Document:

Exhibit 10.9

FORM OF

 

DIEDRICH COFFEE, INC.

 

FRANCHISE
AGREEMENT

 

 

TABLE OF
CONTENTS

 

	
  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

  

 

i

 

	
  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

  

 

ii

 

	
  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

  

 

iii

 

	
  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

 

iv

 

DIEDRICH
COFFEE

FRANCHISE
AGREEMENT

 

THIS
AGREEMENT is made this       
day of
                  
,        (the “Effective Date”) by and between
Diedrich 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 and
other property rights and interests in and to the “Diedrich Coffee” trademark
and service mark, and such other trademarks, service marks, logo types,
insignias, trade dress, designs, and commercial symbols as Company may from
time to time authorize or direct Franchisee to use in connection with the
operation of a “Diedrich Coffee” Coffeehouse (the “Marks”).

 

B.            Company has developed and continues
to develop a system for the operation of coffeehouses, kiosks and coffee carts
and merchandising of Diedrich Coffee Authorized Products, which system features
distinctive signs, recipes, and various trade secrets and other confidential
information, and in some cases also includes architectural designs, trade
dress, uniforms, equipment specifications, layout plans, inventory,
record-keeping and marketing techniques (the “System”).

 

C.            Franchisee desires to obtain a license
and franchise to operate a single “Diedrich Coffee” Coffeehouse under the Marks
and in strict accordance with the System, and the standards and specifications
established by Company, and Company is willing to grant Franchisee such license
and franchise under the terms and conditions of this Agreement.

 

NOW,
THEREFORE, the parties agree as follows:

 

ARTICLE 1

DEFINITIONS

 

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

 

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

 

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

 

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

 

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

 

 

“Applicable
Calendar 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 any
Governmental 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, supplemented
or enacted from time to time.

 

“Assignment” shall
have the meaning set forth in Section 15.2.

 

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

 

“Barista” means a
person who has been certified by Company as an expert in the knowledge and
preparation of espresso drinks.

 

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

 

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

 

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

 

“Continuing
Royalty” shall have the meaning set forth in Section 4.2

 

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

 

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

 

“Diedrich Coffee
Branded Product” is any product now existing or developed in the future that
bears or is packaged under any of Company's Marks.

 

2

 

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

 

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

 

“Franchisee” shall
mean the person or Business Entity identified in the first paragraph of this
Agreement, and for purposes of Article 13 only, shall include Franchisee's
spouse and minor children and its Owners, officers and directors if Franchisee
is a Business Entity.

 

“Governmental
Authority” means and include all Federal, state, county, municipal and local
governmental and quasi-governmental agencies, commissions and authorities.

 

“Gross Sales”
means gross revenues (excluding allowances and sales taxes) received or
receivable 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 the
Marks.

 

“Internet” means
collectively the myriad of computer and telecommunications facilities,
including equipment and software, which comprise the interconnected worldwide
network of networks that employ the TCP/IP [Transmission Control
Protocol/Internet Protocol], or any predecessor or successor protocols to such
protocol, 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 have
the meaning set forth in Section 5.3.

 

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

 

“Location” shall
have the meaning set forth in Section 5.1.1.

 

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

 

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

 

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

 

3

 

“Owner” means any
shareholder, member, general or limited partner, trustee, or other equity owner
of a Business Entity; except that if Company has any ownership interest in
Licensee, the term “Owner” shall not include or refer to the Company or its
Owners or affiliates, and no obligation or restriction upon the “Franchisee”, or
its 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 liability
company.

 

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

 

“Permits” means
and 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 expressly
provided, any ancillary common areas, campus, buildings and other structures
associated with the Premises.

 

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

 

“Supplier” shall
have the meaning set forth in Section 10.3.

 

“System” shall
have the meaning set forth in Recital B.

 

“Term” shall have
the 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 refer
to the 7 day period ending on Sunday of each calendar week, or such other
reporting period hereafter specified by Company.

 

ARTICLE 2

GRANT

 

2.1           Grant.

 

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

 

4

 

 

o Full Service
“Diedrich Coffee” Coffeehouse

o Kiosk

o Cart

 

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

 

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

 

2.3           No Exclusive Territory.  The license and franchise granted to the
Franchisee under this Agreement is non-exclusive, and does not grant Franchisee
any protected trading area or territory, nor any rights to obtain additional
franchises from Company.  Without
limiting the generality of the foregoing, the Company expressly reserves the exclusive,
unrestricted right, in its sole and absolute discretion, directly and
indirectly:

 

(a)           to own or operate, and to franchise
and license others to own, operate or co-brand, coffeehouses, kiosks, and carts
at any location other than at the specific Location identified in Section
5.1.1, regardless of its proximity to the “Diedrich Coffee” Coffeehouse
operated pursuant hereto; and

 

(b)           to produce, promote, license,
distribute and market products, whether or not they bear any of the Marks, at
wholesale or retail, through its employees, affiliates, representatives,
licensees, franchisees, assigns, agents and others, including bulk and
pre-packaged roasted coffee, premium teas, ice cream, beverages, snacks and
other food products; clothing; books, souvenirs and novelty items, through any
outlet 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” of
this Agreement shall begin on the Effective Date and continue for a period of
10 years.

 

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

 

5

 

coffeehouse
franchisees (the “Renewal Franchise Agreement”) for one 10 year period (the
“Renewal Term”).  The term of the
Renewal Franchise Agreement shall commence upon the date of expiration of the
Term hereof; provided, however, notwithstanding the terms of Company's
then-current form of  Franchise
Agreement: (a) Franchisee shall not have the right to renew or extend the term
thereof or enter into any additional Renewal Franchise Agreement for a period
following the Renewal Term; and (b) the Renewal Franchise Agreement shall be
modified 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 before
the expiration of the Term, Franchisee shall notify Company in writing
(“Renewal Notice”) that it intends to exercise its Renewal Right and no sooner
than 10 business days nor more than 20 business days after Franchisee receives
Company's Offering Circular, if applicable, and execution copies of the Renewal
Franchise Agreement, Franchisee shall execute the copies of said Renewal
Franchise Agreement and deliver them to Company together with the then-current
initial fee due to Company.

 

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

 

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

 

3.4           Conditions Precedent to Renewal.  Franchisee's Renewal Right is conditioned
upon Franchisee's fulfillment of each and all of the following conditions
precedent:

 

3.4.1        At the time Franchisee delivers its
Renewal Notice to Franchisor and at all times thereafter until the commencement
of the Renewal Term, Franchisee shall have fully performed all of its material
obligations under this Agreement, the Manuals and all other agreements then in
effect between Franchisee and Company (or its affiliates) including, but not
limited to, Area Development Agreement(s), Franchise Agreement(s), or Sublease
Agreement(s).

 

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

 

6

 

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

 

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

 

3.4.5        Franchisee shall, and Franchisee shall
cause its Owners and affiliates to, execute and deliver to Franchisor a general
release, on a form prescribed by Franchisor of any and all known and unknown
claims 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 complete
at its expense the remodeling, renovation or modernization of the Premises and
the “Diedrich Coffee” Coffeehouse operated pursuant hereto to comply with the
Company's then-current specifications and standards for new “Diedrich Coffee”
Coffeehouses.

 

3.5           Notice Required by Law.  If Applicable Law requires that Company give
notice to Franchisee prior to the expiration of the Term, this Agreement shall
remain in effect on a week to week basis until Company has given the notice
required by such Applicable Law.  If
Company is not offering new franchises, is in the process of revising, amending
or renewing its form of franchise agreement or offering circular, or is not
lawfully able to offer Franchisee its then-current form of franchise agreement,
at the time Franchisee delivers its Renewal Notice, Company may, in its sole
subjective discretion, (i) offer to renew this Agreement upon the same terms
set forth herein for a renewal term determined in accordance with Section 3.2
hereof, or (ii) offer to extend the Term hereof on a week to week basis
following the expiration of the Term hereof for as long as it deems necessary
or appropriate so that it may lawfully offer its then-current form of franchise
agreement.

 

ARTICLE 4

PAYMENTS

 

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

 

7

 

4.2           Continuing Royalty.  Franchisee shall pay to Company each month
during the Term, an amount equal to 5% of its Gross Sales during the preceding
month (the “Continuing Royalty”). 
Franchisee shall cause its Continuing Royalty for each month to be
actually received by Company on or before the 10th day of the following month;
provided, however, that Franchisee at its election may alternatively adopt a
periodic payment cycle that matches Company's fiscal accounting cycle
(presently thirteen (13)  four (4) week
fiscal periods per fiscal year).  In
that event, Franchisee shall notify Company of such election in writing and thereafter
cause its Continuing Royalty for each four (4) week fiscal period (“fiscal
period”) to be actually received by Company on or before the 10th day following
the 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 described
in Section 4.2, an advertising fee equal to 1% (the “Advertising Fee Rate”)of
its Gross Sales during the preceding month (“Advertising Fee”).  Company reserves the right to adjust the
Advertising Fee from time to time provided it shall in no event exceed 2% of
Franchisee's Gross Sales, and may be amended by the Company no more frequently
than annually.  The Advertising Fee
shall be in addition to any other co-op expenditures required or permitted
under Article 9 hereof.  Company shall administer
the 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 sales
on a timely basis in accordance with Section 11.1, Company may estimate the
amount of Franchisee's sales, and deposit or transfer the reported, or in the
absence of a report, the estimated, amounts due into its own account, using the
Franchisee's pre-authorized checks or other instruments or authority.

 

4.4.2        At Company's request, Franchisee shall
instruct 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 which
Company may designate and upon the terms and conditions set forth in the
Operations Manual, and promptly upon Company's request, Franchisee shall
execute or re-execute and deliver to Company such pre-authorized check forms
and other instruments or drafts required by Company's bank, payable against
Franchisee's bank account, to enable Company to draw Franchisee's Continuing
Royalty, Advertising Fee and other sums payable under the terms of this
Agreement.

 

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

 

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

 

8

 

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

 

4.5.3        The amount of all sales taxes, use
taxes, personal property taxes and similar taxes, which shall be imposed upon
Franchisee and required to be collected or paid by Company (a) on account of
Franchisee's Gross Sales, or (b) on account of Continuing Royalties,
Advertising Fees or Initial Fees collected by Company from Franchisee (but
excluding ordinary income taxes). 
Company, at its sole discretion, may collect the taxes in the same
manner as franchise fees are collected herein and if Company collects such
taxes, Company shall promptly pay the tax collections to the appropriate
governmental authority; provided, however, that it shall be Franchisee's
responsibility to pay any sales, use or other taxes now or hereinafter imposed
on Initial Fees, Continuing Royalties, and Advertising Fees imposed by any
Governmental Authorities.

 

4.6           Application of Funds.  If Franchisee shall be delinquent in the
payment of any obligation to Company hereunder, or under any other agreement
with Company, Company shall have the absolute right to apply any payments
received from Franchisee to any obligation owed, whether under this Agreement
or otherwise, notwithstanding any contrary designation by Franchisee as to
application.

 

4.7           Interest and Charges for Late Payments.

 

4.7.1        If Franchisee shall fail to pay to
Company the entire amount of the Continuing Royalty, Advertising Fee or any
other 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 the
unpaid amounts, from the due date thereof, at the rate of 1-1/2% per month, or
the highest rate allowable under applicable law, whichever is less.

 

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

 

ARTICLE 5

CONSTRUCTION
AND 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 following
specific location at the address inserted above:
                                                                                                                 
(the “Location”).

 

9

 

5.1.2        Franchisee may not relocate the
“Diedrich Coffee” Coffeehouse, including in the case of a kiosk or cart
relocating to any other location within the Premises, without Company's prior
written consent.  Any attempt to do so
shall 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 not
be construed to insure or guarantee the profitable or successful operation of
the Location by Franchisee, and Company hereby expressly disclaims any
responsibility therefor.  Franchisee
acknowledges that it is its sole responsibility to find a suitable location,
that the location of the “Diedrich Coffee” Coffeehouse will be a critical
factor in the success of Franchisee's business, and that Company is not
obligated to directly or indirectly identify or obtain a location for
Franchisee.

