-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, T6ORxw/g/1GrRYmPPNenMyiinRGWnfbAkwSu2jCpsx0pmkKyODfE9Y1Hz+NrqzvX kSXDHGTFv/CnqlxR7mJoCA== 0000825324-97-000015.txt : 19971230 0000825324-97-000015.hdr.sgml : 19971230 ACCESSION NUMBER: 0000825324-97-000015 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971229 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: GOOD TIMES RESTAURANTS INC CENTRAL INDEX KEY: 0000825324 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 841133368 STATE OF INCORPORATION: NV FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-18590 FILM NUMBER: 97744911 BUSINESS ADDRESS: STREET 1: 8620 WOLFF CT STE 330 CITY: WESTMINSTER STATE: CO ZIP: 80030 BUSINESS PHONE: 3034274221 MAIL ADDRESS: STREET 1: 8620 WOLFF COURT STREET 2: SUITE 330 CITY: WESTMINSTER STATE: CO ZIP: 80030 FORMER COMPANY: FORMER CONFORMED NAME: PARAMOUNT VENTURES INC DATE OF NAME CHANGE: 19900205 10KSB 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB (Mark One) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended September 30, 1997 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to Commission File Number: 0-18590 GOOD TIMES RESTAURANTS INC. (Exact name of small business issuer in its charter) Nevada 84-1133368 (State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.) 8620 Wolff Court, Suite 330, Westminster 80030 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (303) 427-4221 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered NONE Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par value (Title of class) Common Stock Purchase Warrants (Title of class) Indicate by check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-KSB is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. Registrant's revenues for the most recent fiscal year were $11,865,000. As of December 17, 1997, the aggregate market value of voting stock held by non-affiliates was $2,361,093. As of December 17, 1997, the Registrant had 6,434,849 shares of common stock outstanding. Documents Incorporated by Reference: Incorporated herein by reference are Part III, Items 9 through 12 to the Registrant's definitive proxy statement to be issued in conjunction with Registrant's Annual Meeting of Shareholders to ben held on February 12, 1998. Transitional Small Business Disclosure Format Yes No X PART I ITEM 1. BUSINESS Background Good Times Restaurants Inc. (the "Company") was organized under Nevada law in 1987 and is the holding company for a wholly-owned subsidiary that is engaged in the business of developing, owning, operating and franchising restaurants under the name Good Times Drive Thru BurgersSM. Good Times Drive Thru BurgersSM restaurants are owned, operated and franchised by the Company's subsidiary, Good Times Drive Thru Inc. (Good Times Drive Thru BurgersSM and Good Times Drive Thru Inc. are interchangeably referred to herein as "Good Times" or "Drive Thru"). Round The Corner restaurants are owned and operated by the Company's former subsidiary, Round The Corner Restaurants, Inc. (Round The Corner and Round The Corner Restaurants, Inc. are interchangeably referred to herein as "RTC"). With RTC's restaurant sales significantly declining in 1994 and 1995 and RTC incurring significant losses, the Company divested itself of RTC and focused all of its resources on development of the Good Times concept. On September 30, 1995, the Company sold 100% of the stock of RTC to Hot Concepts Management Group, L.L.C. ("Hot Concepts"). Corporate Operations The Company currently leases approximately 5,600 square feet of space for its executive offices in Westminster, Colorado for $74,000 per year. The lease is for a five year period expiring in April 1998. Thereafter, the Company will lease office space from The Bailey Company (holders of the Preferred Stock of the Company) at their corporate headquarters. It is anticipated that the lease will reduce the Company's expenses related to its office lease. Through fiscal 1995, the Company provided administrative and accounting support to Drive Thru and RTC and charged monthly management fees for such services. With the sale of RTC, the Company no longer provides such services to RTC and has consolidated its operations with Drive Thru. The Company is a holding company and its officers are the President and Chief Executive Officer of the Company and the Controller, Secretary and Treasurer. Officers of the Company hold the same position with Drive Thru and all personnel associated with the Company are employees of Drive Thru. For 1998, Drive Thru plans to concentrate its efforts and capital on the growth of the Good Times restaurant chain in Colorado through additional company-owned, joint-venture and franchised restaurants. Good Times Good Times Drive Thru Inc. is engaged in the operation and development of the Good Times Drive Thru BurgersSM restaurants, featuring extremely fast service and a limited, high quality menu for drive-through and walk-up customers. During fiscal 1997, three restaurants were developed featuring a lobby with interior seating. Drive Thru currently operates and franchises twenty-seven Good Times restaurants in the State of Colorado, of which twenty- two are located in metropolitan Denver, one in Boulder, one in Longmont, one in Grand Junction, one in Ft. Collins and one in Greeley. There is one franchised Good Times restaurant in Boise, Idaho. Eight of the restaurants are company-owned and pursuant to the co-development provisions in its development agreements with two Drive Thru co-development partners, nine of these restaurants in Colorado are owned jointly with such co-development partners. Eleven Good Times restaurants are franchised restaurants with six operating in the Denver metropolitan area, one in Silverthorne, Colorado, one in Grand Junction, Colorado, one in Greeley, Colorado, one in Longmont, Colorado and one in Boise, Idaho. Good Times is offering franchises for the development of additional Good Times restaurants. In fiscal 1996, Drive Thru focused on the disposition or relocation of under-performing restaurants, reductions in corporate overhead and solidifying its working capital position and franchise partners for continued development of the Colorado market. In fiscal 1997, Drive Thru developed one new franchised restaurant and two new joint-venture restaurants and began construction on the conversion of an existing double drive thru restaurant to one with a dining room and 48 seats. The franchised restaurant was developed as a part of an Amoco gas and convenience store development, comprising 2,000 sq. ft. of restaurant space and a dining room with drive thru. The hamburger fast food market remains intensely competitive with the major competitors aggressively discounting menu prices, which has had an adverse impact on Drive Thru's sales and operating profits. The Company believes it has an advantage in providing a superior level of service, quality and overall value based upon consumer research studies, but is limited in its ability to effectively advertise and build awareness of its brand until "critical mass" in restaurant sales are achieved in the Colorado market for consistent television and radio advertising, which the Company estimates to be approximately $30,000,000 in system-wide restaurant sales in Colorado, or 32-35 restaurants. Beginning in September 1997, Drive Thru initiated a television advertising campaign focused on building its brand personality, taste superiority and general awareness and anticipates continuing the campaign throughout fiscal 1998. It is management's intent to continue to develop the concept on those attributes important to the quick service restaurant consumer other than price - taste, speed and overall value. The Company's objectives for fiscal 1998 are to continue to build additional company-owned, joint-venture and franchised restaurants in Colorado and add indoor seating to select existing restaurants to mitigate the adverse impact of inclement weather and to increase sales from additional quick service restaurant consumer occasions that are centered around "sociability", particularly among teens and families that cannot be taken advantage of with the double drive thru format. Additionally, the Company will introduce limited new menu offerings and advertise what it believes to be attractive price points for its products. Colorado is divided into two primary television markets--Denver and Colorado Springs/Pueblo. It is the Company's intent to fully develop the Denver market to "critical mass" and then develop the Colorado Springs market over the next three to four years, depending on availability of financing and suitable sites. Management estimates the Denver market will support 40-50 Good Times restaurants and the Colorado Springs market will support 8-10 restaurants. Drive Thru's goals in fiscal 1995 were to continue to develop the Colorado market and to expand the Good Times concept into an out-of-state market. In the spring of 1995, Drive Thru reached an agreement with a franchisee of four Rally's Hamburger restaurants in Las Vegas, Nevada to acquire those four units. It was management's intent to convert those units into Good Times restaurants and to develop an additional six Good Times restaurants in Las Vegas over a twelve month period. Management believed that with ten units operating in the Las Vegas market, Good Times would have "critical mass" in the Las Vegas television market. ("Critical mass" is defined by the Company as having a sufficient number of restaurants in a market to advertise on television at least 30 weeks out of the year and to take advantage of operational and distribution economies of scale.) Drive Thru opened the first two converted Rally's units in June 1995 and the other two restaurants in August 1995. However, Drive Thru experienced difficulty in securing suitable locations at reasonable cost in the Las Vegas market and suitable financing for new stores and realized that critical mass could not be achieved within an acceptable period of time. During the same time period, media advertising costs in Denver increased dramatically, requiring a higher level of store penetration in Colorado to support the Company's advertising campaign. Since four units would continue to operate at a significant loss until Drive Thru could effectively advertise in the Las Vegas market, it was decided to cease operations in Las Vegas and sell the stores. The four Las Vegas units were closed on October 31, 1995 and sold as of November 30, 1995. Drive Thru will continue to focus its development efforts on new Colorado locations until full penetration and critical mass is achieved. The Concept. Good Times was initially developed as a double drive only, limited menu concept featuring high quality products and extremely fast service, with menu prices 30-40 percent lower than the major hamburger chains. The price advantage once held has diminished due to continued aggressive price discounting by the major chains. Management has focused the development of the concept based on developing strong differentiation in the taste of its products (with a more distinctive taste profile), the speed of service, the overall value and a differentiated brand personality built through its advertising and employee service methods. While the double drive thru format performs well in select locations, it is management's opinion that the perceived value for its products and sales producing capacity of sites may be enhanced with the addition of small, highly efficient dining rooms, accessing consumer occasions not available with drive thru only. The Company plans to develop additional restaurants with seating and a single drive thru lane in fiscal 1998 in select locations with a new prototype building and other conversion opportunities. Good Times' food preparation and service systems deliver a quality meal with a faster order-delivery response time and have the capacity to reach the same sales levels as traditional hambur- ger chains. Typically, a customer receives an order 30 to 45 seconds after his vehicle reaches the take-out window. The simplicity of the menu, the relatively low capital investment, and the efficient design of the building and equipment allow Good Times to sell its products at comparable or lower prices than the major fast food hamburger chains. The limited menu allows maximum attention to be devoted to food quality and speed of service. Menu. The menu of a Good Times restaurant is limited to hamburgers, cheeseburgers, chicken sandwiches, french fries, milkshakes and soft drinks. Each sandwich is made to order at the time the customer places the order and is not pre-prepared. The hamburger patty is 4.0 ounces of 100% USDA approved beef, served on a 4-1/4 inch sesame seed bun. Hamburgers and cheeseburgers are garnished with fresh lettuce, fresh sliced sweet red onions, mayonnaise, mustard, ketchup, pickles and fresh sliced tomato. The cheese is 100% pure sharp American thickly sliced. The chicken sandwiches include a spiced, battered deep-fried breast patty and a grilled spicy breast patty, both served with mayonnaise, lettuce and tomato. Equipment has been automated and equipped with compensating computers to deliver a consistent product and minimize the skills required of employees. As of December 1, 1997, the price of the deluxe Good Times hamburger was $1.39, the deluxe cheeseburger $1.69, the deluxe double cheeseburger $2.49, the deluxe bacon-cheeseburger $2.19, the chicken sandwiches $2.29, the chicken club sandwich $2.89, french fries $.89 and $1.09 and a 22-ounce soft drink $.89. Good Times restaurants are generally open 14 to 16 hours per day, seven days a week, for lunch, dinner and late-night snacks and meals. The Building. The existing Good Times restaurants are less than one-third the size of the typical restaurants of the four largest hamburger chains and require approximately one-half the land area based upon management's experience in the restaurant industry and research reports. The current standard Good Times restaurant building is a double drive-through and walk-up style structure containing approximately 880 square feet built on 18,000 to 30,000 square-foot lots. Most existing restaurants utilize a double drive-thru concept that allows simultaneous service from opposite sides of the restaurant and one or two walk-up windows with a patio for outdoor eating. The Company has developed a new 2,100 square foot prototype building with a dining room and 50 seats and a 1,000 square foot 48 seat addition for existing restaurants. Management of Drive Thru believes that the building form, design and aesthetic appeal address key issues and concerns of the consumer: speed, cleanliness, security, eye appeal and low maintenance. The exterior consists of a cream-colored dry-vit system with an enclosed glass vestibule at the front for walk-up service and to exhibit the fast system of service. A brightly lit multi-colored fascia band runs the length of both sides of the building in addition to product and Good Times proprietary signage. The rest rooms and walk - -in refrigerators are modular components of the building. The double drive thru buildings are transportable and therefore can be moved from an unsuccessful site to a better location. Though management does extensive site evaluation and expects a minimum number of buildings will ever have to be moved, one under- performing Good Times unit was relocated in 1996 and one in 1997. Plan of Operation. The first objective of Drive Thru has been to develop critical mass in the Denver television market (referred to as the Denver ADI which includes Boulder, Greeley, Longmont and other communities in northern Colorado.) In the past, Management believed that, in Denver, critical mass required approximately 20 restaurants to be operating, which was the number of Good Times operating in the Denver ADI when the decision was made to open the Las Vegas Good Times restaurants. However, increased advertising by its competitors and significant increases in the cost of advertising in Denver has caused management to reevaluate critical mass as requiring 32 to 35 Good Times restaurants in the Denver ADI. Good Times currently has eight company-owned, nine franchised and nine joint-venture stores in the Denver ADI. Good Times also has one franchised restaurant in Boise, Idaho and has one franchised restaurant in Grand Junction, Colorado. As of December 15, 1997, the Company operated 17 company-owned and joint- venture Good Times restaurants and had ten franchised restaurants open in Colorado and one in Boise, Idaho. December 15, 1996 December 15, 1997 Company-owned restaurants 7 8 Joint venture restaurants 7 9 Franchise operated restaurants 10 11 Total restaurants 24 28 During fiscal 1997, drive Thru opened two joint-venture restaurants and one franchised restaurant and began construction of one company-owned restaurant. Management anticipates that Drive Thru and its existing franchisees will develop a total of four to seven Good Times units in the Denver ADI in 1998. Drive Thru's ongoing objective is to continue to increase average restaurant sales through increased customer counts in each daypart (lunch, dinner and late-night), selective menu and price promotions and effective marketing of Good Times competitive attributes of high quality products, quick service and overall value. The Company anticipates modest price increases in 1998 in anticipation of higher hourly wages and to reduce cost of sales. Operations and Management. Good Times has defined three ingredients essen- tial to its success: (i) consistent delivery of high quality, great tasting products; (ii) speed of service; and (iii) value pricing. The order system at each Good Times restaurant is equipped with an internal timing device that displays and records the time each order takes to prepare and deliver. The total transaction time for the delivery of food at the window is approximately 30 to 45 seconds during peak times. Each Good Times unit employs a general manager, one to two assistant managers and approximately 25 employees, most of whom work part-time during three shifts. Operating systems and training materials are utilized to ensure consistent performance to Good Times' standards. An eight to ten week training program is utilized to train restaurant managers on all phases of the operation. Ongoing training is provided as necessary. Management of Drive Thru believes that incentive compensation of its restaurant managers is essential to the success of its business. Accordingly, in addition to a salary, managerial employees may be paid a bonus based upon proficiency in meeting financial and performance objectives. Drive Thru provides a medical and dental insurance plan to management with a portion of the cost contributed by the participating employee. Drive Thru presently purchases its products from independent food processors and distributors and does not anticipate any difficulty in continuing to obtain an adequate quantity of food products of acceptable quality and at acceptable prices. Financial and management control is maintained through the use of automated data processing and centralized accounting and management information systems which are provided by the Company. Restaurant managers forward sales reports, vendor invoices, payroll data and other operating information to Drive Thru's headquarters daily via an automated "polling" of each restaurant's point-of-sale systems. Management receives daily, weekly and monthly reports identifying food, labor and operating expenses and other significant indicators of restaurant performance. Management of Drive Thru believes that such reporting requirements enhance its ability to control and manage its operations. Drive Thru employs a full-time Director of Human Resources whose principal responsibility is to recruit and coordinate the training of management personnel required for continued expansion of Good Times units in the Denver ADI. Marketing and Advertising. Marketing activities to date have focused on radio advertising and restaurant level promotions in the immediate trade area around each location. Within the Denver market the ultimate objective is to develop adequate market penetration by establishing a sufficient number of Good Times restaurants to support competitive levels of radio and television