TKG Questionnaire - FDD

The Kosnar Group 2306 Wales Drive Cardiff by the Sea, CA 92007 Phone: (760) 632-8402 Mobile: 619-994-2258 Fax: (760) 632-0772 MEMORANDUM To: From: In Re: Carl J. Kosnar Background on Franchise Disclosure Requirements/Questionnaire to Assist in Drafting the Franchise Disclosure Document (FDD) Date: _________________________________________________________________________ The FTC Franchise Rule requires you to disclose in a basic disclosure document certain background information about the franchising company, you and the other principals, financial condition, existing franchisees and most provisions of the franchise agreement. The basic disclosure document, including a franchise agreement and all other agreements that the franchisee will be required to sign, must be given to a prospective franchisee at least 14 days before signing a binding agreement or paying any fee. The franchisee must also receive completed copies of all contracts at least five days before signing them. This basic franchise disclosure document can be in one of two formats: (i) the FTC Disclosure Document; or (ii) the state Franchise Disclosure Document ("FDD") format. The FDD format is more comprehensive. An overwhelming majority of experienced franchise lawyers will usually recommend the FDD format. The reason for this is that the FDD format generally will be accepted with limited changes in the states requiring franchise registration, whereas the FTC format usually will not be accepted, or will often require substantial modification for acceptance. While you can use the FTC format in 39 states including Florida, Puerto Rico and the U.S. Virgin Islands, if you intend to develop a national franchise program and intend to sell franchises in California, Hawaii, Maryland, Minnesota, New York, North Dakota, Rhode Island, South Dakota, Virginia, Washington and Wisconsin, the FTC format will usually not be accepted in these states without substantial modification. There may be limited circumstances when you want to use the FTC format, but then you may be precluded from selling franchises in, and perhaps to, residents of these states without incurring substantial time and expense to revise the FTC format. We assume, and this Questionnaire is based on the assumption, that you desire a franchise disclosure document in an FDD format. Please let us know if this is not the case or if you would like to discuss this issue 1 further before completing this Questionnaire. The franchise laws provide that no person may offer or sell a franchise by means of any written or oral communication that includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements, in light of the circumstances under which they were made, not misleading. A violation of these laws may result in administrative, civil and/or criminal sanctions, for the corporation and its principals. Responding completely to the information required to be disclosed in a FDD is considered the “minimum” level of disclosure. The greater the disclosure, the lower the exposure to claims of fraud and misrepresentation. Err on over disclosure rather than basic disclosure. This Questionnaire FDD uses on information you are required to disclose in your FDD. Please try to answer the questions as fully as possible. If you are unable to answer any questions completely, respond as best you can. We have tried to eliminate redundant questions already asked and answered in completing the Franchise Agreement Questionnaire. In supplying information, always go by the rule that it is better to "over-disclose" than to "under-disclose." Also include all material facts necessary to make the disclosed information not misleading. Put yourself in the shoes of a prospective franchisee trying to make an informed investment decision. Disclose all material information, even if beyond the literal interpretation of the disclosure requirements, if you would think that, but for that information, you might or might not make the investment decision. If any question is inapplicable to your franchise program, respond with "N/A." We have tried to explain the reasons for many of the questions and have given you a choice of several possible answers based on our franchising experience, where appropriate. These proposed answers are only possibilities, not required responses. If you have a different answer, let us know. When responding to questions about your franchise program, be reasonable and base your responses on any experience you may have had to make your own business successful. We will review your responses to the questions and schedule a time to discuss them with you. This Questionnaire will be used to prepare an FDD for a prospective franchisee purchasing one single-unit franchise. More complex franchise arrangements such as area development (multiple-unit) agreement, subfranchising (master franchising) and area representative (development agents) require additional documents and disclosures. Most start-up franchisors concentrate on single-unit sales initially. Responses consistent with the AAFD Fair Franchising Standards are highlighted in bold. ALL RESPONSES SHOULD BE TYPEWRITTEN OR NEATLY PRINTED 2 - Attach separate sheets as necessary – ITEM 1 - THE FRANCHISOR, ITS PREDECESSORS AND AFFILIATES. - The Franchisor and Any Parents, Predecessors, and Affiliates 1. Does the franchisor maintain a principal business address outside of the United States?  Yes  No If yes, identify: ___________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ 2. Most franchise registration states require the franchisor to appoint a designated government official within that state as the franchisor's agent for service of process within that state. However, in non-registration states, the franchisor will be required to designate an agent for service of process. This agent is generally the individual identified on the franchisor's corporate formation documents. Identify the franchisor's agent for service of process in non-registration states: ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ 3 3. Describe all aspects of each segment of the franchisor's business: ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ 4. Describe the business to be operated by a franchisee: ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ 5. Does the franchisor operate businesses of the type being franchised?  Yes  No If yes, state how many and the states where they are located: State ______________________________ ______________________________ ______________________________ ______________________________ ______________________________ ______________________________ Number ____________ ____________ ____________ ____________ ____________ ____________ 4 6. Describe the market for the goods or services offered by the franchisor (for example, general public, limited market segment, target age group, target professions, etc.): ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ 7. Are there any laws or regulations that are applicable specifically to the industry in which the franchisees will be operating?  Yes  No If yes, explain: ___________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ 8. Describe the businesses the franchisees have to compete with (for example, independent retail outlets, national or regional department stores, etc.): ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ 9. Describe the franchisor's prior business experience, including: a. The length of time the franchisor has conducted a business of the type to be operated by the franchisees: __________________________________________________________________ 5 b. When did the franchisor begin selling franchises? _____________________________, 20___ c. Has the franchisor offered franchises in other lines of business?  Yes  No If yes, describe each other line: _______________________________________ __________________________________________________________________ __________________________________________________________________ d. Identify the number of franchises sold in each other line of business: __________________________________________________________________ e. Identify the length of time the franchisor has offered each other franchise: __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ Predecessors Under the FDD Guidelines, the franchisor must also disclose required information about each of its predecessors. For purposes of the FDD, a predecessor is defined as "a person from whom the franchisor acquired directly or indirectly the major portion of the franchisor's assets." You need only provide information on any entity that qualifies as a predecessor within the last 10-year period. 