Franchise Agreement

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Sample Franchise Agreement

ZERO'S SUBS, INC. FRANCHISE AGREEMENT

THIS FRANCHISE AGREEMENT is signed on_________________, 2006, between ZERO'S MR.

SUBMARINE, INC. a Delaware corporation having its principal place of business is 2859 Virginia Beach Blvd., Suite 105, Virginia Beach, Virginia 23452 (the "Franchisor," "we" "our" or "us") and

____________________________________________________________________,               residing               at

______________________________________________________________(the "Franchisee," "you " or "your").

BACKGROUND

A.           We have developed through significant expenditures of time, skill, effort and money relating to the establishment, development and operation of a Zero's Subs Restaurant (the "Franchised Business") which offers a menu including a widely diverse selection of high quality subs, pizza, salads, and other products, that cater to all age and income groups. /

B.           We have developed a distinctive exterior and interior design, decor, color scheme, fixtures and furnishings for the Franchised Business restaurant, and has developed the uniform standards, specifications, methods, policies and procedures for the restaurant operations, inventory and management control, training and assistance, and advertising and promotional programs (the "System"), all of which may be changed, improved upon, and further developed from time to time.

C.           We have developed, through dedicated operations, marketing methods, and merchandising policies, the reputation, public image and good will of its System and established a firm foundation for its franchised retail operations consisting of the highest standards of training, management, supervision, appearance, services and quality of products.

D.           The System is identified by means of certain trade names, service marks, trade marks, logos, emblems and indicia of origin, including the mark "Zero's Subs®" and logo, and such other trade names, service marks, and trademarks as are now, and may hereafter be designated for use in connection with the System (the "Proprietary Marks");

E.            We continue to develop, expand, use, control and add to the Proprietary Marks and the System for the benefit of and use by us and our franchisees in order to identify for the public the source of the products and services marketed under the Proprietary Marks and to represent the System's high standards of quality and service.

F.            You desire to operate a Franchised Business under the System and the Proprietary Marks and to obtain a license from us for that purpose, as well as to receive the training and other assistance provided by us in connection therewith.

G.           You acknowledge that you have read this Agreement and the Franchise Offering Circular, and that you have no knowledge of any representations about the Franchised Business or about us or our franchising program or policies made by us or by our officers, directors, shareholders, employees or agents which are contrary to the statements in the Franchise Offering Circular or to the terms of this Agreement, and that you understand and accept the terms, conditions and covenants contained in this Agreement as being reasonably necessary to maintain our high standards of quality and service and the uniformity of those standards at all facilities which operate pursuant to the System and thereby to protect and preserve the goodwill of the Proprietary Marks.

H.          You understand and acknowledge the importance of our uniformly high standards of quality and

service and the necessity of operating the Franchised Business in strict conformity with our quality control standards and specifications.

The parties agree as follows:

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ARTICLE 1 - GRANT OF FRANCHISE

Section 1.1 Grant.

'            We grant to you and you accept, upon the terms contained in this Agreement, the non-exclusive and

personal license, right and authority to operate a Zero's Subs Restaurant in strict conformity with our quality control standards and specifications which are a material part of the System, which may be changed, improved and further developed from time to time, only at the specific location which will be selected by you and will be more particularly described in the Site Selection Addendum attached Attachment A. You accept the license and agree to perform all of your obligations as set forth in this Agreement.

Section 1.2 Site Selection Area.

Subject to the terms of this Agreement, we grant to you the non-exclusive right and license to select a site to operate         the- Franchised         Business         within         the jurisdictional         boundaries         of

_:■... "■. _ '; "'"_______..-■          _________________________________(the "Site Selection Area").

Section 1.3 Exclusive Territory.

Provided you have fully complied with your obligations under this Agreement, we agree not to grant or establish another franchise location for a Zero's Subs Restaurant within a 2-mile radius of the location set forth in Attachment A, unless such location is within the geographic boundaries of an area with a population greater than one million persons ("Densely Populated Urban Area" of "DPUA") in which case we agree not to grant another franchise location within a 1-mile radius (trie "Exclusive Territory"). We reserve the right to establish company-owned units, or license other franchisees to establish Franchised Businesses, at any site we deem appropriate outside of the Exclusive Territory.

Section 1.4 Relocation.

You may relocate the Franchised Business to a new location in the same Exclusive Territory upon the following conditions:

(a)          You are not in default of any term of this Agreement or the lease for the former location;

(b)          You deliver to us a current financial statement, including: a profit and loss statement for the Franchised Business during the last 12 months of operation at the former location, and a copy of the lease for the new location;

(c)          The new restaurant must be constructed, located and equipped in accordance with our then current design and other standards; and

(d)          You must be current on all of your financial obligations to us and our affiliates.

You must give us written notice of the proposed relocation 90 days before the relocation date. If you fail to timely deliver notice, this is a ground for default with opportunity to cure as set forth in Section 13.2. Relocation without notice to us is grounds for default without opportunity to cure as set forth in Section 13.1. The restaurant must open for business in the new location within 30 days (which may be extended for another 30 days for good cause) of the date on which the restaurant in the old location closed. You will also enter into an amendment of this Agreement to conform this Agreement to our then current form of Franchise Agreement, including the then current royalty rate, except that: (i) the term of the amended Franchise Agreement will expire on the same day that this Agreement would have expired; and (ii) there will be no requirement for a new Initial Franchise Fee.

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Section 1.5 Reservation of Certain Rights.

Subject to Section 1.3, we reserve the right to establish Franchised Businesses at any site we deem appropriate. We also reserve the right to sell related products and services in other channels of distribution. We reserve the right to offer, grant and support franchises in similar and other lines of business. We make no representation or warranty to you that there will be any right to participate in these franchises.

ARTICLE 2 - TERM AND RENEWAL

Section 2.1 Initial Term.

Except as otherwise provided in this Agreement, the term of this Agreement is 15 years beginning on the date of signing this Agreement; provided, however, that if you lease your business premises and if the lease agreement for your business premises is terminated before the expiration of the term of this Agreement, then we may, at our option, terminate this Agreement.

Section 2.2 Renewal Term. ,

You may, at our option, continue the Franchised Business for an additional 15-year term, or such period as remains in the lease (including ariy renewal options) underlying the initial term of this Agreement, if that period is less than 15 years, subject to the following conditions which must be met before each renewal period, unless and to the extent expressly waived in writing by us:

(a)          You must give us written notice of your election to renew this Agreement not less than 6 months before the end of the current term of this Agreement;

(b)          At least 6 months before the expiration of the current term of this Agreement, we will inspect the Franchised Business and give notice of all required modifications to the nature and quality of the products and services offered at the Franchised Business, your advertising, marketing and promotional programs, your financial and inventory control systems, and the maintenance, refurbishing, equipment upgrade and replacement, renovating and remodeling necessary to comply with our then current standards and specifications and with the requirements of the lease for the Franchised Business. If you elect to renew this Agreement, then you must complete, to our satisfaction, all required modifications, as well as adopt and implement any new methods, programs, modifications, techniques or operational systems required by our notice no later than 2 months before expiration of the current term of this Agreement;

(c)          You must not be in default of any term of this Agreement, any amendment of or successor to this Agreement, or any other agreement between you and us or our subsidiaries, affiliates and suppliers;

(d)          You have satisfied all monetary obligations owed by you to us and its subsidiaries, affiliates and suppliers;

(e)          You must sign our then current form of Franchise Agreement. The new Franchise Agreement supersedes in all respects this Agreement, the terms of which may differ from the terms of this Agreement, including the requirement of a higher percentage royalty fee and/or advertising contributions. In lieu of the then current Initial Franchise Fee, you are required to pay a renewal fee of 10% of the then current Initial Franchise Fee;

(f)           You and your approved General Manager must attend our then current qualification and training programs at your expense;

(g)          You, your shareholders, directors and officers must sign a general release, in a form we prescribe any claims against us and our subsidiaries and affiliates, and their respective officers, directors, agents and employees. You will not be required, however, to release us for violations of or failure to comply with federal or state franchise registration and disclosure laws;

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(h)         You must present evidence satisfactory to us that you have the right to remain in possession of the

premises where the Franchised Business is located for the duration of the renewal term;

(i)          Your operation and management of the Franchised Business must be in full compliance with the

System; and

(j)          You must maintain and be in good standing with all of its necessary and applicable licenses and

permits.

