-----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, WrgKH+EZkkSrbMx5Icv0Z9wGw2CAjU+GFwQiy26YiIK+aZzWXXOGxDKN8GFMl7I6 PmM1RqNxbSrn8L5oaJfOrA== 0000892569-99-002275.txt : 19990817 0000892569-99-002275.hdr.sgml : 19990817 ACCESSION NUMBER: 0000892569-99-002275 CONFORMED SUBMISSION TYPE: 10-QT PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIEDRICH COFFEE INC CENTRAL INDEX KEY: 0000947661 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-FOOD STORES [5400] IRS NUMBER: 330086628 STATE OF INCORPORATION: CA FISCAL YEAR END: 0127 FILING VALUES: FORM TYPE: 10-QT SEC ACT: SEC FILE NUMBER: 000-21203 FILM NUMBER: 99692670 BUSINESS ADDRESS: STREET 1: 2144 MICHELSON DRIVE STREET 2: STE A CITY: IRVINE STATE: CA ZIP: 9262682612 BUSINESS PHONE: 9492601600 MAIL ADDRESS: STREET 1: 2144 MICHELSON DRIVE CITY: IRVINE STATE: CA ZIP: 92612 10-QT 1 FORM 10-Q FOR THE QUARTER ENDED 6/30/99. 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------- FORM 10-Q [ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended _________ OR [X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from January 28, 1999 to June 30, 1999 COMMISSION FILE NUMBER 0-21203 DIEDRICH COFFEE, INC. (Exact name of registrant as specified in its charter) DELAWARE 33-0086628 ------------------------------ ------------------- (State or Other Jurisdiction of (IRS Employer Incorporation or Organization) Identification No.) 2144 MICHELSON DRIVE IRVINE, CALIFORNIA 92612 (Address of Principal Executive Offices including Zip Code) (949) 260-1600 (Registrant's Telephone Number including Area Code) ---------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] As of August 13, 1999, there were 12,603,538 shares of the registrant's common stock outstanding. ================================================================================ 2 DIEDRICH COFFEE, INC. INDEX
PART I - FINANCIAL INFORMATION PAGE NO. -------- Item 1. Financial Statements Condensed Balance Sheets...................................... 3 Condensed Statements of Operations............................ 4 Condensed Statements of Cash Flows............................ 5 Notes to Condensed Financial Statements....................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................................... 9 Item 3 Quantitative and Qualitative Disclosures About Market Risk.... 14 PART II - OTHER INFORMATION Item 1 Legal Proceedings............................................. 15 Item 4 Submission of Matters to a Vote of Security Holders........... 15 Item 5 Other Information............................................. 16 Item 6 Exhibits and Reports on Form 8-K.............................. 17 Signatures.................................................... 21
2 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS DIEDRICH COFFEE, INC. CONDENSED BALANCE SHEETS
ASSETS (Notes 3 and 4) JUNE 30, 1999 JANUARY 27, 1999 ------------- ---------------- Current Assets: Cash $ 552,124 $ 1,200,861 Accounts receivable 335,903 263,651 Note receivable 100,000 100,000 Inventories (Note 2) 1,432,249 1,279,436 Prepaid expenses 153,113 188,993 Income taxes receivable 17,686 17,686 ------------ ------------ Total current assets 2,591,075 3,050,627 Property and equipment, net 7,504,439 9,119,859 Costs in excess of net assets acquired, net 317,741 329,086 Note receivable 40,000 -- Other assets 1,329,185 236,880 ------------ ------------ Total assets $ 11,782,440 $ 12,736,452 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current installments of obligations under capital lease $ 169,488 $ 169,488 Current note payable (Note 3) 1,000,000 -- Accounts payable 1,978,325 1,415,067 Accrued compensation 900,565 970,034 Accrued expenses 886,903 1,039,097 Provision for store closings and restructuring costs 95,195 112,400 ------------ ------------ Total current liabilities 5,030,476 3,706,086 Obligation under capital lease - long term 239,049 283,106 Long term debt (Note 4) 2,500,000 2,500,000 Deferred rent 233,548 219,865 ------------ ------------ Total liabilities 8,003,073 6,709,057 ------------ ------------ Stockholders' Equity: (Note 5) Common stock 61,736 61,674 Additional paid-in capital 18,826,473 18,708,032 Accumulated deficit (15,108,842) (12,742,311) ------------ ------------ Total stockholders' equity 3,779,367 6,027,395 ------------ ------------ Commitments and contingencies Total liabilities and stockholders' equity $ 11,782,440 $ 12,736,452 ============ ============
See accompanying notes to condensed financial statements. 3 4 DIEDRICH COFFEE, INC. CONDENSED STATEMENTS OF OPERATIONS
Nine Weeks Thirteen Weeks Twenty-Two Weeks Twenty-Six Weeks Ended Ended Ended Ended June 30, 1999 July 29, 1998 June 30, 1999 July 29, 1998 ------------- ------------- ------------- ------------- Revenues: Retail $ 3,647,775 $ 5,343,789 $ 8,837,640 $ 10,628,849 Wholesale and other 557,196 685,726 1,415,604 1,324,027 Franchise revenue 58,883 -- 108,913 -- ----------- ----------- ------------ ------------ Total revenues 4,263,854 6,029,515 10,362,157 11,952,876 ----------- ----------- ------------ ------------ Cost and Expenses: Cost of sales and related occupancy costs 1,923,032 2,712,403 4,681,136 5,395,068 Store operating expenses 1,573,162 2,273,005 3,861,190 4,556,908 Other operating expenses 126,783 146,516 284,291 295,301 Depreciation and amortization 637,928 461,352 1,144,863 943,574 Provision for impairment reserve 798,551 -- 798,551 -- General and administrative expenses 788,732 1,113,530 1,645,999 2,088,378 ----------- ----------- ------------ ------------ Total 5,848,188 6,706,806 12,416,030 13,279,229 ----------- ----------- ------------ ------------ Operating loss (1,584,334) (677,291) (2,053,873) (1,326,353) Interest expense (186,840) (99,981) (282,937) (197,254) Interest and other income (expense) (9,557) 18,896 (8,960) 20,406 ----------- ----------- ------------ ------------ Loss before income taxes (1,780,731) (758,376) (2,345,770) (1,503,201) Income tax provision -- 2,890 2,800 3,690 ----------- ----------- ------------ ------------ Net loss $(1,780,731) $ (761,266) $ (2,348,570) $ (1,506,891) =========== =========== ============ ============ Basic net loss per share: $ (0.29) $ (0.13) $ (0.38) $ (0.26) =========== =========== ============ ============ Diluted net loss per share: $ (0.29) $ (0.13) $ (0.38) $ (0.26) =========== =========== ============ ============ Weighted average shares outstanding - basic and diluted 6,173,538 5,941,650 6,172,932 5,871,320 =========== =========== ============ ============
See accompanying notes to condensed financial statements. 4 5 DIEDRICH COFFEE, INC. CONDENSED STATEMENTS OF CASH FLOWS
TWENTY-TWO WEEKS TWENTY-SIX WEEKS ENDED JUNE 30, ENDED JULY 29, 1999 1998 ---------------- ---------------- Cash flows from operating activities: Net loss $(2,348,570) $(1,506,891) Adjustments to reconcile net loss to cash used in operating activities: Depreciation and amortization 1,211,971 943,574 Impairment Charge 798,551 -- Accretion of non-cash interest 100,542 -- Changes in assets and liabilities: Accounts receivable (72,252) (150,512) Inventories (152,813) 111,186 Prepaid expenses 35,880 (78,241) Income taxes receivable -- 23,165 Other assets (44,965) 8,053 Accounts payable 563,258 (251,659) Accrued compensation (69,469) 112,649 Accrued expenses and restructuring charge (158,054) (59,079) Deferred rent 13,683 19,512 ----------- ----------- Net cash used in operating activities (122,238) (828,243) ----------- ----------- Cash flows from investing activities: Capital expenditures for property and equipment (402,676) (811,542) Payment of acquisition costs (1,039,766) -- Issuance of note receivable (40,000) -- ----------- ----------- Net cash used in investing activities (1,482,442) (811,542) ----------- ----------- Cash flows from financing activities: Proceeds from issuance of common stock, net fees paid -- 1,275,000 Proceeds from issuance of note payable 1,000,000 -- Payment on capital lease obligation (44,057) (41,751) ----------- ----------- Net cash provided by financing activities 955,943 1,233,249 ----------- ----------- Net decrease in cash (648,737) (406,536) ----------- ----------- Cash at beginning of period 1,200,861 1,408,161 ----------- ----------- Cash at end of period $ 552,124 $ 1,001,625 =========== =========== Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 133,313 $ 150,000 =========== =========== Income taxes $ 2,800 $ 3,690 =========== =========== Non-cash transactions Equipment purchased under capital lease $ -- $ 54,127 =========== ===========
See accompanying notes to condensed financial statements 5 6 DIEDRICH COFFEE, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS JUNE 30, 1999 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CHANGE IN FISCAL YEAR In an effort to align its fiscal year with that of Coffee People, Inc. ("Coffee People"), which Diedrich Coffee, Inc. (the "Company") acquired on July 7, 1999 (note 7), the Company changed its year end from a fiscal year ending on the Wednesday nearest January 31 to a fiscal year ending on the Wednesday nearest June 30. Accordingly, the transition period condensed statements of operations and cash flows for the nine and twenty-two weeks ended June 30, 1999 are not necessarily comparable to the accompanying thirteen and twenty-six weeks ended July 29, 1998 nor are they indicative of a full fiscal year's results of operations. BASIS OF PRESENTATION The condensed financial statements of the Company have been prepared in accordance with generally accepted accounting principles for interim financial information. In the opinion of management, all adjustments (consisting of normal, recurring adjustments and accruals) considered necessary for a fair presentation of the Company's financial position at June 30,1999 and the results of operations and cash flows for both the nine and twenty-two weeks ended June 30, 1999 and for both the thirteen and twenty-six weeks ended July 29, 1998 have been included. Results for the interim periods are not necessarily indicative of the results for an entire year. This information should be read in conjunction with the financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended January 27, 1999. 2. INVENTORIES Inventories consist of the following:
JUNE 30, 1999 JANUARY 27, 1999 ------------- ---------------- Green coffee (raw materials) $574,745 $412,103 Roasted coffee (finished goods) 157,115 115,979 Accessory and specialty items 258,889 275,386 Other food, beverage and supplies 441,500 475,968 ---------- ---------- $1,432,249 $1,279,436 ========== ==========
3. NOTE PAYABLE On April 6, 1999, the Company entered into a $1,000,000 loan agreement and security agreement with Amre Youness, a former director of the Company. All outstanding principal was due and payable on April 6, 2000. The loan was secured by the assets of the Company with interest accruing and paid monthly at the prime rate plus 3%. In connection with the loan agreement, the Company issued warrants to Mr. Youness to purchase 70,000 shares of the Company's common stock at a price of $5.625 per share. The fair value of the warrants is estimated to be $100,000. In connection with the acquisition (note 7), the loan was repaid on July 8, 1999. As a result of the early repayment, the Company accelerated amortization of the discount attributable to the warrant fair values resulting in an approximate $100,000 non-cash charge to interest expense during the nine weeks ended June 30, 1999. 6 7 DIEDRICH COFFEE, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS JUNE 30, 1999 4. DEBT Long-term debt consists of the following:
JUNE 30, 1999 JANUARY 27, 1999 ------------- ---------------- NUVRTY, INC. Note payable bearing interest at prime rate plus 3 1/2%, interest payable monthly. Note is secured by the assets of the Company. Due September 30, 2002 $1,000,000 $1,000,000 GRANDVIEW TRUST Note payable bearing interest at prime rate plus 3 1/2%, interest payable monthly. Note is secured by the assets of the Company. Due October 15, 2002 750,000 750,000 OCEAN TRUST Note payable bearing interest at prime rate plus 3 1/2%, interest payable monthly. Note is secured by the assets of the Company. Due October 16, 2002 750,000 750,000 ---------- ---------- Long term debt $2,500,000 $2,500,000 ========== ==========
In connection with the acquisition (note 7), the Company repaid the above long-term debt on July 8, 1999. 5. STOCKHOLDERS' EQUITY On February 12, 1999, 6,225 shares of common stock were issued pursuant to the exercise of options granted under the Company's 1996 Stock Incentive Plan. 6. SEGMENT INFORMATION In accordance with the requirements of Statement of Financial Accounting Standards 131, "Disclosures about Segments of an Enterprise and Related Information," the Company's reportable business segments and respective accounting policies are the same as those described in Note 1 of the Company's Annual Report on Form 10-K for the year ended January 27, 1999. Management evaluates segment performance based primarily on revenue and earnings from operations. Interest income and expenses is evaluated on a consolidated basis and not allocated to the Company's business segments. 7 8 DIEDRICH COFFEE, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS JUNE 30, 1999 Segment information is summarized as follows for the twenty-two weeks ended June 30, 1999 and the twenty-six weeks ended July 29,1998.
TWENTY-TWO WEEKS TWENTY-SIX WEEKS ENDED JUNE 30, ENDED JULY 29, 1999 1998 ---------------- ---------------- Net Revenues: Retail operations $ 8,837,640 $ 10,628,849 Wholesale operations 1,415,604 1,324,027 Other 108,913 -- ------------ ------------ 10,362,157 11,952,876 ============ ============ Earnings (loss) from operations: Retail operations (534,482) 752,607 Wholesale operations 223,197 177,114 Other (1,742,588) (2,256,074) ------------ ------------ Total $ (2,053,873) $ (1,326,353) ============ ============
7. SUBSEQUENT EVENTS On July 7, 1999, the Company completed its acquisition of Coffee People, pursuant to an Agreement and Plan of Merger, dated as of March 16, 1999. The acquisition was effected by way of a merger of CP Acquisition Corp., an indirect wholly owned subsidiary of the Company, with and into Coffee People. As a result of the merger each share of Coffee People common stock was converted into the right to receive $2.11 in cash and 0.14 share of the Company's common stock. The Company's acquisition of Coffee People will be accounted for as a purchase. The cash payment to Coffee People stockholders was financed by a portion of the net proceeds of a public equity offering of 4,600,000 shares of the Company's common stock at a price of $6.00 per share. The Company estimates that the total consideration and direct acquisition costs associated with the Company's acquisition of Coffee People amounted to approximately $37,100,000. On July 7, 1999, the Company entered into a credit agreement with BankBoston, N.A. that is secured by pledges of all of the Company's assets and its subsidiaries' stock and provides for a $12 million term loan and a $3 million revolving credit facility, both with final maturity in July 2004. The Company used the proceeds of the term loan to repay indebtedness and to pay expenses related to the acquisition of Coffee People and its public equity offering. The Company intends to use the proceeds from the revolving credit facility to finance additional and remodel existing company-owned retail locations and for general corporate purposes. Amounts outstanding under the credit agreement bear interest, at the Company's option, at BankBoston's base rate plus 1.25% or LIBOR plus 3.00%. The credit agreement contains restrictive covenants customary for credit agreements of the size, type and purpose contemplated which, with specified exceptions, limits our ability to enter into affiliate transactions, pay dividends, consolidate, merge or effect certain asset sales, make specified investments, acquisitions and loans and change the nature of our business. The credit agreement requires the Company to satisfy financial covenants, which covenants will require the maintenance of specified financial ratios and compliance with certain financial tests, including ratios for maximum leverage (not greater than 3.25 to 1 initially), minimum interest coverage (not less than 1.25 to 1 initially), and minimum fixed charge coverage (a static ratio of not less than 1.1 to 1). Advances under the revolving credit facility for the purpose of financing additional company-owned retail locations or making acquisitions permitted under the credit agreement are conditioned upon at least 90% of existing company-owned retail locations having positive cash flow. 8 9 PART I - FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD LOOKING STATEMENTS From time to time, in both written reports and oral statements, we make "forward-looking statements" within the meaning of Federal and state securities laws. Disclosures that use words such as "believes," "anticipates," "expects," "may" or "plans" and similar expressions are intended to identify forward-looking statements. These forward-looking statements reflect our current expectations and are based upon data available at the time of the statements. Forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from expectations. Any forward-looking statements, whether made in this report or elsewhere, should be considered in context with the various disclosures made by us about our business, including the factors discussed below. These projections or forward looking statements fall under the safe harbors of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Foreseeable risks and uncertainties are described elsewhere in this report and in detail under "Risk Factors and Trends Affecting Diedrich Coffee and Its Business" in our Annual Report on Form 10-K for the fiscal year ended January 27, 1999 and in reports that we file with the Securities and Exchange Commission. GENERAL The first retail store operating under the name of Diedrich Coffee commenced operations in 1972. As of June 30, 1999, we operated 32 coffeehouses, two franchised retail locations and seven coffee carts located in California, Colorado and Texas. We sell high quality coffee beverages made with our own freshly roasted coffee. We sell specialty coffee beans, brewed coffee and espresso-based beverages such as cappuccinos, lattes, mochas and espressos and various blended drinks through these company-owned and franchised retail locations. To complement beverage sales, we also sell light food items, whole bean coffee and accessories at our retail locations. In addition, we have a strong wholesale division that markets its products directly to independent and chain food service establishments, as well as to businesses for office coffee systems through brokers and sales representatives. FRANCHISE AREA DEVELOPMENT AGREEMENTS Our franchise area development goal is to enter into franchise area development agreements covering most major U.S. markets. During the last year, we have entered into five franchise area development agreements. On September 16, 1998, we announced our first franchise area development agreement which calls for the development of 44 coffeehouses as well as a number of carts and kiosks in the state of North Carolina over a five year period. In connection with the signing of this agreement, we recorded and collected area development fee income of $100,000. On November 16, 1998, we announced our second franchise area development agreement which provides for the development of 50 coffeehouses as well as a number of carts and kiosks in San Diego, Palm Springs and Temecula, California over the next five years. This franchise area development agreement also includes a one-year option to begin development of 45 coffeehouses in Arizona. In connection with the signing of this agreement, we recorded area development fee income of $100,000 as well as a note receivable for $100,000. On May 17, 1999, we announced our third franchise area development agreement which provides for the development of 50 coffeehouses in the northern portion of Florida. On May 26, 1999, we announced our fourth franchise area development agreement which calls for the development of 80 coffeehouses in the Los Angeles, California market. This agreement also gives the franchisee an option to develop up to 103 additional stores in the Bay Area of Northern California. In connection with signing of this agreement, we recorded an area development fee of $32,000. On June 1, 1999, we announced our fifth franchise area development agreement which provides for the development of 50 coffeehouses in the states of Kentucky and Tennessee. In connection with the signing of this agreement, we recorded an area development fee of $20,000. We are currently in various stages of discussion and negotiations with several additional potential area developers. We have recently added two franchise sales organizations to assist in the sales program. These sales organizations are compensated through success-fees based on the execution of area development agreements. There can be no assurances, however, that positive sales will result from these activities. COFFEE PEOPLE ACQUISITION On July 7, 1999, the Company completed its acquisition of Coffee People, Inc. pursuant to an Agreement and Plan of Merger, dated as of March 16, 1999. The acquisition was effected by way of a merger of CP Acquisition Corp., an indirect 9 10 wholly owned subsidiary of the Company, with and into Coffee People. As a result of the merger, each share of Coffee People common stock was converted into the right to receive $2.11 in cash and 0.14 share of the Company's common stock. The Company's acquisition of Coffee People will be accounted for as a purchase. The cash payment to Coffee People stockholders was financed by a portion of the net proceeds of a public equity offering of 4,600,000 shares of the Company's common stock at a price of $6.00 per share. On July 7, 1999, we entered into a credit agreement with BankBoston, N.A. that is secured by pledges of all of our assets and our subsidiaries' stock and provides for a $12 million term loan and a $3 million revolving credit facility, both with final maturity in July 2004. We used the proceeds of the term loan to repay indebtedness and to pay expenses related to the acquisition of Coffee People and our public equity offering. We intend to use the proceeds from the revolving credit facility to finance additional and remodel existing company-owned retail locations and for general corporate purposes. Amounts outstanding under the credit agreement bear interest, at our option, at BankBoston's base rate plus 1.25% or LIBOR plus 3.00%. YEAR 2000 We are currently working to resolve the potential impact of the year 2000 on the processing of data-sensitive information by our computerized information systems. The year 2000 problem is the result of computer programs being written using two digits rather than four to define the applicable year. Any of our programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000, which could result in miscalculations or system failures. We are investigating the impact of the year 2000 problem on our business, including our operational, information and financial systems. Based on the preliminary review of our existing businesses, we do not expect the year 2000 problem, including the cost of making our computerized information systems year 2000 compliant, to have a material adverse impact on our financial position or results of operations in future periods. However, our inability to resolve all potential year 2000 problems in a timely manner could have a material adverse impact on our business and results of operations. We have also initiated communications with significant suppliers and key business partners on which we rely in an effort to determine the extent to which our business is vulnerable to the failure by these third parties' to remediate their year 2000 problems. Although we have not been informed of any material risks associated with the year 2000 problem on these entities, there can be no assurance that the computerized information systems of these third parties' will be year 2000 compliant on a timely basis. The inability of these third parties to remediate their year 2000 problems could have a material adverse impact on Diedrich Coffee. We will have to modify certain applications and replace some of the hardware used in the processing of financial information. In conjunction with these upgrades, which are expected to be completed by the end of the summer 1999, we believe we will have addressed any potential significant year 2000 issues. Total expenditures related to the upgrade of the information systems are expected to cost less than $20,000. As of June 30, 1999, we have incurred and expensed approximately $34,000 of expenditures consisting of internal staff costs, outside consulting and other expenditures related to this upgrade process. To the extent possible, we will be developing and executing contingency plans designed to allow continued operation in the event of failure of our or third parties' computer information systems. SEASONALITY AND QUARTERLY RESULTS Our business is subject to seasonal fluctuations as well as economic trends that affect retailers in general. Historically, our net revenues have not been realized proportionately in each quarter, with net revenues being highest during the last fiscal quarter (prior to the change in our fiscal year) which included the December holiday season. Hot weather tends to reduce revenues. Quarterly results are affected by the timing of the opening of new stores, which may not occur as anticipated due to events outside our control. As a result of these factors, and of the other contingencies and risk factors described elsewhere in this report and our Annual Report in Form 10-K, the financial results for any individual quarter may not be indicative of the results that may be achieved in a full fiscal year. 10 11 RESULTS OF OPERATIONS Change in Fiscal Year In an effort to align our fiscal year with that of Coffee People, Inc., which we acquired on July 7, 1999, we changed our year end from a fiscal year ending on the Wednesday nearest January 31 to a fiscal year ending on the Wednesday nearest June 30. Accordingly, the transition period condensed statements of operations and cash flows for the nine and twenty-two weeks ended June 30, 1999 are not necessarily comparable to the accompanying thirteen and twenty-six weeks ended July 29, 1998 nor are they indicative of a full fiscal year's results of operations. Nine and Twenty-Two Weeks Ended June 30, 1999 Compared with the Thirteen and Twenty-Six Weeks Ended July 29, 1998. Total revenues. Total revenues of $4,264,000 for the nine weeks ended June 30, 1999 were 29.3% lower than the total revenues of $6,030,000 for the thirteen weeks ended July 29, 1998. This difference was principally due to the abbreviated transition reporting period resulting from our change in fiscal year. During this most recent quarter, we derived 85.6% of total revenues from our retail coffeehouse operations. Wholesale and mail order revenue accounted for 13.1% of total revenues and franchise revenues counted for 1.3% of total revenues. Retail revenues of $3,648,000 for the nine weeks ended June 30, 1999 were 31.7% lower than the retail revenues of $5,344,000 for the thirteen weeks ended July 29, 1998. This difference was primarily a result of the abbreviated transition reporting period and of operating four fewer company-operated coffeehouses during the nine weeks ended June 30, 1999. Two of these retail locations were franchised during the nine weeks ended June 30, 1999 and two were closed. As of June 30, 1999, we operated 39 retail locations, whereas as of July 29, 1998, we operated 43 retail locations. The percentage increase in comparable store sales was 3.5% during the nine weeks ended June 30, 1999. This increase was principally a result of improved targeted marketing programs as no price increases were taken. Wholesale and other revenues of $557,000 were 18.8% lower for the nine weeks ended June 30, 1999 than the wholesale and other revenues of $686,000 for the thirteen weeks ended July 29, 1998. This difference was principally due to the abbreviated transition reporting period resulting from our change in fiscal year. On an average weekly basis, wholesale and other revenues increased approximately 17%. Franchise revenues were $59,000 for the nine weeks ended June 30, 1999. Franchise revenues consist of initial franchise fees and royalties received on sales made at each franchise location. We first recorded franchise revenue in the third quarter of fiscal 1999; as a result, there were no franchise revenues for the thirteen weeks ended July 29, 1998. As of June 30, 1999, we had two franchised coffeehouses. Total revenues of $10,362,000 for the twenty-two weeks ended June 30, 1999 were 13.3% lower than the total revenues of $11,953,000 for the twenty-six weeks ended July 29, 1998. Retail revenues of $8,838,000 for the twenty-two weeks ended June 30, 1999 were 16.9% lower than the retail revenues of $10,629,000 for the twenty-six weeks ended July 29, 1998. Wholesale and other revenues for the twenty-two weeks ended June 30, 1999 increased 6.9% to $1,416,000 from $1,324,000 for the twenty-six weeks ended July 29, 1998. Franchise revenues were $109,000 for the twenty-two weeks ended June 30, 1999. The percentage increase in comparable store sales was 3.4% for the twenty-two weeks ended June 30, 1999. Cost of Sales and Related Occupancy Costs. Cost of roasted coffee, dairy, food, paper and bar supplies, accessories and clothing (cost of sales) and rent (related occupancy costs) for the nine weeks ended June 30, 1999 were $1,923,000, compared to $2,712,000 for the thirteen weeks ended July 29, 1998. As a percentage of total revenue, cost of sales and related occupancy costs increased slightly to 45.1% for the nine weeks ended June 30, 1999 from 45.0% for the thirteen weeks ended July 29, 1998. Costs of sales and related occupancy costs for the twenty-two weeks ended June 30, 1999 were $4,681,0000, compared to $5,395,000 for the twenty-six weeks ended July 29, 1998. As a percentage of total revenue, costs of sales and related occupancy costs increased slightly to 45.2% for the twenty-two weeks ended June 30, 1999 from 45.1% for the twenty-six weeks ended July 29, 1998. Store Operating Expenses. Store operating expenses for the nine weeks ended June 30, 1999 were $1,573,000, compared to $2,273,000 for the thirteen weeks ended July 29, 1998. As a percentage of retail and franchise revenues, store operating expenses decreased to 42.4% for the nine weeks ended June 30, 1999 from 42.5% for the thirteen weeks ended July 29, 1998. These decreases were principally due to increased franchising activities. For the twenty-two weeks ended June 30, 1999, store operating expenses, as a percentage of retail and franchise, increased to 43.2% from 42.9% for the twenty-six weeks ended July 29, 1998. This increase is primarily the result of increases in labor costs resulting from new training programs implemented at the store level and a provision for inventory reserves for excess assessories of $30,000. 11 12 Other Operating Expenses. Other operating expenses (those associated with wholesale and other revenues) for the nine weeks ended June 30, 1999 were $127,000, compared to $147,000 for the thirteen weeks ended July 29, 1998. These expenses, as a percentage of the revenues from the wholesale division, increased to 22.8% from 21.4%. For the twenty-two weeks ended June 30, 1999, other operating expenses, as a percentage of wholesale revenue, decreased to 20.1% from 22.3% for the twenty-six weeks ended July 29, 1998. The decrease as a percentage of revenues from the wholesale division reflects the increase in wholesale revenues, as a result of the emphasis placed on adding new chain restaurant accounts. Depreciation and Amortization. Depreciation and amortization for the nine weeks ended June 30, 1999 were $638,000, compared to $461,000 for the thirteen weeks ended July 29, 1998. As a percentage of total revenue, depreciation and amortization increased to 15.0% in comparison to 7.7%. Depreciation and amortization increased to $1,145,000 for the twenty-two weeks ended June 30, 1999 from $944,000 for the twenty-six weeks ended July 29, 1998. The increase is primarily due to the accelerated depreciation taken on a closed coffeehouse. General and Administrative Expenses. General and administrative expenses for the nine weeks ended June 30, 1999 were $789,000, compared to $1,114,000 for the thirteen weeks ended July 29, 1998. As a percentage of total revenue, general and administrative expenses remained at 18.5%. For the twenty-two weeks ended June 30, 1999, general and administrative expenses, as a percentage of total revenue, decreased to 15.9% from 17.5% for the twenty-six weeks ended July 29, 1998. This decrease was primarily a result of the elimination of management personnel that were not essential to our current growth strategy. Interest Expense. Interest expense increased to $187,000 for the nine weeks ended June 30, 1999 from $100,000 for the thirteen weeks ended July 29, 1998. The increase is related to a acceleration of non-cash interest related to the fair value of the warrants. LIQUIDITY AND CAPITAL RESOURCES We have funded our capital requirements in recent years principally through private and public sales of our common stock and long-term debt. We had working capital deficit of $2,439,000 as of June 30, 1999 compared to working capital deficit of $655,000 as of January 27, 1999. The current period working capital includes remaining restructuring liabilities of $95,000. Cash used by operating activities for the twenty-two weeks ended June 30, 1999 totaled $122,000 as compared to $828,000 for the twenty-six weeks ended July 29, 1998. Net cash used in investing activities for the twenty-two weeks ended June 30, 1999 totaled $1,482,000, which consisted of capital expenditures for property and equipment, payment of acquisition costs, and issuance of a note receivable. Net cash provided by financing activities for the twenty-two weeks ended June 30, 1999 totaled $956,000 which consisted of proceeds from the issuance of debt. As of June 30, 1999, we had $2,500,000 of long-term debt that consisted of three term loans with three separate investors on substantially similar terms. Each of the loans bore interest at the prime rate plus 3 1/2% with the interest only payable monthly. The principal was due in one lump sum at maturity. The loans were scheduled to mature at different times in September and October of 2002 and were secured by all of our assets. As discussed in note 4 of the notes to condensed financial statements, we repaid the loans on July 8, 1999. On April 6, 1999, we entered into a $1,000,000 loan agreement and security agreement with Amre Youness, a former director of Diedrich Coffee. All outstanding principal was scheduled to be due and payable on April 6, 2000. The loan was secured by our assets with interest accruing and paid monthly at the prime rate plus 3%. In connection with the loan agreement, we issued warrants to Mr. Youness to purchase 70,000 shares of common stock at a price of $5.625 per share. As discussed in note 3 of the notes to condensed financial statements, we repaid the loan on July 8, 1999. On July 7, 1999, we entered into a credit agreement with BankBoston, N.A. that is secured by pledges of all of our assets and our subsidiaries' stock and provides for a $12 million term loan and a $3 million revolving credit facility, both with final maturity in July 2004. We used the proceeds of the term loan to repay indebtedness and to pay expenses related to the acquisition of Coffee People and our public equity offering. We intend to use the proceeds from the revolving credit facility to finance additional and remodel existing company-owned retail locations and for general corporate purposes. As of August 13, 1999, we have not borrowed any funds under the revolving credit facility. Amounts outstanding under the credit agreement bear interest, at our option, at BankBoston's base rate plus 1.25% or LIBOR plus 3.00%. Our credit agreement contains restrictive covenants customary for credit agreements of the size, type and purpose contemplated which, with specified exceptions, limits our ability to enter into affiliate transactions, pay dividends, consolidate, 12 13 merge or effect certain asset sales, make specified investments, acquisitions and loans and change the nature of our business. The credit agreement requires us to satisfy financial covenants, which covenants will require the maintenance of specified financial ratios and compliance with certain financial tests, including ratios for maximum leverage (not greater than 3.25 to 1 initially), minimum interest coverage (not less than 1.25 to 1 initially), and minimum fixed charge coverage (a static ratio of not less than 1.1 to 1). Advances under the revolving credit facility for the purpose of financing additional company-owned retail locations or making acquisitions permitted under the credit agreement are conditioned upon at least 90% of existing company-owned retail locations having positive cash flow. We believe that the net proceeds of our public equity offering, cash flow from our operations and borrowings under our credit agreement will be sufficient to satisfy our working capital needs for the next twelve months. 13 14 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK DERIVATIVE INSTRUMENTS We did not invest in market risk sensitive instruments in fiscal 1999, nor for the twenty-two weeks ended June 30, 1999. From time to time, however, we enter into agreements to purchase green coffee in the future at prices to be determined within two to twelve months of the time of actual purchase. At June 30, 1999 these commitments totaled $1,373,000. These agreements are tied to specific market prices (defined by both the origin of the coffee and the month of delivery) but we have significant flexibility in selecting the date of the market price to be used in each contract. We do not use commodity based financial instruments to hedge coffee or any other commodity, as we believe there will continue to be a high probability of maintaining a strong correlation between increases in green coffee prices and the final selling prices of our products. We have not used derivative financial instruments for any purpose, including hedging or mitigating interest rate risk. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). SFAS 133 establishes accounting and reporting standards for derivative instruments embedded in other contracts and hedging activities. SFAS 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. Application of SFAS 133 is not expected to have a material impact on our business, results of operations or liquidity. MARKET RISK Our market risk exposure with regard to certain financial instruments outstanding as of June 30, 1999 was to changes in the "prime rate" in the United States. We borrowed $2,500,000 at the prime rate plus 3 1/2% and $1,000,000 at the prime rate plus 3%. At June 30, 1999, a hypothetical 100 basis point increase in the prime rate would result in additional interest expense of $35,000 on an annualized basis. At June 30, 1999 the prime rate was 7.75%. On July 7, 1999, we entered into a credit agreement which exposes us to market risk with respect to changes in the "base rate" of BankBoston, N.A. or LIBOR. Amounts outstanding under the credit agreement bear interest, at our option, at BankBoston's base rate plus 1.25% or LIBOR plus 3.00%. 14 15 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In the ordinary course of our business, we may become involved in legal proceedings from time to time. During the transition period ended June 30, 1999, however, we were not a party to any material pending legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Our Annual Meeting of Stockholders was held on June 30, 1999 at the Doubletree Hotel in Irvine, California. John Martin, Tim Ryan, Lawrence Goelman, Martin Diedrich, Paul Heeschen, and Peter Churm were elected to the board of directors to serve until the next Annual Meeting of Stockholders. In addition to the election of directors, the stockholders voted upon the following propositions, as recorded and reported by the inspector of elections: For the board of directors:
NAME FOR ABSTAIN OR WITHHELD BROKER NON-VOTES ---- --- ------------------- ---------------- Peter Churm 5,367,212 5,050 --- Martin R. Diedrich 5,367,212 5,050 --- Lawrence Goelman 5,367,212 5,050 --- Paul C. Heeschen 5,367,212 5,050 --- John E. Martin 5,367,212 5,050 --- Timothy J. Ryan 5,367,212 5,050 ---
To approve the issuance of shares of Diedrich Coffee common stock to Coffee People stockholders under the terms of the merger agreement.
FOR AGAINST OR WITHHELD ABSTAIN BROKER NON-VOTES --- ------------------- ------- ---------------- 3,257,317 10,750 3,930 2,100,265
To approve an amendment to the Diedrich Coffee 1996 Stock Incentive Plan to increase by 500,000 shares the total number of shares of Diedrich Coffee common stock that may be issued under the plan.
FOR AGAINST OR WITHHELD ABSTAIN BROKER NON-VOTES --- ------------------- ------- ---------------- 3,227,524 36,358 8,115 2,100,265
To ratify the selection of KPMG LLP as independent accountants for Diedrich Coffee for the current fiscal year ending June 28, 2000.
FOR AGAINST OR WITHHELD ABSTAIN BROKER NON-VOTES --- ------------------- ------- ---------------- 5,359,972 7,350 4,940 ---
15 16 ITEM 5. OTHER INFORMATION. Minimum Advance Notice of Stockholder Proposals. Stockholders of Diedrich Coffee are advised that we must be notified at least 45 days prior to the month and day of mailing the prior year's proxy statement of any proposal or solicitation that any stockholder intends to present at the next annual meeting of stockholders and which the stockholder has not sought to have included in our proxy statement for the meeting in accordance with Rule 14a-8 under the Securities Exchange Act of 1934. If a proponent fails to notify us before the required deadline, management proxies will be allowed to use their discretionary voting authority when the proposal is raised at the annual meeting, without any discussion of the matter in the proxy statement. 16 17 ITEM 6. EXHIBITS AND CURRENT REPORTS ON FORM 8-K. (A) EXHIBITS Set forth below is a list of the exhibits included as part of this Transition Report.
