**Exhibit 10.9**

**FORM OF**

 

**DIEDRICH COFFEE, INC.**

 

**FRANCHISEAGREEMENT**

 

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**TABLE OFCONTENTS**

 
| ARTICLE 1 | DEFINITIONS                                                            |
|-----------|------------------------------------------------------------------------|
|      |                                                                   |
| ARTICLE 2 | GRANT                                                                  |
| 2.1       | Grant                                                                  |
| 2.2       | No  Sublicensing Rights                                                |
| 2.3       | No  Exclusive Territory                                                |
|      |                                                                   |
| ARTICLE 3 | TERM                                                                   |
| 3.1       | Initial Term                                                           |
| 3.2       | Renewal                                                                |
| 3.3       | Form and Manner of Renewal                                             |
| 3.4       | Conditions Precedent to  Renewal                                       |
| 3.5       | Notice  Required by Law                                                |
|      |                                                                   |
| ARTICLE 4 | PAYMENTS                                                               |
| 4.1       | Initial  Franchise Fees                                                |
| 4.2       | Continuing  Royalty                                                    |
| 4.3       | Advertising Fee                                                        |
| 4.4       | Pre-Authorized Payments.                                               |
| 4.5       | Other Payments                                                         |
| 4.6       | Application  of Funds                                                  |
| 4.7       | Interest  and Charges for Late Payments                                |
|      |                                                                   |
| ARTICLE 5 | CONSTRUCTION AND COMMENCEMENT OF BUSINESS                              |
| 5.1       | Location                                                               |
| 5.2       | Company Site Selection Assistance                                      |
| 5.3       | Lease                                                                  |
| 5.4       | Construction and  Renovation                                           |
| 5.5       | Maintaining and Remodeling  of “Diedrich Coffee” Coffeehouse |
|      |                                                                   |
| ARTICLE 6 | TRAINING AND ASSISTANCE                                                |
| 6.1       | Initial Training Program                                               |
| 6.2       | Additional  Training                                                   |
| 6.3       | Other  Assistance                                                      |
|      |                                                                   |
| ARTICLE 7 | OBLIGATIONS OF COMPANY                                                 |
| 7.1       | General                                                                |
| 7.2       | Company Default                                                        |

 

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| 7.3        | No  Other Obligations                                                 |
|------------|-----------------------------------------------------------------------|
|       |                                                                  |
| ARTICLE 8  | MANUALS AND STANDARDS OF FRANCHISEE QUALITY,  CLEANLINESS AND SERVICE |
| 8.1        | Product  Line and Service                                             |
| 8.2        | Containers, Fixtures and Other Goods                                  |
| 8.3        | Menus                                                                 |
| 8.4        | POS System                                                            |
| 8.5        | Manuals                                                               |
| 8.6        | Hours                                                                 |
| 8.7        | Compliance  with Applicable Law                                       |
| 8.8        | Signs, Designs and Forms of Publicity                                 |
| 8.9        | Uniforms  and Employee Appearance                                     |
| 8.10       | Vending  or Other Machines                                            |
| 8.11       | Co-Branding                                                           |
|       |                                                                  |
| ARTICLE 9  | ADVERTISING AND CO-OPS                                                |
| 9.1        | General  Requirements                                                 |
| 9.2        | Local  Advertising                                                    |
| 9.3        | Co-op  Advertising                                                    |
| 9.4        | Advertising  Program                                                  |
| 9.5        | Telephone Numbers and  Directory Advertising                          |
| 9.6        | Promotional  Campaigns                                                |
|       |                                                                  |
| ARTICLE 10 | DISTRIBUTION AND PURCHASE OF EQUIPMENT,  SUPPLIES, AND OTHER PRODUCTS |
| 10.1       | Coffee  and Diedrich Coffee Brand Products                            |
| 10.2       | Proprietary  Products                                                 |
| 10.3       | Non-Proprietary  Products                                             |
| 10.4       | Purchases from Company, Extensions of Credit                          |
| 10.5       | Purchase/Distribution Programs                                        |
| 10.6       | Test Marketing                                                        |
|       |                                                                  |
| ARTICLE 11 | REPORTS, BOOKS AND RECORDS, INSPECTIONS                               |
| 11.1       | General  Reporting                                                    |
| 11.2       | Inspections                                                           |
| 11.3       | Audits                                                                |
|       |                                                                  |
| ARTICLE 12 | MARKS                                                                 |
| 12.1       | Use of Marks                                                          |
| 12.2       | Non-Use of Trade Name                                                 |
| 12.3       | Use of Other  Marks                                                   |
| 12.4       | Non-ownership  of Marks                                               |

 

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| 12.5       | Defense of  Marks                                |
|------------|--------------------------------------------------|
| 12.6       | Prosecution of  Infringers                       |
| 12.7       | Modification of  Marks                           |
| 12.8       | Acts in  Derogation of the Marks                 |
| 12.9       | Assumed Name Registration                        |
|       |                                             |
| ARTICLE 13 | COVENANTS REGARDING OTHER BUSINESS INTERESTS     |
| 13.1       | Non-Competition                                  |
| 13.2       | Confidential Information                         |
| 13.3       | Franchisee’s  Affiliates                    |
|       |                                             |
| ARTICLE 14 | INTERFERENCE WITH EMPLOYMENT RELATIONS           |
| 14.1       | Prohibitions During Term                         |
| 14.2       | Prohibitions  After Term                         |
| 14.3       | Prohibitions Applicable  to Company              |
|       |                                             |
| ARTICLE 15 | NATURE OF INTEREST, ASSIGNMENT                   |
| 15.1       | Assignment  by Company                           |
| 15.2       | Assignment by Franchisee                         |
| 15.3       | Business  Entity Franchisee                      |
|       |                                             |
| ARTICLE 16 | DEFAULT AND TERMINATION                          |
| 16.1       | General                                          |
| 16.2       | Automatic Termination  Without Notice            |
| 16.3       | Option to  Terminate Without Notice              |
| 16.4       | Termination With Notice  and Opportunity To Cure |
| 16.5       | Reimbursement  of Company Costs                  |
| 16.6       | Cross-Default                                    |
| 16.7       | Notice Required  By Law                          |
|       |                                             |
| ARTICLE 17 | RIGHTS AND OBLIGATIONS UPON TERMINATION          |
| 17.1       | General                                          |
| 17.2       | Survival of Obligations                          |
| 17.3       | No  Ownership of Marks                           |
| 17.4       | Government  Filings                              |
|       |                                             |
| ARTICLE 18 | INSURANCE                                        |
| 18.1       | Insurance                                        |
| 18.2       | Use of  Proceeds                                 |
| 18.3       | Proof  of Insurance                              |
|       |                                             |
| ARTICLE 19 | RELATIONSHIP OF PARTIES, DISCLOSURE              |
| 19.1       | Relationship of Franchisee to  Company           |

 

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| 19.2       | Indemnity  by Franchisee                   |
|------------|--------------------------------------------|
|       |                                       |
| ARTICLE 20 | NOTICES                                    |
| 20.1       | General                                    |
|       |                                       |
| ARTICLE 21 | MISCELLANEOUS PROVISIONS                   |
| 21.1       | Company’s  Right To Cure Defaults     |
| 21.2       | Waiver and  Delay                          |
| 21.3       | Survival  of Covenants                     |
| 21.4       | Successors and Assigns                     |
| 21.5       | Joint and Several Liability                |
| 21.6       | General Release                            |
| 21.7       | Governing  Law/Consent to Jurisdiction     |
| 21.8       | Waiver  of Punitive Damages and Jury Trial |
| 21.9       | Limitations of Claims                      |
| 21.10      | Entire  Agreement                          |
| 21.11      | Titles  For Convenience                    |
| 21.12      | Gender And  Construction                   |
| 21.13      | Severability                               |
| 21.14      | Counterparts                               |
| 21.15      | Fees and Expenses                          |
| 21.16      | Counsel                                    |
|       |                                       |
| ARTICLE 22 | SUBMISSION OF AGREEMENT                    |
| 22.1       | General                                    |
|       |                                       |
| ARTICLE 23 | ACKNOWLEDGMENT                             |
| 23.1       | General                                    |
| 23.2       | Due Execution                              |

 

Exhibit A - Minimum Hours of Operation

Exhibit B - Franchisee Information

Exhibit C - Guaranty and Subordination Agreement

 

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**DIEDRICHCOFFEE**

**FRANCHISEAGREEMENT**

 

**THISAGREEMENT** is made this       day of                  ,        (the “Effective Date”) by and betweenDiedrich Coffee, Inc., a Delaware corporation, located at 2144 Michelson Drive,Irvine, California  92612, (“Company”),and                                                          ,[  ] an individual OR [  ] a                              organized under the laws of                                (the “Franchisee”), with reference to the following facts:

 

A.            Company owns certain proprietary andother property rights and interests in and to the “Diedrich Coffee” trademarkand service mark, and such other trademarks, service marks, logo types,insignias, trade dress, designs, and commercial symbols as Company may fromtime to time authorize or direct Franchisee to use in connection with theoperation of a “Diedrich Coffee” Coffeehouse (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.            Franchisee desires to obtain a licenseand franchise to operate a single “Diedrich Coffee” Coffeehouse under the Marksand in strict accordance with the System, and the standards and specificationsestablished by Company, and Company is willing to grant Franchisee such licenseand franchise under the terms and conditions of this Agreement.

 

**NOW,THEREFORE**, the parties agree as follows:

 

**ARTICLE 1**

**DEFINITIONS**

 

In this Agreementthe following capitalized terms shall have the meanings set forth below, unlessthe context otherwise requires:

 

“AdvertisingCo-op” shall have the meaning set forth in Section 9.3.

 

“Advertising Co-opRegion” shall have the meaning set forth in Section 9.3.

 

“Advertising Fee”shall have the meaning set forth in Section 4.3.

 

“Advertising FeeRate” shall have the meaning set forth in Section 4.3.

 

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“ApplicableCalendar Year” shall have the meaning set forth in Section 4.3.2.

 

“Applicable Law”means and includes applicable common law and all applicable statutes, laws,rules, regulations, ordinances, policies and procedures established by anyGovernmental Authority governing the operation of the “Diedrich Coffee”Coffeehouse, including all immigration, labor, disability, food and drug laws,health and safety regulations, and Americans With Disabilities Act requirements,as in effect on the Effective Date hereof, and as may be amended, supplementedor enacted from time to time.

 

“Assignment” shallhave the meaning set forth in Section 15.2.

 

“AuthorizedDiedrich Coffee Products” means the specific espresso drinks and coffees,roasted coffee beans and blends, premium teas, baked goods, snacks and otherfood items and ancillary products, which may include coffee making equipment,cups, hats, t-shirts and novelty items, as specified by Company from time totime in Company's Manuals, or as otherwise directed by Company in writing, forsale at the Franchisee's “Diedrich Coffee” Coffeehouse, prepared and served instrict accordance with Company's recipes, quality standards and specifications,including specifications as to ingredients, brand names, preparation andpresentation.

 

“Barista” means aperson who has been certified by Company as an expert in the knowledge andpreparation of espresso drinks.

 

“Business Entity”means any Partnership, limited liability company, and any association,corporation or other entity which is not an individual.

 

“CompetitiveActivities” shall mean to, own, operate, lend to, advise, be employed by, orhave any financial interest in any business that engages in the roasting ofgreen coffee beans; the sale of roasted coffee beans or ground coffee producedby third parties; or the production or sale at retail or wholesale of anyespresso or coffee product, or any other food products featured by “DiedrichCoffee” Coffeehouses.

 

“ConfidentialInformation” shall have the meaning set forth in Section 13.2.

 

“ContinuingRoyalty” shall have the meaning set forth in Section 4.2

 

“Co-op AdvertisingRegions” shall have the meaning set forth in Section 9.3.

 

“DesignatedFranchisee Representative” shall have the meaning set forth in Section 6.1.1.

 

“Diedrich CoffeeBranded Product” is any product now existing or developed in the future thatbears or is packaged under any of Company's Marks.

 

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“'Diedrich Coffee'Coffeehouse” shall refer to the full service location, kiosk, or coffee cartoperated pursuant to this Agreement under Company's Marks and in accordancewith the System and specializing in the sale of Authorized Diedrich CoffeeProducts.

 

“Effective Date” meansthe date indicated in the first paragraph of this Agreement.

 

“Franchisee” shallmean the person or Business Entity identified in the first paragraph of thisAgreement, and for purposes of Article 13 only, shall include Franchisee'sspouse and minor children and its Owners, officers and directors if Franchiseeis a Business Entity.

 

“GovernmentalAuthority” means and include all Federal, state, county, municipal and localgovernmental and quasi-governmental agencies, commissions and authorities.

 

“Gross Sales”means gross revenues (excluding allowances and sales taxes) received orreceivable by Franchisee as payment, whether in cash or for credit or barter(and, if for credit or barter, whether or not payment is received therefor),for all espresso, coffee, tea and other beverages, roasted coffee beans, food,and other goods, services, and supplies sold or prepared in Franchisee's“Diedrich Coffee” Coffeehouse, or which are promoted or sold under any of theMarks.

 

“Internet” meanscollectively the myriad of computer and telecommunications facilities,including equipment and software, which comprise the interconnected worldwidenetwork of networks that employ the TCP/IP [Transmission ControlProtocol/Internet Protocol], or any predecessor or successor protocols to suchprotocol, to communicate information of all kinds by fiber optics, wire, radio,or other methods of transmission

 

“Initial Fee”shall have the meaning set forth in Section 4.1

 

“Lease” shall havethe meaning set forth in Section 5.3.

 

“LeaseholdImprovements” shall have the same meaning set forth in Section 5.4.1.

 

“Location” shallhave the meaning set forth in Section 5.1.1.

 

“Manuals” meansCompany's Front Line Team Member Training Guide; Diedrich Coffee OperationsManual and Support Manual, and all related manuals now or hereafter created byCompany for use in the operation of a “Diedrich Coffee” Coffeehouse, as thesame may be amended and revised from time to time, including all bulletins,supplements and ancillary manuals.

 

“Marks” shall havethe meaning set forth in Recital A above.

 

“MaximumAdvertising Co-op Fee” shall have the meaning set forth in Section 9.3.2.

 

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“Owner” means anyshareholder, member, general or limited partner, trustee, or other equity ownerof a Business Entity; except that if Company has any ownership interest inLicensee, the term “Owner” shall not include or refer to the Company or itsOwners or affiliates, and no obligation or restriction upon the “Franchisee”, orits Owners, directors or officers shall bind Company, its Owners or affiliates,or their respective Owners, directors or officers.

 

“Partnership”means any general partnership, limited partnership or limited liabilitycompany.

 

“PartnershipRights” means voting power, property, profits or losses, or partnershipinterests of a Partner.

 

“Permits” meansand include all applicable franchises, licenses, permits, registrations,certificates and other operating authority required by Applicable Law.

 

“Premises” means,in the case of a kiosk or cart, the property at which the Franchisee's“Diedrich Coffee” Coffeehouse is located, including, unless otherwise expresslyprovided, any ancillary common areas, campus, buildings and other structuresassociated with the Premises.

 

“RestrictedPersons” means the Franchisee (if the franchisee is an individual), eachofficer, director, or direct or indirect Owner of an interest in Franchisee (iffranchisee is a Business Entity); and the spouse and family members who live inthe same household of each of the foregoing persons.

 

“Supplier” shallhave the meaning set forth in Section 10.3.

 

“System” shallhave the meaning set forth in Recital B.

 

“Term” shall havethe meaning set forth in Section 3.1, including any extensions thereof.

 

“Transfer Fee”shall have the meaning set forth in Section 15.2.12.

 

“Week” shall referto the 7 day period ending on Sunday of each calendar week, or such otherreporting period hereafter specified by Company.

 

**ARTICLE 2**

**GRANT**

 

2.1           Grant.

 

2.1.1        Company hereby awards Franchisee theright and license during the Term, upon the terms and subject to the provisionsof this Agreement, to use and display the Marks, and to use the System, tooperate at, and only at, the Location, one: (check one)

 

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o Full Service“Diedrich Coffee” Coffeehouse

o Kiosk

o Cart

 

2.1.2        Franchisee may not use or operate anypermanent or temporary cart, kiosk or other vending device in connection withany Full Service “Diedrich Coffee” Coffeehouse pursuant to this Agreement,except with Company's prior written consent and pursuant to a separate addendumhereto on a form specified by Company.

 

2.2           No Sublicensing Rights.  Franchisee shall not subfranchise,sublicense, subcontract, sublease, or enter any management agreement providingfor the right to operate the “Diedrich Coffee” Coffeehouse or to use the Systemgranted pursuant to this Agreement.

