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Franchise Disclosure Document for Smashburger Franchising, LLC

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Complete Smashburger Franchising, LLC franchise disclosure document with information on the burger franchise opportunity's costs, training, key executives, financials and more. Get more details on Smashburger Franchising and submit feedback and reviews of the franchise opportunity at Profyling.com

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Franchise Disclosure Document for Smashburger Franchising, LLC

  1. 1. Smashburger 06/2012 FDD 1031.002.006/46510.2 ® FRANCHISE DISCLOSURE DOCUMENT ® SMASHBURGER FRANCHISING LLC a Delaware Limited Liability Company 1515 Arapahoe St. Tower One, 10th Floor Denver, CO 80202 (303) 633-1500 www.smashburger.com franchise@smashburger.com The franchisor will grant the right to establish and operate one or more Smashburger restaurants featuring hamburgers, sandwiches, salads, other food items and beverages. The total investment necessary to begin operation of a SMASHBURGER RESTAURANT ranges from $317,500 to $789,500. This sum includes the initial franchise fee of $40,000 and a lease review fee of $1,500. The total investment necessary under the Multi-Unit Development Agreement equals $20,000 multiplied by the total number of restaurants to be developed (except for the first restaurant). This amount is payable to us. We credit the initial development fee against the initial franchise fee for each restaurant after the first one. See Items 5-7 of this Disclosure Document for further explanation concerning the total investment. This Disclosure Document summarizes certain provisions of your franchise agreement and other information in plain English. Read this Disclosure Document and all accompanying agreements carefully. You must receive this Disclosure Document at least 14 calendar days before you sign a binding agreement with, or make any payment to, the franchisor or an affiliate in connection with the proposed franchise sale. Note, however, that no government agency has verified the information contained in this document. You may wish to receive your Disclosure Document in another format that is more convenient for you. To discuss the availability of disclosures in different formats, contact Smashburger Franchising LLC, 1515 Arapahoe Street, Tower One, 10th Floor, Denver, Colorado, 80202, (303) 633-1500. The terms of your contract will govern your franchise relationship. Don’t rely on this Disclosure Document alone to understand your contract. Read all of your contract carefully. Show your contract and this Disclosure Document to an advisor, like a lawyer or an accountant. Buying a franchise is a complex investment. The information in this Disclosure Document can help you make up your mind. More information on franchising, such as “A Consumer’s Guide to Buying a Franchise,” which can help you understand how to use this Disclosure Document, is available from the Federal Trade Commission. You can contact the FTC at 1-877-FTC-HELP or by writing to the FTC at 600 Pennsylvania Avenue, NW, Washington, D.C. 20580. You can also visit the FTC’s home page at www.ftc.gov for additional information. Call your state agency or visit your public library for other sources of information on franchising. There may also be laws on franchising in your state. Ask your state agencies about them. ISSUANCE DATE: February 28, 2012; as amended June 14, 2012.
  2. 2. Smashburger 06/2012 FDD 1031.002.006/46510.2 STATE COVER PAGE Your state may have a franchise law that requires a franchisor to register or file with a state franchise administrator before offering or selling in your state. REGISTRATION OF A FRANCHISE BY A STATE DOES NOT MEAN THAT THE STATE RECOMMENDS THE FRANCHISE OR HAS VERIFIED THE INFORMATION IN THIS DISCLOSURE DOCUMENT. Call the state franchise administrator listed in Exhibit A for information about the franchisor, or about franchising in your state. MANY FRANCHISE AGREEMENTS DO NOT ALLOW YOU TO RENEW UNCONDITIONALLY AFTER THE INITIAL TERM EXPIRES. YOU MAY HAVE TO SIGN A NEW AGREEMENT WITH DIFFERENT TERMS AND CONDITIONS IN ORDER TO CONTINUE TO OPERATE YOUR BUSINESS. BEFORE YOU BUY, CONSIDER WHAT RIGHTS YOU HAVE TO RENEW YOUR FRANCHISE, IF ANY, AND WHAT TERMS YOU MIGHT HAVE TO ACCEPT IN ORDER TO RENEW. Please consider the following RISK FACTORS before you buy this franchise: 1. THE MULTI-UNIT DEVELOPMENT AGREEMENT AND FRANCHISE AGREEMENT REQUIRES YOU TO RESOLVE DISPUTES WITH US BY ARBITRATION OR LITIGATION ONLY IN COLORADO. OUT OF STATE ARBITRATION OR LITIGATION MAY FORCE YOU TO ACCEPT A LESS FAVORABLE SETTLEMENT FOR DISPUTES. IT MAY ALSO COST YOU MORE TO ARBITRATE OR LITIGATE WITH US IN COLORADO THAN IN YOUR HOME STATE. 2. THE MULTI-UNIT DEVELOPMENT AGREEMENT AND FRANCHISE AGREEMENT STATES THAT COLORADO LAW GOVERNS THE AGREEMENT, AND THIS LAW MAY NOT PROVIDE THE SAME PROTECTION AND BENEFITS AS LOCAL LAW. YOU MAY WANT TO COMPARE THESE LAWS. 3. SOME STATE FRANCHISE LAWS PROVIDE THAT CHOICE OF LAW AND CONSENT TO JURSIDICTION PROVISIONS ARE VOID OR SUPERSEDED. YOU MAY WANT TO INVESTIGATE WHETHER YOU ARE PROTECTED BY A STATE FRANCHISE LAW. YOU SHOULD REVIEW ANY ADDENDA OR RIDERS ATTACHED TO THIS DISCLOSURE DOCUMENT FOR DISCLOSURES REGARDING STATE FRANCHISE LAWS. 4. UNDER SERVICING AGREEMENTS DATED MARCH 5, 2008, OUR AFFILIATES, SMASHBURGER SERVICING AND SMASHBURGER PURCHASING WILL PERFORM CERTAIN OF OUR OBLIGATIONS UNDER FRANCHISE AGREEMENTS WE ISSUE. 5. YOU ARE NOT GRANTED AN EXCLUSIVE TERRITORY UNDER THE FRANCHISE AGREEMENT. 6. THERE MAY BE OTHER RISKS CONCERNING THIS FRANCHISE. We use the services of one or more franchise brokers or referral sources to assist us in selling our franchise. A franchise broker or referral source represents us, not you. We pay this person a fee for selling our franchise or referring you to us. You should be sure to do your own investigation of the franchise. Effective Date: See the next page for state effective dates.
  3. 3. Smashburger 06/2012 FDD 1031.002.006/46510.2 STATE EFFECTIVE DATES The following states require that the Disclosure Document be registered or filed with the state, or be exempt from registration: California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Rhode Island, South Dakota, Virginia, Washington and Wisconsin. This disclosure document is registered, on file or exempt from registration in the following states having franchise registration and disclosure laws, with the following effective dates: Hawaii March 21, 2012; as amended ________, 2012 Illinois February 29, 2012; as amended June 15, 2012 Indiana February 29, 2012; as amended June 14, 2012 Maryland March 7, 2012; as amended ________, 2012 Michigan February 29, 2012; as amended June 14, 2012 Minnesota March 2, 2012; as amended ________, 2012 New York March 2, 2012; as amended ________, 2012 North Dakota March 8, 2012; as amended ________, 2012 Rhode Island March 30, 2012; as amended ________, 2012 South Dakota February 29, 2012; as amended June 14, 2012 Virginia February 29, 2012; as amended ________, 2012 Washington March 6, 2012; as amended ________, 2012 Wisconsin February 29, 2012; as amended June 15, 2012 In all other states that do not require registration, the effective date of this Disclosure Document is the issuance date of February 28, 2012; as amended June 14, 2012.
  4. 4. Smashburger 06/2012 FDD 1031.002.006/46510.2 THE FOLLOWING APPLY TO TRANSACTIONS GOVERNED BY MICHIGAN FRANCHISE INVESTMENT LAW ONLY THE STATE OF MICHIGAN PROHIBITS CERTAIN UNFAIR PROVISIONS THAT ARE SOMETIMES IN FRANCHISE DOCUMENTS. IF ANY OF THE FOLLOWING PROVISIONS ARE IN THESE FRANCHISE DOCUMENTS, THE PROVISIONS ARE VOID AND CANNOT BE ENFORCED AGAINST YOU. (a) A prohibition on the right of a franchisee to join an association of franchisees. (b) A requirement that a franchisee assent to a release, assignment, novation, waiver, or estoppel which deprives a franchisee of rights and protections provided in the Michigan Franchise Investment Act. This shall not preclude a franchisee, after entering into a franchise agreement, from settling any and all claims. (c) A provision that permits a franchisor to terminate a franchise prior to the expiration of its term except for good cause. Good cause shall include the failure of the franchisee to comply with any lawful provision of the franchise agreement and to cure such failure after being given written notice thereof and a reasonable opportunity, which in no event need be more than 30 days, to cure such failure. (d) A provision that permits a franchisor to refuse to renew a franchise without fairly compensating the franchisee by repurchase or other means for the fair market value at the time of expiration of the franchisee’s inventory, supplies, equipment, fixtures, and furnishings. Personalized materials which have no value to the franchisor and inventory, supplies, equipment, fixtures, and furnishings not reasonably required in the conduct of the franchise business are not subject to compensation. This subsection applies only if: (i) the term of the franchise is less than 5 years and (ii) the franchisee is prohibited by the franchise or other agreement from continuing to conduct substantially the same business under another trademark, service mark, trade name, logotype, advertising, or other commercial symbol in the same area subsequent to the expiration of the franchise or the franchisee does not receive at least 6 months advance notice of franchisor’s intent not to renew the franchise. (e) A provision that permits the franchisor to refuse to renew a franchise on terms generally available to other franchisees of the same class or type under similar circumstances. This section does not require a renewal provision. (f) A provision requiring that arbitration or litigation be conducted outside this state. This shall not preclude the franchisee from entering into an agreement, at the time of arbitration, to conduct arbitration at a location outside this state. (g) A provision which permits a franchisor to refuse to permit a transfer of ownership of a franchise, except for good cause. This subdivision does not prevent a franchisor from exercising a right of first refusal to purchase the franchise. Good cause shall include, but is not limited to: (i) The failure of the proposed transferee to meet the franchisor’s then current reasonable qualifications or standards. (ii) The fact that the proposed transferee is a competitor of the franchisor or subfranchisor.
