-----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, MqLi2ncce04iYCrH1MW88aygWtfIy8Le4qpHT8uSThSna7g67TbtG4CHH/pHs5eH cggGXJR+HdRVCXCOg0XFDQ== 0000910117-98-000073.txt : 19980507 0000910117-98-000073.hdr.sgml : 19980507 ACCESSION NUMBER: 0000910117-98-000073 CONFORMED SUBMISSION TYPE: 10KSB/A PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980506 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: COFFEE PEOPLE INC CENTRAL INDEX KEY: 0000925908 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING & DRINKING PLACES [5810] IRS NUMBER: 931073218 STATE OF INCORPORATION: OR FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB/A SEC ACT: SEC FILE NUMBER: 000-21397 FILM NUMBER: 98610992 BUSINESS ADDRESS: STREET 1: 15100 SW KOLL PARKWAY STREET 2: SUITE J CITY: BEAVERTON STATE: OR ZIP: 97006-6026 BUSINESS PHONE: 5036729603 MAIL ADDRESS: STREET 1: 15100 WE KOLL PARKWAY STREET 2: SUITE J CITY: BEAVERTON STATE: OR ZIP: 97006-6026 10KSB/A 1 FORM 10KSB/A FOR PERIOD ENDED 12/31/97 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB/A [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: December 31, 1997 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: 0-21397 COFFEE PEOPLE, INC. (Name of small business issuer in its charter) 93-1073218 Oregon (I.R.S. Employer (State of incorporation) Identification No.) 15100 SW Koll Parkway, Suite J Beaverton, Oregon 97006 (Address of principal executive offices) Issuer's telephone number: (503) 672-9603 Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: Common Stock, without par value (Title of class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 ---- ---- Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this Form 10-KSB, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. ----- State issuer's revenues for its most recent fiscal year: $20,422,000 State the aggregate market value of the voting stock held by nonaffiliates computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of a specified date within 60 days prior to the date of filing: $6,749,133 aggregate market value as of February 27, 1998, based on the price at which the stock was sold. Indicate the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 3,268,718 shares of Common Stock, without par value, on February 27, 1998. DOCUMENTS INCORPORATED BY REFERENCE Part III of this Form 10-KSB incorporates information from the issuer's definitive proxy statement for the 1998 annual meeting of shareholders. Transitional Small Business Disclosure Format (Check One): Yes ; No X -- -- TABLE OF CONTENTS Page Part I - ------ Item 1. Business............................................................ 1 Item 2. Facilities.......................................................... 7 Item 3 Legal Proceedings................................................... 8 Item 4. Submission of Matters to Vote of Securities' Holders................ 8 Part II - ------- Item 5. Market for Common Equity and Related Stockholder Matters............ 8 Item 6. Management's Discussion and Analysis................................ 9 Item 7. Financial Statements................................................18 Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..............................18 Part III - -------- (Items 9, 10, 11 and 12 are incorporated herein by reference from the Company's definitive Proxy Statement for its 1997 annual meeting of shareholders.) Item 9. Directors, Executive Offices, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act.................................................18 Item 10. Executive Compensation..............................................18 Item 11. Security Ownership of Certain Beneficial Owners and Management...............................................19 Item 12. Certain Relationships and Related Transactions......................19 Part IV - ------- Item 13. Exhibits and Reports on Form 8-K. ..................................19 Signatures....................................................................41 PART I ITEM 1: BUSINESS General - ------- Coffee People, Inc. ("Coffee People" or the "Company") sells coffee beverages, coffee beans, cookies, pastries, ice cream, shakes and coffee related merchandise. Coffee People's objective is to be a leading specialty coffee retailer and coffee house operator in selected geographic markets by providing the highest quality coffee and related products with superior customer service in a relaxed and inviting setting. Coffee People distributes products through its company-owned retail stores, including neighborhood coffee houses, drive-through espresso bars, mall-based stores and specialty kiosks. During 1997, Coffee People grew from 22 to 41 stores, 25 of which were in Oregon, 14 of which were in Arizona and 2 of which were in Colorado. The two stores in Colorado are among seven stores outside of Oregon and Arizona which Coffee People has identified for sale or closure. The Oregon stores are operated under the Coffee People name. The Arizona stores, which were purchased in May 1997, are operated under the name Coffee Plantation. In November 1997, the Company entered into an agreement (the "Merger Agreement") with The Second Cup Inc. ("Second Cup") pursuant to which the Company will acquire all of the stock of Gloria Jean's, Inc., a specialty coffee roaster, retailer and franchising company based in California ("Gloria Jean's"), in exchange for issuing to Second Cup shares of Coffee People common stock constituting 69.5 percent of the total issued and outstanding shares of Coffee People common stock, after giving effect to the issuance (the "Merger"). Gloria Jean's is the second largest retail specialty coffee company in the United States, with 246 franchised stores and 31 company-owned stores in 38 states and 6 foreign countries. The Second Cup Inc. is a wholly-owned subsidiary of The Second Cup Ltd., an Ontario, Canada corporation. The Merger is subject to certain conditions to closing, including obtaining the vote of Coffee People's shareholders in favor of the issuance of shares to Second Cup. The Merger also is subject to obtaining the consent to the transaction of certain third parties. There can be no assurance that the Merger will be completed on a timely basis, or at all. The specialty coffee retail business in the United States is growing rapidly and is undergoing substantial change. Industry sources estimate that total retail sales of specialty coffee will grow from $1.5 billion in 1993 to $4.5 billion by 1999. It is estimated that the number of coffee cafes, espresso bars and espresso carts will increase from approximately 3,000 in 1995 to 10,000 by 1999. Due to ease of entry into the business and the growing popularity of specialty coffee nationwide, there has been a proliferation of single unit operators and small, regional coffee companies, many having fewer than 50 stores. Industry studies suggest that a high proportion of consumers in the United States now recognize and appreciate the difference in quality between 1 instant and canned coffees and specialty coffees, which are made from superior beans roasted to specifications that produce coffee with more flavor and consumer appeal. Industry sources estimate that approximately 31.0% of all coffee consumed in the United States in 1995 was specialty coffee, an increase from approximately 3.6% in 1983. Coffee People believes that the specialty coffee industry is entering a period of consolidation, as small to medium-sized coffee companies experience growing demands for capital, management expertise and buying power in the market for green coffee. Coffee People believes that, combined with Gloria Jean's after the Merger, it can continue to grow the Coffee People concept in selected markets, and that it can participate in the consolidation of the specialty coffee industry by combining with other strong regional specialty coffee companies throughout the United States. In its core markets, Coffee People believes it can be a leading specialty coffee retailer by differentiating itself from other coffee houses. Coffee People believes it can achieve this differentiation by being more customer focused than the competition, by providing superior coffee and service and by being constantly innovative. Coffee People was incorporated as an Oregon corporation in 1991. Prior to that time, Coffee People was operated as a partnership. The first Coffee People store opened in Portland, Oregon in 1983. Company Strategy - ---------------- Coffee People's objective is to be a leading specialty coffee retailer and coffee house operator in selected markets by achieving operational excellence and by pursuing development opportunities in its core markets. Together with Gloria Jean's, Coffee People also will seek to grow in new markets through selected acquisition of other specialty coffee retailers. The key elements of Coffee People's strategy include: Achieving Operational Excellence. The operating strategy of Coffee People is to cultivate customer loyalty and brand strength at the store level, while closely monitoring store economics and financial results system wide. Coffee People strives to foster long-term loyalty and a sense of ownership in its customers by being continually receptive to evolving customer desires. Coffee People is dedicated to providing its customers with the highest quality of service, emphasizing speed, consistency and courtesy in stores designed to welcome customers in a friendly, relaxing and inviting atmosphere. To this end, Coffee People has developed and implemented training and incentive programs to create knowledgeable and loyal employees. Coffee People's extensive product menu is designed to appeal to a diverse blend of people, with unique brand names that foster a high degree of market differentiation and customer loyalty. Coffee People strives to achieve exceptional financial results from each of its stores by closely managing sales, costs and customer satisfaction. Coffee People's senior management team have extensive experience in the specialty coffee industry, from selecting the beans to serving the cup. Coffee 2 People expects that the management of Gloria Jean's and Second Cup will bring additional strengths to store operations and development after the Merger. Opening New Stores in Superior Sites in Existing Markets. Coffee People intends to continue its store growth by selecting new store sites within its core markets of Oregon and Arizona. Coffee People intends initially to introduce drive-through espresso bars under the Motor Moka name in selected sites in Arizona, and to continue building Motor Mokas and neighborhood stores both in Arizona and Oregon on a selective basis. In addition, Coffee People will open mall-based stores, kiosks and Aero Moka airport outlets, where opportunities arise. Successfully Integrating Regional Operators. Coffee People's acquisition of Coffee Plantation in May 1997 exemplifies Coffee People's strategy of acquiring a regional coffee company with a solid local following and a unique identity, and integrating it within Coffee People's overall management structure. Coffee Plantation stores offer an inviting setting and superior customer service similar to that found at Coffee People stores, but have their own personality and product offerings. Coffee People did not convert Coffee Plantation stores into Coffee People stores, but rather applied its management controls and operations know-how to the already existing and successful Coffee Plantation concept. Coffee People believes that this approach can successfully be replicated in a consolidation strategy that seeks to combine local or regional coffee companies, with strong brand identity and customer loyalty, into the post-Merger Coffee People, adding efficiencies to the retail operations of the acquired regional companies and capital resources for continued expansion. Profitably Operating and Expanding Gloria Jean's. After the Merger, Gloria Jean's will be Coffee People's wholly-owned subsidiary. Gloria Jean's will look to further improve and expand its network of franchised stores throughout the United States and abroad, and to further strengthen its position as a leading supplier of roasted coffees. Products - -------- Coffee People offers a broad product line including specialty coffees, coffee beans, pastries and cookies, ice cream and shakes and coffee related merchandise. Caffeinated and decaffeinated coffee and espresso-based drinks are offered at all of Coffee People's stores, as are pastries. Coffee People's neighborhood stores and the Coffee Plantation neighborhood and mall-based stores also sell whole coffee beans, teas and accessories, mugs and other merchandise. Certain Coffee Plantation stores offer an expanded menu including soups, sandwiches and light meals. Sales of coffee beverages comprise approximately two-thirds of Coffee People's revenues, with bakery and ice cream products accounting for approximately one-fifth of Coffee People's revenues. Suppliers - --------- Coffee. Coffee People's current roasted coffee supplier, Coffee Bean International, Inc., purchases coffee from a variety of coffee producing countries. Coffee People has not in the past roasted any of its own coffee 3 beans, but rather has contracted for the roasting of its coffees pursuant to its own proprietary blends and specifications. Following the Merger and the expiration of its current supply contract, Coffee People anticipates that its coffee will be supplied by the Gloria Jean's roasting facility in Castroville, California which has established supply relationships for quality coffees. Bakery Goods And Ice Cream. Coffee People obtains bakery goods and ice cream from local vendors with reputations for superior quality. Cookies are made based on recipes developed by Coffee People. By offering alternative selections such as ice cream and non-coffee beverages for people who do not drink coffee, Coffee People believes it creates an inclusive, welcoming setting for all to enjoy its products. Distribution Strategy And Store Types - ------------------------------------- Coffee People's principal distribution channel is retail stores, including neighborhood coffee houses, drive-through espresso bars, airport stores, mall-based stores and specialty kiosks. Coffee People may seek to develop other distribution points such as mail order catalogs, airlines and co-developed stores that feature coffee and other complementary products. Coffee People also has entered into a licensing agreement with an ice cream manufacturer for the distribution of ice cream under Coffee People's brand names in supermarkets and other grocery outlets. Coffee People has five store types: Neighborhood Coffee House. Neighborhood coffee houses, located in both urban and suburban neighborhoods and business districts, offer a complete line of Coffee People products and roasted coffee beans. As of December 31, 1997, Coffee People had eight neighborhood coffee houses: seven in the Portland, Oregon area and one in Eugene, Oregon. In addition, as of December 31, 1997, Coffee People operated six neighborhood coffee houses in Phoenix and one in Tucson, Arizona under the Coffee Plantation name. Coffee People also has two coffee houses in Denver, Colorado which it plans to sell or close in 1998. Drive-Through Espresso Bar. The second type of store is the drive-through espresso bar that operates under the Motor Moka name. As of December 31, 1997, Coffee People operated 10 of these stores in Portland, Oregon, two of which have indoor seating. Drive-through stores without indoor seating generally have a walk-up window. These stores are designed to maximize customer convenience by eliminating the need to park a car and walk into a store. Coffee People intends to introduce Motor Mokas into selected Arizona markets beginning in 1998. Airport Store. The third type of store is designed for major airports. Coffee People has six of these stores at Portland International Airport operating under the Aero Moka name, with plans to open one more in 1998. These stores include quick grab-and-go kiosks, coffee bars and a sit-and-relax cafe. Coffee People believes these types of stores provide visibility and increase brand recognition. 4 Mall-based Store. Coffee People began operating the mall-based store type with the acquisition of Coffee Plantation. Mall-based stores are smaller than neighborhood stores, and have limited seating. They are full-service stores, however, including sales of coffee-related merchandise and whole beans along with prepared espresso-based drinks. As of December 31, 1997, Coffee People had four mall-based stores in the Phoenix area, and one in Tucson operating under the Coffee Plantation name. Specialty Kiosk or Cart. The fifth type of Coffee People store is a specialty kiosk or cart for placement in high-traffic locations such as supermarkets, university campuses and office building lobbies. Kiosks primarily sell coffee beverages and pastries. Coffee People has three kiosks - one in Portland, Oregon and two in Phoenix, Arizona -- and intends to add more as attractive opportunities arise. Marketing Strategy - ------------------ Coffee People's central marketing strategy is to offer quality products and service that create customer loyalty in a satisfying and stimulating environment. To effect this strategy, Coffee People markets the Coffee People Philosophy and the Coffee Plantation Experience. All Coffee People stores are imbued with the Coffee People Philosophy, which begins with a commitment to People and is expressed in its obsession with Coffee. Coffee People is dedicated to providing its customers with superior coffee -- the most flavorful, the most creatively blended, made with the highest quality beans. High quality coffee, the basis for the name Coffee People. Coffee ------ People also is dedicated to providing its customers with the highest quality service, combining speed, consistency and courtesy in an atmosphere that is friendly, relaxed and inviting. High quality service, the basis for the name Coffee People. ------ Coffee People emphasizes the themes of energy and naturalness in its products and marketing. For example, the Black Tiger brand connotes energy. The organically grown Human Being coffee, which forms the base of certain Coffee People espresso beverages, is a natural product with positive implications for the world's coffee growing regions. Velvet Hammer shakes, made with Coffee People's own ice cream blended with espresso, packs a punch with a smooth touch. Coffee People seeks to create new brands and products associated with the brand. Black Tiger, for example, is a name Coffee People developed in 1987 for a high-caffeine coffee with a rustic Italian taste. It was first served as brewed hot coffee and as a distinctive line of espresso drinks. Later, ice cream featuring Black Tiger coffee was developed. The ice cream was combined with espresso and the Black Tiger milkshake was created. Coffee People has expanded the product line to include Black Tiger Sparkling Coffee, Black Tiger chocolate truffles, Black Tiger apparel, and other ancillary products. Black Tiger products now account for a significant amount of Coffee People's total revenues. Coffee People believes that this kind of branded expansion line has been successful in attracting Coffee People's customers to new products and in building sales. Coffee People also seeks ways to weave its branded products 5 themes into the architectural elements in its stores, creating an atmosphere of immersion into the Coffee People culture. Like the Coffee People stores, Coffee Plantation locations have their own distinct feel, products and brands, making the Coffee Plantation Experience entertaining, as well as cup-filling. Live music on evenings and weekends, as well as an expanded menu featuring soups and sandwiches, has been successful at encouraging relatively high customer volumes at Coffee Plantation locations during otherwise off-peak hours. Competition - ----------- The specialty coffee market is intensely competitive and is becoming more so. Many of Coffee People's competitors have greater financial and marketing resources, brand name recognition and a larger customer base than Coffee People. The specialty coffee industry is currently characterized by a small number of large, well-capitalized companies and a large number of small companies and single-unit operators. The activities of large companies such as Starbucks Corp. continue to increase the appreciation and awareness of specialty coffee across the country. At the same time, the national press has focused attention on the growth opportunities associated with operating coffee stores and espresso carts. This attention, combined with relative ease of entry into this business, has resulted in a rapid increase in the number of small independent specialty coffee companies and single-unit operators. Coffee People competes against virtually all coffee sellers. A number of nationwide coffee manufacturers, such as Kraft General Foods, Proctor & Gamble, and Nestle, distribute coffee products in supermarkets and convenience stores, which may serve as substitutes for Coffee People coffees. Other specialty coffee companies, such as Starbucks, Seattle's Best Coffee, Brothers Gourmet Coffees and Green Mountain Coffee Roasters, sell whole bean coffees in supermarkets and variety and discount stores. In the retail area, Coffee People competes for whole bean and beverage sales with national and regional chains, franchise operators and local specialty coffee stores. Coffee People also competes against other specialty retailers and restaurants for suitable sites for new retail stores. There can be no assurance that management will be able to secure suitable sites at acceptable rent levels. Intellectual Property - --------------------- The Company does not own any patents. Coffee People(R), Black Tiger(R), Good Coffee No Backtalk(R), Java Noir(R), Motor Moka(R), Aero Moka(R), Coffeegram(R), Motorist's Espresso Bar(R), and Coffee Plantation(R) are registered in the United States Patent and Trademark Office as service marks or trademarks. Coffee People has applications pending in the United States to register the names Change the World One Cup at a Time(SM), Mile High Blend(TM), and Velvet Night(TM). Coffee People has applied for trademark and service mark protection for the name Coffee People and related marks in Canada and Japan. 6 Coffee People is also the owner of a number of common law service marks and trademarks including Human Being Organic Espresso(TM), Slammahamma(TM), Mindsweeper(TM), Mindfreezer(TM), and Depth Charge(TM). Government Regulation - --------------------- The food service industry is subject to extensive federal, state and local government regulation relating to the development and operation of food service outlets, including laws and regulations relating to building and seating requirements, the preparation and sale of food, cleanliness, safety in the workplace, accommodations for the disabled and the Company's relationship with its employees, such as minimum wage requirements, anti-discrimination laws, overtime and working conditions and citizenship requirements. The failure to obtain or retain necessary food licenses, substantial increases in the minimum wage or substantial increases in payroll taxes to fund mandatory health-care or employee benefit programs could have a material adverse effect on Coffee People. In November 1996, Oregon voters passed a ballot initiative to raise the State's minimum wage over a three year period from $4.75 per hour to $6.50 per hour. Coffee People does not believe that the minimum wage increase had a material adverse effect in 1997. On January 1, 1998, the minimum wage in Oregon increased to $6.00 per hour. It is uncertain what impact, if any, the minimum wage increase will have on Coffee People's operating results in 1998 or beyond. Employees - --------- As of December 31, 1997, the Company had 641 employees, of which 283 were full time and 358 were part time employees. None of Coffee People's employees are covered by a collective bargaining agreement. The Company believes its employee relations are good. ITEM 2: FACILITIES Coffee People currently owns the land and buildings at which two of its Motor Moka facilities are operated, a total of approximately 1,600 square feet of retail space. In addition, the Company owns the buildings, and leases the underlying lands, for five additional facilities, a total of approximately 3,750 square feet of retail space. As of December 31, 1997, Coffee People leased facilities for the operation of 44 retail stores, 39 of which were in operation. Since December 31, 1997, Coffee People has sold two stores located in southern California and has assigned the leases relating to those stores. Coffee People continues to seek to sell the three additional stores located outside its core markets which were closed during the fourth quarter of 1997, and the two stores in Denver, Colorado which continue to operate. Coffee People's retail stores range from 150 to 2,850 square feet with lease rates ranging from approximately $1,200 to $7,100 per month. The monthly lease rate for certain stores is based on that store's monthly sales revenue. Certain of Coffee People's leases expire in the near future. There can be no assurance that specific leases can be renewed on terms acceptable to Coffee People, or at all. One of Coffee People's stores is operated at a location, within a shopping mall undergoing redevelopment, for which there is currently no term 7 lease in effect. The lessor at such location could at any time demand that Coffee People vacate the premises on 30 days prior written notice. Coffee People has periodic discussions with the lessor relative to entering into a long-term lease. There can be no assurance, however, that a lease for such location will be obtainable on commercially reasonable terms, or at all. The loss of this store location could adversely affect Coffee People's earnings. As a requirement under its lease with the Port of Portland for the six Aero Moka stores at Portland International Airport, Coffee People is required to enter into a joint venture with a certified disadvantaged business enterprise for one of Coffee People's airport stores. Upon entry into the joint venture, Coffee People would have a 49% ownership in that store. Coffee People from time to time has had discussions with the Port of Portland as to ways in which this requirement can be met. Coffee People leases approximately 9,400 square feet for its corporate offices in Beaverton, Oregon under a lease which expires February 2004. Approximately 2,660 square feet of that office space is subleased to a third party. Coffee People believes that the terms of its office lease are favorable. Coffee People also occupies approximately 1,888 square feet of office space in Tempe, Arizona as a regional support center for the Coffee Plantation stores. After the Merger, most of the corporate and support functions of Coffee People will be relocated to Castroville, California, though Coffee People expects to maintain a smaller regional support office in the Portland, Oregon area. Therefore, Coffee People may seek to sublet or assign the lease for its current offices in Beaverton. ITEM 3: LEGAL PROCEEDINGS The Company is not involved in any material litigation or proceeding and is not aware of any material litigation or proceeding threatened against it. ITEM 4: SUBMISSION OF MATTERS TO VOTE OF SECURITIES' HOLDERS None. PART II ITEM 5: MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock began trading on September 25, 1996 on the Nasdaq National Market under the symbol "MOKA". The table below sets forth for the periods indicated the high and low sale prices per share of Coffee People common stock, as reported by the Nasdaq National Market. 8
High Low ---- --- Fiscal 1997 (Ended December 31, 1997): Fourth Quarter..........................................................$ 4.75 $ 2.38 Third Quarter.......................................................... 5.00 3.13 Second Quarter......................................................... 7.25 4.50 First Quarter........................................................... 8.00 6.00 High Low ---- --- Fiscal 1996 (Ended December 31, 1996): Fourth Quarter........................................................ $ 9.13 $ 6.25 Third Quarter........................................................ 9.38 7.50 Second Quarter........................................................ N/A N/A First Quarter......................................................... N/A N/A
On February 27, 1998, the closing price of Coffee People common stock, as reported on the Nasdaq National Market, was $3.00, and there were approximately 506 record holders of Coffee People common stock No cash dividends were declared or paid by Coffee People during any of the periods presented above. On July 26, 1996, Coffee People declared a 3-for-2 stock split, which has been retroactively reflected in Coffee People's financial statements for all periods. Coffee People presently does not intend to pay any cash dividends in the foreseeable future, and intends to retain all earnings for use in its business operations. Coffee People's bank credit arrangements currently prohibit the payment of cash dividends. ITEM 6: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion contains forward-looking statements within the meaning of the federal securities law and involves a number of risks and uncertainties. Actual results and trends may differ materially from the statements contained in this discussion, depending on a variety of factors. Such factors include, but are not limited to, the Company's ability to control costs associated with planned store closures; the price and availability of green coffee; timely consummation of the Merger; the impact on Coffee People if the Merger is not consummated; effects of competition; availability of additional capital; and changes in applicable government regulations. Overview - -------- Coffee People sells coffee beverages, coffee beans, cookies, pastries and coffee related merchandise. The first Coffee People store opened in 1983. As of December 31, 1997, Coffee People operated 41 stores. 9 In January 1996, Coffee People raised net proceeds of $3,725,000 in a private placement of Common Stock. In September 1996, Coffee People completed an initial public offering in which it raised net proceeds of $9,717,000 from the sale of 1,225,000 shares of Common Stock. At the time of its initial public offering, Coffee People operated 19 stores, all of which were located in Oregon. During the period from October 1996 through June 30, 1997, Coffee People opened 14 new stores -- two in Denver, Colorado, three in southern California, seven in the Portland, Oregon metropolitan area, and two in Chicago, Illinois. Coffee People closed one store in Portland, Oregon, in April 1997, as anticipated, upon expiration of the store lease. On May 21, 1997, Coffee People acquired 15 Coffee Plantation stores in Phoenix and Tucson, Arizona for cash consideration of approximately $8,651,000. The transaction was an acquisition of assets, accounted for under the purchase method of accounting. Assets acquired included property and equipment, leases, inventories, prepaid expenses, wholesale business assets and intangible assets. Of the total purchase price, $6,000,000 was financed with proceeds from a five-year term loan from Coffee People's principal bank. One of the Coffee Plantation stores was closed at the end of August 1997, as anticipated, upon expiration of the store lease. During the second quarter of 1997, Coffee People took a charge of $5,500,000 relating to the anticipated closure or sale of the seven stores located outside its primary Oregon and Arizona markets and for related restructuring. Such stores consisted of the two stores located in Denver, Colorado, the three stores located in southern California, and the two stores located in Chicago, Illinois. Coffee People intends to dispose of the stores as expeditiously as possible while endeavoring to maximize the amount of store value and to minimize Coffee People's total future cash outlays. As of December 31, 1997, Coffee People had closed the three stores in southern California and the two stores in Chicago, Illinois, but continued making payments on the lease obligations with respect to such five stores. In February 1998, the Company sold two of the stores in southern California, and assigned the leases with respect to such stores. The two stores in Denver, Colorado continue to operate. As of the date of this Report, Coffee People continues to work with local real estate brokers to market, re-lease or sublease the remaining five stores located outside Oregon and Arizona. Coffee People's decision to dispose of or close the seven stores was made because sales at these stores had not developed as anticipated and because the stores were incurring significant operating losses. Coffee People believes that by disposing of these stores, by focusing on its core markets, and by making substantial reductions in general and administrative overhead expense, it can return itself to profitability. Due in part to reductions in general and administrative overhead expense, Coffee People did achieve profitable results in the fourth quarter of 1997. There can be no assurance, however, that the actions taken by Coffee People to dispose of underperforming stores and to reduce general and administrative expenses will result in profitable operations in future periods. 10 After the closure or disposition of the seven stores outside Oregon and Arizona, Coffee People will have a total of 39 stores -- 25 stores in Oregon and 14 in Arizona. On November 13, 1997, Coffee People entered into a definitive agreement that provides for the combination of Coffee People with Gloria Jean's. The Merger agreement is subject to the satisfaction or waiver of certain conditions to closing. Because the Merger will be treated for accounting purposes as a reverse acquisition of Coffee People by Gloria Jean's, the historical financial statements of Gloria Jean's will, after consummation of the Merger, become the historical financial statements of Coffee People.
Results Of Operations - --------------------- The following table sets forth certain financial data for Coffee People for the periods indicated as a percentage of total revenues, except as otherwise indicated: Year Ended December 31, -------------------------------------------------- 1993 1994 1995 1996 1997 ---- ---- ---- ---- ---- Revenues: Retail sales 98.7% 98.4% 98.1 % 98.6 % 98.0% Wholesale and other 1.3 1.6 1.9 1.4 2.0 --------- --------- --------- ---------- --------- Total revenues 100.0 100.0 100.0 100.0 100.0 Cost of sales and related occupancy expenses 45.7 49.1 47.9 47.7 49.3 Store operating expenses(1) 32.1 30.5 31.2 32.0 35.2 Other operating expenses 0.5 0.5 0.6 0.4 0.0 Depreciation and amortization 2.2 2.3 3.5 4.3 6.8 General and administrative expenses 14.6 15.7 13.8 15.2 14.3 Provision for store closures and restructuring - - - - 26.9 --------- --------- --------- ---------- --------- Income (loss) from operations 5.3 2.3 3.7 0.9 (31.9) Other income, net 0.0 0.5 0.4 2.4 1.5 Interest expense (0.8) (1.1) (1.2) (0.6) (1.8) --------- --------- --------- ---------- --------- Income (loss) before (provision) benefit for income taxes 4.5 1.7 2.9 2.7 (32.2) (Provision) benefit for income taxes(2) - (0.2) (1.0) (1.0) 1.0 ========= ========= ========= ========== ========= Net income (loss) 4.5% 1.5% 1.9 % 1.7 % (31.2)% ========= ========= ========= ========== ========= - --------------------------------- (1) As a percentage of retail sales. (2) Coffee People operated for income tax purposes, as a Subchapter S corporation under the Code from January 1, 1993 through August 22, 1994 and as a C corporation thereafter.
