**Exhibit 10.8**

 

**FORM OF**

 

**DIEDRICH COFFEE, INC.,**

 

**AREA DEVELOPMENT AGREEMENT**

 

**Dated:            **

 

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**TABLE OF CONTENTS**

 
| I.     | GRANT OF  AREA DEVELOPMENT FRANCHISE                    |
|--------|---------------------------------------------------------|
|   | 1.1                                                     | Grant of Area Development Franchise |
|   | 1.2                                                     | No Trademark License |
|   | 1.3                                                     | Definitions |
|   |                                                    |
| II.    | DEVELOPER’S  DEVELOPMENT OBLIGATION                |
|   | 2.1                                                     | Minimum Development Obligation |
|   | 2.2                                                     | Force Majeure |
|   | 2.3                                                     | Developer May Exceed Minimum  Development Obligation |
|   |                                                    |   |
| III.   | EXCLUSIVITY                                             |
|   | 3.1                                                     | Exclusivity |
|   |                                                    |   |
| IV.    | TERM  OF AREA DEVELOPMENT AGREEMENT                     |
|   | 4.1                                                     | Term |
|   | 4.2                                                     | Limited Additional Development Right |
|   | 4.3                                                     | Renewal |
|   | 4.4                                                     | Exercise of Right of Additional  Development. |
|   | 4.5                                                     | Conditions to Exercise of Right of  Additional Development |
|   |                                                    |   |
| V.     | PAYMENTS  BY DEVELOPER                                  |
|   | 5.1                                                     | Development Area Fees |
|   | 5.2                                                     | Franchise Agreements for Each Coffeehouse |
|   | 5.3                                                     | Credit Against Initial Fee |
|   |                                                    |   |
| VI.    | EXECUTION  OF INDIVIDUAL FRANCHISE AGREEMENTS, TRAINING |
|   | 6.1                                                     | Site Approval, Submission of Offering  Circular, Execution of Franchise Agreement |
|   | 6.2                                                     | Condition Precedent to Company’s  Obligations |
|   | 6.3                                                     | Lease |
|   | 6.4                                                     | Training |
|   |                                                    |   |
| VII.   | ASSIGNMENT  AND SUBFRANCHISING                          |
|   | 7.1                                                     | Assignment By Company |
|   | 7.2                                                     | No Subfranchising by Developer |
|   | 7.3                                                     | Assignment by Developer |
|   | 7.4                                                     | Individual Franchise Agreements |
|   |                                                    |   |
| VIII.  | NON-COMPETITION, NON-SOLICITATION, TRADE SECRETS        |
|   | 8.1                                                     | In Term |
|   | 8.2                                                     | Post-Term |
|   | 8.3                                                     | Modification |

 

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|      | 8.4                                  | Personnel                                                      |
|-----------|--------------------------------------|----------------------------------------------------------------|
|      | 8.5                                  | Trade Secrets.                                                 |
|      | 8.6                                  | Developer’s Affiliates                                    |
|      |                                 |                                                           |
| IX.       | TERMINATION                          |
|      | 9.1                                  | Termination Pursuant to a Material Breach  of This Agreement.  |
|      | 9.2                                  | Termination by Reason of a Material Breach  of Other Agreement |
|      | 9.3                                  | Effect of Termination                                          |
|      |                                 |                                                           |
| X.        | BUSINESS  ENTITY DEVELOPER           |
|      | 10.1                                 | Business Entity Developer                                      |
|      | 10.2                                 | Limitation on Activities                                       |
|      | 10.3                                 | Guaranty and Subordination Agreement                           |
|      |                                 |                                                           |
| XI.       | GENERAL  CONDITIONS AND PROVISIONS   |
|      | 11.1                                 | Relationship of Developer to Company                           |
|      | 11.2                                 | Indemnity by Developer                                         |
|      | 11.3                                 | Limitation of Liability                                        |
|      | 11.4                                 | Waiver and Delay                                               |
|      | 11.5                                 | Survival of Covenants                                          |
|      | 11.6                                 | Successors and Assigns                                         |
|      | 11.7                                 | Joint and Several Liability                                    |
|      | 11.8                                 | Governing Law                                                  |
|      | 11.9                                 | Entire Agreement                                               |
|      | 11.10                                | Titles For Convenience                                         |
|      | 11.11                                | Gender And Construction                                        |
|      | 11.12                                | Severability                                                   |
|      | 11.13                                | Counterparts                                                   |
|      | 11.14                                | Fees and Expenses                                              |
|      | 11.15                                | Notices                                                        |
|      |                                 |                                                           |
| XII.      | SUBMISSION  OF AGREEMENT             |
|      | 12.1                                 | General                                                        |
|      |                                 |                                                           |
| XIII.     | ACKNOWLEDGMENT                       |
|      | 13.1                                 | General                                                        |
|      |                                 |                                                           |
| EXHIBIT A | DEVELOPMENT AREA                     |
|      |
| EXHIBIT B | MINIMUM DEVELOPMENT OBLIGATIONS      |
|      |
| EXHIBIT C | DEVELOPER INFORMATION                |
|      |
| EXHIBIT D | EXCEPTIONS TO SECTION 8.1       |
|      |                                 |
| EXHIBIT E | GUARANTY AND SUBORDINATION AGREEMENT |

 

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**AREA DEVELOPMENT AGREEMENT**

 

THIS AREADEVELOPMENT AGREEMENT (the “Agreement”) is made and entered intothis        dayof                              ,                   ,(the “Effective Date”) by and between Diedrich Coffee, Inc. (“Company”), aDelaware corporation, and                                                                                           ,[  ] an individual OR [  ]a                         organizedunder t he laws of                                      (“theDeveloper”), with reference to the following facts:

 

A.            Company owns and intends to licensecertain proprietary and other property rights and interests in and to the“Diedrich Coffee” trademark and service mark, and such other trademarks, tradenames, service marks, logo types, insignias, trade dress,  designs, and commercial symbols which Companymay from time to time authorize or direct Developer to use in connection withthe operation of “Diedrich Coffee” Coffeehouses (the “Marks”).

 

B.            Company has developed and continuesto develop a system for the operation of coffeehouses, kiosks and coffee cartsand merchandising of Diedrich Coffee Authorized Products, which system featuresdistinctive signs, recipes, and various Trade Secrets and other confidentialinformation, and in some cases also includes architectural designs, tradedress, uniforms, equipment specifications, layout plans, inventory,record-keeping and marketing techniques (the “System”).

 

C.            Company desires to expand anddevelop its system of “Diedrich Coffee” Coffeehouses, and seeks sophisticatedand efficient multi-unit franchisees who will develop numerous “DiedrichCoffee” Coffeehouses within designated areas.

 

D.            Developer desires to build andoperate “Diedrich Coffee” Coffeehouses, and Company desires to grant toDeveloper the right to build and operate said “Diedrich Coffee” Coffeehouses inaccordance with the terms and upon the conditions contained in this Agreement.

 

WHEREFOREIT IS AGREED

 

I.

GRANTOF AREA DEVELOPMENT FRANCHISE

 

1.1           Grant of Area Development Franchise.

 

Upon the termsand subject to the conditions of this Agreement, Company hereby grants toDeveloper, and Developer hereby accepts, the right and obligation during theTerm hereof, to develop “Diedrich Coffee” Coffeehouses solely at Venues withinthe Development Area.

 

1.1.1        Developer within thirty (30) days ofexecution of this Agreement, shall meet with Company and begin preparation of amarket development plan for the Development Area (identifying and specifyingkey areas and trade areas in the Development Area) and all development pursuantto this Agreement shall be in accordance with this plan (the “MarketPlan”).  The Market Plan shall includeproposed target trade areas where sites are to be located, ranking andprioritization of site locations and other information customarily utilized bymarket planners in the restaurant industry. Developer shall

 

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propose the Market Plan and Company shallapprove or disapprove the Market Plan in its reasonable discretion.  The initial Market Plan shall be completedand approved by Company and Developer no later than sixty (60) days from thedate of execution of this Agreement. Developer acknowledges that no extensions of time with regard to theMinimum Development Obligation shall be granted by Company to Developer as aresult of Developer’s failure to complete a satisfactory Market Plan withinsixty  (60) days of execution of thisAgreement.  The parties recognize thatdemographics, market economics, real estate values, competition and otherconditions may change in the Development Area over the term of this Agreementand that such changes may impact the Market Plan. Therefore, the parties agreethat it is in their respective best interests to review the Market Planperiodically throughout the term of this Agreement.  On the first anniversary of the approval of the initial MarketPlan and at least once annually thereafter, Developer and Company shall reviewthe Market Plan and make such revisions as are required to maximize thesuccessful development of the Diedrich Coffee brand in the Development Area.

