-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, C5O9T+nQX3gjW/QiIoxSRQ8ql+13GufUNR0110Xm5soA29akiRqkuzqE4t03pl84 iTHL1d5U8qp0Y/Vd/9nB1A== 0000887557-96-000006.txt : 20040401 0000887557-96-000006.hdr.sgml : 20040401 19960515120800 ACCESSION NUMBER: 0000887557-96-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960515 DATE AS OF CHANGE: 19970203 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STARBUCKS CORP CENTRAL INDEX KEY: 0000829224 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING & DRINKING PLACES [5810] IRS NUMBER: 911325671 STATE OF INCORPORATION: WA FISCAL YEAR END: 0928 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-20322 FILM NUMBER: 96565820 BUSINESS ADDRESS: STREET 1: P O BOX 34067 CITY: SEATTLE STATE: WA ZIP: 98124-1067 BUSINESS PHONE: 2064471575 MAIL ADDRESS: STREET 1: 2401 UTAH AVENUE SOUTH CITY: SEATTLE STATE: WA ZIP: 98134 10-Q 1 10-Q - ---------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period From ___ to ___ Commission File Number 0-20322 ----------------------------- STARBUCKS CORPORATION (Exact name of registrant as specified in its charter) Washington 91-1325671 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2401 Utah Avenue South, Seattle, Washington 98134 (Address of principal executive office, including zip code) (206) 447-1575 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] As of May 1, 1996, there were 75,687,781 shares of the registrant's Common Stock outstanding. - ------------------------------------------------------------------------------ STARBUCKS CORPORATION INDEX PART I. FINANCIAL INFORMATION Page No. Item 1. Financial Statements. . . . . . . . . . . . . . . . .3 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. . .10 PART II. OTHER INFORMATION Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . .15 Item 4. Submission of Matters to a Vote of Security Holders.15 Item 5. Other Information. . . . . . . . . . . . . . . . . .15 Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . .15 Signatures. . . . . . . . . . . . . . . . . . . . . . . . . .17 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS STARBUCKS CORPORATION CONSOLIDATED STATEMENTS OF EARNINGS (In thousands, except earnings per share) Three Months Ended Six Months Ended March 31, April 2, March 31, April 2, 1996 1995 1996 1995 (13 Weeks) (13 Weeks) (26 Weeks) (26 Weeks) - ------------------------------------------------------------------------- Net sales $153,609 $101,113 $323,145 $216,659 Cost of sales and related occupancy costs 76,938 45,639 163,456 97,622 Store operating expenses 47,002 33,882 94,237 69,343 Other operating expenses 3,788 2,875 9,575 6,602 Depreciation and amortization 8,606 5,152 16,161 9,616 General and administrative expenses 9,720 6,489 16,358 12,236 - ------------------------------------------------------------------------- Operating income 7,555 7,076 23,358 21,240 Interest income 2,857 2,371 5,116 3,357 Gain on sale of investment 9,201 0 9,201 0 Interest expense (2,709) (926) (4,959) (1,876) - ------------------------------------------------------------------------- Earnings before income taxes 16,904 8,521 32,716 22,721 Income taxes 6,513 3,391 12,759 8,970 - ------------------------------------------------------------------------- Net earnings $10,391 $5,130 $19,957 $13,751 ========================================================================= Net earnings per share $0.14 $0.07 $0.27 $0.20 ========================================================================= Weighted average shares outstanding 74,429 72,325 74,400 69,406
See notes to consolidated financial statements. 3 STARBUCKS CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts) March 31, October 1, 1996 1995 - -------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 131,129 $20,944 Short-term investments 91,870 41,507 Accounts receivable (net of allowance for doubtful accounts of $225 and $242, respectively) 12,116 10,157 Inventories 90,806 123,657 Prepaid expenses and other current assets 4,454 4,746 Deferred income taxes, net 4,693 4,644 - ------------------------------------------------------------------- Total current assets 335,068 205,655 Joint ventures and equity investments 3,784 11,628 Property, plant and equipment, net 302,696 244,728 Deposits and other assets 10,404 6,167 - ------------------------------------------------------------------- Total $ 651,952 $468,178 =================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 19,769 $28,668 Checks drawn in excess of bank balances 11,676 13,138 Accrued compensation and related costs 10,602 12,786 Accrued interest payable 3,759 650 Other accrued expenses 18,617 15,804 Income taxes payable 980 0 - ------------------------------------------------------------------ Total current liabilities 65,403 71,046 Deferred income taxes, net 5,073 3,490 Capital lease obligation 766 1,013 Convertible subordinated debentures 244,981 80,398 Shareholders' equity: Common Stock, no par value -- 150,000,000 shares authorized; 71,394,050 and 70,956,990 shares, respectively, issued and outstanding 269,729 265,679 Retained earnings including cumulative translation adjustment of $(877) and $(435), respectively, and net unrealized holding gain(loss) on investments of $(35) and $34, respectively 66,000 46,552 - ------------------------------------------------------------------ Total shareholders' equity 335,729 312,231 - ------------------------------------------------------------------ Total $ 651,952 $468,178 ==================================================================
See notes to consolidated financial statements 4 STARBUCKS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Six Months Ended - ---------------------------------------------------------------------- March 31, April 2, 1996 1995 (26 Weeks) (26 Weeks) - --------------------------------------------------------------------- Operating activities: Net earnings $ 19,957 $13,751 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 17,647 10,468 Loss on asset disposals 355 59 Deferred income taxes, net 1,534 (50) Equity in losses of investees 550 334 Gain on sale of equity investment (9,201) 0 Cash provided (used) by changes in operating assets and liabilities: Accounts receivable (1,962) (3,204) Inventories 32,833 (11,115) Prepaid expenses and other current assets 289 (278) Accounts payable (9,000) 8,131 Income taxes payable 1,031 3,474 Accrued compensation and related costs (2,193) 1,537 Accrued interest payable 3,109 15 Other accrued expenses 2,681 3,095 - ------------------------------------------------------------------- Net cash provided by operating activities 57,630 26,217 Investing activities: Purchase of short-term investments (89,930) (108,331) Sale of short-term investments 3,488 7,741 Maturity of short-term investments 35,966 8,360 Investments in joint ventures and equity securities (4,040) (11,000) Proceeds from sale of equity investments 20,535 0 Additions to property, plant and equipment (75,806) (56,032) Increase in deposits and other assets (638) (1,026) - ------------------------------------------------------------------- Net cash used by investing activities (110,425) (160,288) Financing activities: Decrease in cash provided by checks drawn in excess of bank balances (1,473) (6,771) Proceeds from sale of convertible debentures 165,020 0 Debt issuance costs (4,040) 0 Proceeds from notes payable 0 10,000 Principal repayments of notes payable 0 (10,000) Net proceeds from sale of common stock 0 163,873 Proceeds from sale of common stock under employee stock purchase plan 768 0 Exercise of stock options and warrants 1,935 686 Tax benefit from exercise of non-qualified stock options 921 2,603 Payments on capital lease obligation (125) 0 - ------------------------------------------------------------------- Net cash provided by financing activities 163,006 160,391 - ------------------------------------------------------------------- Balance, carried forward 110,211 26,320
(Continued on next page) 5 Balance, brought forward 110,211 26,320 Effect of exchange rate changes on cash and cash equivalents (26) (49) - ------------------------------------------------------------------ Net increase in cash and cash equivalents 110,185 26,271 Cash and cash equivalents: Beginning of the period 20,944 8,394 - ------------------------------------------------------------------ End of the period $ 131,129 $34,665 ================================================================== Supplemental cash flow information: Cash paid during the period for: Interest $ 1,895 $1,841 Income taxes 8,608 2,885 Noncash financing transactions: Net unrealized holding gain on investments 113 93 Conversion of convertible debt into common stock, net of unamortized issue costs 426 0
See notes to consolidated financial statements 6 STARBUCKS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the 13 Weeks and 26 Weeks Ended March 31, 1996 and April 2, 1995 (UNAUDITED) NOTE 1. FINANCIAL STATEMENT PREPARATION: The consolidated financial statements as of March 31, 1996 and October 1, 1995 and for the 13-week and 26-week periods ended March 31, 1996 and April 2, 1995 have been prepared by Starbucks Corporation ("Starbucks" or the "Company") pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). The financial information for the 13-week and 26-week periods ended March 31, 1996 and April 2, 1995 is unaudited, but, in the opinion of management, reflects all adjustments (consisting only of normal recurring adjustments and accruals) necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods. The financial information as of October 1, 1995, is derived from the Company's consolidated financial statements and notes thereto contained in the Company's Annual Report to Shareholders incorporated by reference in the Company's Annual Report on Form 10-K for the year ended October 1, 1995, and should be read in conjunction with such financial statements. Certain reclassifications of prior year's balances have been made to conform to the current format. The results of operations for the 13-week and 26-week periods ended March 31, 1996, are not necessarily indicative of the Company's results of operations for the entire fiscal year ending September 29, 1996. NOTE 2. JOINT VENTURES AND EQUITY INVESTMENTS: On March 31, 1995, the Company invested $11.3 million in cash for shares of Noah's New York Bagels, Inc. ("Noah's") Series B Preferred Stock, representing approximately 20% ownership in Noah's. On February 1, 1996, Noah's was merged with Einstein Brothers Bagels, Inc. ("Einstein Brothers"), a retailer operating primarily in the Eastern United States. In exchange for its investment in Noah's, the Company received $20.5 million in cash. Concurrently, the Company purchased $1.8 million of Einstein Brothers common stock. This investment will be accounted for under the cost method. The Company realized a $9.2 million pre- tax gain ($5.6 million net of tax) on this transaction. During the second fiscal quarter, the Company modified its 50/50 joint venture agreement with Pepsi Cola Company to revise the allocation of start-up risks and expenses between the partners. NOTE 3. EARNINGS PER SHARE: Earnings per share is based on the weighted average shares outstanding during the period after consideration of the dilutive effect, if any, of stock options granted. The Company's 4-1/2% Convertible Subordinated Debentures due 2003 and 4-1/4% Convertible Subordinated Debentures due 2002 will be included in fully diluted earnings per share, using the "if converted" method, when such securities are dilutive. 7 NOTE 4. INVENTORIES: Inventories consist of the following (in thousands): March 31, October 1, 1996 1995 - -------------------------------------------------------------- Coffee: Unroasted $ 49,338 $ 75,975 Roasted 8,517 11,612 Other merchandise held for sale 28,419 32,731 Packaging and other supplies 4,532 3,339 - ------------------------------------------------------------- Total $ 90,806 $ 123,657 =============================================================
As of March 31, 1996, the Company had fixed price purchase commitments for green coffee totaling approximately $28 million. NOTE 5. PROPERTY, PLANT, AND EQUIPMENT: Property, plant, and equipment consist of the following (in thousands): March 31, October 1, 1996 1995 - -------------------------------------------------------------- Land $ 3,602 $ 3,602 Building 8,338 8,338 Leasehold improvements 210,869 162,948 Roasting and store equipment 100,676 82,490 Furniture, fixtures and other 30,383 24,602 - -------------------------------------------------------------- 353,868 281,980 Less accumulated depreciation (68,277) (52,215) - -------------------------------------------------------------- 285,591 229,765 Construction in process 17,105 14,963 - -------------------------------------------------------------- Total $ 302,696 $ 244,728 ==============================================================
NOTE 6. NEW ACCOUNTING STANDARD: In October 1995, the Financial Accounting Standards Board issued Statement No. 123, Accounting for Stock-Based Compensation. This pronouncement establishes the accounting and reporting standards for stock-based employee compensation plans, including: stock purchase plans, stock options, and stock appreciation rights. This new standard defines a fair value-based method of accounting for these equity instruments. This method measures compensation cost based on the value of the award and recognizes that cost over the service period. Companies may elect to adopt this standard or to continue accounting for these types of equity instruments under current guidance, APB Opinion No. 25, Accounting for Stock Issued to Employees. Companies which elect to continue using the rules of Opinion 25 must make pro forma disclosures of net income and earnings per share as if this new statement had been applied. This new standard is required for fiscal years beginning after December 15, 1995. The Company is in the process of evaluating this statement and its impact on the Company's financial condition and results of operations. 8 NOTE 7. SUBSEQUENT EVENTS: On April 10, 1996, the Company called for redemption its 4-1/2% Convertible Subordinated Debentures due 2003. In total, approximately $80.5 million in principal was converted into the Company's common stock prior to the redemption date, constituting substantially all of the outstanding principal balance. On April 30, 1996, the Company allowed its $30 million revolving line of credit to expire. There had been no advances on the line since November 1994. 9 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General Starbucks Corporation ("Starbucks" or the "Company") derives approximately 86% of net sales from its retail store operations. The Company's specialty sales and mail order operations account for the remainder of net sales. The Company's fiscal year ends on the Sunday closest to September 30. Fiscal years ending on September 29, 1996 and October 1, 1995 each include 52 weeks. The following discussion contains forward-looking statements that involve risks and uncertainties. Actual future results and trends may differ materially depending on a variety of factors, including, but not limited to, coffee and other raw materials prices and availability, successful execution of internal performance and expansion plans, impact of competition, availability of financing, legal proceedings, and other risks detailed in the Company's Securities and Exchange Commission filings, including the Company's Annual Report on Form 10-K for the year ended October 1, 1995. RESULTS OF OPERATIONS -- FOR THE 13 WEEKS ENDED MARCH 31, 1996, COMPARED TO THE 13 WEEKS ENDED APRIL 2, 1995 Revenues. Net sales for the 13 weeks ended March 31, 1996, increased 52% to $153,609,000 from $101,113,000 for the corresponding period in fiscal 1995. Retail sales increased 52% to $132,301,000 from $86,894,000, primarily due to the opening of new retail stores. Comparable store sales (sales from stores open 13 months or longer) increased by 8% for the period. This increase resulted primarily from an increase in the average number of transactions combined with an increase in the average dollar value per transaction. As part of its expansion strategy of clustering stores in existing markets, Starbucks has experienced a certain level of cannibalization of existing stores by new stores as the store concentration has increased. The Company anticipates that this cannibalization, as well as increased competition and other factors, may continue to put downward pressure on its comparable store sales growth in future periods. During the 13 weeks ended March 31, 1996, the Company opened 87 Starbucks stores (including five licensed airport stores). The Company ended the period with 771 Company-operated stores and 57 licensed airport stores. Specialty sales increased 58% to $18,024,000 for the 13 weeks ended March 31, 1996, compared to $11,439,000 for the corresponding period in fiscal 1995. Increased sales to airlines, hotels, a chain of wholesale clubs, restaurants, and several multi-unit retailers accounted for the majority of the increase in sales. Mail order sales increased 18% to $3,284,000 for the 13 weeks ended March 31, 1996, compared to $2,780,000 for the corresponding period in fiscal 1995. Cost and Expenses. Cost of sales and related occupancy costs as a percentage of net sales increased to 50.1% for the 13 weeks ended March 31, 1996, from 45.1% for the corresponding fiscal 1995 period. This increase was primarily the result of higher green coffee costs and higher occupancy costs as a percentage of sales, partially offset by a shift in the retail sales mix towards higher margin products. Figures for both years reflect the cost of markouts (items that no longer meet the Company's strict quality standards), which prior to fiscal 1996 were included in store operating expenses. Store operating expenses as a percentage of retail sales decreased to 35.5% for the 13 weeks ended March 31, 1996, from 39.0% for the corresponding period in fiscal 1995. The 3.5% of retail sales improvement was due primarily to lower advertising, employee benefits, regional overhead and preopening expenses as a percentage of retail sales. The leverage achieved in regional overhead expense is the result of adding stores to existing markets. Preopening expenses as a percentage of retail sales have decreased due to lower average preopening costs per new store and because sales are increasing at a faster rate than new store openings. 10 Other operating expenses as a percentage of net sales decreased to 2.5% for the 13 weeks ended March 31, 1996, from 2.8% for the corresponding period in fiscal 1995. The decrease was due primarily to a modification in the allocation of start-up risks and expenses between partners in the Company's 50/50 joint venture with Pepsi-Cola Company, a division of PepsiCo, Inc. Depreciation and amortization as a percentage of net sales increased 0.5% to 5.6% for the 13 weeks ended March 31, 1996. This increase was due primarily to higher per-store build-out costs. General and administrative expenses as a percentage of net sales were 6.3% for the 13 weeks ended March 31, 1996, compared to 6.4% for the same period in fiscal 1995. This decrease as a percentage of sales was due primarily to leverage on administrative costs combined with cost containment measures which the Company began implementing during the first quarter of fiscal 1996. Operating Income. Operating income for the 13 weeks ended March 31, 1996 increased to $7,555,000 or 4.9% of net sales from $7,076,000 or 7.0% of net sales for the corresponding period in fiscal 1995. Operating income as a percentage of net sales decreased due to lower gross margins and higher depreciation and amortization expense as a percentage of sales, partially offset by lower store operating and other operating expenses as a percentage of sales. Interest Income. Interest income for the 13 weeks ended March 31, 1996 was $2,857,000 compared to $2,371,000 for the corresponding period in fiscal 1995. The increase in interest income is due primarily to higher average investment balances. Gain on Sale of Investment. On March 31, 1995, the Company invested $11.3 million in cash for shares of Noah's New York Bagels, Inc. ("Noah's") Series B Preferred Stock, representing approximately 20% ownership in Noah's. On February 1, 1996, Noah's was merged with Einstein Brothers Bagels, Inc. ("Einstein Brothers"), a retailer operating primarily in the Eastern United States. In exchange for its investment in Noah's, the Company received $20.5 million in cash. Concurrently, the Company purchased $1.8 million of Einstein Brothers common stock. This investment will be accounted for under the cost method. The Company realized a $9.2 million pre-tax gain ($5.6 million net of tax) on this transaction. Interest Expense. Interest expense for the 13 weeks ended March 31, 1996 was $2,709,000 compared to $926,000 for the corresponding period in fiscal 1995. The increase in interest expense is due primarily to interest on the Company's convertible debentures issued in October 1995. Income Taxes. The Company's effective tax rate for the 13 weeks ended March 31, 1996 was 38.5% compared to 39.8% for the corresponding period in fiscal 1995. The Company reduced its tax rate in the second quarter to bring its year-to-date rate down to 39.0%, its expected effective rate for fiscal 1996. RESULTS OF OPERATIONS -- FOR THE 26 WEEKS ENDED MARCH 31, 1996, COMPARED TO THE 26 WEEKS ENDED APRIL 2, 1995 Revenues. Net sales for the 26 weeks ended March 31, 1996, increased 49% to $323,145,000 from $216,659,000 for the corresponding period in fiscal 1995. Retail sales increased 50% to $278,032,000 from $185,007,000, primarily due to the addition of new retail stores. Comparable store sales increased by 5%. This increase resulted primarily from an increase in the average dollar value per transaction combined with an increase in the number of transactions. During the 26 weeks ended March 31, 1996, the Company opened 155 Starbucks stores (including eight licensed airport stores and two replacement stores), converted one Coffee Connection store to a Starbucks store, and closed one store. The Company anticipates opening at least 145 new Company-operated and licensed airport stores during the remainder of fiscal 1996. Specialty sales increased 51% to $34,640,000 for the 26 weeks ended March 31, 1996, compared to $22,979,000 for the corresponding period in fiscal 1995. Increased sales to hotels, airlines, a chain of wholesale clubs, restaurants, and several multi-unit retailers accounted for the majority of the increase in sales. Mail order sales increased 21% to $10,473,000 for the 26 weeks ended March 31, 1996, compared to $8,673,000 for the corresponding period in fiscal 1995. Costs and Expenses. Cost of sales and related occupancy costs as a percentage of net sales increased to 50.6% for the 26 weeks ended March 31, 1996, from 45.1% for the corresponding fiscal 1995 period. This increase was primarily the result of higher green coffee costs and higher occupancy costs as a percentage of sales, partially offset by a shift in the retail sales mix towards higher margin products. 11 Store operating expenses as a percentage of retail sales decreased to 33.9% from 37.5% for the corresponding period in fiscal 1995. The 3.6% of retail sales improvement reflects lower regional overhead, advertising, employee benefits, and preopening expenses as a percentage of retail sales. Other operating expenses as a percentage of net sales remained constant at 3.0%. Depreciation and amortization as a percentage of net sales increased 0.6% to 5.0% for the 26 weeks ended March 31, 1996. The increase in depreciation and amortization is due primarily to higher per-store build-out costs. General and administrative expenses as a percentage of net sales were 5.1% for the 26 weeks ended March 31, 1996, compared to 5.6% for the same period in fiscal 1995. This decrease as a percentage of sales was due primarily to leverage on administrative costs combined with the implementation of cost containment measures. Operating Income. Operating income for the 26 weeks ended March 31, 1996 increased to $23,358,000 or 7.2% of net sales from $21,240,000 or 9.8% of net sales for the corresponding period in fiscal 1995. Operating income as a percentage of net sales decreased due to lower gross margins and higher depreciation and amortization expense as a percentage of sales, partially offset by lower store operating and general and administrative expenses as a percentage of sales. Interest Income. Interest income for the 26 weeks ended March 31, 1996 was $5,116,000 compared to $3,357,000 for the corresponding period in 1995. The increase in interest income is due primarily to higher average investment balances. Gain on Sale of Investment. The Company recorded a $9.2 million ($5.6 million net of taxes) gain on the sale of its investment in Noah's New York Bagels, Inc. Interest Expense. Interest expense for the 26 weeks ended March 31, 1996 was $4,959,000 compared to $1,876,000 for the corresponding period in fiscal 1995. The increase in interest expense is due primarily to interest on the Company's convertible debentures issued in October 1995. Income Taxes. The Company's effective tax rate for the 26 weeks ended March 31, 1996 was 39.0% compared to 39.5% for the corresponding period in fiscal 1995. This decrease is due primarily to a decrease in the effective state tax rate due to changes in the allocation and apportionment formulas. LIQUIDITY AND CAPITAL RESOURCES The Company ended the period with $223.0 million in total cash and investments. Working capital as of March 31, 1996 totaled $269.7 million compared to $134.6 million at October 1, 1995. The increase of $135.1 million was due primarily to proceeds from an October 1995 offering of 4-1/4% Convertible Subordinated Debentures due 2002 which generated proceeds of approximately $161 million, net of issuance costs. Cash provided by operating activities totaled $57.6 million for the first 26 weeks of fiscal 1996. Cash provided from financing activities for the first 26 weeks of fiscal 1996 totaled $163.0 million. This includes the Company's October 1995 offering of convertible debentures discussed above. Cash provided from financing activities also included cash generated in connection with the Company's employee stock purchase plan, and with the exercise of options to purchase shares of the Company's common stock and the related income tax benefit available to the Company upon exercise of such options. The Company will continue to receive proceeds and a tax deduction as a result of its employees participating in stock purchase and option plans; however, neither the amounts nor the timing thereof can be predicted. 12 Cash used by investing activities for the first 26 weeks of fiscal 1996 totaled $110.4 million. This included capital expenditures (additions to property, plant and equipment) of $75.8 million. Capital expenditures included the costs to open 147 new Company-operated stores, remodel certain existing stores, purchase equipment, expand existing office space, and enhance existing information systems. The Company received approximately $20.5 million for the sale of its investment in Noah's and concurrently purchased $1.8 million of common stock in Einstein Brothers. The Company's wholly-owned subsidiary, Starbucks Coffee International, Inc. ("SBI"), contributed $1.5 million to its joint venture with SAZABY, Inc. The Company made equity investments of $0.5 million in its 50/50 joint venture with Pepsi-Cola Company and $0.2 million in its joint venture with Dreyer's Grand Ice Cream, Inc. Excess cash was invested in investment-grade marketable debt securities, the majority of which are classified as cash equivalents. Future cash requirements, other than normal operating expenses, are expected to consist primarily of capital expenditures related to the addition of new company-operated retail stores. The Company also anticipates remodeling certain existing stores and incurring additional expenditures for enhancing its computer systems. Planned capital expenditures for the remainder of fiscal 1996 are estimated to be approximately $95 million. The Company will also have cash requirements for its joint venture partnerships with Pepsi-Cola Company, Dreyer's Grand Ice Cream, Inc., and SAZABY Inc., a Japanese retailer and restauranteur. The Company plans to open, through SBI's joint venture partnership with SAZABY, the first Starbucks retail store in Tokyo, Japan in the summer of 1996. In addition, under the terms of the Company's corporate office lease, the Company has agreed to provide financing to the building owner to be used exclusively for facilities and leasehold development costs to accommodate the Company. During fiscal 1996, the Company expects to provide approximately $3.5 million under this agreement. The maximum amount available under the agreement is $17 million. Any funds advanced by the Company will be repaid with interest over a term not to exceed 20 years. Management believes that the existing cash and investments plus cash generated from operations should be more than sufficient to finance its capital requirements for the remainder of fiscal 1996. The Company anticipates that it will seek additional funds from public or private sources in fiscal 1997; however, there can be no assurance that such funds will be available when needed or be available on terms favorable to the Company. COFFEE PRICES AND AVAILABILITY AND GENERAL RISK CONDITIONS The following important factors, among others, could impact the Company's actual results and could cause such results to differ materially from those expressed in the Company's forward-looking statements. Green coffee commodity prices are subject to substantial price fluctuations, generally a result of reports of adverse growing conditions in certain coffee-producing countries. Due to green coffee commodity price increases, the Company effected sales price increases during fiscal 1994 and 1995 in its coffee beverages and whole bean coffees to mitigate the effects of increases in its costs of supply. Because the Company had established fixed purchase prices for some of its supply of green coffees, the Company's margins were favorably impacted by such sales price increases during much of fiscal 1995. During the latter part of fiscal 1995 and the first half of fiscal 1996, gross margins were negatively impacted relative to the prior year by the sell-through of higher-cost coffee inventories. As the Company continues to sell through these inventories for the remainder of fiscal 1996, it expects gross margins will continue to be negatively impacted relative to the prior year. The Company has entered into fixed price purchase commitments in order to secure an adequate supply of quality green coffee and fix a cost for future periods. As of March 31, 1996 the Company had approximately $28 million in fixed price purchase commitments which, together with existing inventory, the Company believes will provide an adequate supply of green coffee for the remainder of fiscal 1996 and into fiscal 1997. The Company believes that, based on relationships established with its suppliers in the past, the risk of non-delivery on such purchase commitments is remote. 13 In addition to fluctuating coffee prices, management believes that in the future, the Company's results of operations and earnings could be significantly impacted by other factors such as increased competition within the specialty coffee industry, the Company's ability to find optimal store locations at favorable lease rates, the increased costs associated with opening and operating retail stores in new markets, the Company's continued ability to hire, train and retain qualified personnel, and the Company's continued ability to obtain adequate capital to finance its planned expansion. Due to the factors noted above, the Company's future earnings and the prices of the Company's securities may be subject to volatility. There can be no assurance that the Company will continue to generate increases in net sales and net earnings, or growth in comparable store sales. Any variance in the factors noted above, or other areas, from what is expected by investors could have an immediate and adverse effect on the trading price of Company's securities. SEASONALITY AND QUARTERLY RESULTS The Company's business is subject to seasonal fluctuations. A significant portion of the Company's net sales and profits are realized during the first quarter of the Company's fiscal year which includes the December holiday season. In addition, quarterly results are affected by the timing of the opening of new stores, and the Company's rapid growth may conceal the impact of seasonal influences. Because of the seasonality of the Company's business, results for the 26 weeks ended March 31, 1996, are not necessarily indicative of the results that may be achieved for the full fiscal year ended September 29, 1996. NEW ACCOUNTING STANDARD In October 1995, the Financial Accounting Standards Board issued Statement No. 123, Accounting for Stock-Based Compensation. This pronouncement establishes the accounting and reporting standards for stock-based employee compensation plans, including: stock purchase plans, stock options, and stock appreciation rights. This new standard defines a fair value-based method of accounting for these equity instruments. This method measures compensation cost based on the value of the award and recognizes that cost over the service period. Companies may elect to adopt this standard or to continue accounting for these types of equity instruments under current guidance, APB Opinion No. 25, Accounting for Stock Issued to Employees. Companies which elect to continue using the rules of Opinion 25 must make pro forma disclosures of net income and earnings per share as if this new statement had been applied. This new standard is required for fiscal years beginning after December 15, 1995. The Company is in the process of evaluating this statement and its impact on the Company's financial condition and results of operations. 14 PART II. OTHER INFORMATION Item 1. Legal Proceedings The Company is a party to various legal proceedings arising in the ordinary course of its business, but is not currently a party to any legal proceeding that the Company believes would have a material adverse effect on the financial position or results of operations of the Company. Item 4. Submission of Matters to a Vote of Security Holders The annual meeting of shareholders of the Company was held on February 28, 1996 in Kent, Washington for the purposes of electing six directors, approving an amendment to the Company's Articles of Incorporation to increase the number of shares of authorized common stock, no par value, from 100,000,000 to 150,000,000 shares, as well as ratifying the selection of the independent public auditors for fiscal 1996. The table below shows the results of the shareholders' voting: Votes in Votes Broker Favor Opposed Abstain Non-Votes ---------- ------- ------- --------- Election of directors Craig J. Foley 61,856,855 -- 1,484,315 7,816,338 Howard Schultz 61,764,018 -- 1,577,152 7,816,338 Adrian D.P. Bellamy 61,852,477 -- 1,488,693 7,816,338 Howard P. Behar 61,735,935 -- 1,605,235 7,816,338 Orin C. Smith 61,614,334 -- 1,726,836 7,816,338 Barbara Bass 61,832,613 -- 1,508,557 7,816,338 Approve amendment to Articles of Incorporation to increase number of authorized shares of common stock 62,087,876 952,787 300,507 7,816,338 Ratification of independent auditors 62,991,487 141,573 208,110 7,816,338