 

5.3           Lease.  If the
Location is leased or subleased by Franchisee, (i) Company shall have the right
of approval of such lease or sublease, as applicable (the “Lease”), a true and
correct copy of which shall be delivered to Company at least 15 days prior to
the execution thereof; (ii) the term of said Lease shall be for a period which
is not less than the Term of this Agreement, unless Company shall approve, in
writing, a shorter term; (iii) Franchisee shall neither create nor purport to
create any obligations on behalf of Company, nor grant or purport to grant to
the landlord thereunder any rights against Company, nor agree to any other
term, condition, or covenant which is inconsistent with any provision of this
Franchise Agreement; (iv) Franchisee shall duly and timely perform all of the
terms, conditions, covenants and obligations imposed upon him under the Lease;
(v) the Location shall be constructed and improved pursuant to the provisions
of Section 5.4 hereof; (vi) the Lease shall grant Company an option, without
cost or expense to Company, to assume the Lease in the event of termination or
expiration of this Franchise Agreement for any reason, and shall expressly
provide that Company shall have the right (but not the obligation) to succeed
to Franchisee's rights under the Lease if Franchisee fails to exercise any
option to renew, and upon Franchisee's default thereunder, and that upon any
alleged breach thereof by Franchisee, the landlord thereunder shall be
obligated to notify Company in writing at least 15 days prior to its
termination or non-renewal and, in the case of a default, Company shall have
the right, but not the obligation, to cure the breach and to succeed to
Franchisee's rights under said Lease by giving written notice of such election
to Franchisee and such landlord; Franchisee hereby appoints Company as its
attorney-in-fact to execute an assignment and all other documents and
instruments which Company deems necessary or appropriate to effectuate the
foregoing; (vii) a fully executed copy of said Lease shall be delivered to
Company promptly following the execution thereof; (viii) the Lease shall
provide that it may not be assigned, subleased, modified or amended without
Company's prior written consent and that Company shall be provided with copies
of all such assignments, subleases, modifications and amendments, and the landlord
shall consent in advance to any assignment or sublease to Company or a
“Diedrich Coffee” franchisee or licensee approved by Company during the initial
term or any renewal term of the Lease; and (ix) the Lease may not contain a
non-competition covenant which purports to restrict the Company, or any
franchisee 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 that
upon expiration or termination thereof for

 

10

 

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

 

5.4           Construction and Renovation.

 

5.4.1        If on the Effective Date the “Diedrich
Coffee” Coffeehouse, Location or Premises at which the “Diedrich Coffee”
Coffeehouse will operate has not been constructed, or if the same has been
constructed but does not comply with Company's current standards in effect for
new “Diedrich Coffee” coffeehouses, kiosks or carts, as applicable, Franchisee
shall at its sole cost and expense promptly cause the “Diedrich Coffee”
Coffeehouse and Location to be constructed, equipped and improved in accordance
with 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 Franchisee
only from suppliers and manufacturers approved by Company.

 

5.4.2        Following the Effective Date and prior
to any construction or renovation of the “Diedrich Coffee” Coffeehouse or
Location, Company shall provide Franchisee with copies of Company's
specifications for the design and layout of the “Diedrich Coffee” Coffeehouse
and required Leasehold Improvements. 
Franchisee shall, in all respects, comply with all such specifications
and criteria unless Company shall, in writing, agree to modifications
thereof.  Franchisee shall employ
architects, engineers and general contractors of its own selection, and at its
sole cost and expense, to prepare such architectural, engineering and
construction drawings and site plans (collectively referred to as the
“Construction Documents”), and/or to modify the standard Construction Documents
which may be provided by Company, and to obtain all Permits required to
construct, remodel, renovate, and/or equip the “Diedrich Coffee” Coffeehouse
and Location.  All such Construction
Documents, and all modifications and revisions thereto, shall be submitted to
Company for its prior review and approval before Franchisee's commencement of
construction pursuant thereto.  When
completed, said “Diedrich Coffee” Coffeehouse and Location shall in all respect
strictly comply with the Company's specifications therefor, as modified or
revised 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 “Diedrich
Coffee” Coffeehouse opening.  “Project
Record Drawings” are hereby defined as the set of Construction Documents that
are marked to show the changes made in the field, with particular attention
paid to the information on concealed elements (e.g. underground utilities) that
cannot 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 the
reasonable control of Franchisee, such as, by way of illustration, strikes, material
shortages, fires and other acts of God, which Franchisee could not by the
exercise of due diligence have avoided, Franchisee shall complete

 

11

 

construction or
renovation, as the case may be, of the Location and “Diedrich Coffee”
Coffeehouse and shall install all Leasehold Improvements therein as soon as
possible, but in any event within 3 months after commencement of
construction.  At all times prior to
Franchisee 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” Coffeehouse
and all Leasehold Improvements, for the purpose of insuring compliance with
Company's standards and specifications.

 

5.4.4        Franchisee shall commence the operation
of the “Diedrich Coffee” Coffeehouse not later than 6 months following the
Effective Date.

 

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

 

5.5           Maintaining and Remodeling of
“Diedrich Coffee” Coffeehouse.

 

5.5.1        Franchisee at all times during the Term
shall 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 courteous
service, and pleasant ambiance.  If at
any 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 and
Premises, and parking areas) or its Leasehold Improvements, does not meet the
Company's standards therefor, Franchisee shall immediately upon receipt of
notice from Company specifying the action to be taken by Franchisee to correct
such deficiency, repair and refurbish the “Diedrich Coffee” Coffeehouse, the
Location and the Premises, as applicable, and make such modifications and
additions to its layout, decor and general theme, as may be required from time
to time to maintain such condition, appearance, efficient operation, ambiance
and overall image, including without limitation, replacement of worn out or
obsolete Leasehold Improvements, and repair and paint the interior and exterior
of 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 written
notice.  Such maintenance shall not be
deemed 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 to
refurbish, remodel and improve the “Diedrich Coffee” Coffeehouse to conform the
Franchisee's building design, trade dress, color schemes, and presentation of
Marks 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

 

12

 

of Leasehold Improvements
as well as such other changes as the Company may direct, and Franchisee shall
undertake such a program promptly upon notice from the Company, and shall
complete any such remodeling as expeditiously as possible, but in any event
within 90 days of commencing same. 
Company may, on one or more occasions, waive or defer for such period of
time as Company may deem appropriate, Franchisee's obligation to remodel any
such “Diedrich Coffee” Coffeehouse, if Company determines that any such
“Diedrich Coffee” Coffeehouse is, on the date scheduled for commencement of
such remodel, in substantial conformity with Company's then current standard system
decor specifications, or if the proposed remodeling is within the last two
years prior to the expiration of the Term (subject to Company's right to
require remodeling, renovation or modernization as a condition to Franchisee's
exercise of its Renewal Right as provided in Section 3.4).

 

5.5.3        If the “Diedrich Coffee” Coffeehouse is
damaged or destroyed by fire or any other casualty, Franchisee, within 30 days
thereof, shall initiate such repairs or reconstruction, and thereafter in good
faith and with due diligence continue (until completion not more than 120 days
after such fire or other casualty) such repairs or reconstruction, in order to
restore the premises of the “Diedrich Coffee” Coffeehouse to its original
condition prior to such casualty.  If, in
Company's reasonable judgment, the damage or destruction is of such a nature or
to such extent that it is feasible for Franchisee to repair or reconstruct the
Location and the “Diedrich Coffee” Coffeehouse in conformance with the then
standard “Diedrich Coffee” decor specifications, the Company may require
Franchisee, by giving written notice thereof, that Franchisee repair or
reconstruct the Location and “Diedrich Coffee” Coffeehouse in conformance with
the then standard System decor specifications.

 

ARTICLE 6

TRAINING
AND ASSISTANCE

 

6.1           Initial Training Program.

 

6.1.1        Franchisee shall, at all times, employ a
general manager and one or more assistant managers and other employees
acceptable to Company each of whom shall have been trained by Company or by a
trainer certified by Company and qualified as “Barista” in accordance with
Company's policies and standards, and at least one of whom shall be working at
the “Diedrich Coffee” Coffeehouse at all times while the “Diedrich Coffee”
Coffeehouse is open to the public.  At
no extra charge, Company shall provide an initial training program in the
Company's System and methods of operation to up to 5 persons selected by
Franchisee 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 of
training, as Company may determine, at one or more of the following locations:
(i) Company's corporate headquarters in Irvine, California, (ii) at a
Company-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 a
Business Entity, Company may require the general manager to be an Owner,
officer or other designated representative

 

13

 

selected by Franchisee
and acceptable to, and approved by Company (“Designated Franchisee
Representative”).  Subject to Sections
6.1.3 and  6.1.4, Company will bear its
costs of providing the initial training program concurrently to up to 5 persons
pursuant 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 other
expenses, if any, incurred by Franchisee and/or Franchisee's employees in
connection with attendance at training programs.  Franchisee may not open its “Diedrich Coffee” Coffeehouse until
such training shall have been successfully completed by Franchisee's general manager,
assistant manager and Franchisee's management team and staff has been certified
by Company.  Company shall pay no
compensation for any services performed by trainee(s) in connection with such
training programs.

 

6.1.2        The contents of the initial training
program and manner of conducting such program shall be at Company's sole
discretion and control, however, the training course will be structured to
provide practical training in the implementation and operation of a “Diedrich
Coffee” Coffeehouse and may include such topics as on-site coffee and espresso
drink and food preparation, Barista training, use of point of sale cash
register and/or computer systems, inventory, cash handling, Diedrich Coffee
standards, personnel management, marketing techniques, reports, equipment
maintenance, safety and security, customer service techniques and financial
controls.

 

6.1.3        Company shall provide the initial
training at no additional charge pursuant to Sections 6.1.1 and 6.1.2 only if
this is the first “Diedrich Coffee” Coffeehouse operated by Franchisee, and not
if Franchisee has otherwise previously received such training for this
Location.  Unless otherwise agreed in
writing by Company, the Designated Franchisee Representative shall become a
certified trainer and thereafter train Franchisee's “Diedrich Coffee”
Coffeehouse general manager, assistant manager(s) and other employees pursuant
to Section 6.1.4.

 

6.1.4        Unless waived by Company, each of
Franchisee's general managers, assistant managers and staff shall have
satisfactorily completed Company's initial training program as required
pursuant to Section 6.1.1, provided, however, that if general manager or
Designated Franchisee Representative has been approved by Company as a
certified trainer, Franchisee's general manager, assistant managers or staff
for the “Diedrich Coffee” Coffeehouse may be trained by such certified trainer
in lieu of attending Company's initial training program as required pursuant to
Section 6.1.1.  Should Company determine
that any general manager's, assistant manager's or other employee's training is
unsatisfactory, Company may require such person(s) (or a replacement trainee
acceptable to Company) to undergo further training by Company at a time
scheduled by Company, until Company is satisfied that Franchisee's trainee has
satisfactorily completed the training course and Franchisee shall advance or
reimburse, at Company's option, all direct and indirect costs and expense that
Company may incur for the wages, lodging, subsistence and travel of Company's
personnel, if conducted at the “Diedrich Coffee” Coffeehouse in Company's
discretion, for the duration of the extended training and Company's then
current standard training fee. 
Franchisee acknowledges that because of Company's superior skill and
knowledge with respect to the training and skill required to manage the
“Diedrich Coffee” Coffeehouse, its judgment as to whether or not

 

14

 

the Franchisee or his
manager has satisfactorily completed such training shall be determined by
Company in its sole subjective judgment, exercised in good faith.

 

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

 

6.3           Other Assistance.

 

6.3.1        Company will advise Franchisee from time
to time regarding the operation of Franchisee's “Diedrich Coffee” Coffeehouse
based on Franchisee's reports or Company's inspections.  Company will provide guidance to Franchisee
in the Manuals; in bulletins or other written materials; by electronic media;
by telephone consultation; and/or Company's office or Franchisee's “Diedrich
Coffee” Coffeehouse.  If Franchisee
requests 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 its
discretion, cause its field representatives to visit Franchisee's “Diedrich
Coffee” Coffeehouse for the purpose of rendering advice and consultation or
training, with respect to the “Diedrich Coffee” Coffeehouse, its operation and
performance, and compliance by Franchisee with the Manuals.  If provided at the Franchisee's request, the
Company may require the Franchisee to pay such training charges as may be then
in effect, and to reimburse Company for all transportation costs, food, lodging
and similar costs incurred by Company and its personnel in connection with such
training.