6 10. Does the franchisor have any predecessors?  Yes  No If yes, identify: ___________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ 11. Identify each predecessor's principal address: ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ 12. Describe each predecessor's business experience, including: a. The length of time each predecessor has conducted a business of the type to be operated by the franchisees: __________________________________________________________________ b. When did each predecessor begin selling franchises? _____________________________, 20___ _____________________________, 20___ c. Has any predecessor offered franchises in other lines of business?  Yes  No 7 If yes, describe each other line: _______________________________________ __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ d. Identify the number of franchises each predecessor sold in each other line of business: __________________________________________________________________ e. Identify the length of time each predecessor has offered each other franchise: __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ 8 Affiliates Also required under the FDD Guidelines is the same information regarding each affiliate of the franchisor. For purposes of the FDD, an affiliate is defined as "a person (other than a natural person) controlled by, controlling or under common control with the franchisor, which is offering franchises in any line of business or is providing products or services to the franchisees of the franchisor." 13. Does the franchisor have any affiliates?  Yes  No If yes, identify: ___________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ 14. Identify each affiliate's principal address: ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ 15. Describe each affiliate's business experience, including: (If more than one affiliate, please indicate the respective affiliate when answering the following questions.) a. The length of time each affiliate has conducted a business of the type to be operated by the franchisees: __________________________________________________________________ 9 b. When did each affiliate begin selling franchises? _____________________________, 20___ _____________________________, 20___ c. Has any affiliate offered franchises in other lines of business?  Yes If yes, describe each other line: __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ __________________________________________________________________  No d. Identify the number of franchises each affiliate sold in each other line of business: __________________________________________________________________ e. Identify the length of time each affiliate has offered each other franchise: __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ ITEM 2 - BUSINESS EXPERIENCE. List by name and position held (title) the directors, trustees and/or general partners, as the case may be, the principal officers (including the chief executive officer and chief operating officer, president, financial, franchise marketing, training and operations officers) and other executives and subfranchisors who will have management responsibility in the operation of the franchisor and all franchise brokers. If the franchise broker is a company, the principals will need to be disclosed in the same manner as the franchisor's principals. 10 16. For each disclosable person, provide the following information: a. Name: ____________________________________________________________ Position Held: _____________________________________________________ Occupations during the previous 5 years: Name of Employer Location of Employment Dates of Employment _______________________ ___________________________/20__to____/20___ _______________________ ____________________ __/20__ to____/20___ _______________________ _______________________ __/20__ to____/20___ _______________________ _______________________ __/20__ to____/20___ b. Name: ____________________________________________________________ Position Held: _____________________________________________________ Occupations during the previous 5 years: Name of Employer Location of Employment Dates of Employment _______________________ _______________________ ____/20__ to____/20___ _______________________ _______________________ ____/20__ to____/20___ _______________________ _______________________ ____/20__ to____/20___ _______________________ _______________________ ____/20__ to____/20___ c. Name: ____________________________________________________________ Position Held: _____________________________________________________ Occupations during the previous 5 years: 11 Name of Employer Location of Employment Dates of Employment _______________________ _______________________ ____/20__ to____/20___ _______________________ _______________________ ____/20__ to____/20___ _______________________ _______________________ ____/20__ to____/20___ _______________________ _______________________ ____/20__ to____/20___ d. Name: ____________________________________________________________ Position Held: _____________________________________________________ Occupations during the previous 5 years: Name of Employer Location of Employment Dates of Employment _______________________ _______________________ ____/20__ to____/20___ _______________________ _______________________ ____/20__ to____/20___ _______________________ _______________________ ____/20__ to____/20___ _______________________ _______________________ ____/20__ to____/20___ e. Name: ____________________________________________________________ Position Held: _____________________________________________________ Occupations during the previous 5 years: Name of Employer Location of Employment Dates of Employment 12 _______________________ _______________________ ____/20__ to____/20___ _______________________ _______________________ ____/20__ to____/20___ _______________________ _______________________ ____/20__ to____/20___ _______________________ _______________________ ____/20__ to____/20___ [Add additional people/companies on a separate sheet] 17. Referral Program. Some franchisors will pay a referral fee, in cash or merchandise credits, to an existing franchisee who refers a prospective franchisee to the franchisor who actually buys a new franchise. They are technically not franchise brokers, but any referral program should be disclosed. Will the franchisor have a referral fee program?  Yes  No If yes, what will the referral fee be? __________________________________________ ITEM 3 - LITIGATION. The franchising company and every predecessor, affiliate, affiliated person and franchise broker listed in the sections addressing ITEMS 1 and 2 above must disclose certain litigation in which he, she or it has been a party during the last 10 years consisting of: 18. Pending Actions. a. Are there any administrative, criminal or material civil actions (including arbitration proceedings) pending against any person identified in this Questionnaire that involved an allegation of a violation of a franchise, antitrust or securities law, fraud, unfair or deceptive practices or comparable allegations?  Yes If yes, provide the following: Name of action (including citation):_____________________________________ Court or other forum:________________________________________________  No 13 Date of filing:_______________________________________________________ Name of all parties:__________________________________________________ Relationship of parties to the franchisor:________________________________ The legal nature of each claim:________________________________________ Factual nature of each claim:__________________________________________ Relief sought:_______________________________________________________ Conclusions of law:__________________________________________________ Conclusions of fact:__________________________________________________ Current status:______________________________________________________ b. Are there any other actions pending (including arbitration proceedings), not involving the specified allegations, that are significant in the context of the number of franchisees and in the size, nature or financial condition of the franchise system or its business operations?  