The following members of the Board of Directors, who were not up for re-election during the current year, have terms that expire at the annual meeting for fiscal years 1996 and 1997: Term expires at the Director annual meeting for fiscal: - --------------------------------------------------------------- James G. Shennan, Jr. 1996 Jeffrey H. Brotman 1997 Arlen I. Prentice 1997
15 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit No. Description 3.1 Restated Articles of Incorporation of Starbucks Corporation 3.1.1 Articles of Amendment to the Restated Articles of Incorporation of Starbucks Corporation dated November 22, 1995 3.1.2 Articles of Amendment to the Restated Articles of Incorporation of Starbucks Corporation dated March 18, 1996 3.2 Amended and Restated Bylaws of Starbucks Corporation 10.21 Merger Agreement among Noah's New York Bagels, Inc., Shareholders and Certain Optionholders of Noah's New York Bagels, Inc., Einstein Brothers Bagels, Inc. and NNYB Acquisition Corporation dated January 22, 1996. 10.22 Amendment dated February 1, 1996 to Merger Agreement among Noah's New York Bagels, Inc., Shareholders and Certain Optionholders of Noah's New York Bagels, Inc., Einstein Brothers Bagels, Inc. and NNYB Acquisition Corporation dated January 22, 1996. 10.23 Master Licensing Agreement between the Company and ARAMARK Food and Services Group, Inc. dated as of January 30, 1996, as amended and restated May 7, 1996. 11 Statement re: computation of per share earnings (b) Forms 8-K: No reports on Form 8-K were filed by the Company during the 13-week period ended March 31, 1996. 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. STARBUCKS CORPORATION Dated: May 13, 1996 By: /s/ Michael Casey ---------------------- Michael Casey chief financial officer Signing on behalf of the registrant and as principal financial officer 17 STARBUCKS CORPORATION --------------------- EXHIBIT 11 - COMPUTATION OF PER SHARE EARNINGS (IN THOUSANDS, EXCEPT EARNINGS PER SHARE) Three Months Ended Six Months Ended March 31, April 2, March 31, April 2, 1996 1995 1996 1995 (13 Weeks) (13 Weeks) (26 Weeks) (26 Weeks) - -------------------------------------------------------------------------- EARNINGS PER SHARE CALCULATION: Net earnings $10,391 $5,130 $19,957 $13,751 ========================================================================= Weighted average shares outstanding calculation: Weighted average number of common shares outstanding 71,257 70,351 71,186 67,187 Dilutive effect of outstanding common stock options 3,172 1,974 3,214 2,219 - ------------------------------------------------------------------------- Weighted average shares outstanding 74,429 72,325 74,400 69,406 ========================================================================= Earnings per share $ 0.14 $ 0.07 $ 0.27 $ 0.20 ========================================================================= EARNINGS PER SHARE CALCULATION ASSUMING CONVERSION OF CONVERTIBLE SUBORDINATED DEBENTURES(1): Net earnings calculation: Net earnings $ 10,391 $ 5,130 $ 19,957 $ 13,751 Add after tax interest expense on Debentures 1,615 546 2,994 1,093 Add after tax amortization of issuance costs related to the Debentures 128 39 226 79 - ------------------------------------------------------------------------- Net earnings assuming conversion of Debentures $ 12,134 $ 5,715 $ 23,177 $ 14,923 ========================================================================= Weighted average shares outstanding calculation: Weighted average number of common shares outstanding 71,257 70,351 71,186 67,187 Dilutive effect of outstanding common stock options 3,172 1,974 3,214 2,219 Assuming conversion of 4.5% Convertible Subordinated Debentures due 2003 5,331 5,367 5,340 5,367 Assuming conversion of 4.25% Convertible Subordinated Debentures due 2002 7,098 0 6,240 0 - ------------------------------------------------------------------------- Weighted average shares outstanding 86,858 77,692 85,980 74,773 ========================================================================= Earnings per share $ 0.14 $ 0.07 $ 0.27 $ 0.20 ========================================================================= - ------------------- (1) This calculation is submitted in accordance with Regulation S-K item 601(b)(11) although not required by footnote 2 to paragraph 14 of APB Opinion No. 15 because it results in dilution of less than 3%. 18
EX-1 2 EXHIBIT 3.1 RESTATED ARTICLES OF INCORPORATION OF STARBUCKS CORPORATION Pursuant to RCW 23B.10.070, the following Restated Articles of Incorporation are hereby submitted for filing: ARTICLE 1. NAME The name of this corporation is Starbucks Corporation. ARTICLE 2. DURATION The period of this corporation's duration is perpetual. ARTICLE 3. PURPOSES This corporation is organized for the purposes of transacting any and all business for which corporations may be incorporated under Title 23A of the Revised Code of Washington, as amended, including, but not limited to, establishing and operating retail coffee and espresso bars in the State of Washington and in other states. ARTICLE 4. SHARES The Corporation shall have authority to issue 57,500,000 shares of capital stock of which 50,000,000 shares shall be common stock and 7,500,000 shares shall be preferred stock. 4.1 Common Stock. The Corporation shall have authority to issue up to 50,000,000 shares of common stock, each share without par value. 4.2 Preferred Stock. The Corporation shall have authority to issue up to 7,500,000 shares of preferred stock, each share without par value. The Board of Directors shall have all rights afforded by applicable law to establish series of said preferred shares, the rights and preferences of each such series to be set forth in appropriate resolutions of the board. ARTICLE 5. DIRECTORS 5.1 Number of Directors. The number of directors of this Corporation shall be fixed by the bylaws and may be increased or decreased from time to time in the manner specified therein. 5.2 Terms of Directors. Beginning with the Board of Directors elected at the first Annual Meeting of Shareholders held after all series of Preferred Stock outstanding as of May 20, 1992 are converted into Common Stock, the terms of office of all Directors shall be staggered by dividing the total number of Directors into three groups, with each group containing one-third of the total number of directors, as near as may be. The terms of Directors in the first group will expire at the first annual shareholders' meeting after their election, the terms of the second group will expire at the second annual shareholders' meeting after their election, and the terms of the third group will expire at the third annual shareholders' meeting after their election. At each annual shareholders' meeting held thereafter, Directors shall be chosen for a term of three years to succeed those whose terms expire. ARTICLE 6. PREEMPTIVE RIGHTS 6.1 Common Stock. Shareholders of the Common Stock of this corporation shall not have preemptive rights to acquire shares of stock or securities convertible into shares of stock issued by the corporation. 6.2 Preferred Stock. Holders of Preferred Stock shall have preemptive rights subject to the rights and preferences as described under Article 4 of these Articles of Incorporation. ARTICLE 7. CUMULATIVE VOTING Shareholders of this Corporation shall not have the right to cumulate votes in the election of directors. ARTICLE 8. AMENDMENTS OF ARTICLES OF INCORPORATION The Corporation reserves the right to amend or repeal any provisions contained in these Articles of Incorporation, in the manner now or hereafter prescribed by law. All rights and powers conferred herein on shareholders and directors are subject to this reserved power. ARTICLE 9. INCORPORATOR The name and address of the incorporator is G. Scott Greenburg, Shidler McBroom Gates & Lucas, 3500 First Interstate Center, Seattle, Washington, 98104. ARTICLE 10. LIMITATION OF DIRECTOR LIABILITY To the full extent that the Washington Business Corporation Act, as it exists on the date hereof or may hereafter be amended, permits the limitation or elimination of the liability of directors, a director of the Corporation shall not be liable to the Corporation or its shareholders for monetary damages for his acts or omissions as a director. Any amendment to or repeal of this Article 11 shall not adversely affect any right or protection of a director of the Corporation for or with respect to any acts or omissions occurring prior to such amendment or repeal. The undersigned, as Secretary of Starbucks Corporation, executes these Restated Articles of Incorporation as duplicate originals under penalty of perjury this 11th day of September, 1992. STARBUCKS CORPORATION /s/ G. Scott Greenburg ---------------------- G. Scott Greenburg Secretary EX-2 3 EXHIBIT 3.1.1 ARTICLES OF AMENDMENT OF ARTICLES OF INCORPORATION OF STARBUCKS CORPORATION ARTICLES OF AMENDMENT of the Articles of Incorporation of Starbucks Corporation, (the "Corporation") are herein executed by said Corporation, pursuant to the provisions of RCW 23B.10.060 and 23B.10.020(4), as follows: FIRST: The name of the Corporation is Starbucks Corporation. SECOND: Article 4 of the Articles of Incorporation is amended to read as follows: ARTICLE 4. SHARES The Corporation shall have authority to issue 107,500,000 shares of capital stock of which 100,000,000 shares shall be common stock, and 7,500,000 shares shall be preferred stock. 4.1 Common Stock. The Corporation shall have authority to issue up to 100,000,000 shares of common stock, each share without par value. 4.2 Preferred Stock The Corporation shall have authority to issue up to 7,500,000 shares of preferred stock, each share without par value. The Board of Directors shall have all rights afforded by applicable law to establish series of said preferred shares, the rights and preferences of each such series to be set forth in appropriate resolutions of the board. THIRD: This amendment does not provide for an exchange, reclassification or cancellation of issued shares. FOURTH: The date of the adoption of said Amendment by the Directors of said Corporation was the 26th day of September, 1995, and said Amendment shall become effective December 1, 1995. FIFTH: The amendment was adopted by resolution of the Board of Directors without shareholder action. Pursuant to RCW 23B.10.020(4), shareholder action is not required. The foregoing is executed under penalty of perjury by the undersigned, who is authorized to do so on behalf of the Corporation. DATED this 21st day of November, 1995. Starbucks Corporation By: /s/ G. Scott Greenburg ---------------------- G. Scott Greenburg Corporate Secretary EX-3 4 EXHIBIT 3.1.2 ARTICLES OF AMENDMENT OF ARTICLES OF INCORPORATION OF STARBUCKS CORPORATION ARTICLES OF AMENDMENT of the Articles of Incorporation of Starbucks Corporation, (the "Corporation") are herein executed by said Corporation, pursuant to the provisions of RCW 23B.10.060 and 23B.10.020(4), as follows: FIRST: The name of the Corporation is Starbucks Corporation. SECOND: Article 4 of the Articles of Incorporation is amended to read as follows: ARTICLE 4. SHARES The Corporation shall have authority to issue 157,500,000 shares of capital stock of which 150,000,000 shares shall be common stock, and 7,500,000 shares shall be preferred stock. 4.1 Common Stock. The Corporation shall have authority to issue up to 150,000,000 shares of common stock, each share without par value. 4.2 Preferred Stock The Corporation shall have authority to issue up to 7,500,000 shares of preferred stock, each share without par value. The Board of Directors shall have all rights afforded by applicable law to establish series of said preferred shares, the rights and preferences of each such series to be set forth in appropriate resolutions of the board. THIRD: This amendment does not provide for an exchange, reclassification or cancellation of issued shares. FOURTH: The date of the adoption of said Amendment by the Directors of said Corporation was the 20th day of December, 1995. The amendment was duly approved by the shareholders of the Corporation on February 28, 1996, in accordance with the provisions of RCW 23B.10.030 and 23B.10.040. The foregoing is executed under penalty of perjury by the undersigned, who is authorized to do so on behalf of the Corporation. DATED this 15th day of March, 1996. Starbucks Corporation By: /s/ Shelley B. Lanza -------------------- Shelley B. Lanza, Senior Vice President and General Counsel EX-4 5 EXHIBIT 3.2 AMENDED AND RESTATED BYLAWS OF STARBUCKS CORPORATION ARTICLE I. SHAREHOLDERS Section 1.1 Annual Meeting. The annual meeting of the shareholders of the Corporation shall be held each year on a date between January l and June 30, with a specific date and time to be determined from time to time by the Board of Directors. The failure to hold an annual meeting at the time stated in these bylaws does not affect the validity of any corporate action. Section 1.2 Special Meetings. Special meetings of the shareholders may be held upon call of the Board of Directors or of the President or a Vice President, and shall be called by the President or a Vice President upon the request of the holders of ten percent of the outstanding stock entitled to vote. Section 1.3 Meeting Place. All meetings of the shareholders shall be held at the principal place of business of the Corporation, or at such other place as shall be determined from time to time by the Board, and the place at which any such meeting shall be held shall be stated in the notice of the meeting. Section 1.4 Notice of Meetings. Written notice of the time and place of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called shall be delivered personally, or mailed, not less. than ten days nor more than 50 days before the date of the meeting to each shareholder of record entitled to vote, at his post office address appearing upon the stock transfer books of the Corporation. Meetings may be held without notice if all shareholders entitled to vote are present or represented by proxy or if notice is waived by those not present or so represented. Section 1.5 Waiver of Notice. Notice of time, place and purpose of any meeting may be waived in writing whether before or after the time stated therein for the meeting, and will be waived by any shareholder by his attendance at such meeting in person or by proxy. Any shareholder so waiving shall be bound by the proceedings of any such meeting in all respects as if due notice thereof had been given. Section 1.6 Quorum. Except as otherwise required by law: (a) A quorum at any annual or special meeting of shareholders shall consist of shareholders representing, either in person or by proxy, a majority of the outstanding shares of the Corporation, entitled to vote at such meeting; if there be no such quorum, the holders of a majority of such shares so present or represented may adjourn the meeting from time to time until a quorum is present. (b) The votes of a majority in interest of those present at any properly called or adjourned meeting of shareholders at which a quorum as in this section defined is present, shall be sufficient to transact business. Section 1.7 Organization of Meetings. Meetings of the shareholders shall be presided over by the President, but if he is not present, then by the Vice President, but if neither the President nor a Vice President is present, by a Chairman to be chosen at the meeting. The Secretary of the Corporation shall act as Secretary of the meeting, if present. Section 1.8 Proxies. At all meetings of shareholders, a shareholder may vote by proxy executed in writing by the shareholder or by his duly authorized attorney in fact. Such proxy shall be filed with the Secretary of the Corporation before or at the time of the meeting. No proxy shall be valid after eleven months from the date of its execution, unless otherwise provided in proxy. Any proxy regular on its face shall be presumed to be valid. Section 1.9 Shareholders' Action Without Meeting. Any action required or which may be taken at a meeting of the shareholders may be taken without a meeting if a consent in writing setting forth the action so taken shall be signed by all of the shareholders entitled to vote with respect to the subject matter thereof Section 1.10 Action of Shareholders by Communication Equipment. Shareholders may participate in a meeting of shareholders by means of a conference telephone or similar communication equipment by means of which all persons participating in the meeting can hear each other at the same time. Participation by such means shall constitute presence in person at a meeting. Section 1.11 Voting Record. At least ten days before each meeting of shareholders, a complete record of the shareholders entitled to vote at such meeting, or any adjournment thereof, shall be made, arranged in alphabetical order, with the address of and number of shares held by each, which record shall be kept on file at the registered office of the Corporation for a period of ten days prior to such meeting. The record shall be produced and kept open at the time and place of such meeting for the inspection of any shareholder. Failure to comply with the requirements of this section shall not affect the validity of any action taken at such meeting. An officer or agent having charge of the stock transfer books who shall fail to prepare the record of shareholders, or keep it on file for a period of ten days, or produce and keep it open for inspection at the meeting, as provided in this section, shall be liable to any shareholder suffering damages on account of such failure to the extent of such damages. Section 1.12 Cumulative Voting. Shareholders of this Corporation shall not have the right to cumulate votes in the election of directors. ARTICLE II. DIRECTORS Section 2.1 Number, Election, and Powers (a) All corporate powers shall be exercised by or under the authority of, and the business and affairs of the Corporation shall be managed under the direction of the Board, except as may be otherwise provided in the Articles of Incorporation. The Board shall consist of nine members. The number of Directors may be changed by a resolution of the Board or by the shareholders at the annual shareholders' meeting. (b) Beginning with the Board of Directors elected at the first Annual meeting of Shareholders held after all series of Preferred Stock outstanding as of May 20, 1992 are converted into Common Stock, the terms of office of all Directors shall be staggered by dividing the total number of Directors into three classes, with each class containing one- third of the total number of directors, as near as may be. The terms of Directors in the first class will expire at the first annual shareholders' meeting after their election, the terms of the second class will expire at the second annual shareholders' meeting after their election, and the terms of the third class will expire at the third annual shareholders' meeting after their election. At each annual shareholders' meeting held thereafter, Directors shall be chosen for a term of three years to succeed those whose terms expire. Each Director shall hold office for the term for which elected and until his successor shall have been elected and qualified. (c) Directors need not be shareholders or residents of the state of Washington. In addition to the powers and authorities expressly conferred upon the Corporation by these Bylaws and the Articles of Incorporation, the Board may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute or by the Articles of Incorporation or by these Bylaws directed or required to be exercised or done by the shareholders. Section 2.2 Vacancies. Any vacancy occurring in the Board, whether caused by resignation, death or otherwise, may be filled by the affirmative vote of a majority of the remaining directors though less than a quorum of the Board. A Director elected to fill any vacancy shall hold office for the unexpired term of his predecessor and until his successor is elected and qualified. Any directorship to be filled by reason of an increase in the number of Directors may be filled by the Board for a term of office continuing only until the next election of Directors by the shareholders. Section 2.3 Quorum. A majority of the members of the Board of Directors then holding office shall constitute a quorum for the transaction of business, but if at any meeting of the Board there shall be less than a quorum present, a majority of those present may adjourn the meeting from time to time until a quorum shall have been obtained. Section 2.4 Term. Directors shall hold office until the next annual election of Directors, and until their successors shall have been elected and qualified. Section 2.5 Removal of Directors. Except as otherwise provided by law or by the Articles of Incorporation, at a meeting of shareholders called expressly for that purpose, the entire Board of Directors, or any member thereof, may be removed by a vote of the holders of the requisite proportionate number of shares then entitled to vote on a cumulative basis, for the election of Directors. Section 2.6 Regular Meetings. (a) Meetings of the Board of Directors shall be held on a regular schedule of at least every two months at the principal place of business of the Corporation or at such other place or places, either within or without the state of Washington, as the Board may from time to time designate. The meetings may be held with or without notice. The annual meeting of the Board shall be held without notice immediately after the adjournment of the annual meeting of shareholders. (b) Regular meetings of any committee designated by the Board may be held without notice at the principal place of business of the Corporation or at such other place or places, either within or without the state of Washington as such committee may from time to time designate. The schedule for meetings of any committee shall be set by said committee. Section 2.7 Special Meetings. (a) Special meetings of the Board may be called at any time by the President, Secretary or by any one Director, to be held at the principal place of business of the Corporation or at such other place or places as the Board or the person or persons calling such meeting may from time to time designate. (b) Special meetings of any committee may be called at any time by such person or persons and with such notice as shall be specified for such committee by the Board, or in the absence of such specification, in the manner and with the notice required for special meetings of the Board. Section 2.8 Notice of Special Meetings. With the exception of notices transmitted by facsimile machine or telephone communication, notice of each special meeting of the Board shall be delivered personally, telegraphed, or mailed to each Director at his address shown on the records of the Corporation at least two days before the meeting. Notice transmitted by facsimile machine or verbal telecommunication at least three hours prior to the meeting shall be considered effective provided a facsimile response acknowledging receipt of said notice is returned to the Corporation by each Director prior to the special meeting. In the event a facsimile response is not forthcoming, the special meeting shall be postponed until two days after the facsimile or verbal telecommunication was delivered. The notice of any special meeting shall identify the business to be transacted at or the purpose of the special meeting. Section 2.9 Committees. The Board of Directors may, in its discretion, by resolution passed by a majority of the whole Board, appoint various committees, including an Executive Committee, which shall have and may exercise such powers as shall be conferred or authorized by the resolution appointing such committee. A majority of any such committee, composed of more than two members, may determine its action and fix the time and place of its meetings, unless the Board of Directors shall otherwise provide. The Board shall have the power at any time to change the members of any such committee, to fill vacancies, and to discharge any such committee. Section 2.10 Action by Directors Without a Meeting. Any action required or which might be taken at a meeting of the Directors, or of a committee thereof, may be taken without a meeting if a consent in writing, setting forth the action so taken or to be taken, shall be signed by all of the Directors, or all of the members of the committee, as the case may be. Such consent shall be filed in the Corporation's minute book, or with the records of the committee so acting. Section 2.11 Meeting by Telephone. Members of the Board of Directors or any committee designated by the Bylaws or appointed by the Board of Directors may participate in a meeting of such Board or committee by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other at the same time, and participation by such means shall constitute presence in person at a meeting. ARTICLE III. CONFLICTS OF INTEREST This Corporation may enter into contracts and otherwise transact business as vendor, purchaser, or otherwise, with its Directors, officers, and shareholders and with corporations, associations, firms, and entities in which they are or may be or become interested as Directors, officers, shareholders, members, or otherwise, as freely as though such adverse interest did not exist, even though the vote, action, or presence of such Director, officer, or shareholder may be necessary to obligate the Corporation upon such contracts or transactions; and in the absence of fraud, no such contract or transaction shall be voided and no such Director, officer, or shareholder shall be held liable to account to the Corporation, by reason of such adverse interests or by reason of any fiduciary relationship to the Corporation arising out of such office or stock ownership, for any profit or benefit realized by him through any such contract or transaction; provided that in the case of Directors and officers of the Corporation (but not in the case of shareholders who are not Directors or officers), the nature of the interest of such Director or officer, though not necessarily the details or extent thereof, be disclosed or known to the Board of Directors of this Corporation, at the meeting thereof at which such contract or transaction is authorized or confirmed. A general notice that a Director or officer of the Corporation is interested in any corporation, association, firm, or entity shall be sufficient disclosure as to such Director or officer with respect to all contracts and transactions with that corporation, association, firm or entity. Directors, officers and shareholders of the Corporation need make no disclosure under this article when their interest is less than or equal to five percent of the voting power of the other corporation, association, firm or entity. ARTICLE IV. OFFICERS Section 4.1 Election or Appointment. The Board of Directors, as soon as may be after the election of Directors held in each year, shall elect a President, a Secretary and a Treasurer, and from time to time may appoint a Chairman of the Board, one or more Vice Presidents and such Assistant Secretaries, Assistant Treasurers and other officers as it may deem proper. Any two or more offices may be held by the same person, except the offices of President and Secretary, unless all of the issued and outstanding stock owned by the Corporation is owned of record by one shareholder. If one shareholder is the owner of record of all of the Corporation's issued and outstanding stock, one person may hold all or any combination of offices. Unless otherwise required by law, no officer need be a stockholder of the Corporation or a member of the Board of Directors. Section 4.2 Term. The term of office of all officers shall be one year, and until their respective successors are elected and qualify. Any officer may be removed from office at any time by the affirmative vote of a majority of the Directors. The vacancy so created may be filled by the Board of Directors. Section 4.3 Removal. Any officer or agent elected or appointed by the Board may be removed by the vote of at least two-thirds of the Board whenever in its judgment the best interests of the Corporation would be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Section 4.4 Vacancies.. A vacancy in any office because of death, resignation, removal, disqualification or any other cause, may be filled by the Board for the unexpired portion of the term at any regular or special meeting. Section 4.5 Delegation. In the case of absence or inability to act of any officer of the Corporation and of any person herein authorized to act in such person's place, the Board may from time to time delegate the powers or duties of such officer to any other officer or any Director or other person whom it may select. Section 4.6 Bonds. The Board may, by resolution, require any or all of the officers to give bonds to the Corporation, with sufficient surety or sureties, conditioned for the faithful performance of the duties of their respective offices, and to comply with such other conditions as may from time to time be required by the Board. Section 4.7 President. The President shall be the principal executive officer of the Corporation and, subject to the Board's control, shall supervise and control all of the business and affairs of the Corporation. When present, he shall preside over all meetings of shareholders and Directors. With the Secretary or other officer of the Corporation authorized by the Board, he may sign certificates far shares of the Corporation, deeds, mortgages, bonds, contracts, or other instruments that the Board has authorized to be executed, except when the signing and execution thereof has been expressly delegated by the Board or by these Bylaws to some other officer or agent of the Corporation or is required by law to be otherwise signed or executed by some other officer or in some other manner. In general, he shall perform all duties incident to the office of President and such other duties as may be prescribed by the Board from time to time. Section 4.8 Vice President. In the absence of the President or in the event of his death, inability or refusal to act, the executive Vice President, if any, the Vice President (or in the event of more than one Vice President, the Vice President who was first elected to such office) shall perform the duties of the President, and when so acting, shall have all the powers of and be subject to all the restrictions upon the President. Vice Presidents shall perform such other duties as from time to time may be assigned to them by the President or by the Board. Section 4.9 Secretary. The Secretary shall: (a) keep the minutes of shareholders' and Board meetings in one or more books provided for that purpose; (b) see that all notices are duly given in accordance with the provisions of these Bylaws or as required by law; (c) have responsibility for maintaining the corporate records and the seal of the Corporation and see that the seal of the Corporation is affixed to all documents, the execution of which on behalf of the Corporation under its seal is duly authorized; (d) keep a register of the post office address of each shareholder as furnished to the Secretary by each shareholder; (e) sign with the President or a Vice President certificates for shares of the Corporation, the issuance of which have been authorized by resolution of the Board; (f) have general responsibility for the stock transfer books of the Corporation; and (g) in general perform all duties incident to the office of Secretary and such other duties as from time to time may be assigned to him by the President or by the Board. Section 4.10 Treasurer. The Treasurer shall have the custody of all moneys and securities of the Corporation and shall keep regular books of account. The Treasurer shall disburse the funds of the Corporation in payment of the just demands against the Corporation or as may be ordered by the Board, taking proper vouchers for such disbursements, and shall render to the Board from time to time as may be required of the Treasurer, an account of all such transactions as Treasurer and of the financial condition of the Corporation. The Treasurer shall perform such other duties incident to such office or that are properly required of the Treasurer by the Board. The Assistant Treasurer, or Assistant Treasurers in the order designated by the Board, shall perform all of the duties of the Treasurer in the absence or disability of the Treasurer, and at other times may perform such other duties as are directed by the President of the Board. Section 4.11 Salaries. The salaries, if any, of the officers shall be fixed from time to time by the Board, and no officer shall be prevented from receiving such salary by reason of the fact that he is also a Director of the Corporation. ARTICLE V. CONTRACTS, LOANS, CHECKS AND DEPOSITS Section 5.1 Contracts. The Board may authorize any officer or officers, agent or agents, to enter into any contract or execute and deliver any instrument in the name of and on behalf of the Corporation, and such authority may be general or confined to specific instances. Section 5.2 Loans. No loans shall be contracted on behalf of the Corporation and no evidences of indebtedness shall be issued in its name unless authorized by a resolution of the Board. Such authority may be general or confined specific instances. Section 5.3 Loans to Officers and Directors. No loan shall be made by the Corporation to its officers or Directors, unless first approved unanimously by the Board of Directors or first approve by holders of two-thirds of the shares. Section 5.4 Checks, Drafts, etc. All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the Corporation, shall be signed by such officer or officers, agent or agents of the Corporation and in such manner as is from time to time determined by resolution of the Board. Section 5.5 Deposits. All funds of the Corporation not otherwise employed shall be deposited from time to time to the credit of the Corporation in such banks, trust companies or other depositories as the Board may select. ARTICLE VI. CERTIFICATES FOR SHARES AND THEIR TRANSFER Section 6.1 Issuance of Shares. No