 

1.1.2        From time to time, Company may requestupdates, status reports, or other information from Developer regardingdevelopment of the Market Area. Developer shall respond promptly, accurately and completely to such requestswithin a reasonable time, but in no event more than 30 days after the requestby Company.  Without limiting thegenerality of the foregoing, the information requested may relate todemographics, market economics, real estate values, competition and otherconditions in the Development Area.

 

1.2           No Trademark License.

 

No right orlicense is granted to Developer hereunder to use the Marks or the System or anyother trademarks, trade names, service marks, logotypes, insignias, trade dressor designs owned by Company, such right and license being granted solelypursuant to Franchise Agreement(s) executed pursuant to Section 6.1 below.

 

1.3           Definitions.  In this Agreement, (a) capitalized terms nototherwise defined herein shall have the meaning given such term in theFranchise Agreement, and (b) the following capitalized terms shall have themeanings set forth below, unless the context otherwise requires:

 

“Applicable Law” means and includesapplicable common law and all applicable statutes, laws, rules, regulations,ordinances, policies and procedures established by any Governmental Authority,governing the development or operation of a “Diedrich Coffee” Coffeehouse,including all immigration, labor, disability, food and drug laws, health andsafety regulations, and Americans With Disabilities Act requirements, as ineffect on the Effective Date hereof, and as may be amended, supplemented orenacted  from time to time.

 

“Authorized Products” means the specificespresso drinks and coffees, roasted coffee beans and blends, premium teas,baked goods, snacks and other food items and ancillary products, which mayinclude coffee making equipment, cups, hats, t-shirts and novelty items, asspecified by Company from time to time in Company’s Manuals, or as otherwise directedby Company in writing, for sale at the Developer’s “Diedrich Coffee”Coffeehouses, prepared and served in strict accordance with Company’s recipes,quality standards and specifications, including specifications as toingredients, brand names, preparation and presentation.

 

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“Business Entity” means any limited liabilitycompany or Partnership, and any association, corporation or other entity whichis not an individual.

 

“Competitive Activities” shall mean to, own,operate, lend to, advise, be employed by, or have any financial interest in anybusiness that engages in the roasting of green coffee beans; the sale ofroasted coffee beans or ground coffee produced by third parties; or theproduction or sale at retail or wholesale of any espresso or coffee product, orany other food products featured by “Diedrich Coffee” coffeehouses.

 

“Development Area” shall mean and refer tothe geographical area set forth in Exhibit “A” which is annexed hereto and bythis reference made a part hereof

 

“Development Period” shall mean each of thetime periods during which Developer shall have the right and obligation toconstruct, equip, open and thereafter continue to operate “Diedrich Coffee”Coffeehouses in accordance with the Minimum Development Obligation.

 

“Diedrich Coffee Branded Product” is anyproduct now existing or developed in the future that bears or is packaged underany of the Marks.

 

“‘Diedrich Coffee’ Coffeehouse” means a fullservice location, kiosk, or coffee cart operated under the Marks and inaccordance with the System and specializing in the sale of Authorized Products,pursuant to a validly executed Franchise Agreement.

 

“Effective Date” means the date indicated inthe first paragraph of this Agreement.

 

“Franchise Agreement” means the Then-currentform of agreement prescribed by Company and used to grant to Developer (as“Franchisee”) the right to own and operate a single “Diedrich Coffee”Coffeehouse in the Development Area, including all exhibits, riders, guaranteesor other related instruments, all as amended from time to time (references inthis Agreement to “Developer’s Franchise Agreements” will mean FranchiseAgreements issued to Developer as “Franchisee” under those FranchiseAgreements).

 

“Full Service Coffeehouse” means a “DiedrichCoffee” Coffeehouse consisting of at least 1,200 rentable square feet and whichhas at least 24 seats dedicated (i.e. exclusive of common seating areas) foruse by customers of such “Diedrich Coffee” Coffeehouse.

 

“Governmental Authority” means and includesall federal, state, county, municipal and local governmental andquasi-governmental agencies, commissions and authorities.

 

“Gross Sales” of each of Developer’s“Diedrich Coffee” Coffeehouses means gross revenues (excluding allowances andsales taxes) received or receivable by Developer as payment, whether in cash orfor credit or barter (and, if for credit or barter, whether or not payment isreceived therefor), for all espresso, coffee, tea and other beverages, roastedcoffee beans, food, and other goods, services, and supplies sold or prepared inthe “Diedrich Coffee” Coffeehouse, or which are promoted or sold under any ofthe Marks.

 

“Internet” means collectively the myriad ofcomputer and telecommunications facilities, including equipment and software,which comprise the interconnected worldwide network of networks that employ theTCP/IP [Transmission Control Protocol/Internet Protocol], or any predecessor orsuccessor protocols

 

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to such protocol, to communicate informationof all kinds by fiber optics, wire, radio, or other methods of transmission

 

“Lease” means the lease or sublease or otheragreement or instrument pursuant to which Developer obtains the right to occupya “Diedrich Coffee” Coffeehouse location and Premises.

 

“Manuals” means Company’s Front Line TeamMember Training Guide;  trainingsoftware; Diedrich Coffee Operations Manual and Support Manual, and relatedmanuals now or hereafter created by Company for use in connection with theoperation of a “Diedrich Coffee” Coffeehouse, as the same may be amended andrevised from time to time, including all bulletins, supplements and ancillarymanuals.

 

“Marks” shall have the meaning set forth inRecital A.

 

“Minimum Development Obligation” shall meanthe Developer’s right and obligation to construct, equip, open and thereaftercontinue to operate at Venues within the Development Area not less than thecumulative number of Full Service Coffeehouses set forth in Exhibit “B,” whichis annexed hereto and by this reference made a part hereof, and within each ofthe Development Periods specified therein.

 

“Non-Exclusive Venues” shall mean storesoperated at institutional settings and locations of a “non-standard” nature,including, but not limited to, airports and other public transportationfacilities, colleges, universities, schools, hospitals, military and othergovernmental/municipal facilities, office or in-plant food service facilities,shopping mall food courts, hotels, motels, resorts, theme parks, stadiums, andany venue in which food service is or may be provided by a masterconcessionaire or contract food service provider.

 

“Offering Circular” means the UniformFranchise Offering Circular or its equivalent as may be required by applicablelaw.

 

“Owner” means any shareholder, member,general or limited partner, trustee, or other equity owner of a BusinessEntity; except that if Company has any ownership interest in Licensee, the term“Owner” shall not include or refer to the Company or its Owners or affiliates,and no obligation or restriction upon the “Developer”, or its Owners, directorsor officers shall bind Company, its Owners or affiliates, or their respectiveOwners, directors or officers.

 

“Partnership” means any general partnership,limited partnership or limited liability company

 

“Partnership Rights” means voting power,property, profits or losses, or partnership interests of a Partner.

 

“Permits” means and include all applicablefranchises, licenses, permits, registrations, certificates and other operatingauthority required by Applicable Law.

 

“Premises” means, in the case of a kiosk orcart, the property at which such “Diedrich Coffee” Coffeehouse is located,including unless otherwise expressly provided, any ancillary common areas,campus, buildings and other structures associated with the Premises.

 

“Term” shall have the meaning set forth inSection 4.1 including any extensions thereof.

 

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“Then-current” as used in this Agreement andapplied to the Offering Circular, Franchise Agreement or area developmentagreement shall mean the form then currently provided to prospectivefranchisees or area developers, or if not then being so provided, then suchform selected by the Company which previously shall have been delivered to andexecuted by a franchisee or area developer of Company.

 

“Trade Secrets” shall have the meaning setforth in Section 8.5.1.

 

“System” shall have the meaning set forth inRecital B.

 

“Venue” shall mean all types of locationsother than “Non-Exclusive Venues”.

 

“Week” shall refer to the 7 day period endingon Sunday of each calendar week, or such other reporting period hereafterspecified by Company.

 

II.

DEVELOPER’SDEVELOPMENT OBLIGATION

 

2.1           Minimum Development Obligation.

 

2.1.1        Developer shall construct, equip, openand thereafter continue to operate at Venues within the Development Area notless than the cumulative number of Full Service Coffeehouses within each of theDevelopment Periods specified in Exhibit “B”.

