SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):
May 19, 1998
- -------------------------------------------------------------------------------
Coffee People, Inc.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Oregon 0-21397 93-1073218
- -------------------------------------------------------------------------------
(State or other (Commission File No.) (IRS Employer
jurisdiction of Identification No.)
incorporation)
11480 Commercial Parkway Castroville, California 95012
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(408) 633-4001
- -------------------------------------------------------------------------------
<PAGE>
Item 2. Acquisition or Disposition of Assets.
On May 19, 1998, Coffee People, Inc. (the "Company") acquired
100% of the outstanding capital stock of Gloria Jean's Inc. ("Gloria Jean's")
from Second Cup USA Holdings Inc., an Ontario corporation and wholly-owned
subsidiary of The Second Cup Ltd., an Ontario corporation (The Second Cup Ltd.,
together with its subsidiaries, is hereinafter referred to collectively as
"Second Cup"), pursuant to an Agreement and Plan of Merger between the Company
and Second Cup dated as of February 19, 1998 (the "Merger Agreement"). In
accordance with the terms of the Merger Agreement, Gloria Jean's Merger Corp., a
Delaware corporation and wholly-owned subsidiary of the Company ("Merger Sub")
merged into Gloria Jean's, with Gloria Jean's as the surviving corporation (the
"Merger").
At the effective time of the Merger on May 19, 1998, (the
"Effective Time"), the Company issued 7,460,679 shares of common stock, no par
value (the "Common Shares") to Second Cup in exchange for all the outstanding
shares of Gloria Jean's, which shares represent 69.5% of the issued and
outstanding Common Shares of the Company at the closing date, after giving
effect to the issuance of such shares (the "Issuance"). Therefore, immediately
following the Merger, Second Cup owned 69.5% of the issued and outstanding
Common Shares of the Company. Second Cup, headquartered in Ontario, Canada, is
the second largest specialty coffee retail company in North America dedicated to
the sale of specialty coffee and related products through 550 franchised and 52
company-owned stores. The Merger is treated for accounting purposes as a
"reverse merger," in that the historical financial statements of Gloria Jean's
become the historical financial statements of the Company. The terms of the
Merger were determined through arms'-length negotiations between representatives
of the Company and representatives of Second Cup.
The Company's shareholders approved the issuance of Common
Shares to Second Cup at the Company's annual meeting held on May 19, 1998. The
Company and its subsidiary Gloria Jean's together operate 318 retail coffee
stores, of which 246 are franchised stores and 72 are company-owned stores, as
well as a roasting facility at Gloria Jean's headquarters in Castroville,
California.
Immediately following the Merger, Alton McEwen, Chief
Executive Officer of Gloria Jean's, was appointed President and Chief Executive
Officer of the Company. In addition, Mark Archer, Chief Financial Officer of
Gloria Jean's, will serve as Executive Vice President and Chief Financial
Officer of the Company. Taylor Devine and Kenneth Ross, former Chief Executive
Officer and Chief Financial Officer, respectively, of the Company, entered into
employment agreements with the Company, effective at the Effective Time,
providing for base salaries and
2
<PAGE>
bonuses payable upon successful consummation of the Merger and at specified
intervals following the Merger (contingent upon continued employment with the
Company). Pursuant to such agreements, Mr. Devine will serve as President and
Chief Operating Officer of the Coffee People Oregon division of the Company and
Mr. Ross will serve as Vice President, Finance of the Company.
At the Company's annual meeting, the shareholders also elected
a new Board of Directors which, in accordance with the Merger Agreement,
consists of four nominees of Second Cup and two nominees of the Company. The six
directors are Douglas L. Ayer, a previous director of Coffee People, Inc. and
president and managing partner of International Capital Partners, Inc.; Michael
Bregman, chairman and chief executive officer of The Second Cup Ltd.; Robert M.
Haft, founder and managing partner of Vitamin Superstores; Alton McEwen,
president and chief executive officer of the Company; Gary G. Talboy, a previous
director of Coffee People, Inc. and owner of Specialty Coffee Consultants; and
Kathy A. Welsh, executive vice president and chief financial officer of The
Second Cup Ltd.
Although the Company will maintain a regional office in the
Portland area to oversee operations in Oregon, the Company's headquarters will
be moved to Castroville, California.
In connection with the Merger, the Company entered into a loan
agreement with Second Cup pursuant to which the Company may borrow up to an
aggregate principal amount of $4,000,000 under a revolving credit facility,
bearing interest at 11.5% per annum (the "Credit Facility"). The Credit Facility
is subordinate in right of payment to the Company's existing indebtedness to its
primary bank. The Company is obligated to pay a standby fee equal to 0.25% per
annum of the average daily difference between the total outstanding amount under
the Credit Facility and the borrowing limit. The Credit Facility matures on May
19, 2003, but may be canceled prior to that time if the borrowings have been
paid in full. However, if the amounts drawn down by the Company have not been
repaid in full or the Credit Facility has not been canceled by November 19,
2000, the Company will pay to Second Cup an arrangement fee of $80,000. Amounts
borrowed under the Credit Facility will be used by the Company for working
capital purposes. As of the date of this Current Report, the Company has not
borrowed any funds under the Credit Facility.
The foregoing is a summary of certain terms of the Merger
Agreement and the Credit Facility and should not be considered a complete
description. The foregoing description of the Merger and the Credit Facility is
subject to and qualified in its entirety by the Merger Agreement, a copy of
3
<PAGE>
which was included as Exhibit 10.23 to the Company's Annual Report on Form
10-KSB for the period ended December 31, 1997, and the agreement relating to the
Credit Facility, a copy of which is included as Exhibit 10.24 to this Current
Report on Form 8-K.
Item 5. Other Events
In conjunction with the Merger, James Roberts, Chairman of the Board of
Directors, Taylor Devine, President and Chief Executive Officer, Kenneth B.
Ross, Chief Financial Officer and Jeff Ferguson, Vice President, Coffee of the
Company, tendered their resignations as to such positions. Mr. Devine will
continue as President and Chief Operating Officer of the Coffee People Oregon
division and Mr. Ross will continue as Vice President, Finance of the Company.
Item 7. Financial Statements and Exhibits
(a) Financial statements of businesses acquired.
Gloria Jean's financial statements are hereby incorporated by reference
to pages F-21 to F-68 of the Company's Registration Statement on Form S-4
(File No. 333-50905) filed with the Securities and Exchange Commission on April
23, 1998.
(b) Pro Forma Financial Information
The pro forma financial information required by this Item 7(b,) giving
effect to the acquisition of Gloria Jean's, is hereby incorporated by reference
to pages 96 to 105 of the Company's Registration Statement on Form S-4 (File
No. 333-50905) filed with the Securities and Exchange Commission on April 23,
1998.
4
<PAGE>
(c) Exhibits
2.1 Agreement and Plan of Merger between Registrant and
The Second Cup Ltd., dated as of February 19, 1998
(incorporated by reference from Exhibit 10.23 to the
Registrant's Annual Report on Form 10-KSB for the
year ended December 31, 1997)
10.24 Agreement dated May 19, 1998 between the Registrant
and Second Cup relating to the Credit Facility
10.25 Promissory Note executed by the Registrant, in the
amount of $4,000,000, dated May 19, 1998
99.1 Press Release
5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
COFFEE PEOPLE, INC.