shares of the Corporation shall be issued unless authorized by the Board. Such authorization shall include the maximum number of shares to be issued and the consideration to be received for each share. No certificate shall be issued for any share until such share is fully paid. Section 6.2 Certificates for Shares. Certificates representing shares of the Corporation shall be signed by the President or the Vice President and by the Secretary and shall include on their face written notice of any restrictions which the Board may impose on the transferability of such shares. All certificates shall be consecutively numbered or otherwise identified. The name and address of the person to whom the shares represented thereby are issued, with the number of shares and date of issue, shall be entered on the stock transfer books of the Corporation. All certificates surrendered to the Corporation for transfer shall be canceled and no new certificate shall be issued until the former certificates for a like number of shares shall have been surrendered and canceled except that in case of a lost, destroyed or mutilated certificate, a new one may be issued therefor upon such terms and indemnity to the Corporation as the Board may prescribe. Section 6.3 Transfers. (a) Transfers of shares shall be made only upon the share transfer books of the Corporation, kept at the registered office of the Corporation or at its principal place of business, or at the office of its transfer agent or registrar, and before a new certificate is issued the old certificate shall be surrendered for cancellation. The Board may, by resolution, open a share register in any state of the United States, and may employ an agent or agents to keep such register, and to record transfers of shares therein. (b) Shares shall be transferred by delivery of the certificates therefor, accompanied either by an assignment in writing on the back of the certificate or an assignment separate from certificate, or by a written power of attorney to sell, assign and transfer the same, signed by the holder of said certificate. No shares of stock shall be transferred on the books of the Corporation until the outstanding certificates therefor have been surrendered to the Corporation. The Board may, by resolution, adopt appropriate procedures to allow transfers of shares, the certificates for which have been lost, stolen, mutilated or destroyed. Section 6.4 Restriction on Transfer. All certificates representing unregistered shares of the Corporation shall bear the following legend on the face of the certificate or on the reverse of the certificate if a reference to the legend is contained on the face: THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SALE OR DISPOSITION MAY BE MADE WITHOUT AN EFFECTIVE REGISTRATION STATEMENT COVERING SAID SHARES OR AN OPINION OF COUNSEL FOR THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES LAWS OF THE STATE HAVING JURISDICTION OVER SUCH SALE OR DISPOSITION. ARTICLE VII. SEAL The seal of this Corporation shall consist of the name of the Corporation and the state and year of its incorporation. ARTICLE VIII. INDEMNIFICATION Section 8.1 Right to Indemnification. Each person who was or is made a party or is threatened to be made a party to or is involved (including, without limitation, as a witness) in any actual or threatened action, suit, or proceeding, whether civil, criminal, administrative, or investigative, by reason of the fact that he or she is or was a Director, officer, employee, or agent of the Corporation or, being or having been such a Director, officer, employee or agent, he or she is or was serving at the request of the Corporation as a director, officer, employee, or agent of another corporation or of a partnership, joint venture, trust, or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee, or agent or in any other capacity while serving as a director, officer, employee, or agent, shall be indemnified and held harmless by the Corporation to the full extent authorized by the Washington Business Corporation Act or other applicable law, as the same exists or may hereafter be amended, against all expense, liability, and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts to be paid in settlement) actually and reasonably incurred or suffered by such person in connection therewith and such indemnification shall continue as to a person who has ceased to be a Director, officer, employee, or agent and shall inure to the benefit of his or her heirs, executors, and administrators; provided, however, that except as provided in Paragraph 8.2 of this Article with respect to proceedings seeking to enforce rights to indemnification, the Corporation shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board of Directors of the Corporation. The right to indemnification conferred in this Paragraph 8.1 shall be a contract right and shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition; provided, however, that the payment of such expenses in advance of the final disposition of a proceeding shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such Director, officer, employee, or agent, to repay all amounts so advanced if it shall ultimately be determined that such Director, officer, employee, or agent is not entitled to be indemnified under this Paragraph 8.1 or otherwise. Section 8.2 Right of Claimant To Bring Suit. If a claim under Paragraph 8.1 of this article is not paid in full by the Corporation within sixty days after a written claim has been received by the Corporation, except in the case of a claim for expenses incurred in defending a proceeding in advance of its final disposition, in which case the applicable period shall be twenty days, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, to the extent successful in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such claim. The claimant shall be presumed to be entitled to indemnification under this article upon submission of a written claim (and, in an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition, where the required undertaking has been tendered to the Corporation) and thereafter the Corporation shall have the burden of proof to overcome the presumption that the claimant is not so entitled. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel, or its shareholders) to have made a determination prior to the commencement of such action that indemnification of, or reimbursement or advancement, of expenses to the claimant is proper in the circumstances nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel, or its shareholders) that the claimant is not entitled to indemnification or to the reimbursement or advancement of expenses shall be a defense to the action or create a presumption that the claimant is not so entitled. Section 8.3 Non-exclusivity of Rights. The right to indemnification and the payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this Article shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the Articles of Incorporation, Bylaws, agreement, vote of shareholders or disinterested Directors, or otherwise. Section 8.4 Insurance Contracts and Funding. The Corporation may maintain insurance, at its expense, to protect itself and any Director, officer, employee, or agent of the Corporation or another Corporation, partnership, joint venture, trust, or other enterprise against any expense, liability, or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability, or loss under the Washington Business Corporation Act. The Corporation may enter into contracts with any Director, officer, employee, or agent of the Corporation in furtherance of the provisions of this Article and may create a trust fund, grant a security interest, or use other means (including, without limitation, a letter of credit) to ensure the payment of such amounts as may be necessary to effect indemnification as provided in this article. Section 8.5 Indemnification of Employees and Agents of the Corporation. The Corporation may, by action of its Board of Directors from time to time, provide indemnification and pay expenses in advance of the final disposition of a proceeding to employees and agents of the Corporation with the same scope and effect as the provisions of this article with respect to the indemnification and advancement of expenses of Directors and officers of the Corporation or pursuant to rights granted pursuant to, or provided by, the Washington Business Corporation Act or otherwise. ARTICLE IX. BOOKS AND RECORDS The Corporation shall keep correct and complete books and records of account and shall keep minutes of the proceedings of its shareholders and Board; and shall keep at its registered office or principal place of business, or at the office of its transfer agent or registrar, a record of its shareholders, giving the names and addresses of all shareholders and the number and class of the shares held by each. Any books, records, and minutes may be in written form or any other form capable of being converted into written form within a reasonable time. ARTICLE X. AMENDMENTS Except to the extent prohibited by law, and only upon a vote of two-thirds of the Board of Directors, these Bylaws may be altered, amended or repealed, and new Bylaws may be adopted by the Board at any regular or special meeting of the Board. Amended December 14, 1987; January l8, 1991; May 29, 1991; June 4, 1992; September 27, 1993; May 17, 1995; and December 20, 1995. EX-5 6 EXHIBIT 10.21 MERGER AGREEMENT AMONG NOAH'S NEW YORK BAGELS, INC., SHAREHOLDERS AND CERTAIN OPTIONHOLDERS OF NOAH'S NEW YORK BAGELS, INC., EINSTEIN BROS. BAGELS, INC. and NNYB ACQUISITION CORPORATION DATED JANUARY 22, 1996 TABLE OF CONTENTS Page Article 1. The Merger; the Stock Purchase 1. 1.1 The Merger 1. 1.2 Effective Time of the Merger 1. 1.3 Articles of Incorporation of the Company 2. 1.4 Bylaws of the Company 2. 1.5 Treatment of Shares of the Company 2. 1.6 Treatment of Optionees 2. 1.7 Treatment of Shares of Common Stock of Merger Sub 2. 1.8 Time and Place of the Closing 2. 1.9 The Merger 2. 1.10 The Stock Purchase 3. Article 2. Representations and Warranties of the Shareholders Concerning the Transaction 3. 2.1 Organization of Certain Shareholders; Due Authorization 3. 2.2 Binding Obligation 3. 2.3 Ownership of Shares of the Company By the Shareholders 4. 2.4 Investment Bankers' and Brokers' Fees 4. 2.5 Acquisition of Purchased Shares 4. 2.6 Status of Shareholders for Tax Purposes 4. Article 3. Representations and Warranties of Einstein Bros. and Merger Sub 4. 3.1 Organization, Power and Authority of Einstein Bros. and Merger Sub 4. 3.2 Binding Obligation; Noncontravention 5. 3.3 Capital Stock of Einstein Bros. 5. 3.4 Capital Stock of Merger Sub 5. 3.5 Certificates of Incorporation and Bylaws of Einstein Bros. and Merger Sub 5. 3.6 Purchased Shares 6. 3.7 Financial Statements of Einstein Bros. 6. 3.8 Liabilities of Einstein Bros. 6. 3.9 Assets of Einstein Bros. 6. 3.10 Licenses and Permits of Einstein Bros. 6. 3.11 Proprietary Rights of Einstein Bros. 6. 3.12 Adequacy of Einstein Bros.' Assets 7. 3.13 Litigation Concerning Einstein Bros. 7. 3.14 No Material Adverse Change 7. 3.15 Compliance With Laws 7. 3.16 Investment Bankers' and Brokers' Fees 7. 3.17 Products Liability 7. 3.18 Records of Einstein Bros. 7. 3.19 Material Transactions 7. 3.20 Accuracy Of Information Furnished By Einstein Bros. 7. 3.21 Hart-Scott-Rodino Act Reporting Matters 8. Article 4. Representations and Warranties Concerning the Company 8. 4.1 Organization, Power and Authority of the Company; Binding Obligation 8. 4.2 Capital Stock of the Company 9. 4.3 Subsidiaries of the Company 9. 4.4 Financial Statements of the Company 9. 4.5 Liabilities of the Company 10. 4.6 Tax Matters 10. 4.7 Real Estate of the Company 11. 4.8 Good Title to and Condition of the Company's Assets 12. 4.9 Products Liability 12. 4.10 Licenses and Permits of the Company 12. 4.11 Proprietary Rights of the Company 12. 4.12 Adequacy of the Company's Assets; the Company's Relationships with its Customers and Suppliers 13. 4.13 Documents of and Information with Respect to the Company 13. 4.14 Insurance Covering the Company and its Assets 14. 4.15 Litigation Involving the Company 14. 4.16 Records of the Company 14. 4.17 No Material Adverse Change 14. 4.18 Absence of Certain Acts or Events 15. 4.19 Compliance with Laws by the Company 15. 4.20 Environmental Matters 15. 4.21 Labor Relations of the Company 16. 4.22 Employee Benefits 17. 4.23 Accuracy of Information Furnished by the Company 18. 4.24 HSR Act Reporting Matters 18. Article 5. Additional Covenants of the Shareholders and the Company 19. 5.1 Reasonable Best Efforts 19. 5.2 Conduct of Business Pending the Closing 19. 5.3 Access to the Company's Stores, Properties and Records 19. 5.4 Notice of Material Developments 20. 5.5 No Other Discussions 20. Article 6. Additional Covenants of Einstein Bros. and Merger Sub 20. 6.1 Reasonable Best Efforts 20. 6.2 Guarantee of Performance by Merger Sub 20. 6.3 Conduct Of Business Pending The Closing 20. 6.4 Notice Of Material Developments 21. Article 7. Conditions To The Obligation Of Einstein Bros. And Merger Sub 21. 7.1 Accuracy of Representations and Warranties and Compliance with Obligations 21. 7.2 Opinion of Counsel 21. 7.3 Receipt of Bank Consent 21. 7.4 No Adverse Litigation 21. 7.5 Resignations 21. 7.6 Employment and Consulting Agreements; Options 21. 7.7 Landlord Consents 22. 7.8 Qualifications, Legal Investment 22. 7.9 Termination Of Certain Agreements 22. Article 8. Conditions to Obligation of the Shareholders and the Company 22. 8.1 Accuracy of Representations and Warranties and Compliance with Obligations 22. 8.2 Opinion of Counsel 23. 8.3 Einstein Bros. Registration Rights Agreement 23. 8.4 Election of Noah Alper 23. 8.5 Agreements with Certain Members of Noah's Management 23. 8.6 Receipt Of Bank Consent 23. 8.7 No Adverse Litigation 23. 8.8 Landlord Consents 23. Article 9. Certain Actions After the Closing 23. 9.1 Execution of Further Documents 23. 9.2 Restrictions on Transfer of Purchased Shares 24. 9.3 Certain Post-Closing Cooperation 25. 9.4 Certain Voting Agreements 25. 9.5 Confidential Information 26. 9.6 Restrictive Covenants 27. 9.7 Additional Agreements Of Starbucks, the Company And Einstein Bros. 27. 9.8 Additional Agreement Of Noah Alper 28. 9.9 Remedies; Waiver 28. 9.10 Employee Benefit Plans 29. Article 10. Indemnification 29. 10.1 Agreement by the Shareholders to Indemnify 29. Article 11. Miscellaneous 32. 11.1 Amendment and Modification 32. 11.2 Payment of Expenses 32. 11.3 Termination 33. 11.4 Binding Effect 33. 11.5 Entire Agreement 33. 11.6 Headings 33. 11.7 Certain Defined Terms 33. 11.8 Execution in Counterpart 34. 11.9 Notices 34. 11.10 Governing Law 35. 11.11 Amendment and Restatement 35. MERGER AGREEMENT This Merger Agreement (the "Agreement") is made and entered into as of the 22nd day of January, 1996 by and among Noah's New York Bagels, Inc., a California corporation (the "Company"), the shareholders of the Company who have executed this Agreement (collectively, the "Shareholders"), the holders of Options (as defined in Section 1.6) who are Purchasers (as defined in Section 1.1), Einstein Bros. Bagels, Inc., a Delaware corporation ("Einstein Bros."), and NNYB Acquisition Corporation, a Delaware corporation ("Merger Sub"). Recitals The Shareholders own a majority of the issued and outstanding shares of capital stock of the Company. The parties desire that Merger Sub be merged with and into the Company, with the Company being the surviving corporation in the merger and the outstanding shares of capital stock of the Company being converted into cash, on the terms and subject to the conditions set forth herein. The board of directors of each of the Company, Einstein Bros. and Merger Sub has approved and adopted such merger on the terms and subject to the conditions set forth herein. Immediately after such merger, certain of the Shareholders and holders of Options desire to purchase shares of Einstein Bros. Common Stock on the terms and subject to the conditions set forth herein. COVENANTS In consideration of the mutual representations, warranties and covenants and subject to the conditions herein contained, the parties hereto agree as follows: ARTICLE 1. THE MERGER; THE STOCK PURCHASE 1.1 THE MERGER. At the Closing (as defined in Section 1.8), on the terms and subject to the conditions set forth in this Agreement, and in accordance with the General Corporation Law of the State of Delaware (the "Delaware Act") and the General Corporation Law of the State of California (the "California Act"), Merger Sub shall be merged with and into the Company (the "Merger"). Following the Merger, the Company shall continue as the surviving corporation (the "Surviving Company") and the separate existence of Merger Sub shall cease. 1.2 Effective Time of the Merger. The Merger shall become effective at the time (the "Effective Time") the Company and Merger Sub file an agreement of merger in the form attached as Exhibit A hereto (the "Merger Agreement") with the Secretary of State of Delaware and the Secretary of State of California. The Surviving Company may, at any time after the Effective Time, take any action (including executing and delivering any document) in the name and on behalf of either the Company or Merger Sub in order to carry out and effectuate the transactions contemplated by this Agreement. 1.3 Articles of Incorporation of the Company. The Articles of Incorporation of the Surviving Company shall be the Articles of Incorporation of the Company as they exist immediately prior to the Effective Time. 1.4 Bylaws of the Company. The bylaws of the Surviving Company shall be the bylaws of the Company as they exist immediately prior to the Effective Time. 1.5 Treatment of Shares of the Company. At and as of the Effective Time, each outstanding share of capital stock of the Company shall be converted into the right to receive an amount in cash (the "Per Share Merger Consideration") equal to (a) $100,900,000, less the amounts paid to persons identified in the first sentence of Section 11.2, plus the aggregate exercise price of all Options (as defined in Section 1.6), divided by (b) the total number of shares of capital stock of the Company outstanding immediately prior to the Effective Time, plus the total number of shares of capital stock subject to the Options. 1.6 Treatment of Optionees. Subject to obtaining the consent of the shareholders of the Company required under Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), immediately prior to the Effective Time, the Company shall accelerate the vesting of the options held by the optionees identified in the Disclosure Schedule (other than options to purchase 240,000 shares of Common Stock held by Glenn Bacheller) that have not been exercised (the "Options"). At the Effective Time, Einstein Bros. shall pay to each of such optionees in cancellation and satisfaction of his or her Options an amount equal to (a) the total number of shares subject to such optionee's Options, multiplied by the Per Share Merger Consideration, less (b) the aggregate exercise price of such optionee's Options. 1.7 Treatment of Shares of Common Stock of Merger Sub. At and as of the Effective Time, each share of Common Stock of Merger Sub shall be converted into the right to receive one share of Common Stock of the Company. 1.8 Time and Place of the Closing. The Merger shall take place at the offices of Cooley Godward Castro Huddleson & Tatum, One Maritime Plaza, 20th Floor, San Francisco, California at 10:00 a.m., local time, on January 31, 1996; provided, however, that if any of the conditions which are set forth in Articles 7 and 8 have not been satisfied or waived by said date, then, subject to the provisions of Section 11.3 hereof, such transactions shall take place on a subsequent date, which shall be determined by the mutual agreement of Einstein Bros. and the Company. Throughout this Agreement, the consummation of the Merger is referred to as the "Closing" and such date and time are referred to as the "Closing Date." 1.9 The Merger. At the Closing: 1.9.1 Merger Sub and the Company shall file the Merger Agreement with the Secretary of State of California and the Secretary of State of Delaware. 1.9.2 Einstein Bros. (a) shall cause the consideration to be paid to the shareholders and optionholders of the Company in the manner provided in Section 1.5 and Section 1.6, respectively, and (b) shall pay to Alex. Brown & Sons Incorporated and the other persons identified in the first sentence of Section 11.2 hereof the amounts it is instructed in writing by the Company to pay. The parties may cause such payments to be made by a paying agent of the Company, if Einstein Bros. so elects, with the fees of the paying agent to be paid by Einstein Bros. 1.10 The Stock Purchase. Immediately following the Closing, and on the terms and subject to the conditions set forth in this Agreement, the Shareholders and holders of Options identified on Schedule 1.10 (the "Purchasers") will purchase the number of shares of Common Stock of Einstein Bros. set forth opposite their respective names on Schedule 1.1 under the heading "Purchased Shares," in exchange for the cash payment set forth opposite their respective names on Schedule 1.10 under the heading "Purchase Price," for an aggregate of 3,801 shares of Einstein Bros. Common Stock. (Such transaction is herein sometimes referred to as the "Purchase" and the shares of Einstein Bros. Common Stock so purchased are herein sometimes collectively referred to as the "Purchased Shares.") Each Purchaser hereby authorizes Einstein Bros. to withhold such Purchaser's Purchase Price from the consideration to be received by such Purchaser pursuant to Sections 1.5 and 1.6. Article 2. Representations and Warranties of the Shareholders Concerning the Transaction In order to induce Einstein Bros. and Merger Sub to enter into this Agreement and to consummate the transactions contemplated hereunder, except as set forth in the Disclosure Schedule attached hereto, each Shareholder makes the following representations and warranties: 2.1 ORGANIZATION OF CERTAIN SHAREHOLDERS; DUE AUTHORIZATION. If such Shareholder is a corporation or a partnership, such Shareholder is duly organized and legally existing in good standing under the laws of the jurisdiction of its organization, with full power and authority to enter into this Agreement and to carry out the transactions and agreements contemplated hereby. The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary action of such Shareholder. 2.2 Binding Obligation. This Agreement has been duly executed and delivered by such Shareholder and is a valid and binding obligation of such Shareholder, enforceable in accordance with its terms, except to the extent that such enforceability may be limited by applicable bankruptcy, insolvency or similar laws affecting creditors' rights generally or general principles of equity. Neither the execution and delivery of this Agreement by such Shareholder nor the consummation of the transactions contemplated hereby will: (i) conflict with or violate any decree or order of any court or administrative or other governmental body which is either applicable to, binding upon or enforceable against such Shareholder; or (ii) assuming, in the case of Starbucks Corporation ("Starbucks"), the satisfaction of the condition set forth in Section 8.6, result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify or cancel, or require any notice under, any mortgage, contract, agreement, indenture, will, trust or other instrument which is either binding upon or enforceable against such Shareholder. No permit, consent, approval or authorization of, or declaration to or filing with, any regulatory or other government authority is required in connection with the execution and delivery of this Agreement by such Shareholder and the consummation by such Shareholder of the transactions contemplated hereby. 2.3 Ownership of Shares of the Company By the Shareholders. Such Shareholder is the lawful record and beneficial owner of all of the shares of capital stock of the Company shown as owned by such Shareholder in the Disclosure Schedule and has valid title thereto, free and clear of all liens, pledges, encumbrances, security interests, restrictions on transfer (other than restrictions under federal and state securities laws), claims and equities of every kind, except those arising under the agreements listed in the Disclosure Schedule. Except for this Agreement and the agreements listed in the Disclosure Schedule, there are no outstanding warrants, options or rights of any kind to acquire from such Shareholder any of such Shares. 2.4 Investment Bankers' and Brokers' Fees. Such Shareholder has no obligation to pay any fees or commissions to any investment banker, broker, finder or agent with respect to the transactions contemplated by this Agreement, except its obligation under Section 11.2 hereof to pay the fees of Alex. Brown & Sons Incorporated. 2.5 Acquisition of Purchased Shares. If such Shareholder is a Purchaser, such Purchaser is acquiring Purchased Shares for such Shareholder's own account and not with a view to, or for sale in connection with, any distribution thereof. Such Purchaser understands that the Purchased Shares will not have been registered under the Securities Act of 1933, as amended, or under any state securities laws, and that, except as provided in the Amended and Restated Registration Rights Agreement (as hereinafter defined), Einstein Bros. does not contemplate nor is Einstein Bros. legally required to file a registration statement for the purpose of registering the Purchased Shares under any of such laws. Such Purchaser is an "accredited investor" as that term is defined in Rule 501 of Regulation D under the Securities Act of 1933 and confirms that all documents, records and books pertaining to Einstein Bros. and its business have been made available to such Purchaser and that such Purchaser has been given an opportunity to make any further inquiries of Einstein Bros. and its representatives that such Purchaser desires to make and that each such inquiry has been answered, or requested information provided, to such Purchaser's satisfaction. 2.6 Status of Shareholders for Tax Purposes. Such Shareholder is a U.S. person (as defined in Section 7701(a)(30) of the Code). Article 3. Representations and Warranties of Einstein Bros. and Merger Sub. In order to induce the Company and the Shareholders to enter into this Agreement and to consummate the transactions contemplated hereunder, except as set forth in the Einstein Bros. Disclosure Schedule, Einstein Bros. and Merger Sub make the following representations and warranties: 3.1 Organization, Power and Authority of Einstein Bros. and Merger Sub. Each of Einstein Bros. and Merger Sub is a corporation duly organized and validly existing in good standing under the laws of the State of Delaware, with full corporate power and authority to enter into this Agreement and to carry out the transactions and agreements contemplated hereby. The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action of each of Einstein Bros. and the Merger Sub. 3.2 Binding Obligation; Noncontravention. This Agreement and the Merger Agreement have been duly executed and delivered by each of Einstein Bros. and Merger Sub that is a party thereto and each such agreement is a valid and binding obligation of each of Einstein Bros. and Merger Sub that is a party thereto, enforceable in accordance with its terms, except to the extent that such enforceability may be limited by applicable bankruptcy, insolvency or similar laws affecting creditors' rights generally, or general principles of equity. Neither the execution and delivery of this Agreement and the Merger Agreement by each of Einstein Bros. and Merger Sub that is a party thereto nor the consummation of the transactions contemplated hereby will: (i) conflict with or violate any provision of the certificate of incorporation or bylaws of Einstein Bros. or Merger Sub or of any decree or order of any court or administrative or other governmental body which is either applicable to, binding upon or enforceable against Einstein Bros. or Merger Sub; or (ii) assuming satisfaction of the conditions set forth in Article 7.3, result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify or cancel, or require any notice under, any mortgage, contract, agreement, indenture or other instrument which is either binding upon or enforceable against Einstein Bros. or Merger Sub. Assuming the accuracy of the representations of the Company in Section 4.24, no permit, consent, approval or authorization of, or declaration to or filing with, any regulatory or other government authority is required in connection with the execution and delivery of this Agreement and the Merger Agreement by each of Einstein Bros. and Merger Sub that is a party thereto and the consummation of the transactions contemplated hereby, except for the filing of the Merger Agreement and filings under federal and state securities laws. 3.3 Capital Stock of Einstein Bros. The authorized capital stock of Einstein Bros. consists solely of 1,000,000 shares of Common Stock, $.01 par value per share, 24,754.92 shares of which are issued and outstanding and none of which are issued and held in its treasury, and 200,000 shares of Preferred Stock, $.01 par value, 6,250 shares of which are issued and designated as Series A Preferred Stock. Except as set forth in Section 1.10 or the Einstein Bros. Disclosure Schedule: (i) there are no outstanding warrants, options or rights of any kind to acquire from Einstein Bros. any shares of its Common Stock or securities of any kind, (ii) there are no pre-emptive rights with respect to the issuance or sale of shares of capital stock of Einstein Bros. and (iii) there are no voting trusts, proxies or other agreements or understandings with respect to the voting of the capital stock of Einstein Bros. 3.4 Capital Stock of Merger Sub. The authorized capital stock of Merger Sub consists solely of 100 shares of Common Stock, $.01 par value per share, 100 shares of which are issued and outstanding and none of which are issued and held in its treasury. 3.5 Certificates of Incorporation and Bylaws of Einstein Bros. and Merger Sub. Einstein Bros. has previously delivered to the Company copies of the certificate of incorporation and all amendments thereto to date (certified by the Secretary of State of Delaware) and of the bylaws of each of Einstein Bros. and Merger Sub. 3.6 PURCHASED SHARES. The Purchased Shares, when issued at the Closing, will be duly authorized, validly issued, fully paid and nonassessable shares of Common Stock, $.01 par value per share, of Einstein Bros. 3.7 FINANCIAL STATEMENTS OF EINSTEIN BROS. Set forth in the Einstein Bros. Disclosure Schedule, are the following financial statements of Einstein Bros: (i) audited consolidated balance sheet at March 24, 1995, (ii) unaudited consolidated balance sheet at December 31, 1995, and (iii) unaudited consolidated statement of operations for the period from March 24, 1995 to December 31, 1995. Such financial statements present fairly the consolidated financial position of Einstein Bros. at each of such balance sheet dates and the results of its operations for each of the periods covered, and they have been prepared in conformity with generally accepted accounting principles except that the unaudited financial statements are subject to normal recurring year end audit adjustments, none of which will be material, and do not contain either the statement of cash flows or the footnotes required under generally accepted accounting principles. The December 31, 1995 balance sheet is herein sometimes referred to as the "Einstein Bros. Balance Sheet." 3.8 LIABILITIES OF EINSTEIN BROS. As of the date of the Einstein Bros. Balance Sheet, Einstein Bros. had no material liabilities of a type required to be set forth on a balance sheet prepared in accordance with generally accepted accounting principles, except as set forth on the Einstein Bros. Balance Sheet. 3.9 ASSETS OF EINSTEIN BROS. Einstein Bros. has good and marketable title to all of its assets and properties, free and clear of all liens, mortgages, pledges, encumbrances or charges of every kind, nature and description whatsoever, except for mortgages, pledges and security interests granted under or pursuant to the secured loan agreement between Boston Chicken, Inc. ("BCI") and Einstein Bros. dated March 24, 1995, as amended, and such liens, mortgages, pledges, encumbrances or charges as do not have a Material Adverse Effect (as defined in Section 11.7). 3.10 LICENSES AND PERMITS OF EINSTEIN BROS. Einstein Bros. possesses all licenses and other required governmental or official approvals, permits or authorizations, the failure to possess which would have a Material Adverse Effect. All such licenses, approvals, permits and authorizations that are material to Einstein Bros.' business are in full force and effect, Einstein Bros. is in substantial compliance with their requirements, and no proceeding is pending or, to the Best of the Knowledge of Einstein Bros. (as defined in Section 11.7), threatened to revoke or amend any of them. 3.11 PROPRIETARY RIGHTS OF EINSTEIN BROS. To the Best of the Knowledge of Einstein Bros., except as set forth in the Einstein Bros. Disclosure Schedule, Einstein Bros. possesses all proprietary rights to carry on its business as now being conducted without conflict with valid proprietary rights of others. 3.12 ADEQUACY OF EINSTEIN BROS.' ASSETS. The assets and properties of Einstein Bros. constitute, in the aggregate, all of the property necessary for the conduct of Einstein Bros.' business in the manner in which and to the extent to which it is currently being conducted. Except as set forth in this Agreement, Einstein Bros. is not restricted by agreement from carrying on its current business anywhere in the world. 3.13 LITIGATION CONCERNING EINSTEIN BROS. There are on the date hereof no actions, suits, claims, governmental investigations or arbitration proceedings pending or to the Best of the Knowledge of Einstein Bros. threatened against or affecting Einstein Bros. or any of its assets or properties which, if determined adversely to Einstein Bros., would have a Material Adverse Effect. 3.14 NO MATERIAL ADVERSE CHANGE. From the date of the Einstein Bros. Balance Sheet to the date of this Agreement, there have not been any changes in the business or properties of Einstein Bros., or in its consolidated financial condition, other than changes occurring in the ordinary course of business which in the aggregate have not had a Material Adverse Effect. 3.15 COMPLIANCE WITH LAWS. Einstein Bros. is in substantial compliance with all laws, regulations and orders applicable to it, its assets, properties and business, except where the failure so to comply would not have a Material Adverse Effect. 