 

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

 

15

 

ARTICLE 7

OBLIGATIONS
OF COMPANY

 

7.1           General. 
Company shall perform the following obligations:

 

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

 

7.1.2        To supply to Franchisee a set of
standard decor and layout plans and to thereafter approve the initial decor and
layout of Franchisee's “Diedrich Coffee” Coffeehouse as described in Section
5.4;

 

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

 

7.1.4        To provide the training and assistance
described in Article 6.

 

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

 

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

 

7.3           No Other Obligations.  Company shall not be obligated to
provide any services to Franchisee except expressly provided herein and any and
all other services which Company may provide to Franchisee during the Term
shall be at its sole discretion and Company may cease to provide the same
without notice of further obligation to Franchisee.

 

ARTICLE 8

MANUALS
AND STANDARDS OF FRANCHISEE

QUALITY,
CLEANLINESS AND SERVICE

 

 

In order to
promote the value and goodwill of Company's Marks and the System and to protect
Company's Marks and the other Diedrich Coffee Franchisees who comprise the
Diedrich

 

16

 

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

 

8.1           Product Line and Service.  Franchisee shall serve all and only
Authorized Diedrich Coffee Products at or from the “Diedrich Coffee”
Coffeehouse, all of which shall be purchased by Franchisee from a Company or a
designated or approved distributor or manufacturer, as provided in Article
10.  Franchisee acknowledges that
Authorized Diedrich Coffee Products may differ at “Diedrich Coffee”
Coffeehouses, kiosks, carts, and may vary depending on the operating season and
geographic location of the Franchisee's “Diedrich Coffee” Coffeehouse or other
factors.

 

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

 

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

 

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

 

8.3           Menus.  All
Authorized Diedrich Coffee Products shall be distributed under the specific
name designated by Company.  Franchisee
shall not remove any Authorized Diedrich Coffee Product from the Franchisee's
menu unless Franchisee is so instructed by Company.

 

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

 

17

 

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

 

8.3.2        Franchisee shall, upon receipt of notice
from Company, add any Authorized Diedrich Coffee Products to its menu according
to the instructions contained in the notice. 
Franchisee shall have a minimum of 30 days after receipt of written
notice in which to fully implement any such change.  Franchisee shall cease selling any previously approved or
discontinued product within 30 days after receipt of notice that the product is
no longer approved.

 

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

 

8.5           Manuals. 
Franchisee shall operate the “Diedrich Coffee” Coffeehouse in strict
compliance with the standard procedures, policies, rules and regulations
established by Company and incorporated in Company's Manual(s).  The subject matter of the Manuals may
include, without limitation, matters such as: 
forms, information relating to product and menu specifications, cash
control, purchase orders, general operations, labor schedules, personnel, Gross
Sales reports, payroll procedures, training and accounting; safety and
sanitation; design specifications and color of uniforms; display of signs and
notices; authorized and required equipment and fixtures, including
specifications therefor; Mark usage; insurance requirements; lease
requirements; decor; standards for management and personnel, hours of
operation; local advertising formats; standards of maintenance and appearance
of the “Diedrich Coffee” Coffeehouse; and required posting of notices to
customers as to how to contact the Company to submit complaints.  Without limiting the generality of the
foregoing, the Company may establish emergency procedures pursuant to which it
may require Franchisee to temporarily close the “Diedrich Coffee” Coffeehouse
to the public, in which event Company shall not be liable to Franchisee for any
losses or costs, including consequential damages or loss profits occasioned
thereby.

 

18

 

8.5.1        Company shall have the right to modify
the Manuals at any time and from time to time by the addition, deletion or
other modification to the provisions thereof. 
All such modifications shall be equally applicable to all similarly
situated franchisees who are required by their franchise agreements to comply
therewith, and no such modification shall alter Franchisee's fundamental status
and rights under this Agreement. 
Modifications in the Manuals shall become effective upon delivery of
written notice thereof to Franchisee unless a longer period is specified in
such written notice.  The Manuals, as
modified from time to time as hereinabove provided shall be an integral part of
this Agreement and reference made in this Agreement, or in any amendments,
exhibits or schedules hereto, to the Manuals shall be deemed to mean the
Manuals 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 Franchisee
purchased the “Diedrich Coffee” Coffeehouse from an existing franchisee or
entered into this Agreement as a renewal or extension of a pre-existing
franchise agreement for the same Location. 
The Manuals and all amendments to the Manuals (and copies thereof) are
copyrighted and remain Company's property. 
They are loaned to Franchisee for the term of this Agreement, and must
be returned to Company upon the Agreement's termination or expiration.  The Manuals are highly confidential
documents which contain certain Confidential Information of Company, and
Franchisee shall never reveal, and shall take all reasonable precautions, both
during and after the Term of this Agreement, to assure that its employees or
any other party under Franchisee's control, shall never reveal any of the
contents of the Manuals or any other publication, recipe or secret provided by
Company, except as is necessary for the operation of Franchisee's “Diedrich
Coffee” Coffeehouse.  Upon the
expiration or termination of this Agreement for any reason whatsoever, Franchisee
shall immediately return the Manuals to Company.  Franchisee shall not make, or cause or allow to be made, any
copies or reproductions of all or any portion of the Manuals without Company's
express prior written consent.

 

8.6           Hours.  Subject to
Applicable Law to the contrary, Company and Franchisee agree that Franchisee's
“Diedrich Coffee” Coffeehouse shall be open and operational during at least the
minimum hours and days set forth on Exhibit A which is attached hereto and
incorporated herein by this reference. 
Franchisee shall diligently and efficiently exercise its best efforts to
achieve the maximum Gross Sales possible from its Location, and shall remain
open for longer hours if additional opening hours are reasonably required to
maximize operations and sales.  Without
limiting the foregoing, if the hours set forth in Exhibit A are incorrect in
relation to the sales potential of Franchisee's “Diedrich Coffee” Coffeehouse,
then Company and Franchisee shall reasonably adjust such hours by jointly
establishing new hours of operation.  It
is acknowledged that the hours of other Franchisees will vary in relation to
each respective location, and local legal restrictions, if any.

 

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

 

19

 

8.8           Signs, Designs and Forms of Publicity.  Franchisee shall maintain suitable signs
and/or awnings at, on, or near the front of the Location and Premises,
identifying the Location as a “Diedrich Coffee” Coffeehouse, which shall
conform in all respects to Company's specifications and requirements and the
layout and design plan approved for the Location, subject only to restrictions
imposed by Applicable Law.  Without
limiting the foregoing:

 

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

 

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

 

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

 

8.9           Uniforms and Employee Appearance.  Franchisee shall cause all employees, while
working 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 from
the list of approved uniforms, Franchisee shall have 180 days from receipt of
written notice of such removal to discontinue use of its existing inventory of
uniforms and implement the approved type of uniform.

 

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

 

8.11         Co-Branding. 
Franchisee may not install any co-brand at Franchisee's Location
without Company's prior written consent, which may be granted or withheld in
its sole discretion, and, if granted may be subject to such terms and
conditions as Company may establish. 
For the purpose of this article, a co-brand shall be defined as an
independent operating system owned by another person or entity (and not by
Company or any affiliate) that is incorporated as an operational part within
the Franchisee's Premises.  An example
would be an independent ice cream/yogurt operation installed within
Franchisee's Location.  Nothing herein
shall prevent Company from co-branding or authorizing any third party to
co-brand “Diedrich Coffee” coffeehouses, kiosks or carts in conjunction with
such third party's operations.

 

20

 

ARTICLE 9

ADVERTISING
AND CO-OPS

 

9.1           General Requirements.  Franchisee shall conduct all local
advertising and promotion in accordance with such policies and provisions with
respect to format, content, media, geographic coverage and other criteria as
are from time to time contained in the Manuals, or as otherwise directed by
Company, and shall not use or publish any advertising material which does not
conform to said policies and provisions or as to which Franchisee shall not
have received Company's prior written approval; provided, however, that
if Company shall not object to any proposed advertisement submitted by
Franchisee for approval within 10 business days after Company's receipt
thereof, such advertisement shall be deemed approved subject to Company's right
to subsequently withdraw its approval. 
Franchisee may not develop, create, generate, own, license, lease or use
in any manner any computer medium or electronic medium (including any Internet
home page, website, bulletin board, newsgroup or other Internet-related medium)
which in any way uses or displays the Marks, in whole or part, and Franchisee
shall not cause or allow the Marks, or any of them, to be used or displayed in
whole or part, as an Internet domain name, or on or in connection with any
Internet home page, website, bulletin board, newsgroup or other
Internet-related activity without Company's express prior written consent, and
then 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 shall
expend an amount of not less than 1% of its Gross Sales for local advertising
relating to Franchisee's “Diedrich Coffee” Coffeehouse.  Such local advertising does not include the
cost of Franchisee listing its Store in the white pages or yellow pages of such
telephone directories distributed in Franchisee's area as Company authorizes or
directs in accordance with Section 9.5. 
Amounts contributed to an Advertising Co-op, if any, pursuant to Section
9.3 during any calendar quarter shall be credited against Franchisee's local
advertising requirement described in this Section 9.2.  Franchisee shall deliver evidence of such
expenditures in the form and manner prescribed by Company from time to
time.  Until further notice from
Company, Franchisee shall deliver to Company quarterly (no later than the 15th
day of the months of January, April, July, and October), copies of invoices
showing that Franchisee made the required expenditures during the preceding
calendar quarter.  If the invoices
submitted do not demonstrate expenditure of at least the minimum amount
required for local advertising, Franchisee shall pay to Company the amount
necessary 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 Agreement
is located, which region may comprise a Designated Market Areas (“DMA”)
established periodically by Nielson Media Research, an Area of Dominant
Influence (“ADI”) established periodically by Arbitron, a Standard Metropolitan
Statistical Area (“SMSA”) or such other geographic area  established by Company from time to time to
identify the market area in which the Franchisee's “Diedrich Coffee” 

 

21

 

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

 

9.3.1        If and when Company creates an
Advertising 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 become
subscribers and members of the Advertising Co-op and shall execute a
subscription agreement on a form prescribed by Company, and participate therein
in accordance with the Subscription Agreement and the Certificate of
Incorporation 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, all
other “Diedrich Coffee” franchisees similarly situated who are by the terms of
their franchise agreements required to participate, and Company, if Company
owns and operates a Coffeehouse in such Advertising Co-op Region; provided that
the Company alone may from time to time (but not more frequently than one time
per calendar year) amend the geographic size, configuration and content of such
Advertising Co-op Region.  At all
meetings of such Advertising Co-op, each participating Franchisee, as well as
Company, if applicable, shall be entitled to one vote for each “Diedrich
Coffee” Coffeehouse owned and located within the region of the Advertising
Co-op.  At any time upon reasonable
notice, 20% of the total eligible member votes, a majority of the directors of
such Advertising Co-op (who shall be elected in accordance with the Bylaws of
such Advertising Co-op), or Company by itself, may call a meeting of all
members of the Advertising Co-op.  Except
for any amendment of the Certificate of Incorporation, Operating Agreement or
By-laws of the Advertising Co-op (which shall require the affirmative vote of
the Company), all matters concerning operation of the Advertising Co-op shall
be decided by the affirmative vote of at least 2/3's of the total eligible
member votes, and such vote shall bind all members of said Advertising Co-op,
including Company.

 

9.3.2        Franchisee and other franchisees who are
members of the Advertising Co-op will contribute to the Advertising Co-op such
amount as may be determined by vote of the Advertising Co-op, not to exceed an
amount equal to 3% of the Gross Sales of each Advertising Co-op member's
“Diedrich Coffee” Coffeehouse(s) located in the region (the “Maximum
Advertising Co-op Fee”);  provided that
if the Advertising Fee Rate for any year shall exceed 1%, then the percentage
rate of the Maximum Advertising Co-op Fee shall be reduced for that year by an
amount equal to said excess (e.g. if the Advertising Fee Rate is increased to
2%, the Maximum Advertising Co-op Fee shall be reduced to equal to 2% of the
Gross Sales).   The precise amount of
such contribution shall be established from time to time by the Advertising
Co-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 to
Section 9.1) decide as to the usage of funds contributed pursuant to Section
9.3.2 for media time, production of media materials, whether for radio,
television, newspapers or store level materials such as flyers, or posters, or
for any other type of advertising or marketing use, and then such Advertising
Co-op shall in writing request approval from Company to use said funds in said
manner.  No placement of advertising or

 

22

 

commitment of advertising
funds on behalf of the Advertising Co-op will be made without Company's prior
written approval.  Company reserves the
right to establish general standards concerning the operation of the Advertising
Co-op, advertising agencies retained by the Advertising Co-op, and advertising
programs conducted by the Advertising Co-op. 
From time to time Company may propose certain general or specific uses
of the funds contributed pursuant to Section 9.3.2, and in each instance
Franchisee shall attend (by any means permitted by the Advertising Co-op) and
vote (by any means permitted by the Advertising Co-op) at a meeting of the
Advertising Co-op wherein such proposal shall be considered.