EXHIBIT NO. DESCRIPTION ----------- ----------- 2.1 Form of Agreement and Plan of Merger between Diedrich Coffee, a California corporation, and Diedrich Coffee, Inc., a Delaware corporation (1) 2.2 Agreement and Plan of Merger, dated as of March 16, 1999, by and among Diedrich Coffee, CP Acquisition Corp., a wholly owned subsidiary of Diedrich Coffee, and Coffee People (2) 3.1 Certificate of Incorporation (1) 3.2 Bylaws (1) 4.1 Purchase Agreement for Series A Preferred Stock, dated as of December 11, 1992, by and among Diedrich Coffee, Martin R. Diedrich, Donald M. Holly, SNV Enterprises and D.C.H., L.P. (1) 4.2 Purchase Agreement for Series B Preferred Stock, dated as of June 29, 1995, by and among Diedrich Coffee, Martin R. Diedrich, Steven A. Lupinacci, Redwood Enterprises VII, L.P. and Diedrich Partners I, L.P. (1) 4.3 Specimen Stock Certificate (1) 4.4 Form of Conversion Agreement in the connection with the conversion of Series A and Series B Preferred Stock into Common Stock (1) 4.5 Form of Lock-up Letter Agreement among The Second Cup, Ltd. and Diedrich Coffee (3) 4.6 Voting Agreement and Irrevocable Proxy, dated as of March 16, 1999, by and among Diedrich Coffee, D.C.H., L.P., Peter Churm, Martin R. Diedrich, Lawrence Goelman, Paul C. Heeschen, John E. Martin, Timothy J. Ryan, and Second Cup USA Holdings Ltd. (3) 10.1 Form of Indemnification Agreement (1) 10.2 Diedrich Coffee 1996 Stock Incentive Plan (2) 10.3 Diedrich Coffee 1996 Non-Employee Directors Stock Option Plan (1) 10.4 Agreement of Sale, dated as of February 23, 1996, by and among Diedrich Coffee (as purchaser) and Brothers Coffee Bars, Inc. and Brothers Gourmet Coffees, Inc. (as sellers) (1)
17 18 10.5 Separation Agreement, dated May 13, 1997, by and between Steven A. Lupinacci and Diedrich Coffee (4) 10.6 Letter Agreement, dated as of November 17, 1997, by and between Diedrich Coffee and John E. Martin appointing Mr. Martin Chairman of the Board (5) 10.7 Stock Option Plan and Agreement, dated as of November 17, 1997, by and between Diedrich Coffee and John E. Martin granting Mr. Martin the option to purchase up to 850,000 shares of Diedrich Coffee common stock (5) 10.8 Common Stock Purchase Agreement, dated as of November 17, 1997, by and between Diedrich Coffee and John E. Martin under which Mr. Martin agrees to purchase 333,333 shares of Diedrich Coffee common stock (5) 10.9 Employment Agreement, dated as of November 17, 1997, by and between Diedrich Coffee and Timothy J. Ryan retaining Mr. Ryan as Chief Executive Officer (5) 10.10 Stock Option Plan and Agreement, dated as of November 17, 1997, by and between Diedrich Coffee and Timothy J. Ryan granting Mr. Ryan up to 600,00 shares of Diedrich Coffee common stock (5) 10.11 Common Stock Purchase Agreement, dated as of November 17, 1997, by and between Diedrich Coffee and Timothy J. Ryan under which Mr. Ryan agrees to purchase 16,667 shares of Diedrich Coffee common stock (5) 10.12 Form of Promissory Note made in favor of Nuvrty, Inc., the Ocean Trust and the Grandview Trust (6) 10.13 Form of Term Loan Agreement made in favor of Nuvrty, Inc., the Ocean Trust and the Grandview Trust (6) 10.14 Form of Security Agreement made in favor of Nuvrty, Inc., the Ocean Trust and the Grandview Trust (6) 10.15 Form of Warrant Agreement made in favor of Nuvrty, Inc., the Ocean Trust and the Grandview Trust (6) 10.16 Form of Intercreditor Agreement made in favor of Nuvrty, Inc., the Ocean Trust and the Grandview Trust (6) 10.17 Common Stock and Option Purchase Agreement, dated as of April 3, 1998, with Franchise Mortgage Acceptance Company (7) 10.18 Separation and Release Agreement, dated January 28, 1998, with Kerry W. Coin (7) 10.19 Employment Agreement, dated April 8, 1998, with Ann Wride (8) 10.20 Employment Agreement, dated April 8, 1998, with Dolf Berle (9) 10.21 Employment Agreement, dated June 11, 1998, with Catherine Saar (9)
18 19 10.22 Form of Franchise Agreement (10) 10.23 Form of Area Development Agreement (10) 10.24 Employment Agreement, dated June 29, 1998, with Martin R. Diedrich (3) 10.25 Credit Agreement, dated as of July 7, 1999, by and among BankBoston, N.A., Diedrich Coffee and its subsidiaries 10.26 Security Agreement, dated as of July 7, 1999, by and among BankBoston, N.A., Diedrich Coffee and its subsidiaries 10.27 Securities Pledge Agreement, dated as of July 7, 1999, by and among BankBoston, N.A., Diedrich Coffee and its subsidiaries 10.28 Trademark Security Agreement, dated as of July 7, 1999, by and among BankBoston, N.A., Diedrich Coffee and its subsidiaries 10.29 Form of Term Note made in favor of BankBoston, N.A. 10.30 Form of Revolving Note made in favor of BankBoston, N.A. 27 Financial Data Schedule
- ---------------------------- (1) Incorporated by reference to Diedrich Coffee's Registration Statement on Form S-1 (No. 333-08633), as amended, as declared effective by the Securities and Exchange Commission on September 11, 1996. (2) Incorporated by reference to Appendix to Diedrich Coffee's Registration Statement on Form S-4, filed with the Securities and Exchange Commission on April 23, 1999. (3) Incorporated by reference to Diedrich Coffee's Registration Statement on Form S-4, filed with the Securities and Exchange Commission on April 23, 1999. (4) Incorporated by reference to Diedrich Coffee's Quarterly Report on Form 10-Q, for the period ended April 30, 1997, filed with the Securities and Exchange Commission on June 13, 1997. (5) Incorporated by reference to Diedrich Coffee's Current Report on Form 8-K, filed with the Securities and Exchange Commission on November 25, 1997. (6) Incorporated by reference to Diedrich Coffee's Quarterly Report on Form 10-Q, for the period ended October 29, 1997, filed with the Securities and Exchange Commission on December 11, 1997. 19 20 (7) Incorporated by reference to Diedrich Coffee's Annual Report on Form 10-K, for the fiscal year ended January 28, 1998, filed with the Securities and Exchange Commission on April 28, 1998. (8) Incorporated by reference to Diedrich Coffee's Quarterly Report on Form 10-Q, for the period ended April 29, 1998, filed with the Securities and Exchange Commission on June 11, 1998. (9) Incorporated by reference to Diedrich Coffee's Quarterly Report on Form 10-Q, for the period ended July 29, 1998, filed with the Securities and Exchange Commission on September 10, 1998. (10) Incorporated by reference to Diedrich Coffee's Quarterly Report on Form 10-Q, for the period ended October 28, 1998, filed with the Securities and Exchange Commission on December 11, 1998. (B) REPORTS ON FORM 8-K 1. A Current Report on Form 8-K was filed on February 10, 1999 reporting that Diedrich Coffee had signed a letter of intent to acquire all of the outstanding shares of common stock of Coffee People, Inc. 2. A Current Report on Form 8-K was filed on March 25, 1999 reporting that Diedrich Coffee had signed a definitive agreement to acquire all the outstanding shares of common stock of Coffee People, Inc. 20 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Transition Report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: August 13, 1999 DIEDRICH COFFEE, INC. /s/ Timothy J. Ryan ------------------------------------------------ Timothy J. Ryan, President and Chief Executive Officer (Principal Executive Officer) /s/ Ann Wride ------------------------------------------------ Ann Wride Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 21 22 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION ----------- ----------- 2.1 Form of Agreement and Plan of Merger between Diedrich Coffee, a California corporation, and Diedrich Coffee, Inc., a Delaware corporation (1) 2.2 Agreement and Plan of Merger, dated as of March 16, 1999, by and among Diedrich Coffee, CP Acquisition Corp., a wholly owned subsidiary of Diedrich Coffee, and Coffee People (2) 3.1 Certificate of Incorporation (1) 3.2 Bylaws (1) 4.1 Purchase Agreement for Series A Preferred Stock, dated as of December 11, 1992, by and among Diedrich Coffee, Martin R. Diedrich, Donald M. Holly, SNV Enterprises and D.C.H., L.P. (1) 4.2 Purchase Agreement for Series B Preferred Stock, dated as of June 29, 1995, by and among Diedrich Coffee, Martin R. Diedrich, Steven A. Lupinacci, Redwood Enterprises VII, L.P. and Diedrich Partners I, L.P. (1) 4.3 Specimen Stock Certificate (1) 4.4 Form of Conversion Agreement in the connection with the conversion of Series A and Series B Preferred Stock into Common Stock (1) 4.5 Form of Lock-up Letter Agreement among The Second Cup, Ltd. and Diedrich Coffee (3) 4.6 Voting Agreement and Irrevocable Proxy, dated as of March 16, 1999, by and among Diedrich Coffee, D.C.H., L.P., Peter Churm, Martin R. Diedrich, Lawrence Goelman, Paul C. Heeschen, John E. Martin, Timothy J. Ryan, and Second Cup USA Holdings Ltd. (3) 10.1 Form of Indemnification Agreement (1) 10.2 Diedrich Coffee 1996 Stock Incentive Plan (2) 10.3 Diedrich Coffee 1996 Non-Employee Directors Stock Option Plan (1) 10.4 Agreement of Sale, dated as of February 23, 1996, by and among Diedrich Coffee (as purchaser) and Brothers Coffee Bars, Inc. and Brothers Gourmet Coffees, Inc. (as sellers) (1)
23 10.5 Separation Agreement, dated May 13, 1997, by and between Steven A. Lupinacci and Diedrich Coffee (4) 10.6 Letter Agreement, dated as of November 17, 1997, by and between Diedrich Coffee and John E. Martin appointing Mr. Martin Chairman of the Board (5) 10.7 Stock Option Plan and Agreement, dated as of November 17, 1997, by and between Diedrich Coffee and John E. Martin granting Mr. Martin the option to purchase up to 850,000 shares of Diedrich Coffee common stock (5) 10.8 Common Stock Purchase Agreement, dated as of November 17, 1997, by and between Diedrich Coffee and John E. Martin under which Mr. Martin agrees to purchase 333,333 shares of Diedrich Coffee common stock (5) 10.9 Employment Agreement, dated as of November 17, 1997, by and between Diedrich Coffee and Timothy J. Ryan retaining Mr. Ryan as Chief Executive Officer (5) 10.10 Stock Option Plan and Agreement, dated as of November 17, 1997, by and between Diedrich Coffee and Timothy J. Ryan granting Mr. Ryan up to 600,00 shares of Diedrich Coffee common stock (5) 10.11 Common Stock Purchase Agreement, dated as of November 17, 1997, by and between Diedrich Coffee and Timothy J. Ryan under which Mr. Ryan agrees to purchase 16,667 shares of Diedrich Coffee common stock (5) 10.12 Form of Promissory Note made in favor of Nuvrty, Inc., the Ocean Trust and the Grandview Trust (6) 10.13 Form of Term Loan Agreement made in favor of Nuvrty, Inc., the Ocean Trust and the Grandview Trust (6) 10.14 Form of Security Agreement made in favor of Nuvrty, Inc., the Ocean Trust and the Grandview Trust (6) 10.15 Form of Warrant Agreement made in favor of Nuvrty, Inc., the Ocean Trust and the Grandview Trust (6) 10.16 Form of Intercreditor Agreement made in favor of Nuvrty, Inc., the Ocean Trust and the Grandview Trust (6) 10.17 Common Stock and Option Purchase Agreement, dated as of April 3, 1998, with Franchise Mortgage Acceptance Company (7) 10.18 Separation and Release Agreement, dated January 28, 1998, with Kerry W. Coin (7) 10.19 Employment Agreement, dated April 8, 1998, with Ann Wride (8) 10.20 Employment Agreement, dated April 8, 1998, with Dolf Berle (9) 10.21 Employment Agreement, dated June 11, 1998, with Catherine Saar (9)
24 10.22 Form of Franchise Agreement (10) 10.23 Form of Area Development Agreement (10) 10.24 Employment Agreement, dated June 29, 1998, with Martin R. Diedrich (3) 10.25 Credit Agreement, dated as of July 7, 1999, by and among BankBoston, N.A., Diedrich Coffee and its subsidiaries 10.26 Security Agreement, dated as of July 7, 1999, by and among BankBoston, N.A., Diedrich Coffee and its subsidiaries 10.27 Securities Pledge Agreement, dated as of July 7, 1999, by and among BankBoston, N.A., Diedrich Coffee and its subsidiaries 10.28 Trademark Security Agreement, dated as of July 7, 1999, by and among BankBoston, N.A., Diedrich Coffee and its subsidiaries 10.29 Form of Term Note made in favor of BankBoston, N.A. 10.30 Form of Revolving Note made in favor of BankBoston, N.A. 27 Financial Data Schedule
- ---------------------------- (1) Incorporated by reference to Diedrich Coffee's Registration Statement on Form S-1 (No. 333-08633), as amended, as declared effective by the Securities and Exchange Commission on September 11, 1996. (2) Incorporated by reference to Appendix A to Diedrich Coffee's Registration Statement on Form S-4, filed with the Securities and Exchange Commission on April 23, 1999. (3) Incorporated by reference to Diedrich Coffee's Registration Statement on Form S-4, filed with the Securities and Exchange Commission on April 23, 1999. (4) Incorporated by reference to Diedrich Coffee's Quarterly Report on Form 10-Q, for the period ended April 30, 1997, filed with the Securities and Exchange Commission on June 13, 1997. (5) Incorporated by reference to Diedrich Coffee's Current Report on Form 8-K, filed with the Securities and Exchange Commission on November 25, 1997. (6) Incorporated by reference to Diedrich Coffee's Quarterly Report on Form 10-Q, for the period ended October 29, 1997, filed with the Securities and Exchange Commission on December 11, 1997. 25 (7) Incorporated by reference to Diedrich Coffee's Annual Report on Form 10-K, for the fiscal year ended January 28, 1998, filed with the Securities and Exchange Commission on April 28, 1998. (8) Incorporated by reference to Diedrich Coffee's Quarterly Report on Form 10-Q, for the period ended April 29, 1998, filed with the Securities and Exchange Commission on June 11, 1998. (9) Incorporated by reference to Diedrich Coffee's Quarterly Report on Form 10-Q, for the period ended July 29, 1998, filed with the Securities and Exchange Commission on September 10, 1998. (10) Incorporated by reference to Diedrich Coffee's Quarterly Report on Form 10-Q, for the period ended October 28, 1998, filed with the Securities and Exchange Commission on December 11, 1998. EX-10.25 2 CREDIT AGREEMENT DATED 7/7/99. 1 EXHIBIT 10.25 ---------------------------------------------------------- CREDIT AGREEMENT among BANKBOSTON, N.A., DIEDRICH COFFEE, INC. AND ITS DIRECT AND INDIRECT SUBSIDIARIES WHO ARE PARTIES HERETO Dated as of July 7, 1999 ---------------------------------------------------------- 2 TABLE OF CONTENTS
Page ---- SECTION 1. DEFINITIONS............................................................1 SECTION 2. THE CREDIT FACILITIES.................................................15 2.1 THE LOANS AND NOTES...........................................................15 2.2 SCHEDULED PRINCIPAL REPAYMENTS ON THE LOANS...................................16 2.3 CLOSING FEE; COMMITMENT FEES; INTEREST; DEFAULT RATE..........................16 2.4 REQUESTS FOR LOANS............................................................17 2.5 CONVERSION AND CONTINUANCE OF LOANS...........................................18 2.6 REDUCTION OR TERMINATION OF THE REVOLVER COMMITMENT...........................18 2.7 MANDATORY PAYMENTS AND PREPAYMENTS............................................19 2.8 LETTERS OF CREDIT.............................................................20 2.9 CHANGED CIRCUMSTANCES.........................................................22 2.10 CAPITAL ADEQUACY.............................................................25 2.11 PAYMENTS BEFORE END OF EURODOLLAR PERIOD.....................................26 2.12 SECURITY.....................................................................27 2.13 USE OF PROCEEDS..............................................................27 2.14 TIME AND METHOD OF PAYMENTS..................................................27 SECTION 3. CONDITIONS OF CREDIT EXTENSIONS.......................................27 3.1 CONDITIONS TO INITIAL CREDIT EXTENSION........................................29 3.2 CONDITIONS TO ALL CREDIT EXTENSIONS...........................................29 SECTION 4. REPRESENTATIONS AND WARRANTIES........................................30 4.1 ORGANIZATION AND QUALIFICATION................................................30 4.2 CORPORATE OR PARTNERSHIP AUTHORITY............................................30 4.3 VALID OBLIGATIONS.............................................................30 4.4 APPROVALS.....................................................................30 4.5 TITLE TO PROPERTIES; ABSENCE OF LIENS.........................................30 4.6 LICENSES, PATENTS, TRADEMARKS AND INTELLECTUAL PROPERTY.......................31 4.7 COMPLIANCE WITH LAWS AND AGREEMENTS...........................................31 4.8 MATERIAL AGREEMENTS...........................................................31 4.9 ENVIRONMENTAL MATTERS.........................................................31 4.10 COMPLIANCE WITH ERISA........................................................33 4.11 FINANCIAL STATEMENTS.........................................................33 4.12 SOLVENCY.....................................................................33 4.13 TAXES........................................................................34 4.14 LITIGATION...................................................................34 4.15 MARGIN RULES.................................................................34 4.16 RESTRICTIONS ON THE BORROWERS................................................34 4.17 CAPITALIZATION...............................................................34 4.18 FULL DISCLOSURE..............................................................34 4.19 INVESTMENT COMPANY ACT.......................................................35 4.20 LABOR DISPUTES; COLLECTIVE BARGAINING AGREEMENTS; EMPLOYEE GRIEVANCES........35 4.21 YEAR 2000 COMPLIANCE.........................................................35 SECTION 5. FINANCIAL COVENANTS...................................................35 5.1 MAXIMUM LEVERAGE RATIO........................................................35 5.2 MINIMUM FIXED CHARGES COVERAGE RATIO..........................................36 5.3 MINIMUM INTEREST COVERAGE RATIO...............................................36 5.4 MAXIMUM CAPITAL EXPENDITURES..................................................37
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Page ---- SECTION 6. AFFIRMATIVE COVENANTS..................................................37 6.1 FINANCIAL REPORTING............................................................37 6.2 CONDUCT OF BUSINESS............................................................39 6.3 MAINTENANCE AND INSURANCE......................................................39 6.4 TAXES..........................................................................40 6.5 INSPECTION BY THE LENDER.......................................................40 6.6 ACCOUNTING SYSTEM..............................................................40 6.7 FURTHER ASSURANCES.............................................................40 6.8 ENVIRONMENTAL LAWS.............................................................40 6.9 DEPOSITORY.....................................................................40 SECTION 7. NEGATIVE COVENANTS.....................................................41 7.1 INDEBTEDNESS; CONTINGENT LIABILITIES...........................................41 7.2 SALE AND LEASEBACK.............................................................41 7.3 ENCUMBRANCES...................................................................42 7.4 DISPOSITION OF ASSETS, ETC.....................................................42 7.5 AMENDMENT TO CHARTER OR PARTNERSHIP DOCUMENTS..................................43 7.6 MERGERS; CONSOLIDATIONS; ISSUANCE OF SECURITIES; ETC...........................43 7.7 RESTRICTED PAYMENTS............................................................44 7.8 INVESTMENTS, LOANS AND ACQUISITIONS............................................44 7.9 ERISA..........................................................................44 7.10 TRANSACTIONS WITH AFFILIATES..................................................45 7.11 AMENDMENT OF CERTAIN AGREEMENTS...............................................45 7.12 NEGATIVE PLEDGES, ETC.........................................................45 SECTION 8. DEFAULTS................................................................45 8.1 EVENTS OF DEFAULT..............................................................45 8.2 REMEDIES.......................................................................47 8.3 LETTERS OF CREDIT..............................................................48 SECTION 9. MISCELLANEOUS...........................................................48 9.1 NOTICES........................................................................48 9.2 EXPENSES.......................................................................49 9.3 INDEMNIFICATION................................................................49 9.4 TERM OF AGREEMENT..............................................................49 9.5 NO WAIVERS.....................................................................50 9.6 GOVERNING LAW..................................................................50 9.7 ENTIRE AGREEMENT; AMENDMENTS...................................................50 9.8 ASSIGNMENTS; PARTICIPATIONS...................................................50 9.9 COUNTERPARTS; PARTIAL INVALIDITY...............................................51 9.10 WAIVER OF JURY TRIAL..........................................................51 9.11 CONSENT TO JURISDICTION.......................................................51 9.12 JOINT AND SEVERAL LIABILITY...................................................51
-ii- 4 EXHIBITS Exhibit 2.1(a) Form of Revolving Note Exhibit 2.1(b) Form of Term Note Exhibit 2.4 Form of Loan Request Exhibit 2.5 Form of Interest Rate Option Notice Exhibit 2.9 Exemption Certificate Exhibit 6.1 Form of Covenant Compliance Report SCHEDULES Schedule 1(a) Coffee People Sale Stores Schedule 1(b) Quarterly Dates Schedule 4.1 Qualifications Schedule 4.4 Approvals Schedule 4.5 Title to Properties; Absence of Liens Schedule 4.6 Intellectual Property; Trademarks, Etc. Schedule 4.8 Material Agreements Schedule 4.9 Environmental Matters Schedule 4.14 Litigation Schedule 4.17 Capitalization Schedule 7.1 Indebtedness Schedule 7.3 Encumbrances Schedule 7.8 Investments -iii- 5 CREDIT AGREEMENT THIS CREDIT AGREEMENT is made as of July 7, 1999, among DIEDRICH COFFEE, INC., a Delaware corporation (the "Parent"), and its Subsidiaries, COFFEE PEOPLE WORLDWIDE, INC., a Delaware corporation, COFFEE PEOPLE, INC., an Oregon corporation ("Coffee People"), GLORIA JEAN'S, INC., a Delaware corporation, EDGLO ENTERPRISES, INC., a Illinois corporation, GLORIA JEAN'S GOURMET COFFEES CORP., an Illinois corporation, and GLORIA JEAN'S GOURMET COFFEES FRANCHISING CORP., an Illinois corporation (the Parent and such Subsidiaries and such other Subsidiaries who hereafter become parties hereto being collectively referred to herein as the "Borrowers" and individually as a "Borrower") and BANKBOSTON, N.A., a national banking association, or any successor thereto (the "Lender"). RECITALS A. The Borrowers are in the business of owning and operating retail coffee Stores and manufacturing and selling wholesale and retail specialty coffees. B. The Parent has entered into a Merger Agreement dated as of March 16, 1999 (the "CP Acquisition Agreement") to acquire all of the Capital Stock (the "CP Acquisition") of Coffee People. C. The Borrowers have requested that the Lender provide a term loan of $12,000,000 to be used for repayment of indebtedness and closing costs in connection with the CP Acquisition and a revolving line of credit to the Borrowers of up to $3,000,000 to be used for working capital, standby letters of credit for remodeling Stores and to develop or fund new coffee retail Stores via development and acquisition. D. The Lender is willing, subject to the terms and conditions set forth herein, to provide such credit facilities to the Borrowers. NOW, THEREFORE, in consideration of the premises and the mutual agreements herein contained, the parties hereto hereby agree as follows: SECTION 1. DEFINITIONS. As used herein, the terms shall have the following meanings: Accountants: KPMG LLP or other independent certified public accountants acceptable to the Lender. Acquisition: See definition of Permitted Acquisition. Adjusted Eurodollar Rate: As applied to any Interest Period, the rate per annum determined pursuant to the following formula: AER = [ IOR ]* --------------- [1.00 - RP] 6 AER = Adjusted Eurodollar Rate IOR = Interbank Offered Rate RP = Reserve Percentage ---------------- * The amount in brackets shall be rounded upwards, if necessary, to the next higher 1/100th of 1%. Where: The "Interbank Offered Rate" applicable to any Eurodollar Loan for any Interest Period means the rate of interest determined by the Lender to be the prevailing rate per annum at which deposits in U.S. dollars are offered to the Lender by first-class banks in the interbank Eurodollar market in which it regularly participates on or about 10:00 a.m. (Boston time) two Business Days before the first day of such Interest Period in an amount approximately equal to the principal amount of the Eurodollar Loan to which such Interest Period is to apply for a period of time approximately equal to such Interest Period; and The "Reserve Percentage" applicable to any Interest Period means the rate (expressed as a decimal) applicable to the Lender during such Interest Period under regulations issued from time to time by the Board of Governors of the Federal Reserve System for determining the maximum reserve requirement (including, without limitation, any basic, supplemental, emergency or marginal reserve requirement) of the Lender with respect to "Eurocurrency liabilities" as that term is defined under such regulations. The Adjusted Eurodollar Rate shall be adjusted automatically as of the effective date of any change in the Reserve Percentage. Affiliates: As applied to any Person, (a) if an individual, a spouse or relative of such person; (b) if a business entity, any partner, shareholder, member, director, officer or manager of such Person (except an equityholder of not more than 5% of the outstanding stock of any company listed on a national securities exchange or actively traded in the over-the-counter securities market); (c) any corporation, association, partnership, joint venture, firm or other entity of which such Person is a partner, stockholder (except an equityholder of not more than 5% of the outstanding stock of any company listed on a national securities exchange or actively traded in the over-the-counter securities market), venturer, member, director, officer or manager; and (d) any other Person directly or indirectly controlling, controlled by, or under common control with, such Person. Asset Sale: Any sale, lease, sale and leaseback, assignment, conveyance, transfer or other disposition ("Disposition") of property or a series of any such related Dispositions of property (excluding any such Disposition permitted by clause (a) of Section 7.4) for which any Company receives (valued at the initial principal amount thereof in the case of non-cash proceeds consisting of notes or other debt, securities and valued at fair market value in the case of other non-cash proceeds) $25,000 or more. Available Amount: See Section 2.1(a). -2- 7 Available Revolver Commitment: At any time, the aggregate Revolver Commitment, minus the Revolving Credit Outstandings. Base Rate: The higher of (i) the annual rate of interest announced from time to time by the Lender at its head office as its Base Rate, and (ii) the Federal Funds Effective Rate plus .50% per annum (rounded upwards, if necessary, to the next .125%). The Base Rate is not necessarily intended to be the lowest rate of interest determined by the Agent in connection with extensions of credit. Base Rate Loan: Any Loan bearing interest calculated by reference to the Base Rate. Borrower: See the Preamble. Business Day: (i) For all purposes other than as covered by clause (ii) below, any day other than a Saturday, Sunday or legal holiday on which banks in Boston, Massachusetts are open for the transaction of a substantial part of their commercial banking business; and (ii) with respect to all notices and determinations in connection with, and payments of principal and interest on, Eurodollar Loans, any day that is a Business Day described in clause (i) and that is also a day for trading by and between banks in the U.S. Dollar deposits in the interbank Eurodollar market. Capital Expenditures: As to any Person for any period, the sum of all amounts which would, in accordance with GAAP consistently applied, be included as additions to property, plant and equipment and other capital expenditures for such Person for such period, including without limitation amounts with respect to Capitalized Leases, but excluding (i) expenditures constituting the purchase price for Permitted Acquisitions and (ii) so long as no Event of Default exists at the time of such Asset Sale or casualty, amounts constituting Net Sale Proceeds of Asset Sales of the Coffee People Sale Stores and proceeds of casualty insurance policies to the extent permitted to be reinvested in the business of the Borrowers within 180 days after such Asset Sale or casualty to upgrade or remodel Stores or to make other improvements in the assets and operations of the Borrowers. . Capital Stock: Any and all shares, interests, participations or other equivalents (however designated) of capital stock of a corporation, any and all similar ownership interests in any Person which is not a corporation, and any and all warrants, options or other rights to acquire any of the foregoing. Capitalized Leases: Leases under which any Company is the lessee or obligor, the discounted future rental payment obligations under which are required to be capitalized on the balance sheet of the lessee or obligor in accordance with GAAP. Change in Control: for any reason (a) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a Person shall be deemed to have "beneficial ownership" of all securities that such Person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more than -3- 8 35% of the total outstanding Capital Stock (on a fully-diluted basis) of the Parent entitled to vote in the election of directors; (b) any Borrower shall cease to own of record and beneficially 100% of the issued and outstanding Capital Stock in each of its Subsidiaries (unless otherwise permitted hereunder); or (c) during any period of up to 24 consecutive months, commencing after the date of this Agreement, individuals who at the beginning of such 24 month period were directors of the Parent (together with any new director whose election by its Board of Directors or whose nomination for election by its shareholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the directors of the Parent then in office. Code: The Internal Revenue Code of 1986 and the rules and regulations promulgated thereunder, collectively, as the same may from time to time be supplemented or amended and remain in effect. Coffee People: See the Recitals. Coffee People Sales Stores: Those certain existing Coffee People company-owned Stores listed on Schedule 1(a) and located in Texas, Colorado, Oregon and Arizona which are intended to be sold by the Borrowers. Collateral: Any and all real and personal property of any of the Companies, whether tangible or intangible, in each case in which the Lender now has, is granted by this Agreement or otherwise, or hereafter acquires a security interest or any other lien, to secure any of the Obligations. Commitment Fee: See Section 2.3. Commitments: The Revolver Commitment and the Term Loan Commitment. Companies: The Borrowers and each of their Subsidiaries from time to time. Consolidated Cash Flow: For any period, without duplication, the sum of (a) the Consolidated EBITDA of the Companies for such period, minus (b) cash taxes in respect of income and profits for such period, minus (c) the aggregate amount of Maintenance Capital Expenditures during such period; in each case determined on a consolidated basis in accordance with GAAP. Consolidated EBITDA: For any period determined on a consolidated basis in accordance with GAAP, without duplication, the sum of (a) the Consolidated Net Income of the Companies for such period, plus (b) taxes in respect of income and profits, if any, paid or accrued by the Companies for such period, plus (c) Consolidated Interest Expense of the Companies for such period, plus (d) consolidated depreciation and amortization expenses of the Companies for such period (including amortization of goodwill and other intangibles and organizational costs), plus (e) other consolidated non-cash charges of the Companies for such period, plus (f) consolidated nonrecurring charges of the Companies for such period related to mergers and acquisitions, minus (g) other consolidated non-cash credits of the Companies for such period; provided that (i) if at any time during such Reference Period any Asset Sale shall have occurred, the Consolidated EBITDA for such Reference Period -4- 9 shall be reduced by an amount equal to the Consolidated EBITDA (if positive) attributable to the property that is the subject of such Asset Sale for such Reference Period or increased by an amount equal to the Consolidated EBITDA (if negative) attributable thereto for such Reference Period and (ii) if during such Reference Period an Acquisition shall have occurred, Consolidated EBITDA for such Reference Period shall be calculated after giving pro forma effect thereto as if such Acquisition occurred on the first day of such Reference Period. Consolidated EBITDAR: For any period, without duplication, the sum of (a) Consolidated EBITDA, plus (b) rental expense under Operating Leases; in each case determined on a consolidated basis in accordance with GAAP. Consolidated Financial Obligations: For any period, without duplication, the sum of all scheduled payments (including without limitation, principal and Consolidated Interest Expense) on Consolidated Funded Indebtedness of the Companies (including without limitation with respect to Capitalized Leases) which came due during such period, in each case determined on a consolidated basis in accordance with GAAP. Consolidated Funded Indebtedness: At any time, without duplication, as to any Person, the sum of (a) all indebtedness of such Person for borrowed money, (b) all obligations of such Person for the deferred purchase price of property or services (other than trade payables incurred in the ordinary course of such Person's business), (c) all obligations of such Person evidenced by notes, bonds, debentures or other similar instruments, (d) indebtedness created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property), (e) the principal portion of Capitalized Leases of such Person, (f) all obligations of such Person, contingent or otherwise, as an account party under acceptance, letter of credit (as to the face amount thereof plus, without duplication, LC Draw Obligations) or similar facilities, (g) all Guarantees of such Person in respect of Indebtedness of another Person, (h) all Indebtedness of another Person secured by (or for which the holder of such obligation has an existing right, contingent or otherwise, to be secured by) any Lien on property owned by such Person, whether or not such Person has assumed or become liable for the payment of such obligation, (i) all obligations of such Person in respect of Interest Rate Protection Agreements, (j) all obligations of such Person under take-or-pay or similar arrangements or under commodities agreements, (k) all preferred Capital Stock issued by such Person and which by the terms thereof could be (at the request of the holders thereof or otherwise) subject to mandatory sinking fund payments, redemption or other acceleration (other than as a result of a Change of Control or an Asset Sale that does not in fact result in a redemption of such preferred Capital Stock) at any time during the term of this Agreement, (l) the principal portion of all obligations of such Person under synthetic leases, (m) the Indebtedness of any partnership or unincorporated joint venture in which such Person is a general partner or a joint venturer, and (n) the outstanding attributed principal amount under any securitization transaction. Consolidated Interest Expense: For any period, without duplication, the sum of (a) interest expense (including amortization or write-off of debt discount and debt issuance costs) of the Companies for such period, (b) the interest component of all Capitalized Leases of the Companies for such period, and (c) all commitment fees, Letter of Credit Fees, fees relating to Interest Rate -5- 10 Protection Agreements and other fees, discounts, commissions and other charges incurred or payable by the Companies during such period relating to Indebtedness; in each case determined on a consolidated basis in accordance with GAAP. Consolidated Net Assets: As of any date on which the amount thereof is to be determined, the net book value of all assets of the Companies as determined on a consolidated basis in accordance with GAAP. Consolidated Net Income: For any period, the net income (or loss) of the Companies, excluding any extraordinary income (or loss) for such period (taken as a cumulative whole), after deducting all operating expenses, provisions for all taxes and reserves (including reserves for deferred income taxes) and all other proper deductions; all determined on a consolidated basis in accordance with GAAP. Controlled Group: All trades or businesses (whether or not incorporated) under common control that, together with the Companies, are treated as a single employer under Section 414(b) or 414(c) of that Code or Section 4001 of ERISA. CP Acquisition: See the Recitals. CP Acquisition Agreement: See the Recitals. Credit Extensions: The Loans and the Letters of Credit. Debt/Equity Proceeds Payments: See Section 2.7. Debt Issuance: The issuance of Consolidated Funded Indebtedness subordinated to the obligations of the Borrowers to pay principal of and interest on and other amounts due with respect to the Loans, the Notes and other Obligations on terms of subordination satisfactory to the Lender, and pursuant to documentation containing other terms and including, without limitation, interest, amortization, mandatory prepayments, covenants and events of default in form and substance satisfactory to the Lender. Default: An Event of Default or event or condition that, but for the requirement that time elapse or notice be given, or both, would constitute an Event of Default. Distribution: As to any Person, any direct or indirect: (i) declaration or payment of any dividend on or in respect of any Capital Stock of such Person (except, in the case of the Parent, a dividend payable solely in shares of Permitted Capital Stock); (ii) redemption, purchase or other retirement or acquisition of any Capital Stock of such Person, through a Subsidiary of such Person or otherwise; or (iii) return of capital by such Person to its shareholders or other equityholders as such; or (iv) other distribution on or in respect of any Capital Stock of such Person (except, in the case of the Parent, any distribution made by the Parent solely in shares of Permitted Capital Stock in connection with any stock split or reverse stock split). Encumbrances: See Section 7.3. -6- 11 Environmental Laws: Any and all applicable foreign, federal, state and local environmental, health or safety statutes, laws, regulations, rules, ordinances, policies and rules or common law (whether now existing or hereafter enacted or promulgated), of all governmental agencies, bureaus or departments which may now or hereafter have jurisdiction over any Borrower and all applicable judicial and administrative and regulatory decrees, judgments and orders, including common law rulings and determinations, relating to injury to, or the protection of, real or personal property or human health or the environment, including, without limitation, all requirements pertaining to reporting, licensing, permitting, investigation, remediation and removal of emissions, discharges, releases or threatened releases of Hazardous Materials, chemical substances, pollutants or contaminants whether solid, liquid or gaseous in nature, into the environment or relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of such Hazardous Materials, chemical substances, pollutants or contaminants. Without limiting the generality of the foregoing, the term shall encompass each of the following statutes and regulations promulgated thereunder, and amendments and successors to such statutes and regulations, as enacted and promulgated from time to time: (a) the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (codified in scattered sections of 26 U.S.C.; 33 U.S.C.; 42 U.S.C. and 42 U.S.C. Section 9601 et seq.); (b) the Resource Conservation and Recovery Act of 1976 (42 U.S.C. Section 6901 et seq. ); (c) the Hazardous Materials Transportation Act (49 U.S.C. Section 1801 et seq.); (d) the Toxic Substances Control Act (15 U.S.C. Section 2601 et seq.); (e) the Clean Water Act (33 U.S.C. Section 1251 et seq.); (f) the Clean Air Act (42 U.S.C. Section 7401 et seq.); (g) the Safe Drinking Water Act (21 U.S.C. Section 349; 42 U.S.C. Section 201 and Section 300 et seq.); (h) the National Environmental Policy Act of 1969 (42 U.S.C. Section 4321); (i) the Superfund Amendment and Reauthorization Act of 1986 (codified in scattered sections of 10 U.S.C.; 29 U.S.C.; 33 U.S.C. and 42 U.S.C.); and (j) Title III of the Superfund Amendment and Reauthorization Act (40 U.S.C. Section 1101 et seq.). Equity Issuance: any issuance or sale by any Company of (i) any of its Capital Stock, (ii) any warrants or options exercisable in respect of Capital Stock, or (iii) any other security or instrument if representing any Capital Stock (or the right to obtain any Capital Stock) in any Company. ERISA: The Employee Retirement Income Security Act of 1974 and the rules and regulations thereunder, collectively, as the same may from time to time be supplemented or amended and remain in effect. Eurodollar Loan: Any Revolving Loan bearing interest at a rate calculated by reference to the Adjusted Eurodollar Rate. Event of Default: See Section 8.1. Expiration Date: The fifth anniversary of the date hereof, or such earlier date on which the Revolver Commitment of the Lender shall terminate in accordance with the terms hereof. Federal Funds Effective Rate: For any day, a fluctuating interest rate per annum equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a -7- 12 Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average of the quotations for such day on such transactions received by the Lender from three Federal funds brokers of recognized standing selected by the Lender. Fee Letter: The Fee Letter among the Lender and the Borrowers dated as of June 30, 1999. Franchise Agreements: The franchise agreements between the Borrowers and their franchisees in effect from time to time. Franchisees: Each of the franchisees which is a party to a Franchise Agreement with any Borrower pursuant to a Franchise Agreement from time to time. FTC: The Federal Trade Commission, and any successor agency thereof. GAAP: For all purposes other than the financial statements contemplated by Sections 6.1(a), (b) and (c) of this agreement, GAAP shall mean generally accepted accounting principles in effect as of January 27, 1999, applied on a consistent basis. With respect to the financial statements contemplated by Sections 6.1(a) and (b) of this Agreement, GAAP shall mean generally accepted accounting principles in effect at the time of the effective dates thereof, applied on a consistent basis with past financial statements (unless otherwise mutually agreed to in writing by the parties hereto). Guaranty or Guarantees: All guarantee(s), endorsement(s) or other contingent or surety obligation(s) of any Company with respect to obligations of others, whether or not reflected on its balance sheet, including any obligation to furnish funds, directly or indirectly (whether by virtue of partnership arrangements, by agreement to keep-well or