<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 9, 1996
REGISTRATION NO. 333-08633
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 5
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
DIEDRICH COFFEE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
2144 MICHELSON DRIVE
IRVINE, CALIFORNIA 92612
(714) 260-1600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
<TABLE>
<S> <C> <C>
DELAWARE 5499 33-0086628
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
------------------------
STEVEN A. LUPINACCI
CHIEF EXECUTIVE OFFICER
DIEDRICH COFFEE, INC.
2144 MICHELSON DRIVE
IRVINE, CALIFORNIA 92612
(714) 260-1600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
MARK W. SHURTLEFF, ESQ. ROBERT B. KNAUSS, ESQ.
JOHN M. WILLIAMS, ESQ. SANDRA A. SEVILLE-JONES, ESQ.
GIBSON, DUNN & CRUTCHER LLP MUNGER, TOLLES & OLSON
4 PARK PLAZA 355 SOUTH GRAND AVENUE, 35TH FLOOR
IRVINE, CALIFORNIA 92614 LOS ANGELES, CA 90071
(714) 451-3800 (213) 683-9100
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED SEPTEMBER 9, 1996
2,200,000 SHARES
LOGO
DIEDRICH COFFEE, INC.
COMMON STOCK
------------------------
Of the 2,200,000 shares of common stock, par value $.01 per share (the
"Common Stock"), offered hereby (the "Offering"), 1,600,000 shares are being
offered by Diedrich Coffee, Inc. ("Diedrich Coffee" or the "Company") and
600,000 shares are being offered by certain stockholders of the Company (the
"Selling Stockholders"). See "Principal and Selling Stockholders." The Company
will not receive any of the proceeds from the sale of shares by the Selling
Stockholders. Prior to this Offering, there has been no public market for the
Common Stock and there can be no assurance that such a market will develop or,
if a market develops, that it will be sustained. It is currently anticipated
that the initial public offering price will be between $10.50 and $11.50 per
share. The initial public offering price of the shares of Common Stock offered
hereby will be determined by negotiation among the Company, the Selling
Stockholders and The Boston Group, L.P. (the "Representative"), as
representative of the several underwriters (the "Underwriters"), and is not
necessarily related to the Company's asset value, net worth or other established
criteria of value. See "Risk Factors" and "Underwriting." The Common Stock has
been approved for quotation on the Nasdaq National Market under the symbol
"DDRX," subject to notice of issuance.
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" ON PAGE 8.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<S> <C> <C> <C> <C>
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</TABLE>
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS
<S> <C> <C> <C> <C>
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Per Share..................... $ $ $ $
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Total(3)...................... $ $ $ $
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</TABLE>
(1) Does not include (a) a non-accountable expense allowance payable to the
Representative, and (b) the value of the three-year warrants granted to the
Representative to purchase up to 160,000 shares of Common Stock at an
exercise price per share equal to 120% of the greater of: (i) the Price to
Public per share or (ii) $11.50 (the "Representative's Warrants"). For
indemnification and contribution arrangements with the Underwriters, see
"Underwriting."
(2) Before deducting expenses payable by the Company estimated at $1,400,000,
including the Representative's non-accountable expense allowance. See
"Underwriting."
(3) The Selling Stockholders have granted the Underwriters a 30-day option to
purchase up to 330,000 additional shares of Common Stock, solely to cover
over-allotments, if any. See "Underwriting." If all such shares of Common
Stock are purchased, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Selling Stockholders will be $ ,
$ and $ , respectively.
The Common Stock is offered by the Underwriters, when, as and if delivered
to and accepted by them, and subject to their right to withdraw, cancel or
modify the Offering and reject any order in whole or in part. It is expected
that delivery of the certificates for the shares of Common Stock will be made on
or about , 1996.
------------------------
THE BOSTON GROUP, L.P.
The date of this Prospectus is , 1996.
<PAGE> 3
[Photo of the Company's logo surrounded by twelve labels with a background of
roasted coffee beans]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE> 4
<TABLE>
<C> <S>
With a coffee growing heritage spanning three
[PHOTO (i)] generations, Diedrich Coffee selects only the
Martin Diedrich finest arabica beans from each of the world's
major growing regions.
Diedrich's proprietary formula custom roasts
[PHOTO (ii)] individual coffees from each specific region.
Regional Roasting Facility This custom roasting process highlights flavor
characteristics unique to each coffee.
Based on the European coffeehouse concept,
[PHOTO (iii)] each of Diedrich's Coffeehouses serve as a
Diedrich Coffee House, Denver, Colorado community meeting place, designed to be
interesting and inviting and tailored to
reflect the unique character of each
neighborhood.
[PHOTO (iv)]
Mission San Juan Capistrano, California Store
[PHOTO (v)]
Irvine Entertainment Center, Irvine,
California
</TABLE>
Five photos comprised of (i) one photo of the Company's Chairman of the
Board with a coffee plant; (ii) one photo of the Company's Chairman of the Board
with a coffee roasting machine; (iii) one photo of exterior of a Company
coffeehouse; (iv) one photo of interior of Company's Mission San Juan Capistrano
coffeehouse; and (v) one photo of interior of Company's Irvine Entertainment
Center coffeehouse.
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements of
the Company, including the notes thereto, appearing elsewhere in this
Prospectus. Except as otherwise indicated, the information presented in this
Prospectus assumes no exercise of the Underwriters' over-allotment option or the
Representative's Warrants, takes into consideration the conversion of the Series
A and Series B Preferred Stock into Common Stock on or prior to the consummation
of this Offering and gives effect to the reincorporation of the Company in the
State of Delaware to be effected prior to the consummation of this Offering.
Prospective investors should carefully consider the information discussed under
"Risk Factors." References to "fiscal" years refer to the fiscal year ending on
January 31 of the indicated calendar year for fiscal 1996 and prior years and to
the fiscal year ending on the Wednesday nearest January 31 of the indicated
calendar year for all years subsequent to 1996.
THE COMPANY
Diedrich Coffee is a rapidly growing specialty coffee roaster/retailer that
currently operates thirty-seven coffeehouses located in Southern California,
Colorado and Texas. Diedrich Coffee sells high quality coffee beverages made
with its own freshly roasted coffee. In addition to brewed coffee, the Company
offers a broad range of Italian-style beverages such as espresso, cappuccino,
caffe latte, caffe mocha and espresso machiato. See "Business -- Diedrich's
Coffee." To complement beverage sales, the Company sells light food items and
whole bean coffee through its coffeehouses.
The first retail store operating under the name Diedrich Coffee commenced
operations in Orange County, California in 1972. The Company grew from three
coffeehouses in fiscal 1992 to thirty-seven coffeehouses as of July 31, 1996
through the construction of new coffeehouses and recent acquisitions. In
addition, the Company has entered into leases that will permit the opening of
five additional coffeehouses in the next four months. The Company's expansion
strategy is to own and operate newly-developed coffeehouses and to acquire and
convert existing specialty coffee retailers in geographic regions where it has
existing coffeehouses. The Company also evaluates new geographic regions (and
analyzes entry through new store openings or acquisitions) where it believes it
can operate profitably. See "Business -- Growth Strategy."
The Company seeks to further differentiate itself and increase its strong
brand name recognition by developing and operating sophisticated and inviting
coffeehouses intended to serve as neighborhood gathering places. Additionally
Diedrich Coffee focuses heavily on the quality of its products, sourcing its
unroasted coffee beans directly from coffee-producing nations through its
contacts with exporters and growers located in certain of these countries and
through specialty coffee brokers. These beans are then custom roasted in
carefully controlled batches according to the Company's standards and
proprietary recipes developed by the Diedrich family over three generations. To
ensure freshness, the Company has roasting facilities in its principal regions
of operations (Orange County and Denver) and plans to add roasting facilities in
each of the major regions where it establishes operations. See
"Business -- Diedrich's Coffee." The Company believes that this strategy,
together with enthusiastic and friendly customer service, creates a loyal
customer base. Diedrich coffeehouses are generally established in
high-visibility locations, consistent with the Company's strategy of developing
a substantial repeat client base. The Company's coffeehouses average
approximately 1,500 square feet, ranging in size from 725 to 2,654 square feet.
In February 1996, the Company consummated the acquisition of nineteen
retail coffeehouse locations from two separate specialty coffee chains.
Seventeen of the acquired stores are located in Denver, Colorado and the
remaining two stores are located in Houston, Texas. Each of the Denver and
Houston markets had been previously identified by the Company as targets for
near-term expansion. The Company is in the process of converting eighteen of the
acquired stores to the Diedrich coffeehouse format and, as of July 31, 1996, the
conversion of twelve stores had been completed. Management believes that the
addition of the Denver stores will enable the Company to benefit from greater
marketing efficiencies resulting from geographic concentration and the addition
of the two Houston locations will form the basis for further expansion. See
"Business -- Recent Acquisitions."
3
<PAGE> 6
Diedrich Coffee, the predecessor of the Company, was incorporated in
California in March 1985. In connection with this Offering, Diedrich Coffee will
reincorporate in the State of Delaware. The Company's principal executive
offices are located at 2144 Michelson Drive, Irvine, California 92612, and its
telephone number is (714) 260-1600.
------------------------
The Company intends to furnish its security holders annual reports
containing audited financial statements with a report thereon by independent
accountants, and such other periodic reports as the Company may determine to be
appropriate or as required by law.
THE OFFERING
<TABLE>
<S> <C>
Common Stock outstanding prior to the Offering... 3,791,650 shares
Common Stock offered by the Company.............. 1,600,000 shares(1)
Common Stock offered by the Selling
Stockholders................................... 600,000 shares(2)
Common Stock to be outstanding after the
Offering....................................... 5,391,650 shares(1)
Use of proceeds by the Company................... The net proceeds to the Company, estimated
to be approximately $15.1 million, will be
used for funding the opening of additional
coffeehouses (through new store
construction and acquisitions), repayment
of the amounts outstanding under the
Company's short-term revolving credit
facility, a revolving promissory note and
certain other indebtedness, funding for
infrastructure enhancements and working
capital for other general corporate
purposes. See "Use of Proceeds."
Risk Factors..................................... The Common Stock offered hereby involves a
high degree of risk and dilution. See
"Risk Factors" and "Dilution."
Proposed Nasdaq National Market symbol........... DDRX(3)
</TABLE>
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(1) Excludes (i) 160,000 shares of Common Stock which may be issued by the
Company upon the exercise in full of the Representative's Warrants, (ii)
131,350 shares of Common Stock which may be issued by the Company upon the
exercise in full of the Chief Executive Officer's stock options at an
exercise price of $1.45 per share, and (iii) an aggregate of 600,000 shares
of Common Stock reserved for issuance pursuant to the Company's 1996
Non-Employee Directors Stock Option Plan and 1996 Stock Incentive Plan. See
"Underwriting" and "Management."
(2) Excludes 330,000 shares of Common Stock subject to the Underwriters'
over-allotment option granted by the Selling Stockholders. See
"Underwriting."
(3) While the Company's Common Stock has been approved for quotation on the
Nasdaq National Market, there can be no assurance that a public trading
market will develop, or, if developed, will be sustained. See "Risk
Factors."
4
<PAGE> 7
SUMMARY FINANCIAL AND OTHER DATA
The summary financial data in the table are derived from the financial
statements and related notes thereto of the Company and the pro forma financial
statements. The data should be read in conjunction with the financial
statements, related notes and other financial information included elsewhere
herein.
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31, TWELVE THIRTEEN
--------------------------------------------------- WEEKS WEEKS
PRO ENDED ENDED
FORMA APRIL 25, MAY 1,
1994 1995 1996 1996(1) 1995(2) 1996(2)(3)
-------- -------- ---------- ---------- --------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND OTHER DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales................. $ 4,414 $ 7,591 $ 10,244 $ 12,601 $ 2,058 $ 4,275
Cost of sales and related
occupancy costs......... 1,796 3,164 4,409 5,932 872 1,773
Store operating
expenses................ 1,594 2,584 3,520 4,686 669 1,735
Other operating
expenses................ 146 282 277 277 64 60
Depreciation and
amortization............ 102 255 354 498 62 154
General and administrative
expenses................ 809 851 1,335 1,782(4) 277 337
Operating income (loss)... (33) 455 349 (574) 114 216
Net income (loss)......... $ (89) $ 324 $ 186 $ (396) $ 59 $ 107
======== ======== ========== ========== ======== ==========
Pro forma net income
(loss) per share(5)..... $ 0.06 $ (0.13) $ 0.03
========== ========== ==========
Shares used in pro forma
per share
calculation(5).......... 3,153,000 3,087,000 3,906,000
========== ========== ==========
OTHER DATA:
Average sales per
store(6)................ $883,000 $946,000 $1,002,000 $ 216,000 $ 223,000(7)
Average sales per square
foot(6)................. $ 653 $ 678 $ 706 $ 153 $ 148(7)
Percentage change in
comparable store
sales(8)................ 8.0% 17.0% 10.2% 19.8% 8.5%(9)
Number of stores open for
full period............. 4 7 8(10) 8(10) 12
Number of stores open at
end of period........... 7 7 12 8 33(11)
Pre-opening expenses...... $ 68,000 $ -- $ 87,000 $ 15,000 $ 44,000
</TABLE>
<TABLE>
<CAPTION>
JANUARY 31, MAY 1,
-------------------- --------------------------
PRO FORMA AS ADJUSTED
1996 1996(1) 1996(2) 1996(12)
------ --------- ---------- -----------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficiency).......................... $ (53) $(1,436) $ (3,819) $11,521
Total assets.......................................... 5,316 6,699 8,915 21,274
Long-term obligations, less current portion........... 829 829 304 --
Total stockholders' equity............................ 3,304 3,304 3,412 19,056
</TABLE>
- ---------------
(1) The pro forma condensed financial statement information assumes the
Company's acquisition of the 12 stores from Brothers Gourmet Coffees, Inc.
(the "Brothers Stores") occurred on February 1, 1995 for the statement of
operations data and on January 31, 1996 for the balance sheet data. Pro
forma statement of operations and balance sheet data excludes the
acquisition of 7 former bakery-espresso cafes from an unrelated seller (the
"Acquired Cafes") as the acquisition does not require pro forma
presentation. See Note 9 of Notes to Financial Statements and the Unaudited
Pro Forma Condensed Financial Statements.
5
<PAGE> 8
(2) Effective February 1, 1996, the Company changed its fiscal year end from
January 31 to a fiscal year ending on the Wednesday nearest January 31.
Accordingly, the quarterly period ended May 1, 1996 includes 13 weeks.
Prior to the change in fiscal year end, the Company's quarterly periods
included 12 weeks, except for the fourth quarter which had approximately 16
weeks.
(3) Includes the results of operations attributable to the Brothers Stores and
Acquired Cafes since the dates that the acquisitions from unrelated sellers
were completed in February 1996. The pro forma statement of operations data
for the 13 weeks ended May 1, 1996 did not differ materially from the
historical results of operations for such period and, accordingly, has not
been presented. See Note 9 of Notes to Financial Statements.
(4) The pro forma general and administrative expenses include a proportional
allocation to the 12 Brothers Stores of the corporate and administrative
salaries and related employee benefit costs, and other corporate overhead
expenses, which were allocated to all stores operated by Brothers Gourmet
Coffees, Inc. Although no adjustment has been made, the Company believes
that a substantial portion of such allocated expenses are redundant as a
result of its overhead infrastructure and, accordingly, does not believe
the pro forma general and administrative expenses are indicative of the
actual general and administrative expenses that would have been incurred
had the Company owned and operated the Brothers Stores for the year ended
January 31, 1996. See the Unaudited Pro Forma Condensed Financial
Statements.
(5) Pro forma net income (loss) per share is computed by dividing net income
(loss) by the weighted average number of common and common equivalent
shares outstanding during the respective period, assuming the conversion of
the Series A and Series B Preferred Stock to Common Stock as of the date of
issuance. Dividends on the Series A and Series B Preferred Stock have been
excluded from the computation since the preferred stock has been assumed to
have been converted to Common Stock.
(6) Includes only stores open for the entire period indicated.
(7) Sales for the Acquired Cafes and Brothers Stores are not included as none
of these stores were open for the entire period. During this period,
average weekly per store sales for the Acquired Cafes and Brothers Stores
since their respective dates of acquisition were $5,017 while average
weekly per store sales for the Company, excluding such stores, were
$17,191.
(8) Includes only stores open one year or more at the beginning of the period.
(9) The percentage change in comparable store sales has been adjusted for the
additional week in the quarterly period ended May 1, 1996.
(10) Includes one store opened on the second day of the period and considered to
have been open for the entire period.
(11) In accordance with management's initial evaluation at the time of the
acquisition, the Company closed one of the Brothers Stores after May 1,
1996.
(12) Adjusted to reflect the sale of 1,600,000 shares of Common Stock offered by
the Company hereby, based upon an assumed initial public offering price of
$11.00, and the application of the estimated net proceeds therefrom. See
"Use of Proceeds."
6
<PAGE> 9
RECENT OPERATING RESULTS
(UNAUDITED)
For the thirteen weeks ended July 31, 1996, the Company had net sales of
approximately $4,667,000 and net income of approximately $6,000 as compared to
net sales of approximately $2,166,000 and net income of approximately $60,000
for the twelve week period ended July 18, 1995. The decrease in net income for
the second quarter in fiscal 1997 was consistent with the Company's growth
strategy as the Company scheduled most of the budgeted conversion expenses for
the Company's acquisitions in Denver and Houston to take place during this
quarter and also opened five new stores in California. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- General." The noncapitalized conversion costs of approximately
$76,000, plus pre-opening costs of approximately $60,000 in connection with the
new stores opened in California, during the quarter were significantly in excess
of the comparable expenses during the second quarter in fiscal 1996 of $18,000
for pre-opening expenses. In addition, as part of the conversion process,
fifteen of the acquired stores were temporarily closed for periods varying from
five days to twenty-three days which resulted in a reduction in net sales
despite the fact that certain operating expenses, such as occupancy costs and
management salaries, continued to be incurred.
The percentage increase in comparable store sales comparing net sales for
stores open during the full period in the second quarter in fiscal 1996 to net
sales for the same stores in the second quarter of fiscal 1997 was 0.7% versus
8.5% for the first quarter in fiscal 1996 compared to the first quarter in
fiscal 1997. Only eight of the Company's thirty-seven coffeehouses were open for
the full period in the second quarter of fiscal 1996 and are therefore included
in the base for comparable store sales. On average these stores have been open
for five years and had sales of approximately $1,021,000 per store for the
twelve months ended July 31, 1996. The Company believes that the variation in
comparable store sales results in part from the over-representation of mature,
revenue-stable stores in the computation base. Furthermore, given the small
number of stores included in the base for comparable store sales, management
believes that this percentage will remain volatile until the base contains a
more statistically meaningful number of stores that more accurately reflects the
overall composition of the Company.
7
<PAGE> 10
RISK FACTORS
Each prospective investor should carefully consider, in addition to the
other information contained in this Prospectus, the following information in
evaluating the Company and its business before making an investment decision.
Limited Operating History; History of Operations. As of January 31, 1996,
the Company operated twelve coffeehouses, only seven of which had been open more
than one year. The Company had a net loss of $89,000 in fiscal 1994 and net
income of $324,000 and $186,000 in fiscal 1995 and 1996, respectively. Although
the Company has been profitable for the last two years and has experienced
significant recent revenue growth, there can be no assurance that this growth
will continue or that the Company will remain profitable on a quarterly or
annual basis in the future. At January 31, 1996, the Company had an accumulated
deficit of $52,000. The Company's working capital deficiency at the end of
fiscal years 1994, 1995 and 1996 was $364,000, $218,000 and $53,000,
respectively. Management anticipates that profitability may be adversely
affected during fiscal 1997 due to the integration of stores acquired from
Brothers Gourmet Coffees, Inc. (the "Brothers Stores") and the acquisition of
former bakery-espresso cafes (the "Acquired Cafes") during this period. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Reliance on Growth Strategy; Recent Acquisitions and Rapid Expansion. The
Company is pursuing an aggressive growth strategy, the success of which will
depend in large part upon its ability to open and operate new coffeehouses and
to operate a larger business profitably. From the end of fiscal 1992 through
July 31, 1996, the Company expanded the number of coffeehouses from three to
forty-two, of which five are not yet open but are subject to binding leases.
Although the Company has executed these additional leases for future
coffeehouses, there can be no assurance that the Company will be successful in
developing and profitably operating additional coffeehouse sites. Eighteen of
the Company's current coffeehouses were acquired through two separate
acquisitions in February 1996. See "Business -- Recent Acquisitions." The
Company intends to convert these stores and operate them as Diedrich
coffeehouses. As of July 31, 1996, the Company had completed twelve conversions
and as previously anticipated closed one of the acquired stores. Under prior
management, these stores were not profitable, and no assurance can be given that
the Company's efforts to convert these operations to Diedrich coffeehouses will
be successful or result in profitability. Even if the Company is successful in
enhancing profitability after converting acquired stores, there can be no
assurance as to how long a period of time accomplishing such profitability will
take or the levels of future profitability that can be achieved. Acquisitions
involve a number of risks, including, the diversion of management's attention,
issues related to the assimilation of the operations and personnel of the
acquired businesses, and potential adverse effects on the Company's operating
results. The Company's recent acquisitions have resulted in increases in general
and administrative expense and diversion of management resources. Furthermore,
the Company has not yet fully completed the conversion of the Denver
coffeehouses to the Company's financial and management control systems. There
can be no assurance that the Company will find attractive acquisition candidates
in the future, that acquisitions can be consummated on acceptable terms, that
any acquired companies can be integrated successfully into the Company's
operations or that any such acquisitions will not have an adverse effect on the
Company's financial condition or results of operations.
The Company's planned expansion will present numerous operational and
competitive challenges to the Company's senior management and employees as new
potential sites are evaluated, developed and operated. Among other challenges,
the Company anticipates that expansion into new geographic regions will entail
opening multiple coffeehouses in those other regions in a relatively short
period of time. Such growth has, and will continue to place significant demands
on the Company's management, working capital and financial and management
control systems. Failure to upgrade the Company's operating, management and
financial control systems or difficulties encountered during such upgrades could
adversely affect the Company's business and results of operations. Although the
Company believes that its systems and controls are adequate to address its
current needs, there can be no assurance that such systems will be adequate to
address future expansion of the Company's business. The Company's results of
operations will be adversely affected if revenues do not increase sufficiently
to compensate for the increase in operating expenses resulting from expansion
and there can be no assurance that any expansion will be profitable or that it
will not adversely affect the Company's results of operations. In addition, the
success of any expansion plans will depend in part upon the Company's ability to
continue to improve and expand its management and financial control systems, to
attract, retain and
8
<PAGE> 11
motivate key employees and to raise additional capital. There can be no
assurance the Company will be successful in these regards. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources," "Business -- Growth Strategy"
and "Business -- Coffeehouses -- Diedrich Coffeehouse Locations."
Successful achievement of the Company's expansion plans will depend in part
upon its ability to: (i) select and compete successfully in new markets; (ii)
obtain suitable sites at acceptable costs in highly competitive real estate
markets; (iii) hire, train and retain qualified personnel, including additional
regional management; (iv) integrate new stores into existing distribution,
inventory control and information systems; (v) expand roasting facilities in
current and new regions to enable freshly roasted coffee deliveries to
coffeehouses in those regions; and (vi) maintain quality control. The Company
will incur significant start-up costs in connection with entering new markets,
including costs associated with establishing new regional infrastructure that
will permit the Company to maintain its strategy of being a regional
roaster/retailer. In addition, the opening of additional coffeehouses in current
markets could detract from sales at certain of the Company's existing
coffeehouses. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Results of Operations." There can be no assurance
that the Company will achieve its planned expansion goals, manage its growth
effectively or operate its existing and new coffeehouses profitably. The failure
of the Company to achieve its expansion goals on a timely basis, if at all,
manage its growth effectively or operate existing or any new coffeehouses
profitably would have a material adverse effect on the Company's financial
condition or results of operations. See "Business -- Growth Strategy,"
"Business -- Coffeehouses," "Use of Proceeds" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
Need for Additional Financing. The proceeds of this Offering, borrowings
under the Company's credit facility and cash flow from operations are expected
to be sufficient to fund the Company's capital expenditures, estimated to be
$5.3 million, for the last three quarters of fiscal 1997. In order to achieve
and maintain the Company's anticipated growth rate thereafter, including
geographic expansion, the Company believes that it may need to obtain additional
bank financing or sell additional debt or equity (or hybrid) securities in
future public or private financings. In addition, the Company may incur debt or
issue equity securities in order to finance acquisitions. Any such equity-based
financings would dilute the interests of investors in this Offering. There can
be no assurance that any such additional financing will be available on terms
satisfactory to the Company, if at all. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
Fluctuations in Availability and Cost of Unroasted Coffee. The Company
depends upon both its outside brokers and its direct contacts with exporters and
growers in countries of origin for the supply of its primary raw material,
"green" or "unroasted" coffee. Coffee supply and price are subject to
significant volatility beyond the control or influence of the Company. Although
most coffee trades in the commodity market, coffee of the quality sought by the
Company tends to trade on a negotiated basis at a substantial premium above
commodity coffee pricing, depending upon the origin, supply and demand at the
time of purchase. Supply and price can be affected by multiple factors in the
producing countries, including weather and political and economic conditions. In
addition, unroasted coffee prices have been affected in the past, and may be
affected in the future, by the actions of certain organizations and
associations, such as the International Coffee Organization or the Association
of Coffee Producing Countries, that have historically attempted to establish
commodity price controls of unroasted coffee through agreements establishing
export quotas or restricting coffee supplies worldwide. No assurance can be
given that these organizations (or others) will not succeed in raising unroasted
coffee prices or that, in such event, the Company will be able or choose to
maintain its gross margins quickly by raising prices without affecting demand.
Increases in the price of unroasted coffee, or the unavailability of adequate
supplies of unroasted coffee of the quality sought by the Company -- whether due
to the failure of its suppliers to perform, conditions in the coffee-producing
countries, or otherwise -- could have a material adverse effect on the Company's
results of operations. See "Business -- Diedrich's Coffee."
To mitigate the risks associated with increases in coffee prices and to
provide greater predictability in the prices the Company pays for its coffee,
the Company has from time to time, depending upon market volatility, entered
into fixed-price purchase commitments for a portion of its unroasted coffee
requirements. There can
9
<PAGE> 12
be no assurance that these activities will significantly protect the Company
against the risks of increases in coffee prices or that they will not result in
the Company's having to pay substantially more for its supply of coffee than
would have been required absent such activities. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Coffee Prices
and Availability."
Limitations and Vulnerability as a Result of Geographic Concentration of
Management's Experience. Until recently, management's experience was limited to
operating coffeehouses in Southern California. Because the Company's management
has limited operating experience outside of Southern California, there can be no
assurance that the Company will be successful in other geographic areas. For
example, the Company's experience with construction and development outside the
Southern California area is limited, which may increase associated risks of
development and construction as the Company expands. Expansion to other
geographic areas may require substantially more funds for advertising and
marketing since the Company will not initially have name recognition or
word-of-mouth advertising as it does in Southern California. The centralization
of the Company's management in Southern California may pose difficulties in
terms of the Company's current and future expansion to new geographic areas
because the Company lacks experience with local distributors, suppliers,
consumers and other issues as a result of the distance between the Company's
main headquarters and its coffeehouses. These factors could impede the growth of
the Company and could have an adverse effect on the Company's results of
operations.
Competition. The market for prepared specialty coffee beverages is
fragmented and highly competitive, and competition is expected to continue to
increase substantially. The Company's coffee beverages compete directly against
all restaurant and beverage outlets that serve coffee as well as a growing
number of espresso stands, carts and stores. The Company's whole bean coffees
compete directly against specialty coffees sold at retail through supermarkets
and a growing number of specialty coffee stores. The coffee industry is
currently dominated by several large companies, such as Kraft General Foods,
Inc., Proctor & Gamble Co. and Nestle S.A., many of which have begun
aggressively marketing gourmet coffee products. While the market for specialty
gourmet coffee stores remains fragmented, the Company competes directly with
Starbucks Corporation ("Starbucks"), the largest U.S. specialty coffee retailer.
Starbucks has substantially greater financial, marketing and other resources
than the Company. Other competitors, some of which may have greater financial
and other resources than the Company, may also enter the markets in which the
Company currently operates or intends to expand.
One of the main areas of competition in the specialty coffee retail store
marketplace is in the procurement of prime retail store premises. The Company
competes against other specialty retailers and restaurants for store sites, and
there can be no assurance that management will be able to secure adequate,
additional sites at acceptable costs. See "Business -- Competition" and
"Business -- Coffeehouses -- Diedrich Coffeehouse Locations."
Geographic Concentration; Fluctuations in Regional Economic
Conditions. The Company's coffeehouses are currently located in Southern
California, Denver, Colorado and Houston, Texas. As a result, the Company's
success will also depend in large part upon factors affecting general economic
conditions and discretionary consumer spending in these regions. Any economic
downturn or reduction in consumer spending in those regions could have a
material adverse effect on the Company. See "Business -- Coffeehouses --
Diedrich Coffeehouse Locations."
Lack of Diversification. The Company's business is centered around
essentially one product: coffee. To date, the Company's operations have been
limited to the purchase and roasting of raw coffee beans and the sale of whole
bean coffees and coffee beverages, together with other food products, through
its coffeehouses. Any decrease in demand for coffee would have a material
adverse effect on the Company's business, operating results and financial
condition. See "Business -- Diedrich's Coffee."
Leases; Uncertainty of Renewal Terms. The Company's thirty-seven operating
coffeehouses are all on leased premises. Upon the expiration of certain of these
leases, there is no automatic renewal or option to renew. See
"Business -- Coffeehouses -- Diedrich Coffeehouse Locations." No assurance can
be given that these leases can be renewed, or, if renewed, that rents will not
increase substantially, either of which could adversely affect the Company.
Other leases are subject to renewal at fair market value, which could involve
10
<PAGE> 13
substantial rent increases, or are subject to renewal with a scheduled rent
increase, which could result in rents being above fair market value.
Effects of Compliance with Government Regulation. The Company is subject
to various federal, state and local laws, rules and regulations affecting its
businesses and operations. Each Diedrich coffeehouse and roasting facility is
and shall be subject to licensing and reporting requirements by numerous
governmental authorities which may include building, land use, environmental
protection, health and safety and fire agencies in the state or municipality in
which each is located. Difficulties in obtaining or failures to obtain the
necessary licenses or approvals could delay or prevent the development or
operation of a given coffeehouse, the conversion of the remaining Acquired Cafes
and Brothers Stores or limit the products available at a coffeehouse. Any
problems which the Company may encounter in renewing such licenses in one
jurisdiction may adversely affect its licensing status on a federal, state or
municipal level in other relevant jurisdictions. See "Business -- Government
Regulations."
Reliance on Key Existing and Future Personnel. The Company's success will
depend to a large degree upon the efforts and abilities of its officers and key
management employees, particularly Martin Diedrich (the Company's Chairman and
Director of Coffee) and Steven Lupinacci (the Company's President, Chief
Executive Officer and Chief Financial Officer). The loss of the services of one
or more of its key employees could have a material adverse effect on the
Company's business prospects and potential earning capacity. The Company has
entered into employment agreements with Messrs. Diedrich and Lupinacci, which
include, among other things, provisions restricting them from competing with the
Company during the terms of their respective employment agreements. The Company
has also entered into a stock option agreement with Mr. Lupinacci. See
"Management -- Employment Agreements and Compensation Arrangements." The Company
maintains and is the sole beneficiary of key person life insurance in the amount
of $1,000,000 on the life of Mr. Diedrich. The Company will need to continue to
recruit and retain additional key members of senior management to manage
anticipated growth, but there can be no assurance that the Company will be able
to recruit or retain additional members of senior management on terms suitable
to the Company. See "Management -- Directors, Executive Officers and Other Key
Employees."
Control by Certain Existing Stockholders. Upon completion of this
Offering, the Company's executive officers, directors and stockholders prior to
the Offering will beneficially own 59.3% (53.2% if the Underwriters exercise
their over-allotment option in full) of the outstanding shares of Common Stock.
As a result, such stockholders will be in a position to control or influence
significantly the affairs of the Company and certain matters requiring a
stockholder vote, including the election of directors, the amendment of the
Company's charter documents, the merger or dissolution of the Company and the
sale of all or substantially all of the Company's assets. See "Principal and
Selling Stockholders."
