FRANCHISE AGREEMENT

 

 

 

 

 

 

                             CEC ENTERTAINMENT, INC.

                               FRANCHISE AGREEMENT

 

 

 

                                  [CITY, STATE]

 

 

 

                            4441 West Airport Freeway

                                Irving, TX 75062

 

 

 

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                                TABLE OF CONTENTS

 

 

RECITALS.......................................................................1

 

1.   DEFINITIONS...............................................................1

 

2.   GRANT OF RIGHTS...........................................................5

     2.1      Grant............................................................5

     2.2      Exclusivity......................................................5

     2.3      Limitation of Rights.............................................6

 

3.   FEES AND CONTRIBUTIONS....................................................7

     3.1      Franchise Fee....................................................7

     3.2      Royalty Fees.....................................................7

     3.3      System Fund......................................................7

     3.4      Payments and Taxes...............................................7

     3.5      Overdue Payments.................................................8

     3.6      Franchisor's Lien................................................8

     3.7      Contribution Increases...........................................8

 

4.   SITE SELECTION............................................................8

     4.1      Criteria for Site Approval.......................................8

     4.2      Approval by Franchisor...........................................9

     4.3      Costs of On-Site Evaluation......................................9

     4.4      Executed Lease or Purchase Agreement.............................9

     4.5      Extensions.......................................................9

     4.6      Relocation.......................................................9

 

5.   CONSTRUCTION AND REFURBISHMENT...........................................10

     5.1      Pre-Construction/Refurbishment Approval Criteria................10

     5.2      Pre-Construction/Refurbishment Approval.........................11

     5.3      Commencement of Construction/Refurbishment and Extensions.......11

     5.4      Construction/Refurbishment......................................11

     5.5      Opening Assistance..............................................12

     5.6      Inspection......................................................12

     5.7      Continuing Statements...........................................12

     5.8      Installation of Animated Entertainment..........................12

     5.9      Approval for Opening............................................12

 

 

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6.   TRAINING.................................................................13

     6.1      Minimum Training................................................13

     6.2      Location and Expenses...........................................13

     6.3      Additional Training.............................................13

 

7.   OPERATION................................................................13

     7.1      General Manager and Technician..................................13

     7.2      Operational Policies............................................13

     7.3      Suppliers.......................................................15

     7.4      General Maintenance.............................................15

     7.5      Maintenance of Animated Entertainment...........................15

     7.6      Scheduled Refurbishment.........................................16

     7.7      Inspection......................................................16

              7.7.1    Testing................................................16

              7.7.2    Recommendations........................................16

              7.7.3    Failure to Correct Deficiencies........................17

     7.8      Accounting and Records..........................................17

              7.8.1    General Accounting Principles..........................17

              7.8.2    Accounting Statements..................................17

              7.8.3    Inspection of Accounting and Records...................17

              7.8.4    Records of Ownership Interests in Franchisee...........18

              7.8.5    Sales Records..........................................18

     7.9      Internet........................................................18

     7.10     Intranet........................................................19

 

8.   ADVERTISING..............................................................20

     8.1      General Requirements............................................20

     8.2      Pre-Approved Advertising........................................20

     8.3      New Advertising.................................................20

     8.4      Minimum Advertising Expenditures................................20

     8.5      System Fund.....................................................21

     8.6      Advertising Cooperative.........................................22

 

9.   REPRESENTATIONS AND WARRANTIES...........................................23

     9.1      Representations, Warranties and Covenants of Franchisee.........23

              9.1.1    Due Incorporation......................................23

              9.1.2    Authorization..........................................23

              9.1.3    Exclusivity............................................23

              9.1.4    Execution and Performance..............................23

              9.1.5    Corporate Documents....................................23

              9.1.6    Ownership Interests....................................23

              9.1.7    Stop Transfer Instructions.............................24

     9.2      Financial Statements............................................24

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     9.3      Franchisee's Principals.........................................24

     9.4      Guarantee.......................................................24

     9.5      Non-Competition During Term of Agreement........................25

     9.6      Non-Competition after Termination or Non-Renewal of Agreement...25

     9.7      Independent Covenants...........................................25

     9.8      Additional Covenants............................................26

     9.9      Guaranty........................................................26

     9.10     Rights and Limitations to use Animated Entertainment............26

     9.11     Non-Liability...................................................27

     9.12     Performance by Franchisor.......................................27

     9.13     Licensing of Musical Compositions...............................27

 