3.16 INVESTMENT BANKERS' AND BROKERS' FEES. Einstein Bros. does not have any obligation to pay any fees or commissions to any investment banker, broker, finder or agent with respect to the transactions contemplated by this Agreement. 3.17 PRODUCTS LIABILITY. Einstein Bros. has no liability (and to the Best of the Knowledge of Einstein Bros. there is no basis for any liability) arising out of any injury to individuals or property as a result of the ownership, possession, use or consumption of any product manufactured, sold or delivered by Einstein Bros. 3.18 RECORDS OF EINSTEIN BROS. A record of all action taken by the stockholders and board of directors of Einstein Bros. and all minutes of their meetings are contained in the minute books of Einstein Bros. and are accurate and complete, except that such minute books do not contain minutes of meetings of directors held in November, December and January. The stock records and stock ledgers of Einstein Bros. contain an accurate and complete record of all issuances, transfers and cancellations of shares of capital stock of Einstein Bros. 3.19 MATERIAL TRANSACTIONS. Except as set forth in the Einstein Bros. Disclosure Schedule, since the date of the Einstein Bros. Balance Sheet, Einstein Bros. has not incurred any material obligations (including any indebtedness) or entered into any material transaction, except in the ordinary course of business and except for this Agreement and the transactions contemplated hereby. 3.20 ACCURACY OF INFORMATION FURNISHED BY EINSTEIN BROS. No representation, statement or information made or furnished in writing by Einstein Bros. to the Company or the Purchasers, including, without limitation, those contained in this Agreement and the Einstein Bros. Disclosure Schedule, taken as a whole, contains any untrue statement of a material fact or omits any material fact necessary to make the representations, statements and information made or furnished therein, in light of the circumstances in which they were made, not misleading. 3.21 HART-SCOTT-RODINO ACT REPORTING MATTERS. Einstein Bros. is the "ultimate parent entity" of Einstein Bros. within the meaning of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"). Einstein Bros. does not have total assets, and did not record annual net sales for its most recent fiscal year, in excess of $100,000,000, for purposes of the HSR Act. Article 4. Representations and Warranties Concerning the Company In order to induce Einstein Bros. and Merger Sub to enter into this Agreement and to consummate the transactions contemplated hereunder, except as set forth in the Disclosure Schedule, the Company makes the following representations and warranties: 4.1 ORGANIZATION, POWER AND AUTHORITY OF THE COMPANY; BINDING OBLIGATION. The Company is a corporation duly organized and legally existing in good standing under the laws of California, and has full corporate power and authority (i) to enter into this Agreement and to carry out the transactions and agreements contemplated hereby, and (ii) to carry on its business as it is now being conducted. The Company is legally qualified to transact business as a foreign corporation, and is in good standing, in the jurisdictions identified in the Disclosure Schedule, those being the only jurisdictions in which its business or property is such as to require that it be thus qualified. This Agreement and the Merger Agreement have been duly authorized by all necessary corporate action of the Company, including its board of directors and shareholders, and each such agreement has been duly executed and delivered by the Company and is a valid and binding obligation of the Company, enforceable in accordance with its terms, except to the extent that such enforceability may be limited by applicable bankruptcy, insolvency or similar laws affecting creditors' rights generally or general principles of equity. Neither the execution and delivery of this Agreement and the Merger Agreement by the Company nor the consummation of the transactions contemplated hereby will: (i) conflict with or violate any provision of the articles of incorporation or bylaws of the Company, or any decree or order of any court or administrative or other governmental body which is either applicable to, binding upon or enforceable against the Company; or (ii) except as set forth in the Disclosure Schedule, result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify or cancel, or require any notice under, any mortgage, contract, agreement, indenture, will, trust or other instrument which is either binding upon or enforceable against the Company or the assets and properties of the Company. Assuming the accuracy of the representations of Einstein Bros. in Section 3.21 hereof, no permit, consent, approval or authorization of, or declaration to or filing with, any regulatory or other government authority is required in connection with the execution and delivery of this Agreement and the Merger Agreement by the Company and the consummation by it of the transactions contemplated hereby, except for the filing of the Merger Agreement and filings under federal and state securities laws. 4.2 CAPITAL STOCK OF THE COMPANY. The authorized capital stock of the Company consists solely of: 38,000,000 shares of Common Stock without par value, of which 5,365,197 shares are issued and outstanding and none of which are issued and held in its treasury; 38,000,000 shares of Preferred Stock without par value, of which 3,375,000 shares are designated "Series A Preferred Stock" (of which 3,286,406 are issued and outstanding) and 4,904,425 shares are designed "Series B Preferred Stock" (of which 4,744,838 are issued and outstanding). No shares of Preferred Stock are issued and held in the Company's treasury and no other shares of capital stock are outstanding. All voting rights in the Company are vested exclusively in its shares of Common and Preferred Stock, and, except for the agreements listed in the Disclosure Schedule, there are no voting trusts, proxies or other agreements or understandings with respect to the voting of the capital stock of the Company. All of the issued and outstanding shares of Common Stock of the Company are validly authorized and issued, fully paid and non-assessable. The Disclosure Schedule sets forth the name of, and the number of shares of Common Stock of the Company owned by, each shareholder of record as of the date hereof. Except as set forth in the Disclosure Schedule, which lists each outstanding option granted by the Company, the name of the optionee, the number of shares subject to the option and the plan pursuant to which such option was granted, there are no outstanding warrants, options or rights of any kind to acquire from the Company any shares of its Common Stock or securities of any kind, and there are no preemptive rights with respect to the issuance or sale of shares of capital stock of the Company. The Company has delivered to Einstein Bros. true and correct copies of all option plans and option agreements entered into by the Company. The Company has no obligation to acquire any of its issued and outstanding shares of Common Stock or any other security issued by it from any holder thereof. 4.3 SUBSIDIARIES OF THE COMPANY. The Company has no equity interest or the right or obligation to acquire an equity interest, in any other person or entity. 4.4 FINANCIAL STATEMENTS OF THE COMPANY. Set forth in the Disclosure Schedule are the following financial statements of the Company: 4.4.1 audited balance sheets at December 31 of each of the years 1993 and 1994; 4.4.2 an unaudited balance sheet of the Company at November 25, 1995; 4.4.3 audited statements of operations and retained earnings and statements of cash flow for each year in the two-year period ended December 31, 1994; and 4.4.4 an unaudited statement of operations of the Company for the forty-seven week period ended November 25, 1995. Such financial statements present fairly the financial position of the Company at each of the said balance sheet dates and the results of its operations for each of the said periods covered, and they have been prepared in conformity with generally accepted accounting principles applied on a consistent basis except as may be disclosed in the notes thereto; provided, however, that the unaudited financial statements are subject to normal recurring year end audit adjustments, none of which will be material, and do not contain either the statement of cash flows or the footnotes required under generally accepted accounting principles. The unaudited balance sheet of the Company at November 25, 1995 is referred to herein as the "1995 Balance Sheet." 4.5 Liabilities of the Company. The Company has no liabilities or obligations, either accrued, absolute, contingent or otherwise, except: (i) to the extent reflected or taken into account in determining net worth in the 1995 Balance Sheet and not heretofore paid or discharged; (ii) to the extent clearly disclosed and specifically set forth in or incorporated by express reference in any of the schedules attached hereto; (iii) obligations incurred in the ordinary course of business that can be terminated by the Company on not more than 30 days' notice without liability to the Company in excess of $25,000; and (iv) liabilities incurred in the ordinary course of business, consistent with prior practice, since the date of the 1995 Balance Sheet. The Company has no obligation to pay any fees or commissions to any investment banker, broker, finder or agent with respect to the transactions contemplated by this Agreement, except for the fees of Alex. Brown & Sons Incorporated. 4.6 Tax Matters. 4.6.1 The Company has accurately prepared and timely filed all tax returns and reports required to be filed by it, including without limitation all federal, state, local and foreign tax returns, and has paid in full all taxes and other charges which have become due in connection therewith. The amounts provided in the 1995 Balance Sheet for taxes are adequate to cover all unpaid liabilities for all federal, state, local and foreign taxes and other charges in connection therewith which were accrued through, or applicable to the period ended, November 25, 1995 and for which the Company may be liable in its own right or as a transferee of the assets of, or successor to, any other person or entity. There is no tax deficiency proposed or, to the Best of the Knowledge of the Company, threatened against the Company. There are no tax liens upon any property or assets of the Company except liens for current taxes not yet due and payable. The Company has made all payments of estimated taxes when due in amounts sufficient to avoid the imposition of any penalty. 4.6.2 All taxes and other assessments and levies which the Company was required by law to withhold or to collect have been duly withheld and collected, and have been paid over to the proper governmental entity or are being held by the Company, and all such withholdings and collections and all other payments due in connection therewith as of the date of the 1995 Balance Sheet are duly reflected on the 1995 Balance Sheet. 4.6.3 The Company has not been advised that any of the tax returns of the Company is under audit or examination by any tax authority, and there are no outstanding agreements or waivers extending the statute of limitations applicable to any federal or state income tax returns of the Company for any period. The Company has previously delivered to Einstein Bros. accurate and complete copies of all federal and state income tax returns, examination reports and statements of deficiencies assessed against or agreed to by the Company. 4.6.4 The Company has not consented to have the provisions of Section 341(f)(2) of the Code apply, nor has the Company made any "qualified stock purchases," as defined in Section 338 of the Code. 4.6.5 The Company is not, and has not been during the applicable period specified in Section 897(c)(1)(A)(ii) of the Code, a United States real property holding corporation, within the meaning of Section 897(c)(2) of the Code. 4.6.6 To the extent the Company is obligated to make a payment to any individual that would not be deductible to the Company because of the provisions of Section 280G of the Code, or otherwise makes such a payment under this Agreement, the Company shall obtain prior to Closing consents of its shareholders sufficient so that Section 280G shall not apply. 4.7 Real Estate of the Company. 4.7.1 The Company owns no fee interests in real estate. 4.7.2 The Disclosure Schedule accurately and completely sets forth, with respect to every parcel of real estate leased by the Company (the "Leasehold Premises"), the lessor and lessee thereof and the date and term of the lease governing such property. The Company has previously delivered to Einstein Bros. accurate and complete copies of each of the leases covering the Leasehold Premises, and none of such leases has been amended or modified except to the extent that such amendments or modifications are disclosed in such copies or in the Disclosure Schedule. All of the leases covering the Leasehold Premises are in full force and effect, and the Company is not in material default or breach under any such lease. No event has occurred which with the passage of time or the giving of notice or both would cause a material breach of or default by the Company under any such lease. To the Best of the Knowledge of the Company, there is no breach or anticipated breach by the other parties to such lease. 4.7.3 The Leasehold Premises are each in good operating condition, normal wear and tear excepted. The Company's commissary is sufficient to satisfy the Company's current normal production levels. The Company has received no notice of: (i) any condemnation proceeding with respect to any portion of the Leasehold Premises, and to the Best of the Knowledge of the Company no proceeding is contemplated by any governmental authority; or (ii) any special assessment which may affect the Leasehold Premises, and to the Best of the Knowledge of the Company no such special assessment is contemplated by any governmental authority. 4.8 GOOD TITLE TO AND CONDITION OF THE COMPANY'S ASSETS. The Company has good and marketable title to all of its assets and properties, free and clear of all liens, mortgages, pledges, encumbrances or charges of every kind, nature, and description whatsoever, except: (i) those set forth in the Disclosure Schedule, (ii) liens for current taxes not yet due and payable, (iii) purchase money security interests in equipment in or for use by the Company's stores, commissaries, or corporate offices, and (iv) minor liens or encumbrances that have no material effect on the value of the Company's assets and do not impair the present use or marketability of such assets. The Company's fixed assets are in good operating condition, normal wear and tear excepted. The inventory and supplies of the Company consist of items of a quality and quantity saleable or usable, respectively, in the normal course of the Company's business at values in the aggregate at least equal to the values at which such items are carried on its books, net of reserves therefor on the 1995 Balance Sheet. 4.9 PRODUCTS LIABILITY. The Company has no liability (and to the Best of the Knowledge of the Company there is no basis for any liability) arising out of any injury to individuals or property as a result of the ownership, possession, use or consumption of any product manufactured, sold or delivered by the Company. 4.10 LICENSES AND PERMITS OF THE COMPANY. The Company possesses all licenses and other required governmental or official approvals, permits or authorizations, the failure to possess which would have a Material Adverse Effect. All such licenses, approvals, permits and authorizations are in full force and effect, the Company is in compliance with their requirements, and no proceeding is pending or, to the Best of the Knowledge of the Company, threatened to revoke or amend any of them. None of such licenses, approvals, permits and authorizations are or will be impaired or in any way affected by the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby. 4.11 PROPRIETARY RIGHTS OF THE COMPANY. To the Best of the Knowledge of the Company, except as set forth in the Disclosure Schedule, the Company possesses all proprietary rights, to carry on its business as now being conducted without conflict with valid proprietary rights of others. The Disclosure Schedule contains an accurate and complete list of all trade secrets, technology, know-how, copyrights, common law trademarks and service marks, trademark and service mark registrations and applications, trade names, and rights to any of the foregoing, owned by the Company, or in which it has any interest (collectively, "Proprietary Rights"), and each jurisdiction in which each such Proprietary Right is registered and the number and expiration date, if applicable, for such registration and each jurisdiction in which an application to register such item is pending and the date such application was made. Except as set forth on the Disclosure Schedule, (i) the Company owns full, exclusive and unencumbered title in the United States in and to and the exclusive right to use all of the Proprietary Rights, (except that the Company makes no representation that its formulas and processes are protectable trade secrets), (ii) as to the registrations set forth in the Disclosure Schedule, all such registrations are presently in full force and effect, (iii) as to the applications for marks set forth in the Disclosure Schedule, all such applications are presently pending with no known grounds for refusal or outstanding officer actions; (iv) there are no legal or administrative actions, challenges or other adverse claims or challenges pending or, to the Best of the Knowledge of the Company, threatened against any of the Proprietary Rights and there are no grounds for the same, (v) the Company has not entered into any licenses regarding the Proprietary Rights or any open agreement with any third party acknowledging any prior rights or consenting to any concurrent right of any other party or granting any right to any other party to use any proprietary right that is confusingly similar to any of the trademarks, service marks or trade dress included in the Proprietary Rights and (vi) to the Best of the Knowledge of the Company no other person or entity is using any of the Proprietary Rights or any trademark or service mark that is confusingly similar to any of the Proprietary Rights. 4.12 ADEQUACY OF THE COMPANY'S ASSETS; THE COMPANY'S RELATIONSHIPS WITH ITS CUSTOMERS AND SUPPLIERS. The assets and properties of the Company constitute, in the aggregate, all of the property necessary for the conduct of the Company's business in the manner in which and to the extent to which it is currently being conducted. Except for the joint venture between Starbucks and Bagel Oasis no officer or director of the Company has any direct or indirect interest in any customer, supplier or competitor of the Company or in any person from whom or to whom the Company leases real or personal property, or in any other person with whom the Company is doing business, except for the ownership of less than 5% of a public company. The Company is not restricted by agreement from carrying on its business anywhere in the world. All agreements, contracts, commitments or arrangements to which the Company is a party or by which it is bound and to which any of the Shareholders or any Affiliate (as hereinafter defined) of any of the Shareholder (other than the Company) or any officer or director of the Company, or any Affiliate of such person ("Affiliated Person") is a party or by which such person is bound, have been negotiated, and, if applicable, entered into, at arms' length, and do not contain terms or provisions or obligate the Company on terms that are materially less favorable to the Company than those which could be obtained if such agreement, contract, commitment or arrangement was with a person other than an Affiliated Person. As used in this Agreement, the term "Affiliate" means, with respect to a specified person, any other person which directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, the persons specified. 4.13 Documents of and Information with Respect to the Company. The Disclosure Schedule accurately and completely lists the following: (i) each loan, credit agreement, guarantee, security agreement or similar document or instrument to which the Company is a party or by which it is bound, other than agreements creating purchase money security interests in equipment in or for use by the Company's stores, or commissaries or corporate offices; (ii) each lease of personal property to which the Company is a party or by which it is bound, other than leases under which the annual rent payable is less than $50,000; (iii) any other agreement, contract or commitment to which the Company is a party or by which it is bound which involves a future commitment by the Company in excess of $50,000 and which cannot be terminated without liability on 90 days or less notice; (iv) each power of attorney executed by or on behalf of the Company; (v) the name and current annual salary of each salaried employee of the Company whose current annual salary is in excess of $50,000 and the profit sharing, bonus or any other form of compensation (other than salary) paid or payable by the Company to or for the benefit of each such person for the year ended December 31, 1995, and any employment or other compensation agreement of the Company with any of its officers or employees; (vi) the name of each of the Company's officers and directors; and (vii) the name of each bank in which the Company has an account or safe-deposit box, the name in which the account or box is held and the names of all persons authorized to draw thereon or to have access thereto. The Company has previously furnished Einstein Bros. with an accurate and complete copy of each such agreement, contract or commitment listed in the Disclosure Schedule. There is no continuing default under any such agreement, contract or instrument. 4.14 INSURANCE COVERING THE COMPANY AND ITS ASSETS. The Disclosure Schedule accurately and completely lists each policy of insurance in force with respect to the Company, its assets and properties, and each of the performance or other surety bonds maintained by the Company in the conduct of its business. All premiums and other payments which have become due under the policies of insurance listed in the Disclosure Schedule have been paid in full, all of such policies are now in full force and effect and the Company has received no notice from any insurer, agent or broker of the cancellation of, or any increase in premium (other than normal increases) with respect to, any of such policies or bonds. The Company has received no notification from any insurer, agent or broker denying or disputing any claim made by the Company or denying or disputing any coverage for any such claim or the amount of any claim. The Company has no claim against any of its insurers under any of such policies pending or anticipated and, to the Best of the Knowledge of the Company, there has been no occurrence of any kind which would give rise to any such claim. 4.15 LITIGATION INVOLVING THE COMPANY. Except as set forth in the Disclosure Schedule there are on the date hereof no actions, suits, claims, governmental investigations or arbitration proceedings pending or to the Best of the Knowledge of the Company threatened against or affecting the Company or any of its assets or properties and, to the Best of the Knowledge of the Company, there is no basis for any of the foregoing. There are no outstanding orders, decrees or stipulations issued by any federal, state, local or foreign judicial or administrative authority in any proceeding to which the Company is or was a party. 4.16 RECORDS OF THE COMPANY. The Company has previously furnished Einstein Bros. with copies of the Company's amended and restated articles of incorporation and all amendments thereto to date (certified by the Secretary of State of California) and of the Company's by-laws (certified by the Company's secretary), and such copies are correct and complete in all respects. All of the Company's operating data and records, including without limitation customer lists and financial, accounting and credit records (the "Company Records"), are accurate and complete in all material respects and there are no material matters required to be recorded in the Company records as to which appropriate entries have not been made in the Company Records. A record of all action taken by the shareholders and the board of directors of the Company and all minutes of their meetings (except the minutes of the January, 1996 meetings) are contained in the minute books of the Company and are accurate and complete. The stock records and stock ledgers of the Company contain an accurate and complete record of all issuances, transfers and cancellations of shares of capital stock of the Company. 4.17 NO MATERIAL ADVERSE CHANGE. From the date of the 1995 Balance Sheet to the date of this Agreement, there have not been any changes in the business or properties of the Company, or in its consolidated financial condition, other than changes occurring in the ordinary course of business which in the aggregate have not had a Material Adverse Effect. There is not, to the Best of the Knowledge of the Company, except for general competitive conditions or risks common to businesses generally, any threatened event or condition of any character whatsoever which could have a Material Adverse Effect. 4.18 ABSENCE OF CERTAIN ACTS OR EVENTS. Except as disclosed in the Disclosure Schedule, or as contemplated by this Agreement, since the date of the 1995 Balance Sheet, the Company has not: (i) authorized or issued any of its shares of capital stock (including any held in its treasury) or any other securities; (ii) declared or paid any dividend or made any other distribution of or with respect to its shares of capital stock or other securities or purchased or redeemed any shares of its capital stock or other securities; (iii) paid any bonus or, except in the ordinary course of business, increased the rate of compensation of any of its employees; (iv) sold, leased, transferred or assigned any of its assets other than in the ordinary course of business; (v) made or obligated itself to make capital expenditures aggregating more than $50,000; (vi) incurred any material obligations or liabilities (including any indebtedness) or entered into any material transaction, except in the ordinary course of business and except for this Agreement and the transactions contemplated hereby; or (viii) suffered any theft, damage, destruction or casualty loss not covered by insurance in excess of $50,000. 4.19 COMPLIANCE WITH LAWS BY THE COMPANY. Except as set forth in the Disclosure Schedule, the Company is in compliance in all material respects with all laws, regulations and orders applicable to the Company, its assets, properties and business. The Company has received no notification of any asserted past or present failure to comply with any laws, and to the Best of the Knowledge of the Company, no proceeding with respect to any such violation is contemplated. Neither the Company nor, to the Best of the Knowledge of the Company, any employee of the Company, has made any payment of funds in connection with the business of the Company prohibited by law, and no funds have been set aside to be used in connection with the business of the Company for any payment prohibited by law. 4.20 ENVIRONMENTAL MATTERS. 4.20.1 The Company has not transported, stored, treated or disposed, nor has it allowed or arranged for any third parties to transport, store, treat or dispose of Hazardous Substances or other waste to or at any location other than a site lawfully permitted to receive such Hazardous Substances or other waste for such purposes, nor has it performed, arranged for or allowed by any method or procedure such transportation, storage, treatment or disposal in contravention of any laws or regulations. The Company has not disposed, or allowed or arranged for any third parties to dispose, of Hazardous Substances or other waste upon property owned or leased by them, except as permitted by law. For purposes of this Section 4.20, the term "Hazardous Substances" shall have the meaning given it in the Comprehensive Environmental Response, Compensation and Liability Act (42 U.S.C. Sections 9601, et seq.), as amended, and the regulations promulgated pursuant thereto ("CERCLA"), or any similar state law. 4.20.2 There has not occurred during the Company's occupancy of any of the Leasehold Premises, and to the Best of the Knowledge of the Company, there has not occurred prior thereto, any Release of any Hazardous Substance on, into or beneath the surface of such Leasehold Premises. For purposes of this Section 4.20, the term "Release" shall mean releasing, spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, disposing or dumping. 4.20.3 The Company has not transported or disposed, nor has it allowed or arranged for any third parties to transport or dispose, any Hazardous Substance or other waste to or at a site which, pursuant to CERCLA or any similar state law, (i) has been placed on the National Priorities List or its state equivalent, or (ii) the Environmental Protection Agency or the relevant state agency has proposed or is proposing to place on the National Priorities List or its state equivalent. The Company has received no notice, and it has no knowledge of any facts which could give rise to any notice, that the Company is a potentially responsible party for a federal or state environmental cleanup site or for corrective action under CERCLA or any other applicable law or regulation. The Company has not submitted nor was it required to submit any notice pursuant to Section 103(c) of CERCLA with respect to the Leasehold Premises. The Company has received no written or oral request for information in connection with any federal or state environmental cleanup site. The Company has not undertaken (or been requested to undertake) any response or remedial actions or clean-up actions of any kind at the request of any federal, state or local governmental entity, or at the request of any other person or entity. 4.20.4 The Company does not use, and has not used, any Underground Storage Tanks, and the Company is not aware of any Underground Storage Tanks on the Leasehold Premises. For purposes of this Section 4.20, the term "Underground Storage Tanks" shall have the meaning given it in the Resource Conservation and Recovery Act (42 U.S.C. Sections 6901 et seq.). 4.20.5 There is no asbestos in or on any of the Leasehold Premises presently requiring remediation or abatement or which may be reasonably expected hereafter to require such remediation or abatement. 4.20.6 There are no laws, regulations, ordinances, licenses, permits or orders relating to environmental or worker safety matters presently requiring any work, repairs, construction or capital expenditures with respect to the assets or properties of the Company, or which may be reasonably expected hereafter to require any such work. 4.21 Labor Relations of the Company. The Company is not a party to or bound by any collective bargaining agreement or any other agreement with a labor union, and, except as set forth in the Disclosure Schedule, there has been no effort by any labor union to organize any employees of the Company into one or more collective bargaining units. There is not pending or, to the best of the knowledge of the Sellers or the Company, threatened any labor dispute, strike or work stoppage which affects or which may affect the business of the Company or which may interfere with its continued operation. Except as set forth in the Disclosure Schedule, neither the Company nor, to the Best of the Knowledge of the Company, any agent, representative or employee of the Company has committed any unfair labor practice as defined in the National Labor Relations Act, as amended, and there is not now pending or, to the Best of the Knowledge of the Company, threatened any charge or complaint against the Company by or with the National Labor Relations Board or any representative thereof. There has been no strike, walkout or work stoppage affecting the Company involving any of the employees of the Company during the five-year period prior to the date hereof. To the Best of the Knowledge of the Company, no executive or key employee or group of employees has any plans to terminate his, her or their employment with the Company. 4.22 Employee Benefits. 4.22.1 Neither the Company, nor any corporation or business which is now or at the relevant time was a member of a controlled group of corporations or trades or businesses including the Company, within the meaning of Section 414 of the Code, maintains or contributes to, or at any time has maintained or contributed to: (i) any non-qualified deferred compensation or retirement plans or arrangements; (ii) any qualified defined contribution retirement plans or arrangements; (iii) any qualified defined benefit pension plan; (iv) any other plan, program, agreement or arrangement under which former employees of the Company or their beneficiaries are entitled, or current employees of the Company will be entitled following termination of employment, to medical, health, life insurance or other benefits other than pursuant to benefit continuation rights granted by state or federal law; or (v) any other employee benefit, health, welfare, medical, disability, life insurance, stock, stock purchase or stock option plan, program, agreement, arrangement or policy, except in each case as described in the Disclosure Schedule attached hereto. The plans described in the Disclosure Schedule are referred to herein as the "Plans." 4.22.2 The administration of the Plans complies in all respects with the requirements of the Employee Retirement Income Security Act of 1974 ("ERISA"), and the Plans meet any applicable requirements for favorable tax treatment under the Code in both form and operation. All of the Plans which constitute employee pension benefit plans or employee welfare plans subject to ERISA and the trusts or other funding vehicles related to the Plans have been maintained in compliance in both form and operation with the requirements of ERISA including, but not limited to, the preparation and filing of all required reports with respect to the Plans, the submission of such reports to the appropriate governmental authorities, the timely preparation and distribution of all required employee communications (including without limitation any notice of plan amendment which is required prior to the effectiveness of such amendments), the proper and timely purchase and maintenance of required surety bonds and the proper and timely disposition of all benefit claims. The costs of administering the Plans through the date of the 1995 Balance Sheet, including fees for the trustee and other service providers which are customarily paid by the Company, have been paid or will be paid prior to the Closing or are reflected in the 1995 Balance Sheet. There have been no prohibited transactions involving the Company as defined in Section 406 of ERISA or Section 4975 of the Code with respect to any of the Plans or any parties in interest or disqualified persons with respect to the Plans or any reduction or curtailment of accrued benefits with respect to any of the Plans. There are no pending or threatened claims, lawsuits, or arbitrations which have been asserted or instituted against the Plans, any fiduciaries thereof with respect to their duties to the Plans or the assets of any of the trusts under any of the Plans. 