Exhibit 10.25

AGREEMENT OF PURCHASE AND SALE OF ASSETS

by and between

STARBUCKS CORPORATION,

as Buyer

DIEDRICH COFFEE, INC.,

as Seller

and COFFEE PEOPLE, INC.

September 14, 2006

--------------------------------------------------------------------------------

TABLE OF CONTENTS

 

          Page ARTICLE 1    DEFINITIONS    2 ARTICLE 2    THE TRANSACTION    9

  2.1

   Acquisition Assets    9

  2.2

   Assets Not Being Acquired    10

  2.3

   Assumed Liabilities    10

  2.4

   Excluded Liabilities    11

  2.5

   Determination of Subject Locations    11

  2.6

   Purchase Price    12

  2.7

   Escrow    12

  2.8

   Employees    13

  2.9

   Closing    13 ARTICLE 3    REPRESENTATIONS AND WARRANTIES OF SELLER    14

  3.1

   Organization and Qualification    14

  3.2

   Authority Relative to Agreements    15

  3.3

   No Conflicts    15

  3.4

   No Consents    15

  3.5

   Compliance with Laws; Permits    15

  3.6

   Real Estate Leases/Occupancy Agreements/Ground Leases    16

  3.7

   Good Title to the Acquisition Assets; Condition of F&E    16

  3.8

   Tax Matters    16

  3.9

   No Restrictions on Business Activities    17

  3.10

   Litigation    17

  3.11

   Environmental Matters    17

  3.12

   Brokers’ Fees    18

  3.13

   Fraudulent Transfer    18

  3.14

   Insurance    18

  3.15

   Employment Matters    19

  3.16

   Board Approval    19 ARTICLE 4    REPRESENTATIONS AND WARRANTIES OF BUYER   
20

  4.1

   Organization and Qualification    20

  4.2

   Authority Relative to Agreements    20

  4.3

   No Conflicts    20

 

-i-

--------------------------------------------------------------------------------

TABLE OF CONTENTS

(Continued)

 

          Page

  4.4

   Access to Information    20

  4.5

   No Consents    20

  4.6

   Availability of Funds    21

  4.7

   Brokers’ Fees    21

ARTICLE 5

   COVENANTS    21

  5.1

   Covenants of Seller Prior to the Closing and each Post-Closing Transfer    21

  5.2

   No Negotiations    22

  5.3

   Public Announcements    23

  5.4

   Confidentiality    24

  5.5

   Access to Information and Subject Locations    24

  5.6

   Required Filings    25

  5.7

   Non-Disparagement    25

  5.8

   Noncompetition; Nonsolicitation    26

  5.9

   Forms of Consent to Assignment of Lease; Lease and Agreement Amendment    26

  5.10

   Allocation    26

  5.11

   Books and Records    26

  5.12

   Transfer Fees and Taxes; Prorations    27

  5.13

   Additional Covenants    27

  5.14

   Environmental Assessment    28

  5.15

   Meeting of Stockholders    29

ARTICLE 6

   CONDITIONS TO THE CLOSING AND EACH POST-CLOSING TRANSFER    29

  6.1

   Conditions to Obligations of Seller and Buyer    29

  6.2

   Conditions to Obligations of Seller    29

  6.3

   Conditions to Obligations of Buyer    30

  6.4

   Termination Date    32

  6.5

   Post-Closing Transfers    32

  6.6

   Waiver    32

ARTICLE 7

   SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION    32

  7.1

   Nature and Survival of Representations and Warranties    32

 

-ii-

--------------------------------------------------------------------------------

TABLE OF CONTENTS

(Continued)

 

          Page

  7.2

   Indemnification by Seller    33

  7.3

   Indemnification by Buyer    33

  7.4

   Procedure for Indemnification and Dispute Resolution    34

  7.5

   Remedies    37

ARTICLE 8

   TERMINATION    37

  8.1

   Termination    37

  8.2

   Effect of Termination    38

ARTICLE 9

   MISCELLANEOUS    38

  9.1

   Transaction Expenses; Termination Fees    38

  9.2

   Notices    39

  9.3

   Governing Law; Venue    39

  9.4

   No Third Party Beneficiaries    40

  9.5

   Assignment    40

  9.6

   Intent to be Binding; Entire Agreement; Severability    40

  9.7

   Waiver of Provisions    40

  9.8

   Construction    41

  9.9

   Acknowledgement; Independent Due Diligence    41

  9.10

   Disclaimer Regarding Assets    41

 

-iii-

--------------------------------------------------------------------------------

SCHEDULES    Schedule 1.0    Subject Locations Schedule 1.3    Ground Lease
Subject Locations Schedule 1.5    Knowledge Personnel Schedule 2.1(a)    Assumed
Leases and Occupancy Agreements Schedule 2.1(c)    Prepaid Items Schedule 2.1(d)
   F&E Schedule 2.1(e)    Assumed Permits Schedule 2.3    Assumed Liabilities
Schedule 3.0    Schedule of Exceptions Schedule 5.10    Allocation Schedule
Schedule 6.2    Required Approvals and Consents Schedule 6.3(h)    Encumbrances
EXHIBITS    Exhibit A    Form of Escrow Agreement Exhibit B    Form of Bill of
Sale Exhibit C    Form of Assignment and Assumption Agreement Exhibit D    Form
of Consent to Assignment of Lease Exhibit E    Chart of Terms for Lease and
Agreement Amendments Exhibit F-1    Form of Certificate of Seller Exhibit F-2   
Form of Certificate of Buyer

--------------------------------------------------------------------------------

AGREEMENT OF PURCHASE AND SALE OF ASSETS

This Agreement is made as of September 14, 2006, by and between Starbucks
Corporation, a Washington corporation (“Buyer”), Diedrich Coffee, Inc., a
Delaware corporation (“Seller”) and Coffee People, Inc., an Oregon corporation
(“Coffee People”).

RECITAL

Subject to the terms and conditions set forth in this Agreement, Seller and
Coffee People desire to sell and assign to Buyer, and Buyer desires to purchase
and assume from Seller and Coffee People, Seller’s and Coffee People’s entire
right, title and interest in and to the leasehold interests and occupancy rights
under the leases and occupancy agreements set forth on Schedule 2.1(a) and other
specifically identified tangible assets and properties used in connection with
the operation of the retail stores owned or operated by Seller and Coffee
People, respectively, under the Diedrich Coffee and Coffee People brands, all as
listed on Schedule 1.0, as it may be amended from time to time (the “Subject
Locations”).

ARTICLE 1

DEFINITIONS

For purposes of this Agreement and the attached schedules and exhibits, certain
initially capitalized terms have the meanings ascribed to them in Article 1.
Other terms are defined in the body of this Agreement.

“Acquisition Assets” has the meaning set forth in Section 2.1.

“Additional Assessment” has the meaning set forth in Section 5.14(a).

“Affiliate” with respect to any party, means any person or entity controlling,
controlled by, or under common control with, such party, including but not
limited to any subsidiary of such party.

“Allocation Schedule” has the meaning set forth in Section 5.10.

“Applicable Laws” mean all laws, regulations, ordinances and other restrictions
of foreign, federal, state and local governments and agencies regulating or
otherwise affecting Buyer, Seller, Coffee People, the Subject Locations or the
Acquisition Assets, including, without limitation, those regulating or affecting
employee health and safety, discharge of pollutants or wastes, consumer
protection and employee benefit plans.

“Assignment and Assumption Agreement” means the Assignment and Assumption
Agreement substantially in the form attached hereto as Exhibit C.

“Assumed Leases and Occupancy Agreements” has the meaning set forth in
Section 2.1(a).

 

2

--------------------------------------------------------------------------------

“Assumed Liabilities” has the meaning set forth in Section 2.3.

“Assumed Permits” has the meaning set forth in Section 2.1(e).

“Assumption Time” has the meaning set forth in Section 2.3.

“Business Day” means a day other than Saturday, Sunday or any day on which banks
located in Seattle, Washington are closed.

“Buyer” means Starbucks Corporation, a Washington corporation.

“Buyer Group” has the meaning set forth in Section 5.2.

“Buyer’s Cap” has the meaning set forth in Section 7.4(b).

“Claim Notice” has the meaning set forth in Section 7.4(d).

“Closing” has the meaning set forth in Section 2.9(a).

“Closing Date” has the meaning set forth in Section 2.9(a).

“COBRA” has the meaning set forth in Section 3.15.

“Code” means the Internal Revenue Code of 1986, as amended.

“Coffee People” means Coffee People, Inc., an Oregon corporation.

“Consent to Assignment of Lease” means the Consent to Assignment of Lease agreed
to between Buyer and Seller or Coffee People, as applicable, substantially in
the form attached hereto as Exhibit D (to obtain all applicable landlord’s,
sublandlord’s, ground lessor’s or other applicable contract party’s signature
thereon) and providing for the assignment to Buyer of the lease or occupancy
agreement for each Subject Location, together with estoppel, release and consent
provisions in connection therewith.

“Encumbrance” means any claim, lien, charge, security interest, pledge, mortgage
or any other restriction or encumbrance of any kind or nature.

“Environment” means soil, land surface or subsurface strata, surface waters
(including navigable waters and ocean waters), groundwaters, drinking water
supply, stream sediments, ambient air (including indoor air), plant and animal
life and any other environmental medium or natural resource.

“Environmental Assessment” has the meaning set forth in Section 5.14(a).

“Environmental, Health and Safety Liabilities” mean any cost, damages expense,
liability, obligation or other responsibility arising from or under any
Environmental Law or Occupational Safety and Health Law, including those
consisting of or relating to:

 

3

--------------------------------------------------------------------------------

(a) any environmental, health or safety matter or condition (including on-site
or off-site contamination, occupational safety and health and regulation of any
chemical substance or product);

(b) any fine, penalty, judgment, award, settlement, legal or administrative
proceeding, damages, loss, claim, demand or response, remedial or inspection
cost or expense arising under any Environmental Law or Occupational Safety and
Health Law;

(c) financial responsibility under any Environmental Law or Occupational Safety
and Health Law for cleanup costs or corrective action, including any cleanup,
removal, containment or other remediation or response actions (“Cleanup”)
required by any Environmental Law or Occupational Safety and Health Law (whether
or not such Cleanup has been required or requested by any governmental body or
any other person or entity) and for any natural resource damages; or

(d) any other compliance, corrective or remedial measure required under any
Environmental Law or Occupational Safety and Health Law.

The terms “removal,” “remedial” and “response action” include the types of
activities covered by the United States Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended (CERCLA).

“Environmental Law” means as of the date of the Closing any and all civil,
criminal and administrative laws (including common law), statutes, codes, rules,
regulations, ordinances, orders, decrees, judgments, permits, licenses,
approvals, authorizations and other requirements, directives, consents and
obligations lawfully imposed by any Governmental Entity pertaining to the
protection of the Environment, protection of ecology, protection of public
health, protection of worker health and safety, and/or the treatment, emission
and/or discharge of gaseous, particulate and/or effluent pollutants, and/or the
handling of Hazardous Materials, and regulations, guidelines, and policies
promulgated under any of the foregoing, including, but not limited to,
requirements that relate to:

(a) notifying appropriate authorities, employees or the public of intended or
actual Releases of pollutants or hazardous substances or materials, violations
of discharge limits or other prohibitions and the commencement of activities,
such as resource extraction or construction, that could have significant impact
on the Environment;

(b) preventing or reducing to acceptable levels the Release of pollutants or
hazardous substances or materials into the Environment;

(c) reducing the quantities, preventing the Release or minimizing the hazardous
characteristics of wastes that are generated;

(d) assuring that products are designed, formulated, packaged and used so that
they do not present unreasonable risks to human health or the Environment when
used or disposed of;

(e) protecting resources, species or ecological amenities;

 

4

--------------------------------------------------------------------------------

(f) reducing to acceptable levels the risks inherent in the transportation of
hazardous substances, pollutants, oil or other potentially harmful substances;

(g) cleaning up pollutants that have been Released, preventing the Threat of
Release or paying the costs of such clean up or prevention; or

(h) making responsible parties pay private parties, or groups of them, for
damages done to their health or the Environment or permitting self-appointed
representatives of the public interest to recover for injuries done to public
assets.

“Environmental Violation” has the meaning set forth in Section 5.14(b).

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended,
or any successor law, and regulations and rules issued pursuant thereto.

“ERISA Affiliate” means the Seller, any subsidiary of Seller and, with respect
to any employee benefit plan (as defined in Section 3(3) of ERISA), any trade or
business (whether or not incorporated) that is or, at any relevant time, was
treated as a single employer with Seller within the meaning of Section 414(b),
(c), (m) or (o) of the Code.

“Escrow Agent” has the meaning set forth in Section 2.7.

“Escrow Agreement” has the meaning set forth in Section 2.7.

“Escrow Fund” has the meaning set forth in Section 2.7.

“Escrow Period” has the meaning set forth in Section 2.7.

“Excluded Agreements” has the meaning set forth in Section 2.2(c).

“Excluded Assets” has the meaning set forth in Section 2.2.

“Excluded Business” has the meaning set forth in Section 2.2(a).

“Excluded Liabilities” has the meaning set forth in Section 2.4.

“F&E” has the meaning set forth in Section 2.1(d).

“Governmental Entity” means any court, or any federal, state, municipal,
provincial or other governmental authority, department, commission, board,
service, agency, political subdivision or other instrumentality.

“Ground Leases” means the Assumed Leases and Occupancy Agreements relating to
the Ground Lease Subject Locations.

“Ground Lease Improvements” shall have the meaning set forth in Section 2.1(f).

“Ground Lease Subject Locations” means the Subject Locations on Schedule 1.3.

 

5

--------------------------------------------------------------------------------

“Hazardous Activity” means the distribution, generation, handling, importing,
management, manufacturing, processing, production, refinement, Release, storage,
transfer, transportation, treatment or use (including any withdrawal or other
use of groundwater) of Hazardous Material in, on, under, about or from any of
the Acquisition Assets or any part thereof into the Environment and any other
act, business, operation or thing that increases the danger, or risk of danger,
or poses an unreasonable risk of harm, to persons or property on or off the
Subject Locations.

“Hazardous Material” means any substance, material or waste which is regulated
by any governmental body, including any material, substance or waste which is
defined as a “hazardous waste,” “hazardous material,” “hazardous substance,”
“extremely hazardous waste,” “restricted hazardous waste,” “contaminant,” “toxic
waste” or “toxic substance” under any provision of Environmental Law, and
including petroleum, petroleum products, asbestos, or asbestos-containing
material, urea formaldehyde and polychlorinated biphenyls.