10.  PROPRIETARY RIGHTS AND INFORMATION.......................................27

     10.1     Confidential Information........................................27

              10.1.1   Confidentiality Agreements.............................28

              10.1.2   Improvements...........................................28

     10.2     Proprietary Marks...............................................28

     10.3     Copyrights......................................................29

 

11.  TRANSFER OF INTEREST.....................................................30

     11.1     Transfer by Franchisor..........................................30

     11.2     Transfer by Franchisee..........................................30

              11.2.1   General Requisites.....................................30

              11.2.2   Right of First Refusal.................................31

              11.2.3   Death or Disability....................................33

              11.2.4   Public Offerings.......................................33

 

12.  INSURANCE AND INDEMNITY..................................................34

     12.1     Insurance.......................................................34

     12.2     Indemnities.....................................................35

              12.2.1   Indemnification........................................35

              12.2.2   Notice and Counsel.....................................35

              12.2.3   Settlement and Remedial Actions........................36

              12.2.4   Expenses...............................................36

              12.2.5   Third Party Recovery...................................36

              12.2.6   Survival...............................................36

 

13.  TERM, RENEWAL AND TERMINATION............................................36

     13.1     Term............................................................36

     13.2     Renewal.........................................................36

     13.3     Termination.....................................................37

 

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              13.3.1   Automatic Termination..................................37

              13.3.2   Termination upon Notice................................38

              13.3.3   Termination with Ten Day Notice........................40

              13.3.4   Termination with Thirty Day Notice.....................40

     13.4     Obligations upon Termination or Expiration......................40

 

14.  REMEDIES.................................................................44

     14.1    Remedies.........................................................44

              14.1.1   Cure...................................................44

              14.1.2   Specific Enforcement...................................44

 

15.  DISPUTE RESOLUTION.......................................................44

     15.1     Mediation.......................................................44

     15.2     Applicable Law..................................................44

     15.3     Jurisdiction and Venue..........................................45

     15.4     Mutual Benefit..................................................45

 

16.  MISCELLANEOUS............................................................45

     16.1     Independent Contractors.........................................45

     16.2     Entire Agreement................................................45

     16.3     Judgment; Discretion............................................46

     16.4     No Waiver.......................................................46

     16.5     Severability....................................................46

     16.6     Notice..........................................................47

     16.7     Counterparts....................................................47

     16.8     Headings........................................................47

     16.9     Further Assurances..............................................47

     16.10    Compliance with Laws............................................47

 

17.  ACKNOWLEDGMENTS..........................................................48

     17.1     Independent Investigation.......................................48

     17.2     Opportunity to Assess Risks.....................................48

     17.3     Receipt of Disclosure Document..................................48

     17.4     No Extraneous Promises..........................................48

     17.5     No Extraneous Inducements.......................................48

     17.6     Commercial Relationship.........................................49

     17.7     Compliance with Anti-Corruption and Anti-Money Laundering Laws..49

     17.8     No Claims.......................................................49

 

 

SCHEDULE 1.14    STATEMENT OF OWNERSHIP INTERESTSAND FRANCHISEE'S PRINCIPALS..52

 

ATTACHMENT A     AGREEMENT AND GUARANTY OFFRANCHISEE'S PRINCIPALS............A-1

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ATTACHMENT B     GENERAL RELEASE.............................................B-1

 

ATTACHMENT C     LEASE RIDER.................................................C-1

 

ATTACHMENT D     ADVERTISING COOPERATIVE AGREEMENT...........................D-1

 

ATTACHMENT E     EMPLOYEE'S CONFIDENTIALITY AND NON-COMPETITION AGREEMENT....E-1

 

ATTACHMENT F     RENEWAL AMENDMENT TO FRANCHISE AGREEMENT....................F-1

 

 

 

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                             CEC ENTERTAINMENT, INC.

                               FRANCHISE AGREEMENT

 

     This  Franchise  Agreement  is  executed  and  entered  into  this  ___  of

_________,  20__, by and between CEC  Entertainment,  Inc., a Kansas corporation

(as Franchisor), and ____________, a ________ corporation (as Franchisee).