 

2.3           No Exclusive Territory.  The license and franchise granted to theFranchisee under this Agreement is non-exclusive, and does not grant Franchiseeany protected trading area or territory, nor any rights to obtain additionalfranchises from Company.  Withoutlimiting the generality of the foregoing, the Company expressly reserves the exclusive,unrestricted right, in its sole and absolute discretion, directly andindirectly:

 

(a)           to own or operate, and to franchiseand license others to own, operate or co-brand, coffeehouses, kiosks, and cartsat any location other than at the specific Location identified in Section5.1.1, regardless of its proximity to the “Diedrich Coffee” Coffeehouseoperated pursuant hereto; and

 

(b)           to produce, promote, license,distribute and market products, whether or not they bear any of the Marks, atwholesale or retail, through its employees, affiliates, representatives,licensees, franchisees, assigns, agents and others, including bulk andpre-packaged roasted coffee, premium teas, ice cream, beverages, snacks andother food products; clothing; books, souvenirs and novelty items, through anyoutlet or channel of commerce, including grocery stores and convenience stores(regardless of their proximity to Franchisee's “Diedrich Coffee” Coffeehouse),sales by means of the Internet, mail order catalogs, direct mail advertising,vending machines and other distribution methods.

 

**ARTICLE 3**

**TERM**

 

3.1           Initial Term. Subject to earlier termination pursuant to Article 16, the “Term” ofthis Agreement shall begin on the Effective Date and continue for a period of10 years.

 

3.2           Renewal. Subject to the conditions contained in Section 3.4, at the expiration ofthe Term hereof, Franchisee shall have the right (the “Renewal Right”) to enterinto a new franchise agreement in the form then generally being offered toprospective “Diedrich Coffee”

 

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coffeehousefranchisees (the “Renewal Franchise Agreement”) for one 10 year period (the“Renewal Term”).  The term of theRenewal Franchise Agreement shall commence upon the date of expiration of theTerm hereof; provided, however, notwithstanding the terms of Company'sthen-current form of  FranchiseAgreement: (a) Franchisee shall not have the right to renew or extend the termthereof or enter into any additional Renewal Franchise Agreement for a periodfollowing the Renewal Term; and (b) the Renewal Franchise Agreement shall bemodified to conform to the Renewal Rights granted above.

 

3.3           Form and Manner of Renewal.  Franchisee shall exercise its Renewal Right,if at all, strictly in the following manner:

 

3.3.1        Between 9 months and 12 months beforethe expiration of the Term, Franchisee shall notify Company in writing(“Renewal Notice”) that it intends to exercise its Renewal Right and no soonerthan 10 business days nor more than 20 business days after Franchisee receivesCompany's Offering Circular, if applicable, and execution copies of the RenewalFranchise Agreement, Franchisee shall execute the copies of said RenewalFranchise Agreement and deliver them to Company together with the then-currentinitial fee due to Company.

 

3.3.2        If Franchisee shall have exercised itsRenewal Right in accordance with Section 3.3.1 and satisfied all of theconditions contained in Section 3.4, Company shall execute the RenewalFranchise Agreement executed by Franchisee and at or prior to the expiration ofthe Term deliver one fully executed copy thereof to Franchisee.

 

3.3.3        If Franchisee fails to perform any ofthe acts, or deliver any of the notices required pursuant to the provisions ofSections 3.3 or 3.4, in a timely fashion, such failure shall be deemed anelection by Franchisee not to exercise its Renewal Right and shallautomatically cause Franchisee's said Renewal Right to lapse and expire.

 

3.4           Conditions Precedent to Renewal.  Franchisee's Renewal Right is conditionedupon Franchisee's fulfillment of each and all of the following conditionsprecedent:

 

3.4.1        At the time Franchisee delivers itsRenewal Notice to Franchisor and at all times thereafter until the commencementof the Renewal Term, Franchisee shall have fully performed all of its materialobligations under this Agreement, the Manuals and all other agreements then ineffect between Franchisee and Company (or its affiliates) including, but notlimited to, Area Development Agreement(s), Franchise Agreement(s), or SubleaseAgreement(s).

 

3.4.2        Without limiting the generality ofSection 3.4.1, Franchisee shall not have committed 2 or more material breachesof this Agreement during the 12 month period immediately preceding the date ofthe Renewal Notice for which Franchisor shall have delivered a notice ofdefault, whether or not such default was cured.

 

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3.4.3        Without limiting the generality ofSection 3.4.1, Franchisee shall not have committed 2 or more material breachesof this Agreement during any 12 month period during the Term of this Agreementfor which Franchisor shall have delivered notice of default, whether or notsuch defaults were cured.

 

3.4.4        Without limiting the generality of Section3.4.1, Franchisee shall not have committed 4 or more material breaches of thisAgreement during the Term of this Agreement for which Franchisor shall havedelivered notice of default, whether or not such defaults were cured.

 

3.4.5        Franchisee shall, and Franchisee shallcause its Owners and affiliates to, execute and deliver to Franchisor a generalrelease, on a form prescribed by Franchisor of any and all known and unknownclaims against Franchisor and its affiliates and their officers, directors, agents,shareholders and employees.

 

3.4.6        At Company's request, Franchisee shall,prior to the date of commencement of the Renewal Term, undertake and completeat its expense the remodeling, renovation or modernization of the Premises andthe “Diedrich Coffee” Coffeehouse operated pursuant hereto to comply with theCompany's then-current specifications and standards for new “Diedrich Coffee”Coffeehouses.

 

3.5           Notice Required by Law.  If Applicable Law requires that Company givenotice to Franchisee prior to the expiration of the Term, this Agreement shallremain in effect on a week to week basis until Company has given the noticerequired by such Applicable Law.  IfCompany is not offering new franchises, is in the process of revising, amendingor renewing its form of franchise agreement or offering circular, or is notlawfully able to offer Franchisee its then-current form of franchise agreement,at the time Franchisee delivers its Renewal Notice, Company may, in its solesubjective discretion, (i) offer to renew this Agreement upon the same termsset forth herein for a renewal term determined in accordance with Section 3.2hereof, or (ii) offer to extend the Term hereof on a week to week basisfollowing the expiration of the Term hereof for as long as it deems necessaryor appropriate so that it may lawfully offer its then-current form of franchiseagreement.

 

**ARTICLE 4**

**PAYMENTS**

 

4.1           Initial Franchise Fees.  Franchisee shall pay to Company an initialfranchise fee (the “Initial Fee”) equal to $30,000 (or $7,500 if theFranchisee's “Diedrich Coffee” Coffeehouse is a kiosk or cart).  The Initial Fee shall be payable in goodfunds upon signing this Agreement, and shall be deemed fully earned by Companyupon the execution of this Agreement by Company and Franchisee and shall benon-refundable, in whole or in part, under any circumstances.  If Franchisee is party to an AreaDevelopment Agreement with Company, then Franchisee will receive a creditagainst the Initial Fee in accordance with that Area Development Agreement.

 

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4.2           Continuing Royalty.  Franchisee shall pay to Company each monthduring the Term, an amount equal to 5% of its Gross Sales during the precedingmonth (the “Continuing Royalty”). Franchisee shall cause its Continuing Royalty for each month to beactually received by Company on or before the 10th day of the following month;provided, however, that Franchisee at its election may alternatively adopt aperiodic payment cycle that matches Company's fiscal accounting cycle(presently thirteen (13)  four (4) weekfiscal periods per fiscal year).  Inthat event, Franchisee shall notify Company of such election in writing and thereaftercause its Continuing Royalty for each four (4) week fiscal period (“fiscalperiod”) to be actually received by Company on or before the 10th day followingthe end of  the fiscal period.

 

4.3           Advertising Fee.  Franchisee shall pay to Company each month during the Term,simultaneously with its Continuing Royalty payments and in the manner describedin Section 4.2, an advertising fee equal to 1% (the “Advertising Fee Rate”)ofits Gross Sales during the preceding month (“Advertising Fee”).  Company reserves the right to adjust theAdvertising Fee from time to time provided it shall in no event exceed 2% ofFranchisee's Gross Sales, and may be amended by the Company no more frequentlythan annually.  The Advertising Feeshall be in addition to any other co-op expenditures required or permittedunder Article 9 hereof.  Company shall administerthe Advertising Fee as part of the advertising program provided in Section 9.4.

 

4.4           Pre-Authorized Payments.

 

4.4.1        If Franchisee fails to report its saleson a timely basis in accordance with Section 11.1, Company may estimate theamount of Franchisee's sales, and deposit or transfer the reported, or in theabsence of a report, the estimated, amounts due into its own account, using theFranchisee's pre-authorized checks or other instruments or authority.

 

4.4.2        At Company's request, Franchisee shallinstruct its bank to pay the amount of its monthly Continuing Royalty,Advertising Fee and other fees directly to Company from Franchisee's account,by electronic funds transfer or such other automatic payment mechanism whichCompany may designate and upon the terms and conditions set forth in theOperations Manual, and promptly upon Company's request, Franchisee shallexecute or re-execute and deliver to Company such pre-authorized check formsand other instruments or drafts required by Company's bank, payable againstFranchisee's bank account, to enable Company to draw Franchisee's ContinuingRoyalty, Advertising Fee and other sums payable under the terms of thisAgreement.

 

4.5           Other Payments. In addition to all other payments provided herein, Franchisee shall payto Company, its parent companies, subsidiaries, affiliates and designees, asapplicable, promptly when due:

 

4.5.1        All amounts advanced by Company or whichCompany has paid, or for which Company has become obligated to pay on behalf ofFranchisee for any reason whatsoever.

 

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4.5.2        All sums due on account of the purchaseof products or services by or for the account of Franchisee.

 

4.5.3        The amount of all sales taxes, usetaxes, personal property taxes and similar taxes, which shall be imposed uponFranchisee and required to be collected or paid by Company (a) on account ofFranchisee's Gross Sales, or (b) on account of Continuing Royalties,Advertising Fees or Initial Fees collected by Company from Franchisee (butexcluding ordinary income taxes). Company, at its sole discretion, may collect the taxes in the samemanner as franchise fees are collected herein and if Company collects suchtaxes, Company shall promptly pay the tax collections to the appropriategovernmental authority; provided, however, that it shall be Franchisee'sresponsibility to pay any sales, use or other taxes now or hereinafter imposedon Initial Fees, Continuing Royalties, and Advertising Fees imposed by anyGovernmental Authorities.

 

4.6           Application of Funds.  If Franchisee shall be delinquent in thepayment of any obligation to Company hereunder, or under any other agreementwith Company, Company shall have the absolute right to apply any paymentsreceived from Franchisee to any obligation owed, whether under this Agreementor otherwise, notwithstanding any contrary designation by Franchisee as toapplication.

 

4.7           Interest and Charges for Late Payments.

 

4.7.1        If Franchisee shall fail to pay toCompany the entire amount of the Continuing Royalty, Advertising Fee or anyother sums owed to Company, promptly when due, Franchisee shall pay to Company,in addition to all other amounts which are due but unpaid, interest on theunpaid amounts, from the due date thereof, at the rate of 1-1/2% per month, orthe highest rate allowable under applicable law, whichever is less.

 

4.7.2        If any check, draft, electronic orotherwise, is unpaid because of insufficient funds or otherwise, thenFranchisee shall pay Company's expenses arising from such non-payment,including bank fees in the amount of at least $30.00, hourly staff chargesarising from such default, and any other related expenses incurred by Company.

 

**ARTICLE 5**

**CONSTRUCTIONAND COMMENCEMENT OF BUSINESS**

** **

5.1           Location.

 

5.1.1        Franchisee's “Diedrich Coffee”Coffeehouse shall be located at the following address:                                                                                                                 ,and if the “Diedrich Coffee” Coffeehouse is a kiosk or cart, the followingspecific location at the address inserted above:                                                                                                                 (the “Location”).

 

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5.1.2        Franchisee may not relocate the“Diedrich Coffee” Coffeehouse, including in the case of a kiosk or cartrelocating to any other location within the Premises, without Company's priorwritten consent.  Any attempt to do soshall be a material breach hereof.

 

5.2           Company Site Selection Assistance.  Company may voluntarily (without obligation)assist Franchisee in identifying or obtaining a location.  Company's said assistance, if any, shall notbe construed to insure or guarantee the profitable or successful operation ofthe Location by Franchisee, and Company hereby expressly disclaims anyresponsibility therefor.  Franchiseeacknowledges that it is its sole responsibility to find a suitable location,that the location of the “Diedrich Coffee” Coffeehouse will be a criticalfactor in the success of Franchisee's business, and that Company is notobligated to directly or indirectly identify or obtain a location forFranchisee.

 

5.3           Lease.  If theLocation is leased or subleased by Franchisee, (i) Company shall have the rightof approval of such lease or sublease, as applicable (the “Lease”), a true andcorrect copy of which shall be delivered to Company at least 15 days prior tothe execution thereof; (ii) the term of said Lease shall be for a period whichis not less than the Term of this Agreement, unless Company shall approve, inwriting, a shorter term; (iii) Franchisee shall neither create nor purport tocreate any obligations on behalf of Company, nor grant or purport to grant tothe landlord thereunder any rights against Company, nor agree to any otherterm, condition, or covenant which is inconsistent with any provision of thisFranchise Agreement; (iv) Franchisee shall duly and timely perform all of theterms, conditions, covenants and obligations imposed upon him under the Lease;(v) the Location shall be constructed and improved pursuant to the provisionsof Section 5.4 hereof; (vi) the Lease shall grant Company an option, withoutcost or expense to Company, to assume the Lease in the event of termination orexpiration of this Franchise Agreement for any reason, and shall expresslyprovide that Company shall have the right (but not the obligation) to succeedto Franchisee's rights under the Lease if Franchisee fails to exercise anyoption to renew, and upon Franchisee's default thereunder, and that upon anyalleged breach thereof by Franchisee, the landlord thereunder shall beobligated to notify Company in writing at least 15 days prior to itstermination or non-renewal and, in the case of a default, Company shall havethe right, but not the obligation, to cure the breach and to succeed toFranchisee's rights under said Lease by giving written notice of such electionto Franchisee and such landlord; Franchisee hereby appoints Company as itsattorney-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 the landlordshall 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 anyfranchisee or licensee of the Company (or its affiliates), from operating a“Diedrich Coffee” Coffeehouse or any other retail establishment.  In all cases, the Lease shall provide thatupon expiration or termination thereof for

 

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any reason,Franchisee shall, upon Company's demand, remove all of the Marks from theLocation and Premises and modify the decor of the Location so that it no longerresembles, in whole or in part, a “Diedrich Coffee” coffeehouse, kiosk or cartand that if Franchisee shall fail do so, Company will be given written noticeand the right to enter the Location and Premises to make such alterations, inwhich event Franchisee shall reimburse Company for all direct and indirectcosts and expense it may incur in connection therewith, including attorney'sfees.

 

5.4           Construction and Renovation.

 

5.4.1        If on the Effective Date the “DiedrichCoffee” Coffeehouse, Location or Premises at which the “Diedrich Coffee”Coffeehouse will operate has not been constructed, or if the same has beenconstructed but does not comply with Company's current standards in effect fornew “Diedrich Coffee” coffeehouses, kiosks or carts, as applicable, Franchiseeshall at its sole cost and expense promptly cause the “Diedrich Coffee”Coffeehouse and Location to be constructed, equipped and improved in accordancewith such standards and specifications. Except to the extent otherwise agreed to by Company, all fixtures, furnishings,equipment and signs (“Leasehold Improvements”) shall be purchased by Franchiseeonly from suppliers and manufacturers approved by Company.

 

5.4.2        Following the Effective Date and priorto any construction or renovation of the “Diedrich Coffee” Coffeehouse orLocation, Company shall provide Franchisee with copies of Company'sspecifications for the design and layout of the “Diedrich Coffee” Coffeehouseand required Leasehold Improvements. Franchisee shall, in all respects, comply with all such specificationsand criteria unless Company shall, in writing, agree to modificationsthereof.  Franchisee shall employarchitects, engineers and general contractors of its own selection, and at itssole cost and expense, to prepare such architectural, engineering andconstruction drawings and site plans (collectively referred to as the“Construction Documents”), and/or to modify the standard Construction Documentswhich may be provided by Company, and to obtain all Permits required toconstruct, remodel, renovate, and/or equip the “Diedrich Coffee” Coffeehouseand Location.  All such ConstructionDocuments, and all modifications and revisions thereto, shall be submitted toCompany for its prior review and approval before Franchisee's commencement ofconstruction pursuant thereto.  Whencompleted, said “Diedrich Coffee” Coffeehouse and Location shall in all respectstrictly comply with the Company's specifications therefor, as modified orrevised if applicable with Company's prior written consent.  Franchisee must submit to Company one (1)set of “Project Record Drawings” within sixty (60) days of the “DiedrichCoffee” Coffeehouse opening.  “ProjectRecord Drawings” are hereby defined as the set of Construction Documents thatare marked to show the changes made in the field, with particular attentionpaid to the information on concealed elements (e.g. underground utilities) thatcannot be readily identified at a later time. Such drawings should be clearly marked as “Project Record Drawings.”

