Franchise Agreement

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Sample Franchise Agreement

PANCHERO'S FRANCHISE CORPORATION FRANCHISE AGREEMENT

This Franchise Agreement (this "Agreement"), is made this__day of_______________,

20_by and between PANCHERO'S FRANCHISE CORPORATION, an Illinois corporation, having its principal place of business at 2475 Coral Court, Suite B, Coralville, Iowa 52241 ("Franchisor"), and_____________________________________("Franchisee").

WITNESSETH:

WHEREAS, Franchisor and its Affiliate ("Affiliate"), over a period of time and as the result of the expenditure of time, expertise, effort and money, have developed and own a unique System ("System"), identified by the Mark "PANCHERO'S", relating to the establishment, development and operation of businesses for (i) the operation of a restaurant facility providing carry-out and on-premises dining services, featuring burritos, quesadillas, tacos, fajitas, salads, rice, salsa, and other food and beverage products, all prepared in accordance with specified recipes and procedures ("Menu Items"); (ii) may develop and continue to further develop a proprietary line of specially formulated spice packs, salsas, marinades and other food products ("Trade Secret Food Products"); (iii)have developed certain presentation, packaging and marketing standards and techniques for all Menu Items and Trade Secret Food Products; and (iv) have developed consumer acceptance for all Menu Items and Trade Secret Food Products ("Franchised Restaurant"); and

WHEREAS, the distinguishing characteristics of the System include, without limitation, distinctive exterior and interior layout, design and color scheme; exclusively designed signage, decorations, furnishings and materials; display cooking; special recipes, formulae, menus and food and beverage designations; the PANCHERO'S Confidential Operations Manual ("Confidential Operations Manual"); the Proprietary Software Package ("Proprietary Software Package") (if developed); food and beverage storage, preparation and service procedures and techniques; operating procedures for sanitation and maintenance; and methods and techniques for inventory and cost controls, record keeping and reporting, personnel management, purchasing, sales promotion and advertising; all of which may be changed, improved and further developed by Franchisor from time to time; and

WHEREAS, Franchisor's Affiliate, Little Donkeys, Inc., has certain rights together with all the goodwill connected thereto in and to the trade names, service marks and trademarks "PANCHERO'S", "PANCHERO'S, plus the design", associated logos, commercial symbols, and such other trade names, service marks, and trademarks as are now designated (and may hereinafter be designated by Franchisor in writing) as part of the System ("Mark[s]") and has licensed the rights in the Marks to Franchisor with the right to sublicense to Franchisor's franchisees. Franchisor shall continue to develop, use and control such Marks for the benefit and use of itself and its franchisees in order to identify for the public the source of food products and services marketed thereunder and to represent the System's high standards of quality regarding Menu Items, operations, food products, ingredients, appearance and service; and

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WHEREAS, Franchisor grants to qualified persons franchises to own and operate PANCHERO'S Franchised Restaurants offering food products and services authorized and approved by Franchisor and utilizing the System and Marks. Franchisee desires to operate a PANCHERO'S Franchised Restaurant using the System and Marks and has applied for a franchise, which application has been approved by Franchisor in reliance upon all of the representations made therein; and

WHEREAS, Franchisee understands and acknowledges the importance of Franchisor's high and uniform standards of quality, operations and customer service and the necessity of operating the PANCHERO'S Franchised Restaurant in conformity with Franchisor's standards and specifications; and

WHEREAS, Franchisor expressly disclaims the making of and Franchisee acknowledges that it has not received nor relied upon any warranty or guaranty, express or implied, as to the revenues, profits or success of the business venture contemplated by this Agreement. Franchisee acknowledges that it has read this Agreement and Franchisor's Uniform Franchise Offering Circular and that it has no knowledge of any representations by Franchisor, or its officers, directors, shareholders, employees or agents that are contrary to the statements made in Franchisor's Uniform Franchise Offering Circular or to the terms herein.

NOW, THEREFORE, the parties, in consideration of the undertakings and commitments of each party to the other set forth in this Agreement, hereby agree as follows:

I. APPOINTMENT AND FRANCHISE FEE

A. Franchisor hereby grants to Franchisee, upon the terms and conditions herein contained, the right, license and privilege to use the Mark "PANCHERO'S" and the other Marks. Franchisee undertakes the obligation to operate a PANCHERO'S Franchised Restaurant featuring the Menu Items and offering carry-out and on-premises dining services and to use solely in connection therewith the System, as it is currently established and as it may be changed, improved and further developed from time to time, at one (1) location only, such location to be:

1. ____________________________________________________________

("Premises"); or

2. At a location to be designated, as provided in Paragraph III. hereof within

the following area: _____________________________________________; provided,

however, that when a location has been designated and approved by the parties, said location shall become Paragraph I.A.I., as if originally incorporated therein. Franchisee shall not relocate its Franchised Restaurant without the prior written approval of Franchisor which may be withheld by Franchisor in its sole discretion.

B. Franchisor shall not, so long as this Agreement is in force and effect and Franchisee is not in default under any of the terms hereof, enfranchise or operate any other

PANCHERO'S restaurant within the following area: _____________________

__________________________________________________________ ("Designated Area").

The determination of the Designated Area shall be made and agreed upon between Franchisor and Franchisee. Franchisor reserves the right to exclude any regional shopping malls and

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enclosed shopping malls from the determination of an exclusive territory or Designated Area. The Designated Area selected is described in writing and on a map attached hereto as Exhibit A and made a part of this Agreement. However, Franchisor has the right, in its sole discretion, to grant such other franchises outside of the Designated Area as Franchisor, in its sole and exclusive discretion, deems appropriate. This Agreement grants no rights to Franchisee to open a PANCHERO'S Franchised Restaurant outside of this Designated Area.

1. Although neither Franchisor nor its affiliates shall operate a PANCHERO'S restaurant within the Designated Area, Franchisor and its affiliates reserve the right, both within and outside of the Designated Area, to offer and sell at wholesale, retail or through any other distribution system, products and services which comprise, or may in the future comprise, a part of the System, which products may be resold at retail or through any other distribution channel including, but not limited to, supermarkets and other retail facilities, to the general public by such entities. Franchisee shall have no rights of any kind with respect to these sales.

2. Franchisor and its affiliates further reserve the right, both within and outside the Designated Area, to sell at both wholesale and retail all products and services which do not comprise a part of the System. Franchisor and its affiliates also reserve the right, both within and outside the Designated Area, to establish food service units operating under a format and trademarks and service marks distinct from the PANCHERO'S System.

3. Franchisee shall engage only in the retail sale of Menu Items, and Franchisee agrees not to engage in the wholesale sale and/or distribution of any product offered for sale through the Franchised Restaurant, except if authorized in writing by Franchisor. "Wholesale Sale and/or Distribution" shall mean any sale and/or distribution of product by Franchisee to a third party for resale, retail sale or further distribution by such third party.

