Development Agreement

COMPACT DISCS INTERNATIONAL, LTD.



d/b/a



CD WAREHOUSE



DEVELOPMENT AGREEMENT



TABLE OF CONTENTS



SECTION PAGE - ------- ----



1. Certain Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2. Development Rights and Obligations. . . . . . . . . . . . . . . . . . . 3 3. Grant of Franchises to Developer. . . . . . . . . . . . . . . . . . . . 4 4. Initial Payments. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 5. Confidential Information. . . . . . . . . . . . . . . . . . . . . . . . 6 6. Covenants of Non-Competition. . . . . . . . . . . . . . . . . . . . . . 8 7. Proprietary Marks . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 8. Obligations of Developer. . . . . . . . . . . . . . . . . . . . . . . . 11 9. Transfer of Interest. . . . . . . . . . . . . . . . . . . . . . . . . . 12 10. Termination of Agreement. . . . . . . . . . . . . . . . . . . . . . . . 17 11. Obligations Upon Termination and Expiration . . . . . . . . . . . . . . 19 12. Independent Contractor and Indemnification. . . . . . . . . . . . . . . 21 13. Representations and Warranties of Corporate and Partnership Developers. 23 14. Entire Agreement, Modifications . . . . . . . . . . . . . . . . . . . . 24 15. Waiver of Obligations . . . . . . . . . . . . . . . . . . . . . . . . . 24 16. Force Majeure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 17. Rights and Remedies are Cumulative. . . . . . . . . . . . . . . . . . . 25 18. Injunctive Relief . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 19. Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 20. Payment of Obligations Owed to Franchisor, Costs and Attorneys Fees . . 27





21. Governing Law and Consent to Jurisdiction . . . . . . . . . . . . . . . 27 22. Notices and Payments. . . . . . . . . . . . . . . . . . . . . . . . . . 27 23. Severability and Construction . . . . . . . . . . . . . . . . . . . . . 28 24. Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29



GUARANTY



Exhibit A - Development Areas



Exhibit B - Franchise Fee Schedule



Exhibit C - Statement of Ownership Interests



Exhibit D - Lease Addendum



Exhibit E - Franchise Agreement













































C.D. WAREHOUSE

DEVELOPMENT AGREEMENT



THIS AGREEMENT is made and entered into by and between Compact Discs International, Ltd., a Texas limited partnership ("Franchisor"), and _______________________, ("Developer").



W I T N E S S E T H:

-------------------



WHEREAS, Franchisor, as the result of the expenditures of time, skill, effort and money, has developed a system for the operation of businesses which specialize in the sale of new and used compact discs;



WHEREAS, the distinguishing characteristics of the System include, without limitation, distinctive exterior and interior design, exterior and interior signage, color scheme and fixtures; uniform standards, know-how and procedures for the acquisition and sale of new and used compact discs; inventory, management and financial control methods; and training and assistance, all of which may be changed, improved and further developed by Franchisor from time to time;



WHEREAS, Franchisor identifies the System by means of certain trade names, service marks, trademark and logos, including, without limitation, the mark "C.D. Warehouse" and such other trade names and trademark as Franchisor may develop in the future for the purpose of identifying for the public the source of services and products marketed under such marks and the System and representing the System's high standards of quality, appearance and service (collectively, "Proprietary Marks"); and



WHEREAS, Developer desires to use the System to develop and operate one or more Stores, at the locations specified herein, upon the terms and subject to the conditions hereinafter set forth;



NOW THEREFORE, in consideration of the premises and of the mutual undertakings, obligations and commitments contained herein, it is agreed between the parties as follows:



1. CERTAIN DEFINITIONS



For purposes of this Agreement, the terms listed below have the meanings that follow them. Other terms used in this Agreement are defined and construed in the context in which they occur.



AFFILIATE. Any person, entity or company that directly or indirectly owns or controls Franchisor, that is directly or indirectly owned or controlled by Franchisor, or that is under common control with Franchisor. As used herein, the term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of an entity, whether through ownership of voting securities, by contract, or otherwise.