1997 compared to 1996 - --------------------- Revenues. Total revenues increased 66.3% to $20,422,000 for the year ended December 31, 1997 from $12,281,000 for the year ended December 31, 1996. Retail sales increased 65.4% to $20,023,000 in 1997 from $12,104,000 in 1996. The increase in total revenues was a result largely of the acquisition of 14 stores in Arizona and the addition of one store in Oregon during the fourth quarter of 1996 and six new stores in Oregon during 1997. 11 Comparable store sales for the 19 stores open for the full year ended December 31, 1997 and 1996 were flat, declining 0.1%. Sales attributable to nine stores that were closed or targeted for closure contributed approximately $640,000 of the increase in retail sales. Incremental sales from the Oregon store opened in October 1996 contributed 5.3% of the increase in retail sales. Incremental sales from the 19 stores opened or acquired in 1997 and operating at December 31, 1997 contributed the remainder of the increase. Wholesale and other sales increased 125.4% to $399,000 in 1997 from $177,000 in 1996. The increase was due to sales from the wholesale business acquired as part of the Coffee Plantation acquisition. Sales from the Arizona wholesale business accounted for $251,000 of total wholesale and other sales for the year. Coffee People anticipates a reduction in wholesale sales in future periods due to a change in relationship with its primary Arizona customer. The overall increase was offset by a decrease in Coffee People's Oregon wholesale business due to Coffee People's decision in 1996 to turn over the servicing of its Oregon wholesale business to an outside firm. Sales made in Oregon to the outside firm are made at a fixed mark-up over cost. Costs and expenses. Cost of sales and related occupancy expenses as a percentage of total revenues increased to 49.3% in 1997 as compared to 47.7% in 1996. The primary components were an increase in cost of sales of 1.0% and an increase in occupancy expenses of 0.6%. The increase in cost of sales as a percentage of sales was due primarily to the effect of higher coffee prices in 1997 and to the effect of new stores opened in the first and second quarters of 1997 which stores had higher product costs as a percentage of sales than Coffee People's more mature stores. The increase in occupancy expenses as a percentage of total revenues was due primarily to rent expenses incurred at Coffee People's Arizona stores. The Arizona stores, acquired in May 1997, have higher overall occupancy costs than Coffee People's Oregon stores. Store operating expenses as a percentage of retail sales increased to 35.2% in 1997 from 32.0% in 1996. The increase was due primarily to higher operating expenses associated with new stores opened or acquired during the year. Depreciation and amortization as a percentage of total revenues increased to 6.8% in 1997 from 4.3% in 1996, due to the impact of higher costs for stores opened or acquired during 1997. These stores carry higher depreciation expense as a percentage of total revenues than stores opened prior to 1997. The increase in 1997 was further affected by the amortization of goodwill associated with the acquisition of the Coffee Plantation stores in Arizona. General and administrative expenses increased to $2,921,000 in 1997 from $1,868,000 in 1996 due to the higher overhead costs associated with Coffee People's growth in Oregon and Arizona as well as overhead costs through June 30, 1997 associated with the operation of stores slated for closure or sale in California, Colorado and Illinois. As a percentage of total revenues, general and administrative expenses decreased to 14.3% in 1997 from 15.2% in 1996 due primarily to the absorption of general and administrative expenses by higher revenues. 12 As discussed in the Overview section above, during the second quarter of 1997 Coffee People took a charge of $5,500,000 to provide for store closures and restructuring. Average Stores Sales And Store Contribution Margin. For 1997, Coffee People's 12 neighborhood and drive-through stores open for the full year achieved average store sales of $722,000 and an average store contribution margin of 18.7% compared to $729,000 and 20.0%, respectively, for the 12 stores open during the full year of 1996. The six airport stores and one kiosk store open for the full year in 1997 achieved average store sales of $489,000 and an average store contribution margin of 16.6%, respectively, compared to $464,000 and 13.1% for the six airport stores and one kiosk open for the full year in 1996. The difference between the contribution margins realized on the Coffee People's neighborhood stores compared to its airport stores is primarily a result of the percentage rent paid at Portland International Airport on sales generated at the airport stores. The increase in average store sales for Coffee People's airport and kiosk stores resulted from higher transaction volumes at the airport and from higher average transaction amounts attributable to a price increase effected in September 1996 on coffee beverages. The increased contribution margin is primarily due to labor efficiencies and product cost savings at the airport stores. Other Income. Other income as a percentage of total revenues decreased to 1.5% for the year ended December 31, 1997 from 2.4% in 1996, as a result of reductions in interest-bearing investments during the year due to the use of such resources for operations and expansion. Interest Expense. Interest expense as a percentage of total revenues increased to 1.8% for the year ended December 31, 1997 from 0.6% for the same period in 1996, as a result of interest incurred on the bank loan obtained to finance part of the Coffee Plantation acquisition in May 1997. 1996 Compared to 1995 Revenues. Total revenues increased 9.1% to $12,281,000 for the year ended December 31, 1996 from $11,257,000 for the year ended December 31, 1995. Retail sales increased 9.6% to $12,104,000 in 1996 from $11,045,000 in 1995. Comparable store sales for the 17 stores open for the full year ended December 31, 1996 and 1995 increased 2.0% primarily due to increased transaction volumes, particularly at Coffee People's airport stores, and a price increase on coffee beverages effected in September 1996 which resulted in an overall price increase of approximately 4.0%. Comparable store sales during 1996 were adversely affected by a 19.9% decline in sales at one of Coffee People's stores located in a shopping center that is undergoing redevelopment and by a 18.3% decline in a store located in close proximity to one of Coffee People's top producing stores. The lease on the latter store expired in the spring of 1997 and was not renewed. The increase in comparable store sales represents 19.6% of the overall increase in sales. Incremental sales from the stores opened during 1995 contributed 69.9% of the increase in retail sales and incremental sales from the stores opened during 1996 contributed 10.5% of the increase. 13 Wholesale and other sales decreased 16.5% to $177,000 in 1996 from $212,000 in 1995. The decrease was expected due to Coffee People's decision to turn over the servicing of Coffee People's wholesale business to an outside firm. These sales primarily represent sales made to the outside firm at a fixed mark-up over cost. Costs and expenses. Cost of sales and related occupancy expenses as a percentage of total revenues remained relatively stable at 47.7% in 1996 as compared to 47.9% in 1995. The primary components were a decrease of 0.5% in cost of sales and an increase of 0.3% in occupancy costs. The decrease in cost of sales as a percentage of total revenues was due primarily to the effect of the price increase effected in September 1996 which helped absorb increases in the costs of milk, chocolate and pastry. The increase in occupancy expenses as a percentage of total revenues was due primarily to the percentage rent paid on sales generated at Coffee People's stores at Portland International Airport and to the effect of occupancy expenses at the three new stores opened in the fourth quarter of 1996. Store operating expenses as a percentage of retail sales increased to 32.0% in 1996 from 31.2% in 1995. The increase is primarily due to operating expenses associated with the three new stores opened in the fourth quarter. Depreciation and amortization as a percentage of total revenues increased to 4.3% in 1996 from 3.5% in 1995, due primarily to the impact of higher design and build-out costs for the stores opened in 1995 and 1996. These stores carry higher depreciation expense as a percentage of total revenues than stores opened prior to 1995. General and administrative expenses increased to $1,868,000 in 1996 from $1,550,000 in 1995, due primarily to the addition of key management personnel, and other costs necessary to achieve Coffee People's growth plans. As a percentage of total revenues, general and administrative expenses increased to 15.2% in 1996 from 13.8% in 1995. Average Store Sales And Store Contribution Margin. For 1996, Coffee People's 12 neighborhood and drive-through stores open for the full year achieved average store sales of $729,000 and an average store contribution margin of 20.0% compared to $736,000 and 20.5%, respectively, for the 11 stores open during the full year of 1995. The six airport stores and one kiosk store open for the full year achieved average store sales of $464,000 and an average store contribution margin of 13.1%, respectively, compared to $417,000 and 13.9% for five airport stores and one kiosk open for the full year of 1995. The difference between the contribution margins realized on Coffee People's neighborhood stores compared to its airport stores is primarily a result of the percentage rent paid at Portland International Airport on sales generated at the airport stores. The decline in store contribution margin at Coffee People's airport stores is due primarily to higher labor costs and depreciation expenses incurred at these airport stores. 14 Other Income. Other income as a percentage of total revenues increased to 2.4% for the year ended December 31, 1996 from 0.4% for the same period in 1995 due to interest earned on the proceeds from Coffee People's initial public offering in September 1996 and the private placement completed in January 1996. Interest expense. Interest expense as a percentage of total revenues decreased to 0.6% for the year ended December 31, 1996 from 1.2% for the same period in 1995, primarily as a result of utilizing portions of the proceeds from Coffee People's private placement to reduce interest-bearing obligations. Quarterly Comparisons - --------------------- The following tables set forth certain unaudited financial data for each of the quarters in 1996 and 1997. In the opinion of Coffee People's management, such unaudited information has been prepared on the same basis as the audited financial information appearing elsewhere in this Report and includes all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the results of operations for those periods. The operating results for any quarter are not necessarily indicative of results for any future period.
Three months ended ------------------------------------------------------------------------------------------------------------------------ March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31, 1996 1996 1996 1996 1997 1997 1997 1997 ---------- --------- --------- --------- ---------- --------- ---------- -------- (in thousands) Statement of Income Data: Revenues: Retail Sales $2,793 $2,983 $3,107 $3,221 $3,160 $4,798 $5,868 $6,197 Wholesale and 52 48 41 36 33 91 123 152 other ---------------------------------------------------------------------------------------- Total 2,845 3,031 3,148 3,257 3,193 4,889 5,991 6,349 revenues Cost of sales and related 1,334 1,449 1,542 1,535 1,559 2,412 2,975 3,125 occupancy expenses Store operating 873 931 976 1,093 1,134 1,814 2,095 2,005 expenses Other operating 13 12 5 14 - 1 1 2 expenses Depreciation and amortization 114 118 132 166 203 344 421 423 General and administrative 419 436 443 570 717 884 725 595 expenses Provision for store closures and restructuring - - - - - 5,500 - - ---------------------------------------------------------------------------------------- Income (loss) from operations 92 85 50 (121) (420) (6,066) (226) 199 Other income, net 37 45 49 167 126 89 56 41 Interest expense (22) (21) (22) (8) (15) (77) (150) (141) ---------------------------------------------------------------------------------------- Income (loss) before (provision) benefit for 107 109 77 38 (309) (6,054) (320) 99 income taxes (Provision) benefits for (41) (42) (30) (14) 119 - - 89 income taxes ---------------------------------------------------------------------------------------- Net income (loss) $ 66 $ 67 $ 47 $ 24 $ (190) $(6,054) $(320) $188 ======================================================================================== Number of stores open for the full period 19 19 19 19 22 29 46 41 Number of stores open at end of period 19 19 19 22 29 47 46 41 ----------------------
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Three months ended - ------------------------------------------------------------------------------------------------------------------------------- March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31, 1996 1996 1996 1996 1997 1997 1997 1997 --------- --------- -------- --------- -------- -------- -------- --------- Statement of Income Data: Revenues: Retail sales 98.2% 98.4% 98.7% 98.9% 99.0% 98.1% 97.9% 97.6% Wholesale and other 1.8 1.6 1.3 1.1 1.0 1.9 2.1 2.4 ----------------------------------------------------------------------------------------------- Total revenues 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Cost of sales and related occupancy expenses 46.9 47.8 49.0 47.1 48.8 49.3 49.7 49.2 Store operating 31.3 31.2 31.4 33.9 35.9 37.8 35.7 32.4 expenses(1) Other operating expenses 0.5 0.4 0.2 0.4 - - - - Depreciation and 4.0 3.9 4.2 5.1 6.4 7.0 7.0 6.7 amortization General and administrative 14.7 14.4 14.1 17.5 22.5 18.1 12.1 9.4 expenses Provision for store closure and - - - - - 112.5 - - restructuring ----------------------------------------------------------------------------------------------- Income (loss) from operations 3.2 2.8 1.6 (3.7) (13.2) (124.0) (3.8) 3.1 Other income, net 1.4 1.5 1.6 5.1 4.0 1.8 0.9 0.7 Interest expense (0.8) (0.7) (0.7) (0.3) (0.5) (1.6) (2.5) (2.2) ----------------------------------------------------------------------------------------------- Income (loss) before (provision) benefit for 3.8 3.6 2.5 1.1 (9.7) (123.8) (5.4) 1.6 income taxes (Provision) benefit for income taxes (1.5) (1.4) (1.0) (0.4) 3.7 - - 1.4 ----------------------------------------------------------------------------------------------- Net income (loss) 2.3% 2.2% 1.5% 0.7% 6.0% (123.8)% (5.4)% 3.0% =============================================================================================== - --------------------------- (1) As a percentage of retail sales.
Liquidity And Capital Resources - ------------------------------- As of December 31, 1997, Coffee People had closed the three stores in southern California and the two stores in Chicago, Illinois, but was still making payments on the lease obligations for such stores. In February 1998, Coffee People sold two of its stores in southern California and ceased making lease payments on such stores. With respect to the remaining five of the seven stores identified for sale, disposition or closure, Coffee People will continue to make cash outlays for store losses and for such items as rent, utilities and insurance until such time as it is able to sell the store or until it can negotiate satisfactory arrangements with landlords for re-leasing the store premises or for otherwise terminating the lease. There can be no assurance that Coffee People will be successful at selling its stores or in negotiating with landlords for the re-leasing of the store premises or for terminating the leases. If Coffee People is not successful in these efforts, such cash outlays could continue for an indeterminate period during the term of the store leases. The two stores in Denver, Colorado, continue to operate. Coffee People is working with local real estate brokers to market, re-lease or sublease the remaining stores outside of Oregon and Arizona. The lease terms for the five remaining stores range from six to nine years with expiration dates ranging from August 2003 through May 2007. Minimum future rental payments as of March 31, 1998 under the five remaining leases total $2,060,000. 16 Coffee People has suspended its plans to open or acquire new stores, pending the disposition of its stores outside its core Oregon and Arizona markets, although Coffee People has committed to build an additional unit at Portland International Airport during the second quarter of 1998. As of December 31, 1997 Coffee People had $2,545,000 in cash and equivalents. Coffee People had a working capital deficit of $526,000 as of December 31, 1997, as compared to positive working capital of $9,472,000 at December 31, 1996. For the year ended December 31, 1997, cash used by operating activities was $182,000, as compared to cash provided by operating activities of $458,000 for the year ended December 31, 1996. For the year ended December 31, 1997 Coffee People had net cash provided by financing activities of $5,234,000 primarily as a result of the $6,000,000 bank loan obtained to finance the acquisition of the Coffee Plantation stores in May 1997. For the year ended December 31, 1996, net cash provided by financing activities totaled $13,229,000 primarily as a result of net proceeds of $9,717,000 received from Coffee People's initial public offering in September 1996 and from net proceeds of $3,725,000 from Coffee People's private placement completed in January 1996. Coffee People has a line of credit with its primary bank providing for borrowings through August 1, 1998 of up to $500,000. Borrowings bear interest at the rate of 0.5% over the bank's prime rate (9.0% as of December 31, 1997) and are secured by substantially all of Coffee People's assets, including accounts receivable, inventories, trade fixtures and equipment. As of December 31, 1997, there were no borrowings outstanding under the line of credit, however, $73,000 of the line was reserved for a letter of credit dated August 1, 1997. For the years ended December 31, 1997 and 1996, net cash used in investing activities was $12,781,000 and $3,673,000 respectively. The primary use of net cash used in investing activities was for the acquisition of the Coffee Plantation stores in May 1997 for which Coffee People paid approximately $8,651,000. The remaining cash used in investing activities was for capital expenditures for new retail stores. Except for the additional unit at Portland International Airport, Coffee People currently anticipates that any significant capital expenditures for early 1998 will be curtailed pending activities related to the disposition or closure of the seven stores outside of Oregon and Arizona and consummation of the Merger. Coffee People believes that anticipated cash flow from operations, existing cash and bank debt will be sufficient to meet Coffee People's cash requirements through the end of 1998. 17 Seasonality - ----------- Coffee People's business is subject to seasonal fluctuations, due to seasonal changes and general economic conditions, among other factors. Historically, Coffee People's net sales have been highest during the second and third quarters, which include the spring and summer months. Coffee Plantation's net sales typically have been highest during the fourth calendar quarter and lowest during the third calendar quarter. Therefore, results of operations for any individual quarter may not be indicative of results to be achieved for the full year. ITEM 7: FINANCIAL STATEMENTS See pages 23 through 40. ITEM 8: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE During the years ended December 31, 1997 and 1996, there were no disagreements with the Company's auditors, Arthur Andersen LLP ("Arthur Andersen"), on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure which, if not resolved to the satisfaction of Arthur Andersen would have caused Arthur Andersen to make reference thereto on their report on the financial statements for such years. Upon consummation of the Merger, it is anticipated that the Company will change its independent accountants to be Price Waterhouse, LLP, which currently acts as independent accountants for Gloria Jean's. PART III ITEM 9: DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT There is hereby incorporated by reference the information under the caption "Election of Coffee People Directors" in the Company's definitive Proxy Statement to be filed pursuant to Regulation 14A, which Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the end of the Company's fiscal year ended December 31, 1997. The required information concerning compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended, is incorporated herein by reference to the information under the caption "Compliance with Section 16(a) of Securities Exchange Act" in the Company's definitive Proxy Statement to be filed within 120 days after the end of the Company's fiscal year. ITEM 10: EXECUTIVE COMPENSATION There is hereby incorporated by reference the information under the caption "Coffee People Executive Compensation" in the Company's definitive Proxy Statement to be filed with the Securities Exchange Commission within 120 days after the end of the Company's fiscal year. 18 ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT There is hereby incorporated by reference the information under the caption "Beneficial Ownership of Coffee People Common Shares" in the Company's definitive Proxy Statement to be filed with the Securities and Exchange Commission within 120 days after the end of the Company's fiscal year. ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS There is hereby incorporated by reference the information under the caption "Certain Relationships and Related Transactions of Coffee People" in the Company's definitive Proxy Statement to be filed with the Securities and Exchange Commission within 120 days after the end of the Company's fiscal year. PART IV ITEM 13: EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit No. Description - ----------- ----------- 3.1 Registrant's Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form SB-2, effective September 25, 1996 (Registration No. 333-5376-LA)). 3.2 Registrants' Bylaws, as amended (incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form SB-2, effective September 25, 1996 (Registration No. 333-5376-LA)). 4 See Article 2 of Exhibit 3(i) and Article II of Exhibit 3(ii) 10.1* Registrant's 1993 Stock Option Plan (incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form SB-2, effective September 25, 1996 (Registration No. 333-5376-LA)). 10.2* Registrant's 1994 Stock Option Plan (Incorporated by reference to Exhibit 10.2 to the Company's Registration Statement on Form SB-2, effective September 25, 1996 (Registration No. 333-5376-LA)). 10.3* Registrant's 1995 Stock Option Plan (incorporated by reference to Exhibit 10.3 to the Company's Registration Statement on Form SB-2, effective September 25, 1996 (Registration No. 333-5376-LA)). 19 Exhibit No. Description - ----------- ----------- 10.4* Registrant's 1996 Stock Option Plan (incorporated by reference to Exhibit 10.4 to the Company's Registration Statement on Form SB-2, effective September 25, 1996 (Registration No. 333-5376-LA)). 10.5* Form of Incentive Stock Option Agreement related to 1993, 1994, 1995 and 1996 Stock Option Plans (incorporated by reference to Exhibit 10.5 to the Company's Registration Statement on Form SB-2, effective September 25, 1996 (Registration No. 333-5376-LA)). 10.6* Form of Nonstatutory Stock Option Agreement related to 1993, 1994, 1995 and 1996 Stock Option Plans (incorporated by reference to Exhibit 10.6 to the Company's Registration Statement on Form SB-2, effective September 25, 1996 (Registration No. 333-5376-LA)). 10.7* Registrant's Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.7 to the Company's Registration Statement on Form SB-2, effective September 25, 1996 (Registration No. 333-5376-LA)). 10.8 Supply Agreement dated February 17, 1997 between Registrant and Coffee Bean International, Inc., as amended (incorporated in part by reference to Exhibit 10.8 of the Registrant's Annual Report on Form 10-KSB for the year ended December 31, 1996)** 10.9 Form of Indemnity Agreement (incorporated by reference to Exhibit 10.9 to the Company's Registration Statement on Form SB-2, effective September 25, 1996 (Registration No. 333-5376-LA)). 10.9(a) Business Loan Agreement with Bank of America NT & SA, dated August 3, 1995, as amended (incorporated by reference to Exhibit 10.10 to the Company's Registration Statement on Form SB-2, effective September 25, 1996 (Registration No. 333-5376-LA) and the Company's quarterly report on Form 10-QSB for the quarter ended September 30, 1997). 10.10 Security Agreement with Bank of America NT & SA, dated August 3, 1995 (incorporated by reference to Exhibit 10.10(a) to the Company's Registration Statement on Form SB-2, effective September 25, 1996 (Registration No. 333-5376-LA)). 10.11* Employment Agreement with James L. Roberts, Chairman of the Board and Chief Executive Officer (incorporated by reference to Exhibit 10.11 to the Company's Registration Statement on Form SB-2, effective September 25, 1996 (Registration No. 333-5376-LA)). 20 Exhibit No. Description - ----------- ----------- 10.12* Employment Agreement with Taylor H. Devine, President and Chief Executive Officer (incorporated by reference to Exhibit 10.12 to the Company's Registration Statement on Form SB-2, effective September 25, 1996 (Registration No. 333-5376-LA)). 10.13* Terms of employment with Taylor H. Devine, effective as of the closing of the Merger. 10.14* Terms of employment with Kenneth B. Ross, Chief Financial Officer, effective as of the closing of the Merger. 10.15* Employment Agreement with Matthew J. Kimble, Vice President -- Human Relations (incorporated by reference to Exhibit 10.13 of the Registrant's Annual Report on Form 10-KSB for the year ended December 31, 1996). 10.16* Employment Agreement with Steven P. Crantz, Vice President -- Development (incorporated by reference to Exhibit 10.14 to the Company's Registration Statement on Form SB-2, effective September 25, 1996 (Registration No. 333-5376-LA)). 10.17 Redemption agreement, dated January 4, 1993 between the Registrant and Gary G. Talboy (incorporated by reference to Exhibit 10.15 to the Company's Registration Statement on Form SB-2, effective September 25, 1996 (Registration No. 333-5376-LA)). 10.17(a) Promissory Note, dated January 4, 1993, payable to Gary G. Talboy in original principal amount of $245,000 (incorporated by reference to Exhibit 10.15(a)) to the Company's Registration Statement on Form SB-2, effective September 25, 1996 (Registration No. 333-5376-LA)). 10.18 Security Agreement, dated January 4, 1993, among the Registrant, Jeffrey M. Ferguson and Gary G. Talboy (incorporated by reference to Exhibit 10.17 to the Company's Registration Statement on Form SB-2, effective September 25, 1996 (Registration No. 333-5376-LA)). 10.19 Food and Beverage Concession Lease Agreement; dated June 10, 1994, between the Registrant and the Port of Portland (incorporated by reference to Exhibit 10.18 to the Company's Registration Statement on Form SB-2, effective September 25, 1996 (Registration No. 333-5376-LA)). 21 Exhibit No. Description - ----------- ----------- 10.20 Common Stock Purchase Agreement, dated as of January 11, 1996, among the Registrant and certain purchasers (incorporated by reference to Exhibit 10.19 to the Company's Registration Statement on Form SB-2, effective September 25, 1996 (Registration No. 333-5376-LA)). 10.21 Warrant Agreement, dated as of January 23, 1996, between the Registrant and International Capital Partners, Inc. (Incorporated by reference to Exhibit 10.20 to the Company's Registration Statement on Form SB-2, effective September 25, 1996 (Registration No. 333-5376-LA)). 10.22 Form of Warrant Agreement, dated September 30, 1996, with representations of the several underwriters of the Company's initial public offering (incorporated by reference to Exhibit 1.2 to the Company's Registration Statement on Form SB-2, effective September 25, 1996 (Registration No. 333-5376-LA)). 10.23 Agreement and Plan of Merger between the Company and The Second Cup Inc., dated February 19, 1998. 23 Consent of Arthur Andersen LLP, Independent Public Accountants. 27 Financial Data Schedule * Management contract or compensatory plan or arrangement. ** Certain portions of this exhibit are omitted pursuant to an Order of Confidential Treatment. (b) Reports on Form 8-K None. 22 COFFEE PEOPLE, INC. FINANCIAL STATEMENTS AS OF DECEMBER 31, 1997 AND 1996 TOGETHER WITH AUDITORS' REPORT 23 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of Coffee People, Inc.: We have audited the accompanying balance sheets of Coffee People, Inc. (an Oregon corporation) as of December 31, 1997 and 1996, and the related statements of operations, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Coffee People, Inc. as of December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Portland, Oregon, February 4, 1998 24 COFFEE PEOPLE, INC. ------------------- BALANCE SHEETS -------------- AS OF DECEMBER 31, 1997 AND 1996 -------------------------------- (Dollars in thousands) ASSETS ------
1997 1996 -------- -------- CURRENT ASSETS: Cash and cash equivalents (Note 1) $ 2,545 $10,274 Accounts receivable 227 26 Inventories (Notes 1 and 2) 632 205 Prepaid expenses (Note 2) 205 141 Income taxes receivable 157 - Deferred tax assets (Notes 1 and 6) - 28 Other current assets 20 96 -------- -------- Total current assets 3,786 10,770 Property and equipment, net (Notes 1, 2 and 3) 7,338 5,513 Goodwill, net (Notes 1 and 2) 5,781 - Other assets 118 129 -------- -------- Total assets $17,023 $16,412 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt and capital lease obligations (Notes 2 and 5) $ 1,285 $ 115 Current portion of long-term debt to related parties (Note 5) 22 20 Accounts payable 1,011 533 Construction accounts payable - 321 Accrued liabilities 560 262 Provision for store closures and restructuring (Note 16) 1,434 - Income taxes payable (Notes 1 and 6) - 47 -------- -------- Total current liabilities 4,312 1,298 DEFERRED TAX LIABILITY (Notes 1 and 6) - 86 LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (Notes 2 and 5) 4,298 267 LONG-TERM DEBT TO RELATED PARTIES (Note 5) 137 159 COMMITMENTS (Note 8) STOCKHOLDERS' EQUITY (Notes 9, 10, 13 and 15): Preferred Stock, no par value; authorized 10,000,000 shares, none issued or outstanding - - Common Stock, no par value; authorized, 50,000,000 shares; 3,263,872 and 3,237,432 shares issued and outstanding 14,563 14,492 Stock subscription notes receivable (Note 10) (302) (281) Warrants outstanding (Note 13) - - Retained earnings (accumulated deficit) (5,985) 391 -------- -------- Total stockholders' equity 8,276 14,602 -------- -------- Total liabilities and stockholders' equity $17,023 $16,412 ======== ======== The accompanying notes are an integral part of these financial statements.
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COFFEE PEOPLE, INC. ------------------- STATEMENTS OF OPERATIONS ------------------------ FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 ---------------------------------------------------- (Dollars in thousands, except per share data) 1997 1996 1995 ----------- ----------- ----------- REVENUES: Retail sales $ 20,023 $ 12,104 $ 11,045 Wholesale and other 399 177 212 ----------- ----------- ----------- Total revenues 20,422 12,281 11,257 COST OF SALES and related occupancy expenses (cost of sales and occupancy expenses paid to related parties of $332, $239 and $187) 10,071 5,860 5,388 STORE OPERATING EXPENSES 7,048 3,873 3,451 OTHER OPERATING EXPENSES 4 44 63 DEPRECIATION AND AMORTIZATION 1,391 530 391 GENERAL AND ADMINISTRATIVE EXPENSES 2,921 1,868 1,550 PROVISION FOR STORE CLOSURES AND RESTRUCTURINGS 5,500 - - ----------- ----------- ----------- Income (loss) from operations (6,513) 106 414 OTHER INCOME, net 312 298 43 INTEREST EXPENSE (interest expense to related parties of $18, $20 and $35) (383) (73) (134) ----------- ----------- ----------- Income (loss) before benefit (provision) for income taxes (6,584) 331 323 BENEFIT (PROVISION) FOR INCOME TAXES (Notes 1 and 6) 208 (127) (112) ----------- ----------- ----------- NET INCOME (LOSS) $ (6,376) $ 204 $ 211 ======= ======= ======= EARNINGS (LOSS) PER SHARE - BASIC (Note 1) $ (1.96) $ 0.09 $ 0.15 ======= ======= ======= SHARES USED IN COMPUTING EARNINGS (LOSS) PER SHARE - BASIC (Note 1) 3,249,984 2,316,537 1,418,601 EARNINGS (LOSS) PER SHARE - DILUTED (Note 1) $ (1.96) $ 0.09 $ 0.14 ======= ======= ======= SHARES USED IN COMPUTING EARNINGS (LOSS) PER SHARE - DILUTED (Note 1) 3,249,984 2,349,702 1,500,975 The accompanying notes are an integral part of these financial statements.
