-----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, Sx/h3LU6Rokms2b4P6y5SAUB5eAry9VLfoumlYkyTtIWUwdM9YRVgidDNrnb4A6o ZhmXr0OB6mcdeajWssO0pg== 0000892569-96-000405.txt : 19960419 0000892569-96-000405.hdr.sgml : 19960419 ACCESSION NUMBER: 0000892569-96-000405 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 19 CONFORMED PERIOD OF REPORT: 19960129 FILED AS OF DATE: 19960418 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CKE RESTAURANTS INC CENTRAL INDEX KEY: 0000919628 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 330602639 STATE OF INCORPORATION: DE FISCAL YEAR END: 0130 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-11313 FILM NUMBER: 96548146 BUSINESS ADDRESS: STREET 1: 1200 N HARBOR BLVD CITY: ANAHEIM STATE: CA ZIP: 92801 BUSINESS PHONE: 7147745796 10-K405 1 FORM 10-K FOR FISCAL YEAR ENDED JANUARY 29,1996 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JANUARY 29, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER: 1-13192 CKE RESTAURANTS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 33-0602639 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 1200 NORTH HARBOR BOULEVARD ANAHEIM, CALIFORNIA 92801 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 774-5796 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: (TITLE OF EACH CLASS) NAME OF EACH EXCHANGE ON WHICH REGISTERED: COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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-K or any amendment to this Form 10-K. X --- The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 31, 1996 was $211,965,890. The number of shares outstanding of the registrant's common stock, as of March 31, 1996 was 18,587,970. Portions of the registrant's Proxy Statement for the 1996 Annual Meeting of Stockholders which will be filed with the Securities and Exchange Commission within 120 days after January 29, 1996, are incorporated by reference into Part III of this Registration Statement. The Exhibit Index is contained in Part IV herein on Page E-1. 2 CKE RESTAURANTS, INC. AND SUBSIDIARIES INDEX TO ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 29, 1996 PART I
PAGE ---- Item 1. Business.................................................................................. 1 Item 2. Properties................................................................................ 7 Item 3. Legal Proceedings......................................................................... 8 Item 4. Submission of Matters to a Vote of Security Holders....................................... 9 PART II Item 5. Market for the Company's Common Stock and Related Stockholder Matters..................... 9 Item 6. Selected Financial Data................................................................... 10 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations .... 10 Item 8. Financial Statements and Supplementary Data............................................... 16 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....................................................... 16 PART III Item 10. Directors and Executive Officers of the Registrant........................................ 16 Item 11. Executive Compensation.................................................................... 16 Item 12. Security Ownership of Certain Beneficial Owners and Management............................ 16 Item 13. Certain Relationships and Related Transactions............................................ 16 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................... 17
3 PART I SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS CERTAIN STATEMENTS IN THIS FORM 10-K UNDER "ITEM 1. BUSINESS," "ITEM 3. LEGAL PROCEEDINGS," "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND ELSEWHERE IN THIS FORM 10-K CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE SECURITIES ACT OF 1933 AND THE SECURITIES ACT OF 1934. SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES, AND OTHER FACTORS WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE, OR ACHIEVEMENTS OF CKE RESTAURANTS, INC. ("CKE" AND COLLECTIVELY WITH ITS SUBSIDIARIES, THE "COMPANY") TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE, OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. SUCH FACTORS INCLUDE, AMONG OTHERS, THE FOLLOWING: GENERAL ECONOMIC AND BUSINESS CONDITIONS; THE IMPACT OF COMPETITIVE PRODUCTS AND PRICING; SUCCESS OF OPERATING INITIATIVES; DEVELOPMENT AND OPERATING COSTS; ADVERTISING AND PROMOTIONAL EFFORTS; ADVERSE PUBLICITY; ACCEPTANCE OF NEW PRODUCT OFFERINGS; CONSUMER TRIAL AND FREQUENCY; AVAILABILITY, LOCATIONS, AND TERMS OF SITES FOR RESTAURANT DEVELOPMENT; CHANGES IN BUSINESS STRATEGY OR DEVELOPMENT PLANS; QUALITY OF MANAGEMENT; AVAILABILITY, TERMS, AND DEPLOYMENT OF CAPITAL; THE RESULTS OF FINANCING EFFORTS; BUSINESS ABILITIES AND JUDGMENT OF PERSONNEL; AVAILABILITY OF QUALIFIED PERSONNEL; FOOD, LABOR, AND EMPLOYEE BENEFIT COSTS; CHANGES IN, OR THE FAILURE TO COMPLY WITH, GOVERNMENT REGULATIONS; WEATHER CONDITIONS; CONSTRUCTION SCHEDULES; RISKS THAT SALES GROWTH RESULTING FROM THE COMPANY'S CURRENT AND FUTURE REMODELING AND DUAL-BRANDING OF RESTAURANTS CAN BE SUSTAINED AT THE CURRENT LEVELS EXPERIENCED; AND OTHER FACTORS REFERENCED IN THIS FORM 10-K. ITEM 1. BUSINESS GENERAL CKE Restaurants, Inc. ("CKE" and collectively with its subsidiaries, the "Company"), is a Delaware corporation formed in 1994 that is engaged primarily in the food service industry. The Company's restaurant operations are conducted through its two wholly-owned subsidiaries, Carl Karcher Enterprises, Inc. ("Enterprises") and Boston Pacific, Inc. ("Boston Pacific"). Enterprises, the predecessor entity of CKE, commenced operations in the mid-1950s and continues to operate, franchise and license the Carl's Jr.(R) quick-service restaurant concept, principally in the Western United States, Mexico and the Pacific Rim. As of January 29, 1996, there were a total of 667 Carl's Jr. restaurants in operation, of which 394 were operated by Enterprises, 239 were operated by its franchisees and 34 were operated by its international licensees. Boston Pacific holds a minority interest in Boston West, L.L.C. ("Boston West"), which operates Boston Market franchises under an area development agreement with Boston Chicken, Inc. ("BCI"). The area development agreement allows Boston West the rights to develop, own and operate up to 300 Boston Market stores, primarily in Southern California. As of January 29, 1996, a total of 54 Boston Market stores were opened under the area development agreement with BCI, the first of which commenced operations in July 1994. CKE's principal executive offices are located at 1200 North Harbor Boulevard, Anaheim, California 92801. Its telephone number is (714) 774-5796. 1 4 CARL'S JR. RESTAURANTS COMPANY OPERATIONS The Company believes that it is one of the innovators in the quick-service restaurant industry. A variety of products that have a strong reputation for quality and taste are offered in its Carl's Jr. restaurants, along with comfortable dining rooms and partial table service. The Company was among the first to offer self-service salad bars, all-you-can-drink beverage bars and the convenience of an automated debit card for payment of a meal. The Carl's Jr. menu is relatively uniform throughout the chain and features several charbroiled hamburgers and chicken sandwiches, including the Famous Big Star, Western Bacon Cheeseburger(R), Super Star(R), Charbroiler Chicken Sandwiches(R) and the new Crispy Chicken Sandwiches, which were introduced during the current fiscal year. Other entrees include a fish sandwich, several baked potatoes and prepackaged salads. Side orders, such as french fries, onion rings and fried zucchini are also offered. Most restaurants also have a breakfast menu including eggs, bacon, sausage, French Toast Dips(R), the Sunrise Sandwich(R) and a breakfast burrito. In addition, the restaurants sell a variety of promotional products on a limited basis. The Company strives to maintain high standards in all materials used by its restaurants as well as the operations related to food preparation, service and cleanliness. Hamburgers and chicken sandwiches at Carl's Jr. restaurants are generally prepared or assembled after the customer has placed an order and served promptly. Hamburger patties and chicken breasts are charbroiled in a gas-fired double broiler that sears the meat on both sides. The meat is conveyed through the broiler automatically to maintain uniform heating and cooking time. Each Company-operated restaurant is operated by a manager who has received 13 to 17 weeks of management training. This training program involves a combination of classroom instruction and on-the-job training in specially designated training restaurants. Other restaurant employees are trained by the restaurant manager in accordance with Company guidelines. Restaurant managers are supervised by district managers, each of whom are responsible for 11 to 14 restaurants. Approximately 35 district managers are under the supervision of four regional vice presidents, all of whom regularly inspect the operations in their respective districts and regions. In May 1995, the Company entered into a five-year agreement with GB Foods Corporation, operator of The Green Burrito(R) quick-service restaurants. The agreement calls for a minimum of 40 Carl's Jr./Green Burrito dual-brand conversions in fiscal 1997, with up to 200 dual-brand restaurants over the next five years. The Company is required to pay a $7,500 initial franchise fee for each store opened and remit royalties on Green Burrito food sales to GB Foods Corporation, pursuant to this agreement. This strategic opportunity allows the Company to offer its customers more choices under one roof. In addition, Green Burrito's Mexican menu matches the Carl's Jr. menu in terms of superior quality and generous portions. At year end, the Company elected to sub-franchise the Carl's Jr./Green Burrito dual-brand to its franchise community. The Company anticipates 10 franchise dual-brand conversions in fiscal 1997. As of fiscal year end, the Company has converted 22 Carl's Jr. restaurants to the Green Burrito dual-concept. Sales in these dual-brand restaurants are averaging approximately 25% over same-store sales prior to the conversions. FRANCHISED AND LICENSED OPERATIONS The Company's franchise strategy is designed to further the development of the Carl's Jr. chain and reduce the total capital required of the Company for development of new restaurants. Franchise arrangements with franchisees, who operate in Arizona, California, Nevada, Oregon and Utah, generally provide for initial fees and continuing royalty payments to the Company based upon a percentage of sales. Additionally, franchisees may purchase food, paper and other supplies from the Company. Franchisees may also be obligated to remit lease payments for the use of Company-owned or leased restaurant facilities. Under the terms of these leases, they are generally required to pay related occupancy costs, which include maintenance, insurance and property taxes. The Company also receives notes from franchisees in connection with the sales of Company-operated restaurants. During fiscal 1996, the Company sold certain of its franchise notes receivable, with partial recourse, to an independent third party for cash proceeds of approximately $8.4 million. The remaining notes bear interest from 7.0% to 12.5%, mature in five to 15 years and are secured by an interest in the restaurant equipment sold. 2 5 The Company's franchising philosophy is such that only candidates with appropriate experience are considered for the program. Specific net worth and liquidity requirements must also be satisfied. Absentee ownership is not permitted and franchise owners are encouraged to live within a one-hour drive of their restaurants. Area development agreements generally require franchisees to open a specified number of Carl's Jr. restaurants in a designated geographic area within a specified time period. As of January 29, 1996, 239 Carl's Jr. restaurants were operated by its franchisees. In an effort to expand the Carl's Jr. presence internationally, Enterprises has entered into nine exclusive licensing agreements that allow licensees the use of the Carl's Jr. name and trademarks and provide for initial fees and continuing royalties based upon a percent of sales. In May 1995, the Company entered into a joint venture agreement with its Malaysia-based licensee, MBf Holdings Berhad, under the terms of which a minimum of 130 Carl's Jr. restaurants will be developed in 16 Asian countries over the next five years. The Company will hold a 30% equity interest in this venture with no capital outlays. As of January 29, 1996, there were 16 licensed restaurants in operation in Mexico, one licensed restaurant in operation in Japan, five licensed restaurants in operation in Malaysia, 10 sub-licensed restaurants in operation in the Philippines and two sub-licensed restaurants in operation in Indonesia. None of the Company's licensing agreements generated material royalties in the fiscal year ended January 29, 1996. DISTRIBUTION CENTERS The Company operates a distribution center at its corporate headquarters in Anaheim, California and a smaller distribution facility in Manteca, California. Produce, frozen meat patties, dairy and other food and supply items, excluding bakery products, are distributed to Company-operated Carl's Jr. restaurants, generally twice a week. Many of these products are sold to franchisees and, in some cases, to certain licensees. INVESTMENT IN BOSTON MARKET FRANCHISE OPERATIONS Boston Pacific holds a minority interest in Boston West, which operates Boston Market franchise operations under the terms of an area development agreement with BCI. BCI operates and franchises food service stores in the fast-growing home meal replacement category of the food service industry, a category that combines appealing meals associated with traditional home cooking with the convenience and value associated with quick-service restaurants. The area development agreement with BCI allows Boston West the rights to develop, own and operate up to 300 Boston Market stores, primarily in Southern California. (See Note 2 of Notes to Consolidated Financial Statements.) Boston Markets feature rotisserie-roasted chicken, breast of turkey, double-glazed baked ham and double-sauced meat loaf, fresh-baked chicken pot pies, a variety of sandwiches, chicken soup and fresh vegetables, salads and other side dishes, including mashed potatoes made from scratch, corn, stuffing and creamed spinach, as well as beverages and desserts. The signature menu item is chicken that is marinated and then slow-roasted in rotisserie ovens in full view of the customer. All of these stores offer meals in a bright, inviting retail setting and are staffed by friendly and knowledgeable salespeople. The Company believes that the Boston Market concept, which provides the freshness and flavor of home-style meals with a high level of convenience and value, combined with the resurgence of the traditional family meal and the need for convenience, has become very popular in many areas of the United States. As of January 29, 1996, a total of 54 Boston Market stores were opened under the area development agreement with BCI, the first of which commenced operations in July 1994. 3 6 RECENT DEVELOPMENTS The Company and Summit Family Restaurants Inc. ("Summit") signed an Agreement and Plan of Merger and Reorganization ("Merger Agreement") dated as of November 30, 1995, amended as of January 24, 1996 and further amended as of April 2, 1996. Under the terms of the Merger Agreement, as amended, CKE acquired from ABS MB (JB) Limited Partnership 946,714 shares of Series A Convertible Preferred Stock of Summit on April 4, 1996 at a purchase price of $5.27 per share in cash, and will complete the acquisition of Summit in a merger transaction in which all 4,805,902 shares of Summit common stock (other than dissenting shares, if any) will be converted into $2.63 in cash and .165 shares of CKE common stock (the "Summit Merger"). The number of shares of CKE common stock to be issued in the Summit Merger remains subject to adjustment under certain circumstances. The consummation of the Summit Merger is currently expected to occur in May 1996, and remains subject to a number of conditions, including Summit's shareholder approval and other customary conditions. The total estimated purchase price of this transaction is approximately $30.3 million. (See Note 21 of Notes to Consolidated Financial Statements.) Summit operates restaurants under three concepts: 77 company-operated and 24 franchised family style JB's Restaurants; six Galaxy Diner restaurants, which is a promising new 50's diner concept; and 16 HomeTown Buffet restaurants, which are operated by Summit as a franchisee. SOURCES OF RAW MATERIALS The Company's ability to maintain consistent quality depends in part upon its ability to acquire and distribute food products, restaurant equipment, signs, fixtures and supplies from reliable sources in accordance with Company specifications. The Company, its franchisees and its licensees have not experienced any material shortages of these items which the Company purchases from numerous independent suppliers. Alternate sources of these items are generally available. TRADEMARKS AND PATENTS The Company has registered trademarks and service marks which are of material importance to the Company's business, including Carl's Jr.(R), the Happy Star(R) logo and proprietary names for a number of the Carl's Jr. menu items. The Green Burrito(R) is a registered trademark of GB Foods Corporation. SEASONALITY The Company's business is moderately seasonal. Average restaurant sales are normally higher in the summer months than during the winter months. WORKING CAPITAL PRACTICES Historically, current assets included marketable securities and restaurant property costs to be sold and leased back. Subsequent to January 25, 1993, as part of its strategic initiatives, the Company began liquidating a significant portion of its investment portfolio, using the proceeds to repay its borrowings under the Company's revolving credit line. The sale/leaseback program has not been emphasized during the last three fiscal years, and thus existing inventories of restaurant property costs to be sold and leased back were significantly reduced in fiscal 1994. Currently, the Company is utilizing cash flows from operations to fund the expansion of new Carl's Jr. restaurants, the remodeling of its restaurants under the Company's image enhancement program and the conversion of its dual-concept restaurants. The Company does not carry significant amounts of inventory, experience material returns of merchandise, or generally provide extended payment terms to its franchisees or licensees. Cash from operations, along with cash, 4 7 cash equivalents and marketable securities on hand, and a combination of proceeds from its revolving credit line and borrowings from other banks or financial institutions should enable the Company to meet its financing requirements. CUSTOMERS No material part of the Company's business is dependent upon a single customer or a few customers. BACKLOG Backlog orders are not material to the Company's business. GOVERNMENT CONTRACTS AND REGULATIONS The Company has no material contracts with the United States government or any of its agencies. The restaurant industry is subject to numerous federal, state and local government regulations, including those relating to the preparation and sale of food and those relating to building and zoning requirements. The Company and its franchisees are also subject to laws governing their relationship with employees, including minimum wage requirements, overtime, working and safety conditions and citizenship requirements. The Company is also subject to regulation by the FTC and certain state laws which govern the offer and sale of franchises. Many state franchise laws impose substantive requirements on the franchise agreement, including limitations on noncompetition provisions and on provisions concerning the termination or nonrenewal of a franchise. Some states require that certain materials be registered before franchises can be offered or sold in that state. The failure to obtain or retain food licenses or approvals to sell franchises, or an increase in the minimum wage rate, employee benefit costs (including costs associated with mandated health insurance coverage) or other costs associated with employees could adversely affect the Company and its franchisees. COMPETITION The food service industry is intensely competitive with respect to the quality and value of food products offered, concept, quality of service, price, dining experience and location. The Company primarily competes with major restaurant chains which dominate the quick-service restaurant industry, and also competes with a variety of other take-out food service companies and fast-food restaurants. The Company's competitors also include a variety of mid-price, full-service casual dining restaurants, traditional self-service buffet and other soup and salad restaurants, healthful and nutrition-oriented restaurants, delicatessens, and prepared food stores, as well as supermarkets and convenience stores. Many of the Company's competitors have a more established market presence and have substantially greater financial, marketing and other resources than the Company, which may give them certain competitive advantages. Certain of the major quick-service restaurant chains have increasingly offered selected food items and combination meals, temporarily or permanently, at discounted prices. Changes in the pricing or other marketing strategies of one or more of the Company's competitors could have an adverse impact on the Company's sales and earnings in affected markets. As the Company's competitors expand operations in various geographic areas, competition can be expected to intensify. Such increased competition could increase the Company's operating costs or adversely affect its revenues. The Company believes that its particular emphasis on higher quality foods that appeal to a broad consumer base allows the Company to compete effectively with significantly larger quick-service restaurant chains. Careful attention to dining accommodations, including periodic upgrading of existing facilities, also plays an important role. 5 8 RESEARCH AND DEVELOPMENT The Company maintains a test kitchen for its Carl's Jr. operations at its headquarters in which new products and production concepts are developed on an ongoing basis. In addition, the Company is currently testing a number of dual-concepts which include the sale of other branded products from within Carl's Jr. restaurants. While these efforts are critical to the Company, amounts expended for these activities are not considered material. There are no customer-sponsored research and development activities. ENVIRONMENTAL MATTERS Compliance with federal, state and local environmental provisions regulating the discharge of materials into the environment or otherwise relating to the protection of the environment did not have a material effect on capital expenditures, earnings or the competitive position of the Company in fiscal 1996. The Company cannot predict the effect on its operations from possible future legislation or regulation. EMPLOYEES The Company employs approximately 11,100 persons, of whom approximately 10,300 are hourly restaurant, distribution or clerical employees, and approximately 800 are managerial, salaried employees engaged in administrative and supervisory capacities. A majority of the hourly employees are employed on a part-time basis to provide service necessary during peak periods of restaurant operations. None of the Company's employees are currently covered by a collective bargaining agreement. The Company has never experienced a work stoppage attributable to labor disputes and believes its employee relations to be good. The Company is subject to the Fair Labor Standards Act, which governs such matters as minimum wage requirements, overtime and other working conditions. A large portion of the Company's food service personnel are paid at a minimum wage level and, accordingly, increases in the federal or state minimum wage affect the Company's labor costs. The California minimum wage is currently $4.25 and is equal to the established federal minimum wage. EXECUTIVE OFFICERS The executive officers of the Company as of the date of this filing are listed below.
NAME AGE POSITION(S) ---- --- ----------- William P. Foley II 51 Chief Executive Officer and Chairman of the Board of Directors C. Thomas Thompson 46 President and Chief Operating Officer Robert E. Wheaton 43 Executive Vice President Richard C. Celio 45 Senior Vice President, Development Rory J. Murphy 48 Senior Vice President, Restaurant Operations Loren C. Pannier 54 Senior Vice President, Purchasing/Distribution Joseph N. Stein 35 Senior Vice President, Chief Financial Officer Robert W. Wisely 50 Senior Vice President, Marketing Carl A. Arena 42 Vice President, Real Estate Robert A. Wilson 36 Vice President, General Counsel and Secretary
William P. Foley II became Chief Executive Officer in October 1994, Chairman of the Board of Directors in March 1994, and has served as a director since December 1993. Since 1981, Mr. Foley has been Chairman of the Board and Chief Executive Officer of Fidelity National Financial, Inc., a holding company engaged in title insurance and related services. 6 9 C. Thomas Thompson was appointed President and Chief Operating Officer in October 1994. Mr. Thompson has been a franchisee of Enterprises since 1984. Robert E. Wheaton became Executive Vice President in January 1996. Mr. Wheaton served as Vice President and Chief Financial Officer of Denny's, Inc., a subsidiary of Flagstar Corporation, from April 1995 to January 1996. From 1991 to 1995, Mr. Wheaton served as President and Chief Executive Officer, and from 1989 to 1991 as Vice President and Chief Financial Officer, of The Bekins Company. Richard C. Celio was appointed to his current position in February 1996. Mr. Celio joined the Company as Vice President, General Counsel in January 1989 and was promoted to Senior Vice President in July 1995. Prior to joining the Company, he was an attorney at law and partner of the law firm of Holden, Fergus & Celio for seven years, a firm which provided various legal services to, and acted as General Counsel for the Company. Rory J. Murphy has been Senior Vice President, Restaurant Operations for the past three years. He has been employed by the Company in various positions for 17 years. Loren C. Pannier was appointed to his current position in January 1996. Prior to January 1996, Mr. Pannier served as Treasurer since May 1995 and as Chief Financial Officer from 1980 to May 1995. Mr. Pannier has been a Senior Vice President since 1980 and he has been employed by the Company for 24 years. Joseph N. Stein was appointed Chief Financial Officer in May 1995. Mr. Stein served as Senior Vice President and Director of National Agency Operations of Fidelity National Title Insurance Company from April 1990 to May 1995 and as a Certified Public Accountant with KPMG Peat Marwick LLP from July 1985 to April 1990. Robert W. Wisely has been Senior Vice President, Marketing since January 1995. Mr. Wisely has been a franchisee of Enterprises since 1990. Prior to 1990, Mr. Wisely served as Senior Vice President, Marketing from 1985 to 1990 and as Group Vice President, Marketing from 1974 to 1979. Carl A. Arena was promoted to his current position in July 1995 and had previously served as the Director of Real Estate since 1987. Prior to joining the Company in 1987, Mr. Arena was a real estate acquisition officer with Security Pacific National Bank in Los Angeles, California. Robert A. Wilson became Vice President, General Counsel and Secretary in February 1996. Mr. Wilson served as Senior Litigation Counsel of Fidelity National Title Insurance Company from August 1995 to February 1996 and as an attorney at law with Stradling, Yocca, Carlson & Rauth from October 1987 to March 1994 and from January 1995 to August 1995. From March 1994 to January 1995, Mr. Wilson served as General Counsel for Orchids Paper Products Company. ITEM 2. PROPERTIES Most Carl's Jr. restaurants are freestanding, ranging in size from 2,500 to 4,000 square feet, with a seating capacity of 65 to 115 persons. Some restaurants are located in shopping malls and other in-line facilities. Currently, several building plan types are in use system-wide, depending upon operational needs. Most restaurants are constructed with drive-thru facilities. 7 10 A majority of Company-operated restaurants are leased from others. The following table sets forth the types of real estate interests that the Company had in its sites in operation at January 29, 1996:
Type of Interest Lease land and building........................................ 347 Lease land only (building owned)............................... 22 Lease building only (land owned)............................... 1 Own land and building.......................................... 24 --- 394 ===
The Company subleases certain sites to its franchisees and owns an additional 33 restaurant properties which are leased primarily to franchisees. The terms of the Company's leases or subleases generally range between three and 35 years and expire at various dates through 2026. The expiration of these leases is not expected to have a material impact on the Company's operations in any particular year as the expiration dates are staggered over a number of years and many of the leases contain renewal options. Once a potential restaurant site is identified, the Company's real estate personnel either seek to negotiate with the owner to construct a restaurant to the Company's specifications and enter into a long-term lease of the premises, or purchase the site. Spaces for restaurants in shopping malls and in-line buildings are typically leased and developed to the Company's specifications with the Company owning the leasehold improvements. The Company generally performs the construction management function while utilizing outside general contractors to construct its buildings. The following table summarizes the California, Arizona, and Oregon regions in which the Company's Carl's Jr. restaurants are located:
Los Angeles and Orange County............................ 262 Sacramento............................................... 37 San Diego................................................ 38 Fresno................................................... 25 Bakersfield.............................................. 9 Santa Maria/San Luis Obispo.............................. 8 San Francisco............................................ 1 Tucson, Arizona.......................................... 11 Portland, Oregon......................................... 3 --- 394 ===
The Company's corporate headquarters and distribution center, located in Anaheim, California, are leased and occupy approximately 78,000 and 102,000 square feet, respectively. The Manteca, California distribution facility has 42,000 square feet and is owned by the Company. ITEM 3. LEGAL PROCEEDINGS The Company is from time to time the subject of complaints, threat letters or litigation from guests alleging illness, injury or other food quality, health or operational concerns. Adverse publicity resulting from such allegations may materially adversely affect the Company and its restaurants, regardless of whether such allegations are valid or whether the Company is liable. The Company also is the subject of complaints or allegations from former or prospective employees from time to time. The Company believes that the lawsuits, claims and other legal matters to which it has become subject in the course of its business are not material to the Company's financial position or results of operations, but an existing or future lawsuit or claim could result in an adverse decision against the Company that could materially and adversely affect the Company or its business. 8 11 On December 19, 1995, Giant Group, Ltd., a Delaware corporation, filed an action in the U.S. District court against William P. Foley II, the Company's Chairman of the Board and Chief Executive Officer, Fidelity National Financial, Inc., the Company and certain other individuals alleging that the defendants have engaged in various unlawful activities, including trading on non-public confidential information and violating the disclosure requirements of Section 13(d) of the Securities Exchange Act of 1934, in connection with purchases of shares of Giant Group by Fidelity National Financial, Inc. and Mr. Foley. The Company did not purchase, does not own, and has no intention to purchase or own any Giant Group shares. The Company believes the allegations in the complaint to be totally without merit and intends to defend this action vigorously. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS As of April 25, 1994, shares of the Company's Common Stock were traded on the New York Stock Exchange under the symbol "CKR." Prior to that date, the Company's Common Stock was regularly quoted on the NASDAQ National Market System under the symbol "CARL." At January 29, 1996, there were approximately 1,900 record holders of the Company's Common Stock. The high and low closing prices, during each quarter, for the last two fiscal years were as follows:
QUARTER 1ST 2ND 3RD 4TH ------- --- --- --- --- Fiscal 1996 High........................................... $ 8 1/8 $11 1/4 $15 7/8 $17 7/8 Low............................................ 6 3/8 7 3/8 11 3/4 14 3/8 Fiscal 1995 High........................................... $14 $10 1/2 $ 9 1/8 $ 8 3/8 Low............................................ 10 1/8 7 5/8 7 3/4 6 5/8
During fiscal 1996 and 1995 the Company paid two consecutive semi-annual dividends of $.04 per share of Common Stock, for a total of $.08 per share. 9 12 ITEM 6. SELECTED FINANCIAL DATA The information set forth below should be read in conjunction with the consolidated financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Form 10-K. SELECTED FINANCIAL DATA (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS AND RESTAURANT DATA)
FISCAL YEAR ENDED OR AS OF JANUARY 31, (1) ------------------------------------------------------- 1996 1995 1994(2) 1993 1992 -------- -------- -------- -------- -------- System-wide sales: Company-operated (3)........................... $393,486 $370,045 $384,859 $417,268 $469,736 Franchised..................................... 175,716 178,428 190,434 184,658 138,664 Licensed....................................... 18,268 22,742 18,780 17,451 9,535 -------- -------- -------- -------- -------- Total system-wide sales...................... $587,470 $571,215 $594,073 $619,377 $617,935 ======== ======== ======== ======== ======== Revenues (3)..................................... $465,437 $443,747 $463,494 $505,390 $543,908 Income (loss) before cumulative effect of changes in accounting principles............... 10,952 1,264 4,433 (3,057) 13,038 Net income (loss)................................ 10,952 1,264 3,665 (5,507) 13,038 Income (loss) per share before cumulative effect of changes in accounting principles..... .59 .07 .24 (.17) .72 Net income (loss) per share...................... .59 .07 .20 (.31) .72 Cash dividends paid per common share (4)......... .08 .08 .08 .08 .08 Total assets .................................... 246,759 244,361 242,135 268,924 294,375 Long-term debt, including capital lease obligations.................................... 70,554 69,869 63,300 80,254 102,074 Stockholders' equity............................. $101,189 $ 88,474 $ 92,076 $ 84,732 $ 89,679 Ratio of debt to equity (5)...................... 0.8x 0.9x 0.9x 1.3x 1.5x Number of restaurants at year end: Company-operated (6)........................... 394 383 376 379 414 Franchised .................................... 239 246 255 244 196 Licensed....................................... 34 31 17 19 12 -------- -------- -------- -------- -------- Total system-wide restaurants.................... 667 660 648 642 622 ======== ======== ======== ======== ========
- ---------------- (1) The Company's fiscal year is 52 or 53 weeks, ending the last Monday in January. For clarity of presentation, all years are presented as if the fiscal year ended January 31. (2) Fiscal 1994 includes 53 weeks. (3) Prior year amounts have been reclassified to conform with the fiscal 1996 presentation. (4) During fiscal 1996 and 1995, the Company paid two consecutive semi-annual dividends of $.04 per share of Common Stock, for a total of $.08 per share per year. Prior to fiscal 1995, the Company paid four consecutive quarterly dividends of $.02 per share of Common Stock, for a total of $.08 per share per year. (5) Debt, as defined in this computation, includes long-term debt, capital lease obligations and their related current portions. (6) The number of restaurants at year end for fiscal 1995 excludes 22 Boston Market stores which were owned and operated by Boston Pacific under an area development agreement with BCI. (See Note 2 of Notes to Consolidated Financial Statements.) ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the consolidated financial statements and related notes and "Selected Financial Data" included elsewhere in this Form 10-K. 10 13 OVERVIEW CKE Restaurants, Inc. ("CKE" and collectively with its subsidiaries, the "Company"), a Delaware corporation, was formed in June 1994 to provide overall strategic direction and administrative support to its two wholly-owned subsidiaries, Carl Karcher Enterprises, Inc. ("Enterprises") and Boston Pacific, Inc. ("Boston Pacific"). Enterprises, the predecessor entity of the Company, commenced operations in the mid-1950s and continues to operate, franchise and license approximately 667 Carl's Jr. restaurants. Boston Pacific holds a minority interest in Boston West, L.L.C. ("Boston West"), which operates Boston Market franchises under an area development agreement with Boston Chicken, Inc. ("BCI"). Fiscal 1996 was an outstanding year for the Company. Consolidated net income for the current year increased to $11.0 million, or $.59 per share, as compared with $1.3 million, or $.07 per share for the prior fiscal year. Operating income in fiscal 1996 of $25.7 million, an increase of $17.1 million over the prior year, marked the highest operating income reported by the Company in five years. Same-store sales for the current 52-week reporting period, increased 4.4%, the first yearly same-store sales increase reported by the Company since fiscal 1990 and the highest yearly same-store sales increase since fiscal 1989. Per store averages in the Company-operated restaurants grew to more than $1.0 million by the end of the fiscal year. Cash flows from operations at year end totaled $37.8 million, a $16.3 million increase from the prior year. The improved fiscal year operating performance in the Company's Carl's Jr. top-line revenues and cost structure is the result of the programs implemented over the last three fiscal years, and further emphasized in the current fiscal year, to enhance sales growth and to reduce costs through improved operating efficiencies. The Company appointed a new advertising agency in February 1995 to improve and redirect its customers' value perceptions by increasing their awareness of the Company's superior quality products. The campaign was kicked off in May 1995 with aggressive new television and radio commercials featuring messy, drippy, juicy burgers. Since the start of the campaign, the Company has seen consecutive quarterly increases in both same-store sales and customer transactions. In fiscal 1997 the Company plans to spend an additional $3.0 million on media advertising to increase exposure of the Company's quality food products to consumers and to remain competitive with other companies within the food service industry. In April 1995, the Company completed a transaction in which Boston Pacific contributed a majority of its existing Boston Market restaurants assets to Boston West, which assumed the operations of the existing Boston Market stores and agreed to fulfill the Company's obligations under the BCI area development agreement. The area development agreement allows Boston West the rights to develop, own and operate up to 300 Boston Market stores, primarily in Southern California. (See Note 2 of Notes to Consolidated Financial Statements.) During the current year, the Company commenced its image enhancement program, aimed at revitalizing its Carl's Jr. restaurants. All Company-operated Carl's Jr. restaurants will be remodeled with a fresher, more contemporary look. Exterior improvements include new brighter colors -- white and red accented with Monet blue, red awnings and a large tilted Happy Star(R) logo. The new interiors feature the same fresh colors, food murals, display cases for salads and desserts and accent lighting. Early sales results in the 10 restaurants that have been remodeled as of fiscal year end have been very exciting. The cost of remodeling is expected to range from $100,000 to $130,000 for each location, and the Company anticipates remodeling approximately 40 restaurants per quarter in fiscal 1997. In accordance with the Company's Franchise Agreements, after 25% of the Company-operated Carl's Jr. restaurants have been remodeled, the Company's franchisees will have three years to complete the image enhancement program on all franchised Carl's Jr. restaurants. In May 1995, the Company entered into a five-year agreement with GB Foods Corporation, operator of The Green Burrito concept, under which the Company and, in some cases, its franchisees, will convert up to 200 Carl's Jr./Green Burrito dual-brand restaurants. Sales in the 22 Carl's Jr./Green Burrito dual-brand restaurants operating as of fiscal year end are averaging approximately 25% over same-store sales prior to the conversions. The Company plans to aggressively continue the conversion of Carl's Jr. restaurants to the Carl's Jr./Green Burrito concept and anticipates opening a minimum of 40 such dual-brand restaurants over the next twelve months in conjunction with the Company's image enhancement remodeling program. At year end, the Company elected to sub-franchise the Carl's Jr./Green Burrito dual-brand to its franchise community. The Company anticipates that 10 franchised Carl's Jr. restaurants will convert to the Carl's Jr./Green Burrito concept over the next fiscal year, which will generate initial franchise fees and additional royalties for the Company. 11 14 As part of the Company's plans to offer Carl's Jr. products from smaller, non-traditional sites, the Company has teamed with UNOCAL 76 Products Company to offer Carl's Jr. products from UNOCAL Fast Break convenience stores and gasoline stations in California. The first two UNOCAL 76/Carl's Jr. locations have opened within recent months with eight more locations anticipated to open within this calendar year. Internationally, the Company entered into a joint venture agreement with its Malaysia-based licensee, MBf Holdings Berhad in May 1995. Under the terms of this agreement, a minimum of 130 Carl's Jr. restaurants will be developed in 16 Asian countries over the next five years. The Company will hold a 30% interest in this venture with no capital outlay requirements. The Company and Summit Family Restaurants Inc. ("Summit") signed an Agreement and Plan of Merger and Reorganization ("Merger Agreement") dated as of November 30, 1995, amended as of January 24, 1996 and further amended as of April 2, 1996. Under the terms of the Merger Agreement, as amended, CKE acquired from ABS MB (JB) Limited Partnership 946,714 shares of Series A Convertible Preferred Stock of Summit on April 4, 1996 at a purchase price of $5.27 per share in cash, and will complete the acquisition of Summit in a merger transaction in which all 4,805,902 shares of Summit Common Stock (other than dissenting shares, if any) will be converted into $2.63 in cash and .165 shares of CKE Common Stock (the "Summit Merger"). The number of shares of CKE Common Stock to be issued in the Summit Merger remains subject to adjustment under certain circumstances. The consummation of the Summit Merger is currently expected to occur in May 1996, and remains subject to a number of conditions, including Summit's shareholder approval and other customary conditions. The total estimated purchase price of this transaction is approximately $30.3 million. Summit operates restaurants under three concepts: 77 company-operated and 24 franchised family style JB's Restaurants; six Galaxy Diner restaurants, which is a promising new 50's diner concept; and 16 HomeTown Buffet restaurants, which are operated by Summit as a franchisee. The Company anticipates the potential disposition of Summit's 16 HomeTown Buffet Restaurants for cash. Any such sale would generate positive cash flows to reduce the total cash outlay required for the Summit Merger, and for use in the expansion of the Galaxy Diner concept. CKE's management is performing an ongoing evaluation regarding the nature and scope of Summit's JB's Restaurants operations. Various short- and long-term strategic considerations are being assessed, including: the sale, franchise, or other disposition of certain JB's Restaurants; the conversion of certain JB's Restaurants to the Carl's Jr. and Galaxy Diner concept and the retention of a number of JB's Restaurants. Of the 667 Carl's Jr. restaurants in operation as of January 31, 1996, 394 were Company-operated, 239 were franchised and 34 were licensed, representing a system-wide increase of seven restaurants as compared with fiscal 1995. RESULTS OF OPERATIONS REVENUES Company-operated Restaurants Retail sales, comprised mainly of sales from Carl's Jr. restaurants, totaled $393.5 million in fiscal 1996, an increase of $23.4 million, or 6.3% as compared with the prior year. The increase in retail sales in the current fiscal year is primarily the result of the numerous sales enhancement programs implemented by the Company in the later part of the fiscal year which include: the roll out of its Carl's Jr./Green Burrito dual-brand program, the image enhancement of its restaurants through a chain-wide remodeling program and the introduction, in May 1995, of the Company's new advertising campaign to promote great tasting new and existing food products. Also contributing to the rise in retail sales are the efficiencies made in the Carl's Jr. restaurants in the area of speed of service, higher average sales and transaction counts per restaurant and an increase in the number of restaurants in operation in fiscal 1996 as compared with fiscal 1995. On a same-store sales basis, the Company's Carl's Jr. sales, which are calculated using only restaurants open for the full fiscal years being compared, increased 4.4% in fiscal 1996 to $371.9 million, following a 3.8% decrease during fiscal 1995 to $356.0 million. The increase in same-store sales in fiscal 1996 is the first yearly increase in same-store sales experienced by the Company in six years. Carl's Jr. restaurant sales were adversely affected in fiscal 1995 by aggressive promotions and price reductions by the Company's principal competitors. Further, the Company experienced lower average sales per restaurant and fewer restaurants in operation in fiscal 1995 as compared with fiscal 1994. As a result of these factors, retail sales decreased $14.8 million, or 3.8% from fiscal 1994 to 1995. Total retail sales for fiscal 1995 also reflect one week's fewer sales than for 1994 because fiscal 1994 was a 53-week reporting period. 12 15 Franchised and Licensed Restaurants Revenues from franchised and licensed restaurants in all fiscal years presented were mainly comprised of sales of food and supplies to franchisees, initial franchise fees, annual franchise royalties and rents and other occupancy-related amounts collected from many of the Company's franchisees. Overall, these revenues decreased 2.4% to $72.0 million in fiscal 1996 and 6.3% to $73.7 million in fiscal 1995. The fiscal 1996 decrease was largely due to lower prices of food and other products supplied to franchisees by the Company and a decrease in chicken and beef commodity costs, which were passed along to the franchisees. A 4.0% decrease in the number of franchised restaurants in operation on a weighted average basis as compared with fiscal 1995 also contributed to a reduction in revenues for the current year. The fiscal 1995 decrease was due primarily to declining franchisee sales and lower commodities costs, which were passed along to the franchisees, on chicken, beef and tomatoes. OPERATING COSTS AND EXPENSES Company-operated Restaurants The Company's efforts to reduce the restaurant-level cost structure of its Carl's Jr. restaurants, which began in fiscal 1994, have resulted in significant improvements in the gross margins of its retail operations. These margins, as a percentage of retail sales, were 20.4%, 17.2% and 17.1% in fiscal years 1996, 1995 and 1994, respectively. The 3.2% gross margin improvement in fiscal 1996 was primarily attributable to notable declines in the payroll and other employee benefit costs. The slight improvement in fiscal 1995 over fiscal 1994 is particularly noteworthy considering Boston Pacific's start-up nature during its first year of operations and that Carl's Jr. retail sales declined during fiscal 1995. The Company's food and packaging costs have remained relatively consistent at 30.8%, 30.3% and 30.0% of retail sales for fiscal 1996, 1995 and 1994, respectively. The Company's exit from the manufacturing business, which was completed in fiscal 1994, resulted in the lowering of these overall food costs. During the current fiscal year, food costs increased marginally as a result of the change in the mix of products sold to higher-food cost products, such as the new Crispy Chicken sandwiches which were introduced during the third quarter of the current fiscal year, and the Famous Big Star, which is currently the Company's only value-priced product with a competitive selling price, in participating restaurants, of $.99. The Company anticipates that a more favorable product cost mix will be obtained with its two new burger products that are planned for fiscal 1997. Payroll and other employee benefit costs, as a percentage of retail sales, declined 3.1% in fiscal 1994 to 30.9%, followed by a .6% decrease in fiscal 1995 to 30.3% and a further reduction of 2.4% during fiscal 1996 to 27.9%. These significant reductions in payroll and other employee benefit costs were achieved during the past three years as a result of the Company's continued commitment to improve the cost structure of its Carl's Jr. restaurants. Labor productivity programs have been implemented in the current fiscal year to decrease costs and to improve direct labor efficiencies. Further, in fiscal 1994, the Company added new safety and other programs which, coupled with changes in state regulations, have resulted in a drop in the incident rate of 13.1% and 23.7% in its workers compensation claims during fiscal 1996 and 1995, respectively. Occupancy and other operating expenses as a percentage of retail sales were 20.9%, 22.2% and 22.0% in fiscal 1996, 1995 and 1994, respectively. The decrease in fiscal 1996 was largely due to the Company's effort to maintain costs at the fiscal 1995 level, which included reducing utility costs through the installation of energy-efficient lighting and a reduction in the cost of certain promotional items offered. Further, since these costs are generally fixed in nature, as sales increase, these costs as a percentage of sales decrease. Occupancy and other operating expenses remained relatively flat as a percentage of retail sales from fiscal 1994 to 1995. Rent and selected other increases in fiscal 1995 were more than offset by reductions in repair and maintenance costs. Franchised and Licensed Restaurants Franchised and licensed restaurant costs have followed a similar trend over the past three fiscal years as the revenues from franchised and licensed restaurants. These costs have decreased 1.5% in fiscal 1996 to $68.8 million, following a 5.0% decrease in fiscal 1995 to $69.9 million. The decrease in fiscal 1996 was primarily attributable to the decrease in the weighted average number of franchised restaurants in operation as compared with fiscal 1995. The fiscal 1995 decrease was largely due to lower costs which were passed along to franchisees, with little change in the number of franchised restaurants. 13 16 Advertising Expenses Advertising expenses, as a percentage of the Company's retail sales were 5.1%, 5.4% and 5.0% in fiscal 1996, 1995 and 1994, respectively. Advertising expenses have become increasingly important in the current competitive environment and have therefore grown as a percentage of retail sales in fiscal 1994 and 1995. During the current fiscal year, a new advertising agency was appointed to assist the Company in redirecting its Carl's Jr. marketing programs and restoring its reputation of offering superior quality products. An aggressive new advertising campaign was introduced in May 1995 and the Company has seen consecutive quarterly increases in both same-store sales and customer transactions since the start of the campaign while spending less in advertising, both in terms of dollars spent and as a percentage of retail sales. General and Administrative Expenses Excluding the effects of certain nonrecurring charges in fiscal 1995 and 1994, which are discussed below, general and administrative expenses amounted to $37.9 million, $41.5 million and $36.5 million in fiscal 1996, 1995 and 1994, respectively, which represented 8.1%, 9.4% and 7.9% of total consolidated revenues in those years. During the current fiscal year, the Company benefited, through reduced payroll and employee benefit costs, from various reorganizations and headcount reductions that occurred both in the current and prior fiscal years. Also contributing to the decrease in general and administrative expenses in fiscal 1996 was the formation in April 1995 of Boston West, whereby this entity assumed the operations of all of the Company's existing Boston Market stores and agreed to fulfill the Company's remaining obligations under its area development agreement with BCI. (See Note 2 of Notes to Consolidated Financial Statements.) The fiscal 1995 increase was due primarily to start-up costs associated with the Company's Boston Pacific operations (including the costs to convert seven Carl's Jr. restaurants to Boston Market stores), the write-off of the former Carl's Jr. menu boards and expenses related to the plan of reorganization and merger completed during fiscal 1995. Included in general and administrative expenses for fiscal 1995 and 1994 were certain nonrecurring charges. Fiscal 1995 general and administrative expenses were reduced by $2.7 million as a result of the reversal of certain previously established lease subsidy reserves in connection with the reacquisition of 12 Carl's Jr. franchised restaurants. In fiscal 1994, these expenses included a $3.0 million charge related to a binding arbitration judgment and a $1.7 million charge representing the net present value of future retirement benefits granted to the Chairman Emeritus in October 1993. INTEREST EXPENSE Interest expense for fiscal 1996 increased 8.7% to $10.0 million primarily as a result of higher levels of borrowings outstanding and higher interest rates in the current fiscal year. Interest expense decreased 11.4% to $9.2 million in fiscal 1995 as a result of lower average notes payable balances throughout fiscal 1995 as compared with fiscal 1994. OTHER INCOME, NET Other income, net for all periods presented was comprised primarily of investment income, interest on notes and leases receivable, gains and losses on sales of restaurants, and other nonrecurring income. Other income, net decreased 25.9% in fiscal 1996 to $2.2 million and 51.2% in fiscal 1995 to $3.0 million, largely due to decreases in investment income resulting from the redefining of the Company's cash management activities in fiscal 1994. Effective as of the beginning offiscal 1995, the Company adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." As a result of adopting this new standard, net unrealized gains and losses on the Company's marketable securities portfolio, which is comprised of securities that are considered available-for-sale, are included in stockholders' equity while such unrealized gains and losses in fiscal 1994 were included in other income, net. The adoption of this new standard was not material to the Company's consolidated financial statements. FINANCIAL CONDITION LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents increased $8.3 million to $23.4 million in fiscal 1996. Total cash provided by the Company's consolidated operations increased $16.3 million in fiscal 1996 to $37.8 million. Consolidated investing and financing activities required the Company to use a net of $19.6 million and $9.9 million, respectively. Purchases of property and equipment of $27.1 million and a $2.6 million increase in notes receivable and related party notes receivable were offset by cash proceeds of $9.7 million from the collection on and sale of notes receivable and related party notes 14 17 receivable and by the liquidation of $1.7 million of the Company's marketable securities portfolio. Financing activities provided the Company with $14.6 million from increased bank borrowings and $3.6 million from the exercise of stock options. Cash provided by these financing activities were more than offset by a $11.5 million decrease in the bank overdraft, repayments of long-term debt and capital leases totaling $14.3 million, which included a prepayment of $3.0 million on secured notes payable, and dividend payments of $1.5 million. Total cash available to the Company as of January 31, 1996 was $25.9 million, which included $2.5 million of holdings in a diversified, highly liquid investment portfolio with minimal interest rate risk. Following the formation of Boston West, the Company's loan agreement with its bank was amended such that borrowings totaling $28.0 million, drawn against a former revolving credit line primarily to fund the development of the Company's Boston Market operations, were converted to a term loan, payable in quarterly installments through September 1998. In addition, a new $15.0 million unsecured revolving credit line that expires in August 1996 was established for use in the Company's ongoing Carl's Jr. operations, of which no such amounts were drawn against as of the fiscal year end. Subsequent to year end, the Company's bank agreement was amended such that certain of the covenants governing this agreement were modified for the current fiscal year and for future measurement periods. As a result of the amendment, the Company was in compliance with all of the covenants governing its bank agreement as of January 31, 1996. The Company's primary sources of liquidity are its retail sales, which are generated in cash. As the Company is no longer the exclusive provider of capital for Boston West, future capital needs will arise, principally for the construction of new Carl's Jr. restaurants, the remodeling of existing restaurants, the conversion of certain restaurants to the Carl's Jr./Green Burrito dual-brand concept, the payment of lease obligations, the repayment of debt, and in fiscal 1997 the purchase of Series A Convertible Preferred Stock of Summit, the anticipated closing of the Summit Merger and the early repayment of certain indebtedness. During fiscal 1997, the Company expects to open 15 new restaurants, to remodel as many as 160 existing restaurants under the Company's image enhancement program and to complete a minimum of 40 dual-brand conversions. The Company believes that cash generated from its Carl's Jr. operations, along with cash and marketable securities on hand as of January 31, 1996, and a combination of proceeds from its revolving credit line and borrowings from other banks or financial institutions will provide the Company the funds necessary to meet all of its obligations, including the payment of maturing indebtedness, the further development of its Carl's Jr. operations and other obligations described above. On March 12, 1996, the Company's Board of Directors declared a $0.04 per share semi-annual cash dividend, payable on April 26, 1996 to stockholders of record on April 5, 1996. IMPACT OF INFLATION Management recognizes that inflation has an impact on food, construction, labor and benefit costs, all of which can significantly affect the Company's operations. High interest rates can negatively affect lease payments for new restaurants, as well. Historically, the Company has been able to pass any associated higher costs due to these inflationary factors along to its customers because those factors have impacted nearly all restaurant companies. During fiscal 1996, however, management emphasized cost controls rather than price increases, given the competitive pressure within the quick-service industry and the recessionary environment in the Company's core markets. NEW ACCOUNTING PRONOUNCEMENTS In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"). SFAS 121 requires the assessment of certain long-lived assets for possible impairment when events or circumstances indicate their carrying amounts may not be recoverable. The Company must adopt this new pronouncement by fiscal 1997 and, upon adoption, any impairment losses recognized for assets to be held and used must be recorded as a non-cash charge in continuing operations while such losses attributable to assets to be disposed of must be reported as a cumulative effect of a change in accounting principle. The Company is still finalizing the impact of this statement, but estimates the range of exposure to be approximately $1.0 million to $3.0 million. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123"), effective for fiscal years beginning after December 15, 1995. SFAS 123 establishes the fair value based method of accounting for stock-based compensation arrangements, 15 18 under which compensation cost is determined using the fair value of the stock option at the grant date and the number of options vested, and is recognized over the periods in which the related services are rendered. If the Company were to retain its current intrinsic value based method, as allowed by SFAS 123, it would be required to disclose the pro forma effect of adopting the fair value based method for all stock options granted in fiscal years beginning after December 14, 1994. The Company has decided to retain its current intrinsic value based method and to therefore disclose the pro forma effect; however, the Company has not yet completed all of the analysis required to estimate the impact of this new statement. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See the Index included at "Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K." ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information appearing in the "Information Concerning Nominees" section of the Company's Proxy Statement prepared in connection with the Annual Meeting of Stockholders to be held in 1996, to be filed with the Commission within 120 days of January 29, 1996, is hereby incorporated by reference. Information concerning the current executive officers of the Company is contained in Item 1 of Part I of this Annual Report on Form 10-K. ITEM 11. EXECUTIVE COMPENSATION The information appearing in the "Executive Compensation" section of the Company's Proxy Statement prepared in connection with the Annual Meeting of Stockholders to be held in 1996, to be filed with the Commission within 120 days of January 29, 1996, is hereby incorporated by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information appearing in the "Ownership of the Company's Securities" section of the Company's Proxy Statement prepared in connection with the Annual Meeting of Stockholders to be held in 1996, to be filed with the Commission within 120 days of January 29, 1996, is hereby incorporated by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information appearing in the "Transactions with Officers and Directors" section of the Company's Proxy Statement prepared in connection with the Annual Meeting of Stockholders to be held in 1996, to be filed with the Commission within 120 days of January 29, 1996, is hereby incorporated by reference. 16 19 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
PAGE (a)(1) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS: NUMBER ------ Independent Auditors' Report.................................................. F-1 Consolidated Balance Sheets -- as of January 31, 1996 and 1995................ F-2 Consolidated Statements of Income -- for the years ended January 31, 1996, 1995 and 1994............................................................. F-3 Consolidated Statements of Stockholders' Equity -- for the years ended January 31, 1996, 1995 and 1994........................................... F-4 Consolidated Statements of Cash Flows -- for the years ended January 31, 1996, 1995 and 1994.............................................................. F-5 Notes to Consolidated Financial Statements.................................... F-6
(a)(2) INDEX TO FINANCIAL STATEMENTS SCHEDULES: All schedules are omitted since the required information is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and notes thereto. (a)(3) EXHIBITS: An "Exhibit Index" has been filed as a part of this Form 10-K beginning on page E-1 hereof and is incorporated herein by reference. (b) CURRENT REPORTS ON FORM 8-K: Current reports on Form 8-K dated December 1, 1995 and January 25, 1996 were filed during the fourth quarter of the fiscal year to report matters relating to the Company's proposed acquisition of Summit. 17 20 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. CKE RESTAURANTS, INC. By /s/ WILLIAM P. FOLEY II ---------------------------------- William P. Foley II Chairman of the Board and Chief Executive Officer Date: April 16, 1996 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ WILLIAM P. FOLEY II Chairman of the Board and April 16, 1996 - ------------------------------ Chief Executive Officer William P. Foley II (Principal Executive Officer) /s/ JOSEPH N. STEIN Senior Vice President, April 16, 1996 - ------------------------------- Chief Financial Officer Joseph N. Stein (Principal Financial Officer) /s/ JOHN C. FULLER Controller April 16, 1996 - ------------------------------- (Principal Accounting Officer) John C. Fuller /s/ PETER CHURM Director April 16, 1996 - ------------------------------- Peter Churm /s/ CARL L. KARCHER Director April 16, 1996 - -------------------------------- Carl L. Karcher /s/ CARL N. KARCHER Director April 16, 1996 - -------------------------------- Carl N. Karcher /s/ DANIEL D. (Ron) LANE Vice Chairman of the Board April 16, 1996 - --------------------------------- Daniel D. (Ron) Lane /s/ W. HOWARD LESTER Director April 16, 1996 - --------------------------------- W. Howard Lester /s/ FRANK P. WILLEY Director April 16, 1996 - --------------------------------- Frank P. Willey
18 21 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders CKE Restaurants, Inc. and Subsidiaries We have audited the accompanying consolidated financial statements of CKE Restaurants, Inc. and its subsidiaries as listed in the accompanying index. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these 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 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 CKE Restaurants, Inc. and its subsidiaries as of January 31, 1996 and 1995, and the results of its operations and its cash flows for each of the years in the three-year period ended January 31, 1996 in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Orange County, California March 19, 1996 F-1 22 CKE RESTAURANTS, INC. CONSOLIDATED BALANCE SHEETS A S S E T S
January 31 1996 1995 ---- ---- (Dollars in thousands) Current assets: Cash and cash equivalents...................................... $ 23,429 $ 15,174 Marketable securities.......................................... 2,510 3,088 Accounts receivable............................................ 8,009 12,411 Related party receivables...................................... 977 1,509 Inventories.................................................... 6,132 5,950 Deferred income taxes, net..................................... 10,056 12,254 Other current assets and prepaid expenses...................... 5,656 6,438 -------- -------- Total current assets....................................... 56,769 56,824 Property and equipment, net...................................... 127,346 133,248 Property under capital leases, net............................... 28,399 30,515 Long-term investments............................................ 19,814 -- Notes receivable................................................. 7,236 13,139 Related party notes receivable................................... 969 2,109 Other assets..................................................... 6,226 8,526 -------- -------- $246,759 $244,361 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt.............................. $ 8,575 $ 8,168 Current portion of capital lease obligations................... 3,745 3,581 Accounts payable............................................... 15,824 29,754 Other current liabilities...................................... 33,173 30,065 -------- -------- Total current liabilities.................................. 61,317 71,568 -------- -------- Long-term debt................................................... 30,321 27,178 Capital lease obligations........................................ 40,233 42,691 Other long-term liabilities...................................... 13,699 14,450 Stockholders' equity: Preferred stock, $.01 par value; authorized 5,000,000 shares; none issued or outstanding................................... -- -- Common stock, $.01 par value; authorized 50,000,000 shares; issued and outstanding 19,200,141 shares and 18,845,138 shares ....................................... 192 188 Additional paid-in capital..................................... 38,713 35,119 Retained earnings.............................................. 67,393 57,725 Treasury stock, at cost; 670,300 shares and 590,000 shares..... (5,109) (4,558) -------- -------- Total stockholders' equity................................. 101,189 88,474 -------- -------- $246,759 $244,361 ======== ========
See accompanying notes to consolidated financial statements. F-2 23 CKE RESTAURANTS, INC. CONSOLIDATED STATEMENTS OF INCOME
Fiscal year ended January 31 1996 1995 1994 ---- ---- ---- (In thousands except per share amounts) Revenues: Retail sales............................................. $393,486 $370,045 $384,859 Franchised and licensed restaurants...................... 71,951 73,702 78,635 -------- -------- -------- Total revenues....................................... 465,437 443,747 463,494 -------- -------- -------- Operating costs and expenses: Retail operations: Food and packaging..................................... 121,029 111,985 115,444 Payroll and other employee benefits.................... 109,942 112,177 118,774 Occupancy and other operating expenses................. 82,095 82,172 84,890 -------- -------- -------- 313,066 306,334 319,108 Franchised and licensed restaurants...................... 68,839 69,871 73,552 Advertising expenses..................................... 19,940 20,148 19,104 General and administrative expenses...................... 37,857 38,792 41,222 -------- -------- -------- Total operating costs and expenses................... 439,702 435,145 452,986 -------- -------- -------- Operating income .......................................... 25,735 8,602 10,508 Interest expense........................................... (10,004) (9,202) (10,387) Other income, net.......................................... 2,222 2,998 6,148 -------- -------- -------- Income before income taxes and cumulative effect of change in accounting principle................. 17,953 2,398 6,269 Income tax expense ........................................ 7,001 1,134 1,836 -------- -------- -------- Income before cumulative effect of change in accounting principle..................................... 10,952 1,264 4,433 Cumulative effect of change in accounting principle (net of income tax benefit of $512)...................... -- -- (768) -------- -------- -------- Net income ................................................ $ 10,952 $ 1,264 $ 3,665 ======== ======== ======== Net income per common and common equivalent share: Income before cumulative effect of change in accounting principle................................ $ .59 $ .07 $ .24 Cumulative effect of change in accounting principle...... -- -- (.04) -------- -------- -------- Net income .......................................... $ .59 $ .07 $ .20 ======== ======== ======== Common and common equivalent shares used in computing per share amounts...................... 18,679 18,717 18,567 ======== ======== ========
See accompanying notes to consolidated financial statements. F-3 24 CKE RESTAURANTS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Treasury Stock ------------------ ------------------ Additional Total Number of Number of Paid-In Retained Stockholders' Shares Amount Shares Amount Capital Earnings Equity --------- ------ --------- ------ ------- -------- ------------- (In thousands except per share amounts) BALANCE AT JANUARY 31, 1993......... 18,091 $181 -- $-- $ 28,612 $55,939 $84,732 Cash dividends ($.08 per share)....... -- -- -- -- -- (1,456) (1,456) Exercise of stock options 646 6 -- -- 4,351 -- 4,357 Tax benefit associated with exercise of stock options.......... -- -- -- -- 1,191 -- 1,191 Remeasurement of stock options................ -- -- -- -- 9 -- 9 Repurchase and retirement of shares... (60) (1) -- -- (421) -- (422) Net income............... -- -- -- -- -- 3,665 3,665 ------- ----- ----- ------- -------- -------- -------- BALANCE AT JANUARY 31, 1994......... 18,677 186 -- -- 33,742 58,148 92,076 Cash dividends ($.08 per share)....... -- -- -- -- -- (1,499) (1,499) Exercise of stock options 168 2 -- -- 1,097 -- 1,099 Tax benefit associated with exercise of stock options.......... -- -- -- -- 280 -- 280 Purchase of treasury shares................. -- -- 590 (4,558) -- -- (4,558) Net unrealized loss on investment securities.. -- -- -- -- -- (188) (188) Net income............... -- -- -- -- -- 1,264 1,264 ------ ------ ----- -------- -------- -------- -------- BALANCE AT JANUARY 31, 1995......... 18,845 188 590 (4,558) 35,119 57,725 88,474 Cash dividends ($.08 per share)....... -- -- -- -- -- (1,460) (1,460) Exercise of stock options 355 4 -- -- 2,746 -- 2,750 Tax benefit associated with exercise of stock options.......... -- -- -- -- 848 -- 848 Purchase of treasury shares................. -- -- 80 (551) -- -- (551) Net unrealized gain on investment securities.. -- -- -- -- -- 176 176 Net income............... -- -- -- -- -- 10,952 10,952 ------ ----- ----- -------- -------- ------- -------- BALANCE AT JANUARY 31, 1996........ 19,200 $192 670 $(5,109) $ 38,713 $67,393 $101,189 ====== ==== ==== ======= ======== ======= ========
See accompanying notes to consolidated financial statements. F-4 25 CKE RESTAURANTS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal year ended January 31 1996 1995 1994 ---- ---- ---- (Dollars in thousands) Net cash flows from operating activities: Net income......................................................... $ 10,952 $ 1,264 $ 3,665 Adjustments to reconcile net income to net cash provided by operating activities: Noncash franchise (revenue) expense.............................. 209 170 (151) Depreciation and amortization.................................... 21,372 22,755 22,842 Settlement of notes receivable................................... (1,292) -- -- Arbitration judgment ............................................ -- -- 3,000 Loss on sale of property and equipment and capital leases........ 1,828 2,118 613 Reversal of certain lease subsidy reserves....................... -- (2,680) -- Loss on long-term investments.................................... 1,898 -- -- Write-off of accounts and notes receivable....................... -- -- 406 Write-down of marketable securities.............................. -- -- 213 Net noncash investment income.................................... (851) (25) (63) Deferred income taxes............................................ 2,198 3,434 (1,675) Post-employment benefits......................................... -- -- 1,668 Cumulative effect of change in accounting principle.............. -- -- 768 Net change in marketable securities reserve...................... -- -- (479) Net change in receivables, inventories and other current assets.. 256 (4,329) 4,257 Net change in other assets....................................... (463) (1,119) (2,699) Net change in accounts payable and other current liabilities 1,672 (133) (4,617) -------- --------- -------- Net cash provided by operating activities........................ 37,779 21,455 27,748 -------- --------- -------- Cash flows from investing activities: Sale of or reimbursement on restaurant property to be sold and leased back.......................................... -- -- 487 Purchases of: Marketable securities............................................ (921) (3,549) (12,722) Property and equipment........................................... (27,148) (40,010) (13,865) Long-term investments............................................ (1,670) -- -- Proceeds from sale of: Marketable securities............................................ 1,662 15,994 30,177 Property and equipment........................................... 905 110 490 Long-term investments............................................ 310 -- -- Collections on leases receivable................................... 164 148 129 Increases in notes receivable and related party notes receivable... (2,640) (1,985) -- Collections on and sale of notes receivable and related party notes receivable................................................. 9,736 2,293 4,824 --------- --------- -------- Net cash provided by (used in) investing activities.............. (19,602) (26,999) 9,520 --------- --------- -------- Cash flows from financing activities: Net change in bank overdraft....................................... (11,477) 10,203 170 Net change in obligations secured by marketable securities and long-term investments........................................ -- -- (2,422) Short-term borrowings.............................................. 57,060 32,806 15,150 Repayments of short-term debt...................................... (57,060) (13,981) (33,250) Long-term borrowings............................................... 14,573 -- -- Repayments of long-term debt....................................... (11,149) (14,771) (11,488) Repayments of capital lease obligations............................ (3,129) (2,878) (2,650) Net change in other long-term liabilities.......................... (327) (3,076) (887) Repurchase and retirement of common stock.......................... -- -- (422) Purchase of treasury stock......................................... (551) (4,558) -- Payment of dividends............................................... (1,460) (1,499) (1,456) Exercise of stock options.......................................... 2,750 1,099 4,366 Tax benefit associated with the exercise of stock options.......... 848 280 1,191 ---------- --------- -------- Net cash provided by (used in) financing activities.............. (9,922) 3,625 (31,698) ---------- --------- -------- Net increase (decrease) in cash and cash equivalents............... $ 8,255 $ (1,919) $ 5,570 ========== ========= ========
See accompanying notes to consolidated financial statements. F-5 26 CKE RESTAURANTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES A summary of certain significant accounting policies not disclosed elsewhere in the footnotes to the consolidated financial statements is set forth below. Basis of Presentation and Fiscal Year In June 1994, a plan of reorganization and merger (the "Merger") was approved by the stockholders of Carl Karcher Enterprises, Inc. ("Enterprises"), whereby Enterprises, the predecessor entity of the Company that was a publicly held corporation, and Boston Pacific, Inc. ("Boston Pacific") became wholly-owned subsidiaries of CKE Restaurants, Inc. ("CKE" and collectively with its subsidiaries, the "Company"), a Delaware corporation organized during fiscal 1995. Since Boston Pacific began its start-up operations in February 1994 and the Company did not commence its operations until June 1994, the accompanying consolidated financial statements for fiscal 1994 were comprised solely of the results of operations and financial condition of Enterprises. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions are eliminated. The Company's fiscal year is 52 or 53 weeks, ending the last Monday in January each year. Fiscal years 1996 and 1995 each included 52 weeks of operations and fiscal year 1994 included 53 weeks of operations. For clarity of presentation, the Company has described all years presented as if the fiscal year ended January 31. Nature of Operations The Company is engaged primarily in the food service industry. Enterprises operates, franchises and licenses the Carl's Jr. quick-service restaurant concept, primarily in the Western United States, Mexico and the Pacific Rim. The Carl's Jr. menu is relatively uniform throughout the chain and features several charbroiled hamburgers and chicken sandwiches, including the Famous Big Star, Western Bacon Cheeseburger(R), Super Star(R) and Charbroiler Chicken Sandwiches(R). Boston Pacific holds a minority interest in Boston West, L.L.C. ("Boston West"), which owns and operates Boston Market stores in Southern California as a franchisee of Boston Chicken, Inc. ("BCI"). Boston Market stores primarily feature rotisserie-roasted chicken, breast of turkey, double-glazed baked ham and double-sauced meatloaf. Cash Equivalents For purposes of reporting cash flows, highly liquid investments purchased with original maturities of three months or less are considered cash equivalents. The carrying amounts reported in the consolidated balance sheets for these instruments approximate their fair value. Inventories Inventories are stated at the lower of cost (first-in, first-out) or market. Deferred Pre-opening Costs Deferred pre-opening costs consist of the direct and incremental costs associated with the opening of restaurants or stores and are deferred and amortized over the first year they are in operation. Such costs include uniforms and promotional costs related to the grand opening of each new location. Additionally, these costs include initial food, beverage, supply and direct labor costs associated with the testing of all equipment and recipes, and the simulation of other operational procedures shortly before a restaurant or store opens. Deferred pre-opening costs also include, if significant, the cost of required training classes for new managers, assistant managers and regional managers; airfare and lodging related to this training; and the salaries of these individuals during their training classes. Such costs, including training, were not significant in fiscal years 1996 and 1994. These costs were more significant in fiscal 1995 since there was not an existing employee base from which to hire Boston Market store management and the training related to the opening of Boston Market stores was conducted outside of California. F-6 27 Investment in Joint Venture In fiscal 1994, the Company entered into a joint venture agreement with a Mexican company to operate a Carl's Jr. restaurant in Baja California. The Company owns a 50% interest in this joint venture. In fiscal 1996, the Company entered into a joint venture agreement, in which the Company has a 30% interest, with one of its licensees to operate 130 Carl's Jr. restaurants in 16 Asian countries over the next five years. Both joint venture agreements, which are accounted for by the equity method, are not considered material to the Company's financial statements. Depreciation and Amortization Property and equipment are recorded at cost, less depreciation and amortization. Depreciation is computed using the straight-line method based on the assets' estimated useful lives, which range from three to thirty-five years. Leasehold improvements and the cost of business in excess of net assets at acquisition are amortized on a straight-line basis over the lesser of the estimated useful lives of the assets or the related lease terms. The Company assesses the recoverability of cost of business in excess of net assets at acquisition by determining whether the amortization of the balance over its remaining life can be recovered through projected undiscounted future cash flows. Advertising Production costs of commercials and programming are charged to operations in the fiscal year first aired. The costs of other advertising, promotion and marketing programs are charged to operations in the fiscal year incurred. Income Taxes The Company accounts for income taxes under the provision of Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes." Under this method, income tax assets and liabilities are recognized using enacted tax rates for the expected future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. A change in tax rates is recognized in income in the period that includes the enactment date. Estimations The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Earnings per Share Earnings per share is computed based on the weighted average number of common shares outstanding during the year, after consideration of the dilutive effect of outstanding stock options. For all years presented, primary earnings per share approximate fully diluted earnings per share. Reclassifications Certain prior year amounts in the accompanying financial statements have been reclassified to conform with the fiscal 1996 presentation. NOTE 2 -- LONG-TERM INVESTMENTS In January 1994, the Company acquired from BCI the rights to develop, own and operate up to 300 Boston Market stores throughout designated markets in California. Boston Pacific was formed during fiscal 1995 to conduct the Company's Boston Market franchise operations. The Company's obligation under the terms of this agreement included opening 20 Boston Market stores during fiscal 1995, followed by an additional 40 to 50 stores per year during the next four years, for an aggregate of 200 stores by January 1999. This agreement also contained an option to develop an additional 100 stores under certain conditions. F-7 28 In April 1995, the Company's overall strategic plans were revised and the Company determined that its available cash should be used to fund the expansion and image enhancement of its Carl's Jr. restaurants. As such, management determined it would opt for a more passive investment role and eliminate its control and significant influence in the Boston Market concept. The Company formed a new privately owned company, Boston West, which assumed the operations of all of the Company's 25 existing Boston Market stores and agreed to fulfill the Company's remaining obligation to develop an additional 175 Boston Market stores under its January 1994 area development agreement with BCI. In connection with this transaction, the Company received preferred units and all the outstanding common equity units in Boston West, for a cost of approximately $19.7 million and $620,000, respectively, in exchange for a majority of its existing Boston Market restaurant assets. The Company is entitled to receive dividends on its preferred units at rates ranging from 8.6% to 9.0%. The dividends earned through June 1997 will be paid in cash upon conversion of the Company's preferred units into common equity units. In addition, this transaction provided for the leasing of approximately $12.0 million of equipment and real property retained by the Company to Boston West at current market rates. An affiliate of BCI has an option to purchase all the equipment and real property leased by the Company to Boston West. BCI agreed to lend Boston West, over time, up to $63.8 million as part of this transaction. This loan is convertible to common equity units in Boston West, at BCI's option, at 115% of the original equity price. In addition, pursuant to this agreement, the Company has an option to co-fund, along with BCI loan proceeds, the capital requirements of Boston West up to a maximum of $15.0 million, of which the Company has funded approximately $1.7 million as of January 31, 1996 through the purchase of additional preferred units. The $15.0 million may be funded, in part, by proceeds of the purchase option in the equipment and real property leases when and if they are exercised. On May 30, 1995, Boston West issued an additional $2.5 million of common equity units to an independent investor group in return for cash and certain notes receivable, which are secured by $1.2 million of Boston West common equity units. As of this date, the Company ceased consolidating the operations of Boston West into its financial statements and commenced realizing a pro-rata share of the losses of its minority interest in Boston West. On September 12, 1995, Boston West formally agreed to repurchase one half of the Company's outstanding common equity units in Boston West, at a purchase price of $10.00 per unit, or $310,000. As of this date, the Company began accounting for its minority interest in Boston West using the cost method of accounting for investments. As of January 31, 1996, the Company's total long-term investment in Boston West was $19.8 million, which approximates fair value. The Company's estimate of fair value of its long-term investment was based on a number of factors including, the discounted future cash flows of Boston West and the present value of expected future preferred dividend distributions. A total of 54 Boston Market stores were opened under the area development agreement with BCI as of fiscal year end. Subsequent to year end, an affiliate of BCI exercised its option to purchase a portion of the real property leased by the Company to Boston West. The Company received $2.5 million in cash and $2.5 million in additional preferred units in exchange for the real property. In March 1996, the Company's Board of Directors elected to cease participation in the option to co-fund the capital requirements of Boston West. With the amounts co-funded to date and the potential exercise of the purchase option in the equipment and the remaining real property, the Company's minority interest in Boston West may be increased to up to approximately 33% upon conversion of the preferred units. NOTE 3 -- MARKETABLE SECURITIES The Company accounts for its marketable securities under the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Under this method, the Company's marketable securities are categorized as available-for-sale, and as a result are stated at fair value. Unrealized holding gains and losses are included as a component of stockholders' equity until realized. Fair values are based on quoted market prices where available. For marketable securities not actively traded, fair values are estimated using values obtained from independent sources. F-8 29 Marketable securities consist primarily of holdings in investment-grade preferred stock and debt securities in a variety of industries. The fair value and cost of marketable securities, classified as current assets, are as follows:
1996 1995 ---------------- --------------- FAIR FAIR (DOLLARS IN THOUSANDS) VALUE COST VALUE COST ------ ------ ------ ------ Adjustable rate preferred stock........................ $ 193 $ 225 $ 503 $ 536 Fixed rate preferred stock............................. 1,633 1,891 1,510 1,921 Debt securities........................................ 563 462 763 763 Mutual funds and common stock.......................... 121 276 312 372 ------ ------ ------ ------ $2,510 $2,854 $3,088 $3,592 ====== ====== ====== ======
Gross unrealized holding gains and unrealized holding (losses) as of January 31, 1996 were $144,000 and $(488,000), respectively, and, as of January 31, 1995, were $41,000 and $(545,000), respectively. Dividend income is recorded on the ex-dividend date and interest income is recorded as earned. Securities transactions are accounted for on the trade date, or the date the order to buy or sell is executed. Realized gains and losses from securities transactions are determined on a specific identification basis. NOTE 4 -- ACCOUNTS RECEIVABLE Details of accounts receivable are as follows:
(DOLLARS IN THOUSANDS) 1996 1995 ---- ---- Accounts receivable: Trade receivables................................................... $3,232 $ 3,961 Income tax receivable............................................... 3,231 5,171 Notes receivable, current........................................... 594 3,062 Dividend receivable................................................. 714 -- Other............................................................... 238 217 ------ ------- $8,009 $12,411 ====== =======
NOTE 5 -- PROPERTY AND EQUIPMENT Property and equipment consists of the following:
ESTIMATED (DOLLARS IN THOUSANDS) USEFUL LIFE 1996 1995 ----------- ---- ---- Land ............................................... $ 27,891 $ 25,621 Leasehold improvements............................... 4-25 years 96,243 92,421 Buildings and improvements........................... 7-35 years 29,038 35,064 Equipment, furniture and fixtures.................... 3-10 years 128,670 124,735 -------- -------- 281,842 277,841 Less: Accumulated depreciation and amortization...... 154,496 144,593 -------- -------- $127,346 $133,248 ======== ========
Provision is made for an impairment loss if the Company determines that the carrying amount of a real estate asset may not be recoverable. Management evaluates current and anticipated market conditions of the respective properties to F-9 30 determine if an impairment loss has occurred. Losses are recognized when the carrying value of these assets exceeds the total estimated undiscounted cash flows expected to be generated over the assets' estimated life. The impairment loss for all years presented is not considered material. NOTE 6 -- LEASES The Company occupies land and buildings under terms of numerous lease agreements expiring on various dates through 2026. Many of these leases provide for future rent escalations and renewal options. In addition, contingent rentals, determined as a percentage of sales in excess of specified levels, are often stipulated. Most of these leases obligate the Company to pay costs of maintenance, insurance and property taxes. Property under capital leases is comprised of the following:
(Dollars in thousands) 1996 1995 ---- ---- Buildings................................................ $64,186 $65,017 Less: Accumulated amortization........................... 35,787 34,502 ------- ------- $28,399 $30,515 ======= =======
Amortization is calculated on the straight-line basis over the shorter of the lease term or estimated useful lives of the assets. Minimum lease payments for all leases and the present value of net minimum lease payments for capital leases as of January 31, 1996 are as follows:
(Dollars in thousands) Capital Operating ------- --------- Fiscal Year 1997................................................... $ 8,533 $29,262 1998................................................... 8,217 28,333 1999................................................... 7,925 27,458 2000................................................... 7,446 25,894 2001................................................... 7,194 23,846 Thereafter............................................... 42,161 197,571 ------- -------- Total minimum lease payments............................. $81,476 $332,364 ======== Less: Amount representing interest....................... 37,498 ------- Present value of minimum lease payments.................. 43,978 Less: Current portion.................................... 3,745 ------- Capital lease obligations, excluding current portion..... $40,233 =======
Total minimum lease payments have not been reduced by minimum sublease rentals of $41.2 million due in the future under certain operating subleases. The Company has leased and subleased land and buildings to others, primarily as a result of the franchising of certain restaurants. Many of these leases provide for fixed payments with contingent rent when sales exceed certain levels, while others provide for monthly rentals based on a percentage of sales. Lessees generally bear the cost of maintenance, insurance and property taxes. Components of the net investment in leases receivable, included in other assets, are as follows:
(Dollars in thousands) 1996 1995 ---- ---- Net minimum lease payments receivable................... $9,887 $10,690 Less: Unearned income................................... 5,135 5,774 ------ ------- Net investment.......................................... $4,752 $ 4,916 ====== =======
F-10 31 Minimum future rentals to be received as of January 31, 1996 are as follows:
Capital Operating Leases or Lessor (Dollars in thousands) Subleases Leases ---------- -------- Fiscal Year: 1997................................................ $ 803 $ 257 1998................................................ 804 257 1999................................................ 809 258 2000................................................ 808 259 2001................................................ 801 259 Thereafter.......................................... 5,862 1,884 ------ ----- Total minimum future rentals.......................... $9,887 $3,174 ====== ======
Total minimum future rentals do not include contingent rentals which may be received under certain leases. The Company's investment in land under operating leases was $1.8 million at January 31, 1996 and 1995. Aggregate rents under noncancelable operating leases during fiscal 1996, 1995 and 1994 are as follows:
(Dollars in thousands) 1996 1995 1994 ---- ---- ---- Minimum rentals.......................................... $29,225 $29,173 $28,989 Contingent rentals....................................... 1,384 1,459 1,583 Less: Sublease rentals................................... 5,058 5,029 4,812 ------- ------- ------- $25,551 $25,603 $25,760 ======= ======= =======
NOTE 7 -- OTHER CURRENT LIABILITIES Other current liabilities are comprised of the following:
(Dollars in thousands) 1996 1995 ---- ---- Salaries, wages and other benefits....................... $ 9,981 $ 7,732 Self-insured workers' compensation reserve (see Note 9).. 6,854 7,650 Other self-insurance reserves............................ 1,328 1,323 State sales taxes........................................ 5,881 2,525 Deferred revenues........................................ 4,351 3,020 Other accrued liabilities................................ 4,778 7,815 ------- ------- $33,173 $30,065 ======= =======
F-11 32 NOTE 8 -- CREDIT FACILITIES AND LONG-TERM DEBT As of January 31, 1995, advances totaling $18.8 million were drawn against the Company's former revolving credit line, primarily to fund the Company's Boston Market franchise operations. Following the formation of Boston West in April 1995, the Company's loan agreement with its bank was amended such that these borrowings were converted to a term loan, payable in quarterly installments through September 1998. In addition, a new $15.0 million unsecured revolving credit line that expires in August 1996 was also established for use in the Company's ongoing Carl's Jr. operations. As of January 31, 1996, a total of $15.0 million was available to the Company under this new line of credit. Subsequent to year end, the Company's bank agreement was amended such that certain of the covenants governing this agreement were modified for the current fiscal year and for future measurement periods. As a result of the amendment, the Company was in compliance with all of the covenants governing its bank agreement as of January 31, 1996. Long-term debt is comprised of the following:
(Dollars in thousands) 1996 1995 ---- ---- Unsecured note payable to bank, principal payments in specified amounts quarterly through 1998, interest based on the bank prime rate plus .25%.. $22,750 $18,825 Secured note payable to bank, principal payments in specified amounts annually through 1999, interest at 12.95%; prepaid in January 1996....... -- 4,494 Secured note payable, principal payments in specified amounts annually through 2000, interest at 13.5%.......................................... 3,993 5,168 Secured note payable, principal payments in specified amounts monthly through 2001, interest at 8.17%.................................. 5,398 -- Industrial Revenue Bonds, payable in 1999, variable interest rate averaging 3.82% in 1996 and 3.02% in fiscal 1995.................... 3,600 3,600 Other...................................................................... 3,155 3,259 ------- ------- 38,896 35,346 Less: Current portion...................................................... 8,575 8,168 ------- ------- $30,321 $27,178 ======= =======
Notes payable mature in fiscal years ending after January 31, 1996 as follows: (Dollars in thousands)
Fiscal Year: 1997....................................................................... $ 8,575 1998....................................................................... 9,242 1999....................................................................... 9,139 2000....................................................................... 4,703 2001....................................................................... 4,801 Thereafter................................................................... 2,436 ------- $38,896 =======
Secured notes payable are collateralized by certain restaurant property deeds of trust, with a carrying value of $15.5 million as of January 31, 1996. In February 1996, the Company paid in full the 13.5% secured note payable of $4.0 million and also paid $2.5 million against its term loan payable. After consideration of these debt payments subsequent to year end, the Company's total long-term debt obligation would be $32.4 million, payable as follows: $7.4 million in 1997; $8.2 million in 1998; $5.9 million in 1999; $4.1 million in 2000, $4.4 million in 2001 and $2.4 million thereafter. The carrying value of property secured by notes payable after such payments of debt would be $9.4 million. F-12 33 NOTE 9 -- OTHER LONG-TERM LIABILITIES Other long-term liabilities consists of the following:
(Dollars in thousands) 1996 1995 ---- ---- Self-insured workers' compensation reserve........ $6,784 $7,160 Exit costs........................................ 5,274 5,649 Other .......................................... 1,641 1,641 ------ ------ $13,699 $14,450 ======= =======
The Company presently self-insures for group insurance, workers' compensation and fire and comprehensive protection on most equipment and certain other assets. A total of $13.6 million and $14.8 million was accrued as of January 31, 1996 and 1995, respectively, representing the current and long-term portions of the net present value of an independent actuarial valuation of the Company's workers' compensation claims. These amounts are net of a discount of $2.0 million and $1.7 million in fiscal 1996 and 1995, respectively. In prior years, the Company initiated programs to dispose of or franchise its Arizona and Texas operations. As of January 31, 1996 and 1995, $6.7 million and $7.0 million, respectively, were accrued for these reserves, including the current portion. These balances were mainly comprised of estimated lease subsidies, $2.7 million of which were reduced in connection with the reacquisition of several Carl's Jr. franchised restaurants from a related party during fiscal 1995 (see Note 12). These lease subsidies represent the net present value of the excess of future lease payments over estimated sublease income. The remaining unamortized discount to present value of these lease subsidies at January 31, 1996 was $4.4 million and will be amortized to operations over the remaining sublease terms, which range up to 21 years. NOTE 10 -- STOCKHOLDERS' EQUITY Upon consummation of the Merger, stockholders of Enterprises received one share of the Company's common stock for each share of Enterprises' common stock owned by them just prior to the Merger. In connection with this transaction, the Certificate of Incorporation was adopted for CKE which authorizes 50,000,000 shares of common stock and 5,000,000 shares of preferred stock, both of which have a par value of $.01 per share. In July 1994, the Board of Directors authorized the repurchase of up to two million shares of the Company's common stock. A total of 670,300 shares of stock were repurchased to date, which includes the purchase of 62,500 shares in fiscal 1995 from the Chairman Emeritus at the then market price of $9.13 per share. The balance of these shares were purchased in a series of open market transactions, at an average price of approximately $7.48 per share, for an aggregate purchase price of approximately $4.5 million. All shares purchased are being held as treasury stock. During the second quarter of fiscal 1994, the Company purchased a total of 59,750 shares from the Carl N. and Margaret M. Karcher Trust for an aggregate purchase price of $422,000. All shares purchased were canceled and retired. F-13 34 NOTE 11 -- FAIR VALUE OF FINANCIAL INSTRUMENTS The following table presents information on the Company's financial instruments:
(Dollars in thousands) 1996 1995 ---------------------- ---------------------- ESTIMATED ESTIMATED CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------- --------- -------- --------- Financial assets: Cash and cash equivalents......................... $23,429 $23,429 $15,174 $15,174 Marketable securities............................. 2,510 2,510 3,088 3,088 Notes receivable.................................. 9,051 9,097 18,112 17,976 Financial liabilities: Long-term debt, including current portion......... 36,412 34,525 32,832 31,953
The estimated fair values of marketable securities were based on quoted market prices. The estimated fair values of notes receivable were determined by discounting future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings. The estimated fair value of long-term debt was determined by discounting future cash flows using rates currently available to the Company for debt with similar terms and remaining maturities. NOTE 12 -- RELATED PARTY TRANSACTIONS Certain members of management and the Karcher family are franchisees of the Company. A total of 38 restaurants have been sold to these individuals, one of which occurred during fiscal 1996. As part of these transactions, the Company received cash and accepted $10.4 million of interest-bearing notes. Additionally, these franchisees regularly purchase food and other products from the Company on the same terms and conditions as other franchisees. During fiscal 1995, the Company made a salary advance to the Chairman Emeritus totaling $715,000, a majority of which is non-interest bearing and is to be repaid through payroll deductions. The entire amount will be repaid by December 1998. Details of amounts outstanding are as follows:
(Dollars in thousands) 1996 1995 ---- ---- Advance to Chairman Emeritus.............. $ 595 $ 667 7.0% Secured notes....................... 249 296 10.0% Secured notes....................... 72 -- 12.0% Secured notes....................... -- 297 12.5% Secured notes....................... 305 1,318 ------ ------ 1,221 2,578 Less: Long-term portion................... 969 2,109 ------ ------ 252 469 Trade receivables......................... 725 1,040 ------ ------ $ 977 $1,509 ====== ======
In June 1994, the Company reacquired 12 Arizona restaurants from a Karcher family member who was formerly an officer of the Company. As part of this transaction, the Company took possession of certain restaurant assets in exchange for the forgiveness of two notes receivable totaling $1.4 million, and a cash payment of $650,000. In addition, as described in Note 9, certain previously established lease subsidy reserves totaling $2.7 million were reversed in fiscal 1995 as a result of this transaction. F-14 35 The Company leases various properties, including its corporate headquarters, one of its distribution facilities and three of its restaurants, from the Chairman Emeritus. Included in capital lease obligations was $4.5 million and $4.9 million, representing the present value of lease obligations related to these various properties at January 31, 1996 and 1995, respectively. Lease payments under these leases for fiscal 1996, 1995 and 1994 amounted to $1.4, $1.4, and $1.5 million, respectively. This was net of sublease rentals of $148,000, $154,000 and $171,000 in fiscal 1996, 1995 and 1994, respectively. In fiscal 1994, the Chairman Emeritus was granted future retirement benefits for past services consisting principally of payments of $200,000 per year for life and supplemental health benefits, which had a net present value of $1.7 million as of that date. This amount was computed using certain actuarial assumptions, including a discount rate of 7%. A total of $1.4 million remained accrued in other current liabilities as of January 31, 1996. The Company anticipates funding these obligations as they become due. NOTE 13 -- CARL'S JR. FRANCHISE AND LICENSE OPERATIONS Franchise arrangements, with franchisees who operate in Arizona, California, Nevada, Oregon and Utah, generally provide for initial fees and continuing royalty payments to the Company based upon a percent of sales. The Company generally charges an initial franchise fee for each new franchised restaurant that is added to its system, and in some cases, an area development fee, which grants exclusive rights to develop a specified number of Carl's Jr. restaurants in a designated geographic area within a specified time period. Similar fees are charged in connection with the Company's international licensing operations. These fees are recognized ratably when substantially all the services required of the Company are complete and the restaurants covered by these agreements commence operations. Franchisees may also purchase food, paper and other supplies from the Company. Additionally, franchisees may be obligated to remit lease payments for the use of restaurant facilities owned or leased by the Company, generally for a period of 20 years. Under the terms of these leases, they are required to pay related occupancy costs which include maintenance, insurance and property taxes. The Company receives notes from franchisees in connection with the sales of Company-operated restaurants. During fiscal 1996, the Company sold certain of its franchise notes receivable, with partial recourse, to an independent third party for cash proceeds of approximately $8.4 million. The remaining notes bear interest from 7.0% to 12.5%, mature in five to 15 years and are secured by an interest in the restaurant equipment sold. Revenues from franchised and licensed restaurants consist of the following:
(Dollars in thousands) 1996 1995 1994 ---- ---- ---- Food service................. $56,036 $57,058 $60,979 Rental income................ 10,116 10,257 10,575 Royalties.................... 5,704 6,284 6,253 Initial fees................. 116 91 297 Other ..................... (21) 12 531 ------- ------- ------- $71,951 $73,702 $78,635 ======= ======= =======
Operating costs and expenses for franchised and licensed restaurants consist of the following:
(Dollars in thousands) 1996 1995 1994 ---- ---- ---- Food service............................................ $56,590 $57,334 $60,827 Occupancy and other operating expenses.................. 12,249 12,537 12,725 ------- ------- ------- $68,839 $69,871 $73,552 ======= ======= =======
F-15 36 NOTE 14 -- INTEREST EXPENSE Interest expense consists of the following:
(Dollars in thousands) 1996 1995 1994 ---- ---- ---- Notes payable and revolving credit lines........... $ (3,585) $(2,484) $ (3,472) Capital lease obligations.......................... (5,898) (6,194) (6,454) Other ........................................... (521) (524) (461) --------- -------- -------- $(10,004) $(9,202) $(10,387) ======== ======= ========
NOTE 15 -- OTHER INCOME, NET Other income, net is comprised of the following:
(Dollars in thousands) 1996 1995 1994 ---- ---- ---- Net losses on sales of restaurants................. $ (338) $ (463) $ (162) Gains on sales of investments...................... 206 564 2,675 Losses on sales of investments..................... (351) (721) (1,325) Loss on long-term investments...................... (1,624) -- -- Dividend income.................................... 854 357 559 Lease income....................................... 981 -- -- Interest income.................................... 2,494 3,261 4,401 ------- ------ ------- $ 2,222 $2,998 $ 6,148 ======= ====== =======
NOTE 16 -- INCOME TAXES Income tax expense is comprised of the following:
(Dollars in thousands) 1996 1995 1994 ---- ---- ---- Current: Federal...................................... $2,018 $(1,996) $ 2,327 State ....................................... 772 (304) 672 ------ ------- ------- 2,790 (2,300) 2,999 ------ ------- ------- Deferred: Federal...................................... 3,878 2,517 (1,471) State ....................................... 333 917 (204) ------ ------- ------- 4,211 3,434 (1,675) ------ ------- ------- 7,001 1,134 1,324 Tax effect of cumulative effect of change in accounting principle......................... -- -- 512 ------ ------- ------- $7,001 $ 1,134 $ 1,836 ====== ======= =======
F-16 37 A reconciliation of income tax expense at the federal statutory rate of 34% to the Company's provision for taxes on income is as follows:
(Dollars in thousands) 1996 1995 1994 ---- ---- ---- Income taxes at statutory rate................................. $6,104 $ 815 $ 2,131 State income taxes, net of federal income tax benefit.......... 738 800 306 Dividend exclusion............................................. (29) (86) (161) Targeted jobs tax credits...................................... (243) (338) (774) Alternative minimum tax credit................................. -- (551) -- Adjustment of prior years' estimated liabilities............... 289 157 -- Increase in valuation allowance................................ 152 298 200 Other, net..................................................... (10) 39 134 ------- ------- ------- $ 7,001 $ 1,134 $ 1,836 ======= ======= =======
Temporary differences and carryforwards gave rise to a significant amount of deferred tax assets and liabilities as follows:
(Dollars in thousands) 1996 1995 1994 ---- ---- ---- Deferred tax asset: Capitalized leases........................................... $ 8,641 $ 8,589 $ 8,449 Workers' compensation reserve................................ 5,905 6,413 6,976 Exit costs................................................... 2,905 3,068 4,997 Targeted jobs tax credit carryforward........................ 3,055 2,695 2,137 Arbitration judgment and other litigation.................... -- -- 1,539 Other........................................................ 5,437 5,208 5,612 ------- ------- ------- 25,943 25,973 29,710 Less: Valuation allowance.................................... 1,945 1,793 1,495 ------- ------- ------- Total deferred tax asset....................................... 23,998 24,180 28,215 ------- ------- ------- Deferred tax liability: Depreciation................................................. 9,896 9,537 10,210 Safe harbor leases........................................... 586 1,054 1,461 Long-term investment......................................... 2,017 -- -- Other........................................................ 1,443 1,335 1,234 ------- ------- ------- Total deferred tax liability................................... 13,942 11,926 12,905 ------- ------- ------- Net deferred tax asset......................................... $10,056 $12,254 $15,310 ======= ======= =======
While there can be no assurance that the Company will generate any earnings or any specific level of earnings in future years, management believes it is more likely than not that the Company will realize the majority of the benefit of the existing net deferred tax asset at January 31, 1996, based on the Company's current, historical and future pre-tax earnings. The Company had targeted jobs tax credit carryforwards of $3.1 million, which expire in the years 2007 through 2011, available at January 31, 1996. The Company also had an alternative minimum tax credit carryforward of $700,000 with no expiration date. NOTE 17 -- EMPLOYEE BENEFIT AND RETIREMENT PLANS Profit Sharing and Savings Plan The Company maintains a voluntary contributory profit sharing and savings investment plan for all eligible employees other than operations hourly employees. Annual contributions under the profit sharing portion of the plan are determined at the discretion of the Company's Board of Directors. Under the savings investment portion of the plan, participants may elect to contribute up to 15% of their annual salary to the plan. Through December 31, 1994, up to 4% of employee contributions were matched by the Company. Total Company contributions to this plan for fiscal 1995 and 1994 were $344,000 and $813,000, respectively. F-17 38 Pension Plan The Company also maintains a defined benefit pension plan covering substantially all operations employees qualified as to age and service. For fiscal 1996, 1995 and 1994, pension contributions were $512,000, $438,000 and $442,000, respectively. Under the terms of the defined benefit plan, pension expense is computed based upon an independent actuarial valuation study. Company contributions under this plan are funded quarterly. As of February 1, 1995 and 1994, the accumulated benefit obligation related to the plan was $2.0 million and $1.8 million, respectively. On January 1, 1996, the pension plan was amended to limit participation in the plan only to those employees who have become participants in the plan on or before December 31, 1995 and any future contribution of plan benefits will discontinue after December 31, 1995. Stock Purchase Plan In fiscal 1995, the Board of Directors adopted, and stockholders subsequently approved in fiscal 1996, an Employee Stock Purchase Plan ("ESPP"). Under the terms of the ESPP, eligible employees may voluntarily purchase, at current market prices, up to 500,000 shares of the Company's common stock through payroll deductions. Pursuant to the ESPP, employees may contribute an amount between 3% and 10% of their base salary. The Company contributes varying amounts as specified in the ESPP. During fiscal 1996, 25,782 shares were purchased and allocated to employees, based upon their contributions, at an average price of $12.71 per share. The Company contributed $8,000 or an equivalent of 460 shares for the year ended January 31, 1996. Stock Incentive Plans The Company's 1994 stock incentive plan was approved by stockholders in June 1994. The 1994 plan is substantially similar to the 1993 plan under which, as a result of the merger, no further options may be granted. Awards granted to eligible employees under the 1994 plan are not restricted as to any specified form or structure, with such form, vesting and pricing provisions determined by the Compensation Committee of the Board of Directors. The 1994 plan also provides for the automatic annual award of stock options to nonemployee directors and nonemployee director members of the Executive Committee. Options generally have a term of five years from the date of grant for the nonemployee directors and ten years from the date of grant for employees, become exercisable at a rate of 33-1/3% per year following the grant date and are priced at the fair market value of the shares on the date of grant. A total of 1,750,000 shares are available for grants of options or other awards under this plan, of which 859,235 stock options were outstanding as of January 31, 1996, with exercise prices ranging from $6.75 per share to $16.00 per share. The Company's 1993 stock incentive plan was superseded by the 1994 plan, as discussed above. As of January 31, 1996, 424,522 stock options, with exercise prices ranging from $7.13 per share to $13.38 per share, were outstanding under the plan. No further awards may be granted under this plan. The Company's 1982 stock option plan expired in September 1992. Under this plan, stock options were granted to key employees to purchase up to 3,000,000 shares of its common stock at a price equal to or greater than the fair market value at the date of grant. The options generally had a term of 10 years from the grant date and became exercisable at a rate of 25%, 35% and 40% per year following the grant date. The exercise price of the 328,037 options outstanding as of January 31, 1996 under this plan ranges from $5.21 per share to $13.38 per share. Transactions under all plans are as follows:
Number of Shares 1996 1995 1994 - ---------------- ---- ---- ---- Outstanding at beginning of year.............. 1,188,033 1,372,634 1,554,766 Granted....................................... 896,406 437,206 579,812 Cancelled..................................... (117,642) (454,296) (116,349) Exercised..................................... (355,003) (167,511) (645,595) --------- --------- --------- Outstanding at end of year.................... 1,611,794 1,188,033 1,372,634 ========== ========= ========= Exercisable at end of year.................... 621,741 648,324 745,310 ========== ========= =========
F-18 39 NOTE 18 -- SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest and income taxes are as follows:
(Dollars in thousands) 1996 1995 1994 ---- ---- ---- Interest (net of amount capitalized)............................................. $10,198 $ 9,208 $10,558 Income taxes..................................................................... 2,571 645 1,675 Noncash investing and financing activities are as follows: (Dollars in thousands) 1996 1995 1994 ---- ---- ---- Noncash investing and financing activities: Transfers of marketable securities to (from) other current assets............. $ -- $(6,776) $ 6,776 Transfer of inventory, current assets and property and equipment to long-term investments.......................................... 20,352 -- -- Other investing activities: Net change in dividend receivable........................................... (714) -- -- Leasing activities: Capital lessee additions...................................................... 856 -- 505 Capital lessor additions .................................................... -- -- 538 Other leasing activities: Increase in property and equipment.......................................... -- (1,356) -- Reverse certain lease subsidy reserves...................................... -- 2,680 -- Franchising and other disposition activities: (Increase) decrease in property and equipment................................. (2,875) -- 344 (Increase) decrease in notes receivable....................................... 2,796 1,356 (551) Decrease in accounts receivable............................................... 689 -- -- Sale/leaseback activities: Transfer of restaurant property costs to property and equipment............................................................... -- -- 6,750
NOTE 19 -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The following table presents summarized quarterly results. (Dollars in thousands, except per share amounts)
Quarter 1ST 2ND 3RD 4TH ------ ------ ------ ------ FISCAL 1996 Total revenues................................. $137,625 $108,040 $113,074 $106,698 Operating income .............................. 5,264 6,554 7,373 6,544 Net income ................................... 1,915 2,808 3,021 3,208 Net income per common and common equivalent share....................... $ .11 $ .15 $ .16 $ .17 ======== ======== ======== ======== FISCAL 1995 Total revenues................................. $135,006 $105,308 $103,791 $ 99,642 Operating income.............................. 2,904 2,392 1,581 1,725 Net income (loss).............................. 656 864 286 (542) Net income (loss) per common and common equivalent share....................... $ .04 $ .05 $ .02 $ (.03) ======== ======== ======== ========
F-19 40 Quarterly operating results are not necessarily representative of operations for a full year for various reasons, including the seasonal nature of the quick-service restaurant industry, unpredictable adverse weather conditions which may affect sales volume and food costs. In addition, all quarters have 12-week accounting periods, except the first quarters of 1996 and 1995, which have 16-week accounting periods. NOTE 20 -- COMMITMENTS AND CONTINGENT LIABILITIES Concurrent with the new unsecured line of credit (see Note 8), a letter of credit facility, totalling $12.4 million, was established. Two letters of credit are outstanding under this facility, one for $8.5 million issued in May 1995 and a second one for $3.9 million issued in September 1994. The $8.5 million letter of credit secures the Company's potential workers' compensation claims and will expire on June 30, 1996. The State of California requires that the Company provide this letter of credit each year based on its existing claims experience, or set aside a comparable amount of cash or investment securities in a trust account. The upcoming annual security requirement, which begins May 1, 1996, was lowered to $8.3 million due to an improvement in the Company's claims experience. A new letter of credit will be issued for this amount on or before May 1, 1996. The $3.9 million letter of credit secures the Industrial Revenue Bonds issued in connection with the construction of the Company's Northern California distribution facility and expires in January 1997. The Company's standby letter of credit agreements with various banks expire as follows:
(Dollars in thousands) June 1996............................. $ 8,586 January 1997.......................... 3,852 April 2000............................ 275 ------- $12,713 =======
The Company sold certain of its franchise notes receivable, with recourse, to an independent third party (see Note 13). Under the terms of the sale agreement, as of January 31, 1996, the Company is contingently liable for approximately $5.9 million. NOTE 21 -- SUMMIT ACQUISITION The Company and Summit Family Restaurants Inc. ("Summit") signed an Agreement and Plan of Merger and Reorganization ("Merger Agreement") dated as of November 30, 1995, amended as of January 24, 1996 and further amended as of April 2, 1996. Under the terms of the Merger Agreement, as amended, CKE acquired from ABS MB (JB) Limited Partnership 946,714 shares of Series A Convertible Preferred Stock of Summit on April 4, 1996 at a purchase price of $5.27 per share in cash, and will complete the acquisition of Summit in a merger transaction in which all 4,805,902 shares of Summit common stock (other than dissenting shares, if any) will be converted into $2.63 in cash and .165 shares of CKE common stock (the "Summit Merger"). The number of shares of CKE common stock to be issued in the Summit Merger remains subject to adjustment under certain circumstances. The consummation of the Summit Merger is currently expected to occur in May 1996, and remains subject to a number of conditions, including Summit's shareholder approval and other customary conditions. The total estimated purchase price of this transaction is approximately $30.3 million. Summit operates restaurants under three concepts: 77 company-operated and 24 franchised family style JB's Restaurants; six Galaxy Diner restaurants, which is a promising new 50's diner concept; and 16 HomeTown Buffet restaurants, which are operated by Summit as a franchisee. The Company anticipates the potential disposition of Summit's 16 HomeTown Buffet Restaurants for cash. Any such sale would generate positive cash flows to reduce the total cash outlay required for the Summit Merger, and for use in the expansion of the Galaxy Diner concept. CKE's management is performing an ongoing evaluation regarding the nature and scope of Summit's JB's Restaurants operations. Various short- and long-term strategic considerations are being assessed, including: the sale, franchise, or other disposition of certain JB's Restaurants; the conversion of certain JB's Restaurants to the Carl's Jr. and Galaxy Diner concept and the retention of a number of JB's Restaurants. F-20 41 EXHIBIT INDEX EXHIBITS 2-1 Agreement and Plan of Merger and Reorganization, dated as of November 30, 1995; First Amendment to Agreement and Plan of Merger and Reorganization, dated as of January 24, 1996; and Second Amendment to Agreement and Plan of Merger and Reorganization, dated as of April 2, 1996 between CKE Restaurants, Inc. and Summit Family Restaurants Inc. The schedules to the Merger Agreement are omitted. The Registrant agrees to furnish supplementally any omitted schedule to the Securities and Exchange Commission upon request. (1) 3-1 Certificate of Incorporation of the Registrant, incorporated herein by reference to exhibit 3-1 to the Registrant's Form S-4 Registration Statement Number 33-52523. 3-2 Bylaws of Registrant as currently in effect. (1) 10-1 Franchise Development Agreement dated May 17, 1985 by and between Carl Karcher Enterprises, Inc. and Carl Leo Karcher, filed as exhibit 10-53 to the Company's Form 10-K Annual Report as amended for fiscal year ended January 27, 1992, and is hereby incorporated by reference. 10-2 Form of Franchise Agreement by and between Carl Karcher Enterprises, Inc., and Carl Leo Karcher or CLK, Inc. filed as exhibit 10-54 to the Company's Form 10-K Annual Report as amended for fiscal year ended January 27, 1992, and is herein incorporated by reference, relating to the following units:
Date Unit Address ---- ---- ------- May 17, 1985 724 68980 Highway 111 May 17, 1985 725 102 N. Sunrise Way May 17, 1985 726 72840 Highway 111 May 17, 1985 727 81-770 Highway 111 May 17, 1985 728 73-125 Highway 111 May 17, 1985 729 57222 29 Palms Highway May 17, 1985 730 13010 Palm Drive May 17, 1985 731 2520 Palm Canyon Drive December 31, 1985 768 2601 W. Broadway January 25, 1986 769 160 S. Lovekin January 25, 1986 770 1750 4th Avenue January 25, 1986 771 2215 S. Fourth October 27, 1987 772 115 Main Street March 3, 1987 786 1489 Adams Avenue July 6, 1987 793 72305 Vaimer Road October 27, 1987 794 2195 Highway 95 June 14, 1988 811 40050 Washington June 26, 1989 820 I-8 Business Loop November 12, 1990 873 32-250 Date Palm Drive April 1, 1991 895 50-087 Harrison Street December 16, 1991 7013 41717 Big Bear Blvd. January 20, 1992 7038 275 N. Lake Havasu Blvd. April 7, 1993 7085 78-672 Highway 111
E-1 42 10-3 Form of Sublease between Carl Karcher Enterprises, Inc., and Carl Leo Karcher or CLK, Inc., filed as exhibit 10-62 to the Company's Form 10-K Annual Report as amended for fiscal year ended January 27, 1992, and is herein incorporated by reference, relating to the following units:
Date Unit Address ---- ---- ------- May 16, 1985 724 68980 Highway 111 May 16, 1985 725 102 N. Sunrise Way May 16, 1985 728 73-125 Highway 111 May 16, 1985 729 57222 29 Palms Highway May 15, 1985 730 13010 Palm Drive May 16, 1985 731 2520 Palm Canyon Drive September 25, 1987 794 2195 Highway 95 December 16, 1991 7013 41717 Big Bear Blvd.
10-4 Land and Building Sublease Agreement dated December 31, 1985 by and between Carl Karcher Enterprises, Inc. and Carl Leo Karcher, filed as exhibit 10-71 to the Company's Form 10-K Annual Report as amended for fiscal year ended January 27, 1992, and is hereby incorporated by reference. 10-5 Lease Agreement dated September 25, 1987 between Carl Karcher Enterprises, Inc. and Carl Leo Karcher, as amended by the Amendment to Lease dated October 19, 1990 (Unit 772), filed as exhibit 10-81 to the Company's Form 10-K Annual Report as amended for fiscal year ended January 27, 1992, and is hereby incorporated by reference. 10-6 Form of Assignment of Franchise Agreement, Release and Continuing Guaranty between Carl Karcher Enterprises, Inc., and Carl Leo Karcher or CLK, Inc., filed as exhibit 10-51 to the Company's Form 10-K Annual Report as amended for fiscal year ended January 27, 1992, and is herein incorporated by reference, relating to the following units:
Date Unit Address ---- ---- ------- June 9, 1992 724 68980 Highway 111 June 9, 1992 725 102 N. Sunrise Way June 9, 1992 727 81-770 Highway 111 June 9, 1992 728 73-125 Highway 111 June 9, 1992 729 57222 29 Palms Highway June 9, 1992 731 2520 Palm Canyon Drive June 9, 1992 768 2601 W. Broadway June 9, 1992 769 160 S. Lovekin June 9, 1992 770 1750 4th Avenue June 9, 1992 771 2215 S. Fourth October 27, 1987 772 115 Main Street January 27, 1987 786 1498 Adams Avenue October 5, 1987 793 72305 Vaimer Road August 1, 1988 811 40050 Washington January 1, 1990 820 388 West 32nd Street November 13, 1990 873 32-250 Date Palm Drive March 29, 1991 895 50-087 Harrison Street December 16, 1991 7013 41717 Big Bear Boulevard January 20, 1992 7038 275 N. Lake Havasu Boulevard April 7, 1993 7085 78-672 Highway 111
10-7 Assignment of Franchise Agreement and Sublease Agreement by Carl Leo Karcher to CLK, Inc. and Continuing Guaranty each dated August 17, 1989 (Unit 730), filed as exhibit 10-39 to the Company's Form 10-K Annual Report as amended for fiscal year ended January 27, 1992, and is hereby incorporated by reference. 10-8 Assignment of Franchise Agreement and Lease Agreement by Carl Leo Karcher to CLK, Inc. and Continuing Guaranty each dated August 17, 1989 (Unit 726) filed as exhibit 10-94 to the Company's Form 10-K Annual Report as amended for fiscal year ended January 27, 1992, and is hereby incorporated by reference. E-2 43 10-9 Assignment of Restaurant Franchise Agreement by Carl Leo Karcher to CLK, Inc. dated November 28, 1989 (Unit 704), filed as exhibit 10-95 to the Company's Form 10-K Annual Report as amended for fiscal year ended January 27, 1992, and is hereby incorporated by reference. 10-10 License Agreement dated January 27, 1987 by and between Carl Karcher Enterprises, Inc. and CLK, Inc., as amended by the Amendment to License Agreement dated October 10, 1990, filed as exhibit 10-76 to the Company's Form 10-K Annual Report as amended for fiscal year ended January 27, 1992, and is hereby incorporated by reference. 10-11 Agreement to Purchase dated October 27, 1987 by and between Carl Karcher Enterprises, Inc. and Carl Leo Karcher (Unit 772), filed as exhibit 10-83 to the Company's Form 10-K Annual Report as amended for fiscal year ended January 27, 1992, and is hereby incorporated by reference. 10-12 Agreement to Purchase dated October 27, 1987 by and between Carl Karcher Enterprises, Inc. and Carl Leo Karcher (Unit 794), filed as exhibit 10-84 to the Company's Form 10-K Annual Report as amended for fiscal year ended January 27, 1992, and is hereby incorporated by reference. 10-13 Conditional Assignment of Lease dated November 7, 1990 between CLK, Inc. and Carl Karcher Enterprises, Inc. (Unit 770), filed as exhibit 10-97 to the Company's Form 10-K Annual Report as amended for fiscal year ended January 27, 1992, and is hereby incorporated by reference. 10-14 Conditional Assignment of Lease dated November 7, 1990 between CLK, Inc. and Carl Karcher Enterprises, Inc. (Unit 771), filed as exhibit 10-98 to the Company's Form 10-K Annual Report as amended for fiscal year ended January 27, 1992, and is hereby incorporated by reference. 10-15 Conditional Assignment of Lease dated December 18, 1990 by and between CLK, Inc. and Carl Karcher Enterprises, Inc. (Unit 726), filed as exhibit 10-101 to the Company's Form 10-K Annual Report as amended for fiscal year ended January 27, 1992, and is hereby incorporated by reference. 10-16 Development Agreement dated March 22, 1991 between Carl Karcher Enterprises, Inc. and Carl Leo Karcher, filed as exhibit 10-102 to the Company's Form 10-K Annual Report as amended for fiscal year ended January 27, 1992, and is hereby incorporated by reference. 10-17 Security Agreement dated December 16, 1991 between Carl Karcher Enterprises, Inc. and Carl Leo Karcher (Unit 7013/433), filed as exhibit 10-111 to the Company's Form 10-K Annual Report as amended for fiscal year ended January 27, 1992, and is hereby incorporated by reference. 10-18 Carl Karcher Enterprises, Inc. Profit Sharing Plan, as amended, filed as exhibit 10-21 to the Company's Registration Statement on Form S-1, file No. 2-73695, and is hereby incorporated by reference.(2) 10-19 Carl Karcher Enterprises, Inc. Key Employee Stock Option Plan, filed as exhibit 10-24 to the Company's Registration Statement on Form S-1, file No. 2-80283, and is hereby incorporated by reference.(2) 10-20 Carl Karcher Enterprises, Inc. 1993 Employee Stock Incentive Plan, filed as exhibit 10-123 to the Company's Form 10-K Annual Report for fiscal year ended January 25, 1993, and is hereby incorporated by reference.(2) 10-21 CKE Restaurants, Inc. 1994 Stock Incentive Plan, incorporated herein by reference to exhibit 99 to the Registrant's Form S-8 Registration Statement Number 33-55337.(2) 10-22 CKE Restaurants, Inc. 1994 Employee Stock Purchase Plan, incorporated herein by reference to exhibit 99 to the Registrant's Form S-8 Registration Statement Number 33-56313.(2) 10-23 Employment Agreement dated January 1, 1994, by and between Carl Karcher Enterprises, Inc. and Carl N. Karcher, filed as exhibit 10-89 to the Company's Form 10-K Annual Report for fiscal year ended January 31, 1994, and is hereby incorporated by reference. 10-24 Employment Agreement dated November 8, 1994, by and between Carl Karcher Enterprises, Inc. and C. Thomas Thompson, filed as exhibit 10-83 to the Company's Form 10-K Annual Report for fiscal year ended January 30, 1995, and is hereby incorporated by reference.(2) E-3 44 10-25 Business Loan Agreement dated October 31, 1994, by and between CKE Restaurants, Inc., Carl Karcher Enterprises, Inc., Boston Pacific, Inc. and Bank of America National Trust and Savings Association, filed as exhibit 10-79 to the Company's Form 10-K Annual Report for fiscal year ended January 30, 1995, and is hereby incorporated by reference. 10-26 Continuing Guaranty dated October 31, 1994, by and between CKE Restaurants, Inc. and Bank of America National Trust and Savings Association, filed as exhibit 10-80 to the Company's Form 10-K Annual Report for fiscal year ended January 30, 1995, and is hereby incorporated by reference. 10-27 Amendment No. One to Loan Agreement dated April 5, 1995, by and between CKE Restaurants, Inc., Carl Karcher Enterprises, Inc., Boston Pacific, Inc. and Bank of America National Trust and Savings Association, filed as exhibit 10-81 to the Company's Form 10-K Annual Report for fiscal year ended January 30, 1995, and is hereby incorporated by reference. 10-28 Amendment No. Two and Waiver to Business Loan Agreement dated April 28, 1995, by and between CKE Restaurants, Inc., Carl Karcher Enterprises, Inc. and Bank of America National Trust and Savings Association, filed as exhibit 10-82 to the Company's Form 10-K Annual Report for fiscal year ended January 30, 1995, and is hereby incorporated by reference. 10-29 Amendment No. Three and Waiver to Business Loan Agreement dated as of July 3, 1995, by and between CKE Restaurants, Inc., Carl Karcher Enterprises, Inc. and Bank of America National Trust and Savings Association.(1) 10-30 Amendment No. Four and Consent to Business Loan Agreement dated as of April 15, 1996, by and between CKE Restaurants, Inc., Carl Karcher Enterprises, Inc. and Bank of America National Trust and Savings Association.(1) 10-31 Settlement and Development Agreement by and between Carl Karcher Enterprises, Inc., CKE Restaurants, Inc. and GB Foods Corporation dated as of May 1995. (1) 10-32 Agreement to Contribute Assets dated April 17, 1995 by and between Boston West, L.L.C. and Boston Pacific, Inc., filed as exhibit 10-84 to the Company's Form 10-K Annual Report for fiscal year ended January 30, 1995, and is hereby incorporated by reference. 10-33 Amended and Restated Limited Liability Company Agreement of Boston West, L.L.C. (a Delaware Limited Liability Company) dated April 16, 1995, filed as exhibit 10-85 to the Company's Form 10-K Annual Report for fiscal year ended January 30, 1995, and is hereby incorporated by reference. 10-34 First Amendment to the Amended and Restated Limited Liability Company Agreement of Boston West, L.L.C. dated May 15, 1995. (1) 10-35 Second Amendment to the Amended and Restated Limited Liability Company Agreement of Boston West, L.L.C. dated May 30, 1995. (1) 10-36 Third Amendment to the Amended and Restated Limited Liability Company Agreement of Boston West, L.L.C. dated September 12, 1995. (1) 10-37 Fourth Amendment to the Amended and Restated Limited Liability Company Agreement of Boston West, L.L.C. dated January 31, 1996. (1) 10-38 Unit Option Agreement by and between Boston West, L.L.C. and Boston Pacific, Inc., dated as of September 12, 1995. (1) 10-39 Unit Repurchase Agreement by and between Boston West, L.L.C. and Boston Pacific, Inc. dated as of September 12, 1995. (1) 10-40 Term Loan and Security Agreement between Carl Karcher Enterprises, Inc. and Heller Financial, Inc., dated December 19, 1995. (1) 10-41 Amendment No. One to Term Loan and Security Agreement dated as of January 22, 1996, by and between Carl Karcher Enterprises, Inc. and Heller Financial, Inc. (1) E-4 45 11-1 Computation of Earnings Per Share.(1) 12-1 Computation of Ratios. (1) 21-1 Subsidiaries of Registrant.(1) 23-1 Consent of KPMG Peat Marwick LLP.(1) 27-1 Financial Data Schedule (included only with electronic filing). - ----------------------- (1) Filed herewith. (2) A management contract or compensatory plan or arrangement required to be filed as an exhibit to this report pursuant to Item 14(c) of Form 10-K. E-5 EX-2.1 2 AGREEMENT AND PLAN OF MERGER AND REORGANIZATION 1 EXHIBIT 2.1 AGREEMENT AND PLAN OF MERGER AND REORGANIZATION BY AND AMONG SUMMIT FAMILY RESTAURANTS INC. AND CKE RESTAURANTS, INC. DATED: NOVEMBER 30, 1995 -------------- FOLLOWED BY -------------- FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER AND REORGANIZATION BY AND AMONG SUMMIT FAMILY RESTAURANTS INC. AND CKE RESTAURANTS, INC. DATED: JANUARY 24, 1996 -------------- FOLLOWED BY -------------- SECOND AMENDMENT TO AGREEMENT AND PLAN OF MERGER AND REORGANIZATION BY AND AMONG SUMMIT FAMILY RESTAURANTS INC. AND CKE RESTAURANTS, INC. DATED: APRIL 2, 1996 A-1 2 AGREEMENT AND PLAN OF MERGER AND REORGANIZATION BY AND AMONG SUMMIT FAMILY RESTAURANTS INC. AND CKE RESTAURANTS, INC. DATED: NOVEMBER 30, 1995 A-2 3 TABLE OF CONTENTS
PAGE ---- ARTICLE 1 MERGER AND CLOSING 1.1 Formation of Merger Sub......................................................... 1 1.2 The Merger...................................................................... 1 1.3 Closing......................................................................... 1 1.4 Effects of the Merger........................................................... 1 1.5 Certificate of Incorporation and Bylaws......................................... 1 ARTICLE 2 CONVERSION OF SECURITIES; DISSENTING SHARES 2.1 Conversion of Securities........................................................ 2 2.2 Dissenting Shares............................................................... 2 2.3 Fractional Shares............................................................... 2 2.4 Exchange of Certificates........................................................ 2 ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF SUMMIT 3.1 Organization, Good Standing and Authority....................................... 3 3.2 Binding Agreement............................................................... 3 3.3 Capitalization.................................................................. 3 3.4 Subsidiaries.................................................................... 4 3.5 No Violation.................................................................... 4 3.6 Exchange Act Reports and Financial Statements................................... 4 3.7 Information in Registration Statement and Proxy Statement....................... 4 3.8 Consents and Approvals.......................................................... 5 3.9 No Brokers...................................................................... 5 3.10 Insurance....................................................................... 5 3.11 Labor Matters................................................................... 5 3.12 ERISA........................................................................... 5 3.13 Taxes........................................................................... 6 3.14 Title to Properties............................................................. 6 3.15 Environmental Matters........................................................... 6 3.16 Litigation...................................................................... 7 3.17 Contracts and Commitments....................................................... 7 3.18 Compliance with Laws............................................................ 7 3.19 Absence of Certain Developments................................................. 7 ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF CKE 4.1 Organization, Good Standing and Authority....................................... 8 4.2 Binding Agreement............................................................... 8 4.3 Capitalization.................................................................. 8 4.4 Subsidiaries.................................................................... 9 4.5 No Violation.................................................................... 9 4.6 Exchange Act Reports and Financial Statements................................... 9
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PAGE ---- 4.7 Information in Registration Statement and Proxy Statement....................... 9 4.8 Consents and Approvals.......................................................... 10 4.9 No Brokers...................................................................... 10 4.10 Litigation...................................................................... 10 4.11 Compliance with Laws............................................................ 10 4.12 Absence of Certain Developments................................................. 10 ARTICLE 5 ACTIONS BY SUMMIT AND CKE PENDING THE MERGER 5.1 Maintenance of Business......................................................... 11 5.2 Certain Prohibited Transactions................................................. 11 5.3 Registration Statement/Proxy Statement.......................................... 12 5.4 Investigation by CKE............................................................ 12 5.5 Title Reports................................................................... 13 5.6 Consents and Best Efforts....................................................... 13 5.7 Notification of Certain Matters................................................. 13 5.8 Reasonable Best Efforts......................................................... 13 5.9 Letter of Summit's Accountants.................................................. 13 5.10 Letter of CKE's Accountants..................................................... 13 5.11 Stockholders Meeting............................................................ 14 5.12 New York Stock Exchange Listing................................................. 14 5.13 Benefit Plans................................................................... 14 5.14 Stock Option Plans.............................................................. 14 5.15 Change of Control Letters....................................................... 15 5.16 Exclusivity..................................................................... 15 ARTICLE 6 CONDITIONS TO SUMMIT'S OBLIGATIONS 6.1 Completion of Other Transactions................................................ 15 6.2 Representations, Warranties and Covenants....................................... 15 6.3 Consents........................................................................ 16 6.4 No Governmental Proceeding or Litigation........................................ 16 6.5 Certificates.................................................................... 16 6.6 Tax Opinion..................................................................... 16 6.7 Corporate Documents............................................................. 16 6.8 HSR Act......................................................................... 16 6.9 Fairness Opinion................................................................ 16 ARTICLE 7 CONDITIONS TO CKE'S OBLIGATIONS 7.1 Completion of Other Transactions................................................ 16 7.2 Representations, Warranties and Covenants....................................... 17 7.3 Consents........................................................................ 17 7.4 No Governmental Proceeding or Litigation........................................ 17 7.5 Certificates and Opinions....................................................... 17 7.6 Tax Opinion..................................................................... 17 7.7 Corporate Documents............................................................. 17
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PAGE ---- 7.8 HSR Act......................................................................... 17 7.9 Dissenting Shares............................................................... 17 7.10 Fairness Opinion................................................................ 17 ARTICLE 8 ACTIONS BY SUMMIT AND CKE AFTER THE CLOSING 8.1 Further Assurances.............................................................. 18 8.2 Directors' and Officers' Insurance.............................................. 18 ARTICLE 9 TERMINATION AND AMENDMENT 9.1 Termination..................................................................... 18 9.2 Effect of Termination........................................................... 19 9.3 Certain Fees.................................................................... 19 ARTICLE 10 DEFINITIONS 10.1 Defined Terms................................................................... 19 ARTICLE 11 MISCELLANEOUS 11.1 Survival of Representations, Etc. .............................................. 22 11.2 Assignment...................................................................... 23 11.3 Notices......................................................................... 23 11.4 Choice of Law................................................................... 23 11.5 Entire Agreement; Amendments and Waivers........................................ 23 11.6 Counterparts.................................................................... 23 11.7 Invalidity...................................................................... 23 11.8 Headings........................................................................ 23 11.9 Expenses........................................................................ 24 11.10 Specific Performance............................................................ 24 11.11 Attorneys Fees.................................................................. 24 11.12 Publicity....................................................................... 24 11.13 Confidential Information........................................................ 24
SUMMIT DISCLOSURE SCHEDULE CKE DISCLOSURE SCHEDULE A-5 6 [CONFORMED COPY] AGREEMENT AND PLAN OF MERGER AND REORGANIZATION This Agreement and Plan of Merger and Reorganization, dated as of November 30, 1995 (this "Agreement"), is by and among Summit Family Restaurants Inc., a Delaware corporation ("Summit"), and CKE Restaurants, Inc., a Delaware corporation ("CKE"). Capitalized terms not otherwise defined have the meanings set forth in Article 10. RECITALS A. The respective Boards of Directors of Summit and CKE have determined that the merger (the "Merger") of Summit with and into a newly-formed wholly-owned subsidiary ("Merger Sub") of CKE, with Merger Sub surviving the Merger, would be advantageous and beneficial to their respective corporations and stockholders. B. For United States federal income tax purposes, the parties intend that the Merger qualify as a reorganization under Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"). AGREEMENT NOW, THEREFORE, in consideration of the mutual covenants, representations, warranties and promises contained herein and for other good and valuable consideration the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE 1 MERGER AND CLOSING 1.1 FORMATION OF MERGER SUB. Prior to the Effective Time, CKE shall organize Merger Sub as a wholly-owned subsidiary of CKE incorporated under the laws of the State of Delaware. 1.2 THE MERGER. At the Effective Time, in accordance with this Agreement and the applicable provisions of the Delaware General Corporation Law ("DGCL"), Summit shall in the Merger merge with and into Merger Sub, with Merger Sub surviving the Merger, the separate existence of Summit shall cease, and Merger Sub shall continue as the surviving corporation as set forth in the Certificate of Merger. Merger Sub is sometimes referred to herein as the "Surviving Corporation." 1.3 CLOSING. The closing of the Merger and the other transactions contemplated herein (the "Closing") shall be held at 10:00 a.m., Utah time on February 28, 1996 or such later date to which Summit and CKE shall agree (the "Closing Date") at the offices of Summit, unless the parties hereto otherwise agree. After satisfaction or waiver of all conditions to the Closing, the parties hereto will cause the Merger to be consummated on the Closing Date by filing with the Secretary of State of the State of Delaware a certificate of merger as is required by, and executed in accordance with, the relevant provisions of DGCL (the time of such filing being the "Effective Time"). 1.4 EFFECTS OF THE MERGER. The Merger shall have the effects set forth in the DGCL. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time, the separate corporate existence of Summit shall cease and Merger Sub shall be the Surviving Corporation and shall have all of the rights, privileges, immunities and power and shall be subject to all duties and liabilities of a corporation organized under the DGCL. 1.5 CERTIFICATE OF INCORPORATION AND BYLAWS. The Certificate of Incorporation of Merger Sub in effect at the Effective Time shall be the Certificate of the Surviving Corporation. The Bylaws of Merger Sub in effect A-6 7 at the Effective Time shall be the Bylaws of the Surviving Corporation until amended in accordance with applicable law. ARTICLE 2 CONVERSION OF SECURITIES; DISSENTING SHARES 2.1 CONVERSION OF SECURITIES. At the Effective Time, by virtue of the Merger and without any action on the part of the parties hereto each share of Summit Common Stock and Summit Preferred Stock issued and outstanding immediately prior to the Effective Time, other than shares of Summit Common Stock and Summit Preferred Stock for which appraisal rights have been exercised pursuant to Section 262 of the DGCL, will be converted into the right to receive the Merger Consideration. "Merger Consideration" means, for each share of Summit Common Stock and each share of Summit Preferred Stock: (a) $3.00 in cash (without interest) and (b) a number of shares of CKE Common Stock equal to $3.00 divided by the Adjusted CKE Price. "Adjusted CKE Price" means (a) if the Average CKE Price is equal to or greater than $17.00, $14.625 plus the amount by which the Average CKE Price exceeds $17.00, (b) if the Average CKE Price is less than $17.00 and equal to or greater than $12.25, $14.625, (c) if the Average CKE Price is less than $12.25 and CKE has not exercised the Fill-Up Election, $14.625 and (d) if the Average CKE Price is less than $12.25 and CKE has exercised the Fill-Up Election, $14.625 less the amount by which $12.25 exceeds the Average CKE Price. "Average CKE Price" means the average of the per share closing sales prices of CKE Common Stock on the New York Stock Exchange for the 20 consecutive trading days ending two days prior to the Closing Date. 2.2 DISSENTING SHARES. Notwithstanding Section 2.1, shares of Summit Common Stock and Summit Preferred Stock outstanding immediately prior to the Effective Time and held by holders who have not voted in favor of the Merger or consented thereto in writing and who have demanded appraisal for such shares in accordance with Section 262 of the DGCL shall not be converted into rights to receive the Merger Consideration, and holders of such shares of Summit Common Stock and Summit Preferred Stock shall be entitled to receive payment from Summit of the appraised value of such shares of Summit Common Stock and Summit Preferred Stock in accordance with the provisions of such Section 262 unless and until such holders fail to perfect or shall have effectively withdrawn or lost their rights to appraisal and payment under the DGCL. If after the Effective Time any such holder fails to perfect or withdraws or otherwise loses his right to appraisal or payment, such shares shall be treated as if they had been converted as of the Effective Time into a right to receive the Merger Consideration. 2.3 FRACTIONAL SHARES. No fractional shares of CKE Common Stock shall be issued in the Merger. All fractional shares of CKE Common Stock that a holder of CKE Common Stock would otherwise be entitled to receive as a result of the Merger shall be aggregated, and if a fractional share results from such aggregation, such holder shall be entitled to receive from Summit, in lieu thereof, an amount in cash (without interest) derived through the aggregation by Summit of all such fractional shares otherwise issuable, the sale of such shares of CKE Common Stock in the market and the distribution of the proceeds thereof calculated by multiplying the average per share sales price by the fraction of a share of CKE Common Stock to which such holder would otherwise have been entitled. Under no circumstances will the aggregate cash consideration paid by CKE in the Merger constitute more than 50% of the total aggregate consideration paid by CKE in the Merger, with the CKE Common Stock issued in the Merger being valued at the Adjusted CKE Price. 2.4 EXCHANGE OF CERTIFICATES. From and after the Effective Time, each holder of an outstanding certificate which immediately prior to the Effective Time represented outstanding shares of Summit Common Stock and Summit Preferred Stock shall be entitled to receive in exchange therefor, upon surrender thereof to an exchange agent to be selected by CKE, a certificate or certificates representing the number of whole shares of CKE Common Stock into which such holder's shares were converted and a check representing (i) any cash payable in lieu of any fractional share of CKE Common Stock computed set forth above and (ii) the cash A-7 8 portion of the Merger Consideration into which such holder's shares were converted. No holder of a certificate or certificates which immediately prior to the Effective Time represented shares of Summit Common Stock or Summit Preferred Stock shall be entitled to receive any dividend or other distribution from CKE until surrender of such holder's certificate for a certificate or certificates representing shares of Summit Common Stock or Summit Preferred Stock. Upon such surrender, there shall be paid to the holder the amount of any dividends or other distributions (without interest) which became payable on or after the Effective Time, but which were not paid by reason of the foregoing, with respect to the number of whole shares of CKE Common Stock represented by the certificates issued upon such surrender. After the Effective Time, there shall be no further registration of transfers of Summit Common Stock and Summit Preferred Stock and holders of certificates representing Summit Common Stock or Summit Preferred Stock shall not enjoy the rights and privileges of holders of such stock or CKE Common Stock other than to exchange the certificates for the Merger Consideration. If, after the Effective Time, certificates representing Summit Common Stock or Summit Preferred Stock are presented to the Surviving Corporation, they shall be cancelled and exchanged for the Merger Consideration. From and after the Effective Time, CKE shall, however, be entitled to treat certificates for shares of Summit Common Stock and Summit Preferred Stock which have not yet been surrendered for exchange and for which appraisal rights have not been perfected pursuant to the DGCL as evidencing solely the right to receive the Merger Consideration represented by such certificates, notwithstanding any failure to surrender such certificates in exchange therefor. If any certificate for shares of CKE Common Stock is to be issued in a name other than that in which the certificate for shares of Summit Common Stock or Summit Preferred Stock surrendered in exchange therefor is registered, it shall be a condition of such issuance that the person requesting such issuance shall pay any transfer or other tax required by reason of the issuance of certificates for such shares of CKE Common Stock in a name other than that of the registered holder of the certificate surrendered, or shall establish to the satisfaction of CKE or its agent that such tax has been paid or is not applicable. Notwithstanding the foregoing, CKE shall not be liable to any holder of shares of Summit Common Stock or Summit Preferred Stock for any shares of CKE Common Stock (or dividends or distributions with respect thereto) or cash in lieu of fractional shares delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF SUMMIT Except as otherwise set forth in the Summit Disclosure Schedule, Summit hereby represents and warrants to CKE as follows: 3.1 ORGANIZATION, GOOD STANDING AND AUTHORITY. Each of Summit and its Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation. Each of Summit and its Subsidiaries has full corporate power to carry on its business, as it is now being conducted, and to own, lease or operate the properties and assets it now owns, leases or operates. Each of Summit and its Subsidiaries is qualified to do business, is in good standing and has all required business licenses in each jurisdiction in which its failure to obtain or maintain such qualification, good standing or license could have a Material Adverse Effect on Summit. 3.2 BINDING AGREEMENT. Summit has all requisite corporate power and corporate authority to enter into this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all requisite corporate action, subject to approval of Summit's stockholders. This Agreement is a legal, valid and binding obligation of Summit, enforceable against it in accordance with its terms, except as enforcement thereof may be limited by general principles of equity (regardless of whether such enforceability is considered in a proceeding at law or in equity) and the effect of applicable bankruptcy, insolvency, moratorium and other similar laws of general application relating to or affecting creditors' rights generally, including, without limitation, the effect of statutory or other law regarding fraudulent conveyances and preferential transfers. 3.3 CAPITALIZATION. The authorized capitalization of Summit consists solely of (a) 10,000,000 shares of Summit Common Stock, of which 4,798,811 shares were issued and outstanding as of November 30, 1995; A-8 9 (b) 500,000 shares of $.01 par value junior common stock, none of which are outstanding on the date hereof; and (c) 1,000,000 shares of Summit Preferred Stock, of which 946,714 shares were issued and outstanding as of the date hereof. On the Closing Date there will not be outstanding: (i) any options, warrants or other rights to purchase from Summit any capital stock of Summit, except for (x) the options, warrants and other rights to purchase capital stock of Summit outstanding as of the date of this Agreement as set forth on the Summit Disclosure Schedule, (y) options, warrants or other rights to purchase capital stock of Summit granted to employees and officers of Summit as set forth on the Summit Disclosure Schedule and (z) options, warrants and other rights to purchase in the aggregate not more than 50,000 shares of Summit Common Stock granted to new or newly promoted employees in the ordinary course of business; (ii) any securities convertible into or exchangeable for shares of such stock; or (iii) any other commitments of any kind for the issuance of additional shares of capital stock or options, warrants or other securities of Summit. 3.4 SUBSIDIARIES. There is set forth in the Summit Disclosure Schedule (i) the name and percentage ownership by Summit of each of its Subsidiaries; (ii) the jurisdiction of incorporation, capitalization and ownership of each Subsidiary; and (iii) the names of the officers and directors of each Subsidiary. 3.5 NO VIOLATION. (a) Except as set forth in the Summit Disclosure Schedule, none of Summit or any of its Subsidiaries is (i) in violation of its respective Charter Documents, or (ii) to Summit's best knowledge, in default in the performance of any obligation, agreement or condition contained in any Applicable Agreement, which violation or default could, singly or in the aggregate, have a Material Adverse Effect on Summit. (b) Except as set forth in the Summit Disclosure Schedule, neither the execution or delivery by Summit of this Agreement or the performance by Summit of its obligations under this Agreement will (i) constitute a breach or violation under the Charter Documents of Summit or any of its Subsidiaries; or (ii) conflict with, violate, constitute a material breach or material violation of or a material default (with the passage of time or otherwise) under, require the consent of any Person under, give to others any rights of termination, amendment, acceleration or cancellation of or result in the imposition of a material Lien on any of the properties or assets of Summit or any of its Subsidiaries or an acceleration of material indebtedness pursuant to, any Applicable Agreement. 3.6 EXCHANGE ACT REPORTS AND FINANCIAL STATEMENTS. Summit has furnished or will upon request furnish CKE with copies of its Annual Report on Form 10-K for the fiscal years ended September 28, 1992, September 27, 1993, September 26, 1994 and September 25, 1995 (when available), in each case with exhibits, and all other reports filed or required to be filed with the Securities and Exchange Commission (the "SEC") under applicable laws, rules and regulations since September 26, 1994 (all such reports being herein collectively called the "Summit SEC Reports"), each as filed with the SEC. Each such Summit SEC Report when it became effective or was filed with the SEC, or as amended, as the case may be, complied in all material respects with the requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as applicable, and the rules and regulations of the SEC thereunder, and did not on the date of filing or amendment, if any, contain any untrue statement of material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. The financial statements contained in said Summit SEC Reports: (i) were prepared in accordance with the books and records of Summit and its Subsidiaries; (ii) were prepared in accordance with GAAP and with Regulation S-X promulgated under the Exchange Act; (iii) fairly present Summit's consolidated financial condition and the consolidated results of its operations, cash flows and shareholders equity as at the relevant dates thereof and for the periods covered thereby; (iv) contain and reflect all necessary adjustments and accruals for a fair presentation of its consolidated financial condition and the consolidated results of its operations, cash flows and shareholders equity for the periods covered by said financial statements; (v) contain and reflect adequate provisions for all reasonably anticipated liabilities for all taxes, federal, state, local or foreign, with respect to the periods then ended and all prior periods; and (vi) with respect to contracts and commitments for the sale of goods or the provision of services by Summit or any Subsidiary, contain and reflect adequate reserves for all reasonably anticipated material losses, costs and expenses in excess of expected receipts. A-9 10 3.7 INFORMATION IN REGISTRATION STATEMENT AND PROXY STATEMENT. None of the information supplied or to be supplied by Summit for inclusion or incorporation by reference in (i) the registration statement on Form S-4 to be filed with the SEC by CKE in connection with the issuance of shares of CKE Common Stock in the Merger (the "Registration Statement"), will, at the time it becomes effective under the Securities Act and at the Effective Time, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading and (ii) the proxy statement relating to the meeting of Summit's stockholders to be held in connection with the Merger (the "Proxy Statement") will, at the date mailed to Summit's stockholders, at the time of the meeting of stockholders to be held in connection with the Merger and at the Effective Time, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. The Proxy Statement will, when filed with the SEC by Summit, comply as to form in all material respects with the provisions of the Exchange Act and the rules and regulations thereunder, except that no representation is made by Summit with respect to statements made therein about CKE and based on information supplied by CKE in writing specifically for inclusion in the Proxy Statement. 3.8 CONSENTS AND APPROVALS. No consent, approval or authorization of, or declaration, filing or registration with, any United States federal or state governmental or regulatory authority is required to be made or obtained by Summit in connection with the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby, other than any filings required under the HSR Act, the Exchange Act and the Securities Act and filings with NASDAQ. 3.9 NO BROKERS. Except as set forth in the Summit Disclosure Schedule, neither Summit nor any affiliate thereof has entered into or will enter into any agreement, arrangement or understanding with any person or firm which will result in any obligation of Summit to pay any finder's fee, brokerage commission or similar payment in connection with the transactions contemplated hereby. 3.10 INSURANCE. Summit and its Subsidiaries maintain, with reputable insurers, insurance in such amounts, including deductible arrangements, and of such a character as is usually maintained by reasonably prudent managers of companies engaged in the same or similar business. 3.11 LABOR MATTERS. Except as set forth in the Summit Disclosure Schedule, (i) there is no labor strike, dispute, slowdown, work stoppage or lockout pending or, to the best knowledge of Summit, threatened against or affecting Summit or any Subsidiary and, during the past five years, there has not been any such action; (ii) there are no union claims to represent the employees of Summit or any Subsidiary; (iii) neither Summit nor any Subsidiary is a party to or bound by any collective bargaining or similar agreement with any labor organization, or work rules or practices agreed to with any labor organization or employee association applicable to employees of Summit or any Subsidiary; (iv) none of the employees of Summit or any Subsidiary are represented by any labor organization and none of Summit or any Subsidiary have any knowledge of any current union organizing activities among the employees of Summit or any Subsidiary, nor to their best knowledge does any question concerning representation exist concerning such employees; (v) Summit and its Subsidiaries are, and have at all times been, in material compliance with all Applicable Employment Laws and are not engaged in any ULP; (vi) there is no ULP charge or complaint against Summit or any Subsidiary pending or, to the best knowledge of Summit, threatened before the NLRB; and (vi) there is no grievance or arbitration proceeding arising out of any collective bargaining agreement or other grievance procedure relating to Summit or any Subsidiary. 3.12 ERISA. (a) Summit and its Subsidiaries are in compliance with the provisions of ERISA and the Code, and (ii) have not incurred any material liability with respect to any Benefit Plan or Multiemployer Plan to the Pension Benefit Guaranty Corporation (the "PBGC"), the Internal Revenue Service (the "IRS"), any Benefit Plan or Multiemployer Plan or any other party (other than to make premium payments to the PBGC or benefit payments to participants in the ordinary course of business). Each of the Benefit Plans of Summit is in material compliance with all Applicable Laws. The IRS has determined that each such Benefit Plan that is intended to be a qualified plan under section 401(a) of the Code is so qualified and Summit is aware of no A-10 11 event or circumstance that would adversely affect such determination. The liabilities incurred under each such Benefit Plan are accurately reflected on the financial statement included in the Summit SEC Reports. No condition exists or event or transaction has occurred that could result in Summit or any Subsidiary incurring any liability, fine or penalty with respect to any Benefit Plan or Multiemployer Plan that could, singly or in the aggregate, have a Material Adverse Effect on Summit. (b) Summit has previously furnished the Buyer with (i) a true and complete copy of each Benefit Plan, (ii) a copy of each trust or other funding arrangement applicable to each Benefit Plan, (iii) the most recent summary plan description and any applicable summary of material modifications of each Benefit Plan, and (iv) the most recently prepared actuarial report and financial statement, if applicable. Except as contemplated herein, Summit and its Subsidiaries have no commitment or obligation to (x) create or incur any material liability with respect to, or cause to exist any other, employee benefit plan, program or arrangement, (y) enter into any material contract or agreement to provide compensation or benefits to any individual or (z) modify or terminate any Benefit Plan, other than with respect to a modification or termination required by ERISA or the Code. 3.13 TAXES. Except as set forth on the Summit Disclosure Schedule, all Tax Returns and reports required to be filed by Summit or any of its Subsidiaries have been filed or will be timely filed (taking into account extensions), all such Tax Returns are true, correct and complete in all material respects, and all Taxes, due or claimed to be due from Summit or any of its Subsidiaries have been paid, other than those currently payable without penalty or interest and for which an adequate reserve or accrual has been established. There are no: (a) tax audits pending with respect Tax Returns filed by Summit or of any of its Subsidiaries, (b) no waivers of the statute of limitations with respect to any Tax Return filed by Summit of any of the Subsidiaries or (c) to Summit's best knowledge, no actual or proposed additional Tax assessments for any fiscal period ending on or prior to the Closing Date against Summit or any of its Subsidiaries for which an adequate reserve or accrual has not been established. 3.14 TITLE TO PROPERTIES. Each of Summit and each Subsidiary (a) has legal and valid title to all the real properties and other assets (tangible, intangible or mixed) it reflects in the financial statements included in the Summit SEC Reports as owned, free and clear of all Liens (other than Permitted Liens) and free and clear of restrictions on the manner in which such property is presently being used, and (b) enjoys peaceful and undisturbed possession under all leases to which it is a party as lessee. All of the leases to which Summit or any Subsidiary is a party are legal, valid and binding and in full force and effect, and no payment default by Summit, any Subsidiary or, to the best knowledge of Summit, any other party thereto has occurred or is continuing thereunder. Except as set forth in the financial statements included in the Summit SEC Reports or on the Summit Disclosure Schedule, no property or asset, the value of which is reflected in the balance sheets included in the financial statements included in the Summit SEC Reports, is held under any lease or under any conditional sale or other title retention agreement. Except for such assets and facilities as are immaterial in the aggregate to the business of Summit and its Subsidiaries taken as a whole, all tangible assets and facilities of each of Summit and its Subsidiaries are in good condition and repair and are adequate for the uses to which they are being put. 3.15 ENVIRONMENTAL MATTERS. (a) Each of Summit and its Subsidiaries is in compliance with the provisions of all Environmental Laws, which compliance includes, but is not limited to, the possession by Summit or its Subsidiaries, as appropriate, of all licenses, permits and other governmental authorizations required under applicable Environmental Laws, and compliance with the terms and conditions thereof where the failure to comply could, singly or in the aggregate, have a Material Adverse Effect on Summit. None of Summit or any of its Subsidiaries has received any communication (written or oral), whether from a Governmental Authority, employee or otherwise, that alleges that Summit or any of its Subsidiaries is not in such compliance where the failure to comply could, singly or in the aggregate, have a Material Adverse Effect on Summit, and there are no currently existing circumstances known to Summit that, if not corrected, could prevent such compliance in the future. (b) There is no Environmental Claim pending or, to the best knowledge of Summit, threatened against Summit or any of its Subsidiaries or against any Person whose liability for any Environmental Claim Summit A-11 12 or any of its Subsidiaries has retained or assumed either contractually or by operation of law. To the best knowledge of Summit, there is no basis for any such claim. 3.16 LITIGATION. All Proceedings against Summit or any of its Subsidiaries or any of their properties or assets, and a brief description thereof are listed in the Summit Disclosure Schedule. There is no Proceeding or series of related Proceedings against or affecting Summit or any of its Subsidiaries or any of their properties or assets, that could, singly or in the aggregate, have a Material Adverse Effect on Summit. Neither Summit nor any of its Subsidiaries is subject to any judgment, injunction, decree, writ, interpretation or order of any Governmental Authority that could, singly or in the aggregate, have a Material Adverse Effect on Summit. 3.17 CONTRACTS AND COMMITMENTS. (a) Except as set forth in the Summit Disclosure Schedule, neither Summit nor any of its Subsidiaries will have any (i) agreement for the employment of any individual or agreements that contain any severance pay liabilities or obligations; or (ii) contract or commitment not terminable without penalty or cost on notice of thirty (30) days or less and which contains an obligation to pay and/or accrue more than $100,000 per year, other than real estate and equipment leases and franchise agreements. (b) Except as set forth in the Summit Disclosure Schedule: (i) to the best knowledge of Summit, neither Summit nor any of its Subsidiaries has breached, nor has received notice in writing or otherwise of any claim that it has breached, any of the terms of conditions of any agreement, contract or commitment set forth or required to be set forth in the Summit Disclosure Schedule, any agreement with HomeTown Buffet, Inc. or any franchise agreement with respect to a JB's restaurant, which breach or breaches singly or in the aggregate are reasonably likely to have a Material Adverse Effect on Summit, and (ii) to the best knowledge of Summit, there are no facts or conditions which have occurred or are anticipated to occur which, through the passage of time or the giving of notice, or both, would constitute a breach under any such contract which breach is reasonably likely to have a Material Adverse Effect on Summit. 3.18 COMPLIANCE WITH LAWS. Except as set forth on the Summit Disclosure Schedule, to the best knowledge of Summit, Summit and its Subsidiaries have complied with all applicable laws, regulations (including, without limitation, applicable occupational health and safety laws and regulations, applicable immigration laws and regulations and applicable laws governing the sale of franchises) and zoning ordinances of foreign, federal, state and local governments and all agencies thereof which affect the business, business practices or any owned or leased properties of Summit and its Subsidiaries and to which Summit and its Subsidiaries may be subject, except where such failure to comply would not singly or in the aggregate have a Material Adverse Effect on Summit. 