If any of the foregoing conditions to renewal have not been met at least 2 months before the expiration of the current term of this Agreement, then we have no obligation to renew this Agreement and will give you at least 30 days' prior written notice of our intent not to renew this Agreement, which notice will set forth the reasons for our refusal to renew.

ARTICLE 3 - OUR DUTIES

Section 3.1 Pre-Opening Obligations.

i Our duties before the opening of the Franchised Business are as follows:

(a)          Grant the right to use the trademark "Zero's Subs®" in connection with the Franchised Business and within your Exclusive Territory;

(b)          Designate an Exclusive Territory for the Franchised Business;

n.         (c)         Provide location research and site selection assistance including real estate and demographic

analysis, as we deem advisable, subject to the availability of personnel;

(d)          Assist in negotiation of the leaseor property purchase for the franchise;

(e)          Loan to you a single copy of pur confidential Manuals;, which will include guidelines and specifications for equipment, supplies, inventory, management and operation of the Franchised Business and which guidelines and specifications must be adopted by you. The Manuals are confidentialand remain our property. We may modify the Manuals from time to time, but these modifications will not alter your status and rights under this Agreement.

(f)           Loan to you: (i) a sample set of standard building plans and specifications and/or standard recommended floor plan; (ii) specifications of our requirements for design, decoration; layout, equipment, furniture, fixtures and signs for your Zero's Subs Franchise; and (iii) specifications for Zero's Subs uniforms for your employees. These items may be purchased from any approved supplier.

(g)          Provide you and a General Manager with a mandatory initial training program related to the operation of your Franchised Business subject to no additional fees above the Initial Franchise Fee. However, you are responsible for all costs of travel, lodging and meals while training takes place; and

(h)         Make available to you an On-Site Training Program of 80 hours which provides on-site assistance

both before and during the initial 2 weeks of operation of your Franchised Business at the location of the Franchised Business.

Section 3.2 Post-Opening Obligations.

Our obligations following the opening of the Franchised Business are as follows:

(a)         Provide general advisory assistance and field support we deem to be helpful you in the ongoing

operation, advertising and promotion of the Franchised Business.

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(b)          Continue efforts to establish and maintain high standards of quality, cleanliness, safety, customer satisfaction and service.

(c)          Provide you with updates, revisions and amendments to the Manuals.

(d)          Subject to the availability of our staff, provide management consulting services for special projects or assistance upon a mutually acceptable arrangement pertaining to fees and expenses.

(e)          Administer a National Advertising Fund, if we establish a Fund.

(f)           Coordinate and conduct periodic training programs for our network of Franchisees, as we deem necessary in our sole discretion.

(g)          On a periodic basis, conduct, as we deem advisable, inspections of the Franchised Business and its operations and evaluate the methods and staff employed by the Franchised Business.

(h)         For ah additional fee of $150/per day plus meal and travel expenses you may supplement the On-

site Training Program by having our field support training staff provide additional training at your location after the Franchised Business opens.

AH of our obligations under this Agreement are to you, and no other party is entitled to rely on, enforce or obtain relief for breach of these obligations either directly or by subrogation.

ARTICLE 4 - FEES

In consideration of the right and license to operate the Franchised Business granted in this Agreement, you will pay to us the following fees:

Section 4.1 Initial Franchise Fee.

The Initial Franchise Fee payable to us by you is $20,000 payable upon signing this Agreement. The Initial Franchise Fee is deemed fully earned upon receipt by us, and is hori-refundable.

Section 4.2 Royalty Fees.

You will pay to us a continuing non-refundable weekly royalty fee 5% of Gross Sales. The royalty fee is non-refundable and will be paid weekly and sent to us by electronic funds transfer due on Tuesday (for the preceding Sunday through Saturday period) or such other specific day of the week which we designate from time to time (the ~ "Due Date"). Before the opening of the Franchise, you will sign an Authorization; Agreement for Prearranged Payments (Direct Debits) of Royalty Fees by electronic transfer of funds frdm your bank account to our bank account, in the form attached as Attachment E. You will report to us by telephone, facsimile or e-mail, as may be reasonably directed by us, no later than 5:00 p.m. Monday (the "Reporting Date"), with such information and pursuant to such standard transmittal procedures regarding your Gross Sales and such additional information as we may request. We have the right to verify the royalty payments from time to time, as it deems necessary, in any reasonable manner. If you fail to have sufficient funds in the account or otherwise fail to pay any royalties due as of the Due Date, you owe a $50 penalty, and a late charge equivalent to 1!4% per month; however, you are not required to pay a late payment at a rate greater than the maximum interest rate permitted by applicable law.

Section 4.3 National Advertising Fund Contribution.

Pursuant to Section 10.2, we have established a National Advertising Fund pursuant to which you will be required to pay to us a continuing non-refundable weekly advertising contribution of up to 2% of your Gross Sales. The advertising fee is non-refundable and will be paid weekly and sent to us by electronic funds transfer due on Tuesday (for the preceding Sunday through Saturday period) or such other specific day of the week which we designate from time to time (the "Due Date"). Before the opening of the Franchise, you will sign an Authorization

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Agreement for Prearranged Payments (Direct Debits) of Advertising Fees by electronic transfer of funds from your bank account to our bank account, in the form attached as Attachment E. You will report to us by telephone, facsimile or e-mail, or as may be reasonably directed us no later than 5:00 p.m. on Monday (the "Reporting Date"), with such information and pursuant to such standard transmittal procedures regarding your Gross Sales and such additional information as we may request. We have the right to verify such advertising payments from time to time, as it deems necessary, in any reasonable manner. If you fail to have sufficient funds in the account or otherwise fails to pay any Advertising Fee due as of the Due Date, you owe a $50 penalty, and a late charge equivalent to VA% per month; however, you will not be required to pay a late payment at a rate greater than the maximum interest rate permitted by applicable law. We will deposit and disburse the amounts contributed in accordance with the provisions of ARTICLE 10 and any other guidelines or standards, which we may adopt. An advertising council composed of franchisees will be formed to advise us of advertising policies. After the first full year of operation of the Franchised Business, your contributions will be pre-calculated on the basis of the previous year's Gross Sales. You will be required to make contributions to the National Advertising Fund in addition to your obligation to conduct local marketing and promotion as set forth in Section 10.3 of the Franchise Agreement.

Section 4.4 Local Stqre Marketing Expenditures.