 

2.1.2        Within any 12 month period, Developershall have the right to close one “Diedrich Coffee” Coffeehouse opened pursuantto this Agreement if Developer demonstrates to Company’s reasonablesatisfaction that the site has not operated profitably and is unlikely in thefuture to operate profitably, provided that Developer obtains Company’s priorwritten consent to such closure, which Company shall grant or withhold inCompany’s reasonable business judgment. Upon Company’s request, Developer shall promptly provide suchsubstantiating financial data concerning the “Diedrich Coffee” Coffeehouse’shistorical performance and its future prospects as Company may require, andwhich may include market studies prepared by qualified, reputable andindependent third parties or other objective evidence satisfactory toCompany.  For purposes of Developer’sMinimum Development Obligation, any Full Service Coffeehouse closed pursuant tothis Section 2.1.2 with Company’s consent shall continue to be counted asan operating Full Service Coffeehouse for a period of 12 months followingclosure, and Developer shall be deemed in breach of the Minimum DevelopmentObligation if immediately after said 12 month period the cumulative number ofFull Service Coffeehouses then-operating is not equal to or greater than thecumulative number required to have been in operation as of the end of theimmediately preceding Development Period. Developer shall execute a newFranchise Agreement pursuant to Section 6.1 for each subsequently opened“Diedrich Coffee” Coffeehouse, even if opened as a “replacement” for the closed“Diedrich Coffee” Coffeehouse.

 

2.1.3        If a Full Service Coffeehouse opened andoperated by Developer is destroyed or damaged, other than by a voluntary act ofDeveloper, so that such “Diedrich Coffee” Coffeehouse cannot continue tooperate, the destroyed or damaged Full Service Coffeehouse shall continue tocount toward satisfaction of the Minimum Development Obligation (during the perioduntil such substitute location

 

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opens), but only if (i) Developershall repair and restore such Full Service Coffeehouse to Company’s thenapproved plans and specifications within 120 days after the occurrence of suchdestruction or damage, subject to delays permitted by Section 2.2, or(ii) Developer shall, within 120 days after the occurrence of suchdestruction or damage, open a Full Service Coffeehouse at a substitute locationwithin the Development Area in accordance with Company’s then approved plansand specifications (any such substitute location and the Lease for suchlocation must be approved in writing in advance by Company pursuant hereto andDeveloper shall execute a new Franchise Agreement therefor, pursuant toSection 6.1).

 

2.2           Force Majeure.

 

ShouldDeveloper be unable to meet the Minimum Development Obligation solely as theresult of “Force Majeure,” including, but not limited to strikes, materialshortages, fires, floods, earthquakes, and other acts of God, or by force oflaw (including, but not limited to any legal disability of Company to deliverany Offering Circular required by law to be delivered as contemplated bySection 6.1 of this Agreement), which result in the inability of Developerto construct or operate “Diedrich Coffee” Coffeehouse(s) in all orsubstantially all of the Development Area, and which Developer could not by theexercise of due diligence have avoided, Developer may request that Companyextend the affected Development Periods by the amount of time during which suchForce Majeure shall exist.  Company willnot unreasonably decline to extend the applicable Development Period(s) in suchevent, provided that Developer shall have promptly (in any event not more than30 days after commencement of the Force Majeure) submitted its request thereforin writing and promptly furnished Company such information concerning thecircumstances as Company may reasonably require.  In the event of any said legal disability of Company to deliveran Offering Circular, Company shall diligently use all commercially reasonableefforts promptly to remove such legal disability.

 

2.3           Developer May Exceed MinimumDevelopment Obligation.

 

2.3.1        Provided that Company is satisfied, inits sole subjective judgment, that Developer has the requisite skills,financial resources, management structure, personnel and other capabilities todo so, and subject to the terms and conditions of this Agreement and theFranchise Agreements, Developer may during the Term construct, equip, open andoperate more “Diedrich Coffee” Coffeehouses at Venues within the DevelopmentArea than required in the Minimum Development Obligation. Only with Company’sprior written consent in each instance, Developer may open Coffeehouses atNon-Exclusive Venues in the Development Area, but such “Diedrich Coffee”Coffeehouses shall not count toward the Developer’s Minimum DevelopmentObligation.  Further, Developer shallnot contact or solicit any owner, lessee or operator of a Non-Exclusive Venueabout the possibility of opening a “Diedrich Coffee” Coffeehouse without firsthaving obtained Company’s prior written consent to do so.

 

2.3.2        Although Company reserves the right toassess Developer’s  capabilities toexceed the Minimum Development Obligation, nothing in this Section 2.3 isintended to limit or restrict Developer’s right or ability, subject to theterms of this Agreement, to construct, equip, open and operate the number of“Diedrich Coffee” Coffeehouses within the Development Area required by theMinimum Development Obligation.

 

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III.

EXCLUSIVITY

 

3.1           Exclusivity.

 

3.1.1        During the Term of this Agreement,subject to Sections 3.1.2 and 3.1.3, Company shall not operate or grant a licenseor franchise to any other person to operate a “Diedrich Coffee” coffeehouse atany site within the Development Area other than a Non-Exclusive Venue.

 

3.1.2        Company expressly reserves theexclusive, unrestricted right, in its sole and absolute discretion, directlyand indirectly, through its employees, affiliates, representatives, licensees,assigns, agents and others, to own or operate and to franchise or licenseothers (which may include its affiliates and joint ventures in which it or itsaffiliates are participants) to own or operate “Diedrich Coffee” coffeehouses(i) at any location outside the Development Area, including immediatelyadjacent to the Development Area, and (ii) at any site or location which is aNon-Exclusive Venue, even if located within the Development Area, andregardless of its proximity to any “Diedrich Coffee” Coffeehouse developed orunder development or consideration by Developer.

 

3.1.3        In addition, Company expressly reservesthe exclusive, unrestricted right, in its sole and absolute discretion,directly and indirectly, through its employees, affiliates, representatives,licensees, assigns, agents and others, (i) to own or operate and to franchiseor license others (which may include its affiliates and joint ventures in whichit or its affiliates are participants) to own or operate coffeehouses,restaurants and other businesses which operate under names other than “DiedrichCoffee” at any location, and of any type or category whatsoever, and whetherwithin or outside the Development Area, and regardless of its proximity to any“Diedrich Coffee” Coffeehouse developed or under development or considerationby Developer; and (ii) to produce, promote, license, distribute and marketDiedrich Coffee Branded Products, and products bearing other marks, includingespresso, ground coffee and roasted coffee beans, tea, and other food andbeverage products, clothing, souvenirs and novelty items, at or through anylocation or outlet, including grocery stores and convenience stores (includingthose which may be located within the Development Area), and through anydistribution channel, at wholesale or retail, including by means of mail ordercatalogs, direct mail advertising, the Internet, and other distributionmethods.

 

IV.

TERMOF AREA DEVELOPMENT AGREEMENT

 

4.1           Term.

 

The Term ofthis Agreement shall commence on the Effective Date and, unless soonerterminated in accordance with the provisions herein, or extended as provided inSection 2.2, shall continue for a period of                       (     ) years.

 

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4.2           Limited Additional Development Right.

 

Within 60 daysprior to the expiration of the Term, if Company shall determine that furtherdevelopment of the Development Area is desirable, Company shall notifyDeveloper in writing of Company’s determination to develop additional “DiedrichCoffee” Coffeehouses in the Development Area and a plan for such developmentover a five year term.  Subject to theconditions set forth in Section 4.5 of this Agreement, Developer shallhave a prior right to undertake the additional development which Company shallhave set forth in its notice to Developer. This right of additional developmentby Developer shall be exercised only in accordance with Section 4.4.  If such right of additional development isnot exercised by Developer, Company or any franchisee or area developer ofCompany may construct, equip, open and operate additional “Diedrich Coffee”Coffeehouses in the Development Area.

 

4.3           Renewal.

 

Except to theextent otherwise provided in any area development agreement executed pursuantto Section 4.4, Developer shall have no right to renew this Agreement andafter the expiration of the Term, or the sooner termination of this Agreement,Company, and its affiliates may construct, equip, open and operate, and licenseor franchise others to construct, equip, open and operate additional “DiedrichCoffee” Coffeehouses in the Development Area, without any restriction.