4.22.3 All required contributions for all Plan years ending prior to the Closing Date have been made and adequate accruals for contributions with respect to all current Plan years are reflected in the 1995 Balance Sheet. The Company has no plans, programs, agreements or arrangements and has made no other commitments to its employees, former employees or their beneficiaries under which it has any obligation to provide any retiree or other employee benefit payments which are not adequately funded through a trust or other funding arrangement. 4.22.4 The Company has furnished Einstein Bros. with true and complete copies of: (i) the Plans and any amendments thereto and any related or contracts and the related summary plan descriptions with respect to each Plan, if any; (ii) the most recent determination letters received from the Internal Revenue Service regarding the Plans, if any, and copies of any pending applications, filings or notices with respect to any of the Plans with the Internal Revenue Service, the Pension Benefit Guaranty Corporation, the Department of Labor or any other governmental agency, if any; (iii) the policies or contracts, if any, for each of the Plans as of the end of the most recent plan year; and (iv) copies of any communications or notices provided to employees or plan participants with respect to the Plans along with information concerning the date and extent of distribution of such communications, including without limitation notices intended to comply with Section 606 of ERISA and Section 4980B of the Code. 4.23 Accuracy of Information Furnished by the Company. No representation, statement or information made or furnished in writing by the Company to Einstein Bros., in this Agreement and the Disclosure Schedule, taken as whole, contains any untrue statement of a material fact or omits any material fact necessary to make the representations, statements and information made or furnished therein, in light of the circumstances in which they were made, not misleading. 4.24 HSR Act Reporting Matters. The Company is the "ultimate parent entity" of the Company within the meaning of the HSR Act. The Company does not have total assets, and did not record annual net sales for its most recent fiscal year, in excess of $100,000,000. ARTICLE 5. ADDITIONAL COVENANTS OF THE SHAREHOLDERS AND THE COMPANY 5.1 REASONABLE BEST EFFORTS. The Indemnifying Shareholders and the Company will use their reasonable best efforts to cause to be satisfied as soon as practicable and prior to the Closing Date all of the conditions set forth in Article 7 to the obligations of Einstein Bros. and Merger Sub to consummate the Merger. The Indemnifying Shareholders will use their reasonable best efforts to cause each of the shareholders of the Company who has not signed this Agreement on the date hereof to sign this Agreement and become a party hereto prior to Closing. 5.2 CONDUCT OF BUSINESS PENDING THE CLOSING. From and after the execution and delivery of this Agreement and until the Closing Date, except as otherwise provided with the prior written consent of Einstein Bros. or as contemplated by this Agreement: 5.2.1 the Company will conduct its business and operations in the manner in which the same have heretofore been conducted and use reasonable best efforts to (i) preserve its business organization intact, (ii) keep available the services of its officers, employees, agents and distributors, and (iii) preserve its relationships with customers, suppliers and others having dealings with the Company; 5.2.2 the Company will maintain all of its properties in customary repair, order and condition, reasonable wear and use and damage by unavoidable casualty excepted, and maintain insurance of such types and in such amounts upon all of its properties and with respect to the conduct of its business as are in effect on the date of this Agreement; 5.2.3 the Company will not (i) authorize or issue any shares of its capital stock (including any held in its treasury) or any other securities, except pursuant to the exercise of outstanding stock options, (ii) declare or pay any dividend or make any other distribution of or with respect to its shares of capital stock or other securities or purchase or redeem any shares of its capital stock or other securities; (iii) pay any bonus or increase the rate of compensation of any of its employees (except pursuant to normal policies of the Company) or enter into any new employment agreement or amend any existing employment agreement; (iv) sell, lease, transfer or assign any of its assets other than in the ordinary course of business; (v) make or obligate itself to make capital expenditures aggregating more than $50,000; (vi) incur any material obligations or liabilities or enter into any material transaction; or (vii) amend its amended and restated articles of incorporation or by-laws. 5.3 ACCESS TO THE COMPANY'S STORES, PROPERTIES AND RECORDS. From and after the execution and delivery of this Agreement, the Company will afford to the representatives of Einstein Bros. access, during normal business hours and upon reasonable notice, to the Company's premises sufficient to enable Einstein Bros. to inspect the assets and properties of the Company, and the Company shall furnish to such representatives during such period all such information relating to the foregoing investigation as Einstein Bros. may reasonably request; provided, however, that any furnishing of such information to Einstein Bros. and any investigation by Einstein Bros. shall not affect the right of Einstein Bros. to rely on the representations and warranties made by the Company in or pursuant to this Agreement, and, provided further that Einstein Bros. and Merger Sub will hold in confidence all documents and information concerning the Company so furnished, and, if the Merger shall not be consummated, such confidence shall be maintained in accordance with the confidentiality agreement between Einstein Bros. and the Company dated September 13, 1995. 5.4 NOTICE OF MATERIAL DEVELOPMENTS. The Company will give prompt written notice to Einstein Bros. of any material development affecting the assets, properties, business, business prospects, financial condition or results of operation of the Company, including without limitation any development which results in the inaccuracy of any of the representations and warranties of the Company made herein. However, no disclosure pursuant to this Section 5.4 shall be deemed to amend or supplement any of such representations and warranties, or any of the schedules hereto. 5.5 NO OTHER DISCUSSIONS. Neither the Shareholders nor the Company will, prior to the Closing Date, enter into discussions or negotiate with or entertain or accept the unsolicited offer of any other party concerning the potential sale or exchange of all or any part of the assets or shares of the Company to, other than sales in the ordinary course of business, or the merger or consolidation or other business combination of the Company with, any person other than Einstein Bros. ARTICLE 6. ADDITIONAL COVENANTS OF EINSTEIN BROS. AND MERGER SUB. 6.1 REASONABLE BEST EFFORTS. Einstein Bros. and Merger Sub will use their reasonable best efforts to cause to be satisfied as soon as practicable and prior to the Closing Date all of the conditions set forth in Article 8 to the obligation of the Shareholders and the Company to consummate the Purchase and the Merger. Einstein Bros. will use its reasonable best efforts to cause each of its stockholders to enter into the Amended and Restated Registration Rights Agreement (as hereinafter defined) and will indemnify and hold the Shareholders of the Company harmless from and against any expenses, losses, costs, deficiencies, liabilities and damages (including reasonable related counsel fees and expenses) incurred or suffered by any of the shareholders (or any of their successors in interest) arising from any claim or action of any stockholders of Einstein Bros. related to the execution and delivery of the Amended and Restated Registration Rights Agreement or the consummation of any of the transactions contemplated thereby without the consent of such stockholders. 6.2 GUARANTEE OF PERFORMANCE BY MERGER SUB. Einstein Bros. agrees to cause Merger Sub to perform all of its obligations hereunder. 6.3 CONDUCT OF BUSINESS PENDING THE CLOSING. From and after the execution and delivery of this Agreement and until the Closing Date, except as otherwise provided by the prior written consent of the Company, Einstein Bros. will conduct its business and operations in the manner in which the same have heretofore been conducted and use reasonable best efforts to (i) preserve its business organization intact, (ii) keep available the services of its officers, employees, agents and distributors, and (iii) preserve its relationships with customers, suppliers and others having dealings with it. 6.4 NOTICE OF MATERIAL DEVELOPMENTS. Einstein Bros. will give prompt written notice to the Company of any material development affecting the assets, properties, business, business prospects, financial condition or results of operation of Einstein Bros. including without limitation any development which results in the inaccuracy of any of the representations and warranties of Einstein Bros. made herein. However, no disclosure pursuant to this Section 6.4 shall be deemed to amend or supplement any of such representations and warranties, or any of the schedules hereto. ARTICLE 7. CONDITIONS TO THE OBLIGATION OF EINSTEIN BROS. AND MERGER SUB The obligation of Einstein Bros. and Merger Sub to consummate the Merger shall be subject to the satisfaction or waiver of the following conditions: 7.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES AND COMPLIANCE WITH OBLIGATIONS. The representations and warranties of the Company contained in Section 4.1 (except as they relate to foreign qualification) and 4.2 of this Agreement and the representations and warranties of the Shareholders in this Agreement shall have been true and correct in all material respects at and as of the date hereof, and they shall be true and correct in all material respects at and as of the Closing Date with the same force and effect as though made at and as of that time. The Company shall have performed and complied in all material respects with all of its obligations required by this Agreement to be performed or complied with at or prior to the Closing Date. The Company shall have delivered to Einstein Bros. and Merger Sub a certificate, dated as of the Closing Date and signed by the Company, certifying that such representations and warranties are thus true and correct and that all such obligations have been thus performed and complied with. 7.2 OPINION OF COUNSEL. Einstein Bros. shall have received an opinion dated the Closing Date from Cooley Godward Castro Huddleson & Tatum, counsel for the Company and the Sellers, in form and substance as set forth in Exhibit B attached hereto. 7.3 RECEIPT OF BANK CONSENT. BCI shall have obtained the consent of Bank of America, N.A. to the transactions contemplated hereby. 7.4 NO ADVERSE LITIGATION. There shall not be pending or threatened any action or proceeding by or before any court or other governmental body which shall seek to restrain, prohibit or invalidate the Merger or any other transaction contemplated hereby which, in the reasonable judgment of Einstein Bros., makes it inadvisable to proceed with the Merger. 7.5 RESIGNATIONS. The Company shall have delivered to Einstein Bros. the written resignations of the directors of the Company. 7.6 EMPLOYMENT AND CONSULTING AGREEMENTS; OPTIONS. Each of the employment agreements and consulting agreements to which the Company is a party (other than the agreement between William Hughson and the Company) shall have been terminated without liability to the Company. 7.7 LANDLORD CONSENTS. All required consents of the Company's landlords to the transactions contemplated by this Agreement shall have been obtained; provided, however, that Einstein Bros. and Merger Sub shall agree to waive this condition at Closing if requested to do so by the Company, in which event the Shareholders will indemnify Einstein Bros. for all damages it may incur as a result of its failure to obtain such consents, unless Einstein Bros. has requested a similar waiver from the Company and the Shareholders pursuant to Section 8.8 hereof, in which event the Shareholders will indemnify Einstein Bros. for one-half of such damages. 7.8 QUALIFICATIONS, LEGAL INVESTMENT. All authorizations, approvals, filings, or permits, if any, of any governmental authority or regulatory body of the United States, the State of California or of any other state that are required in connection with the lawful sale or issuance of the Purchased Shares shall have been duly obtained and shall be effective on and as of the Closing. At the time of the Closing, the sale or issuance of the Purchased Shares shall be legally permitted by all laws and regulations to which Einstein Bros. and the Purchasers are subject. 7.9 TERMINATION OF CERTAIN AGREEMENTS. Each of the following agreements shall have been terminated without liability to the Company, pursuant to termination agreements satisfactory in form and substance to Einstein Bros.: (i) the Series A Preferred Stock Purchase Agreement dated May 3, 1994 among the Company, certain of its shareholders and certain purchasers, (ii) the Series B Preferred Stock Purchase Agreement dated March 31, 1995 among the Company, certain of its shareholders and certain purchasers; (iii) Amended and Restated Investor Rights Agreement dated March 31, 1995 among Starbucks, the Company and certain shareholders of the Company; (iv) the Amended and Restated Voting Rights Agreement dated March 31, 1995 among Starbucks, the Company and certain shareholders of the Company; (v) the Founders and Rosewood Voting Rights Agreement dated March 31, 1995 among the Company and certain shareholders of the Company; and (vi) the Protective Covenants Agreement dated March 31, 1995 among Starbucks, the Company and certain shareholders of the Company. ARTICLE 8. CONDITIONS TO OBLIGATION OF THE SHAREHOLDERS AND THE COMPANY. The obligation of the Shareholders and the Company to consummate the Merger shall be subject to the satisfaction or waiver of each of the following conditions: 8.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES AND COMPLIANCE WITH OBLIGATIONS. The representations and warranties of Einstein Bros. and Merger Sub contained in Sections 3.1, 3.2, 3.3, 3.4, 3.5 and 3.6 of this Agreement shall have been true and correct in all material respects at and as of the date hereof, and they shall be true and correct in all material respects at and as of the Closing Date with the same force and effect as though made at and as of that time. Einstein Bros. and Merger Sub shall have performed and complied in all material respects with all of its obligations required by this Agreement to be performed or complied with at or prior to the Closing Date. Einstein Bros. and Merger Sub shall have delivered to the Shareholders a certificate, dated as of the Closing Date and signed by an officer of Einstein Bros. and Merger Sub. certifying that such representations and warranties are thus true and correct and that all such obligations have been thus performed and complied with. 8.2 OPINION OF COUNSEL. The Sellers shall have received an opinion, dated the Closing Date, from Bell, Boyd & Lloyd, counsel for Einstein Bros. and Merger Sub, in form and substance as set forth in Exhibit C attached hereto. 8.3 EINSTEIN BROS. REGISTRATION RIGHTS AGREEMENT. Einstein Bros. shall have executed and delivered to each of the Purchasers an amended and restated registration rights agreement in the form set forth in Exhibit D hereof (the "Amended and Restated Registration Rights Agreement"). 8.4 ELECTION OF NOAH ALPER. Noah Alper shall have been elected as a director and vice chairman of Einstein Bros. 8.5 AGREEMENTS WITH CERTAIN MEMBERS OF NOAH'S MANAGEMENT. Einstein Bros. shall have executed and delivered to each of Jim Mizes, Bob Purcell, Nancy Hauge, Bill Schrader, Paul Soulier, Doug Troy and Barbara Musante agreements in the form set forth in Exhibit E. 8.6 RECEIPT OF BANK CONSENT. Starbucks shall have obtained the consent of Bank of America, N.A. to the transactions contemplated hereby. 8.7 NO ADVERSE LITIGATION. There shall not be pending or threatened any action or proceeding by or before any court or other governmental body which shall seek to restrain, prohibit or invalidate the Merger or the Purchase or any other transaction contemplated hereby which, in the reasonable judgment of the Company, makes it inadvisable to proceed with the Merger or the Purchase. 8.8 LANDLORD CONSENTS. All required consents of the Company's landlords to the transactions contemplated by this Agreement shall have been obtained; provided, however, that the Shareholders and the Company shall agree to waive this condition at Closing if requested to do so by Einstein Bros., in which event the Shareholders will have no liability for the failure to obtain any such consent, unless the Company has requested a similar waiver from Einstein Bros. and Merger Sub pursuant to Section 7.7 hereof, in which event the Shareholders will indemnify Einstein Bros. for one-half of all damages it may incur as a result of the Company's failure to obtain any such consents. ARTICLE 9. CERTAIN ACTIONS AFTER THE CLOSING 9.1 Execution of Further Documents. From and after the Closing, upon the reasonable request of Einstein Bros., the Shareholders shall execute, acknowledge and deliver all such further acts, deeds, assignments, transfers, conveyances, powers of attorney and assurances as may be required to carry out the transactions contemplated by this Agreement. 9.2 RESTRICTIONS ON TRANSFER OF PURCHASED SHARES. The restrictions of this Section 9.2 apply to any holder of the Purchased Shares. Each Purchaser acknowledges and agrees that: 9.2.1 The Purchased Shares to be issued pursuant to the Purchase may be owned, as of the Closing, only in the names of and by such Purchasers. 9.2.2 No federal, state or other agency has made any finding or determination as to the fairness of the offering of the Purchased Shares for investment, nor any recommendation or endorsement of the Purchased Shares. 9.2.3 Because the Purchased Shares will not have not been registered under the Securities Act of 1933, as amended ("the Securities Act"), or applicable state or other securities laws, the economic risk of the investment must be borne indefinitely by such Purchasers, and the Purchased Shares cannot be sold unless subsequently registered under the Securities Act and such state or other laws, or unless an exemption from such registration is available; Einstein Bros. is not obligated to file a notification under Regulation A of the Securities Act or a registration statement under the Securities Act, except pursuant to the Amended and Restated Registration Rights Agreement; and Rule 144, adopted under the Securities Act and governing the possible disposition of the Purchased Shares, is not currently available. 9.2.4 No Purchased Shares may be transferred unless (i) such transfer is effected pursuant to a registration statement which has been filed under the Securities Act and declared effective by the Securities and Exchange Commission, or (ii) in the written opinion of counsel, which opinion and counsel shall be satisfactory to Einstein Bros. (the fees and expenses of which counsel shall be borne by the transferring Purchaser), an exemption from the registration requirements of the Securities Act and applicable state or other securities laws is available. 9.2.5 The Purchasers agree that they shall enter into an agreement restricting the public resale of the Purchased Shares for a period of up to 120 days, to the extent required by the underwriters in any initial public offering of shares of Common Stock of Einstein Bros. and that they will not sell, transfer or otherwise dispose of any of the Purchased Shares unless they have first obtained the written agreement of the transferee of such shares (which agreement shall be satisfactory to Einstein Bros.) to be bound by the provisions of this Section 9.2.5. 9.2.6 Each certificate evidencing the Purchased Shares shall bear the following legends: "The shares represented by this certificate were issued without registration under the Securities Act of 1933, as amended (the "Securities Act") or applicable state securities laws, in reliance upon the exemptions contained therein. No transfer of these shares or any interest therein may be made unless (i) such transfer is effected pursuant to a registration statement which has been filed under the Securities Act and declared effective by the Securities and Exchange Commission, or (ii) in the written opinion of counsel, which opinion and counsel shall be satisfactory to the issuer of these shares, an exemption from the registration requirements of the Securities Act and applicable state or other securities laws is available." "The shares represented by this certificate are also subject to certain covenants and agreements (including restrictions on transfer) contained in a Merger Agreement dated as of January 22, 1996 by and among Einstein Bros. Bagels, Inc., Noah's New York Bagels, Inc. ("Noah's"), NNYB Acquisition Corporation and shareholders of Noah's." 9.3 CERTAIN POST-CLOSING COOPERATION. Each of the Shareholders acknowledges and agrees that Einstein Bros. may have need of information concerning the Company and the Shareholders in order to comply with applicable securities laws and regulations in connection with future public and private debt and equity offerings by Einstein Bros. ("Offerings"). Each Purchaser agrees that such Purchaser will cooperate with Einstein Bros. in connection with any Offerings and that such Purchaser will furnish Einstein Bros. with such information concerning the Company prior to the Closing Date and such Purchaser as Einstein Bros. may reasonably require to comply with applicable securities laws and regulations. Each Shareholder who is not a Purchaser agrees that such Shareholder will furnish Einstein Bros. with such information concerning such Shareholder as Einstein Bros. may reasonably require in connection with any Offerings to comply with applicable securities laws and regulations. 9.4 CERTAIN VOTING AGREEMENTS. (a) Each of the Purchasers agrees that from and after the Closing and until the earlier of February 28, 1998 or the completion of any Qualified Public Offering, that such Purchaser shall vote (at any meeting and in any action by written consent) such Purchaser's Purchased Shares (and any equity or other voting securities issued or issuable directly or indirectly with respect to such shares by way of stock dividend or stock split or in connection with a combination of stores, recapitalization, merger, consolidation or other reorganization) over which such Purchaser has voting control and shall take all other actions within the control of such Purchaser (whether in such Purchaser's capacity as a stockholder or director of the Company or otherwise) to cause the election to the Board of Directors of Einstein Bros. of (a) Daniel V. Colangelo, (b) Gail Lozoff, (c) the designee of OBG Holdings, Inc. ("OBG") pursuant to Section 5.M of the agreement to contribute assets dated March 23, 1995 by and among Einstein Bros., OBG (formerly known as Offerdahl's Bagel Gourmet, Inc.) and the shareholders of OBG, (d) three directors designated by BCI, and (e) three directors designated from time to time by the holders of an aggregate of 15,104.95 shares of Common Stock of Einstein Bros. pursuant to subscription agreements entered into by the purchasers of such shares dated as of March 24, 1995. For purposes of this Section 9.4(a), a "Qualified Public Offering" means a sale in an underwritten public offering registered under the Securities Act of 1933, as amended, of shares of Einstein Bros.' Common Stock in which the aggregate gross proceeds are equal to at least $15,000,000. (b) Until the provisions of Section 9.4(a) cease to be effective, the Shareholders shall not sell, transfer, assign, pledge or otherwise dispose of any interest in any Purchased Shares, unless in each case the proposed transferee has executed and delivered to Einstein Bros. a written agreement in form satisfactory to Einstein Bros. pursuant to which such transferee agrees to be bound by the provisions hereof with respect to the Purchased Shares so transferred. (c) Until the provisions of Section 9.4 of this Agreement cease to be effective, each certificate evidencing Purchased Shares shall bear the following legend: "The shares of stock represented by this certificate are subject to certain voting agreements and certain restrictions on transfer set forth in a Merger Agreement dated as of January 22, 1996, a copy of which is available for inspection at the offices of the Secretary of the Company." 9.5 CONFIDENTIAL INFORMATION. 9.5.1 The Restricted Shareholders (as defined in Section 9.6) possess certain confidential and proprietary information and trade secrets of the Company, including, but not limited to, information, methods, techniques, procedures and knowledge developed by or for the Company respecting the business of the Company (the "Confidential Information"). Each of the Restricted Shareholders acknowledges and agrees that neither such Restricted Shareholder nor any other person or entity has acquired by or through such Restricted Shareholder any interest in or right to use the Confidential Information other than the right to utilize it in the operation of the business of Einstein Bros. and its subsidiaries, and that the use or duplication of the Confidential Information in any other business would constitute an unfair method of competition with Einstein Bros. and its subsidiaries. Each of the Restricted Shareholders hereby agrees that such Restricted Shareholder: (i) will not use the Confidential Information in any other business or capacity; (ii) will maintain the absolute secrecy and confidentiality of the Confidential Information; and (iii) will not make unauthorized copies of any portion of the Confidential Information disclosed in written or other tangible form. 9.5.2 Notwithstanding the foregoing, the obligations of the Restricted Shareholders specified above shall not apply to any Confidential Information which (i) is disclosed in a printed publication available to the public, or is otherwise in the public domain through no act of any of the Restricted Shareholders, their agents or any person or entity which has received such Confidential Information from or through any of the Restricted Shareholders, (ii) is approved for release by written authorization of an officer of Einstein Bros., (iii) is required to be disclosed by proper order of a court of applicable jurisdiction after adequate notice to Einstein Bros. to seek a protective order therefor, the imposition of which protective order the Restricted Shareholders agree to approve and support, or (iv) in the written opinion of the disclosing Restricted Shareholder's counsel, is necessary to be made by such Restricted Shareholder in order that the Restricted Shareholder not violate any law, rule or regulation applicable to him or her. 9.6 RESTRICTIVE COVENANTS. Each of the Restricted Shareholders acknowledges and agrees that Einstein Bros. would be unable to protect the Confidential Information against unauthorized use or disclosure and Einstein Bros. would be unable to realize the benefits of this Agreement if such Restricted Shareholder were permitted, directly or indirectly, to engage in, hold interests in or perform services for any entity which derives more than 15% of its revenues from the business of selling, producing, marketing or distributing bagels, other than Einstein Bros. and its subsidiaries and franchisees (a "Competitive Business"). Each of the Restricted Shareholders further acknowledges and understands that Einstein Bros. intends, and expects, to expand its business throughout the United States. Each of the Restricted Shareholders therefore agrees that for a period of three (3) years from the Closing Date, such Restricted Shareholder shall not, and shall not permit such Restricted Shareholder's Affiliates, to directly or indirectly, anywhere in the United States (including without limitation every county in the State of California): (i) have any interest as a record or beneficial owner in any Competitive Business; provided, however, the Restricted Shareholders may have an interest in any Competitive Business as passive investors in such Competitive Business conducted by a company which has a class of securities which is registered under Section 12 of the Securities Exchange Act of 1934, as amended, or traded on a national securities exchange provided that the interest consists solely of such securities and the interest held by any Restricted Shareholder, or any group of which any Restricted Shareholder is a member that would be treated as a person under Section 13(d)(3) of the Securities Exchange Act of 1934, shall in no event exceed five percent (5%) of the total equity securities of such issuer; (ii) perform services as a director, officer, manager, employee, consultant, representative, agent, or otherwise for any Competitive Business; or (iii) divert or attempt to divert any business or any customers of Einstein Bros.' business to any Competitive Business. For purposes of this Section 9.5, the term "Restricted Shareholders" means Noah Alper, Dan Alper and Bill Hughson. 9.7 ADDITIONAL AGREEMENTS OF STARBUCKS, THE COMPANY AND EINSTEIN BROS. 9.7.1 Until March 31, 1998, Starbucks will continue, with respect to both the Company and Einstein Bros., to comply (and to cause its subsidiaries to comply) with the covenants made by it in Section 3.3 of the Amended and Restated Investor Rights Agreement dated as of March 31, 1995 by and among the Company and certain investors in the Company, whether or not such agreement continues in effect. 9.7.2 Until March 31, 1998, the Company and Einstein Bros. will comply (and will cause their respective subsidiaries to comply) with the covenants made by the Company, as if made by both Einstein Bros. and the Company, in Section 3.4 of the Amended and Restated Investor Rights Agreement dated as of March 31, 1995 by and among the Company and certain investors in the Company, whether or not such agreement continues in effect. 9.7.3 At any time, Einstein Bros. may terminate its obligations and those of the Company under Section 9.7.2 upon written notice to Starbucks and shall terminate such obligations if a Covered Entity (as hereinafter defined) takes any action which, if taken by Einstein Bros., would violate Section 9.7.2. If Einstein Bros. terminates its obligations, then the obligations of Starbucks under Section 9.7.1 shall terminate at the same time. "Covered Entity" shall mean (i) an entity in which BCI holds (or has the right to acquire) a majority equity interest or (ii) an entity in which BCI holds (or has the right to acquire) an equity interest which would result in BCI "controlling" such entity within the meaning of such term as it is used in Rule 405 of the Securities Act. 9.8 ADDITIONAL AGREEMENT OF NOAH ALPER. Noah Alper hereby grants to the Company the exclusive right to use his name, likeness and persona in the business conducted by the Company, consistent with the manner in which it is currently used (but without any restriction whatsoever on the use of any trademark or service mark of the Company) and agrees that he will not at any time, without Einstein Bros.' written consent, use his name, likeness or persona in a Competitive Business. 9.9 REMEDIES; WAIVER. 9.9.1 Einstein Bros., the Restricted Shareholders and Starbucks (collectively, the "Restricted Persons") agree that the provisions and restrictions set forth above in Section 9.5, 9.6, 9.7 and 9.8 applicable to such Restricted Person are necessary to protect Einstein Bros. and Starbucks, as applicable, and their respective successors and assigns in the protection of the business to be acquired by Einstein Bros. pursuant to this Agreement. Each of the Restricted Persons agrees that damages cannot compensate Einstein Bros. or Starbucks, as applicable in the event of a violation of the covenants contained in Section 9.5, 9.6, 9.7 or 9.8 hereof applicable to such Restricted Person, and that injunctive relief shall be essential for the protection of Einstein Bros. and Starbucks, as applicable, and their respective successors and assigns. Accordingly, each of the Restricted Persons agrees and consents that, in the event such Restricted Person shall violate or breach any of said covenants, Einstein Bros. or Starbucks, as applicable, shall be entitled to obtain (and such Restricted Person hereby consents to) such injunctive relief against such Restricted Person, without bond, in addition to such further or other relief as may appertain at equity or law. The exercise or enforcement by Einstein Bros. or Starbucks, as applicable, of any other right or remedy hereunder shall not preclude the exercise or enforcement by Einstein Bros. or Starbucks, as applicable, of any other right or remedy hereunder or which Einstein Bros. or Starbucks, as applicable, has the right to enforce under applicable law. 9.9.2 Failure by any party to insist upon strict compliance with any of the terms, covenants or conditions hereof shall not be deemed a waiver of such term, covenant or condition, nor shall any waiver or relinquishment of any right or remedy hereunder at any one or more times be deemed a waiver or relinquishment of such right or remedy at any other time or times. 