Authorization of Preferred Stock and Other Anti-Takeover Mechanisms. The
Company's Certificate of Incorporation authorizes the issuance of preferred
stock with such designations, rights and preferences as may be determined from
time to time by the Company's Board of Directors. Accordingly, the Board of
Directors is empowered, without stockholder approval, to issue preferred stock
with dividend, liquidation, conversion, voting and other rights that could
adversely affect the voting power or other rights of the holders of the Common
Stock. Issuance of the preferred stock could be utilized, under certain
circumstances, as a method of discouraging, delaying or preventing a change in
control of the Company. Although the Company has no present intention to issue
any shares of its preferred stock, there can be no assurance that the Company
will not do so in the future. See "Description of Capital Stock -- Preferred
Stock." The Company is also subject to the provisions of Section 203 of the
Delaware General Corporation Law (the "Delaware Law"), which will prohibit the
Company from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner.
Absence of Dividends. The Company has not paid any dividends on any of its
shares of capital stock since its inception and does not currently anticipate
paying dividends on its Common Stock in the foreseeable future. See "Dividend
Policy."
Immediate and Substantial Dilution. The assumed initial public offering
price is substantially higher than the book value per share of Common Stock.
Investors purchasing shares of Common Stock offered
11
<PAGE> 14
hereby will experience immediate and substantial dilution equal to $7.62 per
share in the net tangible book value of their shares. See "Dilution."
Seasonal Fluctuations of Operating Results. The Company's business has
been seasonal, with decreased sales (and net income) in the first fiscal quarter
of each year. Consequently, the Company's results of operations from any
particular quarter may not necessarily be indicative of net income or loss that
may be expected for any other particular quarter or for the whole year. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Seasonality and Quarterly Results."
Absence of Prior Public Market; Determination of Offering Price; Volatility
of Stock Price. Prior to the Offering, there has been no public market for the
Common Stock, and there can be no assurance that an active trading market will
develop or, if developed, be sustained upon completion of this Offering. There
also can be no assurance that the market price of the Common Stock will not
decline below the initial public offering price. The initial public offering
price of the Common Stock, which will be arbitrarily determined by negotiation
among the Company, the Selling Stockholders and the Representative, does not
necessarily bear any relationship to the Company's asset value, net worth or
other established criteria of value, and may not be indicative of the price of
the Common Stock that may prevail in the public market after the Offering. The
market price of the Common Stock may be significantly affected by numerous
factors such as quarter-to-quarter fluctuations in the Company's anticipated or
actual results of operations, changes in general market conditions,
announcements by the Company or its competitors and the price of unroasted
coffee. Securities of issuers having relatively limited capitalization or
securities recently issued in an initial public offering are particularly
susceptible to volatility based upon the short-term trading strategies of
certain investors. See "Underwriting."
Shares Eligible for Future Sale. Sales of a substantial number of shares
of Common Stock into the public market following the Offering could materially
adversely affect the prevailing market price for the Common Stock. Following
this Offering, the Company will have outstanding an aggregate of 5,391,650
shares of Common Stock, including 2,200,000 shares of Common Stock offered
hereby and "restricted securities" (the "Restricted Shares") pursuant to Rule
144 promulgated under the Securities Act of 1933, as amended (the "Securities
Act"). The shares of Common Stock offered hereby will be freely tradeable
without restriction or further registration under the Securities Act by persons
other than "affiliates" under Rule 144. Beginning 180 days after the Effective
Date, 3,191,650 Restricted Shares subject to lock-up agreements will become
eligible for sale in the public market pursuant to Rule 144, all of which will
be subject to the volume and other resale restrictions pursuant to Rule 144. The
Representative may, in its sole discretion and at any time without notice,
release all or any portion of the securities subject to lock-up agreements. See
"Shares Eligible for Future Sale." In addition, holders of 2,108,568 Restricted
Shares have registration rights that permit such holders to demand the
registration of such shares at the Company's expense and further requires that
such holders be given notice of and an opportunity to participate in any
registration of other securities by the Company. See "Description of Capital
Stock -- Registration Rights."
Recently Formed Representative May Be Unable to Complete Offering or Make a
Market. The Representative was formed in March 1995 and has completed four
public offerings. However, the Chairman, Vice Chairman, Senior Vice President of
Trading and Director of Corporate Finance of the Representative have additional
prior experience with public offerings. The Chairman of the Representative has
been in the securities industry for more than 11 years. He was associated with
various national broker-dealers, including as a registered principal and a
registered representative. The Vice Chairman of the Representative has been in
the securities industry for over 20 years, where he served in various
capacities, including executive officer and registered principal and
representative, for various firms providing back office and related services to
the securities industry, and was employed in various capacities by the National
Association of Securities Dealers, Inc. The Senior Vice President of Trading of
the Representative has been employed in the securities trading business for over
31 years. He has been responsible for supervising the market making operations,
as well as managing the correspondent wire operations, for a financial firm, and
worked as an over-the-counter trader at various financial firms. Nonetheless,
due to the Representative's limited history, there can be no assurance that the
Offering will be completed or, if completed, that an active trading market for
the Common Stock will develop. The Representative is not affiliated with the
Company or any controlling person of the Company. See "Underwriting."
12
<PAGE> 15
USE OF PROCEEDS
The net proceeds to the Company from the Offering, at an assumed initial
public offering price of $11.00, after deducting underwriting discounts and
commissions and estimated offering expenses, are estimated to be approximately
$15,144,000. The Company will not receive any proceeds from the sale of shares
of Common Stock by the Selling Stockholders, including any shares sold as a
result of the exercise of the Underwriters' over-allotment option. The Company
expects to use the net proceeds to repay indebtedness outstanding under the
Company's short-term revolving credit facility (approximately $3,599,000 with a
weighted average interest rate of 7.8% as of August 2, 1996). The funds borrowed
under this facility, which matures on November 1, 1996 (extended to October 1,
1997 upon consummation of the Offering), were used to pay off the Company's
previous line of credit and equipment line which were used for the acquisition
of the Brothers Stores, new store construction and refurbishment and general
working capital purposes. The Company also expects to use a portion of the net
proceeds to repay indebtedness outstanding under a subordinated revolving
promissory note with one of the Company's stockholders (approximately $1,415,000
with an interest rate of 11.25% as of August 2, 1996). See "Certain
Transactions." The funds borrowed pursuant to this note, which matures on
September 30, 1996, were used for coffeehouse construction and conversion of
acquired stores. The Company also intends to repay the outstanding balance on
several other items of indebtedness which, on August 2, 1996, amounted to an
aggregate of approximately $444,000 which bore interest at a weighted average
interest rate of 13.5%. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
Of the remaining net proceeds, approximately $8.2 million will be used to
fund the opening of additional coffeehouses (through new store construction and
acquisitions), as well as providing working capital for general corporate
purposes and approximately $1.5 million will be used to fund infrastructure
enhancements, which will primarily include upgrading the Company's management
information system and the Company's roasting and packaging facilities in
current and new regions in which the Company is operating. Although the Company
from time to time evaluates potential acquisitions of other existing specialty
coffee retail businesses, as of July 31, 1996, it had no understandings,
commitments or agreements with respect to any acquisition. Pending use of the
net proceeds for the above purposes, the Company will invest such funds in
short-term, investment-grade, interest-bearing obligations.
The allocation of the use of proceeds represents management's estimate
based upon current business and economic conditions. Although the Company does
not contemplate material changes in the proposed allocation of the use of
proceeds, to the extent the Company believes that adjustment is warranted by
reason of existing business conditions, the amounts shown may be adjusted among
the uses indicated above.
The Company believes that the net proceeds of this Offering together with
other financing sources, existing cash, bank financing and net cash from
operations will be sufficient to meet the Company's anticipated cash
requirements for at least the next twelve months. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
DIVIDEND POLICY
The Company has never paid any dividends on its stock and anticipates that,
for the foreseeable future, it will continue to retain any earnings for use in
the operation of its business. Payment of cash dividends in the future, if any,
will depend upon the Company's earnings, financial condition, any contractual
restrictions (including restrictions under the Company's credit facility),
restrictions imposed by applicable law, capital requirements and other factors
deemed relevant by the Company's Board of Directors.
13
<PAGE> 16
CAPITALIZATION
The following table sets forth the capitalization of the Company as of May
1, 1996 (i) on an actual basis, (ii) on a pro forma basis giving effect to (a)
the conversion of Series A and Series B Preferred Stock into Common Stock upon
the closing of this Offering and (b) the reincorporation of the Company in the
State of Delaware prior to the closing of this Offering, and (iii) on a pro
forma as adjusted basis giving effect to the sale of the 1,600,000 shares of
Common Stock offered by the Company hereby at an assumed initial public offering
price of $11.00 per share (after deducting underwriting discounts and
commissions and estimated offering expenses payable by the Company) and the
initial application of the estimated net proceeds therefrom. The information in
the table excludes (i) 160,000 shares of Common Stock which may be issued by the
Company upon the exercise in full of the Representative's Warrants, (ii) 131,350
shares of Common Stock which may be issued by the Company upon the exercise in
full of the Chief Executive Officer's stock options at an exercise price of
$1.45 per share, and (iii) an aggregate of 600,000 shares of Common Stock
reserved for issuance pursuant to the Company's 1996 Non-Employee Directors
Stock Option Plan and 1996 Stock Incentive Plan. See "Underwriting" and
"Management."
<TABLE>
<CAPTION>
MAY 1, 1996
-----------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
---------- ---------- -----------
<S> <C> <C> <C>
Long-term debt, less current portion.................. $ 304,345 $ 304,345 $ --
---------- ---------- ----------
Stockholders' equity:
Series A convertible cumulative preferred stock, no
par value; 1,000,000 shares authorized (actual);
no shares authorized (pro forma and as adjusted);
1,000,000 shares outstanding (actual); no shares
outstanding (pro forma and as adjusted).......... 800,000 -- --
Series B convertible cumulative preferred stock, no
par value; 1,608,568 shares authorized (actual);
no shares authorized (pro forma and as adjusted);
1,608,568 shares outstanding (actual); no shares
outstanding (pro forma and as adjusted).......... 2,225,813 -- --
Preferred stock, no par value (actual); par value
$.01 per share (pro forma and as adjusted); no
shares authorized (actual); 3,000,000 shares
authorized (pro forma and as adjusted); no shares
outstanding...................................... -- -- --
Common stock, no par value (actual); par value $.01
per share (pro forma and as adjusted); 4,021,437
shares authorized (actual); 25,000,000 shares
authorized (pro forma and as adjusted); 1,183,082
shares outstanding (actual); 3,791,650 shares
outstanding (pro forma); and 5,391,650 shares
outstanding (as adjusted)........................ 330,698 37,917 53,917
Additional paid-in capital.......................... -- 3,318,594 18,946,594
Retained earnings................................... 55,083 55,083 55,083
---------- ---------- ----------
Total stockholders' equity....................... 3,411,594 3,411,594 19,055,594
---------- ---------- ----------
Total capitalization........................ $3,715,939 $3,715,939 $19,055,594
========== ========== ==========
</TABLE>
14
<PAGE> 17
DILUTION
The pro forma net tangible book value of the Company as of May 1, 1996 was
$2,569,814, or $0.68 per share of Common Stock, based upon 3,791,650 shares of
Common Stock outstanding. Pro forma net tangible book value per share represents
the amount of total tangible assets of the Company less total liabilities,
divided by the number of shares of Common Stock outstanding, after giving effect
to the conversion of all outstanding shares of Preferred Stock into Common Stock
upon the consummation of this Offering. The number of outstanding shares
excludes (i) 160,000 shares of Common Stock which may be issued by the Company
upon the exercise in full of the Representative's Warrants, (ii) 131,350 shares
of Common Stock which may be issued by the Company upon the exercise in full of
the Chief Executive Officer's stock options at an exercise price of $1.45 per
share, and (iii) an aggregate of 600,000 shares of Common Stock reserved for
issuance pursuant to the Company's 1996 Non-Employee Directors Stock Option Plan
and 1996 Stock Incentive Plan. See "Underwriting" and "Management." After giving
effect to the sale of the 1,600,000 shares of Common Stock offered by the
Company hereby at an assumed initial public offering price of $11.00 per share
(after deducting underwriting discounts and commissions and estimated offering
expenses payable by the Company), the pro forma net tangible book value of the
Company as of May 1, 1996 would have been $18,213,814 or $3.38 per share. This
represents an immediate increase in pro forma net tangible book value of $2.70
per share to existing stockholders and an immediate dilution of $7.62 per share
to new investors.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share of Common Stock..... $11.00
Pro forma net tangible book value per share before the Offering... $0.68
Increase in net tangible book value per share attributable to new
investors...................................................... 2.70
-----
Pro forma net tangible book value per share after the Offering...... 3.38
------
Dilution per share to new investors................................. $ 7.62
======
</TABLE>
The following table summarizes, on a pro forma basis as of May 1, 1996, the
number of shares of Common Stock purchased from the Company, the total cash
consideration paid and the average price per share paid by the existing
stockholders and to be paid by purchasers of shares offered hereby at an assumed
initial public offering price of $11.00 (before deducting underwriting discounts
and commissions and estimated offering expenses payable by the Company):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ----------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing Stockholders.......... 3,791,650 70.3 $ 3,356,511 16.0 $ 0.89
New Investors.................. 1,600,000 29.7 17,600,000 84.0 $ 11.00
--------- ----- ----------- -----
Total................ 5,391,650 100.0 $20,956,511 100.0
========= ===== =========== =====
</TABLE>
15
<PAGE> 18
SELECTED FINANCIAL DATA
The following selected financial data as of and for the years ended January
31, 1994, 1995 and 1996 were derived from the Company's financial statements,
which have been audited by BDO Seidman, LLP, independent certified public
accountants. The financial data as of and for the years ended January 31, 1992
and 1993 were derived from unaudited financial statements. The financial data
with respect to the statement of operations for the twelve weeks ended April 25,
1995 and the thirteen weeks ended May 1, 1996 and with respect to the balance
sheet as of May 1, 1996 were derived from unaudited financial statements
appearing herein. The unaudited financial statements include all adjustments,
consisting of normal recurring accruals, which the Company considers necessary
for a fair presentation of the financial position and results of operations for
these periods. The operating results for the thirteen weeks ended May 1, 1996
are not necessarily indicative of the results that may be achieved for the
fiscal year ending on January 29, 1997. The financial data set forth below
should be read in conjunction with the audited financial statements and
accompanying notes and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" appearing elsewhere herein.
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31, TWELVE THIRTEEN
-------------------------------------------------------- WEEKS WEEKS
PRO ENDED ENDED MAY
FORMA APRIL 25, 1,
1992 1993 1994 1995 1996 1996(1) 1995(2) 1996(2)(3)
------ ------ ------ ------ ------ ------- --------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales:
Retail...................... $2,382 $2,906 $3,912 $6,673 $8,879 $11,236 $ 1,757 $3,902
Wholesale and other......... -- 33 502 918 1,365 1,365 301 373
------ ------ ------ ------ ------ ------- ------ ------
Total.................. 2,382 2,939 4,414 7,591 10,244 12,601 2,058 4,275
------ ------ ------ ------ ------ ------- ------ ------
Costs and expenses:
Cost of sales and related
occupancy costs........... 883 1,140 1,796 3,164 4,409 5,932 872 1,773
Store operating expenses.... 770 1,064 1,594 2,584 3,520 4,686 669 1,735
Other operating expenses.... -- 6 146 282 277 277 64 60
Depreciation and
amortization.............. 71 143 102 255 354 498 62 154
General and administrative
expenses.................. 624 762 809 851 1,335 1,782(4) 277 337
------ ------ ------ ------ ------ ------- ------ ------
Total.................. 2,348 3,115 4,447 7,136 9,895 13,175 1,944 4,059
------ ------ ------ ------ ------ ------- ------ ------
Operating income (loss)......... 34 (176) (33) 455 349 (574) 114 216
Interest expense and other...... 80 72 55 78 34 97 13 37
------ ------ ------ ------ ------ ------- ------ ------
Income (loss) before income
taxes......................... (46) (248) (88) 377 315 (671) 101 179
Provision (benefit) for income
taxes......................... 1 (15) 1 53 129 (275) 42 72
------ ------ ------ ------ ------ ------- ------ ------
Net income (loss)............... $ (47) $ (233) $ (89) $ 324 $ 186 $ (396) $ 59 $ 107
====== ====== ====== ====== ====== ======= ====== ======
Pro forma net income (loss) per
share(5)...................... $ 0.06 $ (0.13) $ 0.03
====== ======= ======
Shares used in pro forma per
share calculation(5).......... 3,153,000 3,087,000 3,906,000
========= ========= =========
</TABLE>
16
<PAGE> 19
<TABLE>
<CAPTION>
JANUARY 31,
--------------------------------------------------------
PRO
FORMA MAY 1, 1996
1992 1993 1994 1995 1996 1996(1) (2)(3)
------ ------ ------ ------ ------ ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficiency)......... $ (387) $ 470 $ (364) $ (218) $ (53) $(1,436) $ (3,819)
Total assets......................... 866 1,790 2,163 2,503 5,316 6,699 8,915
Long-term obligations, less current
portion............................ 239 453 544 471 829 829 304
Total stockholders' equity........... 126 938 849 1,173 3,304 3,304 3,412
</TABLE>
- ---------------
(1) The pro forma condensed financial statement information assumes the
Company's acquisition of the 12 Brothers Stores occurred on February 1,
1995 for the statement of operations data and on January 31, 1996 for the
balance sheet data. Pro forma statement of operations and balance sheet
data excludes the acquisition of the Acquired Cafes as the acquisition does
not require pro forma presentation. See Note 9 of Notes to Financial
Statements and the Unaudited Pro Forma Condensed Financial Statements.
(2) Effective February 1, 1996, the Company changed its fiscal year end from
January 31 to a fiscal year ending on the Wednesday nearest January 31.
Accordingly, the quarterly period ended May 1, 1996 includes 13 weeks.
Prior to the change in fiscal year end, the Company's quarterly periods
included 12 weeks, except for the fourth quarter which had approximately 16
weeks.
(3) Includes the results of operations attributable to the Brothers Stores and
Acquired Cafes since the dates that the acquisitions from unrelated sellers
were completed in February 1996. The pro forma statement of operations data
for the 13 weeks ended May 1, 1996 did not differ materially from the
historical results of operations for such period and, accordingly, has not
been presented. See Note 9 of Notes to Financial Statements.
(4) The pro forma general and administrative expenses include a proportional
allocation to the 12 Brothers Stores of the corporate and administrative
salaries and related employee benefit costs, and other corporate overhead
expenses, which were allocated to all stores operated by Brothers Gourmet
Coffees, Inc. Although no adjustment has been made, the Company believes
that a substantial portion of such allocated expenses are redundant as a
result of its overhead infrastructure and, accordingly, does not believe
the pro forma general and administrative expenses are indicative of the
actual general and administrative expenses that would have been incurred
had the Company owned and operated the Brothers Stores for the year ended
January 31, 1996. See the Unaudited Pro Forma Condensed Financial
Statements.
(5) Pro forma net income (loss) per share is computed by dividing net income
(loss) by the weighted average number of common and common equivalent
shares outstanding during the respective period, assuming the conversion of
the Series A and Series B Preferred Stock into Common Stock as of the date
of issuance. Dividends on the Series A and Series B Preferred Stock have
been excluded from the computation since the preferred stock has been
assumed to have been converted to Common Stock.
17
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following should be read in conjunction with the financial statements
of the Company and notes thereto and other financial information appearing
elsewhere in this Prospectus.
GENERAL
The first retail store operating under the name Diedrich Coffee commenced
operations in 1972. At the conclusion of fiscal 1996, there were twelve
coffeehouses in operation, all of which were located in Southern California, and
as of July 31, 1996, the Company operated a total of thirty-seven coffeehouses
located in California, Colorado and Texas, with five additional locations
subject to binding leases.
At the end of fiscal 1996, ten coffeehouses were located in suburban sites
such as neighborhood shopping centers, one coffeehouse was located in a regional
shopping mall and one coffeehouse was located in a regional entertainment
center. The Company also operates one mobile cart located at a regional
hospital. In addition to retail sales at coffeehouses, the Company sells roasted
coffee and selected coffee brewing and espresso machinery to the food service
industry as well as through direct mail order (collectively, the "wholesale
division"). In fiscal 1996, the Company derived 86.7% of its net sales from
retail operations and 13.3% from wholesale operations.
On February 15, 1996, the Company acquired seven retail locations in
Denver, Colorado that were former bakery-espresso cafes (the "Acquired Cafes")
for cash consideration of $450,000. On February 23, 1996, the Company acquired
twelve retail locations from Brothers Gourmet Coffees, Inc., doing business as
Brothers Gourmet Coffee Bars (the "Brothers Stores") for cash consideration of
$1,350,000. Ten of the Brothers Stores are located in Denver, Colorado and two
are in Houston, Texas. Both of the transactions took the form of asset
acquisitions, accounted for under the purchase method, in which the principal
assets acquired were leasehold interests, furniture and fixtures and equipment.
No material liabilities were assumed except for the remaining obligations under
the operating leases for each of the stores. Management anticipates that the
acquisition price, combined with the budgeted improvement and conversion costs
will, on average, result in a total cost which is significantly below the
typical historical cost to open a similar size Diedrich coffeehouse.
The acquired stores operated under prior ownership at sales levels much
lower than those historically experienced in the Company's stores in Southern
California. Of the twelve acquired Brothers Stores, one store is not subject to
a binding lease but such lease is presently being negotiated and one store has
been closed. The closed location's post-acquisition operating results confirmed
management's initial evaluation that sales levels at this location would not be
sufficient to warrant conversion to the Diedrich coffeehouse format. As of July
31, 1996, twelve of the eighteen remaining acquired stores had been converted to
Diedrich coffeehouses which included new signage, decor, recipes, products and
service standards. The Company has budgeted approximately $1,080,000 for the
conversion costs in connection with the Acquired Cafes and the Brothers Stores.
On a per store basis, the average cost of acquiring and converting such stores
is anticipated to be $160,000. This contrasts with the Company's average cost to
open a new coffeehouse in fiscal 1996 of approximately $320,000. From the
respective dates of acquisition until each location is converted, the stores
will be operated under the predecessor's name and style. Management expects that
the conversion of the remaining locations will be completed before the end of
the third quarter of the current fiscal year. The conversion schedule will be
affected by the speed with which the landlords and governmental agencies grant
their approval for the anticipated changes during the remodeling. Management
believes that the conversion of the acquired locations to the Diedrich
coffeehouse format and the operation of the coffeehouses by Diedrich management
will, over time, result in a significant improvement from the financial results
achieved by these stores prior to their acquisition by the Company. During the
current fiscal year, however, management anticipates that profitability may be
adversely affected as a result of the conversion process.
Effective February 1, 1996, the Company changed its fiscal year end from
January 31 to a fiscal year ending on the Wednesday nearest January 31.
Accordingly, the quarterly period ended May 1, 1996 includes thirteen weeks.
Prior to the change in fiscal year end, the Company's quarterly periods included
twelve weeks, except for the fourth quarter which had approximately sixteen
weeks.
18
<PAGE> 21
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
information from the Company's Statements of Operations (dollars in thousands).
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
TWELVE MAY 1, 1996
YEARS ENDED JANUARY 31, WEEKS ---------------------------------
---------------------------------------- ENDED EXCLUDING ACQUIRED
PRO FORMA APRIL 25, ACQUIRED STORES
1994 1995 1996 1996(1) 1995 STORES(2) ONLY(3) ACTUAL
------ ------ ------- --------- --------- ---------- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Retail Net Sales.................. $3,912 $6,673 $ 8,879 $11,236 $ 1,757 $2,907 $ 995 $3,902
Wholesale Net Sales............... 502 918 1,365 1,365 301 373 -- 373
------ ------ ------ ------- ------ ------ ----- ------
Net Sales......................... 4,414 7,591 10,244 12,601 2,058 3,280 995 4,275
------ ------ ------ ------- ------ ------ ----- ------
Cost of Sales and Related
Occupancy
Costs........................... 1,796 3,164 4,409 5,932 872 1,362 411 1,773
Store Operating Expenses.......... 1,594 2,584 3,520 4,686 669 1,207 528 1,735
Other Operating Expenses.......... 146 282 277 277 64 60 -- 60
Depreciation and Amortization..... 102 255 354 498 62 119 35 154
General and Administrative
Expenses........................ 809 851 1,335 1,782 277 337 N/A 337
Operating Income (Loss)........... (33) 455 349 (574) 114 195 21 216
Net Income (Loss)................. $ (89) $ 324 $ 186 $ (396) $ 59 $ 113 $ (6) $ 107
====== ====== ====== ======= ====== ====== ===== ======
</TABLE>
The following table sets forth, for the periods indicated, certain
information derived from the Company's Statements of Operations expressed as
percentages of net sales, except as otherwise noted.
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
TWELVE MAY 1, 1996
YEARS ENDED JANUARY 31, WEEKS -----------------------------------
--------------------------------------- ENDED EXCLUDING ACQUIRED
PRO FORMA APRIL 25, ACQUIRED STORES
1994 1995 1996 1996(1) 1995 STORES(2) ONLY(3) ACTUAL
----- ----- ----- --------- --------- ---------- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Retail Net Sales................. 88.6% 87.9% 86.7% 89.2% 85.4% 88.6% 100.0% 91.3 %
Wholesale Net Sales.............. 11.4 12.1 13.3 10.8 14.6 11.4 -- 8.7
----- ----- ----- ----- ----- ----- ----- -----
Net Sales........................ 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ----- ----- ----- -----
Cost of Sales and Related
Occupancy Costs................ 40.7 41.7 43.0 47.1 42.4 41.5 41.3 41.5
Store Operating Expenses (4)..... 40.8 38.7 39.6 41.7 38.1 41.5 53.1 44.5
Other Operating Expenses (5)..... 29.2 30.8 20.3 20.3 21.4 15.9 -- 15.9
Depreciation and Amortization.... 2.3 3.4 3.5 4.0 3.0 3.6 3.5 3.6
General and Administrative
Expenses....................... 18.3 11.2 13.0 14.1 13.4 10.3 N/A 7.9
Operating Income (Loss).......... (0.7) 6.0 3.4 (4.6) 5.5 6.0 2.1 5.1
Net Income (Loss)................ (2.0)% 4.3% 1.8% (3.1)% 2.9% 3.4% (0.6)% 2.5 %
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
- ---------------
(1) The pro forma condensed statement of operations assumes the Company's
acquisition of the Brothers Stores occurred on February 1, 1995 and
excludes the acquisition of the Acquired Cafes as the acquisition does not
require pro forma presentation. See Note 9 of Notes to Financial Statements
and the Unaudited Pro Forma Condensed Financial Statements.
(2) Excludes the results of operations for the Acquired Cafes and Brothers
Stores acquired in February 1996.
(3) Represents the results of operations for the Acquired Cafes from February
15, 1996 and the Brothers Stores from February 23, 1996 through the period
ending May 1, 1996. General and administrative expenses are attributable to
all stores and not separately attributable to the acquired stores.
(4) Store operating expenses are expressed as a percentage of retail net sales.
(5) Other operating expenses are expressed as a percentage of wholesale net
sales.
YEAR ENDED JANUARY 31, 1996 COMPARED TO YEAR ENDED JANUARY 31, 1995
Net sales. Net sales for the year ended January 31, 1996 were $10,244,000,
an increase of $2,653,000, or 35.0% over net sales for fiscal 1995 which were
$7,591,000. Retail sales increased 33.1% to $8,879,000 in fiscal
19
<PAGE> 22
1996 from $6,673,000 in fiscal 1995. The increase resulted from a combination of
sales growth at existing locations and sales from new locations. Comparable
fiscal 1996 over fiscal 1995 store sales for the seven stores opened prior to
fiscal 1995 showed an increase of 10.2% primarily due to an increased number of
sale transactions. During fiscal 1996, the Company added five new coffeehouses.
These five new stores contributed $1,451,000 to fiscal 1996 sales. The Company's
retail sales mix for fiscal 1996 included whole bean coffee (8.6%), brewed
coffee and espresso beverages (70.6%), food items (18.9%), and accessories and
clothing (1.9%).
Wholesale and mail order sales combined increased 48.8% to $1,365,000 in
fiscal 1996 from $917,000 in fiscal 1995. The increase was due to a more active
sales effort as well as the increased brand recognition resulting from the
addition of new coffeehouse locations within the Southern California market.
Cost of sales and related occupancy costs. Cost of roasted coffee, dairy,
food, paper and bar supplies, accessories and clothing (cost of sales) and rent
(related occupancy costs) for the Company increased to $4,409,000 for the year
ended January 31, 1996 from $3,164,000 for the comparable period in 1995, an
increase of $1,245,000 or 39.4%. As a percentage of net sales, cost of sales and
related occupancy costs increased to 43.0% for the year ended January 31, 1996,
from 41.7% for the comparable period in 1995. The dollar increase is primarily
due to the addition of five new locations during 1996. The percentage increase
is primarily due to a shift of the sales mix resulting from the addition of two
stores which provide more extensive food menus combined with an increase in the
cost of paper, cups and bar supplies which resulted from an industry wide price
increase in the cost of paper.
Store operating expenses. Store operating expenses increased to $3,520,000
for the year ended January 31, 1996, from $2,584,000 for the comparable period
in 1995. The $936,000 or 36.2% increase was due primarily to the addition of
five locations in 1996. Store operating expenses consist of the store-level
components of direct and indirect labor, marketing, utilities, maintenance,
supplies, district supervision and overhead, and pre-opening expenses.
Pre-opening expenses are comprised of training labor, advertising and marketing
and supplies which are accumulated and expensed when a store is opened. In
fiscal 1996, store operating expenses as a percent of retail net sales increased
to 39.6% from 38.7% in the prior year. The percentage increase was due to an
increase in pre-opening expenses over the prior year which was partially offset
by a decrease in store labor.
Other operating expenses. Other operating expenses decreased to $277,000
for fiscal 1996 from $283,000 in the comparable period in 1995. Other operating
expenses include the wholesale division operating costs which consist
principally of labor, advertising and supplies. These expenses decreased, as a
percent of the net sales from the wholesale division, to 20.3% from 30.8% as a
result of increased sales volume.
Depreciation and amortization. Depreciation and amortization increased to
$354,000 for fiscal 1996 from $255,000 for the comparable period in 1995. As a
percentage of net sales, depreciation and amortization increased to 3.5% from
3.4% in the prior year, which reflects the early sales growth stage for the five
stores which were added during the year.
General and administrative expenses. General and administrative expenses
increased to $1,335,000 for fiscal 1996 from $851,000 for fiscal 1995. As a
percentage of net sales, general and administrative expenses increased to 13.0%
from 11.2% principally due to the additions to the infrastructure in
anticipation of growth and also due to higher occupancy costs as a result of the
move of the Company's headquarters to larger facilities. Infrastructure
increases consisted primarily of additional salaries associated with personnel
additions in the real estate, recruiting and training and accounting
departments.
Interest expense. Interest expense decreased to $50,000 for fiscal 1996
from $83,000 for fiscal 1995. The $33,000 or 39.4% decrease was due primarily to
lower average debt outstanding during the year.
Net income. Net income decreased to $186,000 for fiscal 1996 from $324,000
in the comparable period in fiscal 1995, a decrease of $138,000 or 42.7%. As a
percentage of net sales, net income decreased to 1.8% for fiscal 1996 from 4.3%
for fiscal 1995. The decrease in net income is primarily attributable to
increased general and administrative expenses resulting from the Company's move
to a larger principal executive office and the addition of corporate office
personnel in anticipation of the Company's expansion plans.
20
<PAGE> 23
YEAR ENDED JANUARY 31, 1995 COMPARED TO YEAR ENDED JANUARY 31, 1994
Net sales. Net sales for the year ended January 31, 1995 increased to
$7,591,000 from $4,414,000 for the comparable period in 1994, an increase of
72.0%. Retail net sales increased 70.6% to $6,673,000 in fiscal 1995 from
$3,912,000 in fiscal 1994 primarily due to an increased number of sale
transactions and an approximately 3% increase in beverage prices. Comparable
fiscal 1995 over 1994 store sales for the four stores opened prior to fiscal
1994 showed an increase of 17.0% due to an increased number of sale
transactions. No new locations were added during the period. As of the end of
fiscal 1995, there were seven stores in operation, all of which were located in
suburban sites such as neighborhood shopping centers. In addition to the seven
stores, the Company operated one mobile cart located at a regional hospital. The
Company's retail sales mix for fiscal 1995 included whole bean coffee (9.7%),
brewed coffee and espresso beverages (71.8%), food items (16.1%), and
accessories, clothing and other (2.4%).