 

4.4           Exercise of Right of Additional Development.

 

At the timeCompany delivers to Developer Company’s written notice of its determination toundertake additional development in the Development Area, Company shall alsodeliver to Developer a copy of Company’s Then-current Offering Circular and twocopies of the Then-current area development agreement.  The new area development agreement, whichmay vary substantially from this Agreement, will reflect Developer’s newdevelopment obligation consistent with Company’s plan for additionaldevelopment set forth in its notice to Developer.  Notwithstanding the foregoing or inconsistent terms of such areadevelopment agreement, (a) upon execution thereof, Developer shall pay Companya Development Area Fee for each “Diedrich Coffee” Coffeehouse required to beopened thereunder equal to the then-current Development Area Fee and (b) eachFranchise Agreement signed pursuant thereto shall provide for an Initial Feeand Continuing Royalty at the rates specified in the Franchise Agreement.   Within thirty (30) days after Developer’sreceipt of the Offering Circular and the new area development agreement, but nosooner than immediately after any applicable waiting periods prescribed byApplicable Law have passed, Developer shall execute two copies of the area developmentagreement described in the Offering Circular and return them to Companytogether with the applicable Development Area Fee. If Developer has so executedand returned the copies and has satisfied the conditions set forth inSection 4.5, Company will execute the copies and return one fully executedcopy to Developer.

 

4.5           Conditions to Exercise of Right ofAdditional Development.

 

Developer’sright to additional development described in Section 4.2 shall be subjectto Developer’s fulfillment of the following conditions precedent:

 

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4.5.1        Developer shall have fully performed allof its obligations under this Agreement and all other agreements betweenCompany and Developer.

 

4.5.2        Developer shall have demonstrated toCompany Developer’s  financial capacityto perform the additional development obligations set forth in the new areadevelopment agreement. In determining if Developer is financially capable,Company will apply the same criteria to Developer as it applies to prospectivearea developers at that time.

 

4.5.3        At expiration of the Term, Developershall continue to operate, in the Development Area, not less than thecumulative number of Full Service Coffeehouses required by the MinimumDevelopment Obligation set forth in Exhibit “B”.

 

4.5.4        Developer and all affiliates ofDeveloper who then have a currently effective Franchise Agreement or areadevelopment agreement with Company shall have signed a general release on aform prescribed by Company.

 

V.

PAYMENTSBY DEVELOPER

 

5.1           Development Area Fees.  Developer shall pay a “Development Area Fee”of$                      ,payable upon execution of this Agreement. The Development Area Fees shall be deemed fully earned upon the paymentthereof and shall be non-refundable under any circumstances.

 

5.2           Franchise Agreements for EachCoffeehouse.  Notwithstandingthe terms of Company’s Franchise Agreement that Developer shall executepursuant to Section  6.1 of this Agreement for each “Diedrich Coffee”Coffeehouse opened in the Development Area, the definition of “Gross Sales” setforth herein shall apply to all Franchise Agreements executed by Developerpursuant to Section 6.1, notwithstanding any inconsistent definition insuch Franchise Agreements.

 

5.3           Credit Against Initial Fee.  For each Full Service Coffeehouse developedby Developer in accordance with this agreement, Developer shall receive acredit of $5,000 against the Initial Fee at the time Franchise Agreement issigned, up to a maximum cumulative number of full service Coffeehouses thatDeveloper has committed to develop in accordance with Exhibit “B.”  Developer will receive no credit against theinitial fee of “Diedrich Coffee” Coffeehouses that are kiosks or coffee carts,nor will Developer receive any credit for Full Service Coffeehouses in excessof the Minimum Development Obligation.

 

VI.

EXECUTIONOF INDIVIDUAL FRANCHISE AGREEMENTS, TRAINING

 

6.1           Site Approval, Submission of Offering Circular,Execution of Franchise Agreement.

 

6.1.1        After Developer has located a site forconstruction of a “Diedrich Coffee” Coffeehouse, Developer shall submit toCompany such information regarding the proposed site as Company shall require,in the form which Company shall from time to time require, together with a copy

 

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of an executed letter of intent containingthe terms of the proposed Lease for such site. Company may seek such additional information as it deems necessarywithin 30 days after Developer’s submission of the letter of intent andrequired site information, and Developer shall respond promptly, accurately andcompletely to such request for additional information.

 

6.1.2        If Company shall not reject the site inwriting within 30 days, or within 30 days after a receipt of such additionalinformation, whichever is later, the site shall be deemed preliminarilyaccepted by Company.  Company’sacceptance of a site proposed by Developer will not be unreasonably withheld ordelayed.

 

6.1.3        Promptly after Company’s preliminaryacceptance of each site:

 

(a)        Company shall, if required by ApplicableLaw and if it has not done so already, transmit to Developer an OfferingCircular and two execution copies of the Franchise Agreement pertaining to theapproved site.  Immediately upon receiptof the Offering Circular, Developer shall return to Company a signed copy ofthe Acknowledgment of Receipt of the Offering Circular; and

 

(b)        Developer shall proceed promptly tonegotiate a Lease for the site (which shall comply with Section 6.3 below)and shall submit the proposed Lease to Company for review and approval.Developer shall not execute the Lease for the site until it has been reviewedand accepted by Company; and

 

(c)        Following Company’s delivery of any suchrequired Offering Circular and any waiting period required by Applicable Law,but not later than the date on which Developer executes the Lease which hasbeen reviewed and accepted by Company: (i) Developer shall execute and deliverto Company two copies of said Franchise Agreement; (ii) Developer and each ofits affiliates who then has a currently effective Franchise Agreement or areadevelopment agreement with Company shall execute and deliver two copies of ageneral release on a form prescribed by Company, and (iii) Developer shall payto the Company the Initial Fee therefor as provided in the applicable FranchiseAgreement.

 

6.1.4        Company shall, promptly upon receipt ofsaid documents and Initial Fee, execute and return to Developer one copy of theFranchise Agreement.  Developer shallthen procure the site by purchase or lease, and return one copy of the fullyexecuted Lease (which shall conform to the terms approved by Company) or, ifpurchased, the deed evidencing Developer’s right to occupy the approved site.  Developer shall then commence constructionand operation of the “Diedrich Coffee” Coffeehouse pursuant to the terms of theFranchise Agreement.

 

6.1.5        Notwithstanding the foregoing, Company’sobligation to deliver Franchise Agreements shall be subject to Company’s legalauthority to do so, and if Company is not legally able to deliver an OfferingCircular to Developer by reason of any lapse or expiration of its franchiseregistration, or because Company is in the process of amending any suchregistration, or for any reason beyond Company’s reasonable control, Companymay delay approval of the site for Developer’s proposed “Diedrich Coffee”Coffeehouse and delivery of its Offering Circular until such time as Company islegally able to deliver an Offering Circular. In no event shall Company be liable to Developer for any loss, cost orexpense occasioned by such delays.

 

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6.2           Condition Precedent To Company’sObligations.

 

It shall be acondition precedent to Company’s obligations pursuant to Section 6.1, thatDeveloper shall have performed all of his obligations under and pursuant to allagreements between Developer and Company.

 

6.3           Lease.

 

