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