otherwise), through the purchase of goods, supplies or services, or by way of stock purchase, capital contribution, advance or loan, or to enter into a contract for any of the foregoing, for the purpose of payment of obligations of any other Person. Hazardous Material: Any substance (a) the presence of which requires or may hereafter require notification, investigation or remediation under any Environmental Law; (b) which is or becomes defined as a "hazardous waste", "hazardous material", "hazardous material or oil" or "hazardous substance" or "controlled industrial waste" or "pollutant" or "contaminant" or "chemical substance or mixture" under any present or future Environmental Law or amendments thereto including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act (43 U.S.C. Section 9601 et seq.) and any applicable local statutes and the regulations promulgated thereunder; (c) which is toxic, explosive, corrosive, flammable, infectious, radioactive, carcinogenic, mutagenic or otherwise hazardous and is or becomes regulated by any governmental authority, agency, department, commission, board, agency or instrumentality of any foreign country, and the United States, any state of the United States, or any political subdivision thereof to the extent any of the foregoing has or had jurisdiction over the Companies; or (d) without limitation, which contains gasoline, diesel fuel or other petroleum products, asbestos or polychlorinated biphenyls. Hedging Agreement: Any commodity swap or other agreement designed to protect against fluctuations in the price of coffee or coffee-related products. -8- 13 Indebtedness: As to any Person, all obligations, contingent or otherwise, that in accordance with GAAP should be classified on a Person's balance sheet as liabilities or to which reference should be made by footnotes. Initial Financial Statements: See Section 4.11. Insolvent or Insolvency: As applied to any Person, a Person as to which there has occurred one or more of the following events, as applicable: (a) dissolution (except for dissolution of Subsidiaries to the extent permitted hereunder); (b) termination of existence (except for mergers, consolidations or dissolutions to the extent permitted hereunder); (c) insolvency within the meaning of the United States Bankruptcy Code or other applicable statute; (d) such Person's inability to pay his or its debts as they come due; or (e) appointment of a receiver of any part of the property of, execution of a trust mortgage or an assignment for the benefit of creditors by, of the filing of a petition in bankruptcy or the commencement of any proceedings under any bankruptcy or insolvency laws, or any laws relating to the relief of debtors, readjustment or indebtedness or reorganization of debtors, or the offering of a plan to creditors for composition or extension, except for an involuntary proceeding commenced against such Person which is dismissed within 60 days after the commencement thereof without the entry of an order for relief or the appointment of a trustee. Intercompany Notes: See Section 7.1. Interest Period: (a) With respect to each Eurodollar Loan, the period commencing on the date of the making or continuation of or conversion to such Eurodollar Loan and ending one, two, three or six months thereafter, as the Borrowers may elect in the applicable Loan Request or Interest Rate Option Notice; and (b) with respect to each Base Rate Loan, the period commencing on the date of the making or continuation of or conversion to such Base Rate Loan and ending on the next Quarterly Date thereafter provided that, in each case: (i) any Interest Period (other than an Interest Period determined pursuant to clause (iv) below) that would otherwise end on a day that is not a Business Day shall be extended to the next succeeding Business Day unless, in the case of Eurodollar Loans, such Business Day falls in the next calendar month, in which case such Interest Period shall end on the immediately preceding Business Day; (ii) if the Borrowers shall fail to give notice as provided in Section 2.5, the Borrowers shall be deemed to have requested a conversion of the affected Eurodollar Loan to a Base Rate Loan on the last day of the then current Interest Period with respect thereto; (iii) any Interest Period relating to a Eurodollar Loan that begins on the last Business Day of a calendar month (or on a day for which there is not numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (iv) below, end on the last Business Day of a calendar month; (iv) any Interest Period that would otherwise end after the Expiration Date shall end on the Expiration Date; and -9- 14 (v) notwithstanding clause (iv) above, no Interest Period relating to a Eurodollar Loan shall have a duration of less than one month. Interest Rate Option Notice: See Section 2.5. Interest Rate Protection Agreement: Any interest rate swap agreement or other financial agreement or arrangement designed to protect any Company against fluctuations in interest rate. June, 1999 Offering: The 4,600,000 shares of common Capital Stock of the Parent being offered pursuant to the Prospectus in connection with the CP Acquisition. LC Draw Obligation: The Borrowers' obligation to reimburse the Lender on account of any drawing under any Letter of Credit as provided in Section 2.8(c). LC Exposure Amount: At any time, the sum of (i) the aggregate undrawn face amount of all Letters of Credit outstanding at such time, and (ii) the aggregate amount of all drawings under Letters of Credit for which the Lender shall not have been reimbursed by the Borrowers as provided in Section 2.8(c). Lease: Any Operating Lease or Capitalized Lease. Lender: See the Preamble. Letter of Credit: See Section 2.8(a). Letter of Credit Documents: See Section 2.8(a). Letter of Credit Fee: See Section 2.8(g). Loan Documents: Collectively, this Agreement, the Fee Letter, the Notes, the Letters of Credit, the Letter of Credit Documents, the Security Documents and any and all other agreements, instruments, certificates, Loan Requests, Interest Rate Option Notices or reports executed or delivered from time to time in connection with this Agreement, in each case as may be amended or restated from time to time. Loan Request: See Section 2.4. Loans: The Term Loan and the Revolving Loans. Maintenance Capital Expenditures: Capital Expenditures relating solely to expenditures with respect to fixed assets existing as of the date hereof, including without limitation coffee retail Stores, production facilities and corporate offices. Margin Stock: See Section 4.5. -10- 15 Material Adverse Effect: A material adverse effect on (a) the business, assets, property, operations, condition (financial or otherwise), liabilities or prospects of the Parent or of the Borrowers taken as a whole, (b) the ability of any Borrower to perform any material obligation under any of the Loan Documents to which it is bound, or (c) the validity or enforceability of (i) this Agreement, (ii) any of the other Transaction Documents, or (iii) any of the rights or remedies of the Lender hereunder or thereunder. Net Debt/Equity Proceeds: In the case of any Debt Issuance or Equity Issuance (other than an Equity Issuance constituting an Asset Sale), the aggregate amount of all cash received by any Company in respect thereof, net of reasonable, customary fees, discounts, commissions and expenses incurred by the Companies for such Debt Issuance or Equity Issuance. Net Sale Proceeds: With respect to any Asset Sale, the aggregate amount of all cash received by any Company in respect thereof, net of reasonable, customary fees, commissions and expenses incurred by the Companies for such Asset Sale net of taxes paid or reasonably estimated to be payable and for which reserves have been provided as a result thereof. Obligations: Any and all obligations (whether payment or performance related or otherwise) of any Company to the Lender or any of its affiliates of every kind and description, direct or indirect, absolute or contingent, primary or secondary, due or to become due, now existing or hereafter arising, which may arise under, out of, or in connection with, this Agreement (as may be amended or restated from time to time), any other Loan Document (as may be amended or restated from time to time), any Interest Rate Protection Agreement entered into with the Lender or any affiliate of the Lender or any other document made, delivered or given in connection herewith or therewith, whether on account of principal (including any increases thereto), interest, reimbursement obligations, fees, indemnities, costs, expenses (including all fees, charges and disbursements of counsel to the Lender that are required to be paid by the Borrowers pursuant to any Loan Document) or otherwise (including interest accruing after the maturity of the Credit Extensions and interest accruing after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to any Company, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding). Operating Leases: Leases or other periodic payment arrangements for the use of real or personal property, other than Capitalized Leases. Organizational Documents: See Section 4.2. PBGC: The Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA Permitted Acquisitions: The acquisition by any Borrower, whether by way of the purchase of assets or equity interests, by merger or consolidation or otherwise, of substantially all of the assets of or equity interests in a specialty coffee retail Store or Stores (each, an "Acquisition"), subject to the fulfillment of the following conditions: -11- 16 (a) At least 90% of all Stores owned and operated by each of the Borrowers as of the date of such Acquisition must each have a positive Store Cash Flow for the four fiscal quarters immediately preceding such Acquisition (excluding from such computation Stores not owned and operated by the Borrowers throughout such four quarter period and the existing 26 Gloria Jean's Stores owned and operated by Gloria Jean's Gourmet Coffees Corp. and Gloria Jean's Stores bought by Borrowers in the future from franchisees of Gloria Jean's Gourmet Coffees Franchising Corp.); (b) If such Acquisition involves the purchase of equity interests, the same shall be effected in such a manner as to assure that the acquired entity becomes a direct or indirect wholly-owned Subsidiary of the Parent; (c) No later than: (i) 15 days prior to the consummation of any such Acquisition or, if earlier, 10 business days after the execution and delivery of the related acquisition agreement, the Borrowers shall have delivered to the Lender a copy of executed counterparts of such acquisition agreement, together with all schedules thereto, and all applicable financial information, including new Projections (if such Acquisition involves more than five stores), updated to reflect such Acquisition and any related transactions, (ii) promptly following a request therefor, copies of such other information or documents relating to such Acquisition as the Lender shall have reasonably requested, and (iii) promptly following the consummation of such Acquisition, copies of the material agreements, instruments and documents executed and delivered at the closing under such acquisition agreement; (d) No Borrower nor any Subsidiary shall, in connection with any such Acquisition, assume or remain liable with respect to any Indebtedness (including any material tax or ERISA liability) of the related seller, except (i) Indebtedness to the extent permitted under Section 7.1 of this Agreement, (ii) trade obligations of such seller incurred in the ordinary course of business and necessary or desirable to the continued operation of the underlying Store business (but which do not constitute Consolidated Financial Obligations) and (iii) existing Operating Leases of Stores acquired in the Permitted Acquisition; (e) All assets and properties acquired in connection with such Acquisition shall be free and clear of any Encumbrances, other than Permitted Encumbrances; (f) Immediately prior to any such Acquisition and after giving effect thereto, no Default shall have occurred or be continuing; (g) Without limiting the generality of the foregoing, after giving effect to such Acquisition (including any Loan therefor) the Borrowers shall be in compliance with the provisions of Section 5, (i) calculated on a pro forma basis as of the end of and for the Reference Period most recently ended prior to the effective date of such Acquisition, and (ii) under the updated Projections referred to above (if applicable). The Borrowers shall provide to the Lender a certificate signed on behalf of the Borrowers by their treasurer demonstrating such compliance in reasonable detail; -12- 17 (h) On or before the consummation of each such Acquisition involving the purchase or formation of a Subsidiary, such Subsidiary shall be wholly-owned by a Borrower and the Loan Documents shall be revised pursuant to amendments satisfactory in form and substance to the Lender providing for such Subsidiary to become another "Borrower" hereunder and for compliance with all requirements of Section 2.13; and (i) On or before the consummation of each such Acquisition, the Borrowers and their Subsidiaries shall have complied with all of the requirements of Section 2.13 hereto, including the execution and delivery of any required Security Documents, and the Lender shall have received on behalf of the Lenders a first priority security interest in all of the assets so acquired, whether by way of an asset or equity interest acquisition, and the Lender shall have also received a first priority perfected security interest in and pledge of the equity interests of any such acquired Subsidiary. Permitted Capital Stock: Capital Stock of the Parent with respect to which the Parent has no obligation to make any Distributions prior to the indefeasible payment in full in cash of all Obligations. Permitted Encumbrances: See Section 7.3. Permitted Sale: See Section 7.4. Person: Any individual, corporation, partnership, joint venture, trust or unincorporated organization or any government or any agency or political subdivision thereof. Plan: At any time, an employee pension or other benefit plan that is subject to Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code and is either (a) maintained by any Company or any member of the Controlled Group for employees of any Company or any member of the Controlled Group or (b) if such Plan is established maintained pursuant to a collective bargaining agreement or any other arrangement under which more than one employer makes contributions and to which any Company or any member of the Controlled Group is then making or accruing an obligation to make contributions or has within the preceding five Plan years made contributions. Prospectus: The Prospectus dated June 30, 1999 of the Parent, filed with the SEC. Qualified Investments: As applied to any Company, investments in (a) notes, bonds or other obligations of the United States of America or any agency thereof that as to principal and interest constitute direct obligations or are guaranteed by the United States of America, (b) certificates of deposit or other deposit instruments or accounts of banks or trust companies organized under the laws of the United States or any state thereof that have capital and surplus of at least $500,000,000 and are members of the Federal Deposit Insurance Corporation, (c) commercial paper of the Lender or commercial paper of other issuers that is rated not less than prime-one or A-1 or their equivalents by Moody's Investors Service, Inc. or Standard & Poor's Corporation, respectively, or their successors or municipal bonds with at least the equivalent rating, (d) any repurchase agreement secured by any one or more of the foregoing, (e) securities with maturities of one year or less from -13- 18 the date of acquisition issued or fully guaranteed by any state, commonwealth or territory of the United States, by any political subdivision or taxing authority of any such state, commonwealth or territory or by any foreign government, the securities of which state, commonwealth, territory, political subdivision, taxing authority or foreign government (as the case may be) are rated at least A by S&P or A by Moody's; (f) securities with maturities of six months or less from the date of acquisition backed by standard letters of credit issued by the Lender or any commercial bank satisfying the requirements of clause (b) of this definition; or (g) shares of money market mutual or similar funds which invest exclusively in assets satisfying the requirements of clauses (a) through (f) of this definition; and (h) with the Lender's prior written consent, any Subsidiary provided such Subsidiary complies with the provisions of the Loan Documents applicable to it (including without limitation Section 2.12 hereof). Quarterly Dates: The last day of each fiscal quarter of the Borrowers, using their fiscal year accounting as in effect with respect to the Initial Financial Statements of the Parent. The Quarterly Dates for the period from the date hereof through fiscal year end 2004 are listed on Schedule 1 hereto. Reference Period: Each period of four consecutive fiscal quarters of the Borrowers ending on or after the Quarterly Date for the second fiscal quarter of fiscal year 1999. Remedial Work: All activities, including, without limitation, cleanup design and implementation, removal activities, investigation, field and laboratory testing and analysis, monitoring and other remedial and response actions, taken or to be taken, arising out of or in connection with Hazardous Materials, including without limitation (a) all activities included within the meaning of the terms "removal," "remedial action" or "response," as defined in 42 U.S.C. Section 9601(23), (24) and (25), and (b) all activities included within the meaning of the terms "remedial response actions" and "Remedial Response Implementation Plan (RRIP)," as defined in 310 CMR 40. Rental Expense: For any period, all rental expense under Operating Leases. Restricted Payment: With reference to any Company any (i) Distribution or (ii) any retirement, repurchase, defeasance or redemption of, any acquisition for value of, or any repayment of, any Debt Issuance other than as expressly permitted in writing by the Lender. Revolver Commitment: See Section 2.1. Revolving Credit Outstandings: At any time, the sum of (i) the aggregate principal amount of Revolving Loans outstanding at such time, plus (ii) the LC Exposure Amount at such time. Revolving Loans: See Section 2.1. Revolving Note: See Section 2.1. Sale Leaseback: See Section 7.2. -14- 19 Sale Proceeds Payments: See Section 2.7. SEC: The Securities and Exchange Commission, or any successor agency thereto. SEC Acquisition Filings: The Prospectus, Form S-1 and Form S-4 filed with the SEC relating to the June, 1999 Offering or the CP Acquisition. Security Documents: Collectively, the agreements and instruments referred to in Section 3.1 and any and all other agreements, documents and instruments executed by any Company or other Affiliates, to secure, or otherwise in connection with, the Obligations, all as amended from time to time. Store: Any store owned or controlled or franchised as franchisor directly or indirectly by any Company. Store Cash Flow: For any period as to any Store, determined in accordance with generally accepted accounting principles consistently applied, without duplication, the sum of the income (or loss) of such Store, excluding any extraordinary income (or loss) for such Store for such period, after deducting all operating expenses for such Store. Subsidiary: (a) Any corporation, association, joint stock company, business trust or other similar organization of which 50% or more of the ordinary voting power for the election of a majority of the members of the board of directors or other governing body of such entity is held or controlled by any Borrower or a Subsidiary of any Borrower; (b) any other such organization the management of which is directly or indirectly controlled by any Borrower or a Subsidiary of any Borrower through the exercise of voting power or otherwise; or (c) any joint venture, association, partnership or other entity in which any Borrower or any Subsidiary thereof has a 50% or greater equity interest. Term Loan: See Section 2.1. Term Loan Commitment: See Section 2.1. Term Loan Maturity Date: The fifth anniversary of the date hereof, or such earlier date on which all the Commitments of the Lender shall terminate in accordance with the terms hereof. Term Note: See Section 2.1. Transaction Documents: See Section 4.2. SECTION 2. THE CREDIT FACILITY. 2.1 The Loans and Notes. (a) Revolving Loans. The Lender agrees, subject to the terms of this Agreement, to make revolving credit loans (the "Revolving Loans") to the Borrower from time to time from and -15- 20 after the date hereof until the Expiration Date in an aggregate principal amount at any time outstanding up to, but not exceeding, $3,000,000 (the "Revolver Commitment"), minus the LC Exposure Amount at such time. Subject to the terms and conditions of this Agreement, from time to time from and after the date hereof until the Expiration Date, the Borrowers may borrow, repay and reborrow Revolving Loans. The Revolving Loans shall be evidenced by a promissory note in the form of Exhibit 2.1(a) hereto delivered to the Lender on the date hereof (as may be amended, renewed, substituted or replaced from time to time, the "Revolving Note"). (b) Term Loan. The Lender agrees, subject to the terms of this Agreement, to make a term loan (the "Term Loan") to the Borrowers on or about the date hereof in the principal amount of $12,000,000 to pay closing costs and to repay outstanding indebtedness in connection with the CP Acquisition. The Borrowers shall not be entitled to reborrow all or any part of the principal of the Term Loan which shall be paid or prepaid at any time. The Term Loan shall be evidenced by a promissory note in the form of Exhibit 2.1(b) hereto delivered to the Lender on the date hereof (as may be amended, renewed, substituted or replaced from time to time, the "Term Note"). (c) Notations on Notes. The Borrowers irrevocably authorize the Lender to make an appropriate notation on the applicable Note reflecting the making of each Loan and each payment on the Loans. The outstanding amount of the Loans entered in the computer records of the Lender shall be prima facie evidence of the principal amount thereof owing and unpaid to the Lender, but the failure to enter, or any error in so entering, any such amount shall not limit or otherwise affect the obligations of the Borrowers hereunder or under the Notes to make payments of principal, interest and other amounts due thereunder. 2.2 Scheduled Principal Repayments on the Loans. (a) Revolving Loans. The Borrowers shall pay to the Lender on the Expiration Date all then outstanding principal on the Revolving Loans. (b) Term Loan. The Borrower shall pay to the Lender principal of the Term Loan in 18 consecutive quarterly installments, payable on each March 31, June 30, September 30 and December 31, commencing on December 31, 1999. Each of the first 17 installments shall be in the amount of $666,666, with the final 18th installment being in the amount of all remaining outstanding principal due and payable in full on the Term Loan Maturity Date. 2.3 Closing Fee; Commitment Fees; Interest; Default Rate. (a) Closing Fee. The Borrowers shall pay jointly and severally pay to the Lender a fully-earned nonrefundable closing fee on the date hereof as set forth in the Fee Letter. (b) Commitment Fees. The Borrowers shall pay jointly to the Lender a commitment fee (the "Commitment Fee") on the daily unused portion of the Revolver Commitment (taking into account the LC Exposure Amount as usage) at a per annum rate equal to .50%. (c) Interest Rate. The Borrowers may elect an interest rate for each Loan (or one or more portions thereof) based on either the Base Rate or the applicable Adjusted Eurodollar Rate and -16- 21 determined as follows: (i) the rate for any Base Rate Loan shall be the Base Rate plus 1.25%; and (ii) the rate for any Eurodollar Loan shall be the applicable Adjusted Eurodollar Rate plus 3.00%. (e) Interest and Commitment Fees Payment Dates. Interest on Base Rate Loans shall be due and payable, without setoff, deduction or counterclaim, quarterly in arrears on each March 31, June 30, September 30 and December 31, commencing on September 30, 1999, and when such Base Rate Loan is due (whether at maturity, by reason of acceleration or otherwise). The rate of interest on Base Rate Loans shall change on the date of any change in the applicable Base Rate. Interest on each Eurodollar Loan shall be payable, without setoff, deduction or counterclaim, for the related Interest Period on the last day thereof and when such Eurodollar Loan is due (whether at maturity, by reason of acceleration or otherwise) and, if such Interest Period is longer than three months, at intervals of three months after the first day of such Interest Period. Commitment Fees shall be due and payable in arrears on each Quarterly Date and on the Expiration Date. (f) Default Rate; Late Fee. During the existence of any Event of Default, the outstanding principal under the Notes and, to the extent permitted by applicable law, any interest (under this Section 2.3) and fees or any other amounts due and payable hereunder (including without limitation overadvances) shall bear interest, from and including the date such Event of Default occurred at a rate per annum equal to the Base Rate plus 3.00%, which interest shall be compounded daily and payable on demand. If any payment of principal, interest or other amount due hereunder is not paid in full within 10 days after the same is due, the Borrowers shall also jointly and severally pay to the Lender a late fee in the amount of 5.0% of the amount not paid when due. Nothing in this Section 2.3(f) shall affect the Lender's right to exercise any of its rights or remedies, including those provided in Section 8.2 and in the Security Documents, arising upon the occurrence of an Event of Default. (g) Computations. Interest on the Loans and on fees and expenses shall be computed on the basis of the actual number of days elapsed over a 360-day year. Except as otherwise provided in the definition of the term "Interest Period" with respect to the Eurodollar Loans, if any payment hereunder or under the Notes shall be due and payable on a day which is not a Business Day, such payment shall be deemed due on the next following Business Day and interest shall be payable at the applicable rate specified herein through such extension period. 2.4 Requests for Loans. The Parent shall give the Lender telephonic notice confirmed in writing in the form of Exhibit 2.4 of each Loan requested hereunder (a "Loan Request") no later than (a) 1:00 PM (Boston time) on the same Business Day as the proposed date of any Base Rate Loan and (b) 1:00 PM (Boston time) on the third Business Day prior to the proposed date of any Eurodollar Loan. Each such notice shall specify (i) the principal amount thereof requested and the use or uses thereof, (ii) the proposed date of such Loan, (iii) the Interest Period for such Loan, if a Eurodollar Loan, and (iv) whether such Loan shall be a Base Rate Loan or a Eurodollar Loan. Notwithstanding anything herein to the contrary, any Revolving Loan that is to be used by any Borrower for the purpose of new unit growth or Permitted Acquisitions may only be used for such so long as 90% of the company-owned Stores as of the date of such Loan each have a positive Store Cash Flow for the four fiscal quarters immediately preceding the proposed date of such Revolving Loan (excluding from such computation Stores not owned and operated by the Borrowers throughout such four quarter period and the existing 26 Gloria Jean's Stores owned and operated by Gloria -17- 22 Jean's Gourmet Coffees Corp. and Gloria Jean's Stores purchased by Borrowers in the future from their franchisees of Gloria Jean's Gourmet Coffees Franchising Corp.). Each Loan Request shall be irrevocable and binding on the Borrowers and shall obligate the Borrowers to accept the Loan requested on the proposed date. Each Loan Request for a Base Rate Loan shall be in a minimum amount of $50,000 (and integrals thereof) and each Loan Request for a Eurodollar Loan shall be in a minimum amount of $100,000 (and integrals thereof); provided, that at no time shall there be more than five Eurodollar Loans outstanding. The Lender shall disburse Revolving Loans to the Borrowers by depositing them in a joint account of the Borrowers with the Lender. 2.5 Conversion and Continuance of Loans. (a) Conversion to a Different Type of Loan. The Borrowers may elect from time to time to convert any outstanding Loan to a Base Rate Loan or Eurodollar Loan, as the case may, be provided that (i) with respect to any such conversion of a Eurodollar Loan to a Base Rate Loan, the Borrowers shall provide the appropriate Interest Rate Option Notice in the form of Exhibit 2.5 hereto (an "Interest Rate Option Notice") to the Lender by 1:00 PM (Boston time) on the date of such proposed conversion; (ii) with respect to any such conversion of a Base Rate Loan to a Eurodollar Rate Loan, the Borrowers shall provide the appropriate Interest Rate Option Notice to the Lender by 1:00 PM (Boston time) at least three Business Days' prior to the date of such proposed conversion; (iii) with respect to any such conversion of a Eurodollar Loan into a Base Rate Loan, such conversion shall only be made on the last day of the related Interest Period; (iv) no Loans may be converted into a Eurodollar Loan when any Default has occurred and is continuing; (v) at no time shall there be more than five Eurodollar Loans outstanding; and (vi) any conversion of less than all of the outstanding Loans of either type into Loans of the other type shall be in a minimum principal amount of $100,000, provided that a conversion of a Eurodollar Loan to a Base Rate Loan shall be in a minimum principal amount of $100,000. (b) Continuance of an Interest Rate Option. The Borrowers may continue any Loan of either type as a Loan of the same type upon the expiration of the related Interest Period by providing an Interest Rate Option Notice to the Lender in compliance with the notice provisions set forth in Section 2.5(a); provided that no Eurodollar Loan may be continued as such when any Default has occurred and is continuing, but shall be automatically converted to a Base Rate Loan on the last day of the first applicable Interest Period which ends during the continuance of such Default; provided further that if the Borrowers fail to give a timely Interest Rate Option Notice, the affected Loan shall be automatically converted to a Base Rate Loan on the last day of the applicable Interest Period. 2.6 Reduction or Termination of the Revolver Commitment. (a) At any time prior to the Expiration Date, upon at least 10 days prior written notice, the Borrowers may permanently terminate or permanently reduce the Revolver Commitment. Any such reduction shall be in an amount of not less than $500,000 (or multiples thereof) or such lesser amount as equals the Available Revolver Commitment. Simultaneously with any such termination or reduction of the Revolver Commitment, the Borrowers shall (i) make any payments required under Section 2.11 and (ii) pay to the Lender any then accrued unpaid commitment fees and interest on the terminated Revolver Commitment or on the portion of the Revolver Commitment terminated pursuant to any reduction thereof; -18- 23 (b) The Revolver Commitment shall be automatically and permanently reduced to -0- on the Expiration Date, when all outstanding principal, accrued interest and other amounts due on the Revolving Note shall be due and payable in full. 2.7 Mandatory Payments and Prepayments. (a) Overdraws. If at any time the Revolving Credit Outstandings exceed the sum of the Revolver Commitment, the Borrowers shall immediately pay to the Lender the amount of such excess, which excess shall be first applied to any unpaid LC Draw Obligations or, if a Default then exists and is continuing, applied at the Lender's sole and absolute discretion. (b) Mandatory Payments in Connection with Prepayment Events. If at any time any portion of the Term Loan is outstanding, the Borrowers shall, not later than 30 days following each day any Net Sale Proceeds are received by any Borrower or any of its Subsidiaries in excess of $250,000 in the aggregate as to all Asset Sales in any fiscal year, pay to the Lender the amount of such Net Sale Proceeds (each such payment to the Lender being referred to herein as a "Sale Proceeds Payment"), provided, however, Net Sale Proceeds of any Asset Sale of the Coffee People Sale Stores need not be paid to the Lender until 180 days after such Asset Sale and then only to the extent not reinvested pursuant to the definition of "Capital Expenditures". (c) Mandatory Payments in Connection with Debt or Equity Issuances. If at any time any portion of the Term Loan is outstanding, the Borrowers shall, not later than 30 days following each day any Net Debt/Equity Proceeds are received by any Borrower or any of its Subsidiaries in excess of $250,000 in the aggregate as to all Debt Issuances and Equity Issuances of all Companies in any fiscal year, pay to the Lender the amount of such Net Debt/Equity Proceeds (each such payment to the Lender being referred to herein as a "Debt/Equity Proceeds Payment"); provided, however, no Debt/Equity Proceeds Payment shall be required with respect to the June, 1999 Offering. (d) Voluntary Prepayments. Subject to the provisions hereof, including without limitation the provisions of Section 2.11, the Borrowers may at any time voluntarily prepay the Loans in whole or in part (in multiples of $100,000 as to Eurodollar Loans and $50,000 as to Base Rate Loans) from time to time upon not less than the one Business Day's prior notice by 1:00 PM to the Lender with respect to Base Rate Loans and three Business Days' prior notice by 1:00 PM to the Lender with respect to Eurodollar Loans; provided, however, that (i) Eurodollar Loans may be repaid only on the last day of an Interest Period therefor, and (ii) all repayments of Eurodollar Loans or any portion thereof shall be made together with payment of all interest accrued on the amount repaid and other amounts due with respect thereto through the date of such repayment. (e) Application of Payments. (i) If no Default then exists hereunder, all Sale Proceeds Payments and all Debt/Equity Proceeds Payments shall be applied to principal of the Term Loan in inverse order of maturity. -19- 24 (ii) Except as set forth in subparagraph (i) above (or if a Default exists in which case all payments and prepayments may be applied as the Lender elects), all payments and repayments made pursuant to the terms hereof shall be applied (A) first to all (if any) amounts (except principal, interest and fees) due and payable under this Agreement at such time, (B) then to payment of all fees due and payable at such time, (C) then to interest due and payable at such time, (D) then to accrued interest, (E) then to principal of Base Rate Loans, (F) then to principal of Eurodollar Loans, and (G) finally, to all other Obligations. 2.8 Letters of Credit. (a) Letter of Credit Commitment. Subject to the execution and delivery by the Borrowers of a letter of credit application and any other related documents on the Lender's customary forms in effect from time to time (collectively, the "Letter of Credit Documents") and in reliance upon the representations and warranties of the Borrowers contained herein, the Lender agrees from time to time until the Expiration Date to issue, extend and renew for the account of any Borrower one or more standby letters of credit (each individually, a "Letter of Credit"), in such form as may be requested from time to time by the Borrowers and agreed to by the Lender. In the event and to the extent that any provision of any Letter of Credit Document shall be inconsistent with any provision of this Agreement, then the provisions of this Agreement shall govern. (b) Conditions to Issuance of Letters of Credit; Etc. (i) The obligation of the Lender to issue, extend or renew any Letter of Credit hereunder shall be subject to the conditions for Loans set forth in Section 3 and to the following conditions: (A) Such Letter of Credit shall provide for payment in U.S. Dollars and shall expire by its terms no later than the earlier to occur of (A) 30 days prior to the Expiration Date and (b) one year from the date of its issuance; (B) After giving effect to such issuance, extension or renewal, (1) the aggregate outstanding principal amount of the Revolving Loans shall not exceed the Available Revolver Commitment and (2) the sums of the aggregate LC Exposure Amount shall not exceed $1,000,000; (C) The form and terms of each Letter of Credit and the related Letter of Credit Documents shall be acceptable to the Lender; and (D) Each Letter of Credit shall be issued to support obligations of one or more of the Borrowers incurred in the ordinary course of its or their business. (ii) Whenever the Borrowers desire to have a Letter of Credit issued, extended or renewed, the Borrowers will furnish to the Lender a written application therefor which shall (A) be received by the Lender not less than three Business Days prior to the proposed date of issuance, extension or renewal and (B) specify (1) such proposed date (which must be a Business Day), (2) the expiration date of such Letter of Credit, (3) the name and address of -20- 25 the beneficiary of the Letter of Credit, (4) the amount of such Letter of Credit, and (5) the purpose and proposed form of such Letter of Credit. Each Letter of Credit shall be subject to the International Standby Practices (1998) and, to the extent not inconsistent therewith, the laws of the Commonwealth of Massachusetts. (c) LC Draw Obligations of the Borrowers. In order to induce the Lender to issue, extend and renew each Letter of Credit, the Borrowers hereby jointly and severally agree to reimburse or pay to the Lender: (i) except as otherwise expressly provided in paragraph (ii) below, on the Business Day immediately following each date that any draft presented under such Letter of Credit is honored by the Lender or the Lender otherwise makes a payment with respect thereto, as indicated in the notice thereof from the Lender to the Borrowers (A) the amount paid by the Lender under or with respect to such Letter of Credit, and (B) the amount of any taxes, fees, charges or other reasonable costs and expenses whatsoever incurred by the Lender in connection with any payment made by the Lender under or with respect to such Letter of Credit; and (ii) upon the termination or reduction of the Revolver Commitment, or the acceleration of the LC Draw Obligations in accordance with Section 8.1, an amount equal to the LC Exposure Amount (or with respect to a reduction, the excess thereof over the reduced aggregate Revolver Commitment), which amount shall be held by the Lender as cash collateral for all LC Draw Obligations. Interest shall accrue on any and all amounts remaining unpaid by the Borrowers under this Section 2.8 at any time from the date of any draw under a Letter of Credit until payment in full (whether before or after judgment) at the rate specified in Section 2.3 for principal on the Revolving Loans until the Business Day immediately following such draw and, thereafter, at the default rate set forth in Section 2.3, and shall be payable to the Lender on demand. (d) Revolving Loans to Satisfy LC Draw Obligations. The Borrowers may elect to satisfy any LC Draw Obligation arising under paragraph (c)(i) of this Section by borrowing a Base Rate Loan in the amount thereof and applying the proceeds thereto, provided that (i) all conditions to such Revolving Loan set forth in Section 3 shall have been satisfied in full and (ii) after giving effect to such Revolving Loan and the application of proceeds thereof, the Revolving Credit Outstandings will not exceed the Revolver Commitment. (e) Borrowers' Obligations Absolute. The Borrowers assume all risks in connection with the Letters of Credit. The Borrowers' obligations under this Section 2.8 shall be absolute and unconditional under any and all circumstances and irrespective of the occurrence of any Default or any condition precedent whatsoever or any setoff, counterclaim or defense to payment which any Borrower may have or have had against the Lender or any beneficiary of a Letter of Credit. The Borrowers also agree that the Lender shall not be responsible for, and the Borrowers' LC Draw Obligations shall not be affected by, among other things, (i) the validity, genuineness or enforceability of documents or of any endorsements thereon, even if such documents should in fact prove to be in any or all respects invalid, insufficient (provided all such documents conform on their -21- 26 face), fraudulent or forged, or (ii) any dispute between or among any Borrower, any of its Subsidiaries, the beneficiary of any Letter of Credit or any financing institution or other party to which any Letter of Credit may be transferred or any claims or defenses whatsoever of any Borrower or any of its Subsidiaries against the beneficiary of any Letter of Credit or any such transferee. The Lender shall not be liable for any error, omission, interruption or delay in transmission, dispatch or delivery of any message or advice, however transmitted, in connection with any Letter of Credit. The Borrowers agree that any action taken or omitted to be taken by the Lender under or in connection with each Letter of Credit and the related drafts and documents, if done in good faith without gross negligence, shall be binding upon the Borrowers and shall not subject the Lender to any liability. (f) Reliance by Lender. The Lender shall be entitled to rely, and shall be fully protected in relying upon, any Letter of Credit, draft, writing, resolution, notice, consent, certificate, affidavit, letter, telegram, telecopy, telex or teletype message, statement, order or other document believed by it to be genuine and correct and to have been signed, sent or made by the proper Person and upon advice and statements of legal counsel, independent accountants and other experts selected by the Lender. (g) Letter of Credit Fee. In order to induce the Lender to issue, extend and renew each Letter of Credit, the Borrowers hereby agree jointly and severally to pay to the Lender quarterly in arrears on the Quarterly Dates with respect to each such issuance, extension and renewal a fee (in each case, a "Letter of Credit Fee") on the stated amount of such Letter of Credit at a rate per annum equal to 3.00%. In addition, the Borrowers shall pay to the Lender any and all standard charges customarily made by the Lender in connection with such issuance, extension or renewal. 