 

5.4.3        Subject only to causes beyond thereasonable control of Franchisee, such as, by way of illustration, strikes, materialshortages, fires and other acts of God, which Franchisee could not by theexercise of due diligence have avoided, Franchisee shall complete

 

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construction orrenovation, as the case may be, of the Location and “Diedrich Coffee”Coffeehouse and shall install all Leasehold Improvements therein as soon aspossible, but in any event within 3 months after commencement ofconstruction.  At all times prior toFranchisee commencing the operation of the “Diedrich Coffee” Coffeehouse,Company shall have the right, and Franchisee shall provide access to Company,to inspect and examine the Premises, Location, “Diedrich Coffee” Coffeehouseand all Leasehold Improvements, for the purpose of insuring compliance withCompany's standards and specifications.

 

5.4.4        Franchisee shall commence the operationof the “Diedrich Coffee” Coffeehouse not later than 6 months following theEffective Date.

 

5.4.5        The time periods for the commencementand completion of construction and the installation of Leasehold Improvementsas referred to in this Section 5.4 are of the essence of this Agreement.  If Franchisee fails to perform its obligationscontained in this Section, the Company may deem the Franchisee's failure to soperform its obligations as aforesaid to constitute a material breach of thisAgreement.

 

5.5           Maintaining and Remodeling of“Diedrich Coffee” Coffeehouse.

 

5.5.1        Franchisee at all times during the Termshall maintain the condition and appearance of its “Diedrich Coffee”Coffeehouse in accordance with the Manuals and consistent with the image of a“Diedrich Coffee” Coffeehouse as attractive, clean, and efficiently operated,offering high quality food products and beverages, efficient and courteousservice, and pleasant ambiance.  If atany time in the Company's reasonable judgment, the general state of repair,appearance or cleanliness of the Location (including the “Diedrich Coffee”Coffeehouse and the non-Coffeehouse portion of Franchisee's Location andPremises, and parking areas) or its Leasehold Improvements, does not meet theCompany's standards therefor, Franchisee shall immediately upon receipt ofnotice from Company specifying the action to be taken by Franchisee to correctsuch deficiency, repair and refurbish the “Diedrich Coffee” Coffeehouse, theLocation and the Premises, as applicable, and make such modifications andadditions to its layout, decor and general theme, as may be required from timeto time to maintain such condition, appearance, efficient operation, ambianceand overall image, including without limitation, replacement of worn out orobsolete Leasehold Improvements, and repair and paint the interior and exteriorof the “Diedrich Coffee” Coffeehouse, and appurtenant parking areas (if any),and periodic cleaning and redecorating. Franchisee shall fully implement and complete such repairs, painting,refurbishment and changes within 90 days after receipt of said writtennotice.  Such maintenance shall not bedeemed to constitute remodeling, as set forth below.

 

5.5.2        From time to time during the Term,Company may require Franchisee at Franchisee's sole cost and expense torefurbish, remodel and improve the “Diedrich Coffee” Coffeehouse to conform theFranchisee's building design, trade dress, color schemes, and presentation ofMarks to the Company's then current public image.  Such a remodeling may include extensive structural changes to the“Diedrich Coffee” Coffeehouse and replacement or modification

 

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of Leasehold Improvementsas well as such other changes as the Company may direct, and Franchisee shallundertake such a program promptly upon notice from the Company, and shallcomplete any such remodeling as expeditiously as possible, but in any eventwithin 90 days of commencing same. Company may, on one or more occasions, waive or defer for such period oftime as Company may deem appropriate, Franchisee's obligation to remodel anysuch “Diedrich Coffee” Coffeehouse, if Company determines that any such“Diedrich Coffee” Coffeehouse is, on the date scheduled for commencement ofsuch remodel, in substantial conformity with Company's then current standard systemdecor specifications, or if the proposed remodeling is within the last twoyears prior to the expiration of the Term (subject to Company's right torequire remodeling, renovation or modernization as a condition to Franchisee'sexercise of its Renewal Right as provided in Section 3.4).

 

5.5.3        If the “Diedrich Coffee” Coffeehouse isdamaged or destroyed by fire or any other casualty, Franchisee, within 30 daysthereof, shall initiate such repairs or reconstruction, and thereafter in goodfaith and with due diligence continue (until completion not more than 120 daysafter such fire or other casualty) such repairs or reconstruction, in order torestore the premises of the “Diedrich Coffee” Coffeehouse to its originalcondition prior to such casualty.  If, inCompany's reasonable judgment, the damage or destruction is of such a nature orto such extent that it is feasible for Franchisee to repair or reconstruct theLocation and the “Diedrich Coffee” Coffeehouse in conformance with the thenstandard “Diedrich Coffee” decor specifications, the Company may requireFranchisee, by giving written notice thereof, that Franchisee repair orreconstruct the Location and “Diedrich Coffee” Coffeehouse in conformance withthe then standard System decor specifications.

 

**ARTICLE 6**

**TRAININGAND ASSISTANCE**

 

6.1           Initial Training Program.

 

6.1.1        Franchisee shall, at all times, employ ageneral manager and one or more assistant managers and other employeesacceptable to Company each of whom shall have been trained by Company or by atrainer certified by Company and qualified as “Barista” in accordance withCompany's policies and standards, and at least one of whom shall be working atthe “Diedrich Coffee” Coffeehouse at all times while the “Diedrich Coffee”Coffeehouse is open to the public.  Atno extra charge, Company shall provide an initial training program in theCompany's System and methods of operation to up to 5 persons selected byFranchisee and who shall include the general manager and assistant manager(s)of the “Diedrich Coffee” Coffeehouse. Said initial training program shall consist of up to 5 weeks oftraining, as Company may determine, at one or more of the following locations:(i) Company's corporate headquarters in Irvine, California, (ii) at aCompany-owned or franchised coffeehouse, (iii) at Franchisee's Location, or(iv) at such place or places as may be designated by Company.  In the case of a Franchisee which is aBusiness Entity, Company may require the general manager to be an Owner,officer or other designated representative

 

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selected by Franchiseeand acceptable to, and approved by Company (“Designated FranchiseeRepresentative”).  Subject to Sections6.1.3 and  6.1.4, Company will bear itscosts of providing the initial training program concurrently to up to 5 personspursuant to this Section 6.1.1, including Company's staff salaries, materials,and all technical training tools. Franchisee shall pay all travel, living, compensation, and otherexpenses, if any, incurred by Franchisee and/or Franchisee's employees inconnection with attendance at training programs.  Franchisee may not open its “Diedrich Coffee” Coffeehouse untilsuch training shall have been successfully completed by Franchisee's general manager,assistant manager and Franchisee's management team and staff has been certifiedby Company.  Company shall pay nocompensation for any services performed by trainee(s) in connection with suchtraining programs.

 

6.1.2        The contents of the initial trainingprogram and manner of conducting such program shall be at Company's solediscretion and control, however, the training course will be structured toprovide practical training in the implementation and operation of a “DiedrichCoffee” Coffeehouse and may include such topics as on-site coffee and espressodrink and food preparation, Barista training, use of point of sale cashregister and/or computer systems, inventory, cash handling, Diedrich Coffeestandards, personnel management, marketing techniques, reports, equipmentmaintenance, safety and security, customer service techniques and financialcontrols.

 

6.1.3        Company shall provide the initialtraining at no additional charge pursuant to Sections 6.1.1 and 6.1.2 only ifthis is the first “Diedrich Coffee” Coffeehouse operated by Franchisee, and notif Franchisee has otherwise previously received such training for thisLocation.  Unless otherwise agreed inwriting by Company, the Designated Franchisee Representative shall become acertified trainer and thereafter train Franchisee's “Diedrich Coffee”Coffeehouse general manager, assistant manager(s) and other employees pursuantto Section 6.1.4.

 

6.1.4        Unless waived by Company, each ofFranchisee's general managers, assistant managers and staff shall havesatisfactorily completed Company's initial training program as requiredpursuant to Section 6.1.1, provided, however, that if general manager orDesignated Franchisee Representative has been approved by Company as acertified trainer, Franchisee's general manager, assistant managers or stafffor the “Diedrich Coffee” Coffeehouse may be trained by such certified trainerin lieu of attending Company's initial training program as required pursuant toSection 6.1.1.  Should Company determinethat any general manager's, assistant manager's or other employee's training isunsatisfactory, Company may require such person(s) (or a replacement traineeacceptable to Company) to undergo further training by Company at a timescheduled by Company, until Company is satisfied that Franchisee's trainee hassatisfactorily completed the training course and Franchisee shall advance orreimburse, at Company's option, all direct and indirect costs and expense thatCompany may incur for the wages, lodging, subsistence and travel of Company'spersonnel, if conducted at the “Diedrich Coffee” Coffeehouse in Company'sdiscretion, for the duration of the extended training and Company's thencurrent standard training fee. Franchisee acknowledges that because of Company's superior skill andknowledge with respect to the training and skill required to manage the“Diedrich Coffee” Coffeehouse, its judgment as to whether or not

 

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the Franchisee or hismanager has satisfactorily completed such training shall be determined byCompany in its sole subjective judgment, exercised in good faith.

 

6.2           Additional Training.  Company may, from time to time, at itsdiscretion, make available to Franchisee or its manager and/or DesignatedFranchisee Representative, or any of them, additional optional training coursesor programs during the term of this Agreement held on a national or regionalbasis at locations selected by Company to instruct Franchisee with regard tonew procedures or programs which Company deems, in its reasonable judgment, tobe of material importance to the operation of the “Diedrich Coffee” Coffeehouseby its franchisees.  The time and placeof such training courses shall be at Company's sole discretion.  Such supplementary training may relate, byway of illustration, to product production techniques, new recipes, marketing,bookkeeping, accounting and general operating procedures, and theestablishment, development and improvement of computer systems.  Company may establish charges applicable toall franchisees similarly situated for such optional training courses.   In addition to any charge Company mayestablish, Franchisee shall pay all transportation costs, food, lodging andsimilar costs incurred in connection with attendance at such courses.  Company shall pay no compensation for anyservices performed by trainee(s) in connection with such training programs.

 

6.3           Other Assistance.

 

6.3.1        Company will advise Franchisee from timeto time regarding the operation of Franchisee's “Diedrich Coffee” Coffeehousebased on Franchisee's reports or Company's inspections.  Company will provide guidance to Franchiseein the Manuals; in bulletins or other written materials; by electronic media;by telephone consultation; and/or Company's office or Franchisee's “DiedrichCoffee” Coffeehouse.  If Franchiseerequests and Company agrees to provide additional or special guidance,assistance or training, Franchisee must pay Company then applicable charges,including Company's per diem charges and any transportation costs, food,lodging and similar costs incurred by Company and its personnel.

 

6.3.2        Company may, from time to time, at itsdiscretion, cause its field representatives to visit Franchisee's “DiedrichCoffee” Coffeehouse for the purpose of rendering advice and consultation ortraining, with respect to the “Diedrich Coffee” Coffeehouse, its operation andperformance, and compliance by Franchisee with the Manuals.  If provided at the Franchisee's request, theCompany may require the Franchisee to pay such training charges as may be thenin effect, and to reimburse Company for all transportation costs, food, lodgingand similar costs incurred by Company and its personnel in connection with suchtraining.

 

6.3.3        In the event of any sale transfer, orassignment, the transferee/assignee must be trained by Company as a conditionof Company's consent to such transfer. All transfer fees and tuition costs for such training shall be paid toCompany in advance of the attendance by such transferee and its employees inaccordance with Section 15.2.12 herein. No “Diedrich Coffee” Coffeehouse shall be opened or re-opened untilCompany certifies that the transferee is approved to operate the respective“Diedrich Coffee” Coffeehouse.

 

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**ARTICLE 7**

**OBLIGATIONSOF COMPANY**

 

7.1           General. Company shall perform the following obligations:

 

7.1.1        To review and approve or disapprove theFranchisee's proposed Location;

 

7.1.2        To supply to Franchisee a set ofstandard decor and layout plans and to thereafter approve the initial decor andlayout of Franchisee's “Diedrich Coffee” Coffeehouse as described in Section5.4;

 

7.1.3        Subject to Section 8.5.2, to loanFranchisee a copy of its Manuals which contain mandatory and suggestedspecifications, standards and procedures. The Manuals are confidential and remains Company's property.

 

7.1.4        To provide the training and assistancedescribed in Article 6.

 

7.1.5        To administer the Advertising Programdescribed in Section 9.3, if and when implemented.

 

7.2           Company Default.  Company shall not, and can not be held in breach of thisAgreement until (i) Company has received written notice from Franchiseedescribing in detail any alleged breach from Franchisee; and (ii) Company hasfailed to remedy the breach within a reasonable period of time after suchnotice, which period shall not be less than 60 days plus such additional timeas reasonably required by Company if because of the nature of the allegedbreach it cannot reasonably be cured within said 60 days, provided Companypromptly commences and continues diligently to cure such alleged breach.

 

7.3           No Other Obligations.  Company shall not be obligated toprovide any services to Franchisee except expressly provided herein and any andall other services which Company may provide to Franchisee during the Termshall be at its sole discretion and Company may cease to provide the samewithout notice of further obligation to Franchisee.

 

**ARTICLE 8**

**MANUALSAND STANDARDS OF FRANCHISEE**

**QUALITY,CLEANLINESS AND SERVICE**

 

 

In order topromote the value and goodwill of Company's Marks and the System and to protectCompany's Marks and the other Diedrich Coffee Franchisees who comprise theDiedrich

 

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Coffee franchise system,Franchisee shall conduct its business in accordance with the standardspromulgated by Company as follows:

 

8.1           Product Line and Service.  Franchisee shall serve all and onlyAuthorized Diedrich Coffee Products at or from the “Diedrich Coffee”Coffeehouse, all of which shall be purchased by Franchisee from a Company or adesignated or approved distributor or manufacturer, as provided in Article10.  Franchisee acknowledges thatAuthorized Diedrich Coffee Products may differ at “Diedrich Coffee”Coffeehouses, kiosks, carts, and may vary depending on the operating season andgeographic location of the Franchisee's “Diedrich Coffee” Coffeehouse or otherfactors.

 

8.1.1        Franchisee shall not produce, advertisefor sale, sell or give away any goods or services unless the same product hasbeen approved in the Manuals as an Authorized Diedrich Coffee Product approvedfor sale in Franchisee's “Diedrich Coffee” Coffeehouse and has not beenthereafter disapproved in writing by Company.

 

8.1.2        All coffee, coffee drinks and other foodand beverage products sold by Franchisee shall be of the highest quality, andthe ingredients, composition, specifications, and preparation of such foodproducts shall conform strictly with the instructions and recipes provided byCompany or contained in Company's Manuals, and with the further requirements ofCompany as they are communicated to Franchisee from time to time.

 

8.2           Containers, Fixtures and Other Goods.  Franchisee agrees that all food and drinkitems served at the “Diedrich Coffee” Coffeehouse shall be served in approvedcontainers bearing accurate reproductions of Company's Marks.  All containers, napkins, bags, cups,matches, menus and other packaging and like articles used in connection withFranchisee's “Diedrich Coffee” Coffeehouse shall conform to Company'sspecifications, shall be imprinted with Company's Marks and shall be purchasedby Franchisee from a distributor or manufacturer approved in writing byCompany, as provided in Article 10, which approval will not be unreasonablywithheld.  No item of merchandise,furnishings, interior and exterior decor items, supplies, fixtures, equipmentor utensils bearing any of Company's Marks shall be used in or upon any “DiedrichCoffee” Coffeehouse unless the same shall have been first submitted to andapproved in writing by Company.

 

8.3           Menus.  AllAuthorized Diedrich Coffee Products shall be distributed under the specificname designated by Company.  Franchiseeshall not remove any Authorized Diedrich Coffee Product from the Franchisee'smenu unless Franchisee is so instructed by Company.