26
COFFEE PEOPLE, INC. ------------------- STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY --------------------------------------------- FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 ---------------------------------------------------- (Dollars in Thousands) Stock Retained Common Stock Subscription Earnings ------------------- Treasury Notes (Accumulated Shares Amount Stock Receivable Deficit) Total --------- --------- --------- --------------- -------------- ------- BALANCE, December 31, 1994 1,378,204 $1,417 $(467) $ (257) $ (24) $ 669 Exercise of stock options (Notes 9 and 10) 26,850 59 - (58) - 1 Interest income on stock subscription notes at 8.5% per annum (Note 10) - - - (26) - (26) Net income - - - - 211 211 ------------- --------- ------ ------- ------- ------- BALANCE, December 31, 1995 1,405,054 1,476 (467) (341) 187 855 Private Placement (Note 13) 596,250 3,258 467 - - 3,725 Initial public offering (Note 13) 1,225,000 9,717 - - - 9,717 Exercise of stock options (Note 9) 11,128 25 - - - 25 Repayment of stock subscription note and accrued interest (Note 10) - - - 84 - 84 Income tax benefit of disqualifying dispositions - 16 - - - 16 Interest income on stock subscription notes at 8.5% per annum (Note 10) - - - (24) - (24) Net income - - - - 204 204 ------------- ---------- ----- -------- -------- ------- BALANCE, December 31, 1996 3,237,432 14,492 - (281) 391 14,602 Exercise of stock options (Note 9) 26,440 71 - - - 71 Interest income on stock subscription notes at 8.5% per annum (Note 10) - - - (21) - (21) Net loss - - - - (6,376) (6,376) ------------- ---------- ----- -------- -------- -------- BALANCE, December 31, 1997 3,263,872 $14,563 $ - $(302) $(5,985) $ 8,276 ========= ====== === ==== ====== ====== The accompanying notes are an integral part of these financial statements.
27
COFFEE PEOPLE, INC. ------------------- STATEMENTS OF CASH FLOWS ------------------------ FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 ---------------------------------------------------- (Dollars in thousands) 1997 1996 1995 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $(6,376) $ 204 $ 211 Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities- Depreciation and amortization 1,391 530 391 Deferred (benefit) provision for income taxes (58) 5 49 Interest income on stock subscriptions (21) (14) (26) Provision for store closures and restructuring 4,700 - - Changes in operating assets and liabilities: (Increase) decrease in accounts receivable (201) (17) 3 (Increase) decrease in inventories (188) 59 (60) (Increase) decrease in prepaid expenses (77) (29) (26) Increase in income taxes receivable (157) - - Decrease (increase) in other current assets 76 (96) 14 Increase (decrease) in accounts payable 478 (242) (166) Increase in accrued liabilities 298 66 16 (Decrease) increase in income taxes payable (47) (8) 43 Decrease in other current liabilities - - (33) -------- -------- -------- Net cash (used in)provided by operating activities (182) 458 416 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment, net (3,784) (3,888) (933) Acquisition of Coffee Plantation, net of cash acquired (8,614) - - (Increase) decrease in other assets (62) (106) 73 (Decrease) increase in construction accounts payable (321) 321 - -------- -------- -------- Net cash used in investing activities (12,781) (3,673) (860) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term debt obtained for acquisition 6,000 - - Proceeds from long-term debt - - 682 Repayment of debt and capital lease obligations (817) (275) (168) Repayment of debt to related parties (20) (53) (227) Repayment of stock subscription note receivable and interest - 74 - Proceeds from private placement, net - 3,725 - Proceeds from initial public offering, net - 9,717 - Issuance of common stock, net 71 25 1 Income tax benefit of disqualifying dispositions - 16 - Dividends - - (56) -------- -------- -------- Net cash provided by financing activities 5,234 13,229 232 -------- -------- -------- (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (7,729) 10,014 (212) CASH AND CASH EQUIVALENTS, beginning of the period 10,274 260 472 -------- -------- -------- CASH AND CASH EQUIVALENTS, end of the period $ 2,545 $10,274 $ 260 ===== ====== === The accompanying notes are an integral part of these financial statements.
28 COFFEE PEOPLE, INC. ------------------- NOTES TO FINANCIAL STATEMENTS ----------------------------- (Dollars in thousands, except per share data) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: ------------------------------------------- The Company - ----------- Coffee People, Inc. (the Company), an Oregon corporation, sells coffee beverages, coffee beans, cookies, pastries, ice cream, shakes and coffee-related merchandise. Twenty-five of the Company's forty-one stores are located in Oregon, fourteen are located in Arizona and two are located in Denver, Colorado. A downturn in economic conditions in Oregon or Arizona could have a material adverse effect on the Company. On November 13, 1997, the Company entered into a definitive agreement with Second Cup Inc. (Second Cup) that provides for the combination of the Company with Gloria Jean's Inc. (Gloria Jean's) a wholly-owned subsidiary of Second Cup. (See Note 17.) Use of Estimates - ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Fair Value of Financial Instruments - ----------------------------------- The Company's financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and debt instruments. At December 31, 1997 and 1996, the fair value of the Company's receivables and debt under loans approximated the carrying value. Advertising - ----------- Advertising costs are expensed as incurred. For the years ended December 31, 1997, 1996 and 1995, advertising costs were $242, $144 and $49, respectively. Cash and Cash Equivalents - ------------------------- Cash and cash equivalents include cash and short-term investments with original maturity dates of three months or less. Inventories - ----------- Inventories are stated at the lower of cost (first-in, first-out) or market and consist of roasted coffee beans, food, beverages, supplies and other merchandise held for sale. 29 Property and Equipment - ---------------------- Property and equipment is stated at cost less depreciation and valuation reserves. Depreciation on equipment is computed on the straight-line basis over the estimated useful lives of the assets ranging from three to seven years. Leasehold improvements are capitalized and amortized on a straight-line basis over the shorter of the initial lease term or the estimated useful lives of the assets, generally three to ten years. See Notes 3 and 16 for discussion of property and equipment write-downs taken during the year. Maintenance and repairs are charged to expense as incurred. Major repairs and improvements are capitalized and depreciated. Goodwill - -------- Amortization of goodwill is computed on the straight-line basis over 15 years. Accumulated amortization as of December 31, 1997 and 1996 was $234 and $0. Management's policy is to review the ongoing value of the goodwill on a periodic basis by comparing undiscounted future projected earnings to the carrying value of goodwill. Any difference would be recorded as an impairment adjustment. Management is of the opinion that there has been no decline in the value assigned to goodwill. Impairment of Long-lived Assets - ------------------------------- Effective as of the beginning of 1996, the Company adopted the provisions of Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of": (SFAS 121), on a prospective basis. SFAS 121 requires the Company to review long-lived assets and certain identifiable intangibles, including goodwill, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The assessment of impairment is based on the estimated undiscounted future cash flows from operating activities compared with the carrying value of the assets. If the undiscounted future cash flows of an asset are less than the carrying value, a write-down would be recorded, measured by the amount of the difference between the carrying value of the asset and the fair value of the assets. Assets to be disposed of are recorded at the lower of carrying amount or fair value less cost to sell. Store Opening Costs - ------------------- Costs incurred in connection with start-up and promotion of new stores are expensed as incurred. Income Taxes - ------------ Income taxes are provided for on the basis of earnings reported for financial reporting purposes. Deferred taxes are determined based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities given the provisions of enacted tax laws and tax rates. Deferred income tax expenses or credits are based on the changes in the financial statement basis versus the tax basis in the Company's assets or liabilities from year to year. See Note 6 for additional discussion of the Company's tax accounts, including valuation adjustments. Earnings Per Share - ------------------ In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128). SFAS 128 establishes new standards for computing and disclosing earnings per share (EPS). SFAS 128 is effective for both interim and annual periods ending after December 15, 1997. Upon adoption, the Company was required to restate all prior period EPS disclosures with dual presentation of "Basic" and "Diluted" EPS. 30 Basic EPS is based on the average number of shares of Common Stock outstanding during the year. Diluted EPS amounts are based on the average number of shares of Common Stock and diluted Common Stock equivalents outstanding, using the treasury stock method. Common stock equivalents include shares issuable upon exercise of outstanding stock options. In 1997, the Company adopted SFAS 128, effective December 15, 1997. As a result, the Company's reported earnings per share for 1996 and 1995 were restated. The effect of this accounting change on previously reported EPS is as follows:
1996 1995 -------- ------- Per share amounts: Primary EPS as reported $0.09 $0.14 Effect of SFAS 128 - 0.01 ------ ------ Basic EPS as restated $0.09 $0.15 ==== ==== Fully diluted EPS as reported $0.09 $0.14 Effect of SFAS 128 - - ------- ------ Diluted EPS as restated $0.09 $0.14 ===== ====
Stock-Based Compensation Plans - ------------------------------ The Company accounts for its stock-based compensation plans under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25). Effective in 1996, the Company adopted the disclosure option of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). SFAS 123 requires that companies which do not choose to account for stock-based compensation as prescribed by this statement, shall disclose the pro forma effects on earnings and earnings per share as if SFAS 123 had been adopted. Additionally, certain other disclosures are required with respect to stock compensation and the assumptions used to determine the pro forma effects of SFAS 123. 2. ACQUISITION OF COFFEE PLANTATION: --------------------------------- On May 21 1997, the Company acquired certain assets from The Coffee Plantation, Inc. (a wholly-owned subsidiary of Second Cup Inc.) for $8,651. Acquired assets consisted of inventory, certain prepaid accounts and property and equipment for 15 coffeehouse stores (the Acquired Stores). The Company also assumed certain operating lease obligations. The purchase price was paid upon closing. The results of operations of the Acquired Stores have been included in the Company's results of operations since the acquisition date. The following is the purchase price allocation:
Cash paid for the acquired stores $ 2,651 Cash from borrowings 6,000 --------- Total purchase price $ 8,651 31 Assets acquired: Cash $ 37 Inventories 239 Prepaid expenses 23 Property, plant and equipment 2,337 -------- Cost in excess of net assets acquired $ 6,015 ======
The Company financed the transaction with a $6,000 term note payable to a bank over 60 months in equal monthly principal amounts of $100 plus interest at 0.5% over the bank's reference rate beginning June 1, 1997. (See Note 5) The following pro forma information is presented to show the results of operations had the acquisition occurred December 31, 1995:
December 31, 1997 December 31, 1996 (Unaudited) (Unaudited) Total Revenues $23,645 $ 21,701 Income (loss) from operations (6,561) 277 Net Income (6,649) (46) Loss per share - basic and diluted $(2.05) $ (0.02) The above results of operations are not intended to be indicative of the results of operations which actually would have been realized had the acquisition occurred as of December 31, 1995, nor of the future results of operations of the combined Company.
3. PROPERTY AND EQUIPMENT: ----------------------- Property and equipment at December 31, consists of the following:
1997 1996 -------- -------- Land $ 868 $ 868 Buildings 1,099 - Leasehold improvements 6,046 2,634 Machinery and equipment 4,379 1,842 Capital leases 45 116 Construction in progress 1 1,492 --------- --------- 12,438 6,952 Less- Accumulated depreciation (5,100) (1,439) --------- --------- $ 7,338 $ 5,513 ===== ======
At December 31, 1997, included in accumulated depreciation is $3,157 for the impact of the write down of fixed assets related to the provision for store closures. (See Note 16.) 32 4. LINE OF CREDIT: --------------- In August 1997, the Company renewed its line of credit agreement with a bank in the amount of $500. The interest rate for amounts drawn under the line is 0.5% over the prime rate (9.0% at December 31, 1997). There is no amount outstanding under the line of credit at December 31, 1997. Of the $500 credit line, a total of $73 is reserved for use under a letter of credit dated September 1997. The line expires in August 1998. 5. DEBT: ----- Debt consists of the following at December 31:
1997 1996 -------- ------- Note payable to bank, payable in monthly installments of $6 each, plus interest at 9%, commencing September 1, 1995, due August 1, 1998 $ 46 $ 115 Note payable to bank, payable in monthly installments of $100 each, plus interest at 0.5% over the prime rate (9% at December 31, 1997), commencing June 1, 1997, due May 1, 2002 5,300 - Note payable to stockholder, payable in monthly installments of $3, including interest at 2% over the prime rate (10.50% at December 31, 1997), due December 1, 2002 159 179 Note payable to the Port of Portland, payable in monthly installments of $5, commencing April 8, 1995, including interest at 12%, due March 8, 2003 216 244 --------- ------- 5,721 538 Less- Current portion (1,299) (117) --------- ------- $4,422 $ 421 ========= =======
The bank notes and line of credit (Note 4) are secured by substantially all of the Company's assets including accounts receivable, inventories, trade fixtures and equipment. These debt agreements contain restrictions relating to specified financial ratios as well as the lender's standard covenants and restrictions. As of December 31, 1997, the Company was in compliance with all debt covenants. The stockholder note is secured by substantially all of the Company's assets and is subordinated to the bank note. The principal payments on long-term debt are as follows at December 31, 1997: 1998 $1,299 1999 1,259 2000 1,267 2001 1,272 2002 584 Thereafter 40 -------- $5,721 ===== 33 The Company has capital leases for certain equipment. Future minimum payments under the capital leases are as follows at December 31, 1997: 1998 $ 10 1999 5 2000 4 2001 4 2002 2 ----- 25 Less- Portion representing interest (4) ----- Present value of net minimum lease payments 21 Less- Current portion (8) ----- Long-term obligations under capital leases $ 13 === 6. INCOME TAXES: ------------- The components of the (benefit) provision for income taxes consist of the following: 1997 1996 1995 ------ ------ ------ Current: Federal $(150) $100 $ 59 State - 22 4 ------ ------ ------ (150) 122 63 Deferred (58) 5 49 ------ ------ ------ Total (benefit) provision $(208) $127 $112 ==== === === The reconciliation of the statutory federal income tax rates to the Company's effective income tax rates is as follows:
1997 1996 1995 ------ ------ ------ Federal statutory rate (34.0)% 34.0% 34.0% State income taxes, net of federal benefit (2.3) 2.3 2.6 Effect of graduated tax rates - - (1.3) Other (1.0) 2.1 (0.6) Change in valuation allowance 34.1 - - ------ ------ ------ (3.2)% 38.4% 34.7%
34 The components of the net deferred tax assets and liabilities consist of the following at December 31:
1997 1996 -------- ------ Current deferred tax assets: Basis difference in accrued liabilities $1,645 $ 17 Tax deduction carryforwards - 11 -------- ------ 1,645 28 Less - valuation allowance - (1,645) -------- ------ Total current deferred tax asset $ - $ 28 ======== === Long-term deferred tax assets: Tax credit carryforwards $ 14 $ Net operating loss carryforward 639 - Basis difference in property, plant and equipment 64 - Long-term deferred tax liability- Basis difference in property, plant and equipment - (86) -------- ------ 717 (86) Less - valuation allowance (717) - -------- ------ Net long-term deferred tax assets (liability) $ - $(86) ======= ===
As of December 31, 1997, a valuation allowance has been provided against the deferred tax assets, as the Company believes that it is not more likely than not that the deferred tax assets will be realized. 7. OPERATING LEASES: ----------------- The Company leases certain retail store, office and warehouse facilities under operating leases expiring through the year 2013. Most lease agreements contain renewal options and rent escalation clauses. Certain leases provide for contingent rentals based upon gross sales. Rental expense under these lease agreements for the years ended December 31, was as follows: 1997 1996 1995 ------ ------ ------ Minimum rentals $1,871 $1,051 $828 Contingent rentals 91 69 84 ------ ------ ------ $1,962 $1,120 $912 ===== ===== === 35 The Company has sublet certain retail store and office facilities, whereby the sublease tenants are responsible for the lease payments. Minimum future lease payments under these agreements as of December 31, 1997 are as follows:
Gross Minimum Less - amount Net Minimum Lease Lease Payments under subleases Payments -------------- --------------- ----------------- 1998 $ 2,055 $ 46 $ 2,009 1999 2,051 43 2,008 2000 1,843 23 1,820 2001 1,640 24 1,616 2002 1,438 25 1,413 Thereafter 4,261 17 4,244 ---------- ---------- ---------- $13,288 $178 $13,110 ========== ========== ==========
8. COMMITMENTS: ------------ The Company has an agreement with a supplier to purchase substantially all of the Company's coffee requirements through May 1998. Management believes that other suppliers could provide similar products. Any supplier from whom the Company might purchase coffee is subject to volatility in the supply and price of coffee beans. A change in suppliers, however, could affect the terms currently received by the Company. Such a change could have a negative impact on operating results. As a requirement under the lease with the Port of Portland, the Company is committed to enter into a joint venture with a third party for one of the Company's stores at Portland International Airport. Once the agreement is finalized, the Company will have a 49% ownership interest in that store. 9. INCENTIVE PLANS: ---------------- Authorized Stock - ---------------- In June 1995, the Company restated its Articles of Incorporation to authorize 50,000,000 shares of no par value Common Stock and 10,000,000 shares of no par value Preferred Stock. Stock Option Plans - ------------------ At December 31, 1997, the Company had four Stock Option Plans - the 1993 Stock Option Plan adopted in December 1993, the 1994 Stock Option Plan adopted in March 1994, the 1995 Stock Option Plan adopted in June 1995, and the 1996 Stock Option Plan adopted in May 1996 (collectively, the Plans). Under the Plans, key employees and consultants may be granted either incentive stock options or nonqualified stock options. Incentive stock options must comply with the requirements of the Internal Revenue Code (the Code), may be granted only to employees and may be granted at not less than the fair market value of the stock at the date of grant. Nonqualified options may be granted to employees and consultants at not less than 85% of the fair market value of the stock at the date of grant. Canceled options are available for future grant. 36 The following table summarizes the activity for the aforementioned stock option plans:
Number of Price per Weighted Average Shares Share Price per Share --------- ---------- ----------------- Outstanding at December 31, 1994 204,600 $2.22 - $8.00 $4.60 Granted 196,500 8.00 - 10.00 9.54 Exercised (26,850) 2.22 2.22 Canceled (22,237) 2.22 - 8.00 6.12 ---------- ---------------- ------------- Outstanding at December 31, 1995 352,013 2.22 - 10.00 7.44 Granted 197,225 9.00 - 10.00 9.63 Exercised (11,128) 2.22 2.22 Canceled (115,547) 2.22 - 10.00 6.53 ----------- ---------------- ------------- Outstanding at December 31, 1996 422,563 2.22 - 10.00 8.85 Granted 70,500 4.75 - 7.00 6.50 Exercised (17,944) 2.22 2.22 Canceled (127,806) 2.22 - 10.00 9.42 ---------- ---------------- ------------- Outstanding at December 31, 1997 347,313 $2.22 - 10.00 $8.51 ========== ================= =============
For all four plans, there were 271,765 shares of unissued Common Stock reserved for issuance at December 31, 1997. Options to purchase 131,248, 94,489 and 46,796 shares of Common Stock were exercisable at December 31, 1997, 1996 and 1995, respectively. The weighted average share price for shares of Common Stock exercisable at December 31, 1997, 1996 and 1995 were $8.48, $7.24 and $4.07, respectively.
Options outstanding by grant price as of December 31 were as follows: Option Price December 31, 1997 December 31, 1996 December 31, 1995 ------------ ----------------- ----------------- ----------------- $ 2.22 26,813 45,338 65,513 4.00 - - 30,000 4.75 5,000 - - 5.37 3,000 - - 5.56 2,000 - - 6.50 30,000 - - 6.94 16,500 - - 8.00 21,000 30,000 105,000 9.00 63,000 72,475 - 10.00 180,000 274,750 151,500 ---------- ---------- ---------- 347,313 422,563 352,013 ============ ============ ============
Employee Stock Purchase Plan - ---------------------------- In June 1994, the Board of Directors adopted and the shareholders approved an Employee Stock Purchase Plan (the ESPP). Under the ESPP, 150,000 shares of Common Stock have been reserved for issuance to and purchase by employees of the Company. All employees with over four months of service who work more than 20 hours per week and who do not own stock and stock options for more than 5% of the Company's stock are eligible to participate in the ESPP. The ESPP is intended to qualify as an "employee stock purchase plan" under Section 423 of 37 the Internal Revenue Code (the Code). Under that section of the Code, employees may not be granted options if, immediately after the grant, such employee would own stock or hold options to purchase stock possessing 5% or more of the voting power or value of all stock of the Company, nor may any participant purchase Common Stock having a fair market value exceeding $25,000 in any calendar year. As of December 31, 1997, 8,496 shares had been issued and purchased under the ESPP. Statement Financial Accounting Standards No. 123 - ------------------------------------------------ During 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (SFAS 123), which defines a fair value-based method of accounting for an employee stock option or similar equity instrument and encourages all entities to adopt that method of accounting for all of their employee stock compensation plans. However, it also allows an entity to continue to measure compensation cost for those plans using the method of accounting prescribed by APB 25. Entities electing to retain the accounting treatment in APB 25 must make pro forma disclosures of net income and, if presented, earnings per share, as if the fair value-based method of accounting defined in SFAS 123 had been applied. The Company has elected to account for its stock-based compensation plans under APB 25; however, the Company has computed for pro forma disclosure purposes the value of all options granted during 1997, 1996 and 1995 using the Black-Scholes option-pricing model as prescribed by SFAS 123 using the following weighted average assumptions for grants:
1997 1996 1995 ------- ------- ----- Average risk-free interest rate 6.00% 6.36% 6.45% Expected dividend yield 0.00% 0.00% 0.00% Expected lives 5 years 5 years 5 years Expected volatility 57.80% 63.13% 63.13%
The total value of options granted during 1997, 1996 and 1995 was computed as approximately $201, $994 and $1,025, respectively, which would be amortized on a pro forma basis over the five-year vesting period of the options. If the Company had accounted for these plans in accordance with SFAS 123, the Company's net income (loss) and pro forma net income (loss) per share would have been as follows:
As Pro Reported Forma -------- ----- 1997 - Net (loss) $(6,376) $(6,735) Net (loss) per share - basic and diluted (1.96) (2.07) 1996 - Net income (loss) $ 204 $ (63) Net income (loss) per share - basic and diluted 0.09 (0.03) 1995 - Net income $ 211 $ 76 Net income per share - basic and diluted 0.14 0.05
10. STOCK SUBSCRIPTION NOTES RECEIVABLE: ------------------------------------ During December 1993, upon exercise of incentive stock options by an officer and by a key employee, the Company issued 75,000 shares of Common Stock in exchange for notes. On January 4, 1994, a key employee exercised incentive stock options for 37,500 shares of Common Stock in exchange for notes. The notes bear interest at the rate of 8.5% per annum from the dates of exercise, and are due in full on 38 December 31, 1998. During January 1995, an officer exercised incentive stock options for 26,250 shares of Common Stock in exchange for notes. The notes bear interest at the rate of 8.5% per annum from the date of exercise and are due in full on December 31, 1999. The notes provide that in the event any of the stock is sold before the notes mature, all accrued interest and a pro rata portion of the principal balance must be paid. During 1996, the key employee sold 25,000 shares and repaid $84,000, which represented all accrued interest and the pro rata portion of the principal balance. 11. RETIREMENT PLAN: ---------------- Effective on May 1, 1994, the Company adopted a tax deferred savings plan (the 401(k) Plan). All employees with over six months service and who work an average of 30 hours per week or more are eligible to participate in the 401(k) Plan. Participants who choose to participate may contribute up to 20% of their pretax compensation to the 401(k) Plan subject to the statutorily prescribed annual limits. All contributions to the 401(k) Plan, including Company contributions, are fully vested and nonforfeitable at all times. The Company made contributions of $12, $16 and $10 during 1997, 1996 and 1995, respectively. 12. STATEMENTS OF CASH FLOWS: ------------------------- The Company made the following cash payments:
1997 1996 1995 ---- ---- ---- Interest (includes $18, $20 and $35 paid to related parties) $354 $ 75 $134 Taxes 46 101 32 Noncash investing and financing activities are as follows: 1997 1996 1995 ---- ---- ---- Issuance of Common Stock $ - $ - $ 58 Purchase of property under capital lease obligations 18 - -
13. STOCKHOLDERS' EQUITY: --------------------- Initial Public Offering - ----------------------- On September 25, 1996, the Company completed its initial public offering in which it raised $11,025 through the issuance of 1,225,000 shares of Common Stock at $9.00 per share. The Company's proceeds from the initial public offering included in the financial statements are net of offering costs. As part of the initial public offering, the Company also issued warrants which entitle the holders to purchase 122,500 shares of Common Stock at $10.80 per share. The warrants are exercisable for a period of four years beginning one year from the date of the initial public offering. The warrants are callable by the Company upon 90 days notice following the first time when the closing price of the Common Stock exceeds $15.12 per share for 30 consecutive days. Private Placement - ----------------- In January 1996, the Company completed a private placement of equity securities in which it raised $3,975 through the issuance of 596,250 shares of Common Stock at $6.67 per share. The Company's proceeds from the private placement of equity securities included in the financial statements are net of offering costs. 39 14. RELATED PARTY TRANSACTIONS: --------------------------- As of December 31, 1997, the Company had a lease with a stockholder, who is a director of the Company. During 1997 and 1996, the Company purchased approximately $256 and $133, respectively, of products from a company that is 50% owned by a stockholder, who is also a director and an officer of the Company. 15. STOCK SPLIT: ------------ On July 26, 1996, the Board of Directors approved a 3-for-2 stock split. The effect of this stock split has been retroactively reflected in these financial statements and notes for all periods presented. 16. PROVISION FOR STORE CLOSURES AND RESTRUCTURING: ----------------------------------------------- On June 30, 1997, the Company provided for a $5,500 charge for the closure of the seven stores outside its primary Oregon and Arizona markets, and for related restructuring. The primary portion of the liability established by the Company relates to payments under existing lease agreements for closed stores, net of anticipated recoveries from subleases and wind-down of closed store operations. As of December 31, 1997, the Company had incurred approximately $800 in expenditures, which had been charged to the provision. Two of the stores were located in Denver, Colorado; three of the stores were located in southern California; and two of the stores were located in Chicago, Illinois. The charge included the write-down of $3,157 in fixed assets, $36 in prepaid assets, and $73 in other assets, and established a current liability of $2,234 as a provision for store closure and restructuring costs. The Company intends to sell or close these stores. As of December 31, 1997, the two stores in Chicago, Illinois, and the three stores in southern California have been closed. The Company continues to operate the two stores in Denver, Colorado. The Company is working with local real estate brokers to market, re-lease or sublease all seven of these locations. 17. MERGER WITH GLORIA JEAN'S: -------------------------- On November 13, 1997, the Company entered into a definitive agreement with Second Cup Inc. (Second Cup). The agreement provides for the merger of the Company with Gloria Jean's Inc. (Gloria Jean's), a wholly-owned subsidiary of Second Cup. Under the agreement, the Company will issue approximately 7,500,000 shares of the Company's common stock to Second Cup in exchange for 100% of the outstanding common stock of Gloria Jean's. The number of shares to be issued is subject to adjustment upward or downward under certain circumstances based on financial performance of each company. The merger requires shareholder approval and is expected to close in May 1998. After the merger Second Cup will own 69.5% of the outstanding common stock of the Company. The Company's bank loan includes a provision which requires the bank's consent to any combination in which there is a change of control. Currently, the bank has not consented to the merger. For accounting purposes the merger will be accounted as a reverse merger. The historical records of Gloria Jean's will become the historical records of the Company, and the purchase method of accounting will be applied to the Coffee People assets acquired and liabilities assumed which will be recorded at their fair values on the books of Gloria Jean's. The results of operations of the Company will be included with those of Gloria Jean's beginning on the acquisition date. The combined company will continue as Coffee People, Inc. The combined company is expected to change the Coffee People year-end to a fiscal year ending the last Saturday in June. 40 SIGNATURES ---------- In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COFFEE PEOPLE, INC. Dated May 5, 1998 By /s/ Taylor H. Devine -------------------- Taylor H. Devine Chief Executive Officer In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Dated May 5, 1998 /s/ Taylor H. Devine ------------------------ Taylor H. Devine Chief Executive Officer and Director Dated May 5, 1998 /s/ Kenneth B. Ross ------------------------ Kenneth B. Ross, Chief Financial Officer (Principal Financial and Accounting Officer) Dated May 5, 1998 /s/ James L. Roberts ------------------------ James L. Roberts Chairman of the Board and Director Dated May 5, 1998 /s/ Douglas L. Ayer ------------------------- Douglas L. Ayer, Director Dated May 5, 1998 /s/ Jeffrey M. Ferguson -------------------------- Jeffrey M. Ferguson, Director Dated May 5, 1998 /s/ Gary G. Talboy -------------------------- Gary G. Talboy, Director 41 INDEX TO EXHIBITS Exhibit Number Exhibit - -------------- ------- 10.8 Supply Agreement Amendment No. 1 10.13 Terms of employment with Taylor Devine, effective as of the closing of the Merger. 10.14 Terms of employment with Kenneth B. Ross, Chief Financial Officer, effective as of the closing Merger. 10.23 Agreement and Plan of Merger between the Company and The Second Cup Inc., dated February 19, 1998. 23 Consent of Arthur Andersen LLP, Independent Public Accountants. 27 Financial Data Schedule. 42 EX-10.8 2 SUPPLY AGREEMENT AMENDMENT NO. 1 AMENDMENT NO. 1 TO SUPPLY AGREEMENT Coffee People, Inc. ("Coffee People") and Coffee Bean International, Inc. ("CBI") are parties to a Supply Agreement dated February 17, 1997 (the "Supply Agreement"), attached hereto as Exhibit A. In consideration of the terms and mutual convenants contained in the Supply Agreement, the parties agree to extend the term of the Supply Agreement until the later of May 31, 1998 or sixty (60) days after the closing or termination of an agreemnet realteive to the sale of merger of Coffee People, but in no event beyond November 30, 1998. All other terms of the Supply Agreement shall remain unchanged. IN WITNESS WHEREOF, the parties have executed this Agreement on November 10, 1997. Coffee People, Inc. By: /s/ Taylor Devine ----------------------- Taylor Devine President and CEO Coffee Bean International, Inc. By: /s/ Jim M. Myers ------------------------ Jim Myers, President EX-10.13 3 TERMS OF EMPLOYMENT WITH TAYLOR DEVINE SUMMARY OF EMPLOYMENT TERMS BETWEEN COFFEE PEOPLE, INC. AND SECOND CUP INC. AND TAYLOR H. DEVINE These summary employment terms are effective from the Closing Date of the transaction contemplated by the Acquisition Agreement between Coffee People, Inc. ("Company") and Second Cup Inc., dated November 13, 1997 (the "Transaction"). All salary and bonus provisions contained herein shall replace any then existing compensation as at the Closing Date. 1. TERM: One year from the Closing Date of the Transaction. The Closing Date is expected to be on or before March 31, 1998. 