If a site isleased or subleased by Developer, (i) Company shall have the right of approvalof such lease or sublease, as applicable (the “Lease”), a true and correct copyof which shall be delivered to Company at least 15 days prior to the executionthereof; (ii) the term of said Lease shall be for a period which is not lessthan the term of the applicable Franchise Agreement, unless Company shallapprove, in writing, a shorter term; (iii) Developer shall neither create norpurport to create any obligations on behalf of Company, nor grant or purport togrant to the landlord thereunder any rights against Company, nor agree to anyother term, condition, or covenant which is inconsistent with any provision ofthe applicable Franchise Agreement; (iv) Developer shall duly and timelyperform all of the terms, conditions, covenants and obligations imposed uponhim under the Lease; (v) the site shall be constructed and improved pursuant tothe provisions of the applicable Franchise Agreement; (vi) the Lease shallgrant Company an option, without cost or expense to Company, to assume theLease in the event of termination or expiration of the applicable FranchiseAgreement for any reason, and shall expressly provide that Company shall havethe right (but not the obligation) to succeed to Developer’s rights under theLease if Developer fails to exercise any option to renew, and upon Developer’sdefault thereunder, and that upon any alleged breach thereof by Developer, thelandlord thereunder shall be obligated to notify Company in writing at least 15days prior to its termination or non-renewal and, in the case of a default,Company shall have the right, but not the obligation, to cure the breach and tosucceed to Developer’s rights under said Lease by giving written notice of suchelection to Developer and such landlord; Developer hereby appoints Company asits attorney-in-fact to execute an assignment and all other documents andinstruments which Company deems necessary or appropriate to effectuate theforegoing; (vii) a fully executed copy of said Lease shall be delivered toCompany promptly following the execution thereof; (viii) the Lease shallprovide that it may not be assigned, subleased, modified or amended withoutCompany’s prior written consent and that Company shall be provided with copiesof all such assignments, subleases, modifications and amendments, and thelandlord shall consent in advance to any assignment or sublease to Company or a“Diedrich Coffee” franchisee or licensee approved by Company during the initialterm or any renewal term of the Lease; and (ix) the Lease may not contain anon-competition covenant which purports to restrict the Company, or anydeveloper or licensee of the Company (or its affiliates), from operating a“Diedrich Coffee” Coffeehouse or any other retail establishment, unless suchcovenant is approved by the Company in writing prior to the execution of theLease.  In all cases, the Lease shallprovide that upon expiration or termination thereof for any reason, Developershall, upon Company’s demand, remove all of the Marks from the site and modify thedecor of the site so that it no longer resembles, in whole or in part, a“Diedrich Coffee” coffeehouse, kiosk or cart and that if Developer shall faildo so, Company will be given written notice and the right to enter the site tomake such alterations, in which event Developer shall reimburse Company for alldirect and indirect costs and expense it may incur in connection therewith,including attorney’s fees.

 

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6.4           Training.

 

At no extracharge, Company shall provide to up to 3 persons selected by Developer andacceptable to Company an initial developer orientation program to familiarizeDeveloper with Company’s System and methods of operation.  Said initial orientation program shall befor a period of up to 3 days of training, as Company in its reasonable judgmentmay determine, at one or more of the following locations: (i) Company’scorporate headquarters in Irvine, California, (ii) at a Company-owned orfranchised coffeehouse, or (iii) at such place or places as may bedesignated by Company.  In the case of aDeveloper which is a Business Entity, Company may require the trainees toinclude the Developer’s general manager and one or more Owners, officers orother designated representative selected by Developer and acceptable to, andapproved by Company (“Designated Developer Representative”). Company will bearits costs of providing the initial orientation program concurrently to up to 3persons pursuant to this Section 6.4, including Company’s staff salaries,materials, and all technical training tools. Developer shall pay all travel, living, compensation, and otherexpenses, if any, incurred by Developer and/or Developer’s Owners and employeesin connection with attendance at the program.  Company shall pay no compensation for any services performed bytrainee(s) in connection with such training programs.

 

6.4.1        The contents of the initial orientationprogram and manner of conducting such program shall be at Company’s solediscretion and control, however, the training course will be structured toprovide guidance in locating potential sites for “Diedrich Coffee” Coffeehousesin the Development Area and an overview of the topics which will be addressedin the initial training program that will be provided in connection with thefirst Coffeehouse opened by Developer.

 

6.4.2        Pursuant to the first FranchiseAgreement executed hereunder, Company shall provide an additional initialtraining program for the general manager and one or more assistant managers andother employees acceptable to Company (up to a total of 5 persons) forDeveloper’s first “Diedrich Coffee” Coffeehouse.  Company shall also train Developer’s Designated DeveloperRepresentative, or other person acceptable to Company, to act as Developer’scertified trainer who will in turn train the manager, assistant manager(s) andstaff of each “Diedrich Coffee” Coffeehouse, other than the first one,  in accordance with Company’s policies andstandards. Developer may not open any “Diedrich Coffee” Coffeehouse until thegeneral manager, assistant manager and staff shall have been certified byCompany or by Developer’s Company-approved certified trainer as havingsuccessfully completed such training.

 

VII.

ASSIGNMENTAND SUBFRANCHISING

 

7.1           Assignment By Company.

 

This Agreementis fully transferable by Company, in whole or in part, without the consent ofDeveloper and shall inure to the benefit of any transferee or their legalsuccessor to Company’s interests herein; provided, however, that suchtransferee and successor shall expressly agree to assume Company’s obligationsunder this Agreement.  Without limitingthe foregoing, Company may (i) assign any or all of its rights and obligationsunder this Agreement to a subsidiary or affiliated entity; (ii) sell itsassets, its Marks, or its System outright to a third party (including orsubject to this Agreement); (iii) go public; (iv) engage in a private placementof some or all of its securities; (v) merge, acquire other

 

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corporations, or be acquired by anothercorporation; or (vi) undertake a refinancing, recapitalization, leveragedbuy-out or other economic or financial restructuring.  Company shall be permitted to perform such actions withoutliability or obligation to Developer who expressly and specifically waives anyclaims, demands or damages arising from or related to any or all of the aboveactions (or variations thereof). Company shall have no liability for the performance of any obligationscontained in this Agreement after the effective date of such transfer orassignment.

 

7.2           No Subfranchising by Developer.

 

Developershall not offer, sell, or negotiate the sale of “Diedrich Coffee” franchises toany third party, either in Developer’s own name or in the name and on behalf ofCompany, or otherwise subfranchise, subcontract, share, divide or partitionthis Agreement, and nothing in this Agreement will be construed as grantingDeveloper the right to do so.

 

7.3           Assignment by Developer.

 

7.3.1        This Agreement has been entered into byCompany in  reliance upon and inconsideration of the individual or collective character, reputation, skill,attitude, business ability, and financial capacity of Developer or, if applicable,its Owners who will actively and substantially participate in the development,ownership and operation of the “Diedrich Coffee” Coffeehouses. Accordingly,except as otherwise may be permitted herein, neither Developer nor any ofDeveloper’s Owners shall directly or indirectly sell, assign, transfer, convey,give away, pledge, mortgage, or otherwise encumber any direct or indirectinterest in this Agreement or in all or substantially all of Developer’sassets, voluntarily or involuntarily, in whole or in part, by operation of lawor otherwise (an “Assignment”), without Company’s prior written consent,  which consent may be withheld for any reasonwhatsoever in Company’s sole subjective judgment.

 

7.3.2        If Developer is a Business Entity, eachof the following shall be deemed to be an Assignment of this Agreement: (i) thesale, assignment, transfer, conveyance, gift, pledge, mortgage, or otherencumbrance of 50% or more in the aggregate, whether in one or moretransactions, of the assets, capital stock, membership interests or votingpower of Developer, by operation of law or otherwise; (ii) the issuance ofany securities by Developer which itself or in combination with any othertransaction(s) results in the Owners existing as of the Effective Date, owning50% or less of the outstanding shares, membership interests or voting power ofDeveloper as constituted as of the date hereof; (iii) if Developer is aPartnership, the withdrawal, death or legal incapacity of a general partner orlimited partner owning 50% or more of the voting power, property, profits orlosses, or partnership interests of the Partnership (each of which is referredto hereinafter as a “Partnership Right”), or the admission of any additionalgeneral partner or the transfer by any general partner of any of itsPartnership Rights in the Partnership; (iv) the death or legal incapacityof any Owner owning 50% or more of the capital stock, voting power, orPartnership Rights of Developer; and (v) any merger, stock redemption,consolidation, reorganization, recapitalization or other transfer control ofthe Developer, however effected.

 

7.3.3        Developer shall not in any event havethe right to pledge, encumber, hypothecate or otherwise give any third party asecurity interest in this Agreement in any manner

 

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whatsoever without the express prior writtenpermission of Company, which permission may be withheld for any reasonwhatsoever in Company’s sole subjective judgment.

 

7.4           Individual Franchise Agreements.

 

Developershall not execute any Franchise Agreement, or construct or equip any “DiedrichCoffee” Coffeehouse with the intent of transferring or assigning such FranchiseAgreement or “Diedrich Coffee” Coffeehouse. Developer acknowledges and agrees that it will not be permitted to assignany Franchise Agreement executed pursuant to this Agreement except inconjunction with a concurrent assignment to the same assignee of this Agreementand all of the Franchise Agreements executed pursuant to this Agreement, andotherwise in accordance with the terms and conditions of said FranchiseAgreement(s).

 

VIII.