“Improvements” has the meaning set forth in Section 2.1(b).

“Indemnified Party” means the party that is entitled, or is seeking, to be
indemnified under this Agreement.

“Indemnifying Party” means the party required to indemnify, or against which
indemnification is sought, under this Agreement.

“JAMS” has the meaning set forth in Section 7.4(f).

“Knowledge of Seller” means the actual knowledge of such matter of any officer
of Seller set forth on Schedule 1.5. Any such individual will be deemed to have
knowledge of a particular fact, circumstance, event or other matter if (i) such
individual has actual knowledge of such fact, circumstance, event or other
matter; (ii) such fact, circumstance, event or other matter is reflected in one
or more documents (whether written or electronic, including e-mails sent to or
by such individual) in, or that have been in, such individual’s possession,
including personal files of such person; or (iii) such fact, circumstance, event
or other matter is explicitly set forth in one or more documents (whether
written or electronic) contained in books and records of Seller that, based upon
the historical practices of Seller, would be reviewed by a person who has the
duties and responsibilities of such individual in the customary performance of
such duties and responsibilities.

“Lease and Agreement Amendment” means the Lease and Agreement Amendments for
each lease or occupancy agreement with respect to each Subject Location
containing substantially the terms set forth on the Exhibit E.

“Liability” means all liabilities, indebtedness, obligations (contractual,
statutory or otherwise) or guarantees of any kind, character or description,
whether known or unknown, absolute or contingent, accrued or unaccrued, disputed
or undisputed, liquidated or unliquidated, secured or unsecured, joint or
several, due or yet to become due, vested or unvested, executory, determined,
determinable or otherwise.

 

6

--------------------------------------------------------------------------------

“Loss” means any loss, demand, action, cause of action, claim, diminution in
value, assessment, damage, fine, penalty, lost profits, Liability, cost
(including but not limited to costs of cleanup, containment or other
remediation), expense or other losses, including without limitation, interest,
penalties and reasonable attorneys’ and other professional fees and expenses
incurred in the investigation, prosecution, defense or settlement thereof
(including, without limitation, interest which may be imposed in connection
therewith, court costs, litigation expenses, costs of investigation and
reasonable attorneys’, accounting and expert fees).

“Material Adverse Effect” means any event, circumstance, change or effect that
individually or in the aggregate has or is reasonably likely to have a material
adverse effect on (i) the physical condition, use or operation of the
Acquisition Assets taken as a whole, (ii) the ability of Buyer to operate the
Subject Locations as Buyer’s coffee stores in a manner consistent with Seller’s
and Coffee People’s past practice in operating Seller’s and Coffee People’s
coffee stores, (iii) the Assumed Liabilities, or (iv) the ability of Seller to
perform its obligations under this Agreement or to consummate transactions
contemplated by this Agreement; provided, however, that “Material Adverse
Effect” shall not include the effect of any circumstance, change, development,
event or state of facts arising out of or attributable to any of the following,
either alone or in combination: (1) the markets in which Seller and Coffee
People operate generally; (2) general economic or political conditions
(including those affecting the securities markets); (3) the public announcement
of this Agreement or of the consummation of the transactions contemplated by
this Agreement; (4) acts of war (whether or not declared), sabotage or terrorism
or military actions or the escalation thereof; or (5) any changes in Applicable
Laws, regulations or accounting rules.

“Maximum Aggregate Purchase Price” has the meaning set forth in Section 2.5.

“Negative Value Subject Location” has the meaning set forth in Section 2.5.

“Non-Competition Amount” has the meaning set forth in Section 2.5.

“Occupational Safety and Health Law” means any legal requirement designed to
provide safe and healthful working conditions and to reduce occupational safety
and health hazards, including the Occupational Safety and Health Act, and any
program, whether governmental or private (such as those promulgated or sponsored
by industry associations and insurance companies), designed to provide safe and
healthful working conditions.

“Payment Obligations” has the meaning set forth in Section 5.12.

“Permits” means any license, certificate, permit, approval, franchise or
registration issued by a Governmental Entity.

“Permits and Approvals” has the meaning set forth in Section 5.5.

“Permitted Liens” mean (i) statutory liens for current Taxes or assessments not
yet due and payable, (ii) terms and conditions of the Assumed Leases and
Occupancy Agreements, as amended by the Lease and Agreement Amendments,
(iii) items specified on Schedule 2.3, (iv) the rights of the parties pursuant
to this Agreement, the Transaction Documents and any other instruments to be
delivered hereunder, (v) standard exceptions listed on any Title Policy

 

7

--------------------------------------------------------------------------------

procured and delivered to Buyer, and (vi) any other Encumbrances related to the
Acquisition Assets that are specifically and fully set forth in a schedule or
exhibit attached to this Agreement identifying each Acquisition Asset to which
the Encumbrance relates, if and to the extent such Encumbrances are accepted by
Buyer at or prior to Transfer to Buyer; provided, that, without limiting the
specificity of the foregoing, the term Permitted Liens will not include any
materialmen’s, mechanic’s or other similar statutory liens applicable to the
Subject Locations.

“Person” means an individual, partnership (general or limited), corporation,
business trust, limited liability company, limited liability partnership, joint
stock company, trust, unincorporated association, joint venture or other entity
or a governmental authority.

“Phase I” has the meaning set forth in Section 5.14(a).

“Post-Closing Transfer” has the meaning set forth in Section 6.5.

“Prepaid Items” has the meaning set forth in Section 2.1(c).

“Purchase Price” has the meaning set forth in Section 2.6.

“Release” means any release, spill, emission, leaking, pumping, pouring,
dumping, emptying, injection, deposit, disposal, discharge, dispersal, leaching
or migration on or into the Environment or into or out of any property.

“Release Date” has the meaning set forth in Section 7.1.

“Remaining Subject Locations” has the meaning set forth in Section 6.5.

“Representative” means any officer, director, principal, attorney, agent,
employee or other representative.

“Returns” has the meaning set forth in Section 3.8.

“Seller” means Diedrich Coffee, Inc., a Delaware corporation.

“Seller Group” has the meaning set forth in Section 7.3.

“Seller’s Cap” has the meaning set forth in Section 7.4(a).

“Stockholder Meeting” has the meaning set forth in Section 5.15.

“Subject Locations” has the meaning set forth in the RECITAL.

“Superior Offer” has the meaning set forth in Section 5.2(d).

“Tax” means any and all federal, state, local, foreign or other tax, levy,
impost, fee, assessment or other government charge, including without limitation
(i) income, estimated income, business, occupation, franchise, property,
payroll, personal property, real property, sales, value added, transfer, use,
excise, employment, commercial rent, occupancy, franchise or withholding taxes
and (ii) any premium, interest, penalties and additions in connection therewith.

 

8

--------------------------------------------------------------------------------

“Termination Date” has the meaning set forth in Section 6.4.

“Third Party Claim” has the meaning set forth in Section 7.4(d).

“Threat of Release” means a reasonable likelihood of a Release that may require
action in order to prevent or mitigate damage to the Environment that may result
from such Release.

“Threshold” has the meaning set forth in Section 7.4(a).

“Title Company” means the title company that will issue the Title Policies.

“Title Policies” means a leasehold policy of title insurance on the standard
form issued in the State of Oregon with respect to each of the Ground Leases,
each in (i) amounts reasonably acceptable to Buyer, and (ii) showing only
Permitted Liens.

“Transaction Documents” means the Escrow Agreement, Bill of Sale and the
Assignment and Assumption Agreement.

“Transfer” has the meaning set forth in Section 2.1.

“Transfer Premium Subject Location” means a Subject Location for which the
applicable lease requires the payment to the landlord of any consideration, or
portion thereof, that Seller is entitled to receive from Buyer pursuant to this
Agreement.

“Transfer Proposal” means any offer, proposal, inquiry or indication of interest
(other than an offer, proposal, inquiry or indication of interest by Buyer)
contemplating or otherwise relating to any acquisition of any of the Acquisition
Assets, any acquisition of Seller that would include any of the Acquisition
Assets or any merger or consolidation with or involving Seller that would
include any of the Acquisition Assets.

ARTICLE 2

THE TRANSACTION

2.1 Acquisition Assets. At the Closing (or a Post-Closing Transfer in accordance
with the terms of this Agreement), and subject to Seller’s ability to retain
certain Subject Locations in accordance with Section 2.5, Seller will (and will
cause Coffee People to) sell, assign, convey, transfer and deliver (“Transfer”)
to Buyer all of Seller’s and Coffee People’s right, title and interest in the
following assets (the “Acquisition Assets”):

(a) the leases and occupancy agreements listed on Schedule 2.1(a) (the “Assumed
Leases and Occupancy Agreements”);

(b) all fixtures, alterations or modifications that are attached to the Subject
Locations and owned by Seller, except for photographs, pastry cases, menu
boards, signage and any items that contain the Coffee People and Diedrich Coffee
trademarks or tradenames (“Improvements”);

 

9

--------------------------------------------------------------------------------

(c) all credits, security deposits, prepaid expenses and prepaid items related
to the Assumed Leases and Occupancy Agreements or otherwise relating to the
operation of the Subject Locations, including but not limited to those listed on
Schedule 2.1(c) (“Prepaid Items”);

(d) (x) all sinks, freezers (including walk-in freezers) and refrigerators,
(y) with respect to store number 1116, identified on row 27 of Schedule 1.0 (the
San Juan Capistrano store), the custom kitchen hood attached to the wall of such
Subject Location, and (z) all other equipment specifically set forth on Schedule
2.1(d) (“F&E”);

(e) to the extent assignable to Buyer, all Permits (excluding liquor licenses)
specifically listed on Schedule 2.1(e) (“Assumed Permits”); and

(f) any buildings, structures or other improvements located at or on the Ground
Lease Subject Locations (the “Ground Lease Improvements”).

2.2 Assets Not Being Acquired. Other than the assets specifically set forth in
Section 2.1, no other assets are to be sold and delivered to Buyer (the
“Excluded Assets”). By way of example and not in limitation of the foregoing,
the parties hereto expressly agree that the Excluded Assets include:

(a) any rights or assets related to Seller’s or Seller’s Affiliates’ franchise
business, or operations or any other lines of business that do not involve the
operation of the Subject Locations (collectively, the “Excluded Business”);

(b) Seller’s or Coffee People’s intellectual property, intellectual property
rights and other intangible assets, including, without limitation, Seller’s or
Coffee People’s trade names, trademarks, logos, patents, copyrights, trade
secrets and business methods;

(c) any customer, supplier and service agreements (the “Excluded Agreements”);
and

(d) all claims for refund of Taxes and other governmental charges of whatever
nature paid by Seller or Coffee People related to the Acquisition Assets for
periods prior to the date at which such Acquisition Assets were Transferred to
Buyer, except amounts paid for Assumed Permits.

2.3 Assumed Liabilities. At the Closing or a Post-Closing Transfer (as
applicable, the “Assumption Time”), Buyer will assume only the following
Liabilities of Seller and Coffee People (the “Assumed Liabilities”):

(a) all Liabilities under the Assumed Leases and Occupancy Agreements, as
amended by the Lease and Agreement Amendments, and under the Assumed Permits, in
each case only to the extent (i) related to Subject Locations actually
Transferred to Buyer at the Closing or the applicable Post-Closing Transfer and
(ii) related to or arising out of events or circumstances occurring after the
applicable Assumption Time (but excluding any Liabilities under any Assumed
Lease or Occupancy Agreement which are not set forth therein and that become due
after the applicable Assumption Time but arise out of or are based on or
calculated on the basis of events or circumstances occurring prior to the
applicable Assumption Time);

 

10

--------------------------------------------------------------------------------

(b) all Liabilities accruing, arising out of, related to or resulting from the
ownership, use, operations or maintenance of the Improvements, F&E and Ground
Lease Improvements after the applicable Assumption Time;

(c) all Liabilities for Taxes relating to the ownership or operation of the
Acquisition Assets after the applicable Assumption Time; and

(d) the items specified on Schedule 2.3, to the extent they relate to the
Acquisition Assets actually acquired by Buyer at the Closing or the applicable
Post-Closing Transfer.

2.4 Excluded Liabilities. Other than the Assumed Liabilities, Buyer will not
assume any Liability relating to or arising out of or in connection with the
Excluded Business, or any other Liabilities of Seller or Coffee People,
including without limitation (the “Excluded Liabilities”):

(a) any Liability relating to or arising out of or in connection with the
Excluded Assets; or

(b) any Liability relating to or arising out of or in connection with the
Excluded Agreements, including but not limited to any termination, cancellation
or similar fees, or other costs or damages, associated with Seller’s
cancellation or termination of the Excluded Agreements or other services at the
Subject Locations in accordance with Section 5.1(d).

2.5 Determination of Subject Locations. Upon execution of this Agreement,
Schedule 1.0 will contain an initial list of all Subject Locations, and the
Purchase Price applicable to the Transfer of each Subject Location pursuant to
this Agreement. Subject to the other provisions of this Section 2.5, prior to
the Closing or a Post-Closing Transfer, Buyer and Seller may mutually agree to
delete Subject Locations from Schedule 1.0 (and appropriately adjust the Maximum
Aggregate Purchase Price), provided, that Buyer may elect to delete a Subject
Location from Schedule 1.0 in the event that, prior to the applicable Assumption
Time such Subject Location is adversely affected by fire, flood, earthquake or
other force majeure that causes the physical condition of such Subject Location
to be substantially different from the condition of such Subject Location prior
to such event. The aggregate Purchase Price for (i) all Subject Locations not
designated on Schedule 1.0 as having a negative value (each, a “Negative Value
Subject Location”), prior to any deletions or adjustments pursuant to this
Agreement, is $13,400,000 and (ii) the non-competition covenant set forth in
Section 5.8(a) is $120,000 (the “Non-Competition Amount”), for total maximum
aggregate purchase consideration of $13,520,000 (the “Maximum Aggregate Purchase
Price”), provided, that the Purchase Price applicable to a Subject Location
actually Transferred to Buyer will be increased by the amount of any Prepaid
Items set forth on Schedule 2.1(c) attributable to such Subject Location, and
provided, further, that Seller may elect to retain and not Transfer, at any time
prior to the Termination Date, any Subject Locations listed on Schedule 1.0
(i) designated under the column entitled “Transfer Premium Subject Location,”
where the landlord does not waive or amend the

 

11

--------------------------------------------------------------------------------

payment to the landlord of any consideration, or portion thereof, that Seller is
entitled to receive from Buyer pursuant to this Agreement and neither Seller nor
Buyer agrees to make such payment to the landlord, (ii) that is a Negative Value
Subject Location, or (iii) if the applicable landlord, in exchange for providing
a Consent to Assignment of Lease or a Lease and Agreement Amendment, requests
any payment from Seller or Buyer (other than payments in respect of a Transfer
Premium Subject Location, which are covered by (i) above) and neither Seller nor
Buyer agrees to settle such payment with the applicable landlord. If Seller
elects to retain any Subject Location that is not a Negative Value Subject
Location pursuant to this Section 2.5, then the Maximum Aggregate Purchase Price
will be decreased by the amount of value allocated to it in Schedule 1.0. If
Seller elects to retain any Negative Value Subject Location, such election will
have no effect on the Maximum Aggregate Purchase Price. If Seller elects to
Transfer any Negative Value Subject Location, such Transfer will have the effect
of decreasing the Maximum Aggregate Purchase Price in accordance with the
negative value attributed to such Negative Value Subject Location in Schedule
1.0. For the avoidance of doubt and by way of example only, if Seller elects to
Transfer to Buyer store number 1103 (the Costa Mesa store, having a value of
($85,000) (a negative value)) listed on Schedule 1.0 at the Closing, the
aggregate Purchase Price payable for all Subject Locations transferred to Buyer
at the Closing will be reduced by $85,000. Buyer and Seller acknowledge and
agree that, notwithstanding any other provision of this Agreement, no Negative
Value Subject Location will be Transferred to Buyer unless and until a number of
Subject Locations equal to the difference between (x) 25 and (y) the number of
Subject Locations designated on Schedule 1.0 as Transfer Premium Subject
Locations, have been Transferred to Buyer.

