Refer to the financial statement and the notes to consolidated financial statements:

a) What were the Second CUp's total current liabilities at June 24, 200? What was the increase /. decrease in total current liabilities from the pro forma 1999 figures?

b) What components of total current liabilities on June 24, 2000?

c) Explain why "Deposits" would be considered liabilities.

d) Does The Second Cup report any contingent liabilities, if so, where are they disclosed? Explain the nature, amount, and significant of The Second Cup's contingent liabilities, if any.

CONSOLIDATED BALANCE SHEETS Pro Forma (Note 1) (unaudited) As at Jome 24, 2000 and Juve 30. 1959 (thousands of deliaes) 2000 6661 1999 ASSETS Current assets Cash and cash equivalents $ 1,446 822 $ 20,942 Accounts receivable (Note 3) 2,294 25,525 2,494 Inventories (Note 4) 107 103 103 Prepaid expenses and sundry assets (Note 13) 419 934 934 Income taxes receivable 1.150 517 5,416 27,384 24,990 Capital assets (Note 6) 1,768 2,308 2,308 Deferred financing charges (Note 7) 125 235 235 Loans to directors and officers (Note 13) 674 753 753 Investment in Diedrich Coffee, Inc. (Note 3) 1,838 5,960 5,960 Investment in The Great Canadian Bagel, Ltd. (Note 5) 3,495 Future income taxes (Note 10) 295 700 700 Goodwill, less accumulated amortization of $3,304 (1999 - $3,004) 8,449 8.749 8.749 $ 18,565 $ 49,584 $ 43,695 LIABILITIES Current liabilities Accounts payable and accrued liabilities $ 2,718 3,415 $ 2,528 Current portion, long-term debt (Note 7) 3,000 6,500 3,000 Deposits 587 923 923 Income taxes payable 467 6,405 11,305 6,451 Long-term debt (Note 7) 10,250 19,300 19,300 Other deferred liabilities 212 219 219 SHAREHOLDERS' EQUITY Share capital (Note 8) 62,355 61,670 61,670 Deficit (60,657) (42,910) (43,945) 1,698 18,760 17,725 $ 18,565 $ 49,584 $ 43,695 See accompanying notes to Consolidated Financial Statements.NOTES TO CONSOLIDATED FINANCIAL DEATEMENTS 1. BASIS OF PRESENTATION OF PRO FORMA FINANCIAL INFORMATION (UNAUDITED) Due to the material nature of the fiscal 1999 strategic realignment of the Company, pro forma financial information has been compiled to reflect the Consolidated Balance Sheet, Statement of Operations and Deficit and Statement of Cash Flows for the fiscal year ended June 30, 1999 as if: () The merger of Gloria Jean's Inc. with Coffee People, Inc. and the subsequent sale of Coffee People, Inc, to Diedrich Coffee, Inc, had been completed at the end of the previous fiscal year, Cash proceeds of $23,090 from the sale of the Company's investment in Coffee People, Inc. earned interest at 5%, (1) The Company repurchased five million of its common shares for $80,650, including transaction costs, at the end of the preceding fiscal year. Debt incurred as a result of the repurchase bore interest at 6.6%, (iii) The Company divested its investment in The Great Canadian Bagel, Led. for proceeds of $5,050 at the end of the preceding fiscal year. These proceeds were used to retire debt. (iv) Expenses in the fiscal year ended June 30, 1999 were reduced by $930 attributable to costs associated with the stra tegic realignment of the Company. (v) An average income tax rate of 45% had been applied to all interest and expense adjustments. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its subsidiary, All significant intercompany accounts and transactions have been eliminated on consolidation. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of cash on hand, balances with banks, and investments in short term money market instruments. Investments in short term money market instruments are recorded at the lower of cost and estimated market value and consist substantially of highly liquid investments. INVENTORIES Inventories are valued at the lower of cost and net realizable value with cost being determined substantially on a first in, first-out basis. CAPITAL ASSETS Capital assets are recorded at cost. Depreciation is calculated using the straight-line basis at the following rates, which are based on the expected useful life of the asset: Computer software and hardware 3 years Equipment, furniture, fixtures and other 7 years Leasehold improvements lesser of 10 years and the remaining term of the lease GOODWILL The excess of the purchase price over the estimated fair value of identifiable net assets acquired represents goodwill. Goodwill is amortized over 