3.19 ABSENCE OF CERTAIN DEVELOPMENTS. Except as set forth on the Summit Disclosure Schedule and except as expressly contemplated by this Agreement, since September 25, 1995, neither Summit nor any of its Subsidiaries has: (i) suffered a Material Adverse Effect in its business, financial condition, operating results, earnings, assets, customer, supplier, employee and sales representative relations, business prospects, business condition or financing arrangements or material casualty loss or damage to its assets (whether or not covered by insurance); (ii) issued, sold or transferred any notes, bonds or other debt securities or any equity securities, securities convertible, exchangeable or exercisable into equity securities, or warrants, options or other rights to acquire equity securities, in each case of Summit or any Subsidiary thereof; (iii) redeemed or repurchased, directly or indirectly, any shares of capital stock or declared, set aside or paid any dividends or made any other distributions with respect to any shares of its capital stock; (iv) borrowed any amount or incurred or become subject to any liabilities, except liabilities incurred in the ordinary course of business; (v) entered into, amended or terminated any lease, contract, agreement or commitment, or taken any other action or entered into any other transaction other than in the ordinary course of business and in A-12 13 accordance with past custom and practice or as contemplated by this Agreement, or entered into any transaction with any insider except as contemplated by this Agreement; (vi) entered into any other material transaction, whether or not in the ordinary course of business, or materially changed any business practice; (vii) made or granted any bonus or any wage, salary or compensation increase in excess of $50,000 per year to any director, officer, employee or sales representative, group of employees or consultant or made or granted any increase in any employee benefit plan or arrangement, or amended or terminated any existing employee benefit plan or arrangement or adopted any new employee benefit plan or arrangement; (viii) conducted its cash management customs and practices (including the collection of receivables, inventory control and payment of payables) other than in the usual and ordinary course of business in accordance with past custom and practice; (ix) changed or authorized any change in its Charter Documents; or (x) committed to any of the foregoing. ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF CKE Except as otherwise set forth in the CKE Disclosure Schedule, CKE hereby represents and warrants to Summit as follows: 4.1 ORGANIZATION, GOOD STANDING AND AUTHORITY. Each of CKE and its Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation. Each of CKE and its Subsidiaries has full corporate power to carry on its business, as it is now being conducted, and to own, lease or operate the properties and assets it now owns, leases or operates. Each of CKE and its Subsidiaries is qualified to do business, is in good standing and has all required business licenses in each jurisdiction in which its failure to obtain or maintain such qualification, good standing or license could have a Material Adverse Effect on CKE. 4.2 BINDING AGREEMENT. CKE has all requisite corporate power and corporate authority to enter into this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all requisite corporate action. This Agreement is a legal, valid and binding obligation of CKE, enforceable against it in accordance with its terms, except as enforcement thereof may be limited by general principles of equity (regardless of whether such enforceability is considered in a proceeding at law or in equity) and the effect of applicable bankruptcy, insolvency, moratorium and other similar laws of general application relating to or affecting creditors' rights generally, including, without limitation, the effect of statutory or other law regarding fraudulent conveyances and preferential transfers. 4.3 CAPITALIZATION. The authorized capitalization of CKE consists solely of (a) 50,000,000 shares of CKE Common Stock, of which 18,676,587 shares were issued and outstanding as of October 31, 1995; and (b) 5,000,000 shares of Preferred Stock, $.01 per share, of which no shares were issued or outstanding as of the date hereof. On the Closing Date there will not be outstanding: (i) any options, warrants or other rights to purchase from CKE any capital stock of CKE, except for (x) the options, warrants and other rights to purchase capital stock of CKE outstanding as of the date of this Agreement as set forth on the CKE Disclosure Schedule, or (y) options, warrants or other rights to purchase capital stock of CKE granted to employees and officers of CKE as set forth on the CKE Disclosure Schedule; (ii) any securities convertible into or exchangeable for shares of such stock; or (iii) any other commitments of any kind for the issuance of additional shares of capital stock or options, warrants or other securities of CKE other than rights to purchase not more than 400,000 shares of CKE Common Stock granted to existing officers, directors and employees and to new or newly promoted employees in the ordinary course of business. A-13 14 4.4 SUBSIDIARIES. There is set forth in the CKE Disclosure Schedule (i) the name and percentage ownership by CKE of each of its Subsidiaries; (ii) the jurisdiction of incorporation, capitalization and ownership of each Subsidiary; and (iii) the names of the officers and directors of each Subsidiary. 4.5 NO VIOLATION. (a) Except as set forth in the CKE Disclosure Schedule, none of CKE or any of its Subsidiaries is (i) in violation of its respective Charter Documents, or (ii) to CKE's best knowledge, in default in the performance of any obligation, agreement or condition contained in any Applicable Agreement, which violation or default could, singly or in the aggregate, have a Material Adverse Effect on CKE. (b) Except a set for in the CKE Disclosure Schedule, neither the execution or delivery by CKE of this Agreement or the performance by CKE of its obligations under this Agreement will (i) constitute a material breach or material violation under the Charter Documents of CKE or any of its Subsidiaries; or (ii) conflict with, violate, constitute a material breach or material violation of or a material default (with the passage of time or otherwise) under, require the consent of any Person under, give to others any rights of termination, amendment, acceleration or cancellation of or result in the imposition of a material Lien on any of the properties or assets of CKE or any of its Subsidiaries or an acceleration of material indebtedness pursuant to, any Applicable Agreement. 4.6 EXCHANGE ACT REPORTS AND FINANCIAL STATEMENTS. CKE has furnished or will upon request furnish CKE with copies of its Annual Report on Form 10-K for the fiscal years ended January 31, 1993, 1994 and 1995 and its Quarterly Reports on Form 10-Q for the quarters ended May 22, 1995 and August 14, 1995, in each case with exhibits, and all other reports filed or required to be filed with the Securities and Exchange Commission (the "SEC") under applicable laws, rules and regulations since January 31, 1995 (all such reports being herein collectively called the "CKE SEC Reports"), each as filed with the SEC. Each such CKE SEC Report when it became effective or was filed with the SEC, or as amended, as the case may be, complied in all material respects with the requirements of the Exchange Act, as applicable, and the rules and regulations of the SEC thereunder and did not on the date of filing or amendment, if any, contain any untrue statement of material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. The financial statements contained in said CKE SEC Reports: (i) were prepared in accordance with the books and records of CKE and its Subsidiaries; (ii) were prepared in accordance with GAAP and with Regulation S-X promulgated under the Exchange Act; (iii) fairly present CKE's consolidated financial condition and the consolidated results of its operations, cash flows and shareholders equity as at the relevant dates thereof and for the periods covered thereby; (iv) contain and reflect all necessary adjustments and accruals for a fair presentation of its consolidated financial condition and the consolidated results of its operations, cash flows and shareholders equity for the periods covered by said financial statements; (v) contain and reflect adequate provisions for all reasonably anticipated liabilities for all taxes, federal, state, local or foreign, with respect to the periods then ended and all prior periods; and (vi) with respect to contracts and commitments for the sale of goods or the provision of services by CKE or any Subsidiary, contain and reflect adequate reserves for all reasonably anticipated material losses, costs and expenses in excess of expected receipts. 4.7 INFORMATION IN REGISTRATION STATEMENT AND PROXY STATEMENT. None of the information supplied or to be supplied by CKE for inclusion or incorporation by reference in (i) the Registration Statement will, at the time it becomes effective under the Securities Act and at the Effective Time, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading and (ii) the Proxy Statement will, at the date mailed to Summit's stockholders, at the time of the meeting of stockholders to be held in connection with the Merger and at the Effective Time, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. The Registration Statement will, when filed with the SEC by CKE, comply as to form in all material respects with the provisions of the Securities Act and the rules and regulations thereunder, except that no representation is A-14 15 made by CKE with respect to statements made therein based on information supplied by Summit for inclusion in the Registration Statement. 4.8 CONSENTS AND APPROVALS. No consent, approval or authorization of, or declaration, filing or registration with, any United States federal or state governmental or regulatory authority is required to be made or obtained by CKE in connection with the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby, other than any filings required under the HSR Act, the Exchange Act, the Securities Act and filings with the New York Stock Exchange. 4.9 NO BROKERS. Except as set forth in the CKE Disclosure Schedule, neither CKE nor any affiliate thereof has entered into or will enter into any agreement, arrangement or understanding with any person or firm which will result in any obligation of CKE to pay any finder's fee, brokerage commission or similar payment in connection with the transactions contemplated hereby. 4.10 LITIGATION. All material proceedings against CKE or any of its Subsidiaries or any of their properties or assets, and a brief description thereof are listed in the Disclosure Schedule. There is no Proceeding or series of related Proceedings against or affecting CKE or any of the Subsidiaries or any of their properties or assets, that could, singly or in the aggregate, have a Material Adverse Effect on CKE. Neither CKE nor any of its Subsidiaries is subject to any judgment, injunction, decree, writ, interpretation or order of any Governmental Authority that could, singly or in the aggregate, have a Material Adverse Effect on CKE. 4.11 COMPLIANCE WITH LAWS. Except as set forth on the CKE Disclosure Schedule, to the best knowledge of CKE, CKE and its Subsidiaries have complied with all applicable laws, regulations (including, without limitation, applicable occupational health and safety laws and regulations and applicable immigration laws and regulations) and zoning ordinances of foreign, federal, state and local governments and all agencies thereof which affect the business, business practices or any owned or leased properties of CKE and its Subsidiaries and to which CKE and its Subsidiaries may be subject, except where such failure to comply would not singly or in the aggregate have a Material Adverse Effect on CKE. 4.12 ABSENCE OF CERTAIN DEVELOPMENTS. Except as set forth on the CKE Disclosure Schedule and except as expressly contemplated by this Agreement, since August 14, 1995, neither CKE nor any of its Subsidiaries has: (i) suffered a Material Adverse Effect in its business, financial condition, operating results, earnings, assets, customer, supplier, employee and sales representative relations, business prospects, business condition or financing arrangements or material casualty loss or damage to its assets (whether or not covered by insurance); (ii) issued, sold or transferred any notes, bonds or other debt securities or any equity securities, securities convertible, exchangeable or exercisable into equity securities, or warrants, options or other rights to acquire equity securities, in each case of CKE or any Subsidiary thereof; (iii) redeemed or repurchased, directly or indirectly, any shares of capital stock or declared, set aside or paid any dividends or made any other distributions with respect to any shares of its capital stock; (iv) borrowed any amount or incurred or become subject to any liabilities, except liabilities incurred in the ordinary course of business; (v) entered into, amended or terminated any lease, contract, agreement or commitment, or taken any other action or entered into any other transaction other than in the ordinary course of business and in accordance with past custom and practice or as contemplated by this Agreement, or entered into any transaction with any insider except as contemplated by this Agreement; (vi) entered into any other material transaction, whether or not in the ordinary course of business, or materially changed any business practice; (vii) made or granted any bonus or any wage, salary or compensation increase in excess of $50,000 per year to any director, officer, employee or sales representative, group of employees or consultant or made or granted any increase in any employee benefit plan or arrangement, or amended or terminated A-15 16 any existing employee benefit plan or arrangement or adopted any new employee benefit plan or arrangement; (viii) conducted its cash management customs and practices (including the collection of receivables, inventory control and payment of payables) other than in the usual and ordinary course of business in accordance with past custom and practice; (ix) changed or authorized any change in its Charter Documents; or (x) committed to any of the foregoing. ARTICLE 5 ACTIONS BY SUMMIT AND CKE PENDING THE MERGER Summit and CKE covenant as follows for the period from the date hereof through the Closing Date: 5.1 MAINTENANCE OF BUSINESS. Summit shall, and shall cause each Subsidiary to, diligently carry on its business in the ordinary course consistent with past practice, including, without limitation, meeting its obligations as they become due and fulfilling its commitments to suppliers. Summit shall cause its existing insurance policies to be maintained in effect through the Closing Date. 5.2 CERTAIN PROHIBITED TRANSACTIONS. Without the prior written approval of CKE or except as otherwise contemplated under this Agreement, prior to the Effective Time Summit shall not, and shall cause each of its Subsidiaries not to: (a) incur any indebtedness for borrowed money, assume, guarantee, endorse or otherwise become responsible for obligations of any other individual, partnership, firm or corporation, or make any loans or advances to any individual, partnership, firm or corporation, except in the ordinary course of business and consistent with past practice and, with respect to indebtedness, pursuant to existing agreements; (b) issue any shares of its capital stock or any other securities or any securities convertible into shares of its capital stock or any other securities, other than shares issued upon exercise of issued and outstanding options, warrants and other rights to purchase capital stock of Summit, which rights are outstanding as of the date hereof and are reflected in Schedule 3.3 of the Summit Disclosure Schedule; (c) pay or incur any obligation to pay any dividend on its capital stock or make or incur any obligation to make any distribution or redemption with respect to capital stock; (d) make any change to its Certificate of Incorporation or bylaws other than the filing of the Certificate of Merger; (e) mortgage, pledge or otherwise encumber any of its properties or assets or sell, transfer or otherwise dispose of any of its properties or assets (other than (i) shares of HomeTown Buffet, Inc. common stock held by Summit and (ii) restaurants in the process of being disposed of or transferred as set forth in the Summit Disclosure Schedule) or cancel, release, compromise or assign any indebtedness owed to it or any claims held by it, except in the ordinary course of business and consistent with past practice; (f) make any investment of a capital nature either by purchase of stock or securities, contributions to capital, property transfer or otherwise, or by the purchase of any property or assets of any other individual, partnership, firm or corporation, except in the ordinary course of business and consistent with past practice; (g) make any material tax election or make any material change in Summit's accounting principles or practices; (h) enter into any material contracts that would involve the payment or accrual of payments of more than $100,000 in any fiscal year or enter into any additional franchise agreements; or A-16 17 (i) do any other act which would cause any representation or warranty of Summit in this Agreement to be or become untrue. 5.3 REGISTRATION STATEMENT/PROXY STATEMENT. Subject to the terms and conditions of this Agreement, Summit and CKE each agree to use their respective reasonable best efforts to take, or cause to be taken, all actions, and to do, or cause to be done, all things necessary, proper or advisable by such party with respect to (i) the prompt preparation and filing of the Registration Statement by CKE with the SEC under the Securities Act relating to the offer and sale of the CKE Common Stock in the Merger and (ii) the prompt preparation and filing by Summit of the Proxy Statement pertaining to solicitation of approval of Summit's stockholders, the form of which shall be included as part of the Registration Statement, (iii) such actions as may be required to have the Registration Statement declared effective under the Securities Act and to have the Proxy Statement cleared by the SEC, in each case as promptly as practicable, including by consulting with the other parties hereto as to, and responding promptly to, any SEC comments with respect thereto, and (iv) such actions as may be required to be taken under applicable state securities or blue sky laws in connection with the issuance of the CKE Common Stock contemplated hereby. Each party hereto shall promptly consult with the other party with respect to, provide any necessary information with respect to and provide the other party (and its counsel) copies of, all filings made with respect to the Registration Statement and the Proxy Statement. The information supplied by each party for inclusion in the Registration Statement and the Proxy Statement shall not, at (i) the time the Registration Statement (or any amendment or supplement thereto) is declared effective, (ii) the time the Proxy Statement (or any amendment thereof or supplement thereto) is first mailed to the stockholders of Summit and (iii) the time of the Summit stockholders' meeting, respectively, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading and shall comply as to form in all material respects with the requirements of the Securities Act. In addition, if at any time prior to the Effective Time any event or circumstance relating to either Summit or CKE or any of their respective subsidiaries, or any of their respective officers or directors, should be discovered by Summit or CKE, as the case may be, and which are required to be set forth in an amendment or supplement to the Registration Statement or the Proxy Statement, the discovering party shall promptly inform the other party of such event or circumstance. 5.4 INVESTIGATION BY CKE. Summit shall, and shall cause the Subsidiaries to, allow CKE during regular business hours through their employees, agents, advisors and representatives, to make such investigation of the business, properties, books and records of Summit and its Subsidiaries, and to conduct such examination of the condition of Summit and its Subsidiaries, as CKE deems necessary or advisable to familiarize itself and its lenders with such business, properties, books, records, condition and other matters, and to investigate the accuracy and completeness of the representations and warranties of Summit hereunder; provided however, that any information so obtained is subject to the confidentiality agreement previously entered into. Such access shall include authorizing Summit's legal, accounting, tax, insurance and environmental consultants and advisors to cooperate with CKE, its lenders and their advisors. In particular, Summit and its consultants and advisors shall cooperate with CKE to allow CKE (a) to conduct full environmental reviews or studies of Summit's properties and facilities and (b) to arrange for meetings between CKE and the franchisees under the Summit's franchise agreements; provided, that representatives from Summit may attend all such meetings. 5.5 TITLE REPORTS. As promptly as possible after the date hereof, Summit shall order preliminary title reports from a title insurance company or companies reasonably satisfactory to CKE for all real properties that are owned by Summit. Summit shall use its best efforts to cause such reports to be delivered to CKE on or prior to [30] days following the date hereof. 5.6 CONSENTS AND BEST EFFORTS. As promptly as possible after the date hereof, CKE and Summit shall make all filings required under the HSR Act. Summit and CKE will, as soon as possible, commence to take all action required to obtain all consents, approvals and agreements of, and to give all notices and make all other filings with, any third parties, including governmental authorities, necessary to authorize, approve or permit the Merger and the other transactions contemplated by this Agreement. In addition, subject to the terms and conditions herein provided, each of the parties hereto covenants and agrees to use its reasonable A-17 18 best efforts to take, or cause to be taken, all action or do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated hereby and to cause the fulfillment of the parties' obligations hereunder. 5.7 NOTIFICATION OF CERTAIN MATTERS. Summit shall give prompt notice to CKE, and CKE shall give prompt notice to Summit, of (i) the occurrence, or failure to occur, of any event which occurrence or failure would be likely to cause any representation or warranty contained in this Agreement to be untrue or inaccurate any time from the date hereof to the Closing Date and (ii) any material failure of Summit or CKE, as the case may be, to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder, and each party shall use all reasonable efforts to remedy same. Summit and the CKE acknowledge that they are presently unaware of any facts that cause any representation or warranty contained in this Agreement to be untrue or inaccurate. 5.8 REASONABLE BEST EFFORTS. Subject to the terms and conditions of this Agreement, each of the parties hereto agrees to use its reasonable best efforts to take, or cause to be taken, all actions, and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement. Each party shall promptly consult with the other with respect to, provide any necessary information with respect to and provide the other (or its counsel) copies of, all filings made by such party with any Governmental Entity in connection with this Agreement and the transactions contemplated hereby. In addition, if at any time prior to the Effective Time any event or circumstance relating to either Summit or CKE or any of their respective Subsidiaries, or any of their respective officers or directors, should be discovered by Summit or CKE, as the case may be, and which should be set forth in an amendment or supplement to the Registration Statement or the Proxy Statement, the discovering party shall promptly inform the other party of such event or circumstance. 5.9 LETTER OF SUMMIT'S ACCOUNTANTS. Following receipt by KMPG Peat Marwick LLP, Summit's independent auditors, of an appropriate request from CKE pursuant to Statement on Auditing Standards ("SAS") No. 72, Summit shall use its reasonable best efforts to cause to be delivered to CKE a letter of KMPG Peat Marwick LLP, dated a date within two business days before the date on which the Registration Statement shall become effective and addressed to CKE, in form and substance reasonably satisfactory to CKE and customary in scope and substance for letters delivered by independent public accountants in connection with registration statements similar to the Registration Statement, which letter shall be brought down to the Effective Time. 5.10 LETTER OF CKE'S ACCOUNTANTS. Following receipt by KMPG Peat Marwick LLP, CKE's independent auditors, of an appropriate request from CKE pursuant to SAS No. 72, CKE shall use its reasonable best efforts to cause to be delivered a letter of KMPG Peat Marwick LLP, dated a date within two business days before the date on which the Registration Statement shall become effective and addressed to CKE, in form and substance reasonably satisfactory to CKE and customary in scope and substance for letters delivered by independent public accountants in connection with registration statements similar to the Registration Statement, which letter shall be brought down to the Effective Time. 5.11 STOCKHOLDERS MEETING. Summit shall call a meeting of its stockholders for the purpose of voting upon this Agreement, the Merger and related matters. Summit will, through its Board of Directors, recommend to its stockholders approval of such matters and will coordinate and cooperate with respect to the timing of this meetings and shall use its reasonable best efforts to hold such meeting as soon as practicable after the date hereof. 5.12 NEW YORK STOCK EXCHANGE LISTING. CKE shall use its reasonable best efforts to cause the CKE Common Stock to be issued in the Merger to be approved for listing on the New York Stock Exchange, subject to official notice of issuance, prior to the Closing Date. 5.13 BENEFIT PLANS. (a) It is CKE's present intent to provide continuing employees of Summit and its Subsidiaries with employee benefits comparable to those provided to CKE employees. A-18 19 (b) CKE will, and will cause the Surviving Corporation to, honor without modification all employee severance plans (or policies) and employment and severance agreements of Summit or any of its Subsidiaries hereto identified in the Summit Disclosure Schedule as such agreements (or policies) are in effect on the date of this Agreement. 5.14 STOCK OPTION PLANS. (a) On or prior to the Effective Time, Summit and its Board of Directors (or a committee thereof) shall take all action necessary to implement the provisions contained herein; provided, that such provisions do not create an aggregate cash liability at the Effective Time in excess of $606,000. (b) At the election of each holder of an option to purchase shares of Summit Common Stock (a "Summit Stock Option") which is currently vested under a Summit Stock Option Plan, at the Effective Time, (i) all Summit Stock Options held by such holder shall become fully exercisable, (ii) such Summit Stock Options shall be cancelled and (iii) in consideration of such cancellation, Summit shall pay to such holders of such Summit Stock Options an amount in respect thereof equal to the product of (x) the excess, if any, of $6.00 over the respective exercise price thereof and (y) the number of shares of Summit Common Stock subject thereto, respectively (such payment to be net of any required withholding taxes). From and after the Effective Time, each outstanding Summit Stock Option, whether vested or unvested, that is not so cancelled shall constitute an option to acquire, on the same terms and conditions as were applicable under such Summit Stock Option, a number of shares of CKE Common Stock equal to (w) the product of $6.00 and the number of shares of Summit Common Stock purchasable upon exercise of the Summit Stock Option prior to the Effective Time divided by (x) the Average CKE Price, at an exercise price per share equal to (y) the aggregate exercise price for the shares of Summit Common Stock purchasable upon exercise of the Summit Stock Option prior to the Effective Date divided by (z) the aggregate number of shares of CKE Common Stock purchasable upon exercise of such Summit Stock Option following the Effective Date. (c) Except as provided herein or as otherwise agreed to by the parties, and to the extent permitted by the Summit Stock Option Plan, the Summit Stock Option Plan shall terminate as of the Effective Time and the provisions in any other plan, program or arrangement, providing for the issuance or grant of any other interest in respect of the capital stock of Summit or any of its Subsidiaries shall be deleted as of the Effective Time. 5.15 CHANGE OF CONTROL LETTERS. Summit shall cause the seven employees who have signed the Change of Control letters dated August 17, 1995 identified in Schedule 3.17(a)(i)(c) and Mr. McComas under the employment agreement dated November 24, 1993 to sign modifications extending to 90 days following the Closing the date after which such employees may voluntarily resign and obtain the severance benefits set forth therein. 5.16 EXCLUSIVITY. (a) Until the termination of this Agreement pursuant to Section 9.1, Summit will not, nor will it permit its officers, directors, affiliates, representatives or agents, directly or indirectly, to do any of the following: (i) discuss, negotiate, undertake, authorize, recommend, propose or enter into, either as the proposed surviving, merged, acquiring or acquired corporation, any transaction (other than the Merger) involving any disposition or other change of ownership of Summit's stock or assets, other than acquisitions and dispositions of equipment and other property in the ordinary course of Summit's business and dispositions of HomeTown Buffet, Inc. common stock owned by Summit (an "Acquisition Transaction"); (ii) facilitate, encourage, solicit or initiate or in any way engage in any discussion, negotiation or submission of a proposal or offer in respect of an Acquisition Transaction; (iii) furnish or cause to be furnished to any Person any information concerning the business, operations, properties or assets of Summit in connection with an Acquisition Transaction; or (iv) otherwise cooperate in any way with, or assist or participate in, facilitate or encourage, any effort or attempt by any other Person to do or seek any of the foregoing. A-19 20 Summit will inform CKE by telephone within 24 hours of its receipt of any proposal or bid (including the terms thereof and the Person making such proposal or bid) in respect of any Acquisition Transaction. ARTICLE 6 CONDITIONS TO SUMMIT'S OBLIGATIONS The obligations of Summit under this Agreement are subject to the satisfaction, on or prior to the Closing Date, of each of the following conditions: 6.1 COMPLETION OF OTHER TRANSACTIONS. Simultaneously with Summit's effectuation of the transactions to be effected by it at the Closing: (a) The Registration Statement shall have become effective under the Securities Act, the Proxy Statement shall have been cleared by the staff of the SEC and no stop order or proceeding seeking stop orders shall have been issued with respect to the Registration Statement or the Proxy Statement. (b) The Merger shall have been completed and the Certificate of Merger shall have been filed with the Secretary of State of the State of Delaware. (c) This Agreement and the Merger shall have been approved and adopted by the holders of the Summit Common Stock and the Summit Preferred Stock pursuant to and in accordance with the Charter Documents of Summit. (d) The CKE Common Stock shall have been approved for listing on the New York Stock Exchange, subject to official notice of issuance. 6.2 REPRESENTATIONS, WARRANTIES AND COVENANTS. All representations and warranties of CKE contained in this Agreement shall be true and correct at and as of the Closing Date as if such representations and warranties were made at and as of the Closing Date, and CKE shall have performed in all material respects all agreements and covenants required hereby to be performed by it prior to or at the Closing Date. There shall be delivered to Summit a certificate (signed by the President or a Vice President of CKE on behalf of the CKE) to the foregoing effect. 6.3 CONSENTS. All consents, approvals and waivers from governmental authorities, and other parties necessary to permit Summit to consummate the transactions as contemplated hereby, shall have been obtained, unless the failure to obtain any such consent, approval or waiver would not have a Material Adverse Effect upon Summit. 6.4 NO GOVERNMENTAL PROCEEDING OR LITIGATION. No suit, action, investigation, inquiry or other Proceeding by any Governmental Authority shall have been instituted or threatened which questions the validity or legality of the transactions contemplated hereby. No suit, action, investigation, inquiry or other Proceeding by any Governmental Authority or other Person shall have been instituted or threatened which questions the validity or legality of the transactions contemplated hereby and which could reasonably be expected to have a Material Adverse Effect on Summit or its Subsidiaries. 6.5 CERTIFICATES. CKE will furnish Summit with such certificates of its officers, directors and others to evidence compliance with the conditions set forth in this Article 6 as may be reasonably requested by Summit and Summit shall have received an opinion of counsel to CKE reasonably acceptable to Summit. 6.6 TAX OPINION. Summit shall have received an opinion of counsel (a copy of which will be delivered to CKE) to the effect that the Merger shall constitute a tax-free reorganization within the meaning of Section 368(a) of the Code. 6.7 CORPORATE DOCUMENTS. Summit shall have received from CKE resolutions adopted by the board of directors of CKE approving this Agreement and the transactions contemplated hereby, certified by CKE's corporate secretary. A-20 21 6.8 HSR ACT. The applicable waiting period, including any extension thereof, under the HSR Act shall have expired. 6.9 FAIRNESS OPINION. Summit shall have received a letter from Piper Jaffray Inc. confirming the opinion rendered to Summit's Board of Directors on or prior to the date hereof to the effect that the terms of the Merger are fair to the holders of Summit Common Stock from a financial point of view, a copy of which will be delivered to CKE at the Closing. ARTICLE 7 CONDITIONS TO CKE'S OBLIGATIONS The obligations of CKE under this Agreement, including the obligation to pay the Merger Consideration as provided hereby, are subject, in the discretion of CKE, to the satisfaction, on or prior to the Closing Date, of each of the following conditions: 7.1 COMPLETION OF OTHER TRANSACTIONS. Simultaneously with or prior to CKE's effectuation of the transactions to be effected by it at the Closing: (a) The Registration Statement shall have become effective under the Securities Act, the Proxy Statement shall have been cleared by the staff of the SEC and no stop order or proceeding seeking stop orders shall have been issued with respect to the Registration Statement or the Proxy Statement. (b) The Merger shall have been completed and the Certificate of Merger shall have been filed with the Secretary of State of the State of Delaware. (c) This Agreement and the Merger shall have been approved and adopted by the holders of the Summit Common Stock and the Summit Preferred Stock pursuant in accordance with the Charter Documents of Summit. (d) The CKE Common Stock shall have been approved for listing on the New York Stock Exchange, subject to official notice of issuance. 7.2 REPRESENTATIONS, WARRANTIES AND COVENANTS. All representations and warranties of Summit contained in this Agreement shall be true and correct at and as of the Closing Date as if such representations and warranties were made at and as of the Closing Date, and Summit and each Subsidiary shall have performed in all material respects all agreements and covenants required hereby to be performed by any of them prior to or at the Closing Date. There shall be delivered to CKE a certificate (signed by the President or a Vice President of Summit on behalf of Summit) to the foregoing effect. 7.3 CONSENTS. All consents, approvals and waivers from governmental authorities, and other parties necessary to permit Summit or CKE to consummate the transactions as contemplated hereby, shall have been obtained, unless the failure to obtain any such consent, approval or waiver would not have a Material Adverse Effect upon Summit. 7.4 NO GOVERNMENTAL PROCEEDING OR LITIGATION. No suit, action, investigation, inquiry or other Proceeding by any Governmental Authority shall have been instituted or threatened which questions the validity or legality of the transactions contemplated hereby. No suit, action, investigation, inquiry or other Proceeding by any Governmental Authority or other Person shall have been instituted or threatened which questions the validity or legality of the transactions contemplated hereby and which could reasonably be expected to have a Material Adverse Effect on Summit or its Subsidiaries. 7.5 CERTIFICATES AND OPINIONS. Summit shall furnish CKE with such certificates of the respective officers of Summit and others to evidence compliance with the conditions set forth in this Article 7 as may be reasonably requested by CKE and CKE shall have received an opinion of counsel to Summit reasonably acceptable to CKE. A-21 22 7.6 TAX OPINION. CKE shall have received an opinion of counsel to CKE (a copy of which will be delivered to Summit) to the effect that the Merger shall constitute a tax-free reorganization within the meaning of Section 368(a) of the Code. 7.7 CORPORATE DOCUMENTS. CKE shall have received from Summit resolutions adopted by the respective boards of directors of Summit approving this Agreement and the transactions contemplated hereby, certified by the corporate secretary of Summit. CKE shall have also received the corporate minute books, Certificates of Incorporation, bylaws and stock transfer books of Summit and each of the Subsidiaries. 7.8 HSR ACT. The applicable waiting period, including any extension thereof, under the HSR Act shall have expired. 7.9 DISSENTING SHARES. To the extent that holders of Summit Common Stock and Summit Preferred Stock are entitled to dissent from the Merger, the holders of not more than 10% of the shares of Summit Common Stock or Summit Preferred Stock shall have asserted dissenters' rights in accordance with the DGCL. 7.10 FAIRNESS OPINION. CKE shall have received a letter from NatWest Markets confirming the opinion rendered to CKE's Board of Directors on or prior to the date 10 days following to the date hereof to the effect that the terms of the Merger are fair to the holders of CKE Common Stock from a financial point of view, a copy of which will be delivered to Summit at the Closing. ARTICLE 8 ACTIONS BY SUMMIT AND CKE AFTER THE CLOSING 8.1 FURTHER ASSURANCES. On and after the Closing Date, Summit and CKE will take all appropriate action and execute all documents, instruments or conveyances of any kind which may be reasonably necessary or advisable to carry out any of the provisions hereof, including without limitation, putting CKE in possession and operating control of the business of Summit. 8.2 DIRECTORS' AND OFFICERS' INSURANCE. CKE shall either: (i) cause Summit to provide directors' and officers' and fiduciary liability insurance having substantially similar terms and conditions and providing substantially similar coverage as the directors' and officers' and fiduciary liability insurance maintained by Summit at the Effective Time for a period of one year following the Effective Time for all present directors and officers of Summit and its Subsidiaries, provided that CKE may substitute therefor policies of at least the same coverage and amounts containing terms and conditions which are no less advantageous, or (ii) cause Summit to purchase runoff extensions under its existing directors' and officers' and fiduciary liability insurance policies, extending the period for making claims under such policies for at least one year following the Effective Time; provided, however, that the total expense for such extensions shall not exceed $40,000. ARTICLE 9 TERMINATION AND AMENDMENT 9.1 TERMINATION. This Agreement may be terminated at any time prior to the Effective Time: (a) by mutual consent of CKE and Summit; (b) by either CKE or Summit if the Merger shall not have been consummated before April 15, 1996 despite the good faith effort of such party to effect such consummation (unless the failure to so consummate the Merger by such date shall be due to the action or failure to act of the party seeking to terminate this Agreement, which action or failure to act constitutes a breach of this Agreement); (c) by CKE if (i) (A) there are inaccuracies in the representations and warranties of Summit that would have a Material Adverse Effect on Summit, or (B) there has been a material breach on the part of Summit in the covenants of Summit set forth herein, or any failure on the part of Summit to comply with its material obligations hereunder, or any other events or circumstances shall have occurred, such that, in A-22 23 any such case, Summit could not satisfy on or prior to April 15, 1996, any of the conditions to the Closing set forth herein, or (ii) Summit's stockholders do not approve the Merger at the Summit stockholders' meeting; (d) by Summit if (i) (A) there are inaccuracies in the representations and warranties of CKE having a Material Adverse Effect on CKE or (B) there has been a material breach on the part of CKE in the covenants of CKE set forth herein, or any failure on the part of CKE to comply with its material obligations hereunder, or any other events or circumstances shall have occurred, such that, in any such case, CKE could not satisfy on or prior to April 15, 1996, any of the conditions to the Closing set forth in this Agreement, (ii) Summit's stockholders do not approve the Merger at the Summit stockholders' meeting, (iii) prior to the approval of the Merger by Summit's stockholders, Summit receives a firm offer with respect to an Acquisition Transaction that is reasonably capable of being financed and, in the good faith determination of its Board of Directors after consultation with its financial advisors, is financially superior to the Merger and the Board of Directors of Summit, after consulting with its outside counsel, determines that to proceed with the Merger would violate its fiduciary duties under applicable law, or (iv) if the Average CKE Price is less than $12.25, unless CKE notifies Summit in writing that it elects to proceed with the Closing by issuing additional shares of CKE Common Stock to compensate for the reduction in the Average CKE Price below $12.25 (the "Fill-Up Election"); or (e) by holders of the Summit Preferred Stock through written notice to Summit and CKE if the Average CKE Price is less than $12.25, unless CKE makes the Fill-Up Election. 9.2 EFFECT OF TERMINATION. In the event of a termination of this Agreement by either Summit or CKE as provided in Section 9.1, this Agreement shall forthwith become void and there shall be no liability or obligation on the part of CKE or Summit or their respective officers or directors (other than as provided in Section 9.3 below for termination by Summit pursuant to Section 9.1(d)(iii)) except for breach of the confidentiality provisions of Section 11.13, and except to the extent that such termination results from the willful breach by a party hereto of any of its representations, warranties, covenants or agreements set forth in this Agreement. 9.3 CERTAIN FEES. In the event that Summit terminates the Agreement pursuant to Section 9.1(d)(iii), Summit shall promptly pay CKE a cash fee of $800,000. In the event that all conditions to CKE's obligations as set forth in Article 7 are satisfied and CKE nevertheless fails to proceed with the Merger, CKE shall forthwith pay Summit a fee of $800,000, in addition to all other damages that Summit may suffer as a result of such breach. ARTICLE 10 DEFINITIONS 10.1 DEFINED TERMS. As used herein, the terms below shall have the following meanings: "Adjusted CKE Price" has the meaning set forth in Section 2.1. "Average CKE Price" has the meaning set forth in Section 2.1. "Acquisition Transaction" has the meaning set forth in Section 5.14. "Affiliate" of any specified Person means any other Person, directly or indirectly, controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control" when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Agreement" has the meaning set forth in the Preamble hereof. "Applicable Agreement" means, with respect to any Person, any bond, debenture, note or any other evidence of indebtedness, indenture, mortgage, deed of trust, lease, contract, agreement, license or instrument A-23 24 to which such Person or any of the Subsidiaries is a party or by which any of their respective properties or assets is bound. "Applicable Employment Law" means any Applicable Law governing or respecting employment or the termination thereof, employment practices, terms and conditions of employment, wages, hours of work, occupational safety and health, or discriminatory, wrongful or tortious conduct in connection with the employment relationship. "Applicable Law" means any law, statute, ordinance, judgment, injunction, decree, writ, regulation, interpretation, rule or order of any court or Governmental Authority, and any other governmental restrictions or requirements, including (without limitation) pursuant to any permit or license in effect on or prior to the Closing Date. "Benefit Plan" means, with respect to any Person, an employee benefit plan (as defined in Section 3(3) of ERISA) whether or not covered by ERISA, bonus or other incentive plan, deferred compensation, severance arrangement, executive compensation or any material fringe benefit plan or program maintained or contributed to by such Person or any of its Subsidiaries or with respect to which such Person or any of its Subsidiaries has an obligation, actual or potential. "Charter Documents" means, with respect to any Person, the articles or certificate of incorporation and by-laws, partnership agreement or other organizational documents of such Person. "CKE" has the meaning set forth in the Preamble. "CKE Common Stock" means the Common Stock, par value $.01 per share, of CKE. "CKE Disclosure Schedule" means a schedule delivered by CKE to Summit as of the date hereof (and which may be amended or modified on or prior to the Closing Date) which sets forth exceptions to the representations and warranties contained in Article 4 hereof and certain other information called for by Article 4 hereof and other provisions of this Agreement. "Closing" has the meaning set forth in Section 1.2. "Closing Date" has the meaning set forth in Section 1.2. "Code" has the meaning set forth in Recital B. "DGCL" has the meaning set forth in Section 1.1. "Effective Time" has the meaning set forth in Section 1.2. "Environmental Claim" means any claim, action, cause of action, investigation or notice (written or oral) by any Person alleging potential liability (including, without limitation, potential liability for investigatory costs, cleanup costs, governmental response costs, natural resources damages, property damages, personal injuries, or penalties) arising out of or resulting from (a) the presence, or release into the environment, of any Materials of Environmental Concern at any location, whether or not owned or operated by Summit or any of the Subsidiaries, or (b) any noncompliance with any Environmental Law. "Environmental Law" means any and all Applicable Laws relating to pollution or the protection of human health or the environment or to emissions, discharges, releases or threatened releases of any Materials of Environmental Concern into the environment (including without limitation ambient air, surface water, ground water, or land), or otherwise relating to the manufacture, processing, distribution, generation, treatment, storage, disposal, transport or handling of any Materials of Environmental Concern. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "Exchange Act" has the meaning set forth in Section 3.6. "Fill-Up Election" has the meaning set forth in Section 9.1(d)(iv). "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements A-24 25 and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as have been approved by a significant segment of the accounting profession, which are in effect on the date of this Agreement. "Governmental Authority" means any Federal, state, local or foreign court or governmental, administrative or regulatory authority or agency. "HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. "IRS" has the meaning set forth in Section 3.12. "Lien" means any mortgage, pledge, lien, encumbrance, charge or adverse claim, or a security interest of any kind (including, without limitation, any conditional sale or other title retention agreement, any lease in the nature thereof and any option or other agreement to sell). "Material Adverse Effect" means, with respect to any Person, a material adverse effect on (i) the condition (financial or otherwise), results of operations, assets, liabilities, business or business prospects of such Person, (ii) the ability of such Person or any of its Affiliates to perform its obligations hereunder or (iii) the validity or enforceability of this Agreement. "Merger" shall have the meaning set forth in Recital A. "Merger Consideration" has the meaning set forth in Section 2.1. "Materials of Environmental Concern" means pesticides, chemicals, pollutants, contaminants, wastes, toxic substances and hazardous substances. "Multiemployer Plan" means, with respect to any Person, on any date, a multiemployer plan defined as such in Section 3(37) of ERISA to which contributions have been made at any time during the six-year period ending on or prior to such date, by such Person and that is covered by Title IV of ERISA. "NLRB" means the National Labor Relations Board. "PBGC" has the meaning set forth in Section 3.12. "Permitted Liens" means (i) Liens securing indebtedness under the Summit's credit facility with Zions National Bank; (ii) Liens in favor of Summit or any Subsidiary; (iii) Liens to secure the performance of statutory obligations, surety or appeal bonds, performance bonds or other obligations of a like nature incurred in the ordinary course of business; (iv) Liens for taxes, assessments or governmental charges or claims that are not yet delinquent or that are being contested in good faith by appropriate proceedings promptly instituted and diligently concluded, provided that any reserve or other appropriate provision as shall be required in conformity with GAAP shall have been made therefor; (v) carriers', warehousemen's, mechanics', materialmen's, repairmen's, or other similar Liens arising in the ordinary course of business which are not overdue for a period of more than 60 days or which are being contested in good faith by appropriate proceedings diligently conducted, (vi) Liens of landlords or of mortgagees of landlords arising by operation of law, provided that the rental payments secured thereby are not yet due and payable, (vii) Liens incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security; (viii) easements, rights-of-way, restrictions, minor defects or irregularities in title and other similar charges or encumbrances not interfering in any material respect with the business of Summit or any of its Subsidiaries, (ix) Purchase Money Liens (including extensions and renewals thereof); (x) any interest or title of a lessor in property subject to any capital lease obligation or operating lease; and (xi) Liens arising from filing Uniform Commercial Code financing statements regarding leases. "Person" means any individual, partnership, corporation, joint venture, association, joint-stock company, trust, unincorporated organization, government or agency or political subdivision thereof, or other entity. "Proceeding" means an action, claim, suit or proceeding (including, without limitation, an investigation or partial proceeding, such as a deposition), whether commenced or threatened. "Proxy Statement" has the meaning set forth in Section 3.7. A-25 26 "Purchase Money Lien" means a Lien granted on an asset or property to secure incurred incurred solely to finance the purchase, or the cost of construction or improvement, of such asset or property. "Registration Statement" has the meaning set forth in Section 3.7. "SAS" has the meaning set forth in Section 5.8. "SEC" has the meaning set forth in Section 3.6. "Securities Act" means the Securities Act of 1933, as amended. "Subsidiaries" means any corporation with respect to which a specified Person (or a Subsidiary thereof) owns a majority of the common stock or has the power to vote or direct the voting of sufficient securities to elect a majority of directors. "Summit" has the meaning set forth in the Preamble. "Summit Common Stock" means the Common Stock, par value $.10 per share, of Summit. "Summit Disclosure Schedule" means a schedule delivered by Summit to CKE as of the date hereof (and which may be amended or modified on or prior to the Closing Date) which sets forth exceptions to the representations and warranties contained in Article 3 hereof and certain other information called for by Article 3 hereof and other provisions of this Agreement. "Summit Preferred Stock" means the Series A Convertible Preferred Stock, par value $1.00 per share, of Summit. "Summit Stock Option" has the meaning set forth in Section 5.13. "Summit Stock Option Plans" means the 1987 Nonqualified Stock Option Plan, the 1987 Incentive Stock Option Plan, the 1984 Incentive Stock Option Plan, as amended on February 13, 1987, and the 1992 Stock Option Plan, as amended on April 8, 1994 and November 18, 1994, in each case of Summit. "Tax or Taxes" means any federal, state, local, foreign or other income, gross receipts, ad valorem, franchise, profits, sales or use, transfer, registration, excise, utility, environmental, communications, real or personal property, capital stock, license, payroll, wage or other withholding, employment, social security, severance, transfer, stamp, occupation, alternative or add-on minimum, estimated or other taxes of any kind whatsoever (including, without limitation, deficiencies, penalties, additions to tax, and interest attributable thereto) whether disputed or not. "Tax Returns" means any United States Federal, state, local and foreign returns, declarations, elections, statements, reports, schedules and information returns pertaining to any Tax or the refiling or amendment of any such Tax Returns previously filed. "ULP" means an unfair labor practice as defined in the National Labor Relations Act. ARTICLE 11 MISCELLANEOUS 11.1 SURVIVAL OF REPRESENTATIONS, ETC. All statements contained in the Disclosure Schedule or in any certificate or instrument of conveyance delivered by or on behalf of the parties pursuant to this Agreement or in connection with the transactions contemplated hereby shall be deemed to be representations and warranties by the parties hereunder. The representations and warranties of Summit and CKE contained herein shall not survive the Closing Date. 11.2 ASSIGNMENT. Neither this Agreement nor any of the rights or obligations hereunder may be assigned by Summit without the prior written consent of CKE, or by CKE without the prior written consent of Summit. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, and no other person shall have any right, benefit or obligation hereunder. A-26 27 11.3 NOTICES. Unless otherwise provided herein, any notice, request, instruction or other document to be given hereunder by any party to the others shall be in writing and delivered in person or by courier, telegraphed, telexed or by facsimile transmission (with confirmation given) or mailed by certified mail, postage prepaid, return receipt requested (such mailed notice to be effective on the date of such receipt is acknowledged), as follows: If to Summit: Charlotte L. Miller Senior Vice President & General Counsel Summit Family Restaurants Inc. 440 Lawndale Drive Salt Lake City, Utah 84115-2917 (801) 463-5500 Phone (801) 463-5585 Facsimile If to CKE: Richard C. Celio Senior Vice President & General Counsel CKE Restaurants, Inc. 1200 North Harbor Boulevard Anaheim, California 92801 (714) 774-5796 Phone or to such other place and with such other copies as either party may designate as to itself by written notice to the others. 11.4 CHOICE OF LAW. This Agreement shall be construed, interpreted and the rights of the parties determined in accordance with the laws of the State of Delaware except with respect to matters of law concerning the internal corporate affairs of any corporate entity which is a party to or the subject of this Agreement, and as to those matters the law of the jurisdiction under which the respective entity derives its powers shall govern. 11.5 ENTIRE AGREEMENT; AMENDMENTS AND WAIVERS. This Agreement, together with all exhibits and schedules hereto, constitutes the entire agreement among the parties pertaining to the subject matter hereof and supersedes all prior agreements, understandings, negotiations and discussions, whether oral or written, of the parties. No supplement, modification or waiver of this Agreement shall be binding unless executed in writing by the party to be bound thereby. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision hereof (whether or not similar), nor shall such waiver constitute a continuing waiver unless otherwise expressly provided. 11.6 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 11.7 INVALIDITY. In the event that any one or more of the provisions contained in this Agreement or in any other instrument referred to herein, shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement or any other such instrument. 11.8 HEADINGS. The headings of the Articles and Sections herein are inserted for convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement. 11.9 EXPENSES. Summit and CKE will each be liable for its own, costs and expenses incurred in connection with the negotiation, preparation, execution or performance of this Agreement. 11.10 SPECIFIC PERFORMANCE. The parties hereto agree that if any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached, irreparable damage would occur, no adequate remedy at law would exist, and that the parties shall be entitled to specific performance of the terms hereof, in addition to actions for damages and any other remedy at law or equity. A-27 28 11.11 ATTORNEYS FEES. The parties hereby agree that if any party hereto pursues a Proceeding to enforce the terms of this Agreement, the prevailing party in any such Proceeding shall be entitled to recover its attorneys fees and other costs and expenses incurred in such Proceeding from the other party. 11.12 PUBLICITY. Neither party shall issue or make or permit any Affiliate or advisor to issue or make any press release or other public statement regarding the transactions contemplated hereby, without the prior approval of the other party, except as required by law in the opinion of counsel to each party. The parties shall issue a mutually acceptable press release as soon as possible after execution of this Agreement and as soon as practicable after the Closing Date. 11.13 CONFIDENTIAL INFORMATION. The parties acknowledge that the transaction described herein is of a confidential nature and shall not be disclosed except to consultants, lenders, advisors and affiliates, or as required by law, until such time as the parties make a public announcement regarding the transaction. Neither Summit nor CKE shall make any public disclosure of the specific terms of this Agreement, except as required by law. In connection with the negotiation of this Agreement and the preparation for the consummation of the transactions contemplated hereby, each party acknowledges that it will have access to confidential information relating to the other party. Each party shall treat such information as confidential, preserve the confidentiality thereof and not duplicate or use such information, except to advisors, consultants, lenders and affiliates in connection with the transactions contemplated hereby. Summit, at a time and in a manner which it reasonably determines and after prior notice to and consultation with CKE, may notify employees, unions and bargaining agents of the fact of the subject transaction. In the event of the termination of this Agreement for any reason whatsoever, each party shall return to the other all documents, work papers and other material (including all copies thereof) obtained in connection with the transactions contemplated hereby and will use all reasonable efforts, including instructing its employees and others who have had access to such information, to keep confidential and not to use any such information, unless such information is now, or is hereafter disclosed, through no act or omission of such party, in any manner making it available to the general public. A-28 29 SIGNATURES IN WITNESS WHEREOF, the parties hereto have executed this Agreement, or have caused this Agreement to be duly executed on their respective behalf by their respective officers thereunto duly authorized, as of the day and year first above written. SUMMIT FAMILY RESTAURANTS INC. By: /s/ DON M. MCCOMAS ------------------------------------- Don M. McComas President and Chief Executive Officer By: /s/ CHARLOTTE L. MILLER ------------------------------------- Charlotte L. Miller Senior Vice President & General Counsel CKE RESTAURANTS, INC. By: /s/ JOSEPH N. STEIN ------------------------------------- Name: Joseph N. Stein Title: Senior Vice President, Chief Financial Officer By: /s/ RICHARD C. CELIO ------------------------------------- Name: Richard C. Celio Title: Senior Vice President, General Counsel A-29 30 FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER AND REORGANIZATION BY AND AMONG SUMMIT FAMILY RESTAURANTS INC. AND CKE RESTAURANTS, INC. DATED: JANUARY 24, 1996 A-30 31 [CONFORMED COPY] FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER AND REORGANIZATION This First Amendment, dated as of January 24, 1996 (this "Amendment"), to the Agreement and Plan of Merger and Reorganization, dated as of November 30, 1995 (the "Original Agreement"), is by and among Summit Family Restaurants Inc., a Delaware corporation ("Summit"), and CKE Restaurants, Inc., a Delaware corporation ("CKE"). Capitalized terms not defined herein have the meanings set forth in the Original Agreement. Except as specifically amended below, all provisions of the Original Agreement remain in full force and effect. RECITAL The respective Boards of Directors of Summit and CKE have determined to amend the Original Agreement in as set forth in this Agreement. AGREEMENT NOW, THEREFORE, in consideration of the mutual covenants, representations, warranties and promises contained herein and for other good and valuable consideration the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: 1. MERGER AND CLOSING. Recital A is hereby amended to provide that Summit will survive the Merger. Recital B is hereby deleted in its entirety. In addition, Sections 1.2, 1.4 and 1.5 are hereby amended to read in full as follows: 1.2 The Merger. At the Effective Time, in accordance with this Agreement and the applicable provisions of the Delaware General Corporation Law ("DGCL"), the Merger Sub shall in the Merger merge with and into Summit, with Summit surviving the Merger, the separate existence of Merger Sub shall cease, and Summit shall continue as the surviving corporation as set forth in the Certificate of Merger. Summit is sometimes referred to herein as the "Surviving Corporation." 1.4 Effects of the Merger. The Merger shall have the effects set forth in the DGCL. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time, the separate corporate existence of Merger Sub shall cease and Summit shall be the Surviving Corporation and shall have all of the rights, privileges, immunities and powers and shall be subject to all duties and liabilities of a corporation organized under the DGCL. 1.5 Certificate of Incorporation and Bylaws. The Certificate of Incorporation of Summit shall be amended and restated to conform to the Certificate of Incorporation of Merger Sub in effect at the Effective Time. The Bylaws of Summit shall be amended and restated to conform to the Bylaws of Merger Sub in effect at the Effective Time until amended in accordance with applicable law. 2. MERGER CONSIDERATION (SECTION 2.1). The definitions of "Merger Consideration" and "Adjusted CKE Price" in Section 2.1 of the Original Agreement are hereby amended to read in full as follows: "Merger Consideration" means, for each share of Summit Common Stock and each share of Summit Preferred Stock: (a) $2.77 in cash (without interest) and (b) a number of shares of CKE Common Stock equal to $2.78 divided by the Adjusted CKE Price. The Merger Consideration shall be increased by one-half of the amount, if any, by which the consideration to be received from the purchasers under the draft Asset Purchase Agreements with Flagstar and HomeTown Buffet dated January 24, 1996 (which CKE has provided to Summit) increases in an immediately quantifiable dollar amount from the amounts currently provided for in such drafts (either through an increase in the consideration paid or an increase in the liabilities the proposed buyer assumes) pursuant to fully executed definitive Asset Purchase Agreements in effect as of the Closing. The amount of any increase shall be determined at Closing and shall not be further affected by any other transactions involving Summit assets or properties subsequent to Closing. The increase, if any, shall be A-31 32 allocated one-half to the cash portion of the Merger Consideration and one-half to the CKE Common Stock portion of the Merger Consideration. "Adjusted CKE Price" means (a) if the Average CKE Price is equal to or greater than $17.00, $16.00 plus the amount by which the Average CKE Price exceeds $17.00, (b) if the Average CKE Price is less than $17.00 and equal to or greater than $15.00, $16.00, (c) if the Average CKE Price is less than $15.00 and equal to or greater than $13.25, $16.00 less the amount by which $15.00 exceeds the Average CKE Price, (d) if the Average CKE Price is less than $13.25 and CKE has not exercised the Fill-Up Election, $14.25 and (e) if the Average CKE Price is less than $13.25 and CKE has exercised the Fill-Up Election, $16.00 less the amount by which $15.00 exceeds the Average CKE Price. 3. FRACTIONAL SHARES (SECTION 2.3). Section 2.3 of the Original Agreement is hereby amended to read as follows: No fractional shares of CKE Common Stock shall be issued in the Merger. In lieu thereof, cash shall be paid for any fractional shares calculated by multiplying the Adjusted CKE Price by the fraction of a share of CKE Common Stock to which the holder would otherwise have been entitled. 4. FAIRNESS OPINION (SECTION 6.9). Section 6.9 of the Original Agreement is hereby modified to read in full as follows: Summit shall have received a letter from Piper Jaffray Inc. on or prior to the date of the Amendment to the effect that the terms of the Merger are fair to the holders of Summit Common Stock from a financial point of view, a copy of which will be delivered to CKE prior to the Closing. 5. FAIRNESS OPINION (SECTION 7.10). Section 7.10 of the Original Agreement, providing for a fairness opinion from NatWest Markets, is hereby deleted in its entirety. 6. TAX OPINIONS (SECTION 6.6 AND 7.6). Sections 6.6 and 7.6 of the Original Agreement, providing for legal opinions regarding certain tax matters, are hereby deleted in their entirety. 7. TREATMENT OF STOCK OPTIONS (SECTIONS 5.14(A) AND 5.14(B)). Sections 5.14(a) and 5.14(b) of the Original Agreement are hereby amended to read in full as follows: (a) On or prior to the Effective Time, Summit and its Board of Directors (or a committee thereof) shall take all action necessary to implement the provisions contained herein; provided, that such provisions do not create an aggregate cash liability at the Effective Time in excess of $375,000, adjusted for any per share increase in the Merger Consideration as provided in paragraph 2 of this Amendment. (b) At the Effective Time, all options to purchase shares of Summit Common Stock (a "Summit Stock Option") under a Summit Stock Option Plan shall become fully exercisable in accordance with the terms of the Stock Option Plan. Each holder of Summit Stock Options may elect to have such Summit Stock Options cancelled in consideration of the payment of an amount equal to the product of (x) the excess, if any, of the aggregate dollar amount of the Merger Consideration over the exercise price thereof and (y) the number of shares of Summit Common Stock subject thereto, respectively (such payment to be net of any required withholding taxes). From and after the Effective Time, each outstanding Summit Stock Option that is not so cancelled shall constitute an option to acquire, on the same terms and conditions as were applicable under such Summit Stock Option, a number of shares of CKE Common Stock equal to (w) the product of the aggregate dollar amount of the Merger Consideration and the number of shares of Summit Common Stock purchasable upon exercise of the Summit Stock Option prior to the Effective Time divided by (x) the Average CKE Price, at an exercise price per share equal to (y) the aggregate exercise price for the shares of Summit Common Stock purchasable upon exercise of the Summit Stock Option prior to the Effective Date divided by (z) the aggregate number of shares of CKE Common Stock purchasable upon exercise of such Summit Stock Option following the Effective Date. 8. TERMINATION (SECTION 9.1). The date April 15, 1996 in every instance it appears in Section 9.1 in the Original Agreement is hereby changed to May 30, 1996. The reference to $12.25 in Section 9.1(d) and Section 9.1(e) is hereby changed to $13.25. A-32 33 SIGNATURES IN WITNESS WHEREOF, the parties hereto have executed this Amendment, or have caused this Amendment to be duly executed on their respective behalf by their respective officers thereunto duly authorized, as of the date and year first above written. SUMMIT FAMILY RESTAURANTS INC. By: /s/ DON M. MCCOMAS ------------------------------------- Don M. McComas President and Chief Executive Officer By: /s/ CHARLOTTE L. MILLER ------------------------------------- Charlotte L. Miller Senior Vice President & General Counsel CKE RESTAURANTS, INC. By: /s/ JOSEPH N. STEIN ------------------------------------- Joseph N. Stein Senior Vice President, Chief Financial Officer By: /s/ RICHARD C. CELIO ------------------------------------- Richard C. Celio Senior Vice President, General Counsel A-33 34 SECOND AMENDMENT TO AGREEMENT AND PLAN OF MERGER AND REORGANIZATION BY AND AMONG SUMMIT FAMILY RESTAURANTS INC. AND CKE RESTAURANTS, INC. DATED: APRIL 2, 1996 A-34 35 SECOND AMENDMENT TO AGREEMENT AND PLAN OF MERGER AND REORGANIZATION This Second Amendment, dated as of April 2, 1996 (this "Second Amendment"), to the Agreement and Plan of Merger and Reorganization, dated as of November 30, 1995 (the "Original Agreement"), as amended pursuant to the First Amendment to Agreement and Plan of Reorganization, dated as of January 24, 1996 (the "First Amendment") is by and among Summit Family Restaurants Inc., a Delaware corporation ("Summit"), and CKE Restaurants, Inc., a Delaware corporation ("CKE"). Capitalized terms not defined herein have the meanings set forth in the Original Agreement and the First Amendment. Except as specifically amended below, all provisions of the Original Agreement and First Amendment remain in full force and effect. RECITAL The respective Boards of Directors of Summit and CKE have determined to amend the Original Agreement and the First Amendment as set forth in this Second Amendment. AGREEMENT NOW, THEREFORE, in consideration of the mutual covenants, representations, warranties and promises contained herein and for other good and valuable consideration the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: 1. PURCHASE OF SUMMIT PREFERRED STOCK. On or prior to April 4, 1996, CKE shall purchase all of the shares of Summit Preferred Stock from the holder thereof at a purchase price of $5.27 per share in cash. CKE hereby agrees to vote all of such shares of Summit Preferred Stock in favor of the transactions set forth in the Original Agreement, as amended by the First Amendment and the Second Amendment. 2. CONVERSION OF SECURITIES (SECTION 2.1). The first paragraph of Section 2.1 of the Original Agreement and the first paragraph of the definition of "Merger Consideration" in Section 2.1 of the Original Agreement, as amended by the First Amendment, are amended to read in full as follows: At the Effective Time, by virtue of the Merger and without any action on the part of the parties hereto each share of Summit Common Stock and Summit Preferred Stock issued and outstanding immediately prior A-35 36 to the Effective Time, other than shares of Summit Common Stock for which appraisal rights have been exercised pursuant to Section 262 of the DGCL, and other than shares owned by CKE or its subsidiaries (which will be cancelled), will be converted into the right to receive the Merger Consideration. "Merger Consideration" means, for each share of Summit Common Stock and Summit Preferred Stock (other than shares owned by CKE or its subsidiaries, which will be cancelled): (a) $2.63 in cash (without interest) and (b) a number of shares of CKE Common Stock equal to $2.64 divided by the Adjusted CKE Price. 3. FAIRNESS OPINION (SECTION 6.9): Section 6.9 of the Original Agreement, as amended by the First Amendment, is hereby modified to read in full as follows: Summit shall have received letters from Piper Jaffray Inc. confirming the opinions rendered to Summit's Board of Directors on or prior to the date of the Original Agreement, on or prior to the date of the First Amendment and on or prior to the date of the Second Amendment to the effect that the terms of the Merger are fair to the holders of Summit Common Stock from a financial point of view, copies of which will be delivered to CKE at the Closing. 4. REPRESENTATIONS, WARRANTIES AND COVENANTS. Sections 3.19(i) and 4.12(i) of the Original Agreement are hereby deleted in their entirety. CKE acknowledges receipt of the information provided to it regarding the separation compensation plan and procedures and other matters pursuant to the letter, dated February 29, 1996, from Summit. CKE and Summit agree that such information does not constitute a violation of the Original Agreement, as amended, including Sections (3.19(vii) and 5.2(a) thereof. A-36 37 5. TERMINATION (SECTION 9.1). Section 9.1(c)(i)(A) and 9.1(d)(i)(A) are hereby deleted in their entirety. The date May 30, 1996 in every instance it appears in Section 9.1 in the Original Agreement, as amended by the First Amenment, is hereby changed to June 30, 1996. 6. ADOPTION OF ORIGINAL AGREEMENT BY MERGER SUB. Summit Merger, Inc., a Delaware corporation ("Summit Merger"), was recently organized by CKE for purposes of completing the Merger. Summit Merger, by its execution and delivery hereof, agrees to be bound by the terms and provisions of the Original Agreement, as amended, and is hereby made a party to the Original Agreement. For all purposes of the Original Agreement, all references to "Merger Sub" shall be deemed to refer to Summit Merger. A-37 38 SIGNATURES IN WITNESS WHEREOF, the parties hereto have executed this Amendment, or have caused this Amendment to be duly executed on their respective behalf by their respective officers thereunto duly authorized, as of the day and year first above written. SUMMIT FAMILY RESTAURANTS INC. BY /s/ DON M. McCOMAS ----------------------------------------- Don M. McComas President and Chief Executive Officer BY /s/ CHARLOTTE L. MILLER ----------------------------------------- Charlotte L. Miller Senior Vice President & General Counsel CKE RESTAURANTS, INC. BY ----------------------------------------- BY ----------------------------------------- SUMMIT MERGER, INC. BY ----------------------------------------- BY ----------------------------------------- A-38 39 SIGNATURES IN WITNESS WHEREOF, the parties hereto have executed this Amendment, or have caused this Amendment to be duly executed on their respective behalf by their respective officers thereunto duly authorized, as of the day and year first above written. SUMMIT FAMILY RESTAURANTS INC. BY ----------------------------------------- Don M. McComas President and Chief Executive Officer BY ----------------------------------------- Charlotte L. Miller Senior Vice President & General Counsel CKE RESTAURANTS, INC. BY /s/ ROBERT E. WHEATON ----------------------------------------- Robert E. Wheaton Executive Vice President BY /s/ ROBERT A. WILSON ----------------------------------------- Robert A. Wilson Vice President, General Counsel SUMMIT MERGER, INC. BY /s/ ROBERT E. WHEATON ----------------------------------------- Robert E. Wheaton Executive Vice President BY /s/ ROBERT A. WILSON ----------------------------------------- Robert A. Wilson Vice President, General Counsel A-39 EX-3.2 3 BYLAWS OF REGISTRANT 1 EXHIBIT 3.2 BYLAWS OF CARL KARCHER ENTERPRISES, INC. ARTICLE I OFFICES Section 1. PRINCIPAL OFFICE. The board of directors shall fix the location of the principal executive office of the corporation at any place within or outside the State of California. If the principal executive office is located outside the State of California, and the corporation has one or more business offices in the State of California, the board of directors shall likewise fix and designate a principal business office in the State of California. Section 2. OTHER OFFICES. The corporation may also establish offices at such other places, both within and outside the State of California, as the board of directors may from time to time determine or the business of the corporation may require. ARTICLE II MEETINGS OF SHAREHOLDERS Section 1. PLACE OF MEETINGS. Meetings of shareholders shall be held at any place within or outside the State of California designated by the board of directors. In the absence of any such designation, shareholders' meetings shall be held at the principal executive office of the corporation. Section 2. ANNUAL MEETINGS. The annual meeting of shareholders shall be held on the 9th day of June in each year at ten o'clock a.m., or such other date or time as may be fixed by the board of directors; provided, however, that should said day fall upon a legal holiday, such annual meeting of shareholders shall be held at the same time on the next succeeding day which is a full business day. At such meeting, directors shall be elected and any other proper business may be transacted. Section 3. SPECIAL MEETINGS. A special meeting of the shareholders may be called at any time by the board of directors, the chairman of the board, the president, or one or more shareholders holding in the aggregate shares entitled to cast not less than 10% of the votes at any such meeting. If a special meeting is called by anyone other than the board of directors, the request shall be in writing, specifying the time of the meeting and the general nature of the business proposed to be transacted, and shall be delivered personally or sent by registered mail or by telegraphic or other facsimile transmission to the chairman of the board, the president, any vice president or the secretary of the corporation. The officer receiving such request forthwith shall cause notice to be given to the shareholders entitled to vote, in accordance with the provisions of Sections 4 and 5 of this Article II, that a meeting will be held at the time requested by the person or persons calling the meeting, not less than thirty-five (35) nor more than sixty (60) days after the receipt of the request. If the notice is not given within twenty (20) days after receipt of the request, the person or persons requesting the meeting may give the notice. Nothing contained in this paragraph of this Section 3 shall be construed as limiting, fixing or affecting the time when a meeting of shareholders called by action of the board of directors may be held. 1 2 Section 4. NOTICE OF MEETINGS. All notices of meetings of shareholders shall be sent or otherwise given in accordance with Section 5 of this Article II not less than ten (10) nor more than sixty (60) days before the date of the meeting being noticed. The notice shall specify the place, date and hour of the meeting and (i) in the case of a special meeting, the general nature of the business to be transacted, or (ii) in the case of the annual meeting, those matters which the board of directors, at the time of giving the notice, intends to present for action by the shareholders. The notice of any meeting at which directors are to be elected shall include the name of any nominee or nominees whom, at the time of the notice, management intends to present for election. If action is proposed to be taken at any meeting for approval of (i) a contract or transaction in which a director has a direct or indirect financial interest, pursuant to Section 310 of the California Corporations Code (the "Code"), (ii) an amendment of the articles of incorporation, pursuant to Section 902 of the Code, (iii) a reorganization of the corporation, pursuant to Section 1201 of the Code, (iv) a voluntary dissolution of the corporation, pursuant to Section 1900 of the Code, or (v) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, pursuant to Section 2007 of the Code, the notice shall also state the general nature of such proposal. Section 5. MANNER OF GIVING NOTICE. Notice of any meeting of shareholders shall be given personally or by first-class mail or telegraphic or other written communication, charges prepaid, addressed to the shareholder at the shareholder's address appearing on the books of the corporation or given by the shareholder to the corporation for the purpose of notice. If no such address appears on the corp[oration's books or is given, notice shall be deemed to have been given if sent to that shareholder by first-class mail or telegraphic or other written communication to the corporation's principal executive office, or if published at least once in a newspaper of general circulation in the country in which the principal executive office is located. Notice shall be deemed to have been given when delivered personally or deposited in the mail or sent by telegram or other means of written communication. If any notice addressed to a shareholder at the address of such shareholder appearing on the books of the corporation is returned to the corporation by the Untied States Postal Service marked to indicate that the Service is unable to deliver the notice to the shareholder at such address, all future notices or reports shall be deemed to have been duly given without further mailing if the same shall be available to the shareholder upon written demand at the principal executive office of the corporation for a period of one year from the date of the giving of such notice or report to all other shareholders. An affidavit of the mailing or other means of giving any notice of any shareholders' meeting shall be executed by the secretary, assistant secretary or any transfer agent of the corporation, and shall be filed and maintained in the minute book of the corporation. Section 6. QUORUM. Unless otherwise provided in the articles of incorporation, the presence in person or by proxy of the holders of a majority of the shares entitled to vote at any meeting of shareholders shall constitute a quorum for the transaction of business. The shareholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. 2 3 Section 7. ADJOURNMENT. Any shareholders' meeting, annual or special, whether or not a quorum is present, may be adjourned from time to time by the vote of a majority of the shares represented at such meeting, either in person or by proxy, but in the absence of a quorum, no other business may be transacted at such meeting, except as provided in Section 6 of this Article II. When any meeting of shareholders, annual or special, is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place thereof are announced at a meeting at which the adjournment is taken, unless a new record date for the adjourned meeting is fixed, or unless the adjournment is for more than forty-five (45) days from the date set for the original meeting, in which case the board of directors shall set a new record date. Notice of any such adjourned meeting shall be given to each shareholder of record entitled to vote at the adjourned meeting in accordance with the provisions of Sections 4 and 5 of this Article II. At any adjourned meeting, the corporation may transact any business which might have been transacted at the original meeting. Section 8. VOTING. The shareholders entitled to vote at any meeting of shareholders shall be determined in accordance with the provisions of Section II of this Article II, subject to the provisions of Sections 702 to 704, inclusive, of the Code (relating to voting shares held by a fiduciary, in the name of a corporation or in the names of two or more persons). The vote may be by voice vote or by ballot; provided, however, that any election for directors must be by ballot if demanded by a shareholder at the meeting and before the voting begins. Any shareholder entitled to vote on any matter (other than elections of directors) may vote part of the shares in favor of the proposal and refrain from voting the remaining shares or vote them against the proposal, but, if the shareholder fails to specify the number of shares such shareholder is voting affirmatively, it will be conclusively presumed that the shareholder's approving vote is with respect to all shares such shareholder is entitled to vote. If a quorum is present, the affirmative vote of the majority of the shares represented at the meeting and entitled to vote on any matter (other than the election of directors) shall be the act of the shareholders, unless the vote of a greater number of voting by classes is required by the Code or the articles of incorporation. At a shareholders' meeting involving the election of directors, no shareholder shall be entitled to cumulate votes on behalf of any candidate for director (i.e., each shareholder shall be entitled to cast for any one or more candidates no greater number of votes than the number of shares held by such shareholder) unless such candidate or candidates' names have been placed in nomination prior to the voting and the shareholder has given notice prior to the voting of the shareholder's intention to cumulate votes. If any shareholder has given such notice, every shareholder entitled to vote may cumulate votes for candidates in nomination and give one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which such shareholder's shares are entitled, or distribute the shareholder's votes on the same principle among as many candidates as the shareholder thinks fit. The candidates receiving the highest number of votes, up to the number of directors to be elected, shall be elected. Section 9. WAIVER OF NOTICE: CONSENT. The transactions of any meeting of shareholders, annual or special, however called and noticed, and wherever held, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum is present either in person or by proxy, and if, either before or after the meeting, each person entitled to vote, who was not present in person or by proxy, signs a written waiver of notice, or a consent to a holding of the meeting, or an approval of the minutes thereof. The waiver of notice or consent need not specify either the business to be transacted for the purpose of any 3 4 annual or special meeting of shareholders, except that if action is taken or proposed to be taken for approval of any matters specified in the second paragraph of Section 4 of this Article II, the waiver of notice or consent shall state the general nature of the proposal. All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Attendance of a person at a meeting shall also constitute a waiver of notice of such meeting, except when the person objects, at the beginning of the meeting, to the transaction of any business because the meetings is not lawfully called or convened, and except that attendance at a meeting is not a waiver of any right to object to the consideration of matters not included in the notice of such meeting if such objection is expressly made at the meeting. Section 10. ACTION WITHOUT MEETING. Unless otherwise provided in the articles of incorporation, any action which may be taken at any annual or special meeting of shareholders may be taken without a meeting and without prior notice, if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. In the case of election of directors, such consent shall be effective only if signed by the holders of all outstanding shares entitled to vote for the election of directors; provided, however, that a director may be elected at any time to fill a vacancy on the board of directors not filled by the directors, by the written consent of the holders of a majority of the outstanding shares entitled to vote for the election of directors. All such consents shall be filed with the secretary of the corporation and shall be maintained in the corporate records. Any shareholder giving a written consent, or the shareholder's proxy holder, or a transferee of the shares or a personal representative of the shareholder or their respective proxy holders, may revoke the consent by a writing received by the secretary of the corporation prior to the time that written consents of the number of shares required to authorize the proposed action have been filed with the secretary. Unless the consents of all shareholders entitled to vote have been solicited in writing, the secretary shall give prompt notice of any corporate action approved by the shareholders without a meeting by less than unanimous written consent to those shareholders entitled to vote who have not consented in writing. Such notice shall be given in the manner specified in Section 5 of this Article II. In the case of approval of (i) contracts or transactions in which a director has a direct or indirect financial interest, pursuant to Section 310 of the Code, (ii) indemnification of agents of the corporation, pursuant to Section 317 of the Code, (iii) a reorganization of the corporation, pursuant to Section 1201 of the Code, or (iv) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, pursuant to Section 2007 of the Code, such notice shall be given at least ten (10) days before the consummation of the action authorized by any such approval. Section 11. RECORD DATE. For purposes of determining the shareholders entitled to notice of any meeting or to vote or entitled to give consent to corporate action without a meeting, the board of directors may fix, in advance, a record date, which shall not be more than sixty (60) days nor less than ten (10) days prior to the date of the meeting nor more than sixty (60) days prior to the action without a meeting, and in such case only shareholders of record on the date so fixed are entitled to notice and to vote or to give consents, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date, except as otherwise provided in the California General Corporation Law. 4 5 If the board of directors does not so fix a record date: (a) The record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held. (b) The record date for determining shareholders entitled to give consent to corporate action in writing without a meeting, (i) when no prior action by the board has been taken, shall be the day on which the first written consent is given, or (ii) when prior action of the board has been taken, shall be at the close of business on the day on which the board adopts the resolution relating thereto, or the sixtieth (60th) day prior to the date of such other action, whichever is later. Section 12. PROXIES. Every person entitled to vote for directors or on any other matter shall have the right to do so either in person or by one or more agents authorized by a written proxy signed by the person and filed with the secretary of the corporation. A proxy shall be deemed signed if the shareholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by the shareholder or the shareholder's attorney in fact. A validly executed proxy which does not state that it is irrevocable shall continue in full force and effect unless (i) revoked by the person executing it, prior to the vote pursuant thereto, by a writing delivered to the corporation stating that the proxy is revoked or by a subsequent proxy executed by, or attendance at the meeting and voting in person by, the person executing the proxy; or (ii) written notice of the death or incapacity of the maker of the proxy is received by the corporation before the vote pursuant thereto is counted; provided, however, that no such proxy shall be valid after the expiration of eleven (11) months from the date of the proxy, unless otherwise provided in the proxy. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provision of Section 705(e) and (f) of the Code. Section 13. INSPECTORS OF ELECTION. Before any meeting of shareholders, the board of directors may appoint any persons (other than nominees for office) to act as inspectors of election at the meeting or any adjournments thereof. If inspectors of election are not so appointed, the chairman of the meeting may, and on the request of any shareholder or a shareholder's proxy shall, appoint inspectors of election at the meeting. The number of inspectors shall be either one (1) or three (3). If inspectors are appointed at a meeting on the request of one or more shareholders or proxies, the majority of shares represented in person or by proxy shall determine whether one (1) or three (3) inspectors are to be appointed. If any person appointed as inspector fails to appear or refuses to act, the chairman of the meeting may, and upon the request of any shareholder or a shareholder's proxy shall, appoint a person to replace the one who so failed or refused. If there are three (3) inspectors of election, the decision, act or certificate of a majority of them is effective in all respects as the decision, act or certificate of all. Any report or certificate made by the inspectors of election is prima facie evidence of the facts stated therein. ARTICLE III DIRECTORS Section 1. POWERS. Subject to the provisions of the California General Corporation Law and any limitations in the articles of incorporation and these bylaws relating to action required to be approved by the shareholders or by the outstanding shares, the business and 5 6 affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board of directors. Section 2. The authorized number of directors of the Corporation shall be nine (9) until this Section 3.2 is amended by a resolution duly adopted by the Board. Directors need not be stockholders. With the exception of Carl N. Karcher, no person who has attained the age of 75 shall be eligible for election to the Board. Each of the directors of the Corporation shall hold office until such director's successor shall have been duly elected and shall qualify or until such director shall resign or shall have been removed in the manner provided by these Bylaws. Section 3. ELECTION AND TERM OF OFFICE. Directors shall be elected at each annual meeting of the shareholders to hold office until the next annual meeting. Each director, including a director elected to fill a vacancy, shall hold office until the expiration of the term for which elected and until a successor has been elected and qualified. Section 4. REMOVAL. Any or all of the directors may be removed by order of court pursuant to Section 304 of the Code, or by the shareholders pursuant to the provisions of Section 303 of the Code. Section 5. VACANCIES. Vacancies in the board of directors may be filled by a majority of the remaining directors, though less than a quorum, or by a sole remaining director, except that a vacancy created by the removal of a director may be filled only by the vote of a majority of the shares entitled to vote represented at a duly held meeting at which a quorum is present, or by the written consent of holders of a majority of the outstanding shares entitled to vote. Each director so elected shall hold office until the next annual meeting of the shareholders and until a successor has been elected and qualified. A vacancy or vacancies in the board of directors shall be deemed to exist in the case of the death, resignation or removal of any director, or if the board of directors by resolution declares vacant the office of a director who has been declared of unsound mind by an order of court or who has been convicted of a felony, or if the authorized number of directors is increased, or if the shareholders fail, at any meeting of shareholders at which any director or directors are elected, to elect the number of directors to be voted for at that meeting. The shareholders may elect a director or directors at any time to fill any vacancy or vacancies not filled by the directors, but any such election by written consent shall require the consent of a majority of the outstanding shares entitled to vote. Any director may resign effective upon giving written notice to the chairman of the board, the president, the secretary or the board of directors, unless the notice specifies a later time for the effectiveness of such resignation. If the resignation of a director is effective at a future time, the board of directors may elect a successor to take office when the resignation becomes effective. No reduction of the authorized number of directors shall have the effect of removing any director prior to the expiration of his or her term of office. Section 6. PLACE OF MEETINGS AND MEETINGS BY TELEPHONE. Regular meetings of the board of directors may be held at any place within or outside the State of California that has been designated from time to time by resolution of the board. In the absence of such designation, regular meetings shall be held at the principal executive office of the corporation. Special meetings of the board shall be held at any place within or outside the 6 7 State of California that has been designated in the notice of the meeting or, if not stated in the notice or there is no notice, at the principal executive office of the corporation. Any meeting, regular or special, may be held by conference telephone or similar communication equipment, so long as all directors participating can hear one another, and all such directors shall be deemed to be present in person at such meeting. Section 7. REGULAR MEETINGS. Immediately following each annual meeting of shareholders, the board of directors shall hold a regular meeting for the purpose of organization, any desired election of officers and the transaction of other business. Other regular meetings of the board of directors shall be held without call at such time as shall from time to time be fixed by the board of directors. Notice of regular meetings shall not be required. Section 8. SPECIAL MEETINGS. Special meetings of the board of directors for any purpose or purposes may be called at any time by the chairman of the board or the president or any vice president or the secretary or any two directors. Notice of the time and place of special meetings shall be delivered to each director personally or by telephone or sent by first-class mail or telegram, charges prepaid, addressed to each director at his or her address as it is shown on the records of the corporation. In case the notice is mailed, it shall be deposited in the Untied States mail at least four (4) days prior to the time of the holding of the meeting. In case such notice is delivered personally or by telephone or telegraph, it shall be delivered personally or by telephone or to the telegraph company at least forty-eight (48) hours prior to the time of the holding of the meeting. Any oral notice given personally or by telephone may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. The notice need not specify the purpose of the meeting nor the place if the meeting is to be held at the principal executive office of the corporation. Section 9. QUORUM. A majority of the authorized number of directors shall constitute a quorum for the transaction of business, except to adjourn as hereinafter provided. Every act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present shall be regarded as the act of the board of directors, subject to the provisions of Section 310 of the Code (approval of contracts or transactions in which a director has a direct or indirect material financial interest), Section 311 of the Code (appointment of committees), and Section 317(e) of the code (indemnification of directors). A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the require quorum for such meeting. Section 10. WAIVER OF NOTICE: CONSENT. The transactions of any meeting of the board of directors, however called and noticed or wherever held, shall be as valid as though had at a meeting duly held after regular call and notice if a quorum is present and if, either before or after the meeting, each of the directors not present signs a written waiver of notice, a consent to holding the meeting or an approval of the minutes thereof. The waiver of notice or consent need not specify the purpose of the meeting. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Notice of a meeting shall also be deemed given to any director who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to that director. 7 8 Section 11. ADJOURNMENT. A majority of the directors present, whether or not constituting a quorum, may adjourn any meeting to another time and place. Notice of the time and place of holding an adjourned meeting need not be given, unless the meeting is adjourned for more than twenty-four (24) hours, in which case notice of such time and place shall be given prior to the time of the adjourned meeting, in the manner specified in Section 8 of this Article III, to the directors who were not present at the time of the adjournment. Section 12. ACTION WITHOUT MEETING. Any action required or permitted to be taken by the board of directors may be taken without a meeting, if all members of the board shall individually or collectively consent in writing to such action. Such action by written consent shall have the same force and effect as a unanimous vote of the board of directors. The written consent or consents shall be filed with the minutes of the proceedings of the board. Section 13. FEES AND COMPENSATION. Directors and members of committees may receive such compensation, if any, for their services, and such reimbursement of expenses, as may be fixed or determined by resolution of the board of directors. Nothing contained herein shall be construed to preclude any director from serving the corporation in any other capacity as an officer, agent, employee, or otherwise, and receiving compensation for such service. ARTICLE IV COMMITTEES Section 1. COMMITTEES OF DIRECTORS. The board of directors may, by resolution adopted by a majority of the authorized number of directors, designate one or more committees, each consisting of two or more directors, to serve at the pleasure of the board. The board may designate one or more directors as alternate members of any committee, who may replace any absent member at any meeting of the committee. Any such committee, to the extent provided in the resolution of the board, may have all the authority of the board, except with respect to: (a) the approval of any action which, under the California General Corporation Law, also requires shareholders' approval or approval of the outstanding shares; (b) the filling of vacancies on the board of directors or in any committee; (c) the fixing of compensation of the directors for serving on the board or on any committee; (d) the amendment or repeal of bylaws or the adoption of new bylaws; (e) the amendment or repeal of any resolution of the board of directors which by its express terms is not so amendable or repealable; (f) a distribution to the shareholders of the corporation, except at a rate or in a periodic amount or within a price range determined by the board of directors; or (g) the appointment of any other committees of the board of directors or the members thereof. Section 2. MEETINGS AND ACTION. Meetings and action of committees shall be governed by, and held and taken in accordance with, the provisions of Article III of these 8 9 bylaws, Sections 6 (place of meetings and meetings by telephone), 7 (regular meetings), 8 (special meetings), 9 (quorum), 10 (waiver of notice), 11 (adjournment) and 12 (action without meeting), with such changes in the context of those bylaws as are necessary to constitute the committee and its members for the board of directors and its members, except that the time of regular meetings of committees may be determined by resolution of the board of directors as well as the committee; special meetings of committees may also be called by resolution of the board of directors; and notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The board of directors may adopt rules for the government of any committee not inconsistent with the provisions of these bylaws. ARTICLE V OFFICERS Section 1. OFFICERS. The officers of the corporation shall be a president, a secretary and a chief financial officer. The corporation may also have, at the discretion of the board of directors, a chairman of the board, one or more vice presidents, one or more assistant secretaries, one or more assistant treasurers, and such other officers as may be appointed in accordance with the provisions of Section 3 of this Article V. Any number of offices may be held by the same person. Section 2. ELECTION. The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Section 3 or Section 5 of this Article V, shall be chosen by the board of directors, and each shall serve at the pleasure of the board, subject to the rights, if any, of an officer under any contract of employment. Section 3. OTHER OFFICERS. The board of directors may appoint, and may empower the president to appoint, such other officers as the business of the corporation may require, each of whom shall hold office for such period, have such authority and perform such duties as are provided in the bylaws or as the board of directors may from time to time determine. Section 4. REMOVAL AND RESIGNATION. Subject to the rights, if any, of any officer under any contract of employment, any officer may be removed, either with or without cause, by the board of directors or, except in case of an officer chosen by the board of directors, by any officer upon whom such power of removal may be conferred by the board of directors. Any officer may resign at any time by giving written notice to the corporation. Any such resignation shall take effect at the date of the receipt of such notice or at any later time specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Any such resignation is without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. Section 5. VACANCIES. A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these bylaws for regular appointments to such office. Section 6. CHAIRMAN OF THE BOARD. The chairman of the board, if such an officer be elected, shall, if present, preside at meetings of the board of directors and exercise and perform such other powers and duties as may be from time to time assigned to him or her by the board of directors or prescribed by the bylaws. If there is no president, the chairman of the board shall in addition be the chief executive officer of the corporation and shall have the powers and duties prescribed in Section 7 of this Article V. 9 10 Section 7. PRESIDENT. Subject to such supervisory powers, if any, as may be given by the board of directors to the chairman of the board, if there be such an officer, the president shall be the chief executive officer of the corporation and shall, subject to the control of the board of directors, have general supervision, direction and control of the business and the officers of the corporation. He or she shall preside at all meetings of the shareholders and, in the absence of the chairman of the board, or if there be none, at all meetings of the board of directors. He or she shall have the general powers and duties of management usually vested in the office of president of a corporation and shall have such other powers and duties as may be prescribed by the board of directors or the bylaws. Section 8. VICE PRESIDENTS. In the absence or disability of the president, the vice presidents, if any, in order of their rank as fixed by the board of directors, or, if not ranked, a vice president designated by the board of directors, shall perform all the duties of the president, and when so acting shall have all the powers of, and be subject to all the restrictions upon, the president. The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the board of directors or the bylaws and the president or the chairman of the board. Section 9. SECRETARY. The secretary shall keep, or cause to be kept, at the principal executive office or such other place as the board of directors may direct, a book of minutes of all meetings and actions of directors, committees of directors and shareholders, with the time and place of holding, whether regular or special, and, if special, how authorized, the notice thereof given, the names of those present at directors' and committee meetings, the number of shares present or represented at shareholders' meetings, and the proceedings thereof. The secretary shall keep, or cause to be kept, at the principal executive office or at the office of the corporation's transfer agent or registrar, a share register, or a duplicate share register, showing the names of all shareholders and their addresses, the number and classes of shares held by each, the number and date of certificates issued for the same, and the number and date of cancellation of every certificate surrendered for cancellation. The secretary shall give, or cause to be given, notice of all meetings of the shareholder and of the board of directors required by the bylaws or by law to be given, and he or she shall keep the seal of the corporation, if one be adopted, in safe custody, and shall have such other powers and perform such other duties as may be prescribed by the board of directors or by the bylaws. Section 10. CHIEF FINANCIAL OFFICER. The chief financial officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings and shares. The books of account shall at all reasonable times be open to inspection by any director. The chief financial officer shall deposit, or cause to be deposited, all moneys and other valuables in the name and to the credit of the corporation with such depositaries as may be designated by the board of directors. He or she shall disburse, or cause to be disbursed, the funds of the corporation as may be ordered by the board of directors, shall render to the president and directors, whenever they request it, an account of all financial transactions and of the financial condition of the corporation, and shall have such other powers and perform such other duties as may be prescribed by the board of directors or the bylaws. 10 11 ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND OTHER AGENTS Section 1. INDEMNIFICATION. The corporation may, to the maximum extent permitted by the California General Corporation Law, indemnify each of its agents against expenses, judgements, fines, settlements and other amounts actually and reasonably incurred in connection with any proceeding arising by reason of the fact that any such person is or was an agent of the corporation. For purposes of this Article VI, an "agent" of the corporation includes any person who is or was a director, officer, employee or other 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, or was a director, officer, employee or agent of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. Section 2. ADVANCE OF EXPENSES. Expenses incurred in defending any proceeding may be advanced by this corporation prior to the final disposition of such proceeding upon receipt of an undertaking by or on behalf of the agent to repay such amount unless it shall be determined ultimately that the agent is entitled to be indemnified as authorized in this Article. Section 3. OTHER CONTRACTUAL RIGHTS. Nothing contained in this Article shall affect any right to indemnification to which persons other than directors and officers of this corporation or any subsidiary hereof may be entitled by contract or otherwise. Section 4. INSURANCE. Upon and in the event of a determination by the board of directors of this corporation to purchase such insurance, this corporation shall purchase and maintain insurance on behalf of any agent of the corporation against any liability asserted against or incurred by the agent in such capacity or arising out of the agent's status as such whether or not this corporation would have the power to indemnify the agent against such liability. ARTICLE VII RECORDS AND REPORTS Section 1. MAINTENANCE AND INSPECTION OF SHARE REGISTER. The corporation shall keep at its principal executive office, or at the office of its transfer agent or registrar, if either be appointed, a record of its shareholders, giving the names and addresses of all shareholders and the number and class of shares held by each shareholder. A shareholder or shareholders of the corporation holding at least five percent (5%) in the aggregate of the outstanding voting shares of the corporation may (i) inspect and copy the records of shareholders' names and addresses and shareholdings during usual business hours upon five (5) days' prior written demand upon the corporation, or (ii) obtain from the transfer agent of the corporation, upon written demand and upon the tender of the transfer agent's usual charges for such list, a list of the shareholders' names and addresses, who are entitled to vote for the election of directors, and their shareholdings, as of the most recent record date for which such list has been compiled or as of a date specified by the shareholder subsequent to the date of demand. The list shall be made available to that shareholder on or before the later of five (5) days after the demand is received or the date specified therein as the date as of which the list is to be compiled. The record of shareholders shall also be open to inspection upon the written demand of any shareholder or holder of a voting trust certificate, at any time 11 12 during usual business hours, for a purpose reasonably related to such holder's interests as a shareholder or as the holder of a voting trust certificate. Any inspection and copying under this Section may be made in person or as an agent or attorney of the shareholder or holder of a voting trust certificate making such demand. Section 2. MAINTENANCE AND INSPECTION OF BYLAWS. The corporation shall keep at its principal executive office, or if its principal executive office is not in the State of California,at its principal business office in that State, the original or a copy of the bylaws as amended to date, which shall be open to inspection by the shareholders at all reasonable times during office hours. If the principal executive office of the corporation is outside the State of California and the corporation has no principal business office in that State, the secretary shall, upon the written request of any shareholder, furnish to such shareholder a copy of the bylaws as amended to date. Section 3. MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS. The Accounting books and records and minutes of proceedings of the shareholders and the board of directors and any committee or committees of the board of directors shall be kept at such place or places designated by the board of directors, or, in the absence of such designation, at the principal executive office of the corporation. The minutes shall be kept in written form and the accounting books and records shall be kept either in written form or in any other form capable of being converted into written form. Such minutes and accounting books and records shall be open to inspection upon the written demand of any shareholder or holder of a voting trust certificate, at any reasonable time during usual business hours, for a purpose reasonably related to the holder's interests as a shareholder or as the holder of a voting trust certificate. The inspection may be made in person or by an agent or attorney, and shall include the right to copy and make extracts. The foregoing rights of inspection shall extend to the records of each subsidiary of the corporation. Section 4. INSPECTION BY DIRECTORS. Every director shall have the absolute right at any reasonable time to inspect all books, records and documents of every kind and the physical properties of the corporation and each subsidiary corporation. Such inspection by a director may be made in person or by agent or attorney and the right of inspection includes the right to copy and make extracts. Section 5. ANNUAL REPORTS. The Board of Directors of the corporation shall cause an annual report to be sent to the shareholders not later than one hundred twenty (120) days after the close of the fiscal year, provided that such report shall in any event be sent to shareholders at least fifteen (15) (or, if sent by third-class mail, thirty-five (35) days prior to the annual meeting of shareholders to be held during the next fiscal year. Such report shall contain a balance sheet as of the end of such fiscal year and an income statement and statement of changes in financial position for such fiscal year and shall be accompanied by any report thereon of independent accountants. Such report shall also contain any additional matters required by Section 1501(b) of the General Corporation Law, the Securities Exchange Act of 1934 and other applicable laws. Section 6. FINANCIAL STATEMENTS. A copy of any annual financial statement and any income statement of the corporation for each quarterly period of each fiscal year, and any accompanying balance sheet of the corporation as of the end of each such period, that has been prepared by the corporation shall be kept on file in the principal executive office of the corporation for twelve (12) months and each such statement shall be exhibited at all reasonable times to any shareholder demanding examination of any such statement or a copy shall be mailed to any such shareholder. 12 13 If a shareholder or shareholders holding at least five percent (5%) of the outstanding shares of any class of stock of the corporation makes a written request to the corporation for an income statement of the corporation for the three-month, six-month or nine-month period of the then current fiscal year ended more than thirty (30) days prior to the date of the request, and a balance sheet of the corporation as of the end of such period, the chief financial officer shall cause such statement or statements to be prepared, if not already prepared, and shall deliver personally or mail such statement or statements to the person making the request within thirty (30) days after the receipt of such request. If the corporation has not sent to the shareholders its annual report for the last fiscal year, this report shall likewise be delivered or mailed to such shareholder or shareholders within thirty (30) days after such request. The corporation also shall, upon the written request of any shareholder, mail to the shareholder a copy of the last annual, semi-annual or quarterly income statement which it has prepared and a balance sheet as of the end of such period. The quarterly income statements and balance sheets referred to in this section shall be accompanied by the report thereon, if any, of any independent accounts engaged by the corporation or the certificate of an authorized officer of the corporation that such financial statements were prepared without audit from the books and records of the corporation. ARTICLE VIII GENERAL MATTERS Section 1. RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING. For purposes of determining the shareholders entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any other lawful action (other than action by shareholders by written consent without a meeting), the board of directors may fix, in advance, a record date, which shall not be more than sixty (60) days prior to any such action, and in such case only shareholders of record on the date so fixed are entitled to receive the dividend, distribution or allotment of rights or to exercise the rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date so fixed, except as otherwise provided in the California General Corporation Law. If the board of directors does not so fix a record date for determining shareholders for any such propose shall be at the close of business on the date on which the board adopts the resolution relating thereto, or the sixtieth (60th) day prior to the date of such action, whichever is later. Section 2. CHECKS, DRAFTS, EVIDENCES OF INDEBTEDNESS. All checks, drafts or other orders for payment of money, notes or other evidences of indebtedness, issued in the name of or payable to the corporation, shall be signed or endorsed by such person or persons and in such manner as, from time to time, shall be determined by resolution of the board of directors. Section 3. CORPORATE CONTRACTS AND INSTRUMENTS; HOW EXECUTED. The board of directors, except as otherwise provided in these bylaws, may authorize any officer or officers, agent or agents, to enter into any contract or execute any instrument in the name of an on behalf of the corporation, and such authority may be general or confined to specific instances; and, unless so authorized or ratified by the board of directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for 13 14 any purpose or for any amount. Section 4. CERTIFICATES FOR SHARES. A certificate or certificates for shares of the capital stock of the corporation shall be issued to each shareholder when any such shares are fully paid and the board of directors may authorize the issuance of certificates or shares as partly paid provided that such certificates shall state the amount of the consideration to be paid therefor and the amount paid thereon. All certificates shall be signed in the name of the corporation by the chairman of the board or vice chairman of the board or the president or vice president and by the chief financial officer or an assistant treasurer or the secretary or any assistant secretary, certifying the number of shares and the class or series of shares owned by the shareholder. Any or all of the signatures on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if such person were an officer, transfer agent or registrar at the date of issue. Section 5. LOST CERTIFICATES. Except as hereinafter in this Section provided, no new certificates for shares shall be issued in lieu of an old certificate unless the latter is surrendered to the corporation and cancelled. The board of directors may, in case any share certificate or certificate for any other security is lost, stolen or destroyed, authorize the issuance of a new certificate in lieu thereof, upon such terms and conditions as the board may require, including provision for indemnification of the corporation secured by a bond or other adequate security sufficient to protect the corporation against any claim that may be made against it, including any expense or lability, on account of the alleged loss, theft or destruction of such certificate or the issuance of replacement certificate. Section 6. REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The chairman of the board, the president, or any vice president, or any other person authorized by resolution of the board of directors or by any of the foregoing designated officers, is authorized to vote on behalf of the corporation any and all shares of any other corporation or corporations, foreign or domestic, standing in the name of the corporation. The authority granted to said officers to vote or represent on behalf of the corporation any and all shares held by the corporation in any other corporation or corporations may be exercised by any such officer in person or by any person authorized to do so by proxy duly executed by said officer. Section 7. CONSTRUCTION AND DEFINITIONS. Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the California General Corporation Law shall govern the construction of these bylaws. Without limiting the generality of the foregoing, the singular number includes the plural, the plural number includes the singular, and the term "person" includes both a corporation and a natural person. All references in these bylaws to the California General Corporation Law or to sections of the Code shall be deemed to be such Law or sections as they may be amended and in effect and, if renumbered, to such renumbered provisions at the time of any action taken under the bylaws. ARTICLE IX AMENDMENTS Section 1. AMENDMENT BY SHAREHOLDERS. New bylaws may be adopted or these bylaws may be amended or repealed by the vote or written consent of holders of a majority of the outstanding shares entitled to vote; provided, however, that if the articles of incorporation of the corporation set forth the number of authorized directors of the 14 15 corporation, the authorized number of directors may be changed only by an amendment of the articles of incorporation. Section 2. AMENDMENT BY DIRECTORS. Subject to the rights of the shareholders to adopt, amend or repeal bylaws as provided in Section 1 of this Article IX, bylaws may be adopted, amended or repealed by the board of directors. 15 16 CERTIFICATE OF AMENDMENT OF BYLAWS OF CARL KARCHER ENTERPRISES, INC. a California corporation The undersigned, Daniel W. Holden, certifies as follows: 1. He is the duly elected and acting Secretary of Carl Karcher Enterprises, Inc., a California corporation (Corporation). 2. Article V, Section 1. of the ByLaws of the Corporation is hereby amended to read as follows: "Section 1. The officers of the Corporation shall be a Chairman of the Board, President, Chief Financial Officer, Executive Vice President, Group Vice President(s), Treasurer, Corporate Counsel and Secretary. Notwithstanding the above, any Vice-President who held a vice-presidential position existing prior to June 30, 1988, shall be an officer of the corporation until such Vice President vacates said vice-presidential position. 3. The foregoing amendment of the ByLaws has been duly approved by the Board of Directors of the Corporation. I declare under penalty of perjury under the laws of the State of California that the matters set forth in this Certificate are true and correct of my own knowledge. Dated: September 28, 1990. /s/ DANIEL W. HOLDEN ___________________________ Daniel W. Holden, Secretary 17 CERTIFICATE OF AMENDMENT OF BYLAWS OF CARL KARCHER ENTERPRISES, INC. a California corporation The undersigned, Daniel W. Holden, certifies as follows: 1. He is the duly elected and acting Secretary of Carl Karcher Enterprises, Inc., a California corporation (Corporation). 2. Article V, Section 1. of the ByLaws of the Corporation is hereby amended to read as follows: "Section 1. The officers of the Corporation shall be the President and Chief Executive Officer, Chief Financial Officer, Senior Vice Presidents, General Counsel, Controller, Vice President Strategic Development, Vice President Human Resources, Vice President Marketing, and Secretary." 3. The foregoing amendment of the ByLaws has been duly approved by the Board of Directors of the Corporation. I declare under penalty of perjury under the laws of the State of California that the matters set forth in this Certificate are true and correct of my own knowledge. Dated: April 7, 1993 /s/ DANIEL W. HOLDEN ___________________________ Daniel W. Holden, Secretary 18 CERTIFICATE OF AMENDMENT OF BYLAWS OF CARL KARCHER ENTERPRISES, INC. a California corporation The undersigned, Daniel W. Holden, certifies as follows: 1. He is the duly elected and acting Secretary of Carl Karcher Enterprises, Inc., a California corporation (Corporation). 2. Article V, Section 1. of the ByLaws of the Corporation is hereby amended to read as follows: "Section 1. The officers of the Corporation shall be the Chairman of the Board, President and Chief Executive Officer, Chief Financial Officer, Senior Vice Presidents, Vice President/General Counsel, Vice President/Controller, Vice President Systems & Technology, Vice President Human Resources, Vice President Marketing, and Secretary." 3. The foregoing amendment of the ByLaws has been duly approved by the Board of Directors of the Corporation. I declare under penalty of perjury under the laws of the State of California that the matters set forth in this Certificate are true and correct of my own knowledge. Dated: May 7, 1993 /s/ DANIEL W. HOLDEN ___________________________ Daniel W. Holden, Secretary 19 CERTIFICATE OF AMENDMENT OF BYLAWS OF CARL KARCHER ENTERPRISES, INC. a California corporation The undersigned, Daniel W. Holden, certifies as follows: 1. He is the duly elected and acting Secretary of Carl Karcher Enterprises, Inc., a California corporation (Corporation). 2. Article V, Section 1. of the ByLaws of the Corporation is hereby amended to read as follows: "Section 1. The officers of the Corporation shall be the Chairman of the board, President and Chief Executive Officer, Chief Financial Officer, Senior Vice Presidents, General Counsel, Controller, Vice President Strategic Development, Vice President Human Resources, Vice President Marketing, and Secretary." 3. The foregoing amendment of the ByLaws has been duly approved by the Board of Directors of the Corporation. I declare under penalty of perjury under the laws of the State of California that the matters set forth in this Certificate are true and correct of my own knowledge. Dated: July 28, 1993 /s/ DANIEL W. HOLDEN ___________________________ Daniel W. Holden, Secretary 20 CERTIFICATE OF AMENDMENT OF BYLAWS OF CKE RESTAURANTS, INC. a Delaware corporation The undersigned, Robert A. Wilson, certifies as follows: 1. He is the duly elected and acting Secretary of CKE Restaurants, a Delaware corporation (the "Corporation"). 2. Article III, Section 3.2. of the ByLaws of the Corporation is hereby amended to read as follows: "Section 3.2. Election of Directors. The authorized number of directors of the Corporation shall be nine (9) until this Section 3.2 is amended by a resolution duly adopted by the Board. Directors need not be stockholders. With the exception of Carl N. Karcher, no person who has attained the age of 75 shall be eligible for election to the Board. Each of the directors of the Corporation shall hold office until such director's successor shall have been duly elected and shall qualify or until such director shall resign or shall have been removed in the manner provided by these Bylaws." 3. The foregoing amendment of the ByLaws was been duly approved by resolution of the Board of Directors of the Corporation on May 5, 1996. I declare under penalty of perjury under the laws of the State of California that the matters set forth in this Certificate are true and correct of my own knowledge. Dated: March 7, 1996 /s/ Robert A. Wilson - ------------------------------- Robert A. Wilson, Secretary EX-10.29 4 AMENDMENT #3 AND WAIVER TO BUSINESS LOAN AGREEMENT 1 EXHIBIT 10.29 AMENDMENT NO. THREE AND WAIVER TO BUSINESS LOAN AGREEMENT This Amendment No. Three and Waiver (the "Amendment") dated as of July 3, 1995, is between Bank of America National Trust and Savings Association (the "Bank"), CKE Restaurants, Inc. ("CKR") and Carl Karcher Enterprises, Inc. ("CKE"). CKR and CKE are sometimes referred to collectively as the "Borrowers" and individually as the "Borrower" RECITALS A. The Bank and the Borrowers entered into a certain Business Loan Agreement dated as of October 31, 1994, as amended by Amendment No. One dated as of April 5, 1995, and by Amendment No. Two and Waiver dated April 28, 1995 (the "Agreement"). B. The Borrowers are in default of certain covenants of the Agreement and have requested that the Bank waive such defaults. C. The Borrowers have requested that the Bank agree to further amend the Agreement on the terms and conditions herein contained. D. The Bank has agreed to waive the defaults and amend the Agreement on the terms and conditions herein contained. AGREEMENT 1. Definitions. Capitalized terms used but not defined in this Amendment shall have the meaning given to them in the Agreement. 2. Amendments. The Agreement is hereby amended as follows: 2.1 Paragraph 1.10 of the Agreement is amended to add clause (c) to read as follows: "(c) The Borrowers may prepay the term loan in full or in part at any time. The prepayment will be applied to the most remote installment of principal of the term loan due under this Agreement." 2.2 Paragraph 6.10 of the Agreement is amended by substituting the figure "Five Million One Hundred Ten Thousand dollars ($5,110,000)" for the figure "Five Million Dollars ($5,000,000)" appearing therein. 3. Defaults. The Borrowers hereby acknowledge that they have breached the following covenants of the Agreement: (a) Paragraph 6.10 for the fiscal quarter ending May 22, 1995; and - 1 - 2 (b) Paragraphs 6.21(c) as result of CKE entering into the joint venture, MBF Holdings Berhad. 4. Waivers. (a) The Bank hereby waives the failure of the Borrowers to comply with Paragraph 6.10 for the fiscal period set forth above. (b) The Bank hereby waives any violation of Paragraph 6.2(c) resulting from CKE entering into the joint venture, MBF Holdings Berhad, provided that CKE is not required to make any capital contribution to the joint venture and is not liable for any direct or contingent debt of said joint venture. 5. Representations and Warranties. When the Borrowers sign this Amendment, the Borrowers represent and warrant to the Bank that: (a) other than the defaults listed above, there is no event which is, or with notice of, or lapse of time, or both would be, a default under the Agreement; (b) the representations and warranties in the Agreement are true as of the date of this Amendment as if made on the date of this Amendment; (c) this Amendment is within the Borrowers' powers, has been duly authorized and does not conflict with any organizational papers of the Borrowers; and (d) this Amendment does not conflict with any law, agreement, by which any Borrower is bound. 6. Effect of Amendment and Waivers. The above waivers shall be limited precisely as written and relate solely to the sections of the Agreement and for the time referred to above. Except as expressly set forth herein, the terms, provisions, and conditions of the Agreement shall remain in full force and effect and in all other respects are hereby ratified and confirmed. This Amendment is executed as of the date stated at the beginning of this Amendment. BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By: /s/ E. M. Amendt -------------------------- E. M. Amendt Vice President (Signatures continue) - 2 - 3 CKE RESTAURANTS, INC. By: /s/ C. T. T. /s/ Loren Pannier ------------------------------------ C. Loren Pannier Title: Senior Vice President By: /s/ Laurie A. Ball ------------------------------------ Laurie A. Ball Title: Vice President/Controller CARL KARCHER ENTERPRISES, INC. By: /s/ C. T. T. ------------------------------------ C. T. Thompson Title: President & COO By: /s/ Laurie A. Ball ------------------------------------ Laurie A. Ball Title: Vice President/Controller - 3 - EX-10.30 5 AMENDMENT #4 AND CONSENT TO BUSINESS LOAN AGREEMEN 1 EXHIBIT 10.30 AMENDMENT NO. FOUR AND CONSENT TO BUSINESS LOAN AGREEMENT This Amendment No. Four and Consent (the "Amendment") executed as of April 15, 1996, having an effective date as of January 29, 1996, is between Bank of America National Trust and Savings Association (the "Bank"), CKE Restaurants, Inc. ("CKR") and Carl Karcher Enterprises, Inc. ("CKE"). CKR and CKE are sometimes referred to collectively as the "Borrowers" and individually as the "Borrower"). RECITALS a. The Bank and the borrowers entered into a certain Business Loan Agreement dated as of October 31, 1994, as amended by Amendment No. One dated as of April 5, 1995, by Amendment No. Two and Waiver dated April 28, 1995 and by Amendment No. Three and Waiver dated as of July 3, 1995 (the "Agreement"). B. Pursuant to the terms of the Agreement and Plan of Merger and Reorganization, dated as of November 30, 1995, as amended by a First Amendment, dated as of January 24, 1996 and a Second Amendment, dated as of April 2, 1996 ("Merger Agreement") by and among CKR and Summit Family Restaurants, Inc. ("Summit"), a merger (the "Merger") of Summit with and into a newly-formed wholly-owned subsidiary of CKR, with Summit as the surviving corporation, is contemplated. C. Concurrently with or shortly after the Effective Date (as defined in the Merger Agreement) of the Merger, CKR is planning to sell Summit's franchised HomeTown Buffet restaurant operations and related are a development rights, all or a portion of Summit's JB's Restaurants and the JB's Restaurant franchise system, and an interest in Summit's Galaxy Diner operations (collectively, "Summit's Sale Assets"). D. The Borrowers have requested that the Bank agree to further amend the Agreement on the terms and conditions herein contained. E. The Bank has agreed to amend the Agreement on the terms and conditions herein contained. AGREEMENT 1. Definitions. Capitalized terms used but not defined in this Amendme nt shall have the meaning given to them in the Agreement. 2. Amendments. The Agreement is hereby amended as follows: 2.1 In Paragraph 1.2, the date "June 30, 1996" is amended to read "August 31, 1996". - 1 - 2 2.2 Subparagraph 1.7(ii) is amended and restated in its entirety to read as follows: "(ii) Standby letters of credit (including amounts drawn on the letters of credit and not yet reimbursed) with a maximum maturity date of: (i) January 27, 1997, for the letter of credit issued pursuant to the Reimbursement Agreement (as defined in Paragraph 4.3) not exceeding Three Million Eight Hundred Sixty Thousand Dollars ($3,860,000); (ii) June 30, 1997, for the letter of credit issued in favor of Self Insurance Plans State of California in an amount not to exceed $8,600,000; and (iii) other standby letters of credit with a maturity not to extend beyond the Expiration Date." 2.3 Subparagraph 1.7(g) is amended and restated in its entirety to read as follows: "(g) if the line of credit is terminated for any reason, Borrowers will immediately deliver to the Bank as collateral, cash or cash equivalents acceptable to the Bank, or an acceptable standby letter of credit in favor of the Bank from an issuer acceptable to the Bank, in the amount of all outstanding letters of credit (including amounts drawn on letters of credit and not yet reimbursed), together with such security agreements as Bank may require." 2.4 Paragraph 6.1 is amended and restated in its entirety to read as follows: "6.1 Use of Proceeds. To use the proceeds of the credit only for working capital, restaurant development costs, costs in connection with the Summit Merger, and for other general corporate purposes." 2.5 Paragraph 6.4 is amended and restated in its entirety to read as follows: "6.4 Fixed charge Coverage Ratio. To maintain a Fixed Charge Coverage Ratio, determined on a consolidated basis, of at least 1.75:1.0. For purposes of this Agreement, 'Fixed Charge Coverage Ratio' means the following calculation, expressed as a ratio for any fiscal period: (a) EBITDA less the net gain realized on sales of fixed assets (or EBITDA plus the net loss incurred on sales of fixed assets), less taxes and less dividends divided by (b) the sum of (i) interest expense, (ii) current portion of long-term debt and (iii) current portion of capital leases. The current portion of long term debt and the current portion of capital leases will be the amount shown on the balance sheet as of the end of each quarter. 'EBITDA' means earnings before interest and tax expense, depreciation, amortization, and other non-cash charges. This ratio shall be calculated quarterly using a Four Quarter Rolling Basis. 'Four Quarter Rolling Basis' shall mean the four quarters calculated using the results of the fiscal quarter then most recently ended and the immediately preceding three (3) quarters." - 2 - 3 2.6 Paragraph 6.7 is amended and restated in its entirety to read as follows: "6.7 Capital Expenditures. With respect to CKE, not to spend or incur obligations to acquire fixed or capital assets of more than Twenty Five Million Dollars ($25,000,000) through the fiscal year ending January 29, 1996. Commencing with the fiscal year beginning January 30, 1996, Borrowers, on a consolidated basis, will not permit the sum of (i) commitments to acquire fixed or capital assets, plus (ii) capital expenditures incurred fiscal year-to-date, to exceed Thirty Million Dollars ($30,000,000)." 2.7 Subparagraph 6.8(h) is amended and restated in its entirety to read as follows: "6.8 (h) Contingent obligations incurred in connection with franchisee financing agreements, provided that prior to issuance of such obligations, Bank has received copies of such agreements. Any contingent liabilities created hereunder are further subject to the limitations set forth in Subparagraphs 6.8(d), (e), (g) and (i)." 2.8 Subparagraph 6.8(i) is amended and restated in its entirety to read as follows: "(i)Effective as of the fiscal year ending January 29, 1996, contingent debts not to exceed $23,000,000 in the aggregate at any one time, including obligations under Paragraph 6.8(g) and (h)." 2.9 In Paragraph 6.21, the following is added at the beginning of Subparagraph (f): "Except as provided in Paragraph 6.25, ..." 2.10 In Paragraph 6.21, the following is added as subparagraph (g): "(g) pledge stock of CKR or any subsidiary (including, but not limited to CKE and Summit) to any third party." 2.11 Paragraph 6.23 is amended and restated in its entirety to read as follows: "6.23 Loans. Not to make any loans, advances or other extensions of credit to any of Borrowers' executives, officers, directors, shareholders of CKR or affiliates (other than to any Borrower and to Summit) (or any relatives of the foregoing) in excess of an aggregate amount of $100,000, excluding affiliates notes receivable shown on the balance sheet fiscal year end 1996." - 3 - 4 2.12 The following is added as a new Paragraph 6.25: "6.25 Summit's Sale Assets. (a) Within 45 days of Effective Date (as defined in the Merger Agreement) of the Merger, Borrowers shall deliver to the Bank an executed sale purchase agreement with respect to the sale of any of Summit's Sale Assets which shall evidence that, upon closing, the net sale proceeds received by Summit shall not be less than $13,000.00. (b) Promptly following the closing of the sale of any of Summit's Sale Assets, Borrowers shall deliver to Bank a reconciliation of net proceeds realized from such sale. (c) Net sale proceeds from Summit's Sale Assets may be used for general corporate purposes, including capital expenditures after reserve for payment of (or after payment of) 100% of balance sheet liabilities and intercompany debt resulting from the Summit Merger." 3. Consent. Pursuant to Paragraph 6.21 (c) and (e) of the Agreement, the Bank hereby consents to the Merger of Summit with a wholly owned subsidiary of CKR, with Summit as the surviving corporation, pursuant to the terms of the Merger Agreement. 4. Conditions. This amendment will be effective when the Bank receives the following items, in form and content acceptable to the Bank: 4.1 This Amendment duly executed by Borrowers and Bank. 4.2 A certificate from the chief financial officer, dated as of the date of execution of this Amendment certifying that, on a consolidated basis, commitments for capital expenditures plus capital expenditures incurred year-to-date do not exceed Thirty Million Dollars ($30,000,000). 5. Representations and Warranties. When the Borrowers sign this Amendment, the Borrowers represent and warrant to the Bank that: (a) there is no event which is, or with notice of, or lapse of time, or both would be, a default under the Agreement; (b) the representations and warranties in the Agreement are true as of the date of this Amendment as if made on the date of this Amendment; (c) this Amendment is within the Borrowers' powers, has been duly authorized and does not conflict with any organizational papers of the Borrowers; and (d) this Amendment does not conflict with any law, agreement, by which any Borrower is bound. 6. Effect of Amendment. Except as expressly set forth herein, the terms, provisions, and conditions of the Agreement shall remain in full force and effect and in all other respects are hereby ratified and confirmed. - 4 - 5 This Amendment is executed as of the date stated at the beginning of this Amendment. BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By: /s/ Deborah L. Miller --------------------------------- Deborah L. Miller Vice President CKE RESTAURANTS, INC. By: /s/ Robert A. Wilson --------------------------------- Title: Vice President, General Counsel --------------------------------- By: /s/ Joseph N. Stein --------------------------------- Title: Senior Vice President, Chief Financial Officer ---------------------------------------------- CARL KARCHER ENTERPRISES, INC. By: /s/ Robert A. Wilson --------------------------------- Title: Vice President, General Counsel --------------------------------- By: /s/ Joseph N. Stein --------------------------------- Title: Senior Vice President, Chief Financial Officer ---------------------------------------------- - 5 - EX-10.31 6 SETTLEMENT AND DEVELOPMENT AGREEMENT 1 EXHIBIT 10.31 CARL'S JR/GREEN BURRITO SETTLEMENT AND DEVELOPMENT AGREEMENT This Settlement and Development Agreement (the "Agreement") is entered into as of May _____, 1995, by and between CARL KARCHER ENTERPRISES, INC., a California corporation ("CARL"), CKE RESTAURANTS, INC., a Delaware corporation ("CKE") and GB FOODS CORPORATION, a Delaware corporation ("GBFC"). R E C I T A L S This Agreement is made with reference to the following facts, circumstances and objectives: A. CARL and GBFC are both operators and franchisors of quick service restaurants and both own firmly established trademarks, trade names, goodwill, proprietary products, and well-established specialty menus. B. CARL's parent corporation, CKE, and GBFC, have previously analyzed the potential of the Carl's Jr./Green Burrito Dual Product Concept, employing the side-by-side presentation and marketing of CARL's products and GBFC's products at CARL's company and franchisee locations. CARL, CKE, and GBFC believe that their respective products and specialty menus, marketed together, will create synergies and further opportunities for the parties hereto, and their respective franchise networks. C. As part of their analysis, the parties hereto have entered into various documents of agreement, and have also engaged in litigation and extensive discovery pursuant to the litigation. This has involved extensive disclosure of GBFC information including manuals, training materials, franchise offering circulars, franchise agreements, and other matters related to its dual product concept. D. The parties now desire to put all past differences aside; settle all past and present disputes; develop a new relationship; make arrangements for the Franchise Agreements which will apply to the respective arrangements between GBFC and CARL and/or CARL's franchisees, and to provide for an orderly conversion of CARL restaurants to employ the side-by-side presentation and marketing of CARL's products and GBFC products at CARL's Company and Franchise locations, herein the "Dual Product Concept". A G R E E M E N T THEREFORE, in consideration of the mutual covenants and promises contained herein, and in consideration of the recitals set forth above, the parties agree as follows: 1. DUAL CONCEPT LOCATIONS. Pursuant to the terms of this Agreement, CARL and CKE agree to use their best efforts to utilize the Dual Product Concept in as many of the company 2 owned Carl's Jr. restaurants and franchisee-owned Carl's Jr. restaurants as CARL management deems appropriate to aid and enhance the total sales and profits of CARL. A. COMPANY STORES. CARL will convert a minimum of forty (40) company owned Carl's Jr. locations per fiscal year during each of the five (5) following fiscal years, subject to the following: (i) Fiscal Year. for purposes of this Agreement, a fiscal year shall be July 15 through July 14. (ii) 25% Sales Average. On October 15, 1997, after the restaurants converted through fiscal year 1 and fiscal year 2 have been converted, a calculation shall be made to determine the collective percentage sales increase actually experienced by all of the stores which qualify for inclusion in the calculation. (iii) Calculation of Average Store Increase. the calculation shall be a comparison of the "annualized collective post conversion sales" for the stores qualifying for inclusion in the calculation to the "annualized collective pre-conversion sales" of those same stores for the respective twelve (12) months prior to conversion. (1) The numerator shall be computed as follows: the total sales for each store during the post-opening period shall be determined separately, commencing with the ninth week after conversion. (For purposes of this calculation, the first eight weeks of the post conversion period shall be disregarded.) This sales number shall then be divided by the number of weeks the store has been open following the eighth week of conversion, and then multiplied by 52 to obtain a calculated annualized sales number for the store. Each of the calculated annualized sales numbers for each store shall be added together. The total shall be referenced as the "Annualized Collective Post-conversion Sales". (2) The denominator shall be the sum of the total sales for each of the same stores for the respective twelve full months applicable to each store for the period immediately preceding the conversion. This number shall be referenced as the "Annualized Collective Pre-Conversion Sales". (3) Stores qualifying for inclusion in the calculation will be all stores converted up to the date of the calculation, whether a company owned or franchisee location, provided such converted store is, for the ninety (90) days prior to the calculation, selling both Carl's -2- 3 and GBFC products pursuant to the applicable franchise agreements. (4) Expressed as a series of steps, the equation is as follows: STEP 1: (a) Total Converted Store Sales for Week 9 et seq = Computed Weekly Converted --------------------------------------------- Store Sales Number of Weeks Following Week 8 (b) Computed Weekly Converted Store Sales x 52 = Annualized Converted Store Sales
Carry out Step 1 for all stores included in calculation. STEP 2: Sum the Annualized converted Store Sales to arrive at: Annualized Collective Post-Conversion Sales. This is the numerator, i.,e., "Annualized collective Post-Conversion Sales". STEP 3: Sum the actual sales for each store included in the calculation for the respective fifty-two (52) week period prior to conversion. This is the denominator, i.e., the Annualized Collective Pre-Conversion Sales. STEP 4: Annualized Collective Post-Conversion Sales = Comparison Ratio ------------------------------------------- Annualized Collective Pre-Conversion Sales STEP 5: Comparison Ratio = ______% Sales Increase ---------------- 100%
(iv) 25% Threshold. If the overall sales percentage increase computed above does not equal or exceed 25%, then CARL may, at its option, lower the number of annual conversions from 40 restaurants to 20 restaurants for fiscal year 3. On October 15, 1998, another overall percentage increase calculation shall be repeated for the stores converted up to that point and which qualify for inclusion in the calculation. If the overall sales percentage increase then computed does not then equal or exceed 25%, then CARL may, at its option, convert only 20 stores in fiscal year 4 and -3- 4 fiscal year 5. If the average sales percentage increase equals or exceeds 25%, then CARL shall resume the 40 store conversion schedule for fiscal years 4 and 5. (v) For purposes of meeting the number of conversions required in Years 1 and 2, in all events, CARL must convert a minimum of thirty (30) company stores in each of Years 1 and 2; and for purposes of complying with the forty (40) store requirement, during Years 1 and 2, ten (10) franchise stores shall be counted toward the achievement of the forty (40) store obligation. For purposes of meeting the number of conversions required in Years 3, 4, and 5, in all events CARL must convert a minimum of twenty (20) company stores in each of Years 3, 4, and 5; and, for purposes of complying with the forty (40) store requirement, if applicable, during Years 3, 4, and 5, franchisee stores shall be counted toward the achievement of this obligation of the forty (40) stores. (vi) Flexibility. The parties recognize that due to circumstances beyond their control, store opening deadlines may not be achieved. Accordingly, it shall not be a material breach of this agreement if the annual restaurant conversions required are 80% achieved in a particular fiscal year, provided those that do not achieve the planned opening date for fiscal year compliance are in progress and are eventually opened in a timely fashion. A restaurant conversion shall be deemed in progress if the franchise agreement is signed and equipment for the conversion is ordered, and the store is opened in the first half of the following fiscal year. In addition, if more than the requisite number of company store conversions are completed in any fiscal year, the excess number beyond the minimum threshold shall be credited to the subsequent fiscal year, thereby reducing the requirement for company-owned store conversions for that respective year. (vii) Conversions. A new store location which utilizes the Dual Product Concept, and each of the two (2) existing Picante Grill locations, when converted, will be deemed a converted store, and counted against the minimum threshold but shall not be used in computing the twenty-five percent (25%) sales average increase. Throughout this Agreement, the terms, "convert", "conversion(s)" or "converted" shall include new store locations. B. FRANCHISE STORES. CARL will use its best efforts to permit Carl's Jr. franchisees to convert their stores to the Dual Product Concept, at the franchisee's election, subject to the following: -4- 5 (i) Financially Capable. Franchisee must obtain Carl's pre-approval that franchisee is financially capable (in Carl's discretion) to accomplish the conversion and to accomplish store enhancements for the particular location being converted. (ii) Good Standing. Franchisee must obtain Carl's determination that the franchisee is in good standing with CARL. (iii) Improvements. Franchisee must agree to make such reasonable improvements (over and above required equipment) as CARL deems necessary to adapt the franchisee restaurant to the GB Dual Product Concept. (iv) Carl's Jr. Royalties. Franchisee must agree, unless waived by CARL, to pay minimum annual royalties on Carl's Jr. sales equal to the royalty rate specified for the franchisee in the Carl's Jr. Franchise Agreement for the respective location, applied to the sales level for the respective location, for the twelve months immediately proceeding conversion. CARL will not unreasonably withhold its approval or permission for franchisees to convert their stores to the Dual Product Concept, but the parties hereto recognize that CARL cannot mandate the conversion of any franchisee to the Dual Product Concept. C. GOING CONCERN. Neither CKE nor CARL shall be required to perform the above-described conversion commitments for company store locations, pursuant to Subsection A. of this Section 1, nor shall CKE or CARL be required to permit franchisees to convert franchise locations, pursuant to Subsection B of this Section 1, if there shall be a qualification on the GBFC audit opinion from the independent Certified Public Accountant retained by GBFC to perform its annual audit relating to the ability of GBFC to continue as a "going concern" (as defined by the American Institute of Certified Public Accountant Standards, SAS No. 59 and SAS No. 64, and the interpretations thereunder). 2. SELECTION AND APPROVAL OF LOCATIONS. A. COMPANY STORES. CARL will select the locations for conversion taking into account its desire to increase overall sales and profits the greatest amount, and its need to timely convert according to the Schedule described in Section 1 above. GBFC shall have the right to approve or disapprove the site selected, which approval shall not be unreasonably withheld. However, taking into account the same desire as CARL, GBFC may disapprove a location, or request its conversion be later in sequence, if it deems the location selected will be detri- -5- 6 mental, at the time selected, to achieving the twenty-five percent (25%) collective sales percentage increase described in Section 1 above. In the event of a dispute over GBFC's refusal to approve a location in Carl'[s "core market" (i.e., the State of California and Pima County, Arizona), then CARL may proceed with a conversion, and be granted a franchise for same by GBFC (absent: (i) a territorial conflict with the protected GBFC territories set forth in Attachment 5; (ii) a territorial conflict with a GBFC franchisee added after the date of this Agreement [the protected territory under such new franchise agreement in the core areas shall not exceed 1.5 miles]; or (iii) a prohibition which GBFC has not created and which it cannot avoid or eliminate), provided such non-approved conversion shall be excluded from the collective sales percentage increase test described in Section 1 above, if its inclusion negatively impacts the percentage increase calculations by reducing the percentage otherwise attained without reference to these stores. Such non-approved conversion shall, however, count as a converted restaurant for purposes of CARL satisfying the yearly minimum in Section 1A. above. B. FRANCHISE STORES. A CARL franchisee, upon obtaining prior written approval from CARL, may be granted a franchise from GBFC, provided however, GBFC will not grant a franchise to a Carl's Jr. Franchisee in the absence of a prior approval by CARL. 3. FEES AND ROYALTIES. A. COMPANY STORES: (i) Franchise Fee. GBFC shall be paid a franchise fee of Seven Thousand Five Hundred Dollars ($7,500.00) for each company store location converted pursuant to the GBFC Dual Concept Franchise Agreement for company owned stores. This shall be subject to proration as described in the Franchise Agreement. (ii) Royalties. GBFC shall be paid royalties of four percent (4%) on GBFC gross revenues as defined in the GBFC Dual Concept Franchise Agreement for company owned stores. (iii) Duration. the above fee and royalty payment shall remain fixed and may not be increased by GBFC. B. FRANCHISEE STORES: (i) Franchise Fee. Franchisee shall be charged a franchise fee of Twelve Thousand Five Hundred Dollars ($12,500.00) payable Seven Thousand -6- 7 Five Hundred Dollars ($7,500.00) to GBFC, and Five Thousand Dollars ($5,000.00) to CARL, for each franchise location converted pursuant to the GBFC Dual Concept Franchise Agreement for franchise stores. This shall be subject to pro ration as described in the Franchise Agreement. (ii) Royalties -- Existing Stores. Franchisees shall be charged a royalty of five percent (5%) on GBFC gross revenue as described in the GBFC Dual Concept Franchise Agreement for franchisee stores, payable three percent (3%) to GBFC and two percent (2%) to CARL. (iii) Royalties -- New Stores. The royalty charged for new stores will be phased in from zero to five percent (5%) on the same time basis as applicable for the new Carl's Jr. franchise stores pursuant to the CARL Franchise Agreement, provided five percent (5%) will be reached in all events by the fifth (5th) year, and the royalties will be split 3/5 to GBFC and 2/5 to CARL. (iv) Duration. The fees and royalties charged to franchisees shall remain the same until May 31, 2000, unless a change is mutually agreed upon prior thereto by GBFC and CARL. 4. TERM. A. EXISTING LOCATIONS. The GBFC Franchise Agreements shall grant franchises for an initial term of fifteen (15) years, with a renewal option for ten (10) additional years, subject to an adjustment to a shorter term or longer term for existing franchisee locations as of April 1, 1995, to coincide with the initial termination date provided in the Carl Franchise Agreement. In no event does an existing Carl Franchise Agreement extend longer than a duration of twenty (20) years from January 1, 1995. B. NEW LOCATIONS. The GBFC franchise fee has been based on a 15-year franchise. If new locations are granted both CARL and GBFC franchises to utilize the Dual Product Concept, and the CARL franchise agreement terms exceeds fifteen (15) years, then CARL may select one of the following options: (i) Grant the franchisee a twenty- (20-) year GBFC franchise by increasing the franchise fee paid to GBFC by $2,500.00; or (ii) Grant the franchisee a fifteen- (15-) year GBFC franchise, and add a five (5) year renewal increment for $2,500.00 to be paid at the date of renewal. The 10-year renewal provision in the franchise agreement would then follow the initial 5-year renewal. -7- 8 C. FRANCHISEE TERMINATION. In all events, upon termination of the CARL franchisee pursuant to the terms of the Carl Franchise Agreement, the GBFC Franchise Agreement shall terminate concurrently. 5. TRAINING AND SUPERVISION. CARL desires to provide the training and supervision of its company store personnel and of its franchisees. Accordingly, GBFC will provide to CARL materials, training and supervision sufficient to permit CARL to carry out its training of its own personnel and franchisees. Presently, CARL has sufficiently trained personnel to accomplish training and supervision. GBFC shall undertake to update the training for the most current operational items, standards and techniques. At any training sessions or supervision visits conducted by CARL personnel, GBFC shall have the opportunity to be present and to participate to the degree GBFC deems appropriate to achieve its quality control requirements. GBFC and CARL will each use their best efforts and cooperate with each other to achieve and maintain high quality and efficient levels of performance. 6. PROTECTED RADIUS. The GBFC Franchise Agreement shall provide a protected radius of 1.5 miles for each CARL location converted. If another CARL or CARL Franchisee location is within the 1.5 mile protected radius, GBFC will, at CARL's request, grant a GBFC franchise to such CARL or CARL Franchisee location; notwithstanding the 1.5 mile radius protection stated herein. 7. FRANCHISE AGREEMENTS. A. COMPANY STORES. The GBFC Dual Concept Franchise Agreement applicable to company stores is set forth at Attachment 1. b. FRANCHISEE STORES. The GBFC Dual Concept Franchise Agreement applicable to franchise stores is set forth as Attachment 2. Notwithstanding the terms of the Franchise Agreement in Attachment 2, in order for CARL to maintain and enhance its relations with its franchisees and to assure the proper integration of the Dual Product Concept, GBFC covenants and agrees with CARL as follows: (i) GBFC shall only have contact with a CARL franchisee or prospective CARL franchisee through or in a manner approved in writing by CARL; (ii) All training, consultations and supervision of any CARL franchisee shall be as provided in Section 5 above. -8- 9 (iii) All operational, advertising or other requirements imposed on a CARL franchisee by GBFC shall be subject to CARL's prior written approval, not to be unreasonably withheld; and, (iv) In the event that GBFC has a dispute with, or a complaint about a CARL franchisee or its conduct of the Dual Product Concept (whether it is an alleged breach of the Franchise Agreement or otherwise), GBFC shall follow the following dispute/complaint procedure: (i) GBFC shall provide franchisee a written notice with a copy to CARL; (ii) which notice shall contain a detailed explanation of the issue; and (iii) a reasonable period of time not to exceed forty-five (45) days shall be provided for GBFC and CARL to resolve the issues with the franchisee. Pursuant to Subsection C. below, the parties will cooperate in good faith to substitute a revised franchise agreement as needed. C. ALTERNATIVE FRANCHISE AGREEMENT FOR FRANCHISEES. At CARL's sole option, CARL may hereafter elect to become a Master Sub-Franchisor for the GBFC Dual Concept Franchise Agreement awarded to CARL franchisees in which event the parties will in good faith develop a Master Sub-Franchisor Agreement to appoint CARL as the Master Sub-Franchisor, and shall cooperate to satisfy all legal requirements and filings. Upon completion of that process, CARL may, at its option, substitute a franchise agreement in lieu of Attachment 2 to be utilized between CARL and its franchisees provided said document: (i) Is approved by GBFC, which approval will not be unreasonably withheld. (ii) Is in conformance with all franchise laws, reporting, and filing requirements. (iii) Is not materially less favorable to GBFC than the terms set forth in Attachment 2 as modified by the terms of this Agreement, including Sections 5 and 7B. above. In all events, for purposes of GBFC's orderly administration, compliance with contract terms and protection of the integrity of the GBFC franchise system, each such franchisee and franchise location to be granted by CARL must be pre-approved by GBFC, which approval will not be unreasonably withheld. In addition, GBFC must be timely provided with a copy of each such GBFC Franchise Agreement entered into between CARL and its franchisees. 8. EXCLUSIVITY. In addition to the 1.5 mile Protected Radius, GBFC will not authorize GBFC Dual Concept conversions to other traditional quick service restaurant chains featuring hamburgers as their main menu specialty in the core CARL market which is -9- 10 the State of California and Pima County, Arizona, for a period of twenty (20) years from the date of this Agreement, subject to the following: A. For purposes of this provision, traditional quick service restaurants featuring hamburgers as their main menu specialty include, but are not limited to, McDonalds, Burger King. Wendy's, Jack-in-the-Box, In and Out, Rally's, and Checkers, with the exception of the existing Rally's/Green Burrito located at Sunset & Highland, Los Angeles, California. B. In the event GBFC elects to enter into a dual concept arrangement with Rally's, GBFC shall be permitted to offer franchises of the GB system and products to Rally's for use on a per store basis in San Diego, California, subject to the following: (i) GBFC shall offer its franchise for one offering period of two (2) weeks to the Rally's franchisee for the San Diego territory for no more than fifteen (15) locations. (In all events, this two-week period must be completed no later than ninety [90] days following the execution of this Agreement.) (ii) During such two-week period, the Rally's franchisee may accept or reject the GB franchise. (iii) If said Rally's franchisee accepts, then he may utilize the GB system and products on a per store basis (for no more than fifteen [15] stores) in the San Diego area if said franchisee executes a GB Franchise Agreement on a per location basis prior to CARL or a Carl's franchisee executing a GB Franchise Agreement in the same territory. For purposes of this subsection, a territory shall be a straight line radius of 1.5 miles from the affected location of either a CARL or Rally's location. The first of CARL or Rally's to execute a GB Franchise Agreement at each San Diego location shall be entitled to the protected 1.5 mile territory to the exclusion of the other within that 1.5 mile protected territory. If CARL or a CARL franchisee has executed first, the 1.5 mile territory shall belong to CARL or CARL's franchisee. (iv) If, and only if, said Rally's franchise rejects the GBFC franchise opportunity for all San Diego locations during the two-week offering period, then immediately thereafter, for one offering period of two (2) weeks (which must in all events conclude no later than ninety (90) days following the execution of this Agreement), GBFC may make a similar offer to Rally's for a like number of Rally's stores in the Los Angeles area as exist in San Diego (not to exceed fifteen [15]), which again on a per store basis may become GB franchisees, provided that for each such -10- 11 Rally's store which could potentially be converted within 1.5 miles of a CARL location, CARL or CARL's franchisee has not prior thereto executed a GBFC Franchise Agreement for such location. If CARL or a CARL franchisee has executed the GB Franchise Agreement first, the 1.5 mile territory shall belong to CARL or CARL's franchisee. (v) As an alternative to the above Rally's arrangement, to preclude the use of the GREEN BURRITO trade name, trademark, logo, or other indicia of origin at locations other than CARL in the State of California, GBFC may, at its option, offer the GBFC products, system and concept at the fifteen (15) Rally's locations under a substantially different trade name, trademark, logo, or other indicia of origin. In all events, the 1.5 mile protected area applies as though the location were utilizing the Green Burrito trade name and trademarks. C. The exclusivity provision in this Section 8 shall not apply if CARL is in material breach of the Development Agreement; or, if, after CARL's converts stores, it terminates continued featuring of GBFC in more than twenty-five percent (25%) of the stores converted to the GBFC Dual Concept. 9. COVENANT NOT TO COMPETE. During the term of this Agreement which for purposes of this Section shall be deemed to be a period of five (5) years from the date of execution, and for a period of four (4) years thereafter, CARL and its affiliates will not feature or operate in its Carl's Jr. locations, or dual concept in its Carl's Jr. locations, any concept which it develops, owns, operates, or is a licensee thereof if that concept features Mexican food as its main menu attraction which is similar to the GBFC Mexican products and concepts. Nothing herein shall preclude CARL from selling those Mexican offerings which were listed on its menu prior to August 9, 1994. for purposes of this agreement, any sandwich comprised of bread or buns and a main component of hamburger, chicken, or fish, even though garnished with traditional Mexican sauces or flavorings, shall not be deemed a Mexican-type product competing against Green Burrito. Nothing herein shall preclude CKE from owning any restaurant, company, or chain, regardless of the products it features, whether Mexican or otherwise, provided the first sentence of this Section 9 is adhered to by CKE or CARL and its affiliates. This covenant shall cease: A. In the event GBFC files voluntarily or involuntarily for protection under the Bankruptcy laws: (i) If an involuntary bankruptcy, one (1) year after filing of GBFC is not relieved within ninety (90) days; and -11- 12 (ii) If voluntary, one (1) year after filing. B. In the event of a material breach by GBFC under this Agreement. C. In the event the twenty-five percent (25%) calculation is not satisfied. For purposes of this provision, "affiliates" is defined as CARL, CKE, and any of its or their parent corporations, subsidiary corporations, or any partnership or joint ventures in which CARL or CKE own more than fifty percent (50%) of the voting power. 10. TRADEMARK APPLICATION. GBFC and CARL have both applied for registration of the mark, "Two Great Tastes, One Great Place", and/or "One Great Place, Two Great Tastes". Both parties will take all reasonable action to protect this mark, and shall jointly utilize it solely for the promotion of Carl's Jr./Green Burrito Dual Product Concept restaurants. 11. PICANTE GRILL. CARL shall terminate all use of the Picante Grill Concept at such time as the two existing Picante Grills can be converted to Dual Concept restaurants. The two (2) Picante Grill Concept locations will be converted in the first twenty (20) conversions, and count toward the minimum company store conversions required pursuant to Section 1. In all events, CARL will cease all use of the Picante Grill concept and abandon same no later than December 31, 1995. 12. REIMBURSEMENTS. A. CARSON. CARL and GBFC shall upon execution of this Agreement, execute and comply with the standard GBFC Dual Concept Franchise Agreement (Attachment 1) with respect to the Carson store. In addition, CARL shall remit to GBFC the sum of $83,352.00 for reimbursement of sums expended by GBFC in connection with the Carson conversion. In exchange, GBFC shall convey all of its right, title and interest in an to any and all equipment and/or improvements provided by GBFC for the Carson store. B. LA QUINTA STORE. CARL shall, upon execution of this Agreement, remit to GBFC the sum of $114,475.00 for reimbursement of sums expended by GBFC in connection with the La Quinta conversion. In exchange, GBFC shall convey all its right, title and interest in and to any and all equipment, and/or improvements, provided by GBFC to the La Quinta store, and any and all right, title and interest to lease such equipment to Carl Leo Karcher, Lessee, pursuant to Attachment 3. The store shall also be subject to a standard GBFC Dual Concept Franchise Agreement (Attachment 2), but such agreement shall be modified to be free of franchise fees and royalties payable to GBFC for the initial term of such franchise. -12- 13 13. SUPERSEDING AGREEMENT. This Agreement supersedes, nullifies and replaces all prior agreements between the parties, including, but not limited to: A. Confidentiality Agreement dated July 27, 1993. B. Master Agreement dated August 9, 1994. 14. DISMISSAL OF LITIGATION. The parties hereto shall as soon as practical dismiss, with prejudice the claims and counter claims of each in the case in the Superior court of the State of California for the County of Los Angeles captioned: GB Foods Corporation vs. CKE Restaurants, Inc., et al Case No. BC 119345 This shall include a dismissal and release of and by William P. Foley, III, which CARL represents and warrants it will procure forthwith. In addition, although not a party, a release will be provided by William M. Theisen, which GBFC represents and warrants it will procure forthwith. 15. OWNERSHIP OF TRADEMARKS/FORMULAS/SYSTEMS. Each party acknowledges the value and goodwill associated with the other's Trademarks (as defined below) and agrees that each parties' Trademarks and all rights therein and the goodwill pertaining thereto belong exclusively to the respective party and that the respective parties' Trademarks have secondary meaning in the mind of the public. Each party also agrees that its every use of the other's Trademarks shall inure to the benefit of the owner of the Trademark and that neither party shall acquire nor claim any rights in the Trademark of the other party by virtue of any such use, or attempt to develop marks similar to a competitor with the other's marks. As used herein, "Trademarks" shall mean a party's marks, logos, or other symbols for which such party has been granted federal trademark protection under the laws of the United States, or for which such party may, pursuant to federal, state or common law, be entitled to protection from unfair competition. GBFC further agrees that all information concerning Carl's Jr. concept of operations, unique food items, recipes, ingredients, methods of food preparation, systems for food preparation, and the like utilized by CARL in the production and sale of any products sold under the Carl Jr.'s Trademark belong exclusively to Carl Jr.'s and that GBFC shall not disclose or otherwise use any such formulas or recipes now or in the future. GBFC further agrees that it will not reverse engineer or otherwise seek to discover the product formulation of any food product sold by Carl Jr.'s under Carl Jr.'s Trademark and that nothing in this Agreement shall be construed as granting GBFC a license or any other right to disclose or use any product formulation of any food product sold by Carl Jr.'s under the Carl Jr.'s Trademark, or a license or right to use or disclosure any information concerning Carl Jr.'s concept of operations, unique food items, recipes, ingredients, methods of food preparation, systems for food preparation and the like. -13- 14 Carl Jr.'s further agrees that all information concerning GBFC concept of operations, unique food items, recipes, ingredients, methods of food preparation, systems for food preparation, and the like utilized by GBFC in the production and sale of any products sold under the GBFC Trademark belong exclusively to GBFC and that Carl Jr.'s shall not disclose or otherwise use any such formulas or recipes now or in the future. Carl Jr.'s further agrees that it will not reverse engineer or otherwise seek to discover the product formulation of any food product sold by GBFC under a GBFC Trademark and that nothing in this Agreement shall be construed as granting Carl Jr.'s a license or any other right to disclose or use any product formulation of any food product sold by GBFC under the GBFC Trademark, or a license or right to use or disclose any information concerning GBFC concept of operations, unique food items, recipes, ingredients, methods of food preparation, systems for food preparation and the like. The last two (2) paragraphs of this Section 15 are intended only to restrict the disclosure of use by a party of (i) a "trade secret" (as that term is defined under California law) of the other party for so long as it is a "trade secret" of such party; or "trade dress" as that term is defined in Section 43 (a) of the Trademark Act of 1946. 16. GBFC RELEASE. GBFC forever discharges and releases CARL, its employees, officers, directors, and attorneys from any and all rights, claims, demands, damages, debts, liabilities, accounts, reckonings, liens, attorney's fees, costs, expenses, actions and causes of action of every kind and nature whatsoever, whether in contract, tort, at law or in equity, or otherwise, suspected or unsuspected, which Green Burrito owns or holds, or at any time heretofore have ever had, owned or held, related to or arising out of or in any way connected to the Agreements described and superseded at Section 13 above, and in connection with the Picante Grill. 17. CARL RELEASE. CARL forever discharges and releases GBFC, its employees, officers, directors, and attorneys, from any and all rights, claims, demands, damages, debts, liabilities, accounts, reckonings, liens, attorney's fees, costs, expenses, actions and causes of action of every kind and nature whatsoever, whether in contract, tort, at law or in equity, or otherwise, suspected or unsuspected, which Carl owns or holds, or at any time heretofore have ever had, owned or held, related to or arising out of or in any way connected to the Agreements described and superseded at Section 13 above, and in connection with the Picante Grill. 18. WAIVER OF CIVIL CODESS.1542. With the exception of the parties' respective contractual rights and obligation sunder this Settlement and Development Agreement, and the franchise agreements appended hereto, it is the intention of the parties hereto that the foregoing releases in Sections 16 and 17 above shall be effective as a bar to all demands, liens, assignments, contracts, covenants, actions, suits, causes of action, obligations, costs, expenses, attorney's fees, damages, losses, claims, controversies, judgments, orders, and liabilities of whatsoever character, nature, and kind, known or unknown, suspected or unsuspected, and whether or not concealed or hidden, hereinabove specified -14- 15 to be so barred; in furtherance of this intention, the parties hereto expressly, knowingly, and voluntarily waive any and all rights and benefits conferred upon them by the provision of Section 1542 of the California Civil Code, which are as follows: "A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor." The parties hereto expressly consent that this release shall be given full force and effect in accordance with each and all of its express terms and provisions, relating to unknown and unsuspected claims, demands, causes of action, if any, to the same affect as those terms and provisions relating to any other claims, demands, and causes of action hereinabove specified. 19. CROSS INDEMNIFICATION. GBFC, on one hand, and CKE and CARL on the other, hereby mutually cross-indemnify and hold each other and their respective directors, officers, and employees, agents, representatives, and attorneys harmless against claims, damages, liabilities and losses, including reasonable attorneys fees and defense costs, arising directly or indirectly from the actions of the other in connection with (i) the Dual Product Concept Franchise Agreements; (ii) the CARL's franchisee's operation of the GBFC Dual Product Concept franchise; (iii) the awarding of Dual Product franchises to CARL's franchisees; (iv) the services to be provided by CARL's under the GBFC Franchise Agreements to the CARL's/GBFC franchisees; (v) in connection with any product liability claims with respect to any food products; and (vi) claims by the existing GBFC franchisees or claims by future GBFC franchisees that are not part of the CARL system. Notwithstanding anything to the contrary in this Section 19, GBFC shall indemnify and hold harmless CARL, CKE, and their affiliates, directors, officers, employees, agents, representatives, and attorneys with respect to: A. Any action by a GBFC franchisee (who is not also a CARL franchisee) or Rally's or Rally's franchisee based on the grant of a GBFC franchise to CARL or one of its franchisees; B. Failure of GBFC to perform under this Agreement or any franchise agreement with CARL franchisees; C. Any alleged infringement on the rights of any third parties based on CARL or its franchisees or CKE utilizing GBFC's trademarks, trade names, recipes, unique food items or the like as authorized by this Agreement or any GBFC Franchise Agreement involving CARL or a CARL franchisee; -15- 16 D. The failure of GBFC to comply with any franchise, securities or other applicable law. Notwithstanding anything to the contrary in this Section 19, CARL shall indemnify and hold harmless GBFC, and their affiliates, directors, officers, employees, agents, representatives, and attorneys with respect to: A. Any action by a CARL franchisee (who is not also a GBFC franchisee) based on the grant of a GBFC franchise to CARL or one of its franchisees; B. Failure of CARL to perform under this Agreement or any franchise agreement with CARL franchisees; C. Any alleged infringement on the rights of any third parties based on GBFC utilizing CARL's trademarks, trade names, or the like as authorized by any agreement involving CARL and GBFC; D. The failure of CARL to comply with any franchise, securities or other applicable law. 20. EMPLOYEES. For so long as CARL is the Master Franchisee of GBFC, and for one (1) year thereafter, the parties hereto shall not, directly or indirectly, or by action in concert with others, induce or influence, or seek to induce or influence, any person who is engaged as an employee by any other party hereto to (a) end his or his engagement or employment; and (b) to work for one of the other parties to this Agreement. Nothing herein shall preclude any party from hiring an individual who voluntarily and without enticement by such party left employment of another party. 21. CARL REPRESENTATIONS. A. Each of CARL and the person executing this Agreement on behalf of CARL represent and warrant to GBFC that the execution, delivery and performance of this Agreement by CARL and such person have been duly and validly authorized by all necessary corporate action on the party of CARL. B. In addition, CARL represents and warrants to GBFC that: (i) CARL has the requisite corporate power and authority to enter into, and to carry out its obligations under this Agreement. (ii) This Agreement constitutes the valid and binding obligation of CARL, enforceable against CARL in accordance with its terms. -16- 17 (iii) The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby and compliance with its terms will not (a) conflict with, or result in any violation of any provision of, the Articles of Incorporation or Bylaws of CARL; (b) violate or conflict with, or result in a breach of termination of or default under, any agreement, instrument, license, judgment, order, decree, statute, law or regulation applicable to CARL. 22. GBFC REPRESENTATIONS. A. Each of GBFC and the person executing this Agreement on behalf of GBFC represent and warrant to CARL that the execution, delivery and performance of this Agreement by GBFC and such person have been duly and validly authorized by all necessary corporate action on the part of GBFC. B. In addition, GBFC represents and warrants to CARL that: (i) GBFC has the requisite corporate power and authority to enter into and to carry out its obligation sunder this Agreement. (ii) This Agreement constitutes the valid and binding obligation of GBFC, enforceable against GBFC in accordance with its terms. (iii) The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby and compliance with its terms will not (a) conflict with, or result in any violation of any provision of, the Articles of Incorporation or Bylaws of GBFC; (b) violate or conflict with, or result in a breach of termination of or default under, any agreement, instrument, license, judgment, order, decree, statue, law or regulation applicable to GBFC. 23. MISCELLANEOUS PROVISIONS. A. OTHER DUAL CONCEPTS. Nothing herein should preclude CARL from utilizing other concepts in CARL locations (company or franchisee) which are not utilizing Carl's Jr./Green Burrito Dual Concept, provided such other concept is not Mexican in nature. B. UNOCAL. CARL is presently party to an agreement with UNOCAL pursuant to which CARL may offer Carl's Jr. products in UNOCAL locations. The UNOCAL agreement requires CARL to also offer various Mexican products. Accordingly, CARL shall consider Green Burrito as the supplier of the Mexican system and/or products for CARL's UNOCAL contract, but CARL has no obligation to utilize Green Burrito and Green Burrito has no obligation to supply. -17- 18 In the event Green Burrito does not provide the Mexican products and system, the covenant not to compete at Section 9 above shall not be violated as a result of a third party providing the Mexican products and system to CARL for the UNOCAL contract. C. GOVERNING LAW. All questions with respect to the construction of this Agreement and the rights and liabilities of the parties shall be governed by the internal laws of the State of California. D. PUBLIC ANNOUNCEMENTS. CKE and GBFC are both public companies and therefore have obligations to make good faith disclosures and dissemination of information from time to time to the public. Attachment 4 is the mutual announcement of this Settlement and Development Agreement. Future public announcements shall be made in good faith and neither party shall disparage the other, or its products, concept, or system. E. SUCCESSORS AND ASSIGNS. This Agreement and the Exhibits referred to herein shall be binding upon and inure to the benefit of the parties hereto, and their respective successors and assigns; however, neither party shall assign its interest under this Agreement without the prior written consent of the other. F. ENTIRE AGREEMENT. this Agreement and the Exhibits referred to herein contain all of the terms and conditions agreed upon by the parties, and supersede any prior agreements or understandings, with respect to the subject matter of this Agreement. The parties represent and acknowledge that there are no representations separate and apart from this Agreement and its exhibits, each having relied upon their own investigation of the facts and circumstances surrounding this transaction. G. AMENDMENT OR MODIFICATION OF AGREEMENT. This Agreement may be modified, altered or amended only by the written agreement of both parties. The parties recognize and acknowledge that their continued cooperation with each other will be necessary to modify or amend such documents as may reasonably be required or prudent in order to deal with franchisees and franchise laws and regulations. H. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be an original, but all of which shall constitute one and the same instrument. I. FURTHER ACTIONS. Each party agrees to execute and deliver any further documents and to do any additional acts reasonably required to carry out the terms of this Agreement. J. WAIVERS. Any provision of this Agreement may be waived at any time by the party entitled to the benefit thereof by a written instrument by the party of by a duly authorized officer of the party. No waiver of any of the provisions of this -18- 19 Agreement will be deemed, or will constitute, a waiver of any other provision, whether or not similar, nor will any waiver constitute a continuing waiver. K. NOTICES. all notices, requests, demands and other communications given or required to be given under this Agreement shall be in writing and duly addressed to the parties as follows: If to CARL: CKE RESTAURANTS, INC. 1200 NORTH HARBOR BOULEVARD ANAHEIM, CALIFORNIA 92801 ATTN: TOM THOMPSON With copy to: RICHARD CELIO CKE RESTAURANTS, INC. 1200 NORTH HARBOR BOULEVARD ANAHEIM, CALIFORNIA 92801 and ANDREW PUZDER FIDELITY NATIONAL TITLE 17911 VON KARMAN, SUITE 300 IRVINE, CALIFORNIA 92714 If to GBFC: GB FOODS CORPORATION 23 CORPORATE PLAZA, SUITE 240 NEWPORT BEACH, CALIFORNIA 92660 ATTN: WILLIAM M. THEISEN and GB FOODS CORPORATION 10010 NORTH 84 STREET OMAHA, NEBRASKA 68122 ATTN: MICHAEL J. SCHERR With copy to: BRUCE ROHDE McGRATH, NORTH, MULLIN & KRATZ, P.C. 1400 ONE CENTRAL PARK PLAZA OMAHA, NEBRASKA 68102 Any notices properly addressed and sent by certified mail, return receipt requested, shall be deemed to have been duly given and received seventy-two hours after they are deposited in the United States mail, postage prepaid. Notice -19- 20 shall be deemed delivered and received at the time delivered if properly addressed and delivered to the addresses set forth in this Section during normal business hours or personally delivered to the person to whose attention they are addressed. Notice sent by any other manner shall be effective only upon actual receipt by the addressee. Any party may change the address for purposes of this Section by giving notice to the other party as provided in this Section. L. EXPENSES. Except as otherwise provided herein, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such costs or expenses. M. SEVERABILITY. If any paragraph, section, sentence, or clause of phrase contained in this Agreement becomes or is held by any court of competent jurisdiction to be illegal, null or void or against public policy, the remaining paragraphs, sections, sentences, clauses or phrases contained in this Agreement shall not be affected thereby. N. COOPERATION IN DRAFTING. Both CARL and GBFC have cooperated in the drafting and preparing of this Agreement, and therefore, construction to be made of this Agreement shall not be construed against any party. O. RECITALS AND EXHIBITS. all Recitals and Exhibits referred to herein and attached hereto are incorporated by this reference, as though fully set forth in the body of this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. CARL: CKE RESTAURANTS, INC. CARL KARCHER ENTERPRISES, INC. A DELAWARE CORPORATION A CALIFORNIA CORPORATION By /s/ William P. Foley By: /s/ William P. Foley --------------------------- ------------------------- Title: Chairman & CEO Title: Chairman GBFC: GB FOODS CORPORATION, a Delaware corporation By: /s/ William M. Theisen ---------------------------------- Title: Chairman and Chief Executive Officer -20- 21