  5. 5. Smashburger 06/2012 FDD 1031.002.006/46510.2 (iii) The unwillingness of the proposed transferee to agree in writing to comply with all lawful obligations. (iv) The failure of the franchisee or proposed transferee to pay any sums owing to the franchisor or to cure any default in the franchise agreement existing at the time of the proposed transfer. (h) A provision that requires the franchisee to resell to the franchisor items that are not uniquely identified with the franchisor. This subdivision does not prohibit a provision that grants to a franchisor a right of first refusal to purchase the assets of a franchise on the same terms and conditions as a bona fide third party willing and able to purchase those assets, nor does this subdivision prohibit a provision that grants the franchisor the right to acquire the assets of a franchise for the market or appraised value of such assets if the franchisee has breached the lawful provisions of the franchise agreement and has failed to cure the breach in the manner provided in subdivision (c). (i) A provision which permits the franchisor to directly or indirectly convey, assign, or otherwise transfer its obligations to fulfill contractual obligations to the franchisee unless provision has been made for providing the required contractual services. If the franchisor’s most recent financial statements are unaudited and show a net worth of less than $100,000, the franchisor shall, at the request of a franchisee, arrange for the escrow of initial investment and other funds paid by the franchisee until the obligations to provide real estate, improvements, equipment, inventory, training, or other items included in the franchise offering are fulfilled. At the option of the franchisor, a surety bond may be provided in place of escrow. THE FACT THAT THERE IS A NOTICE OF THIS OFFERING ON FILE WITH THE ATTORNEY GENERAL DOES NOT CONSTITUTE APPROVAL, RECOMMENDATION, OR ENFORCEMENT BY THE ATTORNEY GENERAL. Any questions regarding this notice should be directed to: State of Michigan Consumer Protection Division Attn: Franchise 670 G. Mennen Williams Building 525 West Ottawa Lansing, Michigan 48933 Telephone Number: (517) 373-7117 Note: Despite subparagraph (f) above, we intend, and we and you agree to fully enforce the arbitration provisions of the Multi-Unit Development Agreement and Franchise Agreement. We believe that paragraph (f) is unconstitutional and cannot preclude us from enforcing these arbitration provisions. You acknowledge that we will seek to enforce this section as written.
  6. 6. i Smashburger 06/2012 FDD 1031.002.006/46510.2 TABLE OF CONTENTS ITEM Page ITEM 1 THE FRANCHISOR AND ANY PARENTS, PREDECESSORS, AND AFFILIATES.................................................................................................................1 ITEM 2 BUSINESS EXPERIENCE ...........................................................................................3 ITEM 3 LITIGATION.................................................................................................................6 ITEM 4 BANKRUPTCY ..........................................................................................................12 ITEM 5 INITIAL FEES.............................................................................................................12 ITEM 6 OTHER FEES..............................................................................................................13 ITEM 7 ESTIMATED INITIAL INVESTMENT.....................................................................18 ITEM 8 RESTRICTIONS ON SOURCES OF PRODUCTS AND SERVICES......................23 ITEM 9 FRANCHISEE’S OBLIGATIONS .............................................................................25 ITEM 10 FINANCING................................................................................................................27 ITEM 11 FRANCHISOR’S ASSISTANCE, ADVERTISING, COMPUTER SYSTEMS, AND TRAINING ..................................................................................................................27 ITEM 12 TERRITORY ...............................................................................................................35 ITEM 13 TRADEMARKS..........................................................................................................38 ITEM 14 PATENTS, COPYRIGHTS AND PROPRIETARY INFORMATION......................40 ITEM 15 OBLIGATION TO PARTICIPATE IN THE ACTUAL OPERATION OF THE FRANCHISE BUSINESS ...........................................................................................41 ITEM 16 RESTRICTIONS ON WHAT THE FRANCHISEE MAY SELL ..............................42 ITEM 17 RENEWAL, TERMINATION, TRANSFER AND DISPUTE RESOLUTION.........42 ITEM 18 PUBLIC FIGURES......................................................................................................52 ITEM 19 FINANCIAL PERFORMANCE REPRESENTATIONS ...........................................52 ITEM 20 OUTLETS AND FRANCHISEE INFORMATION ...................................................53 ITEM 21 FINANCIAL STATEMENTS.....................................................................................59 ITEM 22 CONTRACTS..............................................................................................................59 ITEM 23 RECEIPTS...................................................................................................................59 EXHIBIT A State Administrators/Agents for Service of Process EXHIBIT B Multi-Unit Development Agreement EXHIBIT C Franchise Agreement EXHIBIT D List of Franchisees
  7. 7. ii Smashburger 06/2012 FDD 1031.002.006/46510.2 EXHIBIT E List of Franchisees Who Have Left the System or Not Communicated EXHIBIT F Financial Statements EXHIBIT G Table of Contents to Standards of Operations Manual EXHIBIT H Representations and Acknowledgement Statement EXHIBIT I Sample General Release EXHIBIT J State Addenda and Agreement Riders EXHIBIT K Receipts APPLICABLE STATE LAW MIGHT REQUIRE ADDITIONAL DISCLOSURES RELATED TO THE INFORMATION CONTAINED IN THIS DISCLOSURE DOCUMENT, AND MIGHT REQUIRE A RIDER TO THE FRANCHISE AGREEMENT. THESE ADDITIONAL DISCLOSURES AND RIDERS, IF ANY, APPEAR IN EXHIBIT J.
  8. 8. Smashburger 06/2012 FDD 1031.002.006/46510.2 ITEM 1 THE FRANCHISOR, AND ANY PARENTS, PREDECESSORS, AND AFFILIATES The Franchisor. The Franchisor is Smashburger Franchising LLC. To simplify the language in this franchise disclosure document (this “Disclosure Document”), we use the terms “Franchisor,” “we,” “us,” “Company,” or “SMASHBURGER” to refer to Smashburger Franchising LLC. When we refer to our affiliates, we will refer to them by their names. “You” means the person or entity that buys the franchise. If you are a corporation, partnership, limited liability company or other entity, certain provisions of the Franchise Agreement (defined below), Multi-Unit Development Agreement (defined below) and related agreements will also apply to your owners. We were originally formed in the State of Delaware on March 5, 2008 and began offering franchises of the type described in this Disclosure Document as of April 8, 2008. We do business under our corporate name and as “Smashburger.” We do not do business under any other name. Our principal business address is 1515 Arapahoe Street, Tower One, 10th Floor, Denver, Colorado 80202, (303) 633-1500. Our agents for service of process in certain states are listed in Exhibit A. Our Parent, Predecessors and Affiliates. In December 2010, we went through an internal corporate reorganization, which resulted in Smashburger Master LLC, a Delaware limited liability company formed on January 3, 2008 (“Smashburger Master”), becoming our parent. Smashburger Master has been licensed the right to use and sublicense the use of the Marks (defined below) from our affiliate, Icon Burger Development Company LLC, parent of Smashburger Master and a Delaware limited liability company formed on September 13, 2006 (“Icon Burger”). Icon Burger owns the trademarks and other intellectual property used in the operation of SMASHBURGER RESTAURANTS (defined below). Smashburger Master has, in turn, licensed us the right to use and sublicense the use of the Marks. Our affiliate, The Smashburger Servicing Company LLC, a subsidiary of Smashburger Master and a Delaware limited liability company formed on March 5, 2008 (“Smashburger Servicing”), under a servicing agreement dated March 5, 2008 with us, will perform certain of our obligations under Franchise Agreements we issue, including negotiating supplier contracts for certain services sold to franchisees. Our affiliate, Smashburger Purchasing Company LLC (“Smashburger Purchasing”), a subsidiary of Smashburger Master and a Delaware limited liability company formed on April 5, 2010, negotiates supplier contracts for certain goods and products sold to franchisees. In connection with providing these services to us, Smashburger Servicing and Smashburger Purchasing use the services of certain individuals and employees associated or employed with our affiliates, Icon Burger Acquisition LLC (“IBA”), a subsidiary of Smashburger Master, formed September 13, 2006, and Consumer Capital Partners Management LLC (“CCP”), formed October 9, 2008. Those individuals or employees that have management responsibility for the sale or operation of the franchises offered by this Disclosure Document are listed in Item 2. Our affiliate, Smashburger AFT Inc. (formed December 18, 2008) is the trustee of the Smashburger Marketing Fund (see Item 11). Our affiliate, Smashburger Gift Card LLC, an Arizona limited liability company formed on August 29, 2008, provides stored value card services to franchisees. Our parent and all of the affiliates described above share our principal business address and phone number. We have no predecessors. Agents for Service of Process. We disclose our agents for service of process in Exhibit A.
  9. 9. Smashburger 06/2012 FDD 1031.002.006/46510.2 2 Prior Experience. We have developed and operate using certain specified and distinct business formats, methods, procedures, signs, designs, layouts, standards, specifications and marks (the “Franchise System”) for the establishment, development and operation of restaurants with a menu featuring gourmet burgers, sandwiches, salads, other food items, shakes, floats, and other beverages in a casual atmosphere (“SMASHBURGER RESTAURANTS”). We have not operated SMASHBURGER RESTAURANTS such as the ones being franchised in this Disclosure Document. Our affiliates have operated SMASHBURGER RESTAURANTS since June 18, 2007, and, as of January 1, 2012, operated 59 SMASHBURGER RESTAURANTS. (See Item 20) Other than as provided above, we and our affiliates do not engage in, or offer franchises for, any other business activities. The Franchises We Offer. We will primarily offer the right to enter into a Multi-Unit Development Agreement which grants you the right to acquire, and under which you agree to acquire, multiple franchises to develop and operate an agreed upon number of SMASHBURGER RESTAURANTS within a specifically described geographic territory according to a development schedule (the “Multi-Unit Development Agreement”). The form of Multi-Unit Development Agreement you will sign is attached as Exhibit B to this Disclosure Document. Your obligation to acquire franchises may be satisfied by you or by an entity controlled by you or your owners that meets our then applicable standards and requirements for franchise owners (an “Approved Affiliate”). To acquire a franchise, either you or an Approved Affiliate must enter into our then current form of Franchise Agreement (the “Franchise Agreement”). Our current form of Franchise Agreement is attached as Exhibit C to this Disclosure Document. Each SMASHBURGER RESTAURANT that you or an Approved Affiliate develops and operates (each a “Restaurant”) must be governed by a Franchise Agreement signed by you or