advertising. The marketing efforts of Good Times focus on building "brand awareness" of the Good Times concept within the context of ad campaigns that are "irreverent, funny and full of surprises", combined with product and limited pricing messages. Supported by consumer research, Drive Thru believes that it has a better tasting product, delivered to the customer faster, at an equal or better value than its competitors. Signage is one of the most important elements for establishing identity at each location. The Good Times restaurant sign package that has been developed offers flexibility based on local codes, site layout and surrounding property. Franchise Program. Drive Thru has prepared prototype area rights and franchise agreements, a Uniform Franchise Offering Circular and advertising material to be utilized in soliciting prospective franchisees. Drive Thru seeks to attract franchisees having experience as restaurant operators, that are well- capitalized and have demonstrated the ability to develop multi-unit franchises. Drive Thru will carefully review sites selected for franchises and will monitor performance of franchise units. Good Times is currently working with potential franchisees only for development of units in Colorado. Drive Thru estimates that it will cost a franchisee on average approximately $475,000 to $575,000 to open a Good Times restaurant, including pre-opening costs and working capital, assuming the land is leased. A franchisee typically will pay a royalty of 4% of net sales, an advertising fee of at least 0.5% of net sales, plus participation in regional or national advertising up to 5% of net sales, and initial development and franchise fees aggregating $20,000 per unit. Among the services and materials which Drive Thru provides to franchisees are site selection assistance, plans and specifications for construction of the Good Times double drive thru restaurants, an operating manual which includes product specifications and quality control procedures, training, on-site pre-opening supervision and advice from time to time relating to operation of the franchised restaurant. Drive Thru has entered into five franchise development agreements in the Denver ADI. Nine franchise restaurants and nine joint-venture restaurants are operating under the development agreements for the Denver ADI. One franchise restaurant in Grand Junction, Colorado has been open pursuant to the development agreement for the Western Slope of Colorado. One joint-venture restaurant opened in Boise, Idaho in 1995, and effective November 1, 1996, that restaurant has been sold as a franchise restaurant. In 1996, Drive Thru signed a franchise agreement and $1,000,000 Series A Convertible Preferred Stock Purchase Agreement with The Bailey Company ("TBC"), a 64 unit franchisee of Arby's (see "Bailey Preferred Stock Investment"). It is anticipated that TBC will develop additional joint-venture or franchise Drive Thru restaurants in 1998. Operations to Date. The first Good Times prototype unit was opened in Boulder, Colorado, in September 1987 and Drive Thru grew slowly to seven restaurants by March, 1993, two of which were franchised restaurants. Thirteen additional restaurants were developed by December 31, 1994, seven of which were joint-ventured, two were franchised, and four were company-owned. In calendar 1995, Drive Thru opened six new restaurants, including one company-owned, two joint-ventured and one franchised restaurants in the Denver ADI, one franchised unit in Grand Junction, Colorado and one joint-ventured unit in Boise, Idaho. In calendar 1996, Drive Thru opened one franchised unit, converted the Boise, Idaho unit to a franchise and closed two under-performing restaurants. In calendar 1997, Drive Thru opened one company-owned unit, two joint-ventured restaurants and one franchised restaurant. Good Times opened two restaurants in June 1995 and two restaurants in August 1995 in Las Vegas, Nevada. These units were previously owned by a franchisee of Rally's Hamburgers, Inc. However, Drive Thru experienced unexpected difficulty in securing suitable locations on which it could develop new units at reasonable cost in the Las Vegas market and realized that critical mass could not be achieved within an acceptable period of time. Since the four units would continue to operate at a significant loss until Drive Thru could effectively advertise in the Las Vegas market, management decided to cease operations in Las Vegas and sell the stores. The four Las Vegas units were closed on October 31, 1995 and sold as of November 30, 1995. Employees. At December 1, 1997, Drive Thru employed approximately 412 persons (including approximately 354 hourly restaurant employees), of whom 19 were management and staff personnel and 39 were restaurant management. Drive Thru considers its employee relations to be good. None of its employees is covered by a collective bargaining agreement. Round The Corner On September 30, 1995, the Company completed the sale of Round The Corner Restaurants, Inc. ("RTC") to Hot Concepts in consideration for $100,000 in cash, a note in the amount of $291,394, and the assumption of all of RTC's liabilities. The sale of RTC by the Company resulted in a deferred gain of $66,000. The Company was notified in August, 1996 of financial difficulties at RTC and of its Chapter 11 bankruptcy filing in October, 1996. In addition to the write-off of the note receivable, the Company recorded a reserve of $333,000 for potential losses associated with its guarantee of two restaurant leases and a note payable. One of such restaurants is being operated by the Company and one has been subleased. The Company has entered into a settlement agreement with RTC whereby RTC will pay the Company $300,000 in two installments for the settlement of all of the Company's claims against RTC. Bailey Preferred Stock Investment On May 31, 1996, the Company entered into a Series A Convertible Preferred Stock Purchase Agreement with The Bailey Company ("TBC") for the purchase by TBC of one million shares of Series A Convertible Preferred Stock. The aggregate purchase price for such shares was $1 million. Effective October 31, 1997, the Company and TBC increased the maximum number of shares of Series A Convertible Preferred Stock which are convertible prior to April 30, 1998 and extended to April 30, 1998 the period during which the shares of Series A Convertible Preferred Stock are convertible at the lower $.46875 conversion price rather than $.56875. Prior to such amendments (i) a maximum of 500,000 shares of Series A Convertible Preferred Stock could be converted between October 1, 1997 and December 31, 1997 and only an additional 250,000 shares could be converted between January 1, 1998 and March 31, 1998 and (ii) the $.46875 conversion price was available with respect to the first 500,000 shares of Series A Convertible Preferred Stock only between October 1 and October 31, 1997 and with respect to the next 250,000 shares of Series A Convertible Preferred Stock only between January 1 and January 31, 1998. Subsequent to those dates, the conversion price was increased to $.056875 with respect to such shares. In consideration of such amendments, TBC has agreed to review and consider assisting the Company with any proposed financing prior to April 30,1998. TBC is not, however, obligated to assist the Company in connection with any financing. Government Regulation Each of the Good Times restaurants is subject to the regulations of various health, sanitation, safety and fire agencies in the jurisdiction in which the restaurant is located. Difficulties or failures in obtaining the required licenses or approvals could delay or prevent the opening of a new Good Times restaurant. Federal and state environmental regulations have not had a material effect on Good Times' operations. More stringent and varied requirements of local governmental bodies with respect to zoning, land use and environmental factors could delay or prevent development of new restaurants in particular locations. The Company and Drive Thru are subject to the Fair Labor Standards Act which governs such matters as minimum wages, overtime and other working con- ditions. In addition, the Company and Drive Thru are subject to the Americans With Disabilities Act (the "ADA") which requires restaurants and other facilities open to the public to provide for access and use of facilities by the handicapped. Management believes that the Company and Drive Thru are in compliance with the ADA. The Company and Drive Thru are also subject to federal and state laws regulating franchise operations, which vary from registration and disclosure requirements in the offer and sale of franchises to the application of statutory standards regulating franchise relationships. Competition The restaurant industry, including the fast food segment, is highly competitive. Drive Thru competes with a large number of other hamburger oriented, fast food restaurants in the areas in which it operates. Many of these restaurants are owned and operated by regional and national restaurant chains, many of which have greater financial resources and experience than does the Company. Restaurant companies that currently compete with Good Times in the Denver market include McDonald's, Burger King, Wendy's and Hardee's. Double drive through restaurant chains such as Rally's Hamburgers, Inc. and Checker's Drive-In Restaurants, Inc., currently operating a total of over 900 double drive through restaurants in various markets in the United States, are not currently operating in Colorado. Management of Drive Thru believes that such double drive through restaurant chains will not expand into Colorado; however, such possibility exists and would result in significant competition for Drive Thru. Management of Drive Thru believes that it may have a competitive advantage in terms of quality of product and price-value compared to traditional fast food hamburger chains. However, recent price discounting by the major fast food hamburger chains has had a detrimental effect on Good Times' sales. Early development of its double drive through concept in Colorado has given Drive Thru an advantage over other double drive through chains that may seek to expand into Colorado because of Good Times' brand awareness and present restaurant locations. In addition, management of Drive Thru believes Drive Thru has a competitive advantage in the areas of purchasing and distribution, financial systems, marketing, construction, site selection, quality assurance and training. Nevertheless, Drive Thru may be at a competitive disadvantage with other restaurant chains with greater name recognition and marketing capability. Furthermore, most of Drive Thru's competitors in the fast-food business operate more restaurants, have been established longer and have greater financial resources and name recognition than Good Times. There is also active competition for management personnel, as well as for attractive commercial real estate sites suitable for restaurants. Trademarks - Colorado Drive Thru has registered its mark "Good Times! Drive Thru Burgers"SM in the state of Colorado and will endeavor to register such mark in each state it or a franchisee intends to open a restaurant. At present, Drive Thru relies solely upon common law trademark protection and state registration. Such reliance will not protect Drive Thru against a prior user of the mark and, if prior use is established, Drive Thru may not be able to use the mark in the area of such use. While the mark is important to Drive Thru, unavailability of the mark in any particular geographic area into which it desires to expand operations may not necessarily be materially adverse. Such name non- availability may, however, preclude the economies and other advantages which may be available through nationwide or regional marketing and advertising. ITEM 2. PROPERTIES The Company currently leases approximately 5,600 square feet of space for its executive offices in Westminster, Colorado for $74,000 per year. The lease is for a five year period expiring in April 1998. Thereafter, the Company will lease office space from The Bailey Company (holders of the Preferred Stock of the Company) at their corporate headquarters. It is anticipated that the lease will reduce the Company's expenses related to its office lease. As of December 15, 1997, Drive Thru has an ownership interest in 17 Good Times units, all of which are located in Colorado. Nine of these restaurants are held in limited partnerships of which Drive Thru is the general partner and has a 50% interest in eight of the partnership restaurants and a 78% interest in one partnership restaurant. There are eight Good Times units wholly-owned by Drive Thru. Each of the existing Good Times restaurants is a free-standing structure containing approximately 880 square feet (except for two conversion that are 1,700-1,900 square feet) situated on lots of approximately 18,000 to 30,000 square feet. The land is leased at all of these locations. Drive Thru intends to enter into ground leases wherever possible. However, there is no assurance that leasing will be available for desirable sites and Drive Thru may be required to purchase such sites. In the event financing is not available for such acquisitions, Drive Thru may have to utilize cash that could otherwise be used to develop additional Good Times restaurants. In such event, Drive Thru will endeavor to enter into sale/leaseback transactions or mortgage financing for such real estate. All of the restaurants are regularly maintained by the Company's repair and maintenance staff as well as by outside contractors, when necessary. Management believes that all of its properties are in good condition and that there will not be a need for significant capital expenditures to maintain the operational and aesthetic integrity of the properties for the foreseeable future. ITEM 3. LEGAL PROCEEDINGS The Company is subject to various lawsuits in the normal course of business. These lawsuits are not expected to have a material impact to the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's outstanding shares of Common Stock (the "Common Stock") and Common Stock Purchase Warrants (the "Warrants") are traded on the over-the- counter market. The following table sets forth the quarterly high and low bid prices as reported by the National Quotation Bureau Incorporated and NASDAQ from December 31, 1995 through September 30, 1997, as adjusted for the one-for-four reverse stock split in May 1992. The quotations represent prices quoted between dealers and do not include commissions, mark-ups or mark-downs and thus may not represent actual transactions. Common Stock Series A Warrants Series B Warrants Bid Prices Bid Prices Bid Prices Quarter Ended High Low High Low High Low December 31, 1995 1.03 .47 .06 .03 .09 .03 March 31, 1996 .69 .31 .03 .03 .06 .03 June 30, 1996 .69 .50 .03 .03 .06 .03 September 30, 1996 .63 .44 .09 .03 .06 .03 December 31, 1996 .56 .32 .06 .03 .06 .03 March 31, 1997 .56 .38 .06 .06 .06 .06 June 30, 1997 .63 .38 .06 .06 .06 .06 September 30, 1997 .44 .38 .06 .06 .06 .06 As of December 1, 1997, there were approximately 354 holders of record of Common Stock and 128 holders of Warrants. However, management estimates that thereare not fewer than 2,700 beneficial owners of the Company's Common Stock. The NASDAQ symbols for the Common Stock and the outstanding Series A warrants and Series B warrants are "GTIM", "GTIMW," and "GTIMZ", respectively. In January 1997, the Company gave notice to the holders of the Series A and Series B warrants that the expiration date of such warrants had been extended from February 10, 1997 to February 10, 1999 and the exercise price of such warrants had been reduced to $2.00 per share. DIVIDEND POLICY The Company has never paid dividends on its Common Stock and does not anticipate paying dividends in the foreseeable future. The Company's ability to pay future dividends will necessarily depend upon its earnings and financial condition. However, since restaurant development is capital intensive, it is the intention of the Company to retain earnings, if any, for that purpose. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE COMPANY, GOOD TIMES AND RTC The following selected financial data is derived from the companies' historical financial statements and is qualified in its entirety by such financial statements which are included in Item 7. GOOD TIMES RESTAURANTS INC. AND SUBSIDIARIES The following presents certain historical financial information of the Company. This financial information includes the combined operations of the Company and Drive Thru for the fiscal years ended September 30, 1996 and September 30, 1997. Year Ended September 30, Operating Data: 1996 1997 Net Revenues $12,826,000 $ 11,865,000 Restaurant Operating Costs: Food and paper costs 4,700,000 4,286,000 Labor, occupancy and other 6,520,000 5,672,000 Depreciation and amortization 770,000 667,000 Total restaurant operating costs 11,990,000 10,625,000 Income From Restaurant Operations 836,000 1,240,000 Other Operating Expenses: Selling, General and Administrative Expense 1,905,000 1,713,000 Loss from operating RTC stores -0- 94,000 Loss on disposal of restaurants and equipment 206,000 55,000 Loss on planned exit of certain market areas 183,000 -0- Loss from lease guarantees -0- 228,000 Total Other Operating Expenses 2,294,000 2,090,000 Income (Loss) from Operations (1,458,000) (850,000) Other Income and (Expenses) Minority income (expense), net 181,000 (120,000) Interest, net (71,000) (34,000) Other, net (109,000) (97,000) Losses from RTC bankruptcy (564,000) -0- Total other income and (expenses) (563,000) (251,000) Net Loss $(2,021,000) $(1,101,000) Preferred Stock Dividends in Arrears -0- (65,000) Net Loss Attributable to Common Shareholders (2,021,000) (1,166,000) Net Loss Per Common Share $ (.31) $ (.18) Weighted Average Shares Outstanding 6,549,000 6,376,186 September 30, 1996 1997 Balance Sheet Data: Working Capital (deficit) $ (732,000) $ (534,000) Total assets 7,162,000 7,192,000 Minority Interest 1,653,000 1,619,000 Long-term debt and long-term capital leases 479,000 546,000 Stockholders' equity $ 3,007,000 $ 2,893,000 Statements in this Filing that are not historical facts may be forward- looking statements. Actual events may differ materially from those projected in any forward-looking statement. There are a number of important factors beyond the control of the Company that could cause actual events to differ materially from those anticipated by any forward-looking information. A description of risks and uncertainties attendant to the Company and its industry and other factors which could affect the Company's financial results are included in this Filing. Results of Operations The Company sold RTC as of September 30, 1995. In October 1996, the purchaser of RTC declared bankruptcy. The following discussion and analysis includes expenses and liabilities related to the Company's guarantee of certain RTC leases. Fiscal Years 1997 and 1996 Net Revenues. Net revenues for the year ended September 30, 1997 decreased 961,000 (7.5%) to $11,865,000 from $12,826,000 for the year ended September 30, 1996. The decrease is primarily attributable to a decrease in revenue of Drive Thru of $1,075,000 from the sale or sublease of five restaurants during the fiscal year ended September 30, 1996. Net revenues also decreased $297,000 due to the sale of one joint-venture restaurant to a franchisee in November 1996. Net revenues increased $735,000 due to the opening of two joint-venture restaurants in May and June 1997 and due to one restaurant that was not open for the full prior year period. Net revenues decreased $226,000 or 2.1% during fiscal 1997 from same store sales for restaurants that have been open for the full fiscal 1996 and 1997 periods. Net revenues from Drive Thru and its franchisees were $18,700,000 for the fiscal year ended September 30, 1997. Management does not anticipate further declines in same store net revenues due to the initiation of television advertising and increases in the per person average check. However, there can be no assurances that the television advertising will generate sufficient increases in revenues to maintain a competitive level of media presence. Food and Paper Costs. In fiscal 1997, Drive