AUTHORIZED ENTITY. An entity controlled by Developer which meets Franchisor's then current standards and requirements for franchise owners, including without limitation financial requirements and limits on the total number of holders of equity interests and requirements for owners of non-controlling ownership interest. For the purposes of this definition, an entity shall be deemed to be controlled by Developer if and only during such times as: (i) Developer owns a minimum of fifty percent (50%) of all classes of equity interests in such entity (including without limitation both general and limited partnership interests and common and preferred stock); (ii) if the entity is a corporation, Developer has at least the percentage of voting power required under applicable law to authorize a transfer of substantially all of the assets of a corporation; (iii) if the entity is a limited partnership, Developer is the sole general partner of the limited partnership; (iv) if the entity us a general partnership, Developer is the managing general partner of the general partnership; and (v) Developer establishes to the satisfaction of Franchisor that Developer has, and during the term of the Franchise Agreement of the Stores to be owned and operated by such entity, will have the right and power to control the operation of such Stores and the sale or other disposition of such Stores.



DEVELOPMENT AREA. The geographic area described in Exhibit A to this Agreement.



DEVELOPMENT PERIOD. Each period of time defined as a Development Period in Exhibit A to this Agreement.



DEVELOPMENT QUOTA. The number of Stores indicated in Exhibit A hereto that Developer is obligated to Develop within a Development Area.



DEVELOPMENT SCHEDULE. The schedule Developer is obligated to meet for the development of Stores within a Development Area, until Developer has satisfied its Development Quota within such Development Area.



FRANCHISE AGREEMENT. The then current form of franchise agreement (including any attachments, exhibits, riders, collateral assignments of lease or sublease, guarantees and any other agreements used in connection therewith) used by Franchisor in the offering and granting of a franchise for the ownership and operation of a Store pursuant to Franchisor's standard form of development agreement. A copy of such franchise agreement is attached hereto as Exhibit E.



OWNERS. All persons or entities holding ownership interests in Developer. As used herein, this term also includes any person who has direct or indirect community property rights in Developer or this Agreement and any person or entity which has any legal or equitable interest in the revenue, profits, rights or assets thereof.



PRINCIPAL OWNERS. Each Owner having an equity ownership interest in Developer of five percent (5%) or more (regardless of whether such Owner is entitled to vote thereon), and any other Owner designated as a Principal Owner in Exhibit C of this Agreement.



STORES. Retail businesses known as "C.D. Warehouse" stores which specialize in the sale of new and used compact discs.







2. DEVELOPMENT RIGHTS AND OBLIGATIONS



A. TERM OF AGREEMENT



Subject to the provisions contained herein, this Agreement shall be for a term commencing on the date hereof and expiring on the earlier of (1) the last day of the last Development Period set forth in Exhibit A to this Agreement, or (2) the first date on which the number of Stores open and operating in the Development Areas is equal to the Development Quota (defined below) for the last Development Period.



B. RIGHTS DURING TERM



Provided that Developer is in full compliance with all of the terms and conditions of this Agreement, including the development obligations contained in Section 2.D, and Developer and any Authorized Entities are in full compliance with all of their obligations under all Franchise Agreements executed pursuant hereto, then during the term of this Agreement Franchisor hereby grants to Developer the right to develop Stores in the Development Areas and use the Proprietary Marks in connection therewith and agrees it: (1) will grant to Developer (or an Authorized Entity), in accordance with the provisions of Section 3 hereof, a franchise for the operation of each Store in each of the Development Areas; and (2) will not (directly or through its Affiliates) operate or grant franchises for the operation of Stores to be located within the Development Areas (except such franchises as are granted to Developer or an Authorized Entity pursuant to this Agreement). Notwithstanding the above, upon the expiration of this Agreement in accordance with Section 2.A, or the termination of this Agreement in accordance with Section 10, Developer's exclusive rights with respect to that Development Area will terminate and Franchisor may grant other development rights and franchises to develop and operate Stores within that Development Area.



C. RIGHTS RETAINED BY FRANCHISOR



Except as expressly limited by Section 2.B above, Franchisor (on behalf of itself and any Affiliates) retains all rights with respect to the System and the Proprietary Marks, and the right to operate, franchise or license others to develop, market, distribute and sell any other products or services under the Proprietary Marks or a different trade name, trademark or service mark, including, without limitation: (a) the right to operate or grant others the right to operate Stores at such locations and on such terms and conditions as the Franchisor, in its sole discretion, deems appropriate and (b) the right to develop, market, distribute and sell any other product or service or own or operate any other business under the Proprietary Marks or any other trademark which would not directly compete with Developer's or an Authorized Entity's Stores.