40 years on a straight-line basis. The Company reviews the carrying value of goodwill on an annual basis to determine if an impairment in value has occurred. The Company measures the potential impairment of goodwill by comparing the undiscounted value of expected future earnings before income taxes, interest and amortization of goodwill to the current carrying value of goodwill. Any permanent impairment in the value of goodwill is written off against earnings. The Company is of the opinion that there has been no permanent impairment in the value of goodwill.A16 APPENDIX A . Specimen Financial Statements FOREIGN CURRENCY TRANSLATION The accounts of the Company's foreign subsidiaries operating in the United States have been translated using the current rate method. Under this method, assets and liabilities have been translated into Canadian dollars at the year-end exchange rate. Revenue and expenses have been translated at the average exchange rates in effect during the year. Exchange gains or losses on translation were deferred and included as a separate component of shareholders' equity. FINANCIAL INSTRUMENTS Financial instruments are initially recorded at historical cost. If subsequent circumstances indicate a decline in fair value is other than temporary, the financial asset is written down to fair value. Unless otherwise indicated, the fair value of financial instruments approximate recorded amounts. The fair value of cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate recorded amounts because of the short-term period to receipt or payment of cash. USE OF ESTIMATES The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the amounts of revenues and expenses for the reported years. Actual results may differ from those estimates. SYSTEMWIDE SALES Systemwide sales includes retail sales of all corporate and franchised stores, based on sales information reported by store operators. FRANCHISE REVENUE Initial franchise fees for stores are recognized as income when the store has opened. Master franchise fees are recognized as income when the agreement has been signed and any material conditions have been met. Franchise royalties are recognized as earned. STORE PRE-OPENING COSTS Certain costs incurred in connection with the opening of new corporate-owned stores are capitalized and expensed during the stores' first year of operation. FISCAL YEAR END Ordinarily, the Company's fiscal year end is the last Saturday in June. In fiscal 1999, the fiscal year was extended to Wednesday, June 30, 1999, in order to reflect the disposition of the Company's investment in Coffee People, Inc. FUTURE INCOME TAX ASSETS Future income tax assets are recognized for deductible temporary differences and operating loss or tax credit carryforwards, and future income tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the amounts of assets and liabilities recorded for income tax and financial reporting purposes. The income tax expense or benefit is the income tax payable or refundable for the year plus or minus the change in future income tax assets and liabilities during the year. In 1999, the value of the future income tax asset was determined using the deferral basis. STOCK -BASED COMPENSATION PLANS The Company has three stock-based compensation plans, which are described in Note 8. Compensation expense is not recognized when stock or stock options are issued under the Amended Directors, Officers and Employees Stock Option Plan or the Share Purchase Plan. Compensation expense is recognized when stock is issued or reserved for future issue under the Directors Share Plan. Any consideration received on exercise of stock options or purchase of stock under all plans is credited to share capital. If stock or stock options issued under these plans are repurchased, the excess of con- sideration paid over the carrying amount of the stock or stock option canceled is charged to retained earnings.Comparative Financial Statements . All 3. ACQUISITION AND DIVESTITURE On March 16, 1999, the Company's subsidiary. Coffee People, Inc. (Coffee People") executed an agreement and plan of merger with Diedrich Coffee, Inc. (Diedrich Coffee"), a NASDAQ listed company pursuant to which Diedrich Coffee would purchase all of the issued and outstanding shares of Coffee People for consideration of cash and Diedrich Coffee common shares. The transaction was