What is the purpose of the Preliminary Agreement between Big Apple Bagels and the PROSPECTIVE FRANCHISEE?

[Item 23: RECEIPTS]

RECITALS

• A. BAB has developed stores that are operated utilizing BAB's distinctive business formats, signs, equipment, layouts, systems, methods, specifications, standards, operating procedures and designs and advertising. Among these are stores that operate under the name "Big Apple Bagels" known as "BAGELS Stores." BAB owns, uses, promotes and licenses certain trademarks and service marks and other commercial symbols, including "Big Apple Bagels" and certain associated logos (the "Marks"). BAB has experience in and the ability to provide assistance and guidance in connection with the operation thereof. BAB grants to qualified persons franchises to own and operate BAGELS Stores ("BAGELS Franchises") selling products and services authorized and approved by BAB and utilizing BAB's business formats, systems, methods, specifications, standards, operating procedures, guidance advertising services, and the Marks;
• B. PROSPECTIVE FRANCHISEE desires to obtain a Franchise from BAB for the operation of a BAGELS Store;
• C. PROSPECTIVE FRANCHISEE has submitted to BAB an application for a BAGELS Franchise;
• D. PROSPECTIVE FRANCHISEE has received and reviewed BAB's BAGELS Franchise Disclosure Document; and
• E. BAB shall consider, subject to the terms and conditions hereof, granting a BAGELS Franchise to PROSPECTIVE FRANCHISEE.
• F. Under a separate offering and disclosure document, Franchisor, BAB Systems, Inc., operates a franchise distribution system to own and operate stores ("My Favorite Muffin Stores") for retail distribution of "My Favorite Muffin" branded muffins and Brewster's branded coffee. These Stores are operated under the trademarks and service marks "My Favorite Muffin Gourmet Muffin Bakery" or "My Favorite Muffin Your All Day Bakery Cafe," one of which is their primary identifying brand.

THEREFORE, the parties agree as follows:

PROSPECTIVE FRANCHISEE has, contemporaneously with the execution of this Preliminary Agreement, deposited with BAB the sum of Ten Thousand ($10,000.00) Dollars ("Deposit") to be applied against the initial franchise fee payable by PROSPECTIVE FRANCHISEE if a BAGELS Franchise shall subsequently be granted.

Upon execution of this Agreement, BAB will furnish PROSPECTIVE FRANCHISEE its written criteria for site selection, which must be returned to BAB upon termination of this Agreement.

It shall be the obligation of PROSPECTIVE FRANCHISEE to search for, locate, and submit in writing to BAB for approval, within sixty (60) days after execution of this Preliminary Agreement, a site suitable for the operation of a BAGELS Store acceptable to BAB within the following area: __________________________ (the "Area").

• a.

The Area is not exclusive or protected either during the term of this Agreement or in the event a franchise is granted.

BAB has the right to offer and grant a franchise to any other party within the Area.

In the event BAB grants a franchise, whether a franchise for a BAGELS Franchise of a "My Favorite Muffin Store" to another party within the Area during the term of this Agreement, PROSPECTIVE FRANCHISEE may terminate this Agreement and obtain a full refund of the Deposit.

In the event PROSPECTIVE FRANCHISEE enters into an Area Development Agreement with BAB, and becomes an Area Developer, he will have a protected territory, as set forth in the Area Development Agreement.

• b.

BAB has the right to withhold approval of sites, based on its standards for general location, physical and demographic characteristics of the neighborhood, traffic pattern, parking, competition, proximity to other businesses (including other BAGELS Stores), the nature of other businesses in proximity to the site, layout and other physical characteristics, rental, lease duration and other lease terms and conditions for the BAGELS Store.

• c.

If PROSPECTIVE FRANCHISEE, within the 60 day period specified in Paragraph 3 above, submits at least 1 site to BAB, which site BAB does not approve, BAB may, at any time thereafter at its sole discretion, either grant an extension to the above referenced 60 day period or terminate this Preliminary Agreement provided it shall refund PROSPECTIVE FRANCHISEE's Deposit less Three Thousand ($3,000.00) Dollars.

• d.

If PROSPECTIVE FRANCHISEE fails to submit any sites to BAB within the 60 day period specified in Paragraph 3 above, BAB may, at any time thereafter, terminate this Preliminary Agreement, in which event PROSPECTIVE FRANCHISEE shall not be entitled to any refund of the Deposit.