NON-COMPETITION,NON-SOLICITATION, TRADE SECRETS

 

8.1           InTerm.

 

Subject to theterms and to the exceptions, if any, explicitly set forth in Exhibit “D”hereto, during the Term, neither Developer, nor any officer, director, ordirect or indirect Owner of a Developer which is a Business Entity, shall inany capacity, either directly or indirectly, through one or more subsidiariesor affiliated companies engage in any Competitive Activities, at any location,whether within or outside the Development Area, unless Company shall consentthereto in writing; provided that, with Company’s prior written consent, whichCompany will not unreasonably withhold, Developer or any Owner, officer or directorof Developer may own and operate one or more restaurants, or any other retailestablishment, which sells brewed coffee, espresso or coffee products if andfor so long as such restaurant, or retail establishment, does not derive 20% ormore of its gross revenues from the sale of espresso drinks, brewed coffee,roasted coffee beans and blends, premium teas, and coffee-related products andequipment, or any of them, during any day part.

 

8.2           Post-Term.

 

Subjectto the terms and to the exceptions, if any, explicitly set forth in Exhibit“D”, to the extent permitted by Applicable Law, upon the expiration ortermination of this Agreement, or if Developer shall make any Assignment to anyperson or Business Entity, or if any Owner, officer or director of Developershall terminate his or her relationship with Developer, then for a period of 24months thereafter, such terminating Owner, officer or director, if applicable,or in the case of expiration, termination or Assignment, Developer, and eachofficer, director, and direct or indirect Owner of Developer shall not in anycapacity, either directly or indirectly, through one or more subsidiaries oraffiliated companies, engage in any Competitive Activities, (i) within theDevelopment Area, (ii) within the County in which any “Diedrich Coffee”Coffeehouse operated by Developer is located, or (iii) within an area withinten (10) miles from the location or any then existing “Diedrich Coffee”Coffeehouse, without the Company’s prior written consent.  In applying for such consent, Developer willhave the burden of establishing that any such activity by it will not involvethe use of benefits provided under this Agreement or constitute unfaircompetition with Company or other franchisees or area developers of the

 

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Company;provided that, with Company’s prior written consent, which Company will notunreasonably withhold, Developer or any Owner, officer or director of Developermay own and operate one or more restaurants, or any other retailestablishment,  which sells brewedcoffee, espresso or coffee products if and for so long as such restaurant, orretail establishment, does not derive 20% or more of its gross revenues fromthe sale of espresso drinks, brewed coffee, roasted coffee beans and blends,premium teas, and coffee-related products and equipment, or any of them, duringany day part.

 

8.3           Modification.

 

The partieshave attempted in Sections 8.1 and 8.2 above to limit the Developer’s right tocompete only to the extent necessary to protect the Company from unfaircompetition.  The parties herebyexpressly agree that if the scope or enforceability of Section  8.1 and8.2 is disputed at any time by Developer, a court or arbitrator, as the casemay be, may modify either or both of such provisions to the extent that itdeems necessary to make such provision(s) enforceable under ApplicableLaw.  In addition, the Company reservesthe right to reduce the scope of either, or both, of said provisions withoutDeveloper’s consent, at any time or times, effective immediately upon notice toDeveloper.

 

8.4           Personnel.

 

8.4.1        During the Term of this Agreement,Developer shall not, without the prior written consent of Company, directly orindirectly: (a) employ or attempt to employ any person who at that time isemployed by Company, an affiliate of Company, or any other franchisee or areadeveloper, including, without limitation, any coffeehouse manager, assistantcoffeehouse manager, or head chef (“Personnel”); (b) employ or attempt toemploy any Personnel who within six (6) months prior thereto had been employedby Company, an affiliate of Company, or any other franchisee or area developer;or (c) induce or attempt to induce any Personnel to leave his or her employmentwith Company, an affiliate of Company, or any other franchisee or areadeveloper.

 

8.4.2        The prohibitions set forth inSection 8.4.1 above shall also apply during the one (1) year period afterthe expiration or termination of this Agreement.

 

8.4.3        During the Term of this Agreement,Company shall not, without the prior written consent of Developer, directly orindirectly: (a) employ or attempt to employ any person who at that time isemployed by Developer or an affiliate of Developer; or (b) induce or attempt toinduce any person to leave his or her employment with Developer or an affiliateof Developer.

 

8.5           Trade Secrets.

 

8.5.1        Company possesses and continues todevelop, and during the course of the relationship established hereunder,Developer shall have access to, proprietary and confidential information,including recipes, secret ingredients, specifications, procedures, concepts andmethods and techniques of developing, marketing and operating coffeehouses,restaurants and other retail outlets featuring espresso, ground coffee androasted coffee beans, tea, and other food and beverage products (the “TradeSecrets”).  Certain of the Trade Secretsmay be disclosed to Developer in Operating Manuals, bulletins, supplements,confidential correspondence, or other confidential communications, and throughthe Company’s training program and other guidance and management assistance,and in performing 

 

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Company’s other obligations and exercisingCompany’s rights under this Agreement or the Franchise Agreements executedpursuant hereto. “Trade Secrets” shall not include information which: (a) hasentered the public domain or was known to Developer prior to Company’sdisclosure of such information to Developer, other than by the breach of anobligation of confidentiality owed (by anyone) to Company; (b) becomes known toDeveloper from a source other than Company and other than by the breach of anobligation of confidentiality owed (by anyone) to Company; or (c) wasindependently developed by Developer without the use or benefit of Company’sTrade Secrets.  The burden of provingthe applicability of the foregoing will reside with Developer.

 

8.5.2        Developer shall acquire no interest inthe Trade Secrets other than the right to use them in developing and operating“Diedrich offee” Coffeehouses pursuant to the Franchise Agreements executedpursuant to Section 6.1 during the Term thereof.  Developer’s duplication or use of the Trade Secrets in any otherendeavor or business shall constitute an unfair method of competition.  Developer shall: (i) not use the TradeSecrets in any business or other endeavor other than in connection with such“Diedrich Coffee” Coffeehouses; (ii) maintain absolute confidentiality ofthe Trade Secrets during and after this Agreement’s Term; (iii) make nounauthorized copy of any portion of the Trade Secrets, including withoutlimitation, all or any part of the Manuals, bulletins, supplements,confidential correspondence, or other confidential communications, whetherwritten or oral; and (iv) operate and implement all reasonable proceduresprescribed from time to time by Company to prevent unauthorized use anddisclosure of the Trade Secrets, including without limitation, restrictionslimiting disclosure to certain employees and use of non-disclosure andnon-competition provisions as Company prescribes in employment agreements withemployees who may have access to the Trade Secrets.  Promptly upon Company’s request, Developer shall deliver executedcopies of such agreements to Company. The provisions of this Section 8.5 shall be in additional to andnot in lieu of any other confidentiality obligation of Developer, or any otherperson, whether pursuant to another agreement, or pursuant to Applicable Law.

 

8.6           Developer’s Affiliates.  For purposes of this Article only,“Developer” shall mean and include the individual Developer; Developer’s spouseand minor children and its Owners, officers and directors if Developer is aBusiness Entity and Developer shall, except as Company may otherwise agree,cause each such person to acknowledge and agree to be bound by the provisionsof Section 8.1 through 8.5.  Theprovisions of this Article shall not limit, restrain or otherwise affectany right or cause of action which may accrue to Company for any infringementof, violation of, or interference with, this Agreement, or Company’s Marks,System, trade secrets, or any other proprietary aspects of Company’s business.

 

IX.

TERMINATION

 

9.1           Termination Pursuant to a MaterialBreach of This Agreement.  

 

This Agreementmay be terminated by Company in the event of any material breach by Developerof this Agreement, unless such default is cured by Developer within 15 daysfollowing written notice of the default (or 5 days in the case of a default inthe payment of money); provided that the following defaults shall be deemedincurable: (i) any attempt by Developer to make any Assignment in violation ofthe terms of this Agreement, or without the written consents required, pursuantto this

 

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Agreement; (ii) failure of Developer to meetthe Minimum Development Obligation; and (iii) any violation by Developer ofArticle VIII.

 

9.2           Termination by Reason of a MaterialBreach of Other Agreement.

 

This Agreementmay be terminated, at the election of Company, in the event of the terminationby reason of a material breach by Developer of an individual FranchiseAgreement or any other agreement between Company and Developer, subject to thenotice and the opportunity to cure, if any, specified in the FranchiseAgreement or other such agreement.