completed, subject to receipt of final funds, on June 30, 1999, following approval by the share- holders of the two companies and the successful placement of 4.6 million common shares by Diedrich Coffee. The Company divested its investment in Coffee People, pursuant to this transaction for cash proceeds of $23,000 and 1,044.495 common shares of Diedrich Coffee, valued at $6,000. These shares represent approximately 8% of the issued and outstanding common shares of Diedrich Coffee and are subject to a one year lock-up agreement and certain share registra- tion requirements. The value ascribed to these common shares at June 30, 1999 reflected the Company's best estimate of the fair value taking into consideration current trading values, liquidity of the stock, the size of the Company's investment relative to the public float and the restrictions on trading these shares. The total cash consideration of $23,000 is included in "Accounts receivable" as at June 30, 1999 and was received during the current year. This transaction gave rise to a $14,700 loss which is included in "Loss on disposition of investments" for the year ended June 30, 1999. In accordance with Canadian generally accepted accounting principles, because this divestiture occurred on the last day of the Company's fiscal year, the Consolidated Statement of Operations and Consolidated Statement of Cash Flows include the activities of Coffee People for the year ended June 30, 1999. However, the Consolidated Balance Sheet as at June 30. 1999 reflects the divestiture and consequently, excludes Coffee People assets and liabilities. During the year the Company reviewed the carrying value of its investment in Diedrich Coffee using the same criteria as at June 30, 1999. It was determined that there had been a permanent impairment in value of $4,122 which has been reflected in the Consolidated Statement of Operations and Deficit in the current year. 4. INVENTORIES 2000 190 Merchandise held for resale 5 96 $ 93 Supplies 11 10 $107 5. INVESTMENT IN THE GREAT CANADIAN BAGEL. LTD.On October 4, 1996, the Company invested $6,495 in The Great Canadian Bagel, Ltd. The investment consisted of a 5% equity interest and a $5,695 subordinated convertible debenture bearing interest at 10%, payable quarterly in arrears. The Company also held warrants to purchase additional shares of The Great Canadian Bagel, Led. which expired on October 4. 1998 and October 4, 1997. During the period of this investment the Company earned and received cumulative interest and other investment income of $1,624 pre-tax to June 30, 1999. These receipts were reported in the relevant fiscal year. During the year ended June 30, 1999, the Company also received a $500 prepayment of the debenture from The Great Canadian Bagel, Ltd. and sold $1,050 of the remaining debenture to The Great Canadian Bagel, Led.'s majority shareholders at face APPENDIX A . Specimen Financial Statements value. On August 4, 1999, the Company sold its remaining investment in The Great Canadian Bagel, Ltd. to these sharehold- ers for proceeds of $3,495. The transaction, net of costs, resulted in a loss of $1,487 which was accrued in fiscal 1999. 6. CAPITAL ASSETS 2000 1999 Cost Leasehold improvements $1,157 $1,294 Equipment, furniture, fixtures and other 1,099 1,020 Computer software and hardware 757 664 3,013 2,978 Accumulated depreciation Leasehold improvements 402 190 Equipment, furniture, fixtures and other 474 279 Computer software and hardware 369 201 1,245 670 Net book value $1,768 $2,308 Depreciation of capital assets for the fiscal period ended June 24, 2000 was $621 (June 30, 1999 - $1,897). Included in this charge is a provision for impairment in net book value of corporate store leasehold improvements, equipment, furniture, fixtures and other of $193 (1999 - nil). 7. LONG-TERM DEBT2000 1999 Non-revolving term facility maturing June 7, 2004 $13,250 $25,000 $10 million revolvingon-revolving credit facility, maturing June 5, 2001 (June 30, 1999 - maturing June 6, 2000). 