PROSPECTIVE FRANCHISEE acknowledges and agrees that BAB's approval of the premises for the BAGELS Store and any information communicated to PROSPECTIVE

FRANCHISEE regarding the premises for the BAGELS Store do not constitute a representation or warranty of any kind, expressed or implied, as to the suitability of the premises for BAGELS Store or for any other purpose. BAB's approval of the premises indicates only that BAB believes that the premises fall within the acceptable criteria established by BAB as of the time period encompassing the evaluation. Both PROSPECTIVE FRANCHISEE and BAB 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 premises and that, subsequent to BAB's approval of a site and premises, demographic and/or economic factors, including competition from other businesses, included in or excluded from BAB's criteria could change, thereby altering the potential of a site and premises. The uncertainty and instability of such criteria are beyond BAB's control and PROSPECTIVE FRANCHISEE agrees that BAB shall not be responsible for the failure of a site and premises approved by BAB to meet PROSPECTIVE FRANCHISEE's expectations as to potential revenue or operational criteria. PROSPECTIVE FRANCHISEE further acknowledges and agrees that his acceptance of a Franchise for the operation of a BAGELS Store at the premises is based on his own independent investigation of the suitability of the premises.

PROSPECTIVE FRANCHISEE ACKNOWLEDGES THAT HE HAS READ THIS PRELIMINARY AGREEMENT AND BAB'S FRANCHISE DISCLOSURE DOCUMENT IN THEIR ENTIRETY AND THAT HE HAS BEEN GIVEN THE OPPORTUNITY TO CLARIFY ANY PROVISIONS THAT HE DID NOT UNDERSTAND AND TO CONSULT WITH AN ATTORNEY OR OTHER PROFESSIONAL ADVISOR. PROSPECTIVE FRANCHISEE REPRESENTS THAT HE UNDERSTANDS THE TERMS, CONDITIONS AND OBLIGATIONS OF THIS PRELIMINARY AGREEMENT AND AGREES TO BE BOUND THEREBY.

NOTE: BAB'S OFFER TO ENTER INTO THIS PRELIMINARY AGREEMENT SHALL BE NULL AND VOID IN THE EVENT PROSPECTIVE FRANCHISEE FAILS TO SIGN THIS AGREEMENT AND SUBMIT IT TO BAB, ALONG WITH THE $10,000 DEPOSIT, WITHIN FOURTEEN (14) DAYS OF THE DATE BAB FURNISHES THIS AGREEMENT TO

PROSPECTIVE FRANCHISEE. IN SUCH EVENT, THE OFFER OF THIS PRELIMINARY AGREEMENT SHALL BE NULL AND VOID, AND PROSPECTIVE FRANCHISEE SHALL HAVE NO RIGHTS UNDER THIS AGREEMENT.

• 1. BAB agrees to expend such time and effort and to incur such expense as may reasonably be required to inspect sites proposed by PROSPECTIVE FRANCHISEE for a BAGELS Store to be operated by PROSPECTIVE FRANCHISEE. Unless PROSPECTIVE FRANCHISEE withdraws his application for a Franchise as hereinafter provided, PROSPECTIVE FRANCHISEE agrees that within fourteen (14) days of approval by BAB of a site for PROSPECTIVE FRANCHISEE's BAGELS Store, PROSPECTIVE FRANCHISEE will execute BAB's Franchise Agreement, in the form delivered to PROSPECTIVE FRANCHISEE. In the event PROSPECTIVE FRANCHISEE fails to execute BAB's Franchise Agreement within said fourteen (14) days, BAB may, at its sole option, terminate this Preliminary Agreement, in which event PROSPECTIVE FRANCHISEE shall not be entitled to any refund of the Deposit.
  • a. PROSPECTIVE FRANCHISEE may withdraw his application for a Franchise and terminate this Preliminary Agreement by a written notice of termination delivered to BAB at any time prior to the submission by PROSPECTIVE FRANCHISEE of a proposed site and the approval by BAB of said site. Upon termination prior to the approval by BAB of a site, BAB shall refund PROSPECTIVE FRANCHISEE's Deposit less Three Thousand ($3,000.00) Dollars.
  • b. Any refund of deposit is conditioned on PROSPECTIVE FRANCHISEE returning to BAB any written criteria for site selection referred to in Paragraph 3 above. The amount withheld by BAB is to compensate the expenses incurred by BAB in connection with PROSPECTIVE FRANCHISEE's proposed purchase of a BAGELS Franchise, including, without limitation, those expenses related to research, demographics data, preliminary layouts, inspection of a site for PROSPECTIVE FRANCHISEE's BAGELS Store, travel and living expenses, compensation of employees of BAB and legal fees and expenses.
• 1. PROSPECTIVE FRANCHISEE's rights under this Preliminary Agreement are personal in nature and are not transferable by assignment, will or operation of law.

Source: Item 23 — RECEIPTS (FDD pages 87–319)