2.6 Purchase Price. At the Closing and at each Post-Closing Transfer, for each
Subject Location Transferred at the applicable Assumption Time, Buyer will
(i) pay to Seller the amount set forth on Schedule 1.0 opposite each Subject
Location (the amount set forth on Schedule 1.0 with respect to each Subject
Location, the “Purchase Price”), plus an amount equal to the Prepaid Items
attributable to such Subject Location that is Transferred to Buyer and less the
applicable portion of the Escrow Fund to be deposited with the Escrow Agent at
the Closing or the Post-Closing Transfer and (ii) assume the Assumed Liabilities
relating to each Subject Location being Transferred at the Closing or a
Post-Closing Transfer. At the Closing, Buyer will also pay the Non-Competition
Amount (less the portion of the Non-Competition Amount contributed to the Escrow
Fund) to Seller. All payments to Seller at the Closing and any Post-Closing
Transfer will be paid in accordance with wire transfer instructions provided in
writing by Seller at least six (6) Business Days prior to the Closing or the
Post-Closing Transfer, as applicable.

2.7 Escrow. At the Closing and thereafter until the Release Date (the “Escrow
Period”), subject to the other provisions of this Agreement and the terms of the
Escrow Agreement attached hereto as Exhibit A (the “Escrow Agreement”), 10% of
the total Purchase Price paid to Seller with respect to Subject Locations
(including any Prepaid Items and the Non-Competition Amount) transferred to
Buyer at the Closing and any Post-Closing Transfer (the “Escrow Fund”) will be
deposited with and held in escrow by Greater Bay Trust Company (or other
institution mutually selected by Buyer and Seller) as escrow agent (the “Escrow
Agent”) to secure the accuracy and full and timely performance of Seller’s
representations, warranties, covenants and agreements, and Seller’s other
indemnity obligations under this Agreement. Seller’s indemnity obligations
pursuant to this Agreement will be satisfied first from the Escrow

 

12

--------------------------------------------------------------------------------

Fund to the extent the Escrow Fund is sufficient to do so, and thereafter Buyer
may seek recovery from Seller directly. Buyer and Seller will share equally in
the payment of any fees to the Escrow Agent for the maintenance and
administration of the Escrow Fund.

2.8 Employees.

(a) Subject to the Closing, Buyer will offer employment to all hourly
non-management (below assistant store manager level) store employees of Seller
or Coffee People (as applicable) at each Subject Location actually Transferred
to Buyer who are in good standing, without conducting employment interviews.
Employees in “good standing” are those whose most recent performance evaluations
by Seller or Coffee People, as applicable, indicate performance at a
satisfactory level or higher, and who are not former employees of Buyer
identified on Buyer’s internal records as ineligible to be rehired by Buyer.
Buyer and Seller will mutually agree on a plan for Buyer to interview employees
at the assistant store manager level and higher. Buyer is not obligated to hire
any such management employees of Seller or Coffee People. Within ten
(10) Business Days after execution of this Agreement, Buyer and Seller will
mutually agree on a plan to facilitate informational sessions for Seller’s or
Coffee People’s employees who currently work at the Subject Locations. The
content of any such informational sessions will be at Buyer’s discretion, and at
locations and times to be determined by Buyer. Seller is and will remain solely
responsible for any pension, severance, bonus, overtime pay and other
compensation, benefits (including but not limited to workers’ compensation
benefits), perquisites or payments incurred in connection with Seller’s or
Coffee People’s termination of any of its employees, whether or not they are
re-hired by Buyer, including but not limited to accrued vacation, sick time,
sick pay, personal leave and compensatory time, none of which will be assumed by
Buyer.

(b) Seller will be responsible for any notice required under or obligations
and/or liabilities associated with the Worker Adjustment and Retraining
Notification Act (29 U.S.C. §§ 2101-2109), and any Applicable Law related to any
closings, mass layoff, relocation or severance associated with Seller’s or
Coffee People’s employees, which takes place or arises on or before the Closing
or the applicable Post-Closing Transfer, as applicable.

(c) Seller will be responsible for any group health plan continuation or
conversion coverage required under Section 4980B of the Code, Part 6 of Title I
of ERISA and the regulations thereunder, or Applicable Laws with respect to
Seller’s or Coffee People’s employees due to a qualifying event occurring on or
before the Closing or a Post-Closing Transfer, as applicable.

2.9 Closing.

(a) The closing (the “Closing”) of the transactions contemplated by this
Agreement will be held not later than the Termination Date, except as provided
in this Section 2.9 and shall take place ninety (90) days after the date of this
Agreement (or if such date falls on a non-Business Day, the next Business Day)
provided that the conditions to Closing set forth in Sections 6.1, 6.2 and 6.3
have been satisfied or waived, or on such other date that the parties mutually
agree, provided, further, that, if the Closing is to occur more than ninety
(90) days after the date of this Agreement (or if such date falls on a
non-Business Day, then the next

 

13

--------------------------------------------------------------------------------

Business Day), Buyer must be in compliance with Section 5.13(b), as determined
by Seller in its reasonable discretion (the “Closing Date”). The Closing and
each Post-Closing Transfer will be held at the offices of DLA Piper US LLP, 701
5th Avenue, Suite 7000, Seattle, WA 98104. Post-Closing Transfers may occur in
accordance with Section 6.5 hereof.

(b) Buyer may give written notice to Seller if Buyer deems the conditions to the
Closing set forth in Sections 6.3(b), 6.3(d) and 6.3(f) to have been satisfied
or waived, or to be within Seller’s or Buyer’s control to satisfy at any time,
(such notice, the “Pre-Closing Notification”). Delivery of the Pre-Closing
Notification by Buyer, and Seller’s receipt of such Pre-Closing Notification,
serves a notice purpose only and will not constitute an acknowledgement by Buyer
or Seller or give rise to any inference or estoppel on the part of Buyer or
Seller that any or all of the other Closing conditions have been satisfied in
accordance with this Agreement. Buyer and Seller will exercise commercially
reasonable efforts to close the Transfers contemplated therein within ten
(10) Business Days after Buyer gives such Pre-Closing Notification, if ever,
subject to the provisions of Article 6 of this Agreement, provided, that the
obligation to exercise commercially reasonable efforts will not apply with
respect to the Negative Value Subject Locations.

(c) At the Closing and at each Post-Closing Transfer, in addition to the
documents to be delivered to Buyer pursuant to Article 6, Seller shall deliver
or cause to be delivered to Buyer: (i) physical possession of the F&E in
connection with the Subject Locations being Transferred; (ii) executed
assignments or transfers of the Assumed Permits; (iii) an executed Bill of Sale,
in the form attached as Exhibit B; and (iv) an executed Assignment and
Assumption Agreement, in the form attached as Exhibit C.

(d) At the Closing and at each Post-Closing Transfer, in addition to the
documents to be delivered to Seller pursuant to Article 6, Buyer shall deliver
or cause to be delivered to Seller (i) the Purchase Price applicable to the
Subject Locations being Transferred minus the amount of the Escrow Fund, by wire
transfer of immediately available funds, and (ii) the executed Assignment and
Assumption Agreement. In addition, Buyer shall deliver the Escrow Fund to the
Escrow Agent at Closing.

ARTICLE 3

REPRESENTATIONS AND WARRANTIES OF SELLER

Representations of Seller. Except as otherwise set forth in the Schedule of
Exceptions attached hereto as Schedule 3.0, the following representations and
warranties are made by Seller as set forth below as of the date of this
Agreement, and as of the Closing and each Post-Closing Transfer. The paragraph
numbers in the Schedule of Exceptions will correspond to the paragraph numbers
in this Agreement; provided, however, that any information disclosed therein
under any Schedule number shall be deemed to be disclosed and incorporated into
any other paragraph or section number in the Schedule of Exceptions where such
disclosure would be appropriate and where the purpose of disclosure in another
section is readily apparent on the face of the disclosure.

3.1 Organization and Qualification. Seller is a corporation duly organized,
validly existing, and in good standing under the laws of the State of Delaware,
and has the requisite

 

14

--------------------------------------------------------------------------------

corporate power and authority to own and operate its properties and to carry on
its business as now conducted. Seller is duly qualified to do business and is in
good standing in California and Oregon. Coffee People is a wholly-owned
subsidiary of Seller, all of the officers and directors of Coffee People are
officers of Seller. Coffee People is a corporation duly organized, validly
existing, and in good standing under the laws of the State of Oregon, and has
the requisite corporate power and authority to own and operate its properties
and to carry on its business as now conducted. Coffee People is duly qualified
to do business and is in good standing in Oregon.

3.2 Authority Relative to Agreements. Subject to receiving stockholder approval,
Seller has the requisite corporate power and authority to enter into this
Agreement, the Escrow Agreement and all other agreements in connection with the
transactions contemplated hereby to which Seller is or will be a party, and has
the requisite corporate power and authority to carry out its obligations
hereunder and thereunder. The execution and delivery of this Agreement and such
other agreements by Seller and the consummation by Seller of such transactions
have been duly authorized by the Board of Directors of Seller and by all
required board and shareholder action of Coffee People. This Agreement has been
duly executed and delivered by Seller, and, after receiving stockholder
approval, will constitute a valid and binding obligation of Seller, enforceable
against it in accordance with its terms, except as the enforceability thereof
may be limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to the enforcement of creditors’ rights generally and by
general principles of equity.

3.3 No Conflicts. Seller is not subject to, or obligated under, any provision of
(i) Seller’s certificate of incorporation or bylaws, (ii) any agreement,
arrangement, or understanding to which Seller is a party or by which Seller or
any of its properties or assets is bound or affected, (iii) any Permit, or
(iv) any Applicable Law, that would be breached or violated, or in respect of
which a right of termination or acceleration would arise, or pursuant to which
any Encumbrance on any of the Acquisition Assets would be created, by Seller’s
execution, delivery, and performance of this Agreement and the consummation by
Seller of the transactions contemplated hereby.

3.4 No Consents. Except as will be delivered at or prior to the Closing or the
relevant Post-Closing Transfer, as applicable, and except as described on
Schedule 6.2, no authorization, consent, or approval of, or filing with, any
governmental body, court, other authority or third party is necessary on the
part of Seller for the consummation by Seller of the transactions contemplated
by this Agreement.

3.5 Compliance with Laws; Permits. Except with respect to tax matters (which are
addressed in Section 3.8), environmental matters (which are addressed in
Section 3.11) and labor and employment matters (which are addressed in
Section 3.15) Seller and Coffee People and their respective Representatives have
complied in all material respects with all Applicable Laws related to the
Acquisition Assets and the Assumed Liabilities, and there are no claims,
investigations or proceedings pending, or to the Knowledge of Seller reasonably
expected or threatened, against Seller or Coffee People alleging a violation of
any Applicable Law and Seller has no basis to expect any such claim,
investigation or proceeding. Each of Seller and Coffee People holds and is in
compliance in all material respects with all Permits required for the conduct of
its business at the Subject Locations.

 

15

--------------------------------------------------------------------------------

3.6 Real Estate Leases/Occupancy Agreements/Ground Leases.

(a) Schedule 2.1(a) of the Agreement sets forth a list of the Assumed Leases and
Occupancy Agreements, in each case, setting forth (i) the parties thereof and
the date and term of each of the leases and occupancy agreements, (ii) the
street address of each property covered thereby, and (iii) the aggregate amount
of rent, deferred rent, CAM, taxes and insurance paid to the applicable landlord
during the thirteen (13) fiscal periods ending July 26, 2006 under such lease or
occupancy agreement (each fiscal period is four (4) weeks). The Assumed Leases
and Occupancy Agreements are in full force and effect, Seller or Coffee People
has a valid and existing leasehold or occupancy interest under each such lease
or occupancy agreement for the term set forth therein, and a valid right to
occupy the Subject Location for each such lease or occupancy agreement in the
manner described in such lease or occupancy agreement for the term set forth
therein, and neither Seller nor Coffee People nor to the Knowledge of Seller any
other party thereto is in default or breach under any such leases or occupancy
agreements. To the Knowledge of Seller no event has occurred that, with the
passage of time or the giving of notice or both, would cause a breach of or
default under any of such leases or occupancy agreements. During the prior 12
months, neither Seller nor Coffee People has asserted any written claim against
the other party under any Assumed Lease and Occupancy Agreement.

(b) Neither Seller nor Coffee People has received any written notice of any
condemnation proceeding with respect to any of the Subject Locations.

(c) Other than the leasehold interests, neither Seller nor Coffee People has any
right, title or interest in or to any buildings or structures at the Subject
Locations, except for the Ground Lease Improvements, and no such buildings or
structures are under construction.

(d) To the Knowledge of Seller, the Assumed Leases and Occupancy Agreements are
assignable to Buyer without payment of any fee that is not set forth in the
Assumed Leases and Occupancy Agreements.

(e) Seller or Coffee People has fee title to the Ground Lease Improvements.