C. In consideration of the franchise granted herein, Franchisee shall pay to Franchisor upon execution of this Agreement, an initial franchise fee determined in accordance with the following schedule: (INITIAL THE PROVISION THAT APPLIES)

1. The initial franchise fee is THIRTY THOUSAND Dollars

($30,000.00).

2. For a Franchisee who executes a Conversion Franchise Agreement,

the initial franchise fee is TWENTY-FIVE THOUSAND Dollars ($25,000.00).

____3. For a Franchisee who has been employed by Franchisor or any

PANCHERO'S restaurant (whether Franchisor-owned, Affiliate-owned or franchised) in a managerial capacity for a period of at least eighteen (18) months, the initial franchise fee is TWENTY THOUSAND Dollars ($20,000.00).

____4. The initial franchise fee for an existing Franchisee in good

standing who purchases a second or subsequent franchise is TWENTY THOUSAND Dollars ($20,000.00) for each additional unit.

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____5. The initial franchise fee for each Franchised Restaurant the parties

agree to develop pursuant to an Area Development Agreement ("Area Development Agreement") is TWENTY THOUSAND Dollars ($20,000.00) with fifty percent (50%) of the total amount due for each Franchised Restaurant pursuant to the Area Development Agreement, payable at the time of execution of the Area Development Agreement and the remaining balance, due upon the signing of this Agreement for each Franchised Restaurant.

Said fee shall be deemed fully earned and non-refundable upon execution of this Agreement as consideration for expenses incurred by Franchisor in furnishing assistance and services to Franchisee and for Franchisor's lost or deferred opportunity to franchise others, except as may be otherwise specifically provided in this Agreement and/or any Exhibit attached hereto.

D. Franchisee acknowledges that because complete and detailed uniformity under many varying conditions may not be possible or practical, Franchisor specifically reserves the right and privilege, at its sole discretion and as it may deem in the best interests of all concerned in any specific instance, to vary standards for any System franchisee based upon the peculiarities of the particular site or circumstance, density of population, business potential, population of trade area, existing business practices or any other condition which Franchisor deems to be of importance to the successful operation of such franchisee's business. Franchisee shall not be entitled to require Franchisor to grant to Franchisee a like or similar variation hereunder.

E. In consideration of Franchisor's agreement not to grant another franchise in Franchisee's Designated Area, Franchisee at all times shall use its best efforts to promote and increase the sales and service of Menu Items and to effect the widest and best possible distribution throughout the Designated Area, soliciting and servicing all potential customers for PANCHERO'S food products and services. Failure of Franchisee to devote its best efforts to adequately represent its PANCHERO'S Franchised Restaurant in its Designated Area through its sales and service efforts shall be deemed just cause for termination.

II. TERM AND RENEWAL

A. This Agreement shall be effective and binding from the date of its execution for an initial term of five (5) years commencing on the date of this Agreement.

B. Franchisee shall have the right to renew this franchise before the expiration of the initial term of the franchise for four (4) additional successive terms of five (5) years each, providing all of the conditions hereinafter set forth have been fulfilled:

1. At the time of giving notice of renewal to Franchisor, Franchisee is not in default under any terms of any agreements with Franchisor;

2. Franchisee has, during the entire term of this Agreement, complied with all its provisions;

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3. At the time of giving notice of renewal to Franchisor, Franchisee is not in default under any terms of this Agreement nor has Franchisee at any time during the term of this Agreement been in material default under any provisions of this Agreement;

4. Franchisee maintains possession of the Franchised Restaurant and before the expiration date of this Agreement has brought the Franchised Restaurant into full compliance with the specifications and standards then applicable for new or renewing PANCHERO'S Franchised Restaurants and presents evidence satisfactory to Franchisor that it has the right to remain in possession of the Premises for the duration of any renewal term; or, in the event Franchisee is unable to maintain possession of the Premises, or if, in the judgment of Franchisor, the Premises should be relocated, Franchisee secures substitute premises approved by Franchisor and has furnished, stocked and equipped such premises to bring the Franchised Restaurant at its substituted premises into full compliance with the then-current specifications and standards before the expiration date of this Agreement;

5. Franchisee has given notice of renewal to Franchisor as provided hereinafter;

6. Franchisee has satisfied all monetary obligations owed by Franchisee to Franchisor and has timely met these obligations throughout the term of this Agreement;

7. Franchisee has executed upon renewal Franchisor's then-current form of the Agreement (with appropriate modifications to reflect the fact that the Agreement relates to the grant of a renewal franchise), which agreement shall supersede in all respects this Agreement, and the terms of which may differ from the terms of this Agreement including, without limitation, a different percentage Continuing Services and Royalty Fee and advertising contribution; a different territory; provided, however, Franchisee shall not be required to pay the then-current initial franchise fee or its equivalent;

8. Franchisee has complied with Franchisor's then-current qualification and training requirements; and

9. Franchisee has executed a general release, in a form prescribed by Franchisor, of any and all claims against Franchisor and its respective officers, directors, agents, shareholders and employees.

C. If Franchisee desires to renew this franchise before the expiration of this Agreement, Franchisee shall give Franchisor written notice of its desire to renew at least nine (9) months, but not more than fifteen (15) months, prior to the expiration of the initial term of this Agreement. Within sixty (60) days after its receipt of such timely notice, Franchisor shall furnish Franchisee with written notice of: (i) reasons which could cause Franchisor not to grant a renewal to Franchisee including, but not limited to, any deficiencies which require correction and a schedule for correction thereof by Franchisee; and (ii) Franchisor's then-current requirements relating to the image, appearance, decoration, furnishing, equipping and stocking of PANCHERO'S Franchised Restaurants and a schedule for effecting upgrading or modifications

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in order to bring the Franchised Restaurant in compliance therewith, as a condition of renewal. Renewal of the franchise shall be conditioned upon Franchisee's compliance with such requirements and continued compliance with all the terms and conditions of this Agreement up to the date of termination of the initial term.

D. Franchisor shall give Franchisee written notice of its election not to renew the franchise at least three (3) months prior to the expiration of the initial term of this Agreement.

III. RESTAURANT LOCATION

A. Franchisee shall operate the Franchised Restaurant only at the location specified in Paragraph I. hereof. If the lease for the site of the Franchised Restaurant expires or terminates without fault of Franchisee, or if the site is destroyed, condemned or otherwise rendered unusable, or as otherwise may be agreed upon in writing by Franchisor and Franchisee, Franchisor shall grant permission for relocation of the Franchised Restaurant at a location and site acceptable to Franchisor. Any such relocation shall be at Franchisee's sole expense and Franchisor shall have the right to charge Franchisee for any and all reasonable costs incurred by Franchisor. If Franchisee is allowed to relocate its Franchised Restaurant, Franchisee must comply with Franchisor's then-current standards and specifications for the Franchised Restaurants. Franchisor shall make no guarantee of Franchisee's success at this new location.