 

9.3           Effect of Termination.

 

Upon theexpiration of the Term, or upon the prior termination of this Agreement:

 

9.3.1        Developer shall have no further right toconstruct, equip, own, open or operate additional “Diedrich Coffee”Coffeehouses which are not, at the time of such termination or expiration, thesubject of a then existing Franchise Agreement between Developer and Companywhich is in full force and effect; and

 

9.3.2        Company and its affiliates mayconstruct, equip, open, own or operate, or franchise or license others toconstruct, equip, open, own or operate “Diedrich Coffee” Coffeehouses in theDevelopment Area, except as may be expressly provided to the contrary in anyFranchise Agreement executed pursuant to this Agreement.

 

 

X.

BUSINESSENTITY DEVELOPER

 

10.1         Business Entity Developer.  If Developer is a Business Entity, thefollowing provisions will apply:

 

10.1.1      Developer represents and warrants that theinformation set forth in Exhibit “C” which is annexed hereto and by thisreference made a part hereof, is accurate and complete in all materialrespects.

 

10.1.2      Developer shall notify Company in writingwithin ten (10) days of any change in the information set forth in Exhibit “C”.

 

10.1.3      Developer promptly shall provide suchadditional information as Company may from time to time request concerning allpersons who may have any direct or indirect financial interest in Developer.

 

10.2         Limitation on Activities.  If Developer is a Business Entity, all ofDeveloper’s organizational documents (including articles of partnership,partnership agreements, articles of incorporation, bylaws, shareholders’agreements, trust instruments, or their equivalent) will provide that theissuance and transfer of any interest in Developer is restricted by the termsof this Agreement, and

 

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that the sole purpose for which Developer isformed (and the sole activity in which Developer is or will be engaged) is thedevelopment and operation of “Diedrich Coffee” Coffeehouses, pursuant to one ormore area development agreements and one or more franchise agreements fromCompany.  Developer will submit toCompany, upon the execution of this Agreement, a resolution of Developer (orits governing body) confirming that Developer is in compliance with thisprovision.

 

10.3         Guaranty and Subordination Agreement.  Upon the execution of this Agreement, uponeach transfer of an interest in Developer, and at any other time upon Company’srequest, all holders of a 10% or greater interest in Developer will execute awritten agreement in the form of Exhibit “E”, personally guaranteeing, jointlyand severally, with all other holders of a 10% or greater interest inDeveloper, the full payment and performance of Developer’s obligations toCompany and to Company’s affiliates.

 

XI.

GENERALCONDITIONS AND PROVISIONS

 

11.1         Relationship of Developer to Company.

 

It isexpressly agreed that the parties intend by this Agreement to establish betweenCompany and Developer the relationship of franchisor and franchisee.  It is further agreed that Developer has noauthority to create or assume in Company’s name or on behalf of Company, anyobligation, express or implied, or to act or purport to act as agent orrepresentative on behalf of Company for any purpose whatsoever.  Neither Company nor Developer is theemployer, employee, agent, partner or co-venturer of or with the other, eachbeing independent.  Developer agreesthat he will not hold himself out as the agent, employee, partner orco-venturer of Company.  All employeeshired by or working for Developer shall be the employees of Developer and shallnot, for any purpose, be deemed employees of Company or subject to Companycontrol.  Each of the parties agrees tofile its own tax, regulatory and payroll reports with respect to its respectiveemployees and operations, saving and indemnifying the other party hereto of andfrom any liability of any nature whatsoever by virtue thereof.

 

11..2        Indemnity by Developer.

 

Developerhereby agrees to protect, defend and indemnify Company, and all of its past,present and future direct and indirect Owners, subsidiaries, affiliates,officers, directors, employees, attorneys and designees and hold them harmlessfrom and against any and all costs and expenses, including attorneys’ fees,court costs, losses, liabilities, damages, claims and demands of every kind ornature on account of any actual or alleged loss, injury or damage to any personor Business Entity or to any property arising out of or in connection withDeveloper’s operation of “Diedrich Coffee” Coffeehouses pursuant hereto, exceptto the extent resulting from the negligence or intentional misconduct ofCompany.

 

11..3        Limitation of Liability

 

11.3.1      Company shall not be liable to Developerfor any consequential damages, including but not limited to lost profits,interest expense, increased construction or occupancy  costs, or other costs and expenses incurred by Developer byreason of any delay in the delivery of Company’s

 

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Offering Circular caused by legal incapacityduring the Term, events beyond Company’s reasonable control, or other conductnot due to the gross negligence or misfeasance of Company.

 

11.3.2      In the event of the termination of thisAgreement solely by reason of Developer’s breach of its Minimum DevelopmentObligation, Company shall waive its right to recover lost profits on account ofthe undeveloped “Diedrich Coffee” Coffeehouses on condition that Developershall abide by its obligations under Article VIII.  This Section 11.3.2 shall not otherwiselimit any other remedy available to Company at law or in equity, nor limit therecovery of damages to Company, except as provided herein.

 

11.4         Waiver and Delay.

 

No waiver byCompany of any breach or series of breaches or defaults in performance byDeveloper, and no failure, refusal or neglect of Company to exercise any right,power or option given to it hereunder or under any other franchise agreementbetween Company and Developer, whether entered into before, after orcontemporaneously with the execution hereof (and whether or not related to the“Diedrich Coffee” Coffeehouses) or to insist upon strict compliance with orperformance of Developer’s obligations under this Agreement or any FranchiseAgreement between Company and Developer, whether entered into before, after orcontemporaneously with the execution hereof (and whether or not related to the“Diedrich Coffee” Coffeehouses), shall constitute a waiver of the provisions ofthis Agreement with respect to any subsequent breach thereof or a waiver byCompany of its right at any time thereafter to require exact and strictcompliance with the provisions thereof.

 

11.5         Survival of Covenants.

 

The covenantscontained in this Agreement which, by their terms, require performance by theparties after the expiration or termination of this Agreement, shall beenforceable notwithstanding said expiration or other termination of thisAgreement for any reason whatsoever.

 

11.6         Successors and Assigns.

 

This Agreementshall be binding upon and inure to the benefit of the successors and assigns ofCompany and shall be binding upon and inure to the benefit of Developer and hisor their respective heirs, executors, administrators, successors and assigns,subject to the prohibitions against Assignment contained herein.

 

11.7         Joint and Several Liability.

 

If Developerconsists of more than one person or business entity, or a combination thereof,the obligations and liabilities of each such person or business entity toCompany are joint and several.

 

11.8         GoverningLaw.

 

This Agreement shall be governed by andconstrued in accordance with the laws of the State of California, withoutgiving effect to any conflict of laws, excepting however the provisions ofArticle

 

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VIII which shall be construed and enforced inaccordance with the laws of the State where the breach of said Section occurs.

 

THE PARTIESHEREBY WAIVE THEIR RIGHT TO TRIAL BY JURY WITH RESPECT TO ANY DISPUTE ARISINGUNDER THIS AGREEMENT, AND THEY AGREE THAT, EXCEPT TO THE EXTENT PROHIBITED BYLAW, ORANGE COUNTY, CALIFORNIA SHALL BE THE VENUE FOR ANY LITIGATION ARISINGUNDER THIS AGREEMENT.  THE PARTIESACKNOWLEDGE THAT THEY HAVE REVIEWED THIS SECTION AND HAVE HAD THEOPPORTUNITY TO SEEK INDEPENDENT LEGAL ADVICE AS TO ITS MEANING AND EFFECT.

 

11.9         EntireAgreement.

 

This Agreementand the Exhibits incorporated herein contain all of the terms and conditionsagreed upon by the parties hereto concerning the subject matter hereof.  No other agreements concerning the subjectmatter hereof, written or oral, shall be deemed to exist or to bind any of theparties hereto and all prior agreements, understandings and representations,are merged herein and superseded hereby. Developer represents that there are no contemporaneous agreements orunderstandings between the parties relating to the subject matter of thisAgreement that are not contained herein. No officer or employee or agent of Company has any authority to make anyrepresentation or promise not contained in this Agreement or any OfferingCircular for prospective franchisees required by Applicable Law, and Developeragrees that he has executed this Agreement without reliance upon any suchrepresentation or promise.  ThisAgreement cannot be modified or changed except by written instrument signed byall of the parties hereto.

 

11.10       Titles For Convenience.

 

Article andparagraph titles used in this Agreement are for convenience only and shall notbe deemed to affect the meaning or construction of any of the terms,provisions, covenants, or conditions of this Agreement.