TABLE OF CONTENTS 1.1. Parties.................................................................................... 1 1.2. Location................................................................................... 1 2. RECITALS ........................................................................................... 1 2.1. Development of system...................................................................... 1 2.2. Carl's Jr. Franchisee System............................................................... 2 2.3. Objective of the Parties................................................................... 2 3. DEFINITIONS.......................................................................................... 2 3.1. Affiliate.................................................................................. 2 3.2. Agreement.................................................................................. 2 3.3. Approved Location.......................................................................... 2 3.4. Breach..................................................................................... 3 3.5. Commencement Date.......................................................................... 3 3.6. Designated Manager......................................................................... 3 3.7. Franchised Business/Restaurant............................................................. 3 3.8. Franchisee................................................................................. 3 3.9. CARL'S JR. Original Food Products.......................................................... 3 3.10. Franchise Network.......................................................................... 3 3.11. Franchisor................................................................................. 4 3.12. "GB Food Products" or "GREEN BURRITO Products"............................................. 4 3.13. GREEN BURRITO Dual Concept System.......................................................... 4 3.14. Dual Product Concept System................................................................ 4 3.15. GREEN BURRITO.............................................................................. 4 3.16. Good Standing.............................................................................. 4 3.17. Gross Revenue.............................................................................. 4 3.18. Training Materials/Manual.................................................................. 5 3.19. Marks...................................................................................... 5 3.20. Proprietary Product........................................................................ 5 3.21. System..................................................................................... 5 3.22. Termination................................................................................ 5 3.23. Trade Name................................................................................. 6 3.24. Transfer................................................................................... 6 3.25. You ...................................................................................... 6 3.26. UNOCAL..................................................................................... 6 4. GRANT OF FRANCHISE................................................................................... 6 4.1. Granting Clause............................................................................ 6 4.1.1 Protected Radius.................................................................... 6 4.2. Term and Renewal........................................................................... 7 4.2.1 Initial Term........................................................................ 7 4.2.2 Relocation.......................................................................... 7 4.2.3 Renewal............................................................................. 7
22 5. SERVICES TO FRANCHISEE............................................................................... 8 5.1. Lay-out and Decor.......................................................................... 8 5.2. Training................................................................................... 8 5.2.1 Initial Training.................................................................... 8 5.2.2 Continuing Education................................................................ 8 5.3. Consultation and Supervision............................................................... 9 5.4. Training Materials/Manual.................................................................. 9 5.5. Advertising................................................................................ 9 5.1.1 Advertising Fund.................................................................... 9 5.6. Suggested Suppliers........................................................................ 10 5.7. Proprietary Product Availability........................................................... 10 6. PAYMENTS BY FRANCHISEE............................................................................... 10 6.1. Initial Fee................................................................................ 10 6.2. Initial Fee Proration...................................................................... 10 6.3. Royalties.................................................................................. 11 6.4. Audit...................................................................................... 11 6.5. Training Fees and Costs.................................................................... 11 6.6. Relocation Fee............................................................................. 11 6.7. Renewal Fee................................................................................ 11 6.8. Transfer Fee............................................................................... 11 6.9. Interest on Late Payments.................................................................. 11 7. OBLIGATIONS OF FRANCHISEE............................................................................ 12 7.1. Use of Trade Name and Marks................................................................ 12 7.1.1 Context............................................................................. 12 7.1.2 Changes in Trade Names and Marks.................................................... 12 7.1.3 Advertising Materials............................................................... 12 7.1.4 Legal Protection.................................................................... 12 7.2. Quality Control............................................................................ 13 7.2.1 Opening............................................................................. 13 7.2.2 Compliance with Manual.............................................................. 13 7.2.3 Products and Services Offered....................................................... 13 7.2.4 Customer Satisfaction Program....................................................... 14 7.2.5 Inspections......................................................................... 14 7.2.6 Use of Proprietary Products......................................................... 14 7.2.7 Notification of Complaints.......................................................... 14 7.3. Personnel.................................................................................. 14 7.3.1 Management.......................................................................... 14 7.3.2 Employees........................................................................... 15 7.4. Local Advertising.......................................................................... 15 7.5. Financial Information...................................................................... 15 7.5.1 Records............................................................................. 15 7.5.2 Reports............................................................................. 15 7.6. Insurance.................................................................................. 15
ii 23 7.7. Financial and Legal Responsibility......................................................... 16 7.7.1 Compliance with Law................................................................. 16 8. RELATIONSHIP OF PARTIES.............................................................................. 16 8.1. Interest in Marks and system............................................................... 16 8.2. Independent Status......................................................................... 16 8.3. Display of Disclaimer...................................................................... 16 8.4. Confidentiality............................................................................ 16 8.5. Indemnification............................................................................ 17 8.6. Covenant Not to Compete.................................................................... 17 9. TRANSFER OF FRANCHISE................................................................................ 18 9.1. Purpose of Conditions for Approval of Transfer............................................. 18 9.2. Notice of Proposed Transfer................................................................ 18 9.3. Consent by GREEN BURRITO................................................................... 18 9.4. Conditions for Consent to Transfer......................................................... 18 9.5. Changes of Ownership Deemed Not To Be Transfers............................................ 19 9.6. Assignment by GREEN BURRITO................................................................ 19 10. TERMINATION OF FRANCHISE............................................................................. 19 10.1. Termination by consent of the Parties...................................................... 19 10.2. Termination by GREEN BURRITO............................................................... 19 10.2.1 Acts of Default.................................................................... 19 10.2.2 Notice of Default.................................................................. 21 10.3. Termination by You......................................................................... 21 10.4. Rights and Obligations After Termination................................................... 21 11. MISCELLANEOUS PROVISIONS............................................................................. 22 11.1. Construction of Contract................................................................... 22 11.2. Governing Law.............................................................................. 22 11.3. Notices.................................................................................... 22 11.4. Amendments................................................................................. 22 11.5. Waiver..................................................................................... 22 11.6. Integration................................................................................ 22 11.7. Arbitration/Mediation...................................................................... 22 11.8. Injunctive Remedy for Breach............................................................... 23 11.9. Attorneys' Fees and Costs.................................................................. 23 11.10. Severability............................................................................... 24 11.11. Acceptance by both Parties................................................................. 24 11.12. DISCLAIMER OF REPRESENTATIONS.............................................................. 25
ATTACHMENT 1. GB Products List iii 24 GREEN BURRITO DUAL CONCEPT FRANCHISE AGREEMENT FOR COMPANY OWNED STORE OF CARL KARCHER ENTERPRISES, INC. ********** STORE # __________ 1.1. PARTIES This Agreement is signed on ____________ 19____, by and between GB Franchise Corporation, a California corporation ("GREEN BURRITO"), with its principal office in Newport Beach, California, and CARL KARCHER ENTERPRISES, INC., a California corporation, with its principal office in Anaheim, California, in its capacity as a franchisee solely relating to the location described immediately below at Section 1.2 ("You" or "CARL'S JR."). 1.2. LOCATION. This Agreement concerns your restaurant located at ___________________ ________________________________________________, and identified as CARL'S JR. Store #__________. 2. RECITALS 2.1. DEVELOPMENT OF SYSTEM. GREEN BURRITO is the licensee of certain intellectual property rights, including GREEN BURRITO's Trade Name "The Green Burrito"and the Marks "Green Burrito" and the "The Green Burrito and Design", and has spent a considerable amount of time, effort and money to devise, and continues to develop business methods, technical knowledge and marketing concepts including, but not limited to, trade secrets, commercial ideas, advertising materials, marketing strategies, information on sources of supply, administrative procedures, business forms, distinctive signage, trade dress, and uniforms, and employee training techniques, and goodwill that, taken together, comprise a proprietary System for the operation of Mexican fast-food restaurants. In addition to the foregoing, GREEN BURRITO has successfully developed a method for expanding the Franchise Network, and, at the same time, complementing and enhancing the menus and marketing of other restaurants by use of the GB Dual Concept System. This proprietary Dual Concept System, appropriately utilized, allows the insertion of the GB System into an existing restaurant. It allows the conversion to occur in a short period of time, with relatively minor interruption or interference with the existing day-to-day business, complements existing color schemes and decor, occupies only a small portion of existing restaurant preparation and sales space, and efficiently utilizes human and fixed asset resources. 1 25 2.2. CARL'S JR. FRANCHISE SYSTEM. You are the owner of the CARL'S JR. franchise system. As a franchisor you own and operate restaurants utilizing your own distinctive trademark, service marks, designs, trade names, copyrights, system, goodwill, specialty menus, proprietary products, and method of operation. The distinguishing characteristics of the CARL'S JR. systems includes, without limitation, special recipes and menu items, distinctive design, decor, color scheme, and furnishings; uniform standards; specifications and procedures for operations; consistency and uniformity of products and services offered; procedures for quality control; training and assistance; and advertising and promotional programs. Nothing in this Agreement provides GREEN BURRITO any rights whatsoever in the CARL'S JR. Franchise System, as it is a separate and distinct system from the GREEN BURRITO System both before and after the addition of the Dual Product Concept. 2.3. OBJECTIVE OF THE PARTIES. GREEN BURRITO and CARL'S JR. have analyzed the potential of their respective systems and believe that their respective products and specialty menus, marketed through their respective systems at a CARL'S JR. location, may create synergies and further opportunities for both. Therefore, it is the objective of the parties to insert the GREEN BURRITO System into CARL'S JR. locations so that two systems are operated side-by-side from the same location. 3. DEFINITIONS For purposes of this Franchise Agreement, the following words and phrases are defined as follows: 3.1. AFFILIATE. "Affiliate" or "Affiliates" means, in the context of a corporation, a parent corporation, subsidiary corporations, and "Affiliates" as defined by the Internal Revenue Code, associated with either GREEN BURRITO or CARL'S JR. 3.2. AGREEMENT. "The Agreement" or "this Agreement" means this Dual Concept Franchise Agreement, signed on the date set out in Article 1. above. 3.3. APPROVED LOCATION. "Approved Location"or "GB Dual Concept Location" means the location specified in Section 1.2 above, that GREEN BURRITO has, (subject to the Development Agreement between GREEN BURRITO and CARL'S JR.) approved, as a site where you may locate the Franchised Restaurant together with your CARL'S JR. restaurant. 2 26 3.4 BREACH. As used herein, the term "breach" always infers and implies a "material breach". 3.5. COMMENCEMENT DATE. "Commencement Date" means the date when your Restaurant at the location specified at Section 1.2 above begins to operate under the GB Dual Concept system, or NINETY (90) days after the execution of this Agreement, whichever is sooner. 3.6. DESIGNATED MANAGER. "Designated Manager" means the person whom you appoint as general manager of a Franchised Restaurant, to include substitutes for the General Manager, such as Assistance Managers, or Shift Managers. 3.7. FRANCHISED BUSINESS/RESTAURANT. "Franchised Business" or "Franchised Restaurant" means the aspects of GB Dual Concept enterprise that GREEN BURRITO has authorized you to conduct utilizing the Trade Name, Marks, and System of GREEN BURRITO, at your currently existing business, which utilizes your CARL'S JR. Trade Name, Mark, and System at the Location approved under this Agreement. 3.8. FRANCHISEE. "Franchisee" means "you" or CARL'S JR., which is the person or entity that is named as Franchisee in Article 1 of this Agreement. "Franchisee" means, in addition, all persons or entities that succeed to your interest as the original Franchisee by Transfer or operation of law. 3.9. CARL'S JR. ORIGINAL FOOD PRODUCTS. "CARL'S JR. Food Products" means those CARL'S JR. products, other than beverages, sold under the CARL'S JR. name and trademark offered prior to the execution of this Agreement at the Approved Location or such other CARL'S JR. products as added or modified in the CARL'S JR. menu from time to time, provided no products added by CARL'S JR. shall be Mexican-type products to compete against GREEN BURRITO Products. For purposes of this Agreement, any sandwich comprised of bread or buns and a main component of hamburger, chicken, or fish, even though garnished with traditional Mexican sauces or flavorings, shall not be deemed a Mexican-type product competing against Green Burrito. 3.10. FRANCHISE NETWORK. "Franchise Network" means the network composed of GREEN BURRITO, owners of all free-standing GREEN BURRITO Restaurants, owners of all dual concept GREEN BURRITO restaurants, GREEN BURRITO's Affiliates, and any other persons or business entities that GREEN BURRITO has licensed to use the Trade Name, Marks, System, or any of them. 3 27 3.11. FRANCHISOR. "Franchisor"means GB Franchise Corporation or any person or entity to which GREEN BURRITO assigns all or part of its rights and obligations under this Agreement. 3.12. "GB FOOD PRODUCTS" OR "GREEN BURRITO PRODUCTS". "GB Food Products" or "GREEN BURRITO Products" shall mean those products listed on Attachment I hereto. 3.13. GREEN BURRITO DUAL CONCEPT SYSTEM. The GREEN BURRITO Dual Concept System is an operating method which allows the insertion of the GREEN BURRITO concept into another restaurant to operate side-by-side with another restaurant concept within a single structure so that the two concepts may share seating and beverage facilities. See Section 2.1 above. 3.14. DUAL PRODUCT CONCEPT SYSTEM. The Dual Product Concept system as used herein is an operating method which allows the insertion of the GB System into a CARL'S JR. restaurant within a single structure so that the two share seating and beverage facilities. See Section 2.1 above. 3.15. GREEN BURRITO. "GREEN BURRITO" means GB Franchise Corporation (as it relates only to the Green Burrito dual concept system and GB Food Products) or any person or entity to which GREEN BURRITO assigns all or part of its rights and obligations under this Agreement. 3.16. GOOD STANDING. "Good Standing" means that you are in material compliance and not in default as the term "default" is used in Section 10.2.1 and Section 10.2.2 below. 3.17. GROSS REVENUE. "Gross Revenue" means the total amount of money received by you and your Affiliates, excluding sales tax and income from non-food items, within an accounting period for (a) all food items sold at the Approved Location under the GREEN BURRITO Trade Name or Marks; and (b) GREEN BURRITO's proportionate share of beverage sales sold at the Approved Location. GREEN BURRITO's proportionate share of beverage sales shall be computed during the respective accounting period by comparing the relationship between CARL'S JR. Products (exclusive of beverage sales) and GREEN BURRITO Products (exclusive of beverage sales), and multiplying that percentage times all beverage sales. 4 28 3.18. TRAINING MATERIALS/MANUAL. "Training Materials" or "Manual" means the current version of the training materials, manuals, and learning aids that GREEN BURRITO will lend to you during the term of this Agreement to establish and train individuals in the use of the GREEN BURRITO Dual concept, which contain information, forms, and requirements for the establishment and operation of a Franchise Restaurant and for use of GREEN BURRITO's Trade Name and Marks, including any modified manual which may be modified from time to time in the form of a common training manual jointly agreed to by the parties hereto. 3.19. MARKS. "Marks" means selected trade names, trademarks, service marks, logos, logotypes, emblems, indicia of origin, slogans and other commercial symbols licensed by GREEN BURRITO to you under this Agreement. 3.20. PROPRIETARY PRODUCT. "Proprietary Product" means any product that has been manufactured in accordance with GREEN BURRITO's secret recipes that has been packaged or labeled with the GREEN BURRITO Marks. 3.21. SYSTEM. GREEN BURRITO has a franchise system which means the business methods, technical knowledge and marketing concepts licensed by GREEN BURRITO to you under this Agreement, including, but not limited to, the right to use GREEN BURRITO's trade secrets, purchasing arrangements, commercial ideas, advertising materials, marketing strategies, information on sources of supply for GREEN BURRITO food products, administrative procedures, distinctive design, distinctive signage, distinctive decor, distinctive color scheme, distinctive trade dress, distinctive uniforms, and employee training techniques. As used in this Agreement, the term "System" refers to the GREEN BURRITO insert system which allows the insertion of the GREEN BURRITO System into a CARL'S JR. restaurant utilizing the GREEN BURRITO trademark, service mark, trade dress and a modified manual. "System", when used alone or not in conjunction with GREEN BURRITO, does not mean or refer to the CARL'S JR. Franchise System (See Section 2.1) as this Agreement covers only the addition of the GREEN BURRITO System to your location and does not cover the CARL'S JR. System. 3.22. TERMINATION. "Termination" means expiration of this Agreement; non-renewal of this Agreement; or termination, under the circumstances described in Article 10 of this Agreement, of the then-current term of this Agreement prior to its normal expiration date. 5 29 3.23. TRADE NAME. "Trade Name" means the commercial name "The Green Burrito." 3.24. TRANSFER. "Transfer" means any sale, gift, or other assignment of all or any part of the rights and obligations of this Agreement or of an interest of the magnitude described in this Section in the Franchised Restaurant. As a corporation, one or more transactions (whether or not they are related) in which there is a cumulative change in beneficial ownership of thirty-four percent (34%) or more of the your voting stock will be deemed to be a Transfer. Notwithstanding the foregoing, a Transfer is not a Transfer between related entities, in which the transferring party owns in excess of 50% of the transferee party; and a transfer will not be deemed to have occurred in the event of the acquisition or merger of franchisee with another company. 3.25. YOU. "You" means the entity that is named as "you" in Article 1 of this Agreement for the location specified at Section 1.2 above. "You" means, in addition, all persons or entities that succeed to the interest of the original franchisee by Transfer or operation of law. 3.26. UNOCAL. Specifically, this Agreement does not cover or address any Carl's Jr./UNOCAL location. 4. GRANT OF FRANCHISE 4.1. GRANTING CLAUSE. GREEN BURRITO grants to you and you accept from GREEN BURRITO a franchise to operate a GREEN BURRITO Dual Concept Franchised Restaurant at the Approved Location using the Trade Name, Marks and System in accordance with the terms of this Agreement. GREEN BURRITO expressly reserves all rights in the Trade Name, Marks and System not expressly granted in this Agreement, including, but not limited to, (a) the right to sell food products that have been prepared following GREEN BURRITO's proprietary recipes, through any means of distribution; and (b) the right to operate fast-food restaurants that do sell Mexican food. Nothing herein shall preclude GBFC from owning any restaurant, company, or chain, regardless of the products it features, whether Mexican or otherwise. 4.1.1 PROTECTED RADIUS. The territorial protection for you is a protected radius of one and one-half (1.5) miles determined on a straight line basis from the approved location ("Protected Area"). GREEN BURRITO agrees not to establish, or to operate or to license or franchise another person or entity, to establish or locate a restaurant within the Protected Area, utilizing the System, nor to allow any other franchisee or company-owned unit using the Trade Name or System to operate or relocate to a site within the Protected Radius as long as you and your affiliates are 6 30 in Good Standing under this Agreement. Notwithstanding the foregoing, if another CARL'S JR. location is within the 1.5 mile protected radius, GBFC may, if requested by CARL'S JR., grant a GBFC franchise to such CARL'S JR. location. 4.2. TERM AND RENEWAL. 4.2.1 INITIAL TERM. The initial term of the Franchise will begin on the Commencement Date and will continue for a period of fifteen (15) years, or the term of your lease, whichever is shorter. 4.2.2. RELOCATION. You may relocate the GREEN BURRITO Restaurant within the Protected area or anywhere within CARL'S JR. core markets, with GREEN BURRITO's prior written consent, which will not be unreasonably withheld, if the following conditions are substantially fulfilled: a. You and your Affiliates are in Good Standing under the Franchise Agreement, any other Agreement between GREEN BURRITO or GREEN BURRITO's Affiliate and you, and the Manual; b. You agree to plan, construct, equip, fixturize, and decorate your new CARL'S JR./GREEN BURRITO Restaurant so that the premises meet the standards of appearance and function applicable to the premises of new GREEN BURRITO/CARL'S JR. Restaurants at the time of relocation. c. GREEN BURRITO has given its prior written approval to the new site and the provisions of the lease for the new premises; d. You have satisfied GREEN BURRITO on any protected territory issue conflicts in existence at the time of relocation. Notwithstanding the foregoing, if you determine the location is no longer commercially reasonable, and you elect to relocate, you may do so with adherence to only Section 4.2.2.(d) immediately above. 4.2.3. RENEWAL. You will have the right to renew the Franchise for one (1) consecutive ten (10) year term on the same terms and conditions, if at the time of renewal the following conditions are fulfilled: a. You and your Affiliates are in Good Standing under this Agreement, any other Agreement between GREEN BURRITO or GREEN BURRITO's Affiliate and you, and the Manual; b. You have notified GREEN BURRITO in writing at least one hundred eighty (180) days before the expiration date of this Agreement of your desire to renew; 7 31 c. You and any Affiliates that have signed this Agreement have signed an extension of the Franchise Agreement not less than thirty (30) days before the expiration of this Agreement; d. You must, before commencement of the renewal term, at your own expense, remodel, modernize and redecorate the Franchise Restaurant premises and replace and modernize the fixtures, equipment, and signage used in the Franchised Restaurant so that the premises of the Franchised Restaurant meet the standards of appearance and function applicable to the premises of new franchised businesses of GREEN BURRITO and CARL'S JR. at the time of renewal; e. You have renewed or have the right to renew the lease for the Approved Location; f. You have paid any initial franchise fees abated at the beginning of this Agreement as a result of a proration of the franchise fee due GREEN BURRITO to reflect a term of years less than fifteen (15) in order to correspond with your lease at the Approved Location. 5. SERVICES TO FRANCHISEE GREEN BURRITO agrees to perform the following services for you, if you are, at the time when service is to be rendered in Good Standing under this Agreement, any other Agreement with GREEN BURRITO or GREEN BURRITO's Affiliate, and the Manual: 5.1. LAY-OUT AND DECOR. CARL'S JR. will, if possible, and without undue cost or burden, agree upon the incremental equipment to be added and installed at the Approved Location, and installation will proceed in accordance with plans and/or schematics mutually approved in writing by GREEN BURRITO and CARL'S JR., which approval will not be unreasonably withheld. 5.2. TRAINING. 5.2.1. INITIAL TRAINING. GREEN BURRITO has provided CARL'S JR. management and selected personnel with sufficient training in the operation of Franchised Business under the GREEN BURRITO System. Before the opening of your Franchised Business at the Approved Location, you, under the supervision of GREEN BURRITO will provide to your management selected for the Approved Location an initial training program in the operation of the Franchised Business under GREEN BURRITO's System. Your Designated Manager for the Approved Location will attend and successfully complete the training program to the satisfaction of you and GREEN BURRITO before opening of a Franchised Restaurant at that location. If the employment of a Designated Manager is ended, you must employ a new Designated Manager within thirty (30) days who must successfully complete an initial training program before starting work. 5.2.2. CONTINUING EDUCATION. GREEN BURRITO may offer continuing education programs on matters related to the operation or promotion of the Franchised Restaurant on a 8 32 mandatory basis, as it deems appropriate for no additional charge other than your payment of your incidental costs. 5.3. CONSULTATION AND SUPERVISION. GREEN BURRITO, for no additional charge, will make its personnel available to you for as much consultation, at the Approved Location, in regard to the establishment and opening promotion of the Franchised Restaurant as GREEN BURRITO in its reasonable discretion deems necessary. In addition, GREEN BURRITO, for no additional charge, will make its personnel available to Franchisee for a reasonable amount of consultation by telephone, telecopier, or in person at GREEN BURRITO's headquarters during the term of this Agreement. Also, GREEN BURRITO's operations consultants will provide on-site supervision for one (1) week after opening of your first Approved Location at no additional charge. 5.4. TRAINING MATERIALS/MANUAL. In connection with training your personnel, GREEN BURRITO will lend you Training Materials and/or a Manual. GREEN BURRITO will revise the Manual from time to time and will distribute up-dated pages containing these revisions to you. If there is any dispute regarding the contents of the Training Materials or Manual at any point, GREEN BURRITO's master copy of the Materials will be dispositive. GREEN BURRITO and CARL'S JR. will, as soon as practical, mutually develop a common training manual to integrate training for the combined CARL'S JR./GREEN BURRITO Dual Concept location. 5.5. ADVERTISING. 5.5.1. ADVERTISING FUND. GREEN BURRITO will have no duty to administer an Advertising fund. CARL'S JR. will in good faith and as part of its overall advertising, promote GREEN BURRITO. As part of CARL'S JR. overall advertising and marketing efforts, CARL'S JR. will utilize GREEN BURRITO approved advertising to the extent CARL'S JR. deems appropriate and necessary to achieve satisfactory sales level of GREEN BURRITO products. This Section does not require CARL'S JR. to advertise GREEN BURRITO every time it advertises CARL'S JR. GREEN BURRITO shall have the opportunity to submit advertising and marketing concepts and proposals to CARL'S JR. which shall be considered in good faith by CARL'S JR. in the development of its CARL'S JR./GREEN BURRITO marketing schemes. GREEN BURRITO shall have the right to review and approve the CARL'S JR. proposed advertisements and promotions of GREEN BURRITO which approvals shall not be unreasonably withheld by GREEN BURRITO. To the extent funds are expended by CARL'S JR. for advertisement/marketing by CARL'S JR., they will be applied in a manner which is no way disparages or diminishes the GREEN BURRITO trade names and trademarks. 9 33 5.6. SUGGESTED SUPPLIERS. With respect to GREEN BURRITO Food Products and equipment, GREEN BURRITO will provide to you in the Manual or otherwise in writing, a list of names and addresses of suppliers of goods and services that currently meet GREEN BURRITO standards and specifications. In advising you of suppliers which meet its standards and specifications, GREEN BURRITO expressly disclaims any warranties or representations as to the condition of the goods or services sold by such suppliers, including, without limitation, express or implied warranties as to merchantability or fitness for any intended purpose. You agree to look solely to the manufacturer of goods or the supplier of services for the remedy for any defect in the goods or services, except for GREEN BURRITO's negligence or wilful conduct. If you desire to purchase any products from an unapproved supplier, you shall submit to GREEN BURRITO a written request for such approval, or shall request the supplier itself to do so. GREEN BURRITO shall have the right to require that its representatives be permitted to inspect the supplier's facilities, and that samples from the supplier be delivered, either to GREEN BURRITO or to an independent laboratory designated by GREEN BURRITO for testing. A charge not to exceed the reasonable cost of the inspection and the actual cost of the test shall be paid by you or the supplier. GREEN BURRITO reserves the right, at its option, to approve or disapprove the supplier, to reinspect from time to time the facilities and products of any such approved supplier to revoke an approval already given upon the supplier's failure to continue to meet any of GREEN BURRITO's then-current criteria. 5.7. PROPRIETARY PRODUCT AVAILABILITY. GREEN BURRITO, will sue all reasonable efforts to ensure that GREEN BURRITO, its Affiliate, or a designated supplier will at all times have a supply of Proprietary Products available for sale to you. 6. PAYMENTS BY FRANCHISEE 6.1. INITIAL FEE. subject to Section 6.2 below, on the day your commence selling GBFC products at the approved location, you must pay GREEN BURRITO in cash other form of payment acceptable to GREEN BURRITO an initial fee of Seven Thousand Five Hundred Dollars ($7,500.00). The initial fee is non-refundable. 6.2. INITIAL FEE PRORATION. If the term of the lease (including renewal options) from a third party not controlled or influenced by you is less than fifteen (15) years, then GREEN BURRITO will pro-rate the Initial Fee to reflect the number of years remaining in the lease term compared to the 15-year term of the franchise. The portion not paid due to proration will be deferred and due prior to any renewal of this Agreement by GREEN BURRITO. If there is no renewal, then no amount deferred is due. 10 34 6.3. ROYALTIES. You must pay GREEN BURRITO a weekly royalty of four percent (4%) of the weekly Gross Revenue (as defined at Section 3.15 above) of the Franchised Restaurant, calculated on the basis of Gross Revenue received by you in the immediately preceding week. Your obligation to pay ongoing weekly royalties will start with the Commencement Date of this Agreement. You must submit to GREEN BURRITO with each royalty payment a weekly statement of Gross Revenue calculations, and other date in the form specified in the Manual. 16.4. AUDIT. GREEN BURRITO will have the right during normal working hours to audit your books and records with respect to the Franchised Restaurant. If an audit discloses an underpayment of royalties payable under this Agreement, you must immediately pay GREEN BURRITO an amount equal to the underpayment and past interest accrued on the amount underpaid in accordance with the preceding section. In addition, if the underpayment exceeds five percent (5%) of the total royalty payable for any period covered under the audit, you must reimburse GREEN BURRITO for all expenses actually incurred by GREEN BURRITO in connection with the audit. 6.5. TRAINING FEES AND COSTS. GREEN BURRITO may reasonably require you to attend continuing education programs at GREEN BURRITO's cost. You will pay costs of travel, lodging, meals and other incidental expenses incurred by you or your employees for all training offered by GREEN BURRITO. 6.6. RELOCATION FEE. No Relocation Fee will be charged. 6.7. RENEWAL FEE. As a condition of renewal of this franchise, you must pay, at the time of signing a renewal of the franchise agreement for the renewal term, any initial fee deferred as a result of pro-ration as described above in Section 6.2. 6.8. TRANSFER FEE. As a condition of Transfer of this franchise, you must pay, prior to or at the time of Transfer, a transfer fee of up to Five Thousand Dollars ($5,000) to reimburse GREEN BURRITO for its actual legal and administrative costs in connection with the Transfer, unless the transfer is to an affiliate in which event no transfer fee shall apply. 6.9. INTEREST ON LATE PAYMENTS. Any payment not received by GREEN BURRITO when due will bear interest at eighteen percent (18%) per year or at the highest rate allowed by applicable law on the date when payment 11 35 is due, whichever is less. Interest charges on late payments are intended to partially compensate GREEN BURRITO for loss of use of the funds and for internal administrative costs resulting from late payment which would otherwise be difficult to measure with precision. The fact that such charges are imposed should not be construed as a waiver of GREEN BURRITO's right to timely payment. 7. OBLIGATIONS OF FRANCHISEE 7.1. USE OF TRADE NAME AND MARKS. 7.1.1. CONTEXT. The GREEN BURRITO Dual Concept contemplates products bearing different Trade Names and Trademarks will be sold side-by-side. You agree to utilize the GREEN BURRITO Trade Name and Marks only in the operation of a Franchised Restaurant at the Approved Location. You will not use any other trade name or marks to identify or describe the Franchised Business unless GREEN BURRITO and you have mutually agreed to do so in writing, nor will GREEN BURRITO utilize your trademarks or trade names for any purpose other than in relation to the Dual Product Concept System. In addition, both parties agree to comply with the terms and conditions of Section 7.1.3. below in connection with the use of any trademark or trade name. 7.1.2. CHANGE IN TRADE NAMES AND MARKS. The parties have invested substantial time, energy, and money in the promotion and protection of its Trade Name and other Marks as they exist on the Commencement Date. Neither has any present intention of altering them. However, both parties recognizer that rights in intangible property such as the Trade Name and Marks are often difficult to establish and defend and that changes in the cultural and economic environment within which the System operates may make changes in the Trade Name and Marks desirable or necessary. Both parties understand that each other therefore reserves the right to change its Trade Name and Marks and the specifications for each when either believes that the changes will benefit the Franchise Network. Each party agrees to conform to any such changes. 7.1.3. ADVERTISING MATERIALS. CARL'S JR. desires to utilize its own creative department or consultants for development of promotional materials for CARL'S JR./GREEN BURRITO. Recognizing the context of the dual Product Concept System, the parties agree to submit to each other copies of all regional advertising materials at least two (2) weeks before the first time those materials are broadcast or published. The receiving party shall review the materials within a reasonable time and will promptly notify the sending party whether it approves or rejects them.Approval will not be unreasonably withheld, and if no objection is registered within ten (10) business days, the materials shall be deemed approved. Advertising materials of a local nature shall be submitted five (5) days in advance of the first broadcast or publication, and if no objection is registered within three (3) business days, the materials shall be deemed approved. for purposes of this paragraph, advertising materials that differ from previously approved materials only in such variables as date, price, or names of products will be considered to be previously approved. However, even if a party has approval for specific materials, it may later withdraw its approval if it reasonably believes it necessary to make the advertising conform to changes in the System or to correct unacceptable features, including, but not limited to, intentional or negligent misrepresentation. 12 36 7.1.4. LEGAL PROTECTION. Each party agrees to notify the other immediately in writing if either becomes aware of any unauthorized use of the other's Trade Name, Marks, or System. We will also promptly notify each other in writing of any claim, demand, or suit against either of us based upon or arising in connection with the use of the other's Trade Name, Marks or System. In any action or proceeding arising from or in connection with any such claim, demand, or suit involving either of our Trade Names, Marks, or Systems, the owner of the respective Trade Name, Mark, or System will prosecute or defend same and indemnify the other and hold the other harmless from same. We agree that the respective owner will select legal counsel and will control the proceedings. 7.2. QUALITY CONTROL. 7.2.1. OPENING. You may not open the Franchised Restaurant under the GREEN BURRITO Dual Concept system until GREEN BURRITO certifies in writing that, in the view of its management, you and your employees are prepared to open. BY CERTIFYING THAT GREEN BURRITO'S MANAGEMENT BELIEVES THE RESTAURANT IS PREPARED TO BEGIN OPERATION, GREEN BURRITO DOES NOT WARRANT THAT THE FRANCHISED RESTAURANT WILL BE SUCCESSFUL. 7.2.2. COMPLIANCE WITH MANUAL. You must operate the Franchised Restaurant in compliance with the standards and specifications set out by GREEN BURRITO in the Manual or otherwise in writing. Employees working in he GREEN BURRITO area of the Restaurant where they are visible to the public, other than the Designated Manager, must wear designated and approved uniforms which have the approval of CARL'S JR. and GREEN BURRITO. CARL'S JR. and GREEN BURRITO will, in good faith, approve uniforms which reasonably depict the association and presence of both CARL'S JR. and GREEN BURRITO. GREEN BURRITO may make changes in the GREEN BURRITO standards and specification, when, in GREEN BURRITO's reasonable discretion, change is needed for the continued success and development of the Franchise Network. These changes may necessitate the purchase of equipment, supplies, furnishings or other goods, completion of additional training by your employees, or other cost to you. You must always keep your copy of the Manual current by inserting in it revised pages given to you by GREEN BURRITO and deleting superseded pages. If there is any dispute as to the requirements of the Manual at any point in time, the terms of the master copy of the Manual maintained by GREEN BURRITO will control. 7.2.3. PRODUCTS AND SERVICES OFFERED. You must offer and sell a minimum of fifteen (15) GREEN BURRITO Products listed in Attachment 1 to this Agreement. Except for existing CARL'S JR. Mexican offerings set forth on Attachment 2, and the CARL'S JR. Original Food Products defined at Section 3.9 above, you may serve only those Mexican food products that GREEN BURRITO has authorized you to provide. Except for Proprietary Products, you may purchase products that are to be sold or used in the Franchised Restaurant from any source that has been approved by GREEN BURRITO. If you wish to use or sell any product which is sold by a supplier not previously approved by GREEN BURRITO, you should advise GREEN BURRITO of this fact and, upon GREEN BURRITO's request, give GREEN BURRITO product specifications, sample products, and/or information about the supplier. GREEN BURRITO will within fifteen (15) days communicate to you either its approval of the supplier or its reasons for withholding its approval. Silence may not be construed as consent. As a condition of approving 13 37 a supplier or product, GREEN BURRITO will require you to reimburse it for any expenses reasonably incurred by GREEN BURRITO in inspecting the suppliers premises, checking the supplier's credentials, or testing the product. As a condition of approving a supplier of any product that bears the Trade Name or Marks, GREEN BURRITO may require that the supplier sign GREEN BURRITO's License Agreement. GREEN BURRITO may withdraw its approval of a supplier or product if it no longer meets GREEN BURRITO's standards. 7.2.4. CUSTOMER SATISFACTION PROGRAM. You must distribute customer response cards in the form prescribed by GREEN BURRITO or CARL'S JR.'s own form, provided same is approved by GREEN BURRITO with respect to GREEN BURRITO items, for return by customers to CARL'S JR. and GREEN BURRITO. If your scores from the customer response cards do not meet GREEN BURRITO's currently effective standards, as described in the Manual, GREEN BURRITO will suggest ways in which you can improve its scores. If you does not take immediate, effective steps to bring your operation up to GREEN BURRITO's standards, your failure to do so will constitute a material breach of this Agreement. 7.2.5. INSPECTION. CARL'S JR. will conduct periodic quality control inspections. In addition, GREEN BURRITO may conduct periodic quality control inspections of the Franchised Restaurant during normal business hours. Quality control inspections may be made with or without prior notice and with or without CARL'S JR. representatives present. In addition, you will cooperate with GREEN BURRITO in undertaking an annual Franchise Business Review; results of the review will be used by GREEN BURRITO in advising you how to improve store performance as well as assessing compliance with system standards. 7.2.6. USE OF PROPRIETARY PRODUCTS. Certain of the proprietary products used in the Franchised Restaurant are unique and their formula and manufacturing processes constitute trade secrets integral to the success of the System. Proprietary products include but are not limited to corn or flour tortillas, corn or flour taco shells, bean mix, meat mixes, spices and seasonings, guacamole recipe, cheese mixes and sauces. The Proprietary Products must be used as prescribed. You may purchase the proprietary products only from GREEN BURRITO, its Affiliate, or a designated vendor. Use or sale of any substitute for the Proprietary Products is a material breach of this Agreement and will result in its immediate Termination, unless such products are not available to you. 7.2.7. NOTIFICATION OF COMPLAINTS. You will notify GREEN BURRITO promptly if you are served with a complaint in any material legal proceeding that is in any way related to the Franchised Restaurant or if you become aware that you are the subject of any complaint to or investigation by a governmental licensing authority or consumer protection agency. 7.3 PERSONNEL. 7.3.1. MANAGEMENT. The parties recognize that the Designated Manager will manage the entire CARL'S JR./GREEN BURRITO Dual Concept restaurants at the Approved Location and that a second manager will not be required. Your Designated Manager must devote sufficient time and effort to the management and operation of the Franchised Restaurant to operate it in accordance with GREEN BURRITO's standards. The Designated Manager or another employee 14 38 who has successfully completed GREEN BURRITO's initial training program must be present at the Approved Location whenever the Franchised Restaurant is open for business. If GREEN BURRITO, reasonably believes that a Designated Manager is not properly performing his duties, GREEN BURRITO will advise you and you will take reasonable steps to correct the situation. You must keep GREEN BURRITO informed as to the identity of your Designated Manager(s). Upon the termination of employment of a Designated Manager, you must appoint a successor within sixty (60) days. Any successor Designated Manager must successfully complete the training program conducted by GREEN BURRITO before starting work in the Franchised Restaurant. 7.3.2. EMPLOYEES. You will maintain at all times a staff of trained employees sufficient to operate the Franchised Restaurant to meet GREEN BURRITO's standards. During the term of this Agreement and for one year after its termination, you agree that you will not, directly or indirectly or by action in concert with others, induce or influence or seek to induce or influence any person who is engaged as an employee by GREEN BURRITO or any other GREEN BURRITO franchisee to (a) end his or her engagement or employment; and (b) to work for another member of the Franchise Network or former member of the Franchise Network. 7.4. LOCAL ADVERTISING. You will reasonably include GREEN BURRITO in your local advertising and marketing promotions that you carry for CARL'S JR. purposes. This does not obligate you to include GREEN BURRITO in all advertising and marketing promotions. for purposes of this paragraph, "local advertising" means advertising that is primarily directed to persons or entities within the geographic area where the Franchised Restaurant is located. 7.5. FINANCIAL INFORMATION. 7.5.1. RECORDS. You must record all sales and all receipts of revenue on individual machine serial-numbered guest checks. Cash registers must validate the receipts that are presented at the time of sale to your customers. You must retain, at a reasonably accessible location, daily sales reporting forms and accompanying cash register tapes for at least three (3) years after the dates of sale. If, for any reason, your cash register must be repaired, you will use your best efforts to obtain a replacement cash register must be used in its absence. 7.5.2. REPORTS. You will submit to GREEN BURRITO, on or before the fifteenth (15th) day of each month, financial reports on the income and expenses of the Franchised Restaurant in a format which demonstrates GREEN BURRITO revenues, total beverages, and costs of sales for GBFC sales. In addition, you shall, upon request, provide additional data reasonably required to confirm that you are complying with your obligations under this Agreement, and to aid in the formulation of forecasts, analysis and trends. 7.6. INSURANCE. You represent that you are either self-insured or maintain an policy or policies of comprehensive public liability insurance including product liability coverage, covering all Franchise Restaurant's assets, personnel, and activities. You are self-insured or also carry casualty insurance. 15 39 In addition, you are self-insured or maintain policies of worker's compensation insurance, disability insurance and all other types of insurance required by applicable law. 7.7. FINANCIAL AND LEGAL RESPONSIBILITY. 7.7.1. COMPLIANCE WITH LAW. You must comply with all federal, state, and local laws and regulations pertaining, directly or indirectly, to the Franchised Restaurant. You must keep current all licenses, permits, bonds, and deposits made to or required by any governmental agency in connection with the operation of the Franchised Restaurant. 8. RELATIONSHIP OF PARTIES 8.1. INTEREST IN MARKS AND SYSTEM. Neither party will, at any time, do or cause to be done anything contesting or impairing the other's interest in its trade name, service marks, trademarks, logos, emblems, indicia of origin, slogans, or system. Neither party acquires any rights in any of these things except for each party's right to use them in accordance with the express terms of this Agreement. Each party retains the right to grant other franchises or licenses to use its own trade name, marks and system upon any terms that party wishes, except is limited by the Development Agreement. 8.2. INDEPENDENT STATUS. You are an independent legal entity and will make this fact clear in your dealings with suppliers, lessors, government agencies, employees, customers and others. You will rely on your own knowledge and judgment in making business decisions, subject only to the requirements of this Agreement and the Manual. You may not expressly or impliedly hold yourself out as an employee, partner, shareholder, joint venturer or representative of GREEN BURRITO, no may you expressly or impliedly state or suggest that you have the right or power to bind GREEN BURRITO or to incur any liability on GREEN BURRITO'S behalf, except as permitted by your appointment as a Master Franchisee pursuant to the Development Agreement. If you are a corporation, you will not use the Trade Name as part of your corporate name. 8.3. DISPLAY OF DISCLAIMER. When appropriate, either party will make such disclaimers as necessary to reflect their independent status. 8.4. CONFIDENTIALITY. You acknowledge and agree that the information, ideas, forms, marketing plans and other materials disclosed to you under this Agreement, whether or not included in the Manual, are confidential and proprietary information and trade secrets of GREEN BURRITO. In particular, certain proprietary recipes are key in differentiating GREEN BURRITO restaurants from their competitors. You agree to maintain the confidentiality of all such material. You will not disclose any such information to any third party, except to your employees and agents as necessary in the 16 40 regular conduct of the Franchised Restaurant and except as authorized in writing by GREEN BURRITO. You will be responsible for requiring compliance of your Affiliates with the provisions of this section. Notwithstanding the foregoing, this Section does not restrict the disclosure of anything that is public or becomes public, or is generally known in the restaurant industry or that is acquired in the normal course of business by you or from a source other than GREEN BURRITO or required to be disclosed by law or legal compulsion. 8.5. INDEMNIFICATION. Each party will indemnify and hold the other harmless from all expenses or liabilities of any kind arising from or in any way connected to the indemnitor's actions pursuant to this Agreement. If either party is made a party to a legal proceeding in connection with an action of the other, then either party may hire counsel to protect its interests and bill the other party for all costs and expenses incurred by that party. Each party will promptly reimburse the other for such fees. 8.6. COVENANT NOT TO COMPETE. During the term of this Agreement and for a period of four (4) years thereafter, you and your affiliates will not feature or operate in this location, or dual concept in this location, any concept which you develop, own, operate, or are a licensee thereof, if that concept features Mexican food as its main menu attraction which is similar to the GBFC Mexican products and concepts. Nothing herein shall preclude you from selling those Mexican offerings which were listed on your menu prior to August 9, 1994. for purposes of this agreement, any sandwich comprised of bread or buns and a main component of hamburger, chicken, or fish, even though garnished with traditional Mexican sauces or flavorings, shall not be deemed a Mexican-type product competing against Green Burrito. Nothing herein shall preclude you from owning any restaurant, company, or chain, regardless of the products it features, whether Mexican or otherwise, provided the first sentence of this Section is adhered to by you and your affiliates. This covenant shall cease: A. In the event GBFC files voluntarily or involuntarily for protection under the Bankruptcy laws; (i) If an involuntary bankruptcy, one (1) year after filing if GBFC is not relieved within ninety (90) days; and (ii) If voluntary, one (1) year after filing. B. In the event of a material breach by GBFC under this Agreement. 17 41 9. TRANSFER OF FRANCHISE 9.1. PURPOSE OF CONDITIONS FOR APPROVAL OF TRANSFER. GREEN BURRITO's grant of this Franchise is made in reliance upon your integrity, ability, experience and financial resources. Neither the franchise nor the Franchised Restaurant operated under it may be transferred unless you have first obtained GREEN BURRITO's written consent, which will not be unreasonably withheld. In order to ensure that no Transfer jeopardizes the Trade Name, the Marks, or GREEN BURRITO's interest in the successful operation of the Franchised Restaurant, GREEN BURRITO will consent to a Transfer only if you comply with the provisions of Section 9.2 and 9.3 of this Agreement and if the conditions described in Section 9.5 are fulfilled. 9.2. NOTICE OF PROPOSED TRANSFER. If you wish to Transfer this franchise, you will submit to GREEN BURRITO: (a) the form of franchise purchase application currently in use by GREEN BURRITO completed by the prospective transferee; and (b) a written notice, setting forth all the terms and conditions of the proposed Transfer. 9.3 CONSENT BY GREEN BURRITO. GREEN BURRITO must respond to your written notice within fifteen (15) days after receiving it, or, if GREEN BURRITO requests additional information, within the later date of fifteen (15) after receipt of the additional information or the final day of the original fifteen (15) day period. GREEN BURRITO may either consent to the Transfer or tell you its reason for refusing consent. Silence will not be construed as consent. If GREEN BURRITO consents, then you may transfer the interest described in the notice only to the named transferee and only upon the terms and conditions set forth in the notice. Consent by GREEN BURRITO to a particular Transfer will not constitute consent to any other or subsequent Transfer. 9.4. CONDITIONS FOR CONSENT TO TRANSFER. The consent of GREEN BURRITO is subject to certain conditions, including but not limited to: (a) Satisfaction of GREEN BURRITO that the proposed transferee meets all of the criteria of character, business experience, financial responsibility, net worth and other standards that GREEN BURRITO customarily applies to new franchisees at the time of Transfer; (b) Payment of all your outstanding debts to GREEN BURRITO; (c) Cure of all defaults under the Franchise Agreement, any other agreement between GREEN BURRITO and you and your affiliates, and the Manual; 18 42 (d) Signing by transferee of the then-current form of Franchise Agreement, amended to shorten the term to the remainder of your current term and to waive payment of an initial fee by the proposed transferee; (e) Payment by you of the transfer fee described in Article 6 of this Agreement; (f) Completion by the transferee of GREEN BURRITO's initial training program to GREEN BURRITO's satisfaction; (g) Signing of a general release of claims by you in favor of GREEN BURRITO; (h) Your transferring the other restaurant operated jointly with your GREEN BURRITO Restaurant at the Approved Location to the same transferee; and (i) GREEN BURRITO's determination, after review of the Transfer Agreement, that its terms allow the transferee a reasonable chance of success. BY MAKING SUCH A DETERMINATION, GREEN BURRITO DOES NOT WARRANT THAT THE TRANSFEREE WILL BE SUCCESSFUL. SUCCESS IS DEPENDENT ON A NUMBER OF FACTORS, INCLUDING YOUR HARD WORK AND ABILITY AND GENERAL ECONOMIC CONDITIONS, THAT ARE NOT UNDER GREEN BURRITO'S CONTROL. 9.5. CHANGES OF OWNERSHIP DEEMED NOT TO BE TRANSFERS. As used in this Agreement, the term "Transfer" does not mean an assignment to any business entity or any other corporate reorganization if the beneficial ownership of the business entity immediately following the assignment or reorganization is at least 50% or more in the same proportions as the beneficial ownership immediately prior to the assignment or reorganization; provided, however, that no such assignment or reorganization will relieve the original party of any of its obligations under this Agreement or in the event of a merger, there shall be no deemed transfer. Information on the identity of the shareholders and officers of the corporation, the percentage of ownership, and the address where corporate records are maintained must be submitted promptly to GREEN BURRITO. You do not need GREEN BURRITO's consent for a non-Transfer assignment. 9.6. ASSIGNMENT BY GREEN BURRITO. GREEN BURRITO may assign this Agreement or any rights or obligations created by it at any time without the consent of you upon the following conditions: (a) the assignee is financially responsible; (b) has comparable or better integrity than GREEN BURRITO; (c) the assignee can perform GREEN BURRITO's obligations under this Agreement; (d) the assignee expressly agrees in writing to assume GREEN BURRITO's obligations under this Agreement; and (e) the assignee is not a CARL'S JR. competitor. 19 43 10. TERMINATION OF FRANCHISE 10.1. TERMINATION BY CONSENT OF THE PARTIES. This Agreement may be terminated upon the mutual written consent of the parties. 10.2. TERMINATION BY GREEN BURRITO 10.2.2. ACTS OF DEFAULT. Upon the occurrence of any of the following defaults, GREEN BURRITO, at its option, may terminate this Agreement: (a) If you misuse the Marks or the System or engage in conduct which reflects materially and unfavorably upon the goodwill associated with them; (b) If you or any of your Affiliates has any direct or indirect interest in the ownership or operation of any business that is confusingly similar to the Franchised Restaurant or uses the System or the Marks; (c) If you repetitively fail to submit to GREEN BURRITO in a timely manner any information you are required to submit under this Agreement; (d) If you fail to begin operation of the Franchised Restaurant by the Commencement Date of this Agreement, or if you fail to operate the Franchised Restaurant in accordance with this Agreement and the Manual; (e) If you attempt to assign your rights under this Agreement in any manner not authorized by this Agreement; (f) If you or your Affiliate have made any material misrepresentation in connection with the acquisition of the Franchised Restaurant or to induce GREEN BURRITO to enter into this Agreement; (g) If you act without GREEN BURRITO's prior written approval or consent in regard to a matter for which GREEN BURRITO's prior written approval or consent is expressly required by this Agreement; (h) If you default in the performance of any material obligation under this Agreement or any other agreement with GREEN BURRITO; (i) If you cease to operate the Franchised Restaurant, unless: (i) operations are suspended for a period of no more than one hundred eighty (180) days; (ii) the suspension was caused by fire, condemnation, or act of God; and (iii) a lease termination. 20 44 (j) If you fail to permanently correct a breach of this Agreement or to meet the standards set out in the Manual after being twice requested in writing by GREEN BURRITO to correct the problem in any twelve- (12-) month period; (k) If you fail to make any payment when due under this Agreement or any other agreement between you and GREEN BURRITO or an Affiliate of GREEN BURRITO; (l) If GREEN BURRITO learns that the operation of the Franchised Restaurant poses a threat to public health or safety; (m) Except as otherwise required by the United States Bankruptcy Code, if you become insolvent, are adjudicated a bankrupt; or (n) If you are convicted of a felony or any criminal misconduct which is relevant to the operation of the Franchised Restaurant. 10.2.2. NOTICE OF DEFAULT. Termination will be effective thirty (30) days after written notice of default is given to you if any of the defaults described in subsections (a) through (j) above has not been cured. Termination will be effective ten (10) days after written notice is given to you if the default described in subsection (k) has not been cured. Termination will be effective immediately upon written notice to you if any of the defaults described in subsections (l) through (o) above occurs. 10.30 TERMINATION BY YOU. If you determine it is no longer commercially reasonable to continue to operate the Franchised Restaurant, you may elect to terminate this Agreement upon ninety (90) days' written notice to GREEN BURRITO if the conditions of the next section of this Agreement, entitled "Rights and Obligations After Termination," are met in full within the specified time periods. For purposes of this Agreement, GREEN BURRITO will agree that it is no longer commercially reasonable to operate the Franchised Business if you are not in breach, are operating in good faith to promote the sale of Green Burrito products, and notwithstanding your efforts the total royalties payable by you for GBFC sales are less than $3,000 for the trailing 12-month period. 10.4. RIGHT AND OBLIGATIONS AFTER TERMINATION. Upon termination of this Agreement for any reason, the parties will have the following rights and obligations: (a) GREEN BURRITO will have no further obligations under this Agreement, except for indemnity, nondisclosure, and protected areas, or other obligations arising from a GREEN BURRITO breach; 21 45 (b) You must give GREEN BURRITO a final accounting for the Franchised Restaurant; pay GREEN BURRITO, within thirty (30) days after Termination, all payments due to GREEN BURRITO; and return the Manual and any other items belonging to GREEN BURRITO to GREEN BURRITO; (c) You must immediately and permanently cease the use of the Marks or any confusingly similar marks, the System, and advertising, signs, stationery, or forms that bear identifying marks or colors that might give others the impression that you are operating a Franchised Restaurant; (d) You must promptly sign any documents and take any steps that in the judgment of GREEN BURRITO are necessary to delete your listings from classified telephone directories, and terminate all other references that indicate you is or ever was associated with the GREEN BURRITO; by signing this Agreement, you irrevocably appoints GREEN BURRITO its attorney-in-fact to take the actions described in this paragraph if you do not do so within seven (7) days after Termination of this Agreement. (e) You must maintain all records required by GREEN BURRITO pursuant to this Agreement for a period of not less than ninety (90) days after final payment of any amounts you owes to GREEN BURRITO when this Agreement is Terminated. (f) You must comply with the provisions of Section 8.6 above (covenant Not to Compete). If the franchise granted in this Agreement is terminated because of default, the rights of the parties described above will not necessarily be the parties' exclusive remedies, but will instead supplement any other equitable or legal remedies available to the parties. Termination of this Agreement will not extinguish any obligation of either party that has accrued prior to Termination. If this Agreement is terminated because of a material default, nothing in this section will be construed to deprive either party of the right to recover damages as compensation for lost profits. All obligations of the parties which by their terms or by reasonable implication are to be performed in whole or in part after Termination will survive Termination. 11. MISCELLANEOUS PROVISIONS 11.1. CONSTRUCTION OF CONTRACT. Section headings in this Agreement are for reference purposes only and will not in any way modify the statements contained in any section of this Agreement. Each word in this Agreement will be deemed to include any number or gender that the context requires. If there is any conflict between this Agreement and the Manual, this Agreement will control. 22 46 11.1. GOVERNING LAW. This Agreement is made in the state where the franchise is to be operated and its provisions will be governed by and interpreted under the laws of that State, with the following exception; the arbitration clause will be governed by and interpreted in accordance with the Federal Arbitration Act. 11.3. NOTICES. The parties to this Agreement should direct any notices to the other party at the address below that party's name on the final page of this Agreement or at another address if advised in writing that the address has been changed. Notice may be delivered by facsimile (with simultaneous posting of a copy by first class mail), courier, or first class mail. Notice by facsimile will be deemed delivered upon transmission; by courier, upon delivery; and by first class mail, three days after posting. Notice of Termination or non-renewal must be given by a receipted form of delivery. 11.4. AMENDMENTS. This Agreement may be amended only by a document signed by all of the parties to this Agreement or by their authorized agents. 11.5. WAIVER. Waiver of any breach of this Agreement will not be interpreted as a waiver of any subsequent breach. 11.6. INTEGRATION. This Agreement, any exhibits or attachments to it constitute the entire agreement between the parties concerning the franchise granted under this Agreement. All prior and contemporaneous agreements and representations are superseded by it. 11.7. ARBITRATION/MEDIATION. Any dispute arising out of or in connection with this Agreement will be determined in accordance with the then current rules for commercial arbitration and mediation of the Judicial Arbitration and Mediation Services, Inc. (JAMS). The location shall be any city in which JAMS maintains an office, other than in the State of California for purposes of neutrality and eliminating conflicts of interest, unless agreed to the contrary by both parties. Both parties prefer a neutral location, with the further provision that neither party prefers a city on the East coast or West Coast. If JAMS maintains an office in Phoenix, Arizona, or Denver, Colorado, both parties acknowledge those cities as preferable locations. The arbitrator will have the power and obligation to grant injunctive relief on a provisional or permanent basis, in addition to any other relief that is available, if the Trade Name, Marks, or goodwill of either parties' Franchise Network are jeopardized or harmed by any act or omission of either party. This arbitration clause will not 23 47 deprive either party of any right it may otherwise have to seek provisional injunctive relief from a court of competent jurisdiction. If proper notice of any hearing has been given, the arbitrator(s) will have full power to proceed to take evidence or to perform any other acts necessary to arbitrate the matter in the absence of any party who fails to appear. BOTH PARTIES WAIVE ANY RIGHT THEY MAY HAVE TO DEMAND TRIAL BY JURY OR TO SEEK PUNITIVE DAMAGES FROM THE OTHER. The arbitrator will have no power to (1) stay the effectiveness of any pending Termination of franchise; (2) assess penitive damages; or (3) make any award that modifies or suspends any lawful provision of this Agreement. All expenses of arbitration must be paid by the party against whom the arbitrator(s) render a decision. Judgment upon any aware and/or enforcing any order of the arbitrator may be entered by any court of competent jurisdiction. 11.8. INJUNCTIVE REMEDY FOR BREACH. The parties recognize that your Franchised Restaurant is only one of several businesses operating under CARL'S JR./GREEN BURRITO's Trade Names and in substantial association with the respective marks. Failure on the part of a single franchisee to comply with the terms of its franchise agreement is likely to cause irreparable damage to CARL'S JR. or GREEN BURRITO and to some or all of the respective franchisees. For this reason, the parties agree that if CARL'S JR. or GREEN BURRITO can demonstrate to a court of competent jurisdiction that there is a substantial likelihood of a breach or threatened breach of any of the terms of this Agreement by CARL'S JR. or GREEN BURRITO, then the harmed party will be entitled, without posting of a bond, to an injunction restraining the breach and/or to a decree of specific performance, without showing or proving any actual damage, until a final determination is made by an arbitrator. 11.9. ATTORNEYS' FEES AND COSTS. If legal action, including any action on appeal, or arbitration is necessary to enforce the terms and conditions of this Agreement, the prevailing party will be entitled to recover reasonable compensation for preparation, investigation and court and/or arbitral costs and reasonable attorneys' fees, as fixed by a court of competent jurisdiction or by the arbitrator. 11.10. SEVERABILITY. Each provision of this Agreement will be considered severable. If, for any reason, any provision of it is determined to be invalid or in conflict with any existing or future law or regulation, that provision will not impair the operation of the remaining provisions of this Agreement. The invalid provisions will be deemed not to be a part of this Agreement. 11.11. ACCEPTANCE BY BOTH PARTIES. This Agreement will not be binding on either party unless and until it has been signed by an authorized officer of each party. 24 48 11.12. DISCLAIMER OF REPRESENTATIONS. NO REPRESENTATIONS OR PROMISES OF ANY KIND HAVE BEEN MADE BY EITHER PARTY TO INDUCE YOU TO EXECUTE THIS AGREEMENT EXCEPT THOSE SPECIFICALLY SET FORTH IN THE FRANCHISE DISCLOSURE DOCUMENTS AND THE DEVELOPMENT AGREEMENT THAT HAVE BEEN DELIVERED TO THE PARTIES. WE ACKNOWLEDGE THAT NEITHER CARL'S JR. NOR GREEN BURRITO NOR ANY OTHER PERSON HAS GUARANTEED THAT EITHER WILL SUCCEED IN THE OPERATION OF THE FRANCHISED RESTAURANT OR HAS PROVIDED ANY SALES OR INCOME PROJECTIONS OF ANY KIND TO YOU. WE HAVE MADE AN INDEPENDENT INVESTIGATION OF ALL IMPORTANT ASPECTS OF THE FRANCHISED RESTAURANT. WE UNDERSTAND THAT GREEN BURRITO AND CARL'S JR. ARE NOT A FIDUCIARY AND HAVE NO SPECIAL RESPONSIBILITIES BEYOND THE NORMAL RESPONSIBILITIES OF A SELLER OR BUYER IN A BUSINESS TRANSACTION. IN WITNESS TO THE PROVISIONS OF THIS AGREEMENT, the undersigned have signed this Franchise Agreement on the date set forth in Article 1. GB FRANCHISE CORPORATION By: _______________________________ Title: ____________________________ 23 Corporate Plaza, Suite 240 Newport Beach, CA 92660 CARL KARCHER ENTERPRISES, INC. By: ________________________________ Title: _____________________________ Address: ___________________________ Date: ______________________________ 25 49 GREEN BURRITO PRODUCTS The following lists "Green Burrito Products" for purposed of the GB Dual Concept Franchise Agreement, which may be modified from time to time at the discretion of GREEN BURRITO: BURRITOS Super Bean Burrito (Rice, beans, guacamole, enchilada sauce & cheese) Super Meat Burrito (Choice of steak, chicken or carnitas) Green Burrito (Pork, Green Chile Sauce, cheese & beans) Meat, Bean & Cheese Burrito (Choice of steak, chicken or carnitas) Meat & Cheese Burrito (Choice of steak, chicken or carnitas) Wet Red Burrito (Steak & rice) Wet Green Burrito (Rice, beans & pork) Big Ed Burrito NACHOS Super Nachos (Choice of steak, chicken or carnitas) Mini Super Nachos (Small version of Super Nachos) Nachos (Chips with melted Jack & Cheddar Cheese) SINGLES Hard Taco Soft Taco Bean & Cheese Burrito Tostada Cheese Quesadilla Two Taquitos with Guacamole Fijitas Chile Relleno Cheese Enchilada Taco Super Taco COMBINATIONS Any combination of any of the above ADDITIONAL ITEMS Any items offered by GBFC at solo franchise locations ATTACHMENT 1 26 50 ATTACHMENT 2 51 GREEN BURRITO DUAL CONCEPT FRANCHISE AGREEMENT FOR FRANCHISEES OF CARL KARCHER ENTERPRISES, INC. ******************** FRANCHISE STORE #_________ __________________________ (GBFC UNIT #__________) 52
TABLE OF CONTENTS 1.1. Parties.................................................................................... 1 1.2. Location................................................................................... 1 2. RECITALS ........................................................................................... 1 2.1. Development of System...................................................................... 1 2.2. Carl's Jr. Franchisee Relationship......................................................... 2 2.3. Objectives of the Parties.................................................................. 2 3. DEFINITIONS.......................................................................................... 2 3.1. Affiliate.................................................................................. 2 3.2. Agreement.................................................................................. 2 3.3. Approved Location.......................................................................... 2 3.4. Breach..................................................................................... 3 3.5. Commencement Date.......................................................................... 3 3.6. Designated Manager......................................................................... 3 3.7. Franchised Business/Restaurant............................................................. 3 3.8. Franchisee................................................................................. 3 3.9. CARL'S JR. Original Food Products.......................................................... 3 3.10. Franchise Network.......................................................................... 4 3.11. Franchisor................................................................................. 4 3.12. "GB Food Products" or "GREEN BURRITO Products"............................................. 4 3.13. GREEN BURRITO Dual concept system.......................................................... 4 3.14 Dual Product concept system................................................................ 4 3.15. GREEN BURRITO.............................................................................. 4 3.16. Good Standing.............................................................................. 4 3.17. Gross Revenue.............................................................................. 4 3.18. Training Materials/Manual.................................................................. 5 3.19. Marks...................................................................................... 5 3.20. Proprietary Product........................................................................ 5 3.21. System..................................................................................... 5 3.22. Termination................................................................................ 6 3.23. Trade Name................................................................................. 6 3.24. Transfer................................................................................... 6 3.25. You ...................................................................................... 6 3.26. UNOCAL..................................................................................... 6 4. GRANT OF FRANCHISE................................................................................... 6 4.1. Granting clause............................................................................ 6 4.1.1 Protected Radius..................................................................... 7 4.2. Term and Renewal........................................................................... 7 4.2.1 Initial Term......................................................................... 7 4.2.2 Relocation........................................................................... 7 4.2.3 Renewal.............................................................................. 7