3.7 Good Title to the Acquisition Assets; Condition of F&E. Seller or Coffee
People owns the Acquisition Assets free and clear of all Encumbrances other than
Permitted Liens. Seller or Coffee People leases the Subject Locations under
leases and occupancy agreements as previously delivered to Buyer. All F&E
Transferred to Buyer at Closing and any Post-Closing Transfer is in good working
order and has no material deferred maintenance obligations.

3.8 Tax Matters.

(a) Either Seller or Coffee People has prepared and timely filed all federal,
foreign, state, county and local income, excise, property, sales,
employment-related wages and benefits, and other Tax returns, estimates,
information statements and reports (“Returns”) required to be filed by Seller or
Coffee People or in respect of the Acquisition Assets for any period ending on
or before the Closing, and all such returns are true, complete and correct and
have been completed in accordance with applicable law.

 

15

--------------------------------------------------------------------------------

(b) All Taxes due and payable by Seller have been paid and all Taxes due and
payable by Coffee People with respect to the Acquisition Assets have been paid.

(c) There is no tax deficiency outstanding and neither Seller nor Coffee People
has waived any statute of limitations in respect of Taxes or agreed to any
extension of time with respect to a Tax assessment or deficiency related to the
Acquisition Assets.

(d) Neither Seller nor Coffee People has received notice of any unresolved
questions or claims concerning its Tax liability related to the Acquisition
Assets.

3.9 No Restrictions on Business Activities. There is no agreement (non-compete
or otherwise), commitment, judgment, injunction, order or decree to which Seller
or Coffee People is a party or otherwise binding on Seller, Coffee People or the
Acquisition Assets that has or reasonably could be expected to have the effect
of prohibiting or impairing the Buyer’s ability to own and operate the
Acquisition Assets in a similar manner as presently conducted by Seller and
Coffee People.

3.10 Litigation. There are no claims, suits, actions, arbitrations,
investigations or proceedings pending or, to the Knowledge of Seller, threatened
against Seller or Coffee People that could reasonably be expected to have any
adverse effect upon the Acquisition Assets. Neither Seller nor Coffee People is
subject to any court, governmental or administrative order, writ, injunction, or
decree applicable to the Acquisition Assets. To the Knowledge of Seller, there
are no facts or conditions that have had or, if continued, will result in, a
default or claim of default under any Assumed Lease and Occupancy Agreement.

3.11 Environmental Matters.

(a) Each of Seller and Coffee People is, and at all times has been, in full
compliance with, and has not been and is not in violation of or liable under,
any Environmental Law with respect to the Acquisition Assets or Assumed
Liabilities. Neither Seller nor Coffee People has, and, to the Knowledge of
Seller, no other person or entity for whose conduct either Seller or Coffee
People is or may be held to be responsible has, received, any actual or, to the
Knowledge of Seller, threatened, order, notice or other communication of any
actual or potential violation or failure to comply with any Environmental Law,
or of any actual or threatened obligation to undertake or bear the cost of any
Environmental, Health and Safety Liabilities with respect to any Acquisition
Asset or Assumed Liability.

(b) There are no pending or, to the Knowledge of Seller, threatened claims,
Encumbrances, civil, criminal or administrative actions, proceedings,
directives, inquiries, investigations or other restrictions of any nature
resulting from any Environmental, Health and Safety Liabilities or arising under
or pursuant to any Environmental Law with respect to or affecting any
Acquisition Asset or Assumed Liability.

(c) Neither Seller nor Coffee People, nor to the Knowledge of Seller, any person
or entity for whose conduct either Seller or Coffee People is or may be held
responsible, has received and, to the Knowledge of Seller, there is no basis to
expect, any citation, directive, inquiry, notice, order, summons, warning or
other communication that relates to Hazardous Activities, Hazardous Materials,
or any alleged, actual, or potential violation or failure to comply with any
Environmental Law with respect to any Acquisition Asset or Assumed Liability.

 

16

--------------------------------------------------------------------------------

(d) Neither Seller nor Coffee People, nor any of their respective
Representatives, nor, to the Knowledge of Seller, any person or entity for whose
conduct Seller or Coffee People is or may be held responsible, has permitted or
conducted any Hazardous Activity with respect to any Subject Location or
adjoining property or Acquisition Assets (whether real, personal or mixed)
except in full compliance with all applicable Environmental Laws, and neither
Seller, Coffee People nor any of their respective Representatives, nor, to the
Knowledge of Seller, any person or entity for whose conduct Seller or Coffee
People is or may be held responsible, has caused (by act or omission) there to
be any Hazardous Materials (whether or not contained in barrels, aboveground or
underground storage tanks or otherwise) present on or in the Environment at any
Subject Location or adjoining property, or deposited or located in land, water,
sumps or any other part of the Subject Locations or such adjoining property, or
incorporated into any structure therein or thereon, except in full compliance
with all applicable Environmental Laws and as could not reasonably be expected
to have a Material Adverse Effect. There has been no Release by Seller or Coffee
People or any Threat of Release by Seller or Coffee People, of any Hazardous
Materials at or from any Subject Location or adjoining property or Acquisition
Asset (whether real, personal or mixed) during the tenancy of Seller or Coffee
People, as applicable. Neither Seller nor Coffee People has received any written
notice of any such Release or Threat of Release by any other person or entity at
or from any Subject Location or adjoining property or Acquisition Asset.

(e) Seller has delivered to Buyer true, complete and correct copies and results
of any reports, studies, analyses, tests or monitoring possessed or initiated by
Seller or Coffee People pertaining to Hazardous Materials or Hazardous
Activities in, on or under the Subject Locations, or concerning compliance, by
Seller or Coffee People with Environmental Laws with respect to the Subject
Locations.

3.12 Brokers’ Fees. No broker, finder or other person or entity is entitled to
any brokerage commissions, finders’ fees or similar compensation in connection
with the transactions contemplated by this Agreement based on any actions of
Seller.

3.13 Fraudulent Transfer. The transfer of the Acquisition Assets to Buyer in
accordance with the terms of this Agreement does not constitute a fraudulent
transfer or conveyance with respect to any third party under Applicable Laws.
The payment of the Purchase Price in accordance with the terms of this Agreement
for the Acquisition Assets constitutes the payment of no less than a reasonably
equivalent value for the Acquisition Assets. Seller acknowledges and agrees that
the Purchase Price was the result of arms-length negotiations between Buyer and
Seller.

3.14 Insurance. Seller and Coffee People (to the extent not provided by Seller)
have maintained insurance coverage with respect to the Acquisition Assets in
accordance with normal industry practice for similar businesses (taking into
account the cost and availability of such insurance).

 

17

--------------------------------------------------------------------------------

3.15 Employment Matters.

(a) None of Seller, any subsidiary or any ERISA Affiliate has ever maintained,
established, sponsored, participated in, contributed to, or is obligated to
contribute to, or otherwise incurred any obligation or liability (including,
without limitation, any contingent liability) under any (i) “multiemployer plan”
(as defined in Section 3(37) of ERISA) or to any “pension plan” (as defined in
Section 3(2) of ERISA) subject to Title IV of ERISA or Section 412 of the Code
or (ii) any “welfare plan” (as defined in Section 3(1) of ERISA) that promises
or provides retiree medical or other retiree welfare benefits to any person.
None of Seller, any subsidiary or any ERISA Affiliate has any actual or
potential withdrawal liability (including, without limitation, any contingent
liability) for any complete or partial withdrawal (as defined in Sections 4203
and 4205 of ERISA) from any multiemployer plan.

(b) With respect to each “welfare plan” (as defined in Section 3(1) of ERISA)
sponsored, maintained, contributed to, or required to be contributed to by
Seller, any subsidiary of Seller, Seller and each of its United States
subsidiaries have complied with the applicable health care continuation and
notice provisions of the Consolidated Omnibus Budget Reconciliation Act of 1985
(“COBRA”) and the regulations thereunder or any state law governing health care
coverage extension or continuation, except to the extent that such failure to
comply could not reasonably be expected to have a Material Adverse Effect.
Neither Seller nor Coffee People has any material unsatisfied obligations to any
employees, former employees, or qualified beneficiaries pursuant to COBRA or any
state law governing health care coverage extension or continuation.

(c) None of Seller’s employee benefit plans will be assumed by Buyer as a matter
of law or otherwise in connection with this Agreement or the transactions
contemplated hereby.

(d) With respect to all employees of Seller or Coffee People who work at any
Subject Location: (i) Seller is not a party to any collective bargaining or
union agreement, and, to the Knowledge of Seller, there have been no efforts at
any Subject Location to organize or the employees at such location into a union;
and (ii) to the Knowledge of Seller, there are no discussions, negotiations,
demands, or proposals that are pending or that have been conducted or made with
or by any labor union or association.

(e) Except as set forth in the Schedule of Exceptions, each of Seller’s and
Coffee People’s employees is in “good standing,” as defined in Section 2.8(a)
(assuming none of such employees is a former employee of Buyer identified on
Buyer’s internal records as ineligible to be rehired by Buyer).

3.16 Board Approval. The board of directors of Seller has (i) approved this
Agreement and the transactions contemplated hereby and (ii) recommended that the
stockholders of Seller adopt and approve this Agreement and the transactions
contemplated hereby.

 

18

--------------------------------------------------------------------------------

ARTICLE 4

REPRESENTATIONS AND WARRANTIES OF BUYER

Representations of Buyer. The following representations and warranties are made
by Buyer as set forth below as of the date of this Agreement and the Closing:

4.1 Organization and Qualification. Buyer is a corporation duly organized,
validly existing, and in good standing under the laws of the State of
Washington, and has the requisite corporate power and authority to own and
operate its properties and to carry on its business as now conducted. Buyer is
duly qualified to do business and is in good standing in all jurisdictions where
the failure to be so qualified would have a material adverse effect on Buyer.

4.2 Authority Relative to Agreements. Buyer has the requisite corporate power
and authority to enter into this Agreement, the Escrow Agreement and all other
agreements in connection with the transactions contemplated hereby to which
Buyer is or will be a party, and has the requisite corporate power and authority
to carry out its obligations hereunder and thereunder. The execution and
delivery of this Agreement and such other agreements by Buyer and the
consummation by Buyer of such transactions have been duly approved by all
necessary corporate action on the part of Buyer, and no other corporate
proceedings on the part of Buyer are necessary to authorize this Agreement and
such transactions. This Agreement has been duly executed and delivered by Buyer
and constitutes a valid and binding obligation of Buyer, enforceable against it
in accordance with its terms, except as the enforceability thereof may be
limited by bankruptcy, insolvency, reorganization, moratorium or other similar
laws relating to the enforcement of creditors’ rights generally and by general
principles of equity.

4.3 No Conflicts. Buyer is not subject to, or obligated under, any provision of
(i) its articles of incorporation or bylaws, (ii) any material agreement,
arrangement, or understanding to which Buyer is a party or by which Buyer or any
of its properties or assets is bound or affected, (iii) any material Permit, or
(iv) any law, regulation, order, judgment, or decree that would be breached or
violated in a material manner, or in respect of which a right of termination or
acceleration would arise, by Buyer’s execution, delivery, and performance of
this Agreement and the consummation by Buyer of the transactions contemplated
hereby.

4.4 Access to Information. Buyer acknowledges that Buyer has had the opportunity
to conduct due diligence with respect to the Acquisition Assets and to inspect
the Acquisition Assets. Buyer has been afforded the opportunity to review all
information provided to it by Seller and has had the opportunity to ask
questions of and receive answers to its satisfaction from representatives of the
Seller concerning the Acquisition Assets, and to obtain any additional
information reasonably requested by it.

4.5 No Consents. No authorization, consent, or approval of, or filing with, any
governmental body, court, other authority or third party is necessary on the
part of Buyer for the consummation by Buyer of the transactions contemplated by
this Agreement, except for such authorizations, consents or approvals which if
not obtained, or filings which if not made, would not individually or in the
aggregate, have a material adverse effect on Buyer’s ability to perform its
obligations under this Agreement.

 

19

--------------------------------------------------------------------------------

4.6 Availability of Funds. Buyer has access to sufficient funds (with no
obligation to set aside, escrow or otherwise segregate funds) to enable Buyer to
pay the Maximum Aggregate Purchase Price and to consummate the transactions
contemplated by this Agreement.

4.7 Brokers’ Fees. No broker, finder or other person or entity is entitled to
any brokerage commissions, finders’ fees or similar compensation in connection
with the transactions contemplated by this Agreement based on any actions of
Buyer.

ARTICLE 5

COVENANTS

5.1 Covenants of Seller Prior to the Closing and each Post-Closing Transfer.
Prior to the Closing or each Post-Closing Transfer, as applicable, Seller will,
and will cause Coffee People to (as applicable):

(a) except as required to perform Seller’s obligations under this Agreement,
(i) timely and fully perform all of its obligations under each of the Assumed
Leases and Occupancy Agreements and Assumed Agreements, unless in the good faith
judgment of the management of Seller, and after notice to Buyer, Seller
determines that it is necessary from a financial perspective to cease operations
at a Subject Location, (ii) operate the Acquisition Assets in the ordinary
course of business (subject to the parenthetical in the foregoing subsection
(i)) and materially discharge the Assumed Liabilities in the ordinary course of
business and in accordance with their respective terms, and (iii) not enter into
any transaction outside the ordinary course of business that would create any
Encumbrance (other than a Permitted Lien) on the Acquisition Assets and/or the
Assumed Liabilities without the prior written consent of Buyer;

(b) reasonably protect the Acquisition Assets from removal, damage and
destruction and maintain existing insurance coverage on the Acquisition Assets;

(c) remove or cause the removal of all security systems or other third party
assets and other Excluded Assets from the Subject Locations being acquired by
Buyer at the Closing or the applicable Post-Closing Transfer, notify all
affected third parties of the removal of such assets from such Subject
Locations, whether or not required by contract, provided, however, that if
Seller or Coffee People, as applicable, fails to remove any of such security
systems or other assets, then Buyer will have the right, in its sole and
absolute discretion, to retain or dispose of such systems and other assets
without any notice or Liability to Seller, Coffee People or any third parties
whatsoever and Seller will indemnify Buyer for any claims brought by, or amounts
owed to, third parties in connection therewith, from the Escrow Fund (which, for
the avoidance of doubt, will not be subject to the Threshold but will be subject
to the administrative procedures described in Article 7);

(d) if Seller or Coffee People, as applicable, has not already done so, cease
all business and operations at the Subject Locations that Buyer will acquire at
the Closing or, with respect to a Post-Closing Transfer, that are to be acquired
at such Post-Closing Transfer, and terminate all services and arrange for
payment in full of all termination and other fees under the Excluded Agreements
as provided herein with respect to such Subject Locations;

 

20

--------------------------------------------------------------------------------

(e) promptly notify Buyer in writing of (i) any adverse change relating to
(a) the Acquisition Assets that materially impairs Seller’s or Coffee People’s,
as applicable, ability to operate a Subject Location or (b) the Assumed
Liabilities, excluding any actions taken by Seller or Coffee People to perform
its obligations under this Agreement, (ii) any governmental or third party
written demands, complaints, investigations, proceedings or hearings (or written
communications indicating that any may be contemplated) related to any of the
Acquisition Assets or Assumed Liabilities or (iii) any event occurring
subsequent to the date of this Agreement that would render any representation or
warranty of Seller contained in this Agreement, if made on or as of the date of
that event or the date of the Closing, materially untrue or inaccurate;

(f) not mortgage, pledge, subject to a lien, or grant a security interest in, or
suffer to exist or otherwise encumber, any of the Acquisition Assets;

(g) use commercially reasonable efforts to (i) satisfy the obligations set forth
in Section 6.3 and (ii) obtain the Consents to Assignment of Lease, Lease and
Agreement Amendments, and all required third party consents necessary to effect
the Closing or a Post-Closing Transfer, as applicable, provided, that the
obligation to exercise commercially reasonable efforts will not apply with
respect to the Negative Value Subject Locations; and

(h) cause Coffee People to take all actions reasonably necessary to enable
Seller to perform all of its obligations pursuant to this Agreement, including
but not limited to under this Article 5.