9.10 EMPLOYEE BENEFIT PLANS. Einstein Bros. intends that the Plans described in Schedule 4.22 (the "Company Benefit Plans") that are in effect at the date of this Agreement shall remain in effect until such time as the Company's employees are allowed to participate in employee plans and benefit arrangements of Einstein Bros. (the "Einstein Bros. Plans") or of an area developer of Einstein Bros. who hires such employees, if such area developer is formed. Article 10. INDEMNIFICATION 10.1 AGREEMENT BY THE SHAREHOLDERS TO INDEMNIFY. The Shareholders agree that they will indemnify and hold Einstein Bros. and the Company harmless in respect of the aggregate of all Indemnifiable Damages (as hereinafter defined). With respect to Indemnifiable Damages arising from any inaccurate representation or warranty made by the Company in Article 4 of this Agreement, the obligation of the Shareholders to indemnify will be limited to the following persons: Starbucks, Rosewood Capital, L.P., Noah Alper, Dan Alper, Robert Polsky and Bill Hughson (collectively, the "Indemnifying Shareholders"), who shall be obligated severally to indemnify Einstein Bros. and Merger Sub, with each such person being obligated to indemnify for up to the following percentage of the aggregate amount of Indemnifiable Damages: Starbucks: 28.74%; Rosewood Capital, L.P.: 29.14%; Noah Alper: 15.76%; Dan Alper: 6.32%; Robert Polsky: 10.94%; and Bill Hughson: 9.10%. With respect to any other Indemnifiable Damages, the obligation of the Shareholders to indemnify shall be several. For purposes of this Agreement, Indemnifiable Damages shall mean the aggregate of all expenses, losses, costs, deficiencies, liabilities and damages (including reasonable related counsel fees and expenses) incurred or suffered by Einstein Bros., Merger Sub or the Company (or any successor to all or any part of the assets or business of the Company) (i) resulting from any inaccurate representation or warranty made by the Shareholders or the Company in or pursuant to this Agreement (disregarding for this purpose the limitations on materiality set forth in the third sentence of Section 4.7.2 and the first sentence of Section 4.19), (ii) resulting from any default in the performance of any of the covenants or agreements made by the Shareholders in this Agreement, (iii) resulting from any claim or action of any shareholder of the Company who has not entered into this Agreement prior to the Closing related to the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby, including without limitation any action based on the dissenters' rights of any such shareholder under California law, or (iv) resulting from any representation or statement made by the Company to its shareholders in connection with the solicitation of consents to approve the Merger that, taken as a whole, contains any untrue statement of a material fact or omits any material fact necessary to make the representations and statements made, in light of the circumstances in which they were made, not misleading. Without limiting the generality of the foregoing, with respect to the measurement of Indemnifiable Damages, Einstein Bros. and the Company shall have the right to be put in the same financial position as they would have been in had each of the representations and warranties of the Shareholders and the Company been true and correct, had each of the covenants of the Shareholders been performed in full, had there been no such claim or action described in clause (iii) of the preceding sentence and had no misleading statement or omission been made as described in clause (iv) of the preceding sentence. The foregoing obligation to indemnify Einstein Bros., and the Company shall be subject to each of the following principles or qualifications: 10.1.1 Each of the representations and warranties made by the Shareholders and the Company in this Agreement or pursuant hereto, shall survive for a period of one year after the Closing Date, notwithstanding any investigation at any time made by or on behalf of Einstein Bros. or Merger Sub, and thereafter all such representations and warranties shall be extinguished, provided, however, that the representations and warranties made by the Shareholders in Sections 2.1, 2.2, 2.3, 2.4, 2.5, 4.1 (except to the extent it relates to foreign qualification and except for clause (ii) of the fourth sentence thereof) and 4.2 hereof shall in each case survive forever (or, to the extent a claim hereunder relates to third-party claims, a period of six months after the expiration of the statute of limitations applicable to such claim), those made in clause (ii) of the fourth sentence thereof shall survive for six months after the expiration of the applicable statute of limitations and those made in Section 4.6 hereof shall in each case survive until the first anniversary of the later of (i) the date on which the applicable period of limitation on assessment or refund of tax has expired, or (ii) the date on which the applicable taxable year (or portion thereof) has been closed. No claim for the recovery of Indemnifiable Damages based upon the inaccuracy of such representations and warranties may be asserted by Einstein Bros. or the Company after such representations and warranties shall be thus extinguished; provided, however, that claims first asserted in writing within the applicable period (whether or not the amount of any such claim has become ascertainable within such period) shall not thereafter be barred. 10.1.2 The Shareholders shall not be liable for any claim for Indemnifiable Damages arising out of any inaccuracy of any representation or warranty if the aggregate amount of all Indemnifiable Damages does not exceed $250,000. For this purpose, amounts which would constitute Indemnifiable Damages but for the limitations on materiality set forth in the third sentence of Section 4.7.2 and the first sentence of Section 4.19 shall be taken into account in determining whether such threshold has been met. 10.1.3 The Shareholders' liability for claims for Indemnifiable Damages arising out of any inaccuracy of representations and warranties shall not exceed $10,000,000 in the aggregate. 10.1.4 The limitations set forth in Sections 10.1.2 and 10.1.3 shall not apply to Indemnifiable Damages arising out of any inaccuracy of any representation or warranty in Sections 2.1, 2.2, 2.3, 2.4, 2.5, 4.1 (except to the extent it relates to foreign qualification) or 4.2. 10.1.5 Einstein Bros. and the Company shall not be entitled to recover Indemnifiable Damages with respect to any matter to the extent such matter is covered by insurance, but in such event the effect of such matter on the insurance costs of Einstein Bros. and the Company shall also be taken into account in determining the amount of Indemnifiable Damages. 10.1.6 Absent fraud, the provisions of this Article 10 shall provide the exclusive remedy of Einstein Bros. and the Company for damages arising from the inaccuracy of representations and warranties of the Shareholders and the Company in this Agreement. 10.1.7 In the event Einstein Bros. or the Company becomes involved in any legal, governmental or administrative proceeding which may result in indemnification claims hereunder and such proceeding, if adversely determined, can reasonably be expected to result in the payment of Indemnifiable Damages hereunder in an amount (a) in excess of the amount of damages of the Company that would not be recovered because of the threshold set forth in Section 10.1.2 hereof, but (b) less than the cap set forth in Section 10.1.3 hereof, then the Indemnifying Shareholders may, at their option and expense, defend such proceeding. If the Indemnifying Shareholders elect to defend any such proceeding, they shall have full control over the conduct of such proceeding, although Einstein Bros. shall have the right to retain legal counsel and to participate in the defense of such proceeding at its own expense and shall have the right to approve any settlement of any dispute giving rise to such proceeding, such approval not to be withheld unreasonably; provided that, in the event the Indemnifying Shareholders shall fail to initiate a defense of a claim within twenty days of the notice to the Indemnifying Shareholders of a claim, Einstein Bros. shall have the option to conduct the defense of such claim as it may in its discretion and in good faith deem proper, and the Indemnifying Shareholders shall have the right to retain legal counsel and to participate in the defense of such proceeding at their own expense. If any proceeding, if adversely determined, can reasonably be expected to result in an amount of damages of the Company (x) that would not be recovered because such amount would be less than the threshold set forth in Section 10.1.2 hereof, or (y) that would exceed the cap set forth in Section 10.1.3 hereof, then Einstein Bros. may, at its option, defend such proceeding. If Einstein Bros. elects to defend any such proceeding, it shall have full control over the conduct of such proceeding, although the Indemnifying Shareholders shall have the right to retain legal counsel and to participate in the defense of such proceeding at their own expense and shall have the right to approve any settlement of any dispute giving rise to such proceeding, such approval not to be withheld unreasonably; provided that, in the event Einstein Bros. shall fail to initiate a timely defense of a claim, the Indemnifying Shareholders shall have the option to conduct the defense of such claim, and Einstein Bros. shall have the right to retain legal counsel and to participate in the defense of such proceeding at its own expense. 10.1.8 Nothing in this Section 10.1 shall prevent Einstein Bros. from obtaining equitable relief in any appropriate case. 10.1.9 Einstein Bros. and the Company agree to use reasonable best efforts to give prompt written notice to the Indemnifying Shareholders of each claim for Indemnifiable Damages which they believe they have suffered; provided, however, that no delay in the giving of such notice shall affect the rights of Einstein Bros., and the Company to recover Indemnifiable Damages hereunder except to the extent the recipient of such notice is prejudiced by such delay. ARTICLE 11. MISCELLANEOUS 11.1 AMENDMENT AND MODIFICATION. Subject to any restrictions set forth in the California Act and the Delaware Act, the parties hereto may amend, modify and supplement this Agreement in such manner as may be agreed upon in writing by Einstein Bros., the Company and Shareholders owning on the date hereof 75% of the aggregate number of shares of capital stock of the Company owned by all of the Shareholders, provided, however, that (i) any amendment to Section 8.4 or 9.8 shall require only the consent of Einstein Bros. and Noah Alper, (ii) any amendment to Section 9.5 or 9.6 shall require only the consent of Einstein Bros. and of all Restricted Shareholders affected thereby, (iii) any amendment to Section 9.7 shall require only the consent of Einstein Bros. and Starbucks, (iv) any amendment to Section 9.9 shall require only the consent of Einstein Bros. and all of the Restricted Persons affected thereby, (v) any amendment to Article 10 shall require only the consent of Einstein Bros. and all of the Indemnifying Shareholders, (vi) any amendment to any of clauses (i) through (v) of this Section 11.1 shall require only the consent of all of the persons identified in such clause, and (vii) any amendment of Section 11.3.4 shall require only the consent of Starbucks, Rosewood Capital, L.P., Noah Alper and Einstein Bros. 11.2 PAYMENT OF EXPENSES. The Shareholders shall pay all fees and expenses incurred in connection with this Agreement and the transactions contemplated hereby payable to Alex. Brown & Sons Incorporated; Cooley Godward Castro Huddleson & Tatum, counsel for the Company; Preston Gates & Ellis, representing Starbucks; and certain other professional advisors approved by the Company. Einstein Bros. shall pay all of the expenses incurred by it or Merger Sub in connection with this Agreement, including without limitation their legal and accounting fees and expenses, and the commissions, fees and expenses of any person employed or retained by them to bring about, or to represent them in, the transactions contemplated hereby. 11.3 TERMINATION. Anything to the contrary herein notwithstanding, this Agreement may be terminated and the transaction contemplated hereby may be abandoned: 11.3.1 by the mutual written consent of all of the parties hereto at any time prior to the Closing Date; 11.3.2 by Einstein Bros. in the event of the material breach by the Shareholders of any provision of this Agreement, which breach is not remedied by the breaching party within 10 days after receipt of notice thereof from Einstein Bros.; 11.3.3 by the Shareholders in the event of the material breach by Einstein Bros. of any provision of this Agreement, which breach is not remedied by Einstein Bros. within 10 days after receipt of notice thereof from Shareholders; or 11.3.4 by any party hereto if the Closing has not taken place by the close of business on February 2, 1996. If this Agreement is terminated pursuant to Sections 11.3.1, no party shall have any liability for any costs, expenses, loss of anticipated profit or any further obligation for breach of warranty or otherwise to any other party to this Agreement. Any termination of this Agreement pursuant to Sections 11.3.2, 11.3.3, or 11.3.4 shall be without prejudice to any other rights or remedies of the respective parties. 11.4 BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors, assigns, heirs and legal representatives. 11.5 ENTIRE AGREEMENT. This Agreement and the exhibits and schedules attached hereto and the confidentiality agreement between Einstein Bros. and the Company dated September 13, 1995, contain the entire agreement of the parties hereto with respect to the Purchase and the Merger and the other transactions contemplated herein, and supersede all prior understandings and agreements of the parties with respect to the subject matter hereof. Any reference herein to this Agreement shall be deemed to include the schedules and exhibits attached hereto. 11.6 HEADINGS. The descriptive headings in this Agreement are inserted for convenience only and do not constitute a part of this Agreement. 11.7 CERTAIN DEFINED TERMS. As used herein, the following terms shall have the meanings given them below: "Best of the Knowledge of the Company" means the knowledge of any of Noah Alper, Dan Alper, Bob Polsky, Bill Hughson or Glenn Bacheller and the knowledge which any of them could reasonably be expected to have upon the exercise of reasonable diligence in the performance of his duties or in the preparation of the Disclosure Schedules (to the extent such person was involved in the preparation of such Disclosure Schedules). "Best of the Knowledge of Einstein Bros." means the knowledge of any of Einstein Bros.' executive officers and the knowledge which any of them could reasonably be expected to have in the performance of his duties or in the preparation of the Einstein Bros. Disclosure Schedules (to the extent such person was involved in the preparation of such Einstein Bros. Disclosure Schedules). "Material Adverse Effect" means, when used with reference to Einstein Bros., a material adverse effect on the business, financial condition or results of operations of Einstein Bros. and its subsidiaries, taken as a whole, and when used with reference to the Company, a material adverse effect on its business, financial condition or results of operations. 11.8 EXECUTION IN COUNTERPART. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original. 11.9 NOTICES. Any notice, request, information or other document to be given hereunder shall be in writing. Any notice, request, information or other document shall be deemed duly given when delivered personally or by courier, when sent by facsimile transmission with confirmed receipt, or four business days after it is sent by registered or certified mail, postage prepaid, to the intended recipient, addressed as follows: If to any one or more of the Shareholders, addressed to such Shareholder at its address set forth on Schedule 11.9 hereto. If to the Company, prior to the Closing, addressed to: Noah's New York Bagels, Inc. 14054 Catalina Street P.O. Box 2158 San Leandro, CA 94577-0331 Attention: Glenn Bacheller with a copy to: Cooley Godward Castro Huddleson & Tatum One Maritime Plaza, 20th Floor San Francisco, CA 94111 Attention: Christopher Westover If to the Company after the Closing, or if to Einstein Bros. or Merger Sub, addressed to: Einstein Bros. Bagels, Inc. 1526 Cole Boulevard, Suite 200 Golden, CO 80401 Attention: General Counsel with a copy to: Bell, Boyd & Lloyd 70 W. Madison, Suite 3200 Chicago, Illinois 60602 Attention: Paul T. Metzger Any party may send any notice, request, information or other document to be given hereunder using any other means (including personal delivery, courier, messenger service, facsimile transmission or ordinary mail), but no such notice, request, information or other document shall be deemed duly given unless and until it is actually received by the party for whom it is intended. Any party may change the address to which notices hereunder are to be sent to it by giving written notice of such change of address in the manner herein provided for giving notice. 11.10 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware applicable to contracts made and to be performed therein, except that the Merger shall be governed by and become effective in accordance with the California Act to the extent provided therein. 11.11 AMENDMENT AND RESTATEMENT. This Agreement amends and restates in its entirety that certain Merger Agreement, dated as of January 22, 1996, among the Company, Einstein Bros., Merger Sub and certain Shareholders. [THIS SPACE INTENTIONALLY LEFT BLANK] In Witness Whereof, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written. Noah's New York Bagels, Inc. By: /s/ William B. Hughson ------------------------ Title: President Einstein Bros. Bagels, Inc. By: /s/ Paul A. Strasen ------------------------ Title: Vice President NNYB Acquisition Corporation By: /s/ Joel Alam ------------------------ Title: Vice President SHAREHOLDER SIGNATURE PAGE TO MERGER AGREEMENT STARBUCKS CORPORATION ------------------------- Print Shareholder Name /s/ Martin M. Casey ------------------------- Signature of Shareholder (or authorized signatory, if Shareholder is not an individual) Senior Vice President ------------------------- Name and Title of authorized signatory, if Shareholder is not an individual EX-6 7 EXHIBIT 10.22 AMENDMENT TO MERGER AGREEMENT This Amendment (the "Amendment") to Merger Agreement is made and entered into this 1st day of February, 1996 by and among Noah's New York Bagels, Inc., a California corporation (the "Company"), the shareholders and optionholders of the Company who have executed this Agreement, Einstein Bros. Bagels, Inc., a Delaware corporation ("Einstein Bros."), and NNYB Acquisition Corporation, a Delaware corporation ("Merger Sub"). RECITALS Certain of the parties hereto are also parties, together with other persons, to a Merger Agreement dated as of January 22, 1996 (the "Merger Agreement"). Pursuant to Section 11.1 of the Merger Agreement, the parties hereto have the right to amend the Merger Agreement in the manner set forth in this Amendment. The parties to this Amendment who have not yet executed the Merger Agreement are becoming parties hereto for the purpose of becoming a party to the Merger Agreement as amended by this Amendment. COVENANTS In consideration of the mutual covenants herein contained, the parties hereto agree as follows: 1. Sections 1.5 and 1.6 of the Merger Agreement are hereby amended to read in their entirety as follows: "1.5 TREATMENT OF SHARES OF THE COMPANY. At and as of the Effective Time, each outstanding share of capital stock of the Company shall be converted into the right to receive an amount in cash (the "Per Share Merger Consideration") equal to (a) $100,900,000, less the amounts paid to persons identified in the first sentence of Section 11.2, plus the aggregate exercise price of all Options (as defined in Section 1.6) that have not been exercised prior to the Effective Time, plus the aggregate exercise price received by the Company upon the exercise of options after the acceleration of vesting provided for in Section 1.6, divided by (b) the total number of shares of capital stock of the Company outstanding immediately prior to the Effective Time, plus the total number of shares of capital stock subject to all unexercised Options. 1.6 TREATMENT OF OPTIONEES. Subject to obtaining the consent of the shareholders of the Company required under Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), prior to the Effective Time the Company shall accelerate the vesting of the options held by the optionees identified in the Disclosure Schedule (other than options to purchase 240,000 shares of Common Stock held by Glenn Bacheller) (the "Options"). At the Effective Time, (a) Options that have been exercised (and as to which the exercise price has been received by the Company) shall be ignored and the shares of Common Stock issued upon such exercise shall be treated as provided in Section 1.5 and (b) the Company shall pay to any optionee whose Options have not been exercised, in cancellation and satisfaction of his or her Options, an amount equal to (i) the total number of shares subject to such optionee's Options, multiplied by the Per Share Merger Consideration, less (b) the aggregate exercise price of such optionee's Options. 2. Section 8.5 of the Merger Agreement is amended to read in its entirety as follows: 8.5 AGREEMENTS WITH CERTAIN MEMBERS OF THE COMPANY'S MANAGEMENT. Einstein Bros. shall have executed and delivered to each of Jim Mizes, Bob Purcell, Nancy Hauge, Bill Schrader, Doug Troy, Barbara Musante and Paul Soulier agreements in the form set forth in Exhibit E. 3. Section 9.6 of the Merger Agreement is amended to read in its entirety as follows: 9.6 RESTRICTIVE COVENANTS. Each of the Restricted Shareholders acknowledges and agrees that Einstein Bros. would be unable to protect the Confidential Information against unauthorized use or disclosure and Einstein Bros. would be unable to realize the benefit of this Agreement if such Restricted Shareholder were permitted, directly or indirectly, to engage in, hold interests in or perform services for any entity which derives more than 15% of its revenues from the business of selling, producing, marketing or distributing bagels, other than Einstein Bros. and its subsidiaries and franchisees (a "Competitive Business"). Each of the Restricted Shareholders further acknowledges and understands that Einstein Bros. intends, and expects, to expand its business throughout the United States. Each of the Founder Restricted Shareholders therefore agrees that for a period of three (3) years from the Closing Date, and each of the Management Restricted Shareholders therefore agrees that for a period of two (2) years from the Closing Date, such Restricted Shareholder shall not, and shall not permit such Restricted Shareholder's Affiliates, to directly or indirectly, anywhere in the United States (including without limitation every county in the State of California): (i) have any interest as a record or beneficial owner in any Competitive Business; PROVIDED, HOWEVER, the Restricted Shareholders may have an interest in any Competitive Business as passive investors in such Competitive Business conducted by a company which has a class of securities which is registered under Section 12 of the Securities Exchange Act of 1934, as amended, or traded on a national securities exchange provided that the interest consists solely of such securities and the interest held by any Restricted Shareholder, or any group of which any Restricted Shareholder is a member that would be treated as a person under Section 13(d)(3) of the Securities Exchange Act of 1934, shall in no event exceed five percent (5%) of the total equity securities of such issuer; (ii) perform services as a director, officer, manager, employee, consultant, representative, agent or otherwise for any Competitive Business; or (iii) divert or attempt to divert any business or any customers of Einstein Bros.' business to any Competitive Business. For purposes of this Section 9.6, the term "Founder Restricted Shareholders" means Noah Alper, Dan Alper and Bill Hughson, the term "Management Restricted Shareholders" means the persons identified in Section 8.5, and the term "Restricted Shareholders" means all of the Founder Restricted Shareholders and all of the Management Restricted Shareholders. 4. The final sentence of Section 9.7.3 of the Merger Agreement is amended to read in its entirety as follows: ""Covered Entity" shall mean (i) an entity in which BCI holds (or has the right to acquire) at least 35% of the equity or (ii) an entity in which BCI holds (or has the right to acquire) an equity interest which would result in BCI "controlling" such entity within the meaning of such term as it is used in Rule 405 of the Securities Act." 5. The second sentence of Section 10.1 of the Merger Agreement is amended by substituting the following percentages for the percentages set forth in the Merger Agreement: Starbucks: 28.88%; Rosewood Capital, L.P.: 28.78%; Noah Alper: 15.84%; Dan Alper: 6.35%; Robert Polsky: 11%; and Bill Hughson: 9.15%. 6. The portion of the second sentence of Section 10.1.7 of the Merger Agreement following the semi-colon is amended to read as follows: "PROVIDED THAT, in the event the Indemnifying Shareholders shall fail to initiate a timely defense of a claim, Einstein Bros. shall have the option to conduct the defense of such claim as it may in its discretion and in good faith deem proper, and the Indemnifying Shareholders shall have the right to retain legal counsel and to participate in the defense of such proceeding at their own expense." The portion of the last sentence of Section 10.1.7 of the Merger Agreement following the semi-colon is amended to read as follows: "PROVIDED THAT, in the event Einstein Bros. shall fail to initiate a timely defense of a claim, the Indemnifying Shareholders shall have the option to conduct the defense of such claim as they may in their discretion and in good faith deem proper, and Einstein Bros. shall have the right to retain legal counsel and to participate in the defense of such proceeding at its own expense." 7. Section 11.2 of the Merger Agreement is amended to read in its entirety as follows: 11.2 PAYMENT OF EXPENSES. The Shareholders shall pay all fees and expenses incurred by the Company or them in connection with this Agreement and the transactions contemplated hereby, including without limitation all fees and expenses payable to Alex. Brown & Sons Incorporated; Cooley Godward Castro Huddleson & Tatum, counsel for the Company; Preston Gates & Ellis, representing Starbucks; and certain other professional advisors approved by the Company. The Shareholders have requested that Einstein Bros. pay on behalf of the Shareholders, from the consideration to be delivered in the Merger, the sum of $1,202,000 to Alex. Brown & Sons Incorporated and the sum of $298,000 to the Cooley Godward Castro Huddleson & Tatum Trust Account, which will be used to pay the professional advisors other than Alex. Brown & Sons Incorporated. Other than the payments described in the preceding sentence, Einstein Bros. or Merger Sub shall have no responsibility for any fees and expenses incurred by the Company or the Shareholders in connection with this Agreement and the transactions contemplated hereby. Einstein Bros. shall pay all of the expenses incurred by it or Merger Sub in connection with this Agreement, including without limitation their legal and accounting fees and expenses, and the commissions, fees and expenses of any person employed or retained by them to bring about, or to represent them in, the transaction contemplated hereby. 8. The Company has requested from Einstein Bros. and Merger Sub and Einstein Bros. and Merger Sub have requested from the Company and the Shareholders a waiver of the respective conditions set forth in Sections 7.7 and 8.8 of the Merger Agreement and each of the parties hereto hereby agrees to waive such conditions. 9. The Company represents and warrants to Einstein Bros. and Merger Sub that the shareholders of the Company who have executed this Amendment own in the aggregate at least 75% of the aggregate number of outstanding shares of capital stock of the Company. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed on the day and year first above written. NOAH'S NEW YORK BAGELS, INC. By: /s/ Glenn Bacheller -------------------------- Title: CEO EINSTEIN BROS. BAGELS, INC. By: /s/ Paul A. Strasen --------------------------- Title: Vice President NNYB ACQUISITION CORPORATION By: /s/ Paul A. Strasen --------------------------- Title: President SHAREHOLDERS: /s/ Noah C. Alper /s/ Douglas Troy - --------------------------- --------------------------- /s/ Daniel V. Alper /s/ Barbara Musante - --------------------------- --------------------------- /s/ William B. Hughson /s/ Paul Soulier - --------------------------- --------------------------- /s/ James Mizes /s/ William Schrader - --------------------------- --------------------------- /s/ Robert Purcell - --------------------------- /s/ Nancy Hauge - --------------------------- /s/ Robert D. Polsky - ---------------------------- IN WITNESS WHEREOF, the parties have caused this Amendment to be duly executed on the day and year first above written. ROSEWOOD CAPITAL, L.P. By: /s/ Chip Adams - --------------------------- Title: Principal STARBUCKS CORPORATION By: /s/ Martin M. Casey - ----------------------------------- Title: Senior Vice President ALPER LIVING TRUST U/A/E 6/18/94 By: /s/ Noah C. Alper, Trustee - ----------------------------------- WILLIAM B. HUGHSON and MARGARET A. HSIA REVOCABLE TRUST By: /s/ William B. Hughson, Trustee - ------------------------------------ EX-7 8 EXHIBIT 10.23 STARBUCKS CORPORATION AMENDED AND RESTATED MASTER LICENSING AGREEMENT THIS AMENDED AND RESTATED MASTER LICENSING AGREEMENT (this "Agreement") is made and entered into this 7th day of May, 1996, by and between Starbucks Corporation, a Washington corporation ("STARBUCKS"), and ARAMARK Food and Services Group, Inc., a Delaware corporation ("ARAMARK"). RECITALS A. STARBUCKS operates specialty retail stores engaged in the sale of coffee, tea, and espresso beverages, whole bean coffee, related hardware items, and selected food items, each of which operates under the name "Starbucks Coffee." B. ARAMARK and STARBUCKS desire to enter into this Agreement to provide ARAMARK with the rights to operate a number of Starbucks Stores at businesses, industrial sites, health care locations, colleges, universities and other locations in the United States designated on each Exhibit A, which is executed by STARBUCKS and ARAMARK or any ARAMARK (as defined hereinafter) from time to time. AGREEMENT NOW, THEREFORE, in consideration of the above recitals, of the following terms and conditions, and of other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereby agree as follows: DEFINITIONS The following terms used herein shall have the following definitions: Agreement. "Agreement" shall mean this Agreement executed on the date first set forth above between STARBUCKS and ARAMARK, as defined in the preamble hereto. Confidential Information. "Confidential Information" shall have the meaning set forth in Section 5.11.1. Commencement Date. "Commencement Date" shall have the meaning set forth in Section 2.2. Effective Date. "Effective Date" shall have the meaning set forth in Section 7.16. Gross Revenue. "Gross Revenue" shall have meaning set forth in Section 2.2. Initial and Advanced Training Programs. STARBUCKS' "Initial Training Program" shall mean the program developed by and presented by STARBUCKS that trains employees concerning coffee and its preparation and in the operational aspects of Starbucks Stores. STARBUCKS' "Advanced Training Program" shall mean the program developed by and presented by STARBUCKS that trains managers in the operational aspects and managerial aspects of the Starbucks System and Starbucks Stores, and that trains participants in how to train Regular Employees to do their jobs within Starbucks Stores to the level of training as presented in the Initial Training Program. Lessor. "Lessor" shall mean the party with whom ARAMARK has an Occupancy Agreement that allows ARAMARK to operate a concession, lease space, or engage in other business ventures on property controlled by such Lessor. For definitional purposes, a party granting an Occupancy Agreement to ARAMARK shall be referred to as a Lessor even if ARAMARK and such party do not have a landlord-tenant relationship. License. "License" shall have the meaning set forth in Section 1.1. "Licensed ARAMARK Affiliate" shall mean ARAMARK Services, Inc.; VERSA Services, Ltd.; ARAMARK Educational Services, Inc.; ARAMARK Refreshment Services, Inc.; and ARAMARK Healthcare Support Services, Inc. License Fee. "License Fee" shall have the meaning set forth in Section 2.1. Management Employee. "Management Employee" shall have the meaning set forth in Section 4.1. Manual. The "Manual" shall mean the series of documents, publications, and bulletins designated as such by STARBUCKS as the guide for operation of a Starbucks Store, which is hereby incorporated by reference as if fully set forth herein. STARBUCKS shall have the continuing right to revise the Manual, upon reasonable notice, and each update, modification, and expansion of and to the Manual adopted from time to time by STARBUCKS shall become a part thereof and accepted by ARAMARK when received by ARAMARK. Occupancy Agreements. As used herein, "Occupancy Agreements" shall mean those agreements, however denominated, that allow ARAMARK to lease, manage and/or operate concessions and stores at property owned by third parties. Without limiting the foregoing, Occupancy Agreements include all leases, concession agreements, licenses, and similar arrangements between ARAMARK and third parties. Regular Employee. "Regular Employee" shall have the meaning set forth in Section 4.1. Royalty. "Royalty" shall have the meaning set forth in Section 2.2. Starbucks Store. "Starbucks Store" shall mean a STARBUCKS retail coffee bar or whole bean coffee store, as the case may be, as operated by ARAMARK pursuant to this Agreement. Starbucks System. "Starbucks System" shall mean the business operation system that allows ARAMARK or a Licensed ARAMARK Affiliate to operate a Starbucks Store, including interior and exterior store design; other items of trade dress; specifications for equipment, fixtures, and uniforms; defined product offerings and preparation methods; standard operating and administrative procedures; and management and technical training programs, all as the same may exist today or as they may change from time to time, as specified in the Manual or as otherwise reasonably directed by STARBUCKS from time to time with respect to comparable operations, consistently applied. Trade Area. "Trade Area" shall include the entire contiguous campus of the college, university, business, health care, or industrial enterprise at which any Starbucks Store is located, unless a smaller Trade Area is set forth on the Exhibit A applicable to such store. Trademarks. "Trademarks" shall mean those proprietary marks held by STARBUCKS that STARBUCKS specifically designates, in writing, for use by ARAMARK, including those trademarks designated by STARBUCKS that are owned by a distributor or joint venture of which STARBUCKS is a part. ARTICLE 1.0 THE LICENSE Grant of License. Subject to the terms and conditions of this Agreement, STARBUCKS hereby grants to ARAMARK and the Licensed ARAMARK Affiliates a nonexclusive license (the "License") to use the Starbucks System and the Trademarks for each licensed Starbucks Store, to be identified on an Exhibit A to this Agreement, executed by ARAMARK or a Licensed ARAMARK Affiliate, as the case may be. Any Licensed ARAMARK Affiliate which executes an Exhibit A shall, as to all Starbucks Stores on such Exhibit, be bound by this Agreement just as if such Licensed ARAMARK Affiliate had executed this Agreement. References herein to "ARAMARK" shall include each Licensed ARAMARK Affiliate as to all Starbucks Stores on each Exhibit A executed by such Licensed ARAMARK Affiliate. ARTICLE 2.0 FEES, ROYALTIES, AND PAYMENTS 2.1. License Fee. ARAMARK will pay a license fee for each Starbucks Store opened by ARAMARK as set forth on Schedule 2.0 (the "License Fee"), with such fee attributable as set forth on Schedule 2.0. The License Fee for each Starbucks Store opened by ARAMARK shall be due on or within thirty (30) days after ARAMARK and STARBUCKS execute an Exhibit A for that Starbucks Store. No store shall open prior to the full execution of Exhibit A for such store and the payment of the applicable License Fee. 2.2. Royalty and Advertising Fee to STARBUCKS. Starting on the first day that its first Starbucks Store opens to the public (the "Commencement Date"), ARAMARK shall pay STARBUCKS a royalty as set forth on Schedule 2.0 (the "Royalty"), plus an advertising fee in accordance with Section 2.3.2. "Gross Revenue" shall mean the total of all revenues derived from the Starbucks Store during the term of the License, whether such revenues are evidenced by cash, services, property, or other means of exchange, and whether STARBUCKS offers such services or products in its other locations, and shall include without limitation, the following: (a) sales, monies, property, or receipts from sales, of any nature or kind whatsoever, derived by ARAMARK or by any other person or entity (including without limitation persons controlling, controlled by, or under common control with ARAMARK); (b) sales of STARBUCKS products in contravention of this Agreement at locations other than the Starbucks Stores, provided, that sales of Starbucks coffee through Starbucks' wholesale programs shall not be considered sales in contravention of this Agreement; (c) the proceeds of any business interruption insurance, after the satisfaction of any applicable deductible; (d) sales from vending devices; (e) mail or telephone orders received or filled on or from the Starbucks Store; (f) all deposits not refunded to purchasers; (g) orders taken although filled elsewhere. There shall be no reduction for the costs or expenses of operating the Starbucks Stores or for federal, state, or local income taxes or business and occupation taxes related to the Starbucks Stores. "Gross Revenue" shall exclude the amount of any state or local sales or use tax actually paid by ARAMARK and sales of fixtures or other capital items sold by ARAMARK after use thereof in the operation of the Starbucks Stores. 