2. LOCATION: Portland, Oregon with expense paid travel as required. 3. TITLE: President and Chief Operating Officer, Coffee People. 4. DUTIES: Reporting to the CEO of Coffee People, Inc., the President, Coffee People is responsible overall, for all day-to-day operations for the Oregon stores and during a transition period, to be determined, will have overall responsibility for all day-to-day operations for the Arizona stores. In addition, the President, Coffee People will be responsible for the development of the non-traditional business for all brands within Coffee People, Inc. 5. COMPENSATION: Annual Salary: Base salary fixed at $150,000.00 per annum. Success Fee: $25,000.00 payable six months following the Closing Date, provided the employee has not voluntarily resigned from the employment of the Company prior to this date. Bonus: $18,750.00 payable six months following the Closing Date, provided the employee has not voluntarily resigned from the employment of the Company prior to this date. $18,750.00 payable twelve months following the Closing Date, provided the employee has not voluntarily resigned from the employment of the Company prior to this date. 6. BENEFITS: To be no less favorable than those currently in place, including without limitation, continuation of existing medical coverage and $100,000.00 term life insurance coverage with employee's designated beneficiary. 7. TERMINATION WITH CAUSE: Wages paid through termination date plus one month severance paid. Bonus and success fee entitlement forfeited, unless termination occurs subsequent to payment dates. There shall be no accrual calculation of bonus or success fee--these payments vest on a lump sum basis on the payment dates. Life Insurance/Medical Coverage canceled at employer's option. 8. TERMINATION WITHOUT CAUSE: Wages paid through termination date and the later of twelve months following the Closing Date or six months following termination, paid as a lump sum less all applicable withholding taxes. All outstanding bonus and success fee payments vest upon termination and are to be paid, less applicable withholding taxes. Life Insurance/Medical Coverage remains in effect for the severance period. 9. VOLUNTARY RESIGNATION: Employee agrees to provide 90 days' written notice of resignation. Wages paid through last date of employment, which shall be 90 days after employee has provided written notice of resignation, unless at its option, the Company determines an earlier effective date of resignation in which case, wages shall only be paid to the effective date of resignation. No additional bonus or success fee monies paid if not otherwise payable by last date of employment. All benefits, including Life Insurance/Medical Coverage cease as of last date of employment. 10. NON-COMPETE: For three years following cessation of employment with the Company, the employee agrees not to, without the express written consent of the Company, directly or indirectly engage in, as owner, operator or employee of any business which competes with the business of Coffee People, Inc. in the United States. Competitors of Coffee People, Inc. are those retail operations for which 50% or more of total sales are derived from coffee (in liquid or whole been form) or coffee related products. These terms of employment, effective from the Closing Date of the Transaction, are hereby agreed by: COFFEE PEOPLE, INC. /s/ Taylor H. Devine By: Kenneth B. Ross, CFO - --------------------- ------------------- Taylor H. Devine Coffee People, Inc. KA Welsh - ----------------- Second Cup Inc. EX-10.14 4 TERMS OF EMPLOYMENT WITH KENNETH ROSS SUMMARY OF EMPLOYMENT TERMS BETWEEN COFFEE PEOPLE, INC. AND SECOND CUP INC. AND KENNETH B. ROSS These summary employment terms are effective from the Closing Date of the transaction contemplated by the Acquisition Agreement between Coffee People, Inc. (the "Company") and Second Cup Inc., dated November 13, 1997 (the "Transaction"). All salary and bonus provisions contained herein shall replace any then existing compensation as at the Closing Date. 1. TERM: One year from the Closing Date of the Transaction. The Closing Date is expected to be on or before March 31, 1998. 2. LOCATION: Portland, Oregon with expense paid travel as required. 3. TITLE: Vice President, Finance and Secretary, Coffee People, Inc. 4. DUTIES: Reporting to the CEO of Coffee People, Inc., all duties customarily assigned to this position. 5. COMPENSATION: Annual Salary: Base salary fixed at $115,000.00 per annum. Salary Adjustment: $7,500.00 payable six months following the Closing Date, provided the employee has not voluntarily resigned from the employment of the Company. $7,500.00 payable twelve months following the Closing Date, provided the employee has not voluntarily resigned from the employment of the Company. Should the employee resign subsequent to six months from the Closing Date, this payment shall be "pro rated" for the period between six months after the Closing Date and the last date of employment. Success Fee: $25,000.00 payable six months following the Closing Date, provided the employee has not voluntarily resigned from the employment of the Company prior to this date. Bonus: $16,250.00 payable six months following the Closing Date, provided the employee has not voluntarily resigned from the employment of the Company prior to this date. $16,250.00 payable twelve months following the Closing Date, provided the employee has not voluntarily resigned from the employment of the Company prior to this date. 6. BENEFITS: To be no less favorable than those currently in place. 7. TERMINATION WITH CAUSE: Wages paid through termination date plus one month severance paid. If termination is in the first six months following the Closing Date, then no salary adjustment shall be paid. If termination is after six months following the Closing Date, then the salary adjustment for the second six month period shall be pro rated to the termination date and paid. Bonus and success fee entitlement forfeited, unless termination occurs subsequent to payment dates. There shall be no accrued calculation of bonuses or success fee--these payments vest on a lump sum basis on the payment dates. Employee benefits cancelled at employer's option. 8. TERMINATION WITHOUT CAUSE: Wages paid through termination date and the later of twelve months following the Closing Date or six months following termination, paid as a lump sum less all applicable withholding taxes. Any unpaid salary adjustment to be paid, less all applicable withholding taxes. All outstanding bonus and success fee payments vest upon termination and are to be paid, less applicable withholding taxes. Employee benefits remain in effect for the severance period. 9. VOLUNTARY RESIGNATION: Employee agrees to provide 90 days' written notice of resignation. Wages paid through last date of employment, which shall be 90 days after employee has provided written notice of resignation, unless at its option, the Company determines an earlier effective date of resignation, in which case, wages shall only be paid to the effective date of resignation. No additional bonus or success fee monies paid if not otherwise payable by last date of employment. Employee benefits cease as of last date of employment. These terms of employment, effective from the Closing Date of the Transaction, are hereby agreed by: COFFEE PEOPLE, INC. /s/ Kenneth B. Ross By: /s/ Taylor H. Devine - ------------------------ ----------------------- Kenneth B. Ross Coffee People, Inc. /s/ KA Welsh - ------------------------ Second Cup Inc. EX-10.23 5 AGREEMENT AND PLAN OF MERGER AGREEMENT AND PLAN OF MERGER - between - THE SECOND CUP INC. - and - COFFEE PEOPLE, INC. February 19, 1998 AGREEMENT AND PLAN OF MERGER Table of Contents ARTICLE I - INTREPRETATION.....................................................2 1.1 Definitions......................................................2 1.2 Construction.....................................................7 1.3 Accounting Principles............................................7 1.4 Schedules........................................................8 1.5 Acquisition Agreement Superseded.................................9 ARTICLE II - THE MERGER, EFFECT OF MERGER, MERGER CONSIDERATION................9 2.1 The Merger.......................................................9 2.2 Effective Time...................................................9 2.3 Certificate of Incorporation; Bylaws; Directors..................9 2.4 Merger Consideration............................................10 2.5 Purchase Price Adjustment.......................................10 ARTICLE III - CLOSING ARRANGEMENTS............................................11 3.1 Place of Closing................................................11 3.2 Delivery of Certificates........................................11 ARTICLE IV - REPRESENTATIONS AND WARRANTIES OF THE VENDOR.....................11 4.1 Organization, Etc...............................................11 4.2 Subsidiaries....................................................12 4.3 Capitalization...................................................12 4.4 Authorization...................................................12 4.5 No Violation....................................................13 4.6 Approvals.......................................................13 4.7 Financial Statements and Other Information......................13 4.8 No Undisclosed Liabilities......................................14 4.9 Events Subsequent to June 28, 1997..............................14 4.10 Taxes..........................................................15 4.11 Litigation.....................................................16 4.12 Compliance with Laws...........................................16 4.13 Franchise Law Compliance.......................................17 4.14 Customers, Suppliers, Franchisees, and Brokers.................17 4.15 Title to and Condition of Property.............................17 4.16 Environmental Matters..........................................17 4.17 Material Contracts.............................................18 4.18 Employment Contracts...........................................18 4.19 Employee Plans.................................................18 4.20 Brokerage Fees.................................................19 4.21 Intellectual Property..........................................19 4.22 Licenses.......................................................20 4.23 Competition....................................................20 4.24 Contracts with Non-Arm's Length Persons........................20 ARTICLE V - REPRESENTATIONS AND WARRANTIES OF THE PURCHASER...................20 5.1 Organization, Etc...............................................20 5.2 Subsidiaries....................................................21 5.3 Capitalization..................................................21 5.4 Authorization...................................................21 5.5 No Violation....................................................21 5.6 Approvals.......................................................22 5.7 Financial Statements and Other Information......................22 5.8 Compliance with Laws............................................23 5.9 No Undisclosed Liabilities......................................23 5.10 Events Subsequent to December 31, 1996.........................23 5.11 Taxes..........................................................24 5.12 Litigation.....................................................25 5.13 Title to and Condition of Property.............................25 5.14 Environmental Matters..........................................25 5.15 CPI Material Contracts.........................................26 5.16 Employment Contracts...........................................26 5.17 Employee Plans.................................................27 5.18 Intellectual Property..........................................27 5.19 Licenses.......................................................28 5.20 Competition....................................................28 5.21 Brokerage Fees.................................................28 5.22 Outstanding Options............................................28 5.23 Contracts with Non-Arm's Length Persons........................28 5.24 Provision for Store Closures...................................28 5.25 Coffee Plantation Acquisition..................................28 ARTICLE VI - COVENANTS OF THE VENDOR..........................................29 6.1 Conduct of the Corporation and its Subsidiaries.................29 6.2 Shareholder Meeting.............................................30 6.3 Compliance with Obligations.....................................30 6.4 Maintenance of Cash in Account..................................30 6.5 Loan to purchaser...............................................30 6.6 Exclusivity Obligations.........................................31 6.7 Maintenance of Nasdaq Listing...................................31 ARTICLE VII - COVENANTS OF THE PURCHASER......................................31 7.1 Conduct of the Purchaser........................................31 7.2 Compliance with Obligations.....................................32 7.3 Orders and Rulings..............................................33 7.4 Shareholder Meeting.............................................33 7.5 Proxy Statement; Registration Statement.........................33 7.6 Store Closings..................................................33 7.7 Delivery of Audited Financial Statements........................33 7.8 Exclusivity Obligations.........................................33 7.9 Coffee Bean International, Inc..................................34 7.10 Nasdaq Listing.................................................34 ARTICLE VIII - COVENANTS OF THE PURCHASER AND THE VENDOR......................34 8.1 Access to Information; Confidentiality..........................34 8.2 Notification of Certain Matters.................................35 8.3 Regulatory Approvals............................................35 8.4 Actions Contrary to Stated Intent...............................35 8.5 Certain Filings.................................................35 8.6 Public Announcements............................................36 8.7 Satisfaction of Conditions Precedent............................36 8.8 Brothers Escrow Agreement.......................................36 8.9 Number of Directors.............................................36 8.10 Tax Cooperation................................................36 8.11 Cash/Working Capital Adjustment................................37 8.12 Lease Consents.................................................37 8.13 Coffee Supply..................................................37 ARTICLE IX - CONDITIONS OF CLOSING............................................38 9.1 Conditions to All Parties' Obligations..........................38 9.2 Conditions to the Obligations of the Purchaser to Effect the Merger..........................................................38 9.3 Conditions to the Obligations of the Vendor to Effect the Merger40 ARTICLE X - TERMINATION, AMENDMENTS, AND WAIVERS..............................42 10.1 Termination....................................................42 10.2 Effect of Termination..........................................42 10.3 Expenses.......................................................42 10.4 Termination Fee................................................43 10.5 Alternate Transaction Fee......................................43 10.6 Maximum Payment by Purchaser...................................44 ARTICEL XI - PROJECTIONS......................................................44 11.1 Vendor's Acknowledgment........................................44 11.2 Representation and Warranty of Purchaser.......................44 ARTICLE XII - GENERAL PROVISIONS..............................................44 12.1 Taking of Necessary Action.....................................44 12.2 Employment Terms...............................................44 12.3 Effect of Due Diligence........................................44 12.4 Successors and Assigns.........................................45 12.5 Non-Survival of Representations and Warranties.................45 12.6 Entire Agreement...............................................45 12.7 Notices........................................................45 12.8 Applicable Law.................................................46 12.9 Consent to Jurisdiction; Receipt of Process....................46 12.10 Counterparts..................................................46 12.11 Headings......................................................46 12.12 Amendment.....................................................46 12.13 Waiver........................................................46 AGREEMENT AND PLAN OF MERGER AGREEMENT AND PLAN OF MERGER is made this 19th day of February, 1998, B E T W E E N: THE SECOND CUP INC., a corporation incorporated under the laws of the State of Delaware (the "Vendor") - and - COFFEE PEOPLE, INC., a corporation incorporated under the laws of the State of Oregon (the "Purchaser") WHEREAS the Vendor owns all of the issued and outstanding shares of Gloria Jean's Inc., a Delaware corporation (the "Corporation"); AND WHEREAS the Vendor and the Purchaser previously entered into an Acquisition Agreement, dated November 13, 1997 (the "Acquisition Agreement"), pursuant to which the Purchaser agreed to purchase, and the Vendor agreed to sell to Purchaser, all of the issued and outstanding shares in the capital of Gloria Jean's Inc., a Delaware corporation (the "Corporation"); AND WHEREAS the Acquisition Agreement contemplated in Section 2.3 thereof that the transactions contemplated thereby might to effected as a statutory merger qualifying as a reorganisation under Section 368(a) of the Internal Revenue Code of 1986, as amended; AND WHEREAS the parties by this Agreement agree to amend and restate the Acquisition Agreement for purposes of effecting the transactions contemplated therein as a statutory merger, and to set forth the terms and conditions of such merger; NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and in consideration of the foregoing and the respective representations, warranties, covenants and agreements set forth herein, the parties hereto agree as follows: ARTICLE I INTERPRETATION 1.1 Definitions. In this Agreement and in all amendments and Schedules hereto, the following words and phrases shall have the meanings hereinafter set forth: "Affiliate" or "affiliate" shall mean, with respect to any Person, any other Person that, directly or indirectly, controls or is controlled by or is under common control with such Person. As used in this definition of "Affiliate," the term "control" and any derivatives thereof mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through ownership of voting securities, by contract, or otherwise. "Agreement" shall mean this agreement, as amended, revised or supplemented from time to time, and includes all Schedules; "Alternate Transaction" shall have the meaning given such term in Section 10.5 hereof. "Audited Financial Statements" shall have the meaning given such term in Section 4.7 hereof. "Brothers Escrow Agreement" means the escrow agreement dated as of November 9, 1995 by and among Brothers Retail Corp., the Corporation and Norwest Bank Colorado, N.A. "Brothers Stock Purchase Agreement" means the stock purchase agreement between Brothers Retail Corp. and The Second Cup Ltd. dated as of October 16, 1995, which agreement was assigned by The Second Cup Ltd. to the Corporation on November 8, 1995. "Business Day" shall mean any day, other than a Saturday, Sunday or legal holiday under the Federal laws of the United States. "CBI Agreement" shall have the meaning given such term in Section 7.9 hereof. "Closing" shall mean the completion of the transactions contemplated by this Agreement, subject only to the filing of a certificate of merger with the Delaware Secretary of State in accordance with the DGCL. "Closing Date" shall mean the date that is seven Business Days after the CPI Meeting, or such other date as may be agreed to by the parties, provided that in no event shall the Closing Date be later than April 15, 1998, or such later date as may be agreed to by the parties. "Code" shall mean the Internal Revenue Code of 1986, as amended. "Confidentiality Agreement" shall mean the agreement dated October 17, 1997 between the Vendor and the Purchaser. "Contaminated Site List" shall mean any list, registry or other compilation established by any Governmental Entity of sites where there is a suspected or confirmed Release of a Hazardous Material or that require or potentially require investigation, removal actions, remedial actions or any other response under any Environmental Laws or treaty covering environmental matters, as the result of a Release or threatened Release of any Hazardous Materials. "Corporate Reorganization" means any internal corporate reorganization undertaken by the Vendor or the Corporation that does not adversely impact the Purchaser among any of the Vendor, CP Old, Inc., a Subsidiary of the Vendor, or a Subsidiary of the Vendor created for the purposes of facilitating the Corporate Reorganization. "Corporation Certificates" shall have the meaning given such term in Section 3.2 hereof. "Corporation Shares" shall mean all the issued and outstanding shares in the common stock of the Corporation. "CPI Common Stock" shall mean shares in the common stock of the Purchaser. "CPI Employee Plans" shall have the meaning given such term in Section 5.17 hereof. "CPI Intellectual Property" shall have the meaning given such term in Section 5.18 hereof. "CPI Leases" shall have the meaning given such term in Section 5.13 hereof. "CPI Licences" shall have the meaning given such term in Section 5.19 hereof. "CPI Material Contracts" shall have the meaning given such term in Section 5.15 hereof. "CPI Meeting" shall mean the special meeting of the shareholders of the Purchaser to be held to consider and, if deemed advisable, approve this Agreement and the transactions contemplated hereby. "CPI 10-KSB" shall have the meaning given such term in Section 5.7 hereof. "CPI 10-QSB" shall have the meaning given such term in Section 5.7 hereof. "DGCL" shall mean the Delaware General Corporation Law, as it now exists and is hereafter amended. "Disclosure Letter" means the letter dated November 11, 1997 from the Purchaser to the Vendor. "EBITDA" shall mean earnings before interest income or expense, income taxes, depreciation and amortization, calculated in accordance with generally accepted accounting principles and before giving effect to any expenses incurred in connection with the transactions contemplated by this Agreement, which expenses shall be no greater than $1,250,000. "Effective Time" shall have the meaning given such term in Section 2.2 hereof. "Employee Plan" shall have the meaning given such term in Section 4.19 hereof. "Environmental Conditions" shall mean any pollution, contamination, degradation, damage or injury caused by, related to, arising from or in connection with the generation, handling, use, treatment, storage, transportation or Release of any Hazardous Materials. "Environmental Laws" shall mean all applicable Federal, provincial, state, local and foreign environmental laws, rules, statutes, regulations, ordinances, decrees or orders of Canada or the United States or of any federal, provincial, state, municipality or other subdivision of any thereof that imposes Environmental Liabilities for the Release of Hazardous Materials to the environment, including but not limited to the Resource Conservation and Recovery Act, 42 U.S.C. ss.6901 et. seq.; the Superfund Amendments and Reauthorization Act, 42 U.S.C. ss.11011 et. seq.; the Clean Air Act, 42 U.S.C. ss.7401 et. seq.; the Federal Water Pollution Control Act, 33 U.S.C. ss.1251 et. seq.; the Toxic Substances Control Act, 15 U.S.C. ss.2601 et. seq.; the Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C. ss.9601 et. seq.; and all applicable published rules, regulations, directives, guidances and policies of the EPA and of all similar state and local agency requirements. "Environmental Liabilities" shall mean any and all liabilities, responsibilities, claims, suits, losses, costs (including remediation, removal, response, abatement, cleanup, investigative and/or monitoring costs and any other related costs and expenses, including without limitation Environmental Remediation Costs), other causes of action, damages, settlements, expenses, charges, assessments, liens, penalties, fines, pre-judgment and post-judgment interest, attorney fees and other legal fees (a) pursuant to any agreement, order, notice, directive (including directives embodied in Environmental Laws), injunction, judgment or similar documents (including settlements), or (b) pursuant to any claim by a governmental entity or other person for personal injury, property damage, damage to natural resources, remediation or similar costs or expenses incurred or asserted by such governmental entity or person pursuant to common law or statute. "Environmental Remediation Costs" shall mean all costs and expenses of actions or activities to (a) clean-up or remove Hazardous Materials from the environment, (b) prevent or minimize the movement, leaching or migration of Hazardous Materials into the environment (c) prevent, minimize or mitigate the Release or threatened Release of Hazardous Materials into the environment, or injury or damage from such Release, and (d) comply with the requirements of any Environmental Laws. Environmental Remediation Costs include, without limitation, costs and expenses payable in connection with the foregoing for legal, engineering or other consultant services, for investigation, testing, sampling and monitoring, for boring, excavation and construction, for removal, modification or replacement of equipment or facilities, for labour and material, and for proper storage, treatment and disposal of Hazardous Materials. "EPA" shall mean the United States Environmental Protection Agency. "ERISA" means the Employee Retirement Income Security Act of 1974, as it now exists and is hereafter amended. "Exchange Act" shall mean the United States Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder. "Filings with the U.S. Commission" shall mean the filings made by the Purchaser with the U.S. Commission listed on Schedule 1.1. "Financial Statements" shall have the meaning given such term in Section 4.7 hereof. "Generally accepted accounting principles" shall mean generally accepted accounting principles in the United States. "Governmental Entity" shall mean any United States, Canadian or foreign court, administrative agency or commission or other federal, state, provincial or local government or governmental authority or instrumentality. "Hazardous Materials" shall mean oil, petroleum, other hydrocarbons, asbestos, other hazardous, toxic, contaminated or polluting materials, substances, chemicals, or wastes, including without limitation, "hazardous substances," "hazardous pollutants," "hazardous wastes," "toxic substances," or similar materials under any Environmental Laws. "Intellectual Property" shall have the meaning given such term in Section 4.21 hereof. "Interim Financial Statements" shall have the meaning given such term in Section 4.7 hereof. "IRS" shall mean the United States Internal Revenue Service. "Leases" shall have the meaning given such term in Section 4.15 hereof. "License" shall have the meaning given such term in Section 4.22 hereof. "Liens" shall mean all liens, charges, security interests, pledges, rights or claims of others, restraints on transfer or other encumbrances. "Material Adverse Change" shall mean, with respect to any Person, a change or a development involving a prospective change which, alone or together with any other such change or development, has, or would reasonably be expected to have a material adverse effect on the value of the assets or the financial condition, which includes the earnings and cash flow streams, of the Person taken as a whole with its Subsidiaries. "Material Contracts" shall have the meaning given such term in Section 4.17 hereof. "Merger" shall have the meaning given such term in Section 2.1 hereof. "Merger Corp." shall mean Gloria Jean's Merger Corp., a corporation to be formed by Purchaser as its wholly owned subsidiary under the laws of the state of Delaware, solely for purposes of effecting the transactions contemplated by this Agreement. "Nasdaq National Market" shall mean the Nasdaq National Market System. "Nasdaq Stock Market" shall mean either the Nasdaq National Market or the Nasdaq SmallCap Market. "Person" shall mean an individual, corporation, partnership, joint venture, trust or unincorporated organization, or a government or any agency or political subdivision thereof. "Plan" shall mean the plan of merger substantially in the form of Exhibit 2.1 hereto, which pursuant to the terms and conditions of this Agreement shall be adopted by the Corporation and Merger Corp., in accordance with the DGCL. "Proxy Statement" means the proxy statement and all amendments and supplements thereto to be prepared in connection with the solicitation of proxies by the management of the Purchaser for the CPI Meeting. "Purchase Price" shall have the meaning given such term in Section 2.4 hereof, subject to the adjustments provided for in Section 2.5 hereof. "Purchaser's Adjustment Factor" shall mean the percentage adjustment factor to be applied in accordance with Section 2.5 hereof. "Purchaser's Counsel" shall mean the law firm Tonkon Torp LLP, located at 1600 Pioneer Tower, 888 S.W. Fifth Avenue, Portland, Oregon, 97212. "Purchaser's EBITDA" shall mean actual EBITDA for the Purchaser for the period between July 1, 1997 and December 31, 1997, accounted for on a basis consistent with past practice. "Purchaser's Financial Period End" shall mean any month period end. "Purchaser's Nominees" shall have the meaning given such term in Section 8.9 hereof. "Registration Statement" shall have the meaning given such term in Section 7.5 hereof. "Regulatory Authority" shall mean the Nasdaq National Market, the United States Department of Justice and Federal Trade Commission, and any foreign, Canadian or United States federal or state government or governmental authority the approval of which, or filing with, is legally required or permitted for consummation of the transactions contemplated by this Agreement. "Release" shall mean any spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping or disposing into the environment. "Requisite Regulatory Approvals" shall have the meaning given such term in Section 9.1(c) hereof. "Subsidiary" means, with respect to any entity, any entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are directly or indirectly (through a Subsidiary or otherwise) owned by such entity. "Tax" and "Taxes" shall have the meaning given such terms in Section 4.10 hereof. "Tax Return(s)" shall have the meaning given such term in Section 4.10 hereof. "Time of Closing" shall mean 10:00 a.m. (Portland time) on the Closing Date or such other time as the Purchaser and Vendor shall agree. "U.S. Commission" shall mean the Securities and Exchange Commission of the United States. "U.S. Securities Act" shall mean the United States Securities Act of 1933, as amended, and the rules and regulations thereunder. "Vendor's Adjustment Factor" shall mean the percentage adjustment factor to be applied in accordance with Section 2.5 hereof. "Vendor's Counsel" shall mean either the law firm Goodman Phillips & Vineberg, located at 250 Yonge Street, Suite 2400, Toronto, Ontario, M5B 2M6 or Heller Ehrman White & McAuliffe located at 525 University Avenue, Palo Alto, California 94301-1900. "Vendor's EBITDA" shall mean the actual EBITDA for the Vendor for the period between June 29, 1997 and December 13, 1997, accounted for on a basis consistent with past practice. "Vendor's Financial Period End" shall mean a four week period end for which the Vendor prepares financial information relating to its business. "Vendor's Nominees" shall have the meaning given such term in Section 8.9 hereof. 1.2 Construction. In this Agreement: (a) words denoting the singular include the plural and vice versa and words denoting any gender include all genders; (b) the word "including" shall mean "including without limitation"; (c) any reference to a statute shall mean the statute in force as at the date hereof and any regulation in force thereunder, unless otherwise expressly provided; (d) the use of headings is for convenience of reference only and shall not affect the construction or interpretation of this Agreement; (e) when calculating the period of time within which or following which any act is to be done or step taken, the date which is the reference day in calculating such period shall be excluded. If the last day of such period is not a Business Day, the period shall end on the next Business Day; (f) all dollar amounts are expressed in United States dollars unless otherwise stipulated; and (g) facts or information within the "knowledge" of the Vendor or Purchaser or "to the best knowledge" of the Vendor or the Purchaser, or any equivalent phrase as used in this Agreement, shall mean facts known, or which should have been known after due inquiry, in the case of the Purchaser, by any of the directors, officers, or senior operations personnel of the Purchaser and, in the case of the Vendor, by any of the directors, officers or senior operations personnel of the Vendor, the Corporation, any of the Subsidiaries of the Corporation or The Second Cup Ltd. (h) notwithstanding any indication to the contrary contained elsewhere herein, all representations, warranties and covenants made in this Agreement shall be deemed to have been made as of November 13, 1997, the date of the Acquisition Agreement, and not as of the date hereof, and no breach of any representation, warranty, or covenant contained in the Acquisition Agreement shall be deemed to be waived by the non-breaching party by execution of this Agreement. 1.3 Accounting Principles. Wherever in this Agreement reference is made to generally accepted accounting principles, such reference shall be deemed to be the United States generally accepted accounting principles from time to time approved by the Financial Accounting Standards Board, or any successor institute, applicable as at the date on which such calculation is made or required to be made in accordance with generally accepted accounting principles. 