D. DEVELOPMENT OBLIGATIONS



(1) Developer agrees that, during the term of this Agreement and any extensions thereof, he will at all times, faithfully, honestly, and diligently perform his obligations hereunder and will continuously exert his best efforts to promote and enhance the development of C.D.







Warehouse Stores within the Development Areas. Without limiting the foregoing obligation, Developer agrees to meet its Development Quota for each Development Area by the end of the Development Period for such Development Area. Developer further agrees to develop and open Stores within each Development Area according to the Development Schedule for such Development Area.



(2) Developer may develop Stores within a Development Area in excess of the Development Quota for such Development Area only with the written approval of Franchisor, which approval shall be within the sole discretion of Franchisor.



3. GRANT OF FRANCHISES TO DEVELOPER



Subject to the provisions of Section 2 hereof, Franchisor agrees to offer to Developer or an Authorized Entity a franchise for the ownership and operation of each Store within each Development Area, on the following terms and conditions:



(a) Developer assumes all cost, liability, expense, and

responsibility for locating, obtaining, and developing a site for any

Store to be established under this Agreement.



(b) Within thirty (30) days after the commencement of each

Development Period or any extended time period approved by Franchisor

in writing, Developer shall locate three (3) potential sites for a

Store within the Development Area which Developer believes to conform

to certain minimum site selection criteria established by Franchisor

from time to time. Developer shall submit a site report to Franchisor

in the form specified by Franchisor containing a description of the

three sites, together with such other information and materials as

Franchisor may reasonably require. Franchisor shall review Developer's

proposed sites based upon such matters as it deems material, including,

without limitation, demographic characteristics of the proposed site,

traffic patterns, visibility, accessibility, the predominant character

of the neighborhood, competition from other businesses selling used

compact discs in the area, the proximity to other businesses (including

other Stores, the exclusivity granted to other Developers of

Franchisor, the nature of other businesses in proximity to the site,

and other commercial characteristics (including the rental obligations

and other lease terms for the proposed site) and the size of the

premises, appearance, and other physical characteristics. Franchisor

may withhold acceptance of a site for any BONA FIDE reason that

Franchisor, in the exercise of its reasonable business judgment, deems

necessary. DEVELOPER HEREBY ACKNOWLEDGES AND AGREES THAT FRANCHISOR'S

ACCEPTANCE OF A SITE DOES NOT CONSTITUTE AN ASSURANCE, REPRESENTATION

OR WARRANTY OF ANY KIND, EXPRESS OR IMPLIED, AS TO THE SUITABILITY OF

THE SITE FOR A STORE OR FOR ANY OTHER PURPOSE. FRANCHISOR'S ACCEPTANCE

OF THE SITE INDICATES ONLY THAT FRANCHISOR BELIEVES THAT THE SITE FALLS

WITHIN THE ACCEPTABLE MINIMUM CRITERIA ESTABLISHED BY FRANCHISOR AS OF

THE TIME OF THE EVALUATION. BOTH DEVELOPER AND FRANCHISOR ACKNOWLEDGE

THAT APPLICATION OF CRITERIA THAT HAVE BEEN EFFECTIVE WITH RESPECT TO

OTHER SITES AND PREMISES MAY NOT BE PREDICTIVE OF POTENTIAL FOR ALL

SITES AND THAT, SUBSEQUENT TO FRANCHISOR'S ACCEPTANCE OF A SITE,

DEMOGRAPHIC AND/OR ECONOMIC







FACTORS INCLUDED IN OR EXCLUDED FROM FRANCHISOR'S CRITERIA COULD

CHANGE, THEREBY ALTERING THE POTENTIAL OF A SITE. SUCH FACTORS ARE

UNPREDICTABLE AND ARE BEYOND FRANCHISOR'S CONTROL AND FRANCHISOR SHALL

NOT BE RESPONSIBLE FOR THE FAILURE OF A SITE ACCEPTED BY FRANCHISOR TO

MEET EXPECTATIONS AS TO REVENUE OR OPERATIONAL CRITERIA. DEVELOPER FURTHER

ACKNOWLEDGES AND AGREES THAT ACCEPTANCE OF A FRANCHISE FOR THE OPERATION

OF A STORE AT THE SITE IS BASED ON HIS OWN INDEPENDENT INVESTIGATION OF

THE SUITABILITY OF THE SITE.