the Approved Affiliate. We may choose not to enter into a Franchise Agreement with single unit operators. However, we may consider it under limited circumstances, such as for Special Venue Restaurants. For purposes of this Disclosure Document, a “Special Venue Restaurant” is (1) any kiosk, mobile facility or similar location or type of operation which, because of its inherent operational limitations, is required to offer a limited menu or have a materially different operating format as compared to a traditional SMASHBURGER RESTAURANT, (2) any location in which foodservice is or may be provided by a master concessionaire, (3) any location which is situated within or as part of a larger venue or facility (other than a mall or shopping center) and, as a result, is likely to draw the predominance of its customers from those persons who are using or attending events in the larger venue or facility (for example, colleges/universities, convention centers, airports, hotels, sports facilities, theme parks, hospitals, transportation facilities, convenience stores, and other similar captive market locations), or (4) any distribution channel other than a SMASHBURGER RESTAURANT (including the Internet, grocery stores, supermarkets, and mail order) through which products and services associated with or sold through SMASHBURGER RESTAURANTS are or may be sold. Market Competition. The market for food products and services SMASHBURGER RESTAURANTS offer is highly competitive, as is the market for obtaining locations for SMASHBURGER RESTAURANTS. Your competition includes all restaurant concepts, particularly quick service restaurants serving hamburgers. However, we believe we offer a unique opportunity in the restaurant industry. SMASHBURGER RESTAURANTS offer high quality hamburgers, which are smashed and grilled, and other food and beverages. Regulations. You should consider that certain aspects of the restaurant business are heavily regulated by federal, state and local laws, rules and ordinances. The U.S. Food and Drug
  10. 10. Smashburger 06/2012 FDD 1031.002.006/46510.2 3 Administration, the U.S. Department of Agriculture, and various state and local departments of health and other agencies have laws and regulations concerning the preparation of food and sanitary conditions and restaurant facilities. State and local agencies routinely conduct inspections for compliance with these requirements. Certain provisions of these laws impose limits on emissions resulting from commercial food preparation. You will need to understand and comply with these laws in operating the Restaurant. You must also obtain a liquor license to sell wine and beer, and you may have liability imposed on you by Dram Shop Laws. There may be other laws applicable to your business. We urge you to make further inquiries about these laws. Financial Requirements. You must maintain, and prove to us that you have, sufficient working capital reserves, as we determine to be necessary and appropriate to comply with your obligations under each Franchise Agreement. We may periodically designate the maximum amount of debt that we will allow franchisees to service. In addition, the 1st and 2nd SMASHBURGER RESTAURANTS developed pursuant to Franchise Agreements signed under a Multi-Unit Development Agreement must be developed with cash equity and without the proceeds from any loans made by the franchisee (or its owners), its affiliates (or their owners) or any other third party. Further, under the Multi-Unit Development Agreement, a developer must always maintain sufficient liquidity to meet its obligations under the Multi-Unit Development Agreement and, in any event, the liquidity of the developer and all of its affiliates who sign Franchise Agreements, combined, must not at any time fall below the amount identified in Item 7 as the total estimated initial investment to open one Restaurant ($789,500). (See Item 10) We reserve the right to review these liquidity requirements, and you must comply with such minimum liquidity requirements that we reasonably impose. ITEM 2 BUSINESS EXPERIENCE Chief Executive Officer: David Prokupek Mr. Prokupek became our Chief Executive Officer in February 2010. From November 2007 to February 2010, he served as our Chief Investment Officer. He has also served as the chief executive officer of Smashburger Master LLC, Icon Burger Acquisition LLC, and other related entities, all located in Denver, Colorado, since February 2010 and their President from July 2010 to October 2011. Since July 2009, he has also been the Chairman of Icon Burger Development Company, LLC located in Denver, Colorado. He has also been the Chief Investment Officer of The Cervantes Holding Company (“Cervantes”) and CCP, and other related entities, all located in Denver, Colorado, since November 2007 and their President since January 2010. He was also appointed the Managing Director of Cervantes and CCP in January 2010. From July 2002 to December 2009, he was the Chief Executive Officer and owner of Geronimo Financial in Denver, Colorado. Mr. Prokupek also served as a member of the Board of Managers of QCE Holding LLC (“QCEH”) from December 2007 to October 2011. President: Greg Creighton Mr. Creighton is employed by our affiliate, Icon Burger Acquisition LLC, and has been our President since July 2011. From June 2010 to June 2011, Mr. Creighton was our Chief Operating Officer; from May 2009 to June 2010, he was our Executive Vice President of Operations; and from September 2008 through April 2009, he served as our Regional Vice President. From March 2007 to September 2008, Mr. Creighton was self employed as a
  11. 11. Smashburger 06/2012 FDD 1031.002.006/46510.2 4 consultant in Minneapolis, Minnesota. From January 1998 to March 2007, he was President and Chief Operating Officer of Leann Chin, Inc. in Bloomington, Minnesota. Chief Development Officer: Scott Crane Mr. Crane is employed by our affiliate, CCP, and has been our Chief Development Officer since December 2011. From November 2007 to June 2010, Mr. Crane was our President. Mr. Crane has also been President of IBA in Denver, Colorado, since November 2007. From April 2007 to October 2007 and from June 2005 to December 2005, he was a real estate developer for Cook Properties in Wichita, Kansas. From January 2006 to March 2007, he was a consultant for Ted’s Montana Grill in Atlanta, Georgia. Chief Legal Officer: Patrick Meyers Mr. Meyers is employed by our affiliate, CCP, and has been our Chief Legal Officer since March 2012. He has held the same position with Icon Burger Development Company LLC, Smashburger Master LLC and other related entities, all located in Denver, Colorado, since March 2012. He also has served as the Chief Legal Officer, Executive Vice President and a member of the Board of Directors of CCP and its predecessor, Cervantes, located in Denver, Colorado, since May 2006. From May 2006 to January 2012, he served as a member of the Board of Managers of QCEH, and from October 2000 to January 2012, he served in various executive roles with QFA Royalties LLC, the franchisor of the Quiznos concepts and its various affiliated and predecessor companies (“QFA”), including General Counsel and a member of the board of directors. Chief Accounting Officer: Christina Carlson Ms. Carlson is employed by our affiliate, Icon Burger Acquisition LLC, and has been our Chief Accounting Officer since April 2012. From June 2005 to March 2012, she was Vice President and Controller of Red Robin Gourmet Burgers in Greenwood Village, Colorado. Operating Partner/Vice President of Training: Janice Branam Ms. Branam is employed by our affiliate, Icon Burger Acquisition LLC, and has been our Operating Partner and Vice President of Training in Denver, Colorado since January 2009 and has also been employed by our affiliate, IBA in Denver, Colorado, since that time. Prior to joining us, from August 1996 to March 2008, Ms. Branam has held various positions with Quizno’s in Denver, Colorado, including Senior Vice President, Training; Vice President, Small Market Development; Vice President, Development and Ops; Senior Vice President, AD Development; Senior Vice President, Curriculum Development; Senior Vice President, Ops Systems and Training; Vice President, Corporate Ops and Training; Vice President, Training and Director of Training. Ms. Branam was an independent consultant in Boulder, Colorado from March 2008 to January 2009. Sr. Vice President of Finance and Strategy: Christopher Chang Mr. Chang is employed by our affiliate, CCP, and has been our Sr. Vice President of Finance and Strategy since June 2011. From November 2008 to June 2011, he was Vice President of CCP in Denver, Colorado. From March 2007 to November 2008, Mr. Chang was Director of Corporate Development for Vail Resorts in Broomfield, Colorado. From March 2006 to March 2007, he was a Director of Western Union in Centennial, Colorado.
  12. 12. Smashburger 06/2012 FDD 1031.002.006/46510.2 5 Sr. Vice President of Marketing & Consumer Insights: Jeremy Morgan Mr. Morgan is employed by our affiliate, Icon Burger Acquisition LLC, and has been our Sr. Vice President of Marketing & Consumer Insights since May 2011. From June 2010 through April 2011, he served as our Vice President – Strategy. From October 2006 to May 2010, Mr. Morgan was Case Team Leader for Bain & Co. in Chicago, Illinois. Sr. Vice President of Franchise Sales: Brett Willis Mr. Willis is employed by our affiliate, Icon Burger Acquisition LLC, and has been our Sr. Vice President of Franchise Sales since May 2012. From May 2011 to May 2012, he was Vice President of Franchise Sales for The Johnny Rockets Group in Aliso Viejo, California. From October 2005 to May 2011, he served in various capacities (most recently as Vice President of Franchise Development) for Arby’s Restaurant Group in Atlanta, Georgia. Vice President of Real Estate: Jesse Yuran Mr. Yuran is employed by our affiliate, Icon Burger Acquisition LLC, and has been our Vice President of Real Estate since August 2011. From February 2002 to August 2011, he was Vice President for Legend Retail Group, LLC in Denver, Colorado. Vice President of Real Estate: Michael Ganzle Mr. Ganzle is employed by our affiliate, Icon Burger Acquisition LLC, and has been our Vice President of Real Estate since April 2012. From August 2007 to March 2012, he was Vice President/Director of Real Estate for J.P. Morgan Chase in Denver, Colorado. From September 2005 to July 2007, he was Development Manager for Starbucks in Denver, Colorado. Vice President of Real Estate: Jesse Heathcock Mr. Heathcock is employed by our affiliate, Icon Burger Acquisition LLC, and has been our Vice President of Real Estate since April 2012. From March 2008 to April 2012 he was Vice President for Jones Lang LaSalle in Chicago, Illinois. From August 1998 to February 2008 he was Real Estate Manager for Brinker International in Dallas, Texas. OTHER INDIVIDUALS WITH MANAGEMENT RESPONSIBILITY The following individuals do not hold any office with us, but they do have certain management responsibility in connection with the sale and operation of Franchises offered by this Disclosure Document. The offices shown are offices they hold with the designated entity. Richard E. Schaden Richard E. Schaden is one of our investors and is neither employed by us nor holds an office with us. From May 2006 to October 2010, he was the Chief Executive Officer of CCP and its predecessor, Cervantes, in Denver, Colorado. From October 2000 to October 2010, Mr. Schaden served in various roles (including Chief Executive Officer) for QFA. Managing Partner and Chief Concept Officer: Thomas Ryan Mr. Ryan has been the Chief Concept Officer of CCP and its predecessor, Cervantes, in Denver, Colorado since May 2007. He was a member of the Board of Managers of QCEH from August 2008 to January 2012 and from July 2003 to May 2007, he was Executive Vice President - Branding for Quizno’s in Denver, Colorado.