(Registrant)
Date: June 3, 1998 By: /s/ Mark J. Archer
------------------
Mark J. Archer
Executive Vice President
Chief Financial Officer
<PAGE>
EXHIBIT INDEX
Exhibit No. Name Page
- ----------- ---- ----
10.24 Agreement dated May 19, 1998 between 8
the Registrant and Second Cup relating
to the Credit Facility
10.25 Promissory Note executed by the Registrant, 28
in the amount of $4,000,000, dated
May 19, 1998
99.1 Press Release 30
THE SECOND CUP LTD.
175 Bloor Street East, Suite 801, South Tower
Toronto, Ontario, Canada M4W 3R8
May 19, 1998
Coffee People, Inc.
15100 S.W. Koll Parkway
Suite J
Beaverton, Oregon
U.S.A. 97006
Attention: Mr. Kenneth Ross
- ----------------------------
Dear Sirs:
Re: U.S.$4,000,000 Subordinated Credit Facility for Coffee People, Inc.
-------------------------------------------------------------------
This letter sets out the terms and conditions upon which The Second
Cup Ltd. ("TSCL") is prepared to provide the Credit Facility (as hereinafter
defined) to the Borrower (as hereinafter defined). Capitalized terms used herein
and not otherwise defined herein shall have the meanings ascribed thereto in
Schedule "A" hereto.
Borrower: Coffee People, Inc., an Oregon Corporation (the "Borrower").
- --------
Credit Facility: TSCL shall establish a revolving fixed rate credit facility
- --------------- (the "Credit Facility") in the maximum principal amount of
U.S.$4,000,000.
Purpose: The Borrower shall use the proceeds under the Credit Facility
- ------- for ongoing working capital purposes and to pay fees to TSCL
and transaction expenses in connection with the Credit
Facility.
Ranking of The Credit Facility will be expressly subordinate in right of
- ---------- payment to any Senior Facility. In the event of any
Credit Facility: insolvency or bankruptcy proceedings, or any receivership,
- --------------- liquidation, reorganization, arrangement or other similar
proceedings, a Senior Lender shall be entitled to receive
payment in full of all amounts owing under, or in respect of,
any Senior Facility, before TSCL is entitled to receive any
payment on account of the Credit Facility.
Maturity: Notwithstanding anything to the contrary contained herein,
- -------- the principal amount of the Credit Facility, all interest
thereon and all other amounts payable in connection therewith
(collectively, the "Total Outstandings"), shall become
immediately due and payable in full, without limitation,
set-off or abatement of any kind:
(a) upon demand being made therefor by TSCL following the
occurrence and during the continuance of an Event of
Default; or
(b) immediately prior to, and as a condition of, any change
in Control of the Borrower. For purposes of this
provision, a change in Control of the Borrower shall be
deemed to occur if TSCL, either directly or through an
affiliate, ceases to own securities of the Borrower (i)
which represent more than 50% of the common equity of the
Borrower issued and outstanding from time to time; and
(ii) to which are attached more than 50% of the votes
that may be cast to elect directors of the Borrower; or
<PAGE>
(c) on the Maturity Date.
Advances: On the terms and subject to the conditions contained herein,
- -------- the Borrower may request an advance (an "Advance") under the
Credit Facility by providing TSCL with notice (an "Advance
Notice") not later than 2:00 p.m. (Toronto time) at least two
Business Days prior to the date of the requested Advance,
which Advance Notice shall be irrevocable and binding on the
Borrower. The Advance Notice shall specify (i) the requested
date of such Advance (which must be a Business Day), and (ii)
the aggregate amount of such Advance. Each Advance Notice
must be issued in respect of an Advance in a principal amount
of no less than $500,000 and in an integral multiple of no
less than $500,000. Further, in each Advance Notice, the
Borrower shall certify that no Default or Event of Default
has occurred.
Optional The Borrower may, subject to the conditions contained herein,
- -------- prepay the Total Outstandings or irrevocably cancel the
Prepayments and Commitment under the Credit Facility in whole or in part,
- --------------- without penalty or premium, upon:
Reductions:
- ----------
(a) at least 3 Business Days' notice to TSCL in the case of a
prepayment; and
(b) at least 3 Business Days' notice to TSCL in the case of a
cancellation, and
in the case of each notice, stating the proposed date of such
prepayment or cancellation (which must be a Business Day),
and the aggregate principal amount of the prepayment or
cancellation. If such notice is given, the Borrower shall, on
the date specified in the notice, (i) pay TSCL in accordance
with such notice the amount of the prepayment, or, in the
case of a cancellation, pay the amount, if any, by which the
outstanding principal amount under the Credit Facility
exceeds the proposed reduced total of the Commitment; and
(ii) pay to TSCL all interest on the amount of such
prepayment or excess amount accrued to the date of such
prepayment or cancellation.
Each partial prepayment or cancellation shall be in the
minimum aggregate principal amount of $500,000 and in an
integral multiple of $500,000.
Arrangement Fee: If, on the date which is 30 months following the date of this
- --------------- agreement (the "Arrangement Fee Date"), the Total
Outstandings have not been repaid in full to TSCL, or the
Credit Facility remains available to be drawn by the Borrower
hereunder, the Borrower shall, on the Arrangement Fee Date,
pay to TSCL a non-refundable arrangement fee of $80,000 (the
"Arrangement Fee"). For certainty, the Arrangement Fee shall
not be payable if, prior to the Arrangement Fee Date, the
Total Outstandings have been paid in full, and the Credit
Facility has been cancelled.
Standby Fee: The Borrower shall pay to TSCL a standby fee (the "Standby
- ----------- Fee") equal to 0.25% per annum of the average daily
difference between the Commitment and the principal amount
outstanding under the Credit Facility. The Standby Fee shall
be calculated daily and shall be payable quarterly in arrears
on the last Business Day of each of March, June, September
<PAGE>
and December so long as such Commitment shall be undrawn and
available to be drawn.
Refund of In the event that, prior to the Arrangement Fee Date, the
- --------- Total Outstandings have been paid, and the Commitment has
Interest: been cancelled in full (for purposes of this provision, the
- -------- date upon which the Commitment is cancelled in full is
referred to as the "Cancellation Date"), TSCL shall refund to
the Borrower, or not require the payment of, an amount equal
to one-half of the interest paid or payable by the Borrower
in respect of the 60 days immediately preceding the
Cancellation Date.
Interest: Each Advance shall bear interest at a rate per annum equal at
- -------- all times to 11.5% from and including the date of such
Advance to the date upon which such Advance is repaid in
full. The interest on each Advance shall accrue from day to
day and shall be calculated from and after the date of such
Advance to the date of repayment.
Interest and fees shall be computed for the actual number of
days elapsed on the basis of a year consisting of 360 days.
For purposes hereof (a) whenever any interest or fee under
this agreement is calculated using a rate based on a year of
360 days, such rate determined pursuant to such calculation,
when expressed as an annual rate, is equivalent to (x) the
applicable rate based on a year of 360 days, (y) multiplied
by the actual number of days in the calendar year in which
the period for which such interest or fee is calculated ends,
and (z) divided by 360.
Notwithstanding any provision hereof, if the amount of
interest, fees or other amounts stipulated under this
agreement would contravene the provisions of the Interest Act
(Canada) or the Criminal Code (Canada), such amount or rate
of interest shall be, and shall be deemed to be, reduced to
such maximum amount or rate of interest as would not
contravene such statutes.