 

8.3.1        Authorized Diedrich Coffee Productsshall be marketed by approved menu formats to be utilized in Franchisee's“Diedrich Coffee” Coffeehouse.  Theapproved and authorized menu and menu format(s) may include, in Company'sdiscretion, requirements concerning organization, graphics, productdescriptions, illustrations, and any other matters (except prices) related tothe menu, whether or not similar to those listed.  In Company's discretion, the menu and/or menu format(s) may varydepending upon region, market size, season and other factors.  Company

 

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may change the menuand/or menu format(s) from time to time or region to region or authorize testsfrom region to region or authorize non-uniform regions or coffeehouses withinregions, in which case Franchisee will be given a reasonable time (not longerthan 60 days) to discontinue use of any old menu format(s) and implement use ofthe new menu format(s).

 

8.3.2        Franchisee shall, upon receipt of noticefrom Company, add any Authorized Diedrich Coffee Products to its menu accordingto the instructions contained in the notice. Franchisee shall have a minimum of 30 days after receipt of writtennotice in which to fully implement any such change.  Franchisee shall cease selling any previously approved ordiscontinued product within 30 days after receipt of notice that the product isno longer approved.

 

8.4           POS System. Franchisee shall purchase, use and maintain the point of sale cashcollection system (the “POS System”) as specified in the Manuals or otherwiseby Company in writing.  The POS Systemmay include a cash register, register tape printer, magnetic stripe reader andcash drawer.  Upon at least 90 daysprior written notice, Company may require Franchisee to computerize the POSSystem and connect the POS System to Franchisee's telephone line(s) via modemor other communications medium. The POS System must accept and use the PLU filesent from Company.  In addition, the POSSystem must be able to create a sales mix file, in the format defined byCompany.  The POS System must beconnected to a telephone line at all times and be capable of accessing theinternet via a designated third party network (such as MSN, Worldnet, etc.) forthe purpose of implementing software, transmitting and receiving data,accessing the internet for ordering and maintaining the POS System.  Within a reasonable time upon Company'srequest, Franchisee shall apply for and maintain debit cards, credit cards orother non-cash systems existing or developed in the future to enable customersto purchase Authorized Diedrich Coffee Products via such procedure, asspecified by Company.  Company mayrequire an upgrade to the POS hardware and/or software.

 

8.5           Manuals. Franchisee shall operate the “Diedrich Coffee” Coffeehouse in strictcompliance with the standard procedures, policies, rules and regulationsestablished by Company and incorporated in Company's Manual(s).  The subject matter of the Manuals mayinclude, without limitation, matters such as: forms, information relating to product and menu specifications, cashcontrol, purchase orders, general operations, labor schedules, personnel, GrossSales reports, payroll procedures, training and accounting; safety andsanitation; design specifications and color of uniforms; display of signs andnotices; authorized and required equipment and fixtures, includingspecifications therefor; Mark usage; insurance requirements; leaserequirements; decor; standards for management and personnel, hours ofoperation; local advertising formats; standards of maintenance and appearanceof the “Diedrich Coffee” Coffeehouse; and required posting of notices tocustomers as to how to contact the Company to submit complaints.  Without limiting the generality of theforegoing, the Company may establish emergency procedures pursuant to which itmay require Franchisee to temporarily close the “Diedrich Coffee” Coffeehouseto the public, in which event Company shall not be liable to Franchisee for anylosses or costs, including consequential damages or loss profits occasionedthereby.

 

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8.5.1        Company shall have the right to modifythe Manuals at any time and from time to time by the addition, deletion orother modification to the provisions thereof. All such modifications shall be equally applicable to all similarlysituated franchisees who are required by their franchise agreements to complytherewith, and no such modification shall alter Franchisee's fundamental statusand rights under this Agreement. Modifications in the Manuals shall become effective upon delivery ofwritten notice thereof to Franchisee unless a longer period is specified insuch written notice.  The Manuals, asmodified from time to time as hereinabove provided shall be an integral part ofthis Agreement and reference made in this Agreement, or in any amendments,exhibits or schedules hereto, to the Manuals shall be deemed to mean theManuals kept current by amendments from time to time.

 

8.5.2        Upon the execution of this Agreement,Company shall furnish to Franchisee one copy of the Manuals, unless Franchiseepurchased the “Diedrich Coffee” Coffeehouse from an existing franchisee orentered into this Agreement as a renewal or extension of a pre-existingfranchise agreement for the same Location. The Manuals and all amendments to the Manuals (and copies thereof) arecopyrighted and remain Company's property. They are loaned to Franchisee for the term of this Agreement, and mustbe returned to Company upon the Agreement's termination or expiration.  The Manuals are highly confidentialdocuments which contain certain Confidential Information of Company, andFranchisee shall never reveal, and shall take all reasonable precautions, bothduring and after the Term of this Agreement, to assure that its employees orany other party under Franchisee's control, shall never reveal any of thecontents of the Manuals or any other publication, recipe or secret provided byCompany, except as is necessary for the operation of Franchisee's “DiedrichCoffee” Coffeehouse.  Upon theexpiration or termination of this Agreement for any reason whatsoever, Franchiseeshall immediately return the Manuals to Company.  Franchisee shall not make, or cause or allow to be made, anycopies or reproductions of all or any portion of the Manuals without Company'sexpress prior written consent.

 

8.6           Hours.  Subject toApplicable Law to the contrary, Company and Franchisee agree that Franchisee's“Diedrich Coffee” Coffeehouse shall be open and operational during at least theminimum hours and days set forth on Exhibit A which is attached hereto andincorporated herein by this reference. Franchisee shall diligently and efficiently exercise its best efforts toachieve the maximum Gross Sales possible from its Location, and shall remainopen for longer hours if additional opening hours are reasonably required tomaximize operations and sales.  Withoutlimiting the foregoing, if the hours set forth in Exhibit A are incorrect inrelation to the sales potential of Franchisee's “Diedrich Coffee” Coffeehouse,then Company and Franchisee shall reasonably adjust such hours by jointlyestablishing new hours of operation.  Itis acknowledged that the hours of other Franchisees will vary in relation toeach respective location, and local legal restrictions, if any.

 

8.7           Compliance with Applicable Law.  Franchisee shall operate its “DiedrichCoffee” Coffeehouse as a clean, orderly, legal and respectable place ofbusiness in accordance with Company's business standards and merchandisingpolicies, and shall comply with all Applicable Laws.  Franchisee shall not cause or allow any part of its Location orPremises to be used for any immoral or illegal purpose.

 

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8.8           Signs, Designs and Forms of Publicity.  Franchisee shall maintain suitable signsand/or awnings at, on, or near the front of the Location and Premises,identifying the Location as a “Diedrich Coffee” Coffeehouse, which shallconform in all respects to Company's specifications and requirements and thelayout and design plan approved for the Location, subject only to restrictionsimposed by Applicable Law.  Withoutlimiting the foregoing:

 

8.8.1        Franchisee will cause to have DiedrichCoffee signs (a) on each pole sign and each monument sign existing or to beerected; (b) on any other free standing sign on the Location existing or to beerected, and (c) on two sides of the Location and, in the case of a kiosk orcart, the Premises building.

 

8.8.2        No sign used at or in connection withthe “Diedrich Coffee” Coffeehouse shall contain any trademark, service mark,logo type or commercial symbol of any other person or Business Entity except asexpressly authorized by Company in writing.

 

8.8.3        No exterior or interior sign or anydesign, advertisement, sign, or form of publicity, including form, color,number, location, and size, shall be used by Franchisee unless first submittedto Company and approved in writing (except with respect to prices).

 

8.9           Uniforms and Employee Appearance.  Franchisee shall cause all employees, whileworking in “Diedrich Coffee” Coffeehouses, to: (i) wear uniforms of such color,design, and other specifications as Company may designate from time to time,and (ii) present a neat and clean appearance. In the event the type of uniform utilized by Franchisee is removed fromthe list of approved uniforms, Franchisee shall have 180 days from receipt ofwritten notice of such removal to discontinue use of its existing inventory ofuniforms and implement the approved type of uniform.

 

8.10         Vending or Other Machines.  Except with Company's prior writtenapproval, Franchisee shall not cause or allow vending or game machines or anyother mechanical device to be installed or maintained in its Location, and inthe case of a kiosk or cart shall use its best efforts to prevent theinstallation or maintenance of same at the Premises.

 

8.11         Co-Branding. Franchisee may not install any co-brand at Franchisee's Locationwithout Company's prior written consent, which may be granted or withheld inits sole discretion, and, if granted may be subject to such terms andconditions as Company may establish. For the purpose of this article, a co-brand shall be defined as anindependent operating system owned by another person or entity (and not byCompany or any affiliate) that is incorporated as an operational part withinthe Franchisee's Premises.  An examplewould be an independent ice cream/yogurt operation installed withinFranchisee's Location.  Nothing hereinshall prevent Company from co-branding or authorizing any third party toco-brand “Diedrich Coffee” coffeehouses, kiosks or carts in conjunction withsuch third party's operations.

 

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**ARTICLE 9**

**ADVERTISINGAND CO-OPS**

 

9.1           General Requirements.  Franchisee shall conduct all localadvertising and promotion in accordance with such policies and provisions withrespect to format, content, media, geographic coverage and other criteria asare from time to time contained in the Manuals, or as otherwise directed byCompany, and shall not use or publish any advertising material which does notconform to said policies and provisions or as to which Franchisee shall nothave received Company's prior written approval; provided, however, thatif Company shall not object to any proposed advertisement submitted byFranchisee for approval within 10 business days after Company's receiptthereof, such advertisement shall be deemed approved subject to Company's rightto subsequently withdraw its approval. Franchisee may not develop, create, generate, own, license, lease or usein any manner any computer medium or electronic medium (including any Internethome page, website, bulletin board, newsgroup or other Internet-related medium)which in any way uses or displays the Marks, in whole or part, and Franchiseeshall not cause or allow the Marks, or any of them, to be used or displayed inwhole or part, as an Internet domain name, or on or in connection with anyInternet home page, website, bulletin board, newsgroup or otherInternet-related activity without Company's express prior written consent, andthen only in such manner and in accordance with such procedures, policies,standards and specifications as Company may establish.

 

9.2           Local Advertising.  Each calendar quarter, Franchisee shallexpend an amount of not less than 1% of its Gross Sales for local advertisingrelating to Franchisee's “Diedrich Coffee” Coffeehouse.  Such local advertising does not include thecost of Franchisee listing its Store in the white pages or yellow pages of suchtelephone directories distributed in Franchisee's area as Company authorizes ordirects in accordance with Section 9.5. Amounts contributed to an Advertising Co-op, if any, pursuant to Section9.3 during any calendar quarter shall be credited against Franchisee's localadvertising requirement described in this Section 9.2.  Franchisee shall deliver evidence of suchexpenditures in the form and manner prescribed by Company from time totime.  Until further notice fromCompany, Franchisee shall deliver to Company quarterly (no later than the 15thday of the months of January, April, July, and October), copies of invoicesshowing that Franchisee made the required expenditures during the precedingcalendar quarter.  If the invoicessubmitted do not demonstrate expenditure of at least the minimum amountrequired for local advertising, Franchisee shall pay to Company the amountnecessary to total 1% of Franchisee's Gross Sales during the prior quarter,less actual expenditures on local advertising. Those funds will be used by Company in accordance with Section 9.4,below.

 

9.3           Co-op Advertising.  The Company shall have the right at any time to designate,and from time to time to redefine, a region (the “Advertising Co-op Region”)within which the Coffeehouse operated by Franchisee pursuant to this Agreementis located, which region may comprise a Designated Market Areas (“DMA”)established periodically by Nielson Media Research, an Area of DominantInfluence (“ADI”) established periodically by Arbitron, a Standard MetropolitanStatistical Area (“SMSA”) or such other geographic area  established by Company from time to time toidentify the market area in which the Franchisee's “Diedrich Coffee” 

 

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Coffeehouse is located,which shall function for the purpose of creating a cohesive team (an“Advertising Co-op”) to coordinate advertising, marketing efforts and programsand maximizing the efficient use of local and/or regional advertising media.

 

9.3.1        If and when Company creates anAdvertising Co-op for the region in which Franchisee's “Diedrich Coffee”Coffeehouse is located, Franchisee (and, if Company owns a “Diedrich Coffee”Coffeehouse in such Advertising Co-op Region, Company), shall becomesubscribers and members of the Advertising Co-op and shall execute asubscription agreement on a form prescribed by Company, and participate thereinin accordance with the Subscription Agreement and the Certificate ofIncorporation and Bylaws of such Advertising Co-op.  The geographic size, configuration and content of such regions,when and if established by the Company, shall be binding upon Franchisee, allother “Diedrich Coffee” franchisees similarly situated who are by the terms oftheir franchise agreements required to participate, and Company, if Companyowns and operates a Coffeehouse in such Advertising Co-op Region; provided thatthe Company alone may from time to time (but not more frequently than one timeper calendar year) amend the geographic size, configuration and content of suchAdvertising Co-op Region.  At allmeetings of such Advertising Co-op, each participating Franchisee, as well asCompany, if applicable, shall be entitled to one vote for each “DiedrichCoffee” Coffeehouse owned and located within the region of the AdvertisingCo-op.  At any time upon reasonablenotice, 20% of the total eligible member votes, a majority of the directors ofsuch Advertising Co-op (who shall be elected in accordance with the Bylaws ofsuch Advertising Co-op), or Company by itself, may call a meeting of allmembers of the Advertising Co-op.  Exceptfor any amendment of the Certificate of Incorporation, Operating Agreement orBy-laws of the Advertising Co-op (which shall require the affirmative vote ofthe Company), all matters concerning operation of the Advertising Co-op shallbe decided by the affirmative vote of at least 2/3's of the total eligiblemember votes, and such vote shall bind all members of said Advertising Co-op,including Company.

 

9.3.2        Franchisee and other franchisees who aremembers of the Advertising Co-op will contribute to the Advertising Co-op suchamount as may be determined by vote of the Advertising Co-op, not to exceed anamount equal to 3% of the Gross Sales of each Advertising Co-op member's“Diedrich Coffee” Coffeehouse(s) located in the region (the “MaximumAdvertising Co-op Fee”);  provided thatif the Advertising Fee Rate for any year shall exceed 1%, then the percentagerate of the Maximum Advertising Co-op Fee shall be reduced for that year by anamount equal to said excess (e.g. if the Advertising Fee Rate is increased to2%, the Maximum Advertising Co-op Fee shall be reduced to equal to 2% of theGross Sales).   The precise amount ofsuch contribution shall be established from time to time by the AdvertisingCo-op.  Payments will be made monthly,on the same day as the Continuing Royalty payments pursuant to Section 4.2.

 

9.3.3        Each Advertising Co-op will (subject toSection 9.1) decide as to the usage of funds contributed pursuant to Section9.3.2 for media time, production of media materials, whether for radio,television, newspapers or store level materials such as flyers, or posters, orfor any other type of advertising or marketing use, and then such AdvertisingCo-op shall in writing request approval from Company to use said funds in saidmanner.  No placement of advertising or

 

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commitment of advertisingfunds on behalf of the Advertising Co-op will be made without Company's priorwritten approval.  Company reserves theright to establish general standards concerning the operation of the AdvertisingCo-op, advertising agencies retained by the Advertising Co-op, and advertisingprograms conducted by the Advertising Co-op. From time to time Company may propose certain general or specific usesof the funds contributed pursuant to Section 9.3.2, and in each instanceFranchisee shall attend (by any means permitted by the Advertising Co-op) andvote (by any means permitted by the Advertising Co-op) at a meeting of theAdvertising Co-op wherein such proposal shall be considered.

 

9.4           Advertising Program.

 

9.4.1        Company shall administratively segregateon its books and records all Advertising Fees received from Franchisee and allother franchisees of Company.  Nothingherein shall be deemed to create a trust fund, and Company may commingleAdvertising Fees with its general operating funds and expend such sums in themanner herein provided.  For each“Diedrich Coffee” Coffeehouse that Company or any of its affiliateoperates,  Company or such affiliatewill similarly allocate Advertising Fees in the amount that would be requiredto be paid if a franchisee operated a franchised “Diedrich Coffee” Coffeehousein the same location.

 

9.4.2        If Company expends less than the totalof all Advertising Fees contributed by franchisees and allocated for “DiedrichCoffee” Coffeehouses operated by Company and its affiliates during any fiscalyear, such excess may be accumulated for use during subsequent years.  If Company advances money for advertising,Company will be entitled to be reimbursed for such advances, including interestat the rate equal to the Company's cost of funds.  Each determination by Company of an interest rate hereunder shallbe conclusive and binding for all purposes, absent manifest error.