53 5. SERVICES TO FRANCHISEE............................................................................... 8 5.1. Lay-out and Decor.......................................................................... 8 5.2. Training................................................................................... 8 5.2.1 Initial Training..................................................................... 8 5.2.2 Continuing Education................................................................. 9 5.3. Consultation and Supervision............................................................... 9 5.4. Training Materials/Manual.................................................................. 9 5.5. Advertising................................................................................ 9 5.6. Suggested Suppliers........................................................................ 10 5.7. Proprietary product Availability........................................................... 10 6. PAYMENTS BY FRANCHISEE............................................................................... 10 6.1. Initial Fee................................................................................ 10 6.2. Initial Fee Proration...................................................................... 10 6.3. Royalties.................................................................................. 11 6.4. Audit...................................................................................... 11 6.5. Training Fees and Costs.................................................................... 11 6.6 Relocation Fee............................................................................. 11 6.7. Renewal Fee................................................................................ 11 6.8. Transfer Fee............................................................................... 11 6.9. Interest on Late Payments.................................................................. 12 7. OBLIGATIONS OF FRANCHISEE............................................................................ 12 7.1. Use of Trade Name and Marks................................................................ 12 7.1.1 Contest.............................................................................. 12 7.1.2 Changes in Trade Names and Marks..................................................... 12 7.1.3 Advertising Materials................................................................ 12 7.1.4 Legal Protection..................................................................... 13 7.2. Quality Control............................................................................ 13 7.2.1 Opening.............................................................................. 13 7.2.2 Compliance with Manual............................................................... 13 7.2.3 Products and Services Offered........................................................ 13 7.2.4 Customer Satisfaction Program........................................................ 14 7.2.5 Inspections.......................................................................... 14 7.2.6 Use of Proprietary Products.......................................................... 14 7.2.7 Notification of complaints........................................................... 14 7.3. Personnel.................................................................................. 15 7.3.1 Management........................................................................... 15 7.3.2 Employees............................................................................ 15 7.4. Local Advertising.......................................................................... 15 7.5. Financial Information...................................................................... 15 7.5.1 Records.............................................................................. 15 7.5.2 Reports.............................................................................. 15 7.6. Insurance.................................................................................. 16
ii 54 7.7. Financial and Legal Responsibility......................................................... 16 7.7.1 Compliance with Law.................................................................. 16 8. RELATIONSHIP OF PARTIES.............................................................................. 16 8.1. Interest in Marks and system............................................................... 16 8.2. Independent Status......................................................................... 16 8.3. Display of disclaimer...................................................................... 17 8.4. Confidentiality............................................................................ 17 8.5. Indemnification............................................................................ 17 8.6. Covenant Not to compete.................................................................... 17 9. TRANSFER OF FRANCHISE................................................................................ 17 9.1. Purpose of Conditions for Approval of Transfer............................................. 17 9.2. Notice of Proposed Transfer................................................................ 18 9.3. Consent by GREEN BURRITO................................................................... 18 9.4. Conditions for Consent to Transfer......................................................... 18 9.5. Changes of Ownership Deemed Not To Be Transfers............................................ 19 9.6. Transfer Upon Your Death................................................................... 19 9.7. Assignment by GREEN BURRITO................................................................ 20 10. TERMINATION OF FRANCHISE............................................................................. 20 10.1. Termination by Consent of the Parties...................................................... 20 10.2. Termination by GREEN BURRITO............................................................... 20 10.2.1 Acts of Default..................................................................... 20 10.2.2 Notice of Default................................................................... 21 10.3. Termination by You......................................................................... 21 10.4. Rights and Obligations After Termination................................................... 21 11. MISCELLANEOUS PROVISIONS............................................................................. 23 11.1. Construction of Contract................................................................... 23 11.2. Governing Law.............................................................................. 23 11.3. Notices.................................................................................... 23 11.4. Amendments................................................................................. 23 11.5. Waiver..................................................................................... 23 11.6. Integration................................................................................ 23 11.7. Arbitration/Mediation...................................................................... 23 11.8. Injunctive Remedy for Breach............................................................... 24 11.9. Attorneys' Fees and Costs.................................................................. 24 11.10. Severability............................................................................... 24 11.11. Approval and Guarantees.................................................................... 25 11.12. Acceptance by Both Parties................................................................. 25 11.13. DISCLAIMER OF REPRESENTATIONS.............................................................. 25
iii 55 ATTACHMENTS: 1: GB Products List 2: Guaranty and Subordination Agreement iv 56 GREEN BURRITO DUAL CONCEPT FRANCHISE AGREEMENT FOR FRANCHISEES OF CARL KARCHER ENTERPRISES, INC. *********** STORE #________ 1.1. PARTIES This Agreement is signed on ___________________ 19___, by and between GB Franchise Corporation, a California corporation ("GREEN BURRITO"), with its principal office in Newport Beach, California, and ____________________________ ______________________________________, in its capacity as a franchisee solely relating to the location described immediately below at Section 1.2, ("You"). 1.2. LOCATION. This Agreement concerns the Carl's Jr. Restaurant located at __________________________________________, and identified as CARL'S JR. Store #____________. 2. RECITALS 2.1. DEVELOPMENT OF SYSTEM. GREEN BURRITO is the licensee of certain intellectual property rights, including GREEN BURRITO's Trade Name "The Green Burrito" and the Marks "Green Burrito" and "The Green Burrito and Design", and has spent a considerable amount of time, effort and money to devise, and continues to develop business methods, technical knowledge and marketing concepts including, but not limited to, trade secrets, commercial ideas, advertising materials, marketing strategies, information on sources of supply, administrative procedures, business forms, distinctive signage, trade dress, and uniforms, and employee training techniques, and goodwill that, taken together, comprise a proprietary System for the operation of Mexican fast-food restaurants. In addition to the foregoing, GREEN BURRITO has successfully developed a method for expending the Franchise Network, and, at the same time, complementing and enhancing the menus and marketing of other restaurants by use of the GB Dual Concept system. This proprietary Dual Concept System, appropriately utilized, allows the insertion of the GB System into an existing restaurant. It allows the conversion to occur in a short period of time, with relatively minor interruption or interference with the existing day-to-day business, complements existing color schemes and decor, occupies only a small portion of existing restaurant preparation and sales space, and efficiently utilizes human and fixed asset resources. 1 57 2.2. CARL'S JR. FRANCHISEE RELATIONSHIP. You are presently a franchisee of Carl Karcher Enterprises, Inc. (CARL'S JR.) which owns a proprietary system that includes, inter alia special recipes and menu items, distinctive design, decor, color scheme, and furnishings; uniform standards; specifications and procedures for operations; consistency and uniformity of products and services offered; procedures for quality control; training and assistance; and advertising and promotional programs; and trade names, service marks, trademarks, logos, emblems, and indicia or origin including but not limited to the mark "CARL'S JR.". 2.3. OBJECTIVE OF THE PARTIES. GREEN BURRITO and CARL'S JR. have analyzed the potential of their respective systems and believe that their respective products and specialty menus, marketed through their respective systems at a CARL'S JR. location, may create synergies and further opportunities for both. Therefore, it is the objective of the parties to insert the GREEN BURRITO System into CARL'S JR. locations so that two systems are operated side-by-side from the same location. 3. DEFINITIONS For purposes of this Franchise Agreement, the following words and phrases are defined as follows: 3.1. AFFILIATE. "Affiliate" or "Affiliates" means people and companies associated with GREEN BURRITO or you, as the context indicates, including, but not limited to, owners, general partners, limited partners owning a Substantial Interest in GREEN BURRITO or you, shareholders owning a substantial Interest in GREEN BURRITO or you, corporations in which GREEN BURRITO or you have a Substantial Interest, corporations in which any person or entity owning a Substantial Interest in you also has Substantial Interest, you officers, directors, employees or agents, or officers cure,s directors, employees or agents of GREEN BURRITO. As used in this paragraph, the phrase "Substantial Interest" means the right to twenty-five percent (25%) or more of the capital or earnings of a partnership, or alternatively, ownership of twenty-five (25%) or more of the voting stock of a corporation. 3.2. AGREEMENT. "The Agreement" or "this Agreement" means this dual Concept Franchise Agreement, signed on the date set out in Article 1. above. 3.3. APPROVED LOCATION. "Approved Location" or "GB Dual Concept Location" means the location specified in Section 1.2 above, that GREEN BURRITO has (subject to the Develop Agreement between 2 58 GREEN BURRITO and CARL'S JR.) approved as a site where you may locate the Franchised Restaurant together with your CARL'S JR. restaurant. 3.4 BREACH. As used herein, the term "breach" always infers and implies a "material breach". 3.5. COMMENCEMENT DATE. "Commencement Date" means the date when your Restaurant at the location specified at Section 1.2 above begins to operate under the GB Dual Concept System, or NINETY (90) days after the execution of this Agreement, whichever is sooner. 3.6. DESIGNATED MANAGER. "Designated Manager" means the person whom you appoint as general manager of a Franchised Restaurant, to include substitutes for the General Manager, such as Assistance Managers, or Shift Managers. 3.7. FRANCHISED BUSINESS/RESTAURANT. "Franchised Business" or "Franchised Restaurant" means the aspects of GB Dual Concept enterprise that GREEN BURRITO has authorized you to conduct utilizing the Trade Name, Marks, and System of GREEN BURRITO, at your currently existing business, which utilizes your CARL'S JR. Trade Name, Mark, and System at the Location approved under this Agreement. 3.8. FRANCHISEE. "Franchisee" means "you", which is the person or entity that is named as Franchisee in Article 1 of this Agreement. "Franchisee" means, in addition, all persons or entities that succeed to the interest as the original Franchisee by Transfer or operation of law. 3.9. CARL'S JR. ORIGINAL FOOD PRODUCTS. "CARL'S JR. Food Products" means those CARL'S JR. products, other than beverages, sold under the CARL'S JR. name and trademark offered prior to the execution of this Agreement at the Approved Location or such other CARL'S JR. products as added or modified in the CARL'S JR. menu from time to time, provided no products added by CARL'S JR. shall be Mexican-type products to compete against GREEN BURRITO Products. For purposes of this Agreement, any sandwich comprised of bread or buns and a main component of hamburger, chicken, or fish, even though garnished with traditional Mexican sauces or flavorings, shall not be deemed a Mexican-type product competing against GREEN BURRITO. 3 59 3.10. FRANCHISE NETWORK. "Franchise Network" means the network composed of GREEN BURRITO, owners of all free-standing GREEN BURRITO Restaurants, owners of all Dual Concept GREEN BURRITO restaurants, GREEN BURRITO's Affiliates, and any other persons or business entities that GREEN BURRITO has licensed to use the Trade Name, Marks, System, or any of them. 3.11. FRANCHISOR. "Franchisor" means GB Franchise Corporation or any person or entity to which GREEN BURRITO assigns all or part of its rights and obligations under this Agreement. 3.12. "GB FOOD PRODUCTS" OR "GREEN BURRITO PRODUCTS". "GB Food Products" or "GREEN BURRITO Products" shall mean those products listed on Attachment I hereto. 3.13. GREEN BURRITO DUAL CONCEPT SYSTEM. The GREEN BURRITO Dual Concept System is an operating method which allows the insertion of the GB System into a CARL'S JR. restaurant within a single structure so that the two share seating and beverage facilities. See Section 2.1 above. 3.14. DUAL PRODUCT CONCEPT SYSTEM. The Dual Product Concept System as used herein is an operating method which allows the insertion of the GB System into a CARL'S JR. restaurant within a single structure so that the two share seating and beverage facilities. See Section 2.1 above. 3.15 GREEN BURRITO. "GREEN BURRITO" means GB Franchise Corporation (as it relates only to the Green Burrito Dual Concept System and GB Food Products) or any person or entity to which GREEN BURRITO assigns all or part of its rights and obligations under this Agreement. 3.16. GOOD STANDING. "Good Standing" means that you are in material compliance and not in default as the term "default" is used in Section 10.2.1 and Section 10.2.2 below. 3.17. GROSS REVENUE. "Gross Revenue" means the total amount of money received by you and your Affiliates, excluding sales tax and income from non-food items, within an accounting period for (a) all food items sold at the Approved Location under the GREEN BURRITO Trade Name or Marks; and (b) GREEN BURRITO's proportionate share of beverage sales sold at the Approved Location. 4 60 GREEN BURRITO's proportionate share of beverage sales shall be computed during the respective accounting period by comparing the relationship between CARL'S JR. Products (exclusive of beverage sales) and GREEN BURRITO Products (exclusive of beverage sales), and multiplying that percentage times all beverage sales. 3.18. TRAINING MATERIALS/MANUAL. "Training Materials" or "Manual" means the current version of the training materials, manuals, and learning aids that GREEN BURRITO will lend to you during the term of this Agreement to establish and train individuals in the use of the GREEN BURRITO Dual Concept, which contain information, forms, and requirements for the establishment and operation of a Franchise Restaurant and for use of GREEN BURRITO's Trade Name and Marks, including any modified manual which may be modified from time to time in the form of a common training manual jointly agreed to by the parties hereto. 3.19. MARKS. "Marks" means selected trade names, trademarks, service marks, logos, logotypes, emblems, indicia of origin, slogans and other commercial symbols licensed by GREEN BURRITO to you under this Agreement. 3.20. PROPRIETARY PRODUCT. "Proprietary Product" means any product that has been manufactured in accordance with GREEN BURRITO's secret recipes or that has been packaged or labeled with the GREEN BURRITO Marks. 3.21. SYSTEM. GREEN BURRITO has a franchise system which means the business methods, technical knowledge and marketing concepts licensed by GREEN BURRITO to you under this Agreement, including, but not limited to, the right to use GREEN BURRITO's trade secrets, purchasing arrangements, commercial ideas, advertising materials, marketing strategies, information on sources of supply for GREEN BURRITO food products, administrative procedures, distinctive design, distinctive signage, distinctive decor, distinctive color scheme, distinctive trade dress, distinctive uniforms, and employee training techniques. As used in this Agreement, the term "System" refers to the GREEN BURRITO insert system which allows the insertion of the GREEN BURRITO System into a CARL'S JR. restaurant utilizing the GREEN BURRITO trademark, service marks, trade dress and a modified manual. "System", when used alone or not in conjunction with GREEN BURRITO, does not mean or refer to the CARL'S JR. Franchise System (See Section 2.1) as this Agreement covers only the addition of the GREEN BURRITO System to your location and does not cover the CARL'S JR. System. 5 61 3.22. TERMINATION. "Termination" means expiration of this Agreement; non-renewal of this Agreement; or termination, under the circumstances described in Article 10 of this Agreement, of the then-current term of this Agreement prior to its normal expiration date. 3.23. TRADE NAME. "Trade Name" means the commercial name The Green Burrito." 3.24. TRANSFER. "Transfer" means any sale, gift, or other assignment of all or any part of the rights and obligations of this Agreement or of an interest of the magnitude described in this Section in the Franchised Restaurant. If you are a partnership, then one or more transactions (whether or not they are related) in which there are a cumulative change in the rights to thirty-four percent (34%) or more of the your capital or profits will be deemed to be a Transfer; if you are a corporation, then one or more transactions (whether or not they are related) in which there is a cumulative change in beneficial ownership of thirty-four (34%) or more of the your voting stock will be deemed to be a Transfer. Notwithstanding the foregoing, a Transfer is not a Transfer between related entities, in which the transferring party owns in excess of 50% of the transferee party; and a transfer will not be deemed to have occurred in the event of the acquisition or merger of franchisee with another company. 3.25. YOU. "You" means the person or entity that is named as "you" in Article 1 of this Agreement, for the location specified at Section 1.2 above. "You" means, in addition, all persons or entities that succeed to the interest of the original franchisee by Transfer or operation of law. 3.26 UNOCAL. Specifically, this Agreement does not cover or address any CARL'S JR./UNOCAL location. 4. GRANT OF FRANCHISE 4.1. GRANTING CLAUSE. GREEN BURRITO grants to you and you accept from GREEN BURRITO a franchise to operate a GREEN BURRITO Dual Concept Franchised Restaurant at the Approved Location using the Trade Name, Marks and System in accordance with the terms of this Agreement. GREEN BURRITO expressly reserves all rights in the Trade Name, Marks and System not expressly granted in this Agreement, including, but not limited to, (a) the right to sell food products that have been prepared following GREEN BURRITO's proprietary recipes, through any means of distribution; and (b) the right to operate fast-food restaurants that do sell Mexican food. Nothing 6 62 herein shall preclude GBFC from owning any restaurant, company, or chain, regardless of the products it features, whether Mexican or otherwise. 4.1.1. PROTECTED RADIUS. The territorial protection for you is a protected radius of one and one-half (1.5) miles determined on a straight line basis from the approved location ("Protected Area"). GREEN BURRITO agrees not to establish, or to operate or to license or franchise another person or entity, to establish or locate a restaurant within the Protected Area, utilizing the System, nor to allow any other franchisee or company-owned unit using the Trade Name or System to operate or relocate to a site within the Protected Radius as long as you and your affiliates are in Good Standing under this Agreement. Notwithstanding the foregoing, if another CARL'S Jr. location is within the 1.5 mile protected radius, GBFC may, if requested by CARL'S JR., grant a GBFC franchise to such CARL'S JR. location. 4.2. TERM AND RENEWAL. 4.2.1. INITIAL TERM. The initial term of the Franchise will begin on the Commencement Date and will continue for a period of fifteen (15) years, or the term of your lease, whichever is shorter. 4.2.2. RELOCATION. You may relocate the GREEN BURRITO Restaurant within the Protected area or anywhere within CARL'S JR. core markets, with GREEN BURRITO's prior written consent, which will not be unreasonably withheld if the following conditions are fulfilled: a. You and your Affiliates are in Good Standing under the Franchise Agreement, any other Agreement between GREEN BURRITO or GREEN BURRITO's Affiliate and you and the Manual; b. You agree to plan, construct, equip, fixturize, and decorate your new CARL'S JR./GREEN BURRITO Restaurant so that the premises meet the standards of appearance and function applicable to the premises of new GREEN BURRITO/CARL'S JR. Restaurants at the time of relocation. c. GREEN BURRITO has given its prior written approval to the new site and the provisions of the lease for the new premises; d. You have satisfied GREEN BURRITO on any protected territory issue conflicts in existence at the time of relocation. Notwithstanding the foregoing, if you determine the location is no longer commercially reasonable and you elect to relocate, you may do so with adherence to only Section 4.2.2(d) immediately above. 4.2.3. RENEWAL. You will have the right to renew the Franchise for one (1) consecutive ten (10) year term on the same terms and conditions, if at the time of renewal the following conditions are fulfilled: 7 63 a. You and your Affiliates are in Good Standing under this Agreement, any other Agreement between GREEN BURRITO or GREEN BURRITO's Affiliate and you, and the Manual; b. You have notified GREEN BURRITO in writing at least one hundred eighty (180) days before the expiration date of this Agreement of your desire to renew; c. You and any Affiliates that have signed this Agreement have signed an extension of the new Franchise Agreement not less than thirty (30) days before the expiration of this Agreement; d. You must, before commencement of the renewal term, at your own expense, remodel, modernize and redecorate the Franchise Restaurant premises and replace and modernize the fixtures, equipment, and signage used in the Franchised Restaurant so that the premises of the Franchised Restaurant meet the standards of appearance and function applicable to the premises of new franchised businesses of GREEN BURRITO and CARL'S JR. at the time of renewal; e. You have renewed or have the right to renew the lease for the Approved Location; f. You have paid any initial franchise fees abated at the beginning of this Agreement as a result of a proration of the franchise fee due GREEN BURRITO to reflect a term of years less than fifteen (15) in order to correspond with your lease or a CARL'S JR. franchise agreement at the Approved Location. 5. SERVICES TO FRANCHISEE GREEN BURRITO agrees to perform the following services for you, if you are, at the time when service is to be rendered, in Good Standing under this Agreement, any other Agreement with GREEN BURRITO or GREEN BURRITO's Affiliate, and the Manual: 5.1. LAY-OUT AND DECOR. CARL'S JR. will, if possible and without undue cost or burden, agree upon the incremental equipment to be added and installed at the Approved Location, and installation will proceed in accordance with plans and/or schematics mutually approved in writing by GREEN BURRITO and CARL'S JR., which approval will not be unreasonably withheld. 5.2. TRAINING. 5.2.1. INITIAL TRAINING. GREEN BURRITO has provided CARL'S JR. management and selected personnel with sufficient training in the operation of Franchised Business under the GREEN BURRITO System. Before the opening of your Franchised Business at the Approved Location, you, under the supervision of GREEN BURRITO will be provided an initial training program in the operation of the Franchised Business under GREEN BURRITO's System. Your Designated Manager for the Approved Location will attend and successfully complete the training 8 64 program to the satisfaction of you and GREEN BURRITO before opening of a Franchised Restaurant at that location. If the employment of a Designated Manager is ended, you must employ a new Designated Manager within thirty (30) days who must successfully complete an initial training program before starting work. 5.2.2. CONTINUING EDUCATION. GREEN BURRITO may offer continuing education programs on matters related to the operation or promotion of the Franchised Restaurant on a mandatory basis, as it deems appropriate for no additional charge other than your payment of your incidental costs. 5.3. CONSULTATION AND SUPERVISION. GREEN BURRITO, for no additional charge, will make its personnel available to you for as much consultation, at the approved Location, in regard to the establishment and opening promotion of the Franchised Restaurant as GREEN BURRITO in its reasonable discretion deems necessary. In addition, GREEN BURRITO, for no additional charge, will make its personnel available to Franchisee for a reasonable amount of consultation by telephone, telecopier, or in person at GREEN BURRITO's headquarters during the term of this Agreement. Also, GREEN BURRITO's operations consultants will provide on-site supervision for (1) week after opening of your first Approved Location at no additional charge. 5.4. TRAINING MATERIALS/MANUAL. In connection with training your personnel, GREEN BURRITO will lend you Training Materials and/or a Manual. GREEN BURRITO will revise the Manual from time to time and will distribute up-dated pages containing these revisions to you. If there is any dispute regarding the contents of the Training Materials or Manual at any point, GREEN BURRITO's master copy of the Materials will be dispositive. GREEN BURRITO and CARL'S JR. will, as soon as practical, mutually develop a common training manual to integrate training for the combined CARL'S JR./GREEN BURRITO Dual Concept location. 5.5. ADVERTISING. 5.5.1. ADVERTISING FUND. GREEN BURRITO will have no duty to administer an Advertising fund. CARL's JR. will in good faith and as part of its overall advertising, promote GREEN BURRITO. As part of CARL'S JR. overall advertising and marketing efforts, CARL'S JR. will utilize GREEN BURRITO approved advertising to the extent CARL'S JR. deems appropriate and necessary to achieve satisfactory sales level of GREEN BURRITO products. This Section does not require CARL'S JR. to advertise GREEN BURRITO every time it advertises CARL'S JR. GREEN BURRITO shall have the opportunity to submit advertising and marketing concepts and proposals to CARL'S JR. which shall be considered in good faith by CARL'S JR. in the development of its CARL'S JR./GREEN BURRITO marketing schemes. GREEN BURRITO shall have the right to review and approve the CARL'S JR. proposed advertisements and promotions of GREEN BURRITO which approvals shall not be unreasonably withheld by GREEN BURRITO. 9 65 To the extent funds are expended by CARL'S JR. for advertisement/marketing by CARL'S JR. they will be applied in a manner which is no way disparages or diminishes the GREEN BURRITO trade names and trademarks. 5.6. SUGGESTED SUPPLIERS. With respect to GREEN BURRITO Food Products and equipment, GREEN BURRITO will provide to you in the Manual or otherwise in writing, a list of names and addresses of suppliers of goods and services that currently meet GREEN BURRITO standards and specifications. In advising you of suppliers which meet its standards and specifications, GREEN BURRITO expressly disclaims any warranties or representations as to the condition of the goods or services sold by such suppliers, including, without limitation, express or implied warranties as to merchantability or fitness for any intended purpose. You agree to look solely to the manufacturer of goods or the supplier of services for the remedy for any defect in the goods or services, except for GREEN BURRITO'S negligence or wilful conduct. If you desire to purchase any products from an unapproved supplier, you shall submit to GREEN BURRITO a written request for such approval, or shall request the supplier itself to do so. GREEN BURRITO shall have the right to require that its representatives be permitted to inspect the supplier's facilities, and that samples from the supplier be delivered, either to GREEN BURRITO or to an independent laboratory designated by GREEN BURRITO for testing. A charge not to exceed the reasonable cost of the inspection and the actual cost of the test shall be paid by you or the supplier. GREEN BURRITO reserves the right, at its option, to approve or disapprove the supplier, to reinspect from time to time the facilities and products of any such approved supplier to revoke an approval already given upon the supplier's failure to continue to meet any of GREEN BURRITO's then-current criteria. 5.7. PROPRIETARY PRODUCT AVAILABILITY. GREEN BURRITO, will use all reasonable efforts to ensure that GREEN BURRITO, its Affiliate, or a designated supplier will at all times have a supply of Proprietary Products available for sale to you. 6. PAYMENTS BY FRANCHISEE 6.1. INITIAL FEE. Subject to Section 6.2 below, on the day you commence selling GBFC Products at the approved location, you must pay GREEN BURRITO in cash or other form of payment acceptable to GREEN BURRITO an initial fee of Seven Thousand Five Hundred Dollars ($7,500.00) and you must pay CARL KARCHER ENTERPRISES, INC. Five Thousand Dollars ($5,000.00). The initial fee is non-refundable. 6.2. INITIAL FEE PRORATION. If the term of your franchise from CARL'S JR. is less than fifteen (15) years, then GREEN BURRITO will pro-rate the Initial Fee to reflect the number of years remaining in the franchise 10 66 term compared to the 15-year term of the franchise. The portion not paid due to proration will be deferred and due prior to any renewal of this Agreement by GREEN BURRITO. If there is no renewal, then no amount deferred is due. 6.3. ROYALTIES. You must pay GREEN BURRITO a weekly royalty of three percent (3%) and CARL'S JR. a weekly royalty of two percent (2%) of the weekly Gross Revenue (as defined at Section 3.15 above) of the Franchised Restaurant, calculated on the basis of Gross Revenue received by you in the immediately preceding week. Your obligation to pay ongoing weekly royalties will start with the Commencement Date of this Agreement. You must submit to GREEN BURRITO with each royalty payment a weekly statement of Gross Revenue calculations, and other data in the form specified in the Manual. 6.4. AUDIT. GREEN BURRITO will have the right during normal working hours to audit your books and records, including your tax returns, with respect to the Franchised Restaurant. If an audit discloses an underpayment of royalties payable under this Agreement, you must immediately pay GREEN BURRITO an amount equal to the underpayment and past interest accrued on the amount underpaid in accordance with the preceding section. In addition, if the underpayment exceeds five percent (5%) of the total royalty payable for any period covered under the audit, you must reimburse GREEN BURRITO for all expenses actually incurred by GREEN BURRITO in connection with the audit. 6.5. TRAINING FEES AND COSTS. GREEN BURRITO may reasonably require you to attend continuing education programs at GREEN BURRITO's cost. You will pay costs of travel, lodging, meals and other incidental expenses incurred by you or your employees for all training offered by GREEN BURRITO. 6.6. RELOCATION FEE. No Relation Fee will be charged. 6.7. RENEWAL FEE. As a condition of renewal of this franchise, you must pay, at the time of signing a renewal of the franchise agreement for the renewal term, any initial fee deferred as a result of pro-ration as described above in Section 6.2. 6.8. TRANSFER FEE. As a condition of Transfer of this franchise, you must pay, prior to or at the time of Transfer, a transfer fee of up to five Thousand dollars ($5,000) to reimburse GREEN BURRITO 11 67 for its actual legal and administrative costs in connection with the Transfer, unless the transfer is to an affiliate in which event no transfer fee shall apply. 6.9. INTEREST ON LATE PAYMENTS. Any payment not received by GREEN BURRITO when due will bear interest at eighteen percent (18%) per year or at the highest rate allowed by applicable law on the date when payment is due, whichever is less. Interest charges on late payments are intended to partially compensate GREEN BURRITO for loss of use of the funds and for internal administrative costs resulting from late payment which would otherwise be difficult to measure with precision. The fact that such charges are imposed should not be construed as a waiver of GREEN BURRITO's right to timely payment. 7. OBLIGATIONS OF FRANCHISEE 7.1. USE OF TRADE NAME AND MARKS. 7.1.1. CONTEXT. The GREEN BURRITO Dual Concept contemplates products bearing different Trade Names and Trademarks will be sold side-by-side. You agree to utilize the GREEN BURRITO Trade Name and Marks only in the operation of a Franchised Restaurant at the Approved Location. You will not use any other trade name or marks to identify or describe the Franchised Business unless GREEN BURRITO and you have mutually agreed to do so in writing, nor will GREEN BURRITO utilize your trademarks or trade names for any purpose other than in relation to the Dual Product Concept system. In addition, both parties agree to comply with the terms and conditions of Section 7.1.3. below in connection with the use of any trademark or trade name. 7.1.2. CHANGES IN TRADE NAMES AND MARKS. GREEN BURRITO has invested substantial time, energy, and money in the promotion and protection of its Trade Name and other Marks as they exist on the Commencement Date. It has no present intention of altering them. However, GREEN BURRITO recognizes that rights in intangible property such as the Trade Name and Marks are often difficult to establish and defend and that changes in the cultural and economic environment within which the System operates may make changes in the Trade Name and Marks desirable necessary. You understand that GREEN BURRITO therefore reserves the right to change its Trade Name and Marks and the specifications for each when GREEN BURRITO believes that the changes will benefit the Franchise Network. You agree that you will conform to any such changes. 7.1.3. ADVERTISING MATERIALS. CARL'S JR. desires to utilize its own creative department or consultants for development of promotional materials for CARL'S JR./GREEN BURRITO. Recognizing the context of the Dual Product Concept System, the parties agree to submit to each other copies of all regional advertising materials at least two (2) weeks before the first time those materials are broadcast or published. The receiving party shall review the materials within a reasonable time and will promptly notify the sending party whether it approves or rejects them. Approval will not be unreasonably withheld, and if no objection is registered within ten (10) business days, the materials shall be deemed approved. Advertising materials of a local nature 12 68 shall be submitted five (5) days in advance of the first broadcast or publication, and if no objection is registered within three (3) business days, the materials shall be deemed approved. For purposes of this paragraph, advertising materials that differ from previously approved materials only in such variables as date, price, or names of products will be considered to be previously approved. However, even if a party has approval for specific materials, it may later withdraw its approval if it reasonably believes it necessary to make the advertising conform to changes in the System or to correct unacceptable features, including, but not limited to, intentional or negligent misrepresentation. 7.1.4. LEGAL PROTECTION. You agree to notify GREEN BURRITO immediately in writing if you become aware of any unauthorized use of GREEN BURRITO's Trade Name, marks, or System. You must promptly notify GREEN BURRITO in writing of any claim, demand, or suit against you or against your principals based upon or arising in connection with your use of the Trade Name, Marks or system. In any action or proceeding arising from or in connection with any such claim, demand, or suit involving the GREEN BURRITO Trade Name, Marks, or System, GREEN BURRITO will prosecute and defend same and indemnify you and hold you harmless from same. You agree that GREEN BURRITO will select legal counsel and will control the proceedings. 7.2. QUALITY CONTROL. 7.2.1. OPENING. You may not open the Franchised Restaurant under the GREEN BURRITO Dual Concept system until GREEN BURRITO certifies in writing that, in the view of its management, you and your employees are prepared to open. BY CERTIFYING THAT GREEN BURRITO'S MANAGEMENT BELIEVES THE RESTAURANT IS PREPARED TO BEGIN OPERATION, GREEN BURRITO DOES NOT WARRANT THAT THE FRANCHISED RESTAURANT WILL BE SUCCESSFUL. 7.2.2. COMPLIANCE WITH MANUAL. You must operate the Franchised Restaurant in compliance with the standards and specifications set out by GREEN BURRITO in the Manual or otherwise in writing. Employees working in the GREEN BURRITO area of the Restaurant where they are visible to the public, other than the Designated Manager, must wear designated and approved uniforms which have the approval of CARL'S JR. and GREEN BURRITO. CARL'S JR. and GREEN BURRITO will, in good faith, approve uniforms which reasonably depict the association and presence of both CARL'S JR. and GREEN BURRITO. GREEN BURRITO may make changes in the GREEN BURRITO standards and specification, when, in GREEN BURRITO's reasonable discretion, change is needed for the continued success and development of the Franchise Network. These changes may necessitate the purchase of equipment, supplies, furnishings or other goods, completion of additional training by your employees, or other cost to you. You must always keep your copy of the Manual current by inserting in it revised pages given to you by GREEN BURRITO and deleting superseded pages. If there is any dispute as to the requirements of the Manual at any point in time, the terms of the master copy of the Manual maintained by GREEN BURRITO will control. 7.2.3. PRODUCTS AND SERVICES OFFERED. You must offer and sell a minimum of fifteen (15) GREEN BURRITO Products listed in Attachment 1 to this Agreement. Except for existing 13 69 CARL'S JR. Mexican offerings set forth on Attachment 2, and the CARL'S JR. Original Food Products defined at Section 3.9 above, you may serve only those Mexican food products that GREEN BURRITO has authorized you to provide. Except for Proprietary Products, you may purchase products that are to be sold or used in the Franchised Restaurant from any source that has been approved by GREEN BURRITO. If you wish to use or sell any product which is sold by a supplier not previously approved by GREEN BURRITO, you should advise GREEN BURRITO of this fact and, upon GREEN BURRITO's request, give GREEN BURRITO product specifications, sample products, and/or information about the supplier. GREEN BURRITO will within fifteen (15) days communicate to you either its approval of the supplier or its reasons for withholding its approval. Silence may not be construed as consent. As a condition of approving a supplier or product, GREEN BURRITO will require you to reimburse it for any expenses reasonably incurred by GREEN BURRITO in inspecting the supplier's premises, checking the supplier's credentials, or testing the product. As a condition of approving a supplier of any product that bears the Trade Name or Marks, GREEN BURRITO may require that the supplier sign GREEN BURRITO's License Agreement. GREEN BURRITO may withdraw its approval of a supplier or product if it no longer meets GREEN BURRITO's standards. 7.2.4. CUSTOMER SATISFACTION PROGRAM. You must distribute customer response cards in the form prescribed by GREEN BURRITO or CARL'S JR.'s own form, provided same is approved by GREEN BURRITO with respect to GREEN BURRITO items, for return by customers to CARL'S JR. and GREEN BURRITO. If your scores from the customer response cards do not meet GREEN BURRITO's currently effective standards, as described in the Manual, GREEN BURRITO will suggest ways in which you can improve its scores. If you does not take immediate, effective steps to bring your operation up to GREEN BURRITO's standards, your failure to do so will constitute a material breach of this Agreement. 7.2.5. INSPECTIONS. CARL'S JR. will conduct periodic quality control inspections. In addition, GREEN BURRITO may conduct periodic quality control inspections of the Franchised Restaurant during normal business hours. Quality control inspections may be made with or without prior notice and with or without CARL'S JR. representatives present. In addition, You will cooperate with GREEN BURRITO in undertaking an annual Franchise Business Review; results of the review will be used by GREEN BURRITO in advising you how to improve store performance as well as assessing compliance with system standards. 7.2.6. USE OF PROPRIETARY PRODUCTS. Certain of the proprietary products used in the Franchised Restaurant are unique and their formula and manufacturing processes constitute trade secrets integral to the success of the System. Proprietary products include but are not limited to corn or flour tortillas, corn or flour taco shells, bean mix, meat mixes, spices and seasonings, guacamole recipe, cheese mixes and sauces. The Proprietary Products must be used as prescribed. You may purchase the proprietary products only from GREEN BURRITO, its Affiliate, or a designated vendor. Use or sale of any substitute for the Proprietary Products is a material breach of this Agreement and will result in its immediate Termination, unless such products are not available to you. 7.2.7. NOTIFICATION OF COMPLAINTS. You will notify GREEN BURRITO promptly if you are served with a complaint in any material legal proceeding that is in any way related to the 14 70 Franchised Restaurant or if you become aware that you are the subject of any complaint to or investigation by a governmental licensing authority or consumer protection agency. 7.3 PERSONNEL. 7.3.1. MANAGEMENT. The parties recognize that the Designated Manager will manage the entire CARL'S JR./GREEN BURRITO Dual Concept restaurants at the Approved Location and that a second manager will not be required. Your Designated Manager must devote sufficient time and effort to the management and operation of the Franchised Restaurant to operate it in accordance with GREEN BURRITO's standards. The Designated Manager or another employee who has successfully completed GREEN BURRITO's initial training program must be present at the Approved Location whenever the Franchised Restaurant is open for business. If GREEN BURRITO, reasonably believes that a Designated Manager is not properly performing his duties, GREEN BURRITO will advise you and you will take reasonable steps to correct the situation. You must keep GREEN BURRITO informed as to the identity of your Designated Manager(s). Upon the termination of employment of a Designated Manager, you must appoint a successor within sixty (60) days. Any successor Designated Manager must successfully complete the training program conducted by GREEN BURRITO before starting work in the Franchised Restaurant. 7.3.2. EMPLOYEES. You will maintain at all times a staff of trained employees sufficient to operate the Franchised Restaurant to meet GREEN BURRITO's standards. During the term of this Agreement and for one year after its termination, you agree that you will not, directly or indirectly or by action in concert with others, induce or influence or seek to induce or influence any person who is engaged as an employee by GREEN BURRITO or any other GREEN BURRITO franchisee to (a) end his or her engagement or employment; and (b) to work for another member of the Franchise Network or former member of the Franchise Network. 7.4. LOCAL ADVERTISING. You will reasonably include GREEN BURRITO in your local advertising and marketing promotions that you carry for CARL'S JR. purposes. This does not obligate you to include GREEN BURRITO in all advertising and marketing promotions. For purposes of this paragraph, "local advertising" means advertising that is primarily directed to persons or entities within the geographic area where the Franchised Restaurant is located. 7.5. FINANCIAL INFORMATION. 7.5.1. RECORDS. You must record all sales and all receipts of revenue on individual machine serial-numbered guest checks. Cash registers must validate the receipts that are presented at the time of sale to your customers. You must retain, at a reasonably accessible location, daily sales reporting forms and accompanying cash register tapes for at least three (3) years after the dates of sale. If, for any reason, your cash register must be repaired, you will use your best efforts to obtain a replacement cash register must be used in its absence. 7.5.2. REPORTS. You will submit to GREEN BURRITO, on or before the fifteenth (15th) day of each month, financial reports on the income and expenses of the Franchised Restaurant in 15 71 a format which demonstrates GREEN BURRITO revenues, total beverages, and costs of sales for GBFC sales. In addition, you shall, upon request, provide additional data reasonably required to confirm that you are complying with your obligations under this Agreement, and to aid in the formulation of forecasts, analysis and trends. 7.6. INSURANCE. You represent that you are either self-insured or maintain a policy or policies of comprehensive public liability insurance including product liability coverage, covering all Franchise Restaurant's assets, personnel, and activities. You are self-insured or also carry casualty insurance. In addition, you are self-insured or maintain policies of worker's compensation insurance, disability insurance and all other types of insurance required by applicable law. 7.7. FINANCIAL AND LEGAL RESPONSIBILITY. 7.7.1. COMPLIANCE WITH LAW. You must comply with all federal, state, and local laws and regulations pertaining, directly or indirectly, to the Franchised Restaurant. You must keep current all licenses, permits, bonds, and deposits made to or required by any governmental agency in connection with the operation of the Franchised Restaurant. 8. RELATIONSHIP OF PARTIES 8.1. INTEREST IN MARKS AND SYSTEM. You may not at any time do or cause to be done anything contesting or impairing the other's interest in its trade name, service marks, trademarks, logos, emblems, indicia of origin, slogans, or system. You acquire no rights in any of these things except for your right to use them according to the express terms of this Agreement. GREEN BURRITO retains the right to grant other franchises or licenses to use its own trade name, marks and system upon any terms that GREEN BURRITO wishes. 8.2. INDEPENDENT STATUS. You are an independent legal entity and will make this fact clear in your dealings with suppliers, lessors, government agencies, employees, customers and others. You will rely on your own knowledge and judgment in making business decisions, subject only to the requirements of this Agreement and the Manual. You may not expressly or impliedly hold yourself out as an employee, partner, shareholder, joint venturer or representative of GREEN BURRITO, nor may you expressly or impliedly state or suggest that you have the right or power to bind GREEN BURRITO or to incur any liability on GREEN BURRITO's behalf, except as permitted by your appointment as a Master Franchisee pursuant to the Development Agreement. If you are a corporation, you will not use the Trade Name as part of your corporate name. 16 72 8.3. DISPLAY OF DISCLAIMER. When appropriate, either party will make such disclaimers as necessary to reflect their independent status. 8.4. CONFIDENTIALITY. You acknowledge and agree that the information, ideas, forms, marketing plans and other materials disclosed to you under this Agreement, whether or not included in the Manual, are confidential and proprietary information and trade secrets of GREEN BURRITO. In particular, certain proprietary recipes are key in differentiating GREEN BURRITO restaurants from their competitors. You agree to maintain the confidentiality of all such material. You will not disclose any such information to any third party, except to your employees and agents as necessary in the regular conduct of the Franchised Restaurant and except as authorized in writing by GREEN BURRITO. You will be responsible for requiring compliance of your Affiliates with the provisions of this section. Notwithstanding the foregoing, this Section does not restrict the disclosures of anything that is public or becomes public or that is acquired in the normal course of business by you or a source other than GREEN BURRITO. 8.5. INDEMNIFICATION. You will indemnify and hold GREEN BURRITO harmless from all expenses or liabilities of any kind arising from or in any way connected to any of your acts or omissions. If GREEN BURRITO is made a party to a legal proceeding in connection with an actor omission, GREEN BURRITO may hire counsel to protect its interests and bill you for all costs and expenses incurred by GREEN BURRITO. You must promptly reimburse GREEN BURRITO. 8.6. COVENANT NOT TO COMPETE. You will not, during the term of this Agreement and for four (4) years after its Termination, operate or own more than a ten percent (10%) beneficial interest in any company or fast-food restaurant that sells Mexican food and is located within a radius of seventy-five (75) miles of any Company-Owned or Franchised Restaurant of GREEN BURRITO. 9. TRANSFER OF FRANCHISE 9.1. PURPOSE OF CONDITIONS FOR APPROVAL OF TRANSFER. GREEN BURRITO's grant of this Franchise is made in reliance upon your integrity, ability, experience and financial resources. Neither the franchise nor the Franchised Restaurant operated under it may be transferred unless you have first obtained GREEN BURRITO's written consent, which will not be unreasonably withheld. In order to ensure that no Transfer jeopardizes the Trade Name, the Marks, or GREEN BURRITO's interest in the successful operation of the Franchised Restaurant, GREEN BURRITO will consent to a Transfer only if you comply with the provisions of Section 9.2 and 9.3 of this Agreement and if the conditions described in Section 9.5 are fulfilled. 17 73 9.2. NOTICE OF PROPOSED TRANSFER. If you wish to Transfer this franchise, you will submit to GREEN BURRITO: (a) the form of franchise purchase application currently in use by GREEN BURRITO completed by the prospective transferee; and (b) a written notice, setting forth all the terms and conditions of the proposed Transfer. 9.3 CONSENT BY GREEN BURRITO. GREEN BURRITO must respond to your written notice within fifteen (15) days after receiving it, or, if GREEN BURRITO requests additional information, within the later date of fifteen (15) days after receipt of the additional information or the final day of the original fifteen (15) day period. GREEN BURRITO may either consent to the Transfer or tell you its reason for refusing to consent. Silence will not be construed as consent. If GREEN BURRITO consents, then you may transfer the interest described in the notice only to the named transferee and only upon the terms and conditions set forth in the notice. Consent by GREEN BURRITO to a particular Transfer will not constitute consent to any other or subsequent Transfer. 9.4. CONDITIONS FOR CONSENT TO TRANSFER. The consent of GREEN BURRITO is subject to certain conditions, including but not limited to: (a) Satisfaction of GREEN BURRITO that the proposed transferee meets all of the criteria of character, business experience, financial responsibility, net worth and other standards that GREEN BURRITO customarily applies to new franchisees at the time of Transfer; (b) Payment of all your outstanding debts to GREEN BURRITO; (c) Cure of all defaults under the Franchise Agreement, any other agreement between GREEN BURRITO and you and your affiliates, and the Manual; (d) Signing by the transferee of the then-current form of Franchise Agreement, amended to shorten the term to the remainder of your current term and to waive payment of an initial fee by the proposed transferee; (e) Payment by you of the transfer fee described in Article 6 of this Agreement; (f) Completion by the transferee of GREEN BURRITO's initial training program to GREEN BURRITO's satisfaction; (g) Signing of a general release of claims by you in favor of GREEN BURRITO; (h) Your transferring the other restaurant operated jointly with your GREEN BURRITO Restaurant at the Approved Location to the same transferee; and 18 74 (i) GREEN BURRITO's determination, after review of the Transfer Agreement, that its terms allow the transferee a reasonable change of success. BY MAKING SUCH A DETERMINATION, GREEN BURRITO DOES NOT WARRANT THAT THE TRANSFEREE WILL BE SUCCESSFUL. SUCCESS IS DEPENDENT ON A NUMBER OF FACTORS, INCLUDING YOUR HARD WORK AND ABILITY AND GENERAL ECONOMIC CONDITIONS, THAT ARE NOT UNDER GREEN BURRITO'S CONTROL. 9.5. CHANGES OF OWNERSHIP DEEMED NOT TO BE TRANSFERS. As used in this Agreement, the term "Transfer" does not mean an assignment to: (a) Any Trustee, Guardian or Conservator for the account and benefit of a souse, ancestor or descendent; or (b) Any business entity if the beneficial ownership of the business entity immediately following the assignment is the same and in the same proportions as the beneficial ownership immediately prior to the assignment; provided, however, that no such assignment or reorganization will relieve the original party of any of its obligations under this Agreement, or in the event of a merger, there shall be no deemed transfer. Information on the identity of the shareholders and officers of the corporation, the percentage of ownership, and the address where corporate records are maintained must be submitted promptly to GREEN BURRITO. You do not need GREEN BURRITO's consent for a non-Transfer assignment. 9.6 TRANSFER UPON YOUR DEATH. If you die within the term of this Agreement, your heirs or beneficiaries will have sixty (60) days within which to demonstrate to GREEN BURRITO's satisfaction that they meet all of the criteria of character, business experience, financial responsibility, net worth and other standards that GREEN BURRITO requires of new franchisees at that time. If GREEN BURRITO approves your heirs or beneficiaries as transferee of the franchise, GREEN BURRITO will waive any transfer fee in connection with the Transfer. If GREEN BURRITO advises your heirs or beneficiaries in writing that GREEN BURRITO will not approve them as transferee of the franchise, or if GREEN BURRITO fails to approve or disapprove the Transfer within sixty (60) days following your death, your heirs or beneficiaries will have one hundred twenty (120) additional days from the date of disapproval of the Transfer within which to find and notify GREEN BURRITO of a proposed Transfer to a qualified transferee in conformity with the provision of Section 9.2, 9.3, and 9.4 of this Agreement. If your heirs or beneficiaries do not advise GREEN BURRITO of a qualified transferee within the specified period, the franchise will automatically Terminate at the end of the period unless a written extension of time has been granted by GREEN BURRITO. 19 75 9.7. ASSIGNMENT BY GREEN BURRITO. GREEN BURRITO may assign this Agreement or any rights or obligations created by it at any time without the consent of you upon the following conditions: (a) the assignee is financially responsible; (b) has comparable or better integrity than GREEN BURRITO; (c) the assignee can perform GREEN BURRITO's obligations under this Agreement; (d) the assignee expressly agrees in writing to assume GREEN BURRITO's obligations under this Agreement; and (e) the assignee is not a CARL'S JR. competitor. 10. TERMINATION OF FRANCHISE 10.1. TERMINATION BY CONSENT OF THE PARTIES. This Agreement may be terminated upon the mutual written consent of the parties. 10.2. TERMINATION BY GREEN BURRITO. 10.2.1. ACTS OF DEFAULT. Upon the occurrence of any of the following defaults, GREEN BURRITO, at its option, may terminate this Agreement: (a) If you misuse the Marks or the System or engage in conduct which reflects materially and unfavorably upon the goodwill associated with them; (b) If you or any of your Affiliates has any direct or indirect interest in the ownership or operation of any business that is confusingly similar to the Franchised Restaurant or uses the System or the Marks; (c) If you repetitively fail to submit to GREEN BURRITO in a timely manner any information you are required to submit under this Agreement; (d) If you fail to begin operation of the Franchised Restaurant by the Commencement Date of this Agreement, or if you fail to operate the Franchised Restaurant in accordance with this Agreement and the Manual; (e) If you attempt to assign your rights under this Agreement in any manner not authorized by this Agreement; (f) If you or your Affiliate have made any material misrepresentation in connection with the acquisition of the Franchised Restaurant or to induce GREEN BURRITO to enter into this Agreement; (g) If you act without GREEN BURRITO's prior written approval or consent in regard to a matter for which GREEN BURRITO's prior written approval or consent is expressly required by this Agreement; 20 76 (h) If you default in the performance of any material obligation under this Agreement or any other agreement with GREEN BURRITO; (i) If you cease to operate the Franchised Restaurant, unless: (i) operations are suspended for a period of no more than one hundred eighty (180) days; (ii) the suspension was caused by fire, condemnation, or act of God; and (iii) a lease termination; (j) If you fail to permanently correct a breach of this Agreement or to meet the standards set out in the Manual after being twice requested in writing by GREEN BURRITO to correct the problem in any twelve- (12-) month period; (k) If you fail to make any payment when due under this Agreement or any other agreement between you and GREEN BURRITO or an Affiliate of GREEN BURRITO; (l) If GREEN BURRITO learns that the operation of the Franchised Restaurant poses a threat to public health or safety; (m) Except as otherwise required by the United States Bankruptcy Code, if you become insolvent, are adjudicated a bankrupt; or (n) If you are convicted of a felony or any criminal misconduct which is relevant to the operation of the Franchised Restaurant. 10.2.2. NOTICE OF DEFAULT. Termination will be effective thirty (30) days after written notice of default is given to you if any of the defaults described in subsections (a) through (j) above has not been cured. Termination will be effective ten (10) days after written notice is given to you id the default described in subsection (k) has not been cured. Termination will be effective immediately upon written notice to you if any of the defaults described in subsections (l) through (o) above occurs. 10.3. TERMINATION BY YOU. If you determine it is no longer commercially reasonable to continue to operate the Franchised Restaurant, you may elect to terminate this Agreement upon ninety (90) days' written notice to GREEN BURRITO if the conditions of the next section of this Agreement, entitled "Rights and Obligations After Termination," are met in full within the specified time periods. For purposes of this Agreement, GREEN BURRITO will agree that it is no longer commercially reasonable to operate the Franchised Business if you are not in breach, are operating in good faith to promote the sale of Green Burrito products, and notwithstanding your efforts the total royalties payable by you for GBFC sales are less than $3,000 for the trailing 12-month period. 21 77 10.4. RIGHTS AND OBLIGATIONS AFTER TERMINATION. Upon termination of this Agreement for any reason, the parties will have the following rights and obligations: (a) GREEN BURRITO will have no further obligations under this Agreement, except for indemnity, nondisclosure, and protected areas, or other obligations arising from a GREEN BURRITO breach; (b) You must give GREEN BURRITO a final accounting for the Franchised Restaurant; pay GREEN BURRITO, within thirty (30) days after Termination, all payments due to GREEN BURRITO; and return the Manual and any other items belonging to GREEN BURRITO to GREEN BURRITO; (c) You must immediately and permanently cease the use of the Marks or any confusingly similar marks, the System, and advertising, signs, stationery, or forms that bear identifying marks or colors that might give others the impression that you are operating a Franchised Restaurant; (d) You must promptly sign any documents and take any steps that in the judgment of GREEN BURRITO are necessary to delete your listings from classified telephone directories, and terminate all other references that indicate you is or ever was associated with the GREEN BURRITO; by signing this Agreement, you irrevocably appoints GREEN BURRITO its attorney-in-fact to take the actions described in this paragraph if you do not do so within seven (7) days after Termination of this Agreement. (e) You must maintain all records required by GREEN BURRITO pursuant to this Agreement for a period of not less than ninety (90) days after final payment of any amounts you owes to GREEN BURRITO when this Agreement is Terminated. (f) You must comply with the provisions of Section 8.6 above (Covenant Not to Compete). If the franchise granted in this Agreement is terminated because of default, the rights of the parties described above will not necessarily be the parties' exclusive remedies, but will instead supplement any other equitable or legal remedies available to the parties. Termination of this Agreement will not extinguish any obligation of either party that has accrued prior to Termination. If this Agreement is terminated because of a material default, nothing in this section will be construed to deprive either party of the right to recover damages as compensation for lost profits. All obligations of the parties which by their terms or by reasonable implication are to be performed in whole or in part after Termination will survive Termination. 22 78 11. MISCELLANEOUS PROVISIONS 11.1. CONSTRUCTION OF CONTRACT. Section headings in this Agreement are for reference proposes only and will not in any way modify the statements contained in any section of this Agreement. Each word in this Agreement will be deemed to include any number or gender that the context requires. If there is any conflict between this Agreement and the Manual, this Agreement will control. 11.2. GOVERNING LAW. This Agreement is made in the state where the franchise is to be operated and its provisions will be governed by and interpreted under the laws of that State, with the following exception; the arbitration clause will be governed by and interpreted in accordance with the Federal Arbitration Act. 11.3. NOTICES. The parties to this Agreement should direct any notices to the other party at the address below that party's name on the final page of this Agreement or at another address if advised in writing that the address has been changed. Notice may be delivered by facsimile (with simultaneous posting of a copy by first class mail), courier, or first class mail. Notice by facsimile will be deemed delivered upon transmission; by courier, upon delivery; and by first class mail, three days after posting. Notice of Termination or non-renewal must be given by a receipted form of delivery. 11.4. AMENDMENTS. This Agreement may be amended only by a document signed by all of the parties to this Agreement or by their authorized agents. 11.5. WAIVER. Waiver of any breach of this Agreement will not be interpreted as a waiver of any subsequent breach. 11.6. INTEGRATION. This Agreement, any exhibits or attachments to it constitute the entire agreement between the parties concerning the franchise granted under this Agreement. All prior and contemporaneous agreements and representations are superseded by it. 11.7. ARBITRATION/MEDIATION. Any dispute arising out of or in connection with this Agreement will be determined in accordance with the then current rules for commercial arbitration and mediation of the Judicial 23 79 Arbitration and Mediation Services, Inc. (JAMS). The location shall be any city in which JAMS maintains an office, other than the State of California for purposes of neutrality and eliminating conflicts of interest, unless agreed to the contrary by both parties. Both parties prefer a neutral location, with the further provision that neither party prefers a city on the East coast or West Coast. If JAMS maintains an office in Phoenix, Arizona, or Denver, Colorado, both parties acknowledge those cities as preferable locations. The arbitrator will have the power and obligation to grant injunctive relief on a provisional or permanent basis, in addition to any other relief that is available, if the Trade Name, Marks, or goodwill of either parties' Franchise Network are jeopardized or harmed by any act or omission of either party. This arbitration clause will not deprive GREEN BURRITO of any right it may otherwise have to seek provisional injunctive relief from a court of competent jurisdiction. If proper notice of any hearing has been given, the arbitrator(s) will have full power to proceed to take evidence or to perform any other acts necessary to arbitrate the matter in the absence of any party who fails to appear. BOTH PARTIES WAIVE ANY RIGHT THEY MAY HAVE TO DEMAND TRAIL BY JURY OR TO SEEK PUNITIVE DAMAGES FROM THE OTHER. The arbitrator will have no power to (1) stay the effectiveness of any pending Termination of franchise; (2) assess punitive damages; or (3) make any award that modifies or suspends any lawful provision of this Agreement. All expenses of arbitration must be paid by the party against whom the arbitrator(s) render a decision. Judgment upon any aware and/or enforcing any order of the arbitrator may be entered by any court of competent jurisdiction. 11.8. INJUNCTIVE REMEDY FOR BREACH. You recognize that your Franchised Restaurant is only one of several businesses operating under GREEN BURRITO's Trade Name and in substantial association with its Marks. Failure on the part of a single franchisee to comply with the terms of its franchise agreement is likely to cause irreparable damage to GREEN BURRITO and to some or all of the other franchisees of you. For this reason, you agrees that if GREEN BURRITO can demonstrate to a court of competent jurisdiction that there is a substantial likelihood of a breach or threatened breach of any of the terms of this Agreement by you, GREEN BURRITO will be entitled, without posting of a bond, to an injunction restraining the breach and/or to a decree of specific performance, without showing or proving any actual damage, until a final determination is made by an arbitrator. 11.9. ATTORNEYS' FEES AND COSTS. If legal action, including any action on appeal, or arbitration is necessary to enforce the terms and conditions of this Agreement, the prevailing party will be entitled to recover reasonable compensation for preparation, investigation and court and/or arbitral costs and reasonable attorneys' fees, as fixed by a court of competent jurisdiction or by the arbitrator. 11.10. SEVERABILITY. Each provision of this Agreement will be considered severable. If, for any reason, any provision of it is determined to be invalid or in conflict with any existing or future law or regulation, that provision will not impair the operation of the remaining provisions of this Agreement. The invalid provisions will be deemed not to be a part of this Agreement. 24 80 11.11. APPROVAL AND GUARANTEES. If you are a corporation, all officers and shareholders with a ten percent (10%) or greater interest in you, or, if you are a partnership, all your general partners must approve this Agreement, permit you to furnish the financial information required by GREEN BURRITO, and agree to the restrictions placed on them, including restrictions on the transferability of their interests in the franchise and Franchised Restaurant and limitations on their rights to compete, and sign separately written guarantees of your payments and performance in accordance with Attachment 2 of this Agreement. 11.12. ACCEPTANCE BY BOTH PARTIES. This Agreement will not be binding on either party unless and until it has been signed by an authorized officer of each party. 11.13. DISCLAIMER OF REPRESENTATIONS. NO REPRESENTATIONS OR PROMISES OF ANY KIND HAVE BEEN MADE BY GREEN BURRITO TO INDUCE YOU TO EXECUTE THIS AGREEMENT EXCEPT THOSE SPECIFICALLY SET FORTH IN THE FRANCHISE DISCLOSURE DOCUMENTS THAT HAVE BEEN DELIVERED TO YOU. YOU ACKNOWLEDGE THAT NEITHER GREEN BURRITO NOR ANY OTHER PERSON HAS GUARANTEED THAT YOU WILL SUCCEED IN THE OPERATION OF THE FRANCHISED RESTAURANT OR HAS PROVIDED ANY SALES OR INCOME PROJECTIONS OF ANY KIND TO YOU. YOU HAVE MADE AN INDEPENDENT INVESTIGATION OF ALL IMPORTANT ASPECTS OF THE FRANCHISED RESTAURANT. YOU UNDERSTAND THAT GREEN BURRITO IS NOT A FIDUCIARY AND HAS NO SPECIAL RESPONSIBILITIES BEYOND THE NORMAL RESPONSIBILITIES OF A SELLER IN A BUSINESS TRANSACTION. IN WITNESS TO THE PROVISIONS OF THIS AGREEMENT, the undersigned have signed this Franchise Agreement on the date set forth in Article 1. GB FRANCHISE CORPORATION By: ______________________ Title: ____________________ 23 Corporate Plaza, Suite 240 Newport Beach, CA 92660 ********SIGNATURES CONTINUED ON NEXT PAGE******** 25 81 FRANCHISE OWNER: NAME: ___________________________ By: _____________________________ Title: __________________________ Address: ________________________ _________________________________ Date: ___________________________ 26 82 GREEN BURRITO PRODUCTS The following lists "Green Burrito Products" for purposes of the GB Dual Concept Franchise Agreement, which may be modified from time to time at the discretion of GREEN BURRITO: BURRITOS Super Bean Burrito (Rice, beans, guacamole, enchilada sauce & cheese) Super Meat Burrito (Choice of steak, chicken or carnitas) Green Burrito (Pork, Green Chile Sauce, cheese & beans) Meat, Bean & Cheese Burrito (Choice of steak, chicken or carnitas) Meat & Cheese Burrito (Choice of steak, chicken or carnitas) Wet Red Burrito (Steak & rice) Wet Green Burrito (Rice, beans & pork) Big Ed Burrito NACHOS Super Nachos (Choice of steak, chicken or carnitas) Mini Super Nachos (Small version of Super Nachos) Nachos (Chips with melted Jack & Cheddar Cheese) SINGLES Hard Taco Soft Taco Bean & Cheese Burrito Tostada Cheese Quesadilla Two Taquitos with Guacamole Fijitas Chile Relleno Cheese Enchilada Taco Super Taco COMBINATIONS Any combination of any of the above ADDITIONAL ITEMS Any items offered by GBFC at solo franchise locations ATTACHMENT 1 27 83 GUARANTY AND SUBORDINATION AGREEMENT The undersigned, to induce GB Franchise Corporation ("Franchisor") to enter into GREEN BURRITO Franchise Agreement with _____________________________ ("Franchisee") for Unit #_____, unconditionally, guarantees to Franchisor, its successors, or its assignees, the prompt and full payment and performance of all obligations of Franchisee that are or may become due and owing to Franchisor, including, but not limited to, all obligations arising out of the Franchise Agreement or any other agreement between the parties and all extensions or renewal of it in the same manner as if the Franchise Agreement was signed between Franchisor and the undersigned directly, as Franchisee. The undersigned expressly waives notice of the acceptance by Franchisor or for the benefit of Franchisee, of the purchase of inventory and goods by Franchisee, the maturing of bills and the failure to pay the same, the incurring by franchisee of an additional future obligations and liability to Franchisor, and other notices and demands. This Guaranty will not be effected by the modification, extension, or renewal of any agreement between Franchisor and Franchisee, the taking of a note or other obligation from Franchisee or others, the taking of security for payment, the granting of an extension of time for payment, the filing by or against Franchisee of bankruptcy, insolvency, reorganization or other debtor relief afforded Franchisee under the Federal Bankruptcy Act or any other state or federal statute or by the decision of any court or any other matter, whether similar or dissimilar to any of the foregoing, and this Guaranty will cover the terms and obligations of any of the modifications, notes, security agreements, extensions, or renewals. The obligations of the undersigned will be unconditional in spite of any defect in the genuineness, validity, regularity, or enforceability of the Franchisee's obligations or liability to validity, regularity, or enforceability of the Franchisee's obligations or liability to Franchisor, or any other circumstances where or not referred to in this Guaranty that might otherwise constitute a legal or equitable discharge of a surety or guarantor. This is an irrevocable, unconditional and absolute guaranty of payment and performance the undersigned agrees that its liability under this guaranty will be immediate and will not be continue upon the exercise or enforcement by Franchisor of whatever remedies it may have against the Franchisee or others, or the enforcement of any lien or realization upon any security Franchisor may at any time possess. The undersigned agree that any indebtedness by the Franchisee to the undersigned for any reason, currently existing or which might arise in the future, will always be inferior and subordinate to any indebtedness owed by the Franchisee to Franchisor. The undersigned will promptly modify any financing statements on file with state agencies to specify that Franchisor's rights are senior to those of Guarantor. ATTACHMENT 2 28 84 The undersigned further agrees that as long as the Franchisee owes any money to Franchisor (other than royalty payments that are not past due) the Franchisee will not pay and the undersigned will not accept payment of any part of any indebtedness owed by Franchisee to any of the undersigned, either directly or indirectly, without the consent of Franchisor. In connection with any litigation or arbitration to determine the undersigned's liability under this Guaranty, the undersigned expressly waives his or her right to trail by jury and agrees to pay costs and reasonable attorneys' fees as fixed by the court or arbitrator. The undersigned represents that full and appropriate corporate authority has been duly granted to authority the execution and delivery of this Guaranty. This Guaranty will remain in full force and effect until all obligations arising out of and under the Franchise Agreement, including all renewals and extension of it, are fully paid and satisfied. DATED: ________________________ GUARANTORS: ____________________________________ ____________________________________ ____________________________________ 29 85 ATTACHMENT 3 86 EXHIBIT 1 EQUIPMENT LEASE THIS EQUIPMENT LEASE is entered into between _________________________ __________________, a ____________ corporation, (herein referred to as "CARL" or "Lessee") and GB FOODS CORPORATION, INC., a Delaware corporation, (herein referred to as "GBFC" or "Lessor"), effective the _______ day of ___________________, 19_____, pertaining to equipment to be located at a franchised location of ________________________, a ____________ corporation. RECITALS: 1. CARL and GBFC commenced Dual Concept marketing of CARL and GBFC products marketed through CARL locations. To facilitate these initial Dual Concept locations. GBFC leased certain items of equipment to Lessee pursuant to the terms of this Lease. 2. The CARL restaurant location at which the GBFC leased equipment is located is: ___________________________ ___________________________ 3. The equipment was placed in service as of the effective date above. AGREEMENT: IT IS HEREBY AGREED by and between Lessor and Lessee as follows: 1. LEASE: Lessor hereby leases to Lessee the GBFC equipment set forth in Exhibit "A" attached hereto and incorporated herein by reference, which equipment is located at the address first listed above. 2. RENT AND PAYMENT: The rent for the leased equipment set forth on Exhibit "A" shall be payable solely out of GBFC sales generated in the above-described Dual Concept Store. The initial rent is FIVE PERCENT (5%) of the GBFC sales generated in the Dual Concept Store until the total rent paid equals the initial GBFC capital expenditure cost set forth on Exhibit "A". After initial rent described in the immediately preceding sentence has been paid so that GBFC has recouped its Capital Expenditure outlay for such equipment, the rent thereafter for the remainder of the term of the Lease shall be ONE PERCENT (1%) of the GBFC sales generated in the Dual Concept Store. 3. GBFC SALES: For purposes of this Agreement, GBFC sales generated in the CARL/GBFC Dual Concept Stores shall include: 87 A. The cash receipts generated by GBFC products; plus B. GBFC's proportionate share of beverage sales, which proportion shall be computed during each respective period by comparing the relationship between CARL products (exclusive of beverage sales) and GBFC products (exclusive of beverage sales). 4. TERM: The term of the Lease shall be for a period of FIFTEEN (15) years. Rent shall be payable on the last day of each month at the rate specified above. 5. PURCHASE OPTION: A. Upon completion of the Lease term, the leased property shall forthwith be returned by Lessee, to GBFC, as Lessor, subject to Lessee's option to purchase the Leased Equipment for its then market value, which shall not exceed ten percent (10%) of its original purchase price as set forth in Exhibit A. Market value shall be determined by appraisal accomplished by any reputable entity experienced in the sale of restaurant equipment. Valuation as finally determined by the appraisers shall be binding on both parties. B. The appraisal shall be completed concurrent with the termination of the Lease. The Lessee shall have no obligation to proceed with the exercise of the option until the appraised value is finally determined by the appraiser. C. In the event the Lessee elects to exercise its purchase option, closing shall be accomplished by delivery of certified funds or wire transfer to Lessor no later than TEN (10) business days following the finalization of the appraisal. 6. TITLE: Lessee assumes the risk for the equipment leased hereunder and for the use, operation, and storage thereof. This is a contract of lease only and nothing herein contained shall be construed as conveying to Lessee any right, title or interest in or to the Leased Equipment. The Leased Equipment shall at all times during the term of this Lease be and remain the personal property of Lessor and title thereto shall remain in the Lessor exclusively and Lessee shall conspicuously identify each unit by suitable lettering thereon to indicate Lessor's ownership. Lessee shall keep the equipment free from any and all liens and claims and shall not do or permit any act or thing whereby Lessor's title or rights may be encumbered or impaired. 7. TAXES, INSURANCE, REPAIR: Lessor shall pay all local taxes and fees assessed in connection with the use or possession of the equipment. Lessee shall, at its own expense, carry adequate public liability insurance against bodily injury and against property damage and such insurance shall protect both Lessor and Lessee. Each unit shall be insured against -2- 88 fire and theft and under extended coverage. Lessee will, at its expense, during the term of this Lease maintain each unit in good operating order, repair and appearance. IN WITNESS WHEREOF, the parties have executed this Agreement on the date and year first above written. LESSOR: LESSEE: GBFC: GB FOODS CORPORATION __________________________________ BY: ___________________________________ BY: ______________________________ TITLE: ________________________________ TITLE: ___________________________ DATE: _________________________________ DATE: ____________________________ -3- EX-10.34 7 1ST AMEND. TO LIMITED LIABILITY COMPANY AGREEMENT 1 EXHIBIT 10.34 FIRST AMENDMENT TO THE AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT OF BOSTON WEST, L.L.C. A DELAWARE LIMITED LIABILITY COMPANY THIS FIRST AMENDMENT TO THE OPERATING AGREEMENT ("Amendment"), of BOSTON WEST, L.L.C., a Delaware limited liability company ("Company"), is made effective May 15, 1995 ("Effective Date"), and is entered into by and among all of the members of the Company whose names are reflected on the signature pages hereof (the "Members"). 1.0 RECITALS. 1.1 CKE RESTAURANTS, INC. and BOSTON PACIFIC, INC. formed the Company pursuant to and in accordance with the Delaware Limited Liability Company Act (6 Del. C. ss. 18-10, et. seq.) ("the Act"), as amended from time to time by entering into a Limited Liability Company Agreement on March 29, 1995 ("Original Agreement"), and filing a Certificate of Formation of the Company with the office of the Secretary of State of the State of Delaware on March 29, 1995. 1.2 On April 16, 1996, the Members executed the Amended and Restated Limited Liability Company Agreement ("Amended Agreement"), to amend and restate the Original Agreement in its entirety. 1.3 The Members desire to modify the initial capital contribution to purchase the Class A Units of the Company and make other changes to the Amended Agreement. NOW, THEREFORE, in consideration of the mutual promises set forth herein and for other good and valuable consideration, it is agreed as follows: 2.0 DEFINITIONS. Any undefined capitalized terms herein shall have the same meaning as those set forth in the Amended Agreement. 3.0 AMENDMENTS. The following sections of the Amended Agreement are amended to read as follows: 3.1 Section 2.2 [Intentionally Omitted] is replaced with the following language: "2.2 Total Capital Contributions. The Company shall be authorized to issue a total of 9,851,744 of the Class A Units (5,543,478 of which shall be reserved for issuance to BCI in the event it -1- 2 exercises all or any portion of its Conversion Right, 3,300,067 of which shall be reserved for issuance to Class B Members in the event they convert the Class B Units into Class A Units pursuant to Section 2.4 hereinbelow, and 696,197 of which shall be reserved for issuance pursuant to the Plan defined below) and 37,951 Class B Units (15,000 reserved for issuance to the Class B Members pursuant to Section 2.3 hereinbelow) at a price and upon such terms as the Managers determine without the issuance of the class A or Class B Units being construed as a recapitalization or reorganization of the Company. 3.2 The first sentence in Section 4.5 Tax Matters partner is amended to read as follows: "The 'tax matters partner' (as such term is defined in Section 6231(a)(7) of the Code) of the Company shall be Boston Pacific, Inc., a California corporation, or any other Member selected by a majority of the Members to succeed it or any of its successors, who shall be subject to the control of the Management Committee." 3.3 Section 5.3 Voting by Members shall be amended to read as follows: "Only the Class A Members shall have the right to vote, except as otherwise provided by law; provided that in the event of the Company is in arrears in distributions to be made pursuant to Section 3.6 by one year (two distributions), the Class B Members, voting as a class, shall be entitled to elect one of the Managers of the Company. This right shall be in addition to any other voting rights. Each class A Member shall have one vote for each class A Unit held by such Member. 3.4 Section 6.6 (c) Appointment of Managers shall be added as follows: "(c) Not withstanding anything to the contrary contained in this Agreement, until the earlier of (I) conversion of the Class B Units into Class A Units, or (ii) BCI exercises its Conversion Right, Boston -2- 3 Pacific, Inc., a California corporation, shall be able to elect one Manager and not participate in the election of the remaining five (5) Managers." 3.5 Section 9.1 (b)(iv) Transfer of Interests shall be amended to read as follows: "(iv) such Transfer shall not impose liability or reporting obligations on the Company or any Member thereof in any jurisdiction, whether domestic or foreign, or result in the Company or any Member thereof becoming subject to the jurisdiction of any court or government entity anywhere other than Delaware." 3.6 Section 9.1 (d) Transfer of Interests shall be added as follows: "Notwithstanding any other provision of this Section 9.1, and subject to BCI's approval, any Member may transfer all or any portion of such Member's Interest to any other Member. 3.7 Schedule 1, Class A Members shall be amended to read as follows: "Schedule 1 CLASS A MEMBERS
Units ----- Boston Pacific, Inc. 62,000 CKE Restaurants, Inc. 2 Authorized Unissued Units 9,789,742 --------- Total Authorized Units 9,851,744" =========
3.8 Schedule 2, Class B Members shall be amended to read as follows: -3- 4 "Schedule 2 CLASS B MEMBERS
Units ----- Boston Pacific, Inc. 22,951 Authorized Unissued Units 15,000 ------ Total Authorized Units 37,951" ======
3.9 Schedule 3, Initial Capital Contributions shall be amended to read as follows: "Schedule 3 INITIAL CAPITAL CONTRIBUTIONS CKE Restaurants, Inc. $ 20.00 (2 Class A Units) Boston Pacific, Inc. 20,000.00 (20,000 Class A Units) 22,951,000.00 (22,951 Class B Units) ------------- $ 23,571,000.00 (Class A and Class B Units)