Yes If yes, provide the following: Name of action (including citation):_____________________________________ Court or other forum:________________________________________________ Date of filing:_______________________________________________________ Name of all parties:__________________________________________________ Relationship of parties to the franchisor:________________________________ The legal nature of each claim:________________________________________ Factual nature of each claim:__________________________________________ Relief sought:_______________________________________________________ Conclusions of law:__________________________________________________ Conclusions of fact:__________________________________________________  No 14 Current status:______________________________________________________ 20. Concluded Actions. Are there any actions (including arbitration proceedings) concluded within the previous 10-year period in which any person identified in this Questionnaire was convicted of a felony or pleaded nolo contendere to a felony charge, or was held liable in a civil action by final judgment or was the subject of a material action involving a violation of a franchise, antitrust or securities law, fraud, unfair or deceptive practices, or comparable allegation?  Yes If yes, provide the following: Name of action (including citations):__________________________________________ Court or other forum:______________________________________________________ Date of filing:_____________________________________________________________ Names of parties:__________________________________________________________ Relationship of parties:_____________________________________________________ Legal nature of each claim:__________________________________________________ Factual nature of each claim:________________________________________________ Relief obtained:___________________________________________________________ Conclusions of law:________________________________________________________ Conclusions of fact:________________________________________________________ Date of conviction or judgment:______________________________________________ Penalty or damages assessed:________________________________________________ Terms of settlement:_______________________________________________________ 20. Injunctions and Restrictive Orders. Is any person previously identified in this Questionnaire subject to a currently effective injunctive or restrictive order or decree relating to the franchise being offered or under a federal, state or Canadian franchise, securities, antitrust, trade regulation or trade practice law resulting from a concluded or pending action or proceeding brought by a public agency?  No 15  Yes If yes, provide the following:  No Name of action (including citations):__________________________________________ Court or other forum:______________________________________________________ Date of filing:_____________________________________________________________ Names of parties:__________________________________________________________ Legal nature of each claim:__________________________________________________ Factual nature of each claim:________________________________________________ Relief sought or obtained:___________________________________________________ Conclusions of law:________________________________________________________ Conclusions of fact:________________________________________________________ Date of order or decree:____________________________________________________ Nature of order or decree:__________________________________________________ Terms of order or decree:___________________________________________________ Conditions of order or decree:_______________________________________________ 16 ITEM 4 - BANKRUPTCY. The franchisor, and any affiliate, predecessor, officer or general partner of the franchisor must disclose any bankruptcy proceedings during the past 10 years, including if that person was a principal officer of any company or a general partner in any partnership that was adjudged bankrupt or reorganized due to insolvency during or within one year after the period that the officer or general partner of the franchisor held a position in the other company or partnership. 21. Is there any involvement in any bankruptcy proceedings?  Yes If yes, provide the following: a. Name of person(s) that was the debtor: _________________________________ ________________________________________________________________ b. Debtor's address: _____________________________________________________ __________________________________________________________________  No _____________________________________________________________________ c. Debtor's principal business: ____________________________________________ __________________________________________________________________ _____________________________________________________________________ d. Debtor's relationship to the franchisor: _________________________________ ____________________________________________________________________ e. f. g. Date of the original bankruptcy filing: __________________________________ Court where the bankruptcy was filed: __________________________________ Case name: ________________________________________________________ __________________________________________________________________ 17 h. Docket number: ____________________________________________________ i. Date of confirmation of a plan of reorganization (Chapter 11 or 13) or the date of discharge (Chapter 7): __________________________________________________________________ j. All other material facts or circumstances: _______________________________ __________________________________________________________________ __________________________________________________________________ To protect you and us, all persons listed in this Questionnaire will be required to sign sworn affidavits relating to their employment, litigation and bankruptcy history. ITEM 5 - INITIAL FEES. 22. The Franchise Agreement Questionnaire that you have already completed has provided us with the information on the franchisor's initial franchise fee. We also need to know whether the franchise fee is identical for all franchisees. For example, if the franchisor will negotiate a lower franchise fee for certain franchisees, this fact must be disclosed. In addition, if the franchisor offers a discount for additional units purchased by the same franchisee, this must also be disclosed. Is the initial franchise fee identical or uniform for all franchisees?  Yes If no, provide the following: a. Identify the range of the amounts of the initial franchise fees or the method or formula by which the initial franchise fee is determined: __________________________________________________________________ b. Identify the factors affecting the amount of the initial franchise fee: __________________________________________________________________  No 18 ITEM 6 - OTHER FEES. 23. The bulk of information that will be included in ITEM 6 of the FDD has been described in the Franchise Agreement Questionnaire that you have already completed. In addition to this information, the franchisor must also disclose information about the voting arrangements for cooperatives that collect fees from franchisees. Are there any cooperatives that collect fees from franchisees?  Yes If yes, provide the following: a. The voting power of company units in the cooperative: __________________________________________________________________ b. If company units have controlling power, state the range for the fee that may be imposed by the cooperative: __________________________________________________________________ ITEM 7 – FRANCHISEE ESTIMATED INITIAL INVESTMENT. 