B. Franchisee shall be responsible for purchasing or leasing a suitable site for the Franchised Restaurant. Prior to the acquisition by lease or purchase of any site for the Premises, Franchisee shall submit a description of the proposed site to Franchisor, together with a letter of intent or other evidence satisfactory to Franchisor which confirms Franchisee's favorable prospects for obtaining the proposed site. Franchisor shall provide Franchisee written notice of approval or disapproval of the proposed site within thirty (30) business days after receiving Franchisee's written proposal. Franchisor has the right to require Franchisee to use only a real estate broker that Franchisor has designated or approved to assist Franchisee in locating a suitable site for the Franchised Restaurant.

C. After receiving Franchisor's written approval of the location of the Franchised Restaurant as provided in Paragraph III.B. hereof, Franchisee shall, subject to the prior approval of terms by Franchisor execute a lease within 6 months after executing the Franchise Agreement (if the Premises are to be leased) or a binding agreement to purchase the site. Franchisor's approval of the lease or purchase agreement shall be conditioned upon inclusion in the lease of terms acceptable to Franchisor, and at Franchisor's option, the lease shall contain such provisions including, but not limited to:

1. A provision reserving to Franchisor the right, at Franchisor's election, to receive an assignment of the leasehold interest upon termination or expiration of the franchise grant;

2. A provision which expressly requires the lessor to provide Franchisor all sales and other information lessor may have related to the operation of the Franchised Restaurant, as Franchisor may request;

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3. A provision which requires the lessor concurrently to provide Franchisor with a copy of any written notice of deficiency under the lease sent to Franchisee and which grants to Franchisor, in its sole discretion, the right (but not obligation) to cure any deficiency under the lease within fifteen (15) business days after the expiration of the period in which Franchisee had to cure any such default should Franchisee fail to do so;

4. A provision which evidences the right of Franchisee to display the Marks in accordance with the specifications required by the Confidential Operations Manual, subject only to the provisions of applicable law;

5. A provision that the Premises be used for the operation of a Franchised Restaurant; and

6. A provision which expressly states that any default under the lease shall constitute a default under this Agreement.

D. If the location is not designated above, Franchisor may use reasonable efforts, but shall not be obligated, to help analyze Franchisee's market area, to help determine site feasibility and to assist in the designation of the location, which must be approved by Franchisor; provided however, that Franchisor shall not conduct site selection activities on Franchisee's behalf. Nothing contained herein shall be interpreted as a guarantee of success for said location nor shall any site recommendation or approval made by Franchisor be deemed a representation that any particular site is available for use as a PANCHERO'S Franchised Restaurant. It shall be the sole responsibility of Franchisee to undertake site selection activities and otherwise secure Premises for Franchisee's Franchised Restaurant.

E. In the event no acceptable site is found and approved by the parties within ninety (90) days from the date of this Agreement, then and in that event, upon written application from either party, this contract shall be terminated and deposits received by Franchisor shall be returned to Franchisee. Provided, however, that in the event Franchisor has within the aforesaid time submitted in writing to Franchisee two (2) or more sites which are acceptable to Franchisor, and Franchisee has refused to accept same, then Franchisee, upon termination, shall forfeit to Franchisor the sum of EIGHT THOUSAND Dollars ($8,000.00) as liquidated damages in payment for Franchisor's expenses in its site evaluation and selection activities. Franchisee and Franchisor agree that the amount set forth to wit, EIGHT THOUSAND Dollars ($8,000.00) as liquidated damages is a reasonable amount and that due to the nature of the subject matter, it shall be impossible to ascertain the exact amount of damages sustained by the recipient therefore. If Franchisee has completed Franchisor's training program, as more fully described in Paragraph IV. hereof, Franchisor shall retain 50% of the franchise fee as such liquidated damages.

F. Franchisee shall promptly after obtaining possession of the site for the Franchised Restaurant: (i) cause to be prepared and submit for approval by Franchisor a site survey and any modifications to Franchisor's basic architectural plans and specifications (not for construction) for the development of a PANCHERO'S Franchised Restaurant (including requirements for dimensions, exterior design, materials, interior design and layout, equipment, fixtures, furniture, signs and decorating) at the site leased or purchased therefore, provided that Franchisee may

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modify Franchisor's basic plans and specifications only to the extent required to comply with all applicable ordinances, building codes and permit requirements and with prior notification to and approval by Franchisor; (ii) obtain all required zoning changes, building, utility, health, sanitation and sign permits and licenses and any other required permits and licenses; (iii) purchase or lease equipment, fixtures, furniture and signs as provided herein; (iv) complete the construction and/or remodeling, equipment, fixtures, furniture and sign installation and decorating of the Franchised Restaurant in full and strict compliance with plans and specifications therefore approved by Franchisor and all applicable ordinances, building codes and permit requirements; (v) obtain all customary contractors' sworn statements and partial and final waivers of lien for construction, remodeling, decorating and installation services; and (vi) otherwise complete development of and have the Franchised Restaurant ready to open and commence the conduct of its business in accordance with Paragraph XIII. hereof.

G. Franchisee shall be required to periodically make reasonable capital expenditures to remodel, modernize and redecorate the Premises so that the Franchised Restaurant shall reflect the then-current image intended to be portrayed by PANCHERO'S businesses. All remodeling, modernization or redecoration of the Premises must be done in accordance with the standards and specifications as prescribed by Franchisor from time to time and with the prior written approval of Franchisor. All replacements must conform to Franchisor's then-current quality standards and specifications and must be approved by Franchisor in writing. Franchisee shall not be required to remodel, modernize and redecorate the Franchised Restaurant and its Premises more than once during the initial term of this Agreement, requiring expenditures in excess of TWENTY FIVE THOUSAND Dollars ($25,000.00); however, maintenance of the Premises and modifying or replacing equipment may exceed this amount and maintenance costs and equipment costs may not be credited to remodeling, modernization or redecoration expenditures. Franchisee must proceed with diligence when undertaking any remodeling, modernization or redecoration of the Premises; Franchisor shall set the timeframe for completion for such remodeling, modernization or redecoration.

IV. TRAINING AND ASSISTANCE

A. Prior to Franchisee's commencement of operations, Franchisor shall make an initial training program available to Franchisee or Franchisee's manager. The initial training program shall be approximately one (1) week in duration. Franchisee or Franchisee's manager is required to attend and successfully complete such program. The initial training program shall be conducted at Franchisor's headquarters, a PANCHERO'S restaurant or at such other place as Franchisor shall designate. Said training program shall include classroom training and on-the-job training at a PANCHERO'S restaurant and shall cover material aspects of the operation of a PANCHERO'S Franchised Restaurant, including administrative, operational and marketing matters. Multiple unit operators shall be provided with such training before opening the first unit only; Franchisees who served previously as a PANCHERO'S manager (whether company-owned, Affiliate-owned or franchised) shall be provided with one (1) week of such training. Such training shall be completed at least six (6) weeks prior to opening the Franchised Restaurant. Franchisee shall attend such training program no later than eight (8) weeks after executing the Franchise Agreement. All expenses incurred by Franchisee and its employees in attending such program including, without limitation, travel costs, room and board expenses and employees' salaries shall be the sole responsibility of Franchisee.