Pursuant to ARTICLE 10 and independent of any National Advertising Fund contributions, you will be required to make annual expenditures of at least 2% of your Gross Sales on local marketing and promotion. This local marketing and promotion, will be conducted by you either individually or in conjunction with other franchisees arid must comply with the policies and procedures established by us for prior approval of all proposed marketing and promotion campaigns and materials. You will be required to submit to us a report, on our form, that demonstrates that you have fulfilled the minimum requirement for local marketing and promotion. These local marketing and promotion requirements and fees exist independently of a National Advertising Fund.

SECTION4.5        TRANSFERFEEv

A non-refundable transfer fee equal to 30% of the then current initial franchise fee must be paid to us by you to cover our administrative and bther expenses in connection with'the transfer of the Franchised Business, unless the transfer is made by you to a corporation formed solely for the convenience of ownership: All transfers must be in accordance with the terms of this Agreement arid consistent with the transfer guidelines provided to you by us. This transfer fee must be fully paid before any such transfer. In addition, at the transferee's expense, the transferee, its Franchisee/General Manager, and shift supervisor must coiriplete any training programs then in effect for current Franchisees upon our reasonable terms and conditions. The transfer fee is non-refundable.

Section4.6 Training Expenses.

We provide you with a mandatory initial training program in restaurant operations and management for up to 2 persons during a training period of up to 6 weeks at Franchisor's training facility and administrative offices in Virginia Beach, VA. We require you to attend the initial training program before the opening of Frarichisee's first Franchised Business and will provide the initial training program, including curriculum materials, at no cost to Franchisee. However, you are solely responsible for your expenses and those of your employees during the training program including the costs of travel, lodging, meals, and the wages of your employees.

Section 4.7 Supplemental Training Fee.

If you request Supplemental Training you will pay us an additional fee of $150/per day plus meal and travel expenses for 3 to 7 days.

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Section 4.8

Public and Private Offering Prospectus Review Fee.

For each proposed offering by you, you must pay to us a non-refundable document review fee of $5,000 or such greater amount as may be required to reimburse us for our reasonable costs and expenses associated with reviewing the proposed offering materials, including legal and accounting fees.

Section 4.9 Management Consulting Fee.

You may retain us to provide management consulting services for special projects or assistance based upon availability of our personnel at the minimum rate of $200 and a maximum of $400 per person/per day plus reimbursement of all reasonable travel, lodging, meal and other expenses incurred by us in connection with the rendering of such services. We reserve the right to make reasonable adjustments from time to time to such daily rate at out discretion. These consulting fees are non-refundable and must be paid to us in advance.

Section 4.10 Costs of Major Alterations.

Once every 5 to 7 years, you will be required to make such major alterations to the restaurant as we may require at your expense.

Section 4.12 Manuals Replacement Fee.

If a Manual is lost, stolen or destroyed, you will be, required to pay to us a non-refundable replacement fee of $500 for each volume of the replacement Manual.:

Section 4.13 Renewal Fee. ,".

You must pay to us a non-refundable renewalfee upon the expiration of the initial term or any renewal term of this Agreement in order to renew this Agreement, the renewal fee is 10% of the then current initial franchise fee.

Section 4.14 Definition of Gross Sales.

"Gross Sales" is defined as all sales generated through the Franchised Business including fees for any and all services you perform, whether for cash or credit (regardless of collectibility), and billings of every kind related to the Franchised Business, including revenues from the sale of merchandise of proprietary products or clothing, catering, use of jukeboxes, vending machines, video games, pinball machines or similar arcade-like machines and from video lottery terminals; provided, however, that "Gross Sales' does not-include any sales tax or other taxes collected from customers by you for transmittal to the appropriate taxing authority.

ARTICLE 5-YOUR DUTIES

Section 5.1 Compliance with System.

You understand and acknowledge that every detail of the appearance and operation of the Franchised Business in compliance with the System is critical to us, you and other franchisees in order to:

(a)          Develop and maintain high and uniform operating standards;

(b)          Increase the demand for the products and services sold by franchisees; and

(c)          Protect the Proprietary Marks and the System, and our trade secrets, reputation and goodwill.

Section 5.2 Site Requirements.

(a)         The criteria that we use to evaluate the site selected include visibility, traffic count, demographics,

and local competition. We will approve or disapprove your proposed site within 10 days after receipt of all materials

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reasonably requested by us. If the Spectra analysis and demographics review are not favorable for a site, we will discourage you from selecting the site but the final decision is yours. You will have a period of 180 days after signing the Franchise Agreement to locate a site for the Franchised Business, to obtain our approval of the site and to sign the lease. We will be available from time to time, and at our sole discretion, to provide general site selection assistance to you. If you fail to find a suitable site we approve with this 180-day period, we may terminate your Franchise Agreement, refund to you the Initial Franchise Fee and neither party has any further obligation to the other except for those matters which expressly survive the termination of the Franchise Agreement including the obligation of confidentiality. The Franchisee must commence the operation of the Franchised Business within 120 days after signing the lease for the Franchised Business site.

(b)          We must approve the site and any lease of the Premises. You must deliver a copy of the final draft of the lease to us at least 10 days before signing. The Landlord, you, your Landlord and we must sign our form of Option for Assignment of Lease set forth as Attachment B the Franchise Agreement. You must agree not to sign or agree to any modification of the lease or sublease that would adversely affect our rights without our written approval.

(c)          You must commence the operation of the Franchised Business within 120 days after signing the lease for the Franchised Business site.

Section 5.3 Pre-Opening Requirements.

Before beginning any construction or leasehold improvements of the Franchised Business, you, at your expense, must comply with all of the following requirements; ;

(a)          You will have received determination of the site you selected for the operation of the Franchised Business and the lease for such site; in accordance with the terms of this Agreement. Such approval will be evidenced by our and your execution of the Site Selection Addendum, attached hereto as Attachment A;

(b)          The proposed site must be in compliance with all applicable local and state laws, regulations and ordinances including all zoning, signage and parking requirements;

(c)          You will employ a qualified general contractor or such other qualified person as we may approve in our absolute and sole discretion for the purposes of supervising the construction of the Franchised Business and ensuring the completion of all construction or leasehold improvements, and you must submit to us a statement identifying the general contractor and describing the general contractor's qualifications and financial responsibility; and

(d)          You must obtain all business licenses, permits and certifications required for lawful construction and ongoing operation of the Franchised Business (including zoning, access, variances, health and safety, and sign and fire requirements) and must certify in writing to us that all such licenses, permits and certifications have been obtained.

Section 5.4 Construction and Opening Requirements.

(a)         You must employ a qualified licensed architect or engineer to prepare a site plan and adopt the

standard building plans and specifications to the specific site and/or adapt the recommended floor plan to the Premises. You will completely construct and equip, at your expense, the Franchise Location in accordance with our standards and specifications. During the period of construction, you will provide to us such periodic progress reports as we may in our discretion require, signed by you and your general contractor, warranting that construction is proceeding on schedule and in accordance with the approved final plans and with all applicable laws, ordinances and regulations. We and our agents have the right to inspect the construction at all reasonable times. You must complete construction (including all exterior and interior carpentry, electrical, painting, and finishing work, and installation of all furnishings, fixtures, equipment, and signs) in accordance with the approved final plans, at your expense, within 120 days after the lease is signed, or sooner if required by the lease (exclusive of time lost by reason of strikes, lockouts, fire, and other casualties and acts of God). You will promptly notify us of the date of completion of construction and, within 10 days thereafter, we will conduct a final inspection of the restaurant and its premises. You

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will not open the Franchised Business without our express written authorization. Our authorization to open may be conditioned upon your strict compliance with all initial inventory, fixtures, furnishings, and equipment requirements.