 

11.11       Gender And Construction.

 

All terms usedin any one number or gender shall extend to mean and include any other numberand gender as the facts, context, or sense of this Agreement or anyarticle or paragraph hereof may require. As used in this Agreement, the words “include,” “includes” or“including” are used in a non-exclusive sense. Unless otherwise expressly provided herein to the contrary, any consent,approval or authorization of Company which Developer may be required to obtainhereunder may be given or withheld by Company in its sole discretion, and onany occasion where Company is required or permitted hereunder to make anyjudgment or determination, including any decision as to whether any condition or circumstance meets Company’sstandards or satisfaction, Company may do so in its sole subjective judgment.

 

11.12       Severability.

 

Nothingcontained in this Agreement shall be construed as requiring the commission ofany act contrary to law.  Whenever thereis any conflict between any provisions of this Agreement and any

 

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present or future statute, law, ordinance orregulation contrary to which the parties have no legal right to contract, thelatter shall prevail, but in such event the provisions of this Agreement thusaffected shall be curtailed and limited only to the extent necessary to bringit within the requirements of the law. In the event that any part, article, paragraph, sentence or clause ofthis Agreement shall be held to be indefinite, invalid or otherwiseunenforceable, the indefinite, invalid or unenforceable provision shall(subject to Section 8.3) be deemed deleted, and the remaining part of thisAgreement shall continue in full force and effect.

 

11.13       Counterparts.

 

This Agreementmay be executed in any number of counterparts, each of which shall be deemed tobe an original and all of which together shall be deemed to be one and the sameinstrument.

 

11.14       Fees and Expenses.

 

Should anyparty hereto commence any action or proceeding for the purpose of enforcing, orpreventing the breach of, any provision hereof, whether by arbitration,judicial or quasi-judicial action or otherwise, or for damages for any allegedbreach of any provision hereof, or for a declaration of such party’s rights orobligations hereunder, then the prevailing party shall be reimbursed by thelosing party for all costs and expenses incurred in connection therewith,including, but not limited to, reasonable attorneys’ fees for the servicesrendered to such prevailing party.

 

11.15       Notices.

 

Except asotherwise expressly provided herein, all written notices and reports permittedor required to be delivered by the parties pursuant hereto shall be deemed sodelivered at the time delivered by hand, one (1) business day after confirmedtransmission by facsimile or other electronic system (with confirmation copysent by regular U.S. Mail), or three (3) business days after placement in theUnited States Mail by Registered or Certified Mail, Return Receipt Requested,postage prepaid and addressed as follows:

 
| If to Company: |
|----------------|
|           |
|           | Diedrich Coffee, Inc. |
|           | 2144 Michelson Drive |
|           | Irvine, California 92612 |
|           | Attention: Vice President Franchise Sales |
|           | Facsimile No.:  (949) 260-6731 |

 

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If to Developer:

 
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|--------|-------------------------------------------------------------------|--------|
|   |                                                              |   |
|   |                                                              |   |
|   |                                                              |   |
|   | Facsimile  No.:  (      ) |   |

 

With Copy to:

 
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|--------|-------------------------------------------------------------------|--------|
|   |                                                              |   |
|   |                                                              |   |
|   |                                                              |   |
|   | Facsimile  No.:  (      ) |   |

 

or to such other address as such party maydesignate by ten (10) days’ advance written notice to the other party.

 

XII.SUBMISSION OF AGREEMENT

 

12.1         General.

 

The submissionof this Agreement does not constitute an offer and this Agreement shall becomeeffective only upon the execution thereof by Company and Developer.

 

XIII.ACKNOWLEDGMENT

 

13.1         General.

 

Developer, andits Owners, jointly and severally acknowledge that they have carefully readthis Agreement and all other related documents to be executed concurrently orin conjunction with the execution hereof, that they have obtained the advice ofcounsel in connection with entering into this Agreement, that they understand thenature of this Agreement, and that they intend to comply herewith and be boundhereby.

 

22

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IN WITNESSWHEREOF, the parties hereto have caused this Agreement to be executed as of thefirst date set forth above.

 
| ACCEPTED on  this      day  of                          ,                  . |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                   |
| COMPANY:                                                                                                                                                                                                                                                                                                                               |
| Diedrich Coffee, Inc.                                                                                                                                                                                                                                                                                                                  |
|                                                                                                                                                                                                                                                                                                                                   |
|                                                                                                                                                                                                                                                                                                                                   |
|                                                                                                                                                                                                                                                                                                                                   |
| By:                                                                                                                                                                                                                                                                                                                                    |   |   |
|                                                                                                                                                                                                                                                                                                                                   |
| Its:                                                                                                                                                                                                                                                                                                                                   |   |   |

 

 
| DEVELOPER:    |
|---------------|
|          |
|          |
| By:           |   |   |
|          |
| Its:          |   |   |
|          |
|          |   |
| an Individual |
|          |
|          |   |
| an Individual |
|          |
|          |   |
| an Individual |

 

23

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EXHIBIT A

DEVELOPMENTAREA

 

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EXHIBIT B

MINIMUMDEVELOPMENT OBLIGATIONS

 

 
| **Development  Period  Ending**                                                                                                |   | **Cumulative  Number of  Full Service Coffeehouses  to be in Operation** |
|--------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------|
|                                                                                                                           |   |                                                                     |
| 1                ,  20     |   |                                                                     |
|                                                                                                                           |   |                                                                     |
| 2                ,  20     |   |                                                                     |
|                                                                                                                           |   |                                                                     |
| 3                ,  20     |   |                                                                     |
|                                                                                                                           |   |                                                                     |
| 4                ,  20     |   |                                                                     |
|                                                                                                                           |   |                                                                     |
| 5                ,  20     |   |                                                                     |

 

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EXHIBIT C

DEVELOPERINFORMATION

 

Developer is a (check as applicable):

ocorporation    olimited partnership

olimited liability company    ogeneral partnership

oOther (specify):                                                  

 

The name and address of each Owner ofDeveloper is:

 
| **NAME** |   | **ADDRESS** |   | **NUMBER OF  SHARES OR  PERCENTAGE  INTEREST** |
|----------|--------|-------------|--------|------------------------------------------------|
|     |   |        |   |                                           |
|     |   |        |   |                                           |

 

There is set forth below the name and addressof each director, member, or general partner, as applicable, of Developer:

 
| **NAME** |   | **ADDRESS** |
|----------|--------|-------------|
|     |   |        |
|     |   |        |

 

There is set forth below the names, andaddresses and titles of Developer’s principal officers or partners who will bedevoting their full time to the “Diedrich Coffee” Coffeehouses:

 
| **NAME** |   | **ADDRESS** |
|----------|--------|-------------|
|     |   |        |
|     |   |        |

 

The address where Developer’s FinancialRecords, and Business Entity records (e.g. Articles of Incorporation, Bylaws,Operating Agreement, Partnership Agreement, etc.) are maintained is:

 
|   |   |   |
|--------|--------|--------|
|   |   |   |
|   |   |   |

 

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EXHIBIT D

 

EXCEPTIONSTO SECTION 8.1

 
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|   |   |
|   |   |
|   |   |
|   |   |

 

*If no exceptions areinserted above and initialed by both parties, no exceptions apply.  If any exception is described above, it islimited to the identified business as it exists on the Effective Date of thisAgreement and does not extend to or include any material change made to thebusiness after the Effective Date, including any change in the menu or productsor services featured by the business. In no event shall any identified exception include any business if(a) its sales of espresso drinks, coffee, roasted coffee beans and blends, and premium teas, or any ofthem, exceeds 20% during any day part, or (b) its sales of bakery goodsexceeds 9% of all revenues derived by the business during any day part, or(c) 85% or more of such business’ total beverage sales are comprised ofnon-coffee beverages.  By way ofillustration, and not limitation, even if a restaurant is identified above, theexception will be void if the restaurant’s sales of coffee or bakery goodsexceed the stated thresholds, whether on the Effective Date, or by reason of asubsequent change in the restaurant’s menu or marketing.*

 

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EXHIBIT E

 

GUARANTYAND SUBORDINATION AGREEMENT

 

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SPOUSALCONSENT

 

Each of theundersigned, each being the spouse of an individual who executed this Agreementas Developer (or if Developer is a partnership, a spouse of a general partner),consents to all of the terms of this Agreement and the execution thereof, andagrees not to assist any person who is a party to this Agreement to violate anyof that party’s duties under this Agreement.

 

 
| By:    |   |   | Dated: |   |   |
|--------|--------|--------|--------|--------|--------|
|   |   |
| By:    |   |   | Dated: |   |   |

 

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