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B. For approximately three (3) weeks after completion of the initial training program, Franchisee or Franchisee's manager and Franchisee's assistant manager or cook shall be provided with additional on-the-job training. Franchisee and/or Franchisee's designees are required to attend and successfully complete such training program. Such training shall be conducted at a location to be designated by Franchisor. Franchisor shall determine, at its option, whether to provide and/or require this on-the-job training for personnel of multiple unit operators. Franchisees who served previously as a PANCHERO'S manager (whether company-owned, Affiliate-owned or franchised) shall be provided with one (1) week of such training. Such training shall be completed at least three (3) weeks prior to opening the Franchised Restaurant. Franchisee and/or Franchisee's designees shall attend such training program no earlier than eight (8) weeks and no later than four (4) weeks before the Franchised Restaurant begins operations. All expenses incurred by Franchisee and its employees in attending such program including, without limitation, travel costs, room and board expenses, and employees' salaries shall be the sole responsibility of Franchisee.

C. If this is Franchisee's first PANCHERO'S Franchised Restaurant, for approximately two (2) weeks around the commencement of operations of Franchisee's Franchised Restaurant, Franchisor shall furnish to Franchisee, at Franchisee's Premises and at Franchisor's expense, one (1) of Franchisor's representatives for the purpose of facilitating the opening of Franchisee's Franchised Restaurant. Franchisor shall also furnish Franchisee during this period one (1) fully trained crew member from Franchisor's, affiliate's or another franchisee's PANCHERO'S Franchised Restaurant for approximately five (5) days to assist Franchisee in beginning operations of Franchisee's Franchised Restaurant. If Franchisee is a multiple unit operator, then, in lieu of the assistance described in the two preceding sentences, Franchisor will furnish to Franchisee one representative who will provide up to five (5) days of operations assistance to Franchisee around the commencement of operations of the Franchised Restaurant. Franchisee is required to successfully complete this phase of the initial training program as well. During this period, such representative shall also assist Franchisee in establishing and standardizing procedures and techniques essential to the operation of a PANCHERO'S Franchised Restaurant and shall assist in training personnel. Should Franchisee request additional assistance from Franchisor in order to facilitate the opening of the Franchised Restaurant and should Franchisor, in its discretion, deem it necessary, feasible and appropriate to comply with the request, Franchisee shall reimburse Franchisor for the expense of Franchisor providing such additional assistance which may include Franchisor's then-current service fee, as set forth in the Confidential Operations Manual which may be amended from time to time.

D. If Franchisor determines, in its sole discretion, that Franchisee is unable to satisfactorily complete either phase of training program, Franchisor shall have the right to: (i) require Franchisee to attend such additional training so as to demonstrate its ability to operate the Franchised Restaurants to Franchisor's satisfaction; or (ii) terminate this Agreement in the manner herein provided. If this Agreement is terminated pursuant to this Paragraph IV., Franchisee shall be liable to Franchisor for the expenses incurred by Franchisor as of such date for providing training to Franchisee and other expenses incurred by Franchisor not to exceed TWELVE THOUSAND FIVE HUNDRED Dollars ($12,500.00). If Franchisee has paid franchise fees in excess of the amount Franchisee is liable to Franchisor, Franchisor shall return to Franchisee the franchise fees paid by Franchisee to Franchisor minus the expenses incurred by Franchisor as of such date for providing training to Franchisee and other expenses incurred by

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Franchisor. Upon return of said amount, Franchisor shall be fully and forever released from any claims or causes of action Franchisee may have under or pursuant to this Agreement and Franchisee shall have no further right, title or interest in the Marks and any such rights shall automatically revert to Franchisor.

E. Franchisor from time to time may provide and if it does, may require that previously-trained and experienced franchisees, its managers and/or employees attend and successfully complete refresher training programs or seminars to be conducted at such location as may be designated by Franchisor. Attendance at such refresher training programs or seminars shall be at Franchisee's sole expense, provided, however, that attendance shall not be required at more than one (1) such program in any calendar year and shall not collectively exceed four (4) business days in duration during any calendar year.

F. If Franchisee designates new or additional managers after the initial training program, Franchisor shall provide training to such managers at the then-current published rates. Any and all designated managers shall be required to successfully complete the training program provided at Franchisor's headquarters or such other location designated by Franchisor. Franchisee shall bear all costs incurred by Franchisee's employees attending such training program.

V. TRUCKS, VANS AND OTHER MOTOR VEHICLES

A. If Franchisee requests to provide delivery services and Franchisor approves such request, Franchisor shall provide Franchisee with specifications for brands and types of trucks, vans and other motor vehicle(s) required for the Franchised Restaurant. Franchisee may purchase or lease original and replacement motor vehicle(s) from any source, provided they meet Franchisor's approval.

B. Franchisee at its expense shall, at all times during the term of this Agreement, maintain the interior and exterior of any motor vehicle(s) utilized in the Franchised Restaurant in good repair, attractive appearance, sound operating condition and equipped in accordance with Franchisor's standards and specifications. Franchisee, at the request of Franchisor, shall make necessary repairs and equipment modifications or additions to Franchisee's motor vehicle(s) used in the Franchised Restaurant in order to maintain the reputation of the System.

C. It shall be the sole responsibility of Franchisee to investigate all applicable licensing, leasing and other requirements for the maintenance of Franchisee's motor vehicle(s) and to insure ongoing compliance with all such requirements throughout the term of this Agreement.

D. The motor vehicle(s) used by Franchisee in conducting the Franchised Restaurant must be capable of prominently providing the external display of PANCHERO'S advertising copy, including the PANCHERO'S logo graphics supplied and/or approved by Franchisor, and further, such logo and graphics must be maintained in good appearance. Additional sales, advertising or display information can be placed on the motor vehicle(s) only with the prior written approval of Franchisor.

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VI. PROPRIETARY MARKS

A. Franchisee acknowledges that Little Donkeys, Inc. has certain rights together with all the goodwill of the Marks and the Franchisor, by virtue of its license from owner, has the right to use and sublicense the Marks herein. Franchisee further acknowledges that Franchisee's right to use the Marks is derived solely from this Agreement and is limited to the conduct of business by Franchisee pursuant to and in compliance with this Agreement and all applicable standards, specifications and operating procedures prescribed by Franchisor from time to time during the term of the Franchise. Any unauthorized use of the Marks by Franchisee is a breach of this Agreement and an infringement of the rights of Franchisor in and to the Marks. Franchisee acknowledges that all usage of the Marks by Franchisee and any goodwill established by Franchisee's use of the Marks shall inure to the exclusive benefit of Franchisor and that this Agreement does not confer any goodwill or other interests in the Marks upon Franchisee. Franchisee shall not, at any time during the term of this Agreement or after its termination or expiration, contest the validity or ownership of any of the Marks or assist any other person in contesting the validity or ownership of the Marks. All provisions of this Agreement applicable to the Marks apply to any and all additional trademarks, service marks and commercial symbols authorized for use by and licensed to Franchisee by Franchisor after the date of this Agreement. Franchisee shall cooperate with Franchisor in its use and display of the Marks in enforcing or protecting the Marks.