(b)         You must open the Franchised Business for operation within 10 days after receipt of our written

authorization to open, provided that the Franchised Business has been fully staffed and that all employees have successfully completed training. The parties agree that time is of the essence in the construction and opening of the Franchised Business.

Section 5.5 Initial Training.

In accordance with the terms and conditions set forth in ARTICLE 3, you/General Manager, and Shift Supervisor must attend and complete, to our reasonable satisfaction, our mandatory initial training program at least 30 days before the opening of the Franchised Business. Any person employed as Franchisee's General Manager must attend and complete to our reasonable satisfaction this initial training program within 30 days of the General Manager's initial employment.

Section 5.6 Supervision Requirements.

:; For the first year from the date of the opening of the Franchised Business, the Franchised Business must at all times be under the direct, oh-premises supervision of you, your General Manager or an operating partner ("Operating Partner") designated by you and approved by us, who: (i) has attended and successfully completed our training program; and (ii) must devote his of her full time and energy during business hours to the supervision and management of the Franchised Business, unless otherwise exempted by permission of us.

Section 5.7 Ongoing Training. V

You will cause your employees (including any person subsequently acting as the General Manager of the Franchised Business) to attend and complete, tq bur reasonable satisfaction; all of our training and market development meetings as may be scheduled by us: Attendance by you or your Operating Partner and the General Manager of the Franchised Business is required. We will only provide arid pay for instruction and training materials in connection with such additional training. You and/or your Operating Partner and your employees will be responsible for any other expenses incurred in training.

Section 5.8 Operation of the Franchised Business.

You will use the Franchised Business solely for the operation of the Franchised Business in strict accordance with the Manuals; keep the Franchised Business open and in normal operation for such minimum hours and days as we may from time to time prescribe; and refrain at all times from using or permitting the use of the premises of the Franchised Business for any other purpose or activity other than as contemplated by this Agreement without first obtaining our written consent.

Section 5.9 Maintenance.

You will continuously maintain the Franchised Business in the highest degree of sanitation, repair and condition as we may reasonably require, and in that connection make all additions, alterations, repairs and replacements (but not without our prior written consent) as may be required for that purpose, including periodic redecorating, replacement of inventory and replacement of obsolete signs, fixtures or materials as we may reasonably direct, or as otherwise required under the lease for the Franchised Business.

Section 5.10 Health and Safety Standards.

You must meet and maintain the highest safety standards and ratings applicable to the operation and management of the Franchised Business and its personnel as we may reasonably require.

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Section 5.11 Working Capital.

You must meet and maintain sufficient levels of working capital for use in connection with the management and operation of the Franchised Business as we may reasonably require.

Section 5.12 Design Modifications.

At our request, you must refurbish the Franchised Business, at your expense, to conform to the then current Franchised Business design and decor, trade dress, color scheme and presentation of trademarks and service marks consistent with the design concepts then in effect for new Franchised Businesses licensed to operate under the System and in accordance with the Manuals, including structural changes, remodeling, redecoration and other modifications to existing improvements as we deem necessary. However, those modifications expected to cost $25,000 or more ("Major Design Modifications") will not be required to be performed more often than once every 7 years, unless required by: the lease for the Franchised Business. Those modifications expected to cost less than $25,000 (Minor Design Modifications") must be made by you at any time or frequency we demand.

Section 5.13 Compliance with Uniform Standards.

You must operate the Franchised Business in conformity with such uniform methods, standards and specifications as we may from time to time prescribe to ensure that the highest degree of product quality and service is uniformly maintained. You will conduct your business in a manner which reflects favorably at all times on the System and the Proprietary Marks. You will not engage in deceptive, misleading or unethical practices or conduct any other act that may have a negative impact on the, reputation and goodwill of us or any other franchisee operating under the System. Pursuant to this-ongoing responsibility, you agree to:

(a)          Maintain in sufficient supply as we may prescribe in the Manuals or otherwise in writing and use at all times only such products and supplies as conform to our standards and specifications as contained in the Manuals, and to refrain from deviating therefrom without our prior written consent;

(b)          Sell or offer for sale only such products and services as meet our uniform standards of quality, quantity and which have been expressly approved for sale in writing by us in accordance with our methods and techniques; to sell or offer for sale all approved items; to refrain from any deviation from our standards and specifications for serving or selling such products or services; and to discontinue selling and offering for sale any such products or services as we may, in our sole discretion, disapprove in writing at any time;

(c)          Lease or purchase and install at your expense all fixtures, furnishings, signs and equipment as we may reasonably specify from time to time in the Manuals or otherwise in writings and to refrain from installing or permitting to be installed on or about the Franchised Business without our prior written consent any fixtures, furnishings, signs, cards, promotional literature, equipment or other items not previously specifically approved as meeting our standards and conforming to our specifications;

(d)          Purchase and maintain any and all signs for use at the Franchised Business, whether for interior or exterior use, in conformity with our quality control standards and specifications;

(e)          Employ such minimum number of employees as may be prescribed by us and to comply with all applicable federal, state and local laws, rules and regulations with respect to such employees;

(f)           Maintain a competent, conscientious staff; and

(g)          Maintain all licenses and permits in good standing.

Section 5.14 Purchase and Lease of Products, Equipment and Supplies.

(a)         In order to maintain the uniformly high standards and reputation of the System, you will be

required to purchase or lease certain items either from us or the approved suppliers that meet our specifications.

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These specifications may include minimum standards for quality, quantity, delivery, performance, design, appearance, durability, style, warranties, price range and other related restrictions. All meat, special spice, design and build-out standards, signage, uniforms, displays, and inventory must be purchased from our approved supplier or us. You may obtain other products, including food, beverage, ingredients (other than the special spice), paper goods and standard equipment from any source that meets our specifications and approval. We consider these specifications to be of critical importance to the success of the System. The Manuals sets forth these specifications in further detail.

(b)         If you propose to purchase or lease any items not previously approved in writing by us, but which

you believe meet our quality control specifications, you must first notify us. We may require, among other things, submission of sufficient samples, specifications, photographs, drawings, and other related information to determine whether such items meet our specifications. We will advise you within a reasonable time whether the proposed supplier meets our specifications and our approval will not be unreasonably withheld. You will be notified in writing of our approval or disapproval and of revocation of approved suppliers. Suppliers must maintain our standards in accordance with our written specifications and any modifications thereto. Failure to correct a deviation from the System's specifications will result in termination of status as an approved supplier.

Section 5.15 Inspection of Premises.

You will permit us or our agents or representatives to enter upon the premises of the Franchised Business at any reasonable time for purposes of conducting inspections, taking photographs and interviewing employees and customers. You will cooperate fully with our agents or representatives in such inspections by rendering such assistance as they may reasonably request. Upon notice from us or our agents or representatives, and without limiting our other rights under this Agreement, you will take such steps as may be necessary to immediately and diligently correct any deficiencies detected during such inspections, including immediately ceasing and preventing the further use of any products, equipment, inventory,; advertising materials, supplies or other items that do not conform to our then current specifications, standards or requirements. If you fail or refuse to correct these deficiencies, we have the right to enter upon the premises of the Franchised Business, without being guilty of trespass or any other tort, for the purpose of making or causing to be made such corrections as may be required, at your sole expense, which you agree to pay upon demand.