2.9 Changed Circumstances. (a) Eurodollar Loans. In the event that: (i) on any date on which the Adjusted Eurodollar Rate would otherwise be set, the Lender shall have determined in good faith (which determination shall be final and conclusive) that adequate and fair means do not exist for ascertaining the Interbank Offered Rate, or (ii) at any time the Lender shall have determined in good faith (which determination shall be final and conclusive) that: (A) the making or continuation of, or conversion of any Base Rate Loan to, a Eurodollar Loan has been made impracticable or unlawful by (1) the occurrence of a contingency that materially and adversely affects the interbank eurodollar market or (2) compliance by the Lender in good faith with any applicable law or governmental regulation, guideline or order or interpretation or change thereof by any governmental authority charged with the interpretation or administration thereof or with any request or directive of any such governmental authority (whether or not having the force of law); or -22- 27 (B) the Adjusted Eurodollar Rate shall no longer represent the effective cost to the Lender for U.S. dollar deposits in the interbank market for deposits in which they regularly participate; then, and in any such event, the Lender shall notify the Borrowers. Until the Lender notifies the Borrowers that the circumstances giving rise to such notice no longer apply, the obligation of the Lender to allow selection by the Borrowers of Eurodollar Loans shall be suspended. If at the time the Lender so notifies the Borrowers, the Borrowers have previously given the Lender a Loan Request or Interest Rate Option Notice with respect to one or more Eurodollar Loans but such Loan or Loans have not yet gone into effect, such notification by the Borrowers shall be deemed to be void and the Loan or Loans shall bear interest at the rate then applicable to Base Rate Loans. Upon such date as the Lender shall specify in such notice (which shall be the last day of applicable Interest Period, if an earlier date is not required), the Borrowers shall prepay all outstanding Eurodollar Loans, together with interest thereon, and may borrow Base Rate Loans in accordance with this Agreement by delivering an Interest Rate Option Notice pursuant to Section 2.5. In the event that the Lender determines at any time following the giving of notice pursuant to this clause that it may lawfully make Eurodollar Loans, the Lender shall give notice thereof to the Borrowers of such determination, whereupon the Borrowers' right to request, and the Lender's obligation to make, Eurodollar Loans shall be restored. (b) All Credit Extensions. After the date hereof, in case any change in any existing or any new law, regulation, treaty or official directive or the interpretation or application thereof by any court or by any governmental authority charged with the administration thereof or the compliance with any guideline or request of any central bank or other governmental authority (whether or not having the force of law): (i) subject to (c) below, subjects the Lender to any tax with respect to payments of principal or interest or any other amounts payable hereunder by any Borrower or otherwise with respect to the transactions contemplated hereby (except for taxes on the overall net income of such Persons imposed by the United States of America or any political subdivision thereof), or (ii) imposes, modifies or deems applicable any deposit insurance, reserve, special deposit or similar requirement against assets held by, or deposits in or for the account of, or Loans or Letters of Credit issued by the Lender (other than such requirements as are already included in the determination of the Adjusted Eurodollar Rate), or (iii) imposes upon the Lender any other condition with respect to the Loans or the Letters of Credit or otherwise with respect to its performance under this Agreement, and the result of any of the foregoing is to increase the cost to the Lender, reduce the income receivable by the Lender or impose any expense with respect to any Loan or Letter of Credit (in each case without duplication of amounts described in Section 2.10), the Lender shall so notify the Borrowers. The Borrowers agree to pay to the Lender the amount of such increase in cost, reduction in income or additional expense as and when such cost, reduction or expense is incurred or determined, upon demand after presentation by the Lender of a statement in the amount and setting -23- 28 forth the Lender's calculation thereof, which statement shall be deemed true and correct absent manifest error. (c) All payments made by the Borrowers under the Loan Documents shall be made free and clear of, and without deduction or withholding for or on account of, any present or future income, stamp or other taxes, levies, imposts, duties, charges, fees, deductions or withholdings, now or hereafter imposed, levied, collected, withheld or assessed by any governmental authority, excluding net income taxes and franchise taxes (imposed in lieu of net income taxes) imposed on the Lender as a result of a present or former connection between the Lender and the jurisdiction of the governmental authority imposing such tax or any political subdivision or taxing authority thereof or therein (other than any such connection arising solely from the Lender having executed, delivered or performed its obligations or received a payment under, or enforced, any Loan Document). If any such non-excluded taxes, levies, imposts, duties, charges, fees, deductions or withholdings ("Non-Excluded Taxes") or other stamp or documentary taxes or excise or property taxes, charges or similar levies arising from any payment made hereunder or from the execution, delivery or enforcement of, or otherwise with respect to, this Agreement or any other Loan Document ("Other Amounts") are required to be withheld from any amounts payable to the Lender hereunder, the amounts so payable to the Lender shall be increased to the extent necessary to yield to the Lender (after payment of all Non-Excluded Taxes and Other Amounts) interest or any such other amounts payable hereunder at the rates or in the amounts specified in this Agreement or such other Loan Document, provided, however, that the Borrowers shall not be required to increase any such amounts payable to the Lender with respect to any Non-Excluded Taxes (i) that are attributable to the Lender's failure to comply with the requirements of paragraph (e) or (f) of this Section or (ii) that are United States withholding taxes imposed on amounts payable to the Lender at the time the Lender becomes a party to this Agreement, except to the extent that the Lender's assignor (if any) was entitled, at the time of assignment, to receive additional amounts from the Borrowers with respect to such Non-Excluded Taxes pursuant to this Section. In addition, the Borrowers shall pay any Other Amounts to the relevant governmental authority in accordance with applicable law. (d) Whenever any Non-Excluded Taxes or Other Amounts are payable by the Borrowers, as promptly as possible thereafter the Borrowers shall send to the Lender a certified copy of an original official receipt received by the Borrowers showing payment thereof. If the Borrowers fail to pay any Non-Excluded Taxes or Other Amounts when due to the appropriate taxing authority or fails to remit to the Lender the required receipts or other required documentary evidence, the Borrowers hereby indemnify the Lender for any incremental taxes, interest or penalties that may become payable by the Lender as a result of any such failure. (e) The Lender or any participant or successor or assignee of the Lender that is not a citizen or resident of the United States of America, a corporation, partnership or other entity created or organized in or under the laws of the United States of America (or any jurisdiction thereof), or any estate or trust that is subject to federal income taxation regardless of the source of its income (a "Non-U.S. Lender") shall deliver to the Borrowers (or, in the case of a participant, to the Lender) two copies of either U.S. Internal Revenue Service Form 1001 or Form 4224, or, in the case of a Non-U.S. Lender claiming exemption from U.S. federal withholding tax under Section 871(h) or 88 1 (c) of the Code with respect to payments of "portfolio interest", a statement substantially in the form of Exhibit 2.9 (an "Exemption Certificate") and a Form W-8, or any subsequent versions -24- 29 thereof or successors thereto, properly completed and duly executed by such Non-U.S. Lender claiming complete exemption from, or a reduced rate of, U.S. federal withholding tax on all payments by the Borrowers under this Agreement and the other Loan Documents. Such forms shall be delivered by each Non-U.S. Lender on or before the date it becomes a party to this Agreement (or, in the case of any participant, on or before the date such participant purchases the related participation). In addition, each Non-U.S. Lender shall deliver such forms promptly upon the obsolescence or invalidity of any form previously delivered by such Non-U.S. Lender. Each Non-U.S. Lender shall promptly notify the Borrowers at any time it determines that it is no longer in a position to provide any previously delivered certificate to the Borrowers (or any other form of certification adopted by the U.S. taxing authorities for such purpose). Notwithstanding any other provision of this Section, a Non-U.S. Lender shall not be required to deliver any form pursuant to this Section that such Non-U.S. Lender is not legally able to deliver. (f) The Lender or any participant or successor or assignee of the Lender that is entitled to an exemption from or reduction of non-U.S. withholding tax under the law of the jurisdiction in which any Borrower is located, or any treaty to which such jurisdiction is a party, with respect to payments under this Agreement shall deliver to the Borrowers (with a copy to the Lender), at the time or times prescribed by applicable law or reasonably requested by the Borrowers, such properly completed and executed documentation prescribed by applicable law as will permit such payments to be made without withholding or at a reduced rate, provided that such Person is legally entitled to complete, execute and deliver such documentation and in such Person's judgment such completion, execution or submission would not materially prejudice its legal position. (g) If the Lender determines that it has recovered or used as a credit any amount withheld on its account pursuant to this section, it shall reimburse the Borrowers to the extent of such amount so determined to have been recovered or used as a credit, provided that nothing contained in this paragraph (g) shall require the Lender to make available its tax returns (or any other information relating to its taxes which it deems to be confidential). (h) The agreements in this Section shall survive the termination of this Agreement and the payment of the Obligations. 2.10 Capital Adequacy. The Lender shall notify the Borrowers if, after the date hereof, the Lender determines that (a) the adoption of or change in any law, rule, regulation or guideline regarding capital requirements for banks or bank holding companies , or any change in the interpretation or application thereof by any governmental authority charged with the administration thereof, or (b) compliance by any such Person or its parent bank holding company with any guideline, request or directive of any such entity regarding capital adequacy (whether or not having the force of law), has the effect of reducing the return on such Person's or such holding company's capital as a consequence of such Person's commitment to make Loans or issue Letters of Credit hereunder to a level below that which such Person or such holding company could have achieved but for such adoption, change or compliance (taking into consideration such Person's or such holding company's then existing policies with respect to capital adequacy and assuming the full utilization of such entity's capital and excluding any such reduction resulting from a decline in such Person's capital or capital ratios) by any amount reasonably deemed by such Person to be material. The Borrowers agree to pay to the Lender the amount of such reduction of return of capital within 30 -25- 30 days after presentation by the Lender of a statement in the amount and setting forth the Agent's or such Lender's calculation thereof, which statement shall be deemed true and correct absent manifest error. In determining such amount, the Lender may use any reasonable averaging and attribution methods used in similar circumstances. 2.11 Payments Before End of Eurodollar Period. If any Borrower for any reason makes any payment or prepayment (whether voluntary or mandatory) of principal with respect to any Eurodollar Loan on any day other than the last day of the applicable Interest Period, or fails to borrow, continue or convert to a Eurodollar Loan after giving a Loan Request or Interest Rate Option Notice pursuant to Section 2.4 or 2.5, or if any Eurodollar Loan is accelerated pursuant to Section 8.1, the Borrowers shall pay to the Lender a makewhole payment pursuant to the following formula: L = (R - T) x P x D --------------- 360 L = amount payable to the Lender R = interest rate on such Loan T = effective interest rate per annum at which any readily marketable bond or other obligation of the United States, selected at the Lender's sole discretion, maturing on or near the last day of the then applicable Interest Period and in approximately the same amount as such Loan can be purchased by the Lender on the day of such payment of principal or failure to borrow, continue or convert P = the amount of principal prepaid or the amount of the requested Loan D = the number of days remaining in the Interest Period as of the date of such payment or the number of days of the requested Interest Period The Borrowers shall pay such amount upon demand upon presentation by the Lender of a statement setting forth the amount and the Lender's calculation thereof pursuant hereto, which statement shall be deemed true and correct absent manifest error. 2.12 Security. The Obligations, whether under this Agreement, the Notes, the Letter of Credit Documents, the other Loan Documents or otherwise, shall be secured at all times by: (a) a first priority perfected security interest in all presently owned and hereafter acquired tangible and intangible personal property and fixtures of the Borrowers and their Subsidiaries (including without limitation all Intercompany Notes and trademarks and service marks and licenses), subject only to Permitted Encumbrances, together with any landlord waivers with respect to the locations of such personal property and fixtures (provided that landlord waivers will not be required for individual Stores other than the Companies' so-called coffee houses) and, after an Event of Default has been declared by the Lender, lock box or agency account agreements with respect to cash receipts; and (b) a first priority perfected pledge of all of the issued and outstanding shares of Capital Stock of all of the Borrowers other than the Parent. -26- 31 The Borrowers agree to take such actions (and to cause their Subsidiaries, if any, to take such actions) as the Lender may reasonably request from time to time in order to cause the Lender to be secured at all times as described in this Section. 2.13 Use of Proceeds. Each of the Borrowers hereby covenants, warrants and represents that proceeds of the Term Loan shall be used for closing costs and repayment of outstanding indebtedness in connection with the CP Acquisition and all Revolving Loans shall be used for the Borrowers' working capital and general corporate purposes, for remodeling of Stores and, so long as 90% of the Stores owned and operated by the Borrowers as of the date of such Loan each have a positive Store Cash Flow for the four fiscal quarters immediately preceding such Revolving Loan (excluding from such computation Stores not owned and operated by the Borrowers throughout such four quarter period and the existing 26 Gloria Jean's Stores owned and operated by Gloria Jean's Gourmet Coffees Corp. and Gloria Jean's Stores bought by Borrowers in the future from franchisees of Gloria Jean's Gourmet Coffees Corp.) to fund new unit growth and for Permitted Acquisitions. 2.14 Time and Method of Payments. All payments of principal, interest, fees and other amounts (including indemnities) payable by the Borrowers hereunder shall be made in U.S. Dollars, in immediately available funds, without deduction, setoff or counterclaim, to the Lender at its principal office on the date on which such payment shall become due; provided, however, that any payment not received by the Lender by 3:00 PM, (Boston time) on the date made shall be deemed received on the next Business Day (but no Default shall be deemed to have occurred as a result thereof under Section 8.1 if payment is received after 3:00 PM (Boston time) but prior to 5:00 PM (Boston time) on the date on which such payment shall become due). The Lender may, but shall not be obligated to, debit the amount of any such payment which is not made by such time to any deposit account of any of the Borrowers with the Lender. Except as otherwise provided in the definition of the term "Interest Period" with respect to the Eurodollar Loans, if any payment of principal or interest becomes due on a day other than a Business Day, such payment may be made on the next succeeding Business Day, and such extension shall be included in computing interest in connection with such payment. All payments hereunder and under the Notes shall be made without setoff or counterclaim. SECTION 3. CONDITIONS OF CREDIT EXTENSIONS. 3.1 Conditions to Initial Credit Extension. The obligations of the Lender to make the initial Credit Extensions hereunder are subject to the fulfillment of the following conditions precedent: (a) Receipt by the Lender of the following documents, certificates and opinions in form and substance satisfactory to the Lender, duly executed and delivered as follows: (i) This Agreement, executed and delivered by all Borrowers; (ii) The Notes executed and delivered by all Borrowers; -27- 32 (iii) The Security Documents executed and delivered by all Borrowers and such stock certificates, stock powers, assignments, consents, landlord waivers, UCC financing statements and other instruments and documents as the Lender shall deem necessary to satisfy the requirements of Section 2.12, provided the Borrowers need use only best efforts in obtaining such landlord waivers; (v) An officer's certificate executed by the chief financial officer of each of the Borrowers in the form provided by the Lender, including all attachments thereto; (vi) Certificates of insurance or insurance binders evidencing compliance with Section 6.3 (including the required lender's loss payable endorsements); and (vii) A favorable legal opinion satisfactory to the Lender, addressed to the Lender and its counsel, from Gibson Dunn & Crutcher LLP, general counsel to the Borrowers and their Subsidiaries, if any; provided, however, an authority opinion from Illinois counsel to the Borrowers who are Illinois corporations need not be delivered to Lender until July 31, 1999; and (viii) A favorable legal opinion satisfactory to the Lender, addressed to the Lender and its counsel, from Knobbe Martins Olsen & Bear, trademark counsel to the Borrowers and their Subsidiaries, if any. (b) The Borrowers shall have paid the fee required by the Fee Letter and the other fees required to be paid as of the date of such Credit Extension and all reasonable fees and expenses of the Lender's counsel through the date of such Credit Extension. (c) The Borrowers shall have provided the Lender with such payoff letters, payment instructions and other additional instruments, certificates, opinions and other documents as the Lender or its counsel shall reasonably request. (d) The Parent shall have received no less than $18,000,000 in Net Debt/Equity Proceeds from the June, 1999 Offering and shall have provided Lender with satisfactory evidence thereof. (e) The closing of the CP Acquisition (including all conditions precedent thereto) shall have been consummated in accordance with the terms of the CP Acquisition Agreement and the SEC Acquisition Filings (except for that portion of the Indebtedness being repaid with proceeds of the Term Loan) and the Borrowers shall constitute the Parent and all of its direct and indirect Subsidiaries. (f) All governmental or other third party approvals necessary or advisable for this Agreement, the CP Acquisition, the June, 1999 Offering or any transactions contemplated thereby or by the SEC Acquisition Filings shall have been obtained and be in full force and effect (including without limitation any consent of the shareholders of the Parent and Coffee People, the SEC, the FTC and the U.S. Department of Justice). -28- 33 (g) The Lender shall be satisfied that no litigation or other legal proceeding exists which could reasonably be expected to result in a Material Adverse Effect or which restrains or attempts to restrain or undo the consummation of the CP Acquisition or any portion thereof. (h) All corporate, partnership and other proceedings, and all documents, instruments and other legal, diligence and financial matters in connection with the transactions contemplated by the Loan Documents shall be reasonably satisfactory in form and substance to the Lender and its counsel. 3.2 Conditions to All Credit Extensions. The obligation of the Lender to make any Credit Extension (including the initial Credit Extension) is subject to the following additional conditions: (a) All representations and warranties contained in this Agreement or otherwise made in writing by or on behalf of any of the Borrowers or any of their Subsidiaries in connection with the transactions contemplated hereby shall be true and correct in all material respects at the time of each such Credit Extension (except to the extent such representations and warranties were expressly made only as of a specific date and except to the extent affected by transactions occurring after the date hereof and permitted hereunder), with and without giving effect to the Credit Extension at such time and the application of the proceeds thereof. (b) At the time of each such Credit Extension (i) the Borrowers and their Subsidiaries shall have performed and complied with all covenants required in this Agreement to be performed or complied with by it prior to the making of such Credit Extension, (ii) no Default shall have occurred and be continuing or would result from such Credit Extension, and (iii) no event or condition shall have occurred which could reasonably be likely to have a Material Adverse Effect. (c) As to any such Credit Extension, the Lender shall have received a properly completed Loan Request or Letter of Credit Documents, as appropriate. (d) The Lender shall have received such other supporting documents and certificates as it may reasonably request. Each request for a Credit Extension shall be deemed to constitute the Borrowers' representations and warranty that all of the foregoing conditions in Sections 3.1 and 3.2 have been satisfied in full. SECTION 4. REPRESENTATIONS AND WARRANTIES. In order to induce the Lender to enter into this Agreement and make the Credit Extensions hereunder, each of the Borrowers hereby confirms the representations and warranties set forth in the Security Documents (which are incorporated by reference herein) and, further, represents and warrants (all of which representations and warranties assume the making of the initial Credit Extensions hereunder) as follows: 4.1 Organization and Qualification. Each of the Companies (a) is a corporation duly organized, validly existing and in good standing under the laws of its state of formation (as designated on Schedule 4.1); (b) has all requisite corporate power and authority to own its property and conduct its business as now conducted and as presently contemplated; and (c) is duly qualified -29- 34 and in good standing in each jurisdiction where the nature of its properties or its business requires such qualification, as specified in Schedule 4.1, except to the extent that the failure to be so qualified could not reasonably be expected to have a Material Adverse Effect. Schedule 4.1 also sets forth each of the Organizational Documents to which any Company is a party. 4.2 Corporate Authority. The execution, delivery and performance of each of the Loan Documents and the CP Acquisition Agreement and each of the documents contemplated thereby (together with the Loan Documents, the "Transaction Documents") and the transactions contemplated thereby (including without limitation the granting of security interests thereunder in favor of the Lender) are within the corporate authority of each of the Companies, have been authorized by all necessary corporate proceedings on the part of each of the Companies, and do not and will not contravene any provision of law (including without limitation the rules and provision of law or the charter documents or by-laws (collectively, "Organizational Documents")) of any of the Companies, or contravene any provisions of, or constitute a Default hereunder or a default under any other material agreement (including any Lease, any shareholder agreement, any license agreement or any supplier contracts), instrument, judgment, order, decree, permit, license or undertaking binding upon or applicable to any of the Companies or any of its properties, or result in the creation, other than in favor of the Lender, of any Encumbrance upon any of the properties of any of the Companies. 4.3 Valid Obligations. Each of the Transaction Documents and all of its terms and provisions (including the security interests granted thereunder to the Lender) are legal, valid and binding obligations of each of the Companies who are named as parties thereto, enforceable in accordance with its respective terms. 4.4 Approvals. The execution, delivery and performance of the Transaction Documents and the transactions contemplated thereby do not require any approval or consent of, or filing or registration with, any governmental or other agency or authority or any other Person, except as disclosed on Schedule 4.4 and all of such approvals or consents and filings or registrations have been obtained or completed, as applicable, as of the date hereof to the extent material to the business of any of the Companies. 4.5 Title to Properties; Absence of Liens. Schedule 4.5 (as updated from time to time as required hereunder) lists all of the Stores of each of the Companies, including the owner thereof, the address thereof, and whether such Store is company-owned or franchised to a Franchisee pursuant to a Franchise Agreement. As of the date hereof or as of the date of the latest required quarterly financials, as applicable, the Companies own the number of company-owned Stores listed on Schedule 4.5 (as updated from time to time as required hereunder) and the number of franchised Stores franchised to Franchisees pursuant to Franchise Agreements listed on Schedule 4.5. Except as set forth in Schedule 4.5 (as updated from time to time as required hereunder), as of the date of this Agreement and after giving effect to the application of the proceeds of the Loans as provided in Section 2.13, or as of the date of the latest required quarterly financials, as applicable, each of the Companies has good and marketable title to all of its material properties of every name and nature now purported to be owned by it, including without limitation all assets of the Stores listed on Schedule 4.5 which are designated thereon as company-owned (as updated from time to time as required hereunder), all rights under each of the Franchise Agreements to which any Company is a -30- 35 party (including without limitation all rights to development and royalty payments thereunder), the Collateral and the properties reflected in the Initial Financial Statements, in each case free from all Encumbrances whatsoever except for Permitted Encumbrances. 4.6 Licenses, Patents, Trademarks and Intellectual Property. Except as otherwise described in Schedule 4.6, each of the Companies has all necessary permits, approvals, authorizations, consents, license (including liquor licenses), franchises, registrations, patents, trademarks, trade names and copyrights, recipes and other rights and privileges to allow it to own and operate its respective business and to operate or franchise, as applicable, the Stores listed on Schedule 4.5 (as updated from time to time as required hereunder) without any violation of law or the rights of others. All trademarks, service marks (including without limitation Diedrich Coffee(R), Weiner Melange(R), Harvest Peak(R), SCOOP-A-CCINO(R), Flor de Apanas(R), Coffee People(R), Gloria Jean's(R), Coffee Plantation(R), Motor Moka(R) and Aero Moka(R)), trade names, patents and patent applications in which any Company has an ownership or licensee interest, and all United States, state and foreign registrations thereof and applications therefor in the name of any Company, are listed on Schedule 4.6 (as updated from time to time as required hereunder), and the Parent or Coffee People is and will at all times hereafter be the owner thereof, free of all Encumbrances except in favor of the Lender. No interest in any of such intellectual property has been licensed or sublicensed to any other Person except to Franchisees pursuant to the Franchise Agreements. 4.7 Compliance with Laws and Agreements. No Company is in violation of any provision of its Organizational Documents and no Company is in violation of any provision of any material indenture, agreement or instrument to which it is a party or by which it is bound (including without limitation any material lease) or of any provision of law (including without limitation, ERISA, Environmental Laws, SEC and FTC Laws, and franchising laws), the violation of which could reasonably be expected to have a Material Adverse Effect or any order, judgment or decree of any court or other agency of government. Without limiting the scope of the foregoing, each Company is in compliance in all material respects with all federal and state laws and regulations, the violation of which could reasonably be expected to have a Material Adverse Effect. To Borrowers' knowledge, third parties to any material agreements are not in material violation thereof to the extent that such violations in the aggregate could reasonably be expected to result in a Material Adverse Effect. 4.8 Material Agreements. As of the date hereof, each of the material agreements to which any Company is a party is in full force and effect and constitutes the legally valid and binding obligation of the Company identified with it thereon and, to Borrowers' knowledge, the other parties thereto, enforceable against each of them in accordance with its respective terms. None of the Franchise Agreements under which any Company is a franchisor prohibit the granting of a security interest by such Company therein to the Lender, including without limitation a security interest in all development fees, royalties and other amounts payable thereunder. Each Company agrees that each Franchise Agreement entered into by it after the date hereof shall not prohibit the granting of any such security interest or the collateral assignment to the Lender of any rights or remedies of such Company thereunder, including without limitation the right to collect development fees, royalties and other payments thereunder. -31- 36 4.9 Environmental Matters. Except as specified in Schedule 4.9: (a) Each Company has obtained all permits, licenses and other authorizations which are required under all Environmental Laws, except to the extent failure to have any such permit, license or authorization could not reasonably be likely to have a Material Adverse Effect. Each Company is in compliance with the terms and conditions of all such permits, licenses and authorizations, and is also in compliance with all other limitations, restrictions, conditions, standards, prohibitions, requirements, obligations, schedules and timetables contained in any applicable Environmental Law or in any regulation, code, plan, order, decree, judgment, injunction, notice or demand letter issued, entered, promulgated or approved thereunder, except to the extent failure to comply would not have a Material Adverse Effect. (b) No notice, notification, demand, request for information, citation, summons or order has been issued, no complaint has been filed, no penalty has been assessed and no investigation or review is pending or threatened by any governmental or other entity with respect to any alleged failure by any Company to have any permit, license or authorization required in connection with the conduct of its business or with respect to any Environmental Laws, including, without limitation, Environmental Laws relating to the generation, treatment, storage, recycling, transportation, disposal or release of any Hazardous Materials, except to the extent that such notice, complaint, penalty or investigation did not or could not result in the remediation of any property costing in excess of $250,000 in the aggregate in each fiscal year prior to the date of this Agreement and, for any periods after such date, except for matters that individually and in the aggregate could not reasonably be expected to have a Material Adverse Effect. (c) No material oral or written notification of a release of a Hazardous Material has been filed by or on behalf of any Company and no property now or previously owned, leased or used by any Company is listed or proposed for listing on the National Priorities List under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, or on any similar state list of sites requiring investigation or clean-up. (d) There are no Encumbrances arising under or pursuant to any Environmental Laws on any of the material real properties owned, leased or used by any Company, and no governmental actions have been taken or are in process which could subject any of such properties to any Encumbrances or, as a result of which any Company would be required to place any notice or restriction relating to the presence of Hazardous Materials at any property owned by it or in any deed to such property. (e) No Company has (i) engaged in or permitted any operations or activities upon or any use or occupancy of any property owned, leased or used by it, or any portion thereof, for the purpose of or in any way involving the handling, manufacture, treatment, storage, use generation, release, discharge, refining, dumping or disposal (whether legal or illegal, accidental or intentional) of any Hazardous Materials on, under, in or about such property, except to the extent commonly used in day-to-day operations of such property and in such case only in compliance with all Environmental Laws, or (ii) transported any Hazardous Materials to, from or across such property except to the extent commonly used in day-to-day operations of such property and, in such case, in compliance with, all Environmental Laws; nor to the knowledge of any of the Borrowers have any Hazardous Materials migrated from other properties upon, about or beneath such property, nor are any -32- 37 Hazardous Materials presently constructed, deposited, stored or otherwise located on, under, in or about such property except to the extent commonly used in day-to-day operations, and, in such case, in compliance with, all Environmental Laws. 4.10 Compliance with ERISA. Each of the Companies and each member of the Controlled Group have fulfilled their obligations under the minimum funding standards of ERISA and the Code with respect to each Plan and are in compliance in all material respects with the applicable provisions of ERISA and the Code, and have not incurred any material liability to the PBGC or a Plan under Title IV of ERISA; and no "prohibited transaction" or "reportable event" (as such terms are defined in ERISA and other than reportable events as to which the 30 day notice period is waived) has occurred with respect to any Plan. 4.11 Financial Statements. The Parent has furnished to the Lender (a) its consolidated audited balance sheet as at January 27, 1999 audited by the Accountants and its related consolidated audited statements of operations and cash flow for the fiscal year then ended, and related consolidating financial statements, and (b) the consolidated audited balance sheet as at June 27, 1998 of Coffee People by PricewaterhouseCoopers LLP and the related consolidated audited statements of operations and cash flow for the fiscal year then ended (collectively, the "Initial Financial Statements"). Such Initial Financial Statements were prepared in accordance with GAAP and as to such fiscal year statements audited by the Accountants. Such Initial Financial Statements fairly present the financial position of the respective Companies as at such dates and the results of operations for such periods covered thereby. No Debt Issuance is outstanding as of the date hereof. The Borrowers have reviewed the projections for the future results of operations of the Companies dated June 3, 1999 for the period commencing June, 1999 and ending June, 2004 (the "Projections"), after given effect to the CP Acquisition, and the Borrowers hereby certify to the Lender that the Projections are based upon good faith estimates and assumptions believed by management of the Parent to be reasonable at the time made, it being recognized by the Lender that such financial information as it relates to future events is not to be viewed as fact and that actual results during the periods covered thereby may differ from the projected results set forth therein by a material amount. Except as reflected in the Initial Financial Statements, as of the date hereof none of the Companies has any material contingent obligations, liabilities for taxes or unusual forward or long-term commitments. Since the effective date of the latest audited Initial Financial Statements, there have been no changes in the assets, liabilities, financial condition, business or prospects of any Company, the effect of which has, individually or in the aggregate, could reasonably be likely to have a Material Adverse Effect. 4.12 Solvency. Each of the Companies has assets (both tangible and intangible) having a fair salable value in excess of the amount required to pay the probable liability on its respective existing debts (whether matured or unmatured, liquidated or unliquidated, fixed or contingent); each of the Companies has access to adequate capital for the conduct of its respective business for the foreseeable future and the discharge of its debts incurred in connection therewith as such debts mature; each of the Companies is not Insolvent and, immediately prior to the consummation of the Term Loan hereunder, each of the Companies was not Insolvent; and each of the Companies does not intend to or believe that it will incur debts beyond its ability to pay them at their maturity. -33- 38 4.13 Taxes. Each of the Companies has filed all federal, state and other material tax returns required to be filed and has paid or made adequate provision for the payment of all taxes, assessments and other such governmental charges due have been fully paid (other than any taxes the amount or validity of which are currently being contested in good faith by appropriate proceedings and with respect to which reserves in conformity with GAAP have been provided for on the books of the Companies). No Company has executed any waiver that would have the effect of extending the applicable statute of limitations in respect of tax liabilities (other than any taxes the amount or validity of which are currently being contested in good faith by appropriate proceedings and with respect to which reserves in conformity with GAAP have been provided for on the books of the Companies). 4.14 Litigation. Except as otherwise described in Schedule 4.14, there is no litigation, proceeding or governmental investigation, administrative or judicial, pending or, to any of the Borrowers' knowledge, threatened against or affecting any Company or its properties which could reasonably be expected to result in a Material Adverse Effect. 4.15 Margin Rules. None of the Borrowers or any of their Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purposes of purchasing or carrying any "margin security" or "margin stock" ("Margin Stock") as such terms are used in Regulations U or X (the "Margin Regulations") of the Board of Governors of the Federal Reserve System. The value of all Margin Stock held by the Borrowers and their Subsidiaries constitutes less than 25% of the value, as determined in accordance with the Margin Regulations, of all assets of the Borrowers and their Subsidiaries. 4.16 Restrictions on the Borrowers. No Company is a party to or bound by any contract, agreement or instrument, nor subject to any charter or other corporate restriction, that has or could reasonably be expected to have a Material Adverse Effect. 4.17 Capitalization. All of the Subsidiaries of each of the Companies are listed on Schedule 4.1 and a Borrower owns all of the issued and outstanding Capital Stock thereof as noted thereon and all of such Subsidiaries are Borrowers hereunder. The Borrowers have supplied the Lender with true and complete copies of their Organizational Documents. Except as otherwise set forth in Schedule 4.1: (a) no Capital Stock of any Company carries preemptive rights; (b) there are no outstanding subscriptions, warrants or options to purchase any Capital Stock of the Parent as of the date hereof or of any other Company; (c) no Company is obligated to redeem or repurchase any of its Capital Stock; and (d) there is no other agreement, arrangement or plan which could directly or indirectly affect the equity structure of any Company. All Capital Stock of each Subsidiary is validly issued and fully paid and non-assessable, free of any Encumbrance, except for liens on the Capital Stock granted to the Lender and restrictions on transfer indicated on the certificates evidencing such Capital Stock pursuant to applicable Federal or state securities regulations. No Company owns any minority interest in any Person, except as set forth in Schedule 4.1. 4.18 Full Disclosure. No statement of fact made by or on behalf of any Company or any Principal in this Agreement or any of the other Loan Documents or in any certificate or schedule furnished to the Lender pursuant hereto or thereto in light of all information provided to the Lender, as of the date such statement, certificate or schedule was so furnished contains any untrue statement -34- 39 of a material fact or omits, when considered as a whole, to state any material fact necessary to make statements continued therein or herein not misleading as of the date such statement, certificate or schedule was so furnished. As of the date hereof, there is no fact known to any Borrower which has not been disclosed to the Lender in writing which could reasonably be likely to have a Material Adverse Effect. 4.19 Investment Company Act. No Company is an "investment company" within the meaning of the Investment Company Act of 1940, as amended, or a "holding company," or a "subsidiary company" of a "holding company," or an "affiliate" of a "holding company," or of a "subsidiary company" of a "holding company," within the meaning of the Public Utility Holding Company Act of 1935, as amended. 4.20 Labor Disputes; Collective Bargaining Agreements; Employee Grievances. Except for matters that individually and in the aggregate could not reasonably be expected to have a Material Adverse Effect (a) there are no collective bargaining agreements or other organized labor contracts covering any Company or any Store; (b) no union or other labor organization is seeking to organize, or to be recognized as bargaining representative for, a bargaining unit of employees of any Company or any Store; (c) there is no material labor dispute pending or threatened against or affecting any Company or any Store; (d) there has not been, during the five year period prior to the date hereof, any material labor dispute against or affecting any Company or any Store, other than employee grievances arising in the ordinary course of business which are not, in the aggregate, material; and (e) each of the Companies and each Store has complied with (or corrected in full any prior noncompliance) and is in compliance with the provisions of the Fair Labor Standards Act and regulations thereunder. 