 

9.4.3        Company will use Advertising Fees fornational, regional, or local advertising, public relations or promotionalcampaigns or programs designed to promote and enhance the image, identity orpatronage of franchised and Company-owned “Diedrich Coffee” Coffeehouses.  Such expenditures may include, withoutlimitation (a) expenditures to conduct marketing studies, and to produce andpurchase advertising art, commercials, musical jingles, print advertisements,point of sale materials, media advertising, outdoor advertising art, and directmail pamphlets and literature; and (b) a payment to Company or its affiliates,for internal expenses incurred to administer the Advertising Fees.  Company shall determine the cost, media,content, format, style, timing, allocation and all other matters relating tosuch advertising, public relations and promotional campaigns.  Nothing herein shall be construed to requireCompany to allocate or expend Advertising Fees so as to benefit any particularfranchisee or group of franchisees on a pro rata or proportional basis orotherwise.  Company may make copies ofadvertising materials available to Franchisee with or without additionalreasonable charge, as determined by Company. Any additional advertising shall be at the sole cost and expense ofFranchisee.

 

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9.4.4        Upon written request, Company shallfurnish to Franchisee within 120 days after the end of each calendar year, areport for the preceding year, prepared and certified correct by an officer ofthe Company containing the calculations of the Advertising Fees which Companyactually expended during such calendar year and the amount remaining whichshall be carried over for use during the following year(s).

 

9.5           Telephone Numbers and DirectoryAdvertising.  In addition to theAdvertising Fees, local advertising, and Franchisee's required expenditures forCo-op Advertising, Franchisee shall, at its sole expense, subscribe for andmaintain throughout the Term, or such lesser period designated by Company, oneor more listed telephone numbers which shall be listed in the white pages ofsuch telephone directory or directories as Company may designate or approvewhich service Franchisee's Location and adjacent or nearby areas.  Company reserves the right to establishgeneral standards concerning directory and other types of advertising.

 

9.6           Promotional Campaigns.  From time to time during the term hereof,Company shall have the right to establish and conduct promotional campaigns ona national or regional basis, which may by way of illustration and notlimitation promote particular products or marketing themes.  Franchisee agrees to participate in suchpromotional campaigns upon such terms and conditions as the Company mayestablish.  Franchisee acknowledges andagrees that such participation may require Franchisee to purchase point of saleadvertising material, posters, flyers, product displays and other promotionalmaterial, and to the extent permitted by Applicable Law may establish themaximum prices which Franchisee may impose for products offered in thepromotion.

 

**ARTICLE 10**

**DISTRIBUTIONAND PURCHASE OF**

**EQUIPMENT,SUPPLIES, AND OTHER PRODUCTS**

 

10.1         Coffee and Diedrich Coffee Brand Products.

 

10.1.1      At all times throughout the Term,Franchisee shall purchase and maintain in inventory such types and quantitiesof Authorized Diedrich Coffee Products as are needed to meet reasonablyanticipated consumer demand.  Franchiseeshall purchase Diedrich Coffee Brand Products, and all roasted coffee beans andblends served, offered or sold at the “Diedrich Coffee” Coffeehouse, solely andexclusively from Company or its designated third party distributors orsuppliers, and all such Diedrich Coffee Brand Products, roasted coffee beansand blends which are purchased from Company or its designated third party distributorsor suppliers shall be used, offered and sold by Franchisee only on a retailbasis, at the “Diedrich Coffee” Coffeehouse pursuant hereto, or at other“Diedrich Coffee” coffeehouses opened by Franchisee under Company's Marks andin accordance with the System pursuant to other validly subsisting franchiseagreements with Company.

 

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10.2         Proprietary Products.  Company may, from time to time throughoutthe Term hereof, require that Franchisee purchase, use, offer and/or promote, and maintain in stock at the“Diedrich Coffee” Coffeehouse in such quantities as are needed to meetreasonably anticipated consumer demand, certain proprietary powder mixes andother ingredients and raw materials, which are manufactured in accordance withCompany's proprietary recipes, specifications and/or formulas (“ProprietaryProducts”).  Franchisee shall purchaseProprietary Products only from Company (if it sells the same) or its designees.  If Franchisee shall purchase ProprietaryProducts from Company, Franchise shall purchase the same at Company's thencurrent published prices charged to similarly situated franchisees, which maybe changed or modified from time to time without prior notice, and which willinclude a profit to the Company. Company shall not be obligated to reveal such recipes, specificationsand/or formulas of such Proprietary Products to Franchisee, non-designatedsuppliers, or any other third parties.

 

10.3         Non-Proprietary Products.  Company may designate baked goods and otherfood and dairy products, condiments, beverages, paper goods, fixtures,furnishings, equipment (including espresso and coffee-making equipment),uniforms, supplies, menus, packaging, forms, POS and cash register systems,computer hardware, software, modems and peripheral equipment and otherproducts, supplies and equipment other than Proprietary Products whichFranchisee may or must use and/or offer and sell at the “Diedrich Coffee”Coffeehouse (“Non-Proprietary Products”). Franchisee may, but shall not be obligated to, purchase suchNon-Proprietary Products from Company, if Company supplies same.  Franchisee may use, offer or sell only suchNon-Proprietary Products that Company has expressly authorized, or that werepurchased or obtained from Company or a producer, manufacturer or supplier(“Supplier”) designated or approved by Company pursuant to Section 10.3.2below.

 

10.3.1      Franchisee may purchase authorizedNon-Proprietary Products from (i) Company, (ii) Suppliers designated by Company,or (iii) Suppliers selected by Franchisee and approved in writing by Companyprior to Franchisee making such purchase(s). Each such Supplier designated or approved by Company must comply withCompany's usual and customary requirements regarding insurance,indemnification, and non-disclosure, and shall have demonstrated to thereasonable satisfaction of Company: (a) its ability to supply a Non-ProprietaryProduct meeting the specifications of Company, which may include, withoutlimitation, specifications as to brand name and model, contents, quality,freshness and compliance with governmental standards and regulations; and (b)its reliability with respect to delivery and the consistent quality of itsproducts or services.

 

10.3.2      If Franchisee should desire to procureauthorized Non-Proprietary Products from a Supplier other than Company or onepreviously approved or designated by Company, Franchisee shall deliver writtennotice to Company of its desire to seek approval of such Supplier, which noticeshall (i) identify the name and address of such Supplier, (ii) contain suchinformation as may be requested by Company or required to be provided pursuantto the Manuals (which may include reasonable financial, operational andeconomic information regarding its business ), and (iii) identify theauthorized Non-Proprietary Products desired to be purchased from

 

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such Supplier.  Company shall, upon request of Franchisee,furnish to Franchisee specifications for such Non-Proprietary Products if suchare not contained in the Manuals.  TheCompany may thereupon request that the proposed Supplier furnish Company at nocost to Company product samples, specifications and such other information asCompany may require.  Company or itsrepresentatives shall also be permitted to inspect the facilities of theproposed Supplier and establish economic terms, delivery, service and otherrequirements consistent with other distribution relationships for other“Diedrich Coffee” Coffeehouses.

 

(a)           Company will use its reasonableefforts to notify Franchisee of its decision within 90 days after Company'sreceipt of Franchisee's request for approval and other requested informationand items in full compliance with Section 10.3.2.  Nothing in this Article shall require Company to approve anydistributor, and without limiting Company's right to approve or disapprove aSupplier in its discretion, Franchisee acknowledges that it is generally disadvantageousto the system generally from a cost and service basis to have more than onedistributor in any given market area and that among the other factors Companymay consider in deciding whether to approve a proposed Supplier, it mayconsider the affect that such approval may have on the ability of Company andits franchisees to obtain the lowest distribution costs and on the quality anduniformity of products offered system-wide by Diedrich Coffee franchisees.  Company may revoke its approval upon theSupplier's failure to continue to meet any of Company's criteria.

 

(b)           As a further condition of suchapproval, Company may require such Supplier to agree in writing: (i) to providefrom time to time upon Company's request free samples of any Non-ProprietaryProduct it intends to supply to Franchisee, (ii) to faithfully comply withCompany's specifications for applicable Non-Proprietary Products sold by it,(iii) to sell any Non-Proprietary Product bearing the Marks only to franchiseesof Company and only pursuant to a trademark license agreement in formprescribed by Company (which may require payment of a royalty), (iv) to provideto Company duplicate purchase invoices for Company's records and inspectionpurposes and (v) to otherwise comply with Company's reasonable requests.

 

(c)           Franchisee or the proposed Suppliershall pay to Company in advance all of Company's reasonably anticipated costsin reviewing the application of the Supplier to service the Franchisee and allcurrent and future reasonable costs and expenses, including travel and livingcosts, related to inspecting, reinspecting and auditing the Suppliers'facilities, equipment, and food products, and all product testing costs paid byCompany to third parties.

 

10.4         Purchases from Company, Extensions of Credit.

 

10.4.1      Company shall not be liable to Franchiseeon account of any delay or failure in the manufacture, delivery or shipment ofroasted coffee beans, blends or other products caused by events orcircumstances beyond Company's reasonable control including such events aslabor or material shortages, conditions of supply and demand, import/exportrestrictions, or disruptions in Company's supply sources.

 

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10.4.2      All product orders by Franchisee shall besubject to acceptance by Company at Company's designated offices, and Companyreserves the right to accept or reject, in whole or in part, any order placedby Franchisee.  Company will establishthe payment terms upon which it will accept Franchisee's orders, and mayrequire Franchisee to pay for orders on a cash-in-advance or cash-on-deliverybasis.

 

10.4.3      Each order placed by Franchisee for anyproduct shall be deemed to incorporate all of the terms and conditions of thisAgreement, shall be deemed subordinate to this Agreement in any instance whereany term or condition of such order conflicts with any term or condition ofthis Agreement, and shall include such information as Company may from time totime specify, and shall be submitted on such form of purchase order as my beprescribed by Company from time to time. No purchase order submitted by Franchisee shall contain any terms exceptas approved in writing by Company, nor be deemed complete unless all of theinformation required by the prescribed purchase order form, as revised fromtime to time, is provided by Franchisee. No new or additional term or condition contained in any order placed byFranchisee shall be deemed valid, effective or accepted by Company unless suchterm or condition shall have been expressly accepted by Company in writing.

 

10.5         Purchase/Distribution Programs.  Franchisee agrees that at such times thatCompany establishes a regional purchase or distribution program, or both, forany of the Franchisee's goods, raw materials or supplies, which may benefit Franchiseeby reduced price, lower labor costs, production of improved AuthorizedProduct(s), increased reliability in supply, improved distribution, costcontrol (establishment of consistent pricing for reasonable periods to avoidmarket fluctuations), improved operations by Franchisee or othertangible benefits to Franchisee, Franchisee will participate in such purchasingprogram in accordance with the terms of such program.

 

10.6         Test Marketing. Company may, from time to time, require Franchisee to test marketproducts and/or services in connection with the operation of the “DiedrichCoffee” Coffeehouse.  Franchisee shallcooperate with Company in connection with the conduct of such test marketing programs and shall comply with theCompany's rules and regulations established from time to time in connectionherewith.

 

**ARTICLE 11**

**REPORTS,BOOKS AND RECORDS, INSPECTIONS**

 

11.1         General Reporting.  Franchisee shall submit monthly financial reporting forms andsuch other financial, operational and statistical information as Company mayrequire to: (i) assist Franchisee in the operation of its “Diedrich Coffee”Coffeehouse in accordance with the System; (ii) allow Company to monitor theFranchisee's Gross Sales, purchases, costs and expenses; (iii) enable Company todevelop chain wide statistics which may improve bulk purchasing; (iv) assistCompany in the development of new Authorized Products or the removal ofexisting unsuccessful products; (v) enable Company to refine existingAuthorized Diedrich Coffee Products; (vi) generally improve

 

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chain-wide understandingof the System (collectively, the “Information”).  Without limiting the generality of the foregoing:

 

11.1.1      Franchisee will allow Company to poll on adaily basis at a time selected by the Company the Franchisee's “DiedrichCoffee” Coffeehouse computerized POS system to retrieve sales, usage, andoperations data.

 

11.1.2      On or before noon (pacific standard time)each Friday, during the Term hereof, Franchisee shall submit a weekly salessummary, on a form prescribed by Company, reporting all Gross Sales for thepreceding week (defined as the seven day period beginning each Thursday andending on the following Wednesday) either by electronic mail (“e-mail”), byfacsimile or, by any other electronic means prescribed by Company.

 

11.1.3      On or before the 10th day of each month,or fiscal period (if Franchisee has adopted Company's fiscal accounting cycleas described in Article 4 above), during the Term hereof, Franchisee shallsubmit a monthly sales summary signed by Franchisee, on a form prescribed byCompany, reporting all Gross Sales for the preceding month, or fiscal period asapplicable, together with such additional financial information as Company mayfrom time to time request.

 

11.1.4      On or before the 30th day following eachcalendar quarter during the Term hereof, Franchisee shall submit to Companyfinancial statements for the preceding quarter, including a Balance Sheet andProfit and Loss Statement, prepared in the form and manner prescribed by theCompany and in accordance with generally accepted accounting principles, whichshall be certified by Franchisee to be accurate and complete.  Franchisee shall also provide Company withquarterly sales and menu mix data in the format and manner prescribed byCompany.

 

11.1.5      Franchisee shall submit to Company asemi-annual Profit and Loss Statement, signed and certified by Franchisee.  The Profit and Loss Statement shall beprepared by a Certified or Public Accountant, in accordance with generallyaccepted accounting principles, and shall provide Franchisee's sales, expensesand financial status with respect to Franchisee's “Diedrich Coffee”Coffeehouse.  Franchisee shall submit toCompany a copy of the original signed 1120 or 1120S tax form each and everyyear or any other forms which take the place of the 1120 or 1120S forms.  Franchisee shall also provide Company withcopies of signed original sales and use tax forms contemporaneously with theirfiling with the appropriate state or local authority.  Company reserves the right to require such further informationconcerning Franchisee's “Diedrich Coffee” Coffeehouse as Company may from timeto time reasonably request.

 

11.1.6      Within 60 days following the end of eachcalendar year, Franchisee shall submit to Company an unaudited annual financialstatement prepared in accordance with generally accepted accounting principles,and in such form and manner prescribed by Company, which shall be certified byFranchisee to be accurate and complete.

 

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11.1.7      Franchisee shall immediately (in no eventmore than 24 hours following) notify Company of any (a) incident that mayadversely affect the operation or financial condition of Franchisee's “DiedrichCoffee” Coffeehouse, Company or its affiliates; (b) legal action (including thecommencement of a suit or proceeding, or the threat thereof), (c) issuance ofany writ, order, injunction, award or decree of any court, agency or Governmentauthority, including any citation, fine or closing order, or (d) any otheradverse inquiry, notice, demand or sanction received by Franchisee relating tothe operation of the “Diedrich Coffee” Coffeehouse or Location, including anyalleged violation of any Applicable Law, including health, safety or employmentlaw violations, and including any labor dispute or actual or threatened laborstrike, work stoppage, lock-out or other incident relating to any laboragreement, and shall provide Company with copies of all related correspondenceand other communications and information relating thereto.

 

11.2         Inspections. Company's authorized representatives shall have the right to enterFranchisee's Location and “Diedrich Coffee” Coffeehouse during business hours,with or without notice, without unreasonably disrupting Franchisee's businessoperations, for the purposes of examining same, conferring with Franchisee'semployees, inspecting and checking operations, food, beverages, furnishings,interior and exterior decor, supplies, fixtures, and equipment, and determiningwhether the business is being conducted in accordance with this Agreement, theSystem and the Manuals.  If any suchinspection indicates any deficiency or unsatisfactory condition with respect toany matter required under this Agreement or the Manuals, including but notlimited to quality, cleanliness, service, health and authorized product line,Company will notify Franchisee in writing of Franchisee's non-compliance withthe Manuals, the System, or this Agreement. Franchisee shall have 24 hours after receipt of such notice, or suchother greater time period as Company in its sole discretion may provide, tocorrect or repair such deficiency or unsatisfactory condition, if it can becorrected or repaired within such period of time.  If not, Franchisee shall within such time period commence suchcorrection or repair and thereafter diligently pursue it to completion.

 

11.3         Audits. Upon 10 days prior written notice, Company, its agents or representativesmay audit Franchisee's books and records in accordance with generally acceptedstandards established by certified public accountants.  In connection with such audit(s) or otheroperational visits, Franchisee shall keep its cash receipts records, monthlycontrol forms, accounts payable records including all payments to Franchisee'sSuppliers in its “Diedrich Coffee” Coffeehouse or at its business office for 5years after their due date, which records shall be available for examination byCompany or its representative(s), at Company's request.  Without any prior written notice, Company,its agents or representatives may inspect Franchisee's entire “Diedrich Coffee”Coffeehouse and Franchisee's daily, weekly and monthly statistical informationwhich is required under the Manuals. Franchisee shall make such information available for such inspections inrecognition that an operational inspection cannot succeed without review ofessential statistical information.  Ifany audit or other investigation reveals an under-reporting or under-recordingerror of 5% percent or more, then in addition to any other sums due, theexpenses of the audit/inspection shall be borne and paid by Franchisee uponbilling by Company, plus interest at the highest compound rate authorized bylaw, but not to exceed the rate of 15% percent per annum.