Section5.16 Proprietary Methods.

You acknowledge and agree that we have developed certain products, services, operational systems and management techniques and may continue to develop additional products and proprietary methods and techniques for use in the operation of the Franchised Business which are all highly confidential and which are our trade secrets. Because of the importance of quality control, uniformity of product and the significance of such proprietary products in the System, it is to the mutual benefit of the parties that we closely control the dissemination of this proprietary information. Accordingly, you agree that if such information and techniques become a part of the System; you will comply and strictly follow these techniques in the operation of your business arid will purchase from lis or from an approved source designated us any supplies or materials necessary to protect and implement such techniques.

Section 5.17 Development of the Market.

You will at all times use your best efforts to promote and increase the sales and consumer recognition of the products and services offered at the Franchised Business pursuant to the System and the Manuals, to effect the widest and best possible distribution of our products and services from the Franchised Business and to devote your best efforts in controlling the Franchised Business, your managers, assistants and employees.

Section 5.18 Display of Proprietary Marks and Logos.

You will display our Proprietary Marks and logos at the Franchised Business, on uniforms and otherwise in the manner prescribed us. The color, design and location of said displays will be specified us and may be changed from time to time in our sole discretion. Specifically, you will conspicuously display to customers the sign or notice designated us which will serve to notify and inform third parties that we are engaged in the business of franchising

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and which will provide sufficient information to enable third parties to contact us to inquire about prospective franchises. You will not display any signs or posters at the premises or elsewhere without our prior written consent.

Section 5.19 Computerized Point-of-Sale and Information System.

You must purchase and maintain a Computerized Point-of-Sale and Information System. We reserve the right to poll (via modem) our franchisees' computer systems in order to compile sales data, consumer trends, food and labor costs, and other such financial and marketing information, as we may deem appropriate. We may distribute this data on a confidential basis to our franchisees.

Section 5.20 Other Requirements.

You will comply with all other requirements set forth in this Agreement, in the Manuals or as we may designate from time to time.

ARTICLE 6 - PROPRIETARY MARKS

Section 6.1 Grant of License.

We grant to you the right and license to use the "Zero's Subs®" mark and any logo derived therefrom in connection with the operation of your Franchised Business and the provision of services and products to your customers. We represent with respect to the Proprietary Marks that we: (1) have, to the best of our knowledge, all rights, title and interest in and to the Proprietary: Marks; (2) have taken and continue to take all steps which we deem reasonably necessary to preserve and protect the ownership and validity of the Proprietary Marks; and (3) will use and license you and other franchisees to use the Proprietary Marks only in accordance with the System and the operating standards and quality control specifications attendant thereto which underlie the goodwill associated with and symbolized by the Proprietary Marks.

Section 6.2 Conditions for Use.

With respect to your use of the Proprietary Marks pursuant to the licensed granted under this Agreement, you agree that:

(a)          You will use only the Proprietary Marks designated us and will use them only in the manner required or authorized and permitted us.

(b)          You will use the Proprietary Marks only in connection with the right and license to operate the Franchised Business.

(c)          During the term of this Agreement and any renewal, you will identify yourself as a licensee and not the owner of the Proprietary Marks and will make any necessary filings under state law to reflect such status. To the extent feasible, you will identify yourself as a licensee of the Proprietary Marks on all invoices, order forms, receipts, business stationary and contracts, as well as at the Franchised Business on a sign provided iis that is conspicuously displayed to customers.

(d)          Your right to use the Proprietary Marks is limited to such uses as are authorized under this Agreement or in the Manuals, and any unauthorized use thereof constitutes an infringement of our rights and grounds for termination of this Agreement.

(e)          You will not use the Proprietary Marks to incur or secure any obligation or indebtedness.

(f)           You will not use the Proprietary Marks as part of your corporate or other legal name.

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(g)         You will comply with our instructions in filing and maintaining the requisite trade name or

fictitious name registrations, and will execute any documents deemed necessary us or our counsel to obtain protection for the Proprietary Marks or to maintain their continued validity and enforceability.

(h)         If you become aware of any infringement of the Proprietary Marks, or if your use of the

Proprietary Marks is challenged by a third party, then you are obligated to immediately notify us, and we have the sole discretion to take such action as we deem appropriate. If we determine that no action to protect the Proprietary Marks is necessary, then you may take any action it deems necessary to protect your own interest, at your own expense. If it becomes advisable at any time in our sole discretion to modify or discontinue the use of any name or mark and/or use one or more additional or substitute names or marks, you will modify or discontinue the use of any such name or mark, and use such additional or substitute name or mark, and will be responsible for the tangible costs (such as replacing signs and materials) of complying with this obligation. If litigation alleging that the Proprietary Marks infringe a third party's rights is instituted or threatened against you, you will promptly notify us and will cooperate fully in defending or settling such litigation

(i)          We indemnify you against and will reimburse you for all damages you are held liable in any

proceeding from your use of the Proprietary Marks in accordance with this Agreement, but only if you: (a) have timely notified us of the claim or proceeding; (b) have otherwise complied with this Agreement; (c) allow us sole eontrol of the defense and settlement of the action; and (d) cooperate fully with us and our counsel in the defense of the action.

Section 6.3 Acknowledgments.

You expressly understand and acknowledge that:

(a)          We own all rights, title and interest in and to the Proprietary Marks and the goodwill associated with and symbolized by them;

(b)          The Proprietary Marks are valid and serve to identify the System and those who are licensed to operate a Franchised Business in accordance with the System;

(c)          Your use of the Proprietary Marks pursuant to this Agreement does not give you any ownership interest or other interest in, or to the Proprietary Marks, except the non-exclusive license granted in this Agreement;

(d)          Any and all goodwill arising from your use of the Proprietary Marks and/or the System inures solely and exclusively to our benefit, and upon expiration or termination of this Agreement no monetary amount will be assigned as attributable to any goodwill associated with your use of the System or the Proprietary Marks;

(f)             The license and rights to use the Proprietary Marks to you are non-exclusive, and we thus may: (i) use, and grant franchises and licenses to others to use the Proprietary Marks and the System; (ii) establish, develop and franchise other systems different from the System licensed to you without offering or providing you any rights in, to or under such other system; and (iii) modify or change, in whole or in part, any aspect of the Proprietary Marks or the System so long as your rights are in no way materially harmed;

(g)          We reserve the right to substitute different trade names, trademarks and service marks for use in identifying the System, the Franchised Business and other Franchised Businesses operating, all of which will become Proprietary Marks;

(h)         We will have no liability to you for any senior users that may claim rights to the Proprietary

Marks; and

(i)          You will not register or attempt to register the Proprietary Marks in your name or that of any other

person, firm, entity or corporation.

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ARTICLE 7 - CONFIDENTIAL MANUALS

Section 7.1 Compliance.

In order to protect our reputation and goodwill and to maintain uniform standards of operation in connection with the Proprietary Marks, you will conduct your business in strict compliance with the operational systems, procedures, policies, methods and requirements prescribed in the Manuals and any supplemental bulletins, notices, revisions, modifications or amendments thereto, all of which will be deemed a part of this Agreement. One registered set of the Manuals will be provided to you on loan from us during the training program, and you will sign a corresponding receipt for the Manuals.

Section 7.2 Use.