1.4 Schedules. The following are the Schedules and Exhibits incorporated by reference herein and deemed to be an integral part of this Agreement: Schedules relating to the Vendor: Schedule 4.2 - Subsidiaries, etc. Schedule 4.3 - Capitalization Schedule 4.6 - Required Consents Schedule 4.8 - Liabilities Schedule 4.9 - Undisclosed Liabilities Schedule 4.10 - Taxes Schedule 4.11 - Litigation Schedule 4.12 - Compliance with Laws Schedule 4.13 - Franchise Law Compliance Schedule 4.14 - Customers, Suppliers, Franchisees and Brokers Schedule 4.15 - Real Property and Leases Schedule 4.16 - Environmental Matters Schedule 4.17 - Contracts Schedule 4.18 - Employment Contracts Schedule 4.19 - Employee Plans Schedule 4.21 - Intellectual Property Schedule 4.23 - Competition Schedule 4.24 - Contracts with Non-Arm's Length Persons Schedules relating to the Purchaser: Schedule 1.1 - Filings with U.S. Commission Schedule 2.5 - Adjustments to Purchase Price Schedule 5.2 - Subsidiaries, etc. Schedule 5.3 - Capitalization Schedule 5.6 - Required Consents Schedule 5.9 - Liabilities Schedule 5.10 - Undisclosed Liabilities Schedule 5.11 - Taxes Schedule 5.12 - Litigation Schedule 5.13 - Real Property and Leases Schedule 5.14 - Environmental Matters Schedule 5.15 - CPI Contracts Schedule 5.16 - Employment Contracts Schedule 5.17 - CPI Employee Plans Schedule 5.18 - Intellectual Property Schedule 5.20 - Competition Schedule 5.22 - Outstanding Options Schedule 5.23 - Contracts with Non-Arm's Length Persons Schedule 7.6 - Store Closings Schedule 9.3(h) - Lease Consents Exhibits Exhibit 2.1 - Plan of Merger Exhibit 9.2(d) - Form of Opinion of Vendor's Counsel Exhibit 9.3(d) - Form of Opinion of Purchaser's Counsel Exhibit 9.3(i) - Voting Agreement Exhibit 12.2 - Terms of Employment for Taylor H. Devine - Terms of Employment for Kenneth B. Ross 1.5 Acquisition Agreement Superseded. This Agreement amends and restates in its entirety the Acquisition Agreement for the purpose of consummating the transactions contemplated therein as a statutory merger qualifying as a reorganization under Section 368(a)(1)(A) of the Code. ARTICLE II THE MERGER, EFFECT OF MERGER, MERGER CONSIDERATION 2.1 The Merger. Upon the terms and subject to the conditions set forth in this Agreement, Purchaser and Vendor shall on the Closing Date cause the Corporation and Merger Corp. to adopt the Plan. Pursuant to the Plan, at the Effective Time (as defined in Section 2.2 below), Merger Corp. shall be merged with and into the Corporation (the "Merger"). The Corporation shall be (and is hereinafter sometimes referred to as) the "Surviving Corporation." The corporate existence of the Corporation with all its rights, privileges, powers and franchises shall continue unaffected and unimpaired by the Merger, and as the Surviving Corporation it shall be governed by the laws of the State of Delaware and succeed to all rights, privileges, powers, franchises, assets, liabilities and obligations of Merger Corp. in accordance with the DGCL. The separate existence and corporate organization of Merger Corp. shall cease at the Effective Time and thereupon the Corporation and Merger Corp. shall be a single corporation. Pursuant to the Plan, the Merger shall have the effects specified in the DGCL. 2.2 Effective Time. Pursuant to the Plan, the Merger shall become effective at the time (the "Effective Time") of filing with the Secretary of State of the State of Delaware a properly executed certificate of merger, together with any other documents required by law to effectuate the Merger, or at such later time as may be specified in the certificate of merger. The parties shall cause the certificate of merger to be filed with the Secretary of State of the state of Delaware as soon as practicable after the Closing. 2.3 Certificate Of Incorporation; Bylaws; Directors. Pursuant to the Plan, the Certificate of Incorporation and Bylaws of the Corporation as they exist as of the date of this Agreement shall remain in place immediately following the Effective Time and shall be the Certificate of Incorporation and Bylaws of the Surviving Corporation. The Board of Directors of the Corporation immediately following the Merger shall consist of Alton McEwen, Kathy A. Welsh and Taylor H. Devine until their respective successors are duly elected or appointed, or until their earlier death, resignation or removal in accordance with the Certificate of Incorporation and Bylaws of the Corporation. 2.4 Merger Consideration. Subject to the adjustments provided for in Section 2.5 of this Agreement, at the Effective Time, by virtue of the Merger and without any action by the Vendor, the Purchaser, the Corporation, or the respective stockholders thereof: (a) All the Corporation Shares held in the aggregate by Vendor immediately prior to the Effective Time shall be converted into that number of shares of CPI Common Stock which will represent 69.5% of the issued and outstanding shares of CPI Common Stock at the Effective Time after giving effect to the transactions contemplated by this Agreement, rounded down to the nearest whole share (the "Purchase Price"). Shares of the Corporation's capital stock held by any person other than the Vendor, if any, shall be cancelled without conversion and without entitlement to any consideration. By way of illustration, if the number of issued and outstanding shares of CPI Common Stock immediately prior to the Effective Time is equal to 3,261,085 shares, then the Purchase Price shall be equal to 7,430,996 shares of CPI Common Stock. (b) Each share of Merger Corp. capital stock issued and outstanding immediately prior to the Effective Time shall be converted into one share of common stock of the Surviving Corporation, with the effect that immediately after the Effective Time, the Surviving Corporation shall be the wholly owned subsidiary of the Purchaser. 2.5 Purchase Price Adjustment. The parties acknowledge that the Purchase Price set out in Section 2.4 is based on relative projected EBITDA contributions which includes the Purchaser's EBITDA and Vendor's EBITDA as projected at the time of negotiations between the parties. Accordingly, in order to accommodate certain negative variances to the Purchaser's EBITDA or the Vendor's EBITDA, the Purchase Price shall be adjusted according to the following formula immediately prior to the Effective Time:
Y x (0.695 + Adjustment Factor) = Adjusted Purchase Price - --------------------------------------------- (0.305 - Adjustment Factor)
For the purposes of this Section 2.5, (i) "Y" shall mean the number of shares of CPI Common Stock issued and outstanding immediately prior to the Effective Time, before giving effect to the transactions contemplated by this Agreement, and (ii) the "Adjustment Factor" shall mean the Purchaser's Adjustment Factor less the Vendor's Adjustment Factor. The Adjustment Factor will be a negative number in circumstances where the Vendor's Adjustment Factor is greater than the Purchaser's Adjustment Factor. The Purchaser's Adjustment Factor shall be calculated as follows: If the Purchaser's EBITDA is greater than $650,000, the Purchaser's Adjustment Factor shall be equal to zero. If the Purchaser's EBITDA is greater than $600,000 and less than or equal to $650,000, the Purchaser's Adjustment Factor shall be equal to 0.01. If the Purchaser's EBITDA is greater than $550,000 and less than or equal to $600,000, the Purchaser's Adjustment Factor shall be equal to 0.02. If the Purchaser's EBITDA is greater than $500,000 and less than or equal to $550,000, the Purchaser's Adjustment Factor shall be equal to 0.03. The Vendor's Adjustment Factor shall be calculated as follows: If the Vendor's EBITDA is greater than $2,325,000, the Vendor's Adjustment Factor shall be equal to zero. If the Vendor's EBITDA is greater than $2,150,000 and less than or equal to $2,325,000, the Vendor's Adjustment Factor shall be equal to 0.01. If the Vendor's EBITDA is greater than $1,975,000 and less than or equal to $2,150,000, the Vendor's Adjustment Factor shall be equal to 0.02. If the Vendor's EBITDA is greater than $1,800,000 and less than or equal to $1,975,000, the Vendor's Adjustment Factor shall be equal to 0.03. Schedule 2.5 provides illustrative examples of the operation of the Purchase Price adjustment hereunder. ARTICLE III CLOSING ARRANGEMENTS 3.1 Place of Closing. The Closing shall take place at the Time of Closing at the offices of the Purchaser's Counsel in Portland, Oregon, or at such other location as may be agreed upon by the Purchaser and the Vendor. 3.2 Delivery of Certificates. (a) At the Effective Time, all the Corporation Shares shall cease to be outstanding, shall be cancelled and retired and shall cease to exist. The Vendor shall surrender to the Purchaser at the Closing one or more certificates that represent immediately prior to the Effective Time all the Corporation Shares ("Corporation Certificates"). (b) The CPI Common Stock into which the Corporation Shares shall have been converted, pursuant to Section 2.4 hereof, shall be deemed to have been issued and outstanding immediately after the Effective Time. At the Closing, upon delivery of all Corporation Certificates, the Purchaser shall issue to the Vendor certificates representing the CPI Common Stock to be held by Vendor immediately after the Effective Time, under Section 2.4 hereof. (c) At the Closing, the Surviving Corporation shall issue certificates to the Purchaser representing the common stock of the Surviving Corporation to be held by the Purchaser immediately after the Effective Time, under Section 2.4 hereof, which shares shall be deemed to have been issued and outstanding immediately after the Effective Time. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE VENDOR The Vendor represents and warrants to the Purchaser (and acknowledges that the Purchaser is relying on the representations and warranties in completing the transactions herein) as follows: 4.1 Organization, Etc. The Corporation is a corporation duly organized and validly existing and in good standing under the laws of the State of Delaware and has all necessary corporate power, authority and capacity to conduct its business as it is now being conducted and to own, operate or lease the properties and assets it currently owns, operates or holds under lease. The Corporation is duly qualified or licensed to do business and is in good standing as a foreign corporation in each jurisdiction where the character of its business or the nature of its properties makes such qualification or licensing necessary, except where the failure to so qualify or be licensed would not result in a Material Adverse Change. 4.2 Subsidiaries. Schedule 4.2 contains a list of all Subsidiaries, partnerships, joint ventures and other entities in which the Corporation has, directly or indirectly, any legal or beneficial interest or any right to acquire a legal or beneficial interest and indicates for each such Subsidiary, partnership, joint venture or other entity: (i) the percentage and type of equity securities of or other interest owned or controlled by the Corporation; (ii) the jurisdiction of incorporation or organization; (iii) each jurisdiction in which it is qualified or licensed to conduct its business; and (iv) in the case of any joint venture, the identity of each other joint venture partner. The Corporation is the direct owner, beneficially and of record, of all such equity securities or other interests listed as being owned by it, free and clear of all Liens. 4.3 Capitalization. The authorized, issued and outstanding capital stock of the Corporation is as set forth on Schedule 4.3. The Corporation does not hold any shares in its own capital. The designations, powers, preferences, rights, qualifications, limitations and restrictions in respect of each class and series of authorized capital stock of the Corporation are as set forth in the Corporation's articles of incorporation, and all such designations, powers, preferences, rights, qualifications, limitations and restrictions are valid, binding and enforceable and in accordance with all applicable laws. All outstanding shares of capital stock of the Corporation have been duly authorized and validly issued as fully paid and non-assessable. Except as set forth in Schedule 4.3, there are no outstanding options, warrants, convertible securities, calls, rights, commitments, pre-emptive rights or agreements or instruments or understandings of any character to which the Corporation or any of its Subsidiaries is a party or by which the Corporation or any of its Subsidiaries is bound, obligating the Corporation or any of its Subsidiaries to issue, deliver or sell, or cause to be issued, delivered or sold, contingently or otherwise, additional shares of its capital stock or the capital stock of any of its or their Subsidiaries or any securities or obligations convertible into or exchangeable for such shares or to grant, extend or enter into any such option, warrant, convertible security, call, right, commitment, pre-emptive right or agreement. There are no outstanding obligations, contingent or other, of the Corporation or any of its Subsidiaries to purchase, redeem or otherwise acquire any shares of its capital stock. Except as set forth in Schedule 4.3, there are no voting trust agreements or other contracts, agreements, arrangements, commitments, plans or understandings restricting or otherwise relating to voting, dividend or other rights with respect to any of the capital stock of the Corporation or any of its Subsidiaries. The Corporation Shares constitute all of the issued and outstanding shares in the capital of the Corporation. 4.4 Authorization. The Vendor has all necessary corporate power, authority and capacity to enter into this Agreement and each of the other agreements contemplated hereby, to carry out its obligations under this Agreement and each of the other agreements contemplated hereby and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement, the consummation of the transactions contemplated hereby and the performance by the Vendor of its obligations hereunder have been duly authorized by all necessary corporate action on the part of the Vendor, subject to required regulatory approvals, to the extent any shall be required to effect the transactions contemplated by this Agreement. This Agreement has been duly executed and delivered by the Vendor and constitutes a legal, valid and binding obligation of the Vendor enforceable against the Vendor in accordance with its terms (except as the enforceability thereof may be limited by any applicable bankruptcy, insolvency or other laws affecting creditors' rights generally or by general principles of equity, regardless of whether enforceability is considered in equity or at law). 4.5 Violation. The execution and delivery of this Agreement by the Vendor does not, and the consummation by the Vendor of the transactions contemplated hereby and compliance with the terms hereof will not, (a) conflict with, or result in any breach of any provision of the articles of incorporation or by-laws of the Vendor or the Corporation or any of its Subsidiaries; (b) conflict with, or result in any material violation of or default or loss of any benefit under, any License, grant, statute, law, rule or regulation, or any judgment, decree or order of any court or other governmental agency or instrumentality to which the Vendor, the Corporation or any of its Subsidiaries is a party or to which any of their respective property is subject; (c) conflict with, or result in a breach or material violation of or default or loss of any benefit under, or accelerate the performance required by, the terms of any material agreement, contract, indenture or other instrument (other than, with respect to the Leases, where such breaches, violations or defaults would not result in a Material Adverse Change) which the Vendor, the Corporation or any of its Subsidiaries is a party or to which any of their respective property is subject, or constitute a default or loss of any right thereunder which, with the lapse of time or notice or both, might result in a default or loss of a right thereunder or the creation of any Lien upon any of the assets or properties of the Vendor, the Corporation or any of its Subsidiaries; or (d) result in any suspension, revocation, impairment, forfeiture or non-renewal of any License. 4.6 Approvals. The execution and delivery of this Agreement by the Vendor and the consummation of the transactions contemplated hereby will not require the consent, approval, order or authorization of any Governmental Entity or Regulatory Authority or any other Person under any statute, law, rule, regulation, permit, license, agreement, indenture or other instrument to which the Vendor or the Corporation or any of its Subsidiaries is a party or to which any of their respective properties are subject and no declaration, filing or registration with any Governmental Entity or Regulatory Authority is required by the Vendor, the Corporation or any of its Subsidiaries in connection with the execution and delivery of this Agreement, the consummation of the transactions contemplated hereby, or the performance by the Vendor of its obligations hereunder, other than (a) as set out on Schedule 4.6. or (b) in connection with the Leases. The Vendor further represents and warrants to the Purchaser (and acknowledges that the Purchaser is relying on the representations and warranties in completing the transactions herein) that, to the best of its knowledge: 4.7 Financial Statements and Other Information. (a) The Vendor has delivered to the Purchaser (i) true, correct and complete copies of the Corporation's audited consolidated balance sheets as of June 28, 1997 and June 29, 1996 and the related audited consolidated statements of income and retained earnings and cash flows (together with the auditors' reports thereon) for each of the year ended June 28, 1997 and the nine month period from September 30, 1995 to June 29, 1996, together with notes to such financial statements (the "Audited Financial Statements"), and (ii) true, correct and complete copies of the Corporation's unaudited balance sheets for the months of July 1997, August 1997 and September 20, 1997 and the related unaudited consolidated statements of income and retained earnings and cash flows for the months of July 1997, August 1997 and September 20, 1997 (the "Interim Financial Statements"). The Audited Financial Statements and Interim Financial Statements are herein collectively referred to as the "Financial Statements". (b) The Financial Statements have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods covered thereby and the balance sheets included therein present fairly, in all material respects, as of their respective dates the financial condition of the Corporation (subject, in the case of Interim Financial Statements, to year-end adjustments that may be required upon audit, which adjustments will not result in a Material Adverse Change on such financial statements). All material liabilities and obligations, whether absolute, accrued, contingent or otherwise, whether direct or indirect, and whether due or to become due, which existed at the date of such Financial Statements have been disclosed in the balance sheets included in the Financial Statements or in notes to the Financial Statements to the extent such liabilities were required, under generally accepted accounting principles, to be so disclosed. 4.8 No Undisclosed Liabilities. (a) Except as set forth on Schedule 4.8, the Corporation has no liability or obligations of any nature (contingent or otherwise), other than those disclosed or reflected in the Financial Statements or incurred in the ordinary course of business consistent with past practice since the date of the last Interim Financial Statements. (b) Since June 28, 1997, no Material Adverse Change in the Corporation and its Subsidiaries taken as a whole has occurred, except as disclosed in Schedule 4.8 or as set forth in the Interim Financial Statements. 4.9 Events Subsequent to June 28, 1997. Since June 28, 1997, neither the Corporation nor any of its Subsidiaries has: (a) except as disclosed in Schedule 4.9, transferred, assigned, sold or otherwise disposed of any of the assets shown in the Audited Financial Statements or cancelled any debts or claims except in each case in the ordinary and normal course of business, consistent with past practice (which ordinary and normal course of business includes the operation of stores owned by the Corporation or any of its Subsidiaries); (b) incurred or assumed any obligation or liability (direct or indirect, absolute or contingent), except those listed in Schedule 4.8 hereto and except unsecured current obligations and liabilities incurred in the ordinary and normal course of business consistent with past practice; (c) except as disclosed in Schedule 4.9, or in connection with a Corporate Reorganization, issued or sold any shares in its capital or any warrants, bonds, debentures or other corporate securities or issued, granted or delivered any right, option or other commitment for the issuance of any such other securities; (d) except as disclosed in Schedule 4.9, or in connection with a Corporate Reorganization, declared or made any payment of any dividend or other distribution in respect of any shares in its capital or purchased or redeemed any such shares thereof or effected any subdivision, consolidation or reclassification of any such shares or repaid in full or in part any shareholder loans; (e) suffered any extraordinary loss, or waived any rights of substantial value, or entered into any commitment or transaction not in the ordinary and normal course of business where such loss, rights, commitment or transaction is or would be material in relation to the Corporation and its Subsidiaries, taken as whole; (f) except as disclosed in Schedule 4.9, amended or changed or taken any action to amend or change its constating documents or by-laws; (g) except as disclosed in Schedule 4.9, made any general wage or salary, or fee increases in respect of personnel it employs or consultants it retains other than regularly scheduled increases in the ordinary course of business, consistent with past practice; (h) except as disclosed in Schedule 4.9 hereto, mortgaged, pledged, subjected to lien, granted a security interest in or otherwise encumbered any of its assets or property, whether tangible or intangible; (i) except as disclosed in Schedule 4.9, loaned or agreed to lend money to any Person including a shareholder; (j) except for inventory, equipment or assets acquired in the ordinary course of business consistent with past practice, made any acquisition of all or any part of the assets, properties, capital stock or business of any other Person; and (k) authorized or agreed or otherwise become committed to any of the foregoing. 4.10 Taxes. Except for matters that would not result in a Material Adverse Change: (a) all tax returns (including, without limitation, income, profit, franchise, sales and use, excise, severance, occupation, property, gross receipts, payroll and withholding tax returns and information returns), deposits and reports (all such returns, deposits and reports herein referred to collectively as "Tax Returns" or singularly as a "Tax Return") of or relating to any Canadian or United States federal, state, provincial, local or foreign or other governmental tax (all, together with any penalties, additions to tax, fines and interest thereon or related thereto, herein referred to collectively as "Taxes" or singularly as a "Tax") that are required to be filed or deposited for, by, on behalf of or with respect to the Corporation or its Subsidiaries, including, but not limited to, those relating to the income, business, operations or property of the Corporation and its Subsidiaries and those which include or should include the Corporation and its Subsidiaries, have been filed or deposited duly and on a timely basis and all Taxes and filing fees shown to be due and payable on such Tax Returns have been paid in full and all instalments, assessments and charges of which the Corporation or its Subsidiaries is aware or has received notice and which are due and payable by the Corporation or its Subsidiaries have been paid in full. Schedule 4.10 sets forth all the jurisdictions in which Tax Returns have been filed; (b) all such Tax Returns and the information and data contained therein have been properly and accurately compiled and completed, fairly present the information purported to be shown therein and reflect all liabilities for Taxes for the periods covered by such Tax Returns; (c) no such Tax Return or designation contains any misstatement or omits any statement that should have been included therein; (d) except as disclosed on Schedule 4.10, none of such Tax Returns are now under audit or examination by any Canadian or United States federal, state, provincial, local or foreign or other Governmental Entity and there are no agreements, waivers or other arrangements providing for an extension of time with respect to the assessment or collection of any Tax or deficiency of any nature against the Corporation of its Subsidiaries or with respect to any such Tax Return or any suits or other judicial or administrative actions, proceedings, investigations or claims now pending or threatened against the Corporation or any of its Subsidiaries with respect to any Tax, governmental charge or assessment; (e) all Taxes imposed on the Corporation or its Subsidiaries (or for which the Corporation or any of its Subsidiaries is or could be liable, whether to any Governmental Entity or to other Persons (as, for example, under tax allocation agreements)), which are due and payable on or before the Closing Date, have been or will be paid when due and the latest balance sheet included in the Financial Statements reflects and includes adequate provisions for the payment in full of any and all Taxes for which the Corporation or any of its Subsidiaries is or could be liable, whether to any Governmental Entity or to other Persons (as, for example, under tax allocation agreements), not yet due for any and all periods up to and including the date of such balance sheet; (f) all Taxes for which the Corporation or any of its Subsidiaries is or could be liable, whether to any Governmental Entity or to other Persons (as, for example, under tax allocation agreements), for periods beginning after September 30, 1995 through the Closing Date have been, or will be, paid when due or adequately reserved against on the books of the Corporation or any of its Subsidiaries on or prior to the Closing Date and an amount of cash equal to the amount of such reserve will have been set aside for payment of such Taxes; (g) the Corporation and its Subsidiaries have withheld and remitted all amounts required to be withheld and have paid such amounts due to the appropriate authority on a timely basis and in the form required under the appropriate legislation; and (h) there is no tax Lien, whether imposed by any Canadian or United States federal, state, provincial, county, local or foreign taxing authority, outstanding and filed against the assets, properties or business of the Corporation or any of its Subsidiaries. Except as disclosed in Schedule 4.10, neither the Corporation nor any of its Subsidiaries has agreed to make nor is required to make any adjustment under Section 481(a) of the Code, by reason of a change in accounting method or otherwise. Neither the Corporation nor any of its Subsidiaries is a party to any agreement, contract, arrangement or plan that has resulted, or as a consequence of the transactions contemplated hereby will result, separately or in the aggregate, in the payment of any excess parachute payments within the meaning of Section 28OG of the Code. 4.11 Litigation. Except as set forth in Schedule 4.11, there is no action, suit, investigation, arbitration or proceeding in progress, pending or threatened against or affecting the Corporation or any of its Subsidiaries or any of their respective properties or rights (including no charge of patent, copyright and/or trademark infringement) and, no circumstances have occurred which would give rise to any such action, suit, investigation, arbitration or proceeding. Except as set forth in Schedule 4.11, there is not presently outstanding against the Corporation or any of its Subsidiaries any judgment, decree, injunction, award or order of any court, commission, agency or arbitrator. 4.12 Compliance with Laws. Except as disclosed in Schedule 4.12, the Corporation and its Subsidiaries have complied in all material respects with all applicable laws (including rules, regulations, codes, plans, injunctions, judgments, orders, decrees, rulings and charges thereunder) of any Governmental Entity relating to or affecting the operation, conduct or ownership of their respective properties or business. No investigation or review by any Governmental Entity (including without limitation any audit or similar review by any federal, foreign, state, provincial or local taxing authority) with respect to the Corporation or a Subsidiary thereto is pending or threatened. Neither the Corporation nor any of its Subsidiaries is in default with respect to any order, writ, injunction or decree known to or served upon the Corporation or any of its Subsidiaries of any Governmental Entity, which default would result in a Material Adverse Change. 4.13 Franchise Law Compliance. Except as disclosed in Schedule 4.13, the Corporation or its Subsidiaries have made all filings under all federal, state and foreign franchise laws and regulations as required by reason of the business conducted by the Corporation and its Subsidiaries, in order to offer, sell and maintain franchises and have all licenses, authorizations and approvals necessary to offer, sell and maintain franchises in the jurisdictions in which they have offered or sold franchises. The offering circulars and disclosure statements filed and distributed by the Corporation or its Subsidiaries (the most recent of which has been supplied to the Purchaser) comply in all material respects with applicable federal, state and foreign laws and regulations and neither the Corporation nor any of its Subsidiaries or Affiliates has received any notice that such offering circulars or disclosure statements are not in compliance with any such applicable laws and regulations. 4.14 Customers, Suppliers, Franchisees and Brokers. Except as set forth in Schedule 4.14, (i) the relationships of the Corporation and its Subsidiaries with their respective customers, suppliers, franchisees and brokers have been entered into and are conducted at arms length in the ordinary course of business and (ii) since June 30, 1997, no material customer, franchisee, broker or material supplier of the Corporation or any of its Subsidiaries has cancelled or otherwise terminated, or threatened in writing to cancel or otherwise terminate, its relationships with the Corporation or such Subsidiary. Except as set forth in Schedule 4.14, none of the franchisees of the Corporation or its Subsidiaries have formed or organized any association relating to the franchisees' relationship with the Corporation or its Subsidiaries. No association or group listed on Schedule 4.14 has commenced, or has threatened to commence, any action, suit, proceeding, claims or legal, administrative or arbitral proceedings or investigations against the Corporation or any of its Subsidiaries or Affiliates, or alleged that any offering circular or disclosure statement issued by the Corporation or such Subsidiaries is false or misleading. 4.15 Title to and Condition of Property. Neither the Corporation nor any of its Subsidiaries owns any real property. Except as set forth on Schedule 4.15, all leases, subleases, licences and other agreements (both verbal and written), under which the Corporation, any Subsidiary thereof or any franchisee occupies real property (collectively, the "Leases") are valid, binding and in full force and effect, no written notice of default or termination thereunder has been received by the Vendor, Corporation, any Subsidiary or any franchisee, all rents and other sums and other charges payable by the lessee thereunder are current (or no more than 60 days past due) and no termination event either conditional or uncured default on the part of the Corporation or any Subsidiary or any franchisee exists thereunder. 4.16 Environmental Matters. Except as disclosed on Schedule 4.16: (a) the Corporation and each of its Subsidiaries have been in the past and are now in compliance with all Environmental Laws and all material requirements of applicable permits, licenses, approvals and other authorizations under applicable Environmental Laws; (b) neither the Corporation nor any of its Subsidiaries is, or has received any notification that it may be subject to any material claim, action, obligation, proceeding, investigation or evaluation directly or indirectly relating to any of their current or past operations, or those of any predecessor, or any by-product thereof, of any of their current or formerly owned, leased or operated properties, or those of any predecessor that could directly or indirectly result in the incurrence of any material Environmental Liabilities and Costs by the Corporation or any of its Subsidiaries; (c) neither the Corporation nor any of its Subsidiaries has entered into any agreement with any Governmental Entity or other Person by which responsibility was assumed for, either directly or indirectly, the conduct of any Remedial Action or the incurrence of any other Environmental Liabilities; provided, however, that the representation and warranty in this subsection (c) does not limit or otherwise modify any other representations and warranties in this Agreement, including without limitation, the representation and warranty in Section 4.16(b) concerning the existence of any claims, actions, obligations, proceedings, investigations or evaluations in connection with any such leases; (d) the Corporation and its Subsidiaries have all permits, orders or approvals as required by the Environmental Laws that are necessary for the conduct of its business as now conducted, all of which are listed on Schedule 4.16 ("Environmental Permits"). All Environmental Permits are listed on Schedule 4.16 and are in full force and effect; (e) no portion of the real property leased by the Corporation or any of its Subsidiaries with respect to its business is listed or proposed for listing on any Contaminated Site List; (f) there has been no Release of any Hazardous Materials on or underlying any real property owned or leased by the Corporation or any of its Subsidiaries; (g) no asbestos-containing materials or polychlorinated biphenyls ("PCBs") are present on or underlying a real property owned or leased by the Corporation or any of its Subsidiaries; (h) there are no underground storage tanks for Hazardous Materials, active or abandoned, at any property now owned or leased by the Corporation and its Subsidiaries; and (i) neither the Corporation nor any of its Subsidiaries is aware of any Environmental Remediation Costs which are required in connection with the operation of their respective businesses. 