2.3. Payment. 2.3.1 Payment of Royalty. ARAMARK will calculate the Royalty due to STARBUCKS for each calendar month and submit payment to STARBUCKS for the amount due together with a statement of ARAMARK's Gross Revenue for the Accounting Period no later than the twenty-fifth day of the month following the month for which such Royalty Payment is due. 2.3.2 Payment of Advertising Fee. For each Starbucks Store, ARAMARK shall submit to STARBUCKS an advertising report in the manner set forth on Schedule 2.0. 2.4. Promotional Materials. ARAMARK shall purchase for each Starbucks Store it opens an initial supply of promotional materials from STARBUCKS costing not less than five hundred dollars ($500) and, from time to time, shall purchase additional promotional materials from STARBUCKS or a vendor approved by STARBUCKS to maintain that supply. Promotional materials are materials such as customer brochures and counter cards that contain the Trademarks. STARBUCKS will supply these materials to ARAMARK at STARBUCKS' cost, plus a markup estimated to be twenty percent (20%) to cover its costs of order processing, handling, and shipping. ARAMARK may submit samples of such products from other vendors to STARBUCKS for testing and approval under the procedures set forth in Section 5.9.1. 2.5. Training Fees. The fees and costs typically charged by STARBUCKS for training one (1) Management Employee and six (6) Regular Employees for each Starbucks Store are included in the License Fee paid by ARAMARK for such site, provided, that ARAMARK and STARBUCKS may agree to such other number of Regular Employees as may be necessary to adequately staff such Starbucks Store. For all other training requested by ARAMARK, STARBUCKS may charge reasonable fees and costs for materials and participation. STARBUCKS shall not be responsible for any out-of-pocket expenses, travel, hotel, or salary costs, incurred during training by ARAMARK personnel (including without limitation any Management Employees or Regular Employees). 2.6 Multiple Stores. In the event there is more than one Starbucks Store at a location that includes a previously licensed Starbucks Store, each such Starbucks Store shall be subject, among other things, to the fees as set forth in this Agreement, including without limitation those described in Sections 2.2, 2.4, and 2.5. 2.7. Initial Design and Fabrication; Refurbishment Costs. 2.7.1. Design, Fabrication, and Set-up. STARBUCKS shall provide initial design services for each Starbucks Store, based on plans, specifications and criteria established by STARBUCKS in accordance with its trade dress and business practice. The costs of such initial design services shall be included within the License Fee and ARAMARK shall not be separately charged for such initial design services. ARAMARK shall build and install the Starbucks Store using a contractor approved by STARBUCKS, acting reasonably, and following procedures set forth in the Manual. The fee covers only initial design services, and Starbucks shall not be responsible for detailed architectural or construction drawings or revisions. 2.7.2. Refurbishment. From time to time, ARAMARK, at its expense, shall refurbish each Starbucks Store as needed to maintain the building design, trade dress, color schemes, and presentation then used by STARBUCKS in its other operations. Refurbishment may include, without limitation, structural changes, remodeling, redecoration, and modifications to existing improvements. During each year of the term of a Starbucks Store, ARAMARK shall not be required to expend more than Twenty Percent (20%) of the total cost incurred by ARAMARK to design, construct and equip the Starbucks Store on refurbishment required by this Section 2.7.2. This limitation shall not apply in the event of a renewal of a License for a Starbucks Store, in which event ARAMARK shall modify the store as necessary to reflect STARBUCKS' current trade dress and image. 2.7.3 Notice of New Starbucks Store. Upon determining that it wishes to open a new store, ARAMARK shall provide STARBUCKS with at least ninety (90) days written notice of such desire. STARBUCKS shall inform ARAMARK whether it wishes to authorize the location within thirty (30) days of receipt of notice from ARAMARK. STARBUCKS shall retain sole and absolute discretion regarding the authorization of any new Starbucks Store, and may elect not to authorize a site for any reason including, without limitation, the failure of ARAMARK's operations to meet with STARBUCKS' continuing operational, financial and legal approval. 2.8. Purchase of Products. 2.8.1 Coffee. ARAMARK shall purchase from STARBUCKS all coffee sold by the Starbucks Stores. STARBUCKS will sell each type of the various blends and roasts of such coffee to ARAMARK at the prices set forth on Schedule 2.8 as of the execution of this Agreement, and thereafter at prices calculated in accordance with Schedule 2.8. 2.8.2 Other Products. ARAMARK may elect to purchase other products, services, and reports from either (a) STARBUCKS, if STARBUCKS has such items available for sale, or (b) other vendors that meet STARBUCKS' specifications and that have been approved in writing by STARBUCKS, which approval shall not be unreasonably withheld. The procedures for purchasing from such other vendors are further described in Section 5.9. 2.8.3 Shipment. All coffee and other products shall be shipped F.O.B. STARBUCKS' dock, Seattle, Washington, or F.O.B. STARBUCKS' dock at such other shipping point in the continental United States as STARBUCKS shall determine. Policies with respect to products, returns, and product quality are contained in the Manual. 2.9. Taxes. ARAMARK shall pay to STARBUCKS the amount of all sales taxes, real estate taxes, use taxes, personal property taxes, and similar taxes imposed on, or paid on account of, any goods or services furnished by sale, lease, or otherwise by STARBUCKS, and all amounts that STARBUCKS may advance, pay, or become obliged to pay on ARAMARK's behalf for any reason whatsoever except with respect to License Fees and Royalty Fees. 2.10. Payment of Invoices. All invoices for products, services, fees, and expenses issued by STARBUCKS are due upon issuance and payable by ARAMARK net forty-two (42) days from the date of issuance except as otherwise provided herein. ARTICLE 3.0 TERM, RENEWAL 3.1 Term of License. The License granted in Section 1.1 shall be for a term of five (5) years for each Starbucks Store, subject to the termination rights of the parties as set forth in Article 6 below. Such term shall begin on the date that such Starbucks Store first opens for business. STARBUCKS and ARAMARK acknowledge that, under certain circumstances, the term for a particular site may be longer or shorter than five years, depending on the terms and conditions of the applicable Occupancy Agreement. Upon store opening, the parties will exchange a revised Exhibit A confirming the actual opening date and expiration date for each store. 3.2 Renewal. Without limiting the termination rights accorded the parties in Article 6, STARBUCKS may renew this Agreement for a Starbucks Store for a period of five(5) years or such longer or shorter renewal term as may be appropriate pursuant to the applicable Occupancy Agreement. If such renewal notice is not given at least ninety (90) days prior to the expiration of the then-existing term for a Starbucks Store, the term for such site shall expire upon its previously established expiration date. There shall be no License Fee applicable to the renewal of a license. ARTICLE 4.0 PREOPENING ASSISTANCE AND REQUIREMENTS 4.1. Training Programs. ARAMARK acknowledges that quality control and adherence to the Starbucks System are needed to preserve and enhance the value of the Starbucks System and the License. As a condition precedent to ARAMARK's opening the Starbucks Stores to the public, all newly hired and replacement managers of ARAMARK's locations ("Management Employees") shall be subject to STARBUCKS' reasonable approval and shall successfully complete, to STARBUCKS' satisfaction, the "Initial Training Program" and the "Advanced Training Program" conducted by STARBUCKS. Employees of ARAMARK having managerial responsibilities at ARAMARK's locations shall have a skill level, training and experience commensurate with the demands of the position, and in keeping with STARBUCKS' high standards for quality products, courteous service, and cleanliness of operations. Also, each non-management employee of ARAMARK that will work in a Starbucks Store ("Regular Employee") shall, prior to, and as a condition precedent to opening of that Starbucks Store, receive training to STARBUCKS' satisfaction to the level of STARBUCKS' Initial Training Program. Except as provided in Section 2.5 hereof, ARAMARK shall pay training costs and related expenses of each person who attends any such training programs on its behalf. STARBUCKS shall not be responsible for paying the salaries and expenses of employees of ARAMARK who are attending training programs. 4.2. Opening Assistance. STARBUCKS shall furnish to ARAMARK one (1) person experienced in the Starbucks System to assist ARAMARK for a minimum period of seven (7) operating days in conjunction with, and prior to, the opening of any Starbucks Store. If ARAMARK opens more than one Starbucks Store at a campus or other location simultaneously, then STARBUCKS may furnish one person, and the opening assistance periods may run consecutively. STARBUCKS shall use diligent effort to furnish one person per Starbucks Store if ARAMARK opens more than one Starbucks Store at a campus or other location simultaneously. 4.3. Opening Timetable. ARAMARK shall locate its first Starbucks Store and obtain STARBUCKS' approval for the location promptly following execution of this Agreement. Initial training for ARAMARK's employees will be scheduled after the execution of this Agreement and completed before the opening date scheduled pursuant to Section 2.7.3 ARAMARK shall commence construction promptly following receipt of approval of a site by STARBUCKS and shall open each Starbucks Store promptly on completing construction. ARTICLE 5.0 OPERATION OF THE BUSINESS 5.1. Standards of Performance and Quality. ARAMARK understands and acknowledges that it is important to STARBUCKS and ARAMARK to develop and maintain high and uniform operating standards, to increase the demand for STARBUCKS' products and services, and to protect the reputation and goodwill of STARBUCKS. Without limiting the standards of performance set forth in the Manual, ARAMARK covenants and agrees as follows: 5.1.1. ARAMARK shall ensure that the operation of each Starbucks Store is at all times under the direct control of a Management Employee. Each Management Employee shall be solely dedicated to operation of the Starbucks Store to which the person is assigned, provided, that a Management Employee may supervise multiple stores if such stores are located within a geographic area that reasonably allows for such multiple store supervision, such as the campus or other location identified on the Exhibit A covering the Starbucks Stores, with such area to be approved by STARBUCKS. 5.1.2. ARAMARK shall operate the Starbucks Stores in accordance with the standards of service, advertising, promotion, management, and cleanliness prescribed by STARBUCKS and on such days and during such hours as ARAMARK may reasonably determine, exercising its judgment as a global provider of food and other managed services; comply with all business policies, practices, and procedures imposed by STARBUCKS; maintain the physical facilities of each Starbucks Store at a "like new" level of cosmetic appearance; sell at the Starbucks Stores only those services and products designated and approved by STARBUCKS; and maintain the interior and exterior of the Starbucks Stores in a sound, clean, and attractive condition. ARAMARK may, exercising its judgment as a global provider of food and other managed services, reasonably determine what STARBUCKS- approved services and products are to be sold at a Starbucks Store, provided, that ARAMARK shall at all times offer the items included in the "core menu" established for such store on the Exhibit A applicable to such store. 5.1.3. ARAMARK shall obtain and use materials distinctive to the operations of Starbucks Stores (napkins, paper bags, etc.) only of the kind now or hereafter marketed or licensed by STARBUCKS in accordance with its specifications. ARAMARK specifically acknowledges and agrees that the cup used to serve STARBUCKS coffee is an integral and valuable part of the STARBUCKS product. ARAMARK therefore agrees to use in the operation of its Starbucks Stores only cups that comply with STARBUCKS' specifications., 5.1.4. ARAMARK shall not alter, add to, or delete from any portion of the Starbucks System, Trademarks, or STARBUCKS products as licensed hereunder without STARBUCKS' prior written consent, which STARBUCKS may withhold in its sole and absolute discretion. 5.1.5. ARAMARK shall purchase all furniture, fixtures, equipment, supplies, and signage, including replacements, in accordance with STARBUCKS' specifications, and from suppliers approved by STARBUCKS under Section 5.9.1. 5.1.6. ARAMARK shall use at all times the methods, materials, and equipment designated by STARBUCKS to serve customers. 5.1.7. ARAMARK shall maintain at all times an inventory of goods and supplies sufficient to satisfy customer demand. 5.1.8. ARAMARK shall cause all of its employees, while working at Starbucks Stores, to wear uniforms of such color, design, and other specifications as STARBUCKS may reasonably designate, to present a neat and clean appearance, and to render competent and courteous service to customers. ARAMARK's employees working in the Starbucks Stores shall be dedicated solely to the Starbucks Stores and shall not work at any other business owned or operated by ARAMARK, except where ARAMARK reasonably determines it can provide shifts at other locations with no detrimental effect on the operations of its Starbucks Stores. 5.1.9. ARAMARK shall operate the Starbucks Stores as a retail business only under the name "Starbucks Coffee" without any additional or accompanying words or symbols unless otherwise directed or approved by STARBUCKS in writing, in STARBUCKS' sole and absolute discretion, subject only to the requirement that such words or symbols be required to be adopted at substantially all other Starbucks Stores. ARAMARK shall implement all changes in identification required by STARBUCKS within forty-five (45) days after receipt of a notice setting out an alternate Trademark pursuant to Section 5.10.2. 5.1.10. ARAMARK shall promptly pay when due all trade and supplier accounts, all federal, state, and local taxes (including, but not limited to, income, business and occupation, gross receipts, sales, use, property, and excise taxes), lease payments, and indebtedness of any kind incurred by ARAMARK in the operation of the Starbucks Stores, unless ARAMARK in good faith, contests any such payment. 5.1.11. ARAMARK shall secure, maintain in force, and, on reasonable notice, give reasonable evidence (or access) to STARBUCKS on request of all business licenses, permits, registrations, and certificates legally required to operate the Starbucks Stores and shall comply with all applicable laws, ordinances, and regulations. 5.1.12. ARAMARK shall faithfully observe and timely perform all covenants to be observed and performed by it pursuant to the Occupancy Agreements for the locations for its Starbucks Stores. 5.1.13. ARAMARK shall not, without the prior consent of STARBUCKS, knowingly employ or seek to employ any person who is at the time employed by STARBUCKS or operating a business under license from STARBUCKS, or otherwise directly or indirectly induce any such person to leave his or her employment. STARBUCKS shall give ARAMARK notice as promptly as is practicable of any situation in which it appears ARAMARK may breach, or has breached, this Section 5.1.13. 5.1.14. ARAMARK shall pay a compensation rate specified by STARBUCKS and out-of-pocket expenses including, but not limited to, transportation, lodging, and food, of any agent or employee of STARBUCKS who works at any of ARAMARK's Starbucks Stores and performs services that would otherwise be performed by an employee of ARAMARK (whether a Management Employee or a Regular Employee). 5.1.15. ARAMARK shall replace items of equipment that are obsolete or otherwise mechanically impaired to the extent they require replacement, or as STARBUCKS may reasonably require. 5.1.16. Except for participation in STARBUCKS' wholesale programs or as otherwise specifically authorized by STARBUCKS, ARAMARK shall sell no coffee products or other products supplied by STARBUCKS outside of the Starbucks Stores nor to any customer for the purpose of resale by the customer, and all sales by ARAMARK shall be for retail consumption only. 5.1.17. ARAMARK shall notify STARBUCKS in writing within ten (10) days after ARAMARK receives actual notice of the commencement of any action, suit, or other proceeding, or the issuance of any order, writ, injunction, award, or other decree of any court, agency, or other governmental instrumentality that pertains to the Starbucks Stores or that may adversely affect ARAMARK's operation of the Starbucks Stores or ability to meet its obligations hereunder, of such proceeding or decree. 5.2. Inspection. ARAMARK agrees to permit representatives of STARBUCKS to inspect ARAMARK's business locations and operating methods during normal business hours to determine the condition of the Starbucks Stores and ARAMARK's compliance with this Agreement. STARBUCKS acknowledges that in certain instances, access to a Starbucks Store may be subject to the consent of the ARAMARK client, and that such client may refuse to grant consent. ARAMARK shall use diligent efforts to obtain such client's consent to access by STARBUCKS. 5.3. Prices. [Intentionally deleted.] 5.4. Employee Training. 5.4.1. STARBUCKS and ARAMARK agree that it is desirable for the benefit and promotion of the Starbucks System to use uniform product preparation methods and employ approved products, ingredients, and techniques. ARAMARK therefore agrees that each Management Employee must be fully trained by STARBUCKS in its Initial Training Program and Advanced Training Program prior to beginning work as a manager in any Starbucks Store and each Regular Employee must be trained up to the level of training in STARBUCKS' Initial Training Program either by a fully trained Management Employee or by attending STARBUCKS' Initial Training Program. The Manual shall contain current charges payable by ARAMARK for any such training performed by STARBUCKS if requested by ARAMARK or required hereunder and not covered by Section 2.5. Notwithstanding any training provided by STARBUCKS, STARBUCKS has no responsibility for the quality of any products provided by ARAMARK to its customers except for beans and other products manufactured by STARBUCKS and provided to ARAMARK. 5.4.2. Pursuant to Sections 2.5 and 4.1, STARBUCKS shall provide the initial training of ARAMARK's initial staff at ARAMARK's Starbucks Stores. STARBUCKS shall also bear the costs of any other training requested by STARBUCKS. ARAMARK shall bear the direct costs and fees associated with any training requested by ARAMARK or required hereunder. ARAMARK shall pay the costs and expenses of each person who attends any STARBUCKS training program on its behalf. STARBUCKS shall not be responsible for any such expenses, or for any salary or salary-related expenses of any of ARAMARK's employees during attendance at training. 5.5. Advertising. 5.5.1. All advertising for its Starbucks Stores conducted by ARAMARK must be dignified and must conform to the highest ethical advertising standards and to policies prescribed by STARBUCKS. All advertising, promotional, or marketing plans and materials that ARAMARK uses shall be developed by STARBUCKS or shall be approved (except with respect to prices charged) in writing by STARBUCKS before use. ARAMARK shall use any advertising schemes or promotional materials developed by STARBUCKS only with STARBUCKS' approval. Any advertising or promotional material submitted by ARAMARK for STARBUCKS' approval, which is not rejected within thirty (30) days after STARBUCKS receipt thereof, shall be deemed approved. 5.5.2. ARAMARK agrees to keep visible to customers at its Starbucks Stores at all times a display, a counter card, a supply of catalogs, or such other items promoting STARBUCKS' mail order business as STARBUCKS may reasonably designate, provided that STARBUCKS gives such materials to ARAMARK without charge. 5.6. Insurance. 5.6.1. At all times during the term of this Agreement, ARAMARK shall keep in effect such insurance (including, but not limited to, course of construction insurance, fire and extended coverage insurance on the real property, equipment, leasehold improvements and stock at the Starbucks Stores, business interruption insurance, rental insurance, and workers' compensation insurance) as may be required by the terms of Occupancy Agreements covering ARAMARK's Starbucks Stores' premises, such insurance as may be required by law, comprehensive general liability insurance (including products and completed operations), and personal injury at a minimum limit of liability of $3,000,000. All policies shall name STARBUCKS as an additional insured as appropriate, and shall provide that STARBUCKS shall receive thirty (30) days' prior written notice of termination, expiration or cancellation of any such policy. All policies shall be written with insurers with a rating reasonably acceptable to STARBUCKS and each insurer shall be licensed to do business in the jurisdiction in which the applicable Starbucks Store is located. 5.6.2. On the execution hereof, ARAMARK shall provide STARBUCKS with an insurance certificate evidencing the coverages required by this Section 5.6. Thereafter, ARAMARK, shall submit to STARBUCKS an insurance certificate evidencing the coverages required by this Section 5.6, at any time and from time to time, within thirty (30) days after a request therefor from STARBUCKS, and ARAMARK shall submit to STARBUCKS annually evidence of the renewal or extension of each insurance policy. 5.6.3. [Intentionally omitted] 5.7 Procurement of Insurance. If ARAMARK at any time fails to maintain in effect any insurance coverage required by STARBUCKS or to furnish satisfactory evidence thereof, STARBUCKS in addition to its other rights and remedies under this Agreement at law or in equity, may, but need not, obtain such insurance coverage on behalf of ARAMARK, and ARAMARK shall promptly execute any applications or other forms or instruments required to obtain any such insurance and pay to STARBUCKS on demand any premiums and any expenses of procurement incurred by STARBUCKS. 5.8. Signs. ARAMARK shall pay all costs of signage, and shall only use signs in connection with its Starbucks Stores that STARBUCKS has approved in writing. ARAMARK shall, at all times, maintain and display signs reflecting the current image of the Starbucks System, which shall be the color, size, design, and materials specified by STARBUCKS, in the locations specified by STARBUCKS, and subject to the approval of the governing body that controls the site on which the Starbucks Store is located, if required by ARAMARK's Occupancy Agreement. ARAMARK agrees that it shall not use any handwritten signs. On receipt of notice by STARBUCKS of a requirement to alter any existing sign on its premises, ARAMARK will at its cost make the required changes within forty-five (45) days, subject to the approval of the applicable governing body for the location of the Starbucks Store if required. ARAMARK shall not place or allow to be placed additional signs or posters on its premises without the written consent of STARBUCKS. 5.9. Purchases From STARBUCKS and Approved Suppliers. 5.9.1. To promote the uniformity and quality of the Starbucks System, ARAMARK shall purchase all coffee from STARBUCKS and all goods, products, and supplies used in or sold from the Starbucks Stores' only from STARBUCKS or from suppliers designated or approved in writing by STARBUCKS, acting in its sole and absolute discretion. In considering its approval, STARBUCKS may require ARAMARK to submit samples or specifications of any goods or supplies from a proposed supplier to STARBUCKS or to any other person for testing and ARAMARK shall bear any cost of such testing. STARBUCKS will notify ARAMARK of the grant or denial of such approval or of STARBUCKS' need for additional information or samples within thirty (30) days of the submission of specifications or samples. All coffees, goods, products, and supplies purchased from STARBUCKS shall be purchased in accordance with the order format issued from time to time by STARBUCKS, the current form of which shall be set forth in the Manual. 5.9.2. STARBUCKS may change the prices, delivery terms and other terms relating to its sale of goods, products and supplies to ARAMARK, including coffee prices, on thirty days' notice. STARBUCKS, in its sole discretion, may discontinue the sale of any product at any time if in STARBUCKS' sole judgment its continued sale becomes unfeasible, unprofitable, or otherwise undesirable. 5.9.3. STARBUCKS shall not be liable to ARAMARK for unavailability of, or delay in shipment or receipt of, merchandise because of temporary product shortages, order backlogs, production difficulties, delays, unavailability of transportation, fire, strikes, work stoppages, or other causes beyond the reasonable control of STARBUCKS. 5.9.4. STARBUCKS may act as a manufacturer or wholesaler of goods, products, and/or supplies purchased by ARAMARK and shall be entitled to a reasonable return comparable to other wholesalers or other manufacturers for similar items in the marketplace. ARAMARK agrees to the wholesale price as set forth in STARBUCKS' wholesale catalog, on all goods, products, and supplies purchased from STARBUCKS, except for coffees purchased at prices set forth in Schedule 2.8 or as adjusted in accordance therewith. 5.9.5. On the termination of this Agreement, STARBUCKS shall not be obliged to fill or ship any orders then pending or made any time thereafter by ARAMARK. 5.10. Trademarks. 5.10.1. ARAMARK acknowledges that STARBUCKS owns the Trademarks and ARAMARK agrees that it shall use only the Trademarks in the operation of the Starbucks Stores and no other trade name or trademark and shall use the Trademarks only for the term of this Agreement. ARAMARK may also use the Trademarks for presentations for business opportunities that it reasonably believes will lead to the development of more Starbucks Stores. 5.10.2. STARBUCKS expressly reserves the right to change the Trademarks or substitute any other trade name, trademark, service name, or service mark at any time; provided that such change or substitution is made effective for substantially all of retail stores operated or owned by STARBUCKS directly. If STARBUCKS makes such a change, each new mark or name shall be a "Trademark" for purposes of this Agreement and shall replace the appropriate discontinued mark or name used in this Agreement. 5.10.3. ARAMARK agrees that it will not use or display any Trademark or any variation thereof other than in strict conformity with STARBUCKS' specifications and the provisions of this Agreement, that ARAMARK has no right to license any person to use any Trademark, and that ARAMARK shall not use any Trademark or any phonetically or visually similar name or mark or any combination thereof in any trading name of any corporation, partnership, or other organization or business without STARBUCKS' express written consent, which may be withheld in STARBUCKS' sole and absolute discretion. Neither during nor after the term of this Agreement shall ARAMARK take any action that does or may adversely affect the goodwill associated with the Trademarks. 5.10.4. ARAMARK shall not imprint or authorize any person to imprint any Trademark on any product without the express written approval of STARBUCKS. ARAMARK shall not use the Trademarks in connection with any offering of securities or any request for credit without the prior express written approval of STARBUCKS. STARBUCKS may withhold or condition any approval related to the Trademarks, including those described in this Section, in its sole and absolute discretion. 5.10.5. If ARAMARK learns of the use of the name "STARBUCKS", any other Trademark, or any phonetically or visually similar name or mark by another, ARAMARK shall promptly inform STARBUCKS. If another person claims that ARAMARK's use of a Trademark infringes upon the rights of such other person, ARAMARK shall promptly notify STARBUCKS. STARBUCKS shall wholly control any litigation with respect to any Trademark, shall be solely responsible for all of its attorneys' fees associated with such litigation, and shall be entitled to all damages awarded based on infringement of any Trademark. STARBUCKS shall indemnify and hold ARAMARK and its affiliates harmless from and against any claim, liability or other obligation arising out of ARAMARK's use of the Trademarks or other intellectual property provided to ARAMARK by STARBUCKS. 5.10.6. If STARBUCKS changes any Trademark, ARAMARK agrees to comply with the change within forty-five (45) days after notice thereof by STARBUCKS, at ARAMARK's expense. 5.10.7. ARAMARK acknowledges and recognizes STARBUCKS' exclusive ownership of the Trademarks and the validity of the Trademarks, and agrees that its use of the Trademarks inures to the benefit of STARBUCKS. ARAMARK agrees not to contest or assist anyone in contesting at any time during or after the term of this Agreement, in any manner, the validity of any Trademark or its registration, and ARAMARK further agrees to maintain the integrity of the Trademarks and to prevent their dilution. ARAMARK agrees that nothing in this Agreement shall grant ARAMARK any right, title, or interest in the Trademarks. 5. 10.8. STARBUCKS makes no representation or warranty about the rights of STARBUCKS or ARAMARK to use the Trademarks. 5.11. Confidential Information. 5.11.1. ARAMARK has or will have knowledge concerning the Starbucks System and other confidential matters necessary or useful to the successful development of Starbucks Stores, such as STARBUCKS' plans, strategy, costing, prospects, and potential locations (the "Confidential Information). Any and all information pertaining to the Starbucks System and that is identified in writing as confidential, either through a stamp on such information or through specific identification of such information as confidential in other written communication, including all information in the Manual, except information that is or has become a part of the public domain through publication or communication by others, or that ARAMARK can show was already in ARAMARK's possession before receipt from STARBUCKS, shall be "Confidential Information" for purposes of this Agreement. ARAMARK acknowledges that the Confidential Information is confidential, proprietary information, and a trade secret. Any financial, operating, statistical, customer, marketing or similar information supplied by ARAMARK to STARBUCKS or compiled by STARBUCKS or its auditors or other agents, directly related to ARAMARK's operations, including without limitation, any client or customer lists, and that is identified in writing as confidential, either through a stamp on such information or through specific identification of such information as confidential in other written communication (the "ARAMARK Information") is confidential, proprietary and constitutes a trade secret owned solely by ARAMARK. STARBUCKS shall not disclose any ARAMARK Information to any third party (except to the extent permitted in Section 5.12.2), and shall not use the ARAMARK Information for any purpose other than fulfilling the terms of this Agreement, without the prior written consent of ARAMARK. 