 

                                    RECITALS

 

     1. Franchisor has developed and is the owner of the System;

 

     2. Franchisor has developed and is the owner of, or licensee with rights to

sublicense,  certain  Animated  Entertainment  and  Proprietary  Marks which are

utilized in connection with and identify the System; and

 

     3. Franchisee  desires to obtain from Franchisor and Franchisor  desires to

grant to Franchisee certain rights to use the System, the Animated Entertainment

and the Proprietary Marks to develop and establish the Franchised  Restaurant at

the Site.

 

     NOW  THEREFORE,   Franchisor  and  Franchisee  in   consideration   of  the

undertakings and commitments set forth herein, agree as follows:

 

1.   DEFINITIONS

 

     As used in this Agreement and the above Recitals, the following capitalized

terms shall have the meanings attributed to them in this Section:

 

     1.1 "Action" means any cause of action,  suit,  proceeding,  claim, demand,

investigation or inquiry (whether a formal proceeding or otherwise) with respect

to which Franchisee's indemnity applies.

 

     1.2  "Advertising  Cooperative"  means  a  group  of  two  or  more  System

Restaurants,   as  determined  by  Franchisor,   for  the  purpose  of  funding,

administering and developing regional advertising and promotion. programs.

 

     1.3 "Agreement" means this franchise agreement and all attachments.

 

     1.4  "Animated  Entertainment"  means the computer  hardware and  software,

artistic designs,  scripts and musical scores,  staging and lighting  techniques

and configurations,  plans, manuals and specifications,  manufacturing  know-how

and  other  intellectual  property  relating  to video  display,  audio or other

entertainment and to computer controlled three dimensional  animated characters,

including present and future improvements,  patents, trademarks,  copyrights and

other intellectual and artistic property.

 

 

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     1.5 "Association" means the International Association of CEC Entertainment,

Inc. which, as of the date of this Agreement, serves as Franchisor's designee to

administer the System Fund, in accordance with the Association's bylaws and this

Agreement and to which  Franchisee will have the right to be a member so long as

Franchisee is in compliance with this Agreement and the Association's bylaws.

 

     1.6  "Change  in  Control"  means  a  Transfer  of an  Equity  Interest  in

Franchisee which, directly, indirectly, or combined with prior Transfers, causes

a change in the number of Persons  which can vote more than fifty  percent (50%)

of the total Equity Interest in Franchisee.

 

     1.7  "Competing  Business"  means a business which operates a restaurant or

food service outlet in combination with family entertainment,  including without

limitation,  live  entertainment  and  entertainment in the form of video games,

video displays or computer controlled animated characters.

 

     1.8  "Confidential  Information"  means  the  terms of this  Agreement  and

Attachments  and any  amendments  hereto,  the  components  of the  System,  the

Animated Entertainment,  the Operational Policies,  manuals,  written directives

and all  drawings,  equipment,  recipes,  and all  other  information  know-how,

techniques,  materials  and data  imparted or made  available by  Franchisor  to

Franchisee which is (I) designated as confidential,  (ii) known by Franchisee to

be considered  confidential by Franchisor,  or (iii) by its nature inherently or

reasonably to be considered confidential.

 

     1.9  "Designated  Market Area" means the geographic area which includes the

Protected  Territory as defined by Nielson Media  Research,  Inc. or a successor

organization designated by Franchisor.

 

     1.10 "Equity Interest" means a direct or indirect ownership interest in the

capital  stock of,  partnership  or  membership  interest in, or other equity or

ownership interest in (including the right to vote) any type of legal entity.

 

     1.11 "Execution  Date"  means the date upon which the  Agreement  is deemed

duly executed and entered into by Franchisee and Franchisor, as indicated on the

first page of the Agreement.

 

     1.12 "Force  Majeure"  means acts of  God (such as  tornadoes,  hurricanes,

floods,  fire  or  other  natural  catastrophe);   strikes,  lockouts  or  other

industrial disturbances; war, riot, or other civil disturbance;  epidemics; acts

of governments,  such as the exercise of eminent domain rights and  condemnation

(if caused by reasons  beyond  Franchisee's  control);  or other  forces  beyond

Franchisee's reasonable control.

 

     1.13 "Franchisee" means ____________.