4.17 Material Contracts. Except as set out in Schedule 4.17 and any other Schedules to this Agreement and except as otherwise disclosed in the Financial Statements, neither the Corporation nor any of its Subsidiaries is a party to or bound by any contract or commitment either now or in the future, whether oral or written (other than contracts for insurance or Leases) which are material to their respective businesses (the "Material Contracts"). For the purposes of this Agreement, any contract or commitment, (i) the performance of which will extend over a period of one year or more or (ii) involving the payment to or from the Corporation or any of its Subsidiaries of more than $100,000 shall be deemed to be a Material Contract. All such Material Contracts are in good standing and in full force and effect without amendment thereto and the Corporation or a Subsidiary thereto is entitled to all benefits thereunder. Neither the execution nor delivery of, nor consummation of the transactions contemplated under this Agreement shall constitute a breach or default under, or give rise to a right of cancellation by any party to any of the Material Contracts. 4.18 Employment Contracts. Except as set out in Schedule 4.18, there are no contracts of employment entered into with any employee employed by the Corporation or any of its Subsidiaries. Neither the Corporation nor any of its Subsidiaries has entered into any agreements with its employees with respect to the payment of any amounts resulting from a termination of employment. The transactions contemplated by this Agreement will not give rise to any severance or other payments to any employee, consultant, director, officer or agent of the Corporation or any of its Subsidiaries. Except as set out in Schedule 4.18, neither the Corporation nor any of its Subsidiaries is subject to any collective bargaining agreement and there are no efforts to unionize any employees employed by the Corporation or its Subsidiaries. 4.19 Employee Plans. Schedule 4.19 sets out all the employee benefit plans, programs and arrangements maintained or contributed to by The Second Cup Ltd., the Vendor, the Corporation or any of its Subsidiaries for the benefit of any current or former employee, officer or director of the Corporation or any of its Subsidiaries (the "Employee Plans"). Except as set forth in Schedule 4.19 and except as would not, individually or in the aggregate, have a Material Adverse Effect: (i) none of the Employee Plans is a multi-employer plan within the meaning of ERISA; (ii) none of the Employee Plans promises or provides retiree medical or life insurance benefits to any person; (iii) each Employee Plan intended to be qualified under Section 401(a) of the United States Internal Revenue Code of 1986, as amended (the "Code") has received a favourable determination letter from the IRS that it is so qualified and nothing has occurred since the date of such letter that could reasonably be expected to affect the qualified status of such Employee Plan; (iv) each Employee Plan has been operated in all material respects in accordance with its terms and the requirements of applicable law; (v) neither the Corporation nor any Subsidiary has incurred any direct or indirect liability arising out of, by operation of Title IV of ERISA in connection with the termination of, or withdrawal from any Employee Plan, or other retirement plan or arrangement, and no fact or event exist that could reasonably be expected to give rise to any such liability; and (vi) the Corporation and the Subsidiaries have not incurred any liability under, and have complied in all respects with, the Worker Adjustment Retraining Notification Act ("WARN") and no fact exist that could give rise to liability under such Act. Except as set forth in Schedule 4.19, the aggregate accumulated benefit obligations of each Employee Plan subject to Title IV of ERISA (as at the date of the most recent actuarial valuation prepared for such Employee Plan) do not exceed the fair market value of the assets of such Employee Plan (as at the date of such valuation). 4.20 Brokerage Fees. No broker, finder or investment banker (other than First Marathon Securities Limited whose fees are paid by the Vendor) is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated hereby based upon arrangements made by or on behalf of the Vendor. 4.21 Intellectual Property. Schedule 4.21 contains an accurate and complete list of all material domestic and foreign patents, patent applications, trade names, trademarks, trade secrets, copyrights, service marks, trademark registrations and applications, service mark registrations and applications, and copyright registrations and applications owned (in whole or in part), licensed to any extent or used or anticipated to be used by the Corporation and its Subsidiaries in the conduct of their business, other than "shrink wrap" licenses to commonly available software (collectively, the "Intellectual Property"). The Corporation and its Subsidiaries either own all right, title and interest in and to, or possess the exclusive right to use, the Intellectual Property used in the conduct of their business (including, without limitation, the exclusive right to use and license the same (in the jurisdiction(s) where registered in the case of trademarks, service marks and copyrights)) and each item constituting part of the Intellectual Property in which the Corporation and its Subsidiaries has an ownership or license interest has been, to the extent indicated on Schedule 4.21, duly registered with, filed in or issued by, as the case may be, the United States Patent and Trademark Office or such other Governmental Entities as are indicated on Schedule 4.21 and such registrations, filings and issuances remain in full force and effect. No claim of infringement or misappropriation of patents, trademarks, trade names, service marks, copyrights or trade secrets of any other Person has been made nor threatened against the Corporation or its Subsidiaries and neither the Corporation nor any of its Subsidiaries is infringing or misappropriating any patents, trademarks, trade names, service marks, copyrights or trade secrets of any other Person. 4.22 Licenses. The Corporation and its Subsidiaries have all licenses, permits, consents and other governmental certificates, authorizations and approvals required by every federal, state, provincial, local and foreign Governmental Entity for the conduct of its business and the use of its properties as presently conducted or used including, without limitation, all licenses required under Environmental Laws and any federal, state, local or foreign law relating to public health and safety, or employee health and safety (collectively, "Licenses"). All of the Licenses are in full force and effect and no action or claim is pending nor is threatened to revoke or terminate any License or declare any License invalid in any material respect. The Corporation and its Subsidiaries have taken all necessary action to maintain such Licenses. 4.23 Competition. Except as set out in Schedule 4.23, and other than restrictions which may exist under any of the Leases, neither the Corporation nor any of its Subsidiaries is a party to any agreement which restricts the freedom of the Corporation or such Subsidiary to carry on its business as currently being carried on, including, without limitation, any contract or agreement which contains a covenant by the Corporation or any Subsidiary thereto not to compete in any line of business with any other Person. 4.24 Contracts with Non-Arm's Length Persons. Except as set forth in Schedule 4.24, there are no existing contracts or arrangements to which the Corporation or any of its Subsidiaries is a party in which the Vendor, any Affiliate of the Vendor, any director or officer of the Vendor, the Corporation or any of its Subsidiaries, or any other Person not dealing at arm's length (as that term is defined in the Code) with the Vendor, the Corporation, any of its Subsidiaries, or any director or officer of the Corporation or any of its Subsidiaries, or any of them, has an interest, whether directly or indirectly, other than such contracts or arrangements with terms based on fair market value in the ordinary course of business which are not material to the business of the Corporation or its Subsidiaries. ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE PURCHASER The Purchaser represents and warrants to the Vendor (and acknowledges that the Vendor is relying on the representations and warranties in completing the transactions herein) as follows: 5.1 Organization, Etc. The Purchaser is a corporation duly organized and validly existing under the laws of the State of Oregon and has all necessary corporate power, authority and capacity to conduct its business as it is now being conducted and to own, operate or lease the properties and assets it currently owns, operates or holds under lease. The Purchaser is duly qualified or licensed to do business and is in good standing as a foreign corporation in each jurisdiction where the character of its business or the nature of its properties makes such qualification or licensing necessary, except where the failure to so qualify or be licensed would not result in a Material Adverse Change 5.2 Subsidiaries. Schedule 5.2 contains a list of all Subsidiaries, partnerships, joint ventures and other entities in which the Purchaser has, directly or indirectly, any legal or beneficial interest or any right to acquire a legal or beneficial interest and indicates for each such Subsidiary, partnership, joint venture or other entity: (i) the percentage and type of equity securities of or other interest owned or controlled by the Purchaser; (ii) the jurisdiction of incorporation or organization; (iii) each jurisdiction in which it is qualified or licensed to conduct its business; and (iv) in the case of any joint venture, the identity of each other joint venture partner. The Purchaser is the direct owner, beneficially and of record, of all such equity securities or other interests listed as being owned by it, free and clear of all Liens. 5.3 Capitalization. The authorized, issued and outstanding capital stock of the Corporation is as set forth on Schedule 5.3. The Corporation does not hold any shares in its own capital. The designations, powers, preferences, rights, qualifications, limitations and restrictions in respect of each class and series of authorized capital stock of the Corporation are as set forth in the Corporation's articles of incorporation, and all such designations, powers, preferences, rights, qualifications, limitations and restrictions are valid, binding and enforceable and in accordance with all applicable laws. All outstanding shares of capital stock of the Corporation have been duly authorized and validly issued as fully paid and non-assessable. Except as set forth in Schedule 5.3, there are no outstanding options, warrants, convertible securities, calls, rights, commitments, pre-emptive rights or agreements or instruments or understandings of any character to which the Corporation is a party or by which the Corporation is bound, obligating the Corporation to issue, deliver or sell, or cause to be issued, delivered or sold, contingently or otherwise, additional shares of its capital stock or any securities or obligations convertible into or exchangeable for such shares or to grant, extend or enter into any such option, warrant, convertible security, call, right, commitment, pre-emptive right or agreement. There are no outstanding obligations, contingent or other, of the Corporation to purchase, redeem or otherwise acquire any shares of its capital stock. Except as set forth in Schedule 5.3, there are no voting trust agreements or other contracts, agreements, arrangements, commitments, plans or understandings restricting or otherwise relating to voting, dividend or other rights with respect to any of the capital stock of the Corporation. The shares of CPI Common Stock to be issued pursuant to Section 2.4 of this Agreement at the Effective Time will be duly authorized, and when issued pursuant to the Merger, will be validly issued as fully paid and nonassessable and will not have been issued in violation of any pre-emptive rights or of any federal or state law. 5.4 Authorization. The Purchaser has all necessary corporate power, authority and capacity to enter into this Agreement and each of the other agreements contemplated hereby, and to carry out its obligations under this Agreement and each of the other agreements contemplated hereby. The execution and delivery by the Purchaser of this Agreement, the consummation of the transactions contemplated hereby and the performance by the Purchaser of its obligations hereunder have been duly authorized by all necessary corporate action on the part of the Purchaser, subject to required regulatory approvals, to the extent any shall be required to effect the transactions contemplated by this Agreement, and the approval of the shareholders of the Purchaser. This Agreement has been duly executed and delivered by the Purchaser and constitutes a legal, valid and binding obligation of the Purchaser, enforceable against the Purchaser in accordance with its terms (except as the enforceability thereof may be limited by any applicable bankruptcy, insolvency or other laws affecting creditors' rights generally or by general principles of equity, regardless of whether such enforceability is considered in equity or at law). This Agreement and the transactions contemplated hereby have been unanimously approved by the board of directors of the Purchaser. 5.5 No Violation. The execution and delivery of this Agreement by the Purchaser does not, and the consummation by the Purchaser of the transactions contemplated hereby and compliance with the terms hereof will not, (a) conflict with, or result in any breach of any provision of the Purchaser's articles of incorporation or by-laws; (b) conflict with, or result in any material violation of or default or loss of any benefit under, any CPI License, grant, statute, law, rule or regulation, or any judgment, decree or order of any court or other governmental agency or instrumentality to which the Purchaser is a party or which any of their respective property is subject; (c) conflict with, or result in a breach or material violation of or default or loss of any benefit under, or accelerate the performance required by, the terms of any material agreement, contract, indenture or other instrument (other than, with respect to the CPI Leases, where such breaches, violations or defaults would not result in a Material Adverse Change) to which the Purchaser is a party or to which any of their respective property is subject, or constitute a default or loss of any right thereunder which, with the lapse of time or notice or both, might result in a default or loss of a right thereunder or the creation of any Lien upon any of the assets or properties of the Purchaser; or (d) result in any suspension, revocation, impairment, forfeiture or non-renewal of any CPI License. 5.6 Approvals. The execution and delivery of this Agreement by the Purchaser and the consummation of the transactions contemplated hereby will not require the consent, approval, order or authorization of any Governmental Entity or Regulatory Authority or any other Person under any statute, law, rule, regulation, permit, license, agreement, indenture or other instrument to which the Purchaser is a party or to which any of its property is subject, and no declaration, filing or registration with any Governmental Entity or Regulatory Authority is required by the Purchaser in connection with the execution and delivery of this Agreement, the consummation of the transactions contemplated hereby, or the performance by the Purchaser of its obligations hereunder, other than (a) the filing of the Nasdaq National Market System Notification Form for Listing of Additional Shares, (b) compliance with any applicable requirements under the Exchange Act, the U.S. Securities Act and foreign and state securities and "blue sky" laws, and the securities laws, regulations and policies of the provinces of Canada, as applicable, and (c) as set out on Schedule 5.6. The Purchaser further represents and warrants to the Vendor (and acknowledges that the Vendor is relying on the representations and warranties in completing the transactions herein) that, to the best of its knowledge: 5.7 Financial Statements and Other Information. (a) The audited balance sheet and any related notes and schedules included in the Purchaser's Annual Report on Form 10-KSB for the fiscal years ended December 31, 1996 and December 31, 1995 (the "CPI 10-KSBs") and the unaudited balance sheet and any related notes and schedules included in the Purchaser's Quarterly Report on Form 10-QSB for the quarters ended March 31, 1997 and June 30, 1997 (the "CPI 10-QSBs") each presents fairly the consolidated financial position of the Purchaser as of its respective date and the other financial statements included in the CPI 10-KSBs and the CPI 10-QSBs present fairly the results of operations or other information included therein of the Purchaser for the respective periods or as of the respective dates therein set forth, subject, where appropriate, to normal year end adjustments which are not material in amount or effect, in each case in accordance with generally accepted accounting principles consisting applied during the periods involved (except as otherwise stated therein). (b) Except as disclosed in Schedule 5.9, since December 31, 1996 (i) there has been no Material Adverse Change of or to the Purchaser, whether as a result of any legislative or regulatory change, revocation of any license or right to do business, fire, explosion, accident, casualty, labour trouble, flood, drought, riot, storm, condemnation or act of God or otherwise, and (ii) no fact or condition exists or is threatened in writing which could reasonably be anticipated to cause a Material Adverse Change in the future. 5.8 Compliance with Laws. The Purchaser has complied in all material respects with all applicable laws (including rules, regulations, codes, plans, injunctions, judgments, orders, decrees, rulings and charges thereunder) of any Governmental Entity relating to or affecting the operation, conduct or ownership of its properties or business. No investigation or review by any Governmental Entity (including without limitation any audit or similar review by any federal, foreign, state, provincial or local taxing authority) with respect to the Corporation or a Subsidiary is pending or, to the best knowledge of the Purchaser, threatened. The Purchaser is not in default with respect to any order, writ, injunction or decree known to or served upon the Purchaser of any Governmental Entity, which default would result in a Material Adverse Change. 5.9 No Undisclosed Liabilities. (a) Except as set forth on Schedule 5.9, the Purchaser has no liability or obligations of any nature (contingent or otherwise), other than those disclosed or reflected in the financial statements included in the CPI 10-QSBs or incurred in the ordinary course of business consistent with past practice since the date of the most recent 10-KSB filed with the U.S. Commission. (b) Since December 31, 1996, no Material Adverse Change of the Purchaser has occurred, other than those disclosed or reflected in the financial statements included in the CPI 10-QSBs or as disclosed in Schedule 5.9. 5.10 Events Subsequent to December 31, 1996. Since December 31, 1996, the Purchaser has not: (a) except as disclosed in Schedule 5.10, transferred, assigned, sold or otherwise disposed of any of the assets shown in the Audited Financial Statement or cancelled any debts or claims except in each case in the ordinary and normal course of business consistent with past practice; (b) incurred or assumed any obligation or liability (direct or contingent), except those listed in Schedule 5.9 hereto and except unsecured current obligations and liabilities incurred in the ordinary and normal course of business consistent with past practice; (c) except as disclosed in Schedule 5.10, issued or sold any shares in its capital or any warrants, bonds, debentures or other corporate securities or issued, granted or delivered any right, option or other commitment for the issuance of any such other securities; (d) except as disclosed in Schedule 5.10, declared or made any payment of any dividend or other distribution in respect of any shares in its capital or purchased or redeemed any such shares thereof or effected any subdivision, consolidation or reclassification of any such shares or repaid in full or in part any shareholder loans; (e) suffered any extraordinary loss, or waived any rights of substantial value, or entered into any commitment or transaction not in the ordinary and normal course of business where such loss, rights, commitment or transaction is or would be material in relation to the Purchaser, taken as whole; (f) except as disclosed in Schedule 5.10, amended or changed or taken any action to amend or change its constating documents or by-laws; (g) except as disclosed in Schedule 5.10, made any general wage or salary or fee increases in respect of personnel which it employs or consultants it retains other than regularly scheduled increases in the ordinary course of business, consistent with past practice; (h) except as disclosed in Schedule 5.10 hereto, mortgaged, pledged, subjected to lien, granted a security interest in or otherwise encumbered any of its assets or property, whether tangible or intangible; (i) except as disclosed in Schedule 5.10, loaned or agreed to lend money to any Person including a shareholder; (j) except for inventory, equipment or assets acquired in the ordinary course of business consistent with past practice and except as disclosed in Schedule 5.10, made any acquisition of all or any part of the assets, properties, capital stock or business of any other Person; and (k) authorized or agreed or otherwise become committed to any of the foregoing. 5.11 Taxes. Except for matters that would not result in a Material Adverse Change: (a) all tax returns (including, without limitation, income, profit, franchise, sales and use, excise, severance, occupation, property, gross receipts, payroll and withholding tax returns and information returns), deposits and reports (all such returns, deposits and reports herein referred to collectively as "Tax Returns" or singularly as a "Tax Return") of or relating to any Canadian or United States federal, state, provincial, local or foreign or other governmental tax (all, together with any penalties, additions to tax, fines and interest thereon or related thereto, herein referred to collectively as "Taxes" or singularly as a "Tax") that are required to be filed or deposited for, by, on behalf of or with respect to the Purchaser including, but not limited to, those relating to the income, business, operations or property of the Purchaser and those which include or should include the Purchaser, have been filed or deposited duly and on a timely basis and all Taxes and filing fees shown to be due and payable on such Tax Returns have been paid in full and all instalments, assessments and charges of which the Purchaser is aware or has received notice and which are due and payable by the Purchaser have been paid in full. Schedule 5.11 sets forth all the jurisdictions in which Tax Returns have been filed; (b) all such Tax Returns and the information and data contained therein have been properly and accurately compiled and completed, fairly present the information purported to be shown therein and reflect all liabilities for Taxes for the periods covered by such Tax Returns; (c) no such Tax Return or designation contains any misstatement or omits any statement that should have been included therein; (d) except as disclosed on Schedule 5.11, none of such Tax Returns are now under audit or examination by any Canadian or United States federal, state, provincial, local or foreign or other Governmental Entity and there are no agreements, waivers or other arrangements providing for an extension of time with respect to the assessment or collection of any Tax or deficiency of any nature against the Purchaser or with respect to any such Tax Return or any suits or other judicial or administrative actions, proceedings, investigations or claims now pending or threatened against the Purchaser with respect to any Tax, governmental charge or assessment; (e) all Taxes imposed on the Purchaser (or for which the Purchaser is or could be liable, whether to any Governmental Entity or to other Persons (as, for example, under tax allocation agreements)), which are due and payable on or before the Closing Date, have been or will be paid when due and the latest balance sheet included in the Financial Statements reflects and includes adequate provisions for the payment in full of any and all Taxes for which the Purchaser is or could be liable, whether to any Governmental Entity or to other Persons (as, for example, under tax allocation agreements), not yet due for any and all periods up to and including the date of such balance sheet; (f) all Taxes for which the Purchaser is or could be liable, whether to any Governmental Entity or to other Persons (as, for example, under tax allocation agreements), for periods beginning after December 31, 1995 through the Closing Date have been, or will be, paid when due or adequately reserved against on the books of the Purchaser on or prior to the Closing Date and an amount of cash equal to the amount of such reserve will have been set aside for payment of such Taxes; (g) the Purchaser has withheld and remitted all amounts required to be withheld and have paid such amounts due to the appropriate authority on a timely basis and in the form required under the appropriate legislation; and (h) there is no tax Lien, whether imposed by any Canadian or United States federal, state, provincial, county, local or foreign taxing authority, outstanding and filed against the assets, properties or business of the Purchaser. Except as disclosed in Schedule 5.11, the Purchaser has not agreed to make nor is required to make any adjustment under Section 481(a) of the Code, by reason of a change in accounting method or otherwise. The Purchaser is not a party to any agreement, contract, arrangement or plan that has resulted, or as a consequence of the transactions contemplated hereby will result, separately or in the aggregate, in the payment of any excess parachute payments within the meaning of Section 28OG of the Code. 5.12 Litigation. Except as set forth in Schedule 5.12, there is no action, suit, investigation, arbitration or proceeding in progress, pending or threatened against or affecting the Purchaser or any of its properties or rights (including no charge of patent, copyright and/or trademark infringement) and no circumstances have occurred which would give rise to any such action, suit, investigation, arbitration or proceeding. Except as set forth in Schedule 5.12, there is not presently outstanding against the Purchaser any judgment, decree, injunction, award or order of any court, commission, agency or arbitrator. 5.13 Title to and Condition of Property. Except as set out in Schedule 5.13, the Purchaser does not own any real property. The Purchaser has good and marketable title to such owned real property. Except as set forth on Schedule 5.13, all leases, subleases, licences and other agreements (both verbal and written) under which the Purchaser occupies real property (collectively, the "CPI Leases") are valid, binding and in full force and effect, no written notice of default or termination thereunder has been received by the Purchaser, all rents and other sums and other charges payable by the lessee thereunder are current (or no more than 60 days past due) and no termination event either conditional or uncured default on the part of the Purchaser, exists thereunder. 5.14 Environmental Matters. Except as disclosed on Schedule 5.14: (a) the Purchaser has been in the past and is now in compliance with all Environmental Laws and all material requirements of applicable permits, licenses, approvals and other authorizations under applicable Environmental Laws; (b) the Purchaser is not, and has not received any notification that it may be subject to any material claim, action, obligation, proceeding, investigation or evaluation directly or indirectly relating to any of their current or past operations, or those of any predecessor, or any by-product thereof, of any of their current or formerly owned, leased or operated properties, or those of any predecessor that could directly or indirectly result in the incurrence of any material Environmental Liabilities and Costs by the Purchaser; (c) the Purchaser has not entered into any agreement with any Governmental Entity or other Person by which responsibility was assumed for, either directly or indirectly, the conduct of any Remedial Action or the incurrence of any other Environmental Liabilities; provided, however, that the representation and warranty in this subsection (c) does not limit or otherwise modify any other representations and warranties in this Agreement, including without limitation, the representation and warranty in Section 5.14(b) concerning the existence of any claims, actions, obligations, proceedings, investigations or evaluations in connection with any such leases; (d) the Purchaser has all Environmental Permits required by the Environmental Laws that are necessary for the conduct of its business as now conducted, all of which are listed on Schedule 5.14. All Environmental Permits are listed on Schedule 5.14 and are in full force and effect; (e) no portion of the real property owned or leased by the Purchaser with respect to its business is listed or proposed for listing on any Contaminated Site List; (f) there has been no Release of any Hazardous Materials on or underlying any real property owned or leased by the Purchaser; (g) no asbestos-containing materials or PCBs are present on or underlying a real property owned or leased by the Purchaser; (h) there are no underground storage tanks for Hazardous Materials, active or abandoned, at any property now owned or leased by the Purchaser; and (i) the Purchaser is not aware of any Environmental Remediation Costs which are required in connection with the operation of their respective businesses. 5.15 CPI Material Contracts. Except as set out in Schedule 5.15 and any other Schedules to this Agreement, the Purchaser is not a party to or bound by any contract or commitment either now or in the future, whether oral or written (other than contracts for insurance or CPI Leases) which are material to its business (the "CPI Material Contracts"). For the purposes of this Agreement, any contract or commitment, (i) the performance of which will extend over a period of one year or more or (ii) involving the payment to or from the Purchaser of more than $50,000, shall be deemed to be a CPI Material Contract. All such CPI Material Contracts are in good standing and in full force and effect without amendment thereto and the Purchaser is entitled to all benefits thereunder. Neither the execution nor delivery of, nor consummation of the transactions contemplated under this Agreement shall constitute a breach or default or give rise to a right of cancellation by any party to any of the CPI Material Contracts. 5.16 Employment Contracts. Except as set out in Schedule 5.16, there are no contracts of employment entered into with any employee employed by the Purchaser. The Purchaser has not entered into any agreements with its employees with respect to the payment of any amounts resulting from a termination of employment. The transactions contemplated by this Agreement will not give rise to any severance or other payments to any employee, consultant, director, officer or agent of the Corporation or any of its Subsidiaries. Except as set out in Schedule 5.16, the Purchaser is not subject to any collective bargaining agreement and there are no efforts to unionize any employees employed by the Purchaser. 5.17 Employee Plans. Schedule 5.17 sets out all the employee benefit plans, programs and arrangements maintained or contributed to by the Purchaser for the benefit of any current or former employee, officer or director of the Purchaser (the "CPI Employee Plans"). Except as set forth in Schedule 5.17 and except as would not, individually or in the aggregate, result in a Material Adverse Change: (i) none of the CPI Employee Plans is a multi-employer plan within the meaning of ERISA; (ii) none of the CPI Employee Plans promises or provides retiree medical or life insurance benefits to any person; (iii) each CPI Employee Plan intended to be qualified under Section 401(a) of the United States Internal Revenue Code of 1986, as amended (the "Code") has received a favourable determination letter from the IRS that it is so qualified and nothing has occurred since the date of such letter that could reasonably be expected to affect the qualified status of such Employee Plan; (iv) each CPI Employee Plan has been operated in all material respects in accordance with its terms and the requirements of applicable law; (v) the Purchaser has not incurred any direct or indirect liability arising out of, by operation of Title IV of ERISA in connection with the termination of, or withdrawal from any CPI Employee Plan, or other retirement plan or arrangement, and no fact or event exist that could reasonably be expected to give rise to any such liability; and (vi) the Purchaser has not incurred any liability under, and has complied in all respects with, the Worker Adjustment Retraining Notification Act ("WARN") and no fact exist that could give rise to liability under such Act. Except as set forth in Schedule 5.17, the aggregate accumulated benefit obligations of each CPI Employee Plan subject to Title IV of ERISA (as at the date of the most recent actuarial valuation prepared for such CPI Employee Plan) do not exceed the fair market value of the assets of such CPI Employee Plan (as at the date of such valuation). 5.18 Intellectual Property. Schedule 5.18 contains an accurate and complete list of all material domestic and foreign patents, patent applications, trade names, trademarks, trade secrets, copyrights, service marks, trademark registrations and applications, service mark registrations and applications, and copyright registrations and applications owned (in whole or in part), licensed to any extent or used or anticipated to be used by the Purchaser in the conduct of his business except for "shrink wrap" licenses of commonly available software (collectively, the "CPI Intellectual Property"). The Purchaser owns all right, title and interest in and to, or possesses the exclusive right to use, the CPI Intellectual Property used in the conduct of its business (including, without limitation, the exclusive right to use and license the same (in the jurisdiction(s) where registered in the case of trademarks, service marks and copyrights)) and each item constituting part of the CPI Intellectual Property in which the Purchaser has an ownership or license interest has been, to the extent indicated on Schedule 5.18, duly registered with, filed in or issued by, as the case may be, the United States Patent and Trademark Office or such other Governmental Entities as are indicated on Schedule 5.18 and such registrations, filings and issuances remain in full force and effect. No claim of infringement or misappropriation of patents, trademarks, trade names, service marks, copyrights or trade secrets of any other Person has been made nor threatened against the Purchaser and the Purchaser is not infringing or misappropriating any patents, trademarks, trade names, service marks, copyrights or trade secrets of any other Person. 