5.2 No Negotiations.

(a) Subject to the provisions of Sections 5.2(b) and 5.2(c), between the date of
this Agreement and the first to occur of (i) the Closing, and (ii) the
termination of this Agreement, Seller will not (and will cause its
Representatives and Affiliates not to), directly or indirectly, (a) take any
action to solicit, initiate, seek, encourage or support any inquiry, proposal,
submission or offer from, (b) furnish any information to, or (c) participate in
any discussions or negotiations with, any Person or other entity or group (other
than Buyer) regarding any acquisition of Seller that would include any of the
Acquisition Assets, any merger or consolidation with or involving Seller that
would include any of the Acquisition Assets, or any acquisition of any of the
Acquisition Assets. Seller agrees that any such discussions or negotiations in
progress as of the date hereof will be terminated or suspended during such
period. Seller represents and warrants that it has the legal right to terminate
or suspend any such pending discussions or negotiations and agrees to indemnify
and hold harmless the Buyer and its Representatives and Affiliates (the “Buyer
Group”) from and against any claims by any party, including, without limitation,
any party to such pending discussions or negotiations, which claims are based on
or arise out of such pending discussions or negotiations or the execution of
this Agreement or any consummation of the transactions contemplated by this
Agreement, as further set forth in Section 7.2(e).

(b) Seller will immediately (and in no event later than 24 hours after the board
of directors of Seller or any committee thereof has considered any bona fide
Transfer Proposal) notify Buyer in writing of any bona fide Transfer Proposal
that has been considered by the board

 

21

--------------------------------------------------------------------------------

of directors of Seller or any committee thereof, (including the material terms
thereof) that is made or submitted by any Person during the period set forth in
the first sentence of Section 5.2(a). Seller will keep Buyer fully informed with
respect to the status of any such Transfer Proposal and any modification or
proposed modification thereto.

(c) Notwithstanding the provisions of Section 5.2(a), Seller, during the period
set forth in the first sentence of Section 5.2(a), may provide non-public
information to and enter into discussions with any third party with respect to
an unsolicited written bona fide Transfer Proposal if (1) neither Seller nor any
Representative of Seller shall have violated any of the restrictions set forth
in this Section 5.2, (2) the board of directors of Seller concludes in good
faith, after having taken into account the advice of its outside legal counsel,
that such action is required for the board of directors of Seller to comply with
its fiduciary obligations to Seller’s stockholders under applicable law, (3) the
board of directors of Seller concludes in good faith that such Transfer Proposal
is reasonably likely to result in the making of a Superior Offer, (4) at least
two (2) Business Days prior to furnishing any such non-public information to, or
entering into discussions with, such third party, Seller gives Buyer the
material terms of the Transfer Proposal and of Seller’s intention to furnish
non-public information to, or enter into discussions with, such third party, and
Buyer does not within such two (2) Business Day period, adjust the Maximum
Aggregate Purchase Price commensurate with the Transfer Proposal, (5) Seller
receives from such third party an executed confidentiality agreement containing
customary limitations on the use and disclosure of all non-public written and
oral information furnished to such third party by or on behalf of Seller, and
(6) at least two (2) Business Days prior to furnishing any such non-public
information to, or entering into discussions with, such third party, Seller
furnishes such non-public information to Buyer (to the extent such non-public
information has not been previously furnished by Seller to Buyer). Without
limiting the generality of the foregoing, Seller acknowledges and agrees that
any violation of any of the restrictions set forth in the preceding sentence by
any Representative of Seller, whether or not such Representative is purporting
to act on behalf of Seller, shall be deemed to constitute a breach of this
Section 5.2 by Seller.

(d) For purposes of Section 5.2(c), “Superior Offer” shall mean any unsolicited,
bona fide written Transfer Proposal that the Seller’s board of directors
determines, in its good faith judgment taking into account applicable legal,
financial, regulatory and other relevant aspects of the Transfer Proposal, the
identity of the third party making the proposal and other relevant
considerations, (i) is more favorable from a financial point of view to Seller’s
stockholders than the sale of the Acquisition Assets to Buyer, (ii) is subject
only to conditions to the consummation of such Transfer Proposal that are
reasonably capable of being satisfied promptly, and (iii) is supported by
financing that is then committed or for which Seller’s board of directors
concludes in good faith is available.

5.3 Public Announcements. Neither Buyer nor Seller will make any public
announcement concerning this Agreement, the related discussions or negotiations,
or any other memoranda, letters or agreements between Buyer and Seller relating
to this Agreement without the prior written consent of, and review of content
by, Seller or Buyer, as applicable, except, after complying with the provisions
of Section 5.6, to the extent that disclosure is required under Applicable Laws
or the rules of any national securities exchange or quotation system. Neither
Buyer nor Seller will make any comments to the media about the other party in
connection with

 

22

--------------------------------------------------------------------------------

this Agreement and will refer all inquiries about such other party to such
party’s media relations hotline or to such other media relations contact as
designated in writing by Buyer or Seller, as the case may be, from time to time
in accordance with the notice provisions set forth in Section 9.2 of this
Agreement. Buyer’s media relations hotline is 206-318-7100. Seller’s media
relations contact number is (310) 788-2850.

5.4 Confidentiality. Buyer agrees, and agrees to cause its Representatives, to
keep confidential and not disclose to any other Person or use for its own
benefit or the benefit of any other Person any confidential or proprietary
information of Seller disclosed by Seller during the negotiations of this
Agreement or preparations for the Closing or any Post-Closing Transfer
(including the existence of this Agreement, except as permitted by Section 5.3).
Seller agrees to, and agrees to cause its Representatives to, keep confidential
and not disclose to any other Person or use for its own benefit or the benefit
of any other Person any confidential or proprietary information of Buyer
disclosed by Buyer during the negotiations of this Agreement or preparations for
the Closing or any Post-Closing Transfer (including the existence of this
Agreement, except as permitted by Section 5.3). Notwithstanding the foregoing,
any party to this Agreement may disclose information related to this Agreement
to the extent such party deems disclosure is necessary or appropriate to
(i) such party’s legal, accounting and financial advisors who have a need to
know such information solely for purposes of assisting in regard to this
Agreement and who are subject to confidentiality obligations to such party,
(ii) landlords/contract parties, as applicable, of the Subject Locations, and
(iii) other parties whose consent is required to satisfy any closing conditions
under this Agreement. The parties will inform their respective legal, accounting
and financial advisors, landlords/contract parties, as applicable, and other
parties giving consent in regard to this Agreement of the confidential nature of
information shared with such persons and will direct such persons to treat such
information in accordance with the terms of this Section. The obligations
contained in this Section 5.4 will continue after the Closing and each
Post-Closing Transfer.

5.5 Access to Information and Subject Locations. To facilitate Buyer’s continued
due diligence investigation for purposes of this Agreement and to facilitate an
efficient Closing and one or more Post-Closing Transfers, if applicable, Seller
will, upon reasonable notice to Buyer, provide Buyer and its Representatives
with reasonable access during normal business hours to (i) all documents,
assets, contracts, books, records, litigation and claims history, files,
drawings, data or information that have been or now are used in or with respect
to, in connection with, or otherwise relate to, the Acquisition Assets and
Subject Locations, and (ii) title reports, surveys, environmental reports and
correspondence in Seller’s possession related to the Subject Locations and the
Assumed Leases and Occupancy Agreements and the real property or other rights
subject to such leases and agreements. Seller will make key personnel available
to Buyer and its Representatives as Buyer may reasonably request to assist in
these efforts. In connection with the transactions contemplated under this
Agreement, and from time to time after the date hereof until the later to occur
of the Closing or the last Post-Closing Transfer, as applicable, Buyer and its
Representatives will have the right to access, inspect and examine all of the
Subject Locations, including the Improvements and F&E and other assets located
thereon, at mutually convenient times, provided that Buyer and its
Representatives shall not unreasonably disrupt operations during normal business
hours at the Subject Locations. Such access will include, but not be limited to,
access for purposes of performing site surveys and other inspections reasonably
necessary or appropriate to remodel, construct, identify, build-out and convert,
as applicable, the

 

23

--------------------------------------------------------------------------------

Subject Locations to Buyer’s coffee stores and subsequently operate them as such
after the Closing or the applicable Post-Closing Transfer, including, without
limitation, in connection with obtaining all Permits reasonably necessary or
appropriate to remodel, construct, identify, build-out and convert, as
applicable, the Subject Locations to Buyer’s coffee stores and subsequently
operate them as such (the “Permits and Approvals”). Seller will reasonably
cooperate with Buyer in providing access to the interior of the premises,
Improvements, F&E and other assets located at each Subject Location in
accordance with this Section 5.5.

5.6 Required Filings. Each of Seller and Buyer will make any and all filings
required to be made by it under Applicable Laws in connection with this
Agreement and the transactions contemplated hereby, including but not limited to
any required premerger notification or other required filings with federal,
state, provincial or local governmental bodies or applicable foreign
governmental agencies. Each of Seller and Buyer will provide the other party
with a reasonable amount of time, but not less than (a) two (2) Business Days,
in the case of any filings made on Form 8-K, and (b) three (3) Business Days in
each other case, to review and comment on any such filings before they are filed
and/or distributed to stockholders. Neither party will be required to receive
the consent of the other in connection with any such filing. Each party will be
responsible for all expenses and filing fees incurred by it in the preparation
of its required filings. The parties will use commercially reasonable efforts to
make such filings promptly, to respond to any requests for additional
information and to obtain all consents, waivers, approvals, authorizations and
orders required in connection with the authorization, execution and delivery of
this Agreement and the transactions contemplated hereby.

5.7 Non-Disparagement.

(a) On and after the date of this Agreement, Seller will not make any false or
misleading statements about Buyer (including but not limited to any of Buyer’s
coffee stores or products) or any of Buyer’s Representatives or take any action
that could reasonably be expected to harm the public perception of Buyer, or its
coffee stores or products. Without limiting the foregoing, Seller will not take
any action to divert customers away from any of the Subject Locations, or in any
manner attempt to discourage current customers of Seller from patronizing
Buyer’s coffee stores. Nothing in this Section is intended to prohibit Seller
from advertising its businesses and products in the normal course of business.

(b) On and after the date of this Agreement, Buyer will not make any false or
misleading statements about Seller (including but not limited to any of Seller’s
coffee stores or products) or any of Seller’s Representatives or take any action
that could reasonably be expected to harm the public perception of Seller, or
its coffee stores or products. Without limiting the foregoing, Buyer will not
take any action to divert customers away from any of the Subject Locations, or
in any manner attempt to discourage current customers of Buyer from patronizing
Seller’s coffee stores. Nothing in this Section is intended to prohibit Buyer
from advertising its businesses and products in the normal course of business.

5.8 Noncompetition; Nonsolicitation.

(a) For a period of three (3) years after the Closing Date, Seller agrees that
it will not in any manner, directly or indirectly, by itself or in conjunction
with any other Person,

 

24

--------------------------------------------------------------------------------

conduct, or have any interest, direct or indirect, in the ownership or operation
of any Person that is operating any retail specialty coffee stores in any city
in which a Subject Location is situated, including without limitation by opening
new Seller-operated stores or selling franchises, provided, however, that the
foregoing limitations (i) will apply only to stores opened after the date of
this Agreement, (ii) will not apply to any retail stores operated under the
“Gloria Jean’s” brand name and the existing “Gloria Jean” business model and
product line, and (iii) will not apply to wholesale sales to retail businesses
that are not operated by Seller or other non-retail businesses or the conversion
of Seller-operated stores existing on the date of this Agreement to franchise
stores.

(b) Seller further agrees that, for a period of three (3) years after the
Closing Date, it will not, without first obtaining the written consent of Buyer,
solicit or attempt to solicit any employee of Buyer or any of its Affiliates to
leave his or her employer, provided, however, that Seller shall not be precluded
from hiring any such employee of Buyer (or an Affiliate) who was not solicited
directly or indirectly by Seller or who responds to notices of employment
published generally by or on behalf of Seller.

(c) If any court having jurisdiction at any time hereafter shall hold any
provision or clause of this Section 5.8 to be unreasonable as to its scope,
territory or term, and if such court in its judgment or decree shall declare or
determine that scope, territory or term that such court deems to be reasonable,
then such scope, territory or term, as the case may be, shall be deemed
automatically to have been reduced or modified to conform to that declared or
determined by such court to be reasonable.

5.9 Forms of Consent to Assignment of Lease; Lease and Agreement Amendment.
Within five (5) Business Days of the date of this Agreement, Buyer will provide
to Seller the forms of Consent to Assignment of Lease and Lease and Agreement
Amendment to be submitted to obtain the applicable landlord, sublandlord, ground
lessor or other applicable contract party’s signature thereon. Such forms will
initially be in substantial compliance with Exhibits D and E, respectively, and
will not be altered, changed or amended without Buyer’s prior consent, which
shall not be unreasonably withheld. Such forms will be submitted to the
applicable landlord, sublandlord, ground lessor or other applicable contract
party within two (2) Business Days after Seller’s receipt from Buyer.