You agree to immediately adopt and use the programs, services, methods, standards, materials, policies and procedures set forth in the Manuals, as they may be modified us from time to time. You acknowledge that we are the owner or licensee of all proprietary rights in, and to the System, and the Manuals, and any changes or supplements.

Section 7.3 Confidentiality.

You will at all times treat the Manuals, any other manuals created for or approved for use in the operation of the Franchised Business and all of the information contained in the Manuals as proprietary and confidential, and will use all reasonable efforts to maintain such information as confidential. The Manuals must remain on the premises of the Franchised Business at all times.

Section 7.4 Trade Secrets;

You acknowledge, know and agree that designated portions of the Manuals are "trade secrets" owned and treated as such by us.

Section 7.5 Access.

The trade secrets must be accorded maximum security consistent with your need to make frequent reference thereto. You will strictly limit access to the Manuals to employees who have a demonstrable and valid need to know the information contained therein in order to perform their duties. You will strictly follow any provisions in the Manuals regarding the care, storage and use of the Manuals and all related proprietary information.

Section 7.6 Duplication.

You will not at any time, without our prior written consent, copy, duplicate, record or otherwise reproduce in any manner any part of the Manuals, updates, supplements or related materials, in whole or in part, or otherwise make the same available to any unauthorized person.

Section 7.7 Our Property.

The Manuals will at all times remain our sole property. Upon the expiration or termination of this Agreement for any reason, you will return to us the Manuals and all supplements thereto.

Section 7.8 Updates or Revisions.

We retain the right to prescribe additions to, deletions from or revisions to the Manuals, which become binding upon you upon being mailed or otherwise delivered to you, as if originally set forth in this Agreement. The Manuals, and any such additions, deletions or revisions thereto, will not alter your rights and obligations under this Agreement.

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Section 7.9

Master Set.

You will at all times insure that its set of the Manuals is kept current and up-to-date, and upon any dispute as to the contents of the Manuals, the terms contained in the master set (#0001) of the Manuals maintained us at our headquarters will be controlling.

Section 7.10 Replacement Fee.

If the Manuals are lost, stolen or destroyed, you will pay us a non-refundable replacement fee of $1,000 for each volume of the replacement Manual.

ARTICLE 8 - CONFIDENTIAL INFORMATION

Section 8.1 Confidential Relationship.

The parties expressly understand and agree that the relationship established between us and you by this Agreement is one of confidence arid trust, and that as a result, We will be disclosing and transmitting to you certain trade secrets and other confidential and proprietary information concerning various aspects of your operation of the Franchised Business, its methods of operation, techniques and all proprietary systems, procedures and materials relevant thereto pursuant to the System and this Agreement.

Section 8.2 Obligations of Franchisee.

In order to preserve and protect the trade secrets and the confidential and proprietary information (the "Confidential Information") which are disclosed to you during the term of this Agreement, you agree that:

(a)          You will treat and maintain the Confidential Information as confidential both during the term of this Agreement and thereafter;

(b)          You will use the Confidential Information only for the operation of the Franchised Business under this Agreement;

(c)          You will disclose the Confidential Information only as necessary to your employees or agents who have a demonstrable and valid need to know the Confidential Information and not to anyone else;

(d)          You will restrict disclosure of the Confidential Information to only those employees or agents who are directly connected with the performance of work requiring knowledge thereof and will disclose only so much of the Confidential Information as is required to enable those employees or agents to carry out their assigned duties;

(e)          You will advise your employees or agents of the confidential nature of the information and the requirements of nondisclosure thereof; and

(f)           You and we will conduct a review to determine which employees will have access to the Confidential Information and to the Manuals. You will not disclose any Confidential Information or provide access to the Manuals to an employee or agent until that person signs a nondisclosure agreement in a form prescribed us, acknowledging the confidential and proprietary nature of the Confidential Information and agreeing not to disclose such information during the course of employment or thereafter. We will be designated a third-party beneficiary of the nondisclosure agreements with the right to enforce its provisions independently of you.

Section 8.3 Confidential Information Defined.

Any information, knowledge, know-how, systems, programs and other methods and techniques which we designate as confidential will be deemed Confidential Information for purposes of this Agreement, except information which you can demonstrate came to your attention before its disclosure by us or which, at the time of its disclosure by us to you, had become a part of the public domain through publication or communication by others or

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which, after disclosure to you by us, becomes a part of the public domain through publication or communication by others. It is understood and agreed that information, improvements to the System or techniques prepared, compiled or developed by you, your employees or agents during the term of this Agreement and relating to the Franchise Business, whether developed separately or in conjunction with us, will be considered as part of the Confidential Information. You grant to us an irrevocable, worldwide, exclusive, royalty-free license, with the right to sub-license the information, improvement or technique.

Section 8.4 Protection of Information.

You acknowledge that you have knowledge of confidential matters, trade secrets, management and training techniques, operational, accounting, quality control procedures, programs and other methods developed by us through and in our System which, for purposes of this Agreement, are owned by us and which are necessary and essential to the operation of the Franchised Business, without which information you could not efficiently, effectively and profitably operate the Franchised Business. You further acknowledge that the Confidential Information was unknown to you before negotiation for, and signing of this Agreement and that the unique and novel combination of "know how" and methods developed by us and licensed to you by us for the operation of the Franchised Business are peculiar to us. You will take all steps necessary, at your expense, to protect the Confidential Information and will not divulge the Confidential Information either during or upon the termination of this Agreement without the our prior written consent.

Section 8.5 Remedies

You acknowledge that, in addition to any remedies available to us under ARTICLE 13, we may attempt to obtain a temporary restraining order and/or an injunction against violation of the requirements of this ARTICLE.

Section 8.6 Communication with Customers.

In order to maintain the high standards of quality control throughout the System, we reserve the right to use test customers from time to time, without prior notification to you, in order to determine whether the Franchised Business is maintaining high standards of quality, integrity, safety, appearance and customer service.

ARTICLE 9 - ACCOUNTING, INSPECTIONS AND RECORDS

Section 9.1 Maintenance of Books and Records.

You will maintain during the term of this Agreement and will preserve for not less than 5 years from the date of preparation full, complete and accurate books, records and accounts in accordance with the System and in the form and manner prescribed us in the Manuals or otherwise in writing from time to time.

Section 9.2 Franchisee Reports

(a)          Weekly Royalty Reports. You must prepare and send to us a Weekly Royalty Report (the "WRR"). Each WRR will cover a period from the preceding Sunday through Saturday of the preceding week. The reports on the reported sales must be telephoned, facsimile or e-mailed on or before 5:00 p.m. on the Monday (the "Reporting Date") following the end of the reporting period. The WRR will report the Gross Sales to our corporate office and other such information from which the Royalty Fee and Advertising Contributions are calculated for the preceding week. Each WRR will be in the form and format prescribed by us, setting further certain information as requested by us. All WRRs received by us will be treated as confidential information, and will not be made available to any third party without your and our consent. If you fail to report Gross Sales by the Reporting Date, we will draft your account the minimum of $200 per week for Royalties and $100 for Advertising Fees; greater if we reasonably estimate that the franchise location is generating higher Gross Sales.

(b)          Monthly Reports. Within 15 business days after the end of each month, an income statement of your Restaurant for the month and for the fiscal year to date, prepared in accordance with generally accepted

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accounting principles ("GAAP") consistently applied, in our recommended format if such statements are available; and

(c)         Annual Financials. Within 90 days after the end of your fiscal year, which will be the calendar

year, an income statement and balance sheet of your Restaurant for the fiscal year (reflecting all year-end adjustments), and a statement of changes in cash flow of the Restaurant, prepared in accordance with GAAP, consistently applied, and in our recommended format as well as copies of your federal and state tax returns. We reserve the right to require that you have reviewed financial statements prepared on an annual basis.