B. Franchisee shall not use any Mark or portion of any Mark (1)) as part of a corporate or trade name, (2)) with any prefix, suffix or other modifying words, terms, designs or symbols, (3)) in connection with the sale of any unauthorized product or service, (4)) as part of any domain name, Website, homepage, electronic address, or other interactive site maintained on the Internet, the World Wide Web, or any other similar proprietary or common carrier electronic delivery system, or (5)) or in any other manner not expressly authorized in writing by Franchisor. Franchisee shall give such notices of trademark and service mark registrations as Franchisor specifies and obtain such fictitious or assumed name registrations as may be required under applicable law.

C. Franchisee shall promptly notify Franchisor and/or Little Donkeys, Inc. of any claim, demand or cause of action based upon or arising from any attempt by any other person, firm or corporation to use the Marks or any colorable imitation thereof. Franchisee shall also notify Franchisor and/or Little Donkeys, Inc. of any action, claim or demand against Franchisee relating to the Marks within ten (10) days after Franchisee receives notice of said action, claim or demand. Upon receipt of timely notice of an action, claim or demand against Franchisee relating to the Marks, Franchisor and/or Little Donkeys, Inc. shall have the sole right, but not the duty, to defend any such action. Franchisor shall have the exclusive right to contest or bring action against any third party regarding the third party's use of any of the Marks and shall exercise such right in their sole discretion. In any defense or prosecution of any litigation relating to the Marks or components of the System undertaken by Franchisor and/or Little Donkeys, Inc., Franchisee shall cooperate with Franchisor and execute any and all documents and take all actions as may be desirable or necessary, in the opinion of their counsel, to carry out such defense or prosecution. Both parties shall make every effort consistent with the foregoing to protect, maintain and promote the Marks as identifying the System and only the System. FRANCHISOR MAKES

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NO REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, AS TO THE USE, EXCLUSIVE OWNERSHIP, VALIDITY OR ENFORCEABILITY OF THE MARKS.

D. If it becomes advisable at any time, in Franchisor's sole discretion, for Franchisor to modify or discontinue use of any Mark, and/or use one or more additional or substitute trade names, trademarks, service marks or other commercial symbols, Franchisee shall comply with Franchisor's directions within a reasonable time, after notice to Franchisee by Franchisor. Franchisee shall stop using and displaying the Marks immediately upon notice by Franchisor of any alleged infringement of the Marks on the rights of a third party. Franchisor shall have no liability or obligation whatsoever with respect to Franchisee's modification or discontinuance of any Mark.

E. In order to preserve the validity and integrity of the Marks and copyrighted material licensed herein and to assure that Franchisee is properly employing the same in the operation of its Franchised Restaurant, Franchisor or its agents shall have the right of entry and inspection of Franchisee's Premises and operating procedures at all reasonable times. Franchisor shall have the right to observe the manner in which Franchisee is rendering its PANCHERO'S services and conducting its operations, to confer with Franchisee's employees and customers and to select Menu Items, the Trade Secret Food Products, ingredients, food and non-food products, beverages and other items, products and supplies for test of content and evaluation purposes to make certain that the Menu Items, the Trade Secret Food Products, ingredients, food and non-food products, beverages and other items, products, materials and supplies are satisfactory and meet the quality control provisions and performance standards established by Franchisor.

VII. CONFIDENTIAL OPERATIONS MANUAL

A. Franchisor shall loan to Franchisee during the term of the franchise one (1) copy of the Confidential Operations Manual containing mandatory and suggested specifications, standards, operating procedures and rules prescribed from time to time by Franchisor for PANCHERO'S Franchised Restaurants and information relative to other obligations of Franchisee hereunder. Franchisor shall have the right to add to and otherwise modify the Confidential Operations Manual from time to time to reflect changes in the specifications, standards, operating procedures and rules prescribed by Franchisor for PANCHERO'S Franchised Restaurants, provided that no such addition or modification shall alter Franchisee's fundamental status and rights under this Agreement.

B. The Confidential Operations Manual shall at all times remain the sole property of Franchisor and shall promptly be returned upon the expiration or other termination of this Agreement. At no time shall Franchisee or its employees make copies or reproductions of all or part of the Confidential Operations Manual.

C. The Confidential Operations Manual contains proprietary information of Franchisor and shall be kept confidential by Franchisee both during the term of the franchise and subsequent to the expiration and/or termination of the franchise. Franchisee shall at all times ensure that its copy of the Confidential Operations Manual be available at the Premises in a current and up-to-date manner. At all times that the Confidential Operations Manual is not in use by authorized personnel, Franchisee shall maintain the Confidential Operations Manual in a

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locked receptacle at the Premises, and shall only grant authorized personnel, as defined in the Confidential Operations Manual, access to the key or lock combination of such receptacle. In the event of any dispute as to the contents of the Confidential Operations Manual, the terms of the master copy of the Confidential Operations Manual maintained by Franchisor at Franchisor's home office shall be controlling.

VIII. CONFIDENTIAL INFORMATION

A. Franchisee acknowledges that its entire knowledge of the operation of a PANCHERO'S Franchised Restaurant including, without limitation, the method of preparation of Menu Items, Trade Secret Food Products and other food products, ideas, designs, pricing, suppliers, the System, the Confidential Operations Manual and other specifications, product formulae, standards and operating procedures of a PANCHERO'S Franchised Restaurant is derived from information disclosed to Franchisee by Franchisor and that such information is proprietary, confidential and the trade secret of Franchisor. In addition, any improvements developed by Franchisee pursuant to Franchisee's operation of the Franchised Restaurant shall constitute proprietary information of Franchisor. "Trade Secrets" refers to the whole or any portion of know-how, knowledge, methods, recipes, formulae, specifications, processes, procedures and/or improvements regarding the PANCHERO'S Franchised Restaurant and the System that is valuable and secret in the sense that it is not generally known to competitors of Franchisor. Franchisee shall maintain the absolute confidentiality of all such information and Trade Secrets and not disclose to any person or entity during and after the term of the franchise and that Franchisee shall not use any such information and Trade Secrets in any other business or in any manner not specifically authorized or approved in writing by Franchisor. Franchisee shall return all such confidential information and Trade Secrets to Franchisor at the termination of this Agreement.