Thru's food and paper costs were 36.8% of net restaurant sales compared to 37.3% of net restaurant sales in fiscal 1996. The decrease in Drive Thru's food and paper costs is primarily attributable to menu price increases taken during the last eight months of the period ended September 30, 1997, with less than proportionate increases in food and paper costs. Income From Restaurant Operations. For the year ended September 30, 1997 Drive Thru's income from restaurant operations was $1,240,000 compared to $836,000 for the year ended September 30, 1996. Drive Thru's income from restaurant operations as a percentage of net restaurant revenues was 10.6% for the year ended September 30, 1997, an increase from 6.6% for the same prior year period. The increase in income from restaurant operations is attributable to the sale or sublease of four under performing restaurants as well as management's focus on improving restaurant labor and operating efficiencies and expenses. Cash flow from ongoing restaurant operations (income from restaurant operations plus depreciation, opening expenses and accretion of deferred rent) as a percentage of net restaurant sales was 17.5% for the year ended September 30, 1997 compared to 14.5% for the year ended September 30, 1996. Income and cash flow from restaurant operations include regional supervision, training and recruiting expenses of $431,000 for the year ended September 30, 1996 and $354,000 for the year ended September 30, 1997. Net franchise development fees and royalties decreased from $216,000 in fiscal 1996 to $213,000 in fiscal 1997. Loss from Operations Drive Thru's loss from operations before other income and expenses improved to ($850,000) in fiscal 1997 compared to a loss from operations of ($1,458,000) in fiscal 1996. Loss from operations was negatively impacted during fiscal 1997 by ($228,000) of expenses associated with certain Las Vegas lease guarantees, as well as ($94,000) from the operation by Good Times of three RTC restaurants. Subsequent to September 30, 1997, the Company negotiated the termination of one RTC lease, entered into a sublease for one RTC lease and continues to operate the third RTC restaurant. Selling, general and administrative expenses decreased from $1,905,000 (14.9% of net revenues) in the year ended September 30, 1996 to $1,713,000 (14.4% of net revenues) in the year ended September 30, 1997. The decrease in selling, general and administrative expenses is due to reductions in staff and administrative expenses as management has positioned the Company for growth and development in the Colorado market. Net Loss The net loss for Drive Thru was ($1,101,000) for the fiscal year ended September 30, 1997 compared to a net loss of ($2,021,000) for the fiscal year ended September 30, 1996. Minority interest expense increased $301,000 due to the sale of two under performing joint-venture restaurants in the year ended September 30, 1996 and as a result of improved Income from Restaurant Operations in the remaining joint-venture restaurants for the year ended September 30, 1997. Interest expense decreased $34,000 due to the pay off of one capital lease in the year ended September 30, 1996 and the reduction in the balance of other capital lease obligations. The net loss for the year ended September 30, 1996 included $564,000 of losses associated with the RTC bankruptcy. Liquidity and Capital Resources As of September 30, 1997, the Company had $408,000 of cash and cash equivalents on hand. The Company has commitments of approximately $200,000 for capital improvements for the development of one new restaurant. The Company has entered into a settlement agreement with RTC whereby the Company will receive $300,000 and anticipates bankruptcy court approval of the settlement agreement by December 31, 1997. Management is actively negotiating the sale of one existing Drive Thru restaurant to a franchisee, the proceeds of which will be used for increasing the Company's working capital reserves and for the development of new restaurants. Management believes this will be sufficient to cover the working capital needs of the Company for the 1998 fiscal year. The Company remains contingently liable on one Las Vegas restaurant lease that has been subleased, so management anticipates minimal future losses from RTC or Vegas lease contingencies. Management also anticipates significantly reducing or eliminating its net loss through improved income from restaurant operations as a result of the benefit of price increases implemented since March, 1997, improved labor efficiencies, anticipated sales improvements from the implementation of television advertising and further reductions in non- restaurant related expenses. The Company had a working capital deficit of ($534,000). Because restaurant sales are collected in cash and accounts payable for food and paper products are paid two to four weeks later, restaurant companies often operate with working capital deficits. It is anticipated that working capital deficits will expand as new Drive Thru restaurants are opened. On November 1, 1996, Drive Thru completed the transfer of its partnership interest in the Boise, Idaho restaurant. The agreement includes indemnification of the Company on $296,000 of notes payable and the assumption of all liabilities, obligations and operating losses by the limited partner. As a part of the agreement, the Company paid $75,000 to the partnership. Net cash provided by operating activities of the Company was $10,000 for fiscal 1997 compared to net cash used in operating activities of the Company of ($893,000) in fiscal 1996. For fiscal 1997, this was the result of a net loss of ($1,101,000) and non-cash reconciling items totaling $1,111,000 (comprised principally of depreciation and amortization of $669,000, minority interest of $120,000, losses associated with lease guarantees of $228,000 and decreases in operating assets and liabilities totaling $152,000). Net cash used in investing activities by the Company in fiscal 1997 was $876,000, which includes the purchase of property and equipment of $803,000. Drive Thru utilizes all cash provided by investing activities for working capital and for capital expenditures consisting primarily of expenditures for the development of new Good Times restaurants and refurbishment of existing restaurants. In fiscal 1996 and 1997, Drive Thru developed three joint-venture restaurants and began development of one company-owned restuarant, which opened in November, 1997. Net cash provided by investing activities by the Company in fiscal 1996 was $418,000, which included proceeds from the sale of assets of $819,000 and the purchase of property and equipment of $401,000. Net cash provided by financing activities by the Company in fiscal 1997 was $734,000, which includes principal payments on notes payable and capital leases of $113,000, borrowings on notes payable and long-term debt of $200,000, distributions to minority interests in partnerships of $283,000 and contributions from minority interests in partnerships of $180,000 and proceeds from the sale of Preferred Stock of $750,000. Net cash provided by financing activities by the Company in fiscal 1996 was $248,000 which includes principal payments on notes payable and long-term debt of $99,000, borrowings on notes payable and long-term debt of $250,000 (which was converted into 250,000 shares of preferred stock on October 1, 1996), distributions to minority interests in partnerships of $227,000, and contributions from minority interests in partnerships of $324,000. Neither the Company nor Drive Thru currently have any bank lines of credit. The Company intends to use its cash resources and cash generated from operations for working capital, and the remodel and addition of seating to one existing restaurant. Drive Thru will require additional capital in order to develop additional company-owned and joint-ventured Good Times restaurants in the future. In the event Drive Thru is not successful in obtaining additional capital, management intends to continue to develop Good Times restaurants through franchising and joint development activities with existing and new franchisees. Impact of Recently Issued Accounting Standards In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards 128, "Earnings per Share" and Statement of Financial Accounting Standards 129 "Disclosure of Information About an Entity's Capital Structure." Statement 128 provides a different method of calculating earnings per share than is currently used in accordance with Accounting Principles Board Opinion 15 "Earnings per Share." Statement 128 provides for the calculation of "basic" and "diluted" earnings per share. Basic earnings per share includes no dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities that could share in the earnings of an entity, similar to fully diluted earnings per share. Statement 129 establishes standards for disclosing information about an entity's capital structure. Statements 128 and 129 are effective for financial statements issued for periods ending after December 15, 1997. Their implementation is not expected to have a material effect on the consolidated financial statements. In 1997, the Financial Accounting Standards Board also issued Statement of Financial Accounting Standards 130, "Reporting Comprehensive Income" and Statement of Financial Accounting Standards 131 "Disclosures About Segments of an Enterprise and Related Information." Statement 130 establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, Statement 130 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statements that displays with the same prominence as other financial statements. Statement 131 supersedes Statement of Financial Accounting Standards 14 "Financial Reporting for Segments of a Business Enterprise." Statement 131 establishes standards on the way that public companies report financial information about operating segments in annual financial statements and requires reporting of selected information about operating segments in interim financial statements issued to the public. It also establishes standards for disclosure regarding products and services, geographical areas and major customers. Statement 131 defines operating segments as components of a company about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Statements 130 and 131 are effective for financial statements for periods beginning after December 15, 1997 and require comparative information for earlier years to be restated. Because of the recent issuance of Statement 130, management has been unable to fully evaluate the impact, if any, the statement may have on the future financial statements disclosures. Results of operations and financial position, however, will be unaffected by implementation of this standard. Statement 131 is not expected to have a material impact on the Company. ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA GOOD TIMES RESTAURANTS INC. AND SUBSIDIARIES: Independent Auditor's Report Consolidated Balance Sheet - September 30, 1997 Consolidated Statements of Operations - For the Years Ended September 30, 1996 and 1997 Consolidated Statement of Stockholders' Equity - For the Period from October 1, 1995 to September 30, 1997 Consolidated Statements of Cash Flows - For the Years Ended September 30, 1996 and 1997 Notes to Consolidated Financial Statements INDEX TO FINANCIAL STATEMENTS PAGE Good Times Restaurants Inc. and Subsidiaries: Independent Auditor's Report . . . . . . . . . . . . . . . . .F-2 Consolidated Balance Sheet - September 30, 1997. . . . . . . .F-3 Consolidated Statements of Operations - For the Years ended September 30, 1996 and 1997 . . . . . . . . . . . . . .F-5 Consolidated Statement of Changes of Stockholders' Equity - For the Period from October 1, 1995 through September 30, 1997. . . . . . . . . . . . . . . . . . . . . . F-6 Consolidated Statements of Cash Flows - For the Years Ended September 30, 1996 and 1997. . . . . . . . . . . . . . . . . .F-7 Notes to Consolidated Financial Statements . . . . . . . . . .F-8 INDEPENDENT AUDITOR'S REPORT To the Stockholders and Board of Directors Good Times Restaurants Inc. Westminster, Colorado We have audited the accompanying consolidated balance sheet of Good Times Restaurants Inc. and subsidiaries as of September 30, 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for the years ended September 30, 1996 and 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Good Times Restaurants Inc. and subsidiaries as of September 30, 1997, and the results of their operations and their cash flows for the years ended September 30, 1996 and 1997, in conformity with generally accepted accounting principles. Hein + Associates LLP Denver, Colorado November 11, 1997 GOOD TIMES RESTAURANTS INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET SEPTEMBER 30, 1997 ASSETS Current Assets: Cash and cash equivalents $408,000 Receivables 81,000 Inventories 51,000 Prepaid expenses and other 11,000 Receivable from settlement of RTC claims 300,000 Notes receivable 41,000 Total current assets 892,000 Property and Equipment, at cost: Land and building 2,561,000 Leasehold improvements 2,646,000 Fixtures and equipment 3,082,000 8,289,000 Less accumulated depreciation and amortization (2,459,000) 5,830,000 Other Assets: Notes receivable 414,000 Other 56,000 470,000 Total Assets $7,192,000 See accompanying notes to these consolidated financial statements. LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current maturities of long-term debt $25,000 Current portion of capital lease obligations 122,000 Accounts payable 465,000 Accrued liabilities - Las Vegas 14,000 Accrued liabilities - RTC 125,000 Accrued other liabilities 675,000 Total current liabilities 1,426,000 Long-Term Liabilities: Debt 478,000 Las Vegas accrued liabilities 166,000 RTC accrued liabilities 277,000 Capital lease obligations, net of current portion 68,000 Deferred liabilities 265,000 Total long-term liabilities 1,254,000 Minority Interests in Partnerships 1,619,000 Commitments and Contingencies (Notes 2, 3, and 6) Stockholders' Equity: Preferred stock, .01 par value, 5,000,000 shares authorized, 1,000,000 Series A issued and outstanding; liquidation preference of 533,750, which includes unpaid dividends of $65,000 10,000 Common stock, $.001 par value; 50,000,000 shares authorized, 6,397,778 shares issued and outstanding 6,000 Capital contributed in excess of par value 11,822,000 Accumulated deficit (8,945,000) Total stockholders' equity 2,893,000 Total Liabilities and Stockholders' Equity $7,192,000 See accompanying notes to these consolidated financial statements. GOOD TIMES RESTAURANTS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the Years Ended September 30, 1996 1997 Net Revenues: Restaurant sales $12,610,000 $11,652,000 Area development and franchise fees 40,000 20,000 Franchise royalties 176,000 193,000 Total net revenues 12,826,000 11,865,000 Restaurant Operating Costs: Food and paper costs 4,700,000 4,286,000 Restaurant labor costs 4,510,000 3,884,000 Restaurant occupancy costs 1,356,000 1,295,000 Accretion of deferred rent 57,000 47,000 Other restaurant operating costs 431,000 358,000 Opening expenses 166,000 88,000 Depreciation and amortization 770,000 667,000 Total restaurant operating costs 11,990,000 10,625,000 Income from Restaurant Operations 836,000 1,240,000 Other Operating Expenses: General and administrative 1,184,000 1,064,000 Advertising 721,000 649,000 Loss from operating RTC stores - 94,000 Loss on disposal of restaurants and equipment 206,000 55,000 Loss on planned exit of certain market areas 183,000 - Loss from Las Vegas lease guarantees - 228,000 Total other operating expenses 2,294,000 2,090,000 Loss From Operations (1,458,000) (850,000) Other Income (Expenses): Interest income 71,000 55,000 Interest expense (142,000) (89,000) Minority interest in income (loss) of partnerships 181,000 (120,000) Losses associated with RTC bankruptcy (564,000) - Other, net (109,000) (97,000) Total other expenses, net (563,000) (251,000) Net Loss $(2,021,000) $(1,101,000) Preferred Stock Dividends $ - $ (65,000) Net Loss Attributable to Common Shareholders $(2,021,000) $(1,166,000) Net Loss Per Common Share $ (.31) $ (.18) Weighted Average Common Shares Outstanding 6,549,000 6,376,186 See accompanying notes to these consolidated financial statements. GOOD TIMES RESTAURANTS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE PERIOD FROM OCTOBER 1, 1995 THROUGH SEPTEMBER 30, 1997 Preferred Stock Common Stock Issued Par Issue Par Shares Value Shares Value Balances, October 1, 1995 - $ - 6,898,152 $ 7,000 Cancellation of note from stockholders - - (625,000) (1,000) Stock issued to employee benefit plan - - 41,668 - Net loss - - - - Balances, September 30, 1996 - - 6,314,820 $ 6,000 Preferred stock issued 1,000,000 10,000 - - Preferred stock issuance cost - - - - Stock issued to employee benefit plan - - 82,958 - Net Loss - - - - Balances, September 30, 1997 1,000,000 $ 10,000 6,397,778 $ 6,000 See accompanying notes to these consolidated financial statements. GOOD TIMES RESTAURANTS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE PERIOD FROM OCTOBER 1, 1994 THROUGH SEPTEMBER 30, 1996 (Continued from previous page) Capital in Officers Excess of Notes Accumulated Par Value Receivables Deficit Total Balances- October 1, 1995 $11,683,000 $ (881,000) $(5,823,000) $ 4,986,000 Cancellation of note from stockholders (880,000) 881,000 - - Stock issued to employee benefit plan 42,000 - - 42,000 Net loss - - (2,021,000) (2,021,000) Balances -September 30, 1996 10,845,000 - (7,844,000) 3,007,000 Preferred stock issued 990,000 - - 1,000,000 Preferred stock issuance cost (52,000) - - (52,000) Stock issued to employee benefit plan 39,000 - - 39,000 Net Loss - - (1,101,000) (1,101,000) Balances-September 30, 1997 $11,822,000 $ - $(8,945,000) $ 2,893,000 See accompanying notes to these consolidated financial statements. GOOD TIMES RESTAURANTS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended September 30, 1996 1997 Cash Flows from Operating Activities: Net loss $(2,021,000) $(1,101,000) Adjustments to reconcile net loss to net cash from operating activities: Depreciation and amortization 773,000 669,000 Accretion of deferred rent 57,000 47,000 Minority interest (181,000) 120,000 Loss on planned exit of certain market areas 183,000 - Loss on disposal of restaurants & equipment 206,000 55,000 Losses associated with RTC bankruptcy 564,000 - Loss on lease guarantees - 228,000 Gain on sale of property, net (75,000) (2,000) Common stock for services 42,000 39,000 Changes in operating assets and liabilities: (Increase) decrease in: Receivables 130,000 46,000 Inventories 19,000 3,000 Prepaid expenses and other (130,000) 17,000 (Decrease) increase in: Accounts payable (241,000) 61,000 Accrued and other liabilities (219,000) (172,000) Net cash provided by (used in) operating activities (893,000) 10,000 Cash Flows from Investing Activities: Payments for the purchase of property & equipment (401,000) (803,000) Proceeds from sale of assets 819,000 2,000 Payments made in conjunction with the sale of a store - (75,000) Net cash provided by (used in) investing activities 418,000 (876,000) Cash Flows from Financing Activities: Principal payments on notes payable and long-term debt (99,000) (113,000) Borrowings on notes payable and long-term debt 250,000 200,000 Distributions paid to minority interests in partnerships (227,000) (283,000) Contributions from minority interest in partnerships 324,000 180,000 Proceeds from the sale of preferred stock - 750,000 Net cash provided by financing activities 248,000 734,000 Increase (Decrease) in Cash and Cash Equivalents (227,000) (132,000) Cash and Cash Equivalents, beginning of period 767,000 540,000 Cash and Cash Equivalents, end of period $540,000 $408,000 Supplemental Disclosures of Cash Flow Information: Cash paid for interest $142,000 $89,000 Purchase of equipment through payables and capital leases $ - $57,000 Stock issued to employee 401(k) plan $ 42,000 $39,000 Conversion of note to preferred stock $ - $250,000 Cancellation of notes in return for common stock $881,000 $ - See accompanying notes to these consolidated financial statements. 