Repayment Subject to the occurrence of any event that would result in
- --------- the immediate repayment of the Credit Facility, as set forth
Provisions: in clauses (a) or (b) under the heading "Maturity" above, all
- ---------- accrued and unpaid interest on the principal amount
outstanding under the Credit Facility shall be payable
quarterly, in arrears, on the last day of each of March,
June, September and December, and on the Maturity Date.
All payments to be made pursuant to this agreement are to be
"net" to TSCL and are to be made without set-off,
compensation or counterclaim. If the Borrower is required by
law to deduct or withhold any amounts from or in respect of
any sum payable to TSCL and TSCL is not entitled to receive a
corresponding credit from Canadian taxing authorities for
such deduction or withholding, the sum payable to TSCL shall
be increased as may be necessary so that after making all
required deductions (including deductions applicable to
additional sums payable under this provision), TSCL receives
an amount equal to the sum it would have received if no such
deduction or withholding had been made.
In the event that the Borrower is required to pay any
additional amounts in accordance with this section and TSCL
subsequently receives a credit or refund from any taxing
authority in respect of such amounts, then forthwith
following receipt of such credit or refund, TSCL shall remit
it to the Borrower, to the extent required to reimburse the
Borrower for any "gross-up" amounts paid by the Borrower
under this section.
<PAGE>
Evidence of Advances will be evidenced by a grid promissory note (the
- ----------- "Note") executed by the Borrower, substantially in the form
Advances: of Schedule "B". Failure by TSCL to make any notation on the
- -------- Note shall not affect the obligation of the Borrower to pay
amounts due in accordance with this agreement. The
indebtedness of the Borrower hereunder shall be prima facie
conclusively evidenced by the accounts, books or records of
TSCL. In the case of any conflict or inconsistency between
the accounts, books or records of TSCL and the Note, the
accounts, books or records of TSCL shall govern.
Security: If, on the Arrangement Fee Date, the Total Outstandings have
- -------- not been repaid in full to TSCL, or the Credit Facility
remains available to be drawn by the Borrower, then the
Borrower shall execute and deliver in favour of TSCL a
general security agreement, in form and substance customary
for similar transactions and reasonably satisfactory to TSCL,
securing the Borrower's obligations hereunder, and shall
cause each of its Subsidiaries to execute and deliver a
general security agreement in favour of TSCL, in form and
substance customary for similar transactions and reasonably
satisfactory to TSCL, as collateral security for such
Subsidiaries' obligations under their respective Guarantees.
The Borrower shall cause its counsel to make registrations,
filings or recordings of such security agreements in all
offices as TSCL shall reasonably request, to perfect the
security interests created by such security agreements, and
the Borrower's counsel shall issue a legal opinion to TSCL
confirming the due authorization, execution, validity and
enforceability of the security agreements and the
registration and perfection of such security agreements in
all offices where such registration is necessary in order to
protect all rights and remedies of TSCL. Such security
agreements shall rank subordinate only to Permitted
Encumbrances. Concurrently with the execution and delivery of
such security agreements, the Borrower shall, and shall cause
each of its Subsidiaries to, add TSCL as an additional named
insured and loss payee on its insurance policies, subject
only to the prior rights, if any, of any Senior Lender
thereunder.
Without derogating from TSCL's rights hereunder, from and
after the Arrangement Fee Date, TSCL shall have no obligation
to make Advances hereunder until the matters contemplated by
this section are completed to TSCL's satisfaction.
Representations The Borrower hereby represents and warrants that, to the best
- --------------- of its knowledge:
and Warranties
- --------------
of the Borrower: (a) it is a corporation duly incorporated and validly
- --------------- subsisting under the laws of Oregon, and it has full
corporate power and authority to carry on its business as
now conducted (the "Business") and to borrow moneys and
to enter into agreements therefor;
(b) it has taken all necessary action to authorize the
execution and delivery of this agreement and to perform
its obligations hereunder, and this agreement constitutes
a legal, valid and binding obligation of the Borrower in
accordance with its terms, subject to the application of
<PAGE>
law relating to bankruptcy, insolvency, creditors' rights
generally and subject to general equitable principles;
(c) it is not subject to any restriction, law, claim,
contract, instrument, encumbrance or any other
restriction of any kind or character whatsoever which
would prevent the consummation of the transactions
contemplated by this agreement or compliance by the
Borrower with the terms, conditions and provisions
thereof, or the continued operation of the Business on
substantially the same basis as operated to the date
hereof;
(d) no Event of Default has occurred, nor has any event or
condition occurred (any such event or condition being
herein referred to as a "Default") which, with the giving
of notice or passage of time, or both, would constitute
an Event of Default; and
(e) all of its assets are adequately insured against loss or
damage.
The Borrower hereby acknowledges that the completion of the
transactions contemplated by the Acquisition Agreement is a
condition precedent to the availment of the Credit Facility.
The Borrower further acknowledges that its representations
and warranties in the Acquisition Agreement are made in
favour of an affiliate of TSCL which, in accordance with the
Acquisition Agreement, will cause its wholly-owned subsidiary
to merge with the Borrower. In view of the foregoing, the
Borrower hereby repeats in favour of TSCL the following
representations and warranties made in favour of the Vendor
(as defined in the Acquisition Agreement) under the
Acquisition Agreement, in each case to the best of Borrower's
knowledge:
(i) section 5.2;
(ii) section 5.5;
(iii) section 5.6;
(iv) section 5.7;
(v) section 5.8;
(vi) section 5.9;
(vii) section 5.11;
(viii) section 5.14;
(ix) section 5.18; and
(x) section 5.19,
and acknowledges that TSCL is relying on the above-listed
representations and warranties contained in the Acquisition
Agreement in making the Credit Facility available hereunder.
For purposes of incorporating into this agreement the
above-listed representations and warranties from the
Acquisition Agreement, capitalized terms used in such
<PAGE>
representations and warranties shall have the meanings
ascribed thereto in the Acquisition Agreement, provided that
references in such representations and warranties to " this
Agreement" and "the transactions contemplated hereby",
respectively, shall refer to "this letter loan agreement" and
"the transactions contemplated by this letter loan
agreement", respectively. In addition, all schedules of the
Vendor contained in Article IV of the Acquisition Agreement
shall, as they relate to Gloria Jean's Inc., be deemed
incorporated into the schedules of the Borrower to Article V
of the Acquisition Agreement.
Each of the representations and warranties contained in this
section shall be deemed to apply to the Borrower's
Subsidiaries as well. To the extent that the Borrower
hereafter acquires any Subsidiaries, such Subsidiaries shall
be subject to the representations and warranties contained in
this section, as if such representations and warranties were
made with respect to such Subsidiaries; provided, however,
that such representations and warranties shall only relate to
such Subsidiaries in respect of the period of time during
which the Borrower owns an interest in such Subsidiaries.
Further, each of the representations and warranties contained
in this section shall be deemed to be continually repeated by
the Borrower at the time and date of each Advance, and all
such representations and warranties shall survive the
execution and delivery of this agreement and shall continue
in full force and effect until all amounts owing hereunder
have been repaid and the Credit Facility has been terminated,
notwithstanding any investigation made at any time by or on
behalf of TSCL.