 

9.4           Advertising Program.

 

9.4.1        Company shall administratively segregate
on its books and records all Advertising Fees received from Franchisee and all
other franchisees of Company.  Nothing
herein shall be deemed to create a trust fund, and Company may commingle
Advertising Fees with its general operating funds and expend such sums in the
manner herein provided.  For each
“Diedrich Coffee” Coffeehouse that Company or any of its affiliate
operates,  Company or such affiliate
will similarly allocate Advertising Fees in the amount that would be required
to be paid if a franchisee operated a franchised “Diedrich Coffee” Coffeehouse
in the same location.

 

9.4.2        If Company expends less than the total
of all Advertising Fees contributed by franchisees and allocated for “Diedrich
Coffee” Coffeehouses operated by Company and its affiliates during any fiscal
year, 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 interest
at the rate equal to the Company's cost of funds.  Each determination by Company of an interest rate hereunder shall
be conclusive and binding for all purposes, absent manifest error.

 

9.4.3        Company will use Advertising Fees for
national, regional, or local advertising, public relations or promotional
campaigns or programs designed to promote and enhance the image, identity or
patronage of franchised and Company-owned “Diedrich Coffee” Coffeehouses.  Such expenditures may include, without
limitation (a) expenditures to conduct marketing studies, and to produce and
purchase advertising art, commercials, musical jingles, print advertisements,
point of sale materials, media advertising, outdoor advertising art, and direct
mail 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 to
such advertising, public relations and promotional campaigns.  Nothing herein shall be construed to require
Company to allocate or expend Advertising Fees so as to benefit any particular
franchisee or group of franchisees on a pro rata or proportional basis or
otherwise.  Company may make copies of
advertising materials available to Franchisee with or without additional
reasonable charge, as determined by Company. 
Any additional advertising shall be at the sole cost and expense of
Franchisee.

 

23

 

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

 

9.5           Telephone Numbers and Directory
Advertising.  In addition to the
Advertising Fees, local advertising, and Franchisee's required expenditures for
Co-op Advertising, Franchisee shall, at its sole expense, subscribe for and
maintain throughout the Term, or such lesser period designated by Company, one
or more listed telephone numbers which shall be listed in the white pages of
such telephone directory or directories as Company may designate or approve
which service Franchisee's Location and adjacent or nearby areas.  Company reserves the right to establish
general 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 on
a national or regional basis, which may by way of illustration and not
limitation promote particular products or marketing themes.  Franchisee agrees to participate in such
promotional campaigns upon such terms and conditions as the Company may
establish.  Franchisee acknowledges and
agrees that such participation may require Franchisee to purchase point of sale
advertising material, posters, flyers, product displays and other promotional
material, and to the extent permitted by Applicable Law may establish the
maximum prices which Franchisee may impose for products offered in the
promotion.

 

ARTICLE 10

DISTRIBUTION
AND 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 quantities
of Authorized Diedrich Coffee Products as are needed to meet reasonably
anticipated consumer demand.  Franchisee
shall purchase Diedrich Coffee Brand Products, and all roasted coffee beans and
blends served, offered or sold at the “Diedrich Coffee” Coffeehouse, solely and
exclusively from Company or its designated third party distributors or
suppliers, and all such Diedrich Coffee Brand Products, roasted coffee beans
and blends which are purchased from Company or its designated third party distributors
or suppliers shall be used, offered and sold by Franchisee only on a retail
basis, at the “Diedrich Coffee” Coffeehouse pursuant hereto, or at other
“Diedrich Coffee” coffeehouses opened by Franchisee under Company's Marks and
in accordance with the System pursuant to other validly subsisting franchise
agreements with Company.

 

24

 

10.2         Proprietary Products.  Company may, from time to time throughout
the 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 meet
reasonably anticipated consumer demand, certain proprietary powder mixes and
other ingredients and raw materials, which are manufactured in accordance with
Company's proprietary recipes, specifications and/or formulas (“Proprietary
Products”).  Franchisee shall purchase
Proprietary Products only from Company (if it sells the same) or its designees.  If Franchisee shall purchase Proprietary
Products from Company, Franchise shall purchase the same at Company's then
current published prices charged to similarly situated franchisees, which may
be changed or modified from time to time without prior notice, and which will
include a profit to the Company. 
Company shall not be obligated to reveal such recipes, specifications
and/or formulas of such Proprietary Products to Franchisee, non-designated
suppliers, or any other third parties.

 

10.3         Non-Proprietary Products.  Company may designate baked goods and other
food 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 other
products, supplies and equipment other than Proprietary Products which
Franchisee 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 such
Non-Proprietary Products from Company, if Company supplies same.  Franchisee may use, offer or sell only such
Non-Proprietary Products that Company has expressly authorized, or that were
purchased or obtained from Company or a producer, manufacturer or supplier
(“Supplier”) designated or approved by Company pursuant to Section 10.3.2
below.

 

10.3.1      Franchisee may purchase authorized
Non-Proprietary Products from (i) Company, (ii) Suppliers designated by Company,
or (iii) Suppliers selected by Franchisee and approved in writing by Company
prior to Franchisee making such purchase(s). 
Each such Supplier designated or approved by Company must comply with
Company's usual and customary requirements regarding insurance,
indemnification, and non-disclosure, and shall have demonstrated to the
reasonable satisfaction of Company: (a) its ability to supply a Non-Proprietary
Product meeting the specifications of Company, which may include, without
limitation, 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 its
products or services.

 

10.3.2      If Franchisee should desire to procure
authorized Non-Proprietary Products from a Supplier other than Company or one
previously approved or designated by Company, Franchisee shall deliver written
notice to Company of its desire to seek approval of such Supplier, which notice
shall (i) identify the name and address of such Supplier, (ii) contain such
information as may be requested by Company or required to be provided pursuant
to the Manuals (which may include reasonable financial, operational and
economic information regarding its business ), and (iii) identify the
authorized Non-Proprietary Products desired to be purchased from

 

25

 

such Supplier.  Company shall, upon request of Franchisee,
furnish to Franchisee specifications for such Non-Proprietary Products if such
are not contained in the Manuals.  The
Company may thereupon request that the proposed Supplier furnish Company at no
cost to Company product samples, specifications and such other information as
Company may require.  Company or its
representatives shall also be permitted to inspect the facilities of the
proposed Supplier and establish economic terms, delivery, service and other
requirements consistent with other distribution relationships for other
“Diedrich Coffee” Coffeehouses.

 

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

 

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

 

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

 

10.4         Purchases from Company, Extensions of Credit.

 

10.4.1      Company shall not be liable to Franchisee
on account of any delay or failure in the manufacture, delivery or shipment of
roasted coffee beans, blends or other products caused by events or
circumstances beyond Company's reasonable control including such events as
labor or material shortages, conditions of supply and demand, import/export
restrictions, or disruptions in Company's supply sources.

 

26

 

10.4.2      All product orders by Franchisee shall be
subject to acceptance by Company at Company's designated offices, and Company
reserves the right to accept or reject, in whole or in part, any order placed
by Franchisee.  Company will establish
the payment terms upon which it will accept Franchisee's orders, and may
require Franchisee to pay for orders on a cash-in-advance or cash-on-delivery
basis.

 

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

 

10.5         Purchase/Distribution Programs.  Franchisee agrees that at such times that
Company establishes a regional purchase or distribution program, or both, for
any of the Franchisee's goods, raw materials or supplies, which may benefit Franchisee
by reduced price, lower labor costs, production of improved Authorized
Product(s), increased reliability in supply, improved distribution, cost
control (establishment of consistent pricing for reasonable periods to avoid
market fluctuations), improved operations by Franchisee or other
tangible benefits to Franchisee, Franchisee will participate in such purchasing
program in accordance with the terms of such program.

 

10.6         Test Marketing. 
Company may, from time to time, require Franchisee to test market
products and/or services in connection with the operation of the “Diedrich
Coffee” Coffeehouse.  Franchisee shall
cooperate with Company in connection with 
the conduct of such test marketing programs and shall comply with the
Company's rules and regulations established from time to time in connection
herewith.

 

ARTICLE 11

REPORTS,
BOOKS AND RECORDS, INSPECTIONS

 

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

 

27

 

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

 

11.1.1      Franchisee will allow Company to poll on a
daily basis at a time selected by the Company the Franchisee's “Diedrich
Coffee” Coffeehouse computerized POS system to retrieve sales, usage, and
operations data.

 

11.1.2      On or before noon (pacific standard time)
each Friday, during the Term hereof, Franchisee shall submit a weekly sales
summary, on a form prescribed by Company, reporting all Gross Sales for the
preceding week (defined as the seven day period beginning each Thursday and
ending on the following Wednesday) either by electronic mail (“e-mail”), by
facsimile 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 cycle
as described in Article 4 above), during the Term hereof, Franchisee shall
submit a monthly sales summary signed by Franchisee, on a form prescribed by
Company, reporting all Gross Sales for the preceding month, or fiscal period as
applicable, together with such additional financial information as Company may
from time to time request.

 

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

 

11.1.5      Franchisee shall submit to Company a
semi-annual Profit and Loss Statement, signed and certified by Franchisee.  The Profit and Loss Statement shall be
prepared by a Certified or Public Accountant, in accordance with generally
accepted accounting principles, and shall provide Franchisee's sales, expenses
and financial status with respect to Franchisee's “Diedrich Coffee”
Coffeehouse.  Franchisee shall submit to
Company a copy of the original signed 1120 or 1120S tax form each and every
year or any other forms which take the place of the 1120 or 1120S forms.  Franchisee shall also provide Company with
copies of signed original sales and use tax forms contemporaneously with their
filing with the appropriate state or local authority.  Company reserves the right to require such further information
concerning Franchisee's “Diedrich Coffee” Coffeehouse as Company may from time
to time reasonably request.

 

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

 

28

 

11.1.7      Franchisee shall immediately (in no event
more than 24 hours following) notify Company of any (a) incident that may
adversely affect the operation or financial condition of Franchisee's “Diedrich
Coffee” Coffeehouse, Company or its affiliates; (b) legal action (including the
commencement of a suit or proceeding, or the threat thereof), (c) issuance of
any writ, order, injunction, award or decree of any court, agency or Government
authority, including any citation, fine or closing order, or (d) any other
adverse inquiry, notice, demand or sanction received by Franchisee relating to
the operation of the “Diedrich Coffee” Coffeehouse or Location, including any
alleged violation of any Applicable Law, including health, safety or employment
law violations, and including any labor dispute or actual or threatened labor
strike, work stoppage, lock-out or other incident relating to any labor
agreement, and shall provide Company with copies of all related correspondence
and other communications and information relating thereto.

 

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

 

11.3         Audits. 
Upon 10 days prior written notice, Company, its agents or representatives
may audit Franchisee's books and records in accordance with generally accepted
standards established by certified public accountants.  In connection with such audit(s) or other
operational visits, Franchisee shall keep its cash receipts records, monthly
control forms, accounts payable records including all payments to Franchisee's
Suppliers in its “Diedrich Coffee” Coffeehouse or at its business office for 5
years after their due date, which records shall be available for examination by
Company 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 information
which is required under the Manuals. 
Franchisee shall make such information available for such inspections in
recognition that an operational inspection cannot succeed without review of
essential statistical information.  If
any audit or other investigation reveals an under-reporting or under-recording
error of 5% percent or more, then in addition to any other sums due, the
expenses of the audit/inspection shall be borne and paid by Franchisee upon
billing by Company, plus interest at the highest compound rate authorized by
law, but not to exceed the rate of 15% percent per annum.