B. Franchisee shall divulge such confidential information only to the extent and only to such of its employees as must have access to it in order to operate the Franchised Restaurant. Any and all information, knowledge and know-how including, without limitation, drawings, materials, equipment, techniques, restaurant systems, product formulae, recipes and other data which Franchisor designates as confidential shall be deemed confidential for purposes of this Agreement, except information which Franchisee can demonstrate lawfully came to its attention prior to disclosure thereof by Franchisor; or which, at the time of disclosure by Franchisor to Franchisee, had lawfully become a part of the public domain, through publication or communication by others; or which, after disclosure to Franchisee by Franchisor, lawfully becomes a part of the public domain, through publication or communication by others. All employees or agents of Franchisee who must have access to such information or materials shall be required to execute nondisclosure agreements in the form acceptable to Franchisor.

C. Due to the special and unique nature of the confidential information, Marks and Confidential Operations Manual of Franchisor and the possibility of irreparable damage due to their disclosure, Franchisee hereby acknowledges that Franchisor shall be entitled to immediate equitable remedies including, but not limited to, restraining orders and injunctive relief in order to safeguard such proprietary, confidential, unique and special information of Franchisor and that money damages alone would be an insufficient remedy with which to compensate Franchisor for any breach of the terms of Paragraphs VI., VII. and VIII. of this Agreement. All owners,

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directors, shareholders, partners and employees of Franchisee having access to the confidential and proprietary information of Franchisor shall be required to execute non-disclosure agreements in the form acceptable to Franchisor.

IX. MODIFICATION OF THE SYSTEM

Franchisee acknowledges that from time to time hereafter, Franchisor may change or modify the System including, without limitation, the adoption and use of new or modified trade names, trademarks, service marks or copyrighted materials, new Menu Items, new products, new equipment, new techniques, new recipes or new presentations and such modifications shall be communicated to Franchisee through the Confidential Operations Manual. Franchisee shall accept, use and display for the purpose of this Agreement any such changes in the System within the timeframe prescribed by Franchisor, as if they were part of this Agreement at the time of execution hereof. Franchisee shall make such expenditures as are reasonably required by such changes or modifications in the System. Franchisee shall not change, modify or alter in any way the System.

X. ADVERTISING

Recognizing the value of advertising and the importance of the standardization of advertising and promotion to the furtherance of the goodwill and the public image of PANCHERO'S Franchised Restaurants, Franchisee agrees as follows:

A. Franchisee shall submit to Franchisor or its designated agency, for its prior approval, all promotional materials and advertising to be used by Franchisee including, but not limited to, newspapers, radio and television advertising, specialty and novelty items, signs, containers and boxes. In the event written disapproval of said advertising and promotional material is not given by Franchisor to Franchisee within thirty (30) days from the date such material is received by Franchisor, said materials shall be deemed approved. Failure by Franchisee to conform with the provisions herein and subsequent nonaction by Franchisor to require Franchisee to cure or remedy this failure and default shall not be deemed a waiver of future or additional failures and defaults of any other provision of this Agreement. The submission of advertising to Franchisor for approval shall not affect Franchisee's right to determine the prices at which Franchisee sells its products or services.

B. Franchisee shall expend a minimum of THREE THOUSAND Dollars ($3,000.00) on newspaper, direct mail or other advertising through other media during the Franchisee's initial two (2) to three (3) weeks of operation of the Franchised Restaurant ("Grand Opening Advertising"). Such Grand Opening Advertising shall be conducted in accordance with guidelines established by Franchisor as published in the Confidential Operations Manual.

C. At such time as Franchisor establishes the PANCHERO'S Advertising and Development Fund ("Advertising Fund"), Franchisee shall contribute to the Advertising Fund an amount not to exceed three percent (3%) of the Gross Revenues derived from the Franchised Restaurant, as defined in Paragraph XL A. of this Agreement. Franchisee's required payments to the Advertising Fund shall be made at the same time and in the same manner as, and in addition to, the Continuing Services and Royalty Fee provided in Paragraph XI. A. herein. Such payment

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shall be made in addition to and exclusive of any sums that Franchisee may be required to spend on local advertising and promotion. The fund shall be maintained and administered by Franchisor or its designee, as follows:

1. Franchisor shall direct all advertising programs with sole discretion over the creative concepts, materials and media used in such programs and the placement and allocation thereof. Franchisee agrees and acknowledges that the Advertising Fund is intended to maximize general public recognition and acceptance of the Marks for the benefit of the System and that Franchisor and its designee undertake no obligation in administering the Advertising Fund to make expenditures for Franchisee which are equivalent or proportionate to its contribution or to ensure that any particular Franchisee benefits directly pro rata from the placement of advertising.

2. The funds may be used to meet any and all costs of maintaining, administering, directing, producing and preparing promotions and advertising (including, without limitation, the cost of conducting public relations activities, conducting advertising; and producing promotional brochures and other marketing materials to franchisees in the System) and developing, implementing, and maintaining an electronic consumer Website and/or related strategies. All sums paid by Franchisee to the Advertising Fund shall be maintained in a separate account from the other funds of Franchisor and shall not be used to defray any of Franchisor's general operating expenses, except for such reasonable administrative costs and overhead, if any, as Franchisor may incur in activities reasonably related to the administration or direction of the Advertising Fund and advertising programs including, without limitation, conducting market research, preparing marketing and advertising materials, and collecting and accounting for assessments for the Advertising Fund. Franchisor-owned and Affiliate-owned restaurants shall contribute the same percentage to the Advertising Fund as Franchised Restaurants.

3. It is anticipated that all contributions to the Advertising Fund shall be expended for advertising and promotional purposes during Franchisor's fiscal year within which contributions are made. If, however, excess amounts remain in the Advertising Fund at the end of such fiscal year, all expenditures in the following fiscal year(s) shall be made first out of any current interest or other earnings of the Advertising Fund, next out of any accumulated earnings and finally from principal.

4. Although Franchisor intends the Advertising Fund to be of perpetual duration, Franchisor maintains the right to terminate the Advertising Fund. The Advertising Fund shall not be terminated, however, until all monies in the Advertising Fund have been expended for advertising and promotional purposes.

5. , An accounting of the operation of the Advertising Fund shall be prepared annually and shall be made available to Franchisee upon request. Franchisor reserves the right, at its option, to require that such annual accounting include an audit of the operation of the Advertising Fund prepared by an independent certified public accountant selected by Franchisor and prepared at the expense of the Advertising Fund.

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6. Franchisor shall, for each of its company-owned and Affiliate-owned PANCHERO'S restaurants offering products and services similar to the Franchised Restaurant, make contributions to the Advertising Fund equivalent to the contributions required of Franchised Restaurant within the System.

D. Franchisee shall spend each calendar month on local advertising and promotion, an amount equal to a percentage of Franchisee's Gross Revenues, (as defined in Paragraph XL A. 1. of this Agreement) in accordance with the following schedule: (INITIAL THE PROVISION THAT APPLIES.)