1. Organization and Summary of Significant Accounting Policies: Organization - Good Times Restaurants Inc. (Good Times or the Company) is a Nevada corporation. In July 1992, Good Times merged with Round the Corner Restaurants, Inc. (RTC). The Company operates through its subsidiary Good Times Drive Thru Inc. (Drive Thru). All of the stock of RTC was sold as of September 30, 1995. Drive Thru commenced operations in 1986 and, as of September 30, 1997, operates 16 company-owned and joint venture drive-thru fast food hamburger restaurants. The Company's restaurants are primarily in Colorado. In addition, Drive Thru has 10 franchises operating in Colorado and one in Boise, Idaho, and is offering franchises for development of additional Drive Thru restaurants. Principles of Consolidation - The consolidated financial statements include the accounts of Good Times and its subsidiaries, including certain 50% owned limited partnerships in which the Company exercises control as general partner. All intercompany accounts and transactions are eliminated. The unrelated limited partners' equity of each partnership has been recorded as minority interest in the accompanying consolidated financial statements. Deferred Opening Costs - Prior to October 1, 1996, the Company deferred certain pre-opening costs. These costs were being amortized over a one year period. Effective October 1, 1996, the Company adopted a policy of expensing all pre-opening costs as incurred. The expensing method is the preferable method based on proposed accounting rule changes and recent accounting trends. The effect of the change was to increase the 1997 loss by approximately $51,000 [($.01) per share]. Inventories - Inventories are stated at the lower of cost or market, determined by the first-in, first-out method, and consist of restaurant food items and related paper supplies. Property and Equipment-Depreciation is recognized on the straight-line method over the estimated useful lives of the assets or the lives of the related leases, if shorter, as follows: Building 15 years Leasehold improvements 7-15 years Fixtures and equipment 3-8 years Maintenance and repairs are charged to expense as incurred, and expenditures for major improvements are capitalized. When assets are retired, or otherwise disposed of, the property accounts are relieved of costs and accumulated depreciation with any resulting gain or loss credited or charged to income. Sales of Restaurants and Restaurant Equity Interests - Sales of restaurants or non-controlling equity interests in restaurants developed by the Company are accounted for under the full accrual method or the installment method. Under the full accrual method, gain is not recognized until the collectibility of the sales price is reasonably assured and the earnings process is virtually complete without further contingencies. When a sale does not meet the requirements for income recognition, gain is deferred until those requirements are met. Under the installment method, gain is recognized as principal payments on the related notes receivable are collected. Deferred Liabilities - Rent expense is reflected on a straight-line basis over the term of the lease for all leases containing step-ups in base rent. An obligation representing future payments (which totaled $190,000 as of September 30, 1997) has been reflected in the accompanying consolidated balance sheet as a deferred liability. The remaining balance includes a deferred gain of $53,000 on the sale of a restaurant. Advertising - The Company incurs advertising expense in connection with marketing of its restaurant operations. Advertising costs are expensed the first time the advertising takes place. Franchise and Area Development Fees - Individual franchise fee revenue is deferred when received and is recognized as income when the Company has substantially performed all of its obligations under the franchise agreement and the franchisee has commenced operations. Area development fees and related direct expenses are recognized ratably upon opening of the applicable restaurants. Continuing royalties from franchisees, which are a percentage of the gross sales of franchised operations, are recognized as income when earned. Franchise development expenses, which consist primarily of legal costs associated with developing and executing master franchise agreements, are expensed as incurred. Statement of Cash Flows - For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Income Taxes - Income taxes are provided for in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." SFAS No. 109 requires an asset and liability approach in the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of the Company's assets and liabilities. Net Loss per Common Share - The computations of loss per share are based on the weighted average number of common shares outstanding during each fiscal period. Warrants, options, and preferred stock outstanding are not included in the computations in loss years because their effect would be antidilutive. Financial Instruments and Concentrations of Credit Risk - Credit risk represents the accounting loss that would be recognized at the reporting date if counterparties failed completely to perform as contracted. Concentrations of credit risk (whether on or off balance sheet) that arise from financial instruments exist for groups of customers or counterparties when they have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly effected by changes in economic or other conditions. Financial instruments with off-balance- sheet risk to the Company include lease liabilities whereby the Company is contingently liable as the primary leasee of certain leases that were assigned to third parties in connection with various store closures (see Note 6). Financial instruments which potentially subject the Company to concentration of credit risk consist principally of cash and cash equivalents and receivables. At September 30, 1997, the Company maintained cash balances with a commercial bank, which were approximately $233,000 in excess of FDIC limits and maintained a government fund balance of $57,000. At September 30, 1997, notes receivable totaled $455,000 and were from three entities. The notes receivables are generally collateralized by buildings and equipment and guaranteed by certain individuals. Additionally, the Company has receivables of $81,000, which consists principally of current franchise receivables. The Company purchases 100% of its restaurant food and paper from one vendor. The Company believes that there are a sufficient number of other suppliers from which food and paper could be purchased to prevent any long-term adverse consequences. The Company operates in one industry segment, restaurants. A geographic concentration exists because the Company's customers are generally located in the State of Colorado. The estimated fair values for financial instruments are determined at discrete points in time based on relevant market information. These estimates involve uncertainties and cannot be determined with precision. The carrying amounts of cash, receivables, notes receivables, long-term debt, capital lease obligations, accounts payable, and accrued liabilities approximate fair value as a result of the short-term maturities or interest rates that approximate the Company's current expected borrowing and lending rates. Accounting Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in these financial statements and the accompanying notes. The actual results could differ from those estimates. Impact of Recently Issued Accounting Standards - In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards 128, "Earnings per Share" and Statement of Financial Accounting Standards 129 "Disclosure of Information About an Entity's Capital Structure." Statement 128 provides a different method of calculating earnings per share than is currently used in accordance with Accounting Principles Board Opinion 15 "Earnings per Share." Statement 128 provides for the calculation of "basic" and "diluted" earnings per share. Basic earnings per share includes no dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities that could share in the earnings of an entity, similar to fully diluted earnings per share. Statement 129 establishes standards for disclosing information about an entity's capital structure. Statements 128 and 129 are effective for financial statements issued for periods ending after December 15, 1997. Their implementation is not expected to have a material effect on the consolidated financial statements. In 1997, the Financial Accounting Standards Board also issued Statement of Financial Accounting Standards 130, "Reporting Comprehensive Income" and Statement of Financial Accounting Standards 131 "Disclosures About Segments of an Enterprise and Related Information." Statement 130 establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, Statement 130 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statements that displays with the same prominence as other financial statements. Statement 131 supersedes Statement of Financial Accounting Standards 14 "Financial Reporting for Segments of a Business Enterprise." Statement 131 establishes standards on the way that public companies report financial information about operating segments in annual financial statements and requires reporting of selected information about operating segments in interim financial statements issued to the public. It also establishes standards for disclosures regarding products and services, geographic areas and major customers. Statement 131 defines operating segments as components of a company about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Statements 130 and 131 are effective for financial statements for periods beginning after December 15, 1997 and require comparative information for earlier years to be restated. Because of the recent issuance of Statement 130, management has been unable to fully evaluate the impact, if any, the statement may have on the future financial statements disclosures. Results of operations and financial position, however, will be unaffected by implementation of this standard. Statement 131 is not expected to have a material impact on the Company. Reclassification - Certain reclassifications have been made to conform 1996 financial statements to the presentation in 1997. The reclassifications had no effect on net loss. 2. Liquidity and Continued Operations: As reflected in the accompanying financial statements, the Company has incurred net losses the past two years and has negative or marginal cash flows from operations. Management has taken the following actions to improve the Company's cash flow and operating results: The Company has finalized a settlement agreement with RTC which will provide $300,000 in cash to the Company and reduce the Company's lease liability to one RTC restaurant that has been subleased and one RTC restaurant that is being operated by the Company until it can be sold or the lease term expires. The Company remains contingently liable on one Las Vegas restaurant lease that has been subleased, therefore, management anticipates minimal future losses from RTC or Vegas lease contingencies. Management is actively negotiating the sale of one existing Drive Thru restaurant to a franchisee, the proceeds of which will be used for increasing the Company's working capital reserves and for the development of new restaurants. Management also anticipates significantly reducing or eliminating its net loss through improved income from restaurant operations as a result of the benefit of price increases implemented since March 1997, improved labor efficiencies, anticipated sales improvements from the implementation of television advertising and further reductions in non-restaurant related expenses. Management believes that the actions taken above will provide adequate cash flow to meet the Company's operating needs and provide capital needed to continue the Company's fiscal 1998 restaurant and franchise expansion program. 3. Sale of Restaurants: On September 30, 1995, the Company sold all its stock in RTC, a 100% owned subsidiary, for $100,000 cash and a $291,000 note. The note had an interest rate of prime minus 2% and is payable quarterly based on an amortization period of 20 years, with a balloon payment at the end of 5 years. The Company elected to report the gain on sale under the installment method and originally deferred the unrealized gain of $66,000 on the $291,000 note. In 1996, the purchaser of RTC declared bankruptcy. In connection with the bankruptcy of RTC in 1996, the Company recorded $231,000 associated with the write-off of the RTC note receivable (net of deferred gain) and accrued a $333,000 loss associated with RTC lease guarantees and a note payable (net of estimated recoveries) guaranteed by the Company. The Company has subleased one RTC restaurant and is currently managing one RTC restaurant in order to minimize future losses associated with its lease guarantees. Operating RTC stores resulted in a loss of $94,000 during fiscal 1997, which is recorded in other operating expenses. During the year ended September 30, 1996, the Company closed two underperforming restaurants and leased the land and building to the purchaser. One of these restaurant sites was closed in September 1996, and the Company moved the building and equipment to a new location in fiscal 1997. During the year ended September 30, 1996, the Company recorded a loss, net of minority interest, of approximately $103,000 as a result of the plan. No significant additional costs were recorded in 1997. In 1997, the Company took over the second site from the purchaser, and converted this restaurant back to the Drive-Thru concept. During the year ended September 30, 1996, the Company approved the sale of its interest in one of its managed limited partnerships to the limited partner. The effective date of the sale was November 1, 1996. The agreement provides for the limited partner to assume all liabilities, obligations, and operating losses, and the Company agreed to pay the purchaser $75,000 and surrender its interest in the limited partnership. As of September 30, 1996, the Company recorded approximately $184,000 in losses as a result of this transaction. No significant additional costs were recorded in 1997. The Company remains a guarantor on $296,000 of notes payable. However, the purchaser and an additional guarantor have personally agreed to indemnify the Company for any payments made on the note by the Company. During the year ended September 30, 1996, the Company sold a restaurant to a franchisee for $480,000 cash and a $20,000 note. The Company recognized a gain on the sale in the amount of approximately $95,000, which is included in other income and expenses. 4. Notes Receivable: Notes receivable consist of the following as of September 30, 1997: Note receivable, 8%, initially due March 1, 1997. Refinanced subsequent to year-end. Under the new terms, monthly payments of interest only are due until June 1, 1998. Starting in June 1998, equal monthly payments of principal and interest are due, with the final payment due in June 2010. Collateralized by a building and guaranteed by an individual. $315,000 Note receivable, 8%, initially due October 1, 1997. Refinanced subsequent to year-end. Under the new terms, monthly payments of interest only are due until June 1, 1998. Starting in June 1998, equal monthly payments of principal and interest are due, with the final payment due in June 2008. Collateralized by a building and guaranteed by an individual. 78,000 Note receivable, 9%, monthly payments of principal and interest in the amount of $1,245, with final payment on September 1, 2000 collateralized by building and equipment. The note is personally guaranteed by an individual. 42,000 Other notes, various terms. 20,000 455,000 Less current portion. (41,000) $414,000 5. Notes Payable and Long-Term Debt: Promissory note, payable by a limited partnership, of which the Company is the general partner, interest and principal payable monthly, with the final payment due August 1, 2004. The interest rate on the note is variable based on the 30-day commercial paper plus 3%, with a floor of 6%. At the option of the Company, the interest rate may be converted to a fixed rate equal to the 7-year treasury bill rate plus 3%, with a floor of 8%. This note is guaranteed by the Company, and the limited partner who is also the holder of the preferred stock. $197,000 Note payable to an individual and his pension plan with interest at 12%, payable quarterly, principal due in May 2000. 300,000 Other notes payable, various terms. 6,000 503,000 Less current portion. (25,000) $478,000 In March 1996, the Company signed a $250,000 promissory note. The interest rate on the note was at prime plus 2% points. On October 1, 1996, this note was converted to 250,000 shares of preferred stock (see Note 11). As of September 30, 1997, debt payments over the next five years are as follows: 1998 $25,000 1999 27,000 2000 326,000 2001 29,000 2002 31,000 Thereafter 65,000 $503,000 6. Commitments and Contingencies: The Company's office space, and the land underlying the Drive Thru restaurant facilities, are leased under operating leases. Certain leases include provisions for additional contingent rental payments if sales volumes exceed specified levels. The Company paid no material amounts as a result of these provisions. Property and equipment at September 30, 1997 includes equipment under capital leases of approximately $427,000, less accumulated depreciation of approximately $160,000. Depreciation of leased equipment is included in depreciation and amortization expense. Following is a summary of operating lease activities: Operating Leases 1997 Minimum rentals $1,252,000 Less sublease rentals (351,000) Net rent expense $ 901,000 As of September 30, 1997, future minimum rental commitments required under Good Times and Drive Thru capital and operating leases that have initial or remaining noncancellable lease terms in excess of one year are as follows: Capital Operating Leases Leases 1998 $141,000 $1,167,000 1999 72,000 1,157,000 2000 - 1,169,000 2001 - 1,045,000 2002 - 1,000,000 Thereafter - 7,217,000 213,000 12,755,000 Less sublease rentals - (3,575,000) 213,000 $9,180,000 Less amount representing interest (23,000) Present value of net minimum lease payments $190,000 The Company remains contingently liable on several leases of restaurants that were previously sold, which have been included in the future minimum rental commitment schedule above. The Company is also a guarantor on a RTC mortgage payable of approximately $725,000 and a Small Business Administration loan to a franchisee for approximately $377,000. The Company is currently in default on a capital lease covenant requiring it to maintain a minimum net worth of $3,500,000. The Company expects to obtain a waiver for this default and has therefore, classified $51,000 due after September 30, 1998 on the lease as long-term. The Company is subject to litigation in the normal course of business. The litigation is not expected to have a material impact to the Company. 7. Franchise and Area Development Agreements: The Company has two area development agreements which give the rights to franchise an additional two Drive Thru restaurants in Colorado and two in Boise, Idaho. Under the area development agreements, the Company generally has the right to build restaurants within the specified geographical areas. 8. Managed Limited Partnerships: Drive Thru is the general partner of certain limited partnerships that were formed to develop Drive Thru restaurants. Limited partner contributions have been used to construct new restaurants. Drive Thru, as a general partner, generally receives an allocation of 50% of the profit and losses and a fee for its management services. The limited partners' equity has been recorded as a minority interest in the accompanying consolidated financial statements. 9. Income Taxes: Deferred tax assets (liabilities) are comprised of the following at September 30, 1997: Long-Term Deferred assets (liabilities): Partnership basis difference $ 650,000 Net operating loss carryforward 2,250,000 Property and equipment basis differences (1,606,000) Other accrued liability difference 77,000 Net deferred tax assets 1,371,000 Less valuation allowance* (1,371,000) Net deferred tax assets $ - ________________________ * The valuation allowance increased by $192,000 during the year ended September 30, 1997. The Company has no taxable income under Federal and state tax laws. Therefore, no provision for income taxes was included. The Company has net operating loss carryforwards of approximately $6,030,000 for income tax purposes which expire from 2002 through 2011. The use of these losses may be restricted in the future due to changes in ownership. 