 

29

 

ARTICLE 12

MARKS

 

12.1         Use of Marks. 
Subject to Section 12.7, the “Diedrich Coffee” Coffeehouse herein
licensed and franchised shall be named “Diedrich Coffee” without any suffix or
prefix attached thereto and Franchisee shall use and display such of the
Company's Marks and such signs, advertising and slogans as Company may from
time to time prescribe or approve.  Upon
expiration or sooner termination of this Agreement, Company may, if Franchisee
does not do so, execute in Franchisee's name and on Franchisee's behalf, any
and all documents necessary in Company's judgment to end and cause the
discontinuance of Franchisee's use of the Marks and Company is hereby
irrevocably 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 shall
not use Company's Marks, or Company's trade name, or any words or symbols which
are 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 Business
Entity in connection with the operation of the “Diedrich Coffee” Coffeehouse.

 

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

 

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

 

 

12.6         Prosecution of Infringers.  If Franchisee shall receive notice or is
informed or learns that any third party, which it believes to be unauthorized
to use the Marks, is using the Marks or any variant thereof, Franchisee shall
promptly notify Company of the facts relating to such alleged infringing
use.  Thereupon, Company shall, in its
sole discretion, determine whether or not it wishes to take any action against
such third person on account of such alleged infringement of the

 

30

 

Marks.  Franchisee shall have no right to make any
demand against any such alleged infringer or to prosecute any claim of any kind
or nature whatsoever against such alleged infringer for or on account of such
infringement.

 

12.7         Modification of Marks.  From time to time, in the Manuals or in
directives or bulletins supplemental thereto, Company may add to, delete or
modify 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 strict
accordance with the procedures, policies, rules and regulations contained in
the Manuals or in written directives issued by Company to Franchisee, as though
they were specifically set forth in this Agreement.

 

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

 

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

 

ARTICLE 13

COVENANTS
REGARDING OTHER BUSINESS INTERESTS

 

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

 

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

 

31

 

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

 

13.1.2      Upon the expiration or termination of this
Agreement, or if Franchisee shall make any Assignment to any person or Business
Entity, or if any Owner, officer or director of Franchisee shall terminate his
or 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 any
capacity, either directly or indirectly, through one or more subsidiaries or
affiliated companies, engage in any Competitive Activities, (i) within the
County in which any “Diedrich Coffee” Coffeehouse operated by Franchisee is or
was located, or (ii) within an area within ten (10) miles from the location or
any then existing “Diedrich Coffee” Coffeehouse; provided that, with Company's
prior written consent, which Company will not unreasonably withhold, the  former Restricted Person may own and operate
one or more restaurants, or any other retail establishment, which sells brewed
coffee, espresso or coffee products if and for so long as such restaurant, or
retail establishment, does not derive 20% or more of its gross revenues from
the sale of espresso drinks, brewed coffee, roasted coffee beans and blends,
premium teas, and coffee-related products and equipment, or any of them, during
any day part.

 

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

 

13.2         Confidential Information

 

 

13.2.1      Company possesses and continues to
develop, and during the course of the relationship established hereunder,
Franchisee shall have access to, trade secrets and other proprietary and
confidential information, including, without limitation, the Manuals, recipes,
secret ingredients, specifications, procedures, concepts and methods and
techniques of operating the “Diedrich Coffee” Coffeehouse and producing
Authorized Diedrich Coffee Products (the “Confidential Information”).  Company will disclose certain of its
Confidential Information to Franchisee in the Manuals, bulletins, supplements,
confidential correspondence, or other confidential communications, and through
the Company's training program and other guidance and management assistance,
and in performing Company's other obligations and exercising Company's rights
under this Agreement.  Confidential
Information shall not include information which: (a) has entered the public
domain or was known to Franchisee prior to Company's disclosure of such
information to

 

32

 

Franchisee, other than by
the 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 than
by the breach of an obligation of confidentiality owed (by anyone) to
Company.  The burden of proving the
applicability of the foregoing will reside with Franchisee.

 

13.2.2      Franchisee shall acquire no interest in
the Confidential Information other than the right to use them in developing and
operating the Business during the Term of this Agreement.  Franchisee's duplication or use of any
Confidential Information in any other endeavor or business shall constitute an
unfair method of competition. 
Franchisee shall: (i) not use the Confidential Information in any
business or other endeavor other than in connection with Franchisee's “Diedrich
Coffee” Coffeehouse; (ii) maintain absolute confidentiality of the Confidential
Information during and after the Term of this Agreement; (iii) make no
unauthorized copy of any portion of the Confidential Information, including
without limitation, the Manuals, bulletins, supplements, confidential
correspondence, or other confidential communications, whether written or oral;
and (iv) operate and implement all reasonable procedures prescribed from time
to time by Company to prevent unauthorized use and disclosure of the
Confidential Information, including without limitation, restrictions on
disclosure to employees and use of non-disclosure and non-competition
provisions as Company prescribes in employment agreements with employees who
may have access to the Confidential Information.  Promptly upon Company's request, Franchisee shall deliver
executed copies of such agreements to Company.

 

13.2.3      In the event any portion of the above
covenants violates laws affecting Franchisee, or is held invalid or
unenforceable in a final judgment to which Company and Franchisee are parties,
then the maximum legally allowable restriction permitted by law shall control
and bind Franchisee.  Company may at any
time unilaterally reduce the scope of any part of the above covenants, and
Franchisee shall comply with any such reduced covenant upon receipt of written
notice.  The provisions of this Section
13.2 shall be in addition to and not in lieu of any other confidentiality
obligation of Franchisee, or any other person, whether pursuant to another
agreement, 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's
spouse and minor children and its Owners, officers and directors if Franchisee
is a Business Entity and Franchisee shall, except as Company may otherwise
agree, cause each such person to acknowledge and agree to be bound by the
provisions of Sections 13.1 and 13.2. 
The provisions of this Article shall not limit, restrain or otherwise
affect any right or cause of action which may accrue to Company for any
infringement of, violation of, or interference with, this Agreement, or
Company's Marks, System or Confidential Information.

 

33

 

ARTICLE 14

INTERFERENCE
WITH EMPLOYMENT RELATIONS

 

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

 

14.2         Prohibitions After Term. The
prohibitions 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 written
consent of Franchisee, directly or indirectly: (a) employ or attempt to employ
any person who at that time is employed by Franchisee or an affiliate of
Franchisee; or (b) induce or attempt to induce any person to leave his or her
employment with Franchisee or an affiliate of Franchisee.

 

ARTICLE 15

NATURE
OF INTEREST, ASSIGNMENT

 

15.1         Assignment by Company. This Agreement is
fully transferable by Company, in whole or in part, without the consent of
Franchisee and shall inure to the benefit of any transferee or their legal
successor to Company's interests herein; provided, however, that such
transferee and successor shall expressly agree to assume Company's obligations
under this Agreement.  Without limiting
the foregoing, Company may (i) assign any or all of its rights and obligations
under this Agreement to a subsidiary or affiliated entity; (ii) sell its
assets, its Marks, or its System outright to a third party (including or
subject to this Agreement); (iii) go public; (iv) engage in a private placement
of some or all of its securities; (v) merge, acquire other corporations, or be
acquired by another corporation; or (vi) undertake a refinancing,
recapitalization, leveraged buy-out or other economic or financial
restructuring.  Company shall be
permitted to perform such actions without liability or obligation to Franchisee
who expressly and specifically waives any claims, demands or damages arising
from or related to any or all of the above actions (or variations thereof).
Company shall have no liability for the performance of any obligations
contained in this Agreement after the effective date of such transfer or
assignment.

 

34

 

15.2         Assignment by Franchisee.

 

15.2.1      The rights and duties created by this
Agreement are personal to Franchisee. 
Accordingly, except as otherwise may be permitted herein, neither
Franchisee nor any person with an interest in Franchisee shall directly or
indirectly sell, assign, transfer, convey, give away, pledge, mortgage, or
otherwise encumber any direct or indirect interest in this Agreement or in all
or substantially all of the assets of the “Diedrich Coffee” Coffeehouse,
voluntarily or involuntarily, in whole or in part, by operation of law or
otherwise (an “Assignment”), without Company's prior written consent, which
consent may be withheld for any reason whatsoever in Company's sole subjective
judgment.  Any such purported Assignment
occurring by operation of law or otherwise without Company's prior written consent
shall constitute a default of this Agreement by Franchisee, and shall be null
and void.  Except in the instance of
Franchisee advertising to sell its “Diedrich Coffee” Coffeehouse pursuant to
the terms hereof, Franchisee shall not, without Company's prior written
consent, offer for sale or transfer at public or private auction or advertise
publicly for sale or transfer, the furnishings, interior and exterior decor
items, supplies, fixtures, equipment, Franchisee's Lease or the real or
personal property used in connection with Franchisee's “Diedrich Coffee”
Coffeehouse. Franchisee shall not subfranchise, subcontract, share, divide or
partition this Agreement, and nothing in this Agreement will be construed as
granting Franchisee the right to do so.

 

15.2.2      If Franchisee is a Business Entity, each
of the following shall be deemed to be an Assignment of this Agreement: (i) the
sale, assignment, transfer, conveyance, gift, pledge, mortgage, or other
encumbrance of 50% or more in the aggregate, whether in one or more
transactions, of the capital stock, membership interests or voting power of
Franchisee, by operation of law or otherwise or any other event(s) or
transaction(s) which, directly or indirectly, effectively changes management
control of Franchisee; (ii) the issuance of any securities by Franchisee which
itself or in combination with any other transaction(s) results in the
shareholders, members or partners existing as of the Effective Date, as
applicable, owning 50% or less of the outstanding shares, membership interests
or voting power of Franchisee as constituted as of the date hereof; (iii) if
Franchisee is a Partnership, the withdrawal, death or legal incapacity of a
general partner or limited partner owning 50% or more of the Partnership Rights
of the Partnership, or the admission of any additional general partner or the
transfer by any general partner of any of its Partnership Rights in the
Partnership; (iv) the death or legal incapacity of any shareholder, member or
partner owning 50% or more of the capital stock, voting power, or Partnership
Rights of Franchisee; and (v) any merger, stock redemption, consolidation,
reorganization, recapitalization or other transfer control of the Franchisee,
however effected.

 

Without limiting
Company'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 and
upon each direct or indirect transfer of an interest in this Agreement or in
Franchisee 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

 

35

 

request, furnish Company
with 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 a
list of all Owners having an interest in this Agreement or in Franchisee, the
percentage interest of Owner, and a list of all officers and directors, in such
form as Company may require;

 

15.2.4      Franchisee's written request for consent
to any Assignment must be accompanied by an offer to Company of a right of
first refusal at the same cash price offered by any bona fide buyer (the
proposed buyer may not offer non-cash consideration).  Company shall have the right and option, exercisable within 15
days after receipt of such written notification, to send written notice to
Franchisee or such person that Company or its third-party designee, intends to
purchase the interest which is proposed to be transferred, on the same terms
and conditions offered by the third party. 
If Company accepts such offer, the training and transfer/administrative
fees due by Franchisee in accordance with Section 15.2.12 shall be waived by
Company.  Any material change in the
terms 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-party
designee, as in the case of the initial offer. 
Company's failure to exercise such option shall not constitute a waiver
of any other provision of this Agreement, including any of the requirements of
this Article with respect to the proposed transfer;

 

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

 

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

 

15.2.7      The transferee/assignee has demonstrated
to Company's satisfaction that it meets all of Company's then-current requirements
for 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 the
ability to fully comply with the terms of this Agreement;

 

15.2.8      The transferee/assignee has assumed this
Agreement by a written assumption agreement approved by Company, or has agreed
to do so at closing, and at closing executes an assumption agreement approved
by Company;

 

15.2.9      The transferee/assignee, its manager or
other 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 other
documents as Company may require, including a replacement franchise agreement
on the form then currently being provided to prospective franchisees, or if not
then being so provided, then such form selected by the Company

 

36

 

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

 

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

 

15.2.12    Upon submission Franchisee's request for
Company's consent to any proposed Assignment, Franchisee shall pay to Company a
transfer fee (“Transfer Fee”) equal to the greater of: (a) 2% of all
consideration received or receivable, directly or indirectly, by Franchisee in
connection 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 of
multiple franchise agreements being assigned simultaneously to the same
assignee) plus (ii) a $1,500 administrative/transfer fee (not limited to the
first assigned franchise agreement in the case of multiple franchise agreements
being assigned simultaneously to the same assignee).