4.0 RATIFICATION. In all other respects, the Amended Agreement is ratified and confirmed in its entirety. 5.0 COOPERATION. The Members agree to cooperate with the Managers in connection with any of the matters set forth in this Amendment, including executing any documents as may reasonably be requested for the purpose of giving effect to, evidencing, or giving notice of the items set forth in this Amendment. 6.0 SUCCESSORS AND ASSIGNS. This Amendment shall be binding upon, and shall inure to the benefit of, the parties hereto and their respective successors and assigns. 7.0 COUNTERPARTS. Any number of counterparts of this Amendment may be executed. Each counterpart will be deemed to be an original instrument, and all counterparts taken together will constitute one agreement. 8.0 GOVERNING LAW. This Amendment will be governed by the laws of the State of Delaware, without giving effect to principles of conflict of laws of that state. -4- 5 IN WITNESS WHEREOF, the parties hereto have subscribed to this Amendment as of the Effective Date. MEMBERS CLASS A MEMBERS: BOSTON PACIFIC, INC., a California corporation By: /s/ Robin D. Downing ------------------------------ ROBIN DOWNING Its: Chief Financial Officer CKE RESTAURANTS, INC., a California corporation By: /s/ Joseph N. Stein ------------------------------ JOSEPH STEIN Its: Chief Financial Officer CLASS B MEMBERS: BOSTON PACIFIC, INC., a California corporation By: /s/ Robin D. Downing ------------------------------ ROBIN DOWNING Its: Chief Financial Officer -5- EX-10.35 8 2ND AMEND. TO LIMITED LIABILITY COMPANY AGREEMENT 1 EXHIBIT 10.35 SECOND AMENDMENT TO THE AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT OF BOSTON WEST, L.L.C. A DELAWARE LIMITED LIABILITY COMPANY THIS SECOND AMENDMENT TO THE OPERATING AGREEMENT ("Amendment"), of BOSTON WEST, L.L.C., a Delaware limited liability company ("Company"), is made effective May 30, 1995 ("Effective Date"), and is entered into by and among all of the members of the Company whose names are reflected on the signature pages hereof (the "Members"). 1.0 RECITALS. 1.1 CKE RESTAURANTS, INC. and BOSTON PACIFIC, INC. formed the Company pursuant to and in accordance with the Delaware Limited Liability Company Act (6 Del. C. ss. 18-10, et. seq.) ("the Act"), as amended from time to time by entering into a Limited Liability Company Agreement on March 29, 1995 ("Original Agreement"), and filing a Certificate of Formation of the company with the office of the Secretary of State of the State of Delaware on march 29, 1995. 1.2 On April 16, 1996, the Members executed the Amended and Restated Limited Liability Company Agreement ("Amended Agreement"), to append and restate the Original Agreement in its entirety. 1.3 On May 15, 1995, the Members executed the First Amendment to the Amended and Restated Limited Liability Company Agreement. 1.4 Whereas, the Company has sold additional Class A Units and desires to increase the number of its Managers as set forth herein. NOW, THEREFORE, in consideration of the mutual promises set forth herein and for other good and valuable consideration, it is agreed as follows: 2.0 DEFINITIONS. Any undefined capitalized terms herein shall have the same meaning as those set forth in the Amended Agreement. 3.0 AMENDMENTS. The following sections of the Amended Agreement are amended to read as follows: 3.1 Section 5.3 Voting by Members shall be amended to read as follows: "Only the Class A Members shall have the right to vote, except as otherwise provided by law; provided that in the event the Company is in arrears in distributions to be made pursuant to Section 3.6 by -1- 2 one year (two distributions), the Class B Members, voting as a class, shall be entitled to elect one of the Managers of the Company. This right shall be in addition to any other voting rights. The voting rights granted above shall be further restricted in that until the earlier of: (i) conversion of the Class B Units into Class A Units, (ii) BCI's exercise of its Conversion Right, or (iii) the existence of more than six (6) Class A Members (excluding Boston Pacific, Inc., a California corporation ("BPI") and CKE Restaurants, Inc., a California corporation ("CKE")) each Class A Member (excluding BPI and CKE) shall have the right to appoint one (1) Manager regardless of the number of Units owned by the Member (totaling six (6) Managers) and BPI and CKE shall be able to collectively elect the one (1) remaining Manager. However, in the event the Company is in arrears in distributions to be made pursuant to Section 3.6 by one (1) year (two (2) distributions) the Class A Members (excluding BPI and CKE) shall have the right to elect a total of five (5) Managers (with each Member voting having one (1) vote for each Class A Unit held by such Member), BPI and CKE shall be able to collectively elect one (1) Manager, and the Class B Members shall be entitled to elect the one (1) remaining Manager. After the occurrence of any of the events noted in (i), (ii), or (iii) above and for all other voting purposes, each Class A Member shall have one (1) vote for each Class A Unit held by such Member." 3.2 Section 6.2 Number, Tenure and Qualifications of Managers shall be amended to read as follows: Until the earlier of: -2- 3 (i) conversion of the Class B Units into Class A Units, or (ii) BCI's exercise of its Conversion Right, the Management Committee shall be comprised of seven (7) managers (the "Managers"); provided however that after the occurrence of either of the events noted in (i) or (ii) above, the Management Committee shall be comprised of six (6) Managers. The Managers shall be selected in the manner set forth in Section 6.6. The names and addresses of the initial individuals selected to serve as the Managers are set forth on Schedule 5 hereto. The number of Managers comprising the Management Committee may be amended from time to time by the vote or written consent of Members holding at least two-thirds (2/3) of the Class A Units, provided, that from and at all time after the time that the number of Class Units owned by BCI and its successors and assignees (the "BCI Units") constitutes at least a majority of the then outstanding Class A Units (the "BCI Effective Time"), the number of Managers shall be fixed by the Holders of a Majority of the BCI Units. Each Manager shall hold office until the next annual meeting of the Members or until a successor shall have been elected and qualified. Managers need not be residents of the State of Delaware or Members of the Company. No Manager of the Company may, at the same time, serve as an officer or director of CKE Restaurants, Inc., provided that from time to time one (1), but only one (1), Manager may also be an officer or director of CKE Restaurants, Inc. 3.3 Subsection (c) of Section 6.6 shall be deleted in it entirety. 4.0 RATIFICATION. In all other respects, the Amended Agreement is ratified and confirmed in its entirety. 5.0 COOPERATION. The Members agree to cooperate with the Managers in connection with any of the matters set forth in this Amendment, including executing any documents as may reasonably be requested for the purpose of giving effect to, evidencing, or giving notice of the items set forth in this Amendment. -3- 4 6.0 SUCCESSORS AND ASSIGNS. This Amendment shall be binding upon, and shall inure to the benefit of, the parties hereto and their respective successors and assigns. 7.0 COUNTERPARTS. Any number of counterparts of this Amendment may be executed. Each counterpart will be deemed to be an original instrument, and all counterparts taken together will constitute one agreement. 8.0 GOVERNING LAW. This Amendment will be governed by the laws of the State of Delaware, without giving effect to principles of conflict of laws of that state. IN WITNESS WHEREOF, the parties hereto have subscribed to this Amendment as of the Effective Date. MEMBERS CLASS A MEMBERS: BOSTON PACIFIC, INC., a California corporation By: /s/ Robin D. Downing -------------------------------- ROBIN DOWNING Its: Chief Financial Officer CKE RESTAURANTS, INC., a California corporation By: /s/ Joseph N. Stein -------------------------------- JOSEPH STEIN Its: Chief Financial Officer /s/ Gregory G. Brightman ------------------------------------ GREGORY G. BRIGHTMAN /s/ Hollis Gieger, Jr. ------------------------------------ HOLLIS GIEGER, JR. /s/ Donald William Manuel ------------------------------------ DONALD WILLIAM MANUEL [SIGNATURES CONTINUED ON THE FOLLOWING PAGE] -4- 5 EDGEMON PROPERTIES, an Alabama sole proprietorship By /s/ James H. Edgemon ------------------------------- JAMES H. EDGEMON Its: President /s/ J. Thomas Talbot ------------------------------- J. THOMAS TALBOT /s/ S. Kent Stewart ---------------------------------- S. KENT STEWART CLASS B. MEMBERS: BOSTON PACIFIC, INC., a California corporation By: /s/ Robin D. Downing ---------------------------------- ROBIN DOWNING Its: Chief Financial Officer -5- EX-10.36 9 3RD AMEND. TO LIMITED LIABILTY COMPANY AGREEMENT 1 EXHIBIT 10.36 THIRD AMENDMENT TO THE AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT OF BOSTON WEST, L.L.C. A DELAWARE LIMITED LIABILITY COMPANY THIS THIRD AMENDMENT TO THE OPERATING AGREEMENT ("Amendment") of BOSTON WEST, L.L.C., a Delaware limited liability company ("Company"), is made effective as of September 12, 1995 ("Effective Date"), and is entered into by and among all of the members of the Company whose names are reflected on the signature pages hereof (the "Members"). 1. RECITALS. 1.1 CKE RESTAURANTS, INC. and BOSTON PACIFIC, INC. formed the Company pursuant to and in accordance with the Delaware Limited Liability Company Act (6 Del. C. ss. 18-10, et. seq.) (the "Act"), as amended from time to time by entering into a Limited Liability Company Agreement on March 29, 1995 ("Original Agreement"), and filing a Certificate of Formation of the Company with the office of the Secretary of State of the State of Delaware on March 29, 1995. 1.2 On April 16, 1995, the Members executed the Amended and Restated Limited Liability Agreement ("Amended Agreement"), to amend and restate the Original Agreement in its entirety. 1.3 On May 15, 1995, the Members executed the First Amendment to the Amended and Restated Limited Liability Company Agreement. 1.4 On May 30, 1995, the Members executed the Second Amendment to the Amended and Restated Limited Liability Company Agreement. 1.5 Whereas, the Company desires to modify the amount of the Class B Rate applicable to the initial investment in Class B Units as set forth herein. NOW, THEREFORE, in consideration of the mutual promises set forth herein and for other good and valuable consideration, it is agreed as follows: 2. DEFINITIONS. any undefined capitalized terms herein shall have the same meaning as those set forth in the Amended Agreement. -1- 2 3. AMENDMENTS. The following sections of the Amended Agreement are amended to read as follows: 3.1 The definition of "Class B Rate" in Section 1.8 of the ended Agreement shall be amended to read as follows: "Class B Rate" shall mean an annual rate equal to (i) 8.55% with respect to the initial Capital Contribution (i.e., $22,951,000 represented by 22,951 Class B Units) of the original Class B Member and (ii) 9.0% with respect to all other Capital Contributions made by Class B Members after the date of such initial Capital Contribution. 4. RATIFICATION. In all other respects, the Amended Agreement is ratified and confirmed in its entirety. 5. COOPERATION. The Members agree to cooperate with the Managers in connection with any of the matters set forth in this Amendment, including executing any documents as may reasonably be requested for the purpose of giving effect to , evidencing, or giving notice of the items set forth in this Amendment. 6. SUCCESSORS AND ASSIGNS. This Amendment shall be binding upon, and shall inure to the benefit of, the parties hereto and their respective successors and assigns. 7. COUNTERPARTS. Any number of counterparts of this Amendment may be executed. Each counterpart will be deemed to be an original instrument, and all counterparts taken together will constitute one agreement. 8. GOVERNING LAW. This Amendment will be governed by the laws of the State of Delaware, without giving effect to principles of conflict of laws of that state. IN WITNESS WHEREOF, the parties hereto have subscribed to this Amendment as of the Effective Date. CLASS A MEMBERS; BOSTON PACIFIC, INC. a California corporation BY: /s/ Joseph N. Stein ------------------------------- Its: Chief Financial Officer [SIGNATURES CONTINUED ON THE FOLLOWING PAGE] -2- 3 CKE RESTAURANTS, INC., a Delaware corporation BY: /s/ Joseph N. Stein ------------------------------- JOSEPH STEIN Its: Chief Financial Officer /s/ Gregory G. Brightman ---------------------------------- GREGORY G. BRIGHTMAN /s/ Hollis Gieger, Jr. ---------------------------------- HOLLIS GIEGER, JR. /s/ Donald W. Manuel ---------------------------------- DONALD W. MANUEL EDGEMON PROPERTIES, an Alabama sole proprietorship By: /s/ James H. Edgemon ------------------------------ JAMES H. EDGEMON Its: President /s/ J. Thomas Talbot ---------------------------------- J. THOMAS TALBOT /s/ S. Kent Stewart ---------------------------------- S. KENT STEWART CLASS B MEMBERS: BOSTON PACIFIC, INC., a California corporation By: /s/ Joseph N. Stein ------------------------------ Its: Chief Financial Officer -3- EX-10.37 10 4THAMEND. TO LIMITED LIABILITY COMPANY AGREEMENT 1 EXHIBIT 10.37 FOURTH AMENDMENT TO THE AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT OF BOSTON WEST, L.L.C. A DELAWARE LIMITED LIABILITY COMPANY THIS FOURTH AMENDMENT TO THE OPERATING AGREEMENT ("Amendment") of BOSTON WEST, L.L.C., a Delaware limited liability company (the "Company"), is made effective January 31, 1996 ("Effective Date"), and is entered into by and among all of the members of the Company whose names and signatures are reflected on the signature pages hereof (the "Members"). 1. RECITALS. 1.1 CKE RESTAURANTS, INC. and BOSTON PACIFIC, INC. formed the Company pursuant to and in accordance with the Delaware Limited Liability Company Act (6 Del. C. ss. 18-10, et. seq.) (the "Act"), as amended from time to time by entering into a Limited Liability Company Agreement on March 29, 1995 (the "Original Agreement"), and by filing a Certificate of Formation of the Company with the office of the Secretary of State of Delaware on March 29, 1995. 1.2 On April 16, 1995 the Members executed the Amended and Restated Limited Liability Company Agreement (the "Amended Agreement"), to amend and restate the Original Agreement in its entirety. 1.3 On May 15, 1995 the Members executed the first Amendment to the Amended Agreement. 1.4 On May 30, 1995 the Members executed the Second Amendment to the Amended Agreement. 1.5 On September 12, 1995 the Members executed the Third Amendment to the Amended Agreement. 1.6 The Members now have determined that Sections 3.5 and 8.3 of the Amended Agreement fail to fully and accurately reflect the agreement of the Members as to the allocation of Net Income and Net Losses (as defined in the Amended Agreement) among the Members for federal and other income tax purposes. Specifically, the Amended Agreement could be interpreted so as to require a full allocation of Net Income to the Members in proportion to their Class A Units to as to eliminate a negative balance in the Class A Members' Capital Accounts, without making adjustments to reflect (or otherwise taking into account) the prior allocation of Net Losses, solely for federal and other applicable income tax purposes, to - 1 - 2 Members other than in proportion to their Class A Units in accordance with the requirements of federal income tax laws and regulations; such an interpretation of the Amended Agreement is not in accordance with the Members' understanding of the way in which Net Income and Net Loss is to be allocated among the Members for federal and other income tax purposes, as such allocations are described in the Confidential Private Placement Memorandum dated on may 15, 1995, as amended, in connection with the offering of $2,500,000 of Class A Membership Units in the Company. 1.7 On October 30, 1995 the Internal Revenue Service published proposed regulations (PS-34-92) governing the requirements for the designation of the tax matters partner for limited liability companies which are organized as partnerships for federal income tax purposes. NOW, THEREFORE, in consideration of the mutual promises set forth herein and for other good and valuable consideration, it is agreed as follows: 2. DEFINITIONS. Any undefined capitalized terms used herein shall have the same meaning as set forth in the Amended Agreement. 3. AMENDMENTS. The following sections of the Amended Agreement are further amended in the manner set for below, and to read as set forth below: 3.1 Section 3.5(g) shall be renumbered as Section 3.5(i); Section 3.5(f) shall be deleted, and the following three sections shall be inserted after Section 3.5(e): "(f) The allocations set forth in Sections 3.2, 3.3, 3.4 and 3.5(a) through (e) shall be interpreted and applied in such as manner as to comply with the provisions of Section 704(b) of the code and the regulations issued thereunder (the "Substantial Economic Effect Provisions") to the maximum extent possible. However, to the extent that, in the judgement of the Managers, such allocations as required by this Agreement do not meet the requirements of the Substantial Economic Effect Provisions, the Managers are authorized, solely for federal income tax purposes and, if applicable, state and local income tax purposes, to allocate those items which would not meet the requirements of the Substantial Economic Effect Provisions if allocated pursuant to the Agreement in a manner that will satisfy the requirements of the Substantial Economic Effect Provisions. (g) The allocations set forth in Section 3.5(a) through (f) hereof (the "Regulatory Allocations") shall be taken into account in allocating Net Income and Net Losses among - 2 - 3 the Members so that, to the extent possible, the net amount of such allocations of Net Income and Net Losses for federal income tax purposes and, if applicable, state and local income tax purposes, shall be equal to the net amount that would have been allocated to each Member if the Regulatory Allocations had not been taken into account. (h) The Regulatory Allocations are intended to comply with the Substantial Economic Effect Provisions. Notwithstanding any other provisions of this Agreement, to the extent that the Regulatory Allocations result in allocations for federal income tax purposes, and, if applicable, for state and local income tax purposes, that differ from the allocations provided by Sections 3.2, 3.3, and 3.4 hereof without regard to the Regulatory Allocations, such differences shall be corrected or reversed as quickly as reasonably possible by means of subsequent allocations of Net Income and Net Losses among the Members solely for federal income tax purposes and, if applicable, state and local income tax purposes, provided that such subsequent allocations shall meet the requirements of the Substantial Economic Effect Provisions as determined by the Managers in their sole discretion." 3.2 The first sentence of Section 4.5 Tax Matters Partner is amended to read as follows: "The 'tax matters partner' (as such term is defined in Section 6231(a)(7) of the Code) of the Company shall be Hollis Gieger, Jr., of any other Member or Member-Manager which is qualified to serve as tax matters partner in accordance with applicable Treasury Regulations, and which is selected by a majority of the Members to succeed it or any of its successors, which shall be subject to the control of the Management Committee." 3.3 Section 8.3(c) is amended to read as follows: "(c) Net Income or Net Loss of the company for the year of liquidation shall be credited or charged to the Capital Accounts of the Members in accordance with the allocation provisions set forth in Sections 3.2, 3.3, 3.4 and 3.5 hereof." 3.4 The final two sentences of Section 8.3(d) are amended to read as follows: - 3 - 4 "Third, to the Class B Members up to the amount equal to the positive balance of the Capital Accounts of the Class B Members (as such Capital Accounts are maintained for federal income tax purposes, taking into account the adjustments, if any, made in accordance with Sections 3.5(f) and 3.5(g) hereof). Fourth, to the Class A Members up to the amount equal to the positive balance of the Capital Accounts of the Class A Members (as such Capital Accounts are maintained for federal income tax purposes, taking into account the adjustments, if any, made in accordance with Sections 3.5(f) and 3.5(g) hereof)." 4. RATIFICATION. In all other respects, the Amended Agreement is ratified and confirmed in its entirety. 5. COOPERATION. The Members agree to cooperate with the Managers in connection with any of the matters set forth in this Amendment, including the execution of any documents which may reasonably be requested for the purpose of giving effect to, evidencing, or giving notice of the Amendments set forth herein. 6. SUCCESSORS AND ASSIGNS. This Amendment shall be binding upon, and shall inure to the benefit of, the parties hereto and their respective successors and assigns. 7. COUNTERPARTS. Any number of counterparts of this Amendment may be executed. Each such executed counterpart shall be deemed to be an original instrument, and all such counterparts taken together shall constitute one agreement. 8. GOVERNING LAW. This Amendment will be governed by the laws of the State of Delaware, without giving effect to principles of conflict of laws of that state. - 4 - 5 IN WITNESS WHEREOF, the parties hereto have subscribed to this Amendment as of the date first above written. MEMBERS CLASS A MEMBERS: BOSTON PACIFIC, INC. a California corporation By: /s/ Joseph Stein ---------------------------- JOSEPH STEIN Its: chief Financial Officer CKE RESTAURANTS, INC. a California corporation By: /s/ Joseph Stein ---------------------------- JOSEPH STEIN Its: Chief Financial Officer /s/ Gregory G. Brightman -------------------------------- GREGORY G. BRIGHTMAN /s/ Hollis Gieger, Jr. -------------------------------- HOLLIS GIEGER, JR. /s/ Donald W. Manuel -------------------------------- DONALD W. MANUEL EDGEMON PROPERTIES, an Alabama sole proprietorship By: /s/ James H. Edgemon ----------------------------- JAMES H. EDGEMON Its: Owner [SIGNATURES CONTINUED ON NEXT PAGE] - 5 - 6 /s/ S. Kent Stewart ------------------------------ S. KENT STEWART /s/ Michael J. Adams ------------------------------ MICHAEL J. ADAMS /s/ David Lamm ------------------------------ DAVID LAMM BALLARD INVESTMENTS By: /s/ Michael B. Ballard -------------------------- Its: General Partner -------------------------- CLASS B MEMBERS: BOSTON PACIFIC, INC. ------------------------------- a California corporation By: /s/ Joseph Stein -------------------------- JOSEPH STEIN Its: Chief Financial Officer - 6 - EX-10.38 11 UNIT OPTION AGREEMENT 1 EXHIBIT 10.38 UNIT OPTION AGREEMENT THIS UNIT OPTION AGREEMENT is issued as of this 12th day of September, 1995, by Boston West, L.L.C., a Delaware limited liability company, (the ("COMPANY"), to Boston Pacific Inc., a California corporation ("OPTIONEE"). WITNESSETH: WHEREAS, the Company is of the opinion that the interests of the Company will be advanced by encouraging Optionee to acquire or increase its proprietary interest in the Company, thus providing Optionee with a more direct stake in its welfare and assuring a closer identification of its interests with those of the Company. NOW, THEREFORE, in consideration of the premises set forth above and for other good and valuable consideration, the receipt of which is hereby acknowledged, the Company hereby grants an option to purchase units of the Company to Optionee on the terms hereinafter expressed. 1. OPTION GRANT. The Company hereby grants to Optionee an option to purchase a total of 31,000 Class A Units (as defined in the Limited Liability Company Agreement of the Company) at an option exercise price of $10 per Class A Unit. 2. TIME OF EXERCISE. This option may not be exercised before January 15, 1996 but may be exercised (in the manner provided in paragraph 3 below) in whole or in part, and from time to time thereafter; provided, however, this option may not be exercised after January 15, 1997. Notwithstanding the foregoing, once those certain investors, who are required to pay the Company by January 15, 1996, an aggregate sum of $1,250,000 in connection with the completion of their purchase of Class A Units of the Company, pay such sum in full to the Company, Optionee shall be required to exercise this option within 15 days following Optionee's receipt of written notice from the Company of the completion of such payment in full. 3. METHOD OF EXERCISE. this option may be exercised only by notice in writing delivered to the Treasurer of the Company and accompanied by: (a) The full purchase price of the Class A Units purchased payable by a certified or cashier's check payable to the order of the Company; 2 (b) Such other documents or representations as the Company may reasonably request in order to comply with securities, tax or other laws then applicable to the exercise of the option; and, (c) Written notice of exercise to Boston Chicken, Inc. 4. ADJUSTMENTS. (a) If the Company shall at any time change the number of issued Class A Units without new consideration to the Company (such as by stock dividend, stock split, recapitalization, reorganization, exchange of Class A Units, liquidation, combination or other change in corporate structure affecting the Class A Units) or make a distribution of cash or property which has a substantial impact on the value of issued Class A Units, the total number of Class A Units then remaining subject to purchase hereunder and the option exercise price per Class A Unit shall be adjusted so that the total consideration payable to the Company upon the purchase of all Class A Units not theretofore purchased shall not be changed. (b) In the case of any sale of assets, merger, consolidation, combination or other corporate reorganization or restructuring of the Company with or into another corporation which results in the outstanding Class A Units being converted into or exchanged for different securities, cash or other property, or any combination thereof (an "ACQUISITION"), Optionee shall have the right thereafter and during the term of this Option (subject however to all of the terms and conditions set forth herein), to receive upon exercise thereof the Acquisition Consideration (as defined below) receivable upon the Acquisition by a holder of the number of Class A Units which might have been obtained upon exercise of this Option or portion thereof, as the case may be, immediately prior to the Acquisition. The term "ACQUISITION CONSIDERATION" shall mean the kind and amount of securities, cash or other property or any combination thereof receivable in respect of one Class A Unit upon consummation of an Acquisition. 5. RIGHTS AND RESTRICTIONS. The Class A Units issuable upon exercise of this Option shall be entitled to, and shall be subject to, all of the rights, preferences, privileges and restrictions then applicable to the other Class A Units then held by Optionee including but not limited to the Pledge Agreement dated April 16, 1995. 6. MISCELLANEOUS. (a) PROMPT DELIVERY OF DOCUMENTS. To the extent that any documents are required to be executed by a party to 3 effectuate this Agreement, the party will execute and deliver the document as promptly as practicable. (b) Amendment. This Agreement cannot be altered, amended, or modified, in any respect, except by a writing duly executed by all of the parties and with the prior written consent of Boston Chicken, Inc., which consent will not be unreasonably withheld or delayed. (c) entire Agreement. This Agreement, including the Exhibits referenced herein, is the entire agreement between the parties with respect to the subject matter hereof and all prior agreements, understandings, oral agreements and writings are expressly superseded hereby. (d) SEVERABILITY. The provisions of this Agreement are severable. If a court of competent jurisdiction rules that any provision of this Agreement is invalid or unenforceable, the court's ruling will not effect the validity and enforceability of the other provisions of this Agreement. (e) GOVERNING LAW. This Agreement and the legal relations between the parties shall be governed by and construed in accordance with the internal laws of the State of Delaware, without giving effect to principles of conflicts of laws. (f) HEADINGS. The title of the various paragraphs in this Agreement are intended solely for convenience of reference, and are not intended and shall not be deemed for any purpose whatsoever to modify, explain or place any construction upon any of the provisions of this Agreement and shall not affect the meaning or interpretation of this Agreement. (g) COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. [SIGNATURE PAGE FOLLOWS] 4 IN WITNESS WHEREOF, the Company has caused this Unit Option Agreement to be executed on the date first above written. BOSTON WEST, L.L.C., A Delaware limited liability company By: /s/ Robin D. Downing ---------------------------------- Its CFO ACCEPTED BY OPTIONEE: BOSTON PACIFIC, INC. By /s/ Joseph N. Stein ---------------------------------- Its CFO The undersigned agrees that the transaction contemplated by this Agreement shall not be a "Default" as defined in the Secured Loan Agreement dated April 16, 1995. BOSTON CHICKEN, INC. a Delaware corporation By: /s/ Donald J. Bingle ---------------------------------- Its Vice President EX-10.39 12 UNIT REPURCHASE AGREEMENT 1 EXHIBIT 10.39 UNIT REPURCHASE AGREEMENT THIS UNIT REPURCHASE AGREEMENT is made as of this 12th day of September, 1995 by and between Boston West, L.L.C., a Delaware limited liability company ("BOSTON WEST"), and Boston Pacific, Inc., a California corporation ("BPI"). WHEREAS, BPI owns an aggregate of 62,000 Class Units (as defined in the Limited Liability Company Agreement of Boston West); and, WHEREAS, in accordance with the terms, conditions and provisions of this Agreement, Boston West desires to repurchase from BPI, and BPI desires to sell to Boston West, 31,000 Class A Units (the "REPURCHASED UNITS"). FOR GOOD AND VALUABLE CONSIDERATION, the sufficiency and receipt of which is hereby acknowledged, and in consideration of the mutual covenants and agreements set forth herein, the parties hereby agree as follows: ARTICLE 1 REPURCHASE OF THE UNITS 1.1 TRANSFER OF THE UNITS. On the date hereof, BPI will tender for purchase and sell, transfer, assign, release and convey to Boston West, as provided herein, all of BPI's right, title and interest in the Repurchased Units. 1.2 PAYMENT. On the date hereof, Boston West shall pay to BPI the sum of Three Hundred Ten Thousand Dollars ($310,000.00) as full payment and satisfaction for the repurchase of the Repurchase Units. ARTICLE 2 REPRESENTATIONS AND WARRANTIES 2.1 BY BPI. BPI represents and warrants to Boston West that as of the date hereof: 2.1.1 AUTHORITY AND RIGHT. BPI has the full power, authority and right to execute and deliver this Agreement, and consummate the transactions contemplated hereby. 2.1.2 BINDING AND ENFORCEABLE. This Agreement has been duly and validly executed and delivered by BPI and constitutes a legal, valid and binding agreement of BPI enforceable against BPI in accordance with its terms, except as the same may be limited by bankruptcy, insolvency, reorganization 2 or other laws affecting the enforcement of creditors' rights generally now or hereafter in effect, and subject to the availability of equitable remedies. 2.1.3 OWNERSHIP OF REPURCHASED UNITS. BPI has the absolute right to sell, transfer, assign and convey the Repurchased Units to Boston West, free and clear of all security interests, liens, pledges, encumbrances, adverse claims and demands of every kind or character and subject to no legal or equitable restrictions of any kind. 2.1.4 CONSENTS. No consent, approval or other authorization of any third party is required in connection with the execution, delivery and performance by BPI of BPI's obligations under this Agreement, except for those consents which have already been obtained. 2.2 BY BOSTON WEST. Boston West represents and warrants to BPI that as of the date hereof: 2.2.1 AUTHORITY AND RIGHT. Boston West has the full power, authority and right to execute and deliver this Agreement and to consummate the transactions contemplated hereby. 2.2.2 BINDING AND ENFORCEABLE. This Agreement has been duly and validly executed and delivered by Boston West and constitutes a legal, valid and binding agreement of Boston West enforceable against BPI in accordance with its terms, except as the same may be limited by bankruptcy, insolvency, reorganization or other laws affecting the enforcement of creditors' rights generally now or hereafter in effect, and subject to the availability of equitable remedies. 2.2.3 CONSENTS. No consent, approval or other authorization of any third party is required in connection with the execution, delivery and performance by Boston West of Boston West's obligations under this Agreement, except for those consents which have already been obtained. 2.3 BPI'S CLOSING DOCUMENTS. BPI shall execute and deliver, or cause to be delivered, to Boston West such documents and agreements as may be either reasonable or necessary to carry out the purpose and intention of this Agreement. 2.4 BOSTON WEST'S CLOSING DOCUMENTS. Boston West shall execute and deliver to BPI such documents and agreements as may be either reasonable or necessary to carry out the purpose and intention of this Agreement. 3 ARTICLE 3 MISCELLANEOUS 3.1 PROMPT DELIVERY OF DOCUMENTS. to the extent that any documents are required to be executed by a party to effectuate this Agreement, the party will execute and deliver the document as promptly as practicable. 3.2 AMENDMENT. This Agreement cannot be altered, amended, or modified, in any respect, except by a writing duly executed by all of the parties and with the prior written consent of Boston Chicken, inc., which consent will not be unreasonably withheld or delayed. 3.3 ENTIRE AGREEMENT. This Agreement, including the Exhibits referenced herein, is the entire agreement between the parties with respect to the subject matter hereof and all prior agreements, understandings, oral agreements and writings are expressly superseded hereby. 3.4 SEVERABILITY. The provisions of this Agreement are severable. If a court of competent jurisdiction rules that any provision of this Agreement is invalid or unenforceable, the court's ruling will not effect the validity and enforceability of the other provisions of this Agreement. 3.5 GOVERNING LAW. this Agreement and the legal relations between the parties shall be governed by and construed in accordance with the internal laws of the State of [Delaware], without giving effect to principles of conflicts of laws. 3.6 HEADINGS. the title of the various paragraphs in this Agreement are intended solely for convenience of reference, and are not intended and shall not be deemed for any purpose whatsoever to modify, explain or place any construction upon any of the provisions of this Agreement and shall not affect the meaning or interpretation of this Agreement. 3.7 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. [SIGNATURE PAGE FOLLOWS] 4 IN WITNESS WHEREOF, the parties hereto have entered into and executed this Unit Repurchase Agreement on the date first indicated above. BOSTON WEST, L.L.C., a Delaware limited liability company By: /s/ Robin D. Downing ------------------------------------ Its: CFO BOSTON PACIFIC, INC., a California corporation By: /s/ Joseph N. Stein ------------------------------------ Its: CFO The undersigned agrees that the transaction contemplated by this Agreement shall not be a "Default" as defined in the Secured Loan Agreement dated April 16, 1995. BOSTON CHICKEN, INC. a Delaware corporation By: /s/ Donald J. Bingle ------------------------------------ Its: Vice President EX-10.40 13 TERM LOAN AND SECURITY AGREEMENT 1 EXHIBIT 10.40 TERM LOAN AND SECURITY AGREEMENT BETWEEN CARL KARCHER ENTERPRISES, INC., AS BORROWER AND HELLER FINANCIAL, INC., AS LENDER CLOSING DATE: DECEMBER 19, 1995 PRINCIPAL AMOUNT: $7,000,000 2 TABLE OF CONTENTS 1. Definitions, Terms and References................................................................. 1 1.1 Certain Definitions....................................................................... 1 1.2 Use of Defined Terms...................................................................... 8 1.3 Accounting Terms.......................................................................... 8 1.4 UCC Terms................................................................................. 8 1.5 Terminology............................................................................... 8 1.6 Exhibits.................................................................................. 8 2. The Financing..................................................................................... 8 2.1 Term Loan Facility........................................................................ 8 2.2 Amortization.............................................................................. 9 2.3 Interest.................................................................................. 9 2.4 Term Notes................................................................................ 10 2.5 Security Deposit/Closing Fee.............................................................. 10 2.6 Late Charge; Liquidated Damages........................................................... 10 2.7 Voluntary Prepayment...................................................................... 11 2.8 Nature of Charges Imposed................................................................. 11 2.9 Savings Clause............................................................................ 12 3. Security Interest -- Collateral................................................................... 13 3.1 Representations and Warranties............................................................ 14 3.2 Special Provisions Regarding Sales and Closings of Financed Restaurant Locations.......... 16 4. General Representations and Warranties............................................................ 17 4.1 Existence................................................................................. 18 4.2 Authority................................................................................. 18 4.3 No Material Litigation.................................................................... 18 4.4 Payment of Taxes.......................................................................... 18 4.5 No Violations Generally................................................................... 18 4.6 Financial Statements; Liabilities......................................................... 19 4.7 Pollution and Environmental Control....................................................... 19 5. Affirmative Covenants............................................................................. 20 5.1 Books and Records......................................................................... 20 5.2 Periodic Financial Statements............................................................. 20 5.3 Annual Financial Statements............................................................... 21 5.4 Compliance Certificates................................................................... 21 5.5 SEC Filings............................................................................... 21 5.6 Payment of Taxes.......................................................................... 21 5.7 Maintenance of Insurance.................................................................. 22 5.8 Preservation of Existence................................................................. 23 5.9 Compliance with Laws...................................................................... 23
3 5.10 Environmental Law Complaint............................................................... 23 5.11 Litigation; Events of Default, Etc........................................................ 25 6. Negative Covenant................................................................................. 25 6.1 Dividends and Distributions.................................................................. 25 6.2 Green Burrito Co-Branding Arrangements....................................................... 25 7. Events of Default................................................................................. 26 7.1 Term Notes................................................................................ 26 7.2 Other Obligations......................................................................... 26 7.3 Misrepresentations........................................................................ 26 7.4 Covenants................................................................................. 26 7.5 Other Debts............................................................................... 26 7.6 Voluntary Bankruptcy...................................................................... 26 7.7 Involuntary Bankruptcy.................................................................... 27 7.8 Judgments................................................................................. 27 7.9 Change of Control......................................................................... 27 7.10 Loss of Collateral........................................................................ 27 7.11 Guarantor................................................................................. 28 7.12 Total Debt Service Coverage Ratio......................................................... 28 7.13 Total Liabilities to Total Net Worth Ratio................................................ 29 7.14 Material Agreements....................................................................... 29 8. Remedies.......................................................................................... 29 8.1 Acceleration of the Obligations........................................................... 29 8.2 Remedies of a Secured Party............................................................... 30 8.3 Repossession of the Collateral............................................................ 30 8.4 Other Remedies............................................................................ 30 9. Miscellaneous..................................................................................... 31 9.1 Waiver.................................................................................... 31 9.2 Governing Law............................................................................. 31 9.3 Survival.................................................................................. 31 9.4 No Assignment by Borrower; Lender may Assign.............................................. 31 9.5 Counterparts.............................................................................. 32 9.6 Reimbursement............................................................................. 32 9.7 Successors and Assigns.................................................................... 32 9.8 Severability.............................................................................. 32 9.9 Notices................................................................................... 33 9.10 Entire Agreement - Amendment.............................................................. 33 9.11 Time of the Essence....................................................................... 33 9.12 Interpretation............................................................................ 34 9.13 Lender Not a Joint Venturer............................................................... 34 9.14 Jurisdiction.............................................................................. 34 9.15 Payment on Non-Business Days.............................................................. 34 9.16 Waiver of Rights.......................................................................... 34 9.17 Cure of Defaults by Lender................................................................ 35
4 9.18 Recitals.................................................................................. 35 9.19 Attorney-in-Fact.......................................................................... 35 9.20 Sole Benefit.............................................................................. 35 9.21 Remedies.................................................................................. 35 9.22 Indemnity................................................................................. 35 9.23 Acceptance................................................................................ 36 10. Conditions Precedent.............................................................................. 36
5 TERM LOAN AND SECURITY AGREEMENT THIS TERM LOAN AND SECURITY AGREEMENT, made, entered into and effective as of the 19th day of December, 1995, by and between CARL KARCHER ENTERPRISES, INC., a California corporation ("Borrower"), and HELLER FINANCIAL, INC., a Delaware corporation ("Lender"); W I T N E S S E T H : WHEREAS, Borrower has applied to Lender for a term loan facil ity in the principal amount of Seven Million Dollars ($7,000,000), the proceeds from which, when obtained, will be used by Borrower to finance the renovation of existing Carl's Jr. restaurants owned by Borrower, the conversion of existing Carl's Jr. restaurants to a co-branded concept with Green Burrito and the construction of new Carl's Jr. restaurants and for general corporate purposes of Borrower; and WHEREAS, Lender has considered Borrower's request for such financing and is willing to extend such financing to Borrower for such purposes in accordance with the terms of this Agreement upon the execution of this Agreement by Borrower, compliance by Borrower with all of the terms and provisions of this Agreement and fulfillment by Borrower of all conditions precedent to Lender's obligations herein contained; NOW, THEREFORE, in consideration of the foregoing premises, to induce Lender to extend the financing provided for herein, and for other good and valuable consideration, the sufficiency and receipt of all of which are acknowledged by Borrower, Lender and Borrower agree as follows: 1. DEFINITIONS, TERMS AND REFERENCES. 1.1. CERTAIN DEFINITIONS. In addition to such other terms as are elsewhere defined herein, as used in this Agreement and in any Exhibits, the following terms shall have the following meanings, unless the context requires otherwise: "Agreement" shall mean this Term Loan and Security Agreement, as amended or supplemented from time to time. "Applicable Rate" shall mean the Fixed Rate or the Default Rate, as applicable to each Term Loan pursuant to Section 2.3 hereof. "Bankruptcy Code" shall mean Title 11 of the United States Code, as amended from time to time. 1 6 "Borrower" shall have the meaning ascribed thereto in the ini tial recitals to this Agreement. "Business Day" shall mean a day on which Lender is open for the conduct of business at its offices in Atlanta, Georgia and Chicago, Illinois. "Closing Date" shall mean the date of this Agreement, as specified hereinabove. "Collateral" shall mean, collectively, the Equipment Col lateral, the Real Estate Collateral and any and all other property of Borrower described in Article 3, or any part thereof, or else where herein or in any Loan Document, all as the context shall require, in which Lender has, or is to have, or hereafter may ob tain, a security interest, lien or encumbrance pursuant thereto, as security for payment of the Obligations. "Compliance Certificate" shall mean a certificate of Borrower executed by the chief financial officer of Borrower, on Borrower's behalf, stating that no Event of Default or Default Condition has occurred or exists, or if an Event of Default or Default Condition has occurred or exists, specifying the nature and period of exist ence thereof and what action Borrower has taken or proposes to take with respect thereto. "Contaminant" shall mean those substances which are regulated by or form the basis of liability under federal, state or local environmental, health and safety statutes or regulations including, without limitation, asbestos, polychlorinated biphenyls ("PCBs"), radioactive substances, petroleum, petroleum products, each "hazardous substance", as defined in Section 25281(f) of the California Health and Safety Code, "waste", as defined in Section 13050(d) of the California Water Code, or any other material or substance which constitutes a material health, safety or environ mental hazard to any Person or Property. "Default Condition" shall mean the occurrence of any event which, after satisfaction of any requirement for the giving of notice or the lapse of time, or both, would become an Event of Default. "Default Rate" shall mean, as to each Term Loan, that simple interest rate equal to two percent (2%) per annum in excess of the Fixed Rate applicable to such Term Loan. "Environmental Claim" shall mean any notice of violation, claim, suit, demand, abatement or other order or direction (condi tional or otherwise) by any Governmental Authority or any Person for personal injury (including sickness, disease or death), tan gible or intangible property damage, damage to the 2 7 environment, nuisance, pollution, contamination or other adverse effects on the environment, or for fines, penalties or restrictions, resulting from or based upon (i) the existence, or the continuation of the existence, of a Release (including, without limitation, sudden or non-sudden, accidental or non-accidental Releases) of, or exposure to, any Contaminant, odor or audible noise (other than noise resulting from the use of Borrower's drive-thru speaker equipment at its restaurant locations) or other release or emission in, into or onto the environment (including, without limitation, the air, ground, surface water, groundwater or any surface) in, by, from, or related to any Property, (ii) the environmental aspects of the transportation, storage, treatment or disposal of materials, in connection with the operation of any Property or (iii) the violation, or alleged violation, of any statutes, ordinances, orders, rules, regulations, Permits, licenses, registrations or ap provals of or from any Governmental Authority relating to envi ronmental matters connected with any Property. "Environmental Laws" shall mean all laws relating to the en vironmental, safety, health and the regulation of Contaminants, including, without limitation, the Comprehensive Environmental Response, Compensation, and Liability Act (42 U.S.C. ss. 9601 et seq.), the Superfund Amendments and Reauthorization Act of 1986, Public Law No. 99-499, 100 Stat. 163, the Hazardous Material Transportation Act (49 U.S.C. ss. 1801 et seq.), the Resource Con servation and Recovery Act (42 U.S.C. ss. 6901 et seq.), the Clean Water Act (33 U.S.C. ss. 1251 et seq.), the Clean Air Act (42 U.S.C. ss. 7401 et seq.), the Toxic Substances Control Act, as amended (15 U.S.C. ss. 2601 et seq.), the Federal Insecticide, Fungicide, and Rodenticide Act (7 U.S.C. ss. 136 et seq.), the Occupational Safety and Health Act (29 U.S.C. ss. 651 et seq.), Division 20 of the California Health and Safety Code, and Division 7 of the California Water Code, as such laws have been and hereafter may be amended or supplemented, and any analogous future federal, or present or future state or local laws and all rules and regulations promulgated pursuant thereto. "Equipment Collateral" shall mean all equipment, machinery, furniture, furnishings and fixtures located on, or used or useful in the operation of a Restaurant Business at each Financed Res taurant Location, including, without limitation, each Restaurant, together with all furniture, fixtures and equipment in each Restau rant, any and all lighting (including without limitation any and all lighting fixtures, lighting pedestals, and flood lights), re movable signage of all varieties, sprinkler controls, sprinkler solenoids, sprinkler heads, exterior menu boards and exterior in tercom ordering systems, exterior music speakers and pedestals, and any and all personal property of any kind or nature contained in, on, or around and/or associated with in any manner the operation of each Restaurant, and all building and construction 3 8 materials, supplies and equipment incorporated in each Restaurant and all machinery, appliances, pipes, conduits, generators, engines, pumps, motors, compressors, boilers, condensing units, disposals, sprinklers, wiring, and furnishings of every kind and description which may be used or useful in connection with the operation of and located inside each Restaurant; all outside seats, tables and umbrellas, outside trash bins and trash cans; all outside removable electrical transformers; all grills, ranges, fryers, broilers, ice machines, ice cream machines, warmers, refrigerators, freezers, ov ens, toasters, mixers and grinders; all security, fire, smoke and other alarm systems; all cash registers and point-of-sale termi nals; all computers (hardware and software); all in-store com munication devices; together with any and all extensions, addi tions, improvements, betterments, after-acquired property, renew als, replacements and substitutions or proceeds from a voluntary or involuntary sale, liquidation or conversion of any of the fore going; and all attachments, additions and accessions thereto, and any and all tools, cooking and cleaning utensils, repair parts and spare parts therefor; all whether now or hereafter existing. "Event of Default" shall mean any of the events or conditions described in Article 7, provided that any requirement for the giv ing of notice or the lapse of time, or both, has been satisfied. "Financed Restaurant Location" shall mean each parcel of real property owned by Borrower and set forth and described on Exhibit "A" attached hereto on which Borrower is conducting, or is to con duct, a Restaurant Business out of a Restaurant, together with all buildings and other improvements thereto and all appurtenances thereto. After acceptance thereof by Lender pursuant to Section 3.2 hereof, each Substitute Financed Restaurant Location shall be a Financed Restaurant Location for all purposes of this Agreement. "Fixed Rate" shall mean, as to each Term Loan, a simple inter est rate equal to ______________ percent (____%) per annum. "GAAP" shall mean generally accepted accounting principles which are (a) consistent with the principles promulgated or adopted by the Financial Accounting Standards Board and its predecessors as in effect on January 1, 1993, (b) such that a certified public accountant would, insofar as the use of accounting principles is pertinent, be in a position to deliver an unqualified opinion as to financial statements in which such principles have been properly applied and (c) applied on a basis consistent with prior periods. "Governmental Authority" shall mean any nation or government, federal, state, city, town, municipality, county, local or 4 9 political subdivision thereof or thereto and any department, commission, instrumentality or agency exercising executive, legislative, judi cial, regulatory or administrative functions on behalf thereof. "Guarantor" shall mean, CKE Restaurants, Inc., a Delaware corporation. "Headquarters" shall mean the principal place of business and chief executive of Borrower, and the office where all books and records of Borrower are maintained, being 1200 North Harbor Boule vard, Anaheim, California 92803. "Indebtedness" shall mean all obligations, contingent and oth erwise, which in accordance with GAAP should be classified upon an obligor's balance sheet as liabilities, or to which reference should be made by footnotes thereto, including, without limitation, in any event and whether or not so classified: (a) all debt and similar monetary obligations, whether direct or indirect; (b) all liabilities secured by any mortgage, pledge, security interest, lien, charge, or other encumbrance existing on property owned or acquired subject thereto, whether or not the liability secured thereby shall have been assumed; and (c) all guarantees, endorsements and other contingent obligations, whether direct or indirect, in respect of Indebtedness of others, including any ob ligation to supply funds to or in any manner to invest in, directly or indirectly, the debtor, to purchase Indebtedness, or to assure the owner of Indebtedness against loss, through an agreement to purchase goods, supplies, or services for the purpose of enabling the debtor to make payment of the Indebtedness held by such owner or otherwise, and the obligations to reimburse the issuer in respect of any letters of credit. "Independent Accountants" shall mean KPMG Peat Marwick or an other firm of nationally recognized independent certified public accountants selected on behalf of Guarantor and Borrower by the Board of Directors of Guarantor and reasonably acceptable to Lender. "Lender" shall have the meaning ascribed thereto in the initial recitals to this Agreement. The term "Lender" shall also include any Participant to whom Lender shall assign, in whole or in part, its right, title and interest in and to the Obligations and here under subsequent to the Closing Date. "Loan Documents" shall mean this Agreement, each Term Note, each Mortgage, each financing statement, and each and every other document, instrument, certificate and agreement executed and/or delivered by Borrower in connection herewith, or any one, more, or all of the foregoing, all as the context shall require. 5 10 "Material Adverse Change" shall mean (a) any change occurring in the business, operations, properties or condition (financial or otherwise) of Borrower or Guarantor, which materially and adversely affects (i) the ability of Borrower or Guarantor to own or operate its assets or conduct its business as a going concern, (ii) the collateral value to Lender of the whole of, or any material portion of, the Collateral, or (iii) the ability of Borrower to pay the Obligations as and when due and payable or otherwise perform its obligations hereunder or under the other Loan Documents; or (iv) the ability of Guarantor to perform its obligations to Lender under its guaranty of the Obligations; or (b) the failure or inability, of either Borrower or Guarantor to pay or perform its obligations to its creditors generally. "Material Adverse Effect" shall mean an effect that has re sulted in, will result in, or is reasonably likely to result in, a Material Adverse Change. "Material Agreements" shall mean all loan and other debt in struments and agreements; all management, employment and labor agreements; and any other agreements, not specified hereinabove, the loss, dimunition or impairment of which would have, or would reasonably be expected to have, a Material Adverse Effect. "Mortgage" shall mean each mortgage, deed of trust or similar instrument pursuant to which Lender shall obtain a mortgage lien, security interest or security title on or in any right, title and ownership of Borrower, as owner, in and to any Financed Restaurant Location. "Obligations" shall mean and include any and all indebtedness, liabilities and obligations of Borrower to Lender arising hereunder or as a result hereof, whether evidenced by the Term Notes or otherwise, and any and all extensions or renewals thereof in whole or in part; together with any and all other indebtedness, li abilities and obligations of Borrower to Lender, whether existing as of the date hereof or hereafter arising, existing or incurred, whether under a loan, lease, line of credit, letter of credit or other type of financing, whether direct, indirect, absolute or contingent, as maker, endorser, guarantor, surety or otherwise, and whether evidenced by, arising out of, or relating to, a promissory note, bill of exchange, check, draft, bond, letter of credit, guaranty agreement or otherwise issued in favor of, or acquired by, Lender. "Participant" shall mean any Person to whom, now or hereafter, Lender sells a participation interest in, or makes an assignment of, its right, title or interest hereunder and in the Obligations (whether in whole or in part). 6 11 "Permit" shall mean any permit, approval, authorization, li cense, variance, or permission required from a Governmental Au thority having jurisdiction under an applicable Environmental Law. "Person" shall mean any individual, partnership, corporation, trust, unincorporated association, business trust, sole propri etorship, or joint venture, a government or any department, agency, political subdivision or instrumentality thereof, or any other entity or organization. "Property" or "Properties" shall mean any real or personal property owned, leased or operated by Borrower. "Real Estate Collateral" shall mean all right, title and in terest of Borrower as owner in fee simple of the Financed Res taurant Locations, inclusive of all buildings and other improve ments thereon and all appurtenances thereto. "Release" shall mean any actual or threatened release, spill, emission, leaking, pumping, injection, deposit, disposal, dis charge, dispersal, leaching or migration into the indoor or outdoor environment or into or out of any Property, including the movement of Contaminants through or into the air, soil, subsurface strata, surface water or groundwater. "Remedial Action" shall mean all actions required to (1) clean up, remove, treat or in any other way address Contaminants in the indoor or outdoor environment; (2) prevent the Release or threat of Release or minimize the further Release of Contaminants so they do not migrate or endanger or threaten to endanger public health or welfare or the indoor or outdoor environment; or (3) perform pre- remedial studies and investigations and post-remedial monitoring and care in respect of actions contemplated in the preceding clauses (1) and (2), in each instance in compliance with Environmental Laws. "Restaurant" shall mean each Carl's Jr. Restaurant building owned by Borrower and situated at a Financed Restaurant Location, on which Borrower is conducting, or is to conduct, a Restaurant Business. "Restaurant Business" shall mean the operation of a Restaurant by Borrower at a Financed Restaurant Location. "Subsidiary" shall mean, with respect to any Person, any corporation, association or other business entity of which more than fifty percent (50%) of the total voting power of shares of stock (or equivalent ownership or controlling interest) entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by that Person 7 12 or one or more of the other Subsidiaries of that Person or a combination thereof. "Substitute Financed Restaurant Location" shall have the meaning assigned thereto in Section 3.2 hereof. "Term Loan" shall mean each term loan made by Lender to Bor rower pursuant to Section 2.1 below. "Term Loans" shall refer, collectively, to all such loans from time to time outstanding. "Term Loan Facility" shall mean the term loan facility in the maximum amount of Seven Million Dollars ($7,000,000) established by Lender in favor of Borrower pursuant to Section 2.1. "Term Note" shall mean each Term Promissory Note issued by Borrower to Lender to evidence the repayment obligation associated with a Term Loan, together with any extensions or renewals thereof, in whole or in part. "UCC" shall mean the Uniform Commercial Code of Illinois, as in effect on the Closing Date. 1.2. USE OF DEFINED TERMS. All terms defined in this Agree ment and the Exhibits shall have the same defined meanings when used in any other Loan Documents, unless the context shall require otherwise. 1.3. ACCOUNTING TERMS. All accounting terms not specifically defined herein shall have the meanings generally attributed to such terms under GAAP. 1.4. UCC TERMS. The terms "equipment", "proceeds" and "prod ucts", as and when used in the Loan Documents, together with any other or similar terms not specifically defined herein but which are defined in the UCC shall have the same meanings as given to such terms therein. 1.5. TERMINOLOGY. All personal pronouns used in this Agree ment, whether used in the masculine, feminine or neuter gender, shall include all other genders; the singular shall include the plural, and the plural shall include the singular. Titles of Articles and Sections in this Agreement are for convenience only, and neither limit nor amplify the provisions of this Agreement, and all references in this Agreement to Articles, Sections, Sub sections, paragraphs, clauses, subclauses or Exhibits shall refer to the corresponding Article, Section, Subsection, paragraph, clause, subclause of, or Exhibit attached to, this Agreement, un less specific reference is made to the articles, sections or other subdivisions divisions of, or Exhibit to, another document or in strument. 8 13 1.6. EXHIBITS. All Exhibits attached hereto are by reference made a part hereof as fully as if the contents thereof were set forth expressly herein. 2. THE FINANCING. 2.1. TERM LOAN FACILITY. Lender hereby creates the Term Loan Facility in favor of Borrower so that on the Closing Date Borrower may obtain two (2) Term Loans, as follows: (i) a Term Loan of Six Million Four Hundred Eighty-Eight Thousand Dollars ($6,488,000) in principal amount (herein, sometimes called "Term Loan A") and (ii) a Term Loan of Five Hundred Twelve Thousand Dollars ($512,000) in principal amount (herein, sometimes called "Term Loan B"). The Term Loans shall be cross-collateralized and cross-defaulted, each to and with the other, until both Term Loans are fully paid and satisfied and this Agreement is terminated. Each Term Loan so obtained shall reduce, dollar-for-dollar, the amount which may be borrowed under the Term Loan Facility. No amount of either Term Loan may be reborrowed once disbursed, notwithstanding its repayment. 2.2. AMORTIZATION. The principal amount of each Term Loan, together with accrued interest thereon at the then Applicable Rate, shall be paid as follows: (a) as to Term Loan A, in fifty-nine (59) equal (or nearly equal) monthly installments (based on one hundred eighty month amortization), commencing on January 1, 1996, and concluding on November 1, 2000, followed by a balloon payment in the amount of the unpaid principal balance of Term Loan A and all accrued and unpaid interest thereon, due and payable on December 1, 2000; and (b) as to Term Loan B, in sixty (60) equal (or nearly equal) monthly installments (based on a sixty month amortization), commencing on January 1, 1996, and continuing through December 1, 2000; it being understood and agreed that: (i) all payments on a Term Loan shall be applied, when received, first to accrued interest on such Term Loan until paid in full and, then, to the principal amount thereof; (ii) the amortization of the Term Loans shall be based on level monthly payments (inclusive of principal and accrued interest); and (iii) the last payment on each Term Loan shall, in any event, be in that amount necessary to pay in full the then unpaid principal balance of such Term Loan together with all accrued, but unpaid, interest thereon. Attached as Schedules I and II hereto are the respective amortization schedules for Term Loan A and Term Loan B. 2.3. INTEREST. Each Term Note shall bear interest at the Fixed Rate. Interest shall be computed on the unpaid principal balance of each Term Note from time to time outstanding, computed on the daily outstanding principal balance thereof on the basis of a year of 360 days (based on twelve 30-day months). Interest on each Term Loan shall be payable monthly in arrears, commencing 9 14 on January 1, 1996, to be collected for the preceding calendar month (or, in the case of the first such payment, from such disbursement date through the end of such calendar month, regardless whether such period is greater or lesser than a calendar month), and continuing on the first day of each succeeding calendar month and upon payment or prepayment in full of each Term Note. Notwithstanding the foregoing, however, from and after the occurrence of any Event of Default, and continuing for so long thereafter as such Event of Default shall be continuing, Lender shall have the right to increase the interest rate payable on each Term Note to the Default Rate applicable thereto upon giving Bor rower ten (10) calendar days' advance written notice thereof, and Borrower shall be responsible for the payment of the additional interest resulting therefrom. 2.4. TERM NOTES. The indebtedness represented by each Term Loan shall be evidenced by a Term Note corresponding in principal amount thereto. Each Term Note shall be executed by Borrower and delivered to Lender coincident with the disbursement of the Term Loan on the Closing Date. 2.5. SECURITY DEPOSIT/CLOSING FEE. Heretofore, Borrower made a security deposit of Sixty Thousand Dollars ($60,000) with Lender in connection with its initial application for the Term Loan Fa cility (the "Deposit"), which Lender continues to hold in escrow as of the Closing Date. On or as soon as practicable after the Closing Date, Lender will determine the amount of expenses incurred by it in connection with the closing of this transaction which are reimbursable by Borrower pursuant to Section 9.6 and apply the Deposit to the payment thereof, and any remainder shall be returned to Borrower, but Borrower shall be liable to Lender for any deficiency after such applications is made. On the Closing Date, Borrower will pay Lender a non-refundable closing fee of Thirty- Five Thousand Dollars ($35,000). This fee shall be deemed earned on the Closing Date. 2.6. LATE CHARGE; LIQUIDATED DAMAGES. If payment of any principal of, or interest on, any Term Note or any other sum payable hereunder or under any other Loan Document is not received within five (5) calendar days after its due date, Lender shall have the right to impose a late charge relative to such payment in an amount equal to up to five percent (5%) of the amount of such past due payment, which charge, if imposed by Lender, shall be due and payable by Borrower immediately upon receipt of notice thereof. In connection with the foregoing, Borrower recognizes that its default in making, when due, any payment of principal or interest due under either Term Note or any other sum payable hereunder or under any other Loan Document, or the occurrence of any other Event of Default, will require Lender to incur additional expense in servicing and administering the Term Loans, in loss to Lender of the use of the money due and 10 15 in frustration to Lender in meeting its other financial and loan commitments and that the damages caused thereby would be extremely difficult and impractical to ascertain. Borrower agrees that (a) an amount equal to the late charge described in the first sentence of this Section 2.6 plus the accrual of interest at the default rate of interest set forth in the last sentence of Section 2.3 hereof is a reasonable estimate of the damage to Lender in the event of a late payment and (b) the accrual of interest at the default rate of interest set forth in the last sentence of Section 2.3 hereof is a reasonable estimate of the damages to Lender in the event of such other Event of Default, regardless of whether there has been acceleration of the Term Loans. Nothing herein shall be construed as an obligation on the part of Lender to accept, at any time, less than the full amount then due hereunder, or as a waiver or limitation of Lender's right to compel prompt performance. 2.7. VOLUNTARY PREPAYMENT. Provided that no Default Condition or Event of Default has occurred which is then continuing, both Term Notes may be prepaid, in whole as to both Term Notes but, except as provided in Section 3.2 hereof, not in part, by Borrower at any time or from time to time after the Closing Date; provided, however, that (i) any such prepayment (inclusive of any prepayment pursuant to Section 3.2 hereof) may be made only on a date on which a regularly scheduled payment of principal is to be made; (ii) any such prepayment must be preceded by at least forty-five (45) calendar days prior written notice thereof to Lender; and (iii) any partial prepayment of a Term Note must be made only in compliance with Section 3.2 below and shall be applied when received to the then remaining installments of such Term Note in the reverse order of their respective maturities (beginning with the balloon payment in the case of Term Loan A); and, provided, further, that any such prepayment must be accompanied by the payment of all then accrued, but unpaid, interest on the principal amount to be prepaid, to gether with a prepayment premium, representing liquidated damages to Lender for the loss of its bargain and not a penalty, equal in amount to (A) four percent (4%) of the principal amount of the Term Note so prepaid, if such prepayment is made during the period from the Closing Date through the first anniversary of the Closing Date; (B) three percent (3%) of the principal amount of the Term Note so prepaid, if such prepayment is made during the period after the first anniversary of the Closing Date through the second anniversary of the Closing Date; (C) two percent (2%) of the prin cipal amount of the Term Note so prepaid, if such prepayment is made during the period after the second anniversary of the Closing Date through the third anniversary of the Closing Date; and (D) one percent (1%) of the principal amount of the Term Note so prepaid, if such prepayment is made during the period during the period after the third anniversary of the Closing Date through the fourth anniversary of the Closing Date. In the event 11 16 that at any time hereafter, as a result of the occurrence and continuation of any Event of Default, payment of the Term Notes is accelerated by Lender, Borrower shall become obligated to pay Lender, in addition to any and all other sums payable hereunder, as liquidated damages for the loss of its bargain and not as a penalty, an amount equal to the then applicable amount of the prepayment premium described above which would have been due and payable to Lender on the date on which such acceleration occurs as if, on such date, the Term Notes then outstanding had been voluntarily prepaid in full, which sum shall be added to the Obligations and be due and payable in full automatically upon such acceleration occurring. 2.8. NATURE OF CHARGES IMPOSED. Lender and Borrower hereby agree that (i) the only charges imposed by Lender upon Borrower for the use of money in connection with the Term Loan Facility are and shall be interest at the rates per annum expressed in Section 2.3 hereinabove and in each Term Note and (ii) all other charges im posed by Lender upon Borrower in connection with the Term Loan Facility, including, without limitation, the Deposit heretofore made by Borrower, as described in Section 2.5, the closing fee described in Section 2.5, and any prepayment premium hereafter paid by Borrower pursuant to Section 2.7, are and shall be deemed to be charges made to compensate Lender for underwriting and administra tive services and costs, and other services and costs performed and incurred, and to be performed and incurred, by Lender in connection with the creation and administration of the Term Loan Facility, and shall under no circumstances be deemed to be charges for the use of money for purposes of Illinois law. 2.9. SAVINGS CLAUSE. Notwithstanding the foregoing or any provision contained in this Agreement, any Term Note or any other Loan Document to the contrary, if at any time the amount of interest computed with respect to any Term Note on the basis of the Applicable Rate would exceed the amount of such interest computed upon the basis of the maximum rate of interest permitted by ap plicable state or federal law in effect from time to time hereaf ter, after taking into account, to the extent required by applicable law, any and all fees, payments, charges and calculations provided for in this Agreement or in any other agreement between Borrower and Lender (the "Maximum Legal Rate"), the interest pay able under this Agreement shall be computed upon the basis of the Maximum Legal Rate, but any subsequent reduction in the Applicable Rate shall not reduce such interest thereafter payable hereunder below the amount computed on the basis of the Maximum Legal Rate until the aggregate amount of such interest accrued and payable under this Agreement equals the total amount of interest which would have accrued if such interest had been at all times computed solely on the basis of the Interest Rate. No agreements, conditions, provisions or stipulations contained in 12 17 this Agreement, any Term Note or any other Loan Document or default of the Borrower, or the exercise by the Lender of the right to accelerate the payment of the maturity of principal and interest, or to exercise any option whatsoever contained in this Agreement or any other Loan Document, or arising of any contingency whatsoever, shall entitle Lender to collect, in any event, interest exceeding the Maximum Legal Rate and in no event shall the Borrower be obligated to pay interest exceeding such Maximum Legal Rate and all agreements, conditions or stipulations, if any, which may in any event or con tingency whatsoever operate to bind, obligate or compel the Bor rower to pay a rate of interest exceeding the Maximum Legal Rate, shall be without binding force or effect, at law or in equity, to the extent only of the excess of interest over such Maximum Legal Rate. In the event any interest is charged in excess of the Maxi mum Legal Rate ("Excess Interest"), Borrower acknowledges and stipulates that any such charge shall be the result of an ac cidental and bona fide error, and such Excess Interest shall be, first, applied to reduce the principal then unpaid hereunder; sec ond, applied to reduce any other Obligations, until paid in full; and third, returned to the Borrower, it being the intention of the parties hereto not to enter at any time into a usurious or other wise illegal relationship. The Borrower recognizes that, with fluctuations in the interest rate and the Maximum Legal Rate, such an unintentional result could inadvertently occur. By the execu tion of this Agreement, the Borrower covenants that (i) the credit or return of any Excess Interest shall constitute the acceptance by the Borrower of such Excess Interest, and (ii) the Borrower shall not seek or pursue any other remedy, legal or equitable, against Lender, based in whole or in part upon the charging or receiving of any interest in excess of the maximum authorized by applicable law. For the purpose of determining whether or not any Excess Interest has been contracted for, charged or received by Lender, all interest at any time contracted for, charged or received by the Lender in connection with this Agreement shall be amortized, prorated, allocated and spread in equal parts during the entire term of this Agreement. The provisions of this Section shall be deemed to be incorporated into each and every Term Note and other Loan Document or communication relating to the Obligations which sets forth or prescribes any account, right or claim or alleged account, right or claim of the Lender with respect to the Borrower (or any other obligor in respect of Obligations), whether or not any provision of this Section is referred to therein. All such documents and communications and all figures set forth therein shall, for the sole purpose of computing the extent of the liabilities and obligations of the Borrower (or other obligor) asserted by the Lender thereunder, be automatically recomputed by any Borrower or obligor, and by any court considering the same, to give effect to the adjustments or credits required by this Section. If the applicable state or federal law is amended in the future to allow 13 18 a greater rate of interest to be charged under this Agreement or any other Loan Documents than is presently allowed by applicable state or federal law, then the limitation of interest under this Section shall be increased to the maximum rate of interest allowed by applicable state or federal law as amended, which increase shall be effective hereunder on the effective date of such amendment, and all interest charges owing to the Lender by reason thereof shall be payable upon demand. 3. SECURITY INTEREST -- COLLATERAL. As security for the pay ment of the Term Notes and all other Obligations, Borrower hereby grants to Lender a continuing, general lien upon, security interest in, and security title to the Equipment Collateral, to the full extent of Borrower's interest therein, together with any and all products and proceeds of the foregoing, including, without limita tion, insurance proceeds. The foregoing shall be in addition to, and be cumulative with, the Real Estate Collateral obtained by Lender pursuant to the Mortgages on Financed Restaurant Locations on or after the Closing Date. 3.1. REPRESENTATIONS AND WARRANTIES. With respect to the Col lateral, Borrower hereby, represents, warrants and covenants to Lender as set forth in Subsections (a) through (i), inclusive. (a) GOOD TITLE; NO EXISTING ENCUMBRANCES. Borrower owns the Collateral free and clear of any prior security interest, lien or encumbrance thereon other than in favor of Lender and, with regard to each Financed Restaurant Location, other than "Permitted Encumbrances" (as that term is defined in the Mortgage encumbering such Financed Restaurant Location) and other than the interest of the landlord in the leased equipment described on Exhibit "B" attached hereto, and no financing statements, registration statements, certificates of title or other evidences of the grant of a security interest respecting the Collateral exist on any public records as of the date hereof, other than any in favor of Lender. (b) RIGHT TO GRANT SECURITY INTEREST; NO FURTHER ENCUM BRANCES. Borrower has the right to grant the security interest in the Collateral prescribed hereinabove in this Article 3; Borrower will pay all sales, use, franchise and other taxes and other charges against the Collateral; Borrower will not use the Collateral illegally or allow the Collateral to be encumbered except for the security interest in favor of Lender granted herein. (c) CONDITION OF COLLATERAL; CASUALTY. All Equipment Collateral is in good working order and repair as of the Closing Date. Borrower will maintain the Equipment Collateral in good working order and repair subsequent to the Closing Date, ordinary wear and tear excepted, and subject to Borrower's right to 14 19 replace Equipment Collateral as provided in Section 3.1(d) hereof. Bor rower further will take such actions subsequent to the Closing Date as may be necessary to keep any manufacturer's warranty in effect with respect to the Equipment Collateral. Borrower further will promptly report to Lender any material loss, damage, theft or other casualty to any Equipment Collateral, and whether Borrower has re paired (or caused to be repaired) or replaced, or intends to repair (or cause to be repaired) or replace, such Equipment Collateral. (d) NO SALE OF COLLATERAL. Except as permitted pursuant to Section 3.2 hereof, Borrower will not sell, assign, lease, li cense, exchange, mortgage, encumber, hypothecate, grant a security interest in, or otherwise dispose of its right, title or interest in any of the Collateral, without in each case first obtaining the prior written consent of Lender thereto; provided, however, that (i) Borrower may replace Equipment Collateral in the ordinary course of its business and consistent with past practice so long as (x) the replacement Equipment Collateral has a value equal to or greater than that of the Equipment Collateral being replaced, and (y) Lender has a perfected first priority security interest in the replacement Equipment Collateral, subject to no other security interests, liens or encumbrances and (ii) Lender will not unreasonably withhold its consent to the granting by Borrower of easements with regard to the Financed Restaurant Locations which do not interfere with Borrower's Restaurant Business operated thereon. (e) WAIVERS. Borrower agrees to obtain, on Lender's be half, such waivers or consents from third parties, including, without limitation, any lessor, licensor, operator, servicer or vendor, as Lender may reasonably request at any time, in order to assure Lender in regard to the perfection and priority of its se curity interest in, and ability to realize on, the Collateral. (f) FURTHER ASSURANCES. Borrower further shall duly ex ecute and/or deliver (or cause to be duly executed and/or deliv ered) to Lender any instrument, invoice, registration certificate, certificate of title, application, document, document of title, dock warrant, dock receipt, warehouse receipt, bill of lading, or der, financing statement, assignment, waiver, consent or other writing which may be necessary to Lender to carry out the terms of this Agreement and any of the other Loan Documents and to perfect its security interest in and facilitate its realization on the Collateral. Borrower shall perform or cause to be performed such acts as Lender may reasonably request to establish and maintain for Lender a valid and perfected first priority security interest in the Collateral, free and clear of any liens, encumbrances or security interests other than in favor of Lender and other than Permitted Encumbrances. 15 20 (g) RIGHT TO INSPECT. Lender or any Participant shall have the right to call at the Headquarters at any reasonable time, and, without hindrance or delay, inspect, audit and check the Col lateral and make extracts from Borrower's books, records, journals, orders, receipts and any correspondence and other data relating to the transactions contemplated herein and to the Collateral; provided, however, that unless an Event of Default has occurred and is continuing (in which event no notice need be given), Lender will give Borrower at least twenty-four (24) hours advance notice of any visit to the Headquarters for such purposes. (h) CHANGE OF NAME. Borrower hereby acknowledges and agrees that if, at any time hereafter, Borrower elects to move its chief executive office and principal place of business from the Headquarters, or if Borrower elects to change its name, identity or its structure to other than a corporate structure Borrower will notify Lender in writing at least thirty (30) days prior thereto (provided that the foregoing shall not be deemed a consent to any action otherwise prohibited by the terms of this Agreement or any of the other Loan Documents) and execute (or cause to be executed) such financing statements, or amendments thereto, or other docu ments as Lender then may require in response to such changed con dition in accordance with Sections 3.1(e) and 3.1(f). (i) CHANGE OF LOCATION. Except in accordance with Sec tion 3.1(d) or 3.2, Borrower further agrees not to remove any Equipment Collateral from a Financed Restaurant Location to any other location except another Financed Restaurant Location. 3.2. SPECIAL PROVISIONS REGARDING SALES AND CLOSINGS OF FI NANCED RESTAURANT LOCATIONS. (a) SALE OF FINANCED RESTAURANT LOCATIONS. Borrower may sell any Financed Restaurant Location and the Equipment Collateral located thereon; provided, that (i) at the time of such sale, no Default Condition or Event of Default has occurred and is con tinuing, (ii) Borrower provides Lender with at least forty-five (45) calendar days prior written notice thereof, (iii) concurrently with any such sale, Borrower prepays the Term Loans in an amount equal to the greater of (A) an amount determined by multiplying the "Pro Rata Appraised Value" (as defined below) of such Financed Restaurant Location and related Equipment Collateral times the aggregate outstanding principal balance of the Term Loans or (B) an amount determined by multiplying the "Pro Rata EBITDA Value" (as defined below) of such Financed Restaurant Location times the aggregate outstanding principal balance of the Term Loans, and (iv) in connection with such prepayment, Borrower pays to Lender any prepayment premium payable pursuant to Section 2.7 hereof and all accrued and unpaid 16 21 interest on the portion of the Term Loans being prepaid. For purposes hereof, (i) "Pro Rata Appraised Value" for each Financed Restaurant Location and related Equipment Collateral shall mean the fraction obtained by dividing (A) the appraised value for such Financed Restaurant Location and related Equipment Collateral, as specified on Exhibit "A" attached hereto by (B) the appraised values for all Financed Restaurant Locations and Equipment Collateral, as specified on Exhibit "A" and (ii) "Pro Rata EBITDA Value" for each Financed Restaurant Location shall mean the fraction obtained by dividing (A) "EBITDA" (as hereinafter defined) for such Financed Restaurant Location for the then most recently ended period of twelve full months by (B) EBITDA for all Financed Restaurant Locations for such period. For purposes hereof, "EBITDA" for any Financed Restaurant Location for any period shall mean net income generated by such Financed Restaurant for such period plus interest expense, income taxes, depreciation and amortization attributed to such Financed Restaurant Location for such period. At least ten (10) days prior to consummating any such sale, Borrower shall deliver to Lender a calculation of Pro Rata EBITDA for the Financed Restaurant that is to be sold, in such detail as Lender shall require, and certified by its chief financial officer to be true, correct and complete. (b) CLOSING OF FINANCED RESTAURANT LOCATIONS. Borrower may close any Financed Restaurant Location; provided, that (i) at the time of such closing, no Default Condition or Event of Default has occurred and is continuing, (ii) Borrower provides Lender with at least forty-five (45) days prior written notice thereof, and (iii) within one hundred twenty (120) days after closing, Borrower either (A) prepays the Term Loans in an amount determined in accordance with the provisions of Section 3.2(a) above with regard to the Financed Restaurant Location that has been closed, together with any applicable prepayment premium pursuant to Section 2.7 and accrued and unpaid interest on the portion of the Term Loans being prepaid or (B) provides to Lender a "Substitute Financed Restaurant Location" (as hereinafter defined) as Collateral hereunder. For purposes hereof, a Substitute Financed Restaurant Location shall mean a Carl Jr.'s Restaurant (inclusive of Equipment located thereon and therein) approved by Lender as Collateral hereunder as to which (i) Borrower has provided to Lender (A) an appraisal satisfying the conditions specified in Section 10.1(f)(8), (B) an as-built survey satisfying the conditions specified in Section 10.1(f)(10), (C) environmental assessments performed by an independent environmental engineer selected by Borrower but acceptable to Lender, the scope and substance of which shall be satisfactory to Lender, (D) a mortgagee's title insurance policy satisfying the conditions specified in Section 10.1(f)(12), (E) evidence of insurance satisfying the conditions specified in Section 10.1(f)(13), (F) a Mortgage and UCC financing statements 17 22 sufficient to grant to Lender a perfected first priority security interest and lien on such Financed Restaurant Location, and (G) such other documents, instruments and agreements as Lender shall reasonably request and (ii) Lender has satisfied itself that it shall have a perfected, first priority security interest and lien thereon subject to no other liens, security interests or encumbrances. (c) APPLICATION OF PREPAYMENT. Any prepayments made pur suant to this Section 3.2 shall be applied as between Term Loan A and Term Loan B on such basis as Lender shall elect and, as to each such Term Loan, shall be applied to the outstanding principal installments thereof in the reverse order of their respective ma turities (beginning with the balloon payment in the case of Term Loan A). (d) RELEASE OF LIENS. Upon satisfaction by Borrower of the conditions for sale of, or closing of, a Financed Restaurant Location specified in clause (a) or clause (b) above, as ap plicable, Lender shall release its liens on such Financed Restau rant Location. 4. GENERAL REPRESENTATIONS AND WARRANTIES. In order to induce Lender to enter into this Agreement, Borrower hereby, represents and warrants to Lender as set forth in Sections 4.1 through 4.7, inclusive. 4.1. EXISTENCE. Borrower is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation. Borrower has qualified to transact business as a foreign corporation in any other jurisdiction where such qualification is necessary. Guarantor is the sole shareholder of Borrower as of the Closing Date. No Person other than the Guaran tor has any stockholder or other ownership interest in Borrower or any right to acquire any such interest. The principal place of business and chief executive office of Borrower is located at the Headquarters. Borrower keeps its books and records concerning the Collateral at the Headquarters. Borrower has not done business during the five (5) years preceding the Closing Date under any name other than "Carl's Jr." Borrower has no Subsidiaries as of the Closing Date. 4.2. AUTHORITY. Borrower has the corporate power to make, deliver and perform under this Agreement, the Term Notes and the other Loan Documents, and to borrow hereunder, and has taken all necessary and appropriate corporate action to authorize the execu tion, delivery and performance of the Loan Documents. This Agree ment constitutes, and the Term Notes and the remainder of the Loan Documents, when executed and delivered for value received, will constitute, the valid obligations of Borrower, legally binding upon it and enforceable against it in accordance 18 23 with their respective terms. The officers of Borrower whose names are inscribed below are duly authorized and empowered to execute, attest and deliver this Agreement, the Term Notes and the remainder of the Loan Documents for and on behalf of Borrower, and to bind Borrower accordingly thereby. 