 

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**ARTICLE 12**

**MARKS**

 

12.1         Use of Marks. Subject to Section 12.7, the “Diedrich Coffee” Coffeehouse hereinlicensed and franchised shall be named “Diedrich Coffee” without any suffix orprefix attached thereto and Franchisee shall use and display such of theCompany's Marks and such signs, advertising and slogans as Company may fromtime to time prescribe or approve.  Uponexpiration or sooner termination of this Agreement, Company may, if Franchiseedoes not do so, execute in Franchisee's name and on Franchisee's behalf, anyand all documents necessary in Company's judgment to end and cause thediscontinuance of Franchisee's use of the Marks and Company is herebyirrevocably appointed and designated as Franchisee's attorney-in-fact so to do.

 

12.2         Non-Use of Trade Name.  If Franchisee is a Business Entity, it shallnot use Company's Marks, or Company's trade name, or any words or symbols whichare confusingly similar to the Marks, as all or part of Franchisee's name.

 

12.3         Use of Other Marks.  Franchisee shall not display the trademark,service mark, trade name, insignia or logotype of any other person or BusinessEntity in connection with the operation of the “Diedrich Coffee” Coffeehouse.

 

12.4         Non-ownership of Marks.  Nothing herein shall give Franchisee anyright, title or interest in or to any of the Marks, except a mere privilege andlicense during the term hereof, to display and use the same according to theterms and conditions herein contained.

 

12.5         Defense of Marks.  If Franchisee receives notice, or is informed, of any claim, suitor demand against Franchisee on account of any alleged infringement, unfaircompetition, or similar matter on account of its use of the Marks in accordancewith the terms of this Agreement, Franchisee shall promptly notify Company ofany such claim, suit or demand. Thereupon, Company shall take such action as it may deem necessary andappropriate to protect and defend Franchisee against any such claim by anythird party; Company shall not be obligated to take any such action,however.  Franchisee shall not settle orcompromise any such claim by a third party without the prior written consent ofCompany.  Company shall have the soleright to defend, compromise or settle any such claim, in its discretion, atCompany's sole cost and expense, using attorneys of its own choosing, andFranchisee shall cooperate fully with Company in connection with the defense ofany such claim.  Franchisee mayparticipate at its own expense in such defense or settlement, but Company'sdecisions with regard thereto shall be final.

 

 

12.6         Prosecution of Infringers.  If Franchisee shall receive notice or isinformed or learns that any third party, which it believes to be unauthorizedto use the Marks, is using the Marks or any variant thereof, Franchisee shallpromptly notify Company of the facts relating to such alleged infringinguse.  Thereupon, Company shall, in itssole discretion, determine whether or not it wishes to take any action againstsuch third person on account of such alleged infringement of the

 

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Marks.  Franchisee shall have no right to make anydemand against any such alleged infringer or to prosecute any claim of any kindor nature whatsoever against such alleged infringer for or on account of suchinfringement.

 

12.7         Modification of Marks.  From time to time, in the Manuals or indirectives or bulletins supplemental thereto, Company may add to, delete ormodify any or all of the Marks. Franchisee shall use, or cease using, as may be applicable, the Marks,including but not limited to, any such modified or additional trade names,trademarks, service marks, logotypes and commercial symbols, in strictaccordance with the procedures, policies, rules and regulations contained inthe Manuals or in written directives issued by Company to Franchisee, as thoughthey were specifically set forth in this Agreement.

 

12.8         Acts in Derogation of the Marks.  Franchisee agrees that the Marks are theexclusive property of Company and Franchisee now asserts no claim and willhereafter assert no claim to any goodwill, reputation or ownership thereof byvirtue of Franchisee's licensed and/or franchised use thereof, orotherwise.  Franchisee shall not do orpermit any act or thing to be done in derogation of any of the rights ofCompany in connection with the same, either during the Term of this Agreementor thereafter, and that it will use the Marks only for the uses and in themanner licensed and/or franchised hereunder and as herein provided.  Without limiting the foregoing, Franchiseeshall not interfere in any manner with, or attempt to prohibit, the use ofCompany's Marks by any other franchisee or licensee of Company.

 

12.9         Assumed Name Registration.  Franchisee agrees to obtain any fictitiousor assumed name registration required under applicable law.  Promptly upon the expiration or terminationof this Agreement for any reason whatsoever, Franchisee shall promptly executeand file such documents as may be necessary to revoke or terminate such assumedname registration, and if Franchisee shall fail to promptly execute and filesuch documents as may be necessary to effectively revoke and terminate suchassumed name registration, Franchisee hereby irrevocably appoints Company asits attorney-in-fact to do so for and on behalf of Franchisee.

 

**ARTICLE 13**

**COVENANTSREGARDING OTHER BUSINESS INTERESTS**

 

13.1         Non-Competition.  Franchisee acknowledges that the Diedrich Coffee System is uniqueand distinctive and has been developed by Company at great effort, time, andexpense, and that Franchisee has regular and continuing access to valuable andconfidential information and training regarding the Diedrich CoffeeSystem.  Franchisee recognizes itsobligations to keep confidential such information as set forth herein.  Franchisee therefore agrees as follows:

 

13.1.1      During the Term, no Restricted Personshall in any capacity, either directly or indirectly, through one or moresubsidiaries or affiliated companies, engage in any Competitive Activities atany location; provided that with Company's prior written consent, which

 

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Company will not unreasonablywithhold, a Restricted Person may own and operate one or more restaurants, orany other retail establishment, which sells brewed coffee, espresso or coffeeproducts if and for so long as such restaurant, or retail establishment, doesnot derive 20% or more of its gross revenues from the sale of espresso drinks,brewed coffee, roasted coffee beans and blends, premium teas, andcoffee-related products and equipment, or any of them, during any day part.

 

13.1.2      Upon the expiration or termination of thisAgreement, or if Franchisee shall make any Assignment to any person or BusinessEntity, or if any Owner, officer or director of Franchisee shall terminate hisor her relationship with Franchisee, then for a period of 24 months thereafter,each person who was a Restricted Person before that event shall not in anycapacity, either directly or indirectly, through one or more subsidiaries oraffiliated companies, engage in any Competitive Activities, (i) within theCounty in which any “Diedrich Coffee” Coffeehouse operated by Franchisee is orwas located, or (ii) within an area within ten (10) miles from the location orany then existing “Diedrich Coffee” Coffeehouse; provided that, with Company'sprior written consent, which Company will not unreasonably withhold, the  former Restricted Person may own and operateone or more restaurants, or any other retail establishment, 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.

 

13.1.3      The parties have attempted in Sections13.1.1 and 13.1.2 above to limit the Restricted Person's right to compete onlyto the extent necessary to protect the Company from unfair competition.  The parties hereby expressly agree that ifthe scope or enforceability of Section 13.1.1 and 13.1.2 is disputed at anytime by a Restricted Person, a court or arbitrator, as the case may be, maymodify either or both of such provisions to the extent that it deems necessaryto make such provision(s) enforceable under Applicable Law.  In addition, the Company reserves the rightto reduce the scope of either, or both, of said provisions without the consentof Franchisee or any Restricted Person, at any time or times, effectiveimmediately upon notice to Franchisee.

 

13.2         Confidential Information

 

 

13.2.1      Company possesses and continues todevelop, and during the course of the relationship established hereunder,Franchisee shall have access to, trade secrets and other proprietary andconfidential information, including, without limitation, the Manuals, recipes,secret ingredients, specifications, procedures, concepts and methods andtechniques of operating the “Diedrich Coffee” Coffeehouse and producingAuthorized Diedrich Coffee Products (the “Confidential Information”).  Company will disclose certain of itsConfidential Information to Franchisee in the Manuals, bulletins, supplements,confidential correspondence, or other confidential communications, and throughthe Company's training program and other guidance and management assistance,and in performing Company's other obligations and exercising Company's rightsunder this Agreement.  ConfidentialInformation shall not include information which: (a) has entered the publicdomain or was known to Franchisee prior to Company's disclosure of suchinformation to

 

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Franchisee, other than bythe breach of an obligation of confidentiality owed (by anyone) to Company; or(b) becomes known to Franchisee from a source other than Company and other thanby the breach of an obligation of confidentiality owed (by anyone) toCompany.  The burden of proving theapplicability of the foregoing will reside with Franchisee.

 

13.2.2      Franchisee shall acquire no interest inthe Confidential Information other than the right to use them in developing andoperating the Business during the Term of this Agreement.  Franchisee's duplication or use of anyConfidential Information in any other endeavor or business shall constitute anunfair method of competition. Franchisee shall: (i) not use the Confidential Information in anybusiness or other endeavor other than in connection with Franchisee's “DiedrichCoffee” Coffeehouse; (ii) maintain absolute confidentiality of the ConfidentialInformation during and after the Term of this Agreement; (iii) make nounauthorized copy of any portion of the Confidential Information, includingwithout limitation, the Manuals, bulletins, supplements, confidentialcorrespondence, or other confidential communications, whether written or oral;and (iv) operate and implement all reasonable procedures prescribed from timeto time by Company to prevent unauthorized use and disclosure of theConfidential Information, including without limitation, restrictions ondisclosure to employees and use of non-disclosure and non-competitionprovisions as Company prescribes in employment agreements with employees whomay have access to the Confidential Information.  Promptly upon Company's request, Franchisee shall deliverexecuted copies of such agreements to Company.

 

13.2.3      In the event any portion of the abovecovenants violates laws affecting Franchisee, or is held invalid orunenforceable in a final judgment to which Company and Franchisee are parties,then the maximum legally allowable restriction permitted by law shall controland bind Franchisee.  Company may at anytime unilaterally reduce the scope of any part of the above covenants, andFranchisee shall comply with any such reduced covenant upon receipt of writtennotice.  The provisions of this Section13.2 shall be in addition to and not in lieu of any other confidentialityobligation of Franchisee, or any other person, whether pursuant to anotheragreement, or pursuant to Applicable Law.

 

13.3         Franchisee's Affiliates.  For purposes of this Article only,“Franchisee” shall mean and include the individual Franchisee; Franchisee'sspouse and minor children and its Owners, officers and directors if Franchiseeis a Business Entity and Franchisee shall, except as Company may otherwiseagree, cause each such person to acknowledge and agree to be bound by theprovisions of Sections 13.1 and 13.2. The provisions of this Article shall not limit, restrain or otherwiseaffect any right or cause of action which may accrue to Company for anyinfringement of, violation of, or interference with, this Agreement, orCompany's Marks, System or Confidential Information.

 

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**ARTICLE 14**

**INTERFERENCEWITH EMPLOYMENT RELATIONS**

 

14.1         Prohibitions During Term. During theTerm of this Agreement, Franchisee shall not, without the prior written consentof Company, directly or indirectly: (a) employ or attempt to employ any personwho at that time is employed by Company, an affiliate of Company, or any otherfranchisee or area developer of Company, including, without limitation, anycoffeehouse manager or assistant coffeehouse manager; (b) employ or attempt toemploy any person who within six (6) months prior thereto had been employed byCompany, an affiliate of Company, or any other franchisee or area developer ofCompany; or (c) induce or attempt to induce any person to leave his or heremployment with Company, an affiliate of Company, or any other franchisee orarea developer of Company.

 

14.2         Prohibitions After Term. Theprohibitions set forth in Section 14.1 above shall also apply during the one(1) year period after the expiration or termination of this Agreement.

 

14.3         Prohibitions Applicable to Company.During the Term of this Agreement, Company shall not, without the prior writtenconsent of Franchisee, directly or indirectly: (a) employ or attempt to employany person who at that time is employed by Franchisee or an affiliate ofFranchisee; or (b) induce or attempt to induce any person to leave his or heremployment with Franchisee or an affiliate of Franchisee.

 

**ARTICLE 15**

**NATUREOF INTEREST, ASSIGNMENT**

 

15.1         Assignment by Company. This Agreement isfully transferable by Company, in whole or in part, without the consent ofFranchisee 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 corporations, or beacquired by another corporation; or (vi) undertake a refinancing,recapitalization, leveraged buy-out or other economic or financialrestructuring.  Company shall bepermitted to perform such actions without liability or obligation to Franchiseewho expressly and specifically waives any claims, demands or damages arisingfrom or related to any or all of the above actions (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.

 

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15.2         Assignment by Franchisee.

 

15.2.1      The rights and duties created by thisAgreement are personal to Franchisee. Accordingly, except as otherwise may be permitted herein, neitherFranchisee nor any person with an interest in Franchisee shall directly orindirectly sell, assign, transfer, convey, give away, pledge, mortgage, orotherwise encumber any direct or indirect interest in this Agreement or in allor substantially all of the assets of the “Diedrich Coffee” Coffeehouse,voluntarily or involuntarily, in whole or in part, by operation of law orotherwise (an “Assignment”), without Company's prior written consent, whichconsent may be withheld for any reason whatsoever in Company's sole subjectivejudgment.  Any such purported Assignmentoccurring by operation of law or otherwise without Company's prior written consentshall constitute a default of this Agreement by Franchisee, and shall be nulland void.  Except in the instance ofFranchisee advertising to sell its “Diedrich Coffee” Coffeehouse pursuant tothe terms hereof, Franchisee shall not, without Company's prior writtenconsent, offer for sale or transfer at public or private auction or advertisepublicly for sale or transfer, the furnishings, interior and exterior decoritems, supplies, fixtures, equipment, Franchisee's Lease or the real orpersonal property used in connection with Franchisee's “Diedrich Coffee”Coffeehouse. Franchisee shall not subfranchise, subcontract, share, divide orpartition this Agreement, and nothing in this Agreement will be construed asgranting Franchisee the right to do so.

 

15.2.2      If Franchisee 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 capital stock, membership interests or voting power ofFranchisee, by operation of law or otherwise or any other event(s) ortransaction(s) which, directly or indirectly, effectively changes managementcontrol of Franchisee; (ii) the issuance of any securities by Franchisee whichitself or in combination with any other transaction(s) results in theshareholders, members or partners existing as of the Effective Date, asapplicable, owning 50% or less of the outstanding shares, membership interestsor voting power of Franchisee as constituted as of the date hereof; (iii) ifFranchisee is a Partnership, the withdrawal, death or legal incapacity of ageneral partner or limited partner owning 50% or more of the Partnership Rightsof the Partnership, or the admission of any additional general partner or thetransfer by any general partner of any of its Partnership Rights in thePartnership; (iv) the death or legal incapacity of any shareholder, member orpartner owning 50% or more of the capital stock, voting power, or PartnershipRights of Franchisee; and (v) any merger, stock redemption, consolidation,reorganization, recapitalization or other transfer control of the Franchisee,however effected.

 

Without limitingCompany's discretion in granting or withholding its consent to any Assignment,Company may impose any or all of the following conditions thereto:

 

 

15.2.3      Upon the execution of this Agreement andupon each direct or indirect transfer of an interest in this Agreement or inFranchisee and at any other time upon Company's request, Franchisee shall,within 5 days prior to such transfer or at any other time at Company's

 

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request, furnish Companywith an estoppel agreement indicating any and all causes of action, if any,that Franchisee may have against Company or if none exist, so stating, and alist of all Owners having an interest in this Agreement or in Franchisee, thepercentage interest of Owner, and a list of all officers and directors, in suchform as Company may require;

 

15.2.4      Franchisee's written request for consentto any Assignment must be accompanied by an offer to Company of a right offirst refusal at the same cash price offered by any bona fide buyer (theproposed buyer may not offer non-cash consideration).  Company shall have the right and option, exercisable within 15days after receipt of such written notification, to send written notice toFranchisee or such person that Company or its third-party designee, intends topurchase the interest which is proposed to be transferred, on the same termsand conditions offered by the third party. If Company accepts such offer, the training and transfer/administrativefees due by Franchisee in accordance with Section 15.2.12 shall be waived byCompany.  Any material change in theterms of an offer prior to closing shall cause it to be deemed a new offer,subject to the same right of first refusal by Company, or its third-partydesignee, as in the case of the initial offer. Company's failure to exercise such option shall not constitute a waiverof any other provision of this Agreement, including any of the requirements ofthis Article with respect to the proposed transfer;

 

15.2.5      The Franchisee is not in default under theterms of this Agreement, the Manuals or any other obligations owed Company, andall of its then-due monetary obligations to Company have been paid in full;

 

15.2.6      The Franchisee and its Owners, if theFranchisee is a Business Entity, have executed a general release under seal, ina form prescribed by Company, of any and all claims against Company, itsaffiliates, subsidiaries, shareholders, directors, officers, and employees;

 

15.2.7      The transferee/assignee has demonstratedto Company's satisfaction that it meets all of Company's then-current requirementsfor new Franchisees or for holders of an interest in a franchise, including,without limitation, possession of good moral character and reputation,satisfactory credit ratings, acceptable business qualifications, and theability to fully comply with the terms of this Agreement;

 

15.2.8      The transferee/assignee has assumed thisAgreement by a written assumption agreement approved by Company, or has agreedto do so at closing, and at closing executes an assumption agreement approvedby Company;

 

15.2.9      The transferee/assignee, its manager orother employees responsible for the operation of the “Diedrich Coffee”Coffeehouse have satisfactorily completed Company's training program;

 

15.2.10    The transferee/assignee executes such otherdocuments as Company may require, including a replacement franchise agreementon the form then currently being provided to prospective franchisees, or if notthen being so provided, then such form selected by the Company

 

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which previously shall have been delivered to and executed by afranchisee or area developer of Company.

