this 17th day of May, 1996. /s/ Boyd E. Hoback Boyd E. Hoback EX-23.1 9 INDEPENDENT AUDITOR'S REPORT To the Stockholders and Board of Directors Good Times Restaurants Inc. Westminster, Colorado We have audited the accompanying consolidated balance sheet of Good Times Restaurants Inc. and subsidiaries as of September 30, 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for the years ended September 30, 1995 and 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Good Times Restaurants Inc. and subsidiaries as of September 30, 1996, and the results of their operations and their cash flows for the years ended September 30, 1995 and 1996, in conformity with generally accepted accounting principles. Hein + Associates llp Denver, Colorado December 2, 1996 EX-27 10
5 YEAR SEP-30-1996 SEP-30-1996 540000 0 211000 0 48000 818000 7514000 (1819000) 7162000 1550000 0 6000 0 0 3001000 7162000 12610000 12826000 4700000 11990000 2857000 0 142000 (2021000) 0 (2021000) 0 0 0 (2021000) (.31) (.31)
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