24. Describe in detail the type of expenditure (by category), the exact or estimated cost (highlow range), method of payment (for example, lump sum, installments, etc.), due date (for example, on signing franchise agreement, upon obtaining site, before opening, etc.), to whom payment is made (for example, franchisor, landlord, contractors, government authorities, suppliers, third parties, etc.) and whether refundable and under what conditions. Footnotes may provide explanatory details, if necessary to understand the disclosures (for example, inventory and lease costs are based on a 3,000 sq. ft. building). Categories listed below are possibilities and are not necessarily applicable to all franchise systems. Add any relevant categories that are not included but are applicable to your operation. Amount Method Payment of When Due To Whom Payment is to be Made  No Type of Expense Land and Building Business Car/Truck Materials And Supplies Opening Inventory Insurance 19 Printing and Signage Office Equipment P.O.S. System Initial Lease Payments and Deposits Leasehold Improvements Utilities Deposits Licenses and Permits Initial Promotional Advertising Expenses Professional Fees Travel, Lodging, Meals, Etc. for Initial Training Additional Funds Finance Costs Miscellaneous Start-Up Costs Working Capital to Break-Even ( months) Other Other Other Other 20 Attach additional pages for any explanatory details. Historical numbers from existing operations should be reviewed. You may want to have your accountant help you on this. 25. Describe the types of premises that are required for operation of the franchise: ________________________________________________________________________ 26. Additional funds are described as those required by the franchisee before operations begin and during the initial phase of franchise operations. A reasonable time for the initial phase of the business is at least 3 months or a reasonable period for the franchisor's particular industry. What time period has been used for the franchisor's initial phase in calculating the "Additional Funds" section of the previous chart? ________________________________________________________________________ 27. Describe the factors, basis and experience used by the franchisor to determine the amount of time necessary for the initial phase: ________________________________________________________________________ ________________________________________________________________________ 28. May any part of the franchisee's initial investment be financed by the franchisor or an affiliate?  Yes If yes, provide the following: a. b. c. d. e. Type of expenditures that may be financed: ________________________ Down payment required: _______________________________________ Estimated effective annual interest rate: ___________________________ Rate factors: _________________________________________________ Estimated loan repayments, including interest: _____________________  No 21 ITEM 8 - RESTRICTIONS ON SOURCES OF PRODUCTS AND SERVICES. 29. Is the franchisee required to purchase or lease any goods, real estate or services from the franchisor or the franchisor's designees (meaning any affiliates of the franchisor, or a single unaffiliated source) relating to the establishment or operation of the franchise?  Yes If yes, provide the following: a. The items required to be purchased or leased from the franchisor or its designees: __________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ b. From whom each item must be purchased: __________________________________________________________________ __________________________________________________________________ c. The relationship between the supplier and the franchisor:  No _____________________________________________________________________ _____________________________________________________________________ 30. Describe how the franchisor formulates and modifies specifications and standards: ________________________________________________________________________ _________________________________________________________________________ 31. Describe how the franchisor issues specifications: _________________________________________________________________________ _________________________________________________________________________ 32. Are the specifications and standards issued to franchisees, subfranchisors or approved suppliers? 22  Yes 33.  No Describe how suppliers are evaluated, approved or disapproved: ________________________________________________________________________ ________________________________________________________________________ 34. Describe how the franchisor issues approval for suppliers: ________________________________________________________________________ ________________________________________________________________________ 35. Are the franchisor's criteria for supplier approval available to franchisees?  Yes  No 36. Describe the procedure to be followed by a franchisee when attempting to secure approval of a new supplier: ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ 37. Is the franchisee required to pay any fee in order to secure approval of a new supplier?  Yes  No If yes, state how the amount of the fee is determined: ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ 23 38. State the manner in which approval previously given by the franchisor is revoked: ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ 39. Does the franchisor or an affiliate derive income as a result of any required purchases (either from the franchisee, an affiliate or a third party supplier)?  Yes If yes, provide the following: a. The basis in which revenues will be derived: __________________________________________________________________ __________________________________________________________________ b. The franchisor's total revenues: __________________________________________________________________ __________________________________________________________________ c. The franchisor's total revenues from all required purchases and leases: __________________________________________________________________ __________________________________________________________________ d. Percentage of the franchisor's total revenues represented by the required purchases: __________________________________________________________________ __________________________________________________________________ e. The source of the franchisor's data on revenues: __________________________________________________________________ __________________________________________________________________  No 24 f. The affiliate's total revenues from required purchases and leases: __________________________________________________________________ g. The percentage of the affiliate's total revenues represented by the required purchases: __________________________________________________________________ h. The source of the affiliate's data: __________________________________________________________________ __________________________________________________________________ i. The basis of any supplier's payment to the franchisor or affiliate: __________________________________________________________________ __________________________________________________________________ j. The percentage or flat amount of any supplier's payments to the franchisor or affiliate: __________________________________________________________________ 40. State to the extent known or estimable by the franchisor the magnitude of these required purchases and leases in relation to all purchases and leases by the franchisee of goods, real estate and services that the franchisee will make or enter into in the establishment and operation of the franchised business: a. b. Approximately _____% to _____% of the cost to establish a franchise. Approximately _____% to _____% of the total annual operating revenues after establishment of the franchise. 41. Are there any purchasing or distributing cooperatives?  Yes  No If yes, does the franchisor negotiate the terms of the purchases?  Yes  No 42. Does the franchisor provide any material benefits (renewal or granting of additional 25 franchises) based on a franchisee's use of approved suppliers?  