Positive Until the Total Outstandings have been paid in full and the
- -------- Commitment has been cancelled, the Borrower covenants and
Covenants: agrees to:
- ---------
(a) perform and observe all of its obligations in respect of
any Senior Facility; and
(b) (i) as soon as available and in any event within 45 days
after the end of each Financial Quarter, deliver to TSCL
unaudited consolidated financial statements for the
Borrower and its Consolidated Subsidiaries, setting forth
the results for the period commencing at the end of the
previous Financial Year and ending with the end of the
immediately preceding Financial Quarter, in each case
setting forth in comparative form the figures for the
corresponding Financial Quarter of the previous Financial
Year, all certified as to fairness in accordance with
GAAP and as to consistency by the Chief Financial Officer
of the Borrower, and (ii) as soon as available and in any
event within 90 days after the end of each Financial Year
of the Borrower, deliver to TSCL the audited consolidated
financial statements of the Borrower and its Consolidated
Subsidiaries in respect of the immediately preceding
Financing Year;
(c) together with the delivery of the financial statements
referred to in clause (b) above, deliver to TSCL a
compliance certificate of the Chief Financial Officer of
the Borrower, together with detailed calculations
relating to such compliance certificate, substantially in
the form of Schedule "C" hereto;
(d) upon the reasonable request of TSCL, deliver to TSCL such
other information respecting the Borrower or any of its
Subsidiaries as TSCL may request;
<PAGE>
(e) preserve and maintain, and cause its of its Subsidiaries
to preserve and maintain, its corporate existence, and
material rights, agreements, licenses, operations,
contracts, franchises and other material arrangements
necessary to carry on its business;
(f) pay and discharge, and cause each of its Subsidiaries to
pay and discharge, before the same shall become
delinquent, (i) all material taxes, assessments and
governmental charges or levies or claims imposed upon it
or upon any of its assets, and (ii) all lawful material
claims which, if unpaid, might by law become an
encumbrance upon its assets, in each case except for any
such tax, assessment, charge, levy or claim which would
result in an encumbrance which is a Permitted
Encumbrance;
(g) comply materially with the requirements of all applicable
laws;
(h) permit TSCL or any of its authorized representatives,
full and reasonable access to the premises of the
Borrower and its Subsidiaries, and to all business,
financial and computer records of the Borrower and its
Subsidiaries;
(i) maintain in respect of itself, and each of its
Subsidiaries, adequate insurance coverage;
(j) pay when due all amounts of principal, interest, fees,
costs and expenses owing by the Borrower hereunder;
(k) provide TSCL with written notice immediately following
receipt of any notice of default from any Senior Lender;
and
(l) at its cost and expense, upon request of TSCL, duly
execute and deliver or cause to be duly executed and
delivered to TSCL such further instruments and do or
cause to be done such further acts as may be necessary or
proper in the reasonable opinion of TSCL to carry out the
provisions of this agreement.
Negative Until the Total Outstandings have been paid in full and the
- -------- Commitment has been cancelled, the Borrower agrees that,
Covenants: without the prior written consent of TSCL:
- ---------
(a) it will not create, incur, assume or suffer to exist, or
permit any of its Subsidiaries to create, incur, assume
or suffer to exist, any encumbrances other than the
encumbrances listed on Schedule "D" (collectively, the
"Permitted Encumbrances");
(b) dispose, or permit any of its Subsidiaries to dispose of
a substantial part of its assets other than in the
ordinary course of its business, it being acknowledged by
TSCL that isolated store closures or sales of corporate
stores do occur in the ordinary course of the Borrower's
business;
(c) create, incur or assume, or permit any of its
Subsidiaries to create, incur or assume, any indebtedness
other than (i) Debt to TSCL hereunder, (ii) unsecured
current liabilities and (iii) Debt incurred in respect of
Permitted Encumbrances, including in respect of any
Senior Facility;
<PAGE>
(d) except in respect of any Senior Facility, guarantee or
indemnify, or permit any Subsidiary to guarantee or
indemnify, any indebtedness of others, unless such
guarantee or indemnity is provided in the ordinary course
of business; or
(e) permit, at any time, the ratio of Consolidated
Indebtedness to Consolidated EBITDA to be more than 3:1.
Conditions TSCL shall have no obligation to make the initial Advance
- ---------- under the Credit Facility until each of the following
Precedent conditions has been satisfied:
- ---------
to Initial Advance:
- ------------------
(a) the Borrower shall have complied with all other
obligations pursuant to this agreement;
(b) the Borrower shall have provided TSCL with evidence of
completion of the transaction contemplated by the
Acquisition Agreement and the satisfaction of all
conditions of closing contained therein;
(c) if required by any Senior Lender or under the terms of
the documentation in respect of any Senior Facility (i)
the Borrower shall have received the approval of any
Senior Lender with respect to the Credit Facility; and
(ii) TSCL, such Senior Lender and the Borrower shall have
entered into an inter-creditor agreement; and
(d) the Borrower shall have caused each of its Subsidiaries
to execute and deliver unlimited guarantees to TSCL, in
respect of the indebtedness of the Borrower to TSCL
hereunder.
Conditions TSCL shall have no obligation to make any Advance under the
- ---------- Credit Facility unless each of the following conditions has
Precedent to been satisfied:
- ------------
all Advances
- ------------
(a) the Borrower shall have complied in all material respects
with all of its obligations pursuant to this agreement;
(b) no material Default or Event of Default has occurred and
is continuing;
(c) the Borrower shall have paid all fees and other costs and
expenses, including legal expenses, incurred by TSCL and
required to be paid by the Borrower in connection with
the Credit Facility.
(d) the representations and warranties of the Borrower
contained in this agreement shall be true and correct in
all material respects as of such date with the same force
and effect as if such representations and warranties had
been made on and as of such date;
(e) the Borrower shall have fulfilled or complied with all
covenants herein contained; and
<PAGE>
(f) all authorizations shall have been obtained on terms
acceptable to TSCL in order to permit the Advance to be
made on the terms and conditions set out in this
agreement without adversely affecting the Borrower's
business, or resulting in the violation or a breach or
default under any material obligation under any license,
permit, lease or contract related to the business.
Waiver of All conditions to an Advance contained herein are for the
- --------- sole benefit of TSCL and may be waived by TSCL in writing, in
Conditions: whole or in part.