Section 9.3 Other Submissions.

You will also submit to us, for review and auditing, such other forms and other reports, including annual accounting of local advertising expenditures and any and all other information and data as we may reasonably designate, in the form and at the times and places reasonably required us, upon request and as specified from time to time in the Manuals or otherwise in writing, at any time during the term of this Agreement.

Section 9.4 Inspection.

We or our designated agents have the right at all reasonable times to examine and copy, atyour expense, your books, records, receipts and tax returns. We also have the right, at any time, to have an independent audit made of your books. If an inspection reveals that any payments to us have been understated in any report to us, then you will immediately pay to us, upon demand, the amount understated plus interest calculated at the Default Rate on a daily basis. If any inspection discloses an understatement in any report of 2% or more, you will, in addition to the payment of interest thereon, reimburse us for any and all costs and expenses connected with the inspection (including reasonable accountants' and attorneys' fees); The foregoing remedies will be in addition to any other remedies available to us.                                                                                           . ,

ARTICLE 10 - ADVERTISING

Recognizing the value of advertising, arid the importance of the standardization of advertising programs to the furtherance and protection of the Proprietary Marks, goodwill and public image of the System, the parties agree as follows:

Section 10.1 Submission and Approval of Promotional and Marketing Materials.

All promotional and marketing materials to be used by you in any medium will be presented in a dignified manner and will conform to such standards and requirements as we may specify from time to time in the Manuals or otherwise. You will submit to us for our written approval, samples of all promotional and marketing materials in whatever form that you desire to use at least 10 days before their insertion. We have 72 hours frorii the time of receipt of the materials to approve, disapprove, or revise the materials. You will comply with all revisions to the promotional and marketing materials that we may require before approving the promotional and marketing materials. You will not use any advertising or promotional plans or materials that have not been approved by us in writing, and you will cease to use any plans or materials promptly upon notice us. Your failure to obtain our written approval of all proposed advertising is a default of this Agreement in accordance with Section 13.2.

Section 10.2 National Advertising Fund Contribution.

(a)         We have established a National Advertising Fund (the "Fund"). You will pay to us a continuing,

non-refundable, weekly contribution of 2% of your Gross Sales for the preceding week for advertising, marketing and promotional programs. We have established a direct debit program to facilitate payments to the Fund. The advertising sums paid by you will be maintained in an account separate from our operating monies. Upon your request, we will annually account for advertising funds expended, including a reasonable allocation for our overhead expenses incurred in connection with administration and management of the Fund. It is understood and agreed that

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we will allocate advertising funds as we deem appropriate. The allocation of the advertising fees will be applied to the DMA for a territory in which you are located.

(b)          The Fund will be administered entirely by us, and we have the right to allocate advertising funds to specific regions and apportion expenditures as we see fit. Some of the factors considered by us in making allocations include advertising benefits from other markets, competitive pressure and estimated market capabilities, and specific local market opportunities. You will not necessarily receive a significant direct benefit from the allocation of advertising funds and we are not required to spend any amount on advertising in the area where your Franchised Business is located.

(c)          If all of the advertising fees are not spent in the fiscal year in which they accrue, they will remain in the Fund for use during the following year. However, advertising funds may not be used for the solicitation of other franchisees.

(d)          If Company Units are established, they will be required to contribute to the Marketing Fund and any Cooperative on the same basis as franchisees.

Section 10.3 Local Store Marketing Expenditures.

Independent of any National Advertising Fund contributions, you will be required to make annual expenditures of at least 2% of your Gross Sales on local marketing and promotion. This local marketing and promotion will be conducted by you either individually or in conjunction with other franchisees and must comply with the policies and procedures we establish for prior approval of all proposed marketing and promotion campaigns and materials. You are required to submit to lis a report, on a form we prescribe, that demonstrates that you have fulfilled the minimum requirement for local marketing and promotion. These local marketing and promotion requirements and fees exist independently of the National Advertising Fund.

ARTICLE 11-INSURANCE

Section ll.l Procurement.

You will procure, before beginning any operations under this Agreement, and thereafter maintain in full force and effect during the term of this Agreement, at your expense, an insurance policy or policies protecting you and us, and our officers, directors, partners and employees, against any loss, liability, personal injury, death, property damage or expense whatsoever from fire, lightning, theft, vandalism, malicious mischief and die perils included in the extended coverage endorsement, arising or occurring upon or in connection with the Franchised Business or the construction of or leasehold improvements to the Franchised Business, or by reason of the operation or occupancy of the Franchised Business, as well as such other insurance applicable to such other special risks, if any, as we may reasonably require for our own and your protection. You will be obligated to procure the insurance and to submit certificates of insurance to us 30 days before the opening to the public of the Franchised Business.

Section 11.2 Minimum Coverage.

The policy or policies must be written by an insurance company satisfactory to us in accordance with the standards and specifications set forth in the Manuals or otherwise in writing, and will include, at a minimum (except as additional coverage and higher policy limits may reasonably be specified from time to time us in the Manuals or otherwise in writing) the following:

(a)          Comprehensive general liability insurance, including contractual liability, broad form property damage, personal injury, advertising injury, product liability, completed operations and independent contractors coverage, and fire damage coverage in the amount of $1,000,000, or higher amount as required by the least, combined single limit, and naming us as an additional insured in each policy or policies;

(b)          Worker's compensation and employer's liability insurance as well as such other insurance as may be required by statute or rule of the state in which the Franchised Business is located and operated;

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(c)          Fire, vandalism and extended coverage insurance with primary and excess limits of not less than the full replacement value of the Franchised Business and its furniture, fixtures and equipment; and

(d)          Business interruption insurance in amounts equal to at least the average monthly royalties, Advertising Fund Contributions and Local Store Marketing deposits payable to us, but not less than $100,000 annual coverage.

Section 11.3 Construction Coverage.

In connection with any construction, leasehold improvements, renovation, refurbishment or remodeling of the premises of the Franchised Business, you will cause the general contractor to maintain with a reputable insurer comprehensive general liability insurance (with comprehensive automobile liability coverage for both owned and non-owned vehicles, builder's risk, product liability and independent contractors coverage) in at least the amount of $1,000,000 with us named as an additional insured, and worker's compensation and employer's liability insurance as required by state law. A copy of the certificate of insurance for worker's compensation coverage will be provided to us.

Section 11.4 Certificates.

At least 30 days' before the grand opening of the Franchised Business and on each policy renewal date thereafter, you will submit to us a certificate of insurance evidencing the required coverage. The evidence of insurance will include a statement by the insurer that the policy will not be canceled or materially altered without at least 30 days'prior written notice to us.

Section 11.5 Independence Of Coverage Requirements.

Your obligation to obtain and maintain the foregoing policy or policies in the amounts specified will not be limited in any way by reason of any insurance which may be maintained us, and your performance of that obligation will not relieve you of liability under the indemnity provision set forth in ARTICLE 17.

SectionII.6 Failure to Procure.

Should you for any reason fail to procure or maintain the insurance required by this Agreement, as revised from time to time for all franchisees by the Manuals or otherwise in writing, we have the right and authority (without, however, any obligation) to immediately procure the insurance and to,charge the cost to you; which costs, together with a reasonable fee for our expenses in so acting, including all attorneys' fees, will be payable by you immediately uponnotice.