Wholesale and mail order sales combined increased 82.6% to $917,000 in
fiscal 1995 from $502,000 in fiscal 1994. The increase was due to a more active
sales effort and the addition of sales staff.
Cost of sales and related occupancy costs. Cost of roasted coffee, dairy,
food, paper and bar supplies, accessories and clothing (cost of sales) and rent
(related occupancy costs) for the Company increased to $3,164,000 for the year
ended January 31, 1995 from $1,796,000 for the comparable period in 1994, an
increase of $1,368,000 or 76.2%. As a percentage of net sales, cost of sales and
related occupancy costs increased to 41.7% for the year ended January 31, 1995,
from 40.7% for the comparable period in 1994. This dollar increase is primarily
due to a full year of costs for the three stores opened in the prior year. The
percentage increase is primarily due to an increase in the cost of unroasted
coffee.
Store operating expenses. Store operating expenses increased to $2,584,000
for fiscal 1995, from $1,594,000 for fiscal 1994. The $990,000 or 62.1% increase
was due primarily to a full year of store operating expenses in 1995 for the
three new coffeehouses opened during 1994. Store operating expenses consist of
the store-level components of direct and indirect labor, marketing, utilities,
maintenance, supplies, district supervision and overhead, and pre-opening
expenses. In fiscal 1995, store operating expenses as a percent of retail net
sales decreased to 38.7% from 40.8% in the prior year. The decrease was due to a
decrease in pre-opening expenses over the prior year.
Other operating expenses. Other operating expenses increased to $283,000
for the year ended January 31, 1995 from $146,000 in the comparable period in
1994. Other operating expenses include the wholesale division operating costs
which consist principally of labor, advertising and supplies. These expenses
increased, as a percent of the net sales from the wholesale division, to 30.8%
from 29.2% as a result of the increased sales force and maintenance staff which
was added during the year.
Depreciation and amortization. Depreciation and amortization increased to
$255,000 for fiscal 1995 from $102,000 for fiscal 1994. As a percentage of net
sales, depreciation and amortization increased to 3.4% from 2.3% in the prior
year, which reflects the early sales growth stage for three of the seven stores
which were added during the prior year.
General and administrative expenses. General and administrative expenses
increased to $851,000 for fiscal 1995 from $809,000 for fiscal 1994. As a
percentage of net sales, general and administrative expenses decreased to 11.2%
from 18.3% principally because the Company's infrastructure had been augmented
in fiscal 1994 to provide the quality of support to facilitate an anticipated
increased coffeehouse count. Management and support staff salary expense at the
principal executive offices decreased to 7.1% from 12.1% of net sales.
Interest expense. Interest expense decreased to $83,000 for the year ended
January 31, 1995 from $91,000 for the comparable year in 1994. The $8,000 or
8.6% decrease was due primarily to lower average debt outstanding during the
year.
Net income. Net income increased to $324,000 for fiscal 1995 from a loss
of $89,000 in the comparable period in fiscal 1994, an increase of $413,000. The
increase resulted primarily from the reduction, as a percentage of net sales, of
general and administrative expenses.
21
<PAGE> 24
THIRTEEN WEEKS ENDED MAY 1, 1996 COMPARED TO THE TWELVE WEEKS ENDED APRIL 25,
1995
Net sales. Net sales of the Company's retail operations, excluding the
Acquired Cafes and Brothers Stores for the thirteen weeks ended May 1, 1996
increased to $2,907,000 from $1,757,000 for the twelve weeks ended April 25,
1995. The increase in sales due to reporting thirteen weeks rather than twelve
weeks was $217,000. The percentage sales increase adjusted for the extra week
was 53.1%. The acquisitions of the Acquired Cafes and Brothers Stores were
consummated on February 15, 1996 and February 23, 1996, respectively. The two
acquisitions, comprising nineteen stores, contributed $995,000 to net sales in
the quarter. For the thirteen weeks ended May 1, 1996, net sales for comparable
Diedrich coffeehouses that were opened prior to the first quarter of fiscal 1996
increased to $2,029,000 from $1,732,000 for the twelve weeks ended April 25,
1995. The increase in sales due to reporting thirteen weeks rather than twelve
weeks was $150,000. The percentage sales increase, adjusted for the extra week,
was 8.5%.
Wholesale and mail order sales combined increased 23.9% to $373,000 in the
thirteen weeks ended May 1, 1996 from $301,000 in the twelve weeks ended April
25, 1995. The increase was due to a more active sales effort and the addition of
sales staff. No wholesale or mail order activities were contributed by the
Brothers Stores or Acquired Cafes.
Cost of sales and related occupancy costs. Cost of roasted coffee, dairy,
food, paper and bar supplies, accessories and clothing (cost of sales) and rent
(related occupancy costs) for the Company, excluding the acquisitions, increased
to $1,362,000 for the thirteen weeks ended May 1, 1996 from $872,000 for the
twelve weeks ended April 25, 1995, an increase of $490,000 or 56.2%. This dollar
increase is primarily due to the operations of five Diedrich coffeehouses which
were opened in the latter part of fiscal 1996. As a percentage of retail net
sales, cost of sales and related occupancy costs decreased to 41.5% for the
first quarter of fiscal 1997 from 42.4% for the first quarter of fiscal 1996.
This decrease is principally a result of a decrease in the cost of unroasted
coffee, which was lower in the first quarter of the current fiscal year as
compared to the first quarter of the prior fiscal year, during which the Company
was still liquidating higher cost coffee inventory. This decrease was partially
offset by the increase in the food cost of sales element caused by a shift in
the product mix due to the addition of several new stores which offer a more
extensive food menu. Collectively, cost of sales and related occupancy costs for
the Brothers Stores and Acquired Cafes was 41.3% of their net sales for the
period from acquisition date to May 1, 1996.
Store operating expenses. Store operating expenses, excluding the
acquisitions, increased to $1,207,000 for the thirteen weeks ended May 1, 1996,
from $669,000 for the twelve weeks ended April 25, 1995. For the first quarter
of fiscal 1997, store operating expenses, excluding the Brothers Stores and
Acquired Cafes, as a percent of retail sales increased to 41.5% from 38.1% in
the prior fiscal year's first quarter. The increase was due to increased labor
and opening costs relating to the opening of two Diedrich coffeehouses in the
first quarter of fiscal 1997. Store operating expenses for the acquired stores
were $528,000 or 53.1% of net sales from the nineteen acquired stores.
Other operating expenses. Other operating expenses decreased to $60,000
for the first quarter of fiscal 1997 from $64,000 in the first quarter of fiscal
1996. These expenses decreased, as a percent of the net sales from the wholesale
division, to 15.9% from 21.4% as a result of a decrease in the overall salary
expense of the sales force due to the reduction of sales management personnel.
Depreciation and amortization. Depreciation and amortization excluding the
acquired stores increased by 91.5% to $119,000 for the thirteen weeks ended May
1, 1996 from $62,000 for the twelve weeks ended April 25, 1995. As a percentage
of net sales, depreciation and amortization increased to 3.6% from 3.0% in the
prior year, principally due to the increase in depreciable assets as a result of
the Company operating six more coffeehouses this quarter than during the same
period in the prior fiscal year. Depreciation and amortization for the Brothers
Stores and Acquired Cafes was $35,000, or 3.5% of net sales from those stores.
General and administrative expenses. General and administrative expenses
increased to $337,000 for the first quarter of fiscal 1997 from $277,000 for the
first quarter of fiscal 1996. As a percentage of net sales, general and
administrative expenses decreased to 7.9% from 13.4% due to the addition of the
acquired stores sales in the revenue base. Management is currently adding
selected resources and personnel to aid in the
22
<PAGE> 25
conversion and control of the new markets according to the integration plan
established prior to the acquisitions. General and administrative expenses are
not directly attributable to specific stores. Accordingly, no separate analysis
of the general and administrative expenses excluding the Brothers Stores and
Acquired Cafes is included here.
Interest expense. Interest expense increased to $39,000 for the thirteen
weeks ended May 1, 1996 from $15,000 for the twelve weeks ended April 25, 1995.
The $24,000 increase was due primarily to higher average debt outstanding as a
result of the acquisition of the Brothers Stores and Acquired Cafes.
Net income Net income of the Company excluding the Brothers Stores and
Acquired Cafes increased to $113,000 for the thirteen weeks ended May 1, 1996
from $59,000 for the twelve weeks ended April 25, 1995, an increase of $54,000
or 92%. As a percentage of net sales, net income for the thirteen weeks ended
May 1, 1996 increased to 3.4% from 2.9% for the twelve weeks ended April 25,
1995. The percentage increase was primarily due to the reduction in general and
administrative expenses as a percentage of net sales. Net loss for the Brothers
Stores and Acquired Cafes for the thirteen weeks ended May 1, 1996 was $6,000 or
0.6% of net sales for the period.
INCOME TAXES
Net operating losses generated in fiscal 1994 and prior were carried
forward and utilized to offset the allowable portion of income tax in fiscal
1995 and 1996. As of January 31, 1996, a net operating loss for federal income
tax purposes of $115,000 remains to be utilized against future taxable income
for years through fiscal 2008, subject to an annual limitation due to the change
in ownership rules under the Internal Revenue Code. As of January 31, 1996, the
Company had deferred tax assets aggregating $48,000. Management has determined,
based upon the Company's history of operating earnings and its expectations for
the future, that operating income for the Company will more likely than not be
sufficient to fully recognize these deferred tax assets. See Note 8 of Notes to
Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirements are for the active expansion
of its retail operations, through construction and/or acquisition, and for the
infrastructure to support such expansion. Working capital requirements also
include inventory associated with stores, seasonal fluctuations in inventory to
accommodate holiday merchandise and the funding of obligations under future
coffee delivery contracts. The Company plans to continue its expansion efforts.
In fiscal 1996, the average cost to open a new store, including leasehold
improvements, equipment and inventory, was approximately $320,000 per store and,
on average, these stores began to show a return on the initial investment within
three to four months. Infrastructure additions consist principally of additional
roasting and packaging capacity as well as development of enhancements to the
management information system at the store level and at the principal executive
offices.
In February 1996, the Company funded the acquisition of the Brothers Stores
and the Acquired Cafes by utilizing the Company's then existing line of credit
which had a maturity date of February 1997. Accordingly, all amounts drawn and
outstanding under that line of credit were classified as current liabilities,
and included in the calculation of working capital, notwithstanding the fact
that the proceeds had been used to finance long-term capital assets. From time
to time, the Company's financing of long-term assets with short-term
indebtedness results in a temporary imbalance in working capital. It has been
the Company's practice to minimize the time period during which a working
capital deficiency exists either through refinancing the indebtedness or an
equity infusion. The working capital deficiency as of May 1, 1996 was $3,819,000
compared to $53,000 as of January 31, 1996. At May 1, 1996, the Company had
forward inventory purchase commitments of $252,000. During the eighteen months
following the Offering, the Company expects to spend approximately $13 million
to finance construction and acquisition of new coffeehouses, the addition of
roasting and packaging facilities and the development and installation of
management information system enhancements. The Company believes that the
proceeds from this Offering, borrowings under the Company's credit facility and
cash flow from operations will be sufficient to fund these expenditures.
23
<PAGE> 26
Through May 1, 1996, the Company has funded its capital requirements
through the issuance of equity securities and through debt from financial
institutions as well as loans from a shareholder. See "Certain Transactions." To
a lesser extent, the Company has utilized an increase in the average balance of
accounts payable to fund short term cash needs for working capital. In the
absence of receiving the funds from the completion of this Offering, the Company
would continue to fund its cash requirements in this manner.
Through July 31, 1996, the Company has entered into lease agreements for
its principal executive office, coffeehouses and warehouse locations which, as
of February 1, 1996, require minimum rental payments as follows:
<TABLE>
<S> <C>
Fiscal 1997.............................................. $1,568,000
Fiscal 1998.............................................. $1,850,000
Fiscal 1999.............................................. $1,860,000
Fiscal 2000.............................................. $1,847,000
Fiscal 2001.............................................. $1,531,000
Thereafter............................................... $5,209,000
</TABLE>
Until recently, the Company had two credit facilities with Wells Fargo
Bank. One facility was a revolving line of credit that permitted maximum
borrowings equal to $2 million, was collateralized by substantially all of the
Company's assets and bore interest at the prime rate plus 0.75% ("Wells Line").
The other facility was a loan commitment available for the purchase of equipment
that permitted maximum borrowings equal to $1 million, was collateralized by
equipment and bore interest at the prime rate plus 1% ("Equipment Loan"). The
Wells Line and the Equipment Loan were both scheduled to mature in February
1997. Aggregate borrowings under the Wells Line and the Equipment Loan were
$2,827,776 at May 1, 1996 at a weighted average interest rate of 9.1%.
In July 1996, the Company entered into a new revolving line of credit with
Bank of America and used the proceeds of such line to repay the outstanding
balances under the Wells Line and the Equipment Loan, which were then
terminated. The new facility permits maximum borrowings equal to $4,100,000. At
August 2, 1996, borrowings under this facility were approximately $3,599,000
with a weighted average interest rate of 7.8% and $501,000 was available for
borrowing under this facility. Borrowings under the Bank of America line of
credit are secured by substantially all of the Company's assets and bear
interest at Bank of America's prime rate plus 0.25% or, at the Company's option,
certain other rates established by Bank of America's Grand Cayman branch or
London branch plus 2.25%. This facility matures on November 1, 1996. Subsequent
to the completion of this Offering, this line of credit will be unsecured, the
maturity date will be extended to October 1, 1997 and maximum borrowings will,
assuming the receipt of net proceeds by the Company from this Offering in excess
of $15 million, be increased to $7 million. This line of credit is currently the
primary external source of liquidity available to the Company.
The Company's credit agreement in connection with the Bank of America line
of credit contains various covenants which, among other things, require the
delivery of regular financial information and the maintenance of positive net
income. In addition, the credit agreement imposes certain restrictions on the
Company, including, with respect to the incurrence of additional indebtedness,
the payment of dividends and the ability to make acquisitions.
On May 20, 1996, the Company entered into a revolving promissory note with
a maximum principal amount of $2,000,000 payable to Redwood Enterprises VII,
L.P., a stockholder of the Company. This note is subordinate to the Company's
line of credit with Bank of America. The interest rate on the note is the prime
rate plus three percent, and the note matures on September 30, 1996. The
outstanding balance on the note as of August 2, 1996 was $1,415,000 and the
interest rate was 11.25%. See "Certain Transactions."
The Company believes that the borrowing under its credit facility, together
with the proceeds of this Offering, anticipated cash flow from operations and
existing cash will be sufficient to meet the Company's anticipated cash
requirements for at least the next twelve months.
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COFFEE PRICES AND AVAILABILITY
The Company believes that it has adequate sources of supply of high quality
arabica coffee to meet its expansion needs for the foreseeable future. The
average cost of coffee acquired by the Company during the first four months of
the current fiscal year declined by approximately 15% as compared to fiscal 1996
principally due to fluctuations in the unroasted coffee market as well as
economies of scale due to increasing order quantities. While the Company seeks
to anticipate its coffee needs carefully, there can be no assurance that the
prices it will have to pay for the highest quality coffee available will remain
stable in the future.
SEASONALITY AND QUARTERLY RESULTS
The Company's business is subject to seasonal fluctuations as well as
general economic trends that affect retailers in general. Historically, the
Company's net sales are not realized ratably in each quarter, with net sales
being the highest during the last fiscal quarter which includes the December
holiday season. Quarterly results are affected by the timing of the opening of
new stores which may not occur as anticipated due to factors outside the
Company's control. As a result of the combination of the seasonality of the
retail operations and the high level of anticipated expansion, the financial
results for any individual quarter may not be indicative of the results that may
be achieved for a full fiscal year.
PRO FORMA CONDENSED FINANCIAL DATA FOR FISCAL 1996
During the first quarter of fiscal 1997, the Company acquired nineteen
stores from two unrelated sellers. The results of operations of the acquired
stores are included in the first quarter of fiscal 1997 from the dates of the
closing of each acquisition through the end of the quarter. Of the two
transactions, the acquisition of the seven Acquired Cafes did not require pro
forma presentation but the twelve acquired Brothers Stores were significant
enough to warrant pro forma disclosure, as discussed below. The pro forma
condensed statement of operations for the thirteen weeks ended May 1, 1996 did
not differ materially from the historical results of operations for such period
and, accordingly, has not been presented.
The purpose of the pro forma condensed financial statements is to present
(i) what the operating results of the Company might have been for the year ended
January 31, 1996 had the acquisition of the Brothers Stores occurred on February
1, 1995, the beginning of the fiscal year, and (ii) what the Company's financial
position might have been at January 31, 1996 if the acquisition had been
completed as of that date. The pro forma condensed financial statements,
however, do not purport to represent what the Company's actual results of
operations or financial position would have been had the acquisition been
completed on those dates, as there are numerous aspects of the Company's
operations that would have been affected by the combination of the business on
one date that cannot be accounted for in the pro forma condensed financial
statements. Moreover, the pro forma condensed financial statements do not
purport to be a projection of the results of operations or financial position of
the Company either for the current fiscal year ending January 29, 1997 or for
any future period and such financial statements should not be relied upon to
project future operating results of the Company, as such operating results will
be affected by a number of circumstances, the nature and effect of which cannot
be predicted.
Pro Forma Condensed Statement of Operations. The Pro Forma Condensed
Statement of Operations for the year ended January 31, 1996 was prepared by (i)
combining the historical statement of operations of the Company for that period
with the historical statement of operations of the Brothers Stores for the year
ended December 29, 1995 in the manner described in the Pro Forma Condensed
Financial Statements and (ii) adjusting the combined results of operations to
give retroactive effect, for financial reporting purposes, to certain changes
that would have occurred either in the operations of the Company or in the
Brothers Stores as a direct result of the acquisition. See Notes 1 through 4 of
Notes to Pro Forma Condensed Financial Statements.
Net sales. Pro forma net sales combine the historical actual net sales of
the Company with that of the Brothers Stores as if the Brothers Stores were
acquired on February 1, 1995, the beginning of the fiscal year. For fiscal 1996,
the Company's net sales were $10,244,000 and net sales for the acquired Brothers
Stores during the same period were $2,356,000.
Cost of sales and related occupancy costs. The historical Brothers Stores'
cost of sales and related occupancy costs (64.6% of Brothers Stores' net sales)
were combined with the Company's (43.0% of the Company's net sales) for a total
of 47.1% of combined pro forma net sales.
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Store operating expenses. Store operating expenses were combined on a
historical basis which blends the Company's expenses at 34.4% of its net sales
with the Brothers Stores' expenses at 49.5% of its net sales for a total of
37.2% of combined pro forma net sales.
Other operating expenses. Other operating expenses consist solely of the
Company's expenses of operating the wholesale division for the year.
Depreciation and amortization. Depreciation and amortization combines the
historical expenses of the two operations with a net pro forma adjustment of
$483,000 for a pro forma combined total of $498,000, or 4.0% of pro forma
combined net sales. The net adjustment gives effect to (i) the difference in
depreciation for the historical cost basis of the property and equipment for the
Brothers Stores and the fair value of such assets, and (ii) the amortization of
the cost in excess of net assets acquired.
General and administrative expenses. General and administrative expenses
comprise the combination of the historical amounts for the Company and Brothers
Stores (13.0% and 19.0%, respectively, of historical net sales), for a total of
$1,782,000, or 14.1% of pro forma combined net sales. The pro forma general and
administrative expenses include a proportional allocation to the twelve Brothers
Stores of the corporate and administrative salaries and related employee benefit
costs, and other corporate overhead expenses, which were allocated to all stores
operated by Brothers Gourmet Coffees, Inc. The Company believes that a
substantial portion of such allocated expenses are redundant as a result of its
overhead infrastructure and, accordingly, does not believe the pro forma general
and administrative expenses are indicative of the actual general and
administrative expenses that would have been incurred had the Company owned and
operated the Brothers Stores for the year ended January 31, 1996.
Pro Forma Condensed Balance Sheet. The Pro Forma Condensed Balance Sheet
as of January 31, 1996 combines the historical balance sheet of the Company with
that of the Brothers Stores and adjusts the combined balance sheet to record (i)
the elimination of assets and liabilities of the Brothers Stores that were not
acquired or assumed, (ii) the fair value of the net assets acquired in
accordance with the purchase method of accounting and (iii) the debt incurred as
a result of the acquisition. See Note 1 of Notes to Pro Forma Condensed
Financial Statements.
NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of,"
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The Company is in the process of analyzing the impact of this
statement and does not believe that it will have a material impact on the
Company's financial position or results of operations. The Company anticipates
adopting the provisions of the statement for fiscal 1997.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," established financial accounting and reporting
standards for stock-based employee compensation plans and certain other
transactions involving the issuance of stock. The Company is in the process of
analyzing the impact of this statement and does not believe that it will have a
material impact on the Company's financial position or results of operations.
The Company anticipates adopting the provisions of the statement for fiscal
1997.
INFLATION
Inflation has not had a material impact on operating results of the Company
in the past. There can be no assurance, however, that the Company's business
will not be affected by inflation.
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BUSINESS
GENERAL
Diedrich Coffee is a rapidly growing specialty coffee roaster/retailer that
currently operates thirty-seven coffeehouses located in Southern California,
Denver, Colorado and Houston, Texas. Diedrich Coffee sells high quality coffee
beverages made with its own freshly roasted coffee. In addition to brewed
coffee, the Company offers a broad range of Italian-style beverages such as
espresso, cappuccino, caffe latte, caffe mocha and espresso machiato. To
complement beverage sales, the Company sells light food items, whole bean coffee
and accessories through its coffeehouses.
The first retail store operating under the name Diedrich Coffee commenced
operations in Orange County, California in 1972. The Company grew from three
coffeehouses in fiscal 1992 to thirty-seven coffeehouses as of July 31, 1996
through the construction of new coffeehouses and recent acquisitions. See
"Business -- Recent Acquisitions." In addition, the Company has entered into
leases that will permit the opening of five additional coffeehouses in the next
four months. The Company's expansion strategy is to own and operate
newly-developed coffeehouses and to acquire and convert existing specialty
coffee retailers in geographic regions where it has existing coffeehouses. The
Company also evaluates new geographic regions (and analyzes entry through new
store openings or acquisitions) where it believes it can operate profitably.
The Company seeks to differentiate itself and build strong brand name
recognition by developing and operating sophisticated and inviting coffeehouses
intended to serve as neighborhood gathering places. Additionally, Diedrich
Coffee focuses heavily on the quality of its products through experienced
sourcing of the unroasted beans and its proprietary roasting formula. To ensure
freshness, the Company has roasting facilities in its principal regions of
operations (Orange County and Denver) and plans to add roasting facilities in
each of the major regions where it establishes operations. The Company believes
that this strategy, together with enthusiastic and friendly customer service,
creates a loyal customer base. Diedrich coffeehouses are generally established
in high-visibility locations, consistent with the Company's strategy of
developing a substantial repeat client base. The Company's coffeehouses average
approximately 1,500 square feet, ranging in size from 725 to 2,654 square feet.
In its continuing efforts to ensure the highest possible standards of
quality, the Company sources its unroasted coffee beans directly from
coffee-producing nations through its contacts with exporters and growers located
in certain of these countries and through specialty coffee brokers. The
Company's unroasted coffee beans are purchased from coffee-producing regions
throughout the world and are custom roasted in carefully controlled batches
according to the Company's standards and proprietary recipes. The beans
purchased by the Company are premium grade arabica variety, which are a higher
quality than the average arabica or robusta variety of coffee typically found in
non-specialty or mass-merchandised coffees. See "Business -- Diedrich's Coffee."
RECENT ACQUISITIONS
In February 1996, the Company consummated the acquisition of nineteen
retail coffeehouse locations from two separate specialty coffee chains.
Seventeen of the acquired stores are located in Denver, Colorado and the
remaining two stores are located in Houston, Texas. Recently, one of the
acquired stores in Denver was closed. The closed location's post-acquisition
operating results confirmed management's initial evaluation that sales levels at
this location would not be sufficient to warrant conversion to the Diedrich
format. Although operated by the Company, one of the acquired stores is not
subject to a binding lease but such lease is presently being negotiated. Each of
the Denver and Houston markets had been previously identified by the Company as
targets for near-term expansion. The Company believes that the addition of the
stores in Denver results in Diedrich Coffee being a major competitor in this
market. The Company also believes that the addition of these stores results in
sufficient critical mass for effective market penetration and will permit the
Company to benefit from greater marketing efficiencies resulting from geographic
concentration. The addition of the two Houston locations will form the basis for
further expansion, initially in the Houston area, and subsequently in other
metropolitan areas in Texas. The Company has recently entered into binding
leases to open one new coffeehouse in Houston and one new coffeehouse in Dallas.
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Until the conversion of an acquired store is completed, it continues to
operate under the predecessor company's name. The Company is in the process of
converting each of the acquired stores to the Diedrich coffeehouse format. As of
July 31, 1996, the conversion of twelve stores had been completed. The Company
anticipates that the remaining conversions will be completed within the next
four months. The average cost of acquisition and conversion of the twelve stores
converted to date was approximately $160,000, which is substantially less than
the historical average cost to build a new store, and the Company anticipates
that the per store costs associated with the remaining conversions should not
materially differ. See "Risk Factors."
The Company believes that, through the introduction of its proprietary
products and recipes as well as its operational systems and service techniques,
the financial performance of the eighteen remaining acquired stores can be
improved significantly. See "Business -- Diedrich's Coffee,"
"Business -- Coffeehouses" and "Business -- Customer Service and Training." As
operated by the previous owners, the historical financial performance in terms
of sales, cost of sales and labor expense was at a level substantially below the
historical performance of Diedrich coffeehouses in Southern California. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
INDUSTRY OVERVIEW
Almost fifty percent of Americans drink coffee and on average they drink
1.7 cups per day according to the National Coffee Association's 1996 study. The
U.S. coffee market consists of two distinct product categories: (i) commercial
ground roast, mass-merchandised coffee and (ii) specialty coffees, which include
gourmet coffees (premium grade arabica coffees sold in whole bean and ground
form) and premium coffees (upscale coffees mass-marketed by the leading coffee
companies).
The Company believes that the market for specialty coffee is large and
growing but tends to be fragmented. The gourmet coffee segment of the specialty
coffee market has experienced strong growth over the past decade and is expected
to continue to grow through the end of the century. According to Avenues For
Growth: A 20-Year Review of the U.S. Specialty Coffee Market, a report published
by the Specialty Coffee Association of America in January 1993, the market for
gourmet coffee nearly doubled during the 1980's, as retail sales grew from
approximately $763 million in 1979 to $1.5 billion in 1989. This report also
predicts that the gourmet coffee industry will approach $5.0 billion in retail
sales by the year 2000. A National Association of Specialty Food Trade survey in
1992 confirms the upward trends in gourmet coffee consumption and notes that the
percentage of coffee consumers purchasing gourmet coffee increased from 22% in
1990 to 31% in 1992.
The Company believes that several factors have contributed to the increase
in demand for gourmet coffee including:
- greater consumer awareness of gourmet coffee as a result of its
increasing availability;
- increased quality differentiation over commercial grade coffees by
consumers;
- increasing demand for all premium food products, including gourmet
coffee, where the differential in price from the commercial brands is
small compared to the perceived improvement in product quality and taste;
- ease of preparation of gourmet coffees resulting from the increased use
of automatic drip coffee makers and home espresso machines; and
- the decline in alcoholic beverage consumption.
The Specialty Coffee Association of America estimates that the number of
specialty coffee beverage outlets in the United States jumped from approximately
200 in 1989 to approximately 4,000 in 1995, and projects this number to continue
increasing to over 10,000 by the end of 1999. The Company believes that, despite
the increase in the number of specialty coffee stores, retail distribution of
specialty coffees continues to be highly fragmented and, with the exception of a
few retailers, the industry remains relatively unbranded.
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BUSINESS STRATEGY
The Company's objective is to become the leading high quality specialty
coffee retailer in each market in which it operates. Each element of the
Company's strategy is designed to differentiate and reinforce Diedrich Coffee's
brand identity, to engender a high degree of customer loyalty and to position
the Company as a leading specialty coffee retailer. The key elements of this
strategy include:
- High Quality, Guaranteed Fresh Roasted Coffee. The Company strives to
deliver only high quality, freshly roasted coffee to its customers.
Diedrich Coffee purchases premium grade arabica beans from throughout the
world which are then roasted by the Company in accordance with the
Company's standards and proprietary recipes. Roasted beans are delivered
to each Diedrich coffeehouse promptly after roasting, and they are
typically either sold or brewed as "coffee of the day" within one week of
roasting. The Company has roasting facilities in Orange County,
California and has recently added a roasting facility in Denver,
Colorado. Diedrich Coffee plans to add roasting facilities in each of the
major regions it enters in order to ensure that the Company's freshly
roasted coffee beans are delivered promptly after roasting to each
Diedrich coffeehouse. The Company believes its multiregional roasting and
guaranteed freshness strategy distinguishes Diedrich Coffee from its
competitors, many of whom rely upon packaging, rather than more frequent
roasting, to preserve freshness. Diedrich Coffee maintains a policy that
if any customer is dissatisfied with one of the Company's coffee
products, the Company will refund the purchase price or replace the
coffee.
- Superior Customer Service. The friendliness, speed and consistency of
the service and the coffee knowledge of Diedrich Coffee's employees are
critical to developing the Company's quality brand identity and to
building a loyal customer base. To this end, the Company places strong
emphasis on identifying, hiring and retaining employees and invests
substantial resources in training them in customer service, sales skills,
coffee knowledge and beverage preparation. The Company evaluates customer
service performance on a regular basis and incorporates these findings
into its employee training program. All Diedrich Coffee store-level
employees receive ongoing customer service training as part of the
Company's efforts to enable its employees to take on increasing levels of
responsibility within the stores.
- Comfortable and Inviting Environment. The Company's coffeehouses are
designed to be more comfortable than those of its competitors while
creating an inviting atmosphere through the use of natural wood, soft
color schemes, outdoor patios, live music and warm lighting. The Diedrich
coffeehouses are designed to reflect the particular character of the
neighborhood in which the coffeehouse is situated. The Company believes
these elements help create its brand image and establish it as a
desirable, high quality tenant.
- Brand Marketing. The Company's marketing strategy is to differentiate
its concept and create brand name recognition based upon Diedrich
Coffee's quality and the image of its coffeehouses as neighborhood
gathering places. The Company implements this strategy by promoting the
distinctive qualities of Diedrich Coffee products, educating customers
about Diedrich Coffee's offering of various coffees and roasts, seeking
to deliver enthusiastic customer service and sponsoring local and
regional community events. Diedrich Coffee believes that these activities
generate initial and repeat purchases by reinforcing positive experiences
with the Company's products.
- Rapid Expansion. An important aspect of the Company's business strategy
is its growth strategy, in which the Company seeks to rapidly expand its
retail store base in both existing and new markets in an effort to secure
a leading presence in each of its markets and to enhance brand awareness.
The Company currently intends to focus on opening additional stores in
Southern California, Colorado and Texas, while simultaneously evaluating
other markets in the Western United States. As of July 31, 1996, the
Company had executed leases for five additional coffeehouses which are
not yet open for business.
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GROWTH STRATEGY
The Company's growth strategy centers around its objective to sustain its
high-growth rate through a strategy of internal growth, growth through
acquisitions, strategic alliances and sales through other selected distribution
channels.
- Internal Growth. The Company will continue to seek new locations to
build additional coffeehouses. In the current fiscal year, in addition to
the nineteen stores recently acquired, the Company has opened seven newly
constructed coffeehouses as of July 31, 1996. Five additional new store
sites have recently been leased. The expansion is anticipated to take
place principally in the Southern California, Colorado and Texas markets
where the Company currently operates. The criteria for store locations
emphasizes high visibility, high traffic locations ranging from 1,200 to
1,800 square feet plus an exterior patio. The Diedrich coffeehouse design
is based upon diversity and the unique character of each community. This
design philosophy is inherently flexible and adaptable to a broader range
of potential retail sites, including unique locations that would be
unable to accommodate rigid and repetitive store formats.
- Acquisitions. The Company intends to evaluate potential acquisitions
that can accelerate critical mass in existing or new markets. The Company
believes that its unique, high-quality product and efficient operational
systems can add value to acquired locations. Management also believes
that acquisitions will continue to be available at a discount to the cost
to construct new stores, especially where, despite attractive real estate
attributes, acquisition targets may be currently underperforming. While
the Company is continually evaluating acquisition opportunities, Diedrich
Coffee is not presently committed to any acquisitions.