 

15.2.11    The Franchisee transfers all FranchiseAgreements between Franchisee and Company to the same transferee/assignee; and

 

15.2.12    Upon submission Franchisee's request forCompany's consent to any proposed Assignment, Franchisee shall pay to Company atransfer fee (“Transfer Fee”) equal to the greater of: (a) 2% of allconsideration received or receivable, directly or indirectly, by Franchisee inconnection with the Assignment, or (b) the sum of (i) a $15,000 training fee(payable only for the first assigned franchise agreement in the case ofmultiple franchise agreements being assigned simultaneously to the sameassignee) plus (ii) a $1,500 administrative/transfer fee (not limited to thefirst assigned franchise agreement in the case of multiple franchise agreementsbeing assigned simultaneously to the same assignee).

 

15.2.13    Company's consent to a transfer shall notconstitute a waiver of any claims it may have against the transferring partyarising out of this Agreement or otherwise.

 

15.3         Business Entity Franchisee.  If a Franchisee is a Business Entity, thefollowing provisions will apply:

 

15.3.1      Franchisee represents and warrants thatthe information set forth in Exhibit “B”, which is annexed hereto and by thisreference made a part hereof, is accurate and complete in all materialrespects.  Franchisee shall notifyCompany in writing within 10 days of any change in the information set forth inExhibit “B.”  Franchisee promptly shallprovide such additional information as Company may from time to time requestconcerning all persons who may have any direct or indirect financial interestin Franchisee.

 

15.3.2      All of Franchisee's organizational documents(including articles of partnership, partnership agreements, articles ofincorporation, bylaws, shareholders agreements, trust instruments, or theirequivalent) will provide that the issuance and transfer of any interest inFranchisee is restricted by the terms of this Agreement, and that sole purposefor which Franchisee is formed (and the sole activity in which Franchisee is orwill be engaged) is the development and operation of “Diedrich Coffee”Coffeehouses, pursuant to one or more franchise agreements from Company.  Franchisee shall submit to Company, upon theexecution of this Agreement and thereafter from time to time upon Company'srequest, a resolution of Franchisee (or its governing body) confirming thatFranchisee is in compliance with this provision.

 

15.3.3      Upon the execution of this Agreement, uponeach transfer of an interest in Franchisee, and at any other time uponCompany's request, all holders of a 10% or greater interest in Franchisee willexecute a written agreement in a form prescribed by Company, the current formof which is attached hereto as of Exhibit “C”, personally, irrevocably andunconditionally guarantees, jointly and severally, with all other holders of a10% or greater interest in Franchisee the

 

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full payment andperformance of Franchisee's obligations to Company and to Company's affiliates.

 

**ARTICLE 16**

**DEFAULTAND TERMINATION**

 

16.1         General. Company shall have the right to terminate this Agreement prior to itsscheduled expiration date pursuant to Section 3.1 only for “cause”.  “Cause” is hereby defined as a materialbreach of this Agreement.  Company shallexercise its right to terminate this Agreement upon notice to Franchisee uponthe following circumstances and manners.

 

16.2         Automatic Termination Without Notice.  Subject to Applicable Laws of thejurisdiction in which Franchisee's “Diedrich Coffee” Coffeehouse is located tothe contrary, Franchisee shall be deemed to be in default under this Agreement,and all rights granted herein shall automatically terminate without notice toFranchisee if: (i) Franchisee shall be adjudicated bankrupt or judiciallydetermined to be insolvent (subject to any contrary provisions of anyapplicable state or federal laws), shall admit to its inability to meet itsfinancial obligations as they become due, or shall make a disposition for thebenefit of its creditors; (ii) Franchisee shall allow a judgment against him inthe amount of more than $5,000 to remain unsatisfied for a period of more than30 days (unless a supersedeas or other appeal bond has been filed); (iii) the“Diedrich Coffee” Coffeehouse or Location, or the Franchisee's assets areseized, taken over or foreclosed by a government official in the exercise ofits duties, or seized, taken over, or foreclosed by a creditor or lienholderprovided that a final judgment against the Franchisee remains unsatisfied for30) days (unless a supersedes or other appeal bond has been filed); (iv) a levyof execution of attachment has been made upon the license granted by thisAgreement or upon any property used in the “Diedrich Coffee” Coffeehouse, andit is not discharged within 5 days of such levy or attachment; (v) Franchiseepermits any mechanics lien to attach to the “Diedrich Coffee” Coffeehouse or toany equipment or other Leasehold Improvements; (vi) Franchisee allows orpermits any judgment to be entered against Company or its subsidiaries oraffiliated corporations, arising out of or relating to the operation ofFranchisee's “Diedrich Coffee” Coffeehouse; or (vii) Franchisee is convicted ofany felony, or any criminal misconduct relevant to the operation of the“Diedrich Coffee” Coffeehouse.

 

16.3         Option to Terminate Without Notice.  Franchisee shall be deemed to be in defaultand Company may, at its option, terminate this Agreement and all rights grantedhereunder, without affording Franchisee any opportunity to cure the default,effective immediately upon receipt of notice by Company upon the occurrence ofany of the following events:

 

16.3.1      Abandonment.  If Franchisee shall abandon the “DiedrichCoffee” Coffeehouse.  For purposes ofthis Agreement, “abandon” shall refer to (i) Franchisee's failure, at any timeduring the term of this Agreement, to keep the “Diedrich Coffee” Coffeehouseopen and operating for business for a period of 5 consecutive days, except asprovided in the Manuals, (ii) Franchisee's failure to keep the “DiedrichCoffee” Coffeehouse open and operating for any period after which it is notunreasonable under the facts and circumstances for Company to conclude that

 

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Franchisee does notintend to continue to operate the franchise, unless such failure to operate isdue to fire, flood, earthquake or other similar causes beyond Franchisee'scontrol, and (iii) failure to actively and continuously maintain and answerFranchisee's telephone;

 

16.3.2      Assignment, Death or Incapacity.  If Franchisee shall purport to make anyAssignment without the prior written consent of Company; provided, however,that on written request and on condition that the “Diedrich Coffee” Coffeehousecontinues to be operated in conformity with this Agreement, (i) upon the deathor legal incapacity of a Franchisee who is an individual, Company shall allowup to 6 months after such death or legal incapacity for the heirs, personalrepresentatives, or conservators (the “Heirs”) of Franchisee either to enterinto a new Franchise Agreement upon Company's then current form (except that noinitial franchise fee or transfer fee shall be charged), if Company issubjectively satisfied that the Heirs meet Company's standards andqualifications, or if not so satisfied to allow the Heirs to sell the “DiedrichCoffee” Coffeehouse to a person approved by Company, or (ii) upon the death orlegal incapacity of an Owner owning 50% or more of the capital stock,membership interests or voting power of a corporate or limited liabilitycompany Franchisee, or a general or limited partner owning 50% or more of anyof the Partnership Rights of a Franchisee which is a Partnership, Company shallallow a period of up to 6 months after such death or legal incapacity for theHeirs to seek and obtain Company's consent to the transfer or Assignment ofsuch stock, membership interests or Partnership Rights to the Heirs or toanother person acceptable by Company. If, within said 6 month period, the Heirs fail either to enter into anew franchise agreement or to sell the “Diedrich Coffee” Coffeehouse to aperson approved by Company pursuant to Section 15.2, or fail either to receiveCompany's consent to the Assignment of such stock, membership interest orPartnership Rights to the Heirs or to another person acceptable by Company, asprovided in Section 15.2, this Agreement shall thereupon automaticallyterminate;

 

16.3.3      Repeated Defaults.  If Franchisee shall default in any materialobligation as to which Franchisee has previously received 3 or more writtennotices of default from Company setting forth the material breach complained ofwithin the preceding 12 months, such repeated course of conduct shall itself begrounds for termination of this Agreement without further notice or opportunityto cure;

 

16.3.4      Misrepresentation.  If Franchisee makes any materialmisrepresentations relating to the acquisition of the “Diedrich Coffee”Coffeehouse.

 

16.3.5      Violation of Law.  If Franchisee fails, for a period of 10 daysafter having received notification of noncompliance from Company or anygovernmental or quasi-governmental agency or authority, to comply with anyfederal, state or local law or regulation applicable to the operation of the“Diedrich Coffee” Coffeehouse;

 

16.3.6      Health or Safety Violations.  Franchisee's conduct of the “DiedrichCoffee” Coffeehouse licensed pursuant to this Agreement is so contrary to thisAgreement, the System and the Manuals as to constitute an imminent danger tothe public health (for example,

 

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selling spoiled foodknowing that the food products are spoiled or allowing a dangerous conditionarising from a failure to strictly comply with any health code or ordinance orother Applicable Law to continue despite Franchisee's knowledge of suchcondition), or selling expired or other unauthorized products to the public afternotice of default and continuing to sell such products whether or notFranchisee has cured the default after one or more notices;

 

16.3.7      Unfair Competition.  Any violation by Franchisee of Section 13.1;Franchisee's disclosure or use in violation of this Agreement of the contentsof the Manual, or any other Confidential Information provided to Franchisee byCompany;

 

16.3.8      Under Reporting.  If an audit or investigation conducted byCompany hereof discloses that Franchisee has knowingly maintained false booksor records, or submitted false reports to Company, or knowingly understated itsGross Sales or withheld the reporting of same as herein provided;

 

16.3.9      Criminal Offenses.  If Franchisee is convicted of a felony orany other crime or offense that is reasonably likely, in the sole opinion ofCompany, to adversely affect the System, the Marks, the goodwill associatedtherewith, or Company's interest therein;

 

16.3.10    Intellectual Property.  If Franchisee misuses or makes anyunauthorized use of the Marks or otherwise materially impairs the goodwillassociated therewith or Company's rights therein, or which reflects materiallyand unfavorably upon the operation and reputation of the “Diedrich Coffee”Coffeehouse or System.

 

16.3.11    Termination of Other Agreements.  If Franchisee or any of its affiliates isparty to any other Development Agreement, Sublease, Management Agreement,Promissory Note, or Franchise Agreements with Company, and that other agreementis terminated by Company for default by Franchisee (after any applicable rightto cure).  Notwithstanding theforegoing, however, Company may not terminate this Agreement if the otheragreement is a Development Agreement, and the only grounds for termination ofthat Development Agreement is failure by Franchisee to meet its minimumdevelopment obligations under the Development Agreement.

 

16.4         Termination With Notice and OpportunityTo Cure.  Except for any default byFranchisee under Sections 16.2 or 16.3, or as otherwise expressly provided inthis Agreement, Franchisee shall have 10 days (5 days in the case of anydefault in the timely payment of sums due to Company or its affiliates), afterCompany's written notice of default within which to remedy any default underthis Agreement, and to provide evidence of such remedy to Company.  If any such default is not cured within thattime period, or such longer time period as Applicable Law may require or asCompany may specify in the notice of default, this Agreement and all rightsgranted by it shall thereupon automatically terminate without further notice oropportunity to cure.

 

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Franchisee shallbe in material default under this Article for any failure to comply with any ofthe requirements imposed by this Agreement. Such material defaults shall include the occurrence of any one or moreof the following events:

 

16.4.1      Franchisee's failure, refusal, or neglectto promptly pay any monies owed to Company, its subsidiaries or affiliates, orany Advertising Co-op, when due, or to submit the financial or otherinformation required by Company under this Agreement;

 

16.4.2      Franchisee's failure to maintain thestandards specified by Company in the Manual or otherwise;

 

16.4.3      Franchisee's failure, refusal or neglectto obtain Company's prior written approval or consent as required by thisAgreement;

 

16.4.4      Franchisee's misuse or unauthorized use ofCompany's Marks or other material impairment of the goodwill associatedtherewith or Company's rights therein;

 

16.4.5      Franchisee's commencement of or conductingany business operation, or marketing of any product, under a name or markwhich, in Company's reasonable opinion, is confusingly similar to Company'sMarks;

 

16.4.6      Franchisee's default, without cure after theapplicable grace period, under any Lease, mortgage, or deed of trust coveringthe Location; or

 

16.4.7      Franchisee's failure to procure ormaintain the insurance required by this Agreement or in the Lease for theLocation.

 

16.5         Reimbursement of Company Costs.  In the event of a default by Franchisee, allof Company's costs and expenses arising from such default, including reasonablelegal fees and reasonable hourly charges of Company's administrative employeesshall be paid to Company by Franchisee within 5 days after cure.

 

16.6         Cross-Default. Any material default by Franchisee under the terms and conditions ofthis Agreement or any Lease, or any other agreement between Company, or itsaffiliate, and Franchisee, or any default by Franchisee of its obligations toany Advertising Cooperative of which it is a member, shall be deemed to be amaterial default of each and every said agreement.  Furthermore, in the event of termination, for any cause, of thisAgreement or any other agreement between the parties hereto, Company may, atits option, terminate any or all said agreements.

 

16.7         Notice Required By Law.  Notwithstanding anything to the contrary contained in thisArticle 16, in the event any valid, Applicable Law of a competent GovernmentalAuthority having jurisdiction over this Agreement and the parties hereto shalllimit Company's rights of termination hereunder or shall require longer noticeperiods than those set forth above, this

 

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Agreement shall be deemedamended to conform to the minimum notice periods or restrictions upontermination required by such laws and regulations.  Company shall not, however, be precluded from contesting thevalidity, enforceability or application of such laws or regulations in anyaction, hearing or dispute relating to this Agreement or the terminationthereof.

 

**ARTICLE 17**

**RIGHTSAND OBLIGATIONS UPON TERMINATION**

 

17.1         General. Upon the expiration or termination of Franchisee's rights granted underthis Agreement:

 

17.1.1      Franchisee shall immediately cease to useCompany's Marks, and any confusingly similar trademark, service mark, tradename, logotype, or other commercial symbol or insignia.  Franchisee shall at its own cost, make cosmeticchanges to Franchisee's “Diedrich Coffee” Coffeehouse so that it no longercontains or resembles Company's proprietary designs including, but not limitedto, Franchisee shall remove all Diedrich Coffee identifying materials anddistinctive Diedrich Coffee cosmetic features and finishes, interior wallcoverings and colors, exterior finishes and colors, signage and Diedrich Coffeecounter equipment (which shall be deemed proprietary to Company) from theLocation as Company may reasonably direct.

 

17.1.2      Company may retain all fees paid pursuantto this Agreement, and Franchisee shall immediately pay any and all amountsowing to Company, its subsidiaries and affiliates.

 

17.1.3      Any and all obligations of Company toFranchisee under this Agreement shall immediately cease and terminate.

 

17.1.4      Any and all rights of Franchisee underthis Agreement shall immediately cease and terminate.

 

17.1.5      Company shall have the option, exercisableby written notice within 30 days after the termination of this Agreement, totake an assignment of all telephone numbers (and associated listings) forFranchisee's “Diedrich Coffee” Coffeehouse. Franchisee is not entitled to any compensation from Company if Companyexercises this option.

 

17.1.6      Franchisee shall, at Company's option,cancel or assign to Company or its designee all of Franchisee's right, titleand interest in any Internet and website home pages, domain name listings andregistrations which contain the Marks, or any of them, in whole or and part,and Franchisee shall notify Network Solutions, InterNIC or other applicabledomain name registrar and all listing agencies, upon the termination orexpiration hereof, of the termination of Franchisee's right to use any domainname, web page and other Internet devise associated with Company or any“Diedrich Coffee” Restaurant, and authorize and instruct their cancellation or

 

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transfer to Company, asdirected by Company. Franchisee is not entitled to any compensation fromCompany if Company exercises its said rights or options.