If the Development Quota for a Development Area exceeds one Store,

Developer shall locate potential sites and submit site reports, in

accordance with the procedures of this Section 3, for each additional

Store. Site reports for subsequent Stores shall be submitted at the

interval specified in the Development Schedule for the Development

Area, commencing thirty (30) days after the beginning of the

Development Period for such Development Area. (E.g. If the

Development Schedule for a Development Area is one Store every sixty

days, then site reports for each subsequent Store in the Development

Area must be submitted every sixty days following the submission of the

first site reports.)



(b) A representative of Franchisor shall travel to Developer's

proposed sites for an initial on-site evaluation of the sites for each

Store. Franchisor agrees to exert its best efforts to conduct such

initial on-site evaluation within ten (10) business days of

Franchisor's receipt of a complete site report on the proposed sites

for a Store. All costs incurred by Franchisor for such initial on-site

evaluation of the proposed sites for a Store to be developed hereunder

shall be paid by Franchisor; provided, if Developer must relocate a

Store for any reason, all such costs incurred by Franchisor for site

selection activities associated with such relocation shall be paid by

Developer. Developer shall also pay all costs incurred for any

additional site evaluations for a Store, if deemed necessary by

Franchisor or requested by Developer.



(c) Franchisor will accept or reject sites proposed by Developer

for the operation of a Store (a site approved by Franchisor is

hereinafter referred to as an "Accepted Site"). Franchisor agrees to

exert its best efforts to deliver such notification to Developer within

five (5) business days after (i) receipt by Franchisor of the complete

site reports and other materials requested by Franchisor, containing

all information reasonably required by Franchisor and (ii) the

completion of Franchisor's on-site evaluation. Developer shall not make

any binding commitment to a prospective vendor or lessor of real estate

with respect to a site for a Store unless the site is accepted in

accordance with the procedure herein set forth. If Developer or an

Authorized Entity shall have failed to obtain lawful possession of an

Accepted Site (through acquisition or lease) within thirty (30) days

after delivery of Franchisor's approval thereof, Franchisor may, in its

sole discretion, withdraw acceptance of such site by written notice to



(d) If Developer is to occupy the premises of a Store under a

lease, Developer shall submit to Franchisor the lease prior to its

execution for Franchisor's acceptance and shall furnish to Franchisor a

copy of the executed lease within ten (10) days after execution

thereof. Any lease for a Store premises shall contain substantially

the terms and provisions







set forth in Exhibit D of this Agreement, except as Franchisor may

otherwise consent to in writing. If Developer is to purchase the

premises for a Store, Developer shall submit the contract of sale to

Franchisor for approval prior to its execution and shall furnish to

Franchisor a copy of the executed contract of sale within ten (10) days

after execution thereof.



(e) Provided Developer or an Authorized Entity shall have

obtained lawful possession of an Accepted Site through purchase or

lease in accordance with the terms of this Section 3, Franchisor shall

offer to Developer or such Authorized Entity a franchise to operate a

Store at such Accepted Site by delivering to Developer a Franchise

Agreement for execution by Developer or such Authorized Entity,

providing for a franchise fee, software license fee and royalty fee in

accordance with Section 3(f) below. Such Franchise Agreement shall be

executed by Developer or such Authorized Entity (and its partners or

shareholders, as required by the terms thereof) and returned to

Franchisor within ten (10) business days of Franchisor's delivery

thereof, with payment of the franchise fee and any other fees required

to be paid upon execution thereof. If Developer or an Authorized

Entity fails to execute such Franchise Agreement and tender payment of

the fees, as above provided, Franchisor may, at its sole discretion,

terminate its offer to grant to Developer or such Authorized Entity a

franchise to operate a Store at such Accepted Site and withdraw its

approval of such site.



(f) For each Store required to be developed by Developer

hereunder: (i) the franchise fee payable shall be $6,000.00, (ii) the

software license fee shall be $1,200.00, and (iii) the royalty fee

shall be five percent (5%) of the gross sales (as defined in the

Franchise Agreement) of such Store. These terms shall also apply to

any additional Stores opened in a Development Area pursuant to Section

2.D(2).



4. INITIAL PAYMENTS



Concurrently with the execution of this Agreement, Developer shall pay to Franchisor the sum set forth in Exhibit B hereof as a nonrefundable deposit to be applied, in the manner set forth in Exhibit B, to initial franchise fees payable by Developer or Authorized Entities under Franchise Agreements entered pursuant to this Agreement.