- Strategic Alliances. The Company strives to identify opportunities for
retail alliances. In the latter half of fiscal year 1996, the Company
opened its first two shared retail spaces utilizing interior passways and
open common walls. These spaces, shared with Barnes & Noble and Sports
Chalet, illustrate the Company's desire and ability to design unique
coffeehouses for its customers. The Company does not have any current
commitments to develop additional shared spaces with these retailers. The
Company
is, however, currently negotiating similar shared retail space agreements
with several additional complementary national retailers. The Company
intends to pursue other such alliances with multi-site retailers to
enable it to accelerate its site and brand development. In July 1996, the
Company signed a development agreement with a Singapore company which
calls for the establishment of a total of at least thirty Diedrich
coffeehouses in Singapore, Malaysia and Indonesia within the next five
years to be operated by franchisees. The development agreement also
provides for the possible expansion into Japan, China, Hong Kong and
other Asian countries. See "Business -- Coffeehouses -- International
Development."
- Other Distribution Channels. The Company is actively seeking new
distribution channels for its products. The Company has engaged in
wholesale and mail order distribution of its products for more than five
years. In fiscal year 1996, these activities accounted for approximately
13% of total Company sales. While the primary focus for growth will be
coffeehouse unit expansion, the Company intends to continue to pursue
appropriate growth opportunities in the wholesale and mail order
distribution channels. In 1996, the Company introduced a proprietary,
branded coffee ice cream which it currently sells in selected Diedrich
coffeehouses. The Diedrich Coffee ice cream is also the base component of
the new Diedrich ice cream shakes, parfaits and floats, which were
introduced in Southern California stores in May 1996. The Company is
exploring distribution of this branded ice cream product through other
retail channels, although it has no current commitments or agreements
with respect to such distribution.
DIEDRICH'S COFFEE
Coffee beans are an agricultural product grown commercially in over fifty
countries in the tropical regions of the world. There are many varieties of
coffee and a broad range of quality grades within each variety. While the
broader coffee market generally treats coffee as a fungible commodity, the
specialty coffee industry focuses on the highest grades of coffee available from
the best crops in small quantities. The Company seeks to purchase only the
finest qualities and varieties of coffee generally available to this industry by
sampling the
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unique characteristics and flavor of the varieties in each region. The
background and experience of the Company's personnel provides the skill
necessary to maintain the Company's commitment to serve and sell only the
highest-quality coffee.
History
Diedrich Coffee is one of the few roaster/retailers with a genuine and long
standing heritage spanning three generations in the specialty coffee industry.
Since the early part of this century, when the Diedrich family acquired a coffee
plantation in Central America, the Diedrich family has been involved in growing
and roasting coffee beans. This knowledge and understanding of coffee growing
was passed to Martin Diedrich, the Company's Chairman and Director of Coffee,
from Carl Diedrich, Martin's father and the founder of the Company. Martin
Diedrich's experience and knowledge enables the Company to consider and analyze
many different factors in selecting the coffee beans that the Company purchases
from the various coffee-growing regions around the world.
During the 1970's, the Diedrich family pioneered new roasting techniques
from the mechanical process to the development of proprietary roasting and
blending formulas. Through their experience as coffee growers, Carl and Martin
Diedrich were able to develop roasting and blending formulas that enhanced the
characteristics of high-quality specialty coffees. Carl Diedrich opened his
first retail store in 1972 to sell his roasted coffees. The store became quite
popular and subsequently, drawing upon the concept of the European coffeehouse,
Martin opened the Company's first European-style coffeehouse. Building upon this
foundation, Martin and his father expanded the business and exposed more people
to the coffeehouse culture without sacrificing the commitment to a high-quality
coffee product. Today, the Company continues to draw upon this knowledge and
passion to provide each community that houses a Diedrich coffeehouse with an
opportunity to experience the unique coffeehouse culture in an atmosphere where
customers can enjoy the quality and heritage of Diedrich coffee.
Sourcing
Martin Diedrich and his staff, who are responsible for purchasing unroasted
coffee beans, evaluate numerous product samples from different crops each week
and purchase a selection of high quality coffee beans on the basis of quality,
taste and availability. In any given month, the Company may make forward
commitments for the purchase of more than a dozen different types of coffee plus
specially featured coffees that may only be available in small quantities.
Rotating its coffee selection enables the Company to provide its customers with
a wider variety of coffees and with certain coffees that are available only on a
seasonal basis. The Diedrich family has built relations with coffee brokers,
growers and exporters worldwide since the beginning of the century, and these
long standing relationships provide the Company with access to the highest
quality beans available.
Diedrich Coffee purchases only premium grade arabica coffee beans and
believes these beans are the best available from each producing region. The
premium grade arabica bean is a higher quality variety than the average grade
arabica or robusta variety coffee bean. These lower quality beans are typically
found in non-specialty or mass-merchandised coffees. The Company contracts for
future delivery of unroasted coffee beans for the Company's account to help
ensure adequacy of supply and typically maintains a minimum six-week supply of
each variety of whole beans then available.
Roasting
The roasting of commercial coffee beans is often accomplished through a
uniform roasting process that does not differentiate between the types of coffee
being roasted. Surprisingly, some specialty roasters also employ this commercial
method. Diedrich Coffee, however, embraces a roasting process that varies based
upon the variety, quality, origin and physical characteristics of the coffee
beans being roasted. The Company utilizes formulas and recipes that have been
developed over three generations to bring out the best characteristics of the
coffee during the roasting process and develop the optimal flavor conditions
that a coffee has to offer.
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Diedrich Coffee has several master roasters who are directly responsible
for overseeing the roasting process. These master roasters are trained by the
Company. This training includes serving an apprenticeship under Martin Diedrich
before being permitted to take responsibility for roasting. These master
roasters are craftsmen who are trained to employ the Company's proprietary
roasting formulas while adjusting the formula to take into account the specific
attributes of the coffee being roasted. Each coffee bean contains aromatic oils
and flavor characteristics that develop from the soil, climate and environment
where the bean is grown. The skill of the roaster is employed by analyzing the
unroasted beans and carefully controlling the roasting process in an effort to
maximize the flavor potential of the coffee.
Freshness
Diedrich Coffee is committed to serving its customers beverages and whole
bean products from coffee beans that are freshly roasted. Serving only freshly
roasted coffee is imperative because roasted coffee is a highly perishable
product that begins to grow stale and lose flavor immediately after roasting.
Within two weeks, roasted coffee has lost a significant amount of quality. To
address this concern, the Company has developed a multiregional roasting
approach to ensure freshness. While the Company presently has roasting
facilities in its principal regions of operations, Orange County and Denver, the
Company plans to add roasting facilities in each of the major regions where the
Company establishes operations. The Company believes that its freshly roasted
product is superior to product offerings that use various types of packaging in
an effort to preserve freshness rather than more frequent roasting. The
Company's coffee is delivered to its coffeehouses promptly after roasting to
enable the Company to guarantee the freshness of each cup of coffee or whole
coffee beans sold in its coffeehouses. The Company's coffeehouses are required
to sell or brew coffee within one week of roasting.
Specialty Coffee Beverages
In addition to brewed coffee, Diedrich Coffee offers a broad range of
Italian-style beverages such as espresso, cappuccino, caffe latte, caffe mocha
and espresso machiato. All espresso-based drinks are prepared to order to ensure
quality and consistency. The Company uses high quality ingredients and
condiments such as hand grated chocolate, all natural syrups and fresh whipping
cream. Diedrich Coffee also offers a wide array of frozen specialty drinks,
including its version of iced mocha, and the Diedrich Granita, a frozen
combination of espresso and milk. The Company's most recent creation is its own
signature line of coffee ice cream which is used in its very popular shakes and
parfaits.
COFFEEHOUSES
As each coffee that the Company serves is unique, Diedrich Coffee strives
to create an environment in each coffeehouse that is unique, dynamic and
comfortable. The Company attempts to design each coffeehouse to reflect the
character of the community in which the coffeehouse is located so that the
coffeehouse serves as a community meeting place which is comfortable and
inviting.
The Coffeehouse Concept
The Company's coffeehouse concept is based upon traditional European
coffeehouses, such as those in Vienna and throughout Italy. These coffeehouses
often served as the town meeting hall and provided a receptive environment for
discussion of the day's issues. In a similar vein, Diedrich Coffee attempts to
absorb the character of the community or neighborhood in which a coffeehouse is
to be located and reflect an interpretation of that character through the design
and construction of the coffeehouse. In order to avoid the labor-intensive work
that would be required to design completely original coffeehouses for each new
store opening, the Company starts with one of a dozen basic concepts and design
layouts and then tailors the coffeehouse to the specific site and the
surrounding neighborhood. In general, Diedrich coffeehouses are designed to
encourage customers to relax and linger in a warm and comfortable environment.
The coffeehouses feature varying amenities to promote this environment, such as
live music or outdoor patios where customers can enjoy their coffee.
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<PAGE> 35
The coffeehouse concept, however, is not limited to the physical structure
of the store. The relaxed and inviting environment is created in large part by
the employees in each coffeehouse. Employees are encouraged to know their
customers and are trained to make "on the spot" decisions to promote customer
service. See "Business -- Customer Service and Training."
Site Selection and Design
The Company's site selection strategy is to open coffeehouses in
high-traffic, high-visibility locations in each of its target markets. A Real
Estate Committee, which consists of senior members of management and a dedicated
real estate staffperson, evaluates potential coffeehouse sites based upon the
demographics of the neighborhood, existing traffic patterns and the proximity of
other destination retailers and potential competitors. This evaluation includes
analysis of available statistical data and examination of physical properties
through site visits. The Real Estate Committee has historically approved a
relatively small percentage of the sites that it reviewed for development into
Diedrich coffeehouses. On a regional basis, the Real Estate Committee has also
considered several potential markets that the Company may wish to enter.
Diedrich Coffee designs each of its coffeehouses based upon one of twelve
successful unique layouts. While each layout offers a different format and
appearance with respect to the front counter and seating area, the service areas
are nearly identical compartmentalized units. This approach permits the Company
to create unique coffeehouses in each location while keeping design costs to a
minimum.
Coffeehouse Unit Economics
As of January 31, 1996, seven coffeehouses had been open for two years or
more, the oldest of which was opened in 1986. These coffeehouses range in size
from 936 to 1,746 square feet, with an average size of 1,430 square feet. The
average initial cost for these coffeehouses, excluding pre-opening costs, was
approximately $227,000 or an average of $159 per square foot. During fiscal
1996, these seven coffeehouses recorded aggregate net retail sales of $7,292,000
or an average of $729 per square foot. These stores earned an average operating
profit after depreciation of approximately $245,000 per store or 23.5% of
average net retail sales. For the twelve-month period ended May 1, 1996, the
Company's net retail sales were $11,024,000, with an operating profit after
depreciation of $1,762,000 or 16% of net retail sales.
During fiscal 1996, five new stores were opened at an average per store
cost (excluding pre-opening costs) of approximately $320,000, or approximately
$181 per square foot. The Company's policy is to expense pre-opening costs,
consisting principally of training labor and promotion, in the month in which a
new store is opened. The average pre-opening cost for the five newly-opened
stores was approximately $17,000.
Coffeehouse Operations
The typical Diedrich coffeehouse is staffed with one to three managers, and
a staff of ten to fifteen part-time hourly employees from which the operating
shifts are filled. The hours for each store are established based upon location
and customer demand, but typically are from 6:00 a.m. to 9:00 p.m. (or later) in
residential locations and from 6:00 a.m. to 6:00 p.m. in commercial locations.
The store managers are overseen by a district manager, who is responsible for
supervising the operations of up to ten coffeehouses and reports to senior
management.
In addition to coffee beverages, all Diedrich coffeehouses serve a select
offering of light food items (bagels, croissants and pastries) and dessert items
(pastries and cakes). Management is consistently working with its suppliers to
enhance its selection of food items to complement beverage sales. Three of the
Company's coffeehouses operate as Diedrich Espresso Cafes. These coffeehouses
offer an expanded menu that includes gourmet style pastas and pizzas, sandwiches
and soups, fresh fruit salads and pasta salads.
Diedrich coffeehouses also sell more than twenty different selections of
regular and decaffeinated roasted whole bean coffee. The Company's coffeehouses
also carry select coffee related merchandise items. In fiscal 1996, the
Company's retail sales mix was 70.6% coffee beverages, 18.9% food items, 8.6%
whole bean coffee and 1.9% accessories and clothing.
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<PAGE> 36
Diedrich Coffeehouse Locations
Set forth below is a list of each of the Company's coffeehouse locations as
of July 31, 1996, separated by the metropolitan areas in which such coffeehouses
are located. The status of each of the coffeehouses is indicated including, with
respect to the acquired stores, whether the conversion to the Diedrich
coffeehouse format has been completed. Until the conversion of an acquired store
is completed, it continues to operate under the predecessor company's name. As
indicated in the table, as of July 31, 1996, the Company was operating
thirty-seven coffeehouses and had entered into leases that will permit the
opening of five additional coffeehouses in the next four months.
<TABLE>
<CAPTION>
COFFEEHOUSE DATE OPENED STATUS
- ------------------------------------------------------------------------------- ---------------- -------------------
<S> <C> <C>
ORANGE COUNTY, CALIFORNIA
Brea....................................................................... July 1996 Open
Costa Mesa................................................................. August 1988 Open
Crown Valley............................................................... June 1995 Open
Crystal Court.............................................................. February 1995 Open
Huntington Beach........................................................... December 1995 Open
Irvine-Crossroads.......................................................... December 1993 Open
Irvine Entertainment Center................................................ November 1995 Open
Laguna Beach............................................................... May 1996 Open
Lake Forest................................................................ December 1993 Open
La Paz..................................................................... September 1995 Open
Newport Beach.............................................................. October 1991 Open
Ocean Ranch................................................................ October 1993 Open
Mission San Juan Capistrano................................................ February 1996 Open
Trabuco Hills.............................................................. August 1992 Open
Tustin..................................................................... August 1986 Open
Irvine-Park Place.......................................................... July 1996 Open
Laguna Niguel.............................................................. N/A Binding Lease
DENVER, COLORADO (1)
Boulevard Center........................................................... February 1996 Open (2)
Cherry Creek............................................................... February 1996 Open (2)
Colorado Boulevard......................................................... February 1996 Open (3)
Denver Place............................................................... February 1996 Open (3)
Equitable Building......................................................... February 1996 Open (3)
The Garage................................................................. February 1996 Open (3)
Green Mountain............................................................. February 1996 Open (2)
Independence Building...................................................... February 1996 Open (3)(4)
Larimar Square............................................................. February 1996 Open (2)
Mile High Center........................................................... February 1996 Open (3)
Mission Plaza.............................................................. February 1996 Open (2)
Petroleum Building......................................................... February 1996 Open (3)
Republic Plaza............................................................. February 1996 Open (3)
Tiffany Plaza.............................................................. February 1996 Open (3)
9th and Downing............................................................ February 1996 Open (3)
17th St. Plaza............................................................. February 1996 Open (2)
HOUSTON, TEXAS
Montrose................................................................... February 1996 Open (3)
Vanderbilt................................................................. February 1996 Open (3)
Westheimer................................................................. N/A Binding Lease
SAN DIEGO, CALIFORNIA
Del Mar.................................................................... March 1996 Open
Encinitas.................................................................. N/A Under Construction
Hillcrest.................................................................. N/A Under Construction
LOS ANGELES, CALIFORNIA
Malibu..................................................................... June 1996 Open
Santa Monica............................................................... June 1996 Open
DALLAS, TEXAS
Addison.................................................................... N/A Binding Lease
</TABLE>
- ---------------
(footnotes on following page)
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- ---------------
(1) Does not include one of the Brothers Stores that, in accordance with
management's initial evaluation at the time of the acquisition, was closed
in July 1996.
(2) Conversion to Diedrich coffeehouse format pending.
(3) Conversion to Diedrich coffeehouse format completed.
(4) The lease for this coffeehouse is presently under negotiation and the
premises are not subject to a binding lease.
International Development
In July 1996, the Company entered into a Development Agreement (the
"Development Agreement") with a Singapore company that specializes in assisting
U.S. companies to establish a presence in Asia (the "Developer"). The
Development Agreement grants the Developer the exclusive right to open and
operate Diedrich coffeehouses in the countries of Singapore, Indonesia and
Malaysia pursuant to a pre-negotiated form of franchise agreement. In return,
the Developer agrees to develop at least thirty stores in these countries
according to the following schedule: two stores by May 1, 1997, six stores by
May 1, 1998, eleven stores by May 1, 1999, twenty-one stores by May 1, 2000 and
thirty stores by May 1, 2001. The Company may terminate the agreement if the
Developer fails to meet this schedule, unless the Developer chooses to make
certain payments to the Company. The Company also has the right to approve each
Diedrich coffeehouse site. In addition, until January 1, 2000, the Developer
shall have the right of first refusal to acquire the development rights for Hong
Kong, Vietnam, China, Thailand, Philippines, Taiwan, Korea and Japan. The
Company shall provide certain training and assistance to the Developer,
including furnishing written and other materials to communicate the Company's
roasting process and techniques to the Developer.
The Company will enter into a pre-negotiated form of franchise agreement
with respect to each Diedrich coffeehouse opened under the Development
Agreement. Under this agreement, the Company will grant the franchise owner a
franchise to operate a Diedrich coffeehouse and will agree to provide the
franchise owner with such opening assistance and guidance as the Company deems
necessary to effectively open the Diedrich coffeehouse franchise store. Each
franchise owner shall agree to pay the Company a one-time franchise fee and a
monthly royalty fee based upon the gross sales of all the Diedrich coffeehouses
owned and operated by the same franchise owner. The franchise owner shall agree
not to use the Company's proprietary and confidential information in any other
business or capacity, and to maintain the absolute confidentiality of such
information during and after the term of this agreement. The franchise
agreements shall generally have a term of 20 years, unless sooner terminated by
the Company in accordance with the specific provisions of the agreement.
Management Information System
Over the last two years, the Company has implemented a comprehensive
management information system (the "MIS"). The MIS maintains financial
accounting controls for each coffeehouse through the use of a centralized
accounting system and, in the California coffeehouses, an automated data link
from each of the retail point of sale ("POS") devices to the Company's principal
executive offices. The data links provide daily performance statistics through
the use of nightly polling, as well as real-time analysis of coffeehouse sales
and other operating measures. From the MIS, detailed daily, weekly and periodic
management reports are prepared and provided to store managers and other
operating personnel. The MIS and its continued improvement contributes to the
Company's efforts and success in controlling store labor costs, the largest cost
element of operating a coffeehouse. These improvements have enabled continued
daily managerial supervision and control with minimal additional overhead
despite increasing geographical expansion.
All newly constructed coffeehouses are equipped with linked POS devices and
the conversion process for the recently acquired stores in Denver and Houston
will ultimately include the addition of new POS equipment. The Company has
recently begun implementation of an internetworked communication system which,
when complete, will provide more timely information concerning inventory
turnover, policies, procedures and recipes, human resources data (including
personnel changes), equipment maintenance tips and requests and problem solving
forums. The Company intends to utilize a portion of the net proceeds of this
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<PAGE> 38
Offering to complete this phase of the MIS upgrades and to continue to explore
technological opportunities to maximize management's efficiency. See "Use of
Proceeds."
CUSTOMER SERVICE AND TRAINING
The Company believes that the training and knowledge of its employees and
the consistency and quality of the service they deliver are fundamental to the
Company's success. Management believes that an employee oriented culture creates
a sense of personal responsibility among all employees and pride in the
Company's products, resulting in a higher level of customer service.
Once hired, counter staff employees who are new to the industry or are
staffing new Diedrich coffeehouses receive training about coffee, beverage
preparation, customer service and sales skills. This training includes written
training materials, lectures, observation and simulation exercises. The final
stage of training is in-store training where employees work for a two-week
period implementing their newly learned skills. Staff level employees with
significant coffeehouse experience hired to work in existing coffeehouses are
trained by the general managers. Topics include Diedrich Coffee culture,
recipes, products and customer service techniques. This general orientation and
training is supplemented by comprehensive in-store training from the general
manager, assistant managers and trainers.
Diedrich Coffee seeks to attract and retain qualified personnel by offering
an attractive package of compensation, benefits and career growth potential. The
Company's incentive compensation system rewards management employees for high
quality service and productivity from a store-level bonus pool. The Company's
benefits package includes medical coverage for full-time and qualifying
part-time workers. In addition, as a rapidly growing business, Diedrich Coffee
is able to offer career advancement opportunities to talented personnel. To
date, the Company has not experienced any material difficulties in retaining
qualified personnel.
MARKETING
The Company's marketing strategy is to differentiate itself and build a
brand identity for its freshly roasted coffee and its coffeehouses. The Company
implements this strategy by promoting the distinctive qualities of its Diedrich
Coffee products, educating consumers about Diedrich Coffee's offering of various
coffees, including private estate coffees and roasts, seeking to deliver
enthusiastic customer service and sponsoring local and regional community
events. Diedrich Coffee's marketing efforts are based upon the belief that the
fresh roasted flavor achieved by the Company's commitment to quality and
freshness delivers a distinguishable advantage in coffee flavor to the consumer.
A steady introduction of new coffee, drink and food products is part of the
Company's marketing strategy to keep the concept fresh and drive incremental
sales volume.
To date, Diedrich Coffee has relied primarily upon the high visibility of
its real estate locations, word-of-mouth, public relations, local store
marketing and the inviting atmosphere of its coffeehouses. The Company also
conducts in-store coffee tastings, provides brewed coffee at local neighborhood
events, donates coffee to local charities and mails periodic announcements to
neighborhood residents to announce a store opening or the introduction of a new
product. The costs of these promotions do not have a material impact on the
Company's operating results. In addition, Diedrich Coffee seeks to develop its
brand identity through participation in local and regional community events.
Diedrich Coffee recently launched an ice cream based, dessert oriented,
beverage promotion. By using point of purchase advertising materials, local
store marketing efforts, direct mail, public relations, bounceback coupons and
external marketing, the Company was able to introduce its new products while
simultaneously attracting first time customers.
As the Company enters new markets, it plans to tailor its marketing
strategy to the overall level of awareness and availability of specialty coffee
in that market. In markets that have a less developed specialty coffee presence,
the emphasis of the Company's promotions will initially be focused on the
fundamental distinctions between Diedrich Coffee and prepackaged ground coffee.
In markets that are more knowledgeable
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<PAGE> 39
about specialty coffees, the Company's advertising will focus on the superiority
of Diedrich Coffee's guaranteed freshly roasted products versus competitive
specialty brands. The Company plans to use direct mail, print and other mass
media advertising to expand brand awareness when the Company has achieved a
market penetration which, in the Company's judgment, would make such efforts
cost-effective. There can be no assurance that the Company will achieve such a
level of market penetration.
COMPETITION
In providing coffee beverages, the Company competes directly against all
restaurant and beverage outlets that serve coffee and a growing number of
espresso stands, carts and stores. The Company's whole bean coffees compete
directly against specialty coffees sold at retail through supermarkets,
specialty retailers and a growing number of specialty coffee stores. Both the
Company's whole bean coffees and its coffee beverages compete to a greater or
lesser extent against all other coffees on the market. The Company believes that
its customers choose among retailers primarily on the basis of quality, taste
and convenience and, to a lesser extent, on price.
The Company competes for beverage and whole bean coffee sales with
franchise operators and locally owned specialty coffee stores in the United
States. There are a number of competing specialty coffee retailers, such as
Starbucks, Timothy's Coffees of the World, Inc., Pasqua's, Inc. and New World
Coffee, Inc. In addition, in virtually every major metropolitan area in which
Diedrich Coffee operates or may operate, local or regional competitors already
exist.
Although competition in the specialty coffee market is currently
fragmented, the Company competes and, in the future, will increasingly compete
with Starbucks, the market's largest retailer. Starbucks and other competitors
have significantly greater financial, marketing and other resources than the
Company. In addition to Starbucks and other current competitors, the
attractiveness of the gourmet specialty coffee store market could draw at any
time one or more new major competitors with substantially greater financial,
marketing and operating resources than the Company.
The Company also expects that competition for suitable sites for new stores
will be intense. The Company competes against other specialty retailers and
restaurants for these sites, and there can be no assurance that management will
be able to continue to secure adequate sites at acceptable rent levels.
Management believes that supermarkets pose one of the greatest competitive
challenges in the whole bean coffee market, in part because supermarkets offer
customers the convenience of not having to make a separate trip to the Company's
stores. A number of nationwide coffee manufacturers, such as Kraft General
Foods, Inc., Proctor & Gamble Co. and Nestle S.A., are distributing premium
coffee products in supermarkets which may serve as substitutes for the Company's
coffees. Regional specialty coffee companies also sell whole bean coffees in
supermarkets.
FACILITIES
Diedrich Coffee leases approximately 25,000 square feet of office space for
administrative offices, warehousing, roasting and training facilities in Irvine,
California. The lease for this facility expires in October 2000, with an option
for one additional five-year term. Recently, the Company has entered into a
lease in Denver, Colorado for a 2,500 square foot facility to be used for
warehousing and roasting. This lease expires on May 31, 1999. In addition, as of
July 31, 1996, the Company was a party to various leases for a total of forty-
two retail coffeehouses. All of the Company's operating coffeehouses are on
leased premises and are subject to varying arrangements specified in property
specific leases, except that the lease for one coffeehouse is presently under
negotiation and that site is not subject to a binding lease. For example, some
of the leases require a flat rent, subject to regional cost-of-living increases,
while others are based upon a percentage of gross sales. In addition, certain of
these leases expire in the near future, and there is no automatic renewal or
option to renew. No assurance can be given that leases can be renewed, or if
renewed, that rents will not increase substantially, both of which would
adversely affect the Company. Other leases are subject to renewal at fair market
value, which could involve substantial increases or are subject to renewal with
a scheduled rent increase, which could result in rents being above fair market
value.
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TRADEMARKS
The Company owns several trademarks and servicemarks that have been
registered with the United States Patent and Trademark Office, including
Diedrich Coffee(R), Wiener Melange(R) and Flor de Apanas(R). In addition, the
Company has applications pending with the United States Patent and Trademark
Office for a number of additional marks, including Harvest Peak(TM) and Ambrosia
Blend(TM). The Company has also made application in Canada for trademark
protection of Flor de Apanas(R) and the related design. The Company has received
an allegation that Ambrosia Blend(TM) infringes on a registered trademark. The
Company disputes this allegation, but believes that if any resulting claim was
determined adversely to the Company, it would not result in a material adverse
effect on the Company's financial position or results of operations.
GOVERNMENT REGULATIONS
The Company is subject to various federal, state and local laws, rules and
regulations affecting its business and operations. Each of the Company's
coffeehouses and roasting facilities is and shall be subject to licensing and
reporting requirements by a number of governmental authorities, which may
include building, land use, environmental protection, health and safety and fire
agencies in the state or municipality in which the coffeehouse or facility is
located. Difficulties in obtaining or failure to obtain the required licenses or
approvals could delay or prevent the development or operation of a given
coffeehouse in a particular area, the conversion of the remaining Acquired Cafes
and Brothers Stores or limit the products available at a coffeehouse. Management
believes that the Company is in compliance in all material respects with all
relevant laws, rules and regulations. Furthermore, the Company has never
experienced abnormal difficulties or delays in obtaining the required licenses
or approvals required to open a new coffeehouse or continue the operation of its
existing coffeehouses. Additionally, management is not aware of any
environmental regulations that have had or that it believes will have a material
adverse effect upon the operations of the Company.
EMPLOYEES
As of July 31, 1996, the Company employed a work force of 668 persons, 91
of whom are employed full-time. No employees are currently covered by collective
bargaining agreements, and the Company believes its relations with its employees
are satisfactory.
LEGAL PROCEEDINGS
In the ordinary course of its business, the Company may become involved in
legal proceedings from time to time. As of the date of this Prospectus, the
Company is not a party to any material pending legal proceedings.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES
The directors, executive officers and other key employees of the Company,
and their ages as of July 31, 1996, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S) HELD
-------------------------------------- --- --------------------------------------
<S> <C> <C>
Martin R. Diedrich.................... 37 Chairman of the Board, Secretary and
Director of Coffee
Steven A. Lupinacci................... 43 President, Chief Executive Officer,
Chief
Financial Officer and Director
Kerry W. Coin......................... 48 Executive Vice President and Chief
Operating Officer
Edwin P. Ott.......................... 37 Controller
Patrick D. Inaba...................... 34 Manager of Store Construction
Cary C. Peterson...................... 30 Manager of Training and Recruiting
Paul C. Heeschen...................... 39 Director
Peter Churm*.......................... 70 Director
Lawrence Goelman*..................... 55 Director
</TABLE>
- ---------------
* Mr. Churm and Mr. Goelman are expected to be nominated by the Board of
Directors of the Company to become directors after the closing of the
Offering.
Martin R. Diedrich has been the Secretary and Director of Coffee and has
served on the Company's Board of Directors since its incorporation. He was
elected as Chairman of the Board in January 1996 and also presently serves on
the Real Estate Committee. Mr. Diedrich is an internationally recognized
specialty coffee expert who is a frequent speaker at industry functions and
recently addressed the 1995 World Specialty Coffee Conference & Exhibition in
Venice, Italy, where he presented material on roasting techniques and
philosophy.
Steven A. Lupinacci has been the President, Chief Executive Officer and
Chief Financial Officer of the Company since December 1992. Mr. Lupinacci has
served as a member of the Board of Directors since December 1992, with the
exception of a six-month period from January to July 1996. In addition, he
currently serves on the Real Estate Committee. From July 1990 to December 1992,
Mr. Lupinacci was a private investor and prior to July 1990, he was a partner
with Price Waterhouse where his practice primarily focused on mergers and
acquisitions.
Kerry W. Coin became the Executive Vice President and Chief Operating
Officer of the Company in August 1996. From May 1996 until joining the Company,
he was President and General Manager of the restaurant subsidiary of Synerdyne
Corporation. From January 1994 to February 1996, he was President and Chief
Executive Officer of Boston West, L.L.C., a franchisee of Boston Chicken, Inc.
From February 1993 to January 1994, Mr. Coin served as Vice President of
Strategic Development for CKE Restaurants, Inc., a Southern California-based
chain of quick-service restaurants, and from June 1987 until February 1993, he
was a principal at A.T. Kearney, Inc., a private management consulting firm.
Edwin P. Ott joined the Company in January 1993 as Controller and also
serves on the Real Estate Committee. From 1991 until joining the Company, Mr.
Ott served as a law clerk for the law firm of Hannan & Cote. Prior to that time,
Mr. Ott worked for twelve years in the restaurant industry serving as a
Promotions Accountant for Taco Bell (a division of PepsiCo), Accounting
Manager/Financial Analyst for the Sizzler Restaurant Division of Collins
Foodservice International, Financial Analyst for El Torito Restaurants (a
division of W.R. Grace) and the Controller for International Onion, Inc.
Patrick D. Inaba joined the Company in January 1993 as a general manager of
one of the Diedrich coffeehouses. In February 1995, Mr. Inaba was promoted to
Manager of New Store Operations and in October 1995, he assumed the position of
Manager of Store Construction. Prior to joining the Company,
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<PAGE> 42
Mr. Inaba served as Director of Operations at Wahoo's Fish Taco from 1989. As
Director of Operations, Mr. Inaba designed menus and recipes, operating systems,
purchasing systems, marketing and advertising programs and staff training
procedures.
Cary C. Peterson joined the Company in November 1995 as Manager of Training
and Recruiting. From January 1993 to November 1995, Mr. Peterson served as
Regional Training and Recruiting Manager at Chevys Mexican Restaurants, a
division of PepsiCo. Prior to January 1993, Mr. Peterson spent seven years with
Cantina Restaurants, a chain of Mexican restaurants, as Director of Operations.
Paul C. Heeschen became a director of the Company in January 1996 and
serves as a member of the Real Estate Committee. For the past five years, Mr.
Heeschen has been a principal of Heeschen & Associates, a private investment
firm. He is also the sole general partner of D.C.H., L.P. and Redwood
Enterprises VII, L.P., each of which are stockholders of the Company. See
"Principal and Selling Stockholders."
Peter Churm is expected to be nominated by the Board of Directors of the
Company to become a director of the Company after the closing of the Offering.
He is Chairman Emeritus of Furon Company, a publicly-held diversified
manufacturing company headquartered in Laguna Niguel, California. Mr. Churm
served as Chairman of the Board of Furon Company from May 1980 through February
1992 and was President of that company for more than sixteen years prior to that
time. He is presently a member of the boards of directors of Furon Company and
CKE Restaurants, Inc.