 

15.2.13    Company's consent to a transfer shall not
constitute a waiver of any claims it may have against the transferring party
arising out of this Agreement or otherwise.

 

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

 

15.3.1      Franchisee represents and warrants that
the information set forth in Exhibit “B”, which is annexed hereto and by this
reference made a part hereof, is accurate and complete in all material
respects.  Franchisee shall notify
Company in writing within 10 days of any change in the information set forth in
Exhibit “B.”  Franchisee promptly shall
provide such additional information as Company may from time to time request
concerning all persons who may have any direct or indirect financial interest
in Franchisee.

 

15.3.2      All of Franchisee's organizational documents
(including articles of partnership, partnership agreements, articles of
incorporation, bylaws, shareholders agreements, trust instruments, or their
equivalent) will provide that the issuance and transfer of any interest in
Franchisee is restricted by the terms of this Agreement, and that sole purpose
for which Franchisee is formed (and the sole activity in which Franchisee is or
will 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 the
execution of this Agreement and thereafter from time to time upon Company's
request, a resolution of Franchisee (or its governing body) confirming that
Franchisee is in compliance with this provision.

 

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

 

37

 

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

 

ARTICLE 16

DEFAULT
AND TERMINATION

 

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

 

16.2         Automatic Termination Without Notice.  Subject to Applicable Laws of the
jurisdiction in which Franchisee's “Diedrich Coffee” Coffeehouse is located to
the contrary, Franchisee shall be deemed to be in default under this Agreement,
and all rights granted herein shall automatically terminate without notice to
Franchisee if: (i) Franchisee shall be adjudicated bankrupt or judicially
determined to be insolvent (subject to any contrary provisions of any
applicable state or federal laws), shall admit to its inability to meet its
financial obligations as they become due, or shall make a disposition for the
benefit of its creditors; (ii) Franchisee shall allow a judgment against him in
the amount of more than $5,000 to remain unsatisfied for a period of more than
30 days (unless a supersedeas or other appeal bond has been filed); (iii) the
“Diedrich Coffee” Coffeehouse or Location, or the Franchisee's assets are
seized, taken over or foreclosed by a government official in the exercise of
its duties, or seized, taken over, or foreclosed by a creditor or lienholder
provided that a final judgment against the Franchisee remains unsatisfied for
30) days (unless a supersedes or other appeal bond has been filed); (iv) a levy
of execution of attachment has been made upon the license granted by this
Agreement or upon any property used in the “Diedrich Coffee” Coffeehouse, and
it is not discharged within 5 days of such levy or attachment; (v) Franchisee
permits any mechanics lien to attach to the “Diedrich Coffee” Coffeehouse or to
any equipment or other Leasehold Improvements; (vi) Franchisee allows or
permits any judgment to be entered against Company or its subsidiaries or
affiliated corporations, arising out of or relating to the operation of
Franchisee's “Diedrich Coffee” Coffeehouse; or (vii) Franchisee is convicted of
any 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 default
and Company may, at its option, terminate this Agreement and all rights granted
hereunder, without affording Franchisee any opportunity to cure the default,
effective immediately upon receipt of notice by Company upon the occurrence of
any of the following events:

 

16.3.1      Abandonment.  If Franchisee shall abandon the “Diedrich
Coffee” Coffeehouse.  For purposes of
this Agreement, “abandon” shall refer to (i) Franchisee's failure, at any time
during the term of this Agreement, to keep the “Diedrich Coffee” Coffeehouse
open and operating for business for a period of 5 consecutive days, except as
provided in the Manuals, (ii) Franchisee's failure to keep the “Diedrich
Coffee” Coffeehouse open and operating for any period after which it is not
unreasonable under the facts and circumstances for Company to conclude that

 

38

 

Franchisee does not
intend to continue to operate the franchise, unless such failure to operate is
due to fire, flood, earthquake or other similar causes beyond Franchisee's
control, and (iii) failure to actively and continuously maintain and answer
Franchisee's telephone;

 

16.3.2      Assignment, Death or Incapacity.  If Franchisee shall purport to make any
Assignment without the prior written consent of Company; provided, however,
that on written request and on condition that the “Diedrich Coffee” Coffeehouse
continues to be operated in conformity with this Agreement, (i) upon the death
or legal incapacity of a Franchisee who is an individual, Company shall allow
up to 6 months after such death or legal incapacity for the heirs, personal
representatives, or conservators (the “Heirs”) of Franchisee either to enter
into a new Franchise Agreement upon Company's then current form (except that no
initial franchise fee or transfer fee shall be charged), if Company is
subjectively satisfied that the Heirs meet Company's standards and
qualifications, or if not so satisfied to allow the Heirs to sell the “Diedrich
Coffee” Coffeehouse to a person approved by Company, or (ii) upon the death or
legal incapacity of an Owner owning 50% or more of the capital stock,
membership interests or voting power of a corporate or limited liability
company Franchisee, or a general or limited partner owning 50% or more of any
of the Partnership Rights of a Franchisee which is a Partnership, Company shall
allow a period of up to 6 months after such death or legal incapacity for the
Heirs to seek and obtain Company's consent to the transfer or Assignment of
such stock, membership interests or Partnership Rights to the Heirs or to
another person acceptable by Company. 
If, within said 6 month period, the Heirs fail either to enter into a
new franchise agreement or to sell the “Diedrich Coffee” Coffeehouse to a
person approved by Company pursuant to Section 15.2, or fail either to receive
Company's consent to the Assignment of such stock, membership interest or
Partnership Rights to the Heirs or to another person acceptable by Company, as
provided in Section 15.2, this Agreement shall thereupon automatically
terminate;

 

16.3.3      Repeated Defaults.  If Franchisee shall default in any material
obligation as to which Franchisee has previously received 3 or more written
notices of default from Company setting forth the material breach complained of
within the preceding 12 months, such repeated course of conduct shall itself be
grounds for termination of this Agreement without further notice or opportunity
to cure;

 

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

 

16.3.5      Violation of Law.  If Franchisee fails, for a period of 10 days
after having received notification of noncompliance from Company or any
governmental or quasi-governmental agency or authority, to comply with any
federal, 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 “Diedrich
Coffee” Coffeehouse licensed pursuant to this Agreement is so contrary to this
Agreement, the System and the Manuals as to constitute an imminent danger to
the public health (for example,

 

39

 

selling spoiled food
knowing that the food products are spoiled or allowing a dangerous condition
arising from a failure to strictly comply with any health code or ordinance or
other Applicable Law to continue despite Franchisee's knowledge of such
condition), or selling expired or other unauthorized products to the public after
notice of default and continuing to sell such products whether or not
Franchisee 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 contents
of the Manual, or any other Confidential Information provided to Franchisee by
Company;

 

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

 

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

 

16.3.10    Intellectual Property.  If Franchisee misuses or makes any
unauthorized use of the Marks or otherwise materially impairs the goodwill
associated therewith or Company's rights therein, or which reflects materially
and 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 is
party to any other Development Agreement, Sublease, Management Agreement,
Promissory Note, or Franchise Agreements with Company, and that other agreement
is terminated by Company for default by Franchisee (after any applicable right
to cure).  Notwithstanding the
foregoing, however, Company may not terminate this Agreement if the other
agreement is a Development Agreement, and the only grounds for termination of
that Development Agreement is failure by Franchisee to meet its minimum
development obligations under the Development Agreement.

 

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

 

40

 

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

 

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

 

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

 

16.4.3      Franchisee's failure, refusal or neglect
to obtain Company's prior written approval or consent as required by this
Agreement;

 

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

 

16.4.5      Franchisee's commencement of or conducting
any business operation, or marketing of any product, under a name or mark
which, in Company's reasonable opinion, is confusingly similar to Company's
Marks;

 

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

 

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

 

16.5         Reimbursement of Company Costs.  In the event of a default by Franchisee, all
of Company's costs and expenses arising from such default, including reasonable
legal fees and reasonable hourly charges of Company's administrative employees
shall 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 of
this Agreement or any Lease, or any other agreement between Company, or its
affiliate, and Franchisee, or any default by Franchisee of its obligations to
any Advertising Cooperative of which it is a member, shall be deemed to be a
material default of each and every said agreement.  Furthermore, in the event of termination, for any cause, of this
Agreement or any other agreement between the parties hereto, Company may, at
its option, terminate any or all said agreements.

 

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

 

41

 

Agreement shall be deemed
amended to conform to the minimum notice periods or restrictions upon
termination required by such laws and regulations.  Company shall not, however, be precluded from contesting the
validity, enforceability or application of such laws or regulations in any
action, hearing or dispute relating to this Agreement or the termination
thereof.

 

ARTICLE 17

RIGHTS
AND OBLIGATIONS UPON TERMINATION

 

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

 

17.1.1      Franchisee shall immediately cease to use
Company's Marks, and any confusingly similar trademark, service mark, trade
name, logotype, or other commercial symbol or insignia.  Franchisee shall at its own cost, make cosmetic
changes to Franchisee's “Diedrich Coffee” Coffeehouse so that it no longer
contains or resembles Company's proprietary designs including, but not limited
to, Franchisee shall remove all Diedrich Coffee identifying materials and
distinctive Diedrich Coffee cosmetic features and finishes, interior wall
coverings and colors, exterior finishes and colors, signage and Diedrich Coffee
counter equipment (which shall be deemed proprietary to Company) from the
Location as Company may reasonably direct.

 

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

 

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

 

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

 

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

 

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

 

42

 

transfer to Company, as
directed by Company. Franchisee is not entitled to any compensation from
Company if Company exercises its said rights or options.

 

17.2         Survival of Obligations. 
In no event shall a termination or expiration of this Agreement affect
Franchisee's obligations to take or abstain from taking any action in
accordance with this Agreement.  The
provisions of this Agreement which constitute post-termination or
post-expiration covenants or agreements shall survive the termination or
expiration of this Agreement.

 

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

 

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

 

ARTICLE 18

INSURANCE

 

18.1         Insurance. 
Franchisee shall obtain and maintain insurance coverage which shall in
each instance designate Company and designated parent companies, subsidiaries,
and affiliates as additional named insureds, with an insurance company approved
by 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 $4,000,000.00
combined single limit for death, personal injury, and $100,000.00 property
damage coverage;

 

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

 

18.1.3      workers' compensation insurance as
required by Applicable Law; and

 

18.1.4      windstorm, fire, and extended coverage
insurance, 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 covered
by insurance, the proceeds of any such insurance shall be used to restore the “Diedrich
Coffee” Coffeehouse to its original condition (but in accordance with Company's
then current standards and specifications) as soon as possible, unless such
restoration is prohibited by the Lease or Company has otherwise consented to in
writing.  Franchisee shall promptly
provide to

 

43

 

Company proof of such
insurance coverage upon the obtaining of such insurance, and at such other
times 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 shall
promptly pay all premiums on the policies as they become due.  In addition, the policies shall contain a
provision requiring 30 days prior written notice to Company of any proposed
cancellation, modification, or termination of insurance.  If Franchisee fails to obtain and maintain
the required insurance, Company may, at its option, in addition to any other
rights it may have, procure such insurance for Franchisee without notice and
Franchisee shall pay, upon demand, the premiums and Company's costs in taking
such action.

 

ARTICLE 19

RELATIONSHIP
OF PARTIES, DISCLOSURE

 

19.1         Relationship of Franchisee to
Company.  It is expressly agreed that
the parties intend by this Agreement to establish between Company and
Franchisee the relationship of Company and franchisee.  It is further agreed that Franchisee has no
authority to create or assume in Company's name or on behalf of Company, any
obligation, express or implied, or to act or purport to act as agent or
representative on behalf of Company for any purpose whatsoever.  Neither Company nor Franchisee is the
employer, employee, agent, partner or co-venturer of or with the other, each
being independent.  Franchisee agrees
that it will not hold himself out as the agent, employee, partner or
co-venturer of Company.  All employees
hired by or working for Franchisee shall be the employees of Franchisee and
shall not, for any purpose, be deemed employees of Company or subject to
Company control.  Each of the parties
shall file its own tax, regulatory and payroll reports, and be responsible for
all employee benefits and workers compensation payments, with respect to its
respective employees and operations, saving and indemnifying the other party
hereto of and from any liability of any nature whatsoever by virtue thereof.