_______1. If the Franchised Restaurant is located in a "Regional Mall or Life Style

Center," Franchisee shall not be required to contribute to local advertising and promotion each month and shall only be required to advertise locally as required by the Regional Mall or Life Style Center lease. However, if such lease requires expenditures for advertising less than three percent (3%) of the Gross Revenues of the Franchised Restaurant, Franchisee shall be required to spend up to three percent (3%) of the Gross Revenues of the Franchised Restaurant on local advertising. "Regional Mall or Life Style Center" shall mean a shopping center having three hundred thousand (300,000) or more square feet of leasable space.

_______2. If the Franchised Restaurant is located at a site other than a Regional Mall

or Life Style Center, Franchisee shall spend an amount equal to three percent (3%) of the Gross Revenues of the Franchised Restaurant on local advertising and promotion each month.

Such expenditures shall be made directly by Franchisee, subject to approval and direction by Franchisor or Franchisor's designated advertising agency. Within thirty (30) days of the end of each calendar month, Franchisee shall furnish to Franchisor, in a manner approved by Franchisor, an accurate accounting of Franchisee's expenditures on local advertising and promotion for the preceding calendar month just ended. Franchisor shall provide guidelines for local advertising and any deviation from such guidelines requires the prior approval of Franchisor. If Franchisee fails to spend each month on local advertising and promotion the required 3% of the Franchised Restaurant's Gross Revenues, Franchisor may require Franchisee to pay this amount to Franchisor immediately, and Franchisor then may spend such three percent (3%) for such local advertising and promotion of the Franchised Restaurant that Franchisor deems best. Franchisor's right to require Franchisee to pay it such amounts is in addition to, and does not replace, Franchisee's obligation to pay Franchisor the amounts specified in Paragraph X.C. above.

E. From time to time Franchisor may designate a local, regional or national Advertising Coverage Area in which Franchisee's business and at least one (1) other PANCHERO'S restaurant is located for purposes of developing a cooperative local, regional or national advertising or promotional program. Franchisee agrees to participate in and contribute its share to such cooperative advertising and promotional programs in Franchisee's Advertising Coverage Area in addition to such contributions and expenditures as required pursuant to Paragraphs X.B. and X.C. The cost of the program shall be allocated among locations in such area and each Franchisee's share shall be in proportion to its sales during the preceding twelve

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(12) month period, or portion of said period. Said contributions to cooperative advertising promotional programs shall be credited toward the local advertising and promotional expenditure required by Paragraph X.D. "Advertising Coverage Area" shall be defined as the area covered by the particular advertising medium (television, radio or other medium) as recognized in the industry. All PANCHERO'S restaurants whether Franchisor-owned, Affiliate-owned or franchised shall have one (1) vote per location in any such cooperative. Franchisor may establish Regional Franchisee Councils to administer the cooperative advertising program which shall be comprised of Franchisor, franchisees in the Advertising Coverage Area and Franchisor-owned or Affiliate-owned restaurants. At the time a program is submitted, Franchisor shall submit a list to Franchisee of all operating PANCHERO'S restaurants within the Advertising Coverage Area.

F. Franchisee shall maintain a listing in boldface type in the white pages of the local telephone directory and advertise continuously in the classified or Yellow Pages of the local telephone directory. Franchisee shall maintain a Yellow Pages listing in boldface type under the listing "Restaurant," "Restaurant - Mexican," and such other listings of the size and type deemed appropriate by Franchisor. When more than one (1) PANCHERO'S Franchised Restaurant serves a metropolitan area, classified advertisements shall list all PANCHERO'S Franchised Restaurants operating within the distribution area of such classified directories and Franchisee shall contribute its equal share in the cost of such advertisement which shall be credited toward the local advertising required in Paragraph X.D. hereof.

G. Franchisee shall not advertise or use in advertising or any other form of promotion, the copyrighted materials, trademarks, service marks or commercial symbols of Franchisor without the appropriate or ® registration marks or the designation or ^SM where applicable.

XI. CONTINUING SERVICES AND ROYALTY FEE

A. Franchisee shall pay without offset, credit or deduction of any nature, to Franchisor, so long as this Agreement shall be in effect, a weekly Continuing Services and Royalty Fee equal to five percent (5%) of the Gross Revenues derived from the Franchised Restaurant. Said Continuing Services and Royalty Fee shall be paid weekly in the manner specified below or as otherwise prescribed in the Confidential Operations Manual.

1. On or before Tuesday of each week, Franchisee shall submit to Franchisor, on a form approved by Franchisor, a correct statement signed by Franchisee, of Franchisee's Gross Revenues for the preceding week ended Saturday. If Franchisor has instructed Franchisee to pay the Continuing Service and Royalty Fee by check (or means other than the electronic deposit mechanism described in Paragraph D. below), then each weekly statement of Gross Revenues shall be accompanied by the Continuing Services and Royalty Fee payment based on the Gross Revenues reported in the statement so submitted. Franchisee shall make available to Franchisor all original books and records that Franchisor may deem necessary to ascertain Franchisee's Gross Revenues for reasonable inspection at reasonable times.

2. The term "Gross Revenues," as used herein and throughout this Agreement, shall mean and include the total of all revenues and income from the sale of

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all Trade Secret Food Products, other food products, beverages and other related merchandise, products and services to customers of Franchisee or any other source, whether or not sold or performed at or from the PANCHERO'S Franchised Restaurant and whether received in cash, in services in kind, from barter and/or exchange, on credit (whether or not payment is received therefore) or otherwise. There shall be deducted from Gross Revenues for purposes of said computation (but only to the extent they have been included) the amount of all sales tax receipts or similar tax receipts which, by law, are chargeable to customers, if such taxes are separately stated when the customer is charged and if such taxes are paid to the appropriate taxing authority. There shall be further deducted from Gross Revenues the amount of any documented refunds, chargebacks, credits and allowances given in good faith to customers by Franchisee. All barter and/or exchange transactions pursuant to which Franchisee furnishes services and/or products in exchange for goods or services to be provided to Franchisee by a vendor, supplier or customer shall, for the purpose of determining Gross Revenues, be valued at the full retail value of the goods and/or services so provided to Franchisee.

B. All Continuing Services and Royalty Fees, advertising contributions, amounts due for purchases by Franchisee from Franchisor and other amounts which Franchisee owes to Franchisor shall bear interest after due date at the highest applicable legal rate for open account business credit, not to exceed one and one-half percent (1.5%) per month. Franchisee acknowledges that this Paragraph XL shall not constitute agreement by Franchisor to accept such payments after same are due or a commitment by Franchisor to extend credit to or otherwise finance Franchisee's operation of, the Franchised Restaurant. Further, Franchisee acknowledges that its failure to pay all amounts when due shall constitute grounds for termination of this Agreement, as provided in Paragraph XVII. hereof, notwithstanding the provisions of this Paragraph XI.

C. Notwithstanding any designation by Franchisee, Franchisor shall have the sole discretion to apply any payments by Franchisee to any past due indebtedness of Franchisee for Continuing Services and Royalty Fees, advertising contributions, purchases from Franchisor, interest or any other indebtedness.