Lawrence Goelman is expected to be nominated by the Board of Directors of
the Company to become a director of the Company after the closing of the
Offering. Since May 1996, Mr. Goelman has served as President and Chief
Executive Officer of Pinnacle Micro, Inc. From June 1995 to May 1996, he was a
managing partner of Tremont Partners, Inc., and from April 1981 to June 1995, he
served as Chairman, President and Chief Executive Officer of CostCare, Inc.
Presently, Mr. Goelman is a director of Pinnacle Micro, Inc. and Urohealth, Inc.
All directors currently serve for one-year terms and until their successors
have been elected and qualified. Officers are elected annually and serve at the
discretion of the Board. There are no family relationships between any of the
directors or executive officers of the Company.
BOARD COMMITTEES
Upon the consummation of the Offering, the Board of Directors intends to
establish an Audit Committee and a Compensation Committee composed of Messrs.
Heeschen, Churm and Goelman. The Audit Committee shall review the results and
scope of the audit and other services provided by the Company's independent
auditors, review and evaluate the Company's internal control functions and
monitor transactions between the Company and its employees, officers and
directors. The Compensation Committee will administer the Company's stock option
plans and designate compensation levels for officers and directors of the
Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Compensation Committee shall consist of Mr. Heeschen, Mr.
Churm and Mr. Goelman. No member of the Compensation Committee was, at any time
during the year ended January 31, 1996 or at any other time, an officer or
employee of the Company. No executive officer of the Company serves as a member
of the Board of Directors or Compensation Committee of any other entity which
has one or more executive officers serving as a member of the Company's Board of
Directors or Compensation Committee.
During fiscal 1996, all compensation was determined by the Company's Board
of Directors because the Company had not yet established a Compensation
Committee. Steven Lupinacci, the Company's President, and Martin Diedrich, the
Company's Secretary, served as members of the Board of Directors during this
period when compensation matters were considered.
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DIRECTOR COMPENSATION
Non-employee directors receive reimbursement for out-of-pocket expenses
incurred in attending Board meetings and will receive certain stock option
grants. See "Management -- 1996 Non-Employee Directors Stock Option Plan."
Directors of the Company who are officers or employees of the Company receive no
extra compensation for their service on the Board.
1996 NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN
The Company has adopted the 1996 Non-Employee Directors Stock Option Plan
(the "Non-Employee Directors Plan"). The purpose of the Non-Employee Directors
Plan is to promote the interests of the Company and its stockholders by using
investment interests in the Company to attract and retain highly qualified
independent directors. The Non-Employee Directors Plan provides for the grant of
non-qualified stock options only. A total of 125,000 shares have been reserved
for issuance under the Non-Employee Directors Plan. No options have been granted
under the Non-Employee Directors Plan to date.
Pursuant to the terms of the Non-Employee Directors Plan, each non-employee
director will automatically receive an initial, one-time grant of an option to
purchase up to 10,000 shares of the Company's Common Stock. These initial
options will vest and become exercisable with respect to 50% of the underlying
shares upon the earlier of (i) the first anniversary of the grant date or (ii)
immediately prior to the first annual meeting of stockholders of the Company
following the grant date, if the recipient has remained a non-employee director
for the entire period from the grant date to such earlier date, and with respect
to the remaining 50% of the underlying shares upon the earlier of (i) the second
anniversary of the grant date or (ii) immediately prior to the second annual
meeting of shareholders of the Company following the grant date, if the
recipient has remained a non-employee director for the entire period from the
grant date to such earlier date. In addition to an initial grant, each
non-employee director will also receive, upon each re-election to the Company's
Board, an automatic grant of an option to purchase up to 5,000 additional shares
of the Company's Common Stock. These additional options will vest and become
exercisable upon the earlier of (i) the first anniversary of the grant date or
(ii) immediately prior to the annual meeting of stockholders of the Company next
following the grant date, if the recipient has remained a non-employee director
for the entire period from the grant date to such earlier date.
All non-employee director options will have a term of ten years and an
exercise price equal to the fair market value of the Company's Common Stock on
the date of grant. The Non-Employee Directors Plan provides that the exercise
price may be paid by Company loan or withholding of underlying stock, or
deferred until completion of broker-assisted exercise and sale transactions.
Vesting of non-employee director options accelerates if the recipient of the
option ceases to be a director of the Company in connection with a change in
control.
41
<PAGE> 44
EXECUTIVE COMPENSATION
Summary Compensation
The following table sets forth all compensation awarded or paid by the
Company during the fiscal year ended January 31, 1996 to its Chief Executive
Officer and the Company's other executive officer (collectively, the "Named
Executive Officers").
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION ($) ---------------------
----------------------- SECURITIES UNDERLYING
NAME AND PRINCIPAL POSITION SALARY OPTIONS(#)
- --------------------------------------------------- ----------------------- ---------------------
<S> <C> <C>
Martin R. Diedrich................................. $ 87,500 --
Chairman of the Board, Secretary and
Director of Coffee
Steven A. Lupinacci................................ $ 116,638 131,350
President, Chief Executive Officer,
Chief Financial Officer and Director
</TABLE>
Stock Option Grants in Last Fiscal Year
The following table sets forth information regarding each grant of stock
options made during the fiscal year ended January 31, 1996 to each of the Named
Executive Officers. No stock appreciation rights were granted during such period
to such persons.
<TABLE>
<CAPTION>
POTENTIAL
INDIVIDUAL GRANTS REALIZABLE
--------------------------------------------------------- VALUE AT ASSUMED
PERCENT OF ANNUAL RATES
NUMBER OF TOTAL OPTIONS OF STOCK PRICE
SECURITIES GRANTED TO APPRECIATION FOR
UNDERLYING EMPLOYEES OPTION TERM (2)
OPTIONS IN FISCAL EXERCISE EXPIRATION -------------------
NAME GRANTED(#)(1) YEAR(%) PRICE ($/SH) DATE 5% ($) 10% ($)
- ---------------------------- ------------- ------------- ------------ ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Martin R. Diedrich.......... -- -- -- -- -- --
Steven A. Lupinacci......... 131,350 100% $ 1.45 6/29/05 $119,778 $303,540
</TABLE>
- ---------------
(1) This option was granted on June 29, 1995 pursuant to Mr. Lupinacci's stock
option plan and agreement and has a maximum term of ten years measured from
the grant date, subject to earlier termination under certain circumstances.
A maximum of 85,350 option shares vest in twelve equal monthly installments
following this Offering and a maximum of 46,000 option shares vest in six
equal monthly installments following a secondary offering. Any unvested
shares become vested eight years after the date of grant. See
"Management -- Employment Agreements and Compensation Arrangements."
(2) The potential realizable value is calculated based on the fair market value
of the underlying Common Stock on the date of grant as determined by the
Board of Directors. If such values were based on the assumed initial public
offering price of $11.00 per share, the potential realizable value at
assumed annual rates of stock price appreciation for the option term at 5%
and 10% would be $2,163,051 and $3,557,111, respectively. The actual value
realized may be greater or less than the potential realizable values set
forth in the table.
42
<PAGE> 45
Aggregated Stock Option Exercises in Last Fiscal Year and Fiscal Year-End
Option Values
The following table sets forth the number and value of the exercisable and
unexercisable options held by each of the Named Executive Officers at January
31, 1996. None of the Named Executive Officers exercised any options during the
fiscal year ended January 31, 1996.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUES OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT FISCAL YEAR-END (#) FISCAL YEAR-END ($)(1)
------------------------------ ------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Martin R. Diedrich............. -- -- -- --
Steven A. Lupinacci............ -- 131,350 -- $ 1,254,393
</TABLE>
- ---------------
(1) These values are calculated using the assumed initial public offering price
of $11.00 per share, less the exercise price of the options.
1996 Stock Incentive Plan
The Board of Directors has adopted the 1996 Stock Incentive Plan (the
"Incentive Plan"). The purpose of the Incentive Plan is to promote the interests
of the Company and its stockholders by using investment interests in the Company
to attract, retain and motivate its management and other persons, to encourage
and reward their contributions to the performance of the Company and to align
their interests with the interests of the Company's stockholders. The Incentive
Plan enables the Company to grant a variety of stock-based incentive awards,
including incentive and nonstatutory stock options, restricted stock, stock
appreciation rights, stock payments, dividend equivalents, stock bonuses, stock
sales, phantom stock and other stock-based benefits. An award may consist of one
such arrangement or benefit or two or more of them in tandem or in the
alternative. A total of 475,000 shares have been reserved for issuance under the
Incentive Plan. Other than options to purchase 120,000 shares of the Company's
Common Stock at an exercise price equal to the initial public offering price per
share that were granted to the Company's Chief Operating Officer in August 1996,
no options have been granted under the Incentive Plan to date.
The Incentive Plan will be administered by a committee of two or more
directors (the "Committee") who are disinterested within the meaning of Rule
16b-3 promulgated under Section 16 of the Securities Exchange Act of 1934, as
amended, and who are eligible to receive only automatic, nondiscretionary awards
under the Non-Employee Directors Plan. The Incentive Plan permits the Committee
to select eligible persons to receive awards and to determine the terms and
conditions of awards. Under the Incentive Plan, options to purchase Common Stock
may be granted with an exercise price below the market value of such stock on
the grant date.
The Board of Directors or the Committee may amend, suspend or terminate the
Incentive Plan at any time. However, only the Committee may take actions
affecting selection of award recipients or the timing, pricing and amounts of
any awards. In addition, the maximum number of shares that may be sold or issued
under the Incentive Plan may be increased and the class of persons eligible to
participate in the Incentive Plan may be altered only with the approval of the
Company's stockholders. With respect to all other amendments to the Incentive
Plan, the Board may, in its discretion, determine that such amendment shall only
become effective upon approval by the stockholders of the Company if the Board
determines that such stockholder approval may be advisable, such as for the
purpose of obtaining or retaining any statutory or regulatory benefits under
federal or state securities laws, federal or state tax laws, or for the purpose
of satisfying applicable stock exchange listing requirements.
EMPLOYMENT AGREEMENTS AND COMPENSATION ARRANGEMENTS
Employment Agreement with Martin R. Diedrich
In June 1995, Martin R. Diedrich, the Company's Chairman of the Board and
Director of Coffee, entered into a three-year employment agreement with the
Company. The agreement provided for an annual base salary of $100,000 per year,
subject to periodic adjustment by the Board of Directors. The Board of Directors
43
<PAGE> 46
may also grant Mr. Diedrich performance bonuses based upon the Company's
performance and Mr. Diedrich's contributions thereto. Mr. Diedrich is also
entitled to receive employee benefits consistent with the Company's policies for
other senior executives. The agreement further provides that Mr. Diedrich shall
not be required to relocate outside of Orange County, California as a condition
to his employment.
Employment Agreement and Compensation Arrangements with Steven A. Lupinacci
In June 1995, Steven A. Lupinacci, the Company's President, Chief Executive
Officer and Chief Financial Officer, entered into a three-year employment
agreement with the Company. The agreement provided for an annual base salary of
$125,000 per year, subject to periodic adjustment by the Board of Directors. The
Board of Directors may also grant Mr. Lupinacci performance bonuses based upon
the Company's performance and Mr. Lupinacci's contributions thereto. Mr.
Lupinacci is also entitled to receive employee benefits consistent with the
Company's policies for other senior executives.
In June 1995, the Company entered into a stock option plan and agreement
with Mr. Lupinacci. The agreement expires on June 29, 2005. The agreement
provides for a grant of options to purchase 131,350 shares of Common Stock at an
exercise price of $1.45 per share. Upon the closing of this Offering or certain
other extraordinary events, Mr. Lupinacci shall be able to exercise a maximum of
85,350 option shares, subject to adjustment based upon the initial public
offering price, which will vest in twelve equal installments at the end of each
month after the closing of the Offering. Upon the closing of a secondary
offering or certain other extraordinary events, Mr. Lupinacci shall be able to
exercise a maximum of 46,000 option shares, subject to adjustment based upon the
public offering price in connection with the secondary offering, which will vest
in six equal installments at the end of each month after the closing of such
secondary offering. In the event of a change in control under certain
circumstances, the vesting schedule for all or a portion of the option shares
may be accelerated. If not exercisable earlier, the option shares are
exercisable in June 2003 and expire in June 2005.
Employment Agreement with Kerry W. Coin
In August 1996, Kerry W. Coin, the Company's Executive Vice President and
Chief Operating Officer, entered into a three-year employment agreement with the
Company. The agreement provided for an annual base salary of $120,000 per year,
subject to periodic adjustment by the Board of Directors. Mr. Coin is also
entitled to receive employee benefits consistent with the Company's policies for
other senior executives and may be eligible for performance bonuses based upon
the Company's performance and Mr. Coin's contributions thereto. The agreement
also provided for the grant of options to purchase 120,000 shares of the
Company's Common Stock at an exercise price equal to the initial public offering
price per share.
INDEMNIFICATION OF DIRECTORS AND OFFICERS AND RELATED MATTERS
The Company's Certificate of Incorporation limits, to the maximum extent
permitted by the Delaware General Corporation Law, the personal liability of
directors and officers for monetary damages for breach of their fiduciary duties
as directors and officers (other than liabilities arising from acts or omissions
that involve intentional misconduct, fraud or knowing violations of law or the
payment of distributions in violation of Delaware General Corporation Law). The
Certificate of Incorporation provides further that the Company shall indemnify,
to the fullest extent permitted by Delaware General Corporation Law, any person
made a party to an action or proceeding by reason of the fact that such person
was a director, officer, employee or agent of the Company. Subject to the
Company's Certificate of Incorporation, the Bylaws provide that the Company
shall indemnify directors and officers for all costs reasonably incurred in
connection with any action, suit or proceeding in which such director or officer
is made a party by virtue of his being an officer or director of the Company
except where such director or officer is finally adjudged to have been derelict
in the performance of his duties as such director or officer.
The Company has entered into separate indemnification agreements with its
directors and officers containing provisions that provide for the maximum
indemnity allowed to directors and officers by the Delaware General Corporation
Law and the Company's Bylaws, subject to certain exceptions. The indemnifi-
44
<PAGE> 47
cation agreements may require the Company, among other obligations, to indemnify
such directors and officers against certain liabilities that may arise by reason
of their status as directors and officers, other than liabilities arising from
willful misconduct of a culpable nature, provided that such person acted in good
faith and in a manner that he or she reasonably believed to be in or not opposed
to the best interests of the Company and, in the case of a criminal proceeding,
had no reasonable cause to believe that his conduct was unlawful. In addition,
the indemnification agreements provide generally that the Company will, subject
to certain exceptions, advance the expenses incurred by directors and officers
as a result of any proceeding against them as to which they may be entitled to
indemnification. The Company believes these agreements are necessary to attract
and retain qualified persons as directors and officers. The Company also
maintains directors' and officers' liability insurance.
The indemnification provisions in the Company's Bylaws, and the indemnity
agreements entered into between the Company and its directors and executive
officers, may permit indemnification for liabilities arising under the
Securities Act. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Company pursuant to the foregoing provisions or otherwise, the Company
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is therefore unenforceable.
KEY MAN LIFE INSURANCE
The Company currently maintains a term life insurance policy in the amount
of $1,000,000 on the life of Martin Diedrich under which the Company is the sole
beneficiary.
CERTAIN TRANSACTIONS
Until 1987, Diedrich Coffee was also engaged in the design and manufacture
of coffee roasters. Beginning in 1987, however, this business was separated from
the Company and operated independently as a sole proprietorship by Stephan
Diedrich, brother of Martin Diedrich, the Company's Chairman. The sole
proprietorship operated under the name Diedrich Manufacturing until it was
incorporated in 1991 as Diedrich Manufacturing, Inc. Presently, Diedrich
Manufacturing, Inc. is doing business as Diedrich Coffee Roasters. The Company
purchases roasting equipment and display bins from Diedrich Coffee Roasters from
time to time. The Company made purchases in the amounts of approximately
$52,000, $17,000 and $16,000 in fiscal years 1996, 1995 and 1994, respectively.
As of July 31, 1996, the Company had purchased approximately $33,000 worth of
goods from Diedrich Coffee Roasters in fiscal 1997. Management believes that the
prices paid to Diedrich Coffee Roasters are at least as favorable to the Company
as those which would have been available from unrelated third parties at the
times the purchases were made.
On May 20, 1996, the Company entered into a revolving promissory note with
a maximum principal amount of $2,000,000 payable to Redwood Enterprises VII,
L.P. ("Redwood Enterprises"). This note is subordinate to the Company's line of
credit with Bank of America. The interest rate on the note is the prime rate
plus three percent, and the note becomes due and payable on September 30, 1996.
The outstanding balance on the note as of July 31, 1996 was $1,415,000 and the
interest rate was 11.25%. Redwood Enterprises owns approximately 8.8% of the
Company's outstanding Common Stock after giving effect to the issuance of shares
in the Offering. In addition, Mr. Heeschen, a director of the Company, is the
sole general partner of Redwood Enterprises.
On October 10, 1995, Wells Fargo Bank extended to the Company a revolving
line of credit in the amount of $750,000 that was guaranteed by Martin R.
Diedrich. On February 20, 1996, the line of credit was amended and the borrowing
base was increased to $2,000,000, the guarantee was released and the due date
was extended to February 1997. This line of credit, which was collateralized by
substantially all of the Company's assets, was replaced by the Company with a
new line of credit and terminated on July 19, 1996.
On June 29, 1995, the Company issued a total of 1,608,568 shares of Series
B Preferred Stock to Redwood Enterprises and Diedrich Partners I, L.P.
("Diedrich Partners") for an aggregate consideration of $2,305,000. Redwood
Enterprises and Diedrich Partners own approximately 8.8% and 11.8%,
respectively, of
45
<PAGE> 48
the Company's outstanding Common Stock after giving effect to the issuance of
shares in the Offering. Mr. Heeschen, a director of the Company, is the sole
general partner of Redwood Enterprises.
On June 29, 1995, the Company entered into an agreement with D.C.H., L.P.
("D.C.H.") which acknowledged a purchase price overpayment of $200,000 for the
1,000,000 shares of Series A Preferred Stock purchased on December 11, 1992 for
an aggregate consideration of $1,000,000. This purchase price overpayment led to
the negotiation of a post-closing adjustment. The post-closing adjustment arose
as a result of the fact that certain liabilities of the Company were estimated
for purposes of the Company's valuation in connection with the sale of the
Series A Preferred Stock and subsequent to the sale of such shares it was
determined that the actual liabilities exceeded the estimated liabilities. The
Company issued to D.C.H. 268,097 shares of Common Stock in exchange for the
$200,000 post-closing adjustment. D.C.H. owns approximately 21.7% of the
Company's outstanding Common Stock after giving effect to the issuance of shares
in the Offering. In addition, Mr. Heeschen, a director of the Company, is the
sole general partner of D.C.H.
On June 29, 1995, the Company issued 17,112 shares of Common Stock to Mr.
Lupinacci to address the dilution resulting from the issuance of shares in
connection with the post-closing adjustment described in the preceding
paragraph. Mr. Lupinacci owns approximately 4.5% of the Company's outstanding
Common Stock after giving effect to the issuance of shares in the Offering.
On June 13, 1995, the Company entered into an agreement to redeem an
aggregate of 229,787 shares of Common Stock owned by Donald Holly at an
aggregate price of $305,000. This agreement in connection with his resignation
from the Company included a release of any and all claims against the Company
arising from his employment, the sale of his shares or any other matter. Mr.
Holly was formerly a director and Chief Financial Officer of the Company.
Shortly following the Company's initial filing of the registration statement in
connection with this Offering which was available to the public, Mr. Holly
contacted the Company alleging that the per share price paid to him in 1995 was
insufficient in light of the estimated initial public offering price disclosed
in such registration statement. The Company believes that Mr. Holly's allegation
is without merit.
In April 1995, the Company borrowed $80,000 from Redwood Enterprises
pursuant to an unsecured installment note bearing interest at a rate of 12%. Mr.
Heeschen, a director of the Company, is the sole general partner of Redwood
Enterprises. In July 1995, this note was repaid in full.
During the period from 1990 to 1995, the Company made a series of unsecured
loans to Martin R. Diedrich, the Company's Chairman of the Board and Secretary.
At January 31, 1995 and 1996, the aggregate outstanding balance of these loans
was $32,000 and $35,546, respectively. The loans bear interest at a rate of
5.19% and are due on February 1, 1999. The aggregate outstanding balance on the
notes as of July 31, 1996 was $36,231.
The Company has agreed to pay certain expenses of the Selling Stockholders
in connection with this Offering. Mr. Heeschen, a director of the Company, is
the sole general partner of Redwood Enterprises and D.C.H., two of the Selling
Stockholders. Amre A. Youness, a former director of the Company, is the sole
general partner of Diedrich Partners, a Selling Stockholder. If the Underwriters
elect to exercise the over-allotment option to purchase 30,000 shares of Common
Stock granted by Mr. Diedrich, the Secretary of the Company, certain of his
expenses will be paid by the Company. See "Underwriting."
In connection with the purchase of the Series A Preferred Stock and Series
B Preferred Stock, the Company granted registration rights to certain
stockholders. See "Description of Capital Stock -- Registration Rights."
All future transactions, including loans, between the Company and its
officers, directors, principal stockholders and affiliates will be approved by a
majority of the Board of Directors, including a majority of the independent and
disinterested outside directors on the Board of Directors, and will be on terms
no less favorable to the Company than could be obtained from unaffiliated third
parties.
46
<PAGE> 49
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of July 31, 1996, and as adjusted to
reflect the sale of Common Stock offered by this Prospectus, (i) by each person
(or group of affiliated persons) who is known by the Company to own beneficially
more than five percent of the Company's Common Stock, (ii) by each of the Named
Executive Officers, (iii) by each of the Company's directors and director
designates, and (iv) by all directors, director designates and executive
officers as a group. The Company believes that the persons and entities named in
the table have sole voting and investment power with respect to all shares of
Common Stock shown as beneficially owned by them, subject to community property
laws, where applicable. The information contained in this table assumes that the
Series A and Series B Preferred Stock of the Company has been converted into
Common Stock.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED
PRIOR TO THE OFFERING NUMBER OF AFTER OFFERING
--------------------- SHARES BEING ---------------------
NAME AND ADDRESS OF BENEFICIAL OWNER(1) NUMBER PERCENT OFFERED(2) NUMBER PERCENT
- --------------------------------------- --------- ------- ------------ --------- -------
<S> <C> <C> <C> <C> <C>
D.C.H., L.P. .......................... 1,268,097 33.4 100,000 1,168,097 21.7
450 Newport Center Drive
Suite 450
Newport Beach, CA 92660
Redwood Enterprises VII, L.P. ......... 804,284 21.2 332,247 472,037 8.8
450 Newport Center Drive
Suite 450
Newport Beach, CA 92660
Diedrich Partners I, L.P.(3) .......... 804,284 21.2 167,753 636,531 11.8
3 Civic Plaza
Suite 170
Newport Beach, CA 92660
Martin R. Diedrich..................... 685,107 18.1 -- 685,107 12.7
Steven A. Lupinacci.................... 236,991(4) 6.2 -- 236,991(4) 4.4
Kerry W. Coin.......................... 11,667(5) * -- 11,667(5) *
Paul C. Heeschen....................... 2,072,381(6) 54.7 432,247 1,640,134(6) 30.4
Peter Churm............................ -- -- -- -- --
Lawrence Goelman....................... -- -- -- -- --
All directors, director designates and
executive officers as a group (6
persons)............................. 3,006,146 78.9 432,247 2,573,899 47.6
</TABLE>
- ---------------
* Less than 1%.
(1) Unless otherwise indicated, the business address of each of the stockholders
named in this table is Diedrich Coffee, Inc., 2144 Michelson Drive, Irvine,
California 92612.
(2) Does not include 216,123 shares beneficially owned by Redwood Enterprises
VII, L.P., 83,877 shares beneficially owned by Diedrich Partners I, L.P. and
30,000 shares beneficially owned by Martin R. Diedrich that are subject to
the Underwriters' over-allotment option.
(3) Amre A. Youness is the sole general partner of this limited partnership with
voting and investment power as to all of the shares beneficially owned by
the limited partnership. Neither Mr. Diedrich nor any member of his family
owns any interest in this limited partnership.
(4) Includes 7,113 shares that Mr. Lupinacci has the right to acquire upon
exercise of stock options within 60 days of July 31, 1996, assuming
consummation of the Offering. These options were granted to Mr. Lupinacci on
June 29, 1995 pursuant to a stock option plan and agreement at an exercise
price of $1.45 per share.
(5) Includes 11,667 shares that Mr. Coin has the right to acquire upon exercise
of stock options within 60 days of July 31, 1996. These options were granted
to Mr. Coin on August 26, 1996 pursuant to the Incentive Plan at an exercise
price equal to the initial public offering price per share.
(6) Includes shares beneficially owned by D.C.H., L.P. and Redwood Enterprises
VII, L.P. Mr. Heeschen is the sole general partner of each of these
partnerships with voting and investment power as to all of such shares. Does
not include a limited partnership interest of approximately 2.2% of Diedrich
Partners I, L.P. owned by Mr. Heeschen as he does not exercise any voting or
investment power with respect to the shares owned by Diedrich Partners I,
L.P.
47
<PAGE> 50
DESCRIPTION OF CAPITAL STOCK
GENERAL
Prior to consummation of the Offering, the Company will be reincorporated
in Delaware and the Company's new certificate of incorporation (the "Certificate
of Incorporation") will authorize 25,000,000 shares of a single class of Common
Stock, par value $.01 per share, and 3,000,000 shares of preferred stock, par
value $.01 per share, none of which shares of preferred stock will be issued and
outstanding immediately after completion of the Offering. All outstanding shares
of Common Stock are, and the shares offered hereby will be, when issued and
sold, fully paid and nonassessable.
The discussion below describes the capital stock of the Company as it will
exist upon the closing of this Offering, unless otherwise noted.
COMMON STOCK
As of July 31, 1996, there were 1,183,082 shares of Common Stock
outstanding held of record by three stockholders and 2,608,568 shares of Common
Stock reserved for issuance upon the conversion of preferred stock to three
stockholders. The holders of Common Stock are entitled to one vote per share on
all matters to be voted on by stockholders and are entitled to receive such
dividends, if any, as may be declared from time to time by the Board of
Directors from funds legally available therefor, subject to the dividend
preferences of any preferred stock that may be designated and issued by the
Company in the future. Upon liquidation or dissolution of the Company, the
holders of Common Stock are entitled to share ratably in all assets available
for distribution after payment of liabilities and liquidation preferences of the
Preferred Stock, if any. Holders of Common Stock have no preemptive rights, no
cumulative voting rights and no rights to convert their Common Stock into any
other securities. Any action taken by common stockholders must be taken at an
annual or special meeting and may not be taken by written consent. The
outstanding shares of Common Stock are, and the shares of Common Stock to be
outstanding upon the completion of this Offering will be, fully paid and
nonassessable.
Pursuant to Section 2115 of the California Corporations Code (the
"California Law"), a corporation incorporated in a State other than California
(such as the Company, which is incorporated in Delaware) may nevertheless be
subject to certain of the provisions of the California Law (as specified in
Section 2115 of the California Law) applicable to California corporations
(commonly designated a "Quasi-California Corporation") if more than one-half of
its outstanding voting securities are owned of record by persons having
addresses in California and more than half of its business is conducted in
California (generally, if the average of its property factor, payroll factor and
sales factor (as defined in Sections 25129, 25132 and 25134 of the California
Revenue and Taxation Code) is more than 50 percent during its latest full income
year). Such a foreign corporation will not be treated as a Quasi-California
Corporation, however, if it has more than 800 holders of record of a class of
securities qualified for trading on the Nasdaq National Market. Prior to this
Offering, 100% of the outstanding shares of the Company's Common Stock were
owned of record by persons having addresses in California. It is expected that
such percentage will be reduced significantly as a result of this Offering. To
the extent, however, that the Company meets the requirements set forth in
Section 2115 of the California Law, the Company could become a Quasi-California
Corporation subject to the California Law which, among other things, requires
cumulative voting and is more restrictive than Delaware law concerning dividends
and other distributions to stockholders.
PREFERRED STOCK
Effective upon the closing of this Offering, the Board of Directors will
have the authority, without any further vote or action by the stockholders, to
provide for the issuance of up to 3,000,000 shares of preferred stock from time
to time in one or more series, to establish the number of shares to be included
in each such series, to fix the designations, preferences, limitations and
relative, participating, optional or other special rights and qualifications or
restrictions of the shares of each series and to determine the voting powers, if
any, of such shares. The issuance of preferred stock could adversely affect,
among other things, the rights of
48
<PAGE> 51
existing stockholders or could delay or prevent a change in control of the
Company without further action by the stockholders. The issuance of preferred
stock could decrease the amount of earnings and assets available for
distribution to holders of Common Stock. In addition, any such issuance could
have the effect of making removal of the present management of the Company more
difficult, or resulting in restrictions upon the payment of dividends and other
distributions to the holders of Common Stock. The Company has no current plans
to issue any preferred stock.
WARRANTS
The Company does not have any outstanding warrants other than the
Representative's Warrants described in this Prospectus. See "Underwriting."
REGISTRATION RIGHTS
After the consummation of this Offering, the holders of 2,108,568 shares of
Common Stock, or their permitted transferees, will be entitled to certain rights
with respect to registration of such shares under the Securities Act. These
rights were granted pursuant to purchase agreements entered into with the
Company by the holders of the Company's Series A and Series B Preferred Stock
prior to this Offering. Such holders have been granted certain demand and
incidental registration rights with respect to the Common Stock issuable upon
conversion of the Series A and Series B Preferred Stock (the "Registrable
Securities"). After the expiration of the 180-day lock-up period, the demand
registration rights can be exercised a maximum of three times by holders of the
Registrable Securities. See "Underwriting." With respect to the Common Stock
issuable upon conversion of the Series B Preferred Stock, however, holders of at
least 50% of such Registrable Securities must make such a demand. The incidental
registration rights provide that if the Company proposes to register any of its
securities under the Securities Act, either for its own account or the account
of other security holders exercising registration rights, such holders are
entitled to notice of such registration and are entitled to include shares of
such Common Stock therein. The Company is required to bear substantially all of
the expenses of all such registrations, except for underwriting discounts and
commissions.
In connection with this Offering, the Company has granted registration
rights to the Representative in connection with the Representative's Warrants.
See "Underwriting."
TRANSFER AGENT
The transfer agent for the Common Stock is U.S. Stock Transfer Corporation.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this Offering, there has not been any public market for the Common
Stock. Sale of a substantial number of shares of Common Stock into the public
market following the Offering could adversely affect prevailing market prices
for the Common Stock.
Following the completion of this Offering, the Company will have
outstanding an aggregate of 5,391,650 shares of Common Stock. In addition to the
2,200,000 shares of Common Stock offered hereby, as of the date of this
Prospectus, there will be 3,191,650 shares of Common Stock outstanding, all of
which are Restricted Shares under the Securities Act.
Beginning 180 days after the Effective Date, 3,191,650 Restricted Shares
subject to lock-up agreements will become eligible for sale in the public market
pursuant to Rule 144, all of which will be subject to the volume and other
resale restrictions pursuant to Rule 144. The Representative may, in its sole
discretion and at any time without notice, release all or any portion of the
securities subject to lock-up agreements prior to the expiration of the
applicable lock-up period.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least two
years (including the holding period of any prior owner except an affiliate) is
entitled to sell in "broker's transactions" or to market makers, within any
three-month period, a
49
<PAGE> 52
number of shares that does not exceed the greater of (i) 1% of the then
outstanding shares of Common Stock (53,916 shares immediately after this
Offering) or (ii) generally, the average weekly trading volume in the Common
Stock during the four calendar weeks preceding the sale. Sales under Rule 144
are also subject to the filing of a Form 144 with respect to such sale and
certain other limitations and restrictions. Under Rule 144(k), a person who is
not deemed to have been an affiliate of the Company at any time during the
ninety (90) days preceding a sale, and who has beneficially owned the shares
proposed to be sold for at least three years, would be entitled to sell such
shares without having to comply with the manner of the sale, volume limitation
or notice filing provisions described above.
Certain holders of shares of Common Stock of the Company are entitled to
certain registration rights. See "Description of Capital Stock -- Registration
Rights" and "Underwriting."
The Company intends to file registration statements on Form S-8 under the
Securities Act to register up to 600,000 shares of Common Stock reserved for
issuance under its Incentive Plan and Non-Employee Directors Plan, thus
permitting the resale of such shares by nonaffiliates in the public market
without restriction under the Securities Act, subject to vesting restrictions
with the Company or the lock-up agreements described above. As of July 31, 1996,
other than options to purchase 120,000 shares of the Company's Common Stock at
an exercise price equal to the initial public offering price per share that were
granted to the Company's Chief Operating Officer in August 1996, there were no
shares subject to options which had been granted under either of these plans.