Yes  No If yes, describe the benefits: _______________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ITEM 9 - FRANCHISEE'S OBLIGATIONS. 43. The bulk of a franchisee's obligations are contained in the franchise agreement and other contracts to be signed by a franchisee. In certain cases, however, a franchisor will impose obligations upon a franchisee that are not contained in the franchise agreement. Does the franchisor impose any obligations on the franchisee that are not identified in the franchise agreement or related contracts?  Yes  No If yes, describe each obligation: _____________________________________________ ________________________________________________________________________ ________________________________________________________________________ ITEM 10 - FINANCING. 44. Does the franchisor or any affiliate, directly or indirectly, offer financing to a franchisee? Indirect includes referring a prospective franchisee over to a third party lender. Financing does not include payments due within 90 days on open account financing.  Yes If yes, describe the following:  No a. Costs for which financing is available: 26 __________________________________________________________________ __________________________________________________________________ b. Terms of any financing: __________________________________________________________________ __________________________________________________________________ c. Identification of the lender: __________________________________________________________________ __________________________________________________________________ d. Relationship of the lender to the franchisor or affiliate: __________________________________________________________________ __________________________________________________________________ e. The amount of financing available (flat amount or percentage of purchase): __________________________________________________________________ __________________________________________________________________ f. Annual interest rate charged (include a recent rate if the rate is variable): __________________________________________________________________ __________________________________________________________________ g. The number of payments or period of repayment: __________________________________________________________________ __________________________________________________________________ h. The nature of any security interests granted: __________________________________________________________________ __________________________________________________________________ 27 i. Must financing be personally guaranteed?  Yes  No j. Can the debt be prepaid?  Yes If yes, is there a prepayment penalty?  Yes  No  No k. Potential liabilities on default (for example, acceleration clause, court costs and attorneys' fees for collection, termination of franchise, or other potential liabilities): __________________________________________________________________ __________________________________________________________________ l. Any other material financing terms: __________________________________________________________________ __________________________________________________________________ m. Terms of any waiver of rights (for example, confession of judgment): __________________________________________________________________ __________________________________________________________________ n. Are there any provisions that require the franchisee to waive asserting any defenses?  Yes If yes, describe: __________________________________________________________________  No 45. Does the franchisor have any past or present practice or intent to sell, assign or discount any note or other instrument executed by the franchisee?  Yes  No 28 If yes, provide the following: a. Terms of assignment by the franchisor: __________________________________________________________________ __________________________________________________________________ b. Will the franchisor remain primarily liable to furnish the goods or services?  Yes 46.  No Does the franchisor receive payments from any person for placement of financing?  Yes If yes, describe the following: a. Type of payment: __________________________________________________________________ __________________________________________________________________ b. Identify of the person making the payment: __________________________________________________________________ c. Relationship of the person making the payments to the franchisor: __________________________________________________________________ d. The amount or method by which payments are determined: __________________________________________________________________ __________________________________________________________________  No 29 ITEM 11 - FRANCHISOR'S ASSISTANCE, ADVERTISING, COMPUTER SYSTEMS, AND TRAINING. The Franchise Agreement Questionnaire that you have already completed has provided us with most of the information we need about the franchisor's obligations under the franchise agreement. The following questions request information in addition to those already given. 47. The franchise agreement describes the marketing fund administered by the franchisor. For this marketing fund, provide the following information: a. The media in which the advertising may be placed: __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ b. Type of coverage of the media (local, regional or national): __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ c. Who prepares the advertising (in-house, national or regional advertising agency)? __________________________________________________________________ Under what conditions will the franchisor permit the franchisees to use their own advertising materials? __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ e. If all advertising fees are not spent in the year they accrue, how does the franchisor use the remaining amount? __________________________________________________________________ __________________________________________________________________ d. 30 f. Will franchisees receive a periodic accounting of how advertising fees are spent?  Yes  No If yes, how does a franchisee obtain an accounting of how advertising fees are spent? __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ g. What percentage of advertising funds is used for the solicitation of new franchisees: __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ 48. Is there any franchisee advertising council?  Yes If yes, provide the following information: a. How are members of the council selected? __________________________________________________________________ b. Is the council advisory only or does it have operational or decision making power? __________________________________________________________________ __________________________________________________________________ c. Does the franchisor have the power to form, change or dissolve the advertising council? __________________________________________________________________ __________________________________________________________________  No 31 49. Is the franchisee required to participate in a local or regional advertising cooperative?  Yes If yes, provide the following information: a. How is area of the membership defined? _________________________________________________________________ __________________________________________________________________ ___________________________________________________________________ b. How are franchisees' contributions to the cooperative calculated? __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ c. Who is responsible for administering the cooperative? __________________________________________________________________ d. Must the cooperative operate from written governing documents?  Yes e.  No  No Are the governing documents available for review by a franchisee?  Yes  No f. Are cooperatives required to prepare annual or periodic financial statements?  Yes If yes, how often: __________________________________________________________________  No g. Are these financial statements available for review by a franchisee?  Yes  No 32 h. Does the franchisor have the power to require the cooperative to be formed, changed, dissolved or merged? __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ 50. Are there any other advertising funds?  