- ----------
Events of Default: Each of the following shall constitute an event of default
- ----------------- ("Event of Default") hereunder, after notice by TSCL and (A)
without continuation, in the case of (e) below, or (B) with
continuation, (i) in the case of (a) below, for a period of
seven days (unless a notice is issued more than 7 days
following a failure to pay, in which case the failure to pay
shall become an immediate Event of Default), and (ii) in all
other cases, for a period of 30 days:
(a) the Borrower shall fail to pay principal or interest when
due pursuant to this agreement; or
(b) the Borrower shall fail to pay fees or other amounts when
due pursuant to this agreement; or
(c) if any representation or warranty or certification made
or deemed to be made by the Borrower in connection with
this agreement shall prove to have been incorrect in any
material respect when made or deemed to be made; or
(d) if the Borrower shall fail in any material respect to
perform or observe any covenant contained in this
agreement to be performed or observed by it;
(e) if the Borrower shall:
(i) become insolvent or generally not pay its debts as
such debts become due;
(ii) admit in writing its inability to pay its debts
generally or make a general assignment for the
benefit of creditors;
(iii)file a notice of intention to file a proposal under
any law relating to bankruptcy, insolvency or
reorganization or relief of debtors;
(iv) institute or have instituted against it any
proceedings seeking: (x) to adjudicate it a bankrupt
or insolvent; (y) any liquidation, winding-up,
reorganization, arrangement, adjustment, protection,
relief or proposition of it or debts under any law
relating to bankruptcy, insolvency or reorganization
or relief of debtors; or (z) the entry of an order
for relief or the appointment of a receiver, trustee
or other similar official for it or any substantial
part of its assets, provided that if any such
proceedings are instituted by a third party, such
<PAGE>
proceedings shall not constitute an Event of Default
if the Borrower immediately acts to stay such
proceedings or vacate any order, and such
proceedings are stayed or such order is vacated
within 30 days after notice thereof; or
(v) take any corporate action to authorize any of the
foregoing; or
(f) the occurrence of any default, or any event or condition
which, with the giving of notice or passage of time, or
both, would constitute a default, by the Borrower or any
of its Subsidiaries under any one or more agreements to
which the Borrower or any of its Subsidiaries is a party
and which has resulted in the acceleration of amounts
owing by the Borrower or any of its Subsidiaries under
such agreement or agreements in excess of $100,000 in the
aggregate, provided that no Default shall be deemed to
have occurred under this paragraph if the Borrower is in
good faith contesting the alleged default and
acceleration. Provided further that no Default shall be
deemed to have occurred under this paragraph in respect
of any lease which the Borrower or any of its
Subsidiaries has entered into in the ordinary course of
its business so long as, at any time the Borrower and its
Subsidiaries have not received notice (whether written or
otherwise) of a default in respect of more than:
(i) during the initial six months of the Credit
Facility, 25 of such leases; and
(ii) thereafter,
15 of such leases (in either case, the "Permitted Amount
of Default Leases"). Notwithstanding the immediately
preceding sentence, the Borrower and its Subsidiaries may
have received notices of default under more than the
Permitted Amount of Default Leases, so long as an
appropriate number of defaults are cured within 60 days
of the Borrower or any such Subsidiary becoming aware of
such additional defaults, so that following the curing of
such defaults, the Borrower and its Subsidiaries are not
knowingly in default of more than the Permitted Amount of
Default Leases; or
(g) the occurrence of any default, or any event or condition
which, with the giving of notice or passage of time, or
both, would constitute a default, by the Borrower or any
of its Subsidiaries under the documentation concerning
any Senior Facility, whether or not the Borrower has
received any notice of default from a Senior Lender, or a
Senior Lender has agreed to waive its rights in respect
of such default; or
(h) the loss, suspension or failure to renew any material
licence or permit held by the Borrower; or
(i) the occurrence of any Material Adverse Effect.
Acceleration: Upon the occurrence of any one or more Events of Default, the
- ------------ Total Outstandings shall, at the option of TSCL, be
immediately due and payable without presentation, demand,
<PAGE>
protest or other notice of any kind, all of which are
expressly waived by the Borrower, and TSCL shall have no
obligation to make further Advances hereunder.
Fees: The Borrower shall pay all of TSCL's reasonable costs and
- ---- expenses respecting the Credit Facility, including reasonable
legal fees:
(a) in connection with the preparation, execution, delivery
or enforcement of, and refinancing, renegotiation or
restructuring of, this agreement, the Guarantees or the
security agreements referred to herein; and
(b) in connection with the registration of the security
agreements referenced herein, and any discharges relating
thereto.
Assignment: This agreement may not be assigned, transferred or otherwise
- ---------- disposed of by the Borrower, without the prior written
consent of TSCL, which consent may not be unreasonably
withheld. TSCL may, without the consent of the Borrower,
grant participation in, or assign all or any part of its
interest in the Credit Facility to one or more persons.
Without limiting its obligations hereunder, the Borrower
shall, at its sole cost and expense, give such certificates,
acknowledgements and further assurances in respect of this
agreement and the Credit Facility as TSCL may reasonably
require in connection with any participation or assignment
pursuant to this section. Prior to the occurrence of a
Default or an Event of Default, TSCL will act on behalf of
all its participants and assignees in all dealings with the
Borrower in respect of the Credit Facility.
Overdue Amounts: All amounts owed by the Borrower to TSCL which are not paid
- --------------- when due under the Credit Facility shall, to the extent
permitted by applicable law, bear interest, from the date on
which such amount is due until such amount is paid in full,
payable on demand, at a rate per annum equal at all times to
13.5%.
Application of All amounts received by TSCL from or on behalf of the
- -------------- Borrower and not previously applied pursuant to this
Payments: agreement shall be applied by TSCL (a) first, in reduction of
- -------- the Borrower's obligation to pay accrued interest, (b)
second, in reduction of the Borrower's obligation to pay
fees, charges or expenses contemplated by this agreement, the
Guarantees or the security agreements referred to herein, (c)
third, in reduction of the Borrower's obligation to pay any
unpaid principal amount of Advances, (d) fourth, in reduction
of any other obligations of the Borrower under this
agreement, the Guarantees or the security agreements referred
to herein, and (e) fifth, to the Borrower or such other
Persons as may be lawfully entitled to remainder, or as any
court of competent jurisdiction may otherwise direct.
Judgement If, for the purposes of obtaining judgement in any court, it
- --------- is necessary to convert any sum due, or owing under this
Currency: agreement, the Guarantees or the security agreements referred
- -------- to herein, to TSCL in any currency (the "Original Currency")
into another currency (the "Other Currency"), the parties
hereto agree, to the fullest extent that they may effectively
do so, that the rate of exchange used shall be that at which
in accordance with normal banking procedures TSCL could
purchase the Original Currency with the Other Currency on the
Business Day preceding that on which final judgement is
granted.
<PAGE>
Time of Essence: Time is of the essence hereof.
- ---------------
Enurement: This agreement shall be binding upon the parties hereto and
- --------- shall enure to the benefit of the parties hereto and any
permitted assigns.
Counterparts: This agreement may be executed in one or more counterparts,
- ------------ each of which shall be deemed an original and all of which,
taken together, shall constitute one and the same instrument.
Non-Merger: The covenants, representations and warranties of the parties
- ---------- contained in this agreement shall not merge on and shall
survive the execution of this agreement and the making of any
Advance, and notwithstanding the execution of this agreement
and the making of any Advance, or any investigation made by
or on behalf of any party, shall continue in full force and
effect. Neither the signing of this agreement nor the making
of any Advance shall prejudice any right of one party against
any other party in respect of anything done or omitted
hereunder or in respect of any right to damages or other
remedies.
Governing Law: This agreement shall be governed by and interpreted in
- ------------- accordance with the laws of the Province of Ontario and the
laws of Canada applicable therein. The parties hereby
irrevocably attorn and submit to the non-exclusive
jurisdiction of the courts of Ontario with respect to any
matter arising under or related to this agreement.
Severability: If any provision of this agreement is, or becomes, illegal,
- ------------ invalid or unenforceable, such provision shall be severed
from this agreement and be ineffective to the extent of such
illegality, invalidity or unenforceability. The remaining
provisions hereof shall be unaffected by such provision and
shall continue to be valid and enforceable.
Interpretation: This agreement shall be interpreted in accordance with the
- -------------- following:
(a) words denoting the singular include the plural and vice
versa and words denoting any gender include all genders;
(b) headings shall not effect the interpretation of this
agreement;
(c) references to dollars, unless otherwise specifically
indicated, shall be references to U.S. Dollars;
(d) the word "including" shall mean "including, without
limitation" and "includes" shall mean "includes, without
limitation";
(e) the expressions "the aggregate", "the total", "the sum"
and expressions of similar meaning shall mean "the
aggregate (or total or sum) without duplication";
(f) in the computation of periods of time, unless otherwise
expressly provided, the word "from" means "from and
excluding" and the words "to" and "until" mean "to but
excluding"; and
(g) accounting terms not specifically defined shall be
construed in accordance with GAAP.