  13. 13. Smashburger 06/2012 FDD 1031.002.006/46510.2 6 ITEM 3 LITIGATION PENDING: There is no pending litigation against us, our officers (as designated in Item 2 above) or involving the Smashburger Franchise System. The litigation referred to below relates to certain persons who, while not our officers, directors or employees, are listed in Item 2 as having management responsibility for the sale or operation of franchises. MKJA, Inc., et al. v. 123 Fit Franchising, LLC et al. and DOES 1-25, Case No. GIN055734 (Superior Court of California, County of San Diego, North District). On September 27, 2006, MKJA, Inc. and certain current and former 123 Fit franchisees and their principals, filed a statement of claim against 123 Fit Franchising, LLC, 123 Fit Services, LLC and Richard E. Schaden (referred to in the remainder of this Item 3 as “Schaden”), among others, asserting claims for failure to comply with the disclosure requirements of the California Franchise Investment Law, breach of contract, breach of the implied covenant of good faith and fair dealing, violation of the California Business and Professions Code, and fraud in the inducement. Plaintiffs alleged that these claims arose out of failure by the defendants to disclose, among other things, information relating to the initial investment required for the franchise. The claim seeks an unspecified amount of damages, injunctive relief, attorneys’ fees, and costs. On October 31, 2007, the court ordered the parties to arbitrate this dispute. On September 10, 2009, the court lifted the stay which would allow the suit to proceed before the court rather than in arbitration. On January 4, 2011, the California Court of Appeals reversed the court’s order lifting the stay of the lawsuit, and on April 20. 2011, the California Supreme Court denied plaintiffs’ petition for review of that decision. Although the case remains on the Superior Court’s docket, the parties are awaiting the plaintiffs’ initiation of arbitration in Colorado, but no formal action has yet been taken in that respect. The defendants intend to defend this lawsuit if arbitration is initiated. Ballwin Food Beverage, Inc., et al., v. Quiznos Franchising II LLC, et al, Case No. 2010CV3711 (District Court, City and County of Denver, State of Colorado). Between May 7, 2010 and October 12, 2010, the following 18 separate complaints were filed by current and former QUIZNOS franchisees against QFA and certain of its affiliates, Schaden, Patrick E. Meyers (our Chief Legal Officer) (referred to in the remainder of this Item 3 as “Meyers”) and certain current and former QUIZNOS officers, directors and employees: Neptune Group Inc., et al. v. Quizno’s Franchising LLC, et al. (Case No. 2010cv3716, District Court, City and County of Denver, State of Colorado, filed May 7, 2010 and amended June 4, 2010); Harry G. Pappas III. v. The Quizno’s Franchise Company LLC f/k/a The Quizno’s Corporation, et al. (Case No. 2010cv3740, District Court, City and County of Denver, State of Colorado, filed May 7, 2010 and amended June 9, 2010); SK7 Inc., et al. v. Quizno’s Franchising II LLC, et al. (Case No. 2010cv4484, District Court, City and County of Denver, State of Colorado; filed and amended June 3, 2010); BC-Q LLC, et al. v. Quizno’s Franchising LLC, et al. (Case No. 2010cv03920, District Court, City and County of Denver, State of Colorado, filed and amended June 3, 2010); SAP & NSD Inc., et al. v. Quizno’s Franchising LLC, et al. (Case No. 2010cv4551, District Court, City and County of Denver, State of Colorado, filed and amended June 4, 2010); O.T.I.S. Enterprise LLC, et al. v. The Quizno’s Franchise Company LLC f/k/a The Quizno’s Corporation, et al. (Case No. 2010cv4540, District Court, City and County of Denver, State of Colorado, filed June 4, 2010); Too Bee Foods LLC, et al. v. Quizno’s Franchising LLC, et al. (Case No. 2010cv4571, District Court, City and County of Denver, State of Colorado, filed June 7, 2010); Ballwin Food & Beverage Inc., et al. v. Quizno’s Franchising LLC, et al. (Case No. 2010cv3711,
  14. 14. Smashburger 06/2012 FDD 1031.002.006/46510.2 7 District Court, City and County of Denver, State of Colorado, filed June 8, 2010); Dr. P’s LLC, et al. v. Quizno’s Franchising LLC, et al. (Case No. 2010cv3714, District Court, City and County of Denver, State of Colorado, filed and amended May 9, 2010); K.R. & K Enterprises LLC, et al. v. The Quizno’s Franchise Company LLC f/k/a The Quizno’s Corporation, et al. (Case No. 2010cv4669, District Court, City and County of Denver, State of Colorado, filed June 10, 2010); Sub-Thing Great Inc., et al. v. The Quizno’s Franchise Company LLC f/k/a The Quizno’s Corporation, et al. (Case No. 2010cv3905, District Court, City and County of Denver, State of Colorado, filed and amended June 10, 2010); Lop Duk Wong v. Quizno’s Franchising II LLC, et al. (Case No. 2010cv4797, District Court, City and County of Denver, State of Colorado, filed June 14, 2010); VDS LLC, et al. v. Quizno’s Franchising II LLC, et al. (Case No. 2010cv4906, District Court, City and County of Denver, State of Colorado, filed June 15, 2010); Cascade Enterprises L.C., et al. v. The Quizno’s Franchise Company LLC f/k/a The Quizno’s Corporation, et al. (Case No. 2010cv4871, District Court, City and County of Denver, State of Colorado, filed June 16, 2010); College Park Foods Inc., et al. v. The Quizno’s Franchise Company LLC f/k/a The Quizno’s Corporation, et al. (Case No. 2010cv4889, District Court, City and County of Denver, State of Colorado, filed June 17, 2010); Abi-Sam Foods LLC, et al. v. The Quizno’s Franchise Company LLC f/k/a The Quizno’s Corporation, et al. (Case No. 2010cv4888, District Court, City and County of Denver, State of Colorado, filed June 17, 2010); Michael Gatas, et al. v. Quizno’s Franchising LLC, et al. (Case No. 2010CV8128, District Court, City and County of Denver, State of Colorado, filed October 12, 2010); and Mark Rosenberg, et al. v. Quizno’s Franchising LLC, et al. (Case No. 2010CV8129, District Court, City and County of Denver, State of Colorado, filed October 12, 2010). In each of the above 18 lawsuits, at least one party in the plaintiff group has claimed to have opted out of the Siemer v. The Quizno’s Franchise Company LLC national class action settlement agreement that was granted final approval by the United States District Court for the Northern District of Illinois on August 13, 2010. Except where noted below, all of the 18 lawsuits allege the following claims: (1) violations of the Colorado Organized Crime Control Act, C.R.S. 18-17-101 et seq., including fraudulent scheme to sell mandated essential goods at inflated prices, fraudulent scheme to sell franchise agreements, and unlawful control over franchisees through a pattern of racketeering activity; (2) violation of the Colorado Consumer Protection Act; (3) conspiracy to violate the Colorado Consumer Protection Act; (4) aiding and abetting the violation of the Colorado Consumer Protection Act; (5) breach of contract; (6) breach of the implied covenant of good faith and fair dealing; (7) unjust enrichment; (8) fraud in the inducement; (9) conspiracy to commit fraud in the inducement; (10) aiding and abetting fraud in the inducement; (11) promissory fraud; (12) conspiracy to commit promissory fraud; (13) aiding and abetting promissory fraud; (14) illusory contract; (15) breach of fiduciary duty; (16) conspiracy to breach fiduciary duty; (17) aiding and abetting breach of fiduciary duty; (18) declaratory judgment; (19) violation of Colorado’s Civil Theft Act; (20) conspiracy to commit civil theft; and (21) aiding and abetting civil theft. The Cascade Enterprises L.C., Abi-Sam Foods LLC, Pappas, Ballwin Food & Beverage Inc., and Dr. P’s LLC lawsuits add an additional claim for economic duress. All 18 lawsuits seek preliminary and permanent injunction relief, an order declaring certain provisions of the plaintiffs’ franchise agreements unconscionable and therefore unenforceable, an order declaring the plaintiffs’ franchise agreements illusory, compensatory, consequential and statutory damages, disgorgement of defendants illegally-obtained profits, attorneys’ fees and costs, and rescission of plaintiffs’ franchise agreements.
  15. 15. Smashburger 06/2012 FDD 1031.002.006/46510.2 8 On July 27, 2010, the QUIZNOS entities filed motions to dismiss the above lawsuits (except for the Gatas and Rosenberg lawsuits which were filed subsequent to the QUIZNOS entities’ motions to dismiss) in their entirety and also filed separate motions to dismiss the individual defendants from these 16 lawsuits. On November 22, 2010, the court granted the QUIZNOS entities’ motions to strike plaintiffs’ jury demand and motion to dismiss with respect to plaintiffs’ claim for economic duress, but denied the QUIZNOS entities’ motions to dismiss with respect to plaintiffs’ remaining claims. In accordance with the court’s orders on September 13, 2010 and November 29, 2010, the above 18 lawsuits, including the Gatas and Rosenberg lawsuits, have been consolidated under the Ballwin Food & Beverage Inc. lawsuit for pre-trial purposes only. Consequently, the QUIZNOS entities’ motions and the court’s orders with respect to such motions apply to all 18 cases, including the subsequently filed Gatas and Rosenberg lawsuits. On December 14, 2010, the QUIZNOS entities (excluding the individually named defendants) filed an answer to each lawsuit, and for the following lawsuits filed a counterclaim against plaintiff(s) and certain additional parties who acted as guarantors for breach of contract arising out of the closure of their QUIZNOS Restaurant: Neptune Group Inc.; Pappas; BC-Q LLC; SAP & NSD Inc.; Too Bee Foods LLC; Ballwin Food & Beverage Inc.; Dr. P’s LLC; Wong; VDS LLC; Cascade Enterprises L.C.; College Park Foods Inc.; Abi-Sam Foods LLC; Gatas; and Rosenberg. Plaintiffs in the previously listed cases filed an answer to the QUIZNOS entities’ counterclaims on January 11, 2011. On January 25, 2011, the court denied the QUIZNOS entities’ motions to dismiss the individual defendants. On February 8, 2011, the individually named defendants filed an answer to each of the 18 lawsuits. On June 12, 2012, the QUIZNOS entities and the other defendants filed motions for summary judgment as to the claims of all 18 plaintiff groups. Trial for all lawsuits has been set for September 2012. Defendants intend to defend these lawsuits and prosecute their counterclaims. COMPLETED: Thin N’ Out Fitness Inc., et al, v. 123 Fit Franchising LLC, et al, No. 75 114 00131 08 (American Arbitration Association, Seattle, Washington). On April 10, 2008, claimants, a former 123 Fit franchisee and its principals, filed a demand for arbitration against 123 Fit Franchising LLC, Schaden, and certain other unaffiliated entities and individuals, asserting claims for violation of the Washington Franchise Investment Practices Act. The demand sought rescission of the plaintiffs’ franchise agreement, or in the alternative, an unspecified amount of damages, fees, and costs. The parties signed a settlement agreement and the case was dismissed in February 2010. The terms of the settlement, which included mutual general releases, required 123 Fit to cause a payment to the plaintiffs in the amount of $27,826. William H. Nickerson, et al v. The Quizno’s Corporation, et al., Case No. 04 CV 04CV0455 (District Court for the City and County of Denver, Colorado). On January 20, 2004, plaintiff, a former shareholder of The Quizno’s Corporation (“TQC”), filed suit against TQC and its board of directors seeking damages allegedly arising in connection with TQC’s November 2000 tender offer to purchase all outstanding shares of its common stock at a price of $8.00 per share. Plaintiff alleged that TQC’s board of directors breached its fiduciary duties to TQC’s shareholders, that TQC was unjustly enriched at the expense of its shareholders, and that defendants violated certain Colorado state securities laws. The case was settled, and as part of the settlement, on June 14, 2004, TQC disbursed $5.8 million to shareholders who submitted a valid claim. The court approved the settlement on September 27, 2004, and the settlement became effective on November 15, 2004.