4.21 Year 2000 Compliance. The Borrowers have (a) reviewed the areas within their business and operations which could be adversely affected by failure to become "Year 2000 Compliant" (that is that computer application, imbedded microchips and other systems used by the Borrowers will be able properly to recognize and perform date sensitive functions involving certain dates prior to and any date after December 31, 1999); (b) developed a detailed plan and timetable to become Year 2000 Compliant in a timely manner; and (c) committed adequate resources to support its Year 2000 plan. Based on such review and plan, the Borrowers reasonably believe that they will become Year 2000 Compliant on a timely basis except to the extent that a failure to do so will not have a Material Adverse Effect. SECTION 5. FINANCIAL COVENANTS. Each of the Borrowers covenants and agrees that, until all Commitments have been terminated, all Letters of Credit have terminated or expired, and all Obligations have been indefeasibly paid in full in cash, the Borrowers will not cause or permit: 5.1 Maximum Leverage Ratio. The ratio of Consolidated Funded Indebtedness at any date to Consolidated EBITDA for the most recently ended Reference Period ending on the Quarterly Date falling nearest to the dates identified in the table below to be greater than the ratio specified below opposite such date. -35- 40 Date Maximum Leverage Ratio - ---- ---------------------- 9/30/99 3.25:1.00 12/31/99 3.00:1.00 3/31/00 2.75:1.00 6/30/00 2.25:1.00 9/30/00 and all Reference 2.00:1.00 Periods thereafter 5.2 Minimum Fixed Charges Coverage Ratio. The ratio of Consolidated Cash Flow for any Reference Period ending on any Quarterly Date falling nearest to the dates identified in the table below to Consolidated Financial Obligations for such Reference Period to be less than the ratio specified below opposite such date. Minimum Fixed Date Charges Coverage Ratio - ---- ---------------------- 9/30/99 through 3/31/00 1.25:1.00 6/30/00 1.10:1.00 9/30/00 1.25:1.00 12/31/00 1.40:1.00 3/31/01 1.50:1.00 6/30/01 through 9/30/01 2.00:1.00 12/31/01 through 6/30/02 2.50:1.00 9/30/02 and each Reference 2.75:1.00 Period thereafter 5.3 Minimum Interest Coverage Ratio. The ratio of Consolidated EBITDAR for any Reference Period ending on any Quarterly Date falling nearest to the dates identified in the table below to Consolidated Interest Expense for such Reference Period to be less than the ratio specified below opposite such date. Minimum Interest Date Coverage Ratio - ---- ---------------- 9/30/99 through 6/30/00 1.25:1.00 9/30/00 through 12/31/00 1.50:1.00 3/31/01 1.75:1.00 6/30/01 2.00:1.00 9/30/01 2.50:1.00 12/31/01 2.75:1.00 3/31/02 3.00:1.00 6/30/02 3.25:1.00 9/30/02 through 3/31/03 3.50:1.00 6/30/03 and each Reference 4.00:1.00 Period thereafter -36- 41 5.4 Maximum Capital Expenditures. Make or agree to make, or incur any obligations with respect to, any Capital Expenditures in excess of the maximum amounts set forth below for the fiscal years listed, plus the lesser of the unused portion, if any, or 35% of the maximum Capital Expenditures amount for the immediately preceding fiscal year (in either case, the "Carryforward Amount"); provided, however, there shall be excluded from Capital Expenditures for purposes of the calculation hereof expenditures constituting the purchase price for Permitted Acquisitions. For purposes of determining the Carryforward Amount in any fiscal year, Capital Expenditures shall first be applied to reduce any Carryforward Amount from the immediately preceding fiscal year and then to reduce the maximum amount specified herein. Fiscal Year Maximum Capital Expenditures ----------- ---------------------------- (ending in June each year) 2000 $ 6,500,000 2001 9,000,000 2002 14,500,000 2003 16,500,000 2004 21,000,000 SECTION 6. AFFIRMATIVE COVENANTS. Each of the Borrowers covenants and agrees that, until all Commitments have been terminated, all Letters of Credit have terminated or expired, and all Obligations have been indefeasibly paid in full in cash: 6.1 Financial Reporting. The Borrowers will furnish to the Lender: (a) as soon as available, but in any event within 90 days after each fiscal year-end, the Parent's consolidated balance sheet as at the end of, and related consolidated statements of operations and cash flow for, such year, prepared in accordance with GAAP consistently applied and audited by the Accountants; and concurrently with such financial statements, consolidating financial statements and a written statement by the Accountants that, in conducting such audit, they have obtained no knowledge of any Default or Event of Default (or, if such an event exists, a statement as to its nature and status), provided that the Accountants shall not be liable to the Lender for failure to obtain knowledge of any Default or Event of Default; (b) as soon as available, but in any event within 45 days after the end of each fiscal quarter, the Parent's consolidated balance sheet as at, the end of, and related consolidated statements of operations and cash flow for, the portion of the year then ended and the fiscal quarter then ended, prepared in accordance with GAAP, together with a comparison of such results to budgeted results and to the results for the comparable period in the prior fiscal year, prepared on a consolidated basis and, in the case of Store Cash Flow only, a per Store basis, in each case certified by the Parent's chief financial officer or controller; together with updated Schedules 4.1, 4.5 and 4.6 hereto, if any changes thereto; -37- 42 (c) as soon as available, but in any event within 45 days after the end of each fiscal quarter, a covenant compliance report in substantially the form of Exhibit 6.1, signed by the Parent's chief financial officer or controller, and updated Schedules 4.1, 4.5 and 4.6 if any changes thereto; (d) as soon as available, but in any event within 30 days after the end of each month, the Parent's consolidated income statement and the coffee house "controllables ranking" report of the Companies; (e) promptly as they become available, a copy of each report (including any so-called management letters) submitted to any Company by the Accountants in connection with each annual, interim or special audit of its books; (f) promptly as they become available, copies of all such financial statements, proxy material and reports as any Company shall send or make available to its stockholders and copies of all material reports filed with the FTC or state or local franchising authorities and all 10K, 10Q and other reports filed by any Company with the SEC; (g) within 30 days after the beginning of each fiscal year, pro forma projections for the Companies for such fiscal year, prepared on a quarterly basis, consisting of a projected balance sheet, projected statements of income, cash flow and projections of Capital Expenditures, all prepared on a basis consistent with the financial statements required by Section 6.1(a); (h) no more than five Business Days after any Company gives or is required to give notice to the PBGC of any "Reportable Event" (as defined in Section 4043 of ERISA) with respect to any Plan that might constitute grounds for a termination of such Plan under Title IV of ERISA, or knows that any member of the Controlled Group or the plan administrator of any Plan has given or is required to give notice of any such Reportable Event, a copy of the notice of such Reportable Event given or required to be given to the PBGC; (i) promptly upon becoming aware of the existence of any condition or event that constitutes an Event of Default or would reasonably be likely to result in a Material Adverse Effect, written notice thereof specifying the nature and duration thereof and the action being or proposed to be taken with respect thereto; (j) no more than five Business Days after becoming aware of any litigation or of any investigative proceedings by a governmental agency or authority commenced or threatened against any Company, the outcome of which could reasonably be likely to have a Material Adverse Effect, written notice thereof and of the action being or proposed to be taken with respect thereto; (k) no more than five Business Days after becoming aware of any investigative proceedings by a governmental agency or authority commenced or threatened against any Company regarding any potential violation of Environmental Laws, any spill, release, discharge or disposal of any Hazardous Material or any other material event required to be reported to any such governmental agency or authority in respect of Environmental Laws or Hazardous Material, written notice thereof and of the action being proposed to be taken with respect thereto; -38- 43 (l) Prior to the consummation of any Asset Sale, if the Net Sale Proceeds of all Asset Sales received by the Companies in the fiscal year in which such Asset Sale occurs are equal to or in excess of $250,000, written notice thereof, specifying the purchase price, payment terms and closing date thereof; (m) At the same time as written notice, if any, is required to be given to the Lender concerning an Asset Sale or concerning a Permitted Acquisition, updated Schedules 4.1, 4.5 and 4.6 to this Agreement, giving effect to such Permitted Sale or Permitted Acquisition, as the case may be; and (n) as soon as reasonably possible and in any event within 10 days after request therefor, such other information regarding the operations, assets, business, affairs and financial condition of any Company or any Store as the Lender may reasonably request. 6.2 Conduct of Business. Each of the Companies will (a) duly observe and comply in all material respects with all applicable laws and all requirements of any governmental authorities relative to its corporate existence, rights and franchises, to the conduct of its business and to its property and assets (including without limitation all applicable health laws, restaurant licensing laws, FTC laws, SEC laws, Environmental Laws and ERISA); (b) maintain and keep in full force and effect all licenses and permits necessary to the proper conduct of its business; (c) comply in all material respects with all material agreements (including without limitation material leases and supplier contracts) to which it is a party; (d) maintain its corporate existence except for mergers and consolidations to the extent permitted hereunder; and (e) remain or engage in the business of owning and operating coffee retail Stores and manufacturing and selling specialty coffees wholesale, and in no other business. Each of Coffee People Worldwide, Inc. and Gloria Jean's, Inc. will be qualified as a foreign corporation in good standing in the State of California on or before August 15, 1999 and shall supply the Lender and its counsel with evidence thereof on or before such date. No Company will engage in any business unless it is a Borrower hereunder. 6.3 Maintenance and Insurance. Each of the Companies will maintain and keep its properties in good repair, working order and condition, and from time to time make all needful and proper repairs, renewals, replacements, additions and improvements thereto so that its business may be properly and advantageously conducted at all times. Each of the Companies and each Store at all times will maintain, or cause to be maintained, insurance covering it and its tangible property in such amounts (including, without limitation, so-called "all perils" coverage at replacement value, "broad form" liability coverage, and fidelity and business interruption insurance), against such hazards and liabilities and for such purposes as is customary in the industry for companies of established reputation engaged in the same or similar businesses and owning or operating similar properties. The Lender shall be named as loss payee (pursuant to a standard "lender's loss payable" endorsement) on property insurance policies and additional insured on liability insurance policies and shall be given at least 10 days' advance notice of any cancellation, change in form or renewal of insurance. Such insurance shall insure the Lender's interest regardless of any breach or violation of the underlying policies by any Company or any other Person. Each of the Companies shall insure, or cause to be insured, its assets in amounts sufficient to prevent the application of any co-insurance provisions. The Borrowers shall evidence their compliance with this Section by delivering a certificate with respect to each policy concurrently with the execution hereof, annually thereafter and -39- 44 at any time upon the Lender's request. If any Company fails to provide or cause to be provided such insurance, the Lender, in its sole discretion, may provide such insurance and charge the cost to any of the Borrowers' deposit accounts with the Lender. 6.4 Taxes. Each of the Companies will pay or cause to be paid all taxes, assessments or governmental charges on or against it or its properties prior to such taxes becoming delinquent; except for any tax, assessment or charge (other than any charge for required environmental cleanup costs) which is being contested in good faith by appropriate legal or other proceedings or actions and with respect to which adequate reserves have been established and are being maintained in accordance with GAAP, if no Encumbrance shall have been filed to secure such tax, assessment or charge. 6.5 Inspection by the Lender. Each of the Companies will at all reasonable times (and upon reasonable notice if no Event of Default exists), during normal business hours permit the Lender or its designees, to (a) visit and inspect the Stores and other properties of the Companies and (b) examine and make copies of and take abstracts from the Companies' and the Stores' books and records. Without limiting the foregoing, the Lender may conduct as many commercial credit examinations of the Companies and the Stores as it reasonably deems necessary (but not more than one such examination per calendar year if no Event of Default exists), whether or not an Event of Default exists, and the Borrowers will reimburse the Lender the reasonable costs of all such credit examinations. 6.6 Accounting System. The Companies will maintain an accurate system of accounting in accordance with GAAP, will at all times be part of a consolidated group for accounting purposes, and, without the Lender's prior written consent, will not change their fiscal year from the June 30 fiscal year end used in the preparation of the Initial Financial Statements for Coffee People. 6.7 Further Assurances. From time to time hereafter, the Companies will execute and deliver, or cause to be executed and delivered, such additional instruments, certificates and documents, and take all such actions, as the Lender shall reasonably request for the purpose of implementing or effectuating the provisions of this Agreement, the Notes, the Letter of Credit Documents or the other Loan Documents, and upon the exercise by the Lender of any power, right, privilege or remedy pursuant to this Agreement, the Notes, the Letter of Credit Documents or the other Loan Documents which requires any consent, approval, registration, qualification or authorization of any governmental authority or instrumentality, exercise and deliver all applications, certifications, instruments and other documents and papers that the Lender may be so required to obtain. 6.8 Environmental Laws. Each of the Companies will comply in all material respects with, and perform or cause to be performed any and all Remedial Work necessary under, all Environmental Laws applicable (now or in the future) to it or to its business. 6.9 Depository. The Borrowers shall maintain a depository account or accounts with the Lender to facilitate borrowings and payments hereunder. Each of the Companies hereby irrevocably authorizes the Lender to debit such depository account or accounts in order to effect the making of any such payments not paid when due. -40- 45 SECTION 7. NEGATIVE COVENANTS. Each of the Borrowers covenants and agrees that, until all Commitments have been terminated, all Letters of Credit have terminated or expired, and all Obligations have been indefeasibly paid in full in cash: 7.1 Indebtedness; Contingent Liabilities. No Company will create, incur, assume, guarantee or be or remain liable with respect to any Consolidated Funded Indebtedness except: (a) Indebtedness of the Companies to the Lender; (b) Indebtedness not constituting Capitalized Leases or purchase money Indebtedness in the amounts existing on the date hereof and described in Schedule 7.1 (but no refinancings, renewals or extensions thereof without the Lender's prior written consent); (c) Guarantees in respect of endorsements of negotiable instruments for collections in the ordinary course of business (and refinancings, renewals or extensions thereof); (d) Capitalized Leases and purchase money Indebtedness which relate to outstanding Indebtedness in the aggregate not exceeding $2,000,000 at any time secured by Permitted Encumbrances under Section 7.3(f); (e) unsecured Indebtedness of any Borrower to any other Borrower hereunder, evidenced by promissory notes pledged and delivered to the Lender pursuant to the Security Documents (the "Intercompany Notes"); (f) Guarantees incurred by the Parent (1) of Indebtedness otherwise permitted hereunder of any other Borrower and (2) of real estate Leases of franchisees of the Borrowers in the ordinary course of business; (g) Indebtedness in respect of Hedging Arrangements not exceeding $5,000,000 in aggregate net exposure at any one time outstanding, provided that such Hedging Arrangements are entered into for legitimate purposes related to the business of the Companies and not for speculative purposes; (h) unsecured Indebtedness in respect of contractual commitments related to future purchases of inventory; (i) provided no Default then exists or could reasonably be expected to result therefrom, Debt Issuance, provided the Net Debt/Equity Proceeds therefrom are paid to the Lender to the extent required hereunder; and (j) additional Indebtedness of the Borrowers in an aggregate principal amount (for all Borrowers) not to exceed $1,000,000 at any one time outstanding. 7.2 Sale and Leaseback. No Company will enter into any arrangement (a "Sale Leaseback"), directly or indirectly whereby any of them shall sell or transfer any of its property -41- 46 acquired prior to the date of this Agreement in order to lease such property or lease other property that any Company intends to use for substantially the same purpose as such property being sold or transferred. 7.3 Encumbrances. No Company will create, incur, assume or suffer to exist any mortgage, pledge, security interest, lien or other charge or encumbrance, including the lien or retained security title of a conditional vendor upon or with respect to any of its property or assets ("Encumbrances"), or assign or otherwise convey any right to receive income, including the sale or discount of accounts receivable with or without recourse, except the following ("Permitted Encumbrances"): (a) Encumbrances in favor of the Lender under the Loan Documents; (b) Encumbrances existing as of the date of this Agreement and disclosed in Schedule 7.3; (c) liens for taxes, fees, assessments and other governmental charges to the extent that payment of the same may be postponed or is not required in accordance with the provisions of Section 6.4; (d) landlord's and lessors' liens in respect of rent not in default or liens in respect of pledges or deposits under worker's compensation, unemployment insurance, social security laws, or similar legislation (other than ERISA) or in connection with appeal and similar bonds incidental to litigation; mechanics', laborers' and materialmen's and similar liens, if the obligations secured by such liens are not then delinquent or are released by appropriate statutory release bonds; liens securing the performance of bids, tenders, contracts (other than for the payment of money); and statutory obligations incidental to the conduct of its business and that do not in the aggregate materially detract from the value of its property or materially impair the use thereof in the operation of its business; (e) judgment liens that shall not have been in existence for a period of longer than 30 days after the creation thereof or, if a stay of execution shall have been obtained, for a period longer than 30 days after the expiration of such stay; (f) Encumbrances in respect of Capital Leases and purchase money obligations incurred within 120 days of purchase which in the aggregate do not secure Indebtedness in excess of $1,000,000 for tangible personal property other than inventory used in its business, provided that any such Encumbrances shall not extend to property and assets not financed by such Capitalized Lease or purchase money obligation and shall not secure Indebtedness greater than the lesser of the cost or fair market value of such tangible personal property so acquired; and (g) easements, rights of way, restrictions and other similar Encumbrances relating to real property and not interfering in a material way with the ordinary conduct of its business. 7.4 Disposition of Assets, Etc. No Company will sell, lease, transfer or otherwise dispose of any of its properties, assets, rights, licenses or franchises to any Person, except for (a) -42- 47 dispositions of inventory in the ordinary course of business (which dispositions may be made free from the Encumbrances of the Loan Documents), the disposition in the ordinary course of business, without replacement, of equipment which is obsolete or no longer needed in the conduct of its business and the disposition and replacement in the ordinary course of business of equipment or other tangible personal property with other equipment of at least equal utility and value (provided that, except for purchase money security interests and rights of lessors of equipment if permitted hereunder, the Lender's lien upon such newly acquired equipment shall have the same priority as the Lender's lien upon the replaced equipment); and (b) so long as no Default exists or could reasonably be expected to result therefrom, (i) the sale of the Coffee People Sale Stores for not less than the fair market value thereof and (ii) any other sale of tangible assets (other than the sale of all or substantially all of the assets of any Company and other than, in any four-quarter period, the sale of greater than 5% of the value of Consolidated Net Assets as of any date therein) for not less than the fair market value thereof (each such permitted sale being referred to as a "Permitted Sale"), provided that prior notice thereof is given to the Lender, if required, pursuant to Section 6.1(l) and the Sale Proceeds Payment with respect thereto is made, if and to the extent required, pursuant to Section 2.7 of this Agreement. 7.5 Amendment to Charter or Partnership Documents. Except for mergers or consolidations to the extent permitted hereunder, each of the Companies will not permit or suffer any amendment of its Organizational Documents without the Lender's prior written consent, which consent shall not be unreasonably withheld. Without limiting the foregoing, no Company will amend any Organizational Document in any manner which could materially adversely affect its financial condition or adversely affect (in light of the entire transaction in which it is a part) the rights of the Lender hereunder or under the Loan Documents (it being expressly agreed that the inclusion in any such charter documents of any provision similar to those set forth in Section 102(b)(2) of Title 8 of the Delaware General Corporation Law is prohibited under this Section). 7.6 Mergers; Consolidations; Issuance of Securities; Etc. No Company will dissolve, liquidate, merge or consolidate into or with any other Person; provided that any Borrower may merge with any other Borrower (so long as the Parent is the surviving entity of any merger to which it is a party). No Company other than the Parent will issue any additional shares of Capital Stock or any securities convertible thereto. 7.7 Restricted Payments. No Company will make any Restricted Payment; provided, that (a) so long as no Default or Event of Default exists or could reasonably be likely to result therefrom, the Parent may make Distributions to the extent required for any repurchase, redemption or other acquisition for value of any Capital Stock of the Parent held by any member of the Parent's management pursuant to any management equity subscription agreement or stock option agreement or similar agreement upon their death, disability, retirement or termination of employment or departure from the Board of Directors of the Parent (provided that the aggregate price paid for all such repurchased, redeemed, acquired or retired Capital Stock shall not exceed $500,000 in any twelve-month period), (b) the Subsidiaries of the Borrowers may make Distributions to the Borrowers, and the Subsidiaries of the Borrowers shall declare and pay cash distributions to the Borrowers, if the same comply with applicable law, to the extent required to ensure that the Borrowers at all times pay and perform when due their Obligations under the Loan Documents, and (c) the Borrowers may make regularly scheduled payments on Debt Issuance to the extent expressly -43- 48 permitted by the applicable terms of subordination of such Debt Issuance agreed to in writing by Lender. 7.8 Investments, Loans and Acquisitions. No Company will (a) purchase or acquire any share of capital stock, partnership interest, evidence of Indebtedness or other equity security of any other Person, (b) acquire all or substantially all of the assets of any Person or any division of any Person, (c) make any loan, advance or extension of credit to, or contribution to the capital of, any other Person other than loans to employees not to exceed $500,000 and to Franchisees not to exceed $500,000, in each case in the aggregate at any time outstanding, advances pursuant to customary indemnification provisions in favor of officers and directors of the Borrowers, extensions of trade credit in the ordinary course of business consistent with past practices, Interest Rate Protection Agreements permitted under Section 7.1 and notes received as part of the settlement of litigation or satisfaction of debts owed by any other Person in the ordinary course of business, (d) purchase any real estate for sale or investment, (e) purchase any commodities futures contracts other than in connection with bona fide hedging transactions in the ordinary course of business, (f) make any other investment in any Person, (g) form any Subsidiary (except to the extent the Parent determines that the formation of a Subsidiary is necessary or appropriate in connection with a Permitted Acquisition), or (h) make any commitment or acquisition of any option or enter into any other arrangement for the purpose of making any of the foregoing investments, loans or acquisitions, except the following: (i) Qualified Investments; (ii) Permitted Acquisitions; (iii) Loans and capital contributions from the Parent to Subsidiaries who are Borrowers hereunder pursuant to Section 7.1(e); (iv) the existing investments referred to in Schedule 7.8 hereto; and (v) other investments in an aggregate amount at any one time outstanding not to exceed $250,000. 7.9 ERISA. No Company nor any member of the Controlled Group shall permit any Plan maintained by it to (a) engage in any "prohibited transaction" (as defined in Section 4975 of the Code), (b) incur any "accumulated funding deficiency" (as defined in Section 302 of ERISA) whether or not waived, or (c) terminate any Plan in a manner that could result in the imposition of a lien or encumbrance on the assets of any Company pursuant to Section 4068 of ERISA. 7.10 Transactions with Affiliates. Except as otherwise expressly permitted by this Agreement, no Company will directly or indirectly (i) make any Investment in any Affiliate, (ii) sell, lease or otherwise dispose of any assets or services to, or purchase, lease or otherwise acquire any Assets or services from, any Affiliate, or (iii) directly or indirectly engage in any other transaction with or for the benefit of, or make any payment or distribution to, any Affiliate; provided, that: (i) any employee (or former employee) of any Company owning any Capital Stock of the Parent may serve as an employee or director of the Parent and receive reasonable compensation (including stock -44- 49 options and other customary incentive compensation) and customary indemnities, (ii) the Companies may make loans and advances to employees for moving, entertainment, travel and other similar expenses in the ordinary course of business not to exceed $500,000 in the aggregate at any time outstanding, (iii) any Borrower may enter into any transaction with another Borrower provided such transaction is not disadvantageous to the Borrowers taken as a whole, and (iv) any Borrower may enter into any transaction with any Affiliate providing for the rendering or receipt of services or the purchase, sale or lease of assets in the ordinary course of business if the monetary or business consideration arising therefrom would be as advantageous to the Borrowers taken as a whole as the monetary or business consideration which it would obtain in a comparable arm's length transaction with a Person not an Affiliate, and such transaction is accurately reflected on the books of the Borrowers. 7.11 Amendment of Certain Agreements. No Company will amend or modify any of its material agreements if the same would be likely to have a material adverse effect upon its business, its ability to fulfill any of its obligations under the Loan Documents, or any of the Lender's rights under any of the Loan Documents. 7.12 Negative Pledges, Etc. No Company will enter into any agreement, amendment or arrangement (excluding this Agreement or any other Loan Document) prohibiting or restricting (a) it from amending or otherwise modifying this Agreement or any other Loan Document, (b) the creation or assumption of any Encumbrances upon its properties, revenues or assets, whether now owned or hereafter acquired, or (c) the ability of any Subsidiary to make any payment or distribution, directly or indirectly, to the Parent; provided that this Section 7.13 shall not apply to (i) purchase money obligations or Capitalized Leases (or refinancings thereof that impose no more restrictive restrictions than those applicable to the obligation being refinanced) for property acquired in accordance with Section 7.1 that impose restrictions solely on the property so acquired which are in effect at the time of acquisition of such property and (ii) restrictions arising by reason of customary non-assignment or no-subletting clauses in leases or other contracts entered into in the ordinary course of business. SECTION 8. DEFAULTS. 8.1 Events of Default. There shall be an Event of Default hereunder if any of the following events occurs: (a) any Borrower shall fail to pay when due (whether on the date fixed for such payment, mandatory prepayment, by acceleration or otherwise) any amount of principal of any Loan, any LC Draw Obligation or any principal on any other Obligation or to pay within three Business Days of when due (whether on the date fixed for such payment, mandatory prepayment, by acceleration or otherwise) any interest thereon, or fees or expenses constituting any Obligation; or (b) any Company shall fail to perform any term, covenant or agreement contained in Section 5, Section 6.1 (other than Section 6.1(m)), or Section 7 hereof; (c) any Company shall fail to perform any term, covenant or agreement contained in this Agreement or any default shall occur on the part of any Company under any other Loan Document, -45- 50 other than those referred to in Sections 8.1(a) and (b) above, and such default shall continue for 30 days after the earlier of (i) written notice thereof from the Lender to the Borrowers, or (ii) actual knowledge thereof by any executive officer of any Company; or (d) any representation or warranty by or on behalf of any Company made in this Agreement or any other Loan Document or in any report, certificate or financial statement delivered hereunder shall prove to have been false in any material respect upon the date when made or deemed to have been made; or (e) any Company shall fail to pay at maturity, or within any applicable period of grace, any obligations which, together with all other such obligations of the Companies, exceed $500,000 in the aggregate, or any Company shall fail to observe or perform any term, covenant or agreement evidencing or securing such obligations, the result of which failure is to permit the holder or holders of such obligations to cause the indebtedness relating thereto to become due prior to its stated maturity upon delivery of required notice, if any; or (f) any Company shall (i) apply for or consent to the appointment of, or the taking of possession by, a receiver, custodian, trustee, liquidator or similar official of itself or of all or a substantial part of its property, (ii) be generally not paying its debts as such debts become due, (iii) make a general assignment for the benefit of its creditors, (iv) commence a voluntary case under the Federal Bankruptcy Code (as now or hereafter in effect), (v) take any action or commence any case or proceeding under any law relating to bankruptcy, insolvency, reorganization, winding-up or composition or adjustment of debts, or any other law providing for the relief of debtors, (vi) fail to contest in a timely or appropriate manner, or acquiesce in writing to, any petition filed against it in an involuntary case under the Federal Bankruptcy Code or other law, (vii) take any action under the laws of its jurisdiction of incorporation or organization similar to any of the foregoing, or (viii) take any action for the purpose of effecting any of the foregoing; or (g) a proceeding or case shall be commenced with respect to any Company, without the application or consent of such in any court of competent jurisdiction, seeking (i) the liquidation, reorganization, dissolution, winding up, or composition or readjustment of its debts, (ii) the appointment of a trustee, receiver, custodian, liquidator or the like of it or of all or any substantial part of its assets, or (iii) similar relief in respect of it, under any law relating to bankruptcy, insolvency, reorganization, winding-up or composition or adjustment of debts or any other law providing for the relief of debtors, and such proceeding or case shall continue undismissed, or unstayed and in effect, for a period of 60 days; or an order for relief shall be entered in an involuntary case under the Federal Bankruptcy Code, against any Company; or action under the laws of the jurisdiction of incorporation or organization of any Company similar to any of the foregoing shall be taken with respect to any Company and shall continue unstayed and in effect for any period of 60 days; or (h) a judgment or order for the payment of money shall be entered against any Company by any court, or a warrant of attachment or execution or similar process shall be issued or levied against property of any Company, that, together with all other such judgments and attachments against the Companies exceeds $250,000 in the aggregate in value and such judgment, order, warrant or process shall continue undischarged, unstayed or not bonded over in full for 30 days, any -46- 51 action shall be legally taken by a judgment creditor to levy upon assets or properties of any Company to enforce any such judgment; or (i) any Company or any member of the Controlled Group shall fail to pay when due an amount or amount that it shall have become liable to pay to the PBGC or to a Plan under Title IV of ERISA and which, together with all such amounts, exceeds $500,000 in the aggregate; or notice of intent to terminate a Plan or Plans shall be filed under Title IV of ERISA by any Company, any member of the Controlled Group, any plan administrator or any combination of the foregoing and such action could reasonably be expected to have a Material Adverse Effect; or the PBGC shall institute proceedings under Title IV of ERISA to terminate or to cause a trustee to be appointed to administer any such Plan or Plans or a proceeding shall be instituted by a fiduciary of any such Plan or Plans against any Company and such proceedings shall not have been dismissed within 30 days thereafter; or a condition shall exist by reason of which the PBGC would be entitled to obtain a decree adjudicating that any such Plan or Plans must be terminated and such action could reasonably be expected to have a Material Adverse Effect; or (j) for any reason, there shall have occurred a Change in Control; or (k) for any reason, any Security Documents shall not be in full force or effect in all material respects, or any party thereto shall contest the validity thereof or disaffirm its obligations thereunder or default with respect to any of its material obligations thereunder. 8.2 Remedies. Upon the occurrence of an Event of Default described in Section 8.1(f) or (g), immediately and automatically, and upon the occurrence and continuance of any other Event of Default, or if on any date that a draft is presented under a Letter of Credit or any date that a Letter of Credit is sought to be issued, extended or renewed, the conditions precedent to the issuance, extension or renewal of Letters of Credit are not satisfied, at the Lender's option and upon the Lender's declaration: (a) the Commitments and any obligation to issue, extend or renew Letters of Credit shall terminate; and (b) the unpaid principal amount of the Loans, together with accrued interest, all LC Draw Obligations and all other Obligations shall become immediately due and payable without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived. Upon termination of the Commitments and acceleration of the Loans and the LC Draw Obligations, the Lender may exercise any and all rights it has under this Agreement, the Security Documents or any other Loan Documents, or at law or in equity, and proceed to protect and enforce the Lender's rights by any action at law, in equity or other appropriate proceeding. In the event that the Lender shall apply for the appointment of, or the taking of possession by, a trustee, receiver or liquidator of any Company or of any other similar official to hold or liquidate all or any substantial part of the properties or assets of any Company following the occurrence of a default in payment of any amount owed hereunder and following any applicable notice or cure period, each of the Companies hereby consents to such appointment and taking of possession and agrees to execute and deliver any and all documents requested by the Lender relating thereto (whether by joining in a petition for the voluntary appointment of, or entering no contest to a petition for the appointment of, such an official or otherwise, as appropriate under applicable law). -47- 52 8.3 Letters of Credit. If any one or more Events of Default shall at any time occur, the Lender may also, by written notice to the Borrowers, take any or all of the following actions, at the same or different times: (a) The Lender may send notices to all or any of the beneficiaries of the Letters of Credit advising such beneficiaries of the intention and desire of the Lender to effect the termination, cancellation and surrender of such Letters of Credit in 30 days; provided, however, that the Lender shall not send any such notice to any beneficiary unless the Lender has requested that the Borrowers deliver cash collateral to the Lender pursuant to paragraph (b) below and the Borrowers have failed to deliver such cash collateral to the Lender within 10 days after such request; and (b) The Lender may require that the Borrowers deliver to the Lender first priority perfected cash collateral in an amount equal to the face amount of all Letters of Credit which remain outstanding. SECTION 9. MISCELLANEOUS. 9.1 Notices. Unless otherwise specified herein, all notices hereunder to any party hereto shall be in writing and shall be deemed to have been given (a) when delivered by hand, (b) three days after mailing by certified mail, return receipt requested, or (c) one day after delivery or electronic facsimile transmission, or to the overnight courier; in each case addressed to such party at its address indicated below: (a) If to the Borrowers: Diedrich Coffee, Inc. 2144 Michelson Drive Irvine, CA 92612 Attention: Ms. Ann Wride Telecopier No.: (949) 756-1144 with a copy (which shall not constitute notice) to: John M. Williams III, Esq. Gibson, Dunn & Crutcher, LLP 4 Park Plaza Irvine, CA 92614 Telecopier No.: (949) 451-4220 -48- 53 (c) If to the Lender: BankBoston, N.A. 100 Federal Street Mail Stop: 01-09-05 Boston, MA 02110 Attention: Debra L. Zurka, Director Telecopier No.: (617) 434-0637 with a copy (which shall not constitute notice) to: Susan E. Siebert, Esq. Edwards & Angell, LLP 101 Federal Street, 23rd Floor Boston, MA 02110 Telecopier No.: (617) 439-4170 or to any other address specified by such party in writing. 9.2 Expenses. The Borrowers will pay jointly and severally on demand all reasonable expenses of the Lender in connection with the preparation, waiver or amendment of this Agreement or any other Loan Documents or the default or collection of the Loans, the LC Draw Obligations or any other Obligation or in connection with the Lender's exercise, preservation or enforcement of any of its rights, remedies or options thereunder, including without limitation the reasonable fees and expenses of outside legal counsel or the allocated costs of in-house legal counsel, accounting, consulting, brokerage or other similar professionals and any reasonable fees or expense associated with any travel or other costs relating to any appraisals or credit or other examinations conducted in connection with the Obligations or any Collateral therefor, and the amount of all such expenses shall, unless paid within 30 days after submission of statements therefor to the Borrowers, thereafter bear interest until paid in full at the highest rate applicable to principal hereunder (including any default rate). All such expenses may be charged against any deposit account maintained by any Borrower with the Lender. 9.3 Indemnification. Each of the Borrowers shall absolutely and unconditionally indemnify and hold the Lender harmless against any and all claims, demands, suits, actions, causes of action, expenses and all other liabilities whatsoever which shall at any time or times be incurred or sustained by it or by any of its shareholders, directors, officers, employees, subsidiaries, affiliates or agents (except any of the foregoing incurred or sustained as a result of the gross negligence or willful misconduct of such Person) on account of, or in relation to, or in any way in connection with, any of the arrangements or transactions contemplated by, associated with or ancillary to any of the Loan Documents, whether or not all or any of the transactions contemplated by, associated with or ancillary to this Agreement or any of such documents are ultimately consummated. 9.4 Term of Agreement. This Agreement shall continue in force and effect until all Commitments have been terminated, all Letters of Credit have been terminated or expired, and all Obligations have been indefeasibly paid in full in cash. -49- 54 9.5 No Waivers. No failure or delay by the Lender in exercising any right, power or privilege hereunder or under any other documents or agreements executed in connection herewith shall operate as a waiver thereof; nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein, in the Notes and in the other Loan Documents are cumulative and not exclusive of any rights or remedies otherwise provided by agreement or law. 9.6 Governing Law. This Agreement shall be deemed to be a contract made under seal and shall be construed in accordance with and governed by the laws of Massachusetts (without giving effect to any conflicts of laws provisions contained therein). 9.7 Entire Agreement; Amendments. This Agreement, the Notes and the other Loan Documents constitute the final agreement of the parties hereto and supersede any prior agreement or understanding, written or oral, with respect to the matters contained herein and therein. No modification or waiver of any provision hereof or of the Notes or any other Loan Document, nor consent to the departure by any Borrower or any of its Subsidiaries therefrom, shall be effective unless the same is in writing, and then such waiver or consent shall be effective only in the specific instance, and for the purpose, for which given. The Lender's failure to insist upon the strict performance of any term, condition or other provision of this Agreement, the Notes, or any of the other Loan Documents, or to exercise any right or remedy hereunder or thereunder, shall not constitute a waiver by the Lender of any such term, condition or other provision or Default or Event of Default in connection therewith, nor shall a single or partial exercise of any such right or remedy preclude any other or future exercise, or the exercise of any other right or remedy; and any waiver of any such term condition or other provision or of any such Default or Event of Default shall not affect or alter this Agreement, the Notes or any of the other Loan Documents, and each and every term, condition and other provision of this Agreement, the Notes and the other Loan Documents shall, in such event, continue in full force and effect and shall be operative with respect to any other then existing or subsequent Default or Event of Default in connection therewith. An Event of Default hereunder and a Default under the Notes or under any of the other Loan Documents shall be deemed to be continuing unless and until cured to the Lender's reasonable satisfaction or waived in writing by the Lenders. 