 

Neither shall have
the power to bind or obligate the other except specifically as set forth in
this Agreement.  Company and Franchisee
agree that the relationship created by this Agreement is not a fiduciary
relationship.  Franchisee shall not,
under any circumstances, act or hold itself out as an agent or representative
of Company.

 

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

 

44

 

ARTICLE 20

NOTICES

 

20.1         General.  Except
as otherwise expressly provided herein, all written notices and reports
permitted or required to be delivered by the parties pursuant hereto shall be
deemed so delivered at the time delivered by hand, one business day after
confirmed transmission by facsimile, telegraph or other electronic system (with
confirmation copy sent by regular U.S. mail), or 3 business days after
placement in the United States Mail by Registered or Certified Mail, Return
Receipt 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 may
change his or its address by giving 10 days prior written notice of such change
to all other parties.

 

ARTICLE 21

MISCELLANEOUS
PROVISIONS

 

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

 

45

 

Franchisee, cure such
default for the account and on behalf of Franchisee, and the cost to Company
thereof shall be due and payable on demand and shall be deemed to be additional
compensation due to Company hereunder and shall be added to the amount of
compensation next accruing hereunder, at the election of Company.

 

21.2         Waiver and Delay.
 No waiver by Company of any
breach or series of breaches or defaults in performance by Franchisee, and no
failure, refusal or neglect of Company to exercise any right, power or option
given to it hereunder or under any other franchise agreement between Company
and Franchisee, whether entered into before, after or contemporaneously with
the execution hereof (and whether or not related to the “Diedrich Coffee”
Coffeehouse) or to insist upon strict compliance with or performance of
Franchisee's obligations under this Agreement, any other franchise agreement
between Company and Franchisee, whether entered into before, after or
contemporaneously with the execution hereof (and whether or not related to the
“Diedrich Coffee” Coffeehouse) or the Manuals, shall constitute a waiver of the
provisions of this  Agreement or the
Manuals with respect to any subsequent breach thereof or a waiver by Company of
its right at any time thereafter to require exact and strict compliance with
the provisions thereof.  Company will
consider written requests by Franchisee for Company's consent to a waiver of
any obligation imposed by this Agreement. 
Franchisee agrees, however, that Company is not required to act
uniformly with respect to waivers, requests and consents as each request will
be considered on a case by case basis, and nothing shall be construed to
require Company to grant any such request. 
Any waiver granted by Company shall be without prejudice to any other
rights Company may have, will be subject to continuing review by Company, and
may 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 guarantees
upon which Franchisee may rely, and assumes no liability or obligation to
Franchisee by providing any waiver, approval, consent, assistance, or
suggestion to Franchisee in connection with this Agreement, or by reason of any
neglect, delay, or denial of any request.

 

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

 

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

 

21.5         Joint and Several Liability. If
Franchisee consists of more than one person or entity, or a combination
thereof, the obligations and liabilities of each such person or entity to
Company are joint and several.

 

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

 

46

 

this Agreement that
Franchisee has executed and delivered to Company a general release, in a form
prescribed by Company, of all existing claims against Company arising out of
those former agreements.

 

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

 

21.8         Waiver of Punitive Damages and Jury
Trial.  Except for Franchisee's
obligation to indemnify Company under Section 19.2 and claims Company bring
against Franchisee for Franchisee's unauthorized use of the Marks or
unauthorized use or disclosure of any Confidential Information, Company and
Franchisee waive to the fullest extent permitted by law any right to or claim
for any multiple, punitive or exemplary damages against the other and agree
that, in the event of a dispute between Company and Franchisee, the party
making a claim will be limited to equitable relief and to recovery of any
actual damages it sustains.

 

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

 

21.9         Limitations of Claims.  Except for claims arising from
Franchisee's non-payment or underpayment of amounts Franchisee owes Company or
its affiliates, any and all claims arising out of or relating to this Agreement
or Company's relationship with Franchisee will be barred unless a proceeding is
commenced within one (1) year from the date on which the party asserting the
claim 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 conditions
agreed upon by the parties hereto with reference to the subject matter hereof.  No other agreements oral or otherwise shall
be deemed to exist or to bind any of the parties hereto and all prior
agreements, understandings and representations are merged herein and superseded
hereby.  Franchisee represents that
there are no contemporaneous agreements or understandings relating to the
subject matter hereof between the parties that are not contained herein.  No officer or employee or agent of Company
has any authority to make any representation or promise not contained in this
Agreement or in any Offering Circular for prospective franchisees required by
applicable law, and Franchisee agrees that it has executed this Agreement
without reliance upon any such representation

 

47

 

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

 

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

 

21.12       Gender And Construction.  All terms used in any one number or gender
shall 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 herein
to the contrary, any consent, approval or authorization of Company which
Franchisee may be required to obtain hereunder may be given or withheld by
Company in its sole discretion, and on any occasion where Company is required
or permitted hereunder to make any judgment or determination, including any
decision as to whether any condition or circumstance meets Company's standards
or satisfaction, Company may do so in its sole subjective judgment.

 

21.13       Severability. 
Nothing contained in this Agreement shall be construed as requiring the
commission of any act contrary to law. 
Whenever there is any conflict between any provisions of this Agreement
or the Manuals and any present or future statute, law, ordinance or regulation
contrary to which the parties have no legal right to contract, the latter shall
prevail, but in such event the provisions of this Agreement or the Manuals thus
affected shall be curtailed and limited only to the extent necessary to bring
it within the requirements of the law. 
If any part, article, section, sentence or clause of this Agreement or
the Manuals shall be held to be indefinite, invalid or otherwise unenforceable,
the indefinite, invalid or unenforceable provision shall (subject to Section
13.2.3) be deemed deleted, and the remaining part of this Agreement shall
continue in full force and effect.

 

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

 

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

 

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

 

48

 

connection with this
Agreement to confer with counsel of their choice regarding their rights and
obligations under this Agreement.

 

ARTICLE 22

SUBMISSION
OF AGREEMENT

 

22.1         General.  The
submission of this Agreement does not constitute an offer and this Agreement
shall become effective only upon the execution thereof by Company and
Franchisee.

 

ARTICLE 23

ACKNOWLEDGMENT

 

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

 

23.2         Due Execution.  The submission of this Agreement to Franchisee does not constitute
an offer and this Agreement shall become effective only upon the execution
thereof by Company and Franchisee.

 

IN WITNESS
WHEREOF, the parties hereof have executed this Agreement as of the date of
execution by Company.

 

	
   

  	
  Company:

  
	
   

  	
   

  
	
   

  	
  DIEDRICH COFFEE, INC.,

  
	
   

  	
  a Delaware corporation

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Its: Vice President

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Franchisee:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Its:_

  	
   

  	
   

  
					

 

49

 

EXHIBIT A

Minimum
Hours of Operation

 

Minimum Operating
Hours:  [ :  ] a.m. to
[ :  ] p.m.

            
days per week

 

A-1

 

EXHIBIT B

 

FRANCHISEE INFORMATION

 

Franchisee is a (check as
applicable):

o corporation  
o limited partnership

o limited liability company   o
general partnership

o Other (specify): 
                           

 

The name and address of
each Owner of Franchisee is:

 

	
  NAME

  	
   

  	
  ADDRESS

  	
   

  	
  NUMBER OF

  SHARES OR

  PERCENTAGE

  INTEREST

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  

 

 

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

 

	
  NAME

  	
   

  	
  ADDRESS

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  

 

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

 

	
  NAME

  	
   

  	
  ADDRESS

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  

 

The address where
Franchisee's Financial Records, and Business Entity records (e.g. Articles of
Incorporation, Bylaws, Operating Agreement, Partnership Agreement, etc.) are
maintained is:

 

 

 

 

B-1

 

EXHIBIT C

GUARANTY AND
SUBORDINATION AGREEMENT

 

 

C-1

 

SPOUSAL CONSENT

 

Each of the undersigned,
each being the spouse of an individual who executed this Agreement as
Franchisee (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, and
agrees not to assist any person who is a party to this Agreement to violate any
of that party's duties under this Agreement.

 

	
  By:

  	
   

  	
   

  	
  Dated:

  	
   

  	
   

  
	
   

  
	
  By:

  	
   

  	
   

  	
  Dated:Exhibit
10.18

 

FOURTH
AMENDMENT

TO CREDIT AGREEMENT

 

THIS FOURTH AMENDMENT TO
CREDIT AGREEMENT (the “Amendment”) is made and dated as of
the       day of October, 2003 by and
between DIEDRICH COFFEE, INC., a Delaware corporation (the “Company”), and BANK
OF THE WEST (the “Lender”).

RECITALS

 

A.                                   Pursuant to that certain Credit Agreement
dated as of September 3, 2002 by and between the Company and the Lender (as
amended, extended and replaced from time to time, the “Credit Agreement,” and
with capitalized terms used herein and not otherwise defined used with the
meanings given such terms in the Credit Agreement), the Lender agreed to extend
credit to the Company on the terms and subject to the conditions set forth
therein.

 

B.                                     The Company has requested the Lender to amend
the Credit Agreement in certain respects and the Lender has agreed to do so on
the terms and subject to the conditions set forth herein.

 

NOW, THEREFORE, in
consideration of the above Recitals and for other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
parties hereto hereby agree as follows:

 

AGREEMENT

 

1.                                       Addition of Workers’ Compensation Letter of
Credit Facility.  To reflect the agreement of the parties
hereto to add a letter of credit facility in support of the Company’s workers’
compensation obligations, as of the Effective Date (as defined in Paragraph
2 below):

 

(a)                                  Paragraph 5 of the Credit Agreement is hereby amended to read in its entirety as
follows:

 

“5.                                 Letter of Credit Facilities.

 

5(a)                            Working Capital Letter of Credit Facility
Sublimit.  On the terms and subject to the conditions
set forth herein, the Lender shall from time to time from and after the
Effective Date, issue standby letters of credit in support of various working
capital obligations of the Company (each a “Working Capital Letter of Credit”
and, collectively, the “Working Capital Letters of Credit”) for the account of
the Company; provided, however that in no event shall the Lender issue any
Working Capital Letter of Credit hereunder if after giving effect to such
issuance:

 

(1)                                  The aggregate dollar amount of Outstanding
Working Capital Letters of Credit and unrepaid L/C Drawings with respect to
Working Capital Letters of Credit would exceed the Working Capital L/C Facility
Sublimit; or

 

(2)                                  The aggregate dollar amount of all
Outstanding Working Capital Letters of Credit and unrepaid L/C Drawings with
respect to Working Capital Letters of Credit plus

 

1

 

the aggregate amount of all
Working Capital Loans outstanding would exceed $675,000.00.

 

5(b)                           Workers’ Compensation Letter of Credit
Facility Credit Limit.  Subject to the terms and subject to the
conditions set forth herein, including, without limitation, the terms and conditions
set forth in Paragraph 5(c) below, the Lender shall from time to time
from and after October __, 2003, issue standby letters of credit in support of
the Company’s workers’ compensation obligations (each a “Workers’ Compensation
Letter of Credit” and, collectively, the “Workers’ Compensation Letters of
Credit”) for the account of the Company; provided, however that in no event
shall the Lender issue any Workers’ Compensation Letter of Credit hereunder if
after giving effect to such issuance the aggregate dollar amount of Outstanding
Workers’ Compensation Letters of Credit and unrepaid L/C Drawings with respect
to Workers’ Compensation Letters of Credit would exceed the Workers’
Compensation L/C Facility Credit Limit.

 

5(c)                            Collateral Security for the Workers’
Compensation Letters of Credit.  Prior to the issuance of the first Workers’
Compensation Letter of Credit hereunder, the Company shall have opened a new
no-access account with the Lender (the “Workers’ Compensation Collateral
Account”).  As an additional condition
precedent to the issuance of any Workers’ Compensation Letter of Credit
(including the first Workers’ Compensation Letter of Credit hereunder), the
Company shall deposit a dollar amount equal to the face amount of the Workers’
Compensation Letter of Credit being requested. 
The Company hereby pledges, assigns and grants to the Lender a security
interest in the Workers’ Compensation Collateral Account, any and all funds
from time to time contained therein, and all products and proceeds of the
foregoing.  The Obligations secured by
the Workers’ Compensation Collateral Account shall only consist of the that
portion of the Obligations arising out of or related to the Workers’
Compensation Letters of Credit.  At such
time the Obligations with respect to any Workers’ Compensation Letter of Credit
shall have been fully satisfied or otherwise terminated, the Lender shall
release its Lien on the portion of the funds contained in the Workers’
Compensation Collateral Account attributable to such Workers’ Compensation
Letter of Credit and remit such funds to the Company.