50
<PAGE> 53
UNDERWRITING
The Underwriters named below, represented by The Boston Group, L.P., have
severally agreed, subject to the terms and conditions contained in the
Underwriting Agreement, to purchase from the Company the number of shares of
Common Stock indicated below opposite their respective names at the initial
public offering price less the underwriting discounts and commissions set forth
on the cover page of this Prospectus. The Underwriting Agreement provides that
the obligations of the Underwriters are subject to certain conditions and that
the Underwriters are committed to purchase all of such shares, if any are
purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------------------------------------------------------------ ---------
<S> <C>
The Boston Group, L.P. ...........................................
---------
Total................................................... 2,200,000
=========
</TABLE>
The Representative was organized in California and its principal business
function is to underwrite and sell securities. The Representative has been
recently formed and has underwritten only a limited number of public offerings.
However, the Chairman, Vice Chairman, Senior Vice President of Trading and
Director of Corporate Finance of the Representative have additional prior
experience with public offerings. The Chairman of the Representative has been in
the securities industry for more than 11 years. He was associated with various
national broker-dealers, including as a registered principal and a registered
representative. The Vice Chairman of the Representative has been in the
securities industry for over 20 years, where he served in various capacities,
including executive officer and registered principal and representative, for
various firms providing back office and related services to the securities
industry, and was employed in various capacities by the National Association of
Securities Dealers, Inc. The Senior Vice President of Trading of the
Representative has been employed in the securities trading business for over 31
years. He has been responsible for supervising the market making operations, as
well as managing the correspondent wire operations, for a financial firm, and
worked as an over-the-counter trader at various financial firms. Nonetheless,
due to the Representative's limited history, there can be no assurance that the
Offering will be completed or, if completed, that an active trading market for
the Common Stock will develop. After interviewing various underwriters, the
Company has advised the Representative that it chose the Representative based
upon various factors, including the Company's belief that the Representative has
an understanding of the Company and its business.
The Company has been advised by the Representative that the Underwriters
propose to offer shares to the public at the initial public offering price set
forth on the cover page of this Prospectus, and to certain securities dealers at
such price less a concession of not more than $ per share, and that the
Underwriters and such dealers may reallow to other dealers, including the
Underwriters, a discount not in excess of $ per share. After the
initial public offering, the public offering price and concessions and discounts
may be changed by the Representative. No reduction in such terms shall change
the amount of proceeds to be received by the Company as set forth on the cover
page of this Prospectus.
The Company will bear the expenses of the Selling Stockholders in
connection with the registration of shares, other than underwriting discounts
and commissions.
51
<PAGE> 54
The Selling Stockholders have granted the Underwriters an option,
exercisable within thirty days after the date of this Prospectus, to purchase up
to an aggregate of an additional 330,000 shares of Common Stock, all of which
will be sold by such Selling Stockholders to cover over-allotments, at the same
price per share of Common Stock being paid by the Underwriters for the other
shares of Common Stock offered hereby. None of the proceeds of sales by Selling
Stockholders will be received by the Company.
The Representative has informed the Company that it does not expect any
sales of the shares of Common Stock offered hereby to be made by the
Underwriters to any accounts over which they exercise discretionary authority.
The Company's officers, directors and stockholders have agreed not to,
directly or indirectly, offer, offer to sell, sell, grant an option to purchase
or sell, or transfer any shares of Common Stock owned by them for a period of
180 days from the date of this Prospectus without the prior written consent of
the Representative (other than with respect to the over-allotment option).
The Company has agreed to pay the Representative a non-accountable expense
allowance of two percent of the gross proceeds from the sale of all shares of
Common Stock offered hereby (including any shares sold by the Selling
Stockholders in the Offering or pursuant to the Underwriters' over-allotment
option), up to a maximum of $500,000. To date, the Company has not paid any of
the non-accountable expense allowance to the Representative. The
Representative's expenses in excess of the non-accountable expense allowance,
including its legal expenses, will be borne by the Representative. To the extent
that the expenses of the Representative are less than the non-accountable
expense allowance, the excess shall be deemed to be compensation to the
Representative.
The Underwriting Agreement provides that the Company and the Selling
Stockholders will indemnify the Underwriters against certain liabilities under
the Securities Act or will contribute payments the Underwriters may be required
to make in respect thereof. The Company has been advised that in the opinion of
the Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
Prior to this Offering, there has not been an established public market for
the Common Stock. The initial public offering price will be determined by
negotiations among the Company, the Selling Stockholders and the Representative.
Among the major factors to be considered in determining the initial public
offering price of the Common Stock will be the prevailing market conditions, the
market prices relative to earnings, cash flow and assets for publicly traded
common stocks of comparable companies, the sales and earnings of the Company and
comparable companies in recent periods, the Company's earning potential, the
experience of its management, and the position of the Company in the industry.
The initial public offering price set forth on the cover page of this Prospectus
should not be considered an indication of the actual value of the Common Stock.
Such price is subject to change as a result of market conditions and other
factors and no assurance can be given that the Common Stock can be resold at the
initial public offering price.
The Company has agreed to sell to the Representative, for $50,
Representative's Warrants to purchase up to 160,000 shares of Common Stock at an
exercise price per share equal to 120% of the greater of: (i) the actual public
offering price per share or (ii) $11.50. The Representative's Warrants are
exercisable for a period of two years beginning one year from the completion of
this Offering. The Representative's Warrants are not transferable except to the
officers or partners of the Representative or, beginning one year after
completion of the Offering, to the employees of the Representative. The
Representative's Warrants include a net exercise provision permitting the
holder, upon consent of the Company, to pay the exercise price by cancellation
of a number of shares with a fair market value equal to the exercise price of
the Representative's Warrants.
The Representative's Warrants provide certain rights with respect to the
registration under the Securities Act of up to 160,000 shares of Common Stock
issuable upon exercise thereof. The holders of the shares issuable upon exercise
of the Representative's Warrants may require the Company to file a registration
statement under the Securities Act with respect to such shares. In addition, if
the Company registers any of its
52
<PAGE> 55
Common Stock for its own account, the holders of the shares issuable upon
exercise of the Representative's Warrants are entitled to include their shares
of Common Stock in the registration.
The foregoing sets forth the material terms and conditions of the
Underwriting Agreement, but does not purport to be a complete statement of the
terms and conditions thereof, copies of which are on file at the offices of the
Representative, the Company, and the Securities and Exchange Commission. See
"Additional Information."
LEGAL MATTERS
Certain legal matters with respect to the shares of Common Stock offered
hereby will be passed upon for the Company by Gibson, Dunn & Crutcher LLP,
Orange County, California. Munger, Tolles & Olson, Los Angeles, California, will
act as counsel for the Underwriters.
EXPERTS
The financial statements of the Company and the Acquired Stores of Brothers
Gourmet Coffees, Inc. included in this Prospectus and in the Registration
Statement have been audited by BDO Seidman, LLP, independent certified public
accountants, to the extent and for the periods set forth in their reports
appearing elsewhere herein and in the Registration Statement, and are included
in reliance upon such reports given upon the authority of said firm as experts
in auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") in Washington, D.C. a Registration Statement on Form S-1 (together
with all amendments thereto, the "Registration Statement"), under the Securities
Act with respect to the shares of Common Stock offered hereby. This Prospectus
does not contain all the information set forth in the Registration Statement and
the exhibits and schedules filed therewith, certain portions of which have been
omitted as permitted by the rules and regulations of the Commission. For further
information with respect to the Company and the Common Stock offered hereby,
reference is hereby made to the Registration Statement and to the exhibits and
schedules filed therewith. Statements contained in this Prospectus regarding the
contents of any contract or other document referred to are not necessarily
complete and in each such instance, reference is made to the copy of such
contract, agreement or other document filed as an exhibit to the Registration
Statement, each such statement being deemed to be qualified in its entirety by
such reference. The Registration Statement, including all exhibits and schedules
thereto, may be inspected without charge at the principal office of the
Commission, at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549, and at the Midwest Regional Office of the Commission at 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and at the Northeast
Regional Office of the Commission at Seven World Trade Center, Suite 1300, New
York, New York 10048. Copies of such material may be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, upon the payment of prescribed fees. The Commission
maintains a web site that contains reports, proxy and information statements and
other information filed electronically with the Commission at
http://www.sec.gov.
53
<PAGE> 56
DIEDRICH COFFEE
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
HISTORICAL FINANCIAL STATEMENTS OF DIEDRICH COFFEE
Report of Independent Certified Public Accountants.................................... F-2
Balance Sheets as of January 31, 1995 and 1996 and May 1, 1996 (unaudited)............ F-3
Statements of Operations for the years ended January 31, 1994, 1995 and 1996 and the
twelve weeks ended April 25, 1995 (unaudited) and the thirteen weeks ended May 1,
1996 (unaudited).................................................................... F-4
Statements of Stockholders' Equity for the years ended January 31, 1994, 1995 and 1996
and the thirteen weeks ended May 1, 1996 (unaudited)................................ F-5
Statements of Cash Flows for the years ended January 31, 1994, 1995 and 1996 and the
twelve weeks ended April 25, 1995 (unaudited) and the thirteen weeks ended May 1,
1996 (unaudited).................................................................... F-6
Notes to Financial Statements......................................................... F-7
HISTORICAL FINANCIAL STATEMENTS OF THE ACQUIRED STORES OF BROTHERS GOURMET COFFEES,
INC.
Report of Independent Certified Public Accountants.................................... F-17
Balance Sheets as of December 30, 1994, December 29, 1995 and
January 26, 1996.................................................................... F-18
Statements of Operations and Store Equity for the period from inception (June 1, 1994)
to December 30, 1994, the year ended December 29, 1995 and the four weeks ended
January 26, 1996.................................................................... F-19
Statements of Cash Flows for the period from inception (June 1, 1994) to December 30,
1994,
the year ended December 29, 1995 and the four weeks ended January 26, 1996.......... F-20
Notes to Financial Statements......................................................... F-21
UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS OF DIEDRICH COFFEE
Pro Forma Condensed Financial Statements.............................................. F-23
Pro Forma Condensed Balance Sheet as of January 31, 1996.............................. F-24
Pro Forma Condensed Statement of Operations for the year ended January 31, 1996....... F-25
Notes to Pro Forma Condensed Financial Statements..................................... F-26
</TABLE>
F-1
<PAGE> 57
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Diedrich Coffee
Irvine, California
We have audited the accompanying balance sheets of Diedrich Coffee as of
January 31, 1995 and 1996, and the related statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended January 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Diedrich Coffee at January
31, 1995 and 1996, and the results of its operations and its cash flows for each
of the three years in the period ended January 31, 1996 in conformity with
generally accepted accounting principles.
BDO SEIDMAN, LLP
Costa Mesa, California
March 11, 1996, except
as to Note 9, which
is as of July 19, 1996
F-2
<PAGE> 58
DIEDRICH COFFEE
BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31,
------------------------- MAY 1,
1995 1996 1996
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS (NOTES 4 AND 9)
Current Assets:
Cash.......................................................... $ 58,884 $ 94,659 $ 79,222
Accounts receivable........................................... 66,542 134,573 159,049
Inventories (Note 2).......................................... 300,103 645,493 849,631
Deferred income taxes (Note 8)................................ 9,082 14,079 14,079
Prepaid expenses.............................................. 70,753 106,367 141,961
Other current assets.......................................... 25,985 12,890 11,390
---------- ---------- ----------
Total current assets................................... 531,349 1,008,061 1,255,332
Property and equipment, net (Notes 3, 4 and 5).................. 1,760,872 4,100,898 6,580,413
Costs in excess of net assets acquired, net (Note 9)............ -- -- 841,780
Deferred income taxes (Note 8).................................. 30,892 34,113 34,113
Other assets (Note 5)........................................... 180,064 172,600 203,068
---------- ---------- ----------
$2,503,177 $5,315,672 $8,914,706
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Checks issued against future deposits......................... $ -- $ -- $ 395,239
Current portion of long-term debt (including related party)
and revolving line of credit (Notes 4 and 9)................ 40,940 117,538 2,941,307
Current portion of obligation under capital lease -- related
party
(Note 5).................................................... 34,143 -- --
Notes payable................................................. 39,398 39,398 39,398
Accounts payable.............................................. 417,057 635,428 1,387,657
Accrued compensation.......................................... 88,723 184,891 140,493
Accrued expenses.............................................. 40,328 32,237 82,366
Income taxes payable (Note 8)................................. 88,277 51,235 87,884
---------- ---------- ----------
Total current liabilities.............................. 748,866 1,060,727 5,074,344
Long-term debt (including related party), less current portion
(Notes 4 and 9)............................................... 338,180 829,320 304,345
Obligation under capital lease -- related party, less current
portion
(Note 5)...................................................... 132,729 -- --
Deferred rent................................................... 110,378 121,144 124,423
---------- ---------- ----------
Total liabilities...................................... 1,330,153 2,011,191 5,503,112
---------- ---------- ----------
Commitments and contingencies (Notes 6, 7 and 9)
Subsequent events (Note 9)
Stockholders' equity (Note 7):
Series A convertible cumulative preferred stock, no par value;
liquidation preference of $1.00 per share, aggregating
$1,000,000; authorized, 1,000,000 shares; issued and
outstanding,
1,000,000 shares............................................ 1,000,000 800,000 800,000
Series B convertible cumulative preferred stock, no par value;
liquidation preference of $1.433 per share, aggregating
$2,305,000; authorized, 1,608,568 shares; issued and
outstanding, 0 shares at January 31, 1995 and 1,608,568
shares at January 31, 1996 and May 1, 1996.................. -- 2,225,813 2,225,813
Common stock, no par value; authorized, 4,021,437 shares;
issued and outstanding, 1,127,660 shares at January 31, 1995
and 1,183,082 shares at January 31, 1996 and May 1, 1996.... 147,000 330,698 330,698
Retained earnings (accumulated deficit)....................... 51,024 (52,030) 55,083
Stockholder receivable........................................ (25,000) -- --
---------- ---------- ----------
Total stockholders' equity............................. 1,173,024 3,304,481 3,411,594
---------- ---------- ----------
$2,503,177 $5,315,672 $8,914,706
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 59
DIEDRICH COFFEE
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31, TWELVE THIRTEEN
------------------------------------ WEEKS ENDED WEEKS ENDED
1994 1995 1996 APRIL 25, MAY 1,
---------- ---------- ---------- 1995 1996
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales:
Retail............................. $3,911,784 $6,673,330 $8,878,904 $ 1,757,205 $ 3,901,997
Wholesale and other................ 502,377 917,423 1,365,271 300,963 372,733
---------- ---------- ---------- ---------- ----------
Total...................... 4,414,161 7,590,753 10,244,175 2,058,168 4,274,730
---------- ---------- ---------- ---------- ----------
Costs and expenses:
Cost of sales and related occupancy
costs........................... 1,795,866 3,163,812 4,409,485 872,214 1,772,892
Store operating expenses........... 1,594,144 2,583,998 3,520,140 668,990 1,734,879
Other operating expenses........... 146,466 282,603 276,788 64,410 59,320
Depreciation and amortization...... 101,692 254,708 353,840 61,995 153,925
General and administrative
expenses........................ 808,831 851,011 1,334,694 276,735 337,375
---------- ---------- ---------- ---------- ----------
Total...................... 4,446,999 7,136,132 9,894,947 1,944,344 4,058,391
---------- ---------- ---------- ---------- ----------
Operating income (loss).............. (32,838) 454,621 349,228 113,824 216,339
Interest expense..................... (90,543) (82,788) (50,187) (14,932) (38,841)
Interest and other income............ 35,383 4,702 15,814 1,793 1,264
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes.... (87,998) 376,535 314,855 100,685 178,762
Provision for income taxes (Note
8)................................. 800 52,704 129,211 41,281 71,649
---------- ---------- ---------- ---------- ----------
Net income (loss).................... $ (88,798) $ 323,831 $ 185,644 $ 59,404 $ 107,113
========== ========== ========== ========== ==========
Pro forma information (Note 1):
Net income per share............... $ .06 $ .03
========== ==========
Weighted average shares
outstanding..................... 3,153,000 3,906,000
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 60
DIEDRICH COFFEE
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SERIES A SERIES B RETAINED
PREFERRED STOCK PREFERRED STOCK COMMON STOCK EARNINGS
--------------------- --------------------- -------------------- (ACCUMULATED STOCKHOLDER
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT DEFICIT) RECEIVABLE TOTAL
--------- ---------- --------- ---------- --------- -------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January
31, 1993......... 1,000,000 $1,000,000 -- $ -- 1,127,660 $147,000 $ (184,009) $ (25,000) $ 937,991
Net loss for the
year............. -- -- -- -- -- -- (88,798) -- (88,798)
--------- ---------- --------- ---------- --------- -------- --------- -------- ----------
Balance, January
31, 1994......... 1,000,000 1,000,000 -- -- 1,127,660 147,000 (272,807) (25,000) 849,193
Net income for the
year............. -- -- -- -- -- -- 323,831 -- 323,831
--------- ---------- --------- ---------- --------- -------- --------- -------- ----------
Balance, January
31, 1995......... 1,000,000 1,000,000 -- -- 1,127,660 147,000 51,024 (25,000) 1,173,024
Repurchase of
common stock
(Note 7)......... -- -- -- -- (229,787) (16,302) (288,698) 25,000 (280,000)
Issuance of Series
B preferred stock
(Note 7)......... -- -- 1,608,568 2,225,813 -- -- -- -- 2,225,813
Common stock issued
upon adjustment
of original
purchase price of
Series A
preferred stock
(Note 7)......... -- (200,000) -- -- 285,209 200,000 -- -- --
Net income for the
year............. -- -- -- -- -- -- 185,644 -- 185,644
--------- ---------- --------- ---------- --------- -------- --------- -------- ----------
Balance, January
31, 1996......... 1,000,000 800,000 1,608,568 2,225,813 1,183,082 330,698 (52,030) -- 3,304,481
Net income for the
period
(unaudited)...... -- -- -- -- -- -- 107,113 -- 107,113
--------- ---------- --------- ---------- --------- -------- --------- -------- ----------
Balance, May 1,
1996
(unaudited)...... 1,000,000 $ 800,000 1,608,568 $2,225,813 1,183,082 $330,698 $ 55,083 $ -- $3,411,594
========= ========== ========= ========== ========= ======== ========= ======== ==========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 61
DIEDRICH COFFEE
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
TWELVE
YEARS ENDED JANUARY 31, WEEKS THIRTEEN
---------------------------------- ENDED WEEKS ENDED
1994 1995 1996 APRIL 25, MAY 1,
--------- --------- ---------- 1995 1996
--------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................ $ (88,798) $ 323,831 $ 185,644 $ 59,404 $ 107,113
Adjustments to reconcile net income (loss) to
cash provided by operating activities:
Depreciation and amortization............. 101,692 254,708 353,840 61,995 153,925
Deferred income taxes..................... -- (39,974) (8,218) -- --
Increase (decrease) from changes in:
Accounts receivable..................... (40,950) (2,924) (68,031) (58,172) (24,476)
Inventories............................. (87,530) (123,623) (345,390) 91,260 (204,138)
Prepaid expenses........................ (28,183) (42,570) (35,614) (126,238) (35,594)
Other current assets.................... (1,023) 6,541 13,095 25,995 1,500
Other assets............................ (18,429) (13,301) (12,768) 53,690 (30,468)
Accounts payable........................ 386,421 (97,624) 218,371 (48,846) 752,229
Accrued compensation.................... (11,733) 67,651 83,505 41,201 (44,398)
Accrued expenses........................ (6,647) (1,371) 4,572 30,545 23,349
Income taxes payable.................... -- 88,277 (37,042) (80,867) 36,649
Deferred rent............................. 41,748 27,592 10,766 2,842 3,279
--------- --------- ----------- --------- -----------
Cash provided by operating activities.......... 246,568 447,213 362,730 52,809 738,970
--------- --------- ----------- --------- -----------
Cash flows from investing activities:
Capital expenditures for property and
equipment................................. (964,822) (342,110) (2,673,634) (142,474) (1,648,440)
Acquisition of coffeehouses.................. -- -- -- -- (1,800,000)
--------- --------- ----------- --------- -----------
Cash used in investing activities.............. (964,822) (342,110) (2,673,634) (142,474) (3,448,440)
--------- --------- ----------- --------- -----------
Cash flows from financing activities:
Checks issued against future deposits........ -- -- -- 125,800 395,239
Proceeds from (payments on) notes payable.... (19,102) 13,500 -- -- --
Proceeds from long-term debt................. 173,500 62,446 580,000 108,747 2,327,776
Principal payments on long-term debt......... (77,795) (108,083) (93,674) (15,218) (28,982)
Principal payments on obligation under
capital lease -- related party............ (24,722) (35,999) (85,460) (166,872) --
Proceeds from sale of preferred stock........ -- -- 2,225,813 -- --
Repurchase of common stock................... -- -- (280,000) -- --
--------- --------- ----------- --------- -----------
Net cash provided by (used in) financing
activities................................... 51,881 (68,136) 2,346,679 52,457 2,694,033
--------- --------- ----------- --------- -----------
Net increase (decrease) in cash................ (666,373) 36,967 35,775 (37,208) (15,437)
Cash at beginning of period.................... 688,290 21,917 58,884 58,884 94,659
--------- --------- ----------- --------- -----------
Cash at end of period.......................... $ 21,917 $ 58,884 $ 94,659 $ 21,676 $ 79,222
========= ========= =========== ========= ===========
Supplemental Disclosure of Cash Flow
Information
Cash paid during the period for:
Interest.................................. $ 91,403 $ 82,384 $ 50,187 $ 14,932 $ 38,841
Income taxes.............................. $ 800 $ 4,440 $ 89,458 $ 61,500 $ 39,000
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 62
DIEDRICH COFFEE
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF MAY 1, 1996 AND FOR THE TWELVE WEEKS ENDED APRIL 25, 1995
AND THE THIRTEEN WEEKS ENDED MAY 1, 1996 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Diedrich Coffee (the "Company") operates a chain of coffeehouses located in
Southern California, Colorado and Texas, which sell coffee beverages made with
its own freshly roasted coffee. In addition, the Company sells light food items
and whole bean coffee through its coffeehouses. In February 1996, the Company
acquired 19 retail coffeehouse locations in Colorado and Texas (see Note 9).
Change in Fiscal Year
Effective February 1, 1996, the Company changed its year end from January
31 to a fiscal year ending on the Wednesday nearest January 31. Accordingly, the
quarterly period ended May 1, 1996 includes thirteen weeks. Prior to the change
in fiscal year end, the Company's quarterly periods included twelve weeks,
except for the fourth quarter which had approximately sixteen weeks.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
(net realizable value).
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over estimated useful lives of five to seven years.
Leasehold improvements are amortized using the straight-line method over the
shorter of their estimated useful lives or the term of the related leases.
Expenditures for major renewals and betterments that extend the useful life
of property and equipment are capitalized. Expenditures for maintenance and
repairs are charged to expense as incurred.
Store Pre-opening Costs
Certain direct and incremental costs incurred prior to the opening of a
coffeehouse location are deferred and expensed upon the opening of the
coffeehouse.
Fair Value of Financial Instruments
The carrying amount of cash, accounts receivable, accounts payable and
accrued expenses are reasonable estimates of their fair value because of the
short maturity of these items. The Company believes the carrying amounts of the
Company's notes payable and long-term debt approximate fair value because the
interest rates on these instruments are subject to change with, or approximate,
market interest rates.
Rent Expense
Certain of the Company's lease agreements provide for scheduled rent
increases during the lease terms or for rental payments commencing on a date
other than the date of initial occupancy. Rent expense is recorded on a
straight-line basis over the respective terms of the leases.
Income Taxes
The Company uses the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards No. 109, "Accounting
For Income Taxes." Deferred income taxes are recognized based on the differences
between financial statement and income tax bases of assets and liabilities
F-7
<PAGE> 63
DIEDRICH COFFEE
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
using enacted tax rates in effect for the year in which the differences are
expected to reverse. Valuation allowances are established, when necessary, to
reduce deferred tax assets to the amount expected to be realized. The provision
for income taxes represents the tax payable for the period and the change during
the period in deferred tax assets and liabilities.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Pro Forma Net Income per Share
Pro forma net income per share is based on the weighted average number of
shares outstanding during the period after consideration of the dilutive effect,
if any, of stock options granted and after giving pro forma effect to the
conversion of the Company's outstanding preferred stock to common stock in
connection with the initial public offering. Dividends on the preferred stock
have been excluded from the computation since the preferred stock has been
assumed to have been converted to common stock. Historical net income per share
has not been presented as such amount is based on a calculation that is not
reflective of the Company's ongoing capital structure.
New Accounting Standards
Statement of Financial Accounting Standards No. 121 "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of"
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The Company is in the process of analyzing the impact of this
statement and does not believe that it will have a material impact on the
Company's financial position or results of operations. The Company anticipates
adopting the provisions of the statement for fiscal year 1997.
Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation" established financial accounting and reporting
standards for stock-based employee compensation plans and certain other
transactions involving the issuance of stock. The Company is in the process of
analyzing the impact of this statement and does not believe it will have a
material impact on the Company's financial position or results of operations.
The Company anticipates adopting the provisions of the statement for fiscal year
1997.
Interim Financial Information
The accompanying unaudited financial statements as of May 1, 1996 and for
the twelve weeks ended April 25, 1995 and the thirteen weeks ended May 1, 1996
have been prepared in accordance with generally accepted accounting principles
for interim financial information. Accordingly, they do not include all of the
footnote information required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal, recurring accruals) considered necessary for a fair
presentation have been included. Results for the interim periods are not
necessarily indicative of the results for an entire year.
F-8
<PAGE> 64
DIEDRICH COFFEE
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
MAY 1,
JANUARY 31, 1996
------------------------- ----------
1995 1996
---------- ---------- (UNAUDITED)
<S> <C> <C> <C>
Unroasted coffee............................... $ 47,679 $ 128,369 $ 159,451
Roasted coffee................................. 20,214 24,274 69,939
Accessory and specialty items.................. 105,091 74,299 119,684
Other food, beverage and supplies.............. 127,119 418,551 500,557
---------- ---------- ----------
$ 300,103 $ 645,493 $ 849,631
========== ========== ==========
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
MAY 1,
JANUARY 31, 1996
------------------------- ----------
1995 1996
---------- ---------- (UNAUDITED)
<S> <C> <C> <C>
Leasehold improvements......................... $1,017,649 $2,107,408 $3,072,007
Equipment...................................... 833,882 1,542,436 2,246,945
Furniture and fixtures......................... 414,174 772,936 1,242,390
Construction in progress....................... 96,382 609,305 1,102,603
---------- ---------- ----------
2,362,087 5,032,085 7,663,945
Accumulated depreciation and amortization...... (601,215) (931,187) (1,083,532)
---------- ---------- ----------
$1,760,872 $4,100,898 $6,580,413
========== ========== ==========
</TABLE>
F-9
<PAGE> 65
DIEDRICH COFFEE
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. LONG-TERM DEBT AND REVOLVING LINE OF CREDIT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JANUARY 31, MAY 1,
--------------------- ----------
1995 1996 1996
-------- -------- ----------
(UNAUDITED)
----------
<S> <C> <C> <C>
$750,000 bank revolving line of credit, collateralized
by substantially all assets, with interest at prime
(8.5% at January 31, 1996) plus .75%. Interest payable
monthly; all outstanding principal and accrued
interest due and payable in October 1996. In February
1996, the line of credit was amended and the borrowing
base was increased to $2,000,000 and the due date was
extended to February 1997. Repaid in July 1996 (see
Note 9)............................................... $ -- $500,000 $2,000,000
$500,000 bank loan commitment available for the purchase
of equipment; advances are collateralized by
equipment; payable in equal monthly installments over
a three-year period with interest at prime plus 1%. In
February 1996, the agreement was amended and the
committed borrowing base was increased to $1,000,000
for which advances are available through February
1997. Repaid in July 1996 (see Note 9)................ -- -- 827,776
Notes payable to landlord, payable in monthly
installments aggregating $5,213 including interest at
15% per annum through various dates ending December
2008. Notes are collateralized by certain property and
equipment used in coffeehouse operations and
personally guaranteed by a stockholder/officer of the
Company............................................... 326,390 309,013 303,638
Note payable bearing interest at 12% per annum; payable
in monthly principal and interest installments of
$3,725; all unpaid principal and interest due July 1,
1997 (see Note 5)..................................... -- 61,089 51,652
Unsecured notes payable to related parties, payable in
monthly installments aggregating $3,821 including 12%
interest, due through March 1997 (see Note 5)......... -- 49,699 39,329
Note payable to a former stockholder under a non-compete
agreement, payable in monthly installments of $2,125
including interest at 10% per annum through October
1995 (see Note 5)..................................... 18,351 -- --
Other................................................... 34,379 27,057 23,257
-------- -------- ----------
379,120 946,858 3,245,652
Less current portion.................................... 40,940 117,538 2,941,307
-------- -------- ----------
$338,180 $829,320 $ 304,345
======== ======== ==========
</TABLE>
F-10
<PAGE> 66
DIEDRICH COFFEE
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Principal maturities of long-term debt as of January 31, 1996 are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING JANUARY 31,
--------------------------------------------------
<S> <C>
1997.............................................. $117,538
1998.............................................. 556,987
1999.............................................. 26,691
2000.............................................. 27,922
2001.............................................. 31,932
Thereafter........................................ 185,788
--------
$946,858
========
</TABLE>
5. RELATED PARTY TRANSACTIONS
Related Party Receivables
The Company has an amount receivable pursuant to a promissory note from a
stockholder/officer aggregating $32,000 and $35,546 at January 31, 1995 and
1996, respectively, which is included in the other assets in the accompanying
balance sheets. The promissory note accrues interest at a rate of 5.19% and is
due in February 1999.
Covenant-Not-To-Compete
On November 1, 1990, the Company's founder entered into an agreement with
one of the Company's stockholders whereby the founder sold all of his shares of
common stock of the Company to the then sole remaining stockholder. As part of
the agreement, the founder also signed a non-compete agreement with the Company
in which the Company was to pay the founder an aggregate of $100,000 over 5
years (see Note 4).
Obligation Under Capital Lease -- Related Party
The Company was the general partner of Diedrich Coffeehouse Partners I (a
California limited partnership). The limited partnership was formed for the
purpose of acquiring equipment, furniture and fixtures and leasehold
improvements for the Company's Newport Beach coffeehouse location. Acquired
assets were leased to the Company under a capital lease agreement expiring in
1998. As of January 31, 1995, $250,000 of asset cost had been capitalized with
accumulated depreciation and amortization aggregating $121,242.
In March 1995, the Company executed agreements with investors in the
partnership to either repay the outstanding principal and accrued interest
balances or convert the outstanding principal and accrued interest balances into
12%, two-year, unsecured and fully amortized notes. On March 20, 1995, the
Company paid $85,460 of principal and interest to investors and converted
$81,412 into two-year notes (see Note 4). In connection with such transactions,
Diedrich Coffeehouse Partners I was dissolved.
Note Payable
In April 1995, the Company borrowed $80,000 from a related party pursuant
to an unsecured installment note bearing interest at 12% and due July 1997,
which was refinanced with an unrelated third party in July 1995 (see Note 4).
F-11
<PAGE> 67
DIEDRICH COFFEE
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES
Operating Leases
As of January 31, 1996, the Company leases warehouse and office space in
Irvine, California and twelve coffeehouse locations in Orange County, California
expiring through February 2007. The leases for five of the coffeehouse locations
are guaranteed by an officer/director of the Company. Certain of the coffeehouse
leases require the payment of property taxes, normal maintenance and insurance
on the properties and additional rents based on percentages of sales in excess
of various specified retail sales levels. Contingent rent expense was
insignificant during the years ended January 31, 1994, 1995 and 1996, and the
twelve and thirteen weeks ended April 25, 1995 and May 1, 1996, respectively.
Future minimum lease payments under non-cancelable operating leases as of
January 31, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING JANUARY 31,
-------------------------------------------------
<S> <C>
1997............................................. $ 856,000
1998............................................. 831,000
1999............................................. 817,000
2000............................................. 822,000
2001............................................. 731,000
Thereafter....................................... 2,252,000
----------
$6,309,000
==========
</TABLE>
Rent expense under operating leases was approximately $324,000, $479,000,
$667,000 and $356,000 (unaudited) for the years ended January 31, 1994, 1995,
1996 and the thirteen weeks ended May 1, 1996, respectively (see Note 9).