5.10 Allocation. Prior to Closing Buyer and Seller will prepare Schedule 5.10
(the “Allocation Schedule”) allocating the Purchase Price amongst the different
asset classes contained within the Acquisition Assets and the non-competition
covenant in Section 5.8. Seller and Buyer will each file IRS Form 8594, and all
federal, state, local and foreign tax returns, in accordance with the Allocation
Schedule.

5.11 Books and Records. The parties will make reasonably available to one
another any records or documents that they maintain with respect to the
Acquisition Assets for purposes of compliance with applicable Tax laws or in
defending any third-party litigation arising in respect of this Agreement.
Seller will make available to Buyer, at Buyer’s request with at least four
(4) Business Days prior notice, all books and records of Seller relating to the
Acquisition Assets and Assumed Liabilities for inspection or copying by Buyer at
any reasonable time for a period of three (3) years after the later of the
Closing Date or the last Post-Closing Transfer.

 

25

--------------------------------------------------------------------------------

5.12 Transfer Fees and Taxes; Prorations. All transfer and assumption fees and
expenses and all Taxes arising out of the transfer to Buyer of the Acquisition
Assets, which fees and expenses include but are not limited to all amounts owing
under the Assumed Leases and Occupancy Agreements and characterized as
“additional rent,” “key money,” “bonus money,” “excess consideration,”
“goodwill,” “other consideration” and similar words or phrases, if any, shall be
handled in a manner to be determined upon mutual agreement by the parties.
Seller will be responsible for any expenses or other payment obligations of
rent, real and personal property taxes, water, gas, electricity and other
utilities and periodic charges (including, without limitation, common area
maintenance fees, tax and insurance contributions due to landlords) and Taxes
payable with respect to the Acquisition Assets and Assumed Liabilities (“Payment
Obligations”) related to any period on or before the Closing Date or a
Post-Closing Transfer, as applicable. Buyer will be responsible for any Payment
Obligations related to any period after the Closing Date or a Post-Closing
Transfer, as applicable. With respect to any Payment Obligations that relate to
periods both before and after the Closing Date, Buyer and Seller shall prorate
such expenses or other payment obligations such that Seller shall be liable with
respect to any period on or before the Closing Date or a Post-Closing Transfer,
as applicable, and Buyer shall be liable with respect to any periods after the
Closing Date.

5.13 Additional Covenants.

(a) At any time before or after the Closing or the last Post-Closing Transfer,
as applicable, Buyer, Seller and Coffee People will execute and deliver any
further documents and instruments of transfer reasonably requested by the other
party, and will take any other action reasonably requested by the other party
consistent with the terms of this Agreement, for the purpose of transferring and
conveying to Buyer all property and rights to be transferred and conveyed by
this Agreement;

(b) Seller will timely and fully discharge all of Seller’s and Coffee People’s
debts, obligations and liabilities related to the Subject Locations, the
Acquisition Assets and the Assumed Liabilities as they come due before and after
the applicable Assumption Time; provided, however, that agreement by Seller or
Coffee People and the landlord of a Subject Location as to the cessation of
business operations at such Subject Location shall not be deemed a breach of
this Section 5.13(b). Buyer shall use commercially reasonable efforts to satisfy
the obligations set forth in Section 6.2 and obtain the executed Consents to
Assignment of Lease, the executed Lease and Agreement Amendments and all
required third party consents necessary to effect the Closing or Post-Closing
Transfer, as applicable, provided, that the obligation to exercise commercially
reasonable efforts will not apply with respect to the Negative Value Subject
Locations;

(c) Seller will deliver a completed Form W-9 (Request for Taxpayer
Identification Number and Certification) to Buyer at least two (2) Business Days
prior to the Closing;

(d) Buyer and Seller hereby waive compliance with the provisions of the “bulk
transfer laws” of any jurisdiction in connection with the sale of the
Acquisition Assets to Buyer; and

 

26

--------------------------------------------------------------------------------

(e) Coffee People will take all actions reasonably necessary to enable Seller to
perform all of its obligations pursuant to this Agreement, including but not
limited to under this Article 5, and to effect the Transfer of the Assumed Lease
and Occupancy Agreements to which it is a party.

5.14 Environmental Assessment.

(a) Not later than sixty (60) days after execution of this Agreement, Buyer may
obtain a Phase I (the “Phase I”) environmental assessment of each of the Ground
Lease Subject Locations by an environmental engineer selected by Buyer. If, in
Buyer’s reasonable judgment based on the findings and recommendations of any
Phase I, Buyer determines that any further environmental assessment, including,
but not limited to, a Phase II (the “Additional Assessment”) of one or more of
the Ground Lease Subject Locations is appropriate, Buyer shall be entitled,
subject to the consent and approval of the owner of each Ground Lease Subject
Location, to obtain an Additional Assessment on such Ground Lease Subject
Location or any portion thereof (the Phase I and the Additional Assessment, if
obtained with respect to any Ground Lease Subject Location, shall each be
referred to herein as an “Environmental Assessment”). If Buyer seeks to obtain
any Additional Assessment, the 60-day environmental review period referenced
above shall be extended to be ninety (90) days from the date of execution of
this Agreement (or if such date falls on a non-Business Day, then the period
shall be extended to the next Business Day). The Buyer shall commission and pay
the cost of each such Environmental Assessment.

(b) If based upon the Environmental Assessment, Buyer reasonably concludes that
Hazardous Material exists at any portion of the Ground Lease Subject Locations
in violation of applicable Environmental Law (an “Environmental Violation”),
Buyer shall deliver to Seller a copy of the Environmental Assessment indicating
such Environmental Violation within the 60-day (or 90-day, if applicable) review
period referenced above. Within ten (10) Business Days of receiving any such
copy of an Environmental Assessment indicating an Environmental Violation,
Seller shall notify Buyer in writing if Seller will agree to remove, correct, or
remedy any such Environmental Violation at Seller’s sole cost and expense prior
to Closing and will agree to provide Buyer, as a condition to Closing, a
certificate from an environmental abatement firm reasonably acceptable to Buyer
that any such Environmental Violation has been fully removed, corrected or
remediated (or, at Buyer’s election and cost, Buyer may require the
environmental assessment firm that performed the original Environmental
Assessment to provide a new environmental report showing that any previously
identified conditions have been corrected).

(c) If Seller notifies Buyer that it will not correct or remedy any
Environmental Violation prior to Closing, or fails to notify Buyer whether it
will correct or remedy any Environmental Violation within the ten (10) Business
Day period referenced in Section 5.14(b), Buyer may elect to exclude the Ground
Lease Subject Location that is affected by the Environmental Violation from the
Subject Locations to be acquired pursuant to this Agreement (with a
corresponding reduction to the Maximum Aggregate Purchase Price), by providing
Seller with written notice of such election within five (5) Business Days after
receiving Seller’s written notice of its election not to cure the Environmental
Violation.

 

27

--------------------------------------------------------------------------------

5.15 Meeting of Stockholders. Seller will promptly after the date hereof take
all action necessary in accordance with the Delaware General Corporation Law and
its certificate of incorporation and bylaws to convene a meeting of the
stockholders of Seller within ninety (90) days of the date of this Agreement (or
if such date falls on a non-Business Day, then the period shall be extended to
the next Business Day) to vote on the adoption of this Agreement and the
transactions contemplated hereby (the “Stockholder Meeting”). Seller shall use
its commercially reasonable efforts to solicit from its stockholders proxies in
favor of the adoption of this Agreement and the transactions contemplated hereby
and shall take all other action necessary or advisable to secure the vote or
consent of stockholders required to effect the same.

ARTICLE 6

CONDITIONS TO THE CLOSING AND

EACH POST-CLOSING TRANSFER

6.1 Conditions to Obligations of Seller and Buyer. The respective obligations of
each party hereto to complete the transactions contemplated by this Agreement
will be subject to the fulfillment on or prior to the Closing Date or
Post-Closing Transfer, as applicable, of the following conditions, except that
the condition in Section 6.1(c) shall not apply to Post-Closing Transfers:

(a) no order will have been entered, and not vacated, by a court or
administrative agency of competent jurisdiction, in any action or proceeding
that enjoins, restrains or prohibits the Transfers or the consummation of all or
any part of any transaction contemplated herein;

(b) there will be no litigation, proceeding or investigation pending by any
third party or Governmental Entity in which (x) an injunction is or may be
sought against the transactions contemplated herein or (y) relief is or may be
sought against any party hereto as a result of this Agreement or any of the
transactions contemplated herein; and

(c) receipt of approval from Seller’s stockholders of this Agreement and the
transactions contemplated hereby.

6.2 Conditions to Obligations of Seller and Coffee People. The obligations of
Seller and Coffee People to complete the transactions contemplated by this
Agreement at the Closing or Post-Closing Transfer, as applicable, are subject to
the satisfaction of the following conditions, unless waived by Seller in
writing, except that the condition in Section 6.2(c) shall not apply to
Post-Closing Transfers:

(a) delivery by Buyer of all Transaction Documents, except for the Escrow
Agreement in the case of Post-Closing Transfers, executed by Buyer;

(b) delivery of all governmental approvals or notices and all third-party
consents including the Consents to Assignment of Lease each executed by Buyer
and the respective landlord or other contract party necessary to Transfer the
Acquisition Assets being Transferred, as set forth on Schedule 6.2;

 

28

--------------------------------------------------------------------------------

(c) Buyer’s purchase at the Closing of the number of Subject Locations equal to
30 less the sum of (i) the Negative Value Subject Locations and (ii) the other
Subject Locations that Seller determines to retain and not Transfer in
accordance with Section 2.5 herein;

(d) delivery of a certificate from Buyer, in the form attached as Exhibit F-2,
which certifies that: (i) the representations and warranties referred to in
Article 4 remain true, complete and correct in all material respects as of the
Closing Date or the relevant Post-Closing Transfer, as applicable, except that
if such representation or warranty is qualified by materiality, then a
certification that such representation or warranty remains true, complete and
correct in all respects; and (ii) except as expressly waived in writing by
Seller, Buyer has satisfied all of its obligations under this Agreement that are
required to be satisfied on or before the Closing Date or the relevant
Post-Closing Transfer, as applicable.

6.3 Conditions to Obligations of Buyer. The obligations of Buyer to complete the
transactions contemplated by this Agreement at the Closing or Post-Closing
Transfer, as applicable, are subject to the satisfaction of the following
conditions, unless waived by Buyer in writing, except that the condition in
Section 6.3(b) shall not apply to Post-Closing Transfers:

(a) delivery by Seller of all Transaction Documents, except for the Escrow
Agreement in the case of Post-Closing Transfers, executed by Seller;

(b) Buyer having obtained all Permits and Approvals for at least 70% of the
Subject Locations being Transferred if the Closing occurs within ninety
(90) days of the date of this Agreement (or if such date falls on a non-Business
Day, then on the next Business Day);

(c) delivery by Seller or Coffee People, as applicable, of executed assignments
or transfers of all Assumed Permits that are listed on Schedule 2.1(e) for the
Subject Locations being Transferred;

(d) receipt by Buyer of executed Lease and Agreement Amendments for each of the
Subject Locations Transferred at Closing or the relevant Post-Closing Transfer;
provided, however, that, with respect to the Closing, Buyer must receive
executed Lease and Agreement Amendments providing for a minimum ten (10) year
term for at least 40% (rounded down to the nearest integer) of the Subject
Locations being transferred that are designated on Schedule 1.0 as requiring a
“minimum 10 year term.” With respect to Post-Closing Transfers, the 40%
threshold in the prior sentence shall be calculated on a cumulative basis
including all Subject Locations that have been previously Transferred;

(e) delivery of an executed and notarized deed that conveys to Buyer legal fee
title to each of the Ground Lease Improvements being Transferred at Closing or
the relevant Post-Closing Transfer;

(f) receipt by Buyer of Consents to Assignment of Lease each executed by Seller
or Coffee People, as applicable, and the respective landlord or other contract
party for each of the Subject Locations being Transferred at Closing or the
relevant Post-Closing Transfer; provided, that the estoppel provisions set forth
in the Form of Consent to Assignment of Lease attached hereto as Exhibit D must
be agreed to for 50% (rounded down to the nearest integer) of the Subject
Locations Transferred at Closing or any Post-Closing Transfer (calculated on a
cumulative basis including all Subject Locations that have been previously
Transferred);

 

29

--------------------------------------------------------------------------------

(g) since the date of this Agreement, there will not have occurred any Material
Adverse Effect, nor will there have occurred any event or circumstance that, in
combination with any other events or circumstances, could reasonably be expected
to have a Material Adverse Effect;

(h) releases of all Encumbrances identified on Schedule 6.3(h) in respect of the
Acquisition Assets being Transferred other than Permitted Liens;

(i) Title Company standing ready to issue the Title Policies with respect to
each Ground Lease Subject Location to be acquired, with such endorsements as are
reasonably requested by Buyer and customarily available in Oregon for similar
title conditions and in similar transactions, insuring Buyer’s interest in each
of the Ground Leases and the Ground Lease Improvements, dated the day of the
Closing or the Post-Closing Transfer, as applicable, with liability in the
amounts of the Purchase Price for each Ground Lease Subject Location (as set
forth on Schedule 1.0) and subject only to Permitted Liens;

(j) all governmental approvals or notices and all third-party consents (other
than the Lease and Agreement Amendments and the Consents to Assignment of Lease
necessary to Transfer the Acquisition Assets being Transferred), as set forth on
Schedule 6.2, which Schedule includes a complete list of all consents required
to effect the transactions set forth herein, including all mortgagee,
governmental, regulatory and other required third-party consents;

(k) a good standing certificate from the state of Delaware and tax clearance or
similar certificate from the states of California and Oregon certifying to the
absence of unpaid Taxes that might constitute an Encumbrance on the Acquisition
Assets or that might become enforceable against Buyer in the event of
non-payment by Seller or Coffee People;

(l) a certificate from Seller, in the form attached as Exhibit F-1, which
certifies that: (i) the representations and warranties referred to in Article 3
remain true, complete and correct in all material respects as of the Closing
Date or the relevant Post-Closing Transfer, as applicable, except that if such
representation or warranty is qualified by materiality, then a certification
that such representation or warranty remains true, complete and correct in all
respects; (ii) except as expressly waived in writing by Buyer, Seller has
satisfied all of its obligations and covenants under this Agreement that are
required to be satisfied on or before the Closing Date or the relevant
Post-Closing Transfer, as applicable; and (iii) Seller has complied with the
Worker Adjustment and Retraining Notification Act; and

(m) if any Environmental Violation with respect to a Ground Lease Subject
Location (which is included as part of the Acquisition Assets) has been
disclosed by the Environmental Assessments and Seller has agreed to remove,
correct, or remedy any such Environmental Violation at Seller’s sole cost and
expense prior to Closing pursuant to Section 5.14(b), Seller will deliver to
Buyer a certificate from an environmental abatement firm reasonably acceptable
to Buyer that any such Environmental Violation has been fully removed, corrected
or remediated.