D. All Continuing Services and Royalty Fees, advertising contributions, amounts due for purchases by Franchisee from Franchisor and other amounts which Franchisee owes to Franchisor shall be paid through an Electronic Depository Transfer Account ("Electronic Depository Transfer Account") as further described in the Confidential Operations Manual. Immediately following execution of this Agreement, Franchisee shall set up an Electronic Depository Transfer Account and Franchisor shall have access to such account for the purpose of receiving payment for Continuing Services and Royalty Fees, advertising contributions, amounts due for purchases by Franchisee from Franchisor and any other amounts which Franchisee owes to Franchisor. Every Wednesday, Franchisee shall make deposits to the fund sufficient to cover amounts owed to Franchisor on the preceding Saturday for Continuing Services and Royalty Fees, advertising contributions and other funds owed to Franchisor. Deposits for all other amounts owed to Franchisor shall be in accordance with the procedures set forth in the Confidential Operations Manual.

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XII. ACCOUNTING AND RECORDS

A. Franchisee shall maintain during the term of this Agreement, and shall preserve for the time period specified in the Confidential Operations Manual, full, complete and accurate books, records and accounts in accordance with the standard accounting system prescribed by Franchisor in the Confidential Operations Manual or otherwise in writing and in accordance with generally accepted accounting principles ("GAAP"), consistently applied. Franchisee shall retain for a period of three (3) years thereafter all books and records related to the Franchised Restaurant including, without limitation, sales checks, purchase orders, invoices, payroll records, customer lists, check stubs, sales tax records and returns, cash receipts and disbursement journals and general ledgers. Franchisor has the right to require Franchisee to use only an accountant that Franchisor has approved. However, if Franchisee fails to comply with Franchisor's accounting, record-keeping, and reporting obligations, Franchisor may require Franchisee to use Franchisor's designated accountant (which also may be Franchisor's accountant) to ensure preparation of required reports and financial statements accurately and in Franchisor's desired format.

B. Franchisee shall supply to Franchisor at the end of each calendar quarter, in the form approved by Franchisor, a profit and loss statement and balance sheet for the last preceding three (3) month period just ended within twenty-five (25) days after the end of the calendar quarter. Additionally, Franchisee shall, at its expense, submit to Franchisor within forty-five (45) days after the end of each fiscal year during the term of this Agreement, a profit and loss statement for such fiscal year and a balance sheet as of the last day of such fiscal year, prepared on an accrual basis, including all adjustments necessary for fair presentation of the financial statements. Such financial statements shall be certified to be true and correct by Franchisee. Franchisor reserves the right to require annual financial statements, prepared in accordance with generally accepted accounting standards, audited by an independent certified public accountant. Franchisee shall provide to Franchisor copies of all federal and state income tax returns and sales tax returns.

C. Franchisee shall submit to Franchisor such other periodic reports, forms and records as specified, in the manner and at the time as specified in the Confidential Operations Manual or as Franchisor shall otherwise require in writing from time to time.

D. Franchisee shall record all sales and related activities on computer-based, point-of-sale cash registers which are fully compatible with any program or system which Franchisor, in its discretion, may now or in the future employ. Franchisee must procure a computer system meeting the specifications and standards prescribed by Franchisor. All Gross Revenues and sales information shall be recorded on such equipment. Franchisor shall have full access to all of Franchisee's data, system and related information by means of direct access whether in person, or by telephone/modem.

E. Franchisor or its designated agents shall have the right at all reasonable times to examine and copy, at its expense, the books, records and tax returns of Franchisee. Franchisor shall also have the right, at any time, to have an independent audit made of the books and records of Franchisee at Franchisor's expense. If an inspection should reveal that any payments due to Franchisor have been understated in any report to Franchisor, then Franchisee shall immediately pay to Franchisor the amount understated upon demand, in addition to interest from the date such

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amount was due until paid, at the maximum rate permitted by law. If an inspection discloses an understatement in any report of two percent (2%) or more, Franchisee shall, in addition, reimburse Franchisor for any and all costs and expenses connected with the inspection (including, without limitation, reasonable accounting and attorneys' fees). The foregoing remedies shall be in addition to any other remedies Franchisor may have.

F. Franchisee acknowledges that nothing contained herein constitutes Franchisor's

agreement to accept any payments after same are due or a commitment by Franchisor to extend credit to or otherwise finance Franchisee's operation of the Franchised Restaurant. Further, Franchisee acknowledges that its failure to pay all amounts when due shall constitute a material default of and grounds for termination of this Agreement.

XIII. STANDARDS OF QUALITY AND PERFORMANCE

A. Franchisee shall comply with all requirements set forth in this Agreement, the Confidential Operations Manual and other written policies supplied to Franchisee by Franchisor. Mandatory specifications, standards, operating procedures and rules prescribed from time to time by Franchisor in the Confidential Operations Manual or otherwise communicated to Franchisee in writing, shall constitute provisions of this Agreement as if fully set forth herein and shall be reasonably and uniformly applied to all franchisees to the extent possible. All references herein to this Agreement shall include all such mandatory specifications, standards and operating procedures and rules. Franchisee shall comply with the entire System including, but not limited to, the requirements of this Paragraph XIII.

B. Franchisee shall commence operation of the Franchised Restaurant not later than nine (9) months after execution of this Agreement or as otherwise required or approved in writing by Franchisor. Prior to such opening, Franchisee shall have procured all necessary licenses, permits and approvals including, but not limited to, construction permits, hired and trained personnel, made all leasehold improvements and purchased initial inventory. If Franchisee for any reason fails to commence operation as herein provided, unless Franchisee is precluded from doing so by force majeure, such failure shall be considered a default and Franchisor may terminate this Agreement as herein provided.

C. Franchisee shall maintain the condition and appearance of the Premises consistent with Franchisor's quality controls and standards. Franchisee shall effect such reasonable maintenance of the Franchised Restaurant as is from time to time required to maintain or improve the appearance and efficient operation of the Franchised Restaurant including, but not limited to, replacement of worn out or obsolete fixtures and signs, repair of the exterior and interior of the Premises and purchasing and installation of new or modified equipment. If at any time in Franchisor's judgment the general state of repair or the appearance of the Premises or its equipment, fixtures, signs or decor does not meet Franchisor's quality control and standards therefore, Franchisor shall so notify Franchisee, specifying the action to be taken by Franchisee to correct such deficiency. If Franchisee fails or refuses to initiate within thirty (30) days after receipt of such notice, and thereafter continue a bona fide program to complete any required maintenance, Franchisor shall have the right, in addition to all other remedies, to enter upon the Premises and effect such repairs, painting, maintenance or replacements of equipment, fixtures or signs on behalf of Franchisee and Franchisee shall pay the entire costs thereof on demand.

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Download PDF: Panchero's Mexican Grill Franchise Agreement 1

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