<PAGE>
Schedules: The schedules attached hereto shall, for all purposes hereof,
- --------- be incorporated in and form an integral part of this
agreement.
Entire: Agreement: This agreement supersedes all prior agreements,
- ------ understandings, negotiations and discussions, whether oral or
written, of the parties relating to the subject matter hereof
and entered into prior to the date of this agreement.
* * * * * * * * *
If the above terms and conditions of this agreement are
acceptable to you, please sign and return the enclosed copy of this letter.
Yours very truly,
THE SECOND CUP LTD.
Per: /s/K. A. Welsh
--------------------
The Borrower hereby agrees to the foregoing and accepts
this agreement and the Credit Facility on the terms set out above.
DATED the 19th day of May, 1998.
COFFEE PEOPLE, INC.
Per: /s/ Kenneth B. Ross
--------------------
<PAGE>
SCHEDULE "A"
DEFINITIONS
Terms listed below shall have the following meanings:
"Accounting Period" means, in relation to the Borrower and its
Consolidated Subsidiaries, the four accounting periods into which the Financial
Year is divided for purposes of reporting financial information pertaining to
the Borrower and its Consolidated Subsidiaries.
"Acquisition Agreement" means the agreement and plan of merger dated February
19, 1998 between The Second Cup Inc. and the Borrower.
"Business Day" means any day other than a Saturday, Sunday or
legal holiday under the federal laws of Canada, the United States, Province of
Ontario or the State of California.
"Commitment" means $4,000,000, as such commitment may be reduced from time to
time.
"Consolidated Depreciation and Amortization Expense" means,
for any period, depreciation, amortization and depletion charged or credited to
the income statement of the Borrower and its Consolidated Subsidiaries for such
period, determined in accordance with GAAP on a consolidated basis.
"Consolidated Earnings" means, for any period, the net income
(loss) of the Borrower and its Consolidated Subsidiaries for such period,
determined in accordance with GAAP on a consolidated basis.
"Consolidated EBITDA" means, for any period, Consolidated Earnings, increased by
the sum of: (i) Consolidated Interest Charges; (ii) Consolidated Income Tax
Expense; and (iii) Consolidated Depreciation and Amortization Expense, in each
case for such period.
"Consolidated Income Tax Expense" means, for any period, the
aggregate of all taxes (including deferred taxes) based on income of the
Borrower and its Consolidated Subsidiaries for such period, determined in
accordance with GAAP on a consolidated basis.
"Consolidated Indebtedness" means the aggregate of all Qualified Debt of the
Borrower and its Consolidated Subsidiaries.
"Consolidated Interest Charges" means, for any period, the
total of all items properly classified as interest expense for the Borrower and
its Consolidated Subsidiaries for such period, determined in accordance with
GAAP on a consolidated basis.
"Consolidated Subsidiary" means, at any time, in respect of
any Person, any other Person, the accounts of which are or should, in accordance
with GAAP, be consolidated with those of such first-mentioned Person in its
consolidated financial statements at such time.
"Debt" means, in respect to any Person, all indebtedness of
such Person for or in respect of borrowed money, credit or other financial
accommodation and all other obligations that are required to be listed as a
liability on a balance sheet in accordance with GAAP of such Person or are
secured by an encumbrance, including: (i) all liabilities and obligations
(including reimbursement obligations), contingent or otherwise, with respect to
letters of credit, letters of guarantee, bankers' acceptances or similar
instruments issued or accepted by banks or other financial institutions for the
account of such Person, obligations in respect of the borrowing of any commodity
and obligations in respect of swap arrangements and other interest rate risk or
foreign exchange risk management arrangements; (ii) all indebtedness for the
<PAGE>
deferred purchase price of property or services represented by a note or other
security, or created or arising under any conditional sale or other title
retention agreement with respect to property acquired by such Person (even
though the rights and remedies of the seller or lender under such agreement in
the event of default are limited to repossession or sale of such property);
(iii) all obligations of such Person as lessee under leases which are or should
be recorded as capital leases in accordance with GAAP; and (iv) all guarantees
given by such Person of any indebtedness, obligations and liabilities of any
other Person of the nature described in clauses (i) to (iii) above.
"Financial Quarter" means, in relation to the Borrower and its
Consolidated Subsidiaries, each Accounting Period beginning on the first day of
the first month of the Borrower's Financial Year.
"Financial Year" means, in relation to the Borrower and its
Consolidated Subsidiaries, the Borrower's financial year commencing on the
Sunday immediately succeeding the last Saturday in June of each calendar year,
and ending on the last Saturday in June of the immediately succeeding year.
"GAAP" means, at any time, generally accepted accounting principles of the
United States.
"Guarantees" means, collectively, the unlimited guarantees to
be entered into by the Borrower's Subsidiaries as a condition precedent to the
initial Advance under the Credit Facility.
"Material Adverse Effect" means a material adverse effect (or
a series of adverse effect, none of which is material in of itself but which,
cumulatively, results in a material adverse effect) on: (i) the business,
operations, assets or financial condition of the Borrower and its Consolidated
Subsidiaries, measured as a whole; or (ii) the ability of the Borrower to
perform any of its payment obligations under this agreement.
"Maturity Date" means May , 2003.
"Person" means an individual, partnership, corporation, trust,
unincorporated association, syndicate, joint venture or other entity or
governmental entity, and pronouns have a similarly extended meaning.
"Qualified Debt" means, in respect of any Person, all interest
bearing indebtedness of such Person for, or in respect of, borrowed money.
"Senior Facility" means the credit facility made available by
Bank of America to the Borrower, as such facility existed on the date of closing
the transactions contemplated by the Acquisition Agreement, as such credit
facility may be modified from time to time with the approval of the board of
directors of the Borrower, and any other Senior Credit Facility as may be
approved by the board of directors of the Borrower from time to time.
"Senior Lender" means Bank of America or any other lender
providing a Senior Facility to the Borrower.
"Subsidiary" means, at any time, as to any Person, any
corporation or other Person, if at such time the first-mentioned Person owns,
directly or indirectly, securities or other ownership interests in such
corporation or other Person, having ordinary voting power to elect a majority of
the board of directors or persons performing similar functions for such
corporation or other Person or has the power to determine the policies and
conduct of the management of such corporation or other Person.
"U.S. Dollars" and "$" means lawful money of the United
States of America.
<PAGE>
SCHEDULE "B"
PROMISSORY NOTE
U.S. $4,000,000
FOR VALUE RECEIVED, the undersigned promises to pay to or to
the order of THE SECOND CUP LTD. ("TSCL") at its head office in Toronto,
Ontario, or at such other place designated by TSCL, in lawful money of the
United States, the principal amount indicated from time to time on the grid
schedule attached hereto (the "Principal Amount") evidencing the amount
outstanding from time to time under that certain letter loan agreement dated the
day of May, 1998, between the undersigned and TSCL (the "Loan Agreement"). All
capitalized terms used herein and not otherwise defined herein shall have the
meanings ascribed to them in the Loan Agreement.
The Principal Amount shall bear interest in the manner
specified in the Loan Agreement, which interest shall be calculated in
accordance with the terms and conditions of the Loan Agreement.