 

 

 

 

 

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     1.14 "Franchisee's  Principals" means Franchisee's spouse, if Franchisee is

an  individual,  all officers and directors of Franchisee  and all holders of an

Equity  Interest  in  Franchisee  and  of  any  entity  directly  or  indirectly

controlling Franchisee, all as listed on Schedule 1.14 attached hereto.

 

     1.15 "Franchised  Restaurant"  means the  family-oriented  pizza restaurant

that is  established  and  operated by  Franchisee  utilizing  the  System,  the

Proprietary  Marks and the Animated  Entertainment  in accordance with the terms

and conditions of this Agreement.

 

     1.16  "Franchisor"  means CEC  Entertainment,  Inc.  or any person or legal

entity to which CEC  Entertainment,  Inc.  assigns or  otherwise  transfers  its

rights and obligations contained in this Agreement.

 

     1.17 "Gross  Sales" means the total of all sales related to or arising from

the operation of the Franchised  Restaurant including,  without limitation,  all

monies and receipts from the sale of all beverages,  food,  merchandise  and the

operation of rides,  amusement  games and other  attractions  in the  Franchised

Restaurant,  as well as all revenue from the sale of tokens, whether for cash or

credit and  regardless of collection,  less  applicable  sales taxes  Franchisee

collects and remits,  and valid coupon credits and employee  discounts  deducted

from revenues  initially  recorded as Gross Sales, but without  deduction of any

other costs or expenses whatsoever.

 

     1.18 "Indemnitees" means any designee(s) of Franchisor which administer the

System Fund, Franchisor and its subsidiaries and affiliates and their respective

directors,  officers,  employees,   shareholders,   affiliates,  successors  and

assigns.

 

     1.19   "Internet"   means   collectively   the  myriad  of   computer   and

telecommunications facilities,  including equipment and software, which comprise

the  interconnected  worldwide  network  of  networks  that  employ  the  TCP/IP

(Transmission  Control  Protocol/Internet   Protocol),  or  any  predecessor  or

successor protocols to such protocol, to communicate information of all kinds by

fiber optics, wire, radio, or other methods of electronic transmission.

 

     1.20 "Intranet" means an intranet, extranet or other communications network

between and among Franchisor and Franchisee that its accessed by the Internet.

 

     1.21 "Losses and  Expenses"  means all losses,  compensatory,  exemplary or

punitive damages,  fines,  penalties,  charges,  costs, expenses,  lost profits,

assessments and fees (including reasonable  attorneys',  experts',  accountants'

and consultants' fees); interest,  court costs,  settlement or judgment amounts,

compensation  for damages to Franchisor's  reputation and goodwill,  costs of or

resulting from delays,  financing costs, costs of advertising material and media

time/space,  and costs of changing,  substituting or replacing the same, and any

and all  expenses of recall,  refunds,  compensation,  public  notices and other

similar  amounts  incurred,  charged  against or suffered by the  Indemnitees in

connection with any Action.

 

 

 

 

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     1.22 "Minority Interest" means an Equity Interest of less than five percent

(5%) of the capital stock of, partnership  interest in, or other Equity Interest

in (including the right to vote) any type of legal entity.

 

     1.23 "Operational," used in reference to the Franchised  Restaurant,  means

that the Franchised Restaurant is fully constructed and finished out as approved

by  Franchisor  and is legally  permitted to render its services to, and is open

to, the general public pursuant to this Agreement.

 

     1.24 "Operational Policies" means the written standards, procedures, rules,

regulations,  and policies for the operation of a Franchised Restaurant pursuant

to the System,  as issued from time to time by Franchisor,  a copy of which will

be provided upon the execution of this Agreement.

 

     1.25 "Person" means an individual,  corporation, limited liability company,

partnership,  association, joint stock company, trust or trustee thereof, estate

or executor  thereof,  unincorporated  organization  or joint venture,  court or

governmental  unit or any agency or  subdivision  thereof,  or any other legally

recognizable entity.

 

     1.26 "Proprietary Marks" means the trademarks,  trade names, service marks,

logos,  emblems and other indicia of origin as  designated  from time to time by

Franchisor,  which may be owned by  Franchisor  or licensed to  Franchisor  with

sublicensing rights,  including, but not limited to, the marks "Chuck E. Cheese"

and "Chuck E. Cheese's."

 

     1.27 "Protected Territory" means the area within a ____ (__) mile radius of

the Franchised Restaurant.