  16. 16. Smashburger 06/2012 FDD 1031.002.006/46510.2 9 Moiez Al-Harazi and Sawson Shoraan v. The Quizno’s Canada Restaurant Corporation, et al., Court File No. 05-CV-302670 (Ontario Superior Court of Justice). On January 5, 2006, 2 franchisees of Quizno’s Canada Restaurant Corporation (“QCRC”) without open QUIZNOS Restaurants, filed an amended statement of claim on behalf of themselves and other similarly-situated franchisees against QCRC and certain of its affiliates, Schaden, Meyers, and certain current and former employees of QCRC, asserting claims for violation of the Wishart Act. The claim sought compensation for loss of income and foregone opportunity cost or damages. A settlement was reached between the representative plaintiffs and defendants. 164 members of the class were entitled to a partial refund of the initial franchise fee (in which case their underlying franchise agreements were terminated) ranging from 25% to 50% of the initial franchise fee paid by the class member (approximately $6,500CAD and $13,000CAD). Alternatively, a class member could remain a QCRC franchisee, which election had to be approved by QCRC, and the class member was entitled to receive a $26,630CAD credit toward the purchase price of equipment and supplies necessary to open a QUIZNOS Restaurant. On July 7, 2007, the class was certified for settlement purposes only and the terms of the settlement were approved by the court. Edward C. Sebesta, et al v. The Quizno’s Corporation, Case No. 01CV6281 (District Court for the City and County of Denver, Colorado). On November 13, 2001, a shareholder of TQC, filed suit against TQC and its board of directors seeking to prevent a proposed transaction by which TQC would become a private company and all publicly-traded shares of TQC would be repurchased. Plaintiffs alleged that TQC’s board of directors breached its fiduciary duties to TQC’s shareholders. The case settled, and the trial court entered judgment for approval of the settlement on April 15, 2004. The maximum aggregate amount that could be received by the plaintiffs in this case is approximately $1.8 million. A hearing was held on July 17, 2008, whereby the court granted approval to distribute a settlement amount to the class members of approximately $293,600, which was completed at the end of the 3rd quarter of 2008. Esmat “Sam” Elhilu and Haytham Kafouf, et al. v. Quizno’s Franchising Company, LLC, et al., Case No. CV 06 7855 FMC (CTx) (United States District Court for the Central District of California), filed in California state court (and subsequently removed) on November 14, 2006, as a putative class action by 2 QUIZNOS franchisees. The defendants are QFA and certain of its affiliates including Schaden. Plaintiffs asserted claims for violation of the California Franchise Investment Law, conspiracy based on alleged misrepresentations relating to site selection and violations of the California unfair competition and false advertising laws. The complaint sought, among other things, an unspecified amount of damages, costs, and attorneys fees. The parties entered into a settlement agreement on March 30, 2009, which was approved by the court on December 8, 2009. Under the settlement, approximately 260 members of the class who have non-terminated QUIZNOS franchise agreements are entitled to payments between $50 and $8,175 in exchange for a termination of their franchise agreements. Alternatively, franchisees in this group can elect to remain franchisees and receive a credit equal to the initial franchise fee toward equipment and other purchases. Another 300 class members whose franchise agreements had been terminated were entitled to payments ranging from $250 to $500. Gause v. Geronimo Financial, Inc. and David Prokupek, Civil Action No. 08CV1458 (District Court for the City and County of Denver, Colorado). On March 4, 2008, Marshall Gause, a former employee of Geronimo Financial, Inc. (“Geronimo”), filed a complaint against Geronimo and David Prokupek, asserting several claims related to the termination of his employment, and he later amended his complaint to include a claim that debt re-payments made
  17. 17. Smashburger 06/2012 FDD 1031.002.006/46510.2 10 by Geronimo to Mr. Prokupek constituted a fraudulent conveyance. Without admitting liability, the parties entered into a Confidential Settlement and Release Agreement on September 3, 2009, in which Gause agreed to dismiss the lawsuit against Geronimo and Mr. Prokupek in exchange for a payment of $300,000. On August 13, 2010, the United States District Court for the Northern District of Illinois granted final approval of the settlement agreement the parties in the following 4 cases entered into on October 27, 2009 affecting all 4 cases: Raymond Bonanno, et al., individually and on behalf of others similarly situated v. The Quizno’s Master LLC, et al., Civil Action No. 1:06-cv-2358-WYD- BNB (United States District Court for the District of Colorado), (filed on February 16, 2006, as a putative class action by 6 QUIZNOS franchisees who never opened Restaurants. The defendants were QFA and certain of its affiliates, Schaden and certain former QUIZNOS employees. The plaintiffs asserted claims for fraudulent inducement, violation of the covenant of good faith and fair dealing, duty, unjust enrichment, breach of contract, violation of the Colorado Consumer Protection Act, common law conspiracy and economic duress. The complaint sought, among other things, an unspecified amount of damages, rescission of plaintiffs’ franchise agreements, and injunctive relief to prevent future sales of QUIZNOS franchises in New Jersey. Fred N. and Michana A. Westerfield, et al. v. The Quizno’s Franchise Company LLC, et al., Case No. 06-C-1210 (United States District Court for the Eastern District of Wisconsin, Green Bay Division), originally filed, as a putative class action, on November 20, 2006 by 12 current and former QUIZNOS franchisees. The defendants were QFA and certain of its affiliates, Meyers, Cervantes, Cervantes Master LLC, Schaden, and Richard F. Schaden. The complaint asserted claims for violation of the federal RICO statute, Section 1 of the Sherman Act, the Wisconsin Fair Dealership Law, the Wisconsin Deceptive Trade Practices Act, Wisconsin Statute Section 895.446 (property damage or loss), Wisconsin Statute Section 134.01 (injury to business), the Wisconsin Franchise Investment Law, fraud in the inducement, breach of contract, fraudulent concealment, breach of the implied covenant of good faith and fair dealing, unjust enrichment, promissory fraud, strict liability misrepresentation, economic duress, illusory contract, breach of fiduciary duty, and declaratory judgment, all allegedly arising out of the sale of franchises and the subsequent sale to franchisees of certain products or services. The complaint sought unspecified preliminary and permanent injunctive relief, and an unspecified amount of damages. Ilene Siemer, et al. v. The Quizno’s Franchise Company LLC, et al., Case No. 07 CV 2170 (United Stated District Court for the Northern District of Illinois), filed on April 19, 2007, as a putative class action by 5 current and former QUIZNOS franchisees. The defendants were QFA and certain of its affiliates, Meyers, Cervantes and Cervantes Master LLC, Schaden and Richard F. Schaden. The plaintiffs asserted claims for violation of the federal RICO statute, the Illinois Franchise Disclosure Act, the Illinois Consumer Fraud and Deceptive Business Practices Act, conspiracy, unjust enrichment, promissory fraud, economic duress, illusory contract, breach of fiduciary duty, and declaratory judgment and for fraud in the inducement, breach of contract, and breach of the covenant of good faith and fair dealing, all allegedly arising out of the sale of franchises and the subsequent sale to franchisees of certain products or services. The
  18. 18. Smashburger 06/2012 FDD 1031.002.006/46510.2 11 complaint sought unspecified preliminary and permanent injunctive relief, and an unspecified amount of damages. Bonnie Brunet, et al. v. The Quizno’s Franchise Company LLC, et al., Case No. 1:07-cv-01717-EWN-KLM (United States District Court for the District of Colorado), filed on August 14, 2007, as a putative class action by 15 current and former QUIZNOS franchisees. The defendants were QFA and certain of its affiliates, Cervantes Capital LLC, Schaden, Richard F. Schaden, Meyers, Cervantes and Cervantes Master LLC. The complaint asserted claims for violation of the federal RICO statute, the Colorado Consumer Protection Act, common law fraud, breach of contract, breach of the implied covenant of good faith and fair dealing, economic duress declaratory judgment, unjust enrichment, promissory fraud, illusory contract, and breach of fiduciary duty. The complaint sought unspecified preliminary and permanent injunctive relief, declaratory relief, and unspecified compensatory, consequential and statutory damages and exemplary, punitive and treble damages. By the terms of the settlement agreement, putative class members of Bonnano v. The Quizno’s Master LLC (the “SNO Class Action”) who previously executed a release against QUIZNOS are entitled to receive a settlement payment between $250 to $500. Settlement payments for the remaining putative SNO Class Action members who choose to exit the system range from approximately $500 to $8,175, representing 5% to 32.7% of the initial franchise fee paid. Alternatively, putative SNO Class Action members who elect to remain franchisees are entitled to receive a credit towards equipment and supplies for their QUIZNOS Restaurant in an amount equal to the amount of the initial franchise fee paid. Settlement payments for putative class members of Westerfield v. The Quizno’s Franchise Company LLC, Siemer v. The Quizno’s Franchise Company LLC, and Brunet v. The Quizno’s Franchise Company LLC range from $475 to $3,150 per franchise agreement. In addition to the above settlement payments to qualified class members, under the settlement agreement, QUIZNOS agreed to make certain modifications to its franchise model and business practices. The above cases were dismissed with prejudice on August 18, 2010 (Bonanno), August 17, 2010 (Westerfield), August 16, 2010 (Brunet) and August 13, 2010 (Siemer), respectively. Joe Martrano, et al, v. The Quizno’s Franchise Company LLC, et al, Case No. 08-cv- 00932 (United States District Court for the Western District of Pennsylvania), filed by 7 current and former QUIZNOS franchisees on July 3, 2008, as a putative class action. The defendants were QFA and certain of its affiliates, Cervantes Capital LLC, Schaden, and Richard F. Schaden. The complaint asserted claims for violation of the federal RICO statute, Section 1 of the Sherman Act, certain Pennsylvania statutes, for fraud in the inducement, breach of contract, and for breach of the covenant of good faith and fair dealing, all allegedly arising out of the sale of franchises and the subsequent sale to franchisees of certain products or services. The complaint sought unspecified preliminary and permanent injunctive relief, and an unspecified general, multiple, and treble amount of damages. On June 15, 2009, the court denied defendants’ motion to dismiss plaintiff’s second amended complaint. Defendants filed counterclaims against plaintiffs for breach of contract on July 14, 2009. On June 8, 2010, plaintiffs filed a motion to withdraw class certification, which motion was granted on June 9, 2010. Defendants filed amended counterclaims against plaintiffs on December 31, 2010. In February 2011, the parties stipulated to the dismissal of 1 of the 13 plaintiff parties, and in June 2011, the defendants filed motions for summary judgment with respect to all claims of each of the 12 remaining plaintiffs, and the plaintiffs filed a motion for summary judgment against the defendants’ counterclaims. On January 4, 2012, defendants entered into a settlement agreement with 11 of the plaintiff parties,
  19. 19. Smashburger 06/2012 FDD 1031.002.006/46510.2 12 which included mutual general releases, and defendants additionally agreed to pay such plaintiff parties $500,000. Also on January 4, 2012, defendants entered into a settlement agreement with the remaining plaintiff party, which included mutual general releases, and defendants also agreed to waive the post-termination covenant not to compete contained in the plaintiff party’s franchise agreement. On January 6, 2012, the court dismissed the plaintiff parties’ and defendants’ claims against each other with prejudice. Other than the above disclosed actions, no litigation is required to be disclosed in this Item. ITEM 4 BANKRUPTCY No bankruptcy is required to be disclosed in this Item. ITEM 5 INITIAL FEES Development Fee. Under the Multi-Unit Development Agreement, you agree to pay us a multi-unit development fee upon signing the Multi-Unit Development Agreement. The multi- unit development fee (“Development Fee”) equals $20,000 multiplied by the number of Restaurants (other than the first Restaurant) required to be developed under the Multi-Unit Development Agreement. Typically, a Multi-Unit Developer should expect to develop 2 to 25 Restaurants, depending on the size of the Development Area, and the range of the Development Fee for the developed Restaurants will range from $40,000 to $520,000. We credit the Development Fee, in $20,000 increments, toward the initial franchise fee that is due as Franchise Agreements are signed (excluding the first Franchise Agreement) until the aggregate amount of such credits equals the Development Fee. Depending on the number of Restaurants to be developed, the Multi-Unit Developer will have between 3 to 5 years to complete the Development Schedule. We will fully earn the Development Fee when you pay it, and you must pay us the fees in one lump sum. These fees are non-refundable. Initial Franchise Fees. When you sign the Multi-Unit Development Agreement, you also sign the Franchise Agreement and pay the initial franchise fee of $40,000 for the first Franchise that you are required to acquire under the Multi-Unit Development Agreement. For each other Restaurant, once we approve the site and before you execute a lease or otherwise gain possession of the site, you or an Approved Affiliate must sign the Franchise Agreement and pay an initial franchise fee. Under your Multi-Unit Development Agreement, the amount of the initial franchise fee for each Franchise Agreement you enter into with us during the original term of the Multi-Unit Development Agreement will be the lower of our then-current initial franchise fee or the standard initial franchise charged by us as of the date you sign the Multi-Development Agreement. We will fully earn the initial franchise fee due under each Franchise Agreement when you pay it, and you must pay us the fee in one lump sum. These fees are non-refundable. If you are executing a Franchise Agreement for an existing SMASHBURGER RESTAURANT that you are buying from another franchisee, we will not charge an initial franchise fee, but you or the seller of the existing SMASHBURGER RESTAURANT must pay the transfer fee due under the seller’s Franchise Agreement. Lease Review Fee. Under the Franchise Agreement, you must pay us or our designated supplier (which may be an affiliate of ours) a lease review fee of $1,500. If you fail or you refuse to sign the approved lease and then submit one or more subsequent leases for us to review
  20. 20. Smashburger 06/2012 FDD 1031.002.006/46510.2 13 and approve, for each such subsequent lease, you will pay an additional Lease Review Fee of $1,500. The Lease Review Fee covers the expenses incurred to review and negotiate your lease (if we choose to do so). Our approval of your lease is required and the Lease Review Fee is not refundable under any circumstances. ITEM 6 OTHER FEES TYPE OF FEE1 AMOUNT DUE DATE REMARKS Royalty5 Paid at 5% of Gross Sales subject to the following adjustment: (1) if Gross Sales during a fiscal year exceed $1,200,000, the Royalty rate, as of the 1st day of the immediately succeeding fiscal year, will be 6% of Gross Sales; and (2) if Gross Sales during a fiscal year are $1,200,000 or less, the Royalty rate, as of the 1st day of the immediately succeeding fiscal year, will be 5% of Gross Sales6 Weekly, but with the quarterly adjustment (if any) due within 10 days after the end of the calendar quarter “Gross Sales” include all revenue derived from operating the Restaurant, but (1) excludes sales, use, or service taxes and (2) documented refunds, credits and discounts to customers and employees. Gift certificate, gift card or similar program payments are included when the gift certificate, gift card, other instrument or applicable credit is redeemed. Gross Sales also include all insurance proceeds received for loss of business due to a casualty to or similar event. Lease Review Fee $1,500 As incurred Fee for review and if we choose, the negotiation of certain provision of premises lease. Fee is charged for each subsequent lease review, if you refuse to sign the approved lease and, as a result, we are required to review additional leases. Proprietary Software Fee We do not currently charge this fee. We estimate that this fee will range between $150 to $250 per month if implemented Monthly If developed, fee for proprietary software or technology licensed to you. The amount shown is merely an estimate as we currently do not have proprietary software that we license to you.