Yes If yes, provide the following information: a. Who contributes to each fund? __________________________________________________________________ __________________________________________________________________ b. Are company units required to contribute to each fund?  Yes c.  No  No Are company units required to contribute on the same basis as franchisees?  Yes  No d. How are franchisees required to contribute to the advertising fund? _________________________________________________________________ __________________________________________________________________ ___________________________________________________________________ e. Who administers the advertising funds? __________________________________________________________________ __________________________________________________________________ f. Are the advertising funds' financial statements audited? 33  Yes g.  No Are financial statements of the advertising funds available for review by franchises?  Yes  No h. Describe the use of each advertising fund in the most recent fiscal year, including: (i) (ii) (iii) (iv) Percentages spent on production: _________________________________ Percentages spent on media placement: ____________________________ Percentages spent on administrative expenses: _______________________ Percentages spent on other expenses, including a description of the other expenses: ___________________________________________________ ____________________________________________________________ 51. Does the franchisor or an affiliate receive payment for providing goods or services to any advertising fund?  Yes If yes, describe: ________________________________________________________________________ ________________________________________________________________________ _______________________________________________________________________  No 52. Does the franchisor require franchisees to buy or use electronic cash registers or computer systems?  Yes  No 34 If yes, provide the following: a. General description of each system in non-technical language: __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ b. Identify each hardware component and software by brand, type and principal function: __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ c. Who has the contractual right or obligation to provide ongoing maintenance, repairs, upgrades or updates (franchisor, affiliate, third party): __________________________________________________________________ d. What is current annual cost of any optional or required maintenance and support contracts, upgrades and updates: __________________________________________________________________ __________________________________________________________________ e. Is only one third-party supplier available?  Yes If yes, provide the following:  No i. The third party: 35 ____________________________________________________________ ii. The third party's business address: ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ iii. The third party's telephone number: ____________________________________________________________ ____________________________________________________________ f. The length of time the component or program has been in continuous use by the franchisor: __________________________________________________________________ 53. Identify all compatible equivalent components or programs that perform the same function: ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ 54. Have compatible equivalent components been approved by the franchisor?  Yes 55.  No Do the franchisees have any contractual obligation to upgrade or update any hardware component or software program?  Yes  No If yes, are there contractual limitations on the frequency and cost of this obligation? Yes  No 36 If yes, describe: ________________________________________________________________________ ________________________________________________________________________ 56. How is each system or program used in the franchised businesses: ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ 57. What type of business information or data will be collected or generated by the system or program: ________________________________________________________________________ 58. Will the franchisor have independent access to this information and data?  Yes  No If yes, are there any contractual limitations on the franchisor's right to access the information and data?  Yes 59.  No Is the franchisor obligated to provide or assist the franchisee in obtaining the required electronic cash registers or computer systems?  Yes  No 60. You will be required under the FDD Guidelines to either: (a) disclose the table of contents of the operating manual as of the franchisor's last fiscal year end or any more recent date; or (b) show the franchisee the complete operating manual before purchasing a franchise only after signing a confidentiality agreement. Which option do you elect?  Table of Contents  Complete Manual 37 61. What factors does the franchisor consider in selecting or approving sites for franchised businesses? ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ 62. What is the typical length of time that passes between signing the franchise agreement and the actual opening of the franchise? ________________________________________________________________________ 63. What factors affect this length of time? ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ 64. ITEM 11 of the FDD must describe the franchisor's initial training program. Describe the following aspects of the franchisor's initial training program: a. Identify all subjects taught: __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ b. Identify the instructional material used for each subject: __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ 38 c. How many hours of classroom training are devoted to each subject? __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ d. How many hours of on-the-job training are provided for each subject? __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ e. Identify all instructors used in the initial training program: __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ f. What is the minimum experience of these instructors in teaching the subjects taught and in the franchisor's operations? __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ g. How often does the franchisor conduct initial training programs? __________________________________________________________________ __________________________________________________________________ h. If the initial training program is not mandatory, what percentage of new franchisees have enrolled in the training program during the previous 12-month period? __________________________________________________________________ 39 ITEM 12 - TERRITORY. 65. You have already identified whether an exclusive or protected territory will be granted to a franchisee in the Franchise Agreement Questionnaire that you have already completed. What is the minimum area that will be granted to a franchisee? ________________________________________________________________________ 66. If no exclusive or protected territory is granted to a franchisee, describe the conditions under which the franchisor will approve the establishment of additional franchise units in the vicinity of existing units: ________________________________________________________________________ ________________________________________________________________________ 67. Has the franchisor established or does the franchisor intend to establish alternative channels of distribution for the trademarked products?  Yes  No If yes, describe the alternative channels of distribution: _________________________ ________________________________________________________________________ 68. Has the franchisor established franchised or company-owned units or dissimilar channels of distribution for selling or leasing a product or service similar to that being granted in the franchise?  