 

     1.28 "Site" means the location for the  establishment  and operation of the

Franchised Restaurant which is approved as per Section 4.2 of this Agreement.

 

     1.29 "Site Selection Territory" means ________, ________.

 

     1.30  "Sky  Tubes"  means  components  configured  to create  sequences  of

group/social  and  independent  play,  using tubes,  windows,  entries,  climbs,

crawls, play stations, passageways, and slides.

 

 

 

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     1.31  "System"  means  the  distinctive   system  developed  and  owned  by

Franchisor for the establishment,  development, and operation of family-oriented

pizza restaurants,  the distinguishing  characteristics of which include without

limitation, Animated Entertainment,  Sky Tubes, separate areas with a variety of

rides,  amusement  games  and  other  attractions,  characteristic  decorations,

furnishings and materials,  specially-designed  equipment and equipment layouts,

trade  secret  food  products  and  other  special  recipes,  menus and food and

beverage designations,  food and beverage preparation and service procedures and

techniques,  operating  procedures for sanitation and  maintenance,  methods and

techniques  for  inventory  and cost  controls,  record  keeping and  reporting,

personnel training and management, and advertising and promotional programs, and

Operational Policies, all of which may be changed, improved or further developed

by Franchisor from time to time.

 

     1.32  "System  Fund"  means  collectively,  the three  (3) funds  currently

identified as follows:

 

          (a) the  "Advertising  Fund"  (for  the  maintenance,  administration,

     direction,  preparation,  purchasing and placement of  advertising  for the

     System, Proprietary Marks and Animated Entertainment),

 

          (b) the "Entertainment  Fund" (for the purchase,  lease,  shipping and

     installation  of  software  programs  and  for  the  costs  related  to the

     production  of show  tapes,  videos  and other  audio,  video and  software

     components of the Animated  Entertainment,  including  licensing  rights to

     certain music, and video, and the design, testing and implementation of new

     entertainment  concepts  which may or may not be  directly  related  to the

     Animated  Entertainment,  as more fully described in Sections 3.3 and 8.5),

     and

 

          (c) the  "Media  Fund" (for  purchasing  national  network  television

     advertising),  established for the purposes described above, as well as any

     other objective which  Franchisor  designates in writing for the purpose of

     furthering the System, the Proprietary Marks, the Animated Entertainment or

     the  sales  of  System  Restaurants  generally,  to which  Franchisee  will

     contribute a stated percentage of Gross Sales on a monthly basis.

 

     1.33 "System  Restaurant" means a family-oriented  pizza restaurant that is

established and operated  utilizing the System,  the  Proprietary  Marks and the

Animated  Entertainment  either in accordance with the terms and conditions of a

franchise agreement or by Franchisor.

 

     1.34  "Transfer"  means the sale,  assignment,  conveyance,  pledge,  gift,

mortgage or other encumbrance,  whether direct or indirect, in whole or in part,

or in one or a  series  of  related  transactions  or  occurrences,  of (i) this

Agreement  or of any or all rights or  obligations  of  herein,  (ii) any Equity

Interest  in  Franchisee,  or (iii) any assets of  Franchisee  beyond  transfers

necessary in the ordinary course of business.

 

2.   GRANT OF RIGHTS

 

     2.1  Grant.  Subject  to the  terms,  conditions  and  limitations  of this

Agreement,  Franchisor  hereby grants to Franchisee  the right,  and  Franchisee

undertakes the obligation, to establish and operate the Franchised Restaurant at

a  duly  approved  Site  in the  Protected  Territory.  Franchisee's  use of the

Proprietary Marks or any element of the System in the operation of a business at

any other location or in any other channel of distribution  without Franchisor's

express  written   authorization   will  constitute   willful   infringement  of

Franchisor's rights in the Proprietary Marks and System.

 

 

 

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     2.2 Exclusivity.  For so long as Franchisee is in full compliance with this

Agreement,  Franchisor will not,  without  Franchisee's  prior written  consent,

establish or operate,  or license  anyone other than  Franchisee to establish or

operate,  a System  Restaurant  which is  physically  located  in the  Protected

Territory during the term of this Agreement.