4.3. NO MATERIAL LITIGATION. There are no proceedings pending or, so far as Borrower knows, threatened, before any court, arbitration panel or administrative agency, no material disputes with any contract party and no pending or threatened labor action which, in each case, if decided adversely to Borrower, would have a Material Adverse Effect. 4.4. PAYMENT OF TAXES. Borrower has filed or caused to be filed any federal income tax returns required to be filed by it, and, to the best of its knowledge following diligent inquiry, all other tax returns required to be filed by it, and has paid all taxes shown to be due and payable by it on said returns or on any assessments made against it. Borrower has not participated in any "prohibited transaction" (as defined in Section 4975 of the Inter nal Revenue Code of 1986) that could subject Borrower to any tax or penalty. 4.5. NO VIOLATIONS, GENERALLY. The execution, delivery and performance by Borrower of this Agreement, the Term Notes and the other Loan Documents do not and will not require any consent or ap proval of any Person, except to the extent obtained by Borrower on or prior to the Closing Date; or violate Borrower's articles or certificate of incorporation or bylaws or any provision of any law, rule, regulation, order, writ, judgment, injunction, decree, de termination or award presently in effect having applicability to Borrower; or result in a breach of or constitute a default under any agreement that is material to Borrower's business; and, to the best of Borrower's knowledge following diligent inquiry, Borrower is not in default under any such law, rule, regulation, order, writ, judgment, injunction, decree, determination or award or mate rial agreement. 4.6. FINANCIAL STATEMENTS; LIABILITIES. The audited financial statements of Guarantor and its consolidated Subsidiaries (including Borrower) for its fiscal year ending closest to the Closing Date and the unaudited financial statements of Borrower for its fiscal quarter ending on August 14, 1995, accurately and fairly represent the financial condition of Guarantor and Borrower, respectively, and the transactions in their respective equity accounts as of the dates referred to therein, and have been prepared in accordance with GAAP. There are no material liabilities, direct or indirect, fixed or contingent, of Borrower as of the date hereof which are not reflected in such financial statements or in the notes thereto. There has been no Material Adverse Change since the date of the aforesaid 19 24 audited financial statements. 4.7. POLLUTION AND ENVIRONMENTAL CONTROL. (a) The business operations of Borrower comply in all material respects with all applicable Environmental Laws; Borrower has generally obtained all environmental, health and safety Permits necessary for the operation of Borrower's business; and all such permits are valid, and in good standing and Borrower is in compliance in all material respects with all terms and conditions of such Permits except where failure to comply would not, and would not reasonably be expected to, have a Material Adverse Effect; and Borrower has no material liability with regard to any Environmental Claim or under any Environmental Laws. (b) Further, with specific reference to the Financed Restaurant Locations and the conduct of Borrower's Restaurant Business (i) Borrower has obtained all environmental, health and safety Permits necessary for the operation of Borrower's Restaurant Business; and all such permits are valid and in good standing and Borrower is in compliance in all respects with all terms and conditions of such Permits except where failure to comply would not, and would not reasonably be expected to, have a Material Adverse Effect; (ii) Borrower is not subject to any outstanding written order or agreement with any Governmental Authority or with any private Person with respect to (A) any Environmental Laws, (B) any Remedial Actions, or (C) any Environmental Claims arising from the Release of a Contaminant into the environment with respect to any Financed Restaurant Location; (iii) none of the operations of Borrower at any Financed Restaurant Location is subject to any judicial or administration proceeding alleging a violation of any Environmental Law; (iv) none of the operations of Borrower is the subject of any federal or state investigation evaluating whether any Remedial Action is needed to respond to a Release of any Con taminant into the environment under any applicable law; (v) neither Borrower nor any predecessor of Borrower has filed any notice under any federal or state law indicating past or present treatment, storage, or disposal of a hazardous waste or reporting a spill or Release of a Contaminant into the environment under any applicable law with respect to any Financed Restaurant Location; (vi) Borrower has no known contingent liability in connection with any Release of any Contaminant into the environment with respect to any Financed Restaurant Location; (vii) Borrower's operations at the Financed Restaurant Locations do not involve the generation, transportation, treatment or disposal of any hazardous waste, as defined under 40 C.F.R. Parts 260-270 or any state equivalent (other than any done in compliance with all Environmental Laws); (viii) Borrower has not disposed of any Contaminant by placing it in or on the ground, 20 25 groundwater or surface water of any Financed Restaurant Location, and, to the best of Borrower's knowledge, neither has any lessee, prior owner, or other Person; and (ix) no Lien in favor of any Governmental Authority for (A) any liability under Environmental Laws or regulations, or (B) damages arising from or costs incurred by such governmental authority in response to a Release of a Contaminant into the environment has been filed or attached to any Financed Restaurant Location. 5. AFFIRMATIVE COVENANTS. Borrower agrees that, so long as any Obligations are outstanding and this Agreement has not been terminated in writing by Lender, Borrower will comply with the covenants set forth in the following Sections 5.1 through 5.11. 5.1. BOOKS AND RECORDS. Borrower shall maintain, at all times, true and complete books, records and accounts in which true and correct entries are made of its transactions in accordance with GAAP. 5.2. PERIODIC FINANCIAL STATEMENTS. Borrower shall, as soon as practicable, and in any event within ninety (90) days after the end of each fiscal quarter, furnish to Lender and each Participant unaudited financial statements of Guarantor and its consolidated Subsidiaries (including Borrower), including, in each instance, balance sheets, income statements and cash flow statements, on a consolidated and consolidating basis, as of and for the quarterly period then ended and for their fiscal year to date, prepared in accordance with GAAP, certified as to truth and accuracy by Guarantor's and Borrower's chief financial officers, plus, if requested by Lender or any Participant, a quarterly profit and loss statement for each Financed Restaurant Location, and accompanied by a report of Guarantor's and Borrower's performance or condition as of or for the corresponding date or period in the preceding fiscal year, displayed on a comparative basis. 5.3. ANNUAL FINANCIAL STATEMENTS. Borrower shall, as soon as practicable, and in any event within one hundred twenty (120) days after the end of each fiscal year of Guarantor, furnish to Lender and each Participant annual audited financial statements of Guarantor and its consolidated Subsidiaries (including Borrower), including, in each instance, balance sheets, income statements and cash flow statements for the fiscal year then ended, on a consolidated and consolidating basis, which have been prepared by Guarantor's and Borrower's Independent Accountants. Such audited financial statements will be required to be accompanied by the Independent Accountant's opinion, which opinion shall be in form generally recognized as "unqualified" and shall state: (i) that such financial statements fairly present the financial position of Guarantor and Borrower and the results of their respective operations and changes in their respective 21 26 financial positions or cash flows for the year ended; (ii) that such financial statements have been prepared in accordance with GAAP applied on a basis consistent with that of the preceding fiscal year (except for changes, if any, as shall be specified and concurred in by such accountants in such opinion); and (iii) that the audit by such accountants in con nection with such financial statements has been made in accordance with generally accepted auditing standards relating to reporting. 5.4. COMPLIANCE CERTIFICATES. Together with each of the fi nancial statements described in Sections 5.2 and 5.3 above, and more frequently, if requested by Lender, Borrower shall deliver a Compliance Certificate and a covenant compliance worksheet to Lender, including calculations of Guarantor's "Fixed Charge Coverage Ratio" and "NetWorth" for the applicable period, as such terms are defined in Sections 7.12 and 7.13, respectively, each signed by the chief financial officers of Guarantor and Borrower. 5.5. SEC FILINGS. Promptly following the filing thereof by Guarantor with the Securities and Exchange Commission or the delivery thereof by Guarantor to its shareholders, Borrower shall deliver to Lender copies of any quarterly, annual or other reports required to be filed by Guarantor with the Securities and Exchange Commission or delivered by Guarantor to its shareholders. 5.6. PAYMENT OF TAXES. Borrower shall pay and discharge all taxes, assessments and governmental charges pertaining to the Financed Restaurant Locations and all other material taxes, assessments and governmental charges upon it, its income and its properties prior to the date on which penalties attach thereto, unless and to the extent only that (x) such taxes, assessments and governmental charges are being contested in good faith and by appropriate proceedings by Borrower and (y) Borrower maintains reasonable reserves on its books therefor. 5.7. MAINTENANCE OF INSURANCE. Borrower shall insure the Col lateral against fire, theft and such other risks (including, but not limited to boiler and machinery) as Lender shall require from time to time at the full replacement cost thereof, and maintain at least six (6) months of business interruption insurance, with Lender shown by endorsement and named on a certificate of insurance as loss payee, additional insured and mortgagee thereof, with re sponsible insurance companies rated "A-" or better by A.M. Best Company. As to other Properties and risks, including, without limitation, liability coverage, Borrower shall maintain such in surance, with such insurers (having the minimum qualifications described above) on such Properties, in such amounts and against such risks as is customarily maintained by similar businesses op erating in the same vicinity; provided that such insurance shall not be less, in terms of insurers, amounts, coverages or limitations, than the insurance being maintained by 22 27 Borrower on the Closing Date; and, provided, further, that such insurance shall include, in any event, at all times, comprehensive general li ability (inclusive of products liability coverage) of at least Five Million Dollars ($5,000,000), in aggregate combined single limit coverage; and, provided, further, that Lender shall be shown by endorsement and named on a certificate of insurance as "additional insured" thereon and with breach of warranty endorsement favoring Lender. All such insurance in existence on the Closing Date shall not be cancellable or modifiable by Borrower, thereafter, unless with the prior written consent of Lender, or by Borrower's insurer, unless with at least thirty (30) days advance written notice to Lender thereof (except as may be necessary to bring such insurance into compliance herewith from time to time). Borrower shall file with Lender on the Closing Date and at least annually thereafter or, at Lender's request at any time from and after the occurrence of, and during the continuance of, any Event of Default, upon its request, an insurer's certificate evidencing Borrower's compliance with the requirements of this Section 5.7. All casualty insurance proceeds paid with respect to the Collateral shall, after deduction of reasonable expenses of Lender actually incurred in collecting such proceeds (if any), (a) if no Event of Default has occurred and is continuing, be applied to repair or restoration of the Collateral (upon compliance with such terms and conditions as may be required by Lender) and (b) if an Event of Default has occurred and is continuing, at Lender's option be (i) applied (upon compliance with such terms and conditions as may be required by Lender) to repair or restoration, either partly or entirely, of the Collateral or (ii) applied to the payment of the Obligations in such order and manner as Lender may elect, whether or not due. In the event that Borrower receives any such insurance proceeds di rectly or that a check for such proceeds is made payable to Bor rower and Lender jointly Borrower shall take all actions necessary to convey such proceeds to Lender. In the event that pursuant hereto such proceeds are to be used for repair or restoration of the Collateral, at its option, Lender will either release such proceeds directly to Borrower or use such proceeds to pay directly invoices for repair or restoration work, in each case upon compliance with such terms and conditions as it may require. Notwithstanding anything contained herein or in any other Loan Document to the contrary, in the event that Lender receives proceeds of Borrower's business interruption insurance at a time when no Default Condition or Event of Default has occurred and is continuing, Lender will return such proceeds to Borrower for use in Borrower's business. 5.8. PRESERVATION OF EXISTENCE. Borrower shall preserve and maintain its corporate existence, rights, franchises and privileges in the State of California, in each jurisdiction in which a Financed Restaurant Location exists and in each other jurisdiction where the nature of the Restaurant Business 23 28 conducted therein or the location of any Property therein requires that such rights, franchises and privileges be preserved and maintained; and obtain and maintain for itself all Permits, licenses, certificates of convenience and necessity, operating rights, authorizations and consents as shall be necessary or advisable to permit it to con tinue to operate its business in the manner contemplated to be conducted by it on the Closing Date. 5.9. COMPLIANCE WITH LAWS. Borrower shall comply with the requirements of all applicable laws, rules, regulations, permits, hearings, approvals and clearances and orders of any Governmental Authority, including particularly, but without limitation, in re spect of Environmental Laws. 5.10. ENVIRONMENTAL LAW COMPLIANCE. (a) On or before the Closing Date, Borrower will provide Lender with copies of any environmental assessments or similar reports made by or on behalf of Borrower with respect to any of the Real Estate Collateral within the preceding five (5) years together with environmental questionnaires concerning all such Properties in such form and detail as Lender shall request; and, subsequent to the Closing Date, Borrower will provide Lender with copies of any such assessments or reports thereafter made by or on behalf of Borrower with respect to any location where Collateral is located, promptly as and when made or received by Borrower, but not later than thirty (30) days thereafter. (b) Borrower will notify Lender in writing of any Envi ronmental Claim or an accusation or allegations which may give rise to an Environmental Claim hereafter made against it or received by it which would or would reasonably be expected to have a Material Adverse Effect if determined adversely to Borrower within ten (10) days after it first obtains knowledge or notice thereof. Each such notice to Lender shall include a copy of any claim, citation, order, notice or other communication (to the extent in writing) received by Borrower from the person making such Environmental Claim, allegation or accusation, a description of the nature of such Environmental Claim, allegation or accusation, the name of the Person making such Environmental Claim, allegation or accusation; Borrower's anticipated defense to such Environmental Claim, allega tion or accusation or the action Borrower proposes to take in respect of such Environmental Claim, allegation or accusation and the anticipated costs to be incurred by Borrower in connection with such Environmental Claim, allegation or accusation (including, with limitation, that amount of any anticipated damages, the costs of defending such Environmental Claims and the costs of any cleanup or corrective action). (c) In addition, Borrower will promptly notify Lender of any 24 29 Release with regard to any Financed Restaurant Location or at any Property if such Release would or would reasonably be expected to have a Material Adverse Effect or of material change in the nature or extent of any Contaminants used, transported or stored by Borrower or any Subsidiary, and allow no material change in the use thereof or Borrower's or any Subsidiary's operations that would increase in any material amount the risk of violation of the Environmental Laws without the express prior written approval of Lender. (d) Borrower further agrees to indemnify and hold Lender, each Participant and the officers, directors, agents, employees, affiliates and representatives of Lender and each Participant (in dividually an "Indemnified Party" and collectively the "Indemnified Parties") harmless from and against any and all damages, penalties, fines, claims, liens, suits, liabilities, costs (including necessary and actual clean-up and response costs), judgments, and expenses (including reasonable attorneys' fees and any consultants' or other experts' fees and expenses) of every kind and nature suffered by or asserted against any Indemnified Party (i) under or on account of the Environmental Laws, including, without limitation, as a result of the past, present or future institution of any suits, claims, actions, or proceedings by any person against Borrower or Lender in respect of any alleged violation of the Environmental Laws by Borrower or Borrower's use, storage or disposition of Contaminants, (ii) with respect to any past, present or future Release of Contaminants affecting any Property, whether or not the same originates or emanates from any Property or any contiguous real estate, (iii) with respect to any other past, present, or future matters affecting any Property within the jurisdiction of any Governmental Authority administering the Environmental Laws or (iv) with respect to any past, present or future requirement under the Environmental Laws which requires the elimination or removal of any Contaminants or other substances regulated pursuant to any Environmental Laws, rules, or regulations of any Governmental Authority having jurisdiction over Borrower, whether attributable to events occurring before or after the Closing Date. Any payments required to be made hereunder shall be due and payable on demand. (e) The agreements contained in this Section shall survive the termination of this Agreement and shall continue in full force and effect for so long as the prospect of any loss or liability covered by the indemnity contained in such clause (d) above exists. 5.11. LITIGATION; EVENTS OF DEFAULT, ETC. Promptly, after receipt of notice or knowledge thereof, but not later than ten (10) days thereafter, Borrower will report to Lender: (i) any 25 30 lawsuit or administrative proceeding or arbitration proceeding in which Borrower is a defendant wherein the amount of damages claimed against Borrower exceeds Five Hundred Thousand Dollars ($500,000) or in which the validity of this Agreement or any Loan Document or any action taken or to be taken pursuant hereto or thereto is ques tioned; (ii) any strike, walkout, lockout or other related legal action, whether pending or threatened pertaining to Borrower; (iii) the existence and nature of any Default Condition or Event of Default; and (iv) any Environmental Claim or an accusation or allegation which may give rise to an Environmental Claim hereafter made against it, or received by it or of which it obtains knowledge, whether or not made against it, which would or would reasonably be expected to have a Material Adverse Effect if determined adversely to Borrower. 6. NEGATIVE COVENANTS. 6.1. DIVIDENDS AND DISTRIBUTIONS. Borrower further agrees that, so long as any Obligations are outstanding and this Agreement has not been terminated in writing by Lender, Borrower will not pay any dividend or other distribution to Guarantor at any time when an Event of Default has occurred and is continuing or would result therefrom; provided, however, that the foregoing shall not prevent Borrower from paying in the ordinary course of its business fees to Guarantor for services actually provided by Guarantor to Borrower which are necessary to the operation of Borrower's business, at the regular rates agreed to between Borrower and Guarantor. 6.2. GREEN BURRITO CO-BRANDING ARRANGEMENTS. Borrower shall not enter into any co-branding arrangements with Green Burrito with regard to any Financed Restaurant Location unless Borrower shall have first (a) delivered to Lender copies of its agreements with Green Burrito in regard thereto, which shall be in form and substance satisfactory to Lender, and (b) delivered to Lender such estoppel and other agreements of Green Burrito in favor of Lender as Lender shall request, each to be in form and substance satisfactory to Lender. 7. EVENTS OF DEFAULT. The occurrence of any events or con ditions described in Sections 7.1 through 7.14 shall constitute an Event of Default hereunder, provided that any requirement for the giving of notice or the lapse of time, or both, has been satisfied. 7.1. TERM NOTES. Borrower shall fail to make any payments of principal of, or interest on, either Term Note, within ten (10) calendar days after the same shall become due and payable. 7.2. OTHER OBLIGATIONS. Borrower shall fail to pay any Ob ligations (other than as evidenced by the Term Notes) to Lender, 26 31 within ten (10) calendar days after the same shall become due and payable (unless a longer or shorter grace period is provided therefor in any document, instrument or agreement evidencing, per taining to or securing the repayment of such other Obligations, in which event such other grace period shall apply). 7.3. MISREPRESENTATIONS. Borrower shall make any represen tation or warranty, respectively, in this Agreement or any of the Loan Documents or in any certificate or statement furnished at any time hereunder or in connection with this Agreement or any of the Loan Documents which proves to have been untrue or misleading in any material respect when made or furnished. 7.4. COVENANTS. Borrower shall default in the observance or performance of any covenant or agreement contained in either Sec tion 5 or 6; or Borrower shall default in the observance or per formance of any other covenant or agreement contained in this Agreement or any of the Loan Documents, except for any default of the types described in Sections 7.1, 7.2 or 7.3 above, and such de fault shall continue for a period of twenty (20) calendar days from the date of receipt by Borrower of written notice from Lender specifying such default (unless a longer or shorter cure period is provided therefor in any such Loan Document, in which case such other grace period shall apply), without such default being waived or cured. 7.5. OTHER DEBTS. Guarantor or Borrower shall default in con nection with any agreement for borrowed money or other credit with any creditor other than Lender, exceeding in face amount the sum of Two Million Dollars ($2,000,000), in the case of Guarantor, and Two Million Dollars ($2,000,000), in the case of Borrower, including particularly, but without limitation, under any real property lease or any equipment lease, and, as a result of such default, said creditor shall have the right to accelerate the maturity thereof. 7.6. VOLUNTARY BANKRUPTCY. Borrower or Guarantor shall file a voluntary petition in bankruptcy or a voluntary petition or an swer seeking liquidation, reorganization, arrangement, readjust ment of its debts, or for any other relief under the Bankruptcy Code, or under any other act or law pertaining to insolvency or debtor relief, whether state, federal, or foreign, now or hereafter existing; Borrower or Guarantor shall enter into any agreement indicating its consent to, approval of, or acquiescence in, any such petition or proceeding; Borrower or Guarantor shall apply for or permit the appointment by consent or acquiescence of a receiver, custodian or trustee for all or a substantial part of its property; Borrower or Guarantor shall make an assignment for the benefit of creditors; or Borrower or Guarantor shall be unable or shall fail to pay its debts generally as such debts become due; or Borrower or Guarantor 27 32 shall admit, in writing, its inability or failure to pay its debts generally as such debts become due. 7.7. INVOLUNTARY BANKRUPTCY. There shall have been filed against Borrower or Guarantor an involuntary petition in bankruptcy or seeking liquidation, reorganization, arrangement, re adjustment of its debts or for any other relief under the Bank ruptcy Code, or under any other act or law pertaining to insol vency or debtor relief, whether state, federal or foreign, now or hereafter existing; or Borrower or Guarantor shall suffer or permit the involuntary appointment of a receiver, custodian or trustee or for all or a substantial part of its property; or Borrower or Guarantor shall suffer or permit the issuance of a warrant of at tachment, execution or similar process against all or any substantial part of its property; unless, in each other case, such petition, appointment or process is fully bonded against, vacated or dismissed within sixty (60) days from its effective date, but not later than ten (10) days prior to any proposed disposition of any assets pursuant to any such proceeding. 7.8. JUDGMENTS. If one or more final, nonappealable judgments or decrees shall be entered against Borrower or Guarantor which, in Lender's reasonable credit judgment, could have a Material Adverse Effect (or in the event Borrower or Guarantor fails to pursue the appeal of such judgment or any rights to appeal any such judgment have been revoked or have expired) and all such judgments or de crees shall not have been vacated, discharged, stayed or bonded pending appeal within thirty (30) days from the date such judgment becomes nonappealable. 7.9. CHANGE OF CONTROL. If: (i) Guarantor shall cease to own and control one hundred percent (100%) of the issued and out standing capital stock of Borrower; or (ii) Borrower shall merge with, or consolidate into, any other corporation; or (iii) Guarantor shall merge or consolidate with any other corporation unless Guarantor is the survivor of such merger or consolidation; or (iv) Guarantor or Borrower shall sell all, or substantially all, of its assets. 7.10. LOSS OF COLLATERAL. If all or any material portion of the Collateral: (i) suffers any loss, damage, theft or other ca sualty, in a single occurrence or series of related occurrences; or (ii) becomes subject to any lien, claim or encumbrance; or (iii) is made the subject of any proceeding in which the existence, scope, coverage, or priority of the security interest of Lender therein is disputed. 7.11. GUARANTOR. If Guarantor shall default in its observance or performance of any term of its guaranty of the Obligations issued in favor of Lender which is not cured or waived within any applicable grace period prescribed therein. 28 33 7.12. FIXED CHARGE COVERAGE RATIO. If Guarantor's Fixed Charge Coverage Ratio, determined on a consolidated basis, is less than the ratio indicated at the end of such fiscal period as specified below:
FISCAL PERIOD ENDING RATIO -------------------- ----- at first quarter 1996, and second quarter 1996 .50:1.00 at third quarter 1996, and at fourth quarter 1996 .55:1.00 at each quarter of 1997 .65:1.00 at first, second and third quarter 1998 .75:1.00 at fourth quarter 1998 .85:1.00 at first quarter 1999 and thereafter 1.00:1.00
For purposes of this Agreement, "Fixed Charge Coverage Ratio" means the following calculation, expressed as a ratio for any fiscal period: (a) EBITDA of Guarantor and its consolidated Subsidiaries less the net gain realized on sales of fixed assets (or the EBITDA of Guarantor and its consolidated Subsidiaries less the net loss incurred on sales of fixed assets), less unfinanced capital expenditures of Guarantor and its consolidated Subsidiaries, less taxes and less dividends divided by (b) the sum of (i) interest expense, (ii) the current portion of long-term debt and (iii) the current portion of capital leases. The current portion of long term debt and the current portion of capital leases will be the amount shown on the consolidated balance sheet of Guarantor as of the end of the applicable quarter. "EBITDA" means earnings of Guarantor and its consolidated Subsidiaries before interest and tax expense, depreciation, amortization and other non-cash charges. This ratio shall be calculated quarterly using a Four Quarter Rolling Basis. "Four Quarter Rolling Basis" shall mean the four quarters calculated using the results of the fiscal quarter then most recently ended and the immediately preceding fiscal three (3) quarters. 7.13. NET WORTH. If Guarantor fails to maintain, on a consolidated basis for Guarantor and its consolidated Subsidiaries determined at the end of each quarter, Net Worth 29 34 equal to at least the amounts indicated for each period specified below:
PERIOD AMOUNT ------ ------ at end of second quarter 1996 $ 94,000,000 at fiscal year end 1996 $ 96,000,000 at end of second quarter 1997 $101,000,000 at fiscal year end 1997 and thereafter $105,000,000
For the purposes of this Agreement, "Net Worth" for Guarantor and its consolidated Subsidiaries, shall mean the total amount of shareholders' equity shown on the consolidated balance sheet of Guarantor at the end of each fiscal quarter or fiscal year end, as the case may be, plus the aggregate amount of stock repurchases permitted under Guarantor's financing arrangements with Bank of America. 7.14. MATERIAL AGREEMENTS. Borrower or any Guarantor shall default in the payment or performance of any Material Agreement which default entitles the other party or parties thereto to terminate or repudiate such contract. 8. REMEDIES. Upon the occurrence or existence of any Event of Default, or at any time thereafter, without prejudice to the rights of Lender to enforce its claims against Borrower for damages for failure by Borrower to fulfill any of its obligations hereunder, subject only to prior receipt by Lender of payment in full of all Obligations then outstanding in a form acceptable to Lender, Lender shall have all of the rights and remedies described in Sections 8.1 through 8.4, inclusive, and it may exercise any one, more, or all of such remedies, in its sole discretion, without thereby waiving any of the others. 8.1. ACCELERATION OF THE OBLIGATIONS. Lender, at its option, may declare all of the Obligations (including but not limited to that portion thereof evidenced by the Term Notes) to be immediately due and payable, whereupon the same shall become immediately due and payable without presentment, demand, protest, notice of non payment or any other notice required by law relative thereto, all of which are hereby expressly waived by Borrower, anything con tained herein to the contrary notwithstanding and, in connection therewith, if Lender so elects, by further written notice to Bor rower, Lender may increase the rate of interest charged on each Term Note then outstanding for so long thereafter as Lender further shall elect to the Default Rate. Thereafter, Lender, at its option, may, but shall not be obligated to, accept 30 35 less than the entire amount of Obligations due, if tendered, provided, however, that unless then agreed to in writing by Lender, no such acceptance shall or shall be deemed to constitute a waiver of any Event of Default or a reinstatement of any commitments of Lender hereunder. 8.2. REMEDIES OF A SECURED PARTY. Lender shall thereupon have the rights and remedies of a secured party under the UCC in effect on the date thereof (regardless of whether the same has been enacted in the jurisdiction where the rights or remedies are as serted), including, without limitation, the right to take posses sion of any of the Collateral or the proceeds thereof, to sell or otherwise dispose of the same, to apply the proceeds therefrom to any of the Obligations in such order as Lender, in its sole discretion, may elect. Lender shall give Borrower written notice of the time and place of any public sale of the Collateral or the time after which any other intended disposition thereof is to be made. The requirement of sending reasonable notice shall be met if such notice is given to Borrower pursuant to Section 9.9 at least ten (10) days before such disposition. Expenses of retaking, holding, insuring, preserving, protecting, preparing for sale or selling or the like with respect to the Collateral shall include, in any event, reasonable attorneys' fees and other legally recoverable collection expenses, all of which shall constitute Obligations. 8.3. REPOSSESSION OF THE COLLATERAL. Lender may take the Collateral or any portion thereof into its possession, by such means (without breach of the peace) and through agents or otherwise as it may elect (and, in connection therewith, demand that Borrower assemble the Collateral at a place or places and in such manner as Lender shall prescribe), and sell, lease or otherwise dispose of the Collateral or any portion thereof in its then condition or following any commercially reasonable preparation or processing, which disposition may be by public or private proceedings, by one or more contracts, as a unit or in parcels, at any time and place and on any terms, so long as the same are commercially reasonable. To facilitate the foregoing, Borrower agrees to make available to Lender the Restaurants or any other premises then owned or leased by Borrower on which Collateral then may be situated for such purposes, without charge or undue delay, and on such terms as Lender then may reasonably request (including, without limitation, if Lender so requests, the temporary or permanent vacation by Bor rower of any leased premises). 8.4. OTHER REMEDIES. Unless and except to the extent ex pressly provided for to the contrary herein, the rights of Lender specified herein shall be in addition to, and not in limitation of, Lender's rights under the UCC, as amended from time to time, or any other statute or rule of law or equity, or under any 31 36 other provision of any of the Loan Documents, or under the provisions of any other document, instrument or other writing executed by Bor rower or any third party in favor of Lender, all of which may be exercised successively or concurrently. 9. MISCELLANEOUS. 9.1. WAIVER. Each and every right granted to Lender under this Agreement, or any of the other Loan Documents, or any other document delivered hereunder or in connection herewith or allowed it by law or in equity, shall be cumulative and may be exercised from time to time. No failure on the part of Lender to exercise, and no delay in exercising, any right shall operate as a waiver thereof, nor shall any single or partial exercise by Lender of any right preclude any other or future exercise thereof or the exercise of any other right. No waiver by Lender of any Default Condition or Event of Default shall constitute a waiver of any subsequent Default Condition or Event of Default. 9.2. GOVERNING LAW. THIS AGREEMENT AND, UNLESS OTHERWISE EXPRESSLY PROVIDED THEREIN, THE TERM NOTES AND THE OTHER LOAN DOC UMENTS, AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER, SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF ILLINOIS. 9.3. SURVIVAL. All representations, warranties and covenants made herein and in the other Loan Documents shall survive the ex ecution and delivery of this Agreement and such other Loan Docu ments. On the Closing Date, Borrower shall be deemed to have restated, renewed and reaffirmed as of each such date all of such representations, warranties and covenants. The terms and provi sions of this Agreement shall continue in full force and effect, notwithstanding the payment of the Term Notes, until all of the Obligations have been paid in full and Lender has terminated this Agreement in writing. 9.4. NO ASSIGNMENT BY BORROWER; LENDER MAY ASSIGN. No as signment hereof shall be made by Borrower without the prior written consent of Lender. Lender may assign, or sell participations in, its right, title and interest herein and in the Loan Documents at any time hereafter without notice to or consent of Borrower to any Participant. Upon any assignment by Lender, the assignee shall be entitled to all the rights, powers, privileges and remedies of Lender to the extent assigned, and the obligations of Borrower shall not be subject, as against any such assignee, to any defense, set-off or counterclaim available to Borrower against Lender and any such defense, set-off or counterclaim may be asserted only against Lender. 9.5. COUNTERPARTS. This Agreement may be executed in two 32 37 or more counterparts, each of which when fully executed shall be an original, and all of said counterparts taken together shall be deemed to constitute one and the same agreement. 9.6. REIMBURSEMENT. Borrower agrees to reimburse Lender for its out-of-pocket expenses, actually incurred, including, without limitation, the reasonable fees and disbursements of its legal counsel (including a reasonable allocation of the costs, compen sation and expenses of internal counsel), incurred in connection with the preparation of the Loan Documents and any and all other documents, notes, and agreements pursuant hereto, including the furnishing of any opinions which may be requested of such counsel by the Lender on questions incident to this transaction. Borrower will pay all expenses incurred by Borrower in this transaction. If any taxes, fees or other costs shall be payable on account of the execution, issuance, delivery or recording of any of the Loan Documents, by reason of any existing or hereafter enacted federal or state statute, Borrower agrees to pay all such taxes, fees or other costs, including any applicable interest and penalty, and to indemnify and hold Lender harmless from and against liability in connection therewith. If any attorney (including, without limitation, internal counsel) is engaged (a) to collect the Obligations, whether or not legal proceedings are thereafter instituted by Lender, (b) to represent Lender in any bankruptcy, reorganization, receivership or other proceedings affecting creditors' rights and involving a claim under this Agreement or any of the other Loan Documents, (c) to protect the lien of the Mortgages or any of the other Loan Documents, (d) to represent Lender in any other proceedings whatsoever in connection with this Agreement, the Mortgages or any other Loan Documents, including, without limitation, post judgment proceedings to enforce any judgment related to the Loan Documents, or (e) in connection with seeking of an out-of-court workout or settlement of any of the foregoing, then Borrower shall pay to Lender all costs, attorneys' fees and expenses in connection therewith (including a reasonable allocation of the costs, compensation and expenses of internal counsel), in addition to all other amounts due hereunder. This provision is separate and several and shall survive the merger of this provision into any judgment. 9.7. SUCCESSORS AND ASSIGNS. This Agreement and every Loan Document shall be binding upon and inure to the benefit of the successors and permitted assigns of the parties hereto and thereto. The foregoing shall expressly include, without limitation, in the case of Lender, any Participant. 9.8. SEVERABILITY. If any provision of this Agreement or of the Loan Documents or the application thereof to any party thereto or circumstances shall be invalid or unenforceable to any extent, the remainder of such Loan Documents and the application 33 38 of such provisions to any other party thereto or circumstance shall not be affected thereby and shall be enforced to the greatest extent per mitted by law. 9.9. NOTICES. All notices, requests and demands to or upon the respective parties hereto shall be deemed to have been given or made when personally delivered or deposited in the mail, registered or certified mail, postage prepaid, or delivered by overnight courier, addressed as follows or to such other address as may be designated hereafter in writing by the respective parties hereto (which, in the case of Lender, may include the name and address of each Participant): Borrower: Carl Karcher Enterprises, Inc. 1200 North Harbor Boulevard Anaheim, California 92803 Attn: Loren Pannier Senior Vice President and Chief Financial Officer Lender: Heller Financial, Inc. Commercial Equipment Finance Division 900 Circle 75 Parkway, N.W. Suite 1600 Atlanta, Georgia 30339 Attn: Dominick J. Masciantonio, Vice President and Region Credit Manager except in cases where it is expressly provided herein or by ap plicable law that such notice, demand to request is not effective until received by the party to whom it is addressed. 9.10. ENTIRE AGREEMENT - AMENDMENT. This Agreement, together with the Term Notes and the other Loan Documents, constitute the entire agreement between the parties hereto with respect to the subject matter hereof and thereof and supersedes any agreement or understanding, oral or written, heretofore made in regard thereto. Neither this Agreement, the Term Notes nor any other Loan Document may be changed, waived, discharged, modified or terminated orally, but only by an instrument in writing signed by the party against whom enforcement is sought. 9.11. TIME OF THE ESSENCE. Time is of the essence in this Agreement, the Term Notes and the other Loan Documents. 9.12. INTERPRETATION. No provision of this Agreement or 34 39 any Loan Document shall be construed against or interpreted to the disadvantage of any party hereto by any court or other governmental or judicial authority by reason of such party having or being deemed to have structured or dictated such provision. 9.13. LENDER NOT A JOINT VENTURER. Neither this Agreement nor any agreements, instruments, documents or transactions contemplated hereby (including the Loan Documents) shall in any respect be interpreted, deemed or construed as making Lender a partner or joint venturer with Borrower or as creating any similar relation ship or entity, and Borrower agrees that it will not make any con trary assertion, contention, claim or counterclaim in any action, suit or other legal proceeding involving Lender and Borrower. 9.14. JURISDICTION. BORROWER AGREES THAT ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT, THE TERM NOTES OR ANY OTHER LOAN DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF ILLINOIS OR THE UNITED STATES OF AMERICA FOR THE NORTHERN DISTRICT OF ILLINOIS, CHICAGO DIVISION, ALL AS LENDER MAY ELECT. BY EXECU TION OF THIS AGREEMENT, BORROWER HEREBY SUBMITS TO EACH SUCH JU RISDICTION, HEREBY EXPRESSLY WAIVING WHATEVER RIGHTS MAY CORRESPOND TO IT BY REASON OF ITS PRESENT OR FUTURE DOMICILE AND CONSENTS TO SERVICE OF PROCESS BY WRITTEN NOTICE GIVEN IN THE MANNER SPECIFIED FOR THE GIVING OF NOTICES IN SECTION 9.9 ABOVE; PROVIDED, HOWEVER, THAT NOTHING HEREIN SHALL AFFECT THE RIGHT OF LENDER TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST BORROWER IN ANY OTHER JURISDICTION OR TO SERVE PROCESS IN ANY MANNER PERMITTED OR REQUIRED BY LAW. EACH OF LENDER AND BORROWER WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY SUCH PROCEEDING. EACH OF LENDER AND BORROWER FURTHER AGREES THAT NEITHER SHALL BE LIABLE TO THE OTHER FOR CONSEQUENTIAL OR SPECIAL DAMAGES ARISING FROM BREACH OF CONTRACT, TORT OR OTHER WRONG OR CLAIM RELATING TO THE ESTABLISHMENT, ADMINISTRATION OR COLLECTION OF ANY OBLIGATIONS OR ANY LOAN DOCUMENT OR ANY ACTION (OR INACTION) BY EITHER PARTY THEREUNDER. 9.15. PAYMENT ON NON-BUSINESS DAYS. Whenever any payment to be made hereunder or under the Term Notes shall be stated to be due on a Saturday, Sunday or a public holiday under the laws of the State of Georgia or the State of Illinois, such payment may be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of payment of interest hereunder or under the Term Notes. 9.16. WAIVER OF RIGHTS. BORROWER HEREBY WAIVES ANY AND ALL RIGHTS, IF ANY, WHICH BORROWER OTHERWISE HAS OR MAY HAVE UNDER AND BY VIRTUE OF ANY LAW, WITH RESPECT TO THE RIGHT OF BORROWER TO NOTICE AND TO A JUDICIAL OR ADMINISTRATIVE HEARING 35 40 PRIOR TO SEIZURE OF ANY COLLATERAL BY LENDER. 9.17. CURE OF DEFAULTS BY LENDER. If, hereafter, Borrower defaults in the performance of any duty or obligation to Lender hereunder, Lender may, at its option, but without obligation, cure such default and any costs, fees and expenses incurred by Lender in connection therewith including, without limitation, for the purchase of insurance, the payment of taxes and the removal or settlement of liens and claims, shall constitute Obligations, be payable on demand and bear interest until paid at the Default Rate applicable to the Term Note with the then highest contract rate. 9.18. RECITALS. All recitals contained herein are hereby incorporated by reference into this Agreement and made part thereof. 9.19. ATTORNEY-IN-FACT. Borrower hereby designates, appoints and empowers Lender irrevocably to act as its attorney-in-fact, at Borrower's cost and expense, to do in the name of Borrower any and all actions which Lender may deem necessary or advisable to carry out the terms hereof, upon the failure, refusal or inability of Borrower to do so, and Borrower hereby agrees to indemnify and hold Lender harmless from any costs, damages, expenses or liabilities arising against or incurred by Lender in connection therewith. 9.20. SOLE BENEFIT. The rights and benefits set forth in this Agreement and in all the other Loan Documents are for the sole and exclusive benefit of Lender, its Participants (if any) and Borrower and may be relied upon only by them. 9.21. REMEDIES. UNLESS EXPRESSLY PROVIDED TO THE CONTRARY, LENDER MAY ENFORCE ITS RIGHTS UNDER THIS AGREEMENT AND ALL OTHER LOAN DOCUMENTS WITHOUT RESORT TO PRIOR JUDICIAL PROCESS OR JUDICIAL HEARING, AND BORROWER EXPRESSLY WAIVES, RENOUNCES AND KNOWINGLY RELINQUISHES ANY LEGAL RIGHT WHICH MIGHT OTHERWISE REQUIRE LENDER TO ENFORCE ITS RIGHTS BY JUDICIAL PROCESS. IN SO PROVIDING FOR A NON-JUDICIAL REMEDY, BORROWER RECOGNIZES AND CONCEDES THAT SUCH A REMEDY IS CONSISTENT WITH THE USAGE OF THE TRADE, IS RESPONSIVE TO COMMERCIAL NECESSITY AND IS THE RESULT OF BARGAINING AT ARM'S LENGTH. NOTHING IN THIS AGREEMENT IS INTENDED TO PREVENT BORROWER OR LENDER FROM RESORTING TO JUDICIAL PROCESS AT EITHER PARTY'S OPTION. 9.22. INDEMNITY. Without limiting any provisions of Sec tions 5.10 or 9.6, Borrower agrees to save, indemnify and hold harmless Lender from and against any and all debts, liabilities, obligations, damages, costs, expenses or other claims incurred by Lender as a result of its entry into, and performance under, this 36 41 Agreement or any other Loan Documents, including, without limitation, with respect to the claims of any broker or other intermedi ary. 9.23. ACCEPTANCE. THIS AGREEMENT, TOGETHER WITH THE TERM NOTES AND ALL OTHER LOAN DOCUMENTS, SHALL NOT BECOME EFFECTIVE UNLESS AND UNTIL (I) DULY EXECUTED BY BORROWER, (II) DELIVERED TO LENDER FOR ACCEPTANCE IN CHICAGO, ILLINOIS, (III) ACCEPTED BY LENDER IN CHICAGO, ILLINOIS AND (IV) DULY EXECUTED BY LENDER, AS APPROPRIATE, IN CHICAGO, ILLINOIS. THE DISBURSEMENT OF THE PRO CEEDS OF THE TERM LOANS BY LENDER FROM ATLANTA, GEORGIA SHALL BE EVIDENCE THAT THE FOREGOING CONDITIONS HAVE BEEN FULFILLED. 10. CONDITIONS PRECEDENT. Unless waived in writing by Lender at or prior to the execution and delivery of this Agreement, the conditions set forth below shall constitute express conditions precedent to any obligation of Lender hereunder: (a) NO INJUNCTION; ETC. No action, proceeding, investigation, regulation or legislation shall have been instituted, threatened or proposed before any court, governmental agency or legislative body to enjoin, restrain, or prohibit, or to obtain substantial damages in respect of, or which is related to or arises out of this Agreement, or the consummation of the transactions contemplated hereby, or which Lender determines would make it inadvisable to consummate the transactions contemplated hereby. (b) NO DEFAULT. No Default Condition or Event of Default shall have occurred and be continuing. (c) COMPLIANCE WITH LAWS GENERALLY; ENVIRONMENTAL LAW COM PLIANCE. Lender shall be satisfied in all respects that Borrower is in material compliance with all applicable federal, state and local laws and regulations, including particularly, but without limitation, all Environmental Laws. (d) MATERIAL AGREEMENTS. Lender shall have reviewed all of Borrower's Material Agreements, and all of the foregoing shall be satisfactory to Lender. (e) LITIGATION. Lender shall have reviewed all existing litigation, injunctions and proceedings, if any, pending or threatened against Borrower and the results of such review shall be satisfactory to Lender. (f) DOCUMENTATION. Lender shall have received the following documents, each to be in form and substance satisfactory to Lender and its counsel, and duly executed and delivered by the party or parties thereto: 37 42 (1) LOAN DOCUMENTS. This Agreement and all other Loan Documents to be executed and delivered by Borrower hereunder and under the Loan Documents on the Closing Date, to the extent not otherwise specified below; (2) INSURANCE CERTIFICATES. Receipt by Lender of a cer tificate from Borrower's insurer (or an authorized agent thereof) respecting all insurance required hereunder, together with copies of all insurance policies evidencing such insurance in each case in form and substance acceptable to Lender. (3) OPINIONS OF BORROWER'S AND GUARANTOR'S COUNSEL. Re ceipt by Lender of satisfactory opinions of counsel from Borrower's and Guarantor's legal counsel, in form and substance satisfactory to Lender, including, in the case of the Real Estate Collateral, opinions of counsel under the laws of the States of California and Oregon; (4) SECRETARIES' CERTIFICATES. Receipt by Lender of secretaries' certificates from Guarantor and Borrower, certifying to their respective articles or certificates of incorporation, bylaws and resolutions approving the transactions contemplated hereby; (5) GUARANTY. Receipt by Lender of an unconditional guaranty of all Obligations from Guarantor, in form and substance satisfactory to Lender; (6) TERM NOTES. Receipt by Lender of Term Notes in an aggregate principal amount equal to the aggregate principal amount of the Term Loans; (7) FINANCING STATEMENTS. Copies of all filing receipts or acknowledgments issued by any Governmental Authority to evidence any filing or recordation necessary to perfect the security inter ests of Lender in all Collateral and evidence in a form acceptable to Lender that such security interests constitute value and per fected first priority security interests in Lender's favor; (8) APPRAISAL. An appraisal, performed at Borrower's ex pense, of each Financed Restaurant Location, by a nationally rec ognized independent appraiser selected by Borrower, but acceptable to Lender, using a methodology of appraisal which is acceptable to Lender, demonstrating a satisfactory range of appraised values for such Property; (9) ENVIRONMENTAL ASSESSMENT. Environmental Questionnaires, as described in Section 5.10, together with an environmental regulatory review for each Financed Restaurant 38 43 Location, prepared at Borrower's expense, by independent environmental experts selected by Lender, together with, if Lender shall so request in its sole discretion, based on the results of such environmental regulatory review, "Phase 1" environmental audits and such additional environmental testing as Lender shall so require with respect to each Financed Restaurant Location, in each case, performed at Borrower's expense by independent environmental experts selected by Lender; (10) SURVEY. A current "as-built" boundary survey for each Financed Restaurant Location together with a surveyor's certificate prepared at Borrower's expense from a registered land surveyor; (11) MORTGAGE. A deed of trust, mortgage, deed to se cure debt or other, similar instrument pursuant to which Borrower shall convey to Lender or to a trustee for the benefit of Lender the entirety of Borrower's right, title and interest in and to each Financed Restaurant Location; (12) MORTGAGEE'S TITLE INSURANCE POLICIES. A mortgagee's title insurance policy, issued, at Borrower's expense, by a title insurer selected by Borrower, but acceptable to Lender insuring Lender's security interest in each Financed Restaurant Location in such amount, and containing only such conditions, limitations and exceptions as shall be acceptable to Lender; (13) EVIDENCE OF INSURANCE. Evidence that each Financed Restaurant Location is covered by the insurance required under Section 5.7 and in the other Loan Documents and as otherwise may be reasonably required by Lender in connection with the disbursement of the Term Loans; IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and Borrower has caused its seal to be affixed hereto, all as of the day and year first above written. "BORROWER" CARL KARCHER ENTERPRISES, INC. By:_____________________________ Loren Pannier Senior Vice President 39 44 [CORPORATE SEAL] "LENDER" HELLER FINANCIAL, INC. By:____________________________ Dominick J. Masciantonio, Vice President and Region Credit Manager 40 45 EXHIBIT A FINANCED RESTAURANT LOCATIONS
APPRAISED PRO RATA LOCATION VALUE APPRAISED VALUE - -------- ----- --------------- 4880 Campus Drive $2,200,000 27.12% Newport Beach,CA 5166 Vineland $1,210,000 14.91% North Hollywood, CA 4424 University Parkway $ 860,000 10.60% San Bernardino, CA 1403 NE 102nd Avenue $ 960,000 11.83% Portland, Oregon 7359 Miliken Avenue $1,140,000 14.05% Rancho Cucamonga, CA 1075 Mono Way $ 740,000 9.12% Sonora, CA 200 Louise Avenue $1,000,000 12.33% Lathrop, CA ---------- ------ $8,110,000 100.00%
41 46 EXHIBIT B LEASED EQUIPMENT Borrower leases certain IBM point of sale equipment from Computer Sales International, Inc. 42 EX-10.41 14 AMENDMENT #1 TO TERM LOAN AND SECURITY AGREEMENT 1 EXHIBIT 10.41 AMENDMENT NO. 1 TO TERM LOAN AND SECURITY AGREEMENT ("AMENDMENT") January 22, 1996 Carl Karcher Enterprises, Inc. 1200 North Harbor Boulevard Anaheim, California 92803 Attn: Loren Pannier Senior Vice President Ladies and Gentlemen: Preamble. We refer to our Term Loan and Security Agreement with you dated as of December 19, 1995 (the "Loan Agreement"). Capitalized terms used herein and not defined herein have the meanings assigned to them in the Loan Agreement. Pursuant to the Loan Agreement it was contemplated that Lender would make the Term Loans available to Borrower against, initially, the security of the Collateral located on or comprising the seven (7) restaurant locations of Borrower described on Ex hibit "A" to the Loan Agreement. Lender has determined, however, that with regard to Borrower's restaurant location at 4424 Univer sity Parkway, San Bernardino, California (the "San Bernardino Lo cation") and Borrower's restaurant location at 1403 NE 102nd Av enue, Portland, Oregon (the "Portland Location"), certain of the conditions precedent to the funding of the Term Loans specified in Section 10 of the Loan Agreement have not been satisfied. As a result of the foregoing, Borrower and Lender have agreed that, (a) initially neither the San Bernardino Location nor the Portland Location will be included as a Financed Restaurant Location under the Loan Agreement, (b) initially the equipment and realty located at or constituting the San Bernardino Location and the Portland Location will not constitute Collateral for purposes of the Loan Agreement and (c) as more fully described herein, Term Loan A and Term Loan B will be made available to Borrower in mul tiple disbursements, consisting of an initial disbursement of Five Million Thirty-Two Thousand Dollars ($5,032,000) in the case of Term Loan A and Three Hundred Sixty-Five Thousand Seven Hundred Fourteen and 29/100 Dollars ($365,714.29) in the case of Term Loan B, and, subject to the satisfaction of the conditions specified in this Amendment and in the Loan Agreement, not more than two ad ditional disbursements in the aggregate amount of up to One Million Four Hundred Fifty-Six Thousand Dollars ($1,456,000) in the case of Term Loan A and One Hundred Forty-Six Thousand Two Hundred Eighty- Five and 71/100 Dollars ($146,285.71) in the case of Term Loan B. The purpose of this Amendment is to memorialize our mutual understanding as to certain amendments to the Loan Agreement 2 pertaining to the foregoing matters and certain related matters. Accordingly you and we hereby agree as follows: 1. Amendments to Section 1.1 of the Loan Agreement. (a) Section 1.1 of the Loan Agreement is hereby amended by adding in appropriate alphabetical order the following additional defined terms: "Additional Financed Restaurant Locations" shall mean the San Bernardino Location and/or the Portland Location, if either of such restaurant locations of Borrower becomes a Financed Restaurant Location pursuant to Section 2.1 of this Agreement and any other restaurant location of Borrower which becomes a Financed Restaurant Location pursuant to the provisions of such Section 2.1. "Portland Location: shall mean Borrower's restaurant location at 1403 NE 102nd Avenue, Portland, Oregon. "San Bernardino Location" shall mean Borrower's restau rant location at 4424 University Parkway, San Bernardino, California. (b) Section 1.1 of the Loan Agreement is hereby further amended by deleting in its entirety the definition of "Closing Date" set forth therein and substituting in lieu thereof the following revised definition of "Closing Date": "Closing Date" shall mean January 23, 1996. (c) Section 1.1 of the Loan Agreement is hereby further amended by deleting in its entirety the last sentence of the definition of "Financed Restaurant Location" set forth therein and substituting in lieu thereof the following sentence: After acceptance thereof by Lender pursuant to Sec tion 2.1 hereof in the case of Additional Financed Res taurant Locations and Section 3.2 hereof in the case of Substitute Financed Restaurant Locations, each Additional Financed Restaurant Location and Substitute Financed Res taurant Location shall be a Financed Restaurant Location for all purposes of this Agreement. (d) Section 1.1 of the Loan Agreement is hereby further amended by deleting in its entirety the definition of "Fixed Rate" set forth therein and substituting in lieu thereof the following revised definition of "Fixed Rate": 2 3 "Fixed Rate" shall mean, as to each Term Loan, a simple interest rate equal to 8.17 percent (8.17%) per annum. 2. Amendments to Section 2.1 of the Loan Agreement. Section 2.1 of the Loan Agreement is hereby deleted in its entirety and the following revised Section 2.1 is substituted in lieu thereof: 2.1 Term Loan Facility. (a) Term Loans. Lender hereby creates the Term Loan Facility in favor of Borrower consisting of two (2) Term Loans, as follows: (i) a Term Loan of up to Six Million Four Hundred Eighty-Eight Thousand Dollars ($6,488,000) in principal amount (herein, sometimes called "Term Loan A") and (ii) a Term Loan of up to Five Hundred Twelve Thousand Dollars ($512,000) in principal amount (herein, sometimes called "Term Loan B"). The Term Loans shall be disbursed in up to three (3) disbursements as follows: (i) on the Closing Date, subject to satisfaction of the conditions precedent set forth in Article 10 hereof, Lender shall make an initial disbursement of Term Loan A in the amount of Five Million Thirty-Two Thousand Dollars ($5,032,000) and an initial disbursement of Term Loan B in the amount of Three Hundred Sixty-Five Thousand Seven Hundred Fourteen and 29/100 Dollars ($365,714.29) and (ii) subject to satisfaction of the conditions precedent specified in clause (b) below, Borrower may obtain not more than two additional disbursements of Term Loan A in the aggregate amount of not more than One Million Four Hundred Fifty-Six Thousand Dollars ($1,456,000) and not more than two additional disbursements of Term Loan B in the aggregate amount of not more than One Hundred Forty- Six Thousand Two Hundred Eighty-Five and 71/100 Dollars ($146,285.71), provided, however, that such additional disbursements of the Term Loans must be made, if at all, on or prior to March 14, 1996. (b) Additional Disbursements of Term Loans. The making of additional disbursements of the Term Loans shall be governed by the following provisions: (i) Portland Location. Subject to clause (iv) below, Borrower may obtain an additional disbursement of Term Loan A in the amount of Seven Hundred Sixty Eight Thou sand Dollars ($768,000) and an additional disbursement of Term Loan B in the amount of Seventy-Three Thousand One Hundred Forty-Two and 86/100 Dollars ($73,142.86), 3 4 upon delivering to Lender, at least ten (10) days prior to the desired disbursement date, a duly completed and executed Addendum to Term Loan and Security Agreement, in the form of Annex 1 attached hereto (a "Term Loan Addendum"), accompanied by each of the following with regard to the Portland Location, prepared or obtained at Borrower's expense (to the extent not delivered on or prior to the Closing Date): (A) a First Amendment to Property Agreement, in the form of Annex 2 attached hereto; (B) a Mortgage and UCC financing statements sufficient to grant to Lender a perfected first priority security interest and lien on the Equipment Collateral and Real Estate Collateral located at or comprising the Portland Location; (C) a mortgagee's title insurance policy satisfying the conditions specified in Section 10.1(f)(12) hereof; (D) evidence of insurance satisfying the conditions specified in Section 10.1(f)(13) hereof; (E) such updated lien search reports as Lender shall request evidencing that there are no liens of record encumbering the Portland Location; and (F) such other documents, instruments and agreements as Lender reasonably requests. (ii) San Bernardino Location. Subject to clause (iv) below Borrower may obtain an additional disbursement of Term Loan A in the amount of Six Hundred Eighty-Eight Thousand Dollars ($688,000) and an additional disburse ment of Term Loan B in the amount of Seventy-Three Thousand One Hundred Forty-Two and 86/100 Dollars ($73,142.86) upon delivering to Lender, at least ten (10) days prior to the desired disbursement date, a duly completed and executed Term Loan Addendum, accompanied by each of the following with regard to the San Bernardino Location (to the extent not delivered on or prior to the Closing Date), prepared or obtained at Borrower's expense: (A) such environmental assessments, reports and testing, prepared and performed by environmental experts satisfactory to Lender, as Lender and the environmental experts employed by it shall request in order to demon strate (x) the absence of Contaminants on, in or under the San Bernardino Location and surrounding properties and (y) that such property is in compliance with ap plicable Environmental Laws; (B) a Mortgage and UCC financing statements sufficient to grant to Lender a perfected first priority security interest and lien on the Equipment Collateral and Real Estate Collateral located at or comprising the San Bernardino Location; (C) a mortgagee's title insurance policy satisfying the conditions specified in 4 5 Section 10.1(f)(12) hereof; (D) evidence of insurance satisfying the conditions specified in Section 10.1(f)(13) hereof; (E) such updated lien search reports as Lender shall request evidencing that there are no liens of record encumbering the San Bernardino Location; and (F) such other documents, instruments and agreements as Lender reasonably requests. (iii) Other Additional Financed Restaurant Locations. In lieu of satisfying the conditions specified in the preceding clause (i) and/or clause (ii) and obtaining additional disbursements of the Term Loans thereunder, Borrower may provide to Lender as additional collateral up to two (2) other Carl's Jr. restaurant locations of Borrower, selected by Borrower and approved by Lender, as to which, in each case, subject to satisfaction of each of the conditions precedent specified below, subject to clause (iv) below and subject to the aggregate limitations on additional disbursements of the Term Loans specified hereinabove, Lender shall make an additional disbursement of Term Loan A in an amount of up to eighty percent (80%) of the appraised as-is market value of the real estate comprising such Additional Financed Restaurant Location and, concurrently therewith, an additional disbursement of Term Loan B in the amount of up to Seventy-Three Thousand One Hundred Forty Two and 86/100 Dollars ($73,142.86) (based on Lender's determination of the value of the equipment located at such Additional Financed Restaurant Location). In the event that Borrower desires to obtain additional disbursements of the Term Loans based on the security of any such Additional Financed Restaurant Location, Borrower shall be required to deliver to Lender, at least twenty (20) days prior to the desired disbursement date, at its expense, a duly completed and executed Term Loan Addendum accompanied by each of the following with regard to such Additional Financed Restaurant Location: (A) an appraisal satisfying the conditions specified in Section 10.1(f)(8) hereof; (B) an as-built survey satisfying the conditions specified in Section 10.1(f)(10) hereof; (C) an Environmental Questionnaire, as described in Section 5.10 hereof, together with an environmental regulatory review for such Additional Financed Restaurant Location, prepared by independent experts selected by Lender, together with, if Lender so requests in its sole discretion, based on the results of such environmental regulatory review, a "Phase I" environmental audit and such additional environmental testing as Lender shall so require with respect to such Additional Financed Restaurant Location, in each case performed by environmental experts selected by Lender and the results of which 5 6 shall be satisfactory to Lender; (D) a mortgagee's title insurance policy satisfying the conditions specified in Section 10.1(f)(12) hereof; (E) a Mortgage and UCC financing statements sufficient to grant to Lender a perfected first priority security interest and lien on such Additional Financed Restaurant Location; (F) evidence of insurance satisfying the conditions specified in Section 10.1(f)(13) of the Loan Agreement; (G) such lien search reports as Lender shall request evidencing that there are no liens of record encumbering such Additional Financed Restaurant Location; and (H) such other documents, instruments and agreements as Lender reasonably requests. (iv) No Default Condition or Event of Default; Represen tations and Warranties True and Correct. Borrower shall have no right to obtain any additional disbursements of the Term Loans if at the time any such disbursement is to be made, any Default Condition or Event of Default has occurred and is continuing, or, except as otherwise approved by Lender, any representation or warranty made hereunder is no longer true and correct. 3. Amendment to Section 2.2 of The Loan Agreement. (a) Section 2.2 of the Loan Agreement, pertaining to the amortization of the Term Loans, is hereby deleted in its entirety and the following revised Section 2.2 is substituted in lieu thereof: 2.2 Amortization. The principal amount of each Term Loan, together with accrued interest thereon at the then Applicable Rate, shall be paid as follows: (a) as to Term Loan A, in fifty-nine (59) monthly installments, in accordance with the amortization schedule set forth on Schedule I attached hereto, as amended from time to time as provided in the last sentence hereof, commencing on February 1, 1996, and concluding on December 1, 2000, followed by a balloon payment in the amount of the unpaid principal balance of Term Loan A and all accrued and unpaid interest thereon, due and payable on January 1, 2001; and (b) as to Term Loan B, in sixty (60) monthly installments, in accordance with the amortization schedule set forth on Schedule II attached hereto, as amended from time to time as provided in the last sentence hereof, commencing on February 1, 1996, and continuing through January 1, 2001; it being under 6 7 stood and agreed that: (i) all payments on a Term Loan shall be applied, when received first to accrued interest on such Term Loan until paid in full and, then, to the principal amount thereof; (ii) the amortization of the Term Loans shall be based on level monthly payments (inclusive of principal and accrued interest); and (iii) the last payment on each Term Loan shall, in any event, be in that amount necessary to pay in full the then unpaid principal balance of such Term Loan together with all accrued, but unpaid, interest thereon. Attached as Schedules I and II hereto are the respective amortization schedules for Term Loan A and Term Loan B based on the disbursements of the Term Loans made on the Closing Date. In the event of any additional disbursements of the Term Loans pursuant to Section 2.1 hereof, the amortization schedules set forth on Schedules I and II shall be amended in the manner set forth on Schedules I and II to the then applicable Term Loan Addendum. (b) Borrower hereby further agrees with Lender that the initial amortization schedules for Term Loan A and Term Loan B shall be as set forth in Schedule I and Schedule II, respectively, attached hereto, and authorizes Lender to attach such schedules as Schedule I and Schedule II to the Loan Agreement. 4. Amendment to Section 2.3 of the Loan Agreement Section 2.3 of the Loan Agreement pertaining to the payment of interest is hereby amended by deleting the date "January 1, 1996" in the second sentence thereof and substituting in lieu thereof the date "February 1, 1996". 5. Amendment to Section 2.4 of the Loan Agreement. Section 2.4 of the Loan Agreement is hereby deleted in its entirety and the following revised Section 2.4 is hereby substituted in lieu thereof: 2.4 Term Notes. The indebtedness represented by each Term Loan shall be evidenced by a Term Note corresponding to the maximum principal amount thereof which may be disbursed hereunder; provided, however, that Borrower's obligations under each Term Note shall be limited to the amount of the Term Loan evidenced thereby which is actually disbursed hereunder. Each Term Note shall be executed by Borrower and delivered to Lender on or prior to the Closing Date. 6. Amendment to Section 2.5 of the Loan Agreement. Section 2.5 7 8 of the Loan Agreement is hereby amended by deleting in their entirety the last two sentences thereof and substituting in lieu thereof the following two sentences: Coincident with each disbursement of the Term Loans, Borrower will pay to Lender a non-refundable closing fee with regard to such disbursement in an amount equal to one-half of one percent (1/2%) of the amount of such disbursement. Each such closing fee shall be deemed to be fully earned on the date of such disbursement. 7. Amendment to Exhibit A to the Loan Agreement. Exhibit A to the Loan Agreement is hereby amended by deleting such exhibit in its entirety and substituting in lieu thereof Exhibit A attached hereto. In the event of any subsequent disbursements of the Term Loans pursuant to Section 2.1 hereof, as amended hereby, Exhibit A shall be further amended as set forth in each applicable Term Loan Addendum. 8. Term Notes; Mortgages. The Term Notes, dated as of December 19, 1995, executed and delivered by Borrower to Lender, are in the respective maximum principal amounts of Term Loan A and Term Loan B. Likewise, the Mortgages, dated as of December 19, 1995, executed and delivered by Borrower to Lender, provide that they secure the maximum principal amounts of Term Loan A and Term Loan B. Lender hereby acknowledges that at all times Borrower's obligations to repay principal under the Term Notes, and the principal amount of the Term Notes secured by the Mortgages, shall be limited to the amount of the Term Loans actually disbursed by Lender under the Loan Agreement. 9. Miscellaneous. (a) Effect of Amendment. Except as set forth expressly herein, all terms of the Loan Agreement and the other Loan Documents, as amended hereby, shall be and remain in full force and effect and shall con stitute the legal, valid, binding and enforceable obligations of Borrower to Lender. To the extent any terms and conditions in any of the Loan Documents shall contradict or be in conflict with any terms or conditions of the Loan Agreement, after giving effect to this Amendment, such terms and conditions are hereby deemed modified and amended accordingly to reflect the terms and conditions of the Loan Agreement as modified and amended hereby. In connection herewith, Borrower shall execute such amendments to the other Loan Documents or re-execute such of the other Loan 8 9 Documents as Lender shall request. (b) Ratification. Borrower hereby restates, ratifies and reaffirms each and every term and condition set forth in the Loan Agreement, as amended hereby, and the Loan Documents effective as of the date hereof. (c) Estoppel. To induce Lender to enter into this Amendment and to make the Term Loans to Borrower under the Loan Agreement, Borrower hereby acknowledges and agrees that, as of the date hereof, no Default Condition or Event of Default has occurred and is continuing and, in addition, there exists no right of offset, defense, counterclaim or objection in favor of Borrower as against Lender with respect to the Obligations. (d) Governing Law. This Amendment shall be governed by, and construed in accordance with, the internal laws (and not the laws of conflicts) of the State of Illinois and all applicable federal laws of the United States of America. 9 10 Please countersign in the space provided below to acknowledge your concurrence with the foregoing. Sincerely yours, HELLER FINANCIAL, INC. By: --------------------------- Dominick J. Masciantonio Vice President and Region Credit Manager Acknowledged and agreed: CARL KARCHER ENTERPRISES, INC. By: --------------------------- Loren Pannier Senior Vice President 10 11 ACKNOWLEDGMENT OF GUARANTOR The undersigned, CKE Restaurants, Inc. being a guarantor of the obligations of Carl Karcher Enterprises, Inc. ("Borrower") under the "Loan Agreement" referenced in the within and foregoing Amendment No. 1 to Term Loan and Security Agreement; capitalized terms used herein and not defined herein have the meanings assigned to them in the Amendment, pursuant to a Guaranty, dated as of December 19, 1995 (the "Guaranty") hereby (a) acknowledges its receipt of a copy of the Amendment and Agreement with its terms and (b) acknowledges and agrees that the Guaranty shall continue in full force and effect, without diminution or impairment, from and after the execution and delivery of the Amendment. IN WITNESS WHEREOF, the undersigned has set its hand and seal as of the 23 day of January, 1996. CKE RESTAURANTS, INC. By:___________________ Name:_________________ Title:________________ 11 12 ANNEX 1 [FORM OF ADDENDUM TO TERM LOAN AND SECURITY AGREEMENT] [TO BE COMPLETED] 12 13 ANNEX 1 [FORM OF ADDENDUM TO TERM LOAN AND SECURITY AGREEMENT] ADDENDUM NO.___ TO TERM LOAN AND SECURITY AGREEMENT Date:________ __, 1996 To: Heller Financial, Inc. Suite 1600 900 Circle 75 Parkway Atlanta, Georgia 30339 Attn: Dominick J. Masciantonio, Vice President and Region Credit Manager (1) Preamble. We refer to that certain Term Loan and Security Agreement, dated as of December 19, 1995, between you and the undersigned, as amended to date, including, without limitation pursuant to a certain Amendment No. 1 to Term Loan and Security Agreement, dated as of January 22, 1996 (as so amended, the "Loan Agreement"), capitalized terms used herein and not defined herein have the meanings assigned to them in the Loan Agreement. (2) Request for Additional Disbursements. Pursuant to Section 2.1 of the Loan Agreement, we hereby request that you make an additional disbursement of the Term Loans as follows: (a) Date of requested disbursement: ________ __, 1996 (b) Amount of requested disbursement of Term Loan A: $__________ (c) Amount of requested disbursement of Term Loan B: $__________ (d) Disbursement Instructions: As set forth on attachment 1 hereto. (3) Additional Financed Restaurant Location. In connection with such request, we are providing to you a Mortgage and all other items required to be delivered to you pursuant to Section 2.1(b) of the Loan Agreement with respect to our restaurant location at _____________________________________________________ which shall be a Financed Restaurant Location for all purposes of the Loan Agreement. (4) Confirmation of Grant of Security Interest. In order to induce you to make the additional disbursements of the Term Loans requested hereby, we hereby grant to you, as further 14 security for the Obligations, a continuing, general lien upon, security interest in, and security title to the Equipment Collateral located at the Financed Restaurant Location described in the preceding paragraph 3, to the full extent of our interest herein, together with any and all products and proceeds of the foregoing, including, without limitation, insurance proceeds, and agree with you that such Equipment Collateral shall constitute Collateral for all purposes of the Loan Agreement. (5) Replacement of Exhibit A to the Loan Agreement. We hereby agree with you that effective upon your making of the additional disbursements of the Term Loans requested hereby Exibit A to the Loan Agreement shall be deleted in its entirety and Exhibit A attached hereto shall be substituted in lieu thereof. (6) Replacement of Schedules I and II of the Loan Agreement. We hereby agree with you that effective upon your making of the additional disbursements of the Term Loans requested hereby Schedules I and II to the Loan Agreement shall be deleted in their entireties and Schedules I and II attached hereto shall be substituted in lieu thereof. (7) Representations and Warranties. In order to induce you to make the additional disbursements of the Term Loans contemplated hereby, we hereby represent and warrant to you that as of the date thereof (a) each of the representations and warranties set forth in the Loan Agreement and the in the other Loan Documents is true and correct, including, without limitation, with reference to the Additional Financed Restaurant location described herein and the Collateral located on or comprising such Additional Financed Restaurant Location, (b) no Default Condition or Event of Default has occurred and is continuing and (c) we have satisfied each of the conditions to the making of the additional disbursements of the Term Loans requested hereby set forth in Section 2.1(b) of the Loan Agreement. IN WITNESS WHEREOF, the undersigned has set its hand as of the day and year first above written. CARL KARCHER ENTERPRISES, INC. By:___________________ Name: ____________ Title: ____________ 2 15 ANNEX 2 [FORM OF FIRST AMENDMENT TO PROPERTY AGREEMENT] [SEE ATTACHED] 16 Recording requested by and when recorded return to: Carl Karcher Enterprises, Inc. 1200 North Harbor Boulevard Anaheim, California 92803-4349 Attn: Judy Butterworth Lease/Escrow Manager FIRST AMENDMENT TO PROPERTY AGREEMENT THIS FIRST AMENDMENT ("Amendment"), made as of the ___ day of January, 1996, by and between REC RESOLUTION COMPANY, an Oregon corporation ("REC"), and CARL KARCHER ENTERPRISES, INC., a Cali fornia corporation ("Karcher"); WITNESSETH: WHEREAS, REC and Karcher are parties to a certain Property Agreement, dated as of August 11, 1994, and recorded on February 3, 1995 at file number 95 14041 in the real estate records of Multnomah County, Oregon (the "Property Agreement"), pursuant to which REC and Karcher have made certain agreements with regard to the property in the Gateway Shopping Center in Portland, Multnomah County, Oregon owned by Karcher as described on Exhibit "C" to the Property Agreement (the "Property"); and WHEREAS, Karcher desires to obtain certain financing from Heller Financial, Inc. ("Heller") and to secure its obligations in respect of such financing by granting to Heller, or to a trustee on its behalf, pursuant to a deed of trust and other security documents (collectively, the "Heller Security Documents"), liens and security interests in the Property and in all improvements, equipment and fixtures located thereon or used in connection therewith; and WHEREAS, in order to permit Karcher to obtain such financing from Heller, Karcher has requested that REC join with it in the execution of this Amendment and REC has agreed to do so; NOW, THEREFORE, in consideration of the foregoing premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. Defined Terms. Capitalized terms used herein and not defined herein shall have the meanings assigned to them in the Property Agreement. 2. Right of Repurchase; Use Restrictions. Notwithstanding anything contained in the Property Agreement to the contrary, REC 17 and Karcher hereby agree that, in connection with the exercise by Heller of any of its rights and remedies under the Heller Security Documents, including, without limitation, by way of taking possession of the Property, conducting a foreclosure sale of the Property or accepting a deed of the Property in lieu of foreclosure (collectively, the "Heller Remedies"), and following such exercise, neither Heller, any of its successors or assigns, including, without limitation, any purchaser in a foreclosure sale of the Property conducted by or on behalf of Heller, nor any subsequent purchaser of the Property following exercise of any Heller Remedies shall be subject to either (A) the provisions of Section 4 of the Property Agreement granting to REC certain repurchase rights or (B) the restrictions on use of the Property set forth in Section 5 of the Property Agreement. 3. Third Party Beneficiaries. Heller, its successors and assigns, including, without limitation, any purchaser in a foreclosure sale of the Property conducted by or on behalf of Heller, and any subsequent purchasers of the Property following exercise of any of the Heller Remedies shall be third party beneficiaries of the provisions of this Amendment, and such provisions may not be amended, modified, waived, terminated or supplemented in any respect without the prior written consent of Heller and any such other person then in possession of the Property. 4. Effect of Amendment. As amended hereby, all provisions of the Property Agreement shall continue in full force and effect and be binding upon REC, Karcher and Heller and its successors and assigns. 2 18 IN WITNESS WHEREOF, each of the undersigned has caused this Amendment to be executed, under seal, by its duly authorized officer, as of the date and year first above written. REC RESOLUTION COMPANY By:________________________ Name:___________________ Title:__________________ CARL KARCHER ENTERPRISES, INC. By:________________________ Name:___________________ Title:__________________ 3 19 ACKNOWLEDGMENTS STATE OF _______________ COUNTY OF ______________ This instrument was acknowledged before me on the ___ day of January, 1996 by _____________________, the ____________________ of REC Resolution Company, an Oregon corporation, on behalf of said corporation. ________________________________ Notary Public for the State of ________________________________ My commission expires: ________________________________ [NOTARY SEAL] 4 20 STATE OF ________________ COUNTY OF________________ This instrument was acknowledged before me on the ___ day of January, 1996 by _____________________, the ____________________ of Carl Karcher Enterprises, Inc., a California corporation, on behalf of said corporation. ________________________________ Notary Public for the State of ________________________________ My Commission Expires: ________________________________ [NOTARY SEAL] 5 21 EXHIBIT A FINANCED RESTAURANT LOCATIONS [TO BE COMPLETED] 22 EXHIBIT A FINANCED RESTAURANT LOCATIONS
APPRAISED PRO RATA LOCATION VALUE APPRAISED VALUE - -------- ----- --------------- 4880 Campus Drive $2,200,000 34.98% Newport Beach,CA 5166 Vineland $1,210,000 19.24% North Hollywood, CA 7359 Miliken Avenue $1,140,000 18.12% Rancho Cucamonga, CA 1075 Mono Way $ 740,000 11.76% Sonora, CA 200 Louise Avenue $1,000,000 15.90% Lathrop, CA ---------- ------ $6,290,000 100.00%
EX-11.1 15 COMPUTATION OF EARNINGS PER SHARE 1 EXHIBIT 11-1 CKE RESTAURANTS, INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE
FISCAL YEAR ENDED JANUARY 31 ----------------------------------------------------------- 1996 1995 1994 1993 1992 ------- ------- ------- ------- ------- (Amounts in thousands, except per share amounts) PRIMARY EARNINGS PER SHARE: Net income (loss).................................... $10,952 $ 1,264 $ 3,665 $(5,507) $13,038 ======= ======= ======= ======== ======= Weighted average number of common shares outstanding during the year........................ 18,382 18,779 18,215 18,034 18,107 Incremental common shares attributable to exercise of stock options...................... 208 82 66 294 (1) 293 Repurchase and retirement of shares.............. -- -- (28) -- (208) Purchase of treasury shares....................... (72) (144) -- -- -- --------- -------- ------- --------- ------- 18,518 18,717 18,253 18,328 18,192 ======= ======= ======= ======= ======= Primary earnings (loss) per share..................... $ .59 $ .07 $ .20 $ (.30)(1) $ .72 ======== ======= ======== ======= ========
FISCAL YEAR ENDED JANUARY 31 ---------------------------------------------------------- 1996 1995 1994 1993 1992 ------- ------- ------- ------- ------- (Amounts in thousands, except per share data) FULLY DILUTED EARNINGS PER SHARE: Net income (loss)..................................... $10,952 $ 1,264 $ 3,665 $(5,507) $13,038 ======= ======= ======= ======= ====== Weighted average number of common shares outstanding during the year......................... 18,382 18,779 18,215 18,034 18,107 Incremental common shares attributable to exercise of stock options....................... 369 82 380 334 (1) 309 Repurchase and retirement of shares............... -- -- (28) -- (208) Purchase of treasury shares....................... (72) (144) -- -- -- ------- -------- ------- ---------- ------- 18,679 18,717 18,567 18,368 18,208 ======= ======= ======= ======== ======= Fully diluted earnings (loss) per share............... $ .59 $ .07 $ .20 $ (.30) (1) $ .72 ======= ======= ======= ========== =======
- --------------- (1) This calculation is submitted in accordance with Regulation S-K item 601(b)(11) although it is contrary to paragraph 40 of Accounting Principles Board Opinion No. 15 because it produces an antidilutive effect. EX-12.1 16 COMPUTATION OF RATIOS 1 EXHIBIT 12-1 CKE RESTAURANTS, INC. AND SUBSIDIARIES COMPUTATION OF RATIO OF DEBT TO EQUITY
FISCAL YEAR ENDED JANUARY 31 --------------------------------------------------------- 1996 1995 1994 1993 1992 -------- ------- ------- -------- -------- (Amounts in thousands) Debt: Current portion of long-term debt................. $ 8,575 $ 8,168 $13,207 $ 28,467 $ 29,759 Current portion of capital lease obligations...... 3,745 3,581 3,354 3,158 2,959 --------- ------- ------- --------- -------- 12,320 11,749 16,561 31,625 32,718 -------- ------- ------- -------- -------- Long-term debt.................................... 30,321 27,178 17,414 31,742 50,485 Capital lease obligations......................... 40,233 42,691 45,886 48,512 51,589 -------- ------- ------- --------- -------- 70,554 69,869 63,300 80,254 102,074 -------- ------- ------- -------- -------- $ 82,874 $81,618 $79,861 $111,879 $134,792 ======== ======= ======= ======== ======== Stockholders' equity: Common stock...................................... $ 192 $ 188 $ 186 $ 181 $ 179 Additional paid-in capital........................ 38,713 35,119 33,742 28,612 26,609 Retained earnings................................. 67,393 57,725 58,148 55,939 62,891 Treasury stock.................................... (5,109) (4,558) -- -- -- -------- -------- ------- -------- -------- $101,189 $88,474 $92,076 $ 84,732 $ 89,679 ======== ======= ======= ======== ======== Ratio of debt to equity........................... 0.8x 0.9x 0.9x 1.3x 1.5x ======== ======= ======= ======== ========
EX-21.1 17 SUBSIDIARIES OF REGISTRANT 1 EXHIBIT 21-1 CKE RESTAURANTS, INC. LIST OF SUBSIDIARIES Set forth below is a list of all the Company's subsidiaries as of January 29, 1996:
Control by Jurisdiction of ------------------------- Name of Subsidiary Incorporation Registrant Subsidiary - ----------------------------- --------------- ---------- ---------- Carl Karcher Enterprises, Inc. California 100% Boston Pacific, Inc. California 100%
EX-23.1 18 CONSENT OF KPMG PEAT MARWICK LLP 1 EXHIBIT 23-1 CONSENT OF INDEPENDENT AUDITORS The Board of Directors CKE Restaurants, Inc. and Subsidiaries We consent to incorporation by reference in the Registration Statements (Nos. 33-56313 and 33-55337) on Forms S-8 of CKE Restaurants, Inc. and Subsidiaries of our report dated March 19, 1996, relating to the consolidated balance sheets of CKE Restaurants, Inc. and Subsidiaries as of January 31, 1996 and 1995 and the related consolidated statements of income, stockholders' equity and cash flows for each of the years in the three-year period ended January 31, 1996, which report appears in the January 31, 1996 Annual Report on Form 10-K of CKE Restaurants, Inc. and Subsidiaries. KPMG Peat Marwick LLP Orange County, California April 17, 1996 EX-27.1 19 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) CKE RESTAURANTS, INC. CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF INCOME AS OF AND FOR THE YEAR ENDED JANUARY 29, 1996. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) FORM 10-K FOR THE YEAR ENDED JANUARY 29, 1996. 1,000 YEAR JAN-29-1996 JAN-31-1995 JAN-29-1996 23,429 2,510 17,191 0 6,132 56,769 281,842 154,496 246,759 61,317 0 0 0 192 100,997 246,759 393,486 465,437 313,066 439,702 (2,222) 0 10,004 17,953 7,001 10,952 0 0 0 10,952 .59 .59
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