800 13.250 25,800 Less: Current portion (3,000) (6,500) $10,250 $19,300 The Company's non-revolving term facility requires quarterly payments of $750 plus the proceeds received from the liqui- dation of the Company's investment in The Great Canadian Bagel, Led. The revolvingon-revolving facility contains a convertible option whereby on each anniversary date, if the option is not extended, payment could be made in full or in installments equal to 21/2% of the outstanding balance on a quarterly basis. Any remaining balance would be due on June 7, 2004. On June 6, 2000 the option was extended for another year. These facilities are secured by the Company's investment in Diedrich Coffee, Inc. and provide that the Company may borrow using Prime, Bankers Acceptances or LIBOR based loans plus interest spreads which vary within a range depend- ing upon a ratio of total debt to EBITDA. Borrowings currently bear interest at the lender's cost of funds plus 1.375%. Deferred financing charges of $125 ($235 at June 30, 1999) incurred by the Company in securing these facilities will con- tinue to be amortized over the term of the loan based on the repayment of the facility. Management considers the carrying value of long-term debt to be fair market value. 20 Comparative Financial Statements . A19 8. SHARE CAPITALAuthorized share capital consists of an unlimited number of common shares and an unlimited number of first preference shares issuable in one or more series of which none are issued. Details of share transactions during the year are as follows: Common Shares Shares Amount Balance as at June 27, 1998 14,329,590 $ 94,833 Issued for cash to employees and directors 16,599 143 6,441 shares reserved for issue to directors 81 Repurchase of shares (5,035,800) (33,387) Balance as at June 30, 1999 9,310,389 $ 61,670 Issued for cash to employees and directors 49,170 513 14,480 shares reserved for issue to directors 172 Balance as at June 24, 2000 9,359,559 $ 62,355 On April 26, 2000, the Company declared a special dividend of $2.00. This dividend was paid on May 31, 2000 to share- holders of record on May 19, 2000. On May 14, 1999, the Company offered to purchase for cancellation a maximum of five million of its then issued and out- standing common shares at a price of $16.00 per common share. Five million common shares were tendered by sharehold- ers prior to the June 7, 1999 expiration of the offer and on June 11, 1999, the Company purchased and cancelled these shares at a cost of $80, 700, including transaction costs. The common stock account of the Company was reduced by the weighted average original issue cost of the purchased common shares and the balance of the transaction cost was applied to retained earnings. On September 18, 1998, The Toronto Stock Exchange approved the Company's Notice of Intention to make a Normal Course Issuer Bid. This Bid permitted the Company to repurchase, for cancellation, through the facilities of the Exchange up to a total of 716,522 common shares, representing approximately 5% of the outstanding common shares. During the year ended June 30, 1999, 35,800 common shares were repurchased and cancelled at a cost of $429. The Toronto Stock Exchange's approval for the Company to make a Normal Course Issuer Bid expired September 21, 1999. No common shares were repurchased and cancelled in fiscal 2000 prior to the expiration date. The Company has a Directors Share Plan, an Amended Director, Officer and Employee Stock Option Plan, and a Share Purchase Plan under which shares are reserved for future issue. Up to 147,876 shares may be issued under the Directors Share Plan, which was approved by the shareholders at the October 16, 1996 Annual and Special Meeting. During the year ended June 24, 2000, 3,399 shares at prices ranging from $7.21 to $14.09 were issued to directors of the Company under this Plan. Also during the current fiscal year, 14,480 shares have been allotted for future issue to directors at prices ranging from $7.21 to $15.12. Under the Directors Share Plan at June 24, 2000, a total of 10,984 shares have been issued and 35,272 shares have been reserved for issue, and 101,620 shares remain available for future issue or allotment. The compensation liability related to shares allotted and reserved for issue is recorded in share capital.Up to 1,360,775 shares have been authorized for issue under the Amended Director, Officer and Employee Stock Option Plan (the "Option Plan"). To June 24, 2000, 141,475 shares have been issued upon exercise of stock options under the Option Plan. Options granted under the Option Plan prior to June 24, 1998 are exercisable commencing three years after the date granted and expire seven years thereafter. Options