All payments of the Principal Amount and interest shall be
made in accordance with the terms and conditions set forth in the Loan
Agreement.
This promissory note is issued pursuant to the Loan Agreement
and is subject to all of the provisions thereof.
The undersigned hereby waives presentment for payment, demand,
notice of non-payment, notice of protest of this promissory note, and all other
notices in connection with the delivery, acceptance, performance, or enforcement
of, or default under, this promissory note, and waives diligence in collection
or bringing suit with respect to this promissory note.
This promissory note and every part hereof shall be binding
upon the undersigned and its successors and shall enure to the benefit of, and
be enforceable by, TSCL and any of its successors and permitted assigns.
This promissory note shall be governed by, and interpreted in
accordance with, the Laws of the Province of Ontario and the Laws of Canada
applicable therein. The undersigned hereby irrevocably attorns and submits to
the non-exclusive jurisdiction of the courts of Ontario with respect to any
matter arising under or related to this promissory note.
This promissory note may be signed by facsimile signature.
The undersigned hereby agrees that any and all costs and
expenses incurred by TSCL in connection with the enforcement of, or default
under, this promissory note shall be for the account of the undersigned.
DATED the day of May, 1998.
COFFEE PEOPLE, INC.
Per:
--------------------
Authorized Signing Officer)
<PAGE>
<TABLE>
<CAPTION>
GRID SCHEDULE
<S> <C> <C> <C>
============================== ================================ ============================ ==========================
Date Amount of Advance/(Repayment) Outstanding Principal Accrued and Unpaid
under the Loan Agreement Amount Owing Interest
- ------------------------------ -------------------------------- ---------------------------- --------------------------
- ------------------------------ -------------------------------- ---------------------------- --------------------------
- ------------------------------ -------------------------------- ---------------------------- --------------------------
============================== ================================ ============================ ==========================
</TABLE>
<PAGE>
SCHEDULE "C"
COMPLIANCE CERTIFICATE
TO: THE SECOND CUP LTD. ("TSCL")
Reference is made to a letter loan agreement dated the
----
day of May, 1998 (the "Loan Agreement", the terms defined therein being used
herein as therein defined) between Coffee People, Inc. (the "Borrower") and
TSCL.
I, , the Chief Financial Officer of the Borrower, in such
capacity and not personally, hereby certify that:
1. I am the duly appointed Chief Financial Officer of the Borrower and as
such I am providing this certificate for and on behalf of the Borrower
pursuant to the Loan Agreement.
2. I am familiar with and have examined the provisions of the Loan
Agreement.
3. To the best of my knowledge, information and belief, and after due
inquiry, no Default or Event of Default has occurred and is continuing
as at the date hereof.
4. For the Financial Quarter of the Borrower and its Consolidated
Subsidiaries ending !, 199!, the amounts pertaining to, and the ratio
of Consolidated Indebtedness to Consolidated EBITDA, are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
======================= ===================== ================================= ====================================
Consolidated Consolidated EBITDA Ratio of Consolidated Required Ratio of Consolidated
Indebtedness Indebtedness to Consolidated Indebtedness to Consolidated EBITDA
EBITDA
- ----------------------- --------------------- --------------------------------- ------------------------------------
- ----------------------- --------------------- --------------------------------- ------------------------------------
- ----------------------- --------------------- --------------------------------- ------------------------------------
- ----------------------- --------------------- --------------------------------- ------------------------------------
======================= ===================== ================================= ====================================
</TABLE>
DATED this day of , 199 .
------------- ------------------------ --
----------------------------------------
(Signature)
----------------------------------------
(Name - please print)
Chief Financial Officer
<PAGE>
SCHEDULE "D"
PERMITTED ENCUMBRANCES
"Permitted Encumbrances" means, with respect to any Person,
any one or more of the following:
(1) encumbrances for taxes, assessments or governmental charges or
levies not at the time due and delinquent or the validity of
which is being contested at the time by the Person in good
faith by proper legal proceedings if, in TSCL's opinion: (i)
adequate security has been provided to TSCL to ensure the
payment of such taxes, assessments and charges; or (ii)
adequate reserves with respect thereto are maintained on the
books of such Person, in accordance with GAAP and, in each
case, such encumbrances will not materially interfere with use
of such assets by such Person or involve any immediate danger
of the sale, forfeiture or loss of such assets;
(2) encumbrances resulting from any judgment rendered or claim
filed against such Person which such Person shall be
contesting in good faith by proper legal proceedings if, in
TSCL's opinion: (i) adequate security has been provided to
TSCL to ensure the payment of such judgment or claim; or (ii)
adequate reserves with respect thereto are maintained on the
books of such Person, in accordance with GAAP and, in each
case, such encumbrances will not materially interfere with use
of such assets by such Person or involve any immediate danger
of the sale, forfeiture or loss of such assets;
(3) undetermined or inchoate encumbrances arising in the ordinary
course of business which have not at such time been filed
pursuant to law against such Person or which relate to
obligations not due or delinquent;
(4) encumbrances affecting real property of such Person which are:
(i) title defects, encroachments or irregularities of a minor
nature; or (ii) restrictions, easements, rights-of-way,
servitudes or other similar rights in land (including, without
restriction, rights of way and servitudes for railways,
sewers, drains, gas and oil pipelines, gas and water mains,
electric light and power and telephone or telegraph or cable
television conduits, poles, wires and cables) granted to or
reserved by other Persons and, in each case, such encumbrances
will not materially interfere with the use of such real
property by such Person;
(5) the right reserved to or vested in any governmental entity by
any statutory provision, or by the terms of any lease,
licence, franchise, grant or permit of such Person, to
terminate any such lease, license, franchise, grant or permit,
or to require annual or other payments as a condition to the
continuance thereof;
(6) any encumbrance resulting from the deposit of cash or
securities in connection with contracts, tenders or
expropriation proceedings, or to secure worker's compensation,
surety or appeal bonds, costs of litigation when required by
law, and public and statutory obligations;
(7) any encumbrance resulting from security given to a public
utility or governmental entity when required by such utility
or governmental entity in connection with the operation of the
business of such Person;
(8) the reservations, limitations, provisos and conditions, if
any, expressed in any original grants of real property from
any governmental entity;
(9) carriers', warehousemen's, mechanics', material-men's,
repairmen's or other similar encumbrances arising in the
ordinary course of business which are not overdue for a period
of more than 30 days or which are being contested at the time
by the Person in good faith by proper legal proceedings if, in
TSCL's opinion (i) adequate security has been provided to TSCL
to ensure payment of such encumbrances; (ii) adequate reserves
with respect thereto are maintained on the consolidated books
of such Person, in accordance with GAAP; or (iii) such
encumbrances will not materially interfere with use of such
assets by the Person or involve any immediate danger of the
sale, forfeiture or loss of such assets;
(10) any encumbrance, payment of which has been provided for by the
depositing with TSCL of an amount in cash, or the obtaining of
a surety bond satisfactory to the Lender in its absolute
discretion, sufficient in either case to pay or discharge the
same and which deposit or bond the Lender is authorized to use
or draw upon for that purpose;
(11) zoning and building by-laws and ordinances, municipal by-laws,
and regulations, which do not adversely affect in any material
respect the use of real property concerned in the operation of
the business conducted on such real property;
(12) covenants restricting or prohibiting access to or from lands
abutting on controlled access highways, which do not adversely
impair in any material respect the use of the real property
concerned in the operation of the business conducted on such
real property;
(13) purchase money mortgages or capitalized lease obligations;
(14) encumbrances in favour of a Senior Lender in respect of any
Senior Facility; and
(15) encumbrances incidental to the conduct of business or the
ownership of properties and assets (including in connection
with workers' compensation, unemployment insurance and similar
laws, warehousemen's and attorneys' liens and statutory
landlords' liens) and encumbrances to secure the performance
of bids, tenders or trade contracts, or to secure statutory
obligations, surety or appeal bonds or other like
encumbrances, in each case in the ordinary course of business
and not in connection with the borrowing of money.