As of January 31, 1996, the Company had entered into fixed price purchase
contracts for unroasted coffee aggregating approximately $245,000. Such
contracts are generally short-term in nature and the Company believes that their
cost approximates fair market value.
Contingencies
The Company is subject to certain legal proceedings and claims arising in
connection with its business. In the opinion of management, there are currently
no claims that will have a material adverse effect on the Company's financial
position or results of operations.
7. STOCKHOLDERS' EQUITY
In June 1995, the Company repurchased 229,787 shares of common stock from a
stockholder for $305,000, which consideration was offset by a $25,000
stockholder receivable related to the original purchase of the shares.
In June 1995, the Company amended and restated its articles of
incorporation and authorized the issuance of 1,608,568 shares of new preferred
stock designated as Series B Preferred Stock ("Series B"). The amended and
restated articles of incorporation also changed the characteristics of the
previously issued Series A Preferred Stock ("Series A") to conform with that of
the newly authorized Series B, except for the liquidation preference. The Series
A and Series B have the following characteristics:
(i) Liquidation Preference
Holders of the Series A are entitled to receive from the assets of the
Company a liquidation value of $1.00 per share, plus all accrued but unpaid
dividends prior to distribution of assets to any other class or
F-12
<PAGE> 68
DIEDRICH COFFEE
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
series of capital stock. After payments to the holders of Series A, the
holders of Series B are entitled to receive from the remaining assets of
the Company a liquidation value of $1.433 per share, plus all accrued but
unpaid dividends prior to distribution of assets to any holders of common
stock.
(ii) Voting Rights
Each share of Series A and Series B may vote on all matters presented
before the stockholders, including the election of the Board of Directors
of the Company.
(iii) Conversion Rights
Up until the close of business of the day immediately preceding the
day of a Qualified Public Offering (the "Automatic Conversion Date"), the
holders of Series A and Series B may, at their option, convert their shares
into shares of common stock on a one-for-one basis. On the Automatic
Conversion Date, all shares of Series A and Series B then outstanding will
automatically convert to shares of common stock. The initial conversion
price is subject to adjustment in the event of stock splits or
combinations.
(iv) Dividends
Holders of Series A and Series B are entitled to a cumulative 6% per
annum dividend only in the event of a liquidation or winding up of the
Company prior to the Automatic Conversion Date, for all dividends not
declared and paid by the Company prior to that time. As of January 31,
1996, the cumulative dividends were $188,384 for Series A and $81,843 for
Series B, none of which had been declared, accrued or paid.
In June 1995, the Company entered into a Series B Preferred Stock Purchase
Agreement for the sale of 1,608,568 shares of Series B Preferred Stock in
exchange for an aggregate purchase price of $2,305,000. Issuance costs
aggregating $79,187 have been netted against the proceeds received.
In June 1995, the Company and the original purchaser of the Series A
Preferred Stock (the "Purchaser") acknowledged a purchase price overpayment and
agreed to a post-closing adjustment to the purchase price from the terms of the
original stock purchase. The Company and the Purchaser agreed to reduce the
original purchase price of the Series A by $200,000. In lieu of receiving cash,
the Purchaser agreed to receive 268,097 shares of the Company's common stock.
Accordingly, the Company recorded this transaction by reducing the cost basis of
the Series A by the $200,000 and issuing the 268,097 shares of common stock to
the Purchaser. Additionally, to address the dilution resulting from the issuance
of shares to the Purchaser, the Company issued an additional 17,112 shares of
common stock to a common stock shareholder.
In June 1995, one executive officer was granted options to purchase 131,350
shares of the Company's common stock at $1.45 per share, the estimated fair
value of the common stock on the grant date. The options become exercisable upon
the occurrence of certain events, including an initial public offering and a
change in control (as defined). If not exercisable earlier, the options become
exercisable in June 2003, and expire 10 years from the date of grant.
F-13
<PAGE> 69
DIEDRICH COFFEE
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. INCOME TAXES
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
-----------------------------
1994 1995 1996
<S> <C> <C> <C>
-----------------------------
Current:
Federal....................... $ -- $67,456 $106,297
State......................... 800 25,222 31,132
---- ------- --------
800 92,678 137,429
---- ------- --------
Deferred:
Federal....................... -- (33,972) (6,483)
State......................... -- (6,002) (1,735)
---- ------- --------
-- (39,974) (8,218)
---- ------- --------
$800 $52,704 $129,211
==== ======= ========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of deferred tax assets and deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
JANUARY 31,
-------------------
1995 1996
------- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................... $50,570 $44,091
Accrued expenses................................... 9,082 14,079
------- ------
Total deferred tax assets............................ 59,652 58,170
------- ------
Deferred tax liabilities:
Depreciation and amortization...................... (10,915) (9,978)
Store pre-opening costs............................ (8,763) --
------- ------
Total deferred tax liabilities....................... (19,678) (9,978)
------- ------
Net deferred tax assets.............................. $39,974 $48,192
======= ======
</TABLE>
A reconciliation of the statutory Federal income tax rate with the
Company's effective income tax rate is as follows:
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
-------------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Federal statutory rate........................... (34.0)% 34.0% 34.0%
State income taxes, net of Federal benefit....... 0.9 5.1 6.1
Net operating loss carryforward without (with)
current benefit................................ 34.0 (23.5) (2.0)
Other............................................ -- (1.6) 2.9
----- ----- -----
0.9% 14.0% 41.0%
===== ===== =====
</TABLE>
As of January 31, 1996, the Company had net operating loss (NOL)
carryforwards of approximately $115,000 and $82,000 for Federal and state
purposes, respectively. The Federal NOL is available to offset future taxable
income through 2008, and the state NOL expires in 1998. The utilization of these
NOL
F-14
<PAGE> 70
DIEDRICH COFFEE
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
carryforwards could be limited due to restrictions imposed under Federal and
state laws upon a change in ownership.
Management has determined, based upon the Company's history of operating
earnings and its expectations for the future, that operating income for the
Company will more likely than not be sufficient to fully recognize these
deferred tax assets.
9. SUBSEQUENT EVENTS
Acquisitions
On February 23, 1996, the Company purchased substantially all of the assets
of twelve coffeehouses previously owned by Brothers Gourmet Coffees, Inc.
("Brothers"). Under the terms of the Brothers purchase agreement, the
acquisition of the twelve coffeehouses is contingent upon the successful
assignment of the building leases to the Company. The cash consideration paid by
the Company totaled $1,350,000 ($675,000 of which is to be held in escrow until
all the related building leases have been assigned to the Company). Management
of the Company anticipates that all leases will be assigned by October 1996. The
Company has been operating the acquired coffeehouses since the acquisition
dates.
The following pro forma results of operations assume the acquisition of the
Brothers coffeehouses occurred on February 1, 1995. The pro forma results have
been prepared for comparative purposes only and do not purport to indicate the
results of operations which would actually have occurred had the combinations
been in effect during the year ended January 31, 1996, or which may occur in the
future. The pro forma results are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
JANUARY 31, 1996
----------------
(UNAUDITED)
<S> <C>
Net sales.................................................. $ 12,600,572
Net loss................................................... $ (395,886)
Net loss per share......................................... $ (.13)
Shares used in per share calculation....................... 3,087,000
</TABLE>
The pro forma results of operations for the thirteen weeks ended May 1,
1996 did not differ materially from the historical results for such period and,
accordingly, have not been presented.
On February 15, 1996, the Company purchased substantially all of the assets
of seven bakery-espresso cafes from an unrelated third party for cash
consideration of $450,000. This acquisition was immaterial and, accordingly, pro
forma results of operations have not been presented.
These acquisitions will be accounted for using the purchase method of
accounting, and accordingly the results of operations of the coffeehouses
acquired will be included with those of the Company as of their respective
acquisition date. The costs in excess of the net assets acquired will be
amortized on a straight-line basis over 15 years, based on management's estimate
of its economic life.
Leases
Subsequent to year end and through July 19, 1996, the Company entered into
lease agreements for additional coffeehouse and warehouse locations in addition
to the lease commitments included in Note 6. The locations, certain of which
have not yet been constructed, generally require rental payments to begin upon
occupancy. The new leases, including the lease obligations for the acquired
coffeehouses and bakery-cafes discussed above, will require expected minimum
rental payments aggregating approximately $7,556,000 over the life of the
leases.
F-15
<PAGE> 71
DIEDRICH COFFEE
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Debt
On May 20, 1996, the Company entered into a revolving promissory note with
a shareholder. The note provides for borrowings up to $2,000,000 with interest
accruing at prime plus 3%. All unpaid principal and accrued interest is due and
payable on September 30, 1996.
On July 19, 1996, the Company entered into a bank revolving line of credit
agreement which provides for borrowings up to $4,100,000 with interest payable
monthly at the bank's reference rate plus .25% or, at the Company's option,
certain other international interest rates established by the bank plus 2.25%.
Borrowings are collateralized by substantially all of the Company's assets.
Proceeds from the line of credit agreement were used to retire the Company's
previous line of credit agreement and equipment loan (see Note 4). In the
absence of an initial public offering, the line of credit is available through
November 1, 1996, at which time all amounts are due and payable. The agreement
also provides for certain unsecured borrowing arrangements subsequent to a
successful initial public offering. The line of credit agreement has certain
covenants and imposes certain restrictions on the Company, including the payment
of dividends.
Stockholders' Equity
On July 16, 1996, the Company adopted the 1996 Stock Incentive Plan (the
"Incentive Plan"), which authorized the granting of a variety of stock-based
incentive awards, including incentive and nonstatutory stock options. A total of
475,000 shares have been reserved for issuance under the Incentive Plan. The
Incentive Plan is administered by a committee of the Board of Directors, who
determine the recipients and terms of the awards granted. Under the Incentive
Plan, options to purchase common stock may be granted with an exercise price
below market value of such stock on the grant date.
On July 16, 1996, the Company adopted the 1996 Non-Employee Directors Stock
Option Plan (the "Directors Plan"), which authorized the granting of
non-qualified stock options to independent directors. A total of 125,000 shares
have been reserved for issuance under the Directors Plan. Pursuant to the
Directors Plan, each non-employee director receives certain automatic grants of
options which generally vest over two years. All non-employee director options
have a term of ten years and an exercise price equal to the fair market value of
the Company's common stock on the date of grant.
Initial Public Offering
In July 1996, the Company agreed to sell 2,200,000 shares (subject to an
over-allotment option) of the Company's common stock in an initial public
offering. Such offering is to consist of (a) 1,600,000 shares of common stock on
behalf of the Company and (b) 600,000 shares of common stock on behalf of
certain selling stockholders. Pursuant to this proposed public offering, the
managing underwriter is entitled to receive warrants exercisable for 160,000
shares of the Company's common stock. The warrants are exercisable for a period
of two years commencing one year after the effective date of the definitive
prospectus and are exercisable at a price per share equal to 120% of the greater
of the actual public offering price or $11.50.
F-16
<PAGE> 72
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Diedrich Coffee
Irvine, California
We have audited the accompanying balance sheets of the Acquired Stores of
Brothers Gourmet Coffees, Inc. as of December 30, 1994, December 29, 1995 and
January 26, 1996, and the related statements of operations and store equity, and
cash flows for the period from inception (June 1, 1994) to December 30, 1994,
the year ended December 29, 1995 and the four weeks ended January 26, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Acquired Stores of
Brothers Gourmet Coffees, Inc. at December 30 1994, December 29, 1995 and
January 26, 1996, and the results of their operations and their cash flows for
the period from inception (June 1, 1994) to December 30, 1994, the year ended
December 29, 1995 and the four weeks ended January 26, 1996, in conformity with
generally accepted accounting principles.
BDO SEIDMAN, LLP
Costa Mesa, California
April 19, 1996
F-17
<PAGE> 73
ACQUIRED STORES OF BROTHERS GOURMET COFFEES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 29, JANUARY 26,
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash............................................. $ 23,274 $ 40,426 $ 50,663
Accounts receivable.............................. 3,453 1,326 1,621
Inventories (Note 3)............................. 76,703 68,112 72,234
---------- ---------- ----------
Total current assets..................... 103,430 109,864 124,518
Property and equipment, net (Note 4)............... 2,247,178 3,712,316 3,666,881
Other assets....................................... 28,801 27,218 16,479
---------- ---------- ----------
$2,379,409 $3,849,398 $3,807,878
========== ========== ==========
LIABILITIES AND STORE EQUITY
Current Liabilities:
Accrued compensation............................. $ 12,689 $ 32,229 $ 30,715
Accrued expenses................................. 8,919 16,859 2,525
---------- ---------- ----------
Total current liabilities................ 21,608 49,088 33,240
Deferred rent...................................... 12,342 46,400 48,382
---------- ---------- ----------
Total liabilities........................ 33,950 95,488 81,622
Commitments (Note 5)
Subsequent event (Note 6)
Store equity (Note 2).............................. 2,345,459 3,753,910 3,726,256
---------- ---------- ----------
$2,379,409 $3,849,398 $3,807,878
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-18
<PAGE> 74
ACQUIRED STORES OF BROTHERS GOURMET COFFEES, INC.
STATEMENTS OF OPERATIONS AND STORE EQUITY
<TABLE>
<CAPTION>
INCEPTION FOUR WEEKS
(JUNE 1, 1994) YEAR ENDED ENDED
TO DECEMBER 30, DECEMBER 29, JANUARY 26,
1994 1995 1996
--------------- ------------ -----------
<S> <C> <C> <C>
Net sales............................................. $ 615,113 $2,356,397 $ 179,243
Cost of sales and related occupancy costs............. 292,420 1,522,674 109,268
Store operating expenses.............................. 266,834 1,165,727 80,378
Depreciation and amortization......................... 40,770 626,758 56,174
---------- ---------- ----------
Store operating income (loss)......................... 15,089 (958,762) (66,577)
Corporate general and administrative expenses
(Note 2)............................................ 126,098 447,306 37,276
---------- ---------- ----------
Net loss.............................................. (111,009) (1,406,068) (103,853)
Store equity, beginning of period..................... -- 2,345,459 3,753,910
Net change in parent company investment (Note 2)...... 2,456,468 2,814,519 76,199
---------- ---------- ----------
Store equity, end of period........................... $ 2,345,459 $3,753,910 $ 3,726,256
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-19
<PAGE> 75
ACQUIRED STORES OF BROTHERS GOURMET COFFEES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
INCEPTION YEAR ENDED FOUR WEEKS
(JUNE 1, 1994) DECEMBER ENDED
TO DECEMBER 30, 29, JANUARY 26,
1994 1995 1996
--------------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.......................................... $ (111,009) $(1,406,068) $ (103,853)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization.................. 40,770 626,758 56,174
Increase (decrease) from changes in:
Accounts receivable.......................... (3,453) 2,127 (295)
Inventories.................................. (76,703) 8,591 (4,122)
Accrued compensation......................... 12,689 19,540 (1,514)
Accrued expenses............................. 8,919 7,940 (14,334)
Deferred rent................................ 12,342 34,058 1,982
--------- ----------- --------
Cash used in operating activities................... (116,445) (707,054) (65,962)
--------- ----------- --------
Cash flows from investing activities:
Capital expenditures for property and equipment... (2,278,266) (1,970,512) --
Other assets...................................... (38,483) (119,801) --
--------- ----------- --------
Cash used in investing activities................... (2,316,749) (2,090,313) --
--------- ----------- --------
Cash flows from financing activities:
Increase in parent company investment............. 2,456,468 2,814,519 76,199
--------- ----------- --------
Net increase in cash................................ 23,274 17,152 10,237
Cash at beginning of period......................... -- 23,274 40,426
--------- ----------- --------
Cash at end of period............................... $ 23,274 $ 40,426 $ 50,663
========= =========== ========
</TABLE>
See accompanying notes to financial statements.
F-20
<PAGE> 76
ACQUIRED STORES OF BROTHERS GOURMET COFFEES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 30, 1994, DECEMBER 29, 1995 AND JANUARY 26, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements include the accounts of twelve
coffeehouses (collectively, the "Acquired Stores") owned by Brothers Gourmet
Coffees, Inc. ("Brothers"). On February 23, 1996, the Acquired Stores were sold
to Diedrich Coffee (see Note 6).
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
(net realizable value).
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over estimated useful lives of five to seven years.
Leasehold improvements are amortized using the straight-line method over the
shorter of their estimated useful lives or the term of the related leases.
Expenditures for major renewals and betterments that extend the useful life
of property and equipment are capitalized. Expenditures for maintenance and
repairs are charged to expense as incurred.
Store Pre-opening Costs
Costs incurred prior to the opening of a coffeehouse location such as
advertising, training expenses and salaries of newly hired employees are
capitalized and amortized using the straight-line method over a one-year period
commencing with the coffeehouse opening.
Rent Expense
Certain of the Company's lease agreements provide for scheduled rent
increases during the lease terms or for rental payments commencing on a date
other than the date of initial occupancy. Rent expense is recorded on a
straight-line basis over the respective terms of the leases.
Income Taxes
The results of operations of the Acquired Stores for the period from
inception (June 1, 1994) to December 30, 1994, the year ended December 29, 1995
and the four weeks ended January 26, 1996 are included in the consolidated tax
return of Brothers. As the Acquired Stores operated at a loss for the periods
presented, no allocation of corporate income taxes or income tax benefit has
been provided.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. RELATED PARTY TRANSACTIONS
The operations of the Acquired Stores through the date of the sale (see
Note 6), were controlled by Brothers. In that regard, cash deposited to the
Acquired Stores operating accounts was transferred to Brothers which used the
funds to pay operating expenses, along with the funds from the other Brothers
non-acquired operating entities, on a company-wide basis. Brothers also paid for
the build-out of the Acquired Stores as well as operating equipment.
F-21
<PAGE> 77
ACQUIRED STORES OF BROTHERS GOURMET COFFEES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The net effect of the above noted intra-company transactions has been
included as a component of net store equity in the accompanying balance sheets.
In addition to the normal operating expenses, the Acquired Stores were
allocated corporate overhead and general and administrative expenses from
Brothers which allocations aggregated $126,098 for the period from inception
(June 1, 1994) to December 30, 1994, $447,306 for the year ended December 29,
1995 and $37,276 for the four weeks ended January 26, 1996.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 29, JANUARY 26,
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Roasted coffee................................ $ 17,948 $ 15,540 $ 17,288
Food, beverage and supplies................... 58,755 52,572 54,946
---------- ---------- ----------
$ 76,703 $ 68,112 $ 72,234
========== ========== ==========
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 29, JANUARY 26,
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Leasehold improvements........................ $1,757,832 $3,463,137 $3,463,137
Furniture, fixtures and equipment............. 520,434 785,641 785,641
---------- ---------- ----------
2,278,266 4,248,778 4,248,778
Accumulated depreciation and amortization..... (31,088) (536,462) (581,897)
---------- ---------- ----------
$2,247,178 $3,712,316 $3,666,881
========== ========== ==========
</TABLE>
5. OPERATING LEASES
Brothers leases the coffeehouse locations in Colorado and Texas pursuant to
operating lease agreements. Future minimum lease payments under non-cancelable
operating leases for the Acquired Stores as of January 26, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 29,
-----------------------------------------------
<S> <C>
1996 (eleven months)........................... $ 287,000
1997........................................... 333,000
1998........................................... 349,000
1999........................................... 348,000
2000........................................... 214,000
Thereafter..................................... 354,000
----------
$1,885,000
==========
</TABLE>
Rent expense under operating leases was approximately $91,000 for the
period from inception (June 1, 1994) to December 30, 1994, $479,000 for the year
ended December 29, 1995 and $34,000 for the four weeks ended January 26, 1996.
6. SUBSEQUENT EVENT
On February 23, 1996, substantially all of the assets of the Acquired
Stores were sold to Diedrich Coffee for $1,350,000, of which $675,000 is to be
held in escrow until all the related building leases have been assigned to
Diedrich Coffee.
F-22
<PAGE> 78
DIEDRICH COFFEE
PRO FORMA CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
On February 23, 1996, the Company acquired certain assets from Brothers
Gourmet Coffees, Inc. ("Brothers"), which assets included property and equipment
for twelve coffeehouse stores (the "Acquired Stores"), and assumed certain lease
obligations for a purchase price of $1,350,000. Fifty percent of the purchase
price was payable upon the closing and the remaining portion is held in escrow
and is payable upon satisfaction of certain conditions, including the assignment
of property leases.
The acquisition will be accounted for using the purchase method of
accounting, with the assets acquired and liabilities assumed recorded at fair
values. The results of operations of the Acquired Stores will be included with
those of the Company as of the acquisition date.
The accompanying pro forma condensed financial statements illustrate the
effect of the acquisition on the Company's financial position and results of
operations. The pro forma condensed balance sheet as of January 31, 1996 is
based on the historical balance sheet of the Company as of that date and the
historical balance sheet of the Acquired Stores as of December 29, 1995 and
assumes the acquisition took place on January 31, 1996. The pro forma condensed
statement of operations for the year ended January 31, 1996 is based on the
historical statement of operations of the Company for that period and the
historical statement of operations of the Acquired Stores for the year ended
December 29, 1995. The pro forma condensed statement of operations assumes the
acquisition took place on February 1, 1995.
The pro forma condensed statement of operations for the thirteen weeks
ended May 1, 1996 did not differ materially from the historical results of
operations for such period and, accordingly, has not been presented.
The pro forma condensed financial statements are not intended to be
indicative of the financial position or results of operations which actually
would have been realized had the acquisition occurred at the times assumed, nor
of the future results of operations of the combined entities. The accompanying
pro forma condensed financial statements should be read in conjunction with the
historical financial statements and notes of the Company and the Acquired
Stores.
F-23
<PAGE> 79
DIEDRICH COFFEE
PRO FORMA CONDENSED BALANCE SHEET
JANUARY 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
DIEDRICH ACQUIRED STORES
COFFEE OF BROTHERS ADJUSTMENTS PRO FORMA
---------- --------------- ----------- ----------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash................................ $ 94,659 $ 40,426 (40,426)(1) $ 94,659
Accounts receivable................. 134,573 1,326 (1,326)(1) 134,573
Inventories......................... 645,493 68,112 (68,112)(1) 645,493
Prepaid expenses and other current
assets........................... 133,336 -- 133,336
---------- ---------- ----------
Total current assets........ 1,008,061 109,864 1,008,061
Property and equipment, net........... 4,100,898 3,712,316 (2,887,316)(1) 4,925,898
Cost in excess of net assets
acquired............................ -- -- 548,000(1) 548,000
Other assets.......................... 206,713 27,218 (27,218)(1) 216,713
10,000(1)
---------- ---------- ----------
$5,315,672 $ 3,849,398 $6,698,672
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt... $ 117,538 $ -- $ 117,538
Notes payable....................... 39,398 -- 675,000(1) 714,398
Obligation to seller for
acquisition...................... -- -- 675,000(1) 675,000
Accounts payable.................... 635,428 -- 635,428
Accrued compensation................ 184,891 32,229 (32,229)(1) 184,891
Accrued expenses.................... 83,472 16,859 (16,859)(1) 116,472
33,000(1)
---------- ---------- ----------
Total current liabilities... 1,060,727 49,088 2,443,727
Long-term debt, less current
portion............................. 829,320 -- 829,320
Deferred rent......................... 121,144 46,400 (46,400)(1) 121,144
---------- ---------- ----------
Total liabilities........... 2,011,191 95,488 3,394,191
Stockholders' equity.................. 3,304,481 3,753,910 (3,753,910)(1) 3,304,481
---------- ---------- ----------
$5,315,672 $ 3,849,398 $6,698,672
========== ========== ==========
</TABLE>
See accompanying notes to pro forma condensed financial statements.
F-24
<PAGE> 80
DIEDRICH COFFEE
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED JANUARY 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
DIEDRICH ACQUIRED STORES
COFFEE OF BROTHERS ADJUSTMENTS PRO FORMA
----------- --------------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales........................... $10,244,175 $ 2,356,397 $12,600,572
Cost of sales and related occupancy
costs............................. 4,409,485 1,522,674 5,932,159
Store operating expenses............ 3,520,140 1,165,727 4,685,867
Other operating expenses............ 276,788 -- 276,788
Depreciation and amortization....... 353,840 626,758 (482,658)(2) 497,940
General and administrative
expenses(5)....................... 1,334,694 447,306 1,782,000
----------- ----------- -----------
Operating income (loss)............. 349,228 (1,406,068) (574,182)
Interest expense.................... (50,187) -- (62,438)(3) (112,625)
Interest and other income........... 15,814 -- 15,814
----------- ----------- -----------
Income (loss) before income taxes... 314,855 (1,406,068) (670,993)
Provision (benefit) for income
taxes............................. 129,211 -- (404,318)(4) (275,107)
----------- ----------- -----------
Net income (loss)................... $ 185,644 $(1,406,068) $ (395,886)
=========== =========== ===========
Pro forma information(6):
Net income (loss) per
share................... $ .06 $ (.13)
=========== ===========
Shares used in per share
calculation............. 3,153,000 3,087,000
=========== ===========
</TABLE>
See accompanying notes to pro forma condensed financial statements.
F-25
<PAGE> 81
DIEDRICH COFFEE
NOTES TO PRO FORMA CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
<TABLE>
<S> <C>
1. Pro forma adjustments to record the purchase of the Acquired Stores:
Components of purchase price:
Cash from borrowings under the Company's credit facility.................... $ 675,000
Obligation to seller upon satisfaction of certain conditions................ 675,000
----------
Total purchase price.................................................. 1,350,000
Allocation of purchase price:
Equity of the Acquired Stores............................................... (3,753,910)
Elimination of assets and liabilities not acquired or assumed as part of the
acquisition:
Cash..................................................................... 40,426
Accounts receivable...................................................... 1,326
Inventories.............................................................. 68,112
Accrued compensation..................................................... (32,229)
Accrued expenses......................................................... (16,859)
Deferred rent............................................................ (46,400)
Write-down of property and equipment to fair value.......................... 2,887,316
Write-off of capitalized pre-opening costs.................................. 27,218
Accrual for store to be closed.............................................. 33,000
Covenant not to compete..................................................... (10,000)
----------
Cost in excess of net assets acquired......................................... $ 548,000
=========
2. Pro forma adjustment to adjust depreciation and amortization:
Elimination of depreciation and amortization expense on assets of the Acquired
Stores...................................................................... $ (626,758)
Depreciation and amortization on new cost basis of property and equipment of
the Acquired Stores......................................................... 107,600
Amortization of cost in excess of net assets acquired over 15 years........... 36,500
----------
$ (482,658)
=========
3. Pro forma adjustment for additional interest expense resulting from borrowings under the
Company's credit facility used to purchase the Acquired Stores.
4. Pro forma adjustment to adjust tax expense to reflect the income tax effects of the pro
forma loss before income taxes, at the Company's effective tax rate of 41%.
5. The pro forma general and administrative expenses include a proportional allocation to the
12 Brothers Stores of the corporate and administrative salaries and related employee
benefit costs, and other corporate overhead expenses, which were allocated to all stores
operated by Brothers Gourmet Coffees, Inc. Although no adjustment has been made, the
Company believes that a substantial portion of such allocated expenses are redundant as a
result of its overhead infrastructure and, accordingly, does not believe the pro forma
general and administrative expenses are indicative of the actual general and
administrative expenses that would have been incurred had the Company owned and operated
the Brothers Stores for the year ended January 31, 1996.
6. Pro forma net income per share is based on the weighted average number of shares
outstanding during the period after consideration of the dilutive effect, if any, of stock
options granted and after giving pro forma effect to the conversion of the Company's
outstanding preferred stock to common stock in connection with the initial public
offering. Dividends on the preferred stock have been excluded from the computation since
the preferred stock has been assumed to have been converted to common stock. Pro forma net
loss per share excludes stock options granted during the period as their effect would be
antidilutive.
</TABLE>
F-26
<PAGE> 82
[Photo of four packages of the Company's coffee, three Company beverage products
and roasted coffee beans.]
<PAGE> 83
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, SHARES OF
COMMON STOCK IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE
ANY SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION OR IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATES AS OF WHICH INFORMATION IS GIVEN IN THIS
PROSPECTUS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 8
Use of Proceeds....................... 13
Dividend Policy....................... 13
Capitalization........................ 14
Dilution.............................. 15
Selected Financial Data............... 16
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 18
Business.............................. 27
Management............................ 39
Certain Transactions.................. 45
Principal and Selling Stockholders.... 47
Description of Capital Stock.......... 48
Shares Eligible for Future Sale....... 49
Underwriting.......................... 51
Legal Matters......................... 53
Experts............................... 53
Additional Information................ 53
Index to Financial Statements......... F-1
</TABLE>
------------------------
UNTIL , 1996 (25 DAYS AFTER THE DATE
OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
2,200,000 SHARES
LOGO
DIEDRICH COFFEE, INC.
------------------------
COMMON STOCK
--------------------
PROSPECTUS
--------------------
THE BOSTON GROUP, L.P.
, 1996
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 84
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses and costs (other than
underwriting discounts and commissions) expected to be incurred in connection
with the sale and distribution of the securities being registered. All of the
amounts shown are estimated except the registration fee of the Securities and
Exchange Commission and the filing fee for the National Association of
Securities Dealers, Inc. The Selling Stockholders will not be required to pay
any portion of such expenses or costs.
<TABLE>
<CAPTION>
AMOUNT TO BE
ITEM PAID BY COMPANY
------------------------------------------------------------------ ---------------
<S> <C>
Securities and Exchange Commission registration fee............... $ 10,032.76
National Association of Securities Dealers, Inc. filing fee....... 3,410.00
Nasdaq National Market listing fee................................ 30,979.13
Blue Sky fees and expenses........................................ 7,500.00
Accounting fees and expenses...................................... 225,000.00
Legal fees and expenses........................................... 275,000.00
Transfer Agent and registrar fees................................. 10,000.00
Printing and engraving expenses................................... 200,000.00
Officers and directors insurance.................................. 120,000.00
Representative's nonaccountable expense allowance................. 500,000.00
Miscellaneous..................................................... 18,078.11
----------
Total................................................... $1,400,000.00
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As of the consummation of this Offering, Diedrich Coffee, Inc. (the
"Company") shall be a Delaware corporation. Article VII of the Company's Bylaws
provides that the Company may indemnify its officers and directors to the full
extent permitted by law. Section 145 of the General Corporation Law of the State
of Delaware (the "GCL") provides that a Delaware corporation has the power to
indemnify its officers and directors in certain circumstances.
Subsection (a) of Section 145 of the GCL empowers a corporation to
indemnify any director or officer, or former director or officer, who was or is
a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation),
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred in connection with such action,
suit or proceeding provided that such director or officer acted in good faith
and in a manner reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, provided that such director or officer had no cause to believe his
or her conduct was unlawful.
Subsection (b) of Section 145 of the GCL empowers a corporation to
indemnify any director or officer, or former director or officer, who was or is
a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that such person acted in any of the
capacities set forth above, against expenses actually and reasonably incurred in
connection with the defense or settlement of such action or suit provided that
such director or officer acted in good faith and in a manner reasonably believed
to be in or not opposed to the best interests of the corporation, except that no
indemnification may be made in respect of any claim, issue or matter as to which
such director or officer shall have been adjudged to be liable to the
corporation unless and only to the extent that the Court of Chancery or the
court in which such action was brought shall determine
II-1
<PAGE> 85
that despite the adjudication of liability such director or officer is fairly
and reasonably entitled to indemnity for such expenses which the court shall
deem proper.
Section 145 of the GCL further provides that to the extent a director or
officer of a corporation has been successful in the defense of any action, suit
or proceeding referred to in subsections (a) and (b) or in the defense of any
claim, issue or matter therein, he or she shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him or her in
connection therewith; that indemnification provided for in Section 145 shall not
be deemed exclusive of any other rights to which the indemnified party may be
entitled; and that the corporation shall have power to purchase and maintain
insurance on behalf of a director or officer of the corporation against any
liability asserted against him or her or incurred by him or her in any such
capacity or arising out of his or her status as such whether or not the
corporation would have the power to indemnify him or her against such
liabilities under Section 145.
Article VIII of the Company's Certificate of Incorporation currently
provides that each Director shall not be personally liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a Director,
except for liability (i) for any breach of the Directors' duty of loyalty to the
Company or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the GCL, or (iv) for any transaction from which the Director
derived an improper benefit.