granted on or after June 24, 1998 vest in equal annual install- ments over three years following the date of grant and expire ten years from the grant date. Options to purchase 524,513 shares remain available to be granted in the future. During the current year the exercise price of all outstanding share options was reduced by $1.03. This was done in consideration of the impact of the special dividend of $2.00 per common share paid May 31, 2000. Details of the Option Plan activity are as follows: Weighted Exercise Average Number Option Price Exercise Price Outstanding at June 27, 1998 554,907 $ 6.75 - $17.19 $10.26 Issued 242,819 $11.35 - $15.97 $13.20 Cancelled (78,825) $ 9.97 - $15.97 $11.12 Exercised (12,300) $ 6.75 - $ 8.00 $ 7.17 Outstanding at June 30, 1999 706,601 $ 6.75 - $17.19 $11.60 Issued 99,561 $ 7.21 - $14.09 $12.66 Cancelled (66,100) $ 6.97 - $16.16 $13.13 Exercised (45,275) $ 5.72 - $12.50 $10.01 Outstanding at June 24, 2000 694,787 $ 5.72 - $16.16 $10.67 The details of share options outstanding at June 24, 2000 are as follows: Vested Non-Vested Weighted Average Number Weighted Average Number Fiscal Year of Expiry Exercise Price of Shares Exercise Price of Shares 2003 $ 5.97 65,000 2004 $ 5.72 12,400 200 $ 6.81 16,000 2006 $10.97 15,000 2007 $10.54 59,594 $ 9.98 535 2008 $ 9.73 235,978 2009 $13.04 67,947 $13.04 135,272 2010 $12.63 87,061 Total $ 9.52 235,941 $11.26 458,846 Total number of vested and non-vested shares and weighted average exercise price $10.67 694,787Under the Share Purchase Plant, which was approved by the Board of Directors on October 16, 1996, employees have an opportunity from time-to time to elect to purchase shares at fair market value front treasury Up to 418,588 shares are reserved for future issue. To June 24, 2000, 800 shares have been issued (June 20, 1999 -800) under the Share Purchase Plan. D. INTEREST AND OTHER INVESTMENT INCOME 2090 Interest and other investment income $ 1.280 Interest expense Long-term debt (1.298) (789) Other (94) (9) 1 (13) $ 3.850 10. INCOME TAXES 2000 1909 Combined Canadian approximate income tax rates Income taxes at combined Canadian statutory rates 14118 $(2.644) Non-deductible losses on disposition of investment 7.080 Non-taxable gain (831) Expenses not deductible for tax purposes Manufacturing and processing profits reduction (80) (72) Adoption of new accounting standard for income taxes (24) Other (78) (8) 1 4.058 $ 4.849 Effective, July 1, 1999, the Company changed its method of accounting for income taxes to the asset and liability methods Previously, income taxes were accounted for by the deferral method. The cumulative effect of this change has been accounted for in the current year. The prior period comparatives remain unchanged. As of June 24, 2000, the Company has available capital losses for tax purposes of approximately $24,000 that may be used to reduce its capital gains for income tax purposes in future years. The benefits of these losses have not been recognized in these financial statements.A22 APPENDIX A . Specimen Financial Statements The significant components of future income tax assets and liabilities are summarized as follows: 2000 1999 Capital loss carryforwards $ 7,095 Write down of investment 1,243 Amortization (25) (116) Reserves 313 633 Share issue costs - 311 Deferred financing costs 7 (102) Other (26) 8,633 700 Valuation allowance (8,338) Net future income tax asset $ 295 $ 700 The Company has recorded a valuation allowance against its capital loss carryforwards and the investment write down because it believes it will likely not generate sufficient capital gains in the future to utilize these future tax assets. Realization of the future tax benefit is dependent upon many factors, including the Company's ability to generate capital gains in the future. 11. CASH HELD IN TRUST Cash held in trust on behalf of franchisees at June 24, 2000 amounted to $2,302 (June 30, 1999 - $4,462) and is not recorded on the Company's balance sheet. 