 

17.2         Survival of Obligations. In no event shall a termination or expiration of this Agreement affectFranchisee's obligations to take or abstain from taking any action inaccordance with this Agreement.  Theprovisions of this Agreement which constitute post-termination orpost-expiration covenants or agreements shall survive the termination orexpiration of this Agreement.

 

17.3         No Ownership of Marks.  Franchisee acknowledges and agrees thatrights in and to Company's Marks and the use thereof shall be and remain theproperty of Company.

 

17.4         Government Filings.  In the event Franchisee has registered any ofCompany's Marks or the name “Diedrich Coffee” as part of Franchisee's assumed,fictitious or corporate name, Franchisee shall promptly amend such registrationto delete Company's Marks therefrom.

 

**ARTICLE 18**

**INSURANCE**

 

18.1         Insurance. Franchisee shall obtain and maintain insurance coverage which shall ineach instance designate Company and designated parent companies, subsidiaries,and affiliates as additional named insureds, with an insurance company approvedby Company, which approval shall not be unreasonably withheld as follows:

 

18.1.1      comprehensive general liability insurance(including products liability); with coverage of $2,000,000.00 to $4,000,000.00combined single limit for death, personal injury, and $100,000.00 propertydamage coverage;

 

18.1.2      business interruption insurance, includingContinuing Royalty coverage, for 12 months after casualty, in amounts equal toat least $150,000 ($50,000 in the case of a cart or kiosk);

 

18.1.3      workers' compensation insurance asrequired by Applicable Law; and

 

18.1.4      windstorm, fire, and extended coverageinsurance, insuring the construction of improvements and completed “Diedrich Coffee”Coffeehouse operated by Franchisee, for the full replacement value thereof.

 

 

18.2         Use of Proceeds. In the event of damage to the “Diedrich Coffee” Coffeehouse coveredby insurance, the proceeds of any such insurance shall be used to restore the “DiedrichCoffee” Coffeehouse to its original condition (but in accordance with Company'sthen current standards and specifications) as soon as possible, unless suchrestoration is prohibited by the Lease or Company has otherwise consented to inwriting.  Franchisee shall promptlyprovide to

 

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Company proof of suchinsurance coverage upon the obtaining of such insurance, and at such othertimes upon the request of Company.

 

18.3         Proof of Insurance.  Franchisee shall, prior to opening its “Diedrich Coffee”Coffeehouse, file with Company, certificates of such insurance and shallpromptly pay all premiums on the policies as they become due.  In addition, the policies shall contain aprovision requiring 30 days prior written notice to Company of any proposedcancellation, modification, or termination of insurance.  If Franchisee fails to obtain and maintainthe required insurance, Company may, at its option, in addition to any otherrights it may have, procure such insurance for Franchisee without notice andFranchisee shall pay, upon demand, the premiums and Company's costs in takingsuch action.

 

**ARTICLE 19**

**RELATIONSHIPOF PARTIES, DISCLOSURE**

 

19.1         Relationship of Franchisee toCompany.  It is expressly agreed thatthe parties intend by this Agreement to establish between Company andFranchisee the relationship of Company and franchisee.  It is further agreed that Franchisee 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 Franchisee is theemployer, employee, agent, partner or co-venturer of or with the other, eachbeing independent.  Franchisee agreesthat it will not hold himself out as the agent, employee, partner orco-venturer of Company.  All employeeshired by or working for Franchisee shall be the employees of Franchisee andshall not, for any purpose, be deemed employees of Company or subject toCompany control.  Each of the partiesshall file its own tax, regulatory and payroll reports, and be responsible forall employee benefits and workers compensation payments, with respect to itsrespective employees and operations, saving and indemnifying the other partyhereto of and from any liability of any nature whatsoever by virtue thereof.

 

Neither shall havethe power to bind or obligate the other except specifically as set forth inthis Agreement.  Company and Franchiseeagree that the relationship created by this Agreement is not a fiduciaryrelationship.  Franchisee shall not,under any circumstances, act or hold itself out as an agent or representativeof Company.

 

19.2         Indemnity by Franchisee. Franchiseehereby agrees to protect, defend and indemnify Company, and all of its past,present and future partners, shareholders, direct and indirect parentcompanies, subsidiaries, affiliates, officers, directors, employees, attorneysand designees and hold them harmless from and against any and all costs andexpenses, including attorneys' fees, court costs, losses, liabilities, damages,claims and demands of every kind or nature on account of any actual or allegedloss, injury or damage to any person or Business Entity or to any propertyarising out of or in connection with Franchisee's operation of the Location and“Diedrich Coffee” Coffeehouse pursuant hereto.

 

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**ARTICLE 20**

**NOTICES**

 

20.1         General.  Exceptas otherwise expressly provided herein, all written notices and reportspermitted or required to be delivered by the parties pursuant hereto shall bedeemed so delivered at the time delivered by hand, one business day afterconfirmed transmission by facsimile, telegraph or other electronic system (withconfirmation copy sent by regular U.S. mail), or 3 business days afterplacement in the United States Mail by Registered or Certified Mail, ReturnReceipt Requested, postage prepaid and addressed as follows:

 
| If to Company:    |   | Diedrich Coffee                                          |
|-------------------|--------|----------------------------------------------------------|
|              |   | 2144 Michelson Drive                                     |
|              |   | Irvine, CA  92612                                   |
|              |   | Attn:   Vice  President - Franchise Sales |
|              |   | Facsimile No.: (949)  260-260-6731                       |
|              |   |                                                     |
| If to Franchisee: |   |                                                     |
|              |   |                                                     |
|              |   |                                                     |
|              |   | Facsimile No.                                            |
|              |   |                                                     |
|              |   |                                                     |
| With copy to:     |   |                                                     |
|              |   |                                                     |
|              |   |                                                     |
|              |   |                                                     |
|              |   | Facsimile No.                                            |

 

Any party maychange his or its address by giving 10 days prior written notice of such changeto all other parties.

 

**ARTICLE 21**

**MISCELLANEOUSPROVISIONS**

 

21.1         Company's Right To Cure Defaults.  In addition to all other remedies hereingranted if Franchisee shall default in the performance of any of itsobligations or breach any term or condition of this Agreement or any relatedagreement, Company may, at its election, immediately or at any time thereafter,without waiving any claim for breach hereunder and without notice to

 

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Franchisee, cure suchdefault for the account and on behalf of Franchisee, and the cost to Companythereof shall be due and payable on demand and shall be deemed to be additionalcompensation due to Company hereunder and shall be added to the amount ofcompensation next accruing hereunder, at the election of Company.

 

21.2         Waiver and Delay. No waiver by Company of anybreach or series of breaches or defaults in performance by Franchisee, and nofailure, refusal or neglect of Company to exercise any right, power or optiongiven to it hereunder or under any other franchise agreement between Companyand Franchisee, whether entered into before, after or contemporaneously withthe execution hereof (and whether or not related to the “Diedrich Coffee”Coffeehouse) or to insist upon strict compliance with or performance ofFranchisee's obligations under this Agreement, any other franchise agreementbetween Company and Franchisee, whether entered into before, after orcontemporaneously with the execution hereof (and whether or not related to the“Diedrich Coffee” Coffeehouse) or the Manuals, shall constitute a waiver of theprovisions of this  Agreement or theManuals with respect to any subsequent breach thereof or a waiver by Company ofits right at any time thereafter to require exact and strict compliance withthe provisions thereof.  Company willconsider written requests by Franchisee for Company's consent to a waiver ofany obligation imposed by this Agreement. Franchisee agrees, however, that Company is not required to actuniformly with respect to waivers, requests and consents as each request willbe considered on a case by case basis, and nothing shall be construed torequire Company to grant any such request. Any waiver granted by Company shall be without prejudice to any otherrights Company may have, will be subject to continuing review by Company, andmay be revoked, in Company's sole discretion, at any time and for any reason,effective upon 10 days prior written notice to Franchisee.  Company makes no warranties or guaranteesupon which Franchisee may rely, and assumes no liability or obligation toFranchisee by providing any waiver, approval, consent, assistance, orsuggestion to Franchisee in connection with this Agreement, or by reason of anyneglect, delay, or denial of any request.

 

21.3         Survival of Covenants.  The covenants contained in this Agreementwhich, by their terms, require performance by the parties after the expirationor termination of this Agreement, shall be enforceable notwithstanding saidexpiration or other termination of this Agreement for any reason whatsoever.

 

21.4         Successors and Assigns.  This Agreement shall be binding upon andinure to the benefit of the successors and assigns of Company and shall bebinding upon and inure to the benefit of Franchisee and its or their respectiveheirs, executors, administrators, successors and assigns, subject to therestrictions on transfer or Assignment contained herein.

 

21.5         Joint and Several Liability. IfFranchisee consists of more than one person or entity, or a combinationthereof, the obligations and liabilities of each such person or entity toCompany are joint and several.

 

21.6         General Release.  If Franchisee has a currently-effective franchise agreement orarea development agreement from Company, then it shall be a condition to theeffectiveness of

 

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this Agreement thatFranchisee has executed and delivered to Company a general release, in a formprescribed by Company, of all existing claims against Company arising out ofthose former agreements.

 

21.7         Governing Law/Consent to Jurisdiction.  Except to the extent governed by the UnitedStates Trademark Act of 1946 (Lanham Act, 15 U.S.C. §§ 1051 etseq.),this Agreement, the franchise and all other matters concerning Franchisee andCompany (and its affiliates) shall be governed by the internal laws of thestate where the Franchisee's “Diedrich Coffee” Coffeehouse is located (withoutreference to the choice of law and conflict of law rules of that state), exceptthat the provisions of any law of that state regarding franchise disclosure,registration or relationship and the regulations thereunder shall not applyunless its jurisdictional requirements are met independently without referenceto this Section.  The parties agreethat, except to the extent prohibited by law, Orange County, California shallbe the venue for any litigation arising under this Agreement. Franchiseeirrevocably submits to the jurisdiction of those courts and waives anyobjection Franchisee might have to either the jurisdiction of or venue in thosecourts.

 

21.8         Waiver of Punitive Damages and JuryTrial.  Except for Franchisee'sobligation to indemnify Company under Section 19.2 and claims Company bringagainst Franchisee for Franchisee's unauthorized use of the Marks orunauthorized use or disclosure of any Confidential Information, Company andFranchisee waive to the fullest extent permitted by law any right to or claimfor any multiple, punitive or exemplary damages against the other and agreethat, in the event of a dispute between Company and Franchisee, the partymaking a claim will be limited to equitable relief and to recovery of anyactual damages it sustains.

 

Company andFranchisee irrevocably waive trial by jury in any action, proceeding, orcounterclaim, whether at law or in equity, brought by either of them.

 

21.9         Limitations of Claims.  Except for claims arising fromFranchisee's non-payment or underpayment of amounts Franchisee owes Company orits affiliates, any and all claims arising out of or relating to this Agreementor Company's relationship with Franchisee will be barred unless a proceeding iscommenced within one (1) year from the date on which the party asserting theclaim knew or should have known of the facts giving rise to the claim.

 

21.10       Entire Agreement.  This Agreement contains all of the terms and conditionsagreed upon by the parties hereto with reference to the subject matter hereof.  No other agreements oral or otherwise shallbe deemed to exist or to bind any of the parties hereto and all prioragreements, understandings and representations are merged herein and supersededhereby.  Franchisee represents thatthere are no contemporaneous agreements or understandings relating to thesubject matter hereof between the parties that are not contained herein.  No officer or employee or agent of Companyhas any authority to make any representation or promise not contained in thisAgreement or in any Offering Circular for prospective franchisees required byapplicable law, and Franchisee agrees that it has executed this Agreementwithout reliance upon any such representation

 

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or promise.  This Agreement cannot be modified or changedexcept by written instrument signed by all of the parties hereto.

 

21.11       Titles For Convenience.  Article and Section titles used in thisAgreement are for convenience only and shall not be deemed to affect themeaning or construction of any of the terms, provisions, covenants, orconditions of this Agreement.

 

21.12       Gender And Construction.  All terms used in any one number or gendershall extend to mean and include any other number and gender as the facts, context,or sense of this Agreement or any article or Section 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 hereinto the contrary, any consent, approval or authorization of Company whichFranchisee may be required to obtain hereunder may be given or withheld byCompany in its sole discretion, and on any occasion where Company is requiredor permitted hereunder to make any judgment or determination, including anydecision as to whether any condition or circumstance meets Company's standardsor satisfaction, Company may do so in its sole subjective judgment.

 

21.13       Severability. Nothing contained in this Agreement shall be construed as requiring thecommission of any act contrary to law. Whenever there is any conflict between any provisions of this Agreementor the Manuals and any present or future statute, law, ordinance or regulationcontrary to which the parties have no legal right to contract, the latter shallprevail, but in such event the provisions of this Agreement or the Manuals thusaffected shall be curtailed and limited only to the extent necessary to bringit within the requirements of the law. If any part, article, section, sentence or clause of this Agreement orthe Manuals shall be held to be indefinite, invalid or otherwise unenforceable,the indefinite, invalid or unenforceable provision shall (subject to Section13.2.3) be deemed deleted, and the remaining part of this Agreement shallcontinue in full force and effect.

 

21.14       Counterparts. This Agreement may be executed in any number of counterparts, eachof which shall be deemed to be an original and all of which together shall bedeemed to be one and the same instrument.

 

21.15       Fees and Expenses.  Should any party hereto commence any actionor proceeding for the purpose of enforcing, or preventing the breach of, anyprovision hereof, whether by judicial or quasi-judicial action or otherwise, orfor damages for any alleged breach of any provision hereof, or for adeclaration of such party's rights or obligations hereunder, the prevailingparty shall be reimbursed by the losing party for all costs and expensesincurred in connection therewith, including, but not limited to, attorneys'fees.  All sums which are due but unpaidto Company or Franchisee shall bear interest from the date due at the highestrate permissible by applicable law.

 

21.16       Counsel.  Franchiseeand its Owners acknowledge and warrant that they understand the terms andconditions of this Agreement and that they have had an opportunity in

 

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connection with thisAgreement to confer with counsel of their choice regarding their rights andobligations under this Agreement.

 

**ARTICLE 22**

**SUBMISSIONOF AGREEMENT**

 

22.1         General.  Thesubmission of this Agreement does not constitute an offer and this Agreementshall become effective only upon the execution thereof by Company andFranchisee.

 

**ARTICLE 23**

**ACKNOWLEDGMENT**

 

23.1         General.  Franchisee, and its Owners, jointly and severally acknowledge thatthey have carefully read this Agreement and all other related documents to beexecuted concurrently or in conjunction with the execution hereof, that theyhave obtained the advice of counsel in connection with entering into thisAgreement, that they understand the nature of this Agreement, and that theyintend to comply herewith and be bound hereby.

 

23.2         Due Execution.  The submission of this Agreement to Franchisee does not constitutean offer and this Agreement shall become effective only upon the executionthereof by Company and Franchisee.

 

IN WITNESSWHEREOF, the parties hereof have executed this Agreement as of the date ofexecution by Company.

 
|   | Company:               |
|--------|------------------------|
|   |                   |
|   | DIEDRICH COFFEE, INC., |
|   | a Delaware corporation |
|   |                   |
|   | By:                    |   |   |
|   | Its: Vice President    |
|   |                   |
|   |                   |
|   | Franchisee:            |
|   |                   |   |
|   |                   |
|   | By:                    |   |   |
|   | Its:_                  |   |   |
|        |                        |  |  |  |

 

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**EXHIBIT A**

**MinimumHours of Operation**

 

Minimum OperatingHours:  [ :  ] a.m. to[ :  ] p.m.

            days per week

 

A-1

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**EXHIBIT B**

 

FRANCHISEE INFORMATION

 

Franchisee is a (check asapplicable):

o corporation  o limited partnership

o limited liability company   ogeneral partnership

o Other (specify):                            

 

The name and address ofeach Owner of Franchisee is:

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

 

 

There is set forth belowthe name and address of each director, member, or general partner, asapplicable, of Franchisee:

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

 

There is set forth belowthe names, and addresses and titles of Franchisee's principal officers orpartners who will be devoting their full time to the “Diedrich Coffee”Coffeehouses:

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

 

The address whereFranchisee's Financial Records, and Business Entity records (e.g. Articles ofIncorporation, Bylaws, Operating Agreement, Partnership Agreement, etc.) aremaintained is:

 

 

 

 

B-1

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**EXHIBIT C**

GUARANTY ANDSUBORDINATION AGREEMENT

 

 

C-1

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SPOUSAL CONSENT

 

Each of the undersigned,each being the spouse of an individual who executed this Agreement asFranchisee (or if Franchisee 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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