9.8 Assignments; Participations. This Agreement shall be binding upon and inure to the benefit of the Borrowers and their successors and to the benefit of the Lender and their respective successors and assigns. Except pursuant to mergers in which a Borrower is the surviving entity to the extent permitted hereunder, the rights and obligations of the Borrowers under this Agreement shall not be assigned or delegated without the prior written consent of the Lender, and any purported assignment or delegation without such consent shall be void. Each of the Borrowers authorizes the Lender to disclose to any participant or assignee any prospective participant or assignee of any and all information in the Lender's possession concerning the Companies which has been delivered to the Lender by or on behalf of the Companies pursuant to this Agreement or which has been delivered to such Lender by or on behalf of the Companies in connection with the Lender's credit evaluation prior to becoming a party to this Agreement. The Lender may at any time pledge or assign all or any portion of such Lender's rights under this Agreement and the other Loan Documents to a Federal -50- 55 Reserve bank; provided, however, that no such pledge or assignment shall release such Lender from its obligations hereunder or any other Loan Document. 9.9 Counterparts; Partial Invalidity. This Agreement may be signed in any number of counterparts with the same effect as if the signatures hereto and thereto were upon the same instrument. The invalidity or unenforceability of any one or more phrases, clauses or sections of this Agreement shall not affect the validity or enforceability of the remaining portions of it. 9.10 WAIVER OF JURY TRIAL. EACH OF BORROWERS AND THE LENDER AGREES THAT NEITHER IT NOR ANY ASSIGNEE OR SUCCESSOR SHALL (A) SEEK A JURY TRIAL IN ANY LAWSUIT, PROCEEDING, COUNTERCLAIM OR ANY OTHER ACTION BASED UPON, OR ARISING OUT OF, THIS AGREEMENT, EITHER NOTE, ANY SECURITY DOCUMENT OR ANY OTHER LOAN DOCUMENT, ANY COLLATERAL OR THE DEALINGS OR THE RELATIONSHIP BETWEEN ANY BORROWER OR THE LENDER, OR (B) SEEK TO CONSOLIDATE ANY SUCH ACTION WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT BE OR HAS NOT BEEN WAIVED. THE PROVISIONS OF THIS PARAGRAPH HAVE BEEN FULLY DISCUSSED BY THE PARTIES HERETO, AND THESE PROVISIONS SHALL BE SUBJECT TO NO EXCEPTIONS. NEITHER THE LENDER NOR ANY BORROWER HAS AGREED WITH OR REPRESENTED TO ANY OTHER THAT THE PROVISIONS OF THIS PARAGRAPH WILL NOT BE FULLY ENFORCED IN ALL INSTANCES. 9.11 CONSENT TO JURISDICTION. EACH OF THE BORROWERS HEREBY SUBMITS TO THE JURISDICTION OF THE COURTS OF THE COMMONWEALTH OF MASSACHUSETTS AND THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS, AS WELL AS TO THE JURISDICTION OF ALL COURTS FROM WHICH AN APPEAL MAY BE TAKEN OR OTHER REVIEW SOUGHT FROM THE AFORESAID COURTS, FOR THE PURPOSE OF ANY SUIT, ACTION OR OTHER PROCEEDING ARISING OUT OF ANY BORROWERS' OBLIGATIONS UNDER OR WITH RESPECT TO THE NOTES, ANY SECURITY DOCUMENT OR ANY OTHER LOAN DOCUMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREBY, AND EXPRESSLY WAIVES ANY AND ALL OBJECTIONS IT MAY HAVE AS TO VENUE IN ANY OF SUCH COURTS. 9.12 Joint and Several Liability. Each of the Borrowers acknowledges and agrees that it is jointly and severally liable for all Obligations under the Loan Documents. -51- 56 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed under seal by their duly authorized officers as of the day and year first above written. LENDER: BANKBOSTON, N.A. By: /s/ -------------------------------------- BORROWERS: DIEDRICH COFFEE, INC. By: /s/ Ann Wride -------------------------------------- COFFEE PEOPLE, INC. By: /s/ Ann Wride -------------------------------------- COFFEE PEOPLE WORLDWIDE, INC. By: /s/ Ann Wride -------------------------------------- GLORIA JEAN'S, INC. By: /s/ Ann Wride -------------------------------------- (SIGNATURES CONTINUED) 57 EDGLO ENTERPRISES, INC. By: /s/ Ann Wride -------------------------------------- GLORIA JEAN'S GOURMET COFFEES CORP. By: /s/ Ann Wride -------------------------------------- GLORIA JEAN'S GOURMET COFFEES FRANCHISING CORP. By: /s/ Ann Wride -------------------------------------- EX-10.26 3 SECURITY AGREEMENT DATED 7/7/99. 1 EXHIBIT 10.26 SECURITY AGREEMENT ------------------ THIS SECURITY AGREEMENT is made as of July 7, 1999, by and among DIEDRICH COFFEE, INC., COFFEE PEOPLE, INC., COFFEE PEOPLE WORLDWIDE, INC., GLORIA JEAN'S, INC., EDGLO ENTERPRISES, INC., GLORIA JEAN'S GOURMET COFFEES CORP., GLORIA JEAN'S GOURMET COFFEES FRANCHISING CORP., and all future Subsidiaries who hereafter become parties hereto (collectively, the "Debtors" and each individually, a "Debtor") and BANKBOSTON, N.A. (the "Secured Party"). FOR VALUE RECEIVED, the receipt of which is hereby acknowledged, including without limitation, enabling the Debtors to obtain credit or other financial accommodations from the Secured Party, each Debtor hereby agrees as follows: Section 1. Definitions. All capitalized terms used herein or in any certificate, report or other document delivered pursuant hereto shall have the meanings assigned to them below (unless otherwise defined). Except as otherwise defined, terms defined in the Uniform Commercial Code shall have the meanings set forth therein. Accounts. All rights of any Debtor to payment for goods sold or leased or for services rendered, all sums of money or other proceeds due or becoming due thereon, all instruments pertaining thereto, all guarantees and security therefor, and such Debtor's rights pertaining to and interest in such goods, including the right of stoppage in transit, replevin or reclamation; all chattel paper; all credit card receivables; all franchise and development fees and other fees under franchising agreements or otherwise; all royalties; all amounts due from Affiliates of such Debtor whether under intercompany notes or otherwise; all other rights and claims to the payment of money, under contracts or otherwise, including amounts due from Affiliates, tax refunds and insurance proceeds; and all other property constituting "accounts" as such term is defined in the Uniform Commercial Code. Business Day. The meaning specified for such term in the Credit Agreement. Collateral. See Section 2. Credit Agreement. The Credit Agreement of even date herewith among the Debtors and the Secured Party, as amended, restated, replaced, supplemented or otherwise modified from time to time. Encumbrance. The meaning specified for such term in the Credit Agreement. Equipment. All machinery, equipment and fixtures, restaurant equipment and fixtures, office furniture, furnishings and trade fixtures, specialty tools and parts, motor vehicles and materials handling equipment of any Debtor, together with such Debtor's interest in, and right to, any and all manuals, computer programs, data bases and other materials relating to the use, 2 operation or structure of any of the foregoing; and all other property constituting "equipment" as such term is defined in the Uniform Commercial Code. Event of Default. The meaning specified for such term in the Credit Agreement. General Intangibles. All of the Debtors' presently existing or hereafter acquired or arising general intangibles (including, those arising under concession agreements, franchise agreements, lease agreements or other agreements) and other personal property including any and all royalties, franchise fees, choses or things in action, recipes, all rights with respect to all patents, together with any reissue, extension or renewal thereof, all patent applications, all patent licenses, all trademarks, service marks, trademark and service mark applications, trade names, trade styles, patents, copyrights, mask works and trade-secrets information and all goodwill associated with the foregoing, and all other proprietary rights and rights to prevent others from doing acts that constitute unfair competition with any Debtor or misappropriation of its property, including without limitation any sums (net of expenses) that any Debtor may receive arising out of any claim for infringement of its rights in any of the foregoing, and all rights of any Debtor under contracts to enjoy performance by others or to be entitled to enjoy rights granted by others, including without limitation any licenses (including liquor licenses to the extent a security interest may be granted in a liquor license under applicable law), franchises and purchase orders; all rights to prevent others from entering into competition with any Debtor; all tax refunds and tax refund claims; all deposit accounts; all rights, title and interest of each Debtor in and to all literature, reports, catalogs, documents, books, records and other information (on whatever medium recorded, and including without limitation computer programs, tapes, discs, punch cards, data processing software and related property and rights) maintained by such Debtor that reflect the conduct of such Debtor's business, such as financial records, marketing and sales records, research and development records, and design, engineering and manufacturing records; all rights under service bureau service contracts; all computer data and the concepts and ideas on which said data is based; all developmental ideas and concepts, papers, plans, schematics, drawings, blueprints, sketches and documents; all data bases; all monies due or recoverable from pension funds; all economic interests (including money due or to become due) under partnership agreements, whether as a general partner or a limited partner; all Intercompany Notes; all customer lists and route lists; and all other property constituting "general intangibles" as such term is defined in the Uniform Commercial Code. Inventory. All goods, merchandise and other personal property (including warehouse receipts and other negotiable and non-negotiable documents of title covering any such property) of any Debtor that are held for sale, lease or other disposition, or for display or demonstration, or leased or consigned, or that are raw materials, piece goods, work-in-process or materials used or consumed or to be used or consumed in such Debtor's business, whether in transit or in the possession of such Debtor or another, including without limitation all goods covered by purchase orders and contracts with suppliers and all goods billed and held by suppliers and goods located on the premises of any carriers, forwarding agents, truckers, warehousemen, vendors, selling agents or other third parties; all proprietary rights, patents, plans, drawings, diagrams, schematics, assembly and display materials relating to any of the foregoing; and all other property constituting "inventory" as such term is defined in the Uniform Commercial Code. -2- 3 Obligations. The meaning specified for such term in the Credit Agreement. Perfection Certificate. A certificate signed by a responsible officer of a Debtor in the form attached hereto as Exhibit A and delivered concurrently herewith. Permitted Encumbrances. The meaning specified for such term in the Credit Agreement. Securities. All of the securities and instruments held by any Debtor, including without limitation all stocks, bonds, U.S. Treasury bills, certificates of deposit, mutual or money market fund shares; and all distributions made and all sums due or to become due on any of the foregoing, and all securities, instruments or other property purchased or acquired as a result of the investment and reinvestment thereof as hereinafter provided, and all other property constituting "investment property" and "securities entitlements" as such term is defined in the Uniform Commercial Code. Uniform Commercial Code. The Uniform Commercial Code as in effect in The Commonwealth of Massachusetts. Section 2. Grant. (a) To secure the payment and performance of the Obligations, each Debtor hereby assigns and pledges to the Secured Party all of its rights, title and interest in, and grants to the Secured Party a continuing security interest in, the following described property: Accounts, Equipment, Inventory, General Intangibles and Securities; whether now owned or existing or hereafter arising or acquired, together with all goods, instruments, documents of title, policies and certificates of insurance, securities, chattel paper, deposit accounts, cash or other property owned by such Debtor or in which such Debtor has an interest; any and all additions, substitutions, replacements and accessions thereto; and all proceeds and products of respect any of the foregoing (collectively, the "Collateral"). (b) Notwithstanding the foregoing provisions of Section 2(a) or elsewhere in this Agreement, so long as no Event of Default has occurred and is continuing, the Secured Party shall not take any act or omit to take any act toward perfection of the Encumbrance granted to the Secured Party pursuant to Section 2(a), above, in the following described property of any Debtor: motor vehicles and, to the extent the same are held by third parties and not Lender, deposit, checking or other bank accounts. (c) Notwithstanding the foregoing provisions of Section 2(a), such grant of security interest shall not extend to and the term "Collateral" shall not include, any chattel paper and general intangibles which are now or hereafter held by the Debtor as licensee, lessee or otherwise, to the extent that (i) such chattel paper and general intangibles are not assignable or capable of being encumbered as a matter of law or under the terms of the license, lease or other agreement applicable thereto (but solely to the extent that any such restriction shall be enforceable under applicable law), without the consent of the licensor or lessor thereof or other applicable party thereto consent of the licensor or lessor thereof or other applicable party thereto and (ii) such consent has not been obtained; provided, however, that the foregoing grant of security interest shall extend to, and the term "Collateral" shall include, (A) any and all proceeds of such chattel paper and general intangibles to the extent that the assignment or encumbering of -3- 4 such proceeds is not so restricted and (B) upon any such licensor, lessor or other applicable party consent with respect to any such otherwise excluded chattel paper or general intangibles being obtained, thereafter such chattel paper or general intangibles as well as any and all proceeds thereof that might have theretofore have been excluded from such grant of a security interest and the term "Collateral". Section 3. Representations, Warranties and Covenants. Each Debtor hereby (a) confirms the representations, warranties and covenants set forth in the Credit Agreement, which are incorporated by reference herein, (b) makes the following representations and warranties and (c) agrees to the following covenants, each of which representations, warranties and covenants shall be continuing and in force so long as this Agreement is in effect: 3.1 Perfection Certificate. The information contained in such Debtor's Perfection Certificate is true, correct and complete, except for changes which would not affect perfection of the Secured Party's security interest in the Collateral. 3.2 Name; Debtor/Collateral Location; Changes. (a) The name of each Debtor set forth on the first page hereof is the true and correct legal name of such Debtor, and except as otherwise disclosed in the Perfection Certificate, within the last five years such Debtor has not done business as or used any other name. (b) The address of each Debtor set forth in such Debtor's Perfection Certificate and identified as its chief executive office is such Debtor's chief executive office and the place where its business records are kept. All tangible Collateral other than Securities and items in transit in the ordinary course of business is located at the addresses specified in such Debtor's Perfection Certificate. (c) No Debtor will change its name, identity or organizational structure or chief executive office or place where its business records are kept, or move any tangible Collateral (other than Securities and items in transit - in the ordinary course of business) to a location other than those set forth in its Perfection Certificate (or to new store locations which would not affect perfection of the Secured Party's security interest in any of the Collateral), or merge into or consolidate with any other entity, unless such Debtor shall have given the Secured Party at least 30 days' prior written notice thereof and shall have delivered to the Secured Party such new Uniform Commercial Code financing statements or other documentation as may be necessary or required by the Secured Party to ensure the continued perfection and priority of the security interests granted by this Agreement. An updated Perfection Certificate for such Debtor shall be delivered to the Secured Party with any such notice. 3.3 Ownership of Collateral; Absence of Liens and Restrictions. The Debtors are, and in the case of property acquired after the date hereof, will be, the sole legal and equitable owners of the Collateral, holding good and marketable title to the same free and clear of all Encumbrances except for the security interests granted hereunder or Permitted Encumbrances, and have good right and legal authority to assign, deliver, and create a security interest in the Collateral in the manner herein contemplated. -4- 5 3.4 Security Interest. Subject to Section 2(b), above, this Agreement, together with the filing of Uniform Commercial Code financing statements in the appropriate offices for the locations of Collateral listed in the Perfection Certificate, create in favor of the Secured Party a valid and continuing lien on and perfected security interest in the Collateral (except for property located in the United States in which a security interest may not be perfected by filing under the Uniform Commercial Code), and, based on the information listed in the Perfection Certificate, such security interest is prior to all other Encumbrances, except Permitted Encumbrances, and is enforceable as such against creditors of any Debtor. Other than as disclosed in the Perfection Certificate, no financing statement under the Uniform Commercial Code of any state or other instrument evidencing an Encumbrance that names any Debtor as debtor is on file in any jurisdiction and no Debtor has signed any such document or any agreement authorizing the filing of any such financing statement or instrument. 3.5 Maintenance; Taxes; Sales; Encumbrances; Insurance. The Debtors will: (a) keep the Collateral in good order and repair; (b) not use the Collateral in violation of law or any policy of insurance thereon; (c) except as may be permitted in the Credit Agreement, pay promptly when due all taxes and assessments on the Collateral or on its use or operation; (d) except as may be permitted in the Credit Agreement, not sell, grant, assign or transfer any interest in, or permit to exist any Encumbrances on, any of the Collateral other than Permitted Encumbrances; (e) defend their title to, and the Secured Party's interest in, the Collateral against all claims and take any action necessary to remove any Encumbrances other than Permitted Encumbrances and defend the right, title and interest of the Secured Party in and to any of the Debtors' rights in the Collateral; and (f) keep the Collateral insured at all times as required in the Credit Agreement. 3.6 Fixture Conflicts; Required Waivers. The Debtors intend, to the extent not inconsistent with applicable law, that the Collateral shall remain personal property of the Debtors and shall not be deemed to be a fixture irrespective of the manner of its attachment to any real estate. Each Debtor will use reasonable efforts to deliver to the Secured Party such disclaimer, waiver, or other document as the Secured Party may request, executed by each person having an interest in such real estate, which efforts shall include, without limitation, delivering any such disclaimer, waiver, or document in executable form to each such person. 3.7 Accounts: Collection and Delivery of Proceeds. Until the Secured Party exercises its rights to collect the Accounts pursuant to this Agreement, each Debtor will, in accordance with its customary business practices, diligently collect all of its Accounts constituting Collateral. So long as any Event of Default has occurred and is continuing, each Debtor shall, at the request of the Secured Party, notify account debtors of the security interest of the Secured Party in any Account and that payment thereof is to be made directly to the Secured Party. So long as any Event of Default has occurred and is continuing, any proceeds of Accounts or Inventory constituting Collateral received by any Debtor, whether in the form of cash, checks, notes or other instruments, shall be held in trust for the Secured Party and the Debtors shall deliver said proceeds daily into a Bank Account (as defined in Exhibit B) designated and controlled by the Secured Party without commingling, in the identical form received (properly endorsed or assigned where required to enable the Secured Party to collect same). 3.8 Further Assurances. Subject to Section 2(b), above, upon the written request of the Secured Party, and at the sole expense of the Debtors, the Debtors will promptly execute and deliver such further instruments and documents and take such further actions as the Secured -5- 6 Party may reasonably deem desirable to obtain the full benefits of this Agreement and of the rights and powers herein granted, including, without limitation, filing of any financing statement under the Uniform Commercial Code; execution of collateral assignments of General Intangibles, pledges or designations of Inventory and assignments of Accounts (giving the Secured Party full power to collect, compromise or otherwise deal with the assigned accounts receivable as the sole owner thereof subject to the terms hereof), all in form and substance satisfactory to the Secured Party; and transfer of Collateral to the Secured Party's possession to the extent necessary to perfect the same. When an Event of Default has occurred and is continuing, upon the written request of the Secured Party, and at the sole expense of the Debtors, the Secured Party may take any act or omit to take any act the Secured Party deems desirable to perfect its security interest in Debtors' property listed in Section 2(b), above, including, without limitation, at such time, the immediate execution and delivery by the Debtors to the Secured Party of an Agency Agreement ("Agency Agreement"), substantially in the form of Exhibit B hereto (with all blanks appropriately completed) with respect to each deposit, checking or other bank account maintained by each Debtor, and Debtors shall so execute and deliver the same, upon Secured Party's request. Each Debtor authorizes the Secured Party to file any such financing statement without the signature of a Debtor to the extent permitted by applicable law, and to file a copy of this Agreement in lieu of a financing statement. If any amount in excess of $25,000 payable under or in connection with any of the Collateral shall be or become evidenced by any promissory note or other instrument, such note or instrument shall be immediately delivered to the Secured Party, duly endorsed in a manner satisfactory to it, provided, that, so long as any Event of Default has occurred and is continuing, all such notes or instruments, regardless of amount shall be immediately delivered to the Secured Party, duly endorsed in a manner satisfactory to the Secured Party, and provided, further, that, until the occurrence of an Event of Default, the Debtors shall be entitled to collect the proceeds of such notes and instruments. Section 4. Notices and Reports Pertaining to Collateral. Each Debtor will, with respect to the Collateral: (a) promptly furnish to the Secured Party, from time to time upon the Secured Party's reasonable request, reports regarding the Collateral, in form and detail satisfactory to the Secured Party, including those reports required in the Credit Agreement; (b) promptly notify the Secured Party of any Encumbrance asserted against the Collateral, including any attachment, levy, execution or other legal process levied against any of the Collateral, and of any other material information received by any Debtor relating to the Collateral, including the Accounts, the account debtors, or other persons obligated in connection therewith, that may in any way materially and adversely affect the value of the Collateral or the rights and remedies of the Secured Party with respect thereto; and (c) promptly after the application by any Debtor for registration of any General Intangibles, notify the Secured Party thereof. Each Debtor authorizes the Secured Party to destroy all invoices, delivery receipts, reports and other types of documents and records submitted to the Secured Party in connection with the transactions contemplated herein at any time subsequent to 12 months from the time such items are delivered to the Secured Party. -6- 7 Section 5. Secured Party's Rights with respect to Collateral. Each Debtor hereby appoints the Secured Party as its lawful attorney-in-fact, with full power of substitution, in the name of such Debtor, for the sole use and benefit of the Secured Party, but at such Debtor's expense, at the Secured Party's option and at any time, after the occurrence of an Event of Default, and during the continuance thereof, without notice or demand on such Debtor, to exercise all or any of following powers with respect to the Collateral: (a) with respect to any Accounts: (i) notify account debtors of the security interest of the Secured Party in such Accounts and that payment thereof is to be made directly to the Secured Party (which notice shall not affect the duties of the Debtors described in Section 3.6); (ii) demand, collect, and receipt for any amounts relating thereto, as the Secured Party may determine; (iii) commence and prosecute any actions in any court for the purposes of collecting any such Accounts and enforcing any other rights in respect thereof; (iv) defend, settle or compromise any action brought and, in connection therewith, give such discharges or releases as the Secured Party may deem appropriate; (v) receive, open and dispose of mail addressed to such Debtor and endorse checks, notes, drafts, acceptances, money orders, bills of lading, warehouse receipts or other instruments or documents evidencing payment, shipment or storage of the goods giving rise to such Accounts or securing or relating to such Accounts, on behalf of and in the name of such Debtor; and (vi) sell, assign, transfer, make any agreement in respect of, or otherwise deal with or exercise rights in respect of, any such Accounts or the goods or services which have given rise thereto, as fully and completely as though the Secured Party were the absolute owner thereof for all purposes; (b) with respect to any Equipment and Inventory: (i) make, adjust and settle claims under any insurance policy related thereto and place and pay for appropriate insurance thereon; (ii) discharge taxes and other Encumbrances at any time levied or placed thereon; (iii) make repairs or provide maintenance with respect thereto; and (iv) pay any necessary filing fees and any taxes arising as a consequence of any such filing (it being understood and agreed that the Secured Party shall have no obligation to make any such expenditures nor shall the making thereof relieve such Debtor of its obligation to make such expenditures); and (c) with respect to any Securities (i) transfer them at any time to itself, or to its nominee, and receive the income thereon and hold the same as Collateral hereunder or apply it to any matured Obligations; and (ii) demand, sue for, collect or make any compromise or settlement it deems desirable. Except as otherwise provided herein, the Secured Party shall have no duty as to the collection or protection of the Collateral nor as to the preservation of any rights pertaining thereto, beyond the safe custody of any Collateral in its possession. Section 6. Secured Party's Rights and Remedies. (a) So long as any Event of Default shall have occurred and be continuing, the Secured Party shall have all of the following rights and remedies: (i) The Secured Party may, at its option, without notice or demand (other than as provided for in the Credit Agreement), cause all of the Obligations to become immediately due and payable and take immediate possession of the Collateral, and for that -7- 8 purpose the Secured Party may, so far as the Debtors can give authority therefor, enter upon any premises on which any of the Collateral is situated and remove the same therefrom or remain on such premises and in possession of such Collateral for purposes of conducting a sale or enforcing the rights of the Secured Party. (ii) Each Debtor will, upon demand, assemble the Collateral and make it available to the Secured Party at such places and times designated by the Secured Party that are reasonably convenient to both parties. (iii) The Secured Party may collect and receive all income and proceeds in respect of the Collateral and exercise all rights of any Debtor with respect thereto, including without limitation the right to exercise all voting and corporate rights at any meeting of the shareholders of the issuer of any Securities and to exercise any and all rights of conversion, exchange, subscription or any other rights, privileges or options pertaining to any Securities as if the Secured Party were the absolute owner thereof, including the right to exchange, at its discretion, any and all of any Securities upon the merger, consolidation, reorganization, recapitalization or other readjustment of the issuer thereof, all without liability except to account for property actually received (but the Secured Party shall have no duty to exercise any of the aforesaid rights, privileges or options and shall not be responsible for any failure to do so or delay in so doing). (iv) The Secured Party may sell, lease or otherwise dispose of the Collateral at a public or private sale, with or without having the Collateral at the place of sale, and upon such terms and in such manner as the Secured Party may determine, and the Secured Party may purchase any Collateral at any such sale. Unless the Collateral threatens to decline rapidly in value or is of the type customarily sold on a recognized market, the Secured Party shall send to the Debtors prior written notice (which, if given within ten days of any sale, shall be deemed to be reasonable) of the time and place of any public sale of the Collateral or of the time after which any private sale or other disposition thereof is to be made. Each Debtor agrees that upon any such sale the Collateral shall be held by the purchaser free from all claims or rights of every kind and nature, including any equity of redemption or similar rights, and all such equity of redemption and similar rights are hereby expressly waived and released by the Debtors. In the event any consent, approval or authorization of any governmental agency is necessary to effectuate any such sale, the Debtors shall execute all applications or other instruments as may be required. (v) In any jurisdiction where the enforcement of its rights hereunder is sought, the Secured Party shall have, in addition to all other rights and remedies, the rights and remedies of a secured party under the Uniform Commercial Code. (b) So long as any Event of Default shall have occurred and be continuing, prior to any disposition of Collateral pursuant to this Agreement the Secured Party may, at its option, cause any of the Collateral to be repaired or reconditioned (but not upgraded unless mutually agreed) in such manner and to such extent as to make it salable. (c) The Secured Party is hereby granted a license or other right to use, so long as any Event of Default shall have occurred and be continuing, without charge, any Debtor's labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks and -8- 9 advertising matter, or any property of a similar nature, relating to the Collateral, in completing production of, advertising for sale and selling any Collateral; and (subject to Section 2(b)) all Debtors' rights under all licenses and all franchise agreements shall inure to the Secured Party's benefit. (d) Each Debtor recognizes that the Secured Party may be unable to effect a public sale of all or a part of the Securities by reason of certain prohibitions contained in the Securities Act of 1933 (as amended from time to time, the "Securities Act") or the securities laws of various states (the "Blue Sky Laws"), but may be compelled to resort to one or more private sales to a restricted group of purchasers who will be obliged to agree, other things, to acquire the Securities for their own account, for investment and not with a view to the distribution or resale thereof. Each Debtor acknowledges that private sales so made may be at prices and upon other terms less favorable to the seller than if the Securities were sold at public sales. Each Debtor agrees that the Secured Party has no obligation to delay sale of any of the Securities for the period of time necessary to permit the Securities to be registered for public sale under the Securities Act or the Blue Sky Laws, and that private sales made under the foregoing circumstances shall be deemed to have been made in a commercially reasonable manner. (e) So long as any Event of Default shall have occurred and be continuing, the Secured Party shall be entitled to retain and to apply the proceeds of any disposition of the Collateral, first, to its reasonable expenses of retaking, holding, protecting and maintaining, and preparing for disposition and disposing of, the Collateral, including attorneys' fees and other legal expenses incurred by it in connection therewith; and second, to the payment of the Obligations in such order of priority as the Secured Party shall determine. Any surplus remaining after such application shall be paid to the Debtors or to whomever may be legally entitled thereto, provided that in no event shall any Debtor be credited with any part of the proceeds of the disposition of the Collateral until such proceeds shall have been received in cash by the Secured Party. The Debtor shall remain liable for any deficiency. Section 7. Waivers. Each Debtor waives presentment, demand, notice, protest, notice of acceptance of this Agreement, notice of any loans made, credit or other extensions granted, collateral received or delivered or any other action taken in reliance hereon and all other demands and notices of any description, except for such demands and notices as are expressly required to be provided to such Debtor under this Agreement or any other document evidencing the Obligations. With respect to both the Obligations and the Collateral, each Debtor assents to any extension or postponement of the time of payment or any other forgiveness or indulgence, to any substitution, exchange or release of Collateral, to the addition or release of any party or person primarily or secondarily liable, to the acceptance of partial payment thereon and the settlement, compromise or adjustment of any thereof, all in such manner and at such time or times as the Secured Party may deem advisable. The Secured Party may exercise its rights with respect to the Collateral without resorting, or regard, to other among collateral or sources of reimbursement for Obligations. The Secured Party shall not be deemed to have waived any of its rights with respect to the Obligations or the Collateral unless such waiver is in writing and signed by the Secured Party. No delay or omission on the part of the Secured Party in exercising any right shall operate as a waiver of such right or any other right. A waiver on any one occasion shall not bar or waive the exercise of any right on any future occasion. All rights and remedies of the Secured Party in the Obligations or the Collateral, whether evidenced hereby or by any other instrument or papers, -9- 10 are cumulative and not exclusive of any remedies provided by law or any other agreement, and may be exercised separately or concurrently. Section 8. Expenses. Each Debtor shall, on demand, pay or reimburse the Secured Party for all reasonable expenses (including attorneys' fees of outside counsel or allocation costs of in-house counsel) incurred or paid by the Secured Party in connection with the preparation, negotiation and closing, and the administration or enforcement, of this Agreement, its commercial credit examinations (subject to any limitations in the Credit Agreement) and any other amounts permitted to be expended by the Secured Party hereunder, including without limitation such expenses as are incurred to preserve the value of the Collateral and the validity, perfection, priority and value of any security interest created hereby, the collection, sale or other disposition of any of the Collateral or the exercise by the Secured Party of any of the rights conferred upon it hereunder. Section 9. Notices. Any demand upon or notice to the Debtors that the Secured Party may give shall be effective when delivered in accordance with the Credit Agreement. Section 10. General. This Agreement may not be amended or modified except by a writing signed by the Debtors and the Secured Party, nor may the Debtors assign any of their rights hereunder. Section headings are for convenience of reference only and are not a part of this Agreement. This Agreement shall be binding upon the Debtors, their successors and assigns, and shall inure to the benefit of and be enforceable by the Secured Party and its successors and assigns. SECTION 11. GOVERNING LAW; CONSENT TO JURISDICTION; WAIVER OF TRIAL BY JURY. (a) THIS AGREEMENT SHALL BE DEEMED TO BE A CONTRACT MADE UNDER SEAL AND SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS (WITHOUT GIVING REFERENCE TO ANY CONFLICTS OF LAW PROVISIONS THEREIN) EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF A SECURITY INTEREST GRANTED HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE REQUIRED TO BE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE COMMONWEALTH OF MASSACHUSETTS. (b) EACH OF THE DEBTORS AND THE SECURED PARTY AGREES THAT NEITHER IT NOR ANY ASSIGNEE OR SUCCESSOR SHALL (A) SEEK A JURY TRIAL IN ANY LAWSUIT, PROCEEDING, COUNTERCLAIM OR ANY OTHER ACTION BASED UPON, OR ARISING OUT OF, THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, ANY COLLATERAL OR THE DEALINGS OR THE RELATIONSHIP BETWEEN SUCH DEBTOR AND THE SECURED PARTY OR (B) SEEK TO CONSOLIDATE ANY SUCH ACTION WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT BE OR HAS NOT BEEN WAIVED. THE PROVISIONS OF THIS PARAGRAPH HAVE BEEN FULLY DISCUSSED BY THE PARTIES HERETO, AND THESE PROVISIONS SHALL BE SUBJECT TO NO EXCEPTIONS. NEITHER THE SECURED PARTY NOR ANY DEBTOR HAS -10- 11 AGREED WITH OR REPRESENTED TO ANY OTHER THAT THE PROVISIONS OF THIS PARAGRAPH WILL NOT BE FULLY ENFORCED IN ALL INSTANCES. (c) EACH DEBTOR HEREBY SUBMITS TO THE JURISDICTION OF THE COURTS OF THE COMMONWEALTH OF MASSACHUSETTS AND THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS, AS WELL AS TO THE JURISDICTION OF ALL COURTS FROM WHICH AN APPEAL MAY BE TAKEN OR OTHER REVIEW SOUGHT FROM THE AFORESAID COURTS, FOR THE PURPOSE OF ANY SUIT, ACTION OR OTHER PROCEEDING ARISING OUT OF ANY OF THE DEBTORS' OBLIGATIONS UNDER OR WITH RESPECT TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREBY, AND EXPRESSLY WAIVES ANY AND ALL OBJECTIONS IT MAY HAVE AS TO VENUE IN ANY OF SUCH COURTS. Section 12. Counterparts. This Agreement may be executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same Agreement. -11- 12 IN WITNESS WHEREOF, each of the Debtors and the Secured Party have caused this Agreement to be duly executed as an instrument under seal as of the date first written above. DEBTORS: DIEDRICH COFFEE, INC. By: /s/ Ann Wride --------------------------------- COFFEE PEOPLE, INC. By: /s/ Ann Wride --------------------------------- COFFEE PEOPLE WORLDWIDE, INC. By: /s/ Ann Wride --------------------------------- GLORIA JEAN'S, INC. By: /s/ Ann Wride --------------------------------- EDGLO ENTERPRISES, INC. By: /s/ Ann Wride --------------------------------- GLORIA JEAN'S GOURMET COFFEES CORP. By: /s/ Ann Wride --------------------------------- GLORIA JEAN'S GOURMET COFFEES FRANCHISING CORP. By: /s/ Ann Wride --------------------------------- SECURED PARTY: BANKBOSTON, N.A. By: /s/ --------------------------------- -12- 13 State of California ----------------------------- County of Orange June 30 1999 ----------------------------- ----------------------,------ Then personally appeared the above named Ann Wride, and acknowledged that he/she executed the foregoing Agreement as his/her free act and deed before me on behalf of each of the foregoing Debtors, as duly authorized agent thereof. /s/ ------------------------- Notary Public My commission expires: -13- 14 EXHIBIT A --------- PERFECTION CERTIFICATE to SECURITY AGREEMENT dated July 7, 1999 of DIEDRICH COFFEE, INC., COFFEE PEOPLE, INC., COFFEE PEOPLE WORLDWIDE, INC., GLORIA JEAN'S, INC., EDGLO ENTERPRISES, INC., GLORIA JEAN'S GOURMET COFFEES CORP., and GLORIA JEAN'S GOURMET COFFEES FRANCHISING CORP. The undersigned, the Vice President and Chief Financial Officer of DIEDRICH COFFEE, INC., and the Secretary and Treasurer of each of COFFEE PEOPLE, INC., COFFEE PEOPLE WORLDWIDE, INC., GLORIA JEAN'S, INC., EDGLO ENTERPRISES, INC., GLORIA JEAN'S GOURMET COFFEES CORP. and GLORIA JEAN'S GOURMET COFFEES FRANCHISING CORP., and all future Subsidiaries who hereafter become parties hereto (collectively, the "Debtors" and each individually a "Debtor"), hereby certify solely in such capacity, with reference to a certain Security Agreement dated of even date herewith (terms defined in such Security Agreement having the same meanings herein as specified therein), among the Debtors and BankBoston, N.A., (the "Secured Party"), to the Bank as follows: 1. NAMES. (a) THE EXACT CORPORATE NAME OF EACH DEBTOR AS IT APPEARS ON ITS ORGANIZATIONAL DOCUMENTS AND ITS TAXPAYER IDENTIFICATION NUMBER IS AS FOLLOWS: Diedrich Coffee, Inc. Tax ID No.: 33-0086628 Coffee People, Inc. Tax ID No.: 93-1073218 Coffee People Worldwide, Inc. Tax ID No.: 33-0862454 Gloria Jean's Inc. Tax ID No.: 86-0743352 15 Edglo Enterprises, Inc. Tax ID No.: 36-3401583 Gloria Jean's Gourmet Coffees Corp. Tax ID No.: 36-3185413 Gloria Jean's Gourmet Coffees Franchising Corp. Tax ID No.: 36-3447732 (b) THE FOLLOWING IS A LIST OF ALL OTHER NAMES (INCLUDING TRADE NAMES OR SIMILAR APPELLATIONS) USED BY THE DEBTOR, OR ANY OTHER BUSINESS OR ORGANIZATION TO WHICH THE DEBTOR BECAME THE SUCCESSOR BY MERGER, CONSOLIDATION, ACQUISITION, CHANGE IN FORM, NATURE OR JURISDICTION OF ORGANIZATION OR OTHERWISE, NOW OR AT ANY PREVIOUS TIME: Barn Owl, Inc. CP Acquisition CP Old, Inc. Gloria Jean's Corp. Coffee Midwest Corp. Gourmet Roasters Corp. Gloria Jean's Coffee Bean Corp. Gloria Jean's Coffee Bean Franchising Corp. The Coffee Bean, Inc. 2. LOCATIONS. (a) THE CHIEF EXECUTIVE OFFICE OF EACH DEBTOR IS LOCATED AT THE FOLLOWING ADDRESSES: Diedrich Coffee, Inc. at 2144 Michelson Drive, Irvine, CA 92602 Coffee People, Inc. at 11480 Commercial Parkway, Castroville, CA 95012 Gloria Jean's, Inc., Gloria Jean's Gourmet Coffees Corp., Gloria Jean's Gourmet Coffees Franchising Corp., and Edglo Enterprises, Inc. at 11480 Commercial