 

30

--------------------------------------------------------------------------------

6.4 Termination Date. If the conditions to the Closing set forth in
Sections 6.1, 6.2 and 6.3 have not been satisfied or waived (a) in the event
that Buyer has not complied with its obligations described in Section 5.13(b),
as determined by Seller in its reasonable discretion, within ninety (90) days
from the date of this Agreement or (b) within 150 days from the date of this
Agreement (or if such 90th or 150th day falls on a non-Business Day, then the
period will end on the next Business Day) (as applicable, the “Termination
Date”), this Agreement may be terminated in accordance with Section 8.1.

6.5 Post-Closing Transfers. If, by the Termination Date, the conditions to the
Closing set forth in Sections 6.1, 6.2 and 6.3 have been satisfied or waived,
then Buyer and Seller will close such Transfers as provided in Section 2.9.
After the Closing, for a period ending 150 days after the date of this Agreement
(or if such date falls on a non-Business Day, then the period will end on the
next Business Day), or such longer period as agreed to by the parties, Seller
and Buyer will use commercially reasonable efforts to satisfy all of the
conditions set forth in Article 6 to Transfer (the “Post-Closing Transfers”) the
remaining Subject Locations (the “Remaining Subject Locations”), provided, that
the obligation to use commercially reasonable efforts will not apply with
respect to the Negative Value Subject Locations. Buyer’s obligation to acquire
and assume the Remaining Subject Locations, and the related Acquisition Assets
and Assumed Liabilities, and fulfill its other obligations at the Post-Closing
Transfer under this Agreement is subject to and conditioned upon the
satisfaction or waiver, at or before the applicable Post-Closing Transfer, of
the conditions set forth in Sections 6.1 and 6.3 that are applicable to
Post-Closing Transfers with respect to the Remaining Subject Locations. Upon
satisfaction or waiver of such conditions, Seller will Transfer (or cause to be
Transferred) the Remaining Subject Locations for which the conditions set forth
in Section 6.2 that are applicable to Post-Closing Transfers have been
satisfied, provided, that Seller may elect not to Transfer any Negative Value
Subject Location. Buyer and Seller will complete such Post-Closing Transfers on
the 120th day and 150th day after the date of this Agreement (or if such date
falls on a non-Business Day, then such Post-Closing Transfers shall take place
on the next Business Day) or on such other dates as the parties may mutually
agree.

6.6 Waiver. The party entitled to satisfaction of any condition to the Closing
or a Post-Closing Transfer set forth in this Agreement may, in its sole and
absolute discretion, waive satisfaction of any condition, in whole or in part,
which must be in writing, provided, that no such waiver will waive any claim
such party may have for non-compliance with the representations and warranties
with respect to any Subject Location that is Transferred.

ARTICLE 7

SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION

7.1 Nature and Survival of Representations and Warranties. No representation or
warranty made by either party to this Agreement or in any document, certificate,
schedule, exhibit or other instrument delivered by or on behalf of either party
pursuant to this Agreement will in any manner be limited by any investigation of
the subject matter thereof made by or on behalf of either party or by the waiver
or satisfaction of any condition to the Closing or a Post-

 

31

--------------------------------------------------------------------------------

Closing Transfer and except as provided below all such representations and
warranties will survive the Closing for a period ending six months after the
Closing Date (the “Release Date”); provided, however, that the representations
and warranties set forth in Sections 3.4 (No Consents), 3.8 (Tax Matters), 3.11
(Environmental Matters) and 3.15 (Employment Matters) will survive the Closing
for a period ending three years after the Closing Date and that the
representations and warranties set forth in Sections 3.2 (Authority Relative to
This Agreement), and 3.7 (Good Title to the Acquisition Assets) and 4.2
(Authority Relative to This Agreement), and any fraud or knowing or intentional
breach of any representation or warranty, will survive the Closing and each
Post-Closing Transfer until the expiration of the applicable statute of
limitations.

7.2 Indemnification by Seller. Subject to the limitations set forth in
Section 7.4(a), Seller agrees to indemnify, defend and hold harmless the Buyer
Group from, against, for and in respect of any and all Losses asserted against,
imposed upon or incurred by any member of the Buyer Group by reason of,
resulting from, based upon, arising out of, or in connection with any of the
following:

(a) the breach, or inaccuracy (taking into account any applicable qualifications
set forth in the text of such representation or warranty), of any representation
or warranty of Seller contained in Article 3 of this Agreement or any
certificate, schedule or Transaction Document delivered by Seller in connection
with this Agreement;

(b) the material breach or nonperformance of any covenant or agreement by Seller
or Coffee People contained in this Agreement or any certificate or Transaction
Document delivered in connection with this Agreement;

(c) all causes of action, lawsuits, judgments, claims and demands of any nature
arising out of or relating to the Excluded Business or the Excluded Assets;

(d) Seller’s failure to discharge the Excluded Liabilities;

(e) the termination or suspension of any previous or existing discussions or
negotiations with any third party with respect to the Acquisition Assets that
were terminated or suspended or will be terminated or suspended as a result of
this Agreement, whether or not the transactions contemplated by this Agreement
are consummated; and

(f) any breach by Seller of this Article 7.

7.3 Indemnification by Buyer. Subject to the limitations set forth in
Section 7.4(b), Buyer agrees to indemnify, defend and hold harmless Seller and
its Representatives (the “Seller Group”) from, against, for and in respect of
any and all Losses asserted against, imposed upon or incurred by any member of
the Seller Group by reason of, resulting from, based upon, arising out of, or in
connection with any of the following:

(a) the breach of any representation or warranty of Buyer contained in Article 4
or made pursuant to this Agreement or any certificate or Transaction Document
delivered by Buyer in connection with this Agreement;

 

32

--------------------------------------------------------------------------------

(b) the material breach or nonperformance of any covenant or agreement by Buyer
contained in this Agreement or any certificate or Transaction Document delivered
in connection with this Agreement;

(c) Buyer’s failure to discharge any Assumed Liabilities arising after their
Assumption Date; and

(d) any breach by Buyer of this Article 7.

7.4 Procedure for Indemnification and Dispute Resolution. Each of the parties
will follow the indemnification procedures set forth in this Article 7. Any
Buyer Loss, indemnity claim or other disputed amount will first be deducted from
the Escrow Fund but exhaustion or payment of the Escrow Fund will not limit
Buyer’s ability to pursue Seller directly.

(a) Seller’s Threshold and Cap Amount. Subject to the following sentence, in
order to facilitate an efficient closing of the transactions contemplated by
this Agreement, Buyer acknowledges and agrees that it will not seek
indemnification for claims arising under Section 7.2(a) until the aggregate
amount of all claims against Seller exceeds $100,000 (the “Threshold”), in which
event Seller will only be liable for such claims to the extent the Losses exceed
the Threshold. Notwithstanding anything to the contrary contained in this
Agreement, in no event will Seller’s aggregate Liability arising out of its
indemnification obligations under Section 7.2(a) exceed $2,000,000 (the
“Seller’s Cap”); provided, however, that, with respect to the representations
and warranties set forth in Sections 3.2 (Authority Relative to This Agreement),
3.4 (No Consents), 3.7 (Good Title to the Acquisition Assets), 3.8 (Tax
Matters), 3.11 (Environmental Matters), 3.15 (Employment Matters), the covenants
set forth in Sections 5.1(c) and 5.12 and any fraud or knowing or intentional
breach of any representation and warranty, Seller will be liable from dollar one
up to, but not in excess of, the sum of (x) the aggregate Purchase Price
actually received by Seller with respect to all Subject Locations Transferred to
Buyer, (y) the Non-Competition Amount and (z) the amount of Prepaid Items
transferred to Buyer.

(b) Buyer’s Threshold and Cap Amount. Subject to the following sentence, in
order to facilitate an efficient closing of the transactions contemplated by
this Agreement, Seller acknowledges and agrees that it will not seek
indemnification for claims arising under this Section 7.3(a) until the aggregate
amount of all claims against Buyer exceeds the Threshold, in which event Buyer
will be liable for such claims only to the extent the Losses exceed the
Threshold. Notwithstanding anything to the contrary contained in this Agreement,
in no event will Buyer’s aggregate Liability arising out of its indemnification
obligations under Section 7.3(a) exceed $2,000,000 (the “Buyer’s Cap”);
provided, however, that, with respect to the representations and warranties in
Section 4.2 (Authority Relative to This Agreement), and any fraud or knowing or
intentional breach of any representation and warranty, Buyer will be liable from
dollar one, without regard to the Threshold or Buyer’s Cap.

(c) Escrow Period; Release From Escrow.

(i) The Escrow Period will terminate on the Release Date; provided, however,
that all or a portion of the Escrow Fund, which, in the reasonable judgment of
Buyer, is

 

33

--------------------------------------------------------------------------------

necessary to satisfy any unsatisfied claims specified in any Claim Notice
delivered to the Escrow Agent prior to the Release Date with respect to facts
and circumstances existing prior to expiration of the Escrow Period, will remain
in the Escrow Fund and subject to the Escrow Agreement until such claims have
been resolved.

(ii) Within three (3) Business Days after the Release Date, the Escrow Agent
will release from escrow to Seller the Escrow Fund less the dollar amount equal
to (A) any portion of the Escrow Fund delivered to Buyer in accordance with
Section 7.4(d) in satisfaction of resolved indemnification claims by Buyer and
(B) any portion of the Escrow Fund withheld in accordance with Section 7.4(c)(i)
with respect to any pending but unresolved indemnification claims of Buyer. Any
portion of the Escrow Fund held as a result of clause (B) will be released to
Seller or delivered to Buyer (as appropriate) promptly upon resolution of each
specific indemnification claim involved.

(iii) The Escrow Agent is hereby granted the power to effect any transfer of the
Escrow Fund contemplated by this Agreement.

(d) Notice of Claim. The Indemnified Party will give written notice to the
Indemnifying Party of the existence and nature of any claims with respect to
which indemnification is sought (and if Buyer is making a claim against the
Escrow Fund, such notice will also be delivered to the Escrow Agent). Each such
notice (a “Claim Notice”) will be delivered reasonably promptly, but in any
event (A) prior to expiration of any applicable survival period for such claim
as specified in Section 7.1, (B) if the claim involves a claim against the
Escrow Fund, prior to the Release Date, and (C) if such claim relates to the
assertion against the Indemnified Party of any claim by a third party (a “Third
Party Claim”), within sixty (60) days after assertion of such Third Party Claim,
provided, that no failure or delay by the Indemnified Party to so notify the
Indemnifying Party will reduce or otherwise affect the obligation of the
Indemnifying Party to indemnify and hold the Indemnified Party harmless, except
to the extent the Indemnified Party’s failure to give or delay in giving the
Claim Notice materially impairs the Indemnifying Party’s ability to perform its
obligation to indemnify or defend or to mitigate its damages, in which case the
Indemnifying Party will have no obligation to indemnify the Indemnified Party to
the extent of Loss, if any, caused by such failure to give or delay in giving
the Claim Notice. The Claim Notice must be accompanied by copies of all relevant
documentation, including but not limited to any summons, complaint or other
pleading that may have been served or written demand or other instrument, and
will specify in reasonable detail the facts and circumstances on which the
asserted claim is based, specify the amount of such claim if then ascertainable
and, if not then ascertainable, the estimated amount thereof. Upon Buyer’s
delivery to the Escrow Agent on or before the Release Date of a Claim Notice,
the Escrow Agent will, subject to the provisions of this Article 7, maintain
cash in the Escrow Fund having a value equal to the amount set forth in the
Claim Notice (or such lesser amount as then remains in the Escrow Fund) until
resolution of the indemnification claim.

(e) Objections to Claims.

(i) At the time of delivery of any Claim Notice from Buyer to the Escrow Agent,
a duplicate copy of such Claim Notice will be delivered to Seller and for a
period of thirty (30) days after such delivery, the Escrow Agent will make no
delivery of the Escrow

 

34

--------------------------------------------------------------------------------

Fund unless the Escrow Agent shall have received written authorization from
Seller to make such delivery. After the expiration of such thirty (30) day
period, the Escrow Agent shall make delivery of the portion of the Escrow Fund
in accordance with Section 7.4(d) hereof, provided, that no such payment may be
made if Seller shall object in a written statement to the claim made in the
Claim Notice, and such statement has been delivered to the Escrow Agent and
Buyer prior to the expiration of such thirty (30) day period.

(ii) In case Seller has timely objected in writing to any claim by Buyer made in
any Claim Notice, Buyer will have thirty (30) days to respond in a written
statement to the objection of Seller. If after such thirty (30) day period there
remains a dispute as to any claims made in any Claim Notice, Seller and Buyer
will attempt in good faith for thirty (30) days to agree upon the rights of the
respective parties with respect to each of such claims. If Seller and Buyer
should so agree, a memorandum setting forth such agreement will be prepared and
signed by both parties and will be furnished to the Escrow Agent. The Escrow
Agent will be entitled to rely on any such memorandum and will distribute the
cash from the Escrow Fund in accordance with the terms thereof.

(f) Resolution of Conflicts and Arbitration. If no agreement can be reached
after good faith negotiation between the parties pursuant to Section 7.4(e)(ii),
either party may, by written notice to the other, demand arbitration of the
matter. The Parties agree that such matters shall be submitted for binding
arbitration and final resolution to the office of the Judicial Arbitration and
Mediation Services (“JAMS”) located in Orange County, California. In the event a
matter is submitted to JAMS for resolution, the parties will either agree on a
single arbitrator or JAMS will provide one through its procedures. The
arbitration shall be conducted in accordance with JAMS Streamlined Arbitration
Rules and Procedures, unless the Parties agree otherwise. The Parties agree that
the arbitrator may award attorney’s fees and costs to the prevailing party.
Unless and until re-allocated by the arbitrator, the Parties will share evenly
in the costs of arbitration. The decision of the arbitrator as to the validity
and amount of any claim in such Claim Notice will be binding and conclusive upon
the parties to this Agreement, and notwithstanding anything in Article 7 hereof,
the Escrow Agent and the parties will be entitled to act in accordance with such
decision and the Escrow Agent will be entitled to make or withhold payments out
of the Escrow Fund in accordance therewith.