  21. 21. Smashburger 06/2012 FDD 1031.002.006/46510.2 14 TYPE OF FEE1 AMOUNT DUE DATE REMARKS On-site Opening Assistance $1,000 to $5,500 As incurred We will bear the expenses for the 1st two SMASHBURGER RESTAURANT opened by you or your affiliates; if, in our judgment, we determine it to be necessary to also send a representative to the site to provide grand opening assistance for the third or subsequent Restaurants, you will be responsible for reimbursing us the costs and expenses incurred by our representative, including the costs of travel, lodging, meals and a per diem to cover the representative’s salary. Marketing Fund 1% to 4% of Gross Sales2 Weekly Local Advertising Cooperative3 Up to 3% of Gross Sales Weekly Co-op will administer advertising programs and develop advertising, marketing and promotional materials for an area with more than 2 SMASHBURGER RESTAURANTS. The total amount that you will be required to spend for Marketing Fund, local advertising and Local Advertising Cooperative will not exceed 5% of Gross Sales. Website Maintenance Fee We do not currently charge this fee. We estimate that this fee will be $50 per month if implemented. Monthly You must provide required information and updates. If you are in default of the Franchise Agreement, your website may be removed until defaults are cured. Interest on Late Payment 2% per month or the maximum rate allowed by applicable state law, whichever is lower. $100 per returned check As incurred You pay interest on amounts owed after due date. Service fee of $100 per occurrence for checks returned due to insufficient funds. Transfer Fee – Franchise Agreement 50% of then-current initial franchise fee for each Restaurant As incurred See Section 12.C (9) of the Franchise Agreement.
  22. 22. Smashburger 06/2012 FDD 1031.002.006/46510.2 15 TYPE OF FEE1 AMOUNT DUE DATE REMARKS Transfer Fee – Multi-Unit Development Agreement (i) the greater of 10% of the purchase price or $35,000, plus applicable goods and services taxed thereon; or (ii) the greater of 5% of the purchase price or $25,000, plus applicable goods and services taxed thereon4 As incurred See Section 6(A)(1)(h) of the Multi- Unit Development Agreement. Renewal Fee 50% of then-current initial franchise fee Upon renewal See Section 13 of the Franchise Agreement. Inspection and Audit Fee Costs of inspection (estimated to be between $1,000 to $15,000) Within 15 days of report receipt You pay fee if examination was done because you failed to provide required reports or reveals a Royalty or Marketing Fund contribution understatement exceeding 2% of the amount that you actually reported. Management Fee 10% of Gross Sales plus costs and expenses As incurred We may assume management of your Restaurant, if: (1) you abandon or fail to actively operate your Restaurant; (2) you fail to comply with any provision of this Agreement or any System Standard and do not cure the failure within the specified time period; or (3) this Agreement expires or is terminated and we are deciding whether to exercise our option to purchase your Restaurant. We will exercise our right to assume management in 90-day increments, renewable for up to 1 year, in the aggregate. We will periodically discuss with you the results of operation during the time we manage the Restaurant. Product testing Variable (estimated to be between $0 to $250) As incurred Fee charged for testing samples of proposed new suppliers.
  23. 23. Smashburger 06/2012 FDD 1031.002.006/46510.2 16 TYPE OF FEE1 AMOUNT DUE DATE REMARKS Additional training Then-current per diem charge, currently $250 As incurred Initial training is provided for up to 3 people. However, if additional training is required or re-training is required, you must pay additional training fee. We may charge you for training newly-hired personnel; for refresher training courses; and for additional or special assistance or training you need or request. Recruiting Fee 200% of the annual salary of such person recruited As incurred Fee is due to us if you recruit or hire any person then employed, or who was employed within the immediate preceding 24 months, as a general manager or assistant manager at any SMASHBURGER RESTAURANT or as our district manager, regional manager or corporate executive. See Section 7(c) of the Franchise Agreement. Insurance $5,000 to $15,000 As incurred If you fail to obtain and maintain insurance, we may, at our option, obtain or reinstate the insurance for you and you must promptly reimburse us for the cost of the insurance plus a reasonable fee for our services and our out of pocket expenses. Indemnification Will vary under circumstances As incurred You must reimburse us and our affiliates if any of us are held liable for claims related to your Restaurant’s operations. Costs and Attorneys’ Fees Will vary under circumstances As incurred Payable only if you do not comply with the Franchise Agreement or Multi-Unit Development Agreement. Marketing Will vary under circumstances As incurred We may, with your approval, advertise, market and promote your Restaurant on your behalf. In the event that we undertake such activities, you must reimburse us for all costs we incur.
  24. 24. Smashburger 06/2012 FDD 1031.002.006/46510.2 17 TYPE OF FEE1 AMOUNT DUE DATE REMARKS Music Fee Currently ranges from $37.95 to $47.95 (plus applicable taxes) per month Monthly For music services provided by the required vendor to your Restaurant. Smashburger Purchasing pays the vendor directly, then initiates an ACH from your bank account to reimburse it for the amount owed. Pest Control Services Currently ranges from $46.95 to $77.95 (plus applicable taxes) per month Monthly For pest control services provided by the required vendor to your Restaurant. Smashburger Purchasing pays the vendor directly, then initiates an ACH from your bank account to reimburse it for the amount owed. Customer Survey Currently $40 per month Monthly For customer survey services provided by the required vendor to your Restaurant. Smashburger Purchasing pays the vendor directly, then initiates an ACH from your bank account to reimburse it for the amount owed. Gift Card Service Currently $80 to $90 per month Monthly The cost of managing the gift card program and replenishing your supply of gift cards. Smashburger Purchasing pays the vendor directly, then initiates an ACH from your bank account to reimburse it for the amount owed. NOTES 1. All fees are imposed by and payable to us. All fees are non-refundable. These fees may not be uniform for franchisees signing the Franchise Agreement. Unless otherwise indicated, fees are due under the Franchise Agreement. 2. Initially, you will contribute 1% of Gross Sales to the Marketing Fund. However, at any time and on notice to you, we may increase the amount you must contribute to the Marketing Fund, up to 4% of Gross Sales, provided that in no event will you be required to contribute or spend, in the aggregate, more than 5% of Gross Sales on Marketing Fund contributions, local marketing requirement, and the required contribution to a Local Advertising Cooperative contributions. 3. If a Local Advertising Cooperative is established for a geographic area that includes the Restaurant, you must contribute to it. Generally, the maximum you would be required to contribute to a Local Advertising Cooperative is 3% of Gross Sales. However, we reserve the right, on notice, to require you to pay to us or our designee any monies you are required to spend on local marketing, in which case, we or our designee would spend those monies, in accordance with local Restaurant marketing guidelines and programs we develop from time to time, to
  25. 25. Smashburger 06/2012 FDD 1031.002.006/46510.2 18 advertise and promote the Restaurant on your behalf. We also have the right to contribute those monies to the Marketing Fund or to a Local Advertising Cooperative. 4. If the sale is completed prior to the 3rd anniversary of the effective date of the Multi- Unit Development, the amount calculated under clause (i) would be due; if the sale is completed on or after the 3rd anniversary of the effective date of the Multi-Unit Development Agreement, the amount calculated under clause (ii) would be due. 5. If you sign a Multi-Unit Development Agreement, the amount of the royalty for each Franchise Agreement you or an Approved Affiliate signs during the original term of the Multi- Unit Development Agreement will be the lower of our then-current royalty or the standard royalty charged by us as of the date you signed the Multi-Unit Development Agreement. 6. If the Restaurant begins operation on or after November 1 of a calendar year, its Gross Sales shall not be considered for purposes of adjustment until the 2nd full fiscal year after it began operations. ITEM 7 ESTIMATED INITIAL INVESTMENT1 YOUR ESTIMATED INITIAL INVESTMENT (MULTI-UNIT DEVELOPMENT AGREEMENT) TYPE OF EXPENDITURE AMOUNT METHOD OF PAYMENT WHEN DUE TO WHOM PAYMENT IS MADE Initial Fee for first Restaurant $40,000 As incurred When you sign the Multi-Unit Development Agreement. Us Fee for Multiple Restaurants (See Item 5)1 $20,000 multiplied by the number of Restaurants under the Development Schedule (less the first Restaurant) Lump Sum When you sign the Multi-Unit Development Agreement. Us Total Estimated Initial Investment2 $80,000
  26. 26. Smashburger 06/2012 FDD 1031.002.006/46510.2 19 NOTES 1. Your actual costs will depend on the number of Restaurants you are to develop under the Development Schedule. Assuming you are to develop and open 3 Restaurants, the total estimated initial investment equals $80,000 ($40,000 for first restaurant plus the sum of $20,000 multiplied by 2 additional Restaurants). We apply this fee, in $20,000 increments, toward the Initial Franchise Fee due under each Franchise Agreement (excluding the first Franchise Agreement) signed by you or an Approved Affiliate in accordance with the Development Agreement. 2. We make no representation that your costs will come within the ranges estimated and cannot guarantee that you will not incur additional expenses entering into a Multi-Unit Development Agreement. YOUR ESTIMATED INITIAL INVESTMENT (FRANCHISE AGREEMENT) TYPE OF EXPENDITURE AMOUNT METHOD OF PAYMENT WHEN DUE TO WHOM PAYMENT IS TO BE MADE Initial Franchise Fee1 $40,000 Upon signing Franchise Agreement Lump Sum Us Leasehold Improvements2 $100,000 – $325,000 As Invoiced As arranged Landlord/Affiliates /Contractors Furniture, Fixtures and Equipment3 $100,000 – $180,000 Before Opening As Invoiced Affiliate or Approved Supplier Signage $8,000 – $20,000 Before Opening As Invoiced Affiliate or Approved Supplier IT, POS System $15,000 – $30,000 Before Opening As Invoiced Affiliate or Approved Supplier Three Month’s Rent4 $6,000 - $33,000 Landlord Security Deposit, Business Licenses5, 8 $5,000 – $15,000 As incurred As invoiced Landlord and Suppliers, Professional Svc. Firms Opening Inventory and Supplies6 $5,000 – $10,000 Before Opening As Invoiced Affiliate or Approved Supplier Grand Opening Advertising7 $10,000 - $25,000 Before Opening As Invoiced Affiliate or Approved Supplier Training Expenses8, 9 $5,000 – $35,000 Before Opening As Invoiced Affiliate or Approved Supplier Miscellaneous Opening Costs9 $500 – $10,000 Before Opening As Invoiced Affiliate or Approved Supplier