Yes If yes, provide the following: a. Describe the similar goods or services: _________________________________ __________________________________________________________________ b. Identify the other trade names and trademarks: ___________________________ __________________________________________________________________  No c. Are the other outlets franchisee-owned or company-owned: _________________ __________________________________________________________________ 40 d. Will the other units or channels of distribution solicit or accept orders within a franchisee's protected or exclusive territory: _____________________________ __________________________________________________________________ 69. Does the franchisor or its affiliates have plans to establish other franchises or companyowned units or alternative channels of distribution selling or leasing similar products or services under a different trademark than that franchised under this system?  Yes If yes, provide the following: a. Describe how the franchisor will resolve conflicts between the franchisor and the franchisees and between franchisees of each system regarding territory, customers and franchisor support: __________________________________________________________________ __________________________________________________________________ b. Identify the principal business address of the franchisor's similar operating business: __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ c. Does the franchisor maintain or plan to maintain physically separate offices and training facilities for similar competing businesses?  Yes  No  No 41 ITEM 13 - TRADEMARKS. 70. Please identify below all the trademarks, service marks, copyrighted materials, patents, and other proprietary property rights that will be used by your franchisees in the operation of the franchise. Also, provide us with copies of all registrations, if any. Name, address and telephone number of trademark, patent and copyright counsel. Name __________________________ Address Telephone No. ________________________ _____________ ________________________ ________________________ Type of registration, if any (identify by Owner: federal or state): Trademarks and service marks: ________________ ________________ ________________ __________ __________ __________ ________________________ ________________________ ________________________ Type of registration, if any (identify by Owner: federal or state): Copyrighted materials: ________________ ________________ ________________ __________ __________ __________ ________________________ ________________________ ________________________ Patents: ________________ ________________ ________________ __________ __________ __________ ________________________ ________________________ ________________________ 42 Other (for example, secret recipe products, trade secrets, etc.): ________________ __________ ________________________ ________________________ ________________________ _________________ __________ _________________ __________ We would like to receive some small camera-ready copies of the franchisor's logo for inclusion in the upper left-hand corner of the cover page of the FDD. We will also use the logo on the cover pages of some of the other franchise-related documents. 71. Will a predecessor or a company other than the franchisor own the trademarks, patents, copyrights and other information?  Yes  No If yes, does a license agreement exist between the two companies?  Yes  No If yes, please supply us a copy. If no, we will prepare the license agreement at your request. 43 ITEM 14 - PATENTS AND COPYRIGHTS AND PROPRIETARY INFORMATION. 72. Does the franchisor own any patents or copyrights that are material to the franchise?  Yes  No 73. Is there any other confidential information or trade secrets that are material to the franchise?  Yes  No If yes, describe the general subject matter of the confidential information or trade secrets: ________________________________________________________________________ ________________________________________________________________________ 74. Describe the terms for use by a franchisee of the confidential information or trade secrets: ________________________________________________________________________ ________________________________________________________________________ ITEM 15 - OBLIGATION TO PARTICIPATE IN THE ACTUAL OPERATION OF THE FRANCHISE BUSINESS. 75. A vast majority of information we need to prepare ITEM 15 is included the Franchise Agreement Questionnaire that you have already completed. If the franchise agreement does not require personal participation of the franchise owner, does the franchisor recommend participation by the franchise owner in the direct operation of the franchised business?  Yes 76.  No Other than as contained in the franchise agreement and related contracts, are there any limitations that the franchisee must place on his or her managers (for example, whether the manager must complete the franchisor's training program, the amount of any equity interest that the manager must have in the franchise, etc.)?  Yes  No If yes, describe: __________________________________________________________ ________________________________________________________________________ 44 ITEM 16 - RESTRICTIONS ON WHAT THE FRANCHISEE MAY SELL. 77. All the information we need to complete ITEM 16 of the FDD has been provided to us in the Franchise Agreement Questionnaire that you have already completed. ITEM 17 - RENEWAL, TERMINATION, TRANSFER AND DISPUTE RESOLUTION. 78. All information that we need to complete ITEM 17 of the FDD has been provided to us in the Franchise Agreement Questionnaire that you have already completed. ITEM 18 - PUBLIC FIGURES. 79. Are there any public figures used in the name or symbol of the franchise or used for the endorsement or recommendation of the franchise in advertisements?  Yes If yes, provide the following: a. Describe the compensation or other benefit given or promised to the public figure: ___________________________________________________________________ __________________________________________________________________ b. Is the public figure involved in the management or control of the franchisor?  Yes  No  No If yes, describe the position and duties of the public figure in the franchisor's business structure: __________________________________________________________________ __________________________________________________________________ c. Does the public figure have an investment in the franchisor?  Yes If yes, provide the following: (i) Describe the type of investment: ____________________________________________________________ ____________________________________________________________  No 45 ____________________________________________________________ (ii) Describe the extent to which the investment is for services performed or to be performed by the public figure: ____________________________________________________________ ____________________________________________________________ ITEM 19 – FINANCIAL PERFORMANCE REPRESENTATIONS. 80. A vast majority of franchisors do not make representations on how much a franchisee can earn. We recognize that this makes it more difficult to sell a franchise. If a representation is made it must be in the form of an earnings claim. An "earnings claim" generally is defined as information given to a prospective franchisee by, on behalf of or at the direction of franchisor or its agent, from which a specific level or range of potential or actual sales, costs, income or profits from franchised or nonfranchised units may be easily ascertained. Included would be projections, pro formas, statements of actual or average historical performance, cash flows and comprehensive cost estimates that enable a prospective franchisee to compile profits by inserting any sales figure (for example, cost of goods sold). An earnings claim made in connection with an offer of a franchise must be included in full in the disclosure statement and must have a reasonable basis at the time it is made. An earnings claim must include a description of its factual basis and the material assumptions underlying its preparation and presentation. If no earnings claim is to be made, the disclosure statement must contain a negative disclosure to that effect. We can discuss the advantages and disadvantages of making an earnings claim. If the franchisor wants to make an earnings claim, we will need to work closely with your accountant. The Fair Franchising Standards requires a franchisor to make an earnings claim. Does the franchisor want to use an earnings claim?  