Section 11.7 Third Parties.

You will ensure that all third parties with which you conduct business are properly insured.

ARTICLE 12 - TRANSFER OF INTEREST

Section 12.1 Transfer by Franchisor.

We have the right to assign this Agreement, and all of its rights and privileges, to any person, firm, corporation or other entity provided that, with respect to any assignment resulting in the subsequent performance by the assignee of our functions under this Agreement: (i) the assignee will, at the time of assignment, be capable of performing our obligations, and (ii) the assignee expressly assumes and agrees to perform our obligations beginning on the transfer date. Specifically, you expressly agree that we may sell our assets, our rights to the Proprietary Marks and the System outright to a third party; may go public; may engage in a private placement of some or all of our securities; may merge, acquire other corporations, or be acquired by another corporation; may undertake a refinancing, recapitalization, leveraged buy-out or other economic or financial restructuring. Nothing contained in

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this Agreement requires us to remain in the restaurant services business or to offer the same products and services, regardless of whether they bear our Proprietary Marks, if we exercise the right to assign our rights in this Agreement.

Section 12.2 Transfer by Franchisee.

(a)         Neither you, any immediate or remote successor to any part of your interest in the Franchised

Business, any individual, partnership, corporation or other legal entity which directly or indirectly controls you, if you means a corporation, nor any general partner or any limited partner (including any corporation which controls, directly or indirectly, any general or limited partner) if you means a partnership, will sell, assign, transfer, convey, give away, pledge, mortgage or otherwise encumber any direct or indirect interest in you or in the Franchised Business without our prior written consent provided, however, that our prior written consent is not required for a transfer of less than a 5% interest in a publicly held corporation or for transfer to a wholly owned corporation you formed expressly for this purpose. For these purposes, and under this Agreement in general, a publicly held corporation is a "Reporting Company" as defined by the Securities Exchange Act of 1934. You must notify us in writing at least 60 days before the date of the intended assignment. Any purported assignment or transfer, by operation of law or otherwise, without our written consent is null and void and constitutes a material breach of this Agreement, for which we may then terminate without opportunity to cure pursuant to Section 13.1 of this Agreement.

(b): ' We will riot unreasonably withhold our consent to a transfer of any interest in you or in this Agreement. If, however, a transfer, alone or together with other previous, simultaneous or proposed transfers, will have the effect of transferring a controlling interest in the Franchised Business, we may, in our sole discretion, require any of all of the following as conditions of our approval:

(i)          All of your accrued monetary obligations and all other outstanding obligations to us, our

subsidiaries, affiliates and suppliers will be up to date, fully paid and satisfied;

(ii) You are not in default of any term of this Agreement, any amendment or successor, any other franchise agreement or other agreement between you and us,i or our subsidiaries, affiliates or suppliers;

(iii) You and each of your partners, shareholders, officers and directors must sign general release under seal, in a form satisfactory to us, of any claims against us and our officers, directors, shareholders and employees in their corporate and individual capacities, including claims arising under federal, state and local laws, rules and ordinances; provided, however, that you are not required to release us for violations of federal and state franchise registration and disclosure laws including the Maryland Franchise Registration and Disclosure Law;

(iv) The transferee must demonstrate to our satisfaction that the transferee meets our educational, managerial and business standards; possesses a good moral character, business reputation and credit rating; has the aptitude and ability to operate the Franchised Business (as may be evidenced by prior related experience, our testing criteria or otherwise); has at least the same managerial and financial criteria required of new franchisees; and will have sufficient equity capital to operate the Franchised Business;

(v)         The transferee must enter into a written assignment, under seal and in a form satisfactory

to us, assuming and agreeing to discharge all of your obligations under this Agreement. If the transferee is not an individual, then the shareholders, partners or other owners of the transferee must jointly and severally guarantee your obligations under this Agreement in writing in a form satisfactory to the Franchisor;

(vi) At our option, the transferee must sign (and/or, upon Franchisor's request, will cause all interested parties to sign) for a term ending on the expiration date of this Agreement and with the renewal term as may be provided by this Agreement, the standard form of Franchise Agreement then being offered to new franchisees and such other ancillary agreements as we may require for the Franchised Business, which agreements supersede this Agreement in all respects and the terms of which agreements may differ from the terms of this Agreement, including a higher percentage royalty fee and advertising contributions and the implementation of other fees;

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(vii) The transferee must upgrade, at the transferee's expense, the Franchised Business to conform to the then current specifications then being used in new Franchised Businesses, and will complete the upgrading and other requirements within the time we specify;

(viii) You will remain liable for all direct and indirect obligations to us in connection with the Franchised Business before the effective date of the transfer, but will continue to remain responsible for your obligations of nondisclosure, noncompetition and indemnification as provided elsewhere in this Agreement and will sign any instruments we reasonably request to further evidence this liability;

(ix) At the transferee's expense, the transferee and his or her Franchisee/General Manager, and Shift Supervisor will complete any training programs then in effect for current franchisees upon such terms as we may reasonably require unless the managers and employees have been trained previously by us;

(x) The transferee must have signed an Acknowledgment of Receipt of all required legal documents, such as the then current Franchise Offering Circular and the then current Franchise Agreement and ancillary agreements;

(xi) The transferor will pay to us a transfer fee equal to 30% of the then current initial franchise fee to cover our administrative expenses in connection with the proposed transfer; and

(xii) The transferor must provide us with a copy of the agreements of purchase and sale between the transferor and the transferee. The terms and price of the proposed transaction between the transferor and a transferee will be fair and reasonable in the sole discretion and based upon our good faith judgment. NOTE: THIS RIGHT OF APPROVAL WILL NOT CREATE ANY SPECIAL LIABILITY OR DUTY ON OUR PART TO THE PROPOSED TRANSFEREE.

(c)         You will not grant a security interest in the Franchised Business or in any of its assets unless the

secured party agrees that upon the occurrence of an event of default by you under any documents related to the security interest, we have the right and option to be substituted as the obligor to the secured party and to cure any default of you. Notwithstanding the foregoing, we will not be construed as your guarantor or surety.

(d). You acknowledge and agree that each of the foregoing conditions of transfer that must be met by you and/or the transferee are necessary and reasonable to assure the transferee's full performance of your obligations under this Agreement.

Section 12.3 Additional Requirements - Corporate Franchisees.

The following requirements will apply to you if you form a corporation, in addition to those requirements set forth elsewhere in this Agreement, the Manuals or otherwise:

(a)          You must be newly organized and its Articles of Incorporation will at all times provide that its activities are confined exclusively to operating the Franchised Business or other approved businesses.

(b)          The Articles of Incorporation, Bylaws and other governing documents, and any amendments thereto, including the resolutions of the Board of Directors authorizing entry into this Agreement, will be promptly furnished to us.

(c)          Each stock certificate of the Corporation issued to shareholders in the Franchised Business will have conspicuously endorsed upon its face a statement in a form satisfactory to us, such as:

"THE TRANSFER, PLEDGE OR ALIENATION OF THIS STOCK IS SUBJECT TO THE TERMS AND RESTRICTIONS CONTAINED WITHIN THE FRANCHISE AGREEMENT BETWEEN ZERO'S, MR. SUBMARINE, INC. AND                                                               ."

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The original documents were scanned as an image. The original file can be downloaded at the link above.