  27. 27. Smashburger 06/2012 FDD 1031.002.006/46510.2 20 TYPE OF EXPENDITURE AMOUNT METHOD OF PAYMENT WHEN DUE TO WHOM PAYMENT IS TO BE MADE Professional Fees $5,000 – $15,000 Before Opening As Invoiced Affiliate or Approved Supplier Insurance Premium10 $5,000 – $15,000 Before Opening As Invoiced Insurance Carrier Liquor Licensing11 $1,500 – $15,000 Before Opening As Invoiced Affiliate or Approved Supplier Lease Review Fee $1,500 Before Opening Upon Submission of Lease for Review Us, Affiliate or Approved Supplier Additional Funds - 3 months12 $10,000 – $20,000 As incurred As invoiced Suppliers and Employees TOTAL ESTIMATED INITIAL INVESTMENT13 $317,500 - $789,500 NOTES 1. The initial franchise fee is non-refundable under the terms of the Franchise Agreement (See Item 5). 2. Our estimate for leasehold improvements does not include any tenant improvement allowance that may be granted by landlords towards leasehold improvements. Tenant improvement allowances are site specific and dependent upon several variables, including rent, occupancy levels and local market conditions, which are beyond our control. 3. This estimate includes freight, installation, and applicable state and local taxes. 4. The cost of acquiring or leasing a location for your Restaurant will vary significantly depending upon the market in which the proposed site is located. A suitable building for a free standing Restaurant will range in size from approximately 1,600 square feet to 2,200 square feet and will likely cost from $15 to $60 per square foot per year. Local market conditions, changes in the economy and inflation will all contribute to your real property costs. The location of the parcel of real property, its relationship to and the nature of any adjoining uses, and its accessibility will affect both its size and price. Lease agreements vary, but usually require the lessee to pay for maintenance, insurance, taxes and any other charges or expenses for the land and building and the operation of the Restaurant or they may require that the Lessee reimburse the Lessor for its proportionate share of these payments (plus interest) made on behalf of the lessee and pay minimum monthly rent or percentage rent. You must get our approval of your proposed lease before signing it. 5. The rent deposit may be refundable under the terms of the lease. 6. Due to differences in local laws, prices, suppliers, geography and commercial practices, you may elect to carry a larger inventory. Local costs will greatly affect this investment.
  28. 28. Smashburger 06/2012 FDD 1031.002.006/46510.2 21 7. You must spend a minimum of $10,000 on an approved grand opening advertising program, but we reserve the right to require you to spend up to $25,000 on the grand opening advertising program depending on factors such as whether your Restaurant is located in an urban or rural location. 8. This estimate covers the associated cost for payroll of management and staff training before the opening of your Restaurant. This includes 4 weeks of training for a managing owner and a non-owner manager. In addition, for the first 2 SMASHBURGER RESTAURANTS opened by you or your affiliates, we will send a training team (the identity and composition of which will be in our discretion) to your Restaurant to assist with the grand opening. We will bear the expense of providing that representative. If, in our judgment, we determine it to be necessary to also send a representative to the Restaurant to provide grand opening assistance for the third or subsequent Restaurants, you will be responsible for reimbursing us the costs and expenses incurred by our representative, including the costs of travel, lodging, meals and a per diem to cover the representative’s salary. The estimated budget also takes into consideration the travel budget for training. Salaries will vary substantially by geographic areas and local market conditions. The estimated initial investment is subject to substantial variance due to delays and the securing of the required permits and license to train and operate the business as well as geographic location (See Item 11). 9. Typical pre-opening expenses include salaries and living expenses for you and your managers in training, training expenses incurred for staff, pre-opening training menus, related pre-opening marketing and personnel ads. Additionally, you will likely have to prepay or make deposits for various utilities such as gas, electricity, sewer, water, telephone, and garbage disposal. We estimate that these prepaid expenses and deposits will be between $500 and $5,000. You must obtain state and local licenses, including liquor licenses (see Note 11), business licenses, vending machine licenses, and games licenses. You may have to post bonds in order to obtain certain governmental permits. 10. You must, at your own expense, keep in force insurance policies for each Restaurant. We reserve the right to change types and amounts of coverage. This estimate is based on our current requirements which are: comprehensive business owners coverage (including contents insurance, loss of business income, employee dishonesty, money coverage, comprehensive general liability and liquor liability) for a minimum of $1 million per occurrence and $2 million in the aggregate; hired/non owned auto liability for a minimum of $1 million; employee practices liability for a minimum of $1 million; boiler and machinery coverage with a coverage rating of $500,000; umbrella coverage for a minimum of $1 million; building coverage for at least 80% of replacement costs (amount dependent upon building value, construction value, and whether owned or leased property) for building of leased/owned premises; and auto liability for a minimum of $1 million. You also must maintain workers’ compensation insurance for your employees. You must provide us with a certificate of insurance naming us and our designated affiliates as additional insureds and provide us with 30 days prior written notice of material changes to or cancellation of the policy. Your lease agreement may require higher insurance limits than those stated above. You will likely have to prepay all or a portion of the first year’s premiums for insurance. 11. The cost to obtain a liquor license varies greatly depending on the licensing authority involved and the local liquor license resale market, if any. In our recent experience with our affiliate-owned restaurants, the cost to obtain a liquor license has run between $1,500 and $15,000 (including legal fees). Generally, liquor-licensing systems fall into two categories: (a)
  29. 29. Smashburger 06/2012 FDD 1031.002.006/46510.2 22 quota-based systems, and (b) non-quota-based systems. In quota-based systems, the total number of licenses available in a municipality, county or other defined territory is set according to the number of people within the territory. For example, state law may limit the total number of licenses available to one per every two thousand persons. Once the licensing authority has issued the total number of licensees according to the population, the licensing agency will not issue any additional new licenses until a new census is taken that shows an increase in population or until an existing permit expires or is revoked. Most often in quota-based systems, parties seeking licenses will not wait for the next census or wait for a license to expire. Instead, they will purchase a license from an existing licensee. In such situations, the cost of obtaining a license can be substantially greater than the cost of obtaining a license directly from the licensing authority. The new licensee will not only pay fixed license fees to the state, but it will also pay the purchase price to the transferor plus fees for attorney’s services and service providers. The licensing agency may or may not regulate the price. The price may simply be set by the market for licenses in a particular location, and that could inflate the price significantly. You should carefully review the system of liquor licensing in your state and review the expected range of costs, if your Restaurant is located in a quota state. In state systems that are not quota-based, the cost of obtaining a state license is usually limited to the fee prescribed by statute or administrative regulation, plus fees for attorney’s services and service providers. However, there may be additional costs imposed by a need to obtain a municipal and/or county liquor license, conditional use permit or other governmental approval. There are also Federal tax permits required. 12. Our estimates of the amounts needed to cover your expenses for the start-up phase (i.e., 3 months from the date the Restaurant opens for business) of your business include: replenishing your inventory, lease payments, initial advertising and promotional expenditures, payroll for managers and other employees, uniforms, utilities and other variable costs. These figures are estimates and we cannot assure you there will not be additional expenses. Your actual cost will depend on factors including management skill, experience, business acumen, local economic conditions, local market for casual dining, prevailing wage rates, competition and the sales level reached during the start-up phase. These amounts do not include any estimates for debt service on loans that you obtain to finance your business. 13. We make no representation that your costs will come within the ranges estimated and cannot guarantee that you will not incur additional expenses starting a SMASHBURGER RESTAURANT. Your actual costs will depend on factors such as: geography, the availability of sites; your Restaurant size and location; construction costs; your discretionary expenditures; the availability of leasing or financing arrangements; your credit rating; and other factors. The estimated initial investment figures shown above for constructing and opening a Restaurant are based primarily on the costs incurred by our affiliates in opening SMASHBURGER RESTAURANTS in the past four and a half years. Because these figures are only estimates, it is possible both to reduce and to exceed costs in any of the areas listed above. Actual costs will vary depending on physical size and current condition of the premises. In addition, actual costs may substantially exceed these estimates in a major metropolitan market. To avoid excessive construction costs, we require that you pick contractors carefully by obtaining several competitive bids beforehand. These estimates do not include extensive exterior renovations. You should review all figures in this Item 7 carefully with a business advisor before you decide to purchase the franchise. Neither we nor our affiliates offer financing directly or indirectly for any part of the initial investment. The availability and terms of financing depend on the availability of financing generally, your creditworthiness and collateral, and