 

5(d)                           Issuance of Letters of Credit. 
Each Letter of Credit, and any amendment, renewal or extension thereof,
shall be requested by the Company at least thirty (30) Business Days prior to
the proposed issuance, amendment, renewal or extension date (other than in the
case of the first Workers’ Compensation Letter of Credit issued hereunder) by
delivery to the Lender of a duly executed Letter of Credit Application,
accompanied by all other L/C Documents which the Lender may require as a
condition to the requested action.  No
Letter of Credit shall have a stated expiration date (or provide for the
extension of such stated expiration date or the issuance of any replacement
therefor) later than October 15, 2004.

 

5(e)                            Repayment of L/C Drawings. 
Each L/C Drawing shall be payable in full by the Company on the date of
such L/C Drawing.

 

2

 

5(f)                              Absolute Obligation to Repay.  The
Company’s obligation to repay L/C Drawings shall be absolute, irrevocable and
unconditional under any and all circumstances whatsoever and irrespective of
any set-off, counterclaim or defense to payment which the Company may have or
have had, against any Lender or any other Person, including, without
limitation, any set-off, counterclaim or defense based upon or arising out of:

 

(1)                                  Any lack of validity or enforceability of
this Agreement or any of the other Loan Documents;

 

(2)                                  Any amendment or waiver of or any consent to
departure from the terms of any Letter of Credit;

 

(3)                                  The existence of any claim, setoff, defense
or other right which the Company or any other Person may have at any time
against any beneficiary or any transferee of any Letter of Credit (or any
Person for whom any such beneficiary or any such transferee may be acting);

 

(4)                                  Any allegation that any demand, statement or
any other document presented under any Letter of Credit is forged, fraudulent,
invalid or insufficient in any respect, or that any statement therein is untrue
or inaccurate in any respect whatsoever or that variations in punctuation,
capitalization, spelling or format were contained in the drafts or any
statements presented in connection with any L/C Drawing;

 

(5)                                  Any payment by the Lender under any Letter of
Credit against presentation of a draft or certificate that does not strictly
comply with the terms of such Letter of Credit, or any payment made by the
Lender under any Letter of Credit to any Person purporting to be a trustee in
bankruptcy, debtor-in-possession, assignee for the benefit of creditors,
liquidator, receiver or other representative of or successor to any beneficiary
or any transferee of any Letter of Credit, including any arising in connection
with any insolvency proceeding;

 

(6)                                  Any exchange, release or non-perfection of
any Collateral; or

 

(7)                                  Any other circumstance or happening
whatsoever, whether or not similar to any of the foregoing, including any other
circumstance that might otherwise constitute a defense available to, or a
discharge of the Company.

 

Nothing contained herein
shall constitute a waiver of any rights of the Company against the Lender
arising out of the gross negligence or willful misconduct of the Lender in
connection with any Letter of Credit issued hereunder; provided, however, that
the exercise of such rights is subject to and conditioned upon the prior
payment in full of all Obligations, including, without limitation, unrepaid L/C
Drawings, and termination of the credit facility evidenced hereby.

 

5(g)                           Uniform Customs and Practice.  The
Uniform Customs and Practice for Documentary Credits as published by the
International Chamber of Commerce most recently at the time of issuance of any
Letter of Credit shall 

 

3

 

(unless otherwise expressly provided in such Letter of
Credit) apply to such Letter of Credit.

 

5(h)                           Relationship to Letter of Credit Applications.  In
the event of any inconsistency between the terms and provisions of this
Agreement and the terms and provisions of the Letter of Credit Applications,
the terms and provisions of this Agreement shall supersede and govern.

 

(b)                                 Paragraph 4(a) of the Credit Agreement is hereby amended in
its entirety to read as follows:

 

“4(a)                      Credit
Limit.  Subject to the terms and
conditions set forth herein, from and after the Effective Date, the Lender
agrees that it shall from time to time to but not including the Working Capital
Facility Maturity Date make loans (each, a “Working Capital Loan”) to the
Company in an aggregate amount not to exceed at any one time outstanding the
lesser of:  (i) $500,000.00, and (ii)
$675,000.00 minus the dollar amount of all Outstanding Working Capital Letters
of Credit and unrepaid L/C Drawings related to Working Capital Letters of Credit
as of such date (the “Working Capital Facility Credit Limit”).  Principal amounts prepaid hereunder prior to
the Working Capital Facility Maturity Date may be reborrowed on the terms and
subject to the conditions set forth in Paragraph 10(b) below, it being
expressly acknowledged and agreed that the credit facility provided under this Paragraph
4 is a revolving credit facility.”

 

(c)                                  Paragraph 10(b)(2) of the Credit Agreement is hereby amended in
its entirety to read as follows:

 

“(2)                            In the
case of the issuance of a Letter of Credit, there shall have been delivered to
the Lender a Letter of Credit Application and all required L/C Documents
relating thereto, and the Company shall be in compliance with the limits set
forth in Paragraphs 5(a) and 5(b) above, as applicable.”

 

(d)                                 The definition of the term “Letter of Credit”
set forth in Paragraph 16 of the Credit Agreement is hereby amended to
read in its entirety as follows:

 

“‘Letter
of Credit’ or ‘Letters of Credit’ shall mean either a Working
Capital Letter or Credit or a Workers’ Compensation Letter of Credit or all
Working Capital Letters of Credit and Workers’ Compensation Letters of Credit,
collectively, as applicable.”

 

(e)                                  The definition of the term “L/C Facility
Sublimit” set forth in Paragraph 16 of the Credit Agreement is hereby
deleted in its entirety.

 

(f)                                    The following new definitions are hereby
added to Paragraph 16 of the Credit Agreement in correct alphabetical
order:

 

“‘Working Capital L/C Facility Credit Limit’
shall mean $250,000.00.”

 

4

 

“‘Working
Capital Letter of Credit’ and ‘Working Capital Letters of Credit’
shall have the meanings given such terms in Paragraph 5(a) above.”

 

“‘Workers’
Compensation Cash Collateral Account’ shall have the meaning given such
term in Paragraph 5(c) above.”

“‘Workers’
Compensation L/C Facility Sublimit’ shall mean $247,500.00.”

 

“‘Workers’
Compensation Letter of Credit’ and ‘Workers’ Compensation Letters of
Credit’ shall have the meaning given such terms in Paragraph 5(b)
above.”

 

2.                                       Effective Date. 
This Amendment shall be effective as of the date first written above
upon the date that the Lender shall have received:

 

(a)                                  This Amendment, duly executed by all parties
signatory hereto; and

 

(b)                                 Such corporate resolutions, incumbency
certificates and other authorizing documentation for the Company and the
Guarantors as the Lender may request.

 

3.                                       Reaffirmation of the Loan Documents.  The
Company and each of the Guarantors, by executing this Amendment as provided
below, hereby affirms and agrees that: 
(a) the execution and delivery by it of and the performance of its
obligations under this Amendment shall not in any way amend, impair, invalidate
or otherwise affect any of its obligations under the Loan Documents to which it
is party except to the extent expressly amended hereby, (b) the term
“Obligations” as used in the Loan Documents include, without limitation, the
Obligations of the Company under the Credit Agreement as amended by this
Amendment, and (c) except as expressly amended hereby, the Loan Documents
remain in full force and effect as written.

 

4.                                       Representations and Warranties.  The
Company and each of the Guarantors by executing this Amendment as provided
below, hereby represents and warrants to the Lender that:

 

(a)                                  It has the requisite power and authority and
the legal right to execute, deliver and perform this Amendment and has taken
all necessary corporate action to authorize the execution, delivery and
performance of this Amendment.

 

(b)                                 This Amendment has been duly executed and
delivered on its behalf and constitutes its legal, valid and binding obligation
enforceable against it in accordance with its terms.

 

(c)                                  There does not exist an Event of Default or
Potential Default.

 

(d)                                 None of such Persons has any existing claims,
counterclaims, defenses, personal or otherwise, or rights of setoff whatsoever
with respect to any of the Loan Documents, and the Loan Documents, as amended
hereby, constitute valid, legal, binding and enforceable obligations of such
Persons, as appropriate.

 

5.                                       No Other Amendment. 
Except as expressly amended hereby, the Credit Agreement and other Loan
Documents shall remain in full force and effect as written.

 

5

 

6.                                       Counterparts. 
This Amendment may be executed in any number of counterparts, each of
which when so executed shall be deemed to be an original and all of which when
taken together shall constitute one and the same agreement.

 

[Signatures
Page Following]

 

6

 

IN WITNESS WHEREOF, the
parties hereto have caused this Amendment to be executed as of the day and year
first above written.

 

	
   

  	
  DIEDRICH COFFEE, INC.,

  a Delaware corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   /s/ Roger Laverty

  
	
   

  	
  Name: 

  	
  Roger Laverty, President
  and Chief Executive Officer

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   /s/ Matthew C. McGuinness

  
	
   

  	
  Name:

  	
  Matthew C. McGuinness,
  Executive Vice President and Chief Financial Officer

  
	
   

  	
   

  
	
   

  	
  BANK OF THE WEST

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Bruce Young

  
	
   

  	
   

  	
  Bruce Young, Vice
  President

  
	
   

  	
   

  
	
  ACKNOWLEDGED AND AGREED
  TO:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  COFFEE PEOPLE WORLDWIDE,
  INC.,

  a Delaware corporation

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
  /s/ Matthew C. McGuinness

  	
   

  
	
  Name: Matthew C.
  McGuinness, President

  	
   

  
	
   

  	
   

  
	
  By:

  	
  /s/ Matt Kimble

  	
   

  
	
  Name: Matt Kimble,
  Assistant Secretary

  	
   

  
						

 

7

 

	
  COFFEE PEOPLE, INC.,

  an Oregon corporation

  
	
   

  
	
   

  
	
  By:

  	
  /s/ Matthew C. McGuinness

  	
   

  
	
  Name: Matthew C.
  McGuinness, President

  
	
   

  
	
   

  
	
  By:

  	
  /s/ Matt Kimble

  	
   

  
	
  Name: Matt Kimble,
  Assistant Secretary

  
	
   

  
	
   

  
	
  GLORIA JEAN’S, INC.,

  
	
  a Delaware corporation

  
	
   

  
	
   

  
	
  By:

  	
  /s/ Matthew C. McGuinness

  	
   

  
	
  Name: Matthew C.
  McGuinness, President

  
	
   

  
	
   

  
	
  By:

  	
  /s/ Matt Kimble

  	
   

  
	
  Name: Matt Kimble,
  Assistant Secretary

  
	
   

  
	
   

  
	
  EDGLO ENTERPRISES, INC.,

  an Illinois corporation

  
	
   

  
	
   

  
	
  By:

  	
  /s/ Matthew C. McGuinness

  	
   

  
	
  Name: Matthew C.
  McGuinness, President

  
	
   

  
	
   

  
	
  By:

  	
  /s/ Matt Kimble

  	
   

  
	
  Name: Matt Kimble,
  Assistant Secretary

  

 

8

 

	
  GLORIA JEAN’S GOURMET
  COFFEES CORP.,

  an Illinois corporation

  
	
   

  
	
   

  
	
  By:

  	
  /s/ Matthew C. McGuinness

  	
   

  
	
  Name: Matthew C.
  McGuinness, President

  
	
   

  
	
   

  
	
  By:

  	
  /s/ Matt Kimble

  	
   

  
	
  Name: Matt Kimble,
  Assistant Secretary

  
	
   

  
	
   

  
	
  GLORIA JEAN’S GOURMET
  COFFEES FRANCHISING CORP.,

  an Illinois corporation

  
	
   

  
	
   

  
	
  By:

  	
  /s/ Matthew C. McGuinness

  	
   

  
	
  Name: Matthew C.
  McGuinness, President

  
	
   

  
	
   

  
	
  By:

  	
  /s/ Matt Kimble

  	
   

  
	
  Name: Matt Kimble,
  Assistant Secretary

  

 

9

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