10. Related Parties: The holder of the preferred stock has entered into a co-development agreement with the Company as well as a franchise agreement. The preferred stockholder and the Company have guaranteed a loan made to the co-development partnership in the amount of $200,000. Two of the Company's Board members are principals of the Company which is the holder of the preferred stock. 11. Stockholders' Equity: The Company has the authority to issue 5,000,000 shares of preferred stock. The Board of Directors has the authority to issue such preferred shares in series and determine the rights and preferences of the shares as may be determined by the Board of Directors. As of September 30, 1997, 1,000,000 shares have been authorized as described below. On October 1, 1996, the Company closed the sale of $1 million of preferred stock, $250,000 of which was the conversion of a note payable. The remaining $750,000 of preferred stock was purchased in three equal installments of $250,000 on October 1,1996, January 1, 1997, and April 1, 1997. In connection with the sale, the Company paid stock issuance costs in the amount of $52,000. The preferred stock has a cumulative dividend rate of 8% and a liquidation preference of $.46875, plus all accrued but unpaid dividends. The dividend may be paid out, at the option of the holder, in cash or common stock. If paid in stock, the value of the stock will be determined based on 75% of the average of the last 14 days trading prices but not less than $.46875 per share. 500,000 of the shares are convertible to common stock on October 1, 1997, 750,000 shares are convertible on January 1, 1998, and the full 1,000,000 shares are convertible on April 1, 1998. The conversion prices range from $.46875 to $.56875 through April 30, 1999. In December 1997, the Board of Directors extended the existing conversion rate of $.46875 for six months. The conversion price approximated market price on the date the terms of the sale were agreed to. Any shares that have not been converted as of May 1, 1999, are convertible at the greater of the dividend conversion rate described above at the time of conversion or $.46875. The preferred shareholders also have the right of participation on additional security issuances, except for a straight debt issuance, with no equity feature, and have certain registration rights. The preferred shareholders can also appoint two Board members, and one member of the compensation committee. Among other restrictions and requirements, the preferred stock agreement requires the Company to restrict future long-term borrowings based on percentage of earnings and requires the Company to spend $1,000,000 for the development of new restaurants before December 31, 1997 unless the board of directors unanimously directs otherwise. 12. Stock-Based Compensation: The Company has an incentive stock option plan (the ISO) and a non-statutory stock option plan (the NSO) whereby 750,000 shares and 300,000 shares, respectively, are reserved for issuance. As of September 30, 1997, options for the purchase of 359,500 and 105,602 shares of common stock are outstanding under these plans, respectively, and no options have been exercised. The following is a summary of activity under these stock option plans for the years ended September 30, 1997 and 1996. Incentive Stock Options - Activity for incentive stock options is summarized below. 1996 1997 Weighted Weighted Average Average Number Exercise Number Exercise Of Shares Price of Shares Price Outstanding, beginning of year 527,590 $2.38 371,300 $2.28 Canceled (212,590) 2.34 (373,300) 2.25 Granted 56,300 1.25 361,500 0.50 Outstanding, end of year 371,300 2.26 359,500 0.50 For all options granted during 1996 and 1997, the weighted average market price of the Company's common stock on the grant date was approximately equal to the weighted average exercise price. At September 30, 1997, options for 315,250 shares were exercisable. An additional 9,900 will be exercisable on September 30, 1998, 14,550 will be exercisable on September 30, 1999, and the remaining 19,800 will be exercisable on September 30, 2000. All the outstanding options at September 30, 1997 had an exercise price of $.50. If not previously exercised, options outstanding at September 30, 1997 will expire on October 1, 2007. Non-Qualified Stock Options - The Company has also granted non-qualified options which are summarized as follows for the years ended September 30, 1996 and 1997: 1996 1997 Weighted Weighted Average Average Number Exercise Number Exercise Of Shares Price of Shares Price Outstanding, beginning of year 140,602 $2.19 105,602 $2.34 Granted - - - - Canceled (35,000) 1.75 - - Exercised - - - - Outstanding, end of year 105,602 2.34 105,602 2.34 All outstanding non-qualified options were exercisable at September 30, 1997. If not previously exercised, non-qualified options outstanding at September 30, 1997 will expire as follows: Weighted Average Number Exercise Year Ending September 30, of Shares Price 1998 45,606 $3.12 1999 59,996 1.75 Total 105,602 Stock Purchase Warrants - The Company has granted warrants which are summarized as follows for the years ended September 30, 1996 and 1997: 1996 1997 Weighted Weighted Average Average Number Exercise Number Exercise Of Shares Price of Shares Price Outstanding, beginning of year 3,448,548 $1.85 3,448,548 $1.85 Granted - - 2,683,013 2.00 Repriced - - (2,683,013) 2.90 Expired - - (593,185) 3.04 Outstanding, end of year 3,448,548 $1.85 2,855,363 $1.97 All outstanding warrants were exercisable at September 30, 1997. If not previously exercised, warrants outstanding at September 30, 1997 will expire as follows: Weighted Average Number Exercise Year Ending September 30, of Shares Price 1998 122,350 $1.35 1999 2,683,013 2.00 2000 50,000 1.40 Total 2,855,363 The above tables do not include 209,000 warrants which are issuable upon the exercise of certain warrants. Pro Forma Stock-Based Compensation Disclosures - The Company applies APB Opinion 25 and related interpretations in accounting for stock options and warrants which are granted to employees. Accordingly, no compensation cost has been recognized for grants of options and warrants to employees since the exercise prices were not less than the fair value of the Company's common stock on the grant dates. Had compensation cost been determined based on the fair value at the grant dates for awards under those plans consistent with the method of FAS 123, the Company's net loss and loss per share would have been changed to the pro forma amounts indicated below. Year Ended September 30, 1996 1997 Net loss applicable to common stockholders: As reported $2,021,000 $1,166,000 Pro forma 2,075,000 1,278,000 Net loss per common share: As reported $(.31) $(.18) Pro forma (.32) (.20) The fair value of each employee option granted in 1997 and 1996 was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: Year Ended December 31, 1996 1997 Expected volatility 134% 130% Risk-free interest rate 6.5% 6.5% Expected dividends - - Expected terms (in years) 3 3 Subsequent to year-end, the Company issued 178,400 incentive stock options at a exercise price of $.50. These options expire in the year 2007. The Company also issued 70,000 non-statutory options at an exercise price of $.50 to the Company's directors, which expire in the year 2002. 13. Retirement Plan: The Company has implemented a 401(k) profit sharing plan (the Plan). Eligible employees may make voluntary contributions to the Plan, which are matched by the Company, using the Company's common stock in an amount equal to 25% of the employees contribution up to 6% of their compensation. The amount of employee contributions is limited as specified in the Plan. The Company may, at its discretion, make additional contributions to the Plan or change the matching percentage. The Company has accrued for contributions of $21,000 at September 30, 1997. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEMS 9-12. Incorporated herein by reference are Part III, Items 9 through 12 to the Registrant's definitive proxy statement for its Annual Meeting of Shareholders to be held on February 12, 1998. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. Exhibit Number Description Location 1.1 Underwriting Agreement between Registrant and Cohig & Associates, Inc. dated June 15, 1992 (6) - Exhibit 1.1 2.1 Acquisition Agreement between Registrant and RTC, as amended (6) - Exhibit 2.1 3.1 Articles of Incorporation of the Registrant (1) - Exhibit 3.1 3.2 Amendment to Articles of Incorporation of the Registrant dated January 23, 1990 (2) - Exhibit 3.1 3.4 Restated Bylaws of Registrant dated June 10, 1996 (11) - Exhibit 3.4 3.5 Certificate of Amendment of Articles of Incorporation (11) - Exhibit 3.5 3.6 Restated Bylaws of Registrant dated November 7, 1997 * 4.1 Form of Warrant Certificate for the purchase of an aggregate of 920,000 shares of Registrant's Common Stock issued in 1990 public offering (3) - Exhibit 4.2 4.2 Form of Underwriters' Warrant for the purchase of 80,000 shares issued in connection with 1990 public offering (3) - Exhibit 1.4 4.3 Form of Underwriters' Warrant for the purchase of 69,000 units issued in connection with 1992 public offering (6) - Exhibit 1.4 4.4 Form of Warrant Certificate for the purchase of an aggregate of 720,000 shares of Registrant's common stock issued in 1992 public offering (6) - Exhibit 4.4 4.5 Amended and Restated Warrant Agreement (6) - Exhibit 4.3 4.6 Form of Warrant Certificate to purchase an aggregate of 105,000 shares of Registrant's common stock issued in November 1991 Private Offering (5) - Exhibit 4.2 4.7 Form of registration rights agreement relating to 105,000 shares of the Registrant's common stock issuable upon exercise of warrants issued in November 1991 Private Offering (5) - Exhibit 4.3 4.8 Form of Warrant Certificate for the purchase of an aggregate 50,000 shares of Registrant's Common Stock issued to limited partners of Good Times Limited Partnership I (6) - Exhibit 4.14 4.9 1992 Incentive Stock Option Plan of Registrant, as amended (7) - Exhibit 4.20 4.10 1992 Non-Statutory Stock Option Plan of Registrant, as amended (7) - Exhibit 4.22 4.11 Form of warrant dated June 1, 1995 for the purchase of 50,000 shares of Registrant's Common Stock at an exercise price of $1.40 per share issued to Boulder Radiologists Inc., Defined Benefit Plan - Dubach, of indebtedness by Registrant to Dr. Kenneth Dubach (9) - Exhibit 4.15 4.16 First Amended and Restated Series B Warrant Agreement (11) - Exhibit 4.16 4.17 Third Amended and Restated Warrant Agreement (11) - Exhibit 4.17 10.1 Form of Agreement of Limited Partnership of Good Times Limited Partnership I (5) - Exhibit 10.16 10.2 Promissory Note made by Fast Restaurants, Inc. and Colfax & Krameria Inc. to Good Times in the principal amount of $280,000 (7) - Exhibit 10.49 10.3 Form of Promissory Note dated June 1, 1995 by and between Good Times Restaurants Inc. and Boulder Radiologist Inc. Pension Plan FBO Dubach in the amount of $300,000 due and payable on May 31, 2000 (9) - Exhibit 10.28 10.4 Lease by and between Sheridan Park 7 Partners, a Colorado limited partnership, and Good Times Restaurants Inc. in consideration for the payment of rent for office space in the aggregate amount of $350,796, commencing April 1, 1993 through April 1998 (9) - Exhibit 10.29 10.5 Master Lease Agreement in the aggregate amount of $2,000,000 between Capital Associates International, Inc., as Lessor, and Good Times Drive Thru Inc. as Lessee (9) - Exhibit 10.30 10.6 Employment Agreement agreed to September 14, 1994 between Registrant and Boyd E. Hoback (9) - Exhibit 10.32 10.7 Form of Promissory Note dated November 3, 1995 by and between AT&T Commercial Finance Corporation, Boise Co-Development Limited Partnership, Good Times Drive Thru Inc. as general partner, and Good Times Restaurants Inc. as guarantor in the amount of $254,625 (9) - Exhibit 10.34 10.8 Form of Promissory Note dated November 3, 1995 by and between AT&T Commercial Finance Corporation, Boise Co-Development Limited Partnership, Good Times Drive Thru Inc. as general partner, and Good Times Restaurants Inc. as guarantor in the amount of $104,055 (9) - Exhibit 10.35 10.9 Series A Convertible Preferred Stock Purchase Agreement dated as of May 31, 1996 by and among Good Times Restaurants Inc. and The Bailey Company (11) - Exhibit 10.13 10.10 First Amendment to Series A Convertible Preferred Stock Purchase Agreement effective as of May 31, 1996 by and between Good Times Restaurants Inc. and The Bailey Company (11) - Exhibit 10.14 10.11 Registration Rights Agreement dated May 31, 1996 regarding registration rights of the common stock issuable upon conversion of the Series A Convertible Preferred Stock (11) - Exhibit 10.15 10.12 Employment Agreement dated May 3, 1996 between Registrant and Boyd E. Hoback (11) - Exhibit 10.17 10.13 Amendment and Agreement Regarding Series A Convertible Preferred Stock by & between Good Times Restaurants Inc. and The Bailey Company dated December 3, 1997, effective as of October 31, 1997 * 10.14 Indemnification by Dr. Kenneth Dubach to Good Times Drive Thru Inc. dated December 10, 1996 with respect to the promissory note of the Boise Co-Development Limited Parntership dated November 3, 1995 in the original amount of $254,625 and the promissory note dated November 3, 1995 in the original amount of $104,055. * 10.15 Settlement Agreement between Good Times Restaurants Inc. and Round The Corner Restaurants, Inc. dated August 29, 1997 * 21.1 Subsidiaries of Registrant * 23.1 Consent of HEIN + ASSOCIATES LLP * (1) Incorporated by reference from Registrant's Registration Statement on Form S-18 as filed with the Commission on November 30, 1988 (File No. 33-25810-LA). (2) Incorporated by reference from Registrant's current report on Form 8-K dated January 18, 1990 (File No. 33-25810-LA). (3) Incorporated by reference from Registrant's Registration Statement on Form S-1 as filed with the Commission on March 26, 1990 (File No. 33-33972). (4) Incorporated by reference from Registrant's Form 10-K for the fiscal year ended September 30, 1990 (5) Incorporated by reference from Registrant's Form 10-K for the fiscal year ended September 30, 1991 (6) Incorporated by reference from Registrant's Registration Statement on Form S-1 as filed with the Commission on March 27, 1992 (File No. 33-46813). (7) Incorporated by reference from Registrant's Form 10-K for the fiscal year ended September 30, 1993 (8) Incorporated by reference from Registrant's Form 10-KSB for the fiscal year ended September 30, 1994. (9) Incorporated by reference from Registrant's Form 10-KSB/A for the fiscal year ended September 30, 1995. (10)Incorporated by reference from Registrant's Form 10-QSB for the quarter ended March 31, 1996. (b) Current Reports on Form 8-K. None. (11)Incorporated by reference from Registrant's Form 10-KSB for the fiscal year ended September 30, 1996. * Filed herewith. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: December 23, 1997 GOOD TIMES RESTAURANTS INC. By: /s/ Boyd E. Hoback, President Boyd E. Hoback, President Pursuant to the requirements of Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE /s/ Geoffrey R. Bailey Geoffrey R. Bailey Chairman December 18, 1997 /s/ Dan W. James, II Dan W. James II Director December 23, 1997 /s/ Boyd E. Hoback Boyd E. Hoback President, Chief December 23, 1997 Executive Officer and Director /s/ David E. Bailey David E. Bailey Director December 18, 1997 /s/ Thomas P. McCarty Thomas P. McCarty Director December 22, 1997 /s/ Alan A. Teran Alan A. Teran Director December 19, 1997 /s/ Richard J. Stark Richard J. Stark Director December 23, 1997 EX-3.6 2 RESTATED BYLAWS OF GOOD TIMES RESTAURANTS INC. November 7, 1997 RESTATED BYLAWS OF GOOD TIMES RESTAURANTS INC. TABLE OF CONTENTS PAGE ARTICLE I. NAME, REGISTERED OFFICE AND REGISTERED AGENT Section 1. Name. . . . . . . . . . . . . . . . . . . . . .1 Section 2. Registered Office and Registered Agent. . . . .1 ARTICLE II. SHAREHOLDERS MEETINGS Section 1. Annual Meetings . . . . . . . . . . . . . . . .1 Section 2. Special Meetings. . . . . . . . . . . . . . . .1 Section 3. Notice of Shareholders Meetings . . . . . . . .2 Section 4. Place of Meeting. . . . . . . . . . . . . . . .2 Section 5. Record Date . . . . . . . . . . . . . . . . . .2 Section 6. Quorum. . . . . . . . . . . . . . . . . . . . .2 Section 7. Voting. . . . . . . . . . . . . . . . . . . . .2 Section 8. Proxies . . . . . . . . . . . . . . . . . . . .3 ARTICLE III. BOARD OF DIRECTORS Section 1. General Powers. . . . . . . . . . . . . . . . .3 Section 2. Election of Directors . . . . . . . . . . . . 3 Section 3. Number, Tenure and Qualifications . . . . . . .3 Section 4. Regular Meetings. . . . . . . . . . . . . . . .3 Section 5. Special Meetings. . . . . . . . . . . . . . . .3 Section 6. Meetings by Telephone . . . . . . . . . . . . .4 Section 7. Quorum. . . . . . . . . . . . . . . . . . . . .4 Section 8. Manner of Acting. . . . . . . . . . . . . . . .4 Section 9. Vacancies . . . . . . . . . . . . . . . . . . .4 Section 10. Removals. . . . . . . . . . . . . . . . . . . .4 Section 11. Resignations. . . . . . . . . . . . . . . . . .5 Section 12. Presumption of Assent . . . . . . . . . . . . .5 Section 13. Compensation. . . . . . . . . . . . . . . . . .5 Section 14. Informal Action by Directors. . . . . . . . . .5 Section 15. Chairman. . . . . . . . . . . . . . . . . . . .5 ARTICLE IV. DIVISIONS OF THE CORPORATION Section 1. Operation of Divisions. . . . . . . . . . . . .6 Section 2. Advisory Board. . . . . . . . . . . . . . . . .6 Section 3. Officers of the Divisions . . . . . . . . . . .6 Section 4. Duties of Officers of Divisions . . . . . . . .6 Section 5. Term of Office, Resignation and Removal . . . .7 Section 6. Authorized Signatures and Checking Accounts . .7 ARTICLE V. OFFICERS Section 1. Number. . . . . . . . . . . . . . . . . . . . .7 Section 2. Election and Term of Office . . . . . . . . . .7 Section 3. Resignations. . . . . . . . . . . . . . . . . .8 Section 4. Removals. . . . . . . . . . . . . . . . . . . .8 Section 5. Vacancies . . . . . . . . . . . . . . . . . . .8 Section 6. President . . . . . . . . . . . . . . . . . . .8 Section 7. Executive Vice-President. . . . . . . . . . . .8 Section 8. Vice-Presidents . . . . . . . . . . . . . . . .9 Section 9. Secretary . . . . . . . . . . . . . . . . . . .9 Section 10. Treasurer . . . . . . . . . . . . . . . . . . .9 Section 11. Assistant Secretaries and Assistant Treasurers . . . . . . . . . . . . . . . . 10 Section 12. General Manager . . . . . . . . . . . . . . . 10 Section 13. Other Officers. . . . . . . . . . . . . . . . 11 Section 14. Salaries. . . . . . . . . . . . . . . . . . . 11 Section 15. Surety Bonds. . . . . . . . . . . . . . . . . 11 ARTICLE VI. COMMITTEES Section 1. Executive Committee . . . . . . . . . . . . . 11 Section 2. Other Committees. . . . . . . . . . . . . . . 11 ARTICLE VII. CONTRACTS, LOANS, DEPOSITS AND CHECKS Section 1. Contracts . . . . . . . . . . . . . . . . . . 12 Section 2. Loans . . . . . . . . . . . . . . . . . . . . 12 Section 3. Deposits. . . . . . . . . . . . . . . . . . . 12 Section 4. Checks and Drafts . . . . . . . . . . . . . . 12 Section 5. Bonds and Debentures. . . . . . . . . . . . . 12 ARTICLE VIII. CAPITAL STOCK Section 1. Certificates of Shares. . . . . . . . . . . . 13 Section 2. Transfers of Shares . . . . . . . . . . . . . 13 Section 3. Transfer Agent and Registrar. . . . . . . . . 13 Section 4. Lost or Destroyed Certificates. . . . . . . . 14 Section 5. Consideration for Shares. . . . . . . . . . . 14 Section 6. Registered Shareholders . . . . . . . . . . . 14 ARTICLE IX. INDEMNIFICATION Section 1. Indemnification Against Third Party Claims. . 14 Section 2. Indemnification Against Derivative Claims . . 15 Section 3. Rights to Indemnification . . . . . . . . . . 15 Section 4. Authorization of Indemnification. . . . . . . 15 Section 5. Advancement of Expenses . . . . . . . . . . . 