(g) Third Party Claims. Subject to Section 7.4(h), In the event that any Third
Party Claim is brought against an Indemnified Party with respect to which the
Indemnifying Party may have liability under this Agreement, the Third Party
Claim shall, upon the written agreement of the Indemnifying Party, be defended
by the Indemnifying Party at its sole cost and expense by counsel reasonably
acceptable to the Indemnified Party and such defense shall include all appeals
or reviews which counsel for the Indemnifying Party shall deem appropriate. For
any such Third Party Claim, the Indemnified Party shall have the right to be
represented by advisory counsel and accountants, at its own expense, and the
Indemnifying Party shall keep the Indemnified Party fully informed as to such
proceeding at all stages thereof, whether or not the Indemnified Party is
represented by its own counsel. The Indemnifying Party shall have the right to
elect to settle any claim for monetary damages without the Indemnified Party’s
consent only if the settlement includes a complete release of the Indemnified
Party and no non-monetary relief or other limitations that would apply to the
Indemnified Party. If the settlement does not include such a release or does
contain or provide for any such non-monetary relief or other limitations, it

 

35

--------------------------------------------------------------------------------

will be subject to the consent of the Indemnified Party, which consent will not
be unreasonably withheld. The Indemnifying Party may not admit any liability of
the Indemnified Party or waive any of the Indemnified Party’s rights without the
Indemnified Party’s prior written consent. It shall not be deemed unreasonable
to withhold consent to a settlement involving injunctive or other non-monetary
relief against the Indemnified Party or its assets, employees, business or
methods of doing business.

(h) Non-Monetary Relief. If the claim set forth in the Claim Notice seeks
injunctive or other non-monetary relief and could have an adverse effect on the
Indemnified Party, the Indemnified Party will have the right, notwithstanding
anything in this Article 7 to the contrary, to control the defense and
settlement of such claim, at the risk and expense of the Indemnified Party. In
such case, the Indemnifying Party will have the right fully to participate in
the defense at its sole cost and expense.

7.5 Remedies. The indemnification provisions of this Article 7 shall be the sole
and exclusive remedy of the parties following the Closing or any Post-Closing
Transfer, including for any claims for the recovery of Losses, whether directly
or by way of contribution, for any and all breaches or alleged breaches of any
representations, warranties, covenants or agreements of the parties or other
provision of this Agreement or relating to the transactions contemplated hereby
other than for claims of, or causes of action arising from fraud or knowing or
intentional breach of any representation or warranty. Under no circumstances
shall any Indemnified Party be entitled to be indemnified for punitive or other
similar damages.

ARTICLE 8

TERMINATION

8.1 Termination. This Agreement may be terminated at any time prior to the
Closing:

(a) by mutual written consent of Buyer and Seller;

(b) by Buyer or by Seller if the other party materially breaches any of its
representations, warranties or covenants contained in this Agreement and, if the
breach is curable, the breach is not cured within ten (10) Business Days after
notice and a description in reasonable detail of the breach;

(c) by Buyer or by Seller if a court of competent jurisdiction or other
Governmental Entity issues a final and nonappealable order, decree or ruling, or
takes any other action, having the effect of permanently restraining, enjoining
or otherwise prohibiting the transactions contemplated hereby;

(d) by Seller if (i) the Closing does not occur within ninety (90) days from the
date of this Agreement (or if such date falls on a non-Business Day, then the
period shall end on the next Business Day) and Buyer has not complied with its
obligations described in Section 5.13(b), as determined by Seller in its
reasonable discretion or (ii) the board of directors of Seller recommends and
accepts a Transfer Proposal;

(e) by Buyer if (i) Seller provides non-public information to, or enters into
discussion with, any third party in accordance with Section 5.2(c), (ii) the
board of directors of

 

36

--------------------------------------------------------------------------------

Seller withdraws or modifies its recommendation of this Agreement and the
transactions contemplated hereby in a manner adverse to Buyer or resolves to do
any of the foregoing, (iii) the board of directors of Seller recommends,
endorses, accepts or agrees to a Transfer Proposal, (iv) for any reason Seller
fails to call and hold the Stockholder Meeting within ninety (90) days after the
date of this Agreement (or if such date falls on a non-Business Day, then the
period shall end on the next Business Day), or (v) Seller fails to obtain the
required vote of stockholders at the Stockholder Meeting or at any adjournment
thereof after public disclosure of a Transfer Proposal.

(f) by Buyer or by Seller if the Closing does not occur within 150 days from the
date of this Agreement (or if such date falls on a non-Business Day, then the
period shall end on the next Business Day), except that neither Seller nor Buyer
will have the right to terminate this Agreement unilaterally if it has failed to
use commercially reasonable efforts to fulfill the obligations set forth in
Article 6 (except that neither Buyer nor Seller nor Coffee People shall have any
obligation whatsoever pursuant to this Agreement or otherwise to use
commercially reasonable efforts with respect to any Negative Value Subject
Locations) and such party’s failure to fulfill any of its obligations under this
Agreement is the reason for the failure of the Closing to occur by the
Termination Date.

8.2 Effect of Termination. If this Agreement is terminated as provided in
Section 8.1, the obligations of the parties to complete the transactions
contemplated by this Agreement will expire and neither party shall have any
further obligations under this Agreement except as set forth in Section 5.3,
Section 5.4, Section 5.7, Section 8.2, Section 9.1, Section 9.2 and Section 9.3
of this Agreement, and except for Liability arising from a material breach of
this Agreement.

ARTICLE 9

MISCELLANEOUS

9.1 Transaction Expenses; Termination Fees.

(a) Except as otherwise expressly provided for herein, each party is responsible
for all of its own fees and expenses relating to the proposed transactions,
including but not limited to all legal, accounting and financial advisory fees
and expenses, provided¸ that Buyer shall pay (i) the premium for the Title
Policies with respect to the Ground Leases, and (ii) the fee for recording the
Deeds and the Assignment of Leases (with respect to the Ground Leases).

(b) If this Agreement is terminated by Buyer pursuant to Sections 8.1(b) (by
reason of a breach of Section 5.2) or 8.1(e), or by Seller pursuant to
Section 8.1(d)(ii), then Seller shall make a nonrefundable cash payment to Buyer
in an amount equal to Buyer’s actual fees and expenses (including all attorneys’
fees, accountants’ fees, financial advisory fees, fees and expenses related to
site surveys, architectural design and architectural processing (e.g. for
expeditors) and filing fees) that have been paid or that are due and owing by or
on behalf of Buyer in connection with the preparation and negotiation of this
Agreement and otherwise in connection with the transactions contemplated hereby
up to an amount no greater than $500,000; provided, however, that Buyer shall,
in any event, be entitled to a minimum amount of $250,000

 

37

--------------------------------------------------------------------------------

notwithstanding Buyer’s actual fees and expenses. Such payment shall be made by
Seller within ten (10) Business Days after Buyer’s delivery to Seller of a
written statement of the amounts described above, which shall be supported by
reasonable documentation if the aggregate amount payable under this
Section 9.1(b) exceeds $250,000. Buyer and Seller acknowledge and agree that
such payment will be the exclusive remedy available to Buyer in connection with
a termination of the Agreement by Seller pursuant to Section 8.1(d)(ii) or by
Buyer pursuant to Sections 8.1(b) (provided, that such limitation shall not
apply to the breach or nonperformance of the covenants set forth in Sections
5.3, 5.4 or 5.7) and 8.1(e).

9.2 Notices. All notices and other communications hereunder will be in writing
and will be deemed given (a) upon receipt if delivered personally (or if mailed
by registered or certified mail), (b) the day after dispatch if sent by
overnight courier or (c) upon dispatch if transmitted by telecopier or other
means of facsimile transmission, in each case to the following:

 

If to Buyer:    Starbucks Corporation    2401 Utah Avenue South    Mail Stop
S-RE1    Seattle, Washington 98134    Phone: (206) 318-8720    Fax No.: (206)
318-0658    Attn: Michael Malanga, vice president, Strategic Planning    and New
Store Development With a copy to:    Starbucks Corporation    2401 Utah Avenue
South    Mail Stop S-LA1    Seattle, Washington 98134    Phone: (206) 318-8028
   Fax No.: (206) 318-0720    Attn: Michael Fink, vice president and assistant
general    counsel If to Seller:    Diedrich Coffee, Inc.    28 Executive Park,
Suite 200    Irvine, California 92614    Phone: (949) 260-1600    Fax No.: (949)
260-1610    Attn: Chief Executive Officer With a copy to:    Gibson, Dunn &
Crutcher LLP    4 Park Plaza    Irvine, California 92614    Phone: (949)
451-3800    Fax No.: (949) 451-4220    Attn: John M. Williams

 

38

--------------------------------------------------------------------------------

9.3 Governing Law; Venue. The validity, construction and enforceability of this
Agreement will be governed in all respects by the laws of the State of
California, without regard to its conflict of laws principles. If any legal
action or any arbitration or other proceeding is brought in connection with this
Agreement, the prevailing party will be entitled to recover reasonable
attorneys’ fees, accounting fees, and other costs incurred in that action or
proceeding, in addition to any other relief to which it may be entitled. Any
action to enforce, or which arises out of or in any way relates to, any of the
provisions of this Agreement (except for any actions that are expressly subject
to arbitration), including any action to compel compliance with the arbitration
provisions of this Agreement and any action to enforce an arbitration judgment,
will be brought and prosecuted exclusively in the United States District Court,
Central District of California (or, in the event such court does not have
jurisdiction, the courts of the State of California located in such district),
and the parties hereto hereby consent to the jurisdiction of such court or
courts and to service of process by registered mail, return receipt requested,
or by any other manner provided by the law of the State of California and the
rules of such courts.

9.4 No Third Party Beneficiaries. Nothing in this Agreement is intended to or
shall confer upon any Person other than the parties and their respective
successors and permitted assigns any legal or equitable right, benefit or remedy
of any nature under or by reason of this Agreement.

9.5 Assignment. Neither Seller nor Buyer nor Coffee People may assign this
Agreement, by operation of law or otherwise, without obtaining the prior written
consent of the other parties, provided such consent will not be unreasonably
withheld, and provided further that Buyer may assign this Agreement or any of
its rights hereunder to a wholly-owned Affiliate of Buyer; provided that Buyer
remains liable for all obligations of Buyer set forth herein.

9.6 Intent to be Binding; Entire Agreement; Severability. The schedules and
exhibits referred to herein are incorporated herein by reference as if fully set
forth in the text of this Agreement. This Agreement may be executed in any
number of counterparts, and each counterpart constitutes an original instrument,
but all such separate counterparts constitute one and the same agreement. Except
as otherwise provided herein, this Agreement may not be amended except by an
instrument in writing signed by Buyer and Seller. This Agreement embodies the
entire agreement and understanding of the parties hereto in respect of the
subject matter contained herein. This Agreement supersedes all prior agreements
and the understandings between the parties with respect to such subject matter.
No discussions regarding or exchange of drafts or comments in connection with
the transactions contemplated herein will constitute an agreement among the
parties thereto. If any term, provision, covenant or restriction of this
Agreement is held by a court to be invalid or unenforceable, the remainder of
the terms, provisions, covenants and restrictions of this Agreement will remain
in full force and effect and will in no way be affected or invalidated and the
court will modify this Agreement or, in the absence thereof, the parties agree
to negotiate in good faith to modify this Agreement to preserve each party’s
anticipated benefits under this Agreement.

9.7 Waiver of Provisions. The terms, covenants, representations, warranties and
conditions of this Agreement may be waived only by a written instrument executed
by the party waiving compliance. The failure of any party at any time to require
performance of any provisions hereof will, in no manner, affect the right of
such party at a later date to enforce the

 

39

--------------------------------------------------------------------------------

same. No waiver by any party of any condition, or breach of any provision, term,
covenant, representation, or warranty contained in this Agreement, whether by
conduct or otherwise, in any one or more instances, will be deemed to be or
construed as a further or continuing waiver of any such condition or of the
breach of any other provision, term, covenant, representation or warranty of
this Agreement.

9.8 Construction. The captions and titles of the articles, sections and
subsections of this Agreement are for convenience of reference only and are not
to be considered in construing this Agreement. This Agreement has been jointly
prepared by Seller and Buyer and shall be construed without regard to any
presumption or other rule requiring the resolution of any ambiguity regarding
the interpretation or construction hereof against the party causing this
Agreement to be drafted.

9.9 Acknowledgement; Independent Due Diligence. Buyer acknowledges that:

(a) Buyer, either alone or together with any individuals or entities Buyer has
retained to advise it with respect to the transactions contemplated hereby, has
knowledge and experience in transactions of this type and in the business
related to the Acquisition Assets, and is therefore capable of evaluating the
risks and merits of acquiring the Acquisition Assets;

(b) neither Seller nor any representative or agent of Seller has given any
investment, legal or other advice or rendered any opinion as to whether the
purchase of the Acquisition Assets is prudent;

(c) Buyer has conducted due diligence, including a review of the documents,
records and books pertaining to the Acquisition Assets that Seller has made
available to Buyer; and

(d) Buyer and its attorneys, accountants and advisors have had the opportunity
to ask questions and receive answers concerning the Acquisition Assets.

9.10 Disclaimer Regarding Assets. Other than the representations and warranties
set forth in this Agreement or any certificate, schedule or Transaction Document
delivered in connection with this Agreement, Seller expressly disclaims, and
Buyer acknowledges that it is not relying upon, any representations or
warranties of any kind or nature, express or implied, as to the condition, value
or quality of the Acquisition Assets and the Assumed Liabilities or the
prospects (financial or otherwise), risks and other incidents of the Acquisition
Assets and Assumed Liabilities.

[The remainder of this page is intentionally blank.]

 

40

--------------------------------------------------------------------------------

Buyer, Seller and Coffee People have executed this Agreement on the date first
written above. By signing below, each individual signing on behalf of an entity
represents that he or she is a duly elected officer of such company and is
authorized to sign in that capacity.

 

“Buyer”

STARBUCKS CORPORATION,

a Washington corporation

By:  

/s/ MICHAEL MALANGA

 

Name:   Michael Malanga Title:  

vice president, Strategic Planning and

New Store Development

“Seller”

DIEDRICH COFFEE, INC.,

a Delaware corporation

By:  

/s/ STEPHEN V. COFFEY

 

Name:   Stephen V. Coffey Title:   Chief Executive Officer “Coffee People”

COFFEE PEOPLE, INC.,

an Oregon corporation

By:  

/s/ STEPHEN V. COFFEY

 

Name:   Stephen V. Coffey Title:   President

 

41