 

     2.3  Limitation  of Rights.  Franchisor  retains  all rights not  expressly

granted hereunder.  Franchisor, its affiliates, and their respective franchisees

and licensees may, among other things, operate other types of facilities besides

System  Restaurants in the Protected  Territory,  including  facilities that are

identified by some or all of the Proprietary  Marks. The license granted by this

Agreement  is only  for the  operation  of a  single  System  Restaurant  at the

approved  Site.  Franchisor  therefore  may (or may  authorize a third party to)

conduct, among other things, the following activities:

 

          (a) Advertise and promote  sales of or by System  Restaurants,  at any

     location, including within the Protected Territory;

 

          (b) Offer and sell  collateral  and  ancillary  products and services,

     such as pre-packaged food products, toys, games, clothing, and memorabilia,

     in the Protected  Territory under the Proprietary  Marks, even though those

     products  and services  may be similar to items  offered by the  Franchised

     Restaurant;

 

          (c) Offer and sell any products and services (regardless of similarity

     to products and services sold in the Franchised Restaurant) under any names

     and marks other than the  Proprietary  Marks,  at any  location,  including

     within the Protected Territory;

 

          (d) Establish and operate a System Restaurant  anywhere outside of the

     Protected  Territory,  regardless  of proximity or financial  impact to the

     Franchised Restaurant;

 

          (e) Establish and operate a non-System  Restaurant  anywhere inside or

     outside of the  Protected  Territory,  regardless of proximity or financial

     impact to the Franchised Restaurant; and

 

          (f)  Operate  one or more sites on the World  Wide Web  portion of the

     Internet that advertise System  Restaurants,  allow customers and potential

     customers  to  make  reservations  at  System  Restaurants  (including  the

     Franchised Restaurant),  sell any product or service including pre-packaged

     food  products,  games,  toys,  clothing or  memorabilia,  or permit  other

     activities (whether or not similar), even though the Web site is accessible

     to or viewable by persons in the Protected Territory.

 

     Franchisee  shall have no right under this Agreement to sub-license  others

to use or grant any rights in the Proprietary Marks, the Animated  Entertainment

or the System.

 

 

 

 

 

 

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3.   FEES AND CONTRIBUTIONS

 

     3.1  Franchise  Fee.  Prior to or upon  the  execution  of this  Agreement,

Franchisee  shall deliver to  Franchisor a franchise  fee of Fifty  Thousand and

no/100 Dollars  ($50,000.00) in readily available funds  ("Franchise  Fee"). The

Franchise  Fee  will be fully  earned  by  Franchisor  and  non-refundable  upon

receipt, in consideration for, among other things,  Franchisor's  administrative

expenses and lost or deferred opportunities in entering into this Agreement.

 

     3.2 Royalty  Fees.  Beginning  the calendar  month in which the  Franchised

Restaurant  is  Operational,  on or  before  the  fifteenth  (15th)  day of each

calendar month thereafter, Franchisee agrees to pay a continuing monthly royalty

fee equal to 3.8% of the  Gross  Sales for the  immediately  preceding  calendar

month,  subject to the immediately  following sentence.  During the term of this

Agreement,  Franchisor  shall have the right,  at its  option,  upon ninety (90)

days' prior notice to  Franchisee,  to increase the royalty fee to an amount not

to exceed five percent (5%) of the Gross Sales of the Franchised Restaurant.  In

such event,  Franchisee shall commence  payment of the increased  royalty fee in

the month immediately following the expiration on the ninety (90) day period.

 

     3.3 System  Fund.  Beginning  the  calendar  month in which the  Franchised

Restaurant  is  Operational,  on or  before  the  fifteenth  (15th)  day of each

calendar  month  thereafter,  Franchisee  agrees  to pay to  the  System  Fund a

continuing  monthly amount  designated by Franchisor,  but in no event more than

three and  one-tenth  percent  (3.1%) of Gross  Sales,  except as  described  in

Section 3.7 and 8.5(f)  (amounting to .2% of Gross Sales currently  allocated to

the  Entertainment   Fund,  .4%  of  Gross  Sales  currently  allocated  to  the

Advertising Fund and 2.5% of Gross Sales currently allocated to the Media Fund).