PROMISSORY NOTE
U.S. $4,000,000
FOR VALUE RECEIVED, the undersigned promises to pay to or to
the order of THE SECOND CUP LTD. ("TSCL") at its head office in Toronto,
Ontario, or at such other place designated by TSCL, in lawful money of the
United States, the principal amount indicated from time to time on the grid
schedule attached hereto (the "Principal Amount") evidencing the amount
outstanding from time to time under that certain letter loan agreement dated the
day of May 19, 1998, between the undersigned and TSCL (the "Loan Agreement").
All capitalized terms used herein and not otherwise defined herein shall have
the meanings ascribed to them in the Loan Agreement.
The Principal Amount shall bear interest in the manner
specified in the Loan Agreement, which interest shall be calculated in
accordance with the terms and conditions of the Loan Agreement.
All payments of the Principal Amount and interest shall be
made in accordance with the terms and conditions set forth in the Loan
Agreement.
This promissory note is issued pursuant to the Loan Agreement
and is subject to all of the provisions thereof.
The undersigned hereby waives presentment for payment, demand,
notice of non-payment, notice of protest of this promissory note, and all other
notices in connection with the delivery, acceptance, performance, or enforcement
of, or default under, this promissory note, and waives diligence in collection
or bringing suit with respect to this promissory note.
This promissory note and every part hereof shall be binding
upon the undersigned and its successors and shall enure to the benefit of, and
be enforceable by, TSCL and any of its successors and permitted assigns.
This promissory note shall be governed by, and interpreted in
accordance with, the Laws of the Province of Ontario and the Laws of Canada
applicable therein. The undersigned hereby irrevocably attorns and submits to
the non-exclusive jurisdiction of the courts of Ontario with respect to any
matter arising under or related to this promissory note.
This promissory note may be signed by facsimile signature.
The undersigned hereby agrees that any and all costs and
expenses incurred by TSCL in connection with the enforcement of, or default
under, this promissory note shall be for the account of the undersigned.
DATED the 19th day of May, 1998.
COFFEE PEOPLE, INC.
Per:/s/ Kenneth B. Ross
----------------------------
(Authorized Signing Officer)
<PAGE>
<TABLE>
<CAPTION>
GRID SCHEDULE
<S> <C> <C> <C>
============================== ================================ ============================ ==========================
Date Amount of Advance/(Repayment) Outstanding Principal Accrued and Unpaid
under the Loan Agreement Amount Owing Interest
- ------------------------------ -------------------------------- ---------------------------- --------------------------
- ------------------------------ -------------------------------- ---------------------------- --------------------------
- ------------------------------ -------------------------------- ---------------------------- --------------------------
============================== ================================ ============================ ==========================
</TABLE>
[COFFEE PEOPLE LETTERHEAD]
FOR IMMEDIATE RELEASE
For more information, contact:
Alton McEwen Ken Ross Dolores Chenoweth
President & CEO Vice President-Finance Investor Relations
Coffee People, Inc. Coffee People, Inc. in.ves'com
408-633-6300 503-672-9603 503-291-1924
COFFEE PEOPLE, INC. COMPLETES MERGER;
FORMS SECOND LARGEST U.S. SPECIALTY COFFEE RETAILER
PORTLAND, OREGON...May 20, 1998...Coffee People, Inc. (NASDAQ:MOKA) has
completed its merger with the U.S. operations of The Second Cup Ltd. (Toronto:
SKL), creating the second largest coffee retailer in the United States with 316
stores throughout the nation and in six foreign countries.
The company's new board of directors also elected Alton McEwen as chief
executive officer of Coffee People.
The merger, which was finalized on May 19, 1998, combines 39 Coffee
People stores in two core markets -- Oregon and Arizona - with the 277-store
operation of Gloria Jean's Inc. For the 24-week period ended December 13, 1997,
the combined companies had pro forma systemwide sales of $60.5 million, with pro
forma revenue of $30.4 million and pro forma net income of $1.5 million, or
$0.14 per share.
"We are extremely pleased to have successfully brought together two
companies with strong brand franchises in the specialty coffee business" said
McEwen. "Now, we can focus the energy of the combined company on operations and
opportunities for growth." The merged company is expected to benefit from
greater management depth, increased purchasing power and vertical integration of
roasting and retail activities.
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McEwen pointed out that the combined Coffee People will have greater
internal financial resources and improved access to capital needed to continue
growing the company in the future. "We believe that Coffee People will be well
positioned to take advantage of consolidation in the specialty coffee industry
through transactions with other strong industry participants," he said.
In the merger, Coffee People issued approximately 7.5 million shares of
Coffee People common stock to Second Cup, giving Second Cup a 69.5 percent
ownership of the combined company. The company now has approximately 10.8
million common shares outstanding. Coffee People's fiscal year will be changed
to end on the last Saturday of June. The merger is being accounted for as a
"reverse purchase" with Gloria Jean's treated as the acquiror for accounting and
financial purposes.
In other business, shareholders elected six board members at the annual
meeting. Douglas L. Ayer, president and managing partner of International
Capital Partners, Inc.; Michael Bregman, chairman and chief executive officer of
The Second Cup Ltd.; Robert M. Haft, founder and managing partner of Vitamin
Superstores; Alton McEwen, president and chief executive officer of Coffee
People; Gary G. Talboy, a director of Coffee People and owner of Specialty
Coffee Consultants, and Kathy A. Welsh, executive vice president and chief
financial officer of The Second Cup Ltd.
In addition to naming McEwen as president and chief executive officer,
Coffee People's board of directors also elected Mark J. Archer as chief
financial officer. McEwen has served as president and chief operating officer of
Second Cup's U.S. operations since July 1996. Prior to that assignment, he was
president and chief operating officer of Second Cup for eight years, commencing
with its acquisition for $12 million (Cdn) in 1988. Today Second Cup is publicly
traded on the Toronto Stock Exchange with a market capitalization of
approximately $250 million (Cdn). Archer joined Gloria Jean's in 1998 as
executive vice president and chief financial officer. He was formerly senior
vice president and chief financial officer of Jamba Juice Company.
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Coffee People, headquartered in Portland, Oregon, has been in business
since 1983 and operates coffee houses, Motor Mokas(R) drive throughs, and Aero
Mokas(R) airport kiosks, primarily in Oregon and Arizona. Gloria Jean's is a
leading specialty coffee retailer with a strong brand franchise operating in
shopping malls throughout the United States. It also has 27 stores
internationally with operations in Japan, Mexico, Ireland, Korea, Australia, and
the United Arab Emirates.
This news release contains forward-looking statements that involve a
number of risks and uncertainties. Actual results may differ materially from
projected results. For a complete discussion of the risks associated with
forward-looking information, refer to the Risk Factors contained in the
company's 10-KSB for 1996 and 1997 and the Registration Statement on Form S-4 as
filed with the Securities and Exchange Commission on April 24, 1998.
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