Yes  No 46 ITEM 20 - LIST OF OUTLETS. 81. If the franchisor is in a start-up mode, it will have nothing to disclose initially concerning existing franchisees. Are there any existing franchisees?  Yes  No If yes, please provide the following information for the previous 3 fiscal years: 2000 Number That Number Left of the Franchises System Operating For at YearOther end Reasons State Located Number Sold Number Number Opened Transferred Number Canceled Or Terminated Number Number Not Renewed Reacquired by the Franchisor 47 2099 Number That Left the Number System For Reacquired Other by the Reasons Franchisor State Located Number Sold Number Number Opened Transferred Number Canceled Or Terminated Number Not Renewed Number of Franchises Operating at Yearend 2098 Number That Left the Number System For Reacquired Other by the Reasons Franchisor State Located Number Sold Number Number Opened Transferred Number Canceled Or Terminated Number Not Renewed Number of Franchises Operating at Yearend 82. The franchisor will be required to provide a list of names, addresses and telephone numbers of all existing franchises. Attach a list to this Questionnaire. 48 83. The franchisor must also include the name and last known home address and home telephone number of every franchisee under a franchise agreement with the franchisor whose franchise has, within the previous 12-month period, been terminated, canceled, not renewed or has, during the same time period, otherwise voluntarily or involuntarily ceased to do business under a franchise agreement or who has not communicated with the franchisor within the past 10 weeks. Are there any franchisees that meet this description?  Yes If yes, attach a list to this Questionnaire.  No 84. The franchisor must also disclose the number of company-owned units. For companyowned units, provide the following information as of the franchisor's last fiscal year end: Units Operating at Year-End State Where Located Units Closed During Year Units Opened During Year 85. Are there any franchises for which a franchise agreement has been signed, but the unit has not yet begun operation?  Yes  No If yes, how many units: ___________________________________________________ 49 86. The franchisor must identify, by state, the number of expected company-owned units to be opened within the current fiscal year. Provide this estimate below. State Number Anticipated to be Opened ____________________________________ ____________________________________ __________________________________ __________________________________ State Number Anticipated to be Opened ___________________________________ ____________________________________ ___________________________________ ____________________________________ ___________________________________ ____________________________________ ___________________________________ ____________________________________ 87. The franchisor must identify, by state, the number of expected franchised units to be opened within the current fiscal year. Please provide this estimate below. State Number Anticipated to be Opened ___________________________________ ____________________________________ ___________________________________ ____________________________________ ___________________________________ ____________________________________ ___________________________________ ____________________________________ ITEM 21 - FINANCIAL STATEMENTS. 88. The financial statements will need to be audited by an independent certified public accountant ("CPA"), ideally one who knows franchising. If you need a recommendation in this regard, we can recommend one. 50 If the franchising company has been in business for 3 or more years, the last 3 years of financial statements must have been audited and must be included in the disclosure document in a comparative format. If the franchising company has been in business for less that 3 years, all prior years' financial statements must have been audited and must be included in the disclosure document in a comparative format. If we are in the process of incorporating the franchising company, the opening balance sheet and income statement must be audited by an independent CPA. The accountant must sign a CPA consent form for certain states (which we will send to him or her) consenting to the inclusion of the franchisor's financial statements in the disclosure document. Please supply us with the name, address and telephone number of the franchisor's accountant: __________________________________________ __________________________________________ __________________________________________ __________________________________________ _(_____)__________________________________ ITEM 22 - CONTRACTS. 89. The franchisor is required to attach as an exhibit to its FDD a copy of all documents that a franchisee might be required to sign during the course of purchasing a franchise, including the franchise agreement, any personal guarantees, security agreements, financing documents (including third party financing documents if the franchisor will be directly or indirectly arranging the financing) and all other agreements that the franchisee must sign. Please identify all documents that the franchisee will be required to sign. Franchise Agreement ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ 51 ITEM 22 - RECEIPT. ACKNOWLEDGMENT OF RECEIPT This Franchise Disclosure Document summarizes certain provisions of the Nutrition Zone Franchise Agreement and other information in plain language. Read this Franchise Disclosure Document and all agreements carefully. If we offer you a Nutrition Zone Franchise, we must provide this Franchise Disclosure Document to you at the earliest of: (1) (2) (3) The first personal meeting to discuss our franchise; or 14 business days before the signing of a binding agreement; or 14 business days before a payment to us. You must also receive a Nutrition Zone Franchise Agreement containing all material terms at least 5 business days before you sign a Nutrition Zone Franchise Agreement. If we do not deliver this Franchise Disclosure Document on time or if it contains a false or misleading statement, or a material omission, a violation of federal and state law may have occurred and should be reported to the Federal Trade Commission, Washington, D.C. 20580 and to the applicable state agency listed in Exhibit A. There are no subfranchisors or franchise brokers offering this Nutrition Zone Franchise for us. The effective date of this Franchise Disclosure Document is _______, 2008. The undersigned, personally and/or as a duly authorized officer or a partner of the prospective Franchisee, does acknowledge receipt from Nutrition Zone of this Franchise Disclosure Document for prospective franchisees dated ________, 2008 (to which this Receipt is attached), including the following Exhibits: A - List of State Administrators and Agents for Service of Process B - State Addenda to FDD C - Nutrition Zone Franchise Agreement D - List of Nutrition Zone Franchisees E - Nutrition Zone Financial Statements F -Acknowledgement of Receipt Dated: ____________________, 2008 ________________________________________________ individually ________________________________________________ as an officer or partner of ________________________________________________ name of entity _____________________ state corporation or partnership (circle one) (Copy # 2 - to be retained for your records) This Questionnaire may not have included all your ideas or concepts. If we have not addressed something please let us know. We hope that this Questionnaire has been helpful in the formulation and initial fine-tuning of your 52 franchise program. We look forward to going over this Questionnaire and any other questions or comments you may have and then to drafting your FDD. Sincerely, Carl J. Kosnar San Diego Office: Carl J. Kosnar Managing Partner 2306 Wales Drive Cardiff by the Sea, CA 92007 Tel: 760 632-8402 Fax: 760 632-0772 Mobile: 619-994-2258 Web: www.kosnar.com Email: carl@kosnar.com 53