16 Section 6. Indemnification by Court Order. . . . . . . . 16 Section 7. Insurance . . . . . . . . . . . . . . . . . . 16 Section 8. Settlement by Corporation . . . . . . . . . . 17 ARTICLE X. WAIVER OF NOTICE. . . . . . . . . . . . . . . . 17 ARTICLE XI. AMENDMENTS. . . . . . . . . . . . . . . . . . . 17 ARTICLE XII. FISCAL YEAR . . . . . . . . . . . . . . . . . . 17 ARTICLE XIII. DIVIDENDS . . . . . . . . . . . . . . . . . . . 18 ARTICLE XIV. CORPORATE SEAL. . . . . . . . . . . . . . . . . 18 RESTATED BYLAWS OF GOOD TIMES RESTAURANTS INC. ARTICLE I NAME, REGISTERED OFFICE AND REGISTERED AGENT Section 1. Name. The name of this corporation is Good Times Restaurants Inc. Section 2. Registered Office and Registered Agent. The address of the registered office of this corporation is One East First, Suite 1600, Reno, Nevada 89501. The name of the registered agent of this corporation at that address is Corporation Trust Company. The corporation shall at all times maintain a registered office. The locations of the registered office may be changed by the Board of Directors. The corporation may also have offices in such other places within or without the State of Nevada as the Board may from time to time designate. ARTICLE II SHAREHOLDERS MEETINGS Section 1. Annual Meetings. The annual meeting of the shareholders of the corporation shall be held at such place within or without the State of Nevada and at such time as the Board of Directors shall determine in compliance with these Bylaws. If such day is a legal holiday, the meeting shall be on the next business day. This meeting shall be for the election of Directors and for the transaction of such other business as may properly come before it. Section 2. Special Meetings. Special meetings of shareholders, other than those regulated by statute, may be called at any time by the Chairman of the Board, the President, any two Directors or the holder or holders of at least 25 percent of the outstanding shares of Series A Convertible Preferred Stock, and must be called by the President upon written request of the holders of ten percent of the outstanding shares of capital stock entitled to vote at such special meeting. Written notice of such meeting stating the place, the date and hour of the meeting, the purpose or purposes for which it is called, and the name of the person by whom or at whose direction the meeting is called shall be given. Such notice shall be given to each shareholder of record in the same manner as notice of the annual meeting. No business other than that specified in the notice of the meeting shall be transacted at any such special meeting. Section 3. Notice of Shareholders Meetings. The Secretary shall give written notice stating the place, date and hour of the meeting and, in the case of a special meeting, the purpose(s) for which the meeting is called, which shall be delivered not less than ten nor more than sixty days prior to the date of the meeting, either personally or by mail to each shareholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail, addressed to the shareholder at his address as it appears on the stock transfer books of the corporation, with postage thereon prepaid. Section 4. Place of Meeting. The Board of Directors may designate any place, either within or without the State of Nevada, as the place of meeting for any annual meeting or for any special meeting called by the Board of Directors. A waiver of notice signed by all shareholders entitled to vote at a meeting may designate any place, either within or without the State of Nevada, as the place for the holding of such meeting. If no designation is made, or if a special meeting is called by other than the Board of Directors, the place of meeting shall be the principal business office of the corporation. Section 5. Record Date. The Board of Directors may fix a date not less than ten nor more than sixty days prior to any meeting as the record date for the purpose of determining shareholders entitled to notice of and to vote at any such meeting of the shareholders. The stock transfer books may be closed by the Board of Directors for a stated period not to exceed sixty days for the purpose of determining shareholders entitled to receive payment of any dividend, or in order to make a determination of shareholders for any other purpose. Section 6. Quorum. Except as otherwise provided in these Bylaws or the Articles of Incorporation, a majority of the votes represented by the outstanding shares of the corporation entitled to vote, represented in person or by proxy, shall constitute a quorum at any meeting of shareholders. If less than a majority of such votes are represented at any such meeting, a majority of the votes so represented may adjourn the meeting from time to time without further notice. At a meeting resumed after any such adjournment at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally noticed. The shareholders present at any duly assembled meeting at which a quorum is present may continue to transact business until adjournment, notwithstanding the withdrawal of shareholders in such number that less than a quorum remain. Section 7. Voting. The holder of an outstanding share entitled to vote at any meeting may vote at such meeting in person or by proxy. Every shareholder of Common Stock shall be entitled to one vote for each share standing in his name on the records of the corporation upon each matter submitted to a vote at a meeting of shareholders. Every holder of Series A Convertible Preferred Stock shall have such number of votes per share on each matter submitted to a vote at a meeting of shareholders as shall equal the number of shares of Common Stock (including fractions of a share) into which each share of Series A Convertible Preferred Stock would be convertible based on the conversion price then in effect, as provided in the terms of the Series A Preferred Stock set forth in the Articles of Incorporation. All shareholder actions shall be determined by a majority of the votes cast at any meeting of shareholders by the holders or proxies of shares entitled to vote thereon. Section 8. Proxies. At all meetings of shareholders, a shareholder may vote in person or by proxy executed in writing by the shareholder or by his duly authorized attorney-in-fact. Such proxy shall be filed with the Secretary of the corporation before or at the time of the meeting. No proxy shall be valid after eleven months from the date of its execution, unless otherwise provided in the proxy. ARTICLE III BOARD OF DIRECTORS Section 1. General Powers. The business and affairs of the corporation shall be managed by its Board of Directors. The Board of Directors may adopt such rules and regulations for the conduct of its meetings and the management of the corporation as it deems proper. Section 2. Election of Directors. The Board of Directors shall be elected by the shareholders at the annual meeting, or if not so elected, at a special meeting called for such purpose. Notwithstanding the foregoing, the holders of the Series A Convertible Preferred Stock voting together, separately as a class, shall have the right to elect two Directors to the Board of Directors, one of whom shall have the right to serve as the Chairman of the Board at his or her discretion. At any meeting (or in a written consent in lieu thereof) held for the purpose of electing Directors, the presence in person or by proxy (or the written consent) of the holders of a majority of the shares of Series A Convertible Preferred Stock then outstanding shall constitute a quorum of the Series A Convertible Preferred Stock for the election of Directors to be elected solely by the holders of the Series A Convertible Preferred Stock or jointly by the holders of the Series A Convertible Preferred Stock and the Common Stock. Section 3. Number, Tenure and Qualifications. The number of Directors of the corporation shall be as determined by the Board of Directors in accordance with the Articles of Incorporation, but shall not be greater than seven unless an increase in such number is approved by the holders of two-thirds of the outstanding shares of Series A Convertible Preferred Stock. Each Director shall hold office until the next annual meeting of shareholders and until his successor shall have been duly elected and qualified. Directors need not be residents of the State of Nevada or shareholders of the corporation. Section 4. Regular Meetings. A regular meeting of the Board of Directors shall be held without other notice than by this Bylaw, immediately following and at the same place as the annual meeting of shareholders. The Board of Directors may provide, by resolution, the time and place for the holding of additional regular meetings without other notice than such resolution. Section 5. Special Meetings. Special Meetings of the Board of Directors may be called by order of the Chairman of the Board, the President, any two Directors or the holder or holders of at least 25 percent of the outstanding shares of Series A Convertible Preferred Stock. The Secretary shall give notice of the time and place of each special meeting by mailing the same at least two days before the meeting or by telephoning or telegraphing the same at least one day before the meeting to each Director. Section 6. Meetings by Telephone. Any meeting of the Board of Directors, regular or special, may be held by conference telephone call. Section 7. Quorum. A majority of the members of the Board of Directors shall constitute a quorum for the transaction of business, but less than a quorum may adjourn any meeting from time to time until a quorum shall be present, whereupon the meeting may be held, as adjourned, without further notice. At any meeting at which every Director shall be present, even though without any notice, any business may be transacted. Section 8. Manner of Acting. At all meetings of the Board of Directors, each Director shall have one vote. The act of a majority present at a meeting shall be the act of the Board of Directors, provided a quorum is present. Section 9. Vacancies. A vacancy in any directorship elected solely by the holders of the Series A Convertible Preferred Stock shall be filled only by vote or written consent of the holders of the Series A Convertible Preferred Stock in accordance with Section 2 hereof, and any vacancy in any directorship elected jointly by the holders of the Series A Convertible Preferred Stock and the Common Stock shall be filled only by vote or written consent of holders of the Series A Convertible Preferred Stock and the Common Stock in accordance with Section 2 hereof. Section 10. Removals. Directors may be removed at any time with or without cause by vote of the shareholders holding a majority of the shares outstanding which are at the time entitled to vote on the election of the Director to be removed. Thus, the Directors elected by the holders of the Series A Convertible Preferred Stock may be removed only by a vote of the majority of the outstanding shares of such stock and such vacancy shall be filled in the manner specified in Section 9 above. No reduction of the authorized number of Directors shall have the effect of removing any Director prior to the expiration of his term of office. Notwithstanding the foregoing, the holders of the Series A Convertible Preferred Stock, voting as a separate class, shall be entitled to remove with or without cause any or all of the Directors and to elect four Directors to the Board of the corporation if the following events occur: (1) the Board shall fail to declare an Accruing Dividend (as such term is defined in the terms of the Series A Convertible Preferred Stock set forth in the Articles of Incorporation) when due if there is adequate surplus to do so, unless the Board of Directors reasonably determines that the payment of a cash dividend would jeopardize the corporation's ability to meet its current and reasonably foreseeable obligations, including reasonable reserves therefor; (2) the corporation files a petition in bankruptcy, is adjudged bankrupt or insolvent, makes an assignment for the benefit of creditors, applies to or petitions any tribunal for the appointment of a receiver, intervenor or trustee for all or a substantial part of its assets, or a proceeding under any bankruptcy law or statute shall have commenced and not been dismissed within sixty days; or (3) if there has been a material breach of any agreement between the corporation and the holders of the Series A Convertible Preferred Stock and the corporation fails to remedy such breach within 14 days after receiving notice of such breach or, if such breach cannot reasonably be cured and the corporation continuously and diligently proceeds to remedy such breach, within thirty days after receiving notice of such breach. Section 11. Resignations. A Director may resign at any time by delivering written notification thereof to the President or Secretary of the corporation. Resignation shall become effective upon its acceptance by the Board of Directors; provided, however, that if the Board of Directors has not acted thereon within ten days after the date of its delivery, the resignation shall be deemed accepted upon the tenth day. Section 12. Presumption of Assent. A Director of the corporation who is present at a meeting of the Board of Directors at which action on any corporate matter is taken shall be presumed to have assented to the action taken unless his dissent shall be entered in the minutes of the meeting or unless he shall file his written dissent to such action with the person acting as the secretary of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the Secretary of the corporation immediately after adjournment of the meeting. Such right of dissent shall not apply to a Director who voted in favor of such action. Section 13. Compensation. By resolution of the Board of Directors, the Directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors, and may be paid a fixed sum for attendance at each such meeting or a stated salary as Director. No such payment shall preclude any Director from serving the corporation in any other capacity and receiving compensation therefor. Section 14. Informal Action by Directors. Any action required to be taken at a meeting of Directors or any action which may be taken at a meeting of Directors may be taken without a meeting by a written consent, setting forth the action so taken, signed by all of the Directors of the corporation. Section 15. Chairman. If one of the Directors elected solely by the holders of the Series A Convertible Preferred Stock does not elect to serve as Chairman of the Board, the Board may elect from its own number a Chairman of the Board. The Chairman of the Board shall preside at all meetings of the Board of Directors and shall perform such other duties as may be prescribed from time to time by the Board of Directors. ARTICLE IV DIVISIONS OF THE CORPORATION Section 1. Operation of Divisions. The Board of Directors shall have power to establish one or more operating divisions of the corporation. Each division of the corporation shall have such authority, responsibilities, and duties as may be delegated to it from time to time by the Board of Directors. Each division of the corporation shall adopt Rules of Procedure for the conduct of its affairs not inconsistent with the Articles of Incorporation and Bylaws of the corporation. Such Rules of Procedure shall become effective when approved by the Board of Directors. Section 2. Advisory Board. The Board of Directors of the corporation may appoint individuals who may, but need not, be Directors, officers or employees of the corporation, to serve as members of an Advisory Board to one or more of the divisions of the corporation. The members of any such Advisory Board shall keep minutes of their meetings which shall be submitted to the Board of Directors of the corporation. The term of office of any member of the Advisory Board shall be at the pleasure of the Board of Directors of the corporation. The function of such Advisory Board shall be to advise with respect to the affairs of the operating divisions of the corporation to which it is appointed. Section 3. Officers of the Divisions. The divisions of the corporation shall each have a President and such Vice-Presidents as the Board of Directors may appoint. The Secretary and Treasurer of the corporation shall also be deemed the Secretary and Treasurer of each division. Section 4. Duties of Officers of Divisions. Any employee designated as an officer of a division shall have such authority, responsibilities, and duties with respect to the applicable division corresponding to those normally vested in the comparable officer of the corporation by these Bylaws, subject to such limitations as may be imposed by the Board of Directors, the Articles of Incorporation or by these Bylaws. The President of a division may sign, execute and deliver in the name of such division only such contracts, agreements or other documents as may be prescribed from time to time by the President of the corporation or the Board of Directors. The designation of any individual as President or Vice-President of any division of the corporation shall not be permitted to conflict in any way with any executive or administrative authority of any officer of the corporation established from time to time by the Board of Directors of the corporation. The President of each division shall report directly to the President and Chief Executive Officer of the corporation. The President of a division, upon written approval of the President of the corporation, may appoint or remove such agents or employees of a division as may, from time to time, become necessary or useful to the operation of such division. Section 5. Term of Office, Resignation and Removal. Each officer of a division shall hold office until his successor shall have been duly appointed by the Board of Directors, or until his death, or until he shall resign. Any officer of a division may resign at any time by delivery of a written resignation either to the President of the corporation, the Secretary of the corporation or to the Board of Directors. Such resignation shall take effect upon delivery. Any officer of the division may be removed from office only by the Board of Directors. Such officer shall be removed when in the sole judgment of the Board of Directors the best interests of the division or the corporation will be served thereby. Any such removal shall require a majority vote of the Board of Directors. Section 6. Authorized Signatures and Checking Accounts. The Board of Directors may authorize each division to have a separate checking account. Any check issued by or for the benefit of any division shall require at least two signatures. The corporate or divisional officers authorized to sign such checks of any division shall be the President of such division, the President of the corporation and the Secretary of the corporation. ARTICLE V OFFICERS Section 1. Number. The corporate officers shall be a President, no Vice-Presidents or one or more Vice-Presidents as determined from time to time by the Board of Directors, a Secretary and a Treasurer, each of whom shall be elected by a majority of the Board of Directors. Such other corporate officers and assistant officers as may be deemed necessary may be elected or appointed by the Board of Directors. In its discretion, the Board of Directors may leave unfilled for any such period as it may determine any corporate office except those of President and Secretary. Any two or more corporate offices may be held by the same person, except the offices of President and Secretary. Corporate officers need not be Directors or shareholders of the corporation. Section 2. Election and Term of Office. The corporate officers to be elected by the Board of Directors shall be elected annually by the Board of Directors at the first meeting of the Board of Directors held after each annual meeting of the shareholders. If the election for corporate officers shall not be held at such meeting, such election shall be held as soon thereafter as convenient. Each corporate officer shall hold office until his successor shall have been duly elected and shall have qualified or until his death or until he shall resign or shall have been removed in the manner hereinafter