5.19 Licenses. The Purchaser has all licenses, permits, consents and other governmental certificates, authorizations and approvals required by every federal, state, provincial, local and foreign Governmental Entity for the conduct of its business and the use of its properties as presently conducted or used including, without limitation, all licenses required under Environmental Laws and any federal, state, local or foreign law relating to public health and safety, or employee health and safety (collectively, "CPI Licenses"). All of the CPI Licenses are in full force and effect and no action or claim is pending nor threatened to revoke or terminate any CPI License or declare any CPI License invalid in any material respect. The Purchaser has taken all necessary action to maintain such CPI Licenses. 5.20 Competition. Except as set out in Schedule 5.20, and other than restrictions which may exist under any of the CPI Leases, the Purchaser is not a party to any agreement which restricts the freedom of the Purchaser to carry on its business as currently being carried on, including, without limitation, any contract or agreement which contains a covenant by the Purchaser thereto not to compete in any line of business with any other Person. 5.21 Brokerage Fees .21 Brokerage Fees .21 Brokerage Fees. No broker, finder or investment banker (other than Black & Company whose fees are paid by the Purchaser) is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated herein based upon arrangements made by or on behalf of the Purchaser. 5.22 Outstanding Options. Schedule 5.22 contains an accurate and complete list of all outstanding options to acquire shares in the capital of the Purchaser held by individuals who are, as at the date hereof, or previously were employees of the Purchaser. Schedule 5.22 sets out the date of grant, the exercise price, the expiry date, the vesting date and the number of options held by each such employee. 5.23 Contracts with Non-Arm's Length Persons. Except as set forth in Schedule 5.23, there are no existing contracts or arrangements to which the Purchaser is a party in which any director or officer of the Purchaser, or any other Person not dealing at arm's length (as that term is defined in the Code) with the Purchaser has an interest, whether directly or indirectly, other than such contracts or arrangements with terms based on fair market value in the ordinary course of business which are not material to the business of the Purchaser. 5.24 Provision for Store Closures. The provision made by the Purchaser for the closure of the stores set out on Schedule 7.6 is adequate and sufficient to provide for all lease termination costs, operating losses and any other costs associated with the closure of such stores. 5.25 Coffee Plantation Acquisition. The parties acknowledge that all of the retail coffee stores operated by the Purchaser in the state of Arizona (collectively, the "Coffee Plantation Business") were acquired from a wholly owned Subsidiary of Vendor, pursuant to an Assets Purchase Agreement, dated April 21, 1997. With respect to all of the representations, warranties and covenants made by the Purchaser in this Agreement, neither the existence of, nor the failure to disclose the existence of, any fact, condition, circumstance, liability, default, obligation or loss arising out of or relating to the operation of the Coffee Plantation Business prior to May 21, 1997 shall constitute a breach by the Purchaser of this Agreement. ARTICLE VI COVENANTS OF THE VENDOR 6.1 Conduct of the Corporation and its Subsidiaries. From the date of the Acquisition Agreement until the Closing Date, the Vendor has caused and shall cause the businesses of the Corporation and its Subsidiaries to be conducted, in all material respects, in the usual and ordinary course. Without limiting the generality of the foregoing, from the date of the Acquisition Agreement until the Closing Date, except as contemplated hereby, without the written consent of the Purchaser, the Vendor shall not permit either the Corporation or any of its Subsidiaries to: (a) amend its articles of incorporation or by-laws, other than in connection with a Corporate Reorganization; (b) (i) enter into any written contract, agreement, plan or arrangement concerning any director, officer, employee or consultant of the Corporation or a Subsidiary thereto that provides for the making of any payments, the acceleration of vesting of any benefit or right or any other entitlement contingent upon (A) the closing of the transactions contemplated by this Agreement or (B) the termination of employment after the closing of the transactions contemplated by this Agreement; or (vii) enter into or amend any employment agreements (oral or written) to increase the compensation payable or to become payable by it to any of its employees or consultants or otherwise materially alter its employment relationship with any officer, director, employee or consultant over the amount payable as of the date of the Acquisition Agreement; (c) other than in connection with a Corporate Reorganization, (i) purchase, acquire, issue, deliver, sell or authorize the issuance, delivery or sale of any shares of its capital stock of any class or any securities convertible into or exchangeable for, or rights, warrants or options to acquire, any such shares of its capital stock or convertible or exchangeable securities; (ii) make any changes in its capital structure; (iii) amend any stock option, warrant, retirement, deferred compensation, employment, termination or other agreement, trust fund or arrangement for the benefit of any director, officer, consultant or employee of the Corporation or any of its Subsidiaries; or (iv) enter into any agreement or understanding or take any preliminary action with respect to the matters referred to in clause (i), (ii) or (iii) of this paragraph (c); (d) permit any individual employed by the Corporation or any of its Subsidiaries as of the date of this Agreement to be granted options to acquire shares in the capital of The Second Cup Ltd., the Vendor, the Corporation or any of its Subsidiaries; (e) incur any additional interest bearing indebtedness for borrowed money (including by way of guarantee or the issuance and sale of debt securities or rights to acquire debt securities), or incur any additional indebtedness to an Affiliate, or incur any account payable except in the ordinary course of business, or enter into or modify any contract, agreement, commitment or arrangement with respect to the foregoing; (f) other than sales in the ordinary course of business and consistent with present practice (i) sell, lease or otherwise dispose of any of its assets (a) material, individually or in the aggregate, to the business, results of operations or financial condition of the Corporation or any of its Subsidiaries, or (b) to its Affiliates (other than dividends or pursuant to a Corporate Reorganization); or (ii) enter into, or consent to the entering into of, any agreement granting a preferential right to sell, lease or otherwise dispose of any of such assets; (g) (i) enter into any new line of business; (ii) merge or consolidate with another entity, or acquire or agree to merge or acquire by purchasing a substantial portion of the assets of, or in any other manner, any business or Person, other than pursuant to a Corporate Reorganization; or (iii) make any investment in any Person; (h) take any action, other than reasonable and usual actions in the ordinary course of business and consistent with past practice, with respect to its accounting policies or procedures; (i) agree or commit to do any of the foregoing; and (j) enter into any agreement or perform any act which might interfere with or be inconsistent with the successful completion of the transactions contemplated by this Agreement. 6.2 Shareholder Meeting. The Vendor will cooperate in a reasonable manner with the Purchaser in the preparation of any filings which the Purchaser may be required to make under the Exchange Act and in the preparation of the Proxy Statement and Registration Statement with respect to any information about The Second Cup Ltd., the Vendor, the Corporation and its Subsidiaries which the Purchaser reasonably requests in connection with the preparation of such filings and statements. 6.3 Compliance with Obligations. Prior to the Closing Date, the Vendor shall cause the Corporation and its Subsidiaries to comply with (a) all applicable federal, state, provincial, local and foreign laws, rules and regulations of Canada and the United States, (b) all agreements and obligations, including its articles of incorporation and by-laws, respectively, by which it, its properties or its assets may be bound, (c) all decrees, orders, writs, injunctions, judgments, statutes, rules and regulations applicable to it, its properties or its assets, and (d) all of their obligations and covenants contained in this Agreement. 6.4 Maintenance of Cash in Account. Unless otherwise adjusted in accordance with Section 8.11 of this Agreement, the Vendor shall ensure that the Corporation and its Subsidiaries have not less than $2,500,000 consolidated in cash in their bank accounts on the Closing Date, after payment of all of their expenses in connection with this Agreement and the transactions contemplated hereby and that neither the Corporation nor any of its Subsidiaries shall have any interest bearing indebtedness for borrowed money (short or long term) or any indebtedness to an Affiliate on the Closing Date. 6.5 Loan to Purchaser. Unless otherwise adjusted in accordance with Section 8.11 of this Agreement, the Vendor shall, or shall cause one of its Subsidiaries to, make available to the Purchaser as at the Closing Date a loan facility (the "Loan") in the maximum principal amount of four million dollars which shall bear the following terms: (i) the maximum term of the Loan shall be five years; (ii) the Loan shall be subordinate to existing bank credit facilities of the Purchaser (which facilities are disclosed on Schedule 5.15 to this Agreement); (iii) the Loan shall be subordinate to future bank credit facilities made available to the Purchaser if such subordination is approved by the board of directors of the Purchaser; (iv) the Loan shall bear interest at such rate as is commercially available for loans of a similar nature; and (v) there shall be no prepayment penalty. The Vendor, or one of its Subsidiaries, shall enter into a definitive loan agreement with the Purchaser which includes the terms set out in this Section 6.5 and such other terms as are customary for similar loan agreements. 6.6 Exclusivity Obligations. The Vendor agrees that during the period from the date of the Acquisition Agreement until the earlier of the Closing Date and the termination of this Agreement pursuant to its terms, the Vendor, its corporate Affiliates, the directors, officers and employees of the Vendor and its Affiliates and their respective legal, financial and other advisors shall not enter into any letter of intent or other acquisition agreement with any Person concerning a transaction related to the acquisition (whether by stock purchase, merger, assets acquisition or otherwise, directly or indirectly) of any United States retail coffee business without the agreement of the Purchaser. In clarification of the foregoing, during this period, the Vendor shall not be precluded from soliciting and engaging in discussions with any person concerning possible transactions related to the United States retail coffee business provided that the Purchaser is advised of the name of such person contemporaneously with any substantive discussions (unless the Vendor is bound by confidentiality obligations from releasing such name to the Purchaser). 6.7 Maintenance of Nasdaq Listing. For at least 18 months from and after the Closing Date, the Vendor shall use its best efforts not to, and shall use its best efforts to cause the Purchaser not to, take any action to delist the shares of CPI Common Stock from the Nasdaq Stock Market; provided, however, that the foregoing shall not preclude the Purchaser from entering into a transaction pursuant to which the holders of CPI Common Stock receive cash and/or securities listed on the New York Stock Exchange, the Nasdaq Stock Market or The Toronto Stock Exchange; and provided further that "best efforts" shall not, in any event, include an obligation to invest any capital in the Purchaser. ARTICLE VII COVENANTS OF THE PURCHASER 7.1 Conduct of the Purchaser. From the date of the Acquisition Agreement until the Closing Date, the Purchaser has conducted and shall conduct its business, in all material respects, in the usual and ordinary course. Without limiting the generality of the foregoing, from the date of the Acquisition Agreement until the Closing Date, except as contemplated hereby, without the written consent of the Vendor, the Purchaser shall not: (a) amend its articles of incorporation or by-laws, except as required to consummate the transactions contemplated hereby; (b) (i) enter into any written contract, agreement, plan or arrangement concerning any director, officer, employee or consultant of the Purchaser that provides for the making of any payments, the acceleration of vesting of any benefit or right or any other entitlement contingent upon (A) the closing of the transactions contemplated by this Agreement or (B) the termination of employment after the closing of the transactions contemplated by this Agreement; or (ii) enter into or amend any employment agreements (oral or written) to increase the compensation payable or to become payable by it to any of its employees or consultants or otherwise materially alter its employment relationship with any officer, director, employee or consultant over the amount payable as of the date of the Acquisition Agreement. (c) (i) purchase, acquire, issue, deliver, sell or authorize the issuance, delivery or sale of any shares of its capital stock of any class (except for the issuance of common stock upon exercise of currently outstanding options or warrants or pursuant to the currently existing Employee Stock Purchase Plan) or any securities convertible into or exchangeable for, or rights, warrants or options to acquire, any such shares of its capital stock or convertible or exchangeable securities; (ii) make any changes in its capital structure; (iii) amend any stock option, warrant, retirement, deferred compensation, employment, termination, or other agreement, trust fund, or arrangement for the benefit of any director, officer, consultant or employee of the Purchaser; or (iv) enter into any agreement or understanding or take any preliminary action with respect to the matters referred to in clause (i) or (ii) of this paragraph (c); (d) (i) declare, set aside, make or pay any dividend or other distribution payable in cash, stock, property or otherwise to holders of its capital stock; (ii) split, combine or reclassify any of its capital stock or propose or authorize the issuance of any other securities in respect of or in lieu of or in substitution for any shares of its or their capital stock; (iii) repurchase, redeem or otherwise acquire any shares of its capital stock of any class or any securities convertible into or exchangeable for, or rights, warrants or options to acquire, any such shares of its capital stock or convertible or exchangeable securities; or (iv) take any preliminary action with respect thereto; (e) incur any additional interest bearing indebtedness for borrowed money, except to the extent permitted under its existing line of credit up to $400,000 (including by way of guarantee or the issuance and sale of debt securities or rights to acquire debt securities), or incur any indebtedness to an Affiliate, or incur any account payable except in the ordinary course of business, or enter into or modify any contract, agreement, commitment or arrangement with respect to the foregoing; (f) other than sales in the ordinary course of business and consistent with past practice or the divestiture of the assets related to those stores set out in Schedule 7.6, (i) sell, lease or otherwise dispose of any of its assets having a book or market value in excess of $50,000 individually or $100,000 in the aggregate or that are otherwise material, individually or in the aggregate, to the business, results of operations or financial condition of the Purchaser; or (ii) enter into, or consent to the entering into of, any agreement granting a preferential right to sell, lease or otherwise dispose of any of such assets; (g) (i) enter into any new line of business; (ii) incur or commit to any capital expenditures, obligations or liabilities in connection therewith other than capital expenditures, obligations or liabilities that in the ordinary course of business or individually do not exceed $75,000 and in the aggregate do not exceed $200,000 other than capital expenditures disclosed on Schedule 7.1; (iii) merge or consolidate with another entity, or acquire or agree to merge or acquire by purchasing a substantial portion of the assets of, or in any other manner, any business or Person; (iv) make any investment in any Person; (v) increase the retail prices of any coffee beverages or whole bean goods that it sells, other than in the normal course of business. The parties agree to act reasonably and in good faith in connection with this Section 7.1(g)(v); (h) take any action, other than reasonable and usual actions in the ordinary course of business and consistent with past practice, with respect to its accounting policies or procedures; (i) agree or commit to do any of the foregoing; and (j) enter into any agreement or perform any act which might interfere with or be inconsistent with the successful completion of the transactions contemplated by this Agreement. 7.2 Compliance with Obligations. Prior to the Closing Date, the Purchaser shall comply with (a) all applicable federal, state, provincial, local and foreign laws, rules and regulations of Canada and the United States, (b) all agreements and obligations, including its articles of incorporation and by-laws, respectively, by which it, its properties or its assets may be bound, (c) all decrees, orders, writs, injunctions, judgments, statutes, rules and regulations applicable to it, its properties or its assets, and (d) all of its obligations and covenants contained in this Agreement. 7.3 Orders and Rulings. The Purchaser shall use its best efforts to obtain from applicable securities regulatory authorities such orders and rulings as may be required so that the shares of the CPI Common Stock to be issued to the Vendor pursuant to this Agreement will be freely tradeable in the United States, subject only to the restrictions imposed by Rule 145 under the U.S. Securities Act and the anti-fraud provisions under applicable laws. 7.4 Shareholder Meeting. The Purchaser shall cause a meeting of its shareholders to be duly called and held as promptly as practicable for the purpose of obtaining shareholder approval, as and to the extent required by applicable federal or state laws, regulations, or rules of the transactions contemplated by this Agreement and, if requested by the Vendor, for a new stock option plan. In connection with such meeting, the Purchaser will use its best efforts to, and will direct its financial advisor to, solicit from its shareholders proxies in favor of any required shareholder approval in connection with this Agreement and the transactions contemplated hereby and shall take all other action necessary or advisable to secure the vote or consent of its shareholders required by the law of Oregon to obtain such approvals and will otherwise comply with all legal requirements applicable to such meeting. 7.5 Proxy Statement; Registration Statement. As promptly as practicable after the execution of this Agreement, the Purchaser shall (i) prepare and file with the U.S. Commission and with any other appropriate regulatory authority in all jurisdictions where the same is required and will mail to its shareholders, and other appropriate Persons as required by applicable law, as promptly as practicable, the Proxy Statement and all other materials for the CPI Meeting in such form and content as is reasonably acceptable to the Vendor and its counsel and (ii) prepare and file with the U.S. Commission a registration statement (together with all amendments thereto, the "Registration Statement") in which the Proxy Statement shall be included, in connection with the registration under the U.S. Securities Act of the shares of the CPI Common Stock to be issued at the Closing Date to the Vendor and any shares of CPI Common Stock issuable upon the exercise of options, (unless an exemption from registration under the U.S. Securities Act is available), and all such shares shall be freely tradeable in the United States, subject only to the restrictions imposed by Rule 145 promulgated under the U.S. Securities Act and the anti-fraud provisions under applicable laws and (iii) if required by the Vendor, prepare a registration statement in connection with the issuance of options to acquire shares of CPI Common Stock to employees of the Purchaser following the Closing to be filed with the U.S. Commission on the Closing Date. The Proxy Statement shall include the recommendation of the board of directors of the Purchaser in favour of this Agreement and the transactions contemplated hereby. 7.6 Store Closings. Forthwith following the execution of this Agreement, the Purchaser shall use all commercially reasonable efforts to negotiate the closure or sale of its stores set out in Schedule 7.6. 7.7 Delivery of Audited Financial Statements. The Purchaser shall deliver to the Vendor audited financial statements for its fiscal year ending December 31, 1997 on the earlier of two Business Days prior to the Closing Date and February 27, 1998. 7.8 Exclusivity Obligations. The Purchaser agrees that during the period from the date of the Acquisition Agreement until the earlier of the Closing Date and the termination of this Agreement pursuant to its terms, the Purchaser, the directors, officers and employees of the Purchaser, and their respective legal, financial and other advisors shall not solicit or negotiate (or continue any such negotiations) with any Person (other than the Vendor) for the sale of more than 10% of the CPI Common Stock (other than (i) shares of CPI Common Stock traded on the Nasdaq Stock Market or (ii) shares of CPI Common Stock issued upon the exercise of stock options) or the sale of assets of the Purchaser (other than non-intellectual property assets located outside of Oregon and Arizona) outside of the ordinary course of business or the merger, amalgamation or other form of business combination involving the Purchaser or any of its shares of CPI Common Stock or assets or provide any confidential information to any Person other than the Vendor or its representatives in connection with any of the foregoing. 7.9 Coffee Bean International, Inc. The Purchaser may seek to extend the terms of its supply agreement with Coffee Bean International, Inc. dated February 17, 1997 which expires on November 30, 1997 (the "CBI Agreement"), provided, however, that the terms of any such extension shall be substantially the same as those contained in the CBI Agreement and shall provide for the full and final termination thereof on or before the later of May 31, 1998 and 60 days immediately following the Closing Date. 7.10 Nasdaq Listing. The Purchaser shall use its best efforts, subject to the constraints imposed by Sections 5.10 and 7.1 of this Agreement, to maintain the listing of the CPI Common Stock on the Nasdaq National Market. ARTICLE VIII COVENANTS OF THE PURCHASER AND THE VENDOR 8.1 Access to Information; Confidentiality. (a) From the date of the Acquisition Agreement to the Closing Date, to the extent it is required for the purposes of the preparation of the Proxy Statement and the Registration Statement, the Purchaser shall (and shall cause its officers, directors, employees, auditors and agents to) afford the officers, employees and agents of the Vendor (the "Vendor's Representatives") reasonable access at all reasonable times to its officers, employees, agents, properties, offices, plants and other facilities, books and records and shall furnish the Vendor's Representatives with all financial, operating and other data and information as may be reasonably requested. (b) From the date of the Acquisition Agreement to the Closing Date, to the extent it is required for the purposes of the preparation of the Proxy Statement and the Registration Statement, the Vendor shall (and shall cause the Corporation and its Subsidiaries and their officers, directors, employees, auditors and agents to) afford the officers, employees and agents of the Purchaser (the "Purchaser's Representatives") reasonable access at all reasonable times to its officers, employees, agents, properties, offices, plants and other facilities, books and records of the Corporation and its Subsidiaries and shall furnish the Purchaser's Representatives with all financial, operating and other data and information relating to the Corporation and its Subsidiaries as may be reasonably requested. (c) The Purchaser shall furnish to the Vendor as promptly as practicable at each of the Purchaser's Financial Period Ends occurring from the date of the Acquisition Agreement to the Closing Date, a complete, internally prepared financial statements package (which shall include an income statement, balance sheet and statement of cash flows) for that particular Purchaser's Financial Period End as well as the standard weekly management reports prepared by the Purchaser (substantially in the form presented to the Vendor prior to the execution of this Agreement). The Vendor shall furnish to the Purchaser as promptly as practicable at each of the Vendor's Financial Period Ends occurring from the date of the Acquisition Agreement to the Closing Date, a complete, internally prepared financial statements package (which shall include an income statement, balance sheet and statement of cash flows) for that particular Vendor's Financial Period End. (d) All information obtained by the Purchaser or the Vendor pursuant to this Section 8.1 shall be kept confidential in accordance with the Confidentiality Agreement. 8.2 Notification of Certain Matters. The Purchaser shall give prompt notice to the Vendor, and the Vendor shall give prompt notice to the Purchaser, of (i) the occurrence or non-occurrence, of any event the occurrence or non-occurrence of which would be likely to cause (a) any representation or warranty contained in this Agreement to be untrue or inaccurate; or (b) any covenant, condition or agreement not to be complied with or satisfied; (ii) any failure of the Purchaser or the Vendor, as the case may be, to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder; (iii) subject to Section 6.1 and 7.1, any lease, sublease, licence or other agreement entered into by the Purchaser, the Corporation, any of the Corporation's Subsidiaries or franchisees to occupy real property after the date of the Acquisition Agreement and any amendment to any of the Leases or the CPI Leases; provided, however, that the delivery of any notice pursuant to this Section 8.2 shall not limit or otherwise affect the remedies available hereunder to the parties receiving such notice. The Purchaser shall give prompt notice to the Vendor of any price increases it makes. The Purchaser and the Vendor will promptly supplement or amend all of the Schedules and Exhibits hereto with respect to any matter hereafter arising which, if existing or occurring at the date of this Agreement, would have been required to be set forth or described in such Schedule and Exhibit hereto (or provide a certificate of an officer certifying to which Schedules and Exhibits do not need to be supplemented or amended pursuant to the terms of this Agreement) at the following times: (i) November 26, 1997; (ii) ten Business Days prior to the day of the CPI Meeting; and (iii) at the Closing. No supplement or amendment of a Schedule or Exhibit made pursuant to this Section shall be deemed to cure any breach of, affect or otherwise diminish any representation or warranty made in this Agreement unless the other party hereto specifically agrees thereto in writing. 8.3 Regulatory Approvals. Prior to the Closing Date, each party shall execute and file, or join in the execution and filing of, any application or other document that may be necessary in order to obtain the authorization, approval or consent of any Governmental Entity or Regulatory Authority which may be reasonably required, or that the other party may reasonably request, in connection with the consummation of the Merger. Each party shall use its commercially reasonable efforts to obtain all such authorizations, approvals and consents. 8.4 Actions Contrary to Stated Intent. Neither party shall, or shall permit any of its Subsidiaries to, take any action that would, or reasonably might be expected to, result in any of its representations and warranties set forth herein being or becoming untrue in any material respect, or in any of the conditions set forth in Article IX not being satisfied. 8.5 Certain Filings. The Purchaser and the Vendor shall cooperate with one another: (a) in determining whether any action by or in respect of, or filing with, any Governmental Entity or Regulatory Authority is required, or any actions, consents, approvals or waivers are required to be obtained from parties to any material contracts, in connection with the consummation of the transactions contemplated by this Agreement; and (b) in seeking any such actions, consents, approvals or waivers or making any such filings, furnishing information required in connection therewith and seeking to obtain in a timely manner any such actions, consents, approvals or waivers. 8.6 Public Announcements. The Purchaser and the Vendor will consult with each other before issuing any press release or making any public statement with respect to this Agreement and the transactions contemplated hereby and will not issue any such press release or make any such public statement without the prior consent of the other party, which shall not be unreasonably withheld; provided, however, that a party may, without the consent of the other party, issue such press release or make such public statement as may be required by law or by the Nasdaq Stock Market or The Toronto Stock Exchange if it has used all reasonable efforts to consult with the other party and to obtain such party's consent but has been unable to do so in a timely manner. 8.7 Satisfaction of Conditions Precedent. The Purchaser and the Vendor will use their best efforts to satisfy or cause to be satisfied all the conditions precedent that are set forth in Article IX, as applicable to each of them, and to cause the transactions contemplated by this Agreement to be consummated, and, without limiting the generality of the foregoing, to obtain all consents and authorizations of third parties and to make all filings with, and give all notices to, third parties that may be necessary or reasonably required on its part in order to effect the transactions contemplated hereby. Each of the Purchaser and the Vendor agrees to negotiate in good faith with respect to any additional agreement reasonably requested by another party hereto which such requesting party determines in good faith is necessary to effect the transactions contemplated hereby. 8.8 Brothers Escrow Agreement. The rights of the Corporation to be indemnified by Brothers Retail Corp. in connection with the settlement of various matters pursuant to the Brothers Stock Purchase Agreement and any rights of the Corporation to monies being held under the Brothers Escrow Agreement in connection with such settlements shall be held by the Corporation for the account of The Second Cup Ltd.; provided, however, that if the rights to indemnification relate to a settlement wherein costs or losses were incurred by the Corporation after the Closing Date, such rights to indemnification (and the monies to be recovered by the Corporation in connection therewith less any costs incurred in the collection of such monies) shall, to the extent of such costs or losses only, remain with the Corporation. The Purchaser acknowledges that the monies being held under the Brothers Escrow Agreement are not part of the assets of the Corporation being acquired by the Purchaser pursuant to this Agreement. Following the execution of this Agreement, the Corporation shall execute an irrevocable direction to Brothers Retail Corp. and Norwest Bank Colorado, N.A. directing Norwest Bank Colorado, N.A. to deliver any monies owing to the Corporation under the Brothers Escrow Agreement to The Second Cup Ltd. in accordance with the terms of this Section 8.8. 8.9 Number of Directors. The Vendor shall take all actions necessary to cause to be elected to the board of directors of the Purchaser for a period of one year from the Closing Date, three persons designated prior to the Closing Date by the Purchaser (the "Purchaser's Nominees"). The Vendor agrees to execute all documents and instruments reasonably requested by Purchaser with respect to this covenant. The Vendor shall be entitled to nominate to the board of directors of the Purchaser up to six directors (the "Vendor's Nominees"). The Proxy Statement shall provide that the board of directors of the Purchaser be fixed at up to nine and shall ask shareholders to nominate the Vendor's Nominees and the Purchaser's Nominees to the board of directors of the Purchaser effective upon the Closing of the transactions contemplated hereby. The Purchaser and the Vendor agree that it is desirable to have a representation of independent directors on the board of directors of the Purchaser. 