Parkway, Castroville, CA 95012 (b) THE FOLLOWING IS A LIST OF ALL OTHER LOCATIONS IN WHICH ANY DEBTOR MAINTAINS ANY BOOKS OR RECORDS RELATING TO ANY OF THE COLLATERAL CONSISTING OF ACCOUNTS, CHATTEL PAPER, GENERAL INTANGIBLES OR MOBILE GOODS: Currently: Street and Number County State Zip Code ----------------- ------ ----- -------- See Attachment B -2- 16 Within the last four months, if different: Street and Number County State Zip Code ----------------- ------ ----- -------- None. (c) THE FOLLOWING ARE ALL THE OTHER PLACES OF BUSINESS OF ANY DEBTOR: Currently: Street and Number County State Zip Code ----------------- ------ ----- -------- See Attachment B Within the last four months, if different: Street and Number County State Zip Code ----------------- ------ ----- -------- Crossroads Mall Omaha NE 68114 (d) THE FOLLOWING ARE ALL THE OTHER LOCATIONS WHERE ANY OF THE COLLATERAL (OTHER THAN SECURITIES AND ANY DEPOSIT ACCOUNTS) IS LOCATED: Currently: Street and Number County State Zip Code ----------------- ------ ----- -------- None. Within the last four months, if different: Street and Number County State Zip Code ----------------- ------ ----- -------- See Attachment C -3- 17 (e) THE FOLLOWING ARE THE NAMES AND ADDRESSES OF ALL PERSONS OR ENTITIES OTHER THAN ANY OF THE DEBTORS, SUCH AS LESSEES, CONSIGNEES, WAREHOUSEMEN, POUNDERKEEPERS OR PURCHASERS OF CHATTEL PAPER, THAT HAVE POSSESSION OR ARE INTENDED TO HAVE POSSESSION OF ANY OF THE COLLATERAL CONSISTING OF CHATTEL PAPER, INVENTORY OR EQUIPMENT: Currently: Street and Number County State Zip Code ----------------- ------ ----- -------- See Attachment D Within the last four months, if different: Street and Number County State Zip Code ----------------- ------ ----- -------- None. -4- 18 IN WITNESS WHEREOF, we have hereunto signed this Certificate as an instrument under seal as of July 7,1999. DIEDRICH COFFEE, INC. By: --------------------------------- Title: COFFEE PEOPLE, INC. By: --------------------------------- Title: COFFEE PEOPLE WORLDWIDE, INC. By: --------------------------------- Title: GLORIA JEAN'S, INC. By: --------------------------------- Title: EDGLO ENTERPRISES, INC. By: --------------------------------- Title: GLORIA JEAN'S GOURMET COFFEES CORP. By: --------------------------------- Title: GLORIA JEAN'S GOURMET COFFEES FRANCHISING CORP. By: --------------------------------- Title: -5- 19 EXHIBIT B --------- AGENCY AGREEMENT -------------------------------- Telephone: ------------------ Telecopier: ------------------ Dated: ---------------------- [Agency Account Institution] [Address] Re: Account No. -------------------- Ladies and Gentlemen: This letter refers to Account No. _________ and all other accounts (collectively, the "Bank Account") which ___________________________ (the "Company") maintains with you (the "Bank"). The Company hereby notifies you that it has entered into certain financial arrangements with BankBoston, N.A. ("BKB") and certain other lenders and, in connection with those financial arrangements, it has transferred exclusive control of the Bank Account to BKB, as agent for itself and such lenders. By its execution and delivery of this letter to BKB, the Bank irrevocably acknowledges and agrees as follows: (a) the Bank has been advised that all funds which may from time to time be on deposit in the Bank Account are subject to a lien and security interest in favor of BKB; (b) the Bank shall disclose to BKB such information relating to the Bank Account and the debits and credits thereto as the BKB may from time to time reasonably request; (c) except as set forth below, the Bank will not exercise any right of set-off, banker's lien or any similar right in favor of itself or any other person in connection with any monies, checks, drafts, instruments or other items of payment deposited into the Bank Account, or any funds on deposit thereon; (d) the Bank will collect all monies, checks, drafts, instruments and other items of payment deposited into the Bank Account; and (e) upon the Bank's receipt of written notice from BKB, it will on a daily basis transfer the collected available balance of funds standing to the credit of the Bank Account by wire transfer (or other means acceptable to BKB) solely to: 20 BankBoston, N.A. Account No. _________________ ABA No. ____________________ Re: Diedrich Coffee, Inc. and its Subsidiaries Attn: ________________________ (the "BKB Concentration Account") or such other destination as BKB shall designate. BKB hereby notifies you that BKB will from time to time access the Bank Account for the sole purpose of facilitating the transfer of funds therein to the BKB Concentration Account pursuant to the instructions set forth in the foregoing sentence. Notwithstanding anything in this letter to the contrary, the Bank shall have the right to deduct from or set off against amounts from time to time in the Bank Account (i) your usual and customary costs and expenses in respect of interest on overdrafts and any return items, and your usual and customary fees and expenses associated with any such return item, overdraft and/or the maintenance of the Bank Account and (ii) the face amount (or portion thereof) of any check, instrument or other item which was deposited in the Bank Account and which has been returned unpaid for reasons of insufficient funds or has otherwise not been collateral. You hereby acknowledge and agree that all such interest, costs, fees and expenses shall be for the account of the Company and in the event the amounts in the Bank Account are insufficient to reimburse you for the same, the Company hereby agrees to reimburse you for such interest, costs, fees and/or expenses immediately upon your demand therefor in immediately available funds. The Bank shall have no duty to inquire into the source or use of any monies, checks, drafts, instruments or other items or amounts deposited into the Bank Account. The Company hereby agrees that any deposits of monies, checks, drafts, instruments or other items into or withdrawals from the Bank Account now or hereafter directed by BKB are authorized by the Company and the Company acknowledges that it has no right to withdraw or direct the transfer of any or all credit balances at any time, except to the extent provided on a written notice from BKB. The Bank shall be fully protected in acting on any instruction of BKB with respect to the Bank Account without making any inquiry as to BKB's authority to give such instruction. The Company consents and agrees to the foregoing, authorizes the Bank to enter into this letter agreement, and agrees to indemnify and hold harmless the Bank from and against any and all claims, actions and suits (whether groundless or otherwise), losses, damages, costs, expenses and liabilities of every nature and character arising out of the Bank's compliance with the terms of this letter, except such as result from the Bank's gross negligence or willful misconduct, and in no event shall the Bank be liable for any consequential, indirect or special damages. This letter agreement is binding upon each of the undersigned and you and each of our respective successors and assigns and shall inure to the benefit of each of us and other respective successors and assigns. It supersedes all prior agreements, oral or written, with respect to the subject matter hereof, and may not be modified without the prior written consent of each of the parties hereto. In addition, the terms of this letter agreement may not be modified without the prior written consent of BKB. This letter agreement may be terminated only as follows: (i) you may terminate this letter agreement and the Bank Account at any time which is thirty (30) days or more after the date you -2- 21 shall have given written notice of such termination to BKB and to the Company and (ii) BKB may terminate this letter agreement and the Bank Account at any time which is ten (10) days or more after the date BKB shall have given written notice of such termination (sent to each of the Company and you). In addition, the terms of this letter agreement may not be modified without the prior written consent of BKB. Any notice hereunder shall be delivered to the relevant party hereto at the address and to the attention of such party set forth below, or at such other address or to the attention of such other party as the party to be addressed may specify by written notice delivered to each other party hereto. No termination shall affect or impair any of the agreements, rights or obligations hereunder of any party with respect to any periods of time prior to the date of such termination. This letter agreement shall be governed by and construed in accordance with the internal laws of the Commonwealth of Massachusetts and applicable federal law. This letter agreement shall become effective immediately upon being executed by all of the parties hereto. Very truly yours, ------------------------------------- Name of Company By: ---------------------------------- Name: -------------------------------- Title: -------------------------------- Address: ----------------------------- Telephone: --------------------------- Telecopier: --------------------------- Attention: --------------------------- BANKBOSTON, N.A. By: ---------------------------------- Name: -------------------------------- Title: -------------------------------- Address: 100 Federal Street Boston, MA 02110 Attention: --------------------------- Telephone: --------------------------- Telecopier: --------------------------- (signatures continued) -3- 22 Acknowledged and agreed to this _____ day of _________, _____. ----------------------------- [Name of Bank] By: ------------------------- Name: ----------------------- Title: ---------------------- Address: --------------------- Telephone: ------------------- Telecopier: ------------------ Attention: ------------------ -4- EX-10.27 4 SECURITIES PLEDGE AGREEMENT DATED 7/7/99. 1 EXHIBIT 10.27 SECURITIES PLEDGE AGREEMENT --------------------------- THIS SECURITIES PLEDGE AGREEMENT made as of July 7, 1999, by and among DIEDRICH COFFEE, INC., COFFEE PEOPLE, INC., COFFEE PEOPLE WORLDWIDE, INC., GLORIA JEAN'S, INC., EDGLO ENTERPRISES, INC., GLORIA JEAN'S GOURMET COFFEES CORP., and GLORIA JEAN'S GOURMET COFFEES FRANCHISING CORP. (collectively, the "Pledgors" and each individually a "Pledgor"); and BANKBOSTON, N.A., (together with its successors and assigns, the "Secured Party"). RECITALS A. The Pledgors and the Secured Party entered into a Credit Agreement dated on or about June 30, 1999 (as the same may be amended, restated, renewed, replaced, supplemented or otherwise modified from time to time, the "Credit Agreement"), pursuant to which the Secured Party is extending credit to the Pledgors. Capitalized terms used herein without definition have the meanings assigned to them in the Credit Agreement. B. It is a condition to the Secured Party's willingness to enter into the Credit Agreement and provide to the Pledgors the financing contemplated thereby that the Pledgors shall have pledged to the Secured Party, for the benefit of the Secured Party, all of the issued and outstanding capital stock, partnership interests, member interests and other equity interests of now or hereafter held legally or beneficially by any Pledgor, including without limitation all equity interests of their existing and future Subsidiaries. C. Each Pledgor will benefit materially from the extensions of credit contemplated by the Credit Agreement and, as a material inducement to the Secured Party to enter into the Credit Agreement and to extend credit to the Pledgors as contemplated thereby, wishes hereby to pledge to the Secured Party such capital stock and interests. NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged by each of the parties hereto, the parties hereby agree as follows: Section 1. Pledge. (a) For good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, each Pledgor hereby delivers, pledges, grants security interests in and assigns to the Secured Party all of such Pledgor's right, title and interest in and to, whether now existing or hereafter coming into existence, the securities, shares of capital stock, warrants, options, partnership interests, member interests, and other equity and ownership interests now or hereafter standing in the name of or otherwise now or hereafter held legally or beneficially by such Pledgor (the "Ownership Interests") in any issuer (a "Company" and, collectively, the "Companies"), and all certificates (if any) representing or evidencing such Ownership Interests standing in such Pledgor's name, all such Ownership Interests as of the date hereof being more particularly described on Exhibit A attached hereto, and all other rights of such Pledgor under any and all agreements, including, without limitation, all right, title and interest (if any) of such 2 Pledgor as a partner or director, as the case may be, to participate in the operation or management of any Company and all rights of such Pledgor to the property, assets, partnership interests and distributions under the Organizational Documents, and all present and future rights of such Pledgor to receive payment of money or other distributions or payments arising out of or in connection with the Ownership Interests of such Pledgor in any Company and its rights under the Organizational Documents, any and all other related agreements and all general intangibles relating thereto and proceeds resulting therefrom as collateral security, and all rights of any Pledgor with respect to the pledge of any Ownership Interests pursuant to the terms and conditions of the Organizational Documents or any other agreement or instrument, for (i) the payment and performance of all obligations of the Pledgors under the Credit Agreement; (ii) the due and punctual payment of the Notes, as defined in the Credit Agreement and issued pursuant thereto, to the Secured Party, including, without limitation, all interest payable on the Notes at the interest rates provided therein and in the Credit Agreement, regardless of the extent allowed as a claim in any proceeding in respect of the bankruptcy, reorganization or insolvency of any Pledgor (a "Reorganization"); (iii) the due and punctual payment of any of the Pledgors' notes or instruments as may hereafter from time to time be issued in addition to, in place of, or in amendment of, the Notes under the Credit Agreement, including, without limitation, all interest payable on such notes or instruments at the interest rates provided therein, regardless of the extent allowed as a claim in any Reorganization; (iv) the payment and performance of all indebtedness, liabilities and obligations of the Pledgors under the other Security Documents contemplated by the Credit Agreement; (v) the payment and performance of all obligations, indebtedness and liabilities of any of the Pledgors to the Secured Party under the other Security Documents contemplated by the Credit Agreement; (vi) the performance of all of the obligations of each of the Pledgors to the Secured Party contained in any of the Loan Documents contemplated by the Credit Agreement; and (vii) the payment of all other future advances and other obligations of any Pledgor to the Secured Party including, without limitation any future loans and advances made to any Pledgor by the Secured Party prior to, during or following any Reorganization, and any and all other indebtedness, liabilities and obligations of any Pledgor to the Secured Party of every kind and description, direct, indirect or contingent, now or hereafter existing, due or to become due (all of the foregoing hereinafter called the "Obligations"). (b) In the case of certificated securities, each Pledgor shall promptly pledge and deposit hereunder with the Secured Party, any stock or other certificates, warrants, options or other rights to acquire a certificate of Ownership Interests acquired by such Pledgor in addition to the securities referred to on Exhibit A attached hereto, whether by (i) new purchase or (ii) new issuance or by declaration of a dividend or distribution with respect to, or a split of, or conversion of, any securities now or hereafter held in pledge (all in suitable form for transfer by delivery or accompanied by (a) duly executed instruments of transfer or assignments in blank, and (b) any required transfer tax stamps). Such stock or other certificate, equity securities, warrants, options, voting or other rights shall stand pledged and assigned as collateral security for the Obligations in the same manner as the property described in the first paragraph hereof and this paragraph. Nothing contained in this Section 1 shall be deemed to permit any issuances of debt or equity securities, exercise of rights, distributions, payments or other actions not otherwise permitted by the Credit Agreement. In the case of uncertificated securities, each Pledgor shall comply with the provisions of Section 2(h) hereunder and cause the lien on the Pledged Securities to be registered in the books and records maintained by the applicable Company. (All -2- 3 of the property described in the first paragraph hereof and this paragraph is hereinafter collectively called the "Pledged Securities".) Section 2. Representations, Warranties and Covenants of the Pledgors. Each Pledgor hereby represents, warrants and covenants as follows with respect to the Pledged Securities held in such Pledgor's name: (a) Except for the security interest and pledge hereunder and any security interest and pledge permitted under the Credit Agreement, (i) such Pledgor is the legal and beneficial owner of the Pledged Securities and such Pledgor holds the Pledged Securities free and clear of any Encumbrance or restriction on transfer (in the case of restrictions on transfer, except as may be imposed by any state or local governmental authorities), (ii) there are no restrictions upon the voting rights of any of the Pledged Securities (other than as may be imposed by any state or local governmental authorities), (iii) the Pledged Securities are duly and validly issued, fully paid and non-assessable, and (iv) such Pledgor has the right to pledge said securities to the Secured Party hereunder free of any Encumbrances. (b) Such Pledgor shall promptly pay any and all taxes, assessments and governmental charges upon the Pledged Securities pledged by such Pledgor hereunder when due other than those contested in good faith by appropriate proceedings for which adequate funds for the payment thereof shall have been set aside. (c) Except as permitted under the Credit Agreement, such Pledgor shall not sell or otherwise assign, transfer or dispose of the Pledged Securities or any interest therein during such time as they shall be pledged to the Secured Party as contemplated hereby. (d) Such Pledgor shall keep the Pledged Securities free from any Encumbrance except for the pledge provided hereby and shall take such actions reasonably necessary to protect such Pledged Securities against all claims and demands of all persons at any time claiming any interest therein. (e) The Pledged Securities are duly and validly issued, fully paid and nonassessable, and in the case of certificated securities, such Pledgor or the Secured Party holds a certificate or instrument evidencing the Pledged Securities issued in the name of such Pledgor as described on Exhibit A. (f) The Pledged Securities represent, and the Pledgors are, the legal and beneficial holders of, all of the issued and outstanding equity interests of the Companies listed on Exhibit A. (g) Such Pledgor will not, without the prior written consent of the Secured Party, which consent will not be unreasonably withheld or delayed, amend or -3- 4 modify any of the Organizational Documents, as in effect on the date hereof provided however, each Pledgor agrees to amend immediately any Organizational Documents which contain provisions similar to those set forth in Section 102(b)(2) of Title 8 of the Delaware General Corporation Law in order to delete any such provision. (h) Such Pledgor shall execute and deliver written instructions to the applicable Company to register the Encumbrance created hereunder in any uncertificated equity interests in the books and records maintained by such Company for such registrations and cause such Company to execute and deliver to the Secured Party a written confirmation and account control agreement to the effect that the Encumbrance created hereunder in such equity interests has been duly registered in such books and records and is perfected. (i) Such Pledgor will perform and observe, or cause to be performed and observed, all of such Pledgor's obligations under the Organizational Documents. (j) The execution and delivery of, and performance by such Pledgor of its respective obligations under the Security Documents to which it is a party will not violate any provision of law, any order, judgment or decree of any court or other agency of government, the Organizational Documents or any indenture, agreement or other instrument to which such Pledgor is a party, or by which such Pledgor is bound, or be in conflict with, result in a breach of, or constitute (with due notice or lapse of time or both) a default under, or result in the creation or imposition of any Encumbrance of any nature whatsoever upon any of the property or assets of such Pledgor pursuant to, any such indenture, agreement or instrument. (k) Such Pledgor is not required to obtain any consent, approval or authorization from, or to file any declaration or statement with, any governmental instrumentality or other agency or any other Person in connection with or as a condition to the execution, delivery or performance of any of the Security Documents to which such Pledgor is a party, except such consents as have already been obtained. (l) Exhibit A accurately and completely lists each Pledgor's correct legal name and principal address and amount of Ownership Interests in any of the Companies and whether the same are certificated, all as of the date hereof. (m) This Agreement and other agreements and instruments relating hereto constitute the valid and binding obligations of such Pledgor, enforceable against it in accordance with its terms, subject, however to bankruptcy, insolvency, reorganization, moratorium and similar laws affecting the rights and remedies of creditors generally or the application of principles of equity, whether in any action in law or proceeding in equity, and subject to the availability of the remedy of specific performance or of any other equitable remedy or relief to enforce any right under any such agreement. -4- 5 Section 3. Right to Receive Distributions on Pledged Securities. (a) Unless and until an Event of Default (as defined in Section 5 hereof) has occurred, and if the Secured Party has notified any Pledgor in writing of its election to exercise the Secured Party's rights under this Section 3, such Pledgor shall be entitled to receive and retain for its own use any and all dividends, interest and other payments and distributions made upon or with respect to the Pledged Securities (subject to any restrictions thereon set forth in the Credit Agreement or any other Loan Document referred to therein), except (i) dividends or distributions payable in securities or other property (other than cash dividends or distributions); (ii) dividends or distributions on dissolution or on partial or total liquidation or in connection with a reduction of capital, capital surplus or paid-in surplus; and (iii) any other securities issued with respect to or in lieu of the Pledged Securities in any manner whatsoever (whether upon conversion of any convertible securities included therein or through a split, spin-off, split-off, reclassification, merger, consolidation, sale of assets, combination of securities or otherwise). All of the foregoing, together with all new, substituted or additional certificates, warrants, options, notes or other rights, or other securities issued in addition to or in respect of all or any of the Pledged Securities shall be delivered to the Secured Party hereunder as required by Section 1 hereof, to be held as collateral pursuant to the terms hereof in the same manner as the Pledged Securities delivered to the Secured Party on the date hereof. Nothing in this Section 3 shall be deemed to permit any issuance of debt or equity securities, exercise of rights, distributions, payments or other actions not otherwise permitted by the Credit Agreement. (b) Notwithstanding any provision herein to the contrary, if any Event of Default shall have occurred, upon the giving of the written notice referred to in subsection (a) above, then and whether or not any holder of the Obligations exercises any available option to declare such Obligations due and payable or seeks or pursues any other relief or remedy available to such holder under this Agreement or any instrument or agreement evidencing or securing any Obligations, all dividends, distributions, or interest or principal payments, as the case may be, on the Pledged Securities shall be paid directly to the Secured Party, and retained by it as part of the Pledged Securities, subject to the terms of this Agreement, and, if the Secured Party shall so request in writing, the Pledgor agrees to execute and deliver to the Secured Party appropriate additional distribution and other orders and documents to that end. -5- 6 Section 4. Right to Vote Pledged Securities. (a) Unless and until an Event of Default has occurred, and if the Secured Party shall have notified any Pledgor in writing of its election to exercise the Secured Party's rights under this Section 4, each Pledgor shall have the right, from time to time, to vote and to give consents, ratifications and waivers with respect to the Pledged Securities held in such Pledgor's name and to exercise conversion rights with respect to any convertible securities included therein; provided, however, that no vote shall be cast, and no consent shall be given or member action taken, which would have the effect of impairing the position or interest of the Secured Party with respect to the Pledged Securities or Secured Party's rights and remedies under, or which would authorize or effect any action then prohibited by, the Credit Agreement or any other Loan Document referred to therein. (b) Notwithstanding any provision herein to the contrary, if any Event of Default shall have occurred, upon the giving of the written notice referred to in subsection (a) above, then and whether or not any holder of the Obligations exercises any available option to declare such Obligations due and payable or seeks or pursues any other relief or remedy available to such holder under this Agreement or any instrument or agreement evidencing or securing any Obligations, the Secured Party, or its nominee, shall forthwith, without further action on the part of any person, have the sole and exclusive right to exercise all voting and other powers of ownership pertaining to the Pledged Securities and shall exercise such powers in such manner as the Secured Party shall determine to be necessary, appropriate or advisable. Each Pledgor hereby agrees to execute and deliver to the Secured Party such additional powers, authorizations, proxies, dividends and such other documents as the Secured Party may reasonably request to secure the Secured Party the rights, powers and authority intended to be conferred upon by this subsection (b). Section 5. Events of Default. Each Pledgor shall be in default under this Agreement upon the occurrence of any of one of the following events (herein referred to as an "Event of Default"): (a) default by such Pledgor in the due observance or performance of any covenant or agreement contained herein, which default, if curable, is not cured within 10 days of the earlier of receipt by such Pledgor of notice thereof or such Pledgor's actual knowledge thereof; (b) breach by such Pledgor in any material respect of any representation or warranty herein contained; or (c) the occurrence of any "Event of Default" under (and as defined) in the Credit Agreement. Section 6. Remedies Upon Event of Default. (a) If any Event of Default shall occur, the Secured Party may exercise all the rights and remedies of a secured party under the Uniform Commercial Code. Without limitation of the foregoing, unless the Obligations shall have been paid in full in cash, the Secured Party may, in the Secured Party's sole discretion, without further demand, advertisement or notice, except as -6- 7 expressly provided for in subsection (i) below, apply the cash, if any, then held by it as collateral hereunder, for the purposes and in the manner provided in Section 7 hereof, and, if there shall be no such cash or the cash so applied shall be insufficient to make payment in full of all payments provided in Section 7 hereof, (i) Sell the Pledged Securities, or any part thereof, in one or more sales, at public or private sale, conducted by any officer or agent of the Secured Party, at a place of business of the Secured Party or elsewhere, for cash, upon credit or future delivery, and at such price or prices as the Secured Party shall determine, and, to the extent permitted by law, the Secured Party may be the purchaser of any or all of the Pledged Securities so sold. Upon any such sale, the Secured Party shall have the right to deliver, assign and transfer to the purchaser thereof the Pledged Securities so sold. Each purchaser (including the Secured Party) at any such sale shall hold the Pledged Securities so sold, absolutely free from any claim or right of whatsoever kind, including, without limitation, any equity or right of redemption of any Pledgor which such Pledgor, to the extent it may lawfully do so, hereby specifically waives. Unless the Pledged Securities are of a type sold on a recognized market, the Secured Party shall give such Pledgor at least 10 days' advance written notice of its intention to make any such public or private sale. Secured Party and Pledgor agree that such notice constitutes "reasonable notification" within the meaning of Section 9-504(3) of the Uniform Commercial Code. Such notice, in case of a public sale shall state the time and place fixed for such sale. Such notice in the case of a private sale or disposition, shall state the time after which any private sale or other intended disposition is to be made. The Secured Party shall not be obligated to make any sale pursuant to any such notice. The Secured Party may, without notice or publication, adjourn any public or private sale from time to time by announcement at the time and place fixed for such sale, or any adjournment thereof, and any such sale may be made at any time or place to which the same may be so adjourned without further notice or publication. In case of any sale of all or any part of the Pledged Securities for credit or for future delivery, the Pledged Securities so sold may be retained by the Secured Party until the selling price is paid by the purchaser thereof, but the Secured Party shall not incur any liability in case of the failure of such purchaser to pay for the Pledged Securities so sold, and in case of any such failure, such Pledged Securities may again be sold under and pursuant to the provisions hereof; or (ii) Proceed by a suit or suits at law or in equity to foreclose upon this Pledge Agreement and sell the Pledged Securities, or any portion thereof, under a judgment or decree of a court or courts of competent jurisdiction. (b) If at any time when the Secured Party shall determine to exercise its right to sell all or any part of the Pledged Securities pursuant to subsection (a)(i) of this Section, and if such Pledged Securities or the part thereof to be sold shall not, for any reason whatsoever, be effectively registered under the Securities Act of 1933, as from time to time in effect (the "Securities Act") or the securities laws of any state, the Secured Party, in its sole and absolute -7- 8 discretion, is hereby expressly authorized to sell such Pledged Securities or such part thereof by private sale in such manner and under such circumstances as the Secured Party may reasonably determine in order that such sale may legally be effected without such registration. The Secured Party may sell all or any part of the Pledged Securities at any price which is commercially reasonable under the circumstances, in their sole and absolute discretion. (c) The Secured Party as attorney-in-fact pursuant to Section 8 hereof may, in the name and stead of each Pledgor, make and execute all conveyances, assignments and transfers of the Pledged Securities sold in accordance with this Agreement. Each Pledgor shall, if so requested by the Secured Party ratify and confirm any sale or sales by executing and delivering to the Secured Party, or to such purchaser or purchasers, all such instruments as may, in the judgment of the Secured Party, be advisable for such purpose. (d) The receipt of the Secured Party of the purchase money paid at any such sale made by it shall be a sufficient discharge therefor to any purchaser (other than the Secured Party) of the Pledged Securities, or any portion thereof, sold as aforesaid; and no such purchaser (or his or its representatives or assigns) (other than the Secured Party), after paying such purchase money and receiving such receipt, shall be bound to see to the application of such purchase money or any part thereof or in any manner whatsoever be answerable for any loss, misapplication or nonapplication of any such purchase money, or any part thereof, or be bound to inquire as to the authorization, necessity, expediency or regularity of any such sale. (e) The Secured Party shall incur no liability as a result of the sale of the Pledged Securities, or any part thereof, at any private sale pursuant to Section 6 hereof. Each Pledgor hereby waives any claims against the Secured Party arising by reason of the fact that the price at which the Pledged Securities may have been sold at such private sale was less than the price that might have been obtained at a public sale or was less than the aggregate amount of the secured Obligations, even if the Secured Party accepts the first offer received and does not offer the Pledged Securities to more than one offeree, so long as the terms of the sale were commercially reasonable. (f) In connection with the exercise by the Secured Party of any of its rights and remedies under this Agreement, the Pledgor consents to the assignment of any Ownership Interests (including any economic interest therein and all voting rights and respect thereof) in any of the Companies and agrees that no such assignment and no foreclosure thereunder or other remedies in respect thereof in accordance herewith shall in itself effect a termination or dissolution of any Company. Effective as of the date that the Secured Party takes title to the Pledged Securities pledged hereunder, voluntarily or involuntarily by way of foreclosure or agreement, in accordance with the provisions of this Agreement, the Secured Party shall be entitled to all rights benefits and privileges of a holder of such Ownership Interests except that the Secured Party shall be obligated to make any capital contributions not expressly assumed by them in writing. Section 7. Application of Proceeds. The proceeds of any sale, or of collection, of all or any part of the Pledged Securities shall be applied by the Secured Party, without any marshaling of assets, in the following order: -8- 9 (a) first, to the payment of all of the costs and expenses of such sale, including, without limitation, reasonable legal fees, and all other expenses, liabilities and advances made or incurred by the Secured Party in connection therewith (including, without limitation, costs and expenses incurred in connection with any bankruptcy, reorganization or insolvency proceeding); (b) second, to the payment of the Obligations in such order as the Lender in its sole discretion shall determine, until payment in full thereof; and (c) finally, ratably in accordance with their relative sharing ratios, to each Pledgor, its, his or her successors, assigns, legal representatives or heirs, or to whomsoever may be lawfully entitled to receive the same. Section 8. The Secured Party Appointed Attorney-in-Fact. Each Pledgor hereby appoints the Secured Party as the Pledgor's lawful attorney, with full power of substitution, in the name of such Pledgor, for the sole use and benefit of the Secured Party, but at such Pledgor's expense, to take any action and execute any instruments which the Secured Party may deem necessary or advisable to accomplish the purposes hereof. Such appointment as attorney is irrevocable and coupled with an interest. Section 9. Record Ownership of Pledged Securities. Upon the occurrence of an Event of Default and subject to the requirements of mandatory law, the Secured Party may cause, upon receipt of written notification to any Pledgor, any or all of the Pledged Securities to be transferred of record into the Secured Party's name. Each Pledgor shall, upon request, promptly give to the Secured Party copies of any notices or other communications received by such Pledgor with respect to the Pledged Securities registered in the such Pledgor's name. Section 10. Perfection. Prior to or concurrently with the execution and delivery of this Agreement, each Pledgor shall (i) deliver the certificates representing the Pledged Securities hereunder if any, to the Secured Party or register the same for purposes of Article 8 of the Uniform Commercial Code; and (ii) execute such financing statements and other documents in such offices as the Secured Party may reasonably request to perfect the security interest granted by such Pledgor pursuant to Section 1 of this Agreement and will permit the same to be filed by the Secured Party. Section 11. No Waiver. No failure on the part of the Secured Party to exercise, and no delay on the part of the Secured Party in exercising, any right, power or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise by the Secured Party of any right, power or remedy hereunder preclude any other or further right, power or remedy. Section 12. Survival of Obligations; Termination of Pledge. This Pledge Agreement and the warranties, representations, agreements and covenants contained herein and in any certificates or instruments delivered pursuant hereto shall survive the making of the Loans and the execution and delivery of the Notes, regardless of any investigation made by the Secured Party or any person on behalf of the Secured Party, and shall continue for so long as any of the -9- 10 Obligations shall remain outstanding or the Secured Party shall have any obligation to advance funds to any Pledgor. Upon the repayment and performance in full indefeasibly in cash of all the Obligations and the expiration or termination of any obligations of the Secured Party to advance funds to the Pledgors, the Secured Party shall forthwith assign, transfer and deliver to each Pledgor or its assignees, without representation, warranty or recourse, against appropriate receipts, all the Pledged Securities, if any, then held by it in pledge hereunder and all duly executed instruments of transfer or assignments in blank relating thereto and any other property held by the Secured Party pursuant to this Agreement free and clear of the Encumbrance of this Agreement and the other Loan Documents, except that such Encumbrance shall survive with respect to any payment made or received by the Secured Party in respect of the Obligations that is subsequently voided as a fraudulent conveyance, preference or otherwise. Section 13. Consent to Jurisdiction. Each Pledgor hereby irrevocably and unconditionally: (a) submits for itself and its property in any legal action or proceeding relating to this Agreement and the other Loan Documents to which it is a party, or for recognition and enforcement of any judgment in respect thereof, to the non-exclusive general jurisdiction of the Courts of the Commonwealth of Massachusetts, the courts of the United States of America for the District of Massachusetts, and appellate courts from any thereof; (b) consents that any such action or proceeding may be brought in such courts and waives any objection that it may now or hereafter have to the venue of any such action or proceeding in any such court or that such action or proceeding was brought in an inconvenient court and agrees not to plead or claim the same; (c) agrees that service of process in any such action or proceeding may be effected by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, to such Pledgor at its address as set forth in the Credit Agreement or at such other address of which the Secured Party shall have been notified pursuant to the terms of this Agreement; (d) agrees that nothing herein shall affect the right to effect service of process in any other manner permitted by law or shall limit the right to sue in any other jurisdiction; and (e) waives, to the maximum extent not prohibited by law, any right it may have to claim or recover in any legal action or proceeding referred to in this subsection any special, exemplary, punitive or consequential damages. Section 14. WAIVER OF JURY TRIAL. EACH OF THE PLEDGOR AND THE SECURED PARTY HEREBY VOLUNTARILY AND IRREVOCABLY WAIVES TRIAL BY JURY IN ANY ACTION BROUGHT ON OR WITH RESPECT TO THIS AGREEMENT OR ANY OTHER AGREEMENTS EXECUTED IN CONNECTION HEREWITH. -10- 11 Section 15. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the legal representatives, heirs, successors and assigns of each Pledgor and the Secured Party, and any subsequent holder of any of the Obligations. Section 16. Additional Instruments and Assurance. Each Pledgor hereby agrees, at such Pledgor's own expense: (i) to execute and deliver, from time to time, any and all further, or other, instruments and to perform such acts, as shall be reasonably required to effect the purposes of this Agreement to secure to the Secured Party, and to all persons who may from time to time be the holder of any of the Obligations, the benefits of all right, authorities and remedies conferred upon the Secured Party by the terms of this Agreement, and (ii) to otherwise cooperate fully with the Secured Party in taking any action which they may reasonably request in order to cause the Secured Party to obtain and enjoy their full rights and benefits under the Loan Documents, including without limitation, using its best efforts to assist the Security Party in obtaining the approval or any state municipality or other governmental authority for any action or transaction contemplated by any of the Loan Documents which is then required under applicable law. Section 17. Notices. All notices, requests, demands and other communications provided for hereunder shall be in writing (including telecopied communication) and mailed or telecopied or delivered to the applicable party at the addresses indicated below. If to the Secured Party, to its address or telecopy number set forth in the Credit Agreement, with a copy (which shall not constitute notice) to: Susan E. Siebert, Esq. Edwards & Angell, LLP 101 Federal Street 23rd Floor Boston, Massachusetts 02110 Telecopy No: (6l7) 439-4170 If to any Pledgor to the Borrowers' address or telecopy number as set forth in the Credit Agreement, with a copy (which shall not constitute notice) to: John M. Williams III, Esq. Gibson, Dunn & Crutcher, LLP 4 Park Plaza Irvine, California 92614 Telecopy No.: (949) 451-4220 or, as to each party, at such other address as shall be designated by such parties in a written notice to the other parties complying as to delivery with the terms of this Section. All such -11- 12 notices, requests, demands and other communication shall be deemed given upon receipt by the party to whom such notice is directed. Section 18. Severability. In case any one or more of the provisions of this Agreement shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision hereof, but this Agreement shall be construed as if such invalid, illegal or unenforceable provision had not been included. The rights, powers and remedies provided herein in favor of the Secured Party shall not be deemed exclusive, but shall be cumulative, and shall be in addition to all other rights and remedies in favor of the Secured Party existing at law or in equity, including (without limitation) all of the rights, powers and remedies available to a secured party under any law or regulation. Section 19. Savings Clause. Anything in this Agreement to the contrary notwithstanding, this Pledge Agreement shall not constitute an agreement to pledge or assign, if an attempted pledge or assignment, without the consent of a third party thereto, would constitute a breach of any Organizational Agreement relating thereto or in any way effect the respective rights of the Pledgor or the Secured Party thereunder, unless such consent is obtained. If such consent is not obtained, or if an attempted pledge or assignment thereof would be ineffective or would effect the rights thereunder so that the Secured Party would not receive all such rights, each of the Pledgors will cooperate with the Secured Party to provide to the Secured Party the benefits of such Ownership Interests and Pledged Securities and claims or rights and benefits arising thereunder or resulting therefrom. Section 20. GOVERNING LAW. THIS AGREEMENT SHALL BE DEEMED EXECUTED AS A SEALED INSTRUMENT AND SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS AS A CONTRACT TO BE EXECUTED AND PERFORMED WITHIN THE COMMONWEALTH OF MASSACHUSETTS. Section 21. Miscellaneous. The headings of the Sections of this Agreement have been inserted for convenience of reference only and shall in no way affect the construction or interpretation of this Agreement. In the event this Agreement shall be enforced by suit or otherwise, each Pledgor will reimburse the Secured Party and the holder or holders of the Obligations, upon demand, for all reasonable expenses incurred in connection therewith, including without limitation, reasonable attorneys' fees (including, without limitation, all such costs, charges and expenses incurred by the Secured Party in connection with any Reorganization). This Agreement may be executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same Agreement. Section 22. Permitted Transfers to Secured Party. Notwithstanding the provisions of any Organizational Document or any other agreement to the contrary: (a) The Pledgors hereby (i) consent to the collateral assignment and pledge of the Ownership Interests of Pledgors (and all economic interests therein) pursuant to this Agreement; (ii) in connection with the exercise by the Secured Party of any of its rights and remedies under this Agreement, consent to the assignment of any of such Ownership Interests (including any -12- 13 economic interests therein) to any other Person (and to the substitution of such other Person as a substitute partner, member, manager and/or shareholder, as the case may be, holding the Ownership Interest(s) so assigned), and (iii) agree that no such assignment (or substitution) and no foreclosure thereunder or other remedies in respect thereof shall effect a termination or dissolution of any Company. (b) Without limiting the generality of the foregoing, each Pledgor hereby agrees that upon the occurrence of any Event of Default hereunder, to the extent not permitted by applicable law: (i) with respect to each Ownership Interest (and economic interest therein) assigned by any Pledgor, the Secured Party, at its election, shall thereupon be admitted (or shall have the right to have one or more designees of its choice admitted) as a substitute stockholder, member, limited partner or otherwise, as the case may be (in each such case (whether the Secured Party or its designee) being hereinafter referred to as the "New Equity Owner") with no further action by any Pledgor or any other Person being necessary, and the Pledgors hereby consent to such admission and agrees to execute and deliver such instruments, if any, as shall be necessary to effect or further evidence the foregoing; (ii) with respect to the Secured Party and any other New Equity Owner, the Pledgors waive the right to enforce the voting restrictions set forth in any Organizational Documents and consents to the Secured Party and any New Equity Owner not being bound by such voting restrictions; (iii) in connection with the admission of any New Equity Owner, no capital contribution by such New Equity Owner shall be required; (iv) as provided herein, no New Equity Owner shall have any liability with respect to the obligations of any Pledgor under the Credit Agreement or other Loan Documents; and (v) on and after the admission of any New Equity Owner, such New Equity Owner shall have all powers, statutory and otherwise, possessed at law and shall have the authority to manage the business and affairs of such Company. Except as otherwise provided herein or in any applicable laws, the Pledgors thereafter shall have no further powers or privileges with respect to the management of such Company. -13- 14 IN WITNESS WHEREOF, this Agreement has been executed as a sealed instrument by the parties hereto by their duly authorized representatives all as of the day and year first above written. SECURED PARTY: -------------- BANKBOSTON, N.A. By: /s/ -------------------------------- PLEDGORS: DIEDRICH COFFEE, INC. By: /s/ Ann Wride -------------------------------- COFFEE PEOPLE, INC. By: /s/ Ann Wride -------------------------------- COFFEE PEOPLE WORLDWIDE, INC. By: /s/ Ann Wride -------------------------------- GLORIA JEAN'S, INC. By: /s/ Ann Wride -------------------------------- EDGLO ENTERPRISES, INC. By: /s/ Ann Wride -------------------------------- GLORIA JEAN'S GOURMET COFFEES CORP. By: /s/ Ann Wride -------------------------------- GLORIA JEAN'S GOURMET COFFEES FRANCHISING CORP. By: /s/ Ann Wride -------------------------------- -14- 15 STATE OF California ----------------------- COUNTY OF Orange ----------------------- The foregoing Pledge Agreement was executed and acknowledged before me this 30th day of June, 1999 by Ann Wride, personally known to me to be the an executive officer of each of the foregoing Pledgors on behalf of such Pledgors. /s/ --------------------------------- Notary Public My Commission Expires: ----------- -15- 16 EXHIBIT A PLEDGED SECURITIES