provided. Section 3. Resignations. Any corporate officer may resign at any time by delivering a written resignation either to the corporate President or to the corporate Secretary. Unless otherwise specified therein, such resignation shall take effect upon delivery. Section 4. Removals. Any corporate officer or agent may be removed by the Board of Directors, with or without cause, whenever in its judgment the best interests of the corporation would be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Election or appointment of a corporate officer or agent shall not of itself create contract rights. Any such removal shall require a majority vote of the Board of Directors, exclusive of the corporate officer in question if he is also a Director. Section 5. Vacancies. A vacancy in any corporate office because of death, resignation, removal, disqualification or otherwise, or if a new corporate office shall be created, may be filled by the Board of Directors for the unexpired portion of the term. Section 6. President. The President shall be the chief executive and administrative officer of the corporation. He shall preside at all meetings of the shareholders and, in the absence of the Chairman of the Board, at meetings of the Board of Directors. He shall exercise such duties as customarily pertain to the office of President and shall have general and active supervision of the property, business, offices and affairs of the corporation and each division. He may appoint officers, agents, or employees on the corporate or division level other than those appointed by the Board of Directors. He may sign, execute and deliver in the name of the corporation powers of attorney, contracts, bonds and other obligations, and shall perform such other duties as may be prescribed from time to time by the Board of Directors or by these Bylaws. Section 7. Executive Vice-President. The Executive Vice-President shall be the chief executive and administrative officer of the corporation in the absence of the President, and in such absence shall be vested with all rights, powers, privileges and obligations of the President as more fully set forth in Section 6 of this Article V. In addition, he may sign, execute and deliver in the name of the corporation, powers of attorney, contracts, bonds and other obligations when the President is present but unavailable for the execution of such documents, and he shall perform such other duties as may be prescribed from time to time by the Board of Directors, the President or the Bylaws. Section 8. Vice-Presidents. Vice-Presidents shall have such powers and perform such duties as may be assigned to them by the Board of Directors or by the President. In the absence or disability of the President, the Vice-President designated by the Board or by the President shall perform the duties and exercise the powers of the President. A Vice-President may sign and execute contracts and other obligations pertaining to the regular course of his duties. Section 9. Secretary. The Secretary shall also be deemed the Secretary of each of the divisions. The Secretary shall, subject to the direction of the President, Executive Vice-President, or a designated Vice-President, keep the minutes of all meetings of the shareholders and of the Board of Directors and, to the extent ordered by the Board of Directors or the President, the minutes of meetings of all divisions and committees. He shall cause notice to be given of meetings of shareholders, of the Board of Directors and of any committee appointed by the Board. He shall have custody of the corporate seal and general charge of the records, documents and papers of the corporation and each division not pertaining to the performance of the duties vested in other officers, which records, documents and papers shall at all reasonable times be open to examination by any Director. He may sign or execute contracts with the President, Executive Vice-President or Vice- Presidents thereunto authorized in the name of the corporation and affix the seal of the corporation thereto, provided, however, that he may not simultaneously act both in the capacity of Secretary and that of Executive Vice-President or Vice-President upon the execution of such documents. He shall perform such other duties as may be prescribed from time to time by the Board of Directors or by these Bylaws. He shall be sworn to the faithful discharge of his duties. If necessary, Assistant Secretaries shall assist the Secretary and shall keep and record such minutes of meetings as shall be directed by the Board of Directors. Section 10. Treasurer. The Treasurer shall, subject to the direction of the President, Executive Vice-President or a designated Vice-President, have general custody and control of the collection and disbursement of funds of the corporation and each division. He shall endorse on behalf of the corporation and each division for collection checks, notes and other obligations, and shall deposit the same to the credit of the corporation or the division in such bank(s) or depositories as the Board of Directors may designate. He may sign, with the President or such other persons as may be designated for the purpose by the Board of Directors, all bills of exchange or promissory notes of the corporation or any division, provided, however, that he may not simultaneously act both in the capacity of Treasurer and that of Executive Vice-President or Vice-President upon the execution of such documents. He shall enter or cause to be entered regularly in the books of the corporation or any division a full and accurate account of all monies received and paid by him or under his direction on account of the corporation or such division. He shall at all reasonable times exhibit his books and accounts to any Director of the corporation upon timely application at the office of the corporation during business hours, and whenever required by the Board of Directors or the President, he shall render a statement of his accounts. He shall perform such other duties as may be prescribed from time to time by the Board of Directors or by the Bylaws. If necessary, Assistant Treasurers shall assist the Treasurer and shall perform such duties as shall be directed by the Board of Directors. He shall give bond for the faithful performance of his duties in such sum and with or without such surety as shall be required by the Board of Directors. Section 11. Assistant Secretaries and Assistant Treasurers. The Board of Directors may appoint such Assistant Secretaries and Assistant Treasurers as may be necessary for the expedient discharge of the affairs of the corporation or any division. The Assistant Secretaries and Assistant Treasurers shall be authorized to perform any of the duties of the Secretary or Treasurer, respectively, in the absence of the Secretary or Treasurer, or in any situation where the Secretary or Treasurer may be acting in another capacity such as Executive Vice-President or Vice-President. Section 12. General Manager. The Board of Directors may employ and appoint a General Manager who may or may not be one of the officers or Directors of the corporation. He shall be the chief operating officer of the corporation, and subject to the direction of the Board of Directors and of the President, shall have general charge of the business operations of the corporation and general supervision over its employees and agents. He may be given the exclusive management of the business of the corporation in any or all of its dealings, but at all times he shall be subject to the control of the Board of Directors or of the Executive Committee. He may employ all employees of the corporation, or delegate such employment to subordinate officers or division chiefs, and he may have the authority to discharge any person so employed. He shall make a report to the President and to the Board of Directors quarterly, or more often if required to do so, setting forth the result of the operations under his charge, together with suggestions looking to the improvement and betterment of the condition of the corporation. He may perform such other duties as the Board of Directors shall require. Section 13. Other Officers. Other officers shall perform such duties and have such powers as may be assigned to them by the Board of Directors. Section 14. Salaries. Salaries or other compensation of the corporate officers and the officers of any division of the corporation shall be fixed from time to time by the Board of Directors, except that the Board of Directors may delegate to any person or group of persons the power to fix the salaries or other compensation of any such subordinate officers or agent. No officer shall be prevented from receiving any such salary or compensation because he is also a Director of the corporation. Section 15. Surety Bonds. If the Board of Directors shall so require, any corporate or division officer or agent shall execute to the corporation a bond in such sums and with such surety or sureties as the Board of Directors may direct, conditioned upon the faithful performance of his duties to the corporation or the applicable division, including his responsibility for negligence and the accounting for all property, monies or securities of the corporation or a division which may come into his hands. ARTICLE VI COMMITTEES Section 1. Executive Committee. The Board of Directors may appoint from among its members an Executive Committee of not less than two nor more than five members, one of whom shall be the President, and shall designate one of such members as Chairman. The Board may also designate one or more of its members as alternates to serve as members on the Executive Committee in the absence or disability of a regular member(s). The Board of Directors reserves to itself alone the power to declare dividends, issue stock, recommend to shareholders any action requiring their approval, change the membership of any committee at any time, fill vacancies therein and disband any committee either with or without cause at any time. Subject to the foregoing limitations, the Executive Committee shall possess and exercise all other powers of the Board of Directors during the intervals between meetings. Section 2. Other Committees. The Board of Directors may also appoint from among its own members such other committees as the Board of Directors may determine. Such committees shall in each case consist of not less than two Directors, and shall have such powers and duties and shall from time to time be prescribed by the Board. The President shall be a member ex officio of each committee appointed by the Board of Directors. A majority of the members of any committee may fix its rules of procedure. ARTICLE VII CONTRACTS, LOANS, DEPOSITS AND CHECKS Section 1. Contracts. The Board of Directors may authorize any officer(s) or agent(s) to enter into any contract or execute and deliver any instrument in the name and on behalf of the corporation, and such authority may be either general or confined to specific instances. Section 2. Loans. No loan(s) or advance(s) shall be contracted on behalf of the corporation, no negotiable paper or other evidence of its obligation under any loan or advance shall be issued in its name, and no property of the corporation shall be mortgaged, pledged, hypothecated or transferred as security for the payment of any loan, advance, indebtedness or liability of the corporation unless and except as authorized by the Board of Directors. Any such authorization may be either general or confined to specific instances. Section 3. Deposits. All funds of the corporation not otherwise employed shall be deposited from time to time to the credit of the corporation in such banks, trust companies or other depositories as the Board of Directors may select, or as may be selected by any officer or agent so authorized by the Board of Directors. Section 4. Checks and Drafts. All notes, drafts, acceptances, checks, endorsements and evidences of indebtedness of the corporation shall be signed by such officer(s) or such agent(s) of the corporation and in such manner as the Board of Directors from time to time may determine. Endorsements for deposit to the credit of the corporation in any of its duly authorized depositories shall be made in such manner as the Board of Directors from time to time may determine. Section 5. Bonds and Debentures. Every bond or debenture issued by the corporation shall be evidenced by an appropriate instrument which shall be signed by the President or a Vice-President and by the Treasurer or by the Secretary. The seal may be a facsimile, engraved or printed. Where such bond or debenture is to be authenticated with the manual signature of an authorized officer of the corporation or other trustee designated by the indenture of trust or other agreement under which such security is issued, the signature of any of the corporation's officers named thereon may be facsimile. In case any officer who signed, or whose facsimile signature has been used on any such bond or debenture, shall cease to be an officer of the corporation, such bond or debenture may nevertheless be adopted by the corporation and issued and delivered as though the person who signed it or whose facsimile signature has been used thereon had not ceased to be such officer. ARTICLE VIII CAPITAL STOCK Section 1. Certificates of Shares. The shares of the corporation shall be represented by certificates prepared by the Board of Directors and signed by the President or the Vice-President and by the Secretary, and sealed with the seal of the corporation or a facsimile. The signatures of such officers upon a certificate may be facsimiles if the certificate is countersigned by a transfer agent or registered by a registrar other than the corporation itself or one of its employees. All certificates for shares shall be consecutively numbered or otherwise identified. The name and address of the person to whom the shares are issued, with the number of shares and the date of issue, shall be entered on the stock transfer books of the corporation. All certificates surrendered to the corporation for transfer shall be cancelled. No new certificates shall be issued until the former certificate for a like number of shares shall have been surrendered and cancelled, except that in case of a lost, destroyed or mutilated certificate, a new one may be issued therefor upon such terms of indemnity to the corporation as the Board of Directors may prescribe. Section 2. Transfers of Shares. Transfers of shares of the corporation shall be made only on the stock transfer books of the corporation by the holder of record thereof or by his legal representative, or by his attorney thereunto authorized by a power of attorney duly executed and such representative or attorney shall furnish proper evidence of his authority to so transfer the shares to the Secretary of the corporation upon the surrender for cancellation of the certificate for such shares. The person in whose name shares stand on the stock transfer books of the corporation shall be deemed by the corporation to be the owner thereof for all purposes. Section 3. Transfer Agent and Registrar. The Board of Directors shall have power to appoint one or more transfer agents and registrars, who may also be employees of the corporation, for the transfer and registration of certificates of stock of any class, and may require that stock certificates shall be countersigned and registered by one or more of such transfer agents and registrars. Section 4. Lost or Destroyed Certificates. The Board of Directors may direct a new certificate to be issued to replace any certificate theretofore issued by the corporation and alleged to have been lost or destroyed if the new owner makes an affidavit that the certificate is lost or destroyed. The Board of Directors may, at its discretion, require the owner of such certificate or his legal representative to give the corporation a bond in such sum and with such sureties as the Board of Directors may direct to indemnify the corporation and transfer agents and registrars, if any, against claims that may be made on account of the issuance of such new certificates. A new certificate may be issued without requiring any bond. Section 5. Consideration for Shares. The capital stock of the corporation shall be issued for such consideration as shall be fixed from time to time by the Board of Directors, but in no event shall such value be less than the par value of such shares. In the absence of fraud, the determination of the Board of Directors as to the value of any property or services received in full or partial payment for shares shall be conclusive. Section 6. Registered Shareholders. The corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder thereof in fact and shall not be bound to recognize any equitable or other claim to or interest in the shares. ARTICLE IX INDEMNIFICATION Section 1. Indemnification Against Third Party Claims. The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, except an action by or in the right of the corporation, by reason of the fact that he is or was a Director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a Director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses, including attorneys' fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with the action, suit or proceeding if he acted in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests if the corporation, and, with respect to any criminal action or proceeding, has no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, does not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and that, with respect to any criminal action or proceeding, he had reasonable cause to believe that his conduct was unlawful. Section 2. Indemnification Against Derivative Claims. The corporation shall further indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a Director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a Director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses, including amounts paid in settlement and attorneys' fees actually and reasonably incurred by him in connection with the defense or settlement of the action or suit if he acted in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation; provided that indemnification shall not be made for any claim, issue or matter as to which such a person has been adjudged by a court of competent jurisdiction, after exhaustion of all appeals therefrom, to be liable to the corporation or for amounts paid in settlement to the corporation, unless and only to the extent that the court in which the action or suit was brought or other court of competent jurisdiction determines upon application that in view of all the circumstances of the case, the person is fairly and reasonably entitled to indemnity for such expenses as the court deems proper. Section 3. Rights to Indemnification. To the extent that a Director, officer, employee or agent of the corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsections 1 and 2, or in defense of any claim, issue or matter therein, he shall be indemnified by the corporation against expenses, including attorneys' fees, actually and reasonably incurred by him in connection with the defense. Section 4. Authorization of Indemnification. Any indemnification under subsections 1 and 2, unless ordered by a court or advanced pursuant to subsection 5, shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the Director, officer, employee or agent is proper in the circumstances. The determination shall be made: (a) by the shareholders, (b) by the Board of Directors by majority vote of a quorum consisting of Directors who were not parties to the act, suit or proceeding, (c) if a majority vote of a quorum consisting of Directors who were not parties to the act, suit or proceeding so orders, by independent legal counsel in a written opinion, or (d) if a quorum consisting of Directors who were not parties to the act, suit or proceeding cannot be obtained, by independent legal counsel in a written opinion. Section 5. Advancement of Expenses. The expenses of officers and Directors incurred in defending a civil or criminal action, suit or proceeding, by reason of the fact that he was a Director or officer of the corporation, shall be paid by the corporation as they are incurred and in advance of the final disposition