  30. 30. Smashburger 06/2012 FDD 1031.002.006/46510.2 23 lending policies of financial institutions. The estimate does not include any finance charge, interest, or debt service obligation. ITEM 8 RESTRICTIONS ON SOURCES OF PRODUCTS AND SERVICES In order to maintain the quality and uniformity of all food products, menu items, ingredients, services, products, materials, forms, items, supplies, fixtures, furnishings and equipment utilized in or by SMASHBURGER RESTAURANTS, you must purchase all food products, ingredients, condiments, fixtures, furnishings, equipment, decor items and signage from suppliers approved by us in writing. We may designate ourselves or an affiliate as an approved supplier of food and related products and services. We will provide a list of approved suppliers and approved food products, ingredients and condiments, including designation by brand and our standards and specifications, as contained in the Standards of Operations Manual (see Item 11) or otherwise in writing. You must strictly comply with the standards and specifications and comply with all required purchases of products and services from approved suppliers and in conformity with our standards and specifications. All menu items and food products must be prepared in strict compliance with the recipes and the procedures we specify in the Standards of Operations Manual, or otherwise in writing. You must offer and sell all, and you are permitted to offer and sell only, those food products and menu items and services that we have specifically approved in writing. You may not deviate from our approved menu items without prior written approval from us. As of the date of this Disclosure Document, none of our officers owns an interest in any approved suppliers. In constructing and operating the Restaurant, you must use only those types of food items, condiments, construction and decorative materials, fixtures, equipment, furniture and signs (“Operating Assets”) that we have approved according to our specifications and standards for appearance, function and performance. We develop the specifications and standards in our sole discretion. We will not issue to you or to our approved suppliers (except as we deem necessary for purposes of production) the specifications and standards for proprietary Operating Assets. We will communicate the approved Operating Assets to you in the prototype architectural plans for a SMASHBURGER RESTAURANT, in the Standards of Operations Manual, and otherwise in writing. You may purchase approved Operating Assets from (and only from) any supplier approved or designated by us (which may include us or our affiliates). You must purchase computer hardware and software from our designated suppliers. We, our affiliates or our officers are not currently designated suppliers of approved Operating Assets, but we reserve the right to do so in the future. We or our affiliates may derive revenue or profit from such transactions. We maintain approved supplier criteria; however, we do not issue these criteria to you. If you propose to purchase any unapproved Operating Assets from any supplier or any item which has not been specifically approved by us in writing, you must first notify us in writing, using our vendor approval process and application, and submit to us sufficient specifications, photographs, drawings and other information or samples for us to determine whether the proposed Operating Assets comply with our specifications and standards, and the supplier meets our approved supplier criteria, which determination will be made and communicated in writing to you within a reasonable time, typically within 30 days after receipt of the information from you or from the proposed supplier. We may charge you a fee for testing and evaluating suppliers and may impose limits on the number of approved suppliers. We will
  31. 31. Smashburger 06/2012 FDD 1031.002.006/46510.2 24 make an effort to communicate our approval or denial within a reasonable time after completion of the investigation of the proposed supplier/vendor. We have developed and may continue to develop for use by SMASHBURGER RESTAURANTS certain products that are prepared from confidential secret recipes and other proprietary products that bear our Marks. If those products become a part of the Franchise System, we may require you to purchase those items solely from us, our affiliate or from another designated supplier. We and our affiliates do not currently sell any products to franchisees, but we reserve the right to do so in the future. In order to standardize and enhance the customers’ experience in SMASHBURGER RESTAURANTS, we require you to use our designated vendors (i) for music services, (ii) pest control services, (iii) customer satisfaction surveys, and (iv) gift card management services. In each case, we or our affiliates have negotiated system-wide agreements with the vendors for an agreed upon price per restaurant. We or our affiliates pay the vendors directly, then ACH your bank account for your restaurant’s respective cost. In some cases, we or our affiliates will negotiate purchase arrangements, including prices and terms, with designated and approved suppliers on behalf of SMASHBURGER RESTAURANTS. We or our affiliates may derive revenue from those arrangements, typically in the form of marketing support payments or rebates based on purchases made by us, our affiliates or our franchisees of the products or services supplied by the approved supplier. The basis for rebates paid to us or our affiliates will depend on the type of product or service supplied, but currently they range from $0.02 to $6.25 per unit (that is, a case, gallon, container or other purchase unit) for food, beverage and other products and services, and from $100 to $1,300 per piece of equipment purchased for use in the development and operation of the restaurant. During 2011, our total revenue was $6,851,000, and we did not receive any revenue or other consideration from purchases made by our franchisees from approved vendors. However, during this period, our affiliate, Smashburger Purchasing, received $1,973,444 in rebates from approved vendors and, in turn, contributed $237,635 back to franchisees under its franchisee rebate programs. In addition, during 2011, our approved vendors contributed $245,149 to the Marketing Fund. As of the date of this Disclosure Document, there are no purchasing or distribution cooperatives for any of the items described above. All advertising and promotional materials, signs, decorations, paper goods (including menus and all forms and stationery used in the Restaurant) and other items we designate must bear the Marks (see Item 13) in the form, color, location and manner we prescribe. No unauthorized logos, symbols or marks may be placed, used or displayed on any advertising, menus or promotional items without our express written consent. Before you may use any advertising or promotional materials, you must submit them to us and we must approve them in writing. We estimate that 95% to 100% of your initial investment and 95% to 100% of your ongoing expenditures will be directed to purchase products and services that will be restricted by us in some manner. Except as disclosed above, we do not currently receive or derive revenue or other material consideration from vendors as a result of purchases or leases we require franchisees to make. Other than as described above, we do not provide any material benefits to franchisees based on their use of designated or approved suppliers.
  32. 32. Smashburger 06/2012 FDD 1031.002.006/46510.2 25 ITEM 9 FRANCHISEE’S OBLIGATIONS This table lists your principal obligations under the franchise and other agreements. It will help you find more detailed information about your obligations in these agreements and in other items of this Disclosure Document. OBLIGATION SECTION IN AGREEMENTS ITEM IN DISCLOSURE DOCUMENT A. Site selection and acquisition/lease Section 2 in Multi-Unit Development Agreement. Sections 2.A and 2.B in Franchise Agreement Items 8 and 11 B. Pre-opening purchases/leases Not applicable Sections 2.E and 2.F in Franchise Agreement. Items 5, 7, 8, and 11 C. Site development and other pre- opening requirements Section 2 in Multi-Unit Development Agreement. Section 2 in Franchise Agreement. Items 7, 8, and 11 D. Initial and ongoing training Section 4.A in Franchise Agreement. Item 11 E. Opening Section 2.F in Franchise Agreement. Item 11 F. Fees Section 3 in Multi-Unit Development Agreement. Section 3 in Franchise Agreement. Items 5, 6 and 7 G. Compliance with standards and policies/ Standards of Operations Manual Sections 4.B, 4.C and 8 in Franchise Agreement. Items 8, 11 and 14 H. Trademarks and proprietary information Section 4 in Multi-Unit Development Agreement. Section 5 in Franchise Agreement. Items 13 and 14 I. Restriction on products/services offered Section 8.B in Franchise Agreement. Items 8 and 16 J. Warranty and customer service requirements Section 10.C in Multi-Unit Development Agreement. Section 8.E in Franchise Agreement. None. K. Territorial development and sales quotas Sections 2.C and 2.D in Multi-Unit Development Agreement Item 12
  33. 33. Smashburger 06/2012 FDD 1031.002.006/46510.2 26 OBLIGATION SECTION IN AGREEMENTS ITEM IN DISCLOSURE DOCUMENT L. Ongoing product/service purchases Sections 8.B and 8.D in Franchise Agreement. Item 8 M. Maintenance, appearance and remodeling requirements Sections 8.A and 8.I in Franchise Agreement. Item 11 N. Insurance Section 8.F in Franchise Agreement. Item 7 O. Advertising Section 9 in Franchise Agreement. Items 6, 8 and 11 P. Indemnification Sections 8.B and 9.B in Multi-Unit Development Agreement Sections 5.E, 16.D and 17.J in Franchise Agreement. Item 6 Q. Owner’s participation, management, and staffing Section 1.D in Multi-Unit Development Agreement. Section 8.C in Franchise Agreement. Items 11 and 15 R. Records/reports Section 2.E in Multi-Unit Development Agreement. Section 10 in Franchise Agreement. Items 6 and 11 S. Inspections/audits Section 11 in Franchise Agreement. Items 6 and 11 T. Transfer Section 6 in Multi-Unit Development Agreement. Section 12 in Franchise Agreement. Items 6 and 17 U. Renewal Section 1.B in Multi-Unit Development Agreement. Section 13 in Franchise Agreement. Item 17 V. Post-termination obligations Sections 7.B and 7.C in Multi-Unit Development Agreement. Section 15 in Franchise Agreement. Item 17 W. Non-competition covenants Section 7.C in Multi-Unit Development Agreement. Sections 7 and 15.D in Franchise Agreement. Item 17 X. Dispute resolution Section 9 in Multi-Unit Development Agreement. Section 17 in Franchise Agreement. Item 17
  34. 34. Smashburger 06/2012 FDD 1031.002.006/46510.2 27 ITEM 10 FINANCING We do not offer direct or indirect financing. We do not guarantee your promissory notes, mortgages, leases or other obligations. Under the Multi-Unit Development Agreement and Franchise Agreement, you agree that we may periodically designate the maximum amount of debt that SMASHBURGER RESTAURANTS may service and you (and any Approved Affiliates that execute Franchise Agreements) agree not to borrow more than any such prescribed maximum allowed debt. Currently, the maximum amount of debt we allow a franchisee to service is up to 50% of the estimated total initial investment amount. We periodically may change this amount for SMASHBURGER RESTAURANTS. In addition, you agree that the first 2 SMASHBURGER RESTAURANTS developed pursuant to Franchise Agreements signed under the Multi-Unit Development Agreement must be developed with cash equity and without the proceeds from any loans made by you (or your owners), your affiliates (or their owners) or any other third party. We impose this requirement because excess debt and debt service will adversely affect a SMASHBURGER RESTAURANT’s operational results. If you sign a Multi-Unit Development Agreement, you must always maintain sufficient liquidity to meet your obligations under the Multi-Unit Development Agreement and, in any event, the liquidity of you and all of our affiliates who sign Franchise Agreements, combined, must not at any time fall below the amount shown in Item 7 of this Disclosure Document as the total estimated initial investment to open one Restaurant ($789,500). We reserve the right to review these liquidity requirements from time to time, and you must comply with such minimum liquidity requirements that we reasonably impose. ITEM 11 FRANCHISOR’S ASSISTANCE, ADVERTISING, COMPUTER SYSTEMS, AND TRAINING Except as listed below, we are not required to provide you with any assistance. Our Assistance: We will devote resources to fulfill our obligations to you. However, except as listed below, we need not provide any assistance to you. Our Pre-opening Obligations. Before you open the Restaurant, we will provide you the following assistance: 1) Consultation on and approval of sites (Franchise Agreement – Section 2.A; Multi- Unit Development Agreement - Section 2.A) 2) Review and approval of the lease (Franchise Agreement – Section 2.B) 3) Initial training up to 3 persons (including your Designated Manager (defined in Item 15)) at our headquarters or another location designated by us. This training will last at least 4 weeks. (Franchise Agreement – Section 4.A). 4) For the first 2 SMASHBURGER RESTAURANTS opened by your or your affiliates, we will send a training team (the identity and composition of which will be in our discretion)

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