5. CONFIDENTIAL INFORMATION



A. Franchisor possesses and will further develop and acquire certain confidential and proprietary information and trade secrets relating to the System, consisting of the following categories of information, methods, techniques, procedures, and knowledge developed or to be developed by Franchisor, its Affiliates, or its franchise owners and developers (the "Confidential Information"): (i) methods, techniques, specifications, standards, policies, procedures, information, concepts, systems, and knowledge of and experience in the development, operation, and franchising of Stores; (ii) marketing programs for Stores; (iii) knowledge concerning the proprietary computer software programs developed for use in the operation of Stores, including any modifications and enhancements thereto, all related documentation, the tangible media upon which such programs are







recorded, the data base file structure thereof, and the bar code format used in connection with the proprietary software; (iv) knowledge of specifications for and suppliers of certain materials, equipment, furniture and fixtures used in Stores; (v) knowledge of operating results and financial performance of Stores.



B. Franchisor will disclose such parts of the Confidential Information to Developer as are required for the development of Stores hereunder during training, in the Manuals (as defined in Section 8.B), and such other manuals for the operation and development of a Store as are given to Developer pursuant to this Agreement or a Franchise Agreement. Developer may learn additional Confidential Information during the term hereof. Developer acknowledges and agrees that Developer will not acquire any interest in the Confidential Information, other than the right to use it in the development and operation of Stores pursuant to this Agreement, and that the use or duplication of the Confidential Information in any other business would constitute an unfair method of competition with Franchisor and with other Store developers and franchise owners. Developer agrees to disclose the Confidential Information to Owners and to its employees only to the extent reasonably necessary for the development of Stores hereunder.



C. Developer and its Owners acknowledge and agree that the Confidential Information is a valuable asset of Franchisor, is proprietary, includes trade secrets of Franchisor and is disclosed to Developer solely on condition that Developer and its Owners agree, and Developer and its Owners do hereby agree, that they: (1) shall not, during the term of this Agreement or any time thereafter, communicate, divulge, or use for the benefit of any other person, partnership, association, corporation or other entity any Confidential Information which may be communicated or provided to Developer or of which they may be apprised by virtue of Developer's or an Authorized Entity's operation of Stores under the terms of this Agreement; (2) will not use the Confidential Information in any other business or capacity; (3) will not, at any time, copy, duplicate, record or otherwise reproduce any Confidential Information, in whole or in part, or otherwise make the same available to any unauthorized person, without the prior written consent of Franchisor; and (4) will adopt and implement all reasonable procedures prescribed from time to time by Franchisor to prevent unauthorized use or disclosure of the Confidential Information.



D. Developer agrees to fully and promptly disclose to Franchisor and provide Franchisor with all necessary information concerning any new concepts, processes, techniques or improvements relating to the development, operation or promotion of a business offering the goods and services offered by Stores developed by Developer or an Authorized Entity or any employee of Developer or an Authorized Entity during the term of this Agreement. Developer acknowledges that any such concept, process, technique or improvement shall become the property of Franchisor, without compensation, and Franchisor shall have the perpetual right to utilize or disclose such information to its developers, franchisees and other parties as it deems appropriate.



E. Developer and each of the Principal Owners acknowledge that any failure to comply with the requirements of this Section 5 shall constitute a material event of default under this Agreement; that such failure will cause Franchisor irreparable injury and that money damages will not adequately compensate Franchisor; and that Franchisor may obtain specific performance of, or an injunction against a violation of, the requirements of this Section 5 without the necessity of







posting bond. Developer and each of the Principal Owners agree to pay all court costs and reasonable attorneys' fees incurred by Franchisor in enforcing its rights under this Section 5.



6. COVENANTS OF NON-COMPETITION



A. Developer and the Principal Owners specifically acknowledge that, pursuant to this Agreement, Developer and the Principal Owners will receive valuable specialized training, trade secrets, and confidential information, including, without limitation, information regarding the management, operational and marketing methods and techniques of Franchisor and the System which are beyond the present skills and experience of Developer and the Principal and Developer's managers and employees. Developer and Principal Owners acknowledge that such specialized training, trade secrets, and confidential information provide a competitive advantage and will be valuable to them in the development and operation of Stores, a ...