5.11.2. ARAMARK hereby covenants to treat as confidential at all times the Confidential Information and to use all reasonable efforts to keep such information confidential. ARAMARK acknowledges that the unauthorized use or disclosure of such Confidential Information will cause incalculable and irreparable injury to STARBUCKS. ARAMARK accordingly agrees that it shall not at any time during or after the term of this Agreement disclose or use or permit the use (except as may be required by applicable law or authorized by this Agreement) of the Confidential Information, in whole or in part, or otherwise make the same available to any unauthorized person or source without STARBUCKS' prior written consent. 5.11.3. ARAMARK shall grant access to the Confidential Information to its employees only on a need-to-know basis, and shall, to the extent permitted by law, require all of its Management Employees to enter into a written confidentiality and noncompetition agreement in the form attached hereto as Exhibit B, prohibiting them during the term of their employment or thereafter from communicating, divulging, or using for the benefit of anyone, any Confidential Information that they may acquire during their employment with ARAMARK at the Starbucks Stores. 5.11.4. If ARAMARK has any reason to believe that any Management Employee has violated the provisions of the confidentiality and noncompetition agreement, ARAMARK shall promptly notify STARBUCKS and shall cooperate with STARBUCKS to protect STARBUCKS against infringement or other unlawful use including, but not limited to, the prosecution of any lawsuits if, in the reasonable judgment of STARBUCKS, such action is necessary or advisable. 5.11.5. In view of the importance of the Trademarks and the Confidential Information to STARBUCKS, and the importance of the ARAMARK Information to ARAMARK and the incalculable and irreparable harm that would result to either party if the other party were to breach its covenants and agreements in connection with these matters, the parties agree that STARBUCKS may seek specific performance and/or injunctive relief to enforce the covenants and agreements in this Agreement, in addition to any other relief to which STARBUCKS may be entitled at law or in equity, and that ARAMARK may seek specific performance and/or injunctive relief, in addition to other legal or equitable remedies, to enforce the covenants and agreements in this Section 5.11. 5.11.6. ARAMARK shall not disclose the substance of this Agreement to any third party except as necessary to inform entities from which it is seeking Occupancy Agreements or entities which are parties to Occupancy Agreements in order to obtain renewals of, or avoid terminations of, such Occupancy Agreements or as necessary to obtain any governmental permits, licenses, approvals, etc., or to the extent required by the lawful order of any court of competent jurisdiction or federal, state, or local agency having jurisdiction over ARAMARK, provided that ARAMARK shall give STARBUCKS prior notice of such disclosure. The parties agree to cooperate on press releases and other public communications and to coordinate any public announcements concerning this Agreement. 5.12. Accounting, Reports, and Records. 5.12.1. ARAMARK shall prepare, and keep for a period of not less than three (3) years following the end of each of its fiscal years, adequate books and records showing inventories and receipts of all inventory, daily receipts in, at, or from the Starbucks Stores, applicable sales tax returns (if any), all pertinent original serially numbered sales slips and cash register records, and such other sales records as may be reasonably required by STARBUCKS from time to time to verify Gross Revenue reported by ARAMARK to STARBUCKS, in a form suitable for an audit of its records by an authorized auditor or agent of STARBUCKS. Such information shall be broken down by categories of goods, foods and beverages sold, where possible. ARAMARK shall permit STARBUCKS or its duly authorized auditor or agent to inspect, audit, examine and make copies from ARAMARK's books and accounting records for the Starbucks Stores at any reasonable time during normal business hours. 5.12.2 ARAMARK shall submit reports of Gross Revenue for the Starbucks Stores to STARBUCKS for each calendar month or at such intervals as STARBUCKS may reasonably require. STARBUCKS agrees that this information is ARAMARK Information, and shall be treated as provided in Section 5.11(except to the extent that applicable law requires disclosure or that STARBUCKS uses it to prepare reports detailing average sales and income and similar statistics). STARBUCKS may require that ARAMARK connect each of its Starbucks Stores to STARBUCKS' point-of-sale system at STARBUCKS' cost or otherwise give daily reports of sales to STARBUCKS. STARBUCKS may require ARAMARK to submit annual reports of Gross Revenue for the Starbucks Stores prepared at ARAMARK's expense and reviewed and approved by ARAMARK's internal audit staff. STARBUCKS also has the right to have an independent audit made of the books of ARAMARK's Starbucks Stores at any time. If an audit reveals that any Gross Revenues have been understated in any report to STARBUCKS, then ARAMARK shall pay STARBUCKS the Royalty due on the understated Gross Revenues immediately on demand, together with interest at the prime rate as announced from time to time by Seattle First National Bank plus two percent (2%) or, if less, the maximum rate permitted by law. In addition, if an audit reveals that Gross Revenues were understated by two percent (2%) or more during the period audited, ARAMARK shall reimburse STARBUCKS for all costs and expenses incurred in connection with the audit. The foregoing remedies shall be in addition to any other remedies available to STARBUCKS. 5.13. Promotional Programs. ARAMARK shall honor all coupons, discounts, and similar promotions provided by STARBUCKS for use at its stores generally that are presented by ARAMARK's customers. STARBUCKS shall reimburse ARAMARK for any direct costs incurred by ARAMARK thereby. STARBUCKS shall have no obligation to reimburse ARAMARK for coupons, discounts, and similar promotions if (i) promoted or undertaken for ARAMARK's Starbucks Stores but not for Starbucks Stores generally, or (ii) if ARAMARK has delayed more than 60 days in submitting reimbursement requests for such coupons, discounts and promotions pursuant to the above. 5.14. Customer Lists. ARAMARK shall use reasonable efforts to secure the names and addresses of its customers at Starbucks Stores and shall allow such ARAMARK information to be used by STARBUCKS. This obligation shall not require ARAMARK to solicit such customer information outside the boundaries of the Starbucks Stores. 5.15. Indemnification. ARAMARK hereby agrees to indemnify and hold harmless STARBUCKS, its officers, directors, shareholders, employees, and agents and each of them, in their corporate and individual capacities, from any liability or damage any of them may incur, including reasonable attorneys fees, as a result of claims, demands, costs, or judgments of any kind or nature, by anyone whomsoever, for bodily injury or property damage arising out of or otherwise connected with ARAMARK's negligent performance or actions with respect to this Agreement, the License, the Trademarks, the Confidential Information, the ownership, maintenance, or operation of the Starbucks Stores, or any act of omission or commission by ARAMARK or its officers, directors, shareholders, partners, employees, or agents, except to the extent such liability or damage is due to the negligence or fault of STARBUCKS. ARAMARK's obligations to indemnify and the rights of STARBUCKS and its officers, directors, shareholders, employees and agents, to indemnification under this Section shall survive termination or expiration of this Agreement. STARBUCKS shall give ARAMARK prompt notice of any claim for which STARBUCKS demands indemnity, shall cooperate with ARAMARK in the defense of such claim, and hereby grants to ARAMARK full right and power to direct, manage, control and settle the litigation of such claim. The absence of any indemnity obligation of STARBUCKS (other than that set forth in Section 5.10) shall not be, or be construed to be, a bar to ARAMARK's action for such indemnity for claims, including without limitation, those claims excepted out of ARAMARK's indemnity obligation in this Section 5.15. ARTICLE 6.0 TERMINATION; TRANSFERS 6.1. Termination; Default. 6.l.1. The License may be terminated at any time by mutual agreement of ARAMARK and STARBUCKS. 6.1.2. Either ARAMARK or STARBUCKS may terminate this License and Agreement for convenience at any time, either with respect to one or more particular Starbucks Stores or with respect to the entire Agreement, on thirty (30) days' written notice. 6.1.3. STARBUCKS may terminate this Agreement due to default by ARAMARK by written notice to ARAMARK at any time before its expiration on any of the following grounds: 6.1.3.1. ARAMARK's failure to pay STARBUCKS any sums due and owing STARBUCKS under this Agreement within fifteen (15) days after receipt of written notice of default. 6.1.3.2. ARAMARK's failure to comply with the Trademark provisions of this Agreement within fifteen (15) days after receipt from STARBUCKS of notice of default. 6.1.3.3. By giving ARAMARK not less than thirty (30) days' prior written notice of termination (or such longer notice as may be required by applicable law) on the failure of ARAMARK to comply with any other terms required to be observed by ARAMARK under this Agreement or any other agreement between STARBUCKS and ARAMARK, or on any grounds that are a basis for termination of the License under applicable law and, in the case of any default capable of being cured, failure to cure such default within fifteen (15) days after receipt of written notice of default. 6.1.3.4. With respect to a particular Starbucks Store, on the fourth default by ARAMARK at such store within any 12- month period, after three such defaults at such store of which ARAMARK was given notice and an opportunity to cure, regardless of whether previous defaults were cured, and without affording ARAMARK any additional time to cure such default. 6.1.3.5. With respect to a particular site, on not less than thirty (30) days' prior written notice on the occurrence of any one or more of the following events: a condemnation or transfer in lieu of condemnation, or the withdrawal of permission from the applicable Lessor that results in ARAMARK's inability to continue operation of any Starbucks Store; casualty damage to a Starbucks Store that cannot reasonably be repaired or replaced within thirty (30) days; or closing of a Starbucks Store required by law if such closing was not the result of a violation by STARBUCKS, provided that in any such case, the termination shall apply only to the affected Starbucks Store. 6.1.3.6. ARAMARK's filing of a voluntary petition in bankruptcy or any pleading seeking any reorganization, liquidation, or dissolution under any law, or ARAMARK's admission or failure to contest the material allegations of any such pleading filed against it, the entry of an order for relief against ARAMARK under the Bankruptcy Code, the adjudication of ARAMARK as insolvent, the appointment of a receiver for a substantial part of the assets of ARAMARK or its Starbucks Stores, the abatement of the claims of creditors of ARAMARK or the Starbucks Stores under any law, or the making of an assignment for the benefit of creditors, or similar disposition of the assets of the Starbucks Stores. 6.1.3.7. ARAMARK's participation in fraud or criminal misconduct relating to operation of the Starbucks Stores or if ARAMARK or any of its officers, directors, or key employees is convicted of or pleads guilty or nolo contendere to a charge of any felony, or any law, the violation of which will adversely affect the Starbucks Stores, the Trademarks, any Confidential Information, or the reputation of STARBUCKS or ARAMARK. 6.1.3.8. ARAMARK's assignment, transfer, or attempt to assign or transfer: (i) the Starbucks Stores, License Agreement, or ARAMARK in whole or in part or (ii) any portion of the premises upon which any Starbucks Store is located, in a manner inconsistent with the provisions of Section 6.5 and 6.6 of this Agreement. 6.1.3.9. ARAMARK's failure to have its employees complete successfully and timely the Initial Training Program. 6.1.3.10. ARAMARK's submission to STARBUCKS on three or more separate occasions for the same Starbucks Store at any time during the term of the License a periodic report, financial statement, tax return or schedule, or other information that understates the Gross Revenues of the Starbucks Stores for any period by more than two percent (2%). 6.1.3.11. ARAMARK's unauthorized use, disclosure, or duplication of the Confidential Information. 6.1.3.12. ARAMARK's surrender or transfer of control of any Starbucks Stores without STARBUCKS' written consent. 6.1.4. Termination shall be without prejudice to any other rights or remedies that STARBUCKS or ARAMARK, as the case may be, shall have in law or in equity. 6.1.5 STARBUCKS, without waiving any rights it may have pursuant to this Section 6.1, and in its sole discretion, may elect not to terminate a License as a result of a default. In the event a default occurs, STARBUCKS may elect to give written notification (a "Notice of Noncompliance") to ARAMARK that a Starbucks Store (or more than one Starbucks Store, if applicable), is not in compliance with the terms and conditions of this Agreement. Such Notice of Noncompliance shall state a period for ARAMARK to cure the noncompliance, which shall be a period not less than thirty (30) days. For a period of six months from and after the date of such Notice of Noncompliance, ARAMARK shall reimburse STARBUCKS for reasonable costs that STARBUCKS incurs with respect to the Starbucks Store(s) identified in such notice, including without limitation the costs of any audit or inspection of such store(s) in excess of STARBUCKS' normal audit program applied to all Starbucks stores, any mystery shopping for such store during such six month period in excess of STARBUCKS' normal mystery shopping program applied to all Starbucks Stores, additional training that STARBUCKS determines is required to bring the store up to STARBUCKS standards, and any personnel costs incurred by STARBUCKS at the store site to ensure the proper management and operation of such store(s). Nothing in this section shall limit STARBUCKS' termination rights as otherwise set forth in this Agreement, which STARBUCKS reserves the right to exercise at any time. 6.1.6 ARAMARK may terminate this Agreement due to a default by STARBUCKS, which is not cured by STARBUCKS within thirty (30) days after STARBUCKS receipt of such notice, upon written notice to STARBUCKS, provided, that if the default is such that it cannot be reasonably cured within such thirty-day period, STARBUCKS shall not be deemed in default if it commences to cure such default within thirty days and diligently prosecutes such cure to completion. 6.2. ARAMARK's Obligations Upon Termination, Expiration or Nonrenewal. On termination, expiration or nonrenewal of this Agreement for any reason, with respect to each Starbucks Store, ARAMARK agrees as follows: 6.2.1. ARAMARK shall immediately pay all sums due and owing to STARBUCKS, including any reasonable expenses incurred by STARBUCKS in obtaining injunctive relief for the enforcement of this Agreement. 6.2.2. ARAMARK shall immediately cease to operate the Starbucks Stores, and shall not thereafter, directly or indirectly, hold any of its locations out as a Starbucks Store. 6.2.3. ARAMARK shall immediately cease using all of the Confidential Information, the Trademarks, and any confusingly similar names, marks, systems, insignia, symbols, or other rights, procedures, and methods. ARAMARK shall deliver all goods and materials containing the Trademarks to STARBUCKS and STARBUCKS shall have the sole and exclusive use of any items containing the Trademarks. ARAMARK shall immediately make any specified changes to its location as STARBUCKS may reasonably require for this purpose, which shall include, but not be limited to, removal of the signs, custom decorations, and promotional materials. 6.2.4. ARAMARK shall immediately cease representing itself as then or formerly a licensee or other affiliate of STARBUCKS. 6.2.5. ARAMARK shall immediately return the Manual and all written materials incorporating Confidential Information and any copies thereof to STARBUCKS. 6.2.6. ARAMARK shall immediately cancel all assumed name or equivalent registrations relating to its use of any Trademark, notify the telephone company and all listing agencies of the termination or expiration of ARAMARK's right to use any telephone number and any classified or other telephone directory listings associated with its Starbucks Stores, and authorize their transfer to STARBUCKS. 6.2.7 If STARBUCKS so elects, at its sole option, upon any termination or expiration of this Agreement, ARAMARK will sell to STARBUCKS such equipment and furnishings as STARBUCKS may designate that are associated with the Starbucks Store (other than product and inventory, which shall be handled in accordance with Section 6.3) at its net book value, using a 5-year amortization period. 6.3. Product, Inventory, and De-identification. 6.3.1 If STARBUCKS terminates this Agreement with respect to any or all Starbucks Stores for convenience, or if ARAMARK terminates this Agreement with respect to any or all Starbucks Stores due to a default by STARBUCKS, STARBUCKS shall repurchase all unused, but usable, product and supplies inventory at the terminated Starbucks Store(s) at ARAMARK's cost for such product and supplies inventory. In such event, STARBUCKS shall bear the expense of de- identifying the Starbucks Store(s) subject to such termination. If the termination is partial, and if STARBUCKS so permits, ARAMARK shall use its best efforts to use the inventory at other Starbucks Stores to reduce the amount STARBUCKS would pay pursuant to this Section. STARBUCKS shall have no other payment obligations to ARAMARK, and ARAMARK specifically waives any and all claims to be paid for equipment, furnishings, fixtures, personalized materials not usable by STARBUCKS, or the goodwill associated with the terminated Starbucks Store(s). STARBUCKS may offset against its obligations pursuant to this Section any amounts owed by ARAMARK to STARBUCKS. 6.3.2 If ARAMARK terminates this Agreement with respect to any or all Starbucks Stores for convenience, or if STARBUCKS terminates this Agreement with respect to any or all Starbucks Stores due to a default by ARAMARK, ARAMARK shall not receive any compensation for any remaining product and supplies inventory at the terminated Starbucks Store(s). Upon STARBUCKS' request and at ARAMARK's expense, ARAMARK shall return any remaining product and supplies inventory to a location designated by STARBUCKS. In such event, ARAMARK shall also bear the expense of de-identifying the Starbucks Store(s) subject to such termination. If the termination is partial, and provided there is no adverse effect on the quality of products sold, STARBUCKS shall permit ARAMARK to use such inventory at other Starbucks Stores to reduce the expense of returning such inventory to STARBUCKS. 6.3.3 Upon any termination or expiration, each Starbucks Store shall be de-identified to the standard set forth in the Manual, or, if no standard is included in the Manual, to such standards as STARBUCKS may then have in effect for its company-owned operations. Upon any termination or expiration of this Agreement, STARBUCKS shall return all ARAMARK Information and copies thereof, to ARAMARK 6.4. Transferability of Interest. 6.4.1. ARAMARK may not sell, assign, or transfer its interest in this Agreement, including transfers for security, without STARBUCKS' prior written approval, which STARBUCKS may withhold in its sole and absolute discretion, and any attempt or purported assignment or transfer shall constitute a breach of this Agreement and be void and shall be cause for termination. 6.4.2. Without limiting STARBUCKS' discretion to approve any assignment of this Agreement or the License for security, ARAMARK shall grant no security interest in this Agreement, the License, the Starbucks Stores, or any of its assets at a Starbucks Store unless the secured party agrees that it shall give STARBUCKS prior notice of any attempt to foreclose on its security interest, STARBUCKS shall have the right and option to be substituted as obligee to the secured party, and STARBUCKS shall have the right to cure any default of ARAMARK. 6.4.3. STARBUCKS has the right to disapprove, in its sole discretion, of any person or entity or any transaction that would change the actual, legal, or effective control of the License or the Starbucks Stores upon a sale, transfer, or change of ownership of ARAMARK, the License, or the Starbucks Stores. Without limiting the foregoing, STARBUCKS may disapprove an assignment, sale, or transfer of this Agreement, the License, or the Starbucks Stores by ARAMARK or its owners unless: 6.4.3.1. The assignment or transfer complies with all applicable laws and regulations, all obligations of ARAMARK created by this Agreement, and any other agreement between STARBUCKS and ARAMARK, and the relationships created hereunder are assumed by the transferee, provided however, that such assumption shall not relieve ARAMARK of any such obligations; 6.4.3.2. All debts of ARAMARK to STARBUCKS are paid; 6.4.3.3. ARAMARK is not in default under this Agreement or any other related agreement; 6.4.3.4. The transferee and its Management and Regular Employees satisfactorily complete the training required of new licensees on STARBUCKS' then current terms before the transfer; 6.4.3.5. ARAMARK reasonably satisfies STARBUCKS that the transferee meets all requirements of STARBUCKS for new ARAMARK's, including, but not limited to, experience, skill, aptitude, good reputation and character, business acumen, financial strength, and other business conditions; 6.4.3.6. ARAMARK or transferee pays to STARBUCKS Five Thousand Dollars($5,000) for each Starbucks Store for transferee's initial training, and STARBUCKS' internal and out-of-pocket costs associated with acting on the transfer request, including without limitation all of STARBUCKS' costs and attorneys' fees associated with the transfer; and 6.4.3.7. There shall not be any suit, action, or proceeding pending, or to the knowledge of ARAMARK any suit, action, or proceeding threatened, against ARAMARK with respect to the Starbucks Stores. 6.4.5. Any consent to assignment or transfer shall be without prejudice to STARBUCKS' rights against ARAMARK hereunder or to any right (including right of indemnity), remedy, or relief vested in or to which STARBUCKS may be entitled by reason of the default, breach, or nonobservance of any covenant, term, or condition that occurred before the sale or assignment. Without limiting the foregoing, it is expressly understood and agreed that STARBUCKS' consent to an assignment of this Agreement or transfer of the License shall not waive: (i) any payment or other duty owed by ARAMARK to STARBUCKS under this Agreement before such assignment or transfer; or (ii) ARAMARK's duty of indemnification and defense as set forth in Section 5.15 hereof, whether before or after such assignment or transfer, or (iii) the obligation to obtain STARBUCKS' consent to any subsequent transfer. 6.4.6. ARAMARK shall not assign this Agreement as security for the payment of any obligation that may arise by reason of such sale or assignment. 6.5. Noncompetition. 6.5.1. During the term of this Agreement and for a period of three (3) years following its termination, ARAMARK shall not without first obtaining STARBUCKS' written consent solicit or contact personnel of STARBUCKS or its related or affiliated companies in an attempt to hire or employ said personnel. 6.5.2. During the term of this Agreement, within the Trade Area of a licensed Starbucks Store, ARAMARK shall not, except as authorized under the License or any additional or successor license granted by STARBUCKS, or as consented to by STARBUCKS in writing, have any interest, direct or indirect, in the ownership or operation of, nor grant any rights of operation to, any retailer selling espresso drinks, premium branded coffee by the drink other than STARBUCKS, or whose primary product is premium branded coffee. The foregoing shall not preclude ARAMARK from selling any of its own proprietary brands of drip coffee, whether regular or flavored (but not whole bean coffee, espresso or espresso related drinks) within the Trade Area of a Starbucks Store, so long as ARAMARK's sales of such coffee are made in a manual food service location such as a cafeteria servery, or food court, or in a vending area, or in any other location where such coffee is not the dominant product offering at that location. 6.5.3. At no time during or after the terms of this Agreement shall ARAMARK: 6.5.3.1 Commit any act that adversely affects the Starbucks Stores, the Trademarks, or the Confidential Information; or 6.5.3.2 Except as authorized under the License or any additional or successor license granted by STARBUCKS, use, in connection with the operation of any business wherever located, the Starbucks System, any Trademarks, or the Confidential Information, or cause or permit any such business to imitate the Starbucks System or to be operated in a manner tending to have such effect. 6.5.4. The parties agree that (i) if any provision of this Section 6.5 is held to be invalid or unenforceable, the remaining provisions shall continue to be valid and enforceable as though the invalid or unenforceable part had not been included, and (ii) if any geographical area or term or period of this Section 6.5 is held to be invalid or unenforceable, such geographical area or term or period shall be valid and enforceable over a reasonable geographical area or a reasonable term or period of time. 6.5.5 ARAMARK agrees that, if it goes into a business pursuant to which it offers, by mail order, products available from STARBUCKS, it will provide STARBUCKS a reasonable opportunity to participate in such program. ARTICLE 7.0 MISCELLANEOUS 7.1. Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws of the State of Washington. 7.2. Relationship of Parties. 7.2. 1. ARAMARK is an independent contractor and is not, and shall not hold itself out as, a partner, joint-venturer, agent, employee, or legal representative of STARBUCKS, and is not otherwise authorized to act for or on behalf of STARBUCKS as a result of this Agreement or any other agreement and cannot act for nor legally bind STARBUCKS. ARAMARK is not authorized to make any agreement, warranty, covenant, or other representation nor to create any obligation, express or implied, on behalf of STARBUCKS, nor shall ARAMARK represent that it has any right or power to do so. 7.2.2. ARAMARK shall hire and be exclusively responsible for the compensation and training of all employees of its Starbucks Stores except for the training described in Sections 2.5 and 4.1, and ARAMARK shall have sole responsibility to collect and promptly pay when due all federal, state, and FICA, FUTA, withholding, and other applicable payroll taxes, worker's compensation contributions, unemployment insurance premiums, and all similar taxes, fees, and charges. ARAMARK acknowledges that it is acting as an independent contractor, and not as an agent for STARBUCKS, in connection with all matters described in this Section. 7.3. Limitation of Remedy. If STARBUCKS should breach this Agreement or any related agreement, ARAMARK may pursue whatever remedies may be available at law or in equity, provided, that in no event shall ARAMARK have the remedy of withholding any payment due STARBUCKS under this Agreement. If ARAMARK breaches this Agreement or any related agreement, STARBUCKS may pursue any remedies that may be available at law or in equity. 7.4. Entire Agreement. This Agreement and all documents, schedules, exhibits, and information specifically incorporated into this Agreement by reference, collectively constitute the entire agreement between STARBUCKS and ARAMARK in respect of the subject matter hereof, and supersedes all prior agreements between STARBUCKS and ARAMARK in connection with its subject matter. No officer, employee, or other servant or agent of STARBUCKS or ARAMARK is authorized to make any representation, warranty, or other promise not contained in this Agreement. No change, termination, or attempted waiver of any provision of this Agreement shall bind STARBUCKS or ARAMARK unless in writing and signed by STARBUCKS and ARAMARK. 7.5. Severability. If any provision of this Agreement or the application of any provision to any person or to any circumstance is determined to be invalid or unenforceable, then such determination shall not affect any other provision of this Agreement or the application of such provision to any other person or circumstance, all of which other provisions shall remain in full force and effect. STARBUCKS and ARAMARK intend that if any provision of this Agreement is susceptible to two or more constructions, one of which would render the provision enforceable and the other or others of which would render the provision unenforceable, then the provision shall be given the meaning that renders it enforceable. 7.6. Waiver and Consent. No waiver by either party of any covenant or condition or the breach of any covenant of this Agreement to be kept or performed by the other party shall be construed as a waiver by the waiving party of any subsequent breach of such covenant or condition or authorize the breach or nonobservance on any other occasion of the same or any other covenant or condition of this Agreement. Acceptance by STARBUCKS of any payments due it hereunder shall not be deemed to be a waiver of any preceding breach by ARAMARK of any terms, covenants, or conditions of this Agreement. 7.7 Modification. To be effective, any modification of this Agreement must be in writing and signed by ARAMARK and STARBUCKS. 7.8. Section Headings; Pronouns. This Agreement may be executed in duplicate originals, each of which shall be deemed an original. The Section headings are for convenience of reference only and shall not be deemed to alter or affect any provision thereof. Each pronoun used herein shall be deemed to include the other number and gender. 7.9. Forum. Any lawsuit, arbitration or other proceeding arising out of or with respect to this Agreement shall be conducted in King County, Washington. 7.10. Attorneys' Fees and Costs. If either party is required to employ legal counsel or to incur other expenses to enforce any provision of this Agreement, then the prevailing party will be entitled to recover from the nonprevailing party the amount of all reasonable fees of counsel and all other expenses incurred in enforcing such obligation or in defending against such claim, demand, action, or proceeding. 7.11. Interest. Any sum owed to STARBUCKS by ARAMARK or paid by STARBUCKS on ARAMARK's behalf shall bear interest from the date due until paid by ARAMARK at the rate of twelve percent (12%) or, if lower, the maximum lawful rate. 7.12. Notices. Notices under this Agreement shall be in writing, and shall be delivered in person or by registered or certified mail, return-receipt requested, prepaid, addressed as follows: If to STARBUCKS: STARBUCKS Corporation 2401 Utah Avenue South Seattle, Washington 98134 Attn: Department of Law and Corp. Affairs If to ARAMARK: ARAMARK Food & Support Services Group, Inc. 1101 Market Street, ARAMARK Tower Philadelphia, PA 19107 Attn: Don Lowry, Vice President, Marketing With a required copy to: Any Starbucks Store(s) affected by such notice at the address set forth on Exhibit A for such Starbucks Store. Any Licensed ARAMARK Affiliates affected by such notice, at the principal ARAMARK notice address set forth above. or such other address any party shall have specified in a written notice to the other. 7.13. Successors and Assigns. The terms and provisions of this Agreement shall inure to the benefit of and be binding upon the successors and assigns of the parties. 7.14. Incorporation of Exhibits, Schedules, Etc. The terms of the Manual, as the same may change from time to time, and all Exhibits and Schedules hereto are hereby incorporated into and made a part of this Agreement as if the same had been set forth in full herein. The following Exhibits and Schedules are incorporated herein: Exhibit A (form of notice and agreement on location); Exhibit B (form of nondisclosure agreement) Schedule 2.0 - Fee Schedule Schedule 2.8 - Coffee Price Adjustment 7.15. Acknowledgments. ARAMARK acknowledges that: 7.15.1. STARBUCKS expressly disclaims the making of, and ARAMARK acknowledges that it has not received or relied upon, any warranty or guaranty, express or implied, as to the potential volume, profits, or success of the business venture contemplated by this Agreement. 7.15.2. It knows of no representation by STARBUCKS, or its officers, directors, shareholders, employees, agents, or servants, about the ARAMARK that is contrary to the terms of this Agreement or the documents incorporated herein, and further represents to STARBUCKS as an inducement to its entry into this Agreement, that it has made no misrepresentations in obtaining this Agreement. 7.16. Effective Date. This Agreement shall be effective as of the date it is execute an authorized representative of STARBUCKS. IN WITNESS WHEREOF, the parties have hereunto set their hands as of the day and year indicated below. EXECUTED by ARAMARK this 7th day of May, 1996. ARAMARK FOOD AND SUPPORT SERVICES GROUP, INC. By: /s/ Michael O'Hara ------------------ Its: Vice President EXECUTED by STARBUCKS at Seattle, Washington, this 7th day of May 1996. STARBUCKS CORPORATION By: /s/ Howard Schultz ------------------ Its: Chairman of the Board and Chief Executive Officer -----END PRIVACY-ENHANCED MESSAGE-----