The  portion  of the  System  Fund  payment  allocated  to the Media Fund may be

withdrawn  upon (1) the  unilateral  election of  Franchisor  or (2) the vote of

System franchisees in good standing under their respective franchise agreements,

with  thirty  (30) days  advance  notice of such vote,  one vote per  franchised

restaurant  location  and a simple  majority of  restaurants  voting in favor of

withdrawal; provided however, that if such vote or election shall be taken on or

before  March 1 of any  calendar  year,  it  shall  first  become  effective  on

September 1 of the same year, and if such vote or election shall have been taken

after March 1 of any calendar year, it shall first become effective  September 1

of the following  calendar year. Not less than six (6) months following any such

withdrawal,  such payment may be  reinstated,  upon the  unilateral  election by

Franchisor or by vote in favor of reinstatement in accordance with the procedure

described in this Section.

 

 

 

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     3.4  Payments  and Taxes.  All  franchise  and  royalty  fees shall be paid

directly to Franchisor or its designee.  All payments and contributions shall be

in United States dollars and will be made free and clear of any tax,  deduction,

offset or  withholding  of any kind. All taxes and penalties on any payment made

by  Franchisee  pursuant  to this  Agreement  now or in the future will be fully

borne by  Franchisee.  In the event of any bona fide dispute as to liability for

taxes assessed or other indebtedness, Franchisee may contest the validity or the

amount of the tax or  indebtedness  in accordance  with procedures of the taxing

authority or applicable law; however,  in no event shall Franchisee permit a tax

sale or seizure by levy of execution or similar writ or warrant,  or  attachment

by a creditor, to occur against the premises of the Franchised Restaurant or any

improvements thereon.

 

     3.5 Overdue  Payments.  Any payment not actually  received by Franchisor or

its  designee  when due shall  accrue  late  charges  equal to one and  one-half

percent  (1.5%) per month or the maximum  rate  permitted  by law,  whichever is

less,  from the date it was due until paid.  Such  interest  charges  will be in

addition to any other remedies that may be available to Franchisor.

 

     3.6 Franchisor's Lien. The obligations to make monthly payments required in

this  Section 3 shall give rise to and  remain,  until  paid in full,  a lien in

favor of  Franchisor  against any and all of the personal  property,  machinery,

fixtures,  equipment  and  inventory  owned  by  Franchisee  at  the  Franchised

Restaurant, and against the proceeds and replacements thereof. Franchisee hereby

irrevocably   appoints  Franchisor  as  its   attorney-in-fact   (surviving  any

termination or expiration  hereof) to execute and file in the name of Franchisee

as  debtor  such  instruments,   including  Uniform  Commercial  Code  financing

statements,  as may be required by Franchisor from time to time to evidence such

lien.  Franchisee  shall,  immediately upon Franchisor's  request,  execute such

documents as Franchisor may, from time to time, deem necessary to effectuate the

above.

 

     3.7  Contribution  Increases.  The monthly  contribution to the System Fund

shall be subject at any time to increase upon a majority vote cast by all System

franchisees in good standing under their franchise agreements (e.g., not subject

to a pending default notice from Franchisor).  Each franchisee shall be provided

thirty (30) days advance notice and opportunity to vote on the proposed increase

and shall be entitled to one (1) vote per System Restaurant in operation,  and a

majority vote required for any increase  shall be a majority of all  restaurants

represented  by the votes  cast.  Franchisor  shall  provide  written  notice to

Franchisee at least sixty (60) days prior to the effective  date of any increase

so approved by such majority vote.

 

4.   SITE SELECTION

 

     4.1 Criteria for Site Approval.  Franchisee  agrees that prior to or within

one hundred and twenty (120) days after the execution of this Agreement, it will

locate  and  obtain  the  approval  of  Franchisor  for a Site  within  the Site

Selection  Territory  for the  establishment  and  operation  of the  Franchised

Restaurant.

 

     Franchisee must submit to Franchisor:

 

          (a) a completed site review form designated by Franchisor,  which will

     include,  among other things,  demographic  information,  a site plan,  and

     traffic-related information;

 

          (b)  if  the  premises  for  the  proposed  Site  are  to  be  leased,

     satisfactory   evidence   that  the  lessor   will  agree  to  the  minimum

     requirements   contained  in  the  Lease  Rider  to  be  executed   between

     Franchisor, Franchisee and the lessor attached hereto as Attachment C; and

 

 

 

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          (c) any  other  information  or  materials  as  Franchisor  reasonably

     requires,  such as a letter  of  intent or other  document  which  confirms

     Franchisee's favorable prospects for obtaining the proposed Site.

 

     4.2 Approval