12. MINIMUM LEASE COMMITMENTS AND CONTINGENT LIABILITIES The Company has lease commitments for corporate-owned stores and office premises. The Company also, as the franchisor, is the lessee in most of the franchisees' lease agreements. The Company enters into sublease agreements with the individ- ual franchisee, whereby the franchisee assumes responsibility for and makes lease payments directly to the landlord. The Company's minimum lease commitments and contingent liabilities for any leases subject to a sublease agreement between the Company and a franchisee at June 24, 2000 are approximately as follows: Minimum Lease Contingent Commitments Liabilities 2001 $ 577 $14,070 2002 586 13,585 2003 535 12,868 2004 513 12,182 2005 511 10,945 Thereafter 1,039 32,109 $3,761 $95,759 Page 22 / 25 +Comparative Financial Statements 13. RELATED PARTY TRANSACTIONS Included in "Loans to directors and officers" are loans due from directors totaling $674 (June 30, 1999 - $503) that were made under the Director Share Loan Plan (the "Loan Plan") which was approved by the Board of Directors on June 24, 1998. The loans are secured by promissory notes and bear interest equal to the amount of any ordinary dividends declared and paid on the common shares by the Company. Common shares purchased pursuant to the Loan Plan are pledged by the director to the Company as additional security for the repayment of the loan and all interest thereon. Repayment can be made at any time, but in any case no later than three months subsequent to the point in time at which the director ceases, for any reason, to be a director of the Company. As at June 24, 2000 the market value of the common shares pledged as security was less than the amount of the outstanding loans. As at June 30, 1999 the market value of the common shares pledged as security exceeded the amount of the outstanding loans. As at June 24, 2000, a non-interest-bearing loan totaling $250 (June 30, 1999 - $500) was due from an officer of the Company; this amount is included in "Prepaid expenses and sundry assets". $250 of the loan balance outstanding at June 30, 1999 was forgiven by the Company on June 26, 2000, and has been expensed in the fiscal 2000 year. The remaining $250 will be forgiven by the Company on July 2, 2001 providing that the officer is in the employ of the Company on that date. The outstanding loan balance is immediately repayable when the officer ceases, for any reason, to be an employee of the Company. During the year ended June 24, 2000, the Company recorded franchise income of $455 (June 30, 1999 - $462) from Cara Operations Limited, which owns approximately 39% of the Company's issued and outstanding common shares. The fran- chise income was earned in the normal course of business pursuant to the license agreement signed July 2, 1996. During the year ended June 30, 1999, the Company loaned some of its excess cash to Cara Operations Limited on a short- term basis at prevailing market rates. Total interest earned on the loans made during the year ended June 30, 1999 was $114. At June 30, 1999 there were no loans outstanding. 14. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION 2000 1999 Interest paid $1,029 $1,012 Taxes paid $5,436 $4,374 CASH AND CASH EQUIVALENTS Cash and cash equivalents included in the cash flow statements comprise the following: 2000 1999 Cash on hand and balances with banks $ 448 822 Short-term investments 998 Total cash and cash equivalents $1.446 $ 822A24 APPENDIX A > Specimen Financial Statements 15. SEGMENTED INFORMATION The following is a summary of the Company's operations and assets by geographic area: Canada United States Consolidated June 24 June 30 June 24 June 30 June 24 June 30 2000 1999 2000 1999 2000 1999 Systemwide sales $159,198 $ 148,970 $ 191,783 $ 159, 198 $340,753 Revenue Franchise revenue $ 19,021 17,573 $ 10,590 $ 19,021 $ 28,163 Sales from corporate stores 1,750 3,507 48,138 1,750 51,645 Product sales 73 385 25,164 73 25,549 Total revenue $ 20,844 $ 21,465 - $ 83,892 $ 20,844 $ 105,357 EBITDA - operations $ 11,814 9,549 $ 3,145 $ 11,814 $ 12,694 Corporate office administration (1,728) (2,299) (1,728) (2,299) EBITDA $ 10,086 7,250 3,145 $ 10,086 $ 10,395 Depreciation and amortization 921 730 2.657 921 3,387 Earnings before the undernoted $ 9,165 $ 6,520 488 $ 9,165 $ 7,008 Write down of investment (4,122) Loss on disposition of investments (16,233) Earnings (loss) before interest, taxes and minority interest 5,043 $ (9,225) Interest and other investment income (expense) (13) 3,350 Income taxes (4,058) (4,249) Minority interest 29 Net earnings (loss) 972 (10,095) Total assets $ 18,565 $ 49,584 $ 18,565 $ 49,584 Number of stores: Franchised 392 374 392 374 Corporate 6 Total number of stores 398 380 398 380