of the action, suit or proceeding, upon receipt of an undertaking by or on behalf of the Director or officer to repay the amount if it is ultimately determined by a court of competent jurisdiction that he is not entitled to be indemnified by the corporation. The provisions of this subsection 5 do not affect any rights to advancement of expenses to which corporate personnel other than Directors and officers may be entitled under any contract or otherwise by law. Section 6. Indemnification by Court Order. The indemnification and advancement of expenses authorized in or ordered by a court pursuant to this section (a) does not exclude any other rights to which a person seeking indemnification or advancement of expenses may be entitled under these Articles of Incorporation or the Bylaws of the corporation, or any other agreement, vote of shareholders or disinterested Directors or otherwise, for either an action in his official capacity or an action in another capacity while holding his office, except that indemnification, unless ordered by a court pursuant to subsection 2 hereof or for the advancement of the expenses made pursuant to subsection 5 hereof, may not be made to or on behalf of any Director or officer if a final adjudication establishes that his acts or omissions involved intentional misconduct, fraud or a knowing violation of the law and was material to the cause of action and (b) continues for a person who has ceased to be a Director, officer, employee or agent and inures to the benefit of the heirs, executors and administrators of such a person. Section 7. Insurance. The Board of Directors may, in its discretion, direct that the corporation purchase and maintain insurance on behalf of any person who is or was a Director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a Director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against liability under the provisions of this Section. Section 8. Settlement by Corporation. The right of any person to be indemnified shall be subject always to the right of the corporation by the Board of Directors, in lieu of such indemnification, to settle any such claim, action, suit or proceeding at the expense of the corporation by the payment of the amount of such settlement and the costs and expenses incurred in connection therewith. ARTICLE X WAIVER OF NOTICE Whenever any notice is required to be given to any shareholder or Director of the corporation under the provision of these Bylaws or under the provisions of the Articles of Incorporation or under the provisions of the laws of the State of Nevada, a waiver thereof in writing signed by the person(s) entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. Attendance at any meeting shall constitute a waiver of notice of such meetings, except where attendance is for the express purpose of objecting to the legality of that meeting. ARTICLE XI AMENDMENTS These Bylaws may be altered, amended, repealed, or new bylaws adopted by a majority vote of the entire Board of Directors at any regular or special meeting. Any bylaw adopted by the Board of Directors may be repealed or changed by a majority vote of the shareholders. ARTICLE XII FISCAL YEAR The fiscal year end of the corporation shall be fixed and may be varied by resolution of the Board of Directors. ARTICLE XIII DIVIDENDS The Board of Directors may at any regular or special meeting, as it deems advisable, declare dividends payable out of the surplus of the corporation. ARTICLE XIV CORPORATE SEAL The corporation shall have an official seal which shall bear the name of the corporation and the state and year of incorporation. These Restated Bylaws were adopted for the corporation by the Board of Directors on the 7th day of November, 1997. EX-10.13 3 GOOD TIMES RESTAURANTS INC. AMENDMENT AND AGREEMENT REGARDING SERIES A CONVERTIBLE PREFERRED STOCK This Amendment and Agreement Regarding Series A Convertible Preferred Stock ("Amendment") is dated this 3rd day of November, 1997, effective as of October 31, 1997, by and between Good Times Restaurants Inc. (the "Company") and The Bailey Company ("Bailey"). RECITALS A. Bailey currently owns all of the outstanding shares of the Company's Series A Convertible Preferred Stock consisting of 1,000,000 shares (the "Preferred Shares"), which shares were purchased by Bailey pursuant to the terms and conditions of the Series A Convertible Preferred Stock Purchase Agreement dated May 31, 1996, as amended by the First Amendment to Series A Convertible Preferred Stock Purchase Agreement dated effective as of May 31, 1996 (the "Agreement"). All capitalized and undefined terms herein shall have the same meaning as in the Agreement. B. Pursuant to the Agreement, the Preferred Shares are convertible into common stock of the Company at various conversion prices depending upon the number of Preferred Shares being converted and the date of conversion. C. The Company desires to obtain financing of at least $2,000,000 on acceptable terms prior to April 30, 1998 ("Financing"), the proceeds of which shall be used by the Company for the development of additional restaurants and for advertising and other Company expenses. D. The Company and Bailey desire to modify and amend the conversion rights of the Preferred Shares in consideration of Bailey's agreement to consider in its sole and absolute discretion assisting the Company to obtain its Financing as set forth herein. AGREEMENT NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and Bailey agree as follows: 1. Bailey hereby agrees to review all information provided to it by the Company in connection with any Financing and it shall consider in its sole and absolute discretion assisting the Company with such Financing upon terms and conditions to be mutually agreeable between the Company and Bailey. Notwithstanding the foregoing, Bailey shall have no obligation to assist the Company with any Financing whatsoever. 2. In consideration of Bailey's agreement in paragraph 1 above, the conversion periods and the conversion prices with respect to the Preferred Shares as set forth in the Agreement are hereby amended as follows: Maximum Number of Conversion Period Preferred Shares Conversion Price October 1, 1997 - 1,000,000 $0.46875 April 30, 1998 May 1, 1998 - April 30, 1999 1,000,000* $0.56875 May 1, 1999 and thereafter 1,000,000* the greater of (i) the Dividend Conversion Rate at the time of such conversion, and (ii) $0.46875 * To the extent not previously converted. 3. If Bailey does not assist the Company in obtaining its Financing, and if Bailey converts some or all of the Preferred Shares on or before April 30, 1998 at the $0.46875 conversion price as set forth above, then any dividend shall not be paid or accrue (or to the extent already paid shall be refunded) from and after October 1, 1997 with respect to the first 500,000 Preferred Shares (or any portion thereof) converted and from and after January 1, 1998 with respect to the next 250,000 Preferred Shares (or any portion thereof) converted beyond the first 500,000. Except under the foregoing circumstances, dividends shall continue to accrue and be payable with respect to all unconverted Preferred Shares. 4. The Company and Bailey understand and agree that it is impossible to determine to what extent, if any, and under what circumstances Bailey may assist the Company in obtaining acceptable Financing. Depending upon the terms and risks involved in connection with any proposed assistance with a Financing by Bailey, Bailey may require additional consideration from the Company, including without limitation additional amendments to the conversion rights with respect to the Preferred Shares. The Company is not however obligated to accept any assistance from Bailey nor is it obligated to provide Bailey with any additional consideration in connection with any Bailey assisted Financing. 5. Except as expressly set forth in this Amendment, all other rights, powers, preferences, qualifications and restrictions with respect to the Preferred Shares shall remain in full force and effect. 6. This Amendment has been approved by the vote of the Board of Directors of the Company without participation of the two Company directors appointed by Bailey. 7. This Amendment may be executed in counterparts and delivered by facsimile transmission. IN WITNESS WHEREOF, the parties hereto have duly executed this Amendment effective as of October 31, 1997. GOOD TIMES RESTAURANT INC., a Nevada corporation By: /s/ Boyd E. Hoback, President Boyd E. Hoback, President THE BAILEY COMPANY, a Colorado limited partnership By: The Erie County Investment Co., Its General Partner By: /s/ David E. Bailey, President David E. Bailey, President EX-10.14 4 December 4, 1996 Kenneth Dubach 9786 North Foothills Highway Longmont, CO 80503 Kenneth Dubach hereby agrees to indemnify and hold harmless Good Times from and against any and all obligations, claims, demands, losses, liabilities, costs and expenses (including reasonable attorneys fees) suffered, sustained, incurred or required to be paid by Good Times arising out of or in any way relating to the promissory note of Boise Co-Development Limited Partnership ("BCDLP") dated November 3, 1995 in the original principal amount of $254,625 and the promissory note of BCDLP dated November 3, 1995 in the original principal amount of $104,055 or Good Times' guarantee of such notes. Agreed and acknowledged this 10th day of December, 1996. /s/ Kenneth Dubach Kenneth Dubach EX-10.15 5 UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF COLORADO In re: Case No. 96-23391 DEC ROUND THE CORNER RESTAURANTS, INC., a Colorado corporation, EIN: 84-0586003, Chapter 11 Debtor-In-Possession. SETTLEMENT AGREEMENT This Settlement Agreement ("Agreement"), is entered into this 29th day of August, 1997, between Round The Comer Restaurants, Inc. ("RTC"), and Good Times Restaurants, Inc. ("Good Times"), for and in consideration of the mutual covenants contained herein and for the payment by RTC to Good Times of the sum of three-hundred-thousand dollars ($300,000.00), and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged. RECITALS A. RTC operates a chain of specialty restaurants along the Front Range of Colorado,with most locations being in the greater Denver metropolitan area. B. On or about February October 25, 1996 RTC filed its voluntary petition under Chapter 11 of the United States Bankruptcy Code, Case No. 96-23391 DEC ("Case"). C. Good Times asserts it is both a secured and unsecured creditor in the Case. Good Times status as a creditor arises from its sale of RTC to Hot Concepts, LLC ("Hot Concepts") in October of 1995, and various promissory notes and security agreements executed in its favor by RTC at the time of that sale ("Sale"). Further, even after the Sale of RTC to Hot Concepts, Good Times continued to pay monthly rent at various RTC retail restaurant locations as it remains liable as a guarantor for the rents due thereon. D. Good Times may also possess a right to assert claims in the RTC Case as a result of its status as both an unsecured and secured creditor, for any claims w@ich may have arisen as a result of its payments of post-petition monthly rents on RTC retail locations, and for damages arising from RTC's rejection of various leases during the Case. E. The undersigned, (hereinafter collectively referred to as the "Parties") have reached an agreement to settle all differences which exist between them related to the Good Times status as a creditor in the Case. AGREEMENT 1. In conjunction with the execution of this Agreement, RTC agrees to pay Good Times the sum of three-hundred-thousand dollars ($300,000.00), ("Funds") solely from the proceeds of a separate settlement agreement reached with the Einstein/Noah Bagel Corporation ("Einsteins") as follows: one payment of $80,000.00, due upon the entry of a final court order approving both this Agreement, and the agreement to be entered into with Einsteins and the closing on the sale of RTC's Table Mesa location to Einsteins; $110,000.00 due within two (2) business days of RTC's receipt of the second installment payment from Einsteins in the amount of $110,000.00, pursuant to that agreement, and $110,000.00 due within two (2) business days of RTC's receipt of the third $110,000.00 installment payment due from Einsteins. The Second $110,000 is due from Einstein by no later than December 1, 1997, and the third installment payment is due from Einsteins by no later than March 1, 1998. 2. RTC has further agreed to assume and assign to Good Times its retail restaurant locations, including all rights, title to and interest in the restaurant equipment used therein and Good Times shall have the right to operate without charge under the "RTC" name and a separate motion has been filed and noticed to creditors setting forth the terms and conditions for said assumption and assignment, said restaurants being at the following locations: a. Colorado Boulevard Restaurant Lease: 1550 S. Colorado Blvd. Denver, CO 80210 b. Crossroads Mall Lease: 1600 - 28th Street Boulder, CO 80501 The Motion regarding these restaurant locations was filed on August 4, 1997 with an objection date of August 28, 1997. 3. Upon a final Court Order approving this Agreement RTC shall transfer, sell and assign to Good Times all of its rights, title to and interest in the following personal property: a. All rights, title to and interest in the restaurant equipment used at its Aurora Mall and Westland locations, which restaurant locations are no longer in operation; b. All rights, title to and interest in the restaurant equipment used at its Table Mesa location, upon the closing of the sale of said location to Einsteins; and c. All rights, title to and interest in one 7000 Panasonic point-of-sale system. 4. In exchange for the above, upon a final Court Order approving this Agreement, and upon completion of RTC's performance hereunder, including but not limited to Good Times' receipt of the $300,000 described in paragraph 1 above, Good Times shall: a. Waive any and all claims of any kind whatsoever it may possess against RTC as a result of the Case or the Sale; b. Execute any and all documents necessary to release any security interests it may possess in any real property or personal property owned by RTC; C. Cancel all indebtedness which may be owed to it by RTC and mark as paid any and all promissory notes which have been executed by RTC and return same to RTC; d. Withdraw any proof of claim filed in the Case; e. Waive any claim it may possess to further payment to it by RTC under any Plan Of Reorganization which may be filed by RTC and submitted for Court approval in the Case; f. Vote in support of the support any Plan Of Reorganization which may be filed by RTC and submitted for Court approval in the Case which incorporates the terms of this Agreement; g. Deem any indebtedness it claims to be owed by RTC discharged in the RTC Case. h. Release Hot Concepts from any and all claims it may possess against Hot Concepts; i. Agree to indemnify RTC for any and all claims which might be asserted against RTC and its' principals at any time now or in the future as a result of Good Times' agreement to operate the RTC restaurant locations and restaurant equipment referenced in Paragraph two (2) above, and to maintain at all times liability insurance in an amount of not less than $1,000,000 per occurrence, in support of the indemnification agreement as set forth herein. j. Assume responsibility for payment of any and all costs, expenses and any and all other liabilities, known or unknown, associated with the Good Times' agreement to operate the RTC restaurant locations referenced in Paragraph two (2) above. 5. Except for the obligations and rights set forth in this Agreement, Good Times and RTC shall, for themselves, their successors, their assigns, and for anyone claiming by or through them, shall, upon Court approval of this Settlement Agreement and full performance hereunder, be deemed to have hereby released and forever discharged each other, their officers, directors, partners, employees, agents, representatives, successors, assigns and the like, and their administrators an assigns, from any claims they may possess. 6. As further consideration for this Agreement, the Parties hereto warrant that no promise or agreement that is not expressed in this Agreement has been made to any party hereby released; in executing this release, the Parties are not relying upon any statement or representation made by the parties, agents or attorneys concerning any matter or thing, but are relying solely upon their own judgment and knowledge that the within referenced consideration is received by each party in full settlement and satisfaction of all the aforesaid claims and demands; that in determining said consideration there has been taken into consideration not only any ascertained or estimated damages and expenses involved with the Case, but also the possibility that any damages allegedly sustained may be indefinite, or the consequences not now anticipated may result from events which have occurred. 7. As further consideration for this Agreement, the Parties acknowledge that this Agreement is not to be construed as an admission of any allegation of law or fact on the part of either Party, but rather is a settlement of a disputed claim made to forgo the expense and uncertainty of litigation which might have arisen during the Case and in the absence of this Agreement. 8. The Parties represent that they have full authority to execute this Agreement and that this Agreement constitutes the entire agreement between the parties and supersedes any aid all prior agreements whether oral or written as to the subject matters hereof. 9. Promptly after the execution of this Agreement, RTC shall submit the Agreement for Court approval, which must be obtained on or before October 15, 1997. Accordingly, all obligations and rights of the Parties to this Agreement are contingent upon the approval of this Agreement by the United States Bankruptcy Court in Case No. 96-23391 DEC on or before October 15, 1997. 10. All questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be governed by the laws of the State of Colorado. Jurisdiction over any dispute which may arise with respect to this Agreement shall be proper only in the United States Bankruptcy Court for the District of Colorado. 11. This Agreement may be executed in any number of counterparts which when read together shall constitute one complete and binding original Agreement. It shall be acceptable for the Parties to provide signatures via telecopier. DATED this 29th day of August, 1997. ROUND THE CORNER RESTAURANTS, INC. By: /S/ Don Beck Don Beck, President GOOD TIMES RESTAURANTS, INC. By: /s/ Boyd Hoback Boyd E. Hoback, President APPROVED AS TO FORM: BASS & MILLER, LLP By: /s/ William M. Bass William M. Bass, #13650 David M. Miller, #17915 455 Sherman Street, Suite 450 Denver, Colorado 80203 Telephone: (303) 722-6936 ATTORNEYS FOR ROUND THE CORNER RESTAURANTS, INC. COHEN, BRAME & SMITH, P.C, By: /s/ Roger C. Cohen Roger C. Cohen #3515 1700 Lincoln Street, Suite 1800 Denver, Colorado 80203 Telephone: (303) 837-8800 ATTORNEYS FOR GOOD TIMES RESTAURANTS, INC. EX-21.1 6 Exhibit 21.1 December 22, 1997 Good Times Drive Thru Inc., a Colorado Corporation, is the only current subsidiary of Registrant. EX-23.1 7 INDEPENDENT AUDITOR'S REPORT To the Stockholders and Board of Directors Good Times Restaurants Inc. We have audited the accompanying consolidated balance sheet of Good Times Restaurants Inc. and subsidiaries as of September 30, 1995, and the related consolidated statements of operations, stockholders' equity and cash flows for the years ended September 30, 1995 and 1994. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Good Times Restaurants Inc. and subsidiaries as of September 30, 1995, and the results of their operations and their cash flows for the years ended September 30, 1995 and 1994, in conformity with generally accepted accounting principles. Hein + Associates LLP Denver, Colorado December 1, 1995 EX-27 8
5 YEAR SEP-30-1997 SEP-30-1997 408000 0 81000 0 51000 892000 8289000 (2459000) 7192000 1426000 0 0 10000 6000 2877000 7192000 11652000 11865000 4286000 10625000 2252000 0 (89000) (1101000) 0 (1101000) 0 0 0 (1166000) (.18) (.18)
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