8.10 Tax Cooperation. (a) The Purchaser and the Vendor shall cooperate fully, as and to the extent reasonably requested by the other party, in connection with the preparation and filing of Tax returns (including any report required pursuant to Section 368 of the Code and all treasury regulations promulgated thereunder), any audit, litigation or other proceeding with respect to Taxes. Such cooperation shall include the retention and (upon the other party's request) the provision of records and information which are reasonably relevant to any such audit, litigation or other proceeding and making employees available on a mutually convenient basis to provide additional information and explanation of any material provided hereunder. The Purchaser and the Vendor agree (i) to retain all books and records with respect to Tax matters pertinent to the Purchaser, the Corporation and its Subsidiaries relating to any Tax period before the Closing Date and to abide by all record retention agreements entered into with any taxing authority, and (ii) to give the other party reasonable written notice prior to destroying or discarding any such books and records. (b) The Purchaser and the Vendor further agree, upon request, to use all reasonable efforts to obtain any certificate or other document from any governmental authority or customer of the Purchaser, the Corporation or any of the Corporation's Subsidiaries or any other person as may be necessary to mitigate, reduce or eliminate any Tax that could be imposed (including but not limited to with respect to the transactions contemplated hereby). 8.11 Cash/Working Capital Adjustment. The parties acknowledge that the basis for the cash contribution to be made by the Corporation pursuant to Section 6.4 of this Agreement was predicated on an assessment as at the time of negotiations between the parties of the net indebtedness and the working capital position of the Purchaser (the "Cash Adjustment Base," which means current assets less current liabilities less long term debt and capital leases). In order to accommodate certain negative variances in the Cash Adjustment Base between the date of the Acquisition Agreement and the Closing Date, excluding changes resulting from the negotiations and consummation of this transaction, which shall be no greater than $1,250,000, the Vendor's obligations under Sections 6.4 and 6.5 of this Agreement shall be adjusted in the following circumstances as follows: If the Purchaser's Cash Adjustment Base as at the most current Purchaser's Financial Period End prior to the Closing Date is less than negative $5,300,000, the Vendor shall (i) decrease the amount of cash to be kept in the Corporation's bank account on the Closing Date in accordance with Section 6.4 on a dollar for dollar basis with the amount by which the Purchaser's Cash Adjustment Base (after adding back amounts paid or accrued by the Purchaser in connection with the negotiations and consummation of the transactions contemplated by this Agreement, which amounts shall be no greater than $1,250,000) is less than negative $5,300,000 and (ii) increase the maximum principal amount of the Loan to be made to the Purchaser at the Closing Date pursuant to Section 6.5 on a dollar for dollar basis (after adding back amounts paid or accrued by the Purchaser in connection with the negotiations and consummation of the transactions contemplated by this Agreement, which amounts shall be no greater than $1,250,000) with the amount by which the Purchaser's Cash Adjustment Base is less than negative $5,300,000. The parties acknowledge that the exclusion of transaction costs from the Working Capital Adjustment is to give effect to the Vendor's agreement to reimburse the Purchaser's expenses from the transactions contemplated by this Agreement, which expenses shall be no greater than $1,250,000. 8.12 Lease Consents. The Purchaser has been informed that the Vendor will not obtain consents or approval with respect to the Leases because there will be no effective change of control of the Corporation. A failure to obtain any required consents with respect to the Leases shall not constitute a breach of this Agreement, unless such failure results in a Material Adverse Change. 8.13 Coffee Supply. Subject to the full and final termination of the CBI Agreement pursuant to Section 7.9, the Purchaser and the Vendor agree that the production of coffee for the Purchaser shall be transferred to the Corporation's roasting facility at Castroville, California as soon as possible after the Closing Date, that such transfer shall be undertaken so as to ensure a smooth transition of production of Purchaser's coffee and that coffee of a quality equal or superior to that currently purchased by the Purchaser shall be produced at such facility on terms to be agreed upon by the parties at or prior to Closing. ARTICLE IX CONDITIONS OF CLOSING 9.1 Conditions to All Parties' Obligations. The obligations of all the parties to this Agreement to effect the transactions contemplated hereby shall be subject to the fulfilment or satisfaction, at or prior to the Closing Date (or such other date as provided in Section 10.1(f) and 10.1(g) hereof), of the following conditions or the mutual waiver by the parties: (a) Shareholder Approval. The Shareholders of Purchaser shall have at the CPI Meeting approved the transactions contemplated by this Agreement to the extent required by applicable federal or state laws, regulations, or rules. (b) Illegality or Legal Constraint. No temporary restraining order, preliminary or permanent injunction or other order or restraint issued by any court of competent jurisdiction in the United States or Canada, no statute, rule, regulation, order, decree, restraint or pronouncement by any Governmental Entity, and no other legal restraint or prohibition which would prevent or have the effect of preventing the consummation of the Merger shall have been issued or adopted or be in effect; provided, however, that the parties shall use their best efforts to cause any such injunction, restraint, decree, pronouncement or other order to be vacated or lifted. (c) Governmental Authorizations. All permits, approvals, filings and consents required or advisable to be obtained or made prior to the closing of the transactions contemplated by this Agreement under applicable Canadian law, federal laws of the United States or applicable laws of any state or foreign country having jurisdiction over the transactions contemplated herein shall have been obtained or made, as the case may be, on terms and conditions satisfactory to the Purchaser and the Vendor, acting reasonably, including without limitation approvals by the U.S. Commission and the Nasdaq Stock Market and all other applicable securities regulatory authorities having jurisdiction over the issuance of CPI Common Stock pursuant to the Merger (all such permits, approvals, filings, and consents and the lapse of all such waiting periods being referred to as the "Requisite Regulatory Approvals"), and all such Requisite Regulatory Approvals shall be in full force and effect. (d) Registration Statement. The Registration Statement shall have been declared effective by the U.S. Commission under the U.S. Securities Act. No stop order suspending the effectiveness of the registration statement shall have been issued by the U.S. Commission and no proceedings for that purpose shall have been initiated or, to the knowledge of the Purchaser or the Vendor, threatened by the U.S. Commission. 9.2 Conditions to the Obligations of the Purchaser to Effect the Merger. The obligations of the Purchaser under this Agreement to effect the transactions contemplated hereby are subject to the fulfilment or satisfaction, at or prior to the Closing Date, of the following conditions, unless waived by the Purchaser in its sole discretion: (a) Accuracy of Representations and Warranties. The representations and warranties of the Vendor set forth in Article III hereof shall be true and correct in all material respects as of the date when made and at and as of the Closing Date, except for such changes as are permitted by this Agreement and except to the extent a representation or warranty speaks only as of an earlier date; provided, however, that any inaccuracy of a representation or warranty in existence on the Closing Date, and which arose subsequent to the date of the Acquisition Agreement, shall not result in the non-satisfaction of this Section 9.2(a) unless any such inaccuracy or inaccuracies, either (i) individually or in the aggregate, results in a Material Adverse Change to the Corporation and its Subsidiaries, taken as a whole or (ii) are willful and intentional misrepresentations that constitute common law fraud. (b) Covenants and Agreements. The Vendor shall have duly performed and complied in all material respects with the covenants and agreements required by this Agreement to be performed by or complied with by it or the Corporation or a Subsidiary thereof prior to or at the Closing Date. (c) Consents. Any consent required for the consummation of the transactions contemplated by this Agreement under any Contract or License to which the Corporation or a Subsidiary thereof is a party shall have been obtained. (d) Opinion of Counsel. The Purchaser shall have received the opinion of Vendor's Counsel dated the Closing Date in the form attached as Exhibit 9.2 on or before the Closing Date. (e) Certificates of the Vendor. The Purchaser shall have received certificates of the Vendor, satisfactory in form and substance to the Purchaser, executed on behalf of the Vendor by its Chief Executive Officer or President, as to compliance with the matters set forth in paragraphs (a), (b), (c), (f) and (h) of this Section 9.2. (f) No Adverse Decision. There shall not be any action taken or threatened, or any statute, rule, regulation or order enacted, entered, threatened, or deemed applicable to the transactions contemplated hereby, by any foreign, Canadian or United States federal, provincial, state or local government or Governmental Entity or Regulatory Authority or court that, whether in connection with the grant of a Requisite Regulatory Approval, any agreement proposed by any foreign, Canadian or United States federal, state, local or provincial government or Governmental Entity or Regulatory Authority, or otherwise, which (i) requires or could reasonably be expected to require any divestiture by the Purchaser, the Corporation or any of its Subsidiaries of a portion of its business that the Purchaser in its reasonable judgment believes will result in a Material Adverse Change to the Purchaser or the Corporation or (ii) imposes any condition upon the Corporation or any of its Subsidiaries that in the Purchaser's reasonable judgment (x) would be materially burdensome to the Corporation and its Subsidiaries taken as a whole or (y) would materially increase the costs incurred or that could be incurred by the Purchaser as a result of consummating the transactions contemplated hereby. (g) Proceedings; Receipt of Documents. All corporate and other proceedings taken or required to be taken in connection with the transactions contemplated hereby and all documents incident thereto shall be reasonably satisfactory in form and substance to the Purchaser and the Purchaser's counsel, and Purchaser and Purchaser's counsel shall have received all such information and such counterpart originals or certified or other copies of such documents as the Purchaser or its counsel may reasonably request. (h) Adverse Change. From the date of the Acquisition Agreement through and including the Closing Date, neither the Corporation nor any of its Subsidiaries shall have suffered any Material Adverse Change (whether or not such change is described in any supplement to a Schedule hereto). (i) Approval of Vendor. The Vendor, as sole shareholder of the orporation, shall have approved the Merger in accordance with the DGCL. 9.3 Conditions to the Obligations of the Vendor to Effect the Merger. The obligations of the Vendor under this Agreement to effect the transactions contemplated hereby are subject to the fulfilment or satisfaction, at or prior to the Closing Date, of the following conditions, unless waived by the Vendor in its sole discretion: (a) Accuracy of Representations and Warranties. The representations and warranties of the Purchaser set forth in Article V hereof shall be true and correct in all material respects as of the date when made and at and as of the Closing Date, except to the extent a representation or warranty speaks only as of an earlier date and except for changes contemplated by this Agreement; provided, however, that any inaccuracy of a representation or warranty in existence on the Closing Date, and which arose subsequent to the date of the Acquisition Agreement, shall not result in the non-satisfaction of this Section 9.3(a) unless any such inaccuracy or inaccuracies, either (i) individually or in the aggregate, results in a Material Adverse Change to the Purchaser or (ii) are willful and intentional misrepresentations that constitute common law fraud. (b) Covenants and Agreements. The Purchaser shall have duly performed and complied, in all material respects, with the covenants and agreements required by this Agreement to be performed or complied with by it prior to or at the Closing Date. (c) Consents. Any consent required for the consummation of the transactions contemplated by this Agreement under any Contract or License to which the Purchaser is a party shall have been obtained. (d) Opinion of Counsel. The Vendor shall have received the opinion of Purchaser's Counsel dated the Closing Date in the form attached as Exhibit 9.3(d) on or before the Closing Date. (e) Certificates of the Purchaser. The Vendor shall have received a certificate of the Purchaser, satisfactory in form and substance to the Vendor, executed on behalf of the Purchaser by its Chief Executive Officer as to compliance with the matters set forth in paragraphs (a), (b), (c), (f) and (h) of this Section 9.3. (f) No Adverse Decision. There shall not be any action taken or threatened, or any statute, rule, regulation or order enacted, entered, threatened, or deemed applicable to the transactions contemplated hereby, by any foreign, Canadian or United States federal, provincial, state or local government or Governmental Entity or Regulatory Authority or court that, whether in connection with the grant of a Requisite Regulatory Approval, any agreement proposed by any foreign, Canadian or United States federal, state, local or provincial government or Governmental Entity or Regulatory Authority, or otherwise, which (i) requires or could reasonably be expected to require any divestiture by the Purchaser, the Corporation or any of its Subsidiaries of a portion of its business that the Vendor in its reasonable judgment believes will result in a Material Adverse Change to the Purchaser or the Corporation or (ii) imposes any condition upon the Purchaser that in the Vendor's reasonable judgment (x) would be materially burdensome to the Purchaser or (y) would materially increase the costs incurred or that could be incurred by the Purchaser as a result of consummating the transactions contemplated hereby. (g) Proceedings; Receipt of Documents. All corporate and other proceedings taken or required to be taken in connection with the transactions contemplated hereby and all documents incident thereto shall be reasonably satisfactory in form and substance to the Vendor and the Vendor's counsel, and the Vendor and the Vendor's counsel shall have received all such information and such counterpart originals or certified or other copies of such documents as the Vendor or its counsel may reasonably request. (h) Adverse Change. From the date of the Acquisition Agreement, through and including the Closing Date, the Purchaser shall not have suffered any Material Adverse Change (whether or not such change is described in any supplement to a Schedule hereto). The failure of the Purchaser to obtain on or prior to the Closing Date the written consent of the lessors, or the sublessors, as the case may be, under the CPI Leases set out on Schedule 9.3(h) to the transactions contemplated by this Agreement shall be deemed to be a Material Adverse Change in the Purchaser. Notwithstanding the preceding sentence and Section 10.3(b), if the Purchaser fails to obtain the written consent of a lessor or sublessor of a CPI Lease for a store in Arizona, the Purchaser shall only be required to pay the Vendor's Expenses if such failure results in a change or a development involving a prospective change which, alone or together with any other such change or development, has or would reasonably be expected to have a material adverse effect on the value of the assets or the financial condition, which includes the earnings and cash flow streams, of the Purchaser. (i) Voting Agreement. From the date hereof, through and including the date of the CPI Meeting, each of the Voting Agreements executed contemporaneously with this Agreement shall remain in full force and effect, unamended, in the form attached as Exhibit 9.3(i). (j) Nasdaq Listing. If the CPI Common Stock is trading on the Nasdaq National Market or the Nasdaq SmallCap Market at the time of Closing, the shares of CPI Common Stock to be issued to the Vendor pursuant to the terms of this Agreement shall have been approved for listing on the stock market on which the CPI Common Stock is so trading. (k) Officers and Directors. Alton McEwen, or such other person as the Vendor shall designate in its discretion if not Alton McEwen, shall have been appointed Chief Executive Officer of the Purchaser, following the CPI Meeting effective as of the Closing. The Vendor's Nominees shall have been elected to the board of directors of the Purchaser effective as of the Closing. (l) Financial Statements Unqualified. The audited financial statements of the Purchaser to be delivered to the Vendor pursuant to Section 7.8, shall be unqualified and shall not reflect any Material Adverse Change since the date of the interim financial statements dated June 30, 1997, except for the impact of the costs and expenses incurred as a result of the transactions contemplated by this Agreement, which costs shall be no more than $1,250,000. (m) Approval of Bank of America. The Purchaser shall have received the approval of Bank of America to this Agreement and the transactions contemplated hereby or, in the alternative, the Purchaser shall have provided the Vendor with evidence satisfactory to the Vendor that a financial institution comparable to Bank of America has committed to finance the Purchaser following the Closing and that such financing shall be on substantially the same terms as the financing arrangements currently in place with Bank of America with respect to principal amount, interest rate and term and shall include covenants that are commercially reasonable for loans of a similar nature; provided that Vendor shall have used its best efforts to assist Purchaser in obtaining such approval or alternative financing, as the case may be (which best efforts shall not, in any event, include an obligation to invest any capital in the Purchaser); and provided further that Vendor, pursuant to its obligations under Section 6.5 hereof, shall have agreed to enter into any subordination agreement reasonably requested by Bank of America, or such other financial institution, as the case may be. ARTICLE X TERMINATION, AMENDMENTS AND WAIVERS 10.1 Termination. This Agreement may be terminated at any time prior to the Closing Date: (a) by the mutual consent of the Purchaser and the Vendor; (b) by the Purchaser, if it is not in material breach of its obligations under this Agreement, and if (A) there has been a breach by the Vendor of any of its representations and warranties hereunder such that Section 9.2(a) will not be satisfied; or (B) there has been a willful breach on the part of the Vendor of any of its covenants or agreements contained in this Agreement such that the first sentence of Section 9.2(b) will not be satisfied, and, in both case (A) and case (B), such breach has not been cured within ten (10) days after notice to the Vendor; (c) by the Vendor, if it is not in material breach of its obligations under this Agreement, and if (A) there has been a breach by the Purchaser of any of its representations and warranties hereunder such that Section 9.3(a) will not be satisfied; or (B) there has been a willful breach on the part of the Purchaser of any of its covenants or agreement contained in this Agreement such that the first sentence of Section 9.3(b) will not be satisfied, and, in both case (A) and (B), such breach has not been cured within ten (10) days after notice to the Purchaser; (d) by the Purchaser, if, after the date of this Agreement, there shall have occurred a Material Adverse Change in the Corporation and its Subsidiaries taken as a whole; (e) by the Vendor if, after the date of this Agreement, there shall have occurred a Material Adverse Change in the Purchaser; (f) by the Purchaser, if, after the date of this Agreement, one or more of the conditions set out in Section 9.1 or 9.2 has not been fulfilled by the Closing Date; or (g) by the Vendor, if, after the date of this Agreement, one or more of the conditions set out in Section 9.1 or 9.3 has not been fulfilled by the Closing Date. Any termination of this Agreement under this Section 10.1 will be effective by the delivery of written notice by the terminating party to the other party hereto. 10.2 Effect of Termination. Except as provided in Sections 10.3, 10.4 and 10.5, in the event of the termination of this Agreement pursuant to Section 9.1, this Agreement shall forthwith become void, there shall be no liability on the part of the Purchaser or the Vendor or any of their respective corporate affiliates, officers or directors to the other and all rights and obligations of any party hereto shall cease; provided, however, that nothing herein shall relieve any party from liability for the wilful breach of any of its representations, warranties, covenants or agreements set forth in this Agreement. 10.3 Expenses. (a) Subject to paragraph (b) of this Section 10.3, all out-of-pocket cost and expenses, including, without limitation, fees and disbursements of counsel, financial advisers and accounting, incurred by the parties hereto shall be borne solely and entirely by the party which has incurred such costs and expenses (with respect to such party, its "Expenses"); provided, however, that all costs and expenses related to printing, filing and mailing the Registration Statement and Proxy Statement and all U.S. Commission and other regulatory filing fees incurred in connection with the Registration Statement and the Proxy Statement shall be borne solely by the Purchaser and all filing fees required under the HSR Act, if any, shall be borne equally between the Purchaser and the Vendor. (b) The Purchaser and the Vendor agree that if this Agreement is terminated pursuant to Section 10.1(d) or Section 10.1(e), then, the party who has suffered the Material Adverse Change shall pay to the other party that other party's Expenses incurred subsequent to September 16, 1997. Any payment required to be made pursuant to this Section 10.3(b) shall be made as promptly as practicable but not later than 10 Business Days after receipt by the party required to pay the Expenses of the statement setting forth the Expenses of the other party in reasonable detail and shall be made by wire transfer of immediately available funds to the account designated by the party entitled to payment of its Expenses. 10.4 Termination Fee. (a) Payment by Purchaser. Subject to Section 10.6, if this Agreement is terminated pursuant to Section 10.1(g) because the condition set out in Section 9.1(a) is not met (due to no failure of the Vendor), or because the Purchaser has failed to satisfy the condition set out in Section 9.3(a)(ii), 9.3(b), 9.3(d), 9.3(g), 9.3(k), 9.3(m) or, to the extent that the failure to satisfy the condition is not a result of a Material Adverse Change, 9.3(1), then the Purchaser shall pay to the Vendor a fee of $500,000 and the Vendor's Expenses incurred subsequent to September 16, 1997 (by wire transfer in immediately available funds) within 15 Business Days after delivery of the notice contemplated in Section 10.1. (b) Payment by Vendor. If this Agreement is terminated pursuant to Section 10.1(f) because the Vendor has failed to satisfy the condition set out in Section 9.2(a)(ii), 9.2(b), 9.2(d), 9.2(g), or 9.2(i) then the Vendor shall pay to the Purchaser a fee of $500,000 and the Purchaser's Expenses incurred subsequent to September 16, 1997 (by wire transfer in immediately available funds) within 15 Business Days after delivery of the notice contemplated in Section 10.1. A party shall not be entitled to receive any payment under this Section 10.4 if, at the time of delivery of the applicable notice of termination pursuant to Section 10.1, the party alleging a breach is in material breach of this Agreement. 10.5 Alternate Transaction Fee. Subject to Section 10.6, if on or before the Closing Date, an offer is publicly announced, received by the Purchaser, commenced or made with respect to the sale of more than 10% of the issued and outstanding shares of CPI Common Stock (other than (i) shares of CPI Common Stock traded on the Nasdaq National Market, and (ii) shares of CPI Common Stock issued upon the exercise of stock options) or the sale of the assets of the Purchaser (other than non-intellectual property assets of the Purchaser located outside of Oregon and Arizona) outside of the ordinary course of business or the merger, amalgamation, or other form of business combination with or involving the Purchaser, its assets or the shares of CPI Common Stock (the "Alternate Transaction") and the Alternate Transaction is thereafter completed on or before August 15, 1998 (whether or not on its original terms), and the Vendor continues to use its commercially reasonable best efforts to close the transactions contemplated by this Agreement after becoming aware of the Alternate Transaction, the Purchaser shall pay to the Vendor in consideration of its efforts a fee of $500,000. Notwithstanding the foregoing, the Vendor shall not be required to continue to use its commercially reasonable best efforts to close the transactions contemplated by this Agreement if the Purchaser is precluded from dealing with the Vendor or the Purchaser ceases to discuss or prepare for the closing of the transactions contemplated by this Agreement. 10.6 Maximum Payment by Purchaser. Notwithstanding the provisions set out in Sections 10.3, 10.4 and 10.5, the aggregate maximum amount that the Purchaser shall be required to pay for the Expenses and the fees contemplated by Section 10.4(a) and 10.5 shall in no event exceed $1,000,000 and, to the extent that the amount payable would otherwise exceed $1,000,000, the amount to be paid shall be $1,000,000. ARTICLE XI PROJECTIONS 11.1 Vendor's Acknowledgement. The Vendor acknowledges having received the projections attached to theDisclosure Letter. 11.2 Representation and Warranty of Purchaser. The Purchaser represents and warrants to the Vendor that the projections attached to the Disclosure Letter represent a reasonable, best efforts projection for the Purchaser, (excluding the expenses contemplated by this Agreement, which expenses shall be no greater than $1,250,000) based on all facts known by the Purchaser as at the date of the Disclosure Letter, for the 1998 calendar year. ARTICLE XII GENERAL PROVISIONS 12.1 Taking of Necessary Action. Subject to the terms and conditions of this Agreement, each of the parties hereto agrees, subject to applicable laws, to use all best efforts promptly to take or cause to be taken all action and promptly to do or cause to be done all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement. Without limiting the foregoing, the Vendor and the Purchaser shall use their commercially reasonable efforts to obtain and make all consents, approvals, assurances and filings of or with third parties and Governmental Entities necessary, or in the reasonable opinion of the Purchaser or the Vendor advisable for the consummation of the transactions contemplated by this Agreement. Each party shall cooperate with the other in good faith to help the other satisfy its obligations hereunder. 12.2 Employment Terms. The parties agree that Exhibit 12.2 sets out the terms of employment for Taylor H. Devine and Kenneth Ross following Closing. 12.3 Effect of Due Diligence. No investigation by or on behalf of the Purchaser into the business, operations, prospects, assets or condition (financial or otherwise) of the Corporation and its Subsidiaries shall diminish in any way the effect of any representations or warranties made by the Vendor in this Agreement or shall relieve the Vendor of any of its obligations under this Agreement. No investigation by or on behalf of the Vendor into the business, operations, prospects, assets or condition (financial or otherwise) of the Purchaser shall diminish in any way the effect of any representations or warranties made by the Purchaser in this Agreement or shall relieve the Purchaser of any of its obligations under this Agreement. 12.4 Successors and Assigns. This Agreement will inure to the benefit of and be binding upon the parties hereto and their respective successors and permitted assigns. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by either of the parties hereto without the prior written consent of the other party hereto. 12.5 Non-survival of Representations and Warranties. None of the representations, warranties and covenants made herein, or in any instrument delivered pursuant to this Agreement, shall survive the Closing Date or termination of this Agreement, except for the provisions of Sections 8.1(d) (which shall survive for a period of three years from the date of the Confidentiality Agreement), 6.7, 8.9 and 8.10 (each of which shall survive in accordance with their terms) and, 10.2, 10.3, 10.4, 10.5 and 10.6 each of which shall survive indefinitely. 12.6 Entire Agreement. This Agreement, together with the Schedules and Exhibits hereto and the Confidentiality Agreement constitute the entire agreement among the parties hereto with respect to the transactions contemplated hereby, and controls and supersedes any prior understandings, agreements or representations by or between the parties, written or oral with respect to the subject matter hereof. 12.7 Notices. All notices or other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered personally or sent by telefax communication, by recognized overnight courier marked for overnight delivery, or by registered or certified mail, postage prepaid, addressed as follows: (a) If to the Purchaser: c/o Coffee People, Inc. 15100 S.W. Koll Parkway, Suite J Beaverton, Oregon 97006 Attention: Kenneth B. Ross Fax: (503) 672-9013 with a copy to: Tonkon Torp LLP 1600 Pioneer Tower 888 S.W. Fifth Avenue Portland, Oregon 97204-2099 Attention: Ronald L. Greenman Fax: (503) 274-8779 (b) If to the Vendor: c/o The Second Cup Ltd. 175 Bloor Street East South Tower, Suite 801 Toronto, Ontario M4W 3R8 Attention: Michael Bregman Fax: (416) 975-9856 with a copy to: Goodman Phillips & Vineberg 250 Yonge Street Suite 2400 Toronto, Ontario M5B 2M6 Attention: David Matlow Fax: (416) 979-1234 or such other addresses as shall be furnished by like notice by such party. All such notices and communications shall, when telefaxed (immediately thereafter confirmed by telephone), be effective when telefaxed, or if sent by nationally recognized overnight courier service, be effective one Business Day after the same has been delivered to such courier service marked for overnight delivery, or, if mailed, be effective when received. 12.8 Applicable Law. This Agreement shall be governed by, and construed in accordance with, the internal laws of the State of Delaware, without reference to or application of any conflicts of laws principles. 12.9 Consent to Jurisdiction; Receipt of Process. Each party hereby consents to the jurisdiction of, and confers non-exclusive jurisdiction upon, any federal or state court located in the City of Portland, Oregon, and appropriate appellate courts therefrom, over any action, suit or proceeding arising out of or relating to this Agreement, or any of the transactions contemplated hereby. Each party hereby irrevocably waives, and agrees not to assert as a defense in any such action, suit or proceeding, any objection which it may now or hereafter have to venue of any such action, suit or proceeding brought in any such federal or state court and hereby irrevocably waives any claim that any such action, suit or proceeding brought in any such court or tribunal has been brought in an inconvenient forum. Process in any such action, suit or proceeding may be served on any party anywhere in the world, whether within or without the State of Oregon, provided that notice thereof is provided pursuant to provisions for notice under this Agreement. 12.10 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 12.11 Headings. The headings used in this Agreement are for convenience only and are not to be considered in construing or interpreting any term or provision of this Agreement. 12.12 Amendment. This Agreement may be amended by the parties hereto at any time prior to the Closing Date. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto. 12.13 Waiver. The failure of any party to enforce at any time any of the provisions of this Agreement or any of the rights of such party with respect thereto or to insist upon strict adherence to any term of this Agreement shall not be considered to be a waiver of such provision, right or term or in any way to effect the validity of this Agreement or deprive the applicable party of the right thereafter to insist upon strict adherence to that term or any term of this Agreement. The exercise by any party of any of the rights of such party provided by this Agreement shall not preclude or prejudice such party from exercising any other rights such party may have under this Agreement, irrespective or any previous action or proceeding taken by it hereunder. Any waiver by any party of the performance of any of the provisions of this Agreement shall be effective only if in writing and signed by a duly authorized representative of such party. IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by the duly authorized officers of the parties hereto as of the date first written above. THE SECOND CUP INC. By: /s/KA Welsh -------------------- Title: Secretary COFFEE PEOPLE, INC. By: /s/ Kenneth B. Ross --------------------- Title: Chief Financial Officer EX-23 6 AUDITOR'S CONSENT CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-KSB, into the Company's previously filed Registration Statement File Nos. 333-14531 and 333-18931. ARTHUR ANDERSEN LLP Portland, Oregon, May 4, 1998 EX-27 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COFFEE PEOPLE, INC. ANNUAL 1997 10-KSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1997 DEC-31-1997 2,545 0 227 0 632 3,786 12,438 5,100 17,023 4,312 0 0 0 14,563 (302) 17,023 20,422 20,422 10,071 10,071 11,364 5,500 383 (6,584) (208) (6,376) 0 0 0 (6,376) (1.96) (1.96)
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