=========================================================================================================================== OWNERSHIP INTEREST (percentage; no. and NAME AND ADDRESS type of interests, CERTIFICATE OF PLEDGOR ISSUER shares) NOS. (if any) - --------------------------------------------------------------------------------------------------------------------------- Diedrich Coffee, Inc. 100% 2144 Michelson Drive Coffee People 1,000 shares of Irvine, California 92612 Worldwide, Inc. Common Stock 1 - --------------------------------------------------------------------------------------------------------------------------- Coffee People Worldwide, Inc. 100% 2144 Michelson Drive CP Acquisition Corp. n/k/a 1,000 shares of Irvine, California 92612 Coffee People, Inc. Common Stock 2 - --------------------------------------------------------------------------------------------------------------------------- Coffee People, Inc. 100% 2144 Michelson Drive 261 shares of Irvine, California 92612 Gloria Jean's, Inc. Common Stock 4 - --------------------------------------------------------------------------------------------------------------------------- Gloria Jean's, Inc. 100% 2144 Michelson Drive 1,000 shares of Irvine, California 92612 Edglo Enterprises, Inc. Common Stock 6 - --------------------------------------------------------------------------------------------------------------------------- Edglo Enterprises, Inc. 100% 2144 Michelson Drive Gloria Jean's Gourmet 1,000 shares of Common Irvine, California 92612 Coffee Corp. Common Stock 9 - --------------------------------------------------------------------------------------------------------------------------- Edglo Enterprises, Inc. 100% 2144 Michelson Drive Gloria Jean's Gourmet Coffees 50,000 shares of Irvine, California 92612 Franchising Corp. Common Stock 2 ===========================================================================================================================
EX-10.28 5 TRADEMARK SECURITY AGREEMENT DATED 7/7/99. 1 EXHIBIT 10.28 TRADEMARK SECURITY AGREEMENT This Agreement dated as of July 7, 1999 among DIEDRICH COFFEE, INC., COFFEE PEOPLE, INC., COFFEE PEOPLE WORLDWIDE, INC., GLORIA JEAN'S, INC., EDGLO ENTERPRISES, INC., GLORIA JEAN'S GOURMET COFFEES CORP., GLORIA JEAN'S GOURMET COFFEES FRANCHISING CORP., and all future Subsidiaries who hereafter become parties hereto (collectively, the "Borrowers" and each individually, a "Borrower") and BANKBOSTON, N.A., located at 100 Federal Street, Boston, Massachusetts 02110, (together with its successors and assigns, the "Secured Party") under, and as defined in, the Credit Agreement dated on or about the date hereof as from time to time in effect (the "Credit Agreement"), between the Borrower and the Secured Party. Terms defined in the Credit Agreement and not otherwise defined herein are used herein with the meanings so defined. 1. Grant of Security Interest. Each of the Borrowers hereby grants to the Secured Party and its successors and assigns a security interest in the items referred to below, whether now owned or hereafter acquired, and all proceeds thereof (collectively, the "Collateral") to secure the Obligations: 1.1. All of the right, title and interest of such Borrower in and to all existing and hereafter arising service marks and trademarks (collectively, the "Marks"), all existing and hereafter arising registrations for the Marks (collectively, the "Registrations") and all existing and hereafter arising service mark and trademark applications for the Marks (collectively, the "Applications"). Such Registrations and Applications shall include without limitation all registrations and applications of the Borrowers described in Exhibit A hereto. 1.2. The goodwill of the business of all Borrowers symbolized by each of the Marks. 1.3. All right, title and interest of such Borrower in and to any cause of action that has heretofore arisen or that may arise with respect to unconsented use or infringement of the Marks, the Registrations or the Applications. 2. Further Assurances. Each of the Borrowers shall execute, or use its reasonable efforts at its reasonable expense to cause to be executed, such further documents as may be reasonably requested by the Secured Party in order to effectuate fully the grant of security interest set forth in Section 1 hereof. 3. Agreement to Assign Collateral. Each of the Borrowers shall execute and deliver to the Secured Party on the date of this Agreement a written Assignment of Trademarks to the Secured Party in substantially the form attached hereto as Exhibit B (the "Assignment"). The Secured Party shall hold the Assignment in escrow, and the Assignment shall have no legal effect and shall not be binding on the Borrowers, until the occurrence and continuance of an Event of Default, at which time the Secured Party may file the Assignment with the U.S. Patent and 2 Trademark Office and, upon such filing, the Assignment shall take effect as a legal document binding upon the Borrowers. 4. Foreclosure. Upon the occurrence and during the continuance of an Event of Default, in addition to all other rights and remedies granted by this Agreement and the Assignment, the Secured Party may exercise the rights and remedies of a secured party enacted in any of the jurisdictions in which the Collateral may be located. Without limiting the generality of the foregoing, upon the occurrence and during the continuance of an Event of Default, without demand or notice (except as set forth next below), all of which are waived, and without advertisement, the Secured Party may sell at public or private sale or otherwise realize upon, in the Commonwealth of Massachusetts or elsewhere, all or from time to time any of the Collateral, or any interest which any of the Borrowers may have therein. Notice of any sale or other disposition of the Collateral shall be given to the Borrowers at least 10 days before the time of any intended public or private sale or other disposition of the Collateral is to be made, which the Borrowers agree shall be reasonable notice of such sale or other disposition. At any such sale or other disposition, any holder of any Obligation or any Secured Party may, to the extent permissible under applicable law, purchase the whole or any part of the Collateral (including associated goodwill) free from any right or redemption on the part of the Borrowers, which right is waived and released. After deducting from the proceeds of sale or other disposition of the Collateral and associated goodwill all expenses (including reasonable expenses for brokers' fees and legal services), the balance of such proceeds shall be applied toward the payment of the Obligations. Any remainder of the proceeds after payment in full of the Obligations shall be paid over to the Borrowers. 5. Defeasance. Upon payment in full of the Obligations and termination of the commitments therefor, the Secured Party shall, at the Borrowers' expense, release the security interest in the Collateral granted under this Agreement and execute and deliver such instruments and other documents and take such further actions as may be necessary to carry out such release, including cancellation of this Agreement by written notice to the U.S. Patent and Trademark Office and delivery back to the Borrowers of the Assignment upon request of the Borrowers. 6. Covenants. Each of the Borrowers covenants and agrees as follows: 6.1. Such Borrower shall not abandon any Marks, Registrations or Applications included in the Collateral except such Marks, Registrations or Applications, the abandonment of which could not reasonably be expected to have a material adverse effect on the business, financial conditions or operations of the Borrowers. 6.2. Such Borrower shall maintain all rights held by such Borrower relating to the Marks, Registrations and Applications except such Marks, Registrations or Applications which the failure to maintain could not reasonably be expected to have a material adverse effect on the business, financial conditions or operations of the Borrowers. 6.3. Until all of the Obligations shall have been paid indefeasibly in full in cash and all commitments therefor and the Credit Agreement have been terminated, such Borrower shall not enter into any agreement (including without limitation a license agreement) which -2- 3 conflicts with such Borrower's obligations under this Agreement other than agreements that could not reasonably be expected to affect the value of any of the Collateral in any material respect, without the Secured Party's prior written consent (which consent will not be unreasonably withheld or delayed). 6.4. If such Borrower shall obtain any rights to any registrable service marks or trademarks after the date hereof, the provisions of Section 1 shall automatically apply thereto and such Borrower shall within 30 days after obtaining such rights give to the Secured Party written notice thereof, execute an amendment to Exhibit A including such after-acquired Registrations and Applications, and take any other action reasonably necessary to record the Secured Party's interest in such Marks, Registrations and Applications with the U.S. Patent and Trademark Office and other applicable filing offices. 6.5 Such Borrower has used, and will continue to use, proper statutory notice in connection with its use of the Collateral to the extent commercially practicable and customary within the relevant industry. 7. Representations and Warranties of Title. Each of the Borrowers represents and warrants to the Secured Party (which representations and warranties are made as of the date hereof and shall survive the delivery of this Agreement) as follows: 7.1. Exhibit A sets forth as of the date hereof all Marks, Registrations and Applications owned by such Borrower or in which such Borrower has any interest. 7.2. As of the date hereof, all of the Collateral set forth on Exhibit A is subsisting and has not been adjudged invalid or unenforceable. 7.3. As of the date hereof, no claim has been made that the use of any of the Collateral violates the rights of any third person and no Borrower is aware of any basis for any such claim to be asserted. 7.4. Such Borrower is the sole and exclusive owner of the entire right, title and interest in and to the Collateral, free and clear of any Encumbrances, including without limitation, pledges, assignments, licenses, registered user agreements and covenants by the Borrower not to sue third persons (other than Permitted Encumbrances and licenses in favor of other Borrowers and the Secured Party). 7.5. Such Borrower has the full power and authority to enter into this Agreement and perform its terms. 8. General. 8.1. No course of dealing among the Borrowers and the Secured Party, nor any failure to exercise, nor any delay in exercising on the part of the Secured Party, any right, power or privilege hereunder or under the Credit Agreement shall operate as a waiver thereof; nor shall -3- 4 any single or partial exercise of any right, power or privilege hereunder or thereunder preclude any other or further exercise thereof or the exercise of any right, power or privilege. 8.2. All of the Secured Party's rights and remedies with respect to the Collateral, whether established hereby or by the Credit Agreement, or by any other agreement or by law shall be cumulative and may be exercised singularly or concurrently. 8.3. If any clause or provision of this Agreement shall be held invalid and unenforceable in whole or in part in any jurisdiction, then such invalidity or unenforceability shall affect only such clause or provision, or part thereof, in such jurisdiction, and shall not in any manner affect such clause or provision in any other jurisdiction, or any other clause or provision of this Agreement in any jurisdiction. 8.4. This Agreement is subject to modification only by a writing signed by the parties, except as otherwise provided in Section 6.4 hereof. 8.5. The benefits and obligations of this Agreement shall inure to the benefit of and be binding upon the respective successors and permitted assigns of the parties. 8.6. The validity and interpretation of this Agreement and the rights and obligations of the parties shall be governed by the laws (other than the conflict of laws rules) of the Commonwealth of Massachusetts. 8.7. This Agreement is a Loan Document (as defined in the Credit Agreement) and may be executed in any number of counterparts, which together shall constitute one instrument. 8.8. (a) THIS AGREEMENT SHALL BE DEEMED TO BE A CONTRACT MADE UNDER SEAL AND SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS (WITHOUT GIVING REFERENCE TO ANY CONFLICTS OF LAW PROVISIONS THEREIN) EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF A SECURITY INTEREST GRANTED HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE REQUIRED TO BE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE COMMONWEALTH OF MASSACHUSETTS. (b) EACH OF THE BORROWERS AND THE SECURED PARTY AGREES THAT NEITHER IT NOR ANY ASSIGNEE OR SUCCESSOR SHALL (A) SEEK A JURY TRIAL IN ANY LAWSUIT, PROCEEDING, COUNTERCLAIM OR ANY OTHER ACTION BASED UPON, OR ARISING OUT OF, THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, ANY COLLATERAL OR THE DEALINGS OR THE RELATIONSHIP BETWEEN SUCH BORROWER AND THE SECURED PARTY OR (B) SEEK TO CONSOLIDATE ANY SUCH ACTION WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT BE OR HAS NOT BEEN WAIVED. THE PROVISIONS OF THIS PARAGRAPH HAVE BEEN FULLY DISCUSSED BY THE -4- 5 PARTIES HERETO, AND THESE PROVISIONS SHALL BE SUBJECT TO NO EXCEPTIONS. NEITHER THE SECURED PARTY NOR ANY BORROWER HAS AGREED WITH OR REPRESENTED TO ANY OTHER THAT THE PROVISIONS OF THIS PARAGRAPH WILL NOT BE FULLY ENFORCED IN ALL INSTANCES. (c) EACH BORROWER HEREBY SUBMITS TO THE JURISDICTION OF THE COURTS OF THE COMMONWEALTH OF MASSACHUSETTS AND THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS, AS WELL AS TO THE JURISDICTION OF ALL COURTS FROM WHICH AN APPEAL MAY BE TAKEN OR OTHER REVIEW SOUGHT FROM THE AFORESAID COURTS, FOR THE PURPOSE OF ANY SUIT, ACTION OR OTHER PROCEEDING ARISING OUT OF ANY OF SUCH BORROWER'S OBLIGATIONS UNDER OR WITH RESPECT TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREBY, AND EXPRESSLY WAIVES ANY AND ALL OBJECTIONS IT MAY HAVE AS TO VENUE IN ANY OF SUCH COURTS. -5- 6 Each of the undersigned has caused this Agreement to be signed by its duly authorized officer as of the date first written above. BORROWERS: DIEDRICH COFFEE, INC. By: /s/ Ann Wride -------------------------------- COFFEE PEOPLE, INC. By: /s/ Ann Wride -------------------------------- COFFEE PEOPLE WORLDWIDE, INC. By: /s/ Ann Wride -------------------------------- GLORIA JEAN'S, INC. By: /s/ Ann Wride -------------------------------- EDGLO ENTERPRISES, INC. By: /s/ Ann Wride -------------------------------- GLORIA JEAN'S GOURMET COFFEES CORP. By: /s/ Ann Wride -------------------------------- -6- 7 GLORIA JEAN'S GOURMET COFFEES FRANCHISING CORP. By: /s/ Ann Wride -------------------------------- SECURED PARTY: BANKBOSTON, N.A. By: /s/ -------------------------------- -7- 8 EXHIBIT A --------- TO TRADEMARK SECURITY AGREEMENT DATED AS OF JULY 7, 1999 9 EXHIBIT A --------- TO TRADEMARK SECURITY AGREEMENT ------------------------------- DIEDRICH TRADEMARKS: 1. BANTU, 75-679078, PENDING- INITIALIZED 2. JAVA TO THE PEOPLE, 75-679080, PENDING- INITIALIZED 3. PAPUA NEW GUINEA, 75-679093, PENDING- INITIALIZED 4. MORNING EDITION BLEND, 75-679096, PENDING- INITIALIZED 5. NEPENTHE BLEND, 75-679097, PENDING- INITIALIZED 6. DIEDRICH COFFEE, 75-679620, PENDING- INITIALIZED 7. CUPID'S CUP, 75-679673, PENDING- INITIALIZED 8. EL DORADO, 75-651603, PENDING- INITIALIZED 9. DIEDRICH COFFEE EXPRESS, 75-358949, PENDING 10. WHERE FRIENDS GATHER, 2,248,287, REGISTERED 11. SCOOP-A-CCINO, 2,230,175, REGISTERED 12. HARVEST PEAK, 2,192,477, REGISTERED 13. WIENER MELANGE BLEND, 1,894,232, REGISTERED 14. FLOR DE APANAS, 1,840,738, REGISTERED 15. DIEDRICH COFFEE, 1,925,384, REGISTERED COFFEE PEOPLE TRADEMARKS: 1. VELVET NIGHT, (WORDS ONLY), 75-325921, PUBLISHED 2. CHANGE THE WORLD ONE CUP AT A TIME, (WORDS ONLY), 2,121,622, REGISTERED 3. COFFEE PEOPLE AERO MOKA, (WORDS AND DESIGN), 2,105,089, REGISTERED 10 4. COFFEEGRAM, (WORDS ONLY), 2,052,685, REGISTERED 5. NONE, (DESIGN ONLY), 1,938,159, REGISTERED 6. NONE, (DESIGN ONLY), 1,938,160, REGISTERED 7. COFFEE PEOPLE AERO MOKA, (WORDS AND DESIGN), 2,046,259, REGISTERED 8. JAVA NOIR, (WORDS ONLY), 1,843,093, REGISTERED 9. BLACK TIGER, (WORDS AND DESIGN), 1,809,442, REGISTERED 10. M, (LETTER AND DESIGN), 1,808,232, REGISTERED 11. M, (LETTER AND DESIGN), 1,813,936, REGISTERED 12. COFFEE PEOPLE, (WORDS ONLY), 1,883,745, REGISTERED 13. MOTORIST'S ESPRESSO BAR, (WORDS ONLY), 1,820,886, REGISTERED 14. COFFEE PEOPLE, (WORDS ONLY), 1,793,115, REGISTERED 15. BEST COFFEE IN PORTLAND, (WORDS ONLY), 1,820,880, REGISTERED 16. MOTOR MOKA, (WORDS ONLY), 1,796,594, REGISTERED 17. GOOD COFFEE-NO BACK TALK, (WORDS ONLY), 1,796,472, REGISTERED 18. COFFEE PLANTATION, (WORDS AND DESIGN), 1,782,839, REGISTERED 19. BLACK TIGER, (WORDS ONLY), 1,640,694, REGISTERED 20. SLAMMER, (WORDS ONLY), OR T27085, RENEWED 21. MOTOR MOKA, (WORDS ONLY), OR S27086, RENEWED 22. SLAMMAHAMMA, (WORDS ONLY), OR T27088, RENEWED 23. COFFEE PEOPLE "GOOD COFFEE NO BACKTALK", (WORDS AND DESIGN), OR TS30794, REGISTERED 24. COFFEE PEOPLE, (WORDS AND DESIGN), OR TS30795, REGISTERED 25. VELVET NIGHT, (WORDS ONLY), OR T31700, REGISTERED GLORIA JEAN'S GOURMET COFFEES CORP. TRADEMARKS: - ----------------------------------------------- 2 11 1. GLORIA JEAN'S COFFEES, (WORD AND DESIGN), 75-521458, PENDING - INITIALIZED 2. CARAMELATTE, (WORDS ONLY), 75-386172, PENDING 3. MOCHA TRUFFLE, (WORDS ONLY), 75-386171, PENDING 4. GLORIA JEAN'S COFFEES, (WORDS AND DESIGN), 2,208,443, REGISTERED 5. NONE, (DESIGN ONLY), 1,896,366, REGISTERED 6. GLORIA JEAN'S GOURMET COFFEES, (WORDS AND DESIGN), 1,912,998, REGISTERED 7. GLORIA JEAN'S GOURMET COFFEES, (WORDS AND DESIGN), 1,962,645, REGISTERED 8. GREAT BEANS, GREAT COFFEE!, (WORDS ONLY), 1,825,337, REGISTERED 9. CAROLYN JEAN'S, (WORDS ONLY), 1,931,885, REGISTERED 10. AMERICA'S LARGEST PURVEYOR OF FINE COFFEES, (WORDS ONLY), 1,838,153, REGISTERED 11. GLORIA JEAN'S, (WORDS ONLY), 1,703,976, REGISTERED 12. IF YOU DON'T KNOW GLORIA JEAN'S, YOU DON'T KNOW BEANS, (WORDS ONLY), 1,675,466, REGISTERED 13. NONE, (DESIGN ONLY), 1,659,049, REGISTERED 14. EIGHT DAYS A WEEK, (WORDS ONLY), 1,616,940, REGISTERED 15. GLORIA JEAN'S COFFEE BEAN, (WORDS AND DESIGN), 1,578,273, REGISTERED 16. GLORIA JEAN'S, (WORDS AND DESIGN), 1,576,977, REGISTERED 17. GLORIA JEAN'S COFFEE BEAN, (WORDS AND DESIGN), 1,577,970, REGISTERED 18. GLORIA JEAN'S, (WORDS AND DESIGN), 1,577,971, REGISTERED 19. GLORIA JEAN'S COFFEE BEAN, (WORDS ONLY), 1,366,020, REGISTERED 20. GLORIA JEAN'S, (WORDS ONLY), 1,362,248, REGISTERED 21. GLORIA JEAN'S COFFEE BEAN, (WORDS ONLY), IL 55521, RENEWED 3 12 22. GLORIA JEAN'S COFFEE BEAN, (WORDS ONLY), IL 55522, RENEWED 23. GLORIA JEAN'S COFFEE BEAN, (WORDS ONLY), WI 477624, REGISTERED EXCEPTIONS: 1. Coffee People, Inc. and its subsidiaries have been utilizing The Second Cup Ltd.'s "Paradiso" mark, Canadian registration number TMA 492735, dated April 9, 1998, without written licenses or other written agreements from Second Cup Ltd. 2. Gloria Jean's Gourmet Coffees Corp. currently utilizes the "Motor Moka" trademark without a written license or other written agreement from Coffee People, Inc. 3. Gloria Jean's Gourmet Coffees Corp. is registering its new logo with the U.S. Patent and Trademark Office. Application number 75/521458, filed on July 20, 1998. 4. Coffee People, Inc. is aware of a possible infringement of its unregistered trademarks -Mindsweeper(TM) and Velvet Hammer(TM) - by a coffee retailer in Boise, Idaho, and of the trademark Velvet Hammer(TM) by a company in Minnesota. No action has been taken to stop these companies from using these names. 5. Coffee People, Inc. owns and is the licensor of certain trademarks to Cascade Glacier Ice Cream, Inc., which pays certain graduated royalties to Coffee People, Inc. for the sale of products bearing the trademarks. 6. Gloria Jean's trademarks numbers 8 and 10 through 20 above are possibly subject to liens that were originally granted in connection with indebtedness that has been repaid. These liens, if any, will be released promptly following closing. 7. A break in the chain of title exists between Coffee People, Inc. and Coffee Plantation for Coffee People trademark number 18 above. 4 13 ASSIGNMENT OF TRADEMARKS This Assignment of Trademarks (the "Assignment") dated as of July 7, 1999 among DIEDRICH COFFEE, INC., COFFEE PEOPLE, INC., COFFEE PEOPLE WORLDWIDE, INC., GLORIA JEAN'S, INC., EDGLO ENTERPRISES, INC., GLORIA JEAN'S GOURMET COFFEES CORP., GLORIA JEAN'S GOURMET COFFEES FRANCHISING CORP., and all future Subsidiaries who hereafter become parties hereto (collectively, the "Borrowers" each individually, a "Borrower") and BANKBOSTON, N.A., located at 100 Federal Street, Boston, Massachusetts 02110, (together with its successors and assigns, the "Secured Party") under, and as defined in, the Credit Agreement dated on or about the date hereof as from time to time in effect (the "Credit Agreement"), between the Borrower and the Secured Party. Terms defined in the Credit Agreement and not otherwise defined herein are used herein with the meanings so defined. This Assignment is made pursuant to that certain Trademark Security Agreement dated as of this date (the "Security Agreement") between the Borrowers and the Secured Party. BACKGROUND Section 3 of the Security Agreement provides that the Borrowers shall execute this Assignment of the items listed in Exhibit A thereto (collectively, the "Collateral"), as amended from time to time (and attached hereto as Exhibit 1A), and that the Secured Party may file this Assignment upon the occurrence and during the continuance of an Event of Default. ASSIGNMENT 1. Assignment. Subject to the occurrence and continuance of an Event of Default, each of the Borrowers hereby assigns to the Secured Party and its successor and assigns, the items referred to below (collectively, the "Assigned Material"): (a) All of the right, title and interest of the Borrowers in and to all service marks and trademarks (collectively, the "Marks"), the registrations relating to the Marks (collectively, the "Registrations") and all service marks and trademark applications relating to the Marks (collectively, the "Registrations"), now owned or hereafter acquired by the Borrowers. Such Marks, Registrations and Applications shall include without limitation all existing United States and foreign registrations and applications of the Borrowers described in Exhibit 1A. (b) The goodwill of the business of the Borrowers symbolized by each of the Marks. (c) All right, title and interest of the Borrowers in and to any cause of action that has heretofore arisen or that may arise with respect to unconsented use or infringement of the Marks, the Registrations or the Applications. 2. Further Assurances. Each of the Borrowers shall execute, or use its reasonable efforts at its reasonable expense to have carefully executed, any further documents as may be reasonably requested by the Secured Party in order to fully effectuate this Assignment. 3. General. The provisions of this Assignment shall be read cumulatively with the provisions of Sections 4, 5, 6, 7 and 8 of the Security Agreement. Upon filing with the U.S. Patent and Trademark Office (or any other applicable foreign filing office with respect to Registrations which are not United States Registrations), and not before, this Assignment amends the Security Agreement by deleting Sections 1, 2 and 3 of the Security Agreement with respect to Assigned Material relating to such filing office, which Sections 1, 2 and 3 shall be of no further force or effect in respect of such Assigned Material. This Assignment is a Loan Document. [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK] -2- 14 Each of the undersigned has caused this Assignment to be signed by its duly authorized officer as of the day and year first written above. BORROWERS: DIEDRICH COFFEE, INC. By: -------------------------------- Title: COFFEE PEOPLE, INC. By: -------------------------------- Title: COFFEE PEOPLE WORLDWIDE, INC. By: -------------------------------- Title: GLORIA JEAN'S, INC. By: -------------------------------- Title: EDGLO ENTERPRISES, INC. By: -------------------------------- Title: GLORIA JEAN'S GOURMET COFFEES CORP. By: -------------------------------- Title: -3- 15 GLORIA JEAN'S GOURMET COFFEES FRANCHISING CORP. By: -------------------------------- Title: SECURED PARTY: BANKBOSTON, N.A. By: -------------------------------- Title: -4- 16 State of ------------------------- County of ------------------------- Then personally appeared the above named ____________________________ , and acknowledged that he/she executed the foregoing Assignment as his/her free act and deed before me on behalf of each of the foregoing Borrowers, as duly authorized agent thereof. ----------------------------------- Notary Public My commission expires: -5- EX-10.29 6 FORM OF TERM NOTE MADE IN FAVOR OF BANKBOSTON 1 EXHIBIT 10.29 TERM NOTE $12,000,000 Dated as of July 7, 1999 FOR VALUE RECEIVED, DIEDRICH COFFEE, INC. and all of its direct and indirect Subsidiaries (collectively, the "Borrowers"), hereby jointly and severally promise to pay to the order of BANKBOSTON, N.A. (hereinafter, together with its successors and assigns, called the "Lender"), at the office of the Lender pursuant to the Credit Agreement (as amended or extended from time to time, the "Credit Agreement"), dated as of June 30, 1999, among the Borrowers and the Lender, the principal sum of $12,000,000, together with interest on the principal balance thereof from time to time outstanding from the date hereof until payment in full, without set-off, deduction or counterclaim, on the dates and in such amounts as specified in the Credit Agreement, and at the final maturity of this Note, whether by payment or prepayment, acceleration or otherwise. Interest accruing on the unpaid balance hereof from time to time shall be calculated on the basis of a 360-day year for the actual number of days elapsed. Overdue principal (whether at maturity, by reason of acceleration or otherwise) and, to the extent permitted by applicable law, overdue interest and fees or any other amounts payable under the Credit Agreement due to the Borrowers' failure to pay the same in full shall bear interest from and including the due date thereof until paid, at a rate or rates per annum determined in accordance with the Credit Agreement, which interest shall be compounded daily and payable on demand. All payments under this Note shall be made to the Lender, at the head office of the Lender, at 100 Federal Street, Boston, Massachusetts 02110 (or at such other place as the Lender may designate from time to time in writing) in lawful money of the United States of America in immediately available funds. The outstanding principal amount of this Note and accrued and unpaid interest thereon shall be due and payable as provided in the Credit Agreement. The Borrowers have the right in certain circumstances and the obligation in certain other circumstances to prepay this Note in whole or in part on the terms and conditions provided in the Credit Agreement. This Note is the "Term Note" referred to in the Credit Agreement and evidences a Term Loan thereunder. This Note is entitled to the benefits of the Credit Agreement (including the Schedules thereto) and all other instruments evidencing and/or securing the indebtedness hereunder; but neither this reference to the Credit Agreement nor any provision thereof shall affect or impair the absolute and unconditional obligation of the Borrowers to pay the principal of and interest on this Note as herein provided. The occurrence or existence of an "Event of Default" as defined in the Credit Agreement shall constitute a default under this Note and the entire indebtedness hereunder may become or be declared due and payable as may be provided for in the Credit Agreement. All agreements involving the Borrowers and the Lender are hereby expressly limited so that in no contingency or event whatsoever shall the amount paid or agreed to be paid to the Lender for the use or forbearance of the indebtedness evidenced hereby exceed the maximum amount which the Lender is permitted to receive under applicable law. If, from any circumstances whatsoever, fulfillment of any provision hereof or of the Credit Agreement, at the time performance of such provision shall be due, shall involve exceeding such amount, then the obligation to be fulfilled shall automatically be reduced to the limit of such validity, and if from any circumstance the Lender should ever receive as interest an amount which would exceed such maximum amount, such amount which would be excessive interest shall be applied to the reduction of the principal balance evidenced hereby and not to the payment of interest. As used herein, the term "applicable law" shall mean the law in effect as of the date hereof; provided, however, that in the event there is a change in 2 the law which results in a higher permissible rate of interest, then this Note shall be governed by such new law as of its effective date. This provision shall control every provision of all agreements involving the Borrowers and the Lender. Each of the Borrowers and every endorser and guarantor of this Note or the obligation represented hereby waives presentment, demand, notice, notice of dishonor, protest and all other demands and notices in connection with the delivery, acceptance, performance, default or enforcement of this Note, assent to any extension or postponement of the time of payment or any other indulgence, to any substitution, exchange or release of collateral and to the addition or release of any other party or person primarily or secondarily liable. This instrument shall have the effect of an instrument executed under seal and shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts (without giving effect to any conflicts of laws provisions contained therein). IN WITNESS WHEREOF, the undersigned has caused this Note to be signed in its corporate name under seal by its duly authorized officer as of the day and year first above written. DIEDRICH COFFEE, INC. By: /s/ Ann Wride ------------------------------- COFFEE PEOPLE, INC. By: /s/ Ann Wride ------------------------------- COFFEE PEOPLE WORLDWIDE, INC. By: /s/ Ann Wride ------------------------------- GLORIA JEAN'S, INC. By: /s/ Ann Wride ------------------------------- (SIGNATURES CONTINUED) -2- 3 EDGLO ENTERPRISES, INC. By: /s/ Ann Wride ------------------------------- GLORIA JEAN'S GOURMET COFFEES CORP. By: /s/ Ann Wride ------------------------------- GLORIA JEAN'S GOURMET COFFEES FRANCHISING CORP. By: /s/ Ann Wride ------------------------------- -3- EX-10.30 7 FORM OF REVOLVING NOTE MADE IN FAVOR OF BANKBOSTON 1 EXHIBIT 10.30 REVOLVING NOTE $3,000,000 Dated as of July 7, 1999 FOR VALUE RECEIVED, DIEDRICH COFFEE, INC. and all of its direct and indirect Subsidiaries (collectively, the "Borrowers"), hereby jointly and severally promise to pay to the order of BankBoston, N.A. (hereinafter, together with its successors and assigns, called the "Lender"), at the office of the Lender pursuant to the Credit Agreement (as amended or extended from time to time, the "Credit Agreement"), dated as of June 30, 1999, among the Borrowers and the Lender, the principal sum of $3,000,000 or, if less, the aggregate unpaid principal amount of Revolving Loans advanced by the Lender to any of the Borrowers pursuant to the Credit Agreement, together with interest on the principal balance thereof from time to time outstanding from the date hereof until payment in full, without set-off, deduction or counterclaim, on the dates and in such amounts as specified in the Credit Agreement, and at the final maturity of this Note, whether by payment or prepayment, acceleration or otherwise. Interest accruing on the unpaid balance hereof from time to time shall be calculated on the basis of a 360-day year for the actual number of days elapsed. Overdue principal (whether at maturity, by reason of acceleration or otherwise) and, to the extent permitted by applicable law, overdue interest and fees or any other amounts payable under the Credit Agreement due to the Borrowers' failure to pay the same in full shall bear interest from and including the due date thereof until paid, at a rate or rates per annum determined in accordance with the Credit Agreement, which interest shall be compounded daily and payable on demand. All payments under this Note shall be made to the Lender, at the head office of the Lender, at 100 Federal Street, Boston, Massachusetts 02110 (or at such other place as the Lender may designate from time to time in writing) in lawful money of the United States of America in immediately available funds. The outstanding principal amount of this Note and accrued and unpaid interest thereon shall be due and payable as provided in the Credit Agreement. The Borrowers have the right in certain circumstances and the obligation in certain other circumstances to prepay this Note in whole or in part on the terms and conditions provided in the Credit Agreement. This Note is the "Revolving Note" referred to in the Credit Agreement and evidences Revolving Loans thereunder. This Note is entitled to the benefits of the Credit Agreement (including the Schedules thereto) and all other instruments evidencing and/or securing the indebtedness hereunder; but neither this reference to the Credit Agreement nor any provision thereof shall affect or impair the absolute and unconditional obligation of the Borrowers to pay the principal of and interest on this Note as herein provided. The occurrence or existence of an "Event of Default" as defined in the Credit Agreement shall constitute a default under this Note and the entire indebtedness hereunder may become or be declared due and payable as may be provided for in the Credit Agreement. The Lender shall, and is hereby irrevocably authorized by the Borrowers to, endorse on the schedule attached to this Note or a continuation of such schedule attached hereto and made a part hereof, an appropriate notation evidencing advances and repayments of principal of this Note, provided that failure by the Lender to make any such notations shall not affect any of the Borrowers' obligations or the validity of any repayments made by any of the Borrowers in respect of this Note. All agreements involving the Borrowers and the Lender are hereby expressly limited so that in no contingency or event whatsoever shall the amount paid or agreed to be paid to the Lender for the use or forbearance of the indebtedness evidenced hereby exceed the maximum amount which the 2 Lender is permitted to receive under applicable law. If, from any circumstances whatsoever, fulfillment of any provision hereof or of the Credit Agreement, at the time performance of such provision shall be due, shall involve exceeding such amount, then the obligation to be fulfilled shall automatically be reduced to the limit of such validity, and if from any circumstance the Lender should ever receive as interest an amount which would exceed such maximum amount, such amount which would be excessive interest shall be applied to the reduction of the principal balance evidenced hereby and not to the payment of interest. As used herein, the term "applicable law" shall mean the law in effect as of the date hereof; provided, however, that in the event there is a change in the law which results in a higher permissible rate of interest, then this Note shall be governed by such new law as of its effective date. This provision shall control every provision of all agreements involving the Borrower and the Lender. Each of the Borrowers and every endorser and guarantor of this Note or the obligation represented hereby waives presentment, demand, notice, notice of dishonor, protest and all other demands and notices in connection with the delivery, acceptance, performance, default or enforcement of this Note, assent to any extension or postponement of the time of payment or any other indulgence, to any substitution, exchange or release of collateral and to the addition or release of any other party or person primarily or secondarily liable. This instrument shall have the effect of an instrument executed under seal and shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts (without giving effect to any conflicts of laws provisions contained therein). IN WITNESS WHEREOF, the undersigned has caused this Note to be signed in its corporate name under seal by its duly authorized officer as of the day and year first above written. DIEDRICH COFFEE, INC. By: /s/ Ann Wride ----------------------------------- COFFEE PEOPLE, INC. By: /s/ Ann Wride ----------------------------------- COFFEE PEOPLE WORLDWIDE, INC. By: /s/ Ann Wride ----------------------------------- (SIGNATURES CONTINUED) -2- 3 GLORIA JEAN'S, INC. By: /s/ Ann Wride ----------------------------------- EDGLO ENTERPRISES, INC. By: /s/ Ann Wride ----------------------------------- GLORIA JEAN'S GOURMET COFFEES CORP. By: /s/ Ann Wride ----------------------------------- GLORIA JEAN'S GOURMET COFFEES FRANCHISING CORP. By: /s/ Ann Wride ----------------------------------- -3- 4
AMOUNT OF AMOUNT OF PRINCIPAL BALANCE OF REVOLVING PAID OR PRINCIPAL NOTATION DATE LOAN PREPAID UNPAI MADE BY - ---- --------- --------- ---------- -------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
-4- EX-27 8 FINANCIAL DATA SCHEDULE.
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DIEDRICH COFFEE, INC.'S FINANCIAL STATEMENTS FOR THE TWENTY-TWO WEEKS ENDED AND AS OF JUNE 30, 1999 CONTAINED IN DIEDRICH COFFEE, INC.'S TRANSITION REPORT FOR THE PERIOD FROM JANUARY 28, 1999 TO JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. OTHER JUN-30-1999 JAN-28-1999 JUN-30-1999 552,124 0 335,903 0 1,432,249 2,591,075 13,310,212 5,805,773 11,782,440 5,030,476 0 0 0 61,736 0 11,782,440 10,362,157 10,362,157 4,681,136 4,681,136 7,734,894 0 282,937 (2,345,770) 2,800 (2,348,570) 0 0 0 (2,348,570) (0.38) (0.38)
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