Reference is made to the Form of Underwriting Agreement (which will be
filed as Exhibit 1.1 to this Registration Statement) which provides for
indemnification by the Underwriters under certain circumstances of the directors
and officers of the Company signing the Registration Statement and certain
controlling persons of the Company against certain liabilities, including those
arising under the Securities Act.
The Company intends to carry directors' and officers' liability insurance
covering its directors and officers.
Insofar as indemnification for liabilities under the Securities Act may be
permitted to directors, officers or persons controlling the Registrant pursuant
to the foregoing provisions, the Registrant has been informed that, in the
opinion of the Commission, such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On December 11, 1992, the Company issued 1,000,000 shares of Series A
Preferred Stock to D.C.H., L.P. for an aggregate consideration of $1 million.
With respect to the issuance of these securities, the Company relied upon the
provisions of Section 4(2) of the Securities Act, in that such transaction did
not involve a public offering and was thereby exempt from registration under the
Securities Act. The purchaser was an accredited investor (as defined under
Regulation D of the Securities Act). The securities were not offered or sold by
means of a general solicitation and the purchaser represented that it was not
acquiring the securities with a view toward distribution thereof. The securities
were issued with an investment legend thereon. Prior to the consummation of the
Offering, the shares of Series A Preferred Stock shall be converted into an
equivalent number of shares of the Company's Common Stock.
On June 13, 1995, an aggregate of 229,787 shares of Common Stock owned by
an employee of the Company were redeemed by the Company. These shares were
valued at $305,000 on the date of redemption.
On June 29, 1995, the Company issued a total of 1,608,568 shares of Series
B Preferred Stock to Redwood Enterprises VII, L.P. and Diedrich Partners I, L.P.
for an aggregate consideration of $2,305,000. With respect to the issuance of
these securities, the Company relied upon the provisions of Rule 505 of
Regulation D promulgated under the Securities Act, in that such transaction did
not involve a public offering and was thereby exempt from registration under the
Securities Act. The purchasers were accredited investor (as defined under
Regulation D of the Securities Act). The securities were not offered or sold by
means of a general solicitation and the purchasers represented that they were
not acquiring the securities with a view toward distribution thereof. The
securities were offered and sold in compliance with all of the provisions of
Rule 505, and the shares were issued with an investment legend thereon. Prior to
the consummation of the Offering, the shares of Series B Preferred Stock shall
be converted into an equivalent number of shares of the Company's Common Stock.
II-2
<PAGE> 86
On June 29, 1995, the Company issued 268,097 shares of Common Stock to
D.C.H., L.P. for an aggregate consideration of $200,000 that was owed to D.C.H.,
L.P. by the Company. With respect to the issuance of these securities, the
Company relied upon the provisions of Rule 505 of Regulation D promulgated under
the Securities Act, in that such transaction did not involve a public offering
and was thereby exempt from registration under the Securities Act. The purchaser
was an accredited investor (as defined under Regulation D of the Securities
Act). The securities were not offered or sold by means of a general solicitation
and the purchaser represented that it was not acquiring the securities with a
view toward distribution thereof. The securities were offered and sold in
compliance with all of the provisions of Rule 505, and the shares were issued
with an investment legend thereon.
On June 29, 1995, the Company issued 17,112 shares of Common Stock to the
Company's Chief Executive Officer to address the dilution resulting from the
issuance of shares described in the preceding paragraph. With respect to the
issuance of these securities, the Company relied upon the provisions of Rule 505
of Regulation D promulgated under the Securities Act, in that such transaction
did not involve a public offering and was thereby exempt from registration under
the Securities Act. As the Chief Executive Officer, the purchaser was familiar
with the business and financial affairs of the Company. The securities were not
offered or sold by means of a general solicitation and the purchaser represented
that it was not acquiring the securities with a view toward distribution
thereof. The securities were offered and sold in compliance with all of the
provisions of Rule 505, and the shares were issued with an investment legend
thereon.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS.
Set forth below is a list of the exhibits included as part of this
Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ ----------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement
2.1 Form of Agreement and Plan of Merger (4)
3.1 Certificate of Incorporation of the Company (4)
3.2 Bylaws of the Company (4)
4.1 Purchase Agreement for Series A Preferred Stock dated as of December 11, 1992 by
and among Diedrich Coffee, Martin R. Diedrich, Donald M. Holly, SNV Enterprises
and D.C.H., L.P.(3)
4.2 Series B Preferred Stock Purchase Agreement dated as of June 29, 1995 by and among
Diedrich Coffee, Martin R. Diedrich, Steven A. Lupinacci, Redwood Enterprises VII,
L.P. and Diedrich Partners I, L.P.(3)
4.3 Representative's Warrant Agreement
4.4 Specimen Stock Certificate
4.5 Form of Conversion Agreement in connection with the conversion of Series A and
Series B Preferred Stock into Common Stock (4)
5.1 Opinion of Gibson, Dunn & Crutcher LLP
10.1 Martin R. Diedrich Employment Agreement, dated June 29, 1995 (1)
10.2 Steven A. Lupinacci Employment Agreement, dated June 29, 1995(4)
10.3 Stock Option Plan and Agreement of Steven A. Lupinacci, dated June 29, 1995(3)
10.4 Form of Indemnification Agreement (1)
10.5 Diedrich Coffee 1996 Stock Incentive Plan (1)
10.6 Diedrich Coffee 1996 Non-Employee Directors Stock Option Plan(3)
10.7 Business Loan Agreement dated as of July 19, 1996 by and between Bank of America
National Trust and Savings Association and Diedrich Coffee(3)
</TABLE>
II-3
<PAGE> 87
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ ----------------------------------------------------------------------------------
<C> <S>
10.8 Revolving Promissory Note dated May 20, 1996 by Diedrich Coffee in favor of
Redwood Enterprises VII, L.P. (1)
10.9 Agreement of Sale by and among Diedrich Coffee (as purchaser) and Brothers Coffee
Bars, Inc. and Brothers Gourmet Coffees, Inc. (as sellers) dated as of February
23, 1996(3)
10.10 Kerry W. Coin Employment Agreement, dated August 26, 1996
23.1 Consent of BDO Seidman, LLP re: Diedrich Coffee
23.2 Consent of BDO Seidman, LLP re: Acquired Stores of Brothers Gourmet Coffees, Inc.
23.3 Consent of Gibson, Dunn & Crutcher LLP (included in Exhibit 5.1)
24.1 Powers of Attorney (2)
27.1 Financial Data Schedule (4)
99.1 Consent of Peter Churm(3)
99.2 Consent of Lawrence Goelman(3)
</TABLE>
- ---------------
* To be filed by amendment.
(1) Previously filed with this Registration Statement on July 23, 1996.
(2) Previously filed with Amendment No. 1 to this Registration Statement on July
24, 1996.
(3) Previously filed with Amendment No. 2 to this Registration Statement on
August 12, 1996.
(4) Previously filed with Amendment No. 3 to this Registration Statement on
August 28, 1996.
(b) FINANCIAL STATEMENT SCHEDULE
All schedules are omitted because they are not applicable or the required
information is shown in the financial statements of the Registrant or notes
thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the Offering of such securities at that time shall be deemed to be the
initial bona fide Offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described in Item 14 hereof, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-4
<PAGE> 88
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 5 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Irvine, State of California, on September 9, 1996.
DIEDRICH COFFEE, INC.
By: /s/ STEVEN A. LUPINACCI
------------------------------------
Steven A. Lupinacci
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 5 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ----------------------------------- ------------------------------------- -------------------
<C> <S> <C>
* Chairman of the Board, Secretary and September 9, 1996
- ----------------------------------- Director of Coffee
Martin R. Diedrich
/s/ STEVEN A. LUPINACCI President, Chief Executive Officer, September 9, 1996
- ----------------------------------- Chief Financial Officer and Director
Steven A. Lupinacci (Principal Executive Officer and
Principal Financial Officer)
* Controller (Principal Accounting September 9, 1996
- ----------------------------------- Officer)
Edwin P. Ott
* Director September 9, 1996
- -----------------------------------
Paul C. Heeschen
*By: /s/ STEVEN A. LUPINACCI
- -----------------------------------
Steven A. Lupinacci
Attorney-in-Fact
</TABLE>
II-5
<PAGE> 89
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGES
- ------------ -------------------------------------------------------------------- -------------
<C> <S> <C>
1.1 Form of Underwriting Agreement
2.1 Form of Agreement and Plan of Merger(4)
3.1 Certificate of Incorporation of the Company(4)
3.2 Bylaws of the Company(4)
4.1 Purchase Agreement for Series A Preferred Stock dated as of December
11, 1992 by and among Diedrich Coffee, Martin R. Diedrich, Donald M.
Holly, SNV Enterprises and D.C.H., L.P.(3)
4.2 Series B Preferred Stock Purchase Agreement dated as of June 29,
1995 by and among Diedrich Coffee, Martin R. Diedrich, Steven A.
Lupinacci, Redwood Enterprises VII, L.P. and Diedrich Partners I,
L.P.(3)
4.3 Representative's Warrant Agreement
4.4 Specimen Stock Certificate
4.5 Form of Conversion Agreement in connection with the conversion of
Series A and Series B Preferred Stock into Common Stock(4)
5.1 Opinion of Gibson, Dunn & Crutcher LLP
10.1 Martin R. Diedrich Employment Agreement, dated June 29, 1995 (1)
10.2 Steven A. Lupinacci Employment Agreement, dated June 29, 1995(4)
10.3 Stock Option Plan and Agreement of Steven A. Lupinacci, dated June
29, 1995(3)
10.4 Form of Indemnification Agreement (1)
10.5 Diedrich Coffee 1996 Stock Incentive Plan (1)
10.6 Diedrich Coffee 1996 Non-Employee Directors Stock Option Plan(3)
10.7 Business Loan Agreement dated as of July 19, 1996 by and between
Bank of America National Trust and Savings Association and Diedrich
Coffee(3)
10.8 Revolving Promissory Note dated May 20, 1996 by Diedrich Coffee in
favor of Redwood Enterprises VII, L.P. (1)
10.9 Agreement of Sale by and among Diedrich Coffee (as purchaser) and
Brothers Coffee Bars, Inc. and Brothers Gourmet Coffees, Inc. (as
sellers) dated as of February 23, 1996(3)
10.10 Kerry W. Coin Employment Agreement, dated August 26, 1996
23.1 Consent of BDO Seidman, LLP re: Diedrich Coffee
23.2 Consent of BDO Seidman, LLP re: Acquired Stores of Brothers Gourmet
Coffees, Inc.
23.3 Consent of Gibson, Dunn & Crutcher LLP (included in Exhibit 5.1)
24.1 Powers of Attorney (2)
27.1 Financial Data Schedule(4)
99.1 Consent of Peter Churm(3)
99.2 Consent of Lawrence Goelman(3)
</TABLE>
- ---------------
* To be filed by amendment.
(1) Previously filed with this Registration Statement on July 23, 1996.
(2) Previously filed with Amendment No. 1 to this Registration Statement on July
24, 1996.
(3) Previously filed with Amendment No. 2 to this Registration Statement on
August 12, 1996.
(4) Previously filed with Amendment No. 3 to this Registration Statement on
August 28, 1996.
<PAGE> 1
EXHIBIT 1.1
2,200,000 Shares of Common Stock
DIEDRICH COFFEE, INC.
UNDERWRITING AGREEMENT
Los Angeles, California
September ___, 1996
THE BOSTON GROUP, L.P.
As Representative of the
Several Underwriters
Named in Schedule I Hereto
2049 Century Park East, 30th Floor
Los Angeles, California 90067
Ladies and Gentlemen:
Diedrich Coffee, Inc., a Delaware corporation (the "Company") and
successor to Diedrich Coffee, a California corporation ("Diedrich California"),
and D.C.H, L.P., a California limited partnership, Redwood Enterprises VII,
L.P., a California limited partnership ("Redwood"), and Diedrich Partners I,
L.P., a California limited partnership ("Diedrich Partners") (collectively, the
"Selling Stockholders"), confirm their agreement with the several Underwriters
named in Schedule I attached hereto and incorporated herein by this reference
(the "Underwriters") with respect to the sale by the Company and the purchase
by the Underwriters, severally and not jointly, of the number of shares of
Common Stock set forth opposite each person's name under the column "Number of
Selling Shares" in Schedule I, for an aggregate of one million six hundred
thousand (1,600,000) shares (the "Company Shares") of the Company's common
stock, $0.01 par value (the "Common Stock"), and the sale by the Selling
Stockholders, severally and not jointly, and the purchase by the Underwriters,
severally and not jointly, of the number of shares of Common Stock set forth
opposite each person's name under the column "Number of Selling Shares" in
Schedule I, for an aggregate of six hundred thousand (600,000) shares (the
"Selling Shares") of Common Stock from the Selling Stockholders (the Company
Shares and the Selling Shares collectively shall herein be called the "Firm
Shares"). Redwood, Diedrich Partners and Martin R. Diedrich (collectively, the
"Overallotment Sellers") further, severally and not jointly, confirm their
agreement to sell to the Underwriters the number of shares of Common Stock set
forth opposite each person's name under the column "Number of Option Shares" in
Schedule II
-1-
<PAGE> 2
attached hereto for an aggregate of up to three hundred thirty thousand
(330,000) shares of Common Stock for the purpose of covering over-allotments,
if any (the "Option Shares"), in accordance with the provisions of Section 4(b)
hereof. The Firm Shares and the Option Shares are hereinafter referred to
collectively as the "Securities" and are more fully described in the
Registration Statement and the Prospectus referred to below. The Company also
proposes to issue and sell to you or your designees, individually and not in
your capacity as Representative, warrants (the "Representative's Warrants")
pursuant to the Representative's Warrant Agreement substantially in the form
filed as Exhibit 4.3 to the Registration Statement (the "Representative's
Warrant Agreement"), for the purchase of an additional one hundred sixty
thousand (160,000) shares of Common Stock (the "Representative's Shares"), in
accordance with the provisions of Section 4(d) hereof. The shares of Common
Stock issuable upon exercise of the Representative's Warrants are hereinafter
referred to as the "Warrant Shares."
1. Representations and Warranties of the Company. The Company
represents and warrants to each of the Underwriters as of the date hereof, and
as of the Closing Date and each Option Closing Date (as such terms are defined
below), if any, as follows:
(a) The Company has prepared and filed with the
Securities and Exchange Commission (the "Commission") a registration statement,
and amendments thereto, on Form S-1 (Registration No. 333-08633), including any
related Preliminary Prospectus (as defined below), for the registration of the
offer and sale of the Securities under the Securities Act of 1933, as amended
(the "Act"). The Company will next file with the Commission either (A) prior
to effectiveness of such registration statement, a further amendment to such
registration statement, including the form of final prospectus or (B) after
effectiveness of such registration statement, a final prospectus in accordance
with Rules 430A and 424(b)(1) or (4). In the case of clause (B), the Company
will include in such registration statement, as amended at the Effective Date
(as defined below), all material information (other than Rule 430A Information
(as defined below)) required by the Act and the rules thereunder to be included
in the Prospectus with respect to the Securities and the offering thereof. As
filed, such amendment and form of final prospectus, or such final prospectus,
shall include all Rule 430A Information, together with all other such required
information, with respect to the Securities and the offering thereof and,
except to the extent the Representative shall agree in writing to a
modification, shall be in all substantive respects in the form furnished to you
prior to the Execution Time (as defined below) or, to the extent not completed
at the Execution Time, shall contain only such specific additional information
and other changes (beyond that contained in the latest Preliminary Prospectus,
as defined below) as the Company has advised you, prior to the Execution Time,
will be included or made therein. "Rule 430A Information" means information
with respect to the Securities and the offering thereof permitted to be omitted
from the Registration Statement when it becomes effective pursuant to Rule
430A. As used in this Agreement, the term "Registration Statement" means such
registration statement, as amended at the time when it was or is declared
effective, including all financial statements and exhibits thereto and, in the
event of any post-effective amendment thereto or a registration statement filed
with respect to the Securities pursuant to Rule 462(b) (or post-effective
amendment thereto), becomes effective prior to the Closing Date (as hereinafter
defined), shall also mean such registration statement as so amended or
registration statement (or amendment thereto) pursuant to Rule 462(b),
respectively. Such
-2-
<PAGE> 3
term shall include any information deemed to be included therein at the
Effective Date pursuant to Rule 430A under the Act or any Term Sheet (as
defined below) filed pursuant to Rule 434 under the Act. The term "Preliminary
Prospectus" means each prospectus subject to completion filed with such
Registration Statement or any amendments thereto (including the prospectus
subject to completion, if any, included in the Registration Statement or any
amendment thereto at the time it was or is declared effective); the term
"Prospectus" means: (i) if the Company relies on Rule 434 under the Act, the
Term Sheet relating to the Securities that is first filed pursuant to Rule
424(b)(7) under the Act, together with the Preliminary Prospectus identified
therein that such Term Sheet supplements, (ii) if the Company does not rely on
Rule 434 under the Act, the prospectus first filed with the Commission pursuant
to Rule 424(b) under the Act, or (iii) if the Company does not rely on Rule 434
under the Act and if no prospectus is required to be filed pursuant to Rule
424(b) under the Act, the prospectus included in the Registration Statement;
and the term "Term Sheet" means any term sheet that satisfies the requirements
of Rule 434 under the Act. Any reference hereto to the "date" of a Prospectus
that includes a Term Sheet shall mean the date of such Term Sheet. For
purposes hereof, "Rules and Regulations" means the rules and regulations
adopted by the Commission under the Act or the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), as applicable. The term "Effective Date"
shall mean each date that the Registration Statement and any post-effective
amendment or amendments thereto become effective. "Execution Time" shall mean
the date and time that this Agreement is executed and delivered by the parties
hereto.
(b) Neither the Commission nor any state regulatory
authority has issued any order preventing or suspending the use of any
Preliminary Prospectus, the Registration Statement or the Prospectus or any
part of any of the foregoing, and no proceedings for a stop order suspending
the effectiveness of the Registration Statement or any part thereof have been
initiated or, to the Company's knowledge, are pending, contemplated or
threatened. Each Preliminary Prospectus and the Registration Statement
(including each amendment thereto), at the time of filing thereof and on the
Effective Date, complied or will comply with the requirements of the Act and
the Rules and Regulations, and neither any Preliminary Prospectus nor the
Registration Statement, at the time of filing thereof and on the Effective
Date, contained or will contain an untrue statement of a material fact or
omitted or will omit to state a material fact required to be stated therein or
necessary to make the statements therein, not misleading; provided that, the
foregoing shall not apply to statements made or statements omitted in reliance
upon information furnished to the Company by you or on your behalf in writing
expressly for use in any Preliminary Prospectus or in the Registration
Statement.
(c) The Company has filed a Form 8-A with the Commission
providing for the registration under the Exchange Act of its Common Stock,
which registration shall become effective concurrently with the effectiveness
of the Registration Statement.
(d) The Company has been duly organized and is validly
existing as a corporation in good standing under the laws of the jurisdiction
of its incorporation. The Company is duly qualified and licensed and in good
standing as a foreign corporation in each jurisdiction in which it owns or
leases property or in which the conduct of its business, as currently being
conducted, requires such qualification or licensing, except where the failure
-3-
<PAGE> 4
to be so qualified, licensed or in good standing, singularly or in the
aggregate, would not have a material adverse effect on the condition (financial
or otherwise), earnings, business affairs, position, prospects, stockholders'
equity, operations, properties, businesses or results of operations of the
Company taken as a whole ("Material Adverse Effect"). The Company has all
requisite power and authority (corporate, if applicable, and other), and has
obtained any and all authorizations, approvals, orders, licenses, certificates,
franchises and permits of and from all governmental or regulatory officials,
agencies, authorities and bodies (including, without limitation, those having
jurisdiction over environmental, health or similar matters) ("Permits")
necessary to own or lease its properties and conduct its business as described
in the Prospectus other than those which, singularly or in the aggregate, the
failure to obtain would not have a Material Adverse Effect. The Company has
fulfilled and performed all of its material obligations with respect to such
Permits, and all federal, state and local laws, regulations and orders; and the
Company has not received any notice of proceedings relating to the revocation
or modification of any such Permits which, singularly or in the aggregate, if
the subject of an unfavorable decision, ruling or finding, would have a
Material Adverse Effect. None of such Permits contains any restriction that is
materially burdensome to the Company in conducting its business as described in
the Prospectus except as may be set forth therein. The disclosure in the
Registration Statement concerning the effects of federal, state and local laws,
rules, regulations and orders on the Company's business as currently conducted
and as contemplated is correct in all material respects and does not omit to
state a material fact required to be stated therein or necessary to make the
statements contained therein, in light of the circumstances in which they were
made, not misleading. The Company does not own an interest in any corporation,
partnership, trust, joint venture or other entity.
(e) The Company has the duly authorized, issued and
outstanding capitalization as set forth in the Prospectus, and any amendment or
supplement thereto under "Capitalization" and "Description of Capital Stock,"
and will have the adjusted capitalization set forth therein on the Closing Date
and each Option Closing Date, if any, based upon the assumptions set forth
therein. The Company is not a party to or bound by any instrument, agreement
or other arrangement or understanding providing for or requiring it to issue
any capital stock, rights, warrants, options or other securities, except for
this Agreement, the Representative's Warrant Agreement, the Company's
Non-Employee Directors Stock Plan (the "Non-Employee Directors Plan"), the
Company's 1996 Stock Incentive Plan (the "Incentive Plan"), and the Stock
Option Plan and Agreement of Mr. Lupinacci as in effect as of the date of this
Agreement and as described in the Registration Statement (collectively, the
"Incentive Plans"). The Securities and all other securities issued or issuable
by the Company conform or, when issued and paid for, will conform, in all
material respects to the description thereof contained in the Registration
Statement and the Prospectus. All issued and outstanding securities of the
Company (including the Selling Shares) have been duly authorized and validly
issued and are fully paid and non- assessable; the holders thereof have no
rights of rescission with respect thereto, and the holders of ownership
interests in the Company are not subject to personal liability solely by reason
of being such holders; and none of such securities were issued in violation of
the preemptive rights, co-sale right, right of first refusal or other similar
rights of any holders of any security of the Company. The Securities have been
duly authorized and, when issued, paid for and delivered in accordance with the
terms hereof, will be validly issued, fully paid and non-assessable and issued
in full
-4-
<PAGE> 5
compliance with all applicable federal and state securities laws; the holders
thereof will not be subject to any liability solely by reason of being such
holders; all corporate action required to be taken for the authorization, issue
and sale of the Securities has been duly and validly taken; and the
certificates representing the Securities, when delivered by the Company, will
be in due and proper form. Upon the issuance and delivery of the Securities
pursuant to the terms hereof and the Representative's Warrant Agreement and
Representative's Warrants and Representative's Shares to be sold by the Company
hereunder and thereunder, respectively, the Underwriters and the
Representative, respectively, will acquire good and marketable title to such
Securities and Representative's Warrants and Representative's Shares, free and
clear of any lien, charge, claim, encumbrance, pledge, security interest,
defect or other restriction of any kind whatsoever other than those arising
from acts of any Underwriter or their affiliates.
(f) The financial statements of the Company and the notes
thereto included in the Registration Statement and the Prospectus fairly
present the financial position, results of operations and cash flow and changes
in financial position and stockholders' equity of the Company at the respective
dates and for the respective periods to which they apply, and such financial
statements and related notes thereto have been prepared in conformity with
generally accepted accounting principles and the Rules and Regulations,
consistently applied throughout the periods involved. The as adjusted and/or
pro forma combined financial information included in the Registration Statement
and the Prospectus present fairly the information shown therein, have been
prepared in conformity with the Rules and Regulations and have been properly
compiled on the basis described therein consistent with the historical
financial statements included in the Registration Statement and the Prospectus.
The assumptions underlying such as adjusted and/or pro forma financial
information are reasonable, and the adjustments made therein are appropriate to
give effect to the transactions or circumstances referred to therein. There
has been no material adverse change, or known development involving a material
prospective change, in the condition (financial or otherwise), earnings,
business affairs, position, prospects, stockholders' equity, operations,
obligations, properties, businesses or results of operations of the Company,
whether or not arising in the ordinary course of business, since the date of
the financial statements included in the Registration Statement and the
Prospectus, except as described therein. The outstanding debt, property and
assets (both tangible and intangible) and the businesses of the Company conform
in all material respects to the descriptions thereof contained in the
Registration Statement and the Prospectus. The financial information set forth
in the Prospectus fairly presents the information set forth therein and such
financial information has been derived from or compiled on a basis consistent
with that of the audited financial statements included in the Registration
Statement and the Prospectus as described above.
(g) The Company (i) has filed all federal, state, local
and foreign tax returns required to be filed, which returns are true and
correct in all material respects, (ii) has paid all federal, state, local and
foreign taxes for which it is liable, including, but not limited to,
withholding taxes and amounts payable under Chapters 21 through 24 of the
Internal Revenue Code of 1986, as amended (the "Code"), and any other
assessments, fines or penalties leveled against it and has furnished all
information returns it is required to furnish pursuant to the Code or
otherwise, (iii) has established adequate reserves for such
-5-
<PAGE> 6
taxes, assessments, fines or penalties which are not due and payable and (iv)
does not have any tax deficiency or claims outstanding, proposed or assessed
against it.
(h) No transfer tax, stamp, duty or other similar tax,
fee or duty is payable by or on behalf of the Underwriters or the
Representative, as applicable, in connection with (i) the issuance by the
Company of the Securities, (ii) the purchase by the Underwriters of the
Securities or (iii) the consummation of any of the transactions contemplated by
this Agreement, the Representative's Warrant Agreement, the Registration
Statement or the Prospectus.
(i) The Company maintains insurance policies, including,
without limitation, general liability, property and personal liability
insurance, and surety bonds which insure the Company, its employees and such
other persons to whom such entities may become liable against such losses and
risks generally insured against by comparable businesses, all of which
insurance is in full force and effect.
(j) There is no action, suit, proceeding, inquiry,
arbitration, investigation, litigation or governmental or other proceeding
(including, without limitation, those pertaining to environmental, health or
similar matters) pending, contemplated or threatened (or circumstances that may
give rise to the same), to which the Company is subject or to which any
property or assets (tangible or intangible) of the Company is subject (or
circumstances that may give rise to the same) which (i) questions the validity
of the capital stock of the Company, of this Agreement, of the Representative's
Warrant Agreement or of any action or transaction contemplated by this
Agreement, the Representative's Warrant Agreement, the Registration Statement
or the Prospectus, (ii) is required to be disclosed in the Prospectus which is
not so disclosed (and such proceedings as are summarized in the Prospectus are
accurately summarized in all respects) or (iii) might, if adversely determined,
have a Material Adverse Effect, except as disclosed in the Prospectus.
(k) The Company has full legal right, power and authority
to authorize, issue, deliver and sell the Securities, to enter into this
Agreement and the Representative's Warrant Agreement and to consummate the
transactions contemplated in such agreements, the Registration Statement and
the Prospectus; and this Agreement has been duly and properly authorized,
executed and delivered by the Company. This Agreement constitutes a legal,
valid and binding agreement of the Company enforceable against the Company in
accordance with its terms except to the extent that indemnity and/or
contribution may be limited by federal securities law or the public policy of a
state with respect to such matters.
(l) Neither the issuance, delivery and sale of the
Securities, the execution, delivery or performance of this Agreement or
Representative's Warrant Agreement, the consummation of the transactions
contemplated herein, therein, in the Registration Statement or the consummation
of the Merger (as hereinafter defined), nor the conduct of the Company's
business as described in the Registration Statement, the Prospectus and any
amendments thereof or supplements thereto, conflicts or will conflict with, or
results or will result in any breach or violation of any of the terms,
covenants, conditions or provisions of, or constitutes or will constitute (with
notice, the lapse of time or both) a default under, or results or will result
in the creation or imposition of any lien, charge, claim, encumbrance,
-6-
<PAGE> 7
pledge, security interest, defect or other restriction or equity of any kind
whatsoever upon any property or assets (tangible or intangible) of the Company
(except as described in the Prospectus) pursuant to the terms of, (i) the
Certificate of Incorporation or bylaws of the Company, (ii) any license,
contract, indenture, mortgage, installment sale agreement, lease, deed of
trust, voting trust agreement, stockholders agreement, purchase order, note,
loan or credit agreement or any other material agreement or instrument
evidencing an obligation for borrowed money, or any other material agreement or
instrument to which the Company is a party or by which it is or may be bound or
to which any of its properties or assets (tangible or intangible) is or may be
subject except where such conflict, breach, violation, lien or other
restriction would not have a Material Adverse Effect or (iii) any law, statute,
judgment, decree, order, rule or regulation applicable to the Company of any
arbitrator, court, administrative agency or other governmental or regulatory
official, agency authority or body (including, without limitation, those having
jurisdiction over environmental, health or similar matters) having jurisdiction
over the Company or any of its activities or properties.
(m) No consent, approval, authorization, registration,
qualification, or order of, and no filing with, any court, administrative
agency or other government or regulatory official, agency, authority or body is
required for the issuance, delivery and sale of the Securities pursuant to this
Agreement, the Prospectus and the Registration Statement, the performance of
this Agreement and the Representative's Warrant Agreement and the consummation
of the transactions contemplated hereby, thereby, by the Registration Statement
and by the Prospectus, except such as have been or may be obtained under the
Act, state securities or "blue sky" laws and the rules of the National
Association of Securities Dealers, Inc. (the "NASD") in connection with the
Underwriters' purchase and distribution of the Securities.
(n) All agreements, contracts or other documents or
copies of executed agreements, contracts or other documents filed or required
to be filed as exhibits to the Registration Statement to which the Company
therein is a party or by which it may be bound are accurately described and
fairly present the information required to be shown with respect thereto by
Form S-1 or the Rules and Regulations; there are no agreements, contracts or
other documents which are required by the Act to be described in the
Registration Statement or filed as exhibits to the Registration Statement which
are not described or filed as required; and the exhibits which have been filed
are complete and correct copies of the agreements, contracts or other documents
of which they purport to be copies.
(o) Subsequent to the respective dates as of which
information is set forth in the Registration Statement and the Prospectus, and
except as may otherwise be indicated or contemplated herein or therein, the
Company has not done, or agreed to do, any of the following, (i) issued any
securities or incurred any liability or obligation, direct, indirect or
contingent, for borrowed money, (ii) entered into any transaction other than in
the ordinary course of business or (iii) declared or paid any dividend or made
any other distribution on or in respect of any class of its capital stock; and,
subsequent to such dates and except as may otherwise be indicated or
contemplated herein or therein, there has not been any change in the capital
stock or any change in the debt (long- or short-term) or liabilities or
obligations or any material change in the condition (financial or otherwise),
earnings, business affairs, position, prospects, stockholders' equity,
operations, properties, businesses or results of
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<PAGE> 8
operations of the Company except for debt, liabilities and obligations incurred
in the normal course of business consistent with past practices.
(p) No material default exists, and no event has occurred
which, with notice, lapse of time or both, would constitute a default in the
due performance and observance of any term, covenant, condition or provision of
any license, contract, indenture, mortgage, installment sale agreement, lease,
deed of trust, voting trust agreement, stockholders' agreement, purchase order,
note, loan or credit agreement or any other material agreement or instrument
evidencing an obligation for borrowed money, or any other material agreement or
instrument to which the Company is a party or by which it is or may be bound or
its properties or assets (tangible or intangible) are or may be subject, except
where such default would not have a Material Adverse Effect. The Company is
not in violation of its Certificate of Incorporation or bylaws, or other
organizational documents, or in violation in any material respect of any law,
ordinance, administrative or governmental rule or regulation applicable to the
Company or its subsidiaries.
(q) The Company has generally enjoyed a satisfactory
employer-employee relationship with its employees and it is in substantial
compliance with all federal, state and local laws, rules, regulations and
orders respecting employment and employment practices, including, without
limitation, terms and conditions of employment and wages and hours. There are
no pending investigations involving the Company by the U.S. Department of
Labor, the Department of Justice - Immigration and Naturalization Service or
any other governmental or regulatory official, agency, authority or body
responsible for the enforcement of such federal, state or local laws, rules,
regulations and orders, except where such investigation could not be expected
to have a Material Adverse Effect. There is no unfair labor practice charge or
complaint pending, threatened or contemplated against the Company before the
National Labor Relations Board or any strike, picketing, boycott, dispute,
slowdown or stoppage pending, threatened or contemplated against or involving
the Company and none has ever occurred. There are no existing collective
bargaining agreements with the Company. No representation question exists
respecting the employees of the Company and no collective bargaining agreement
or modification thereof is currently being negotiated by or on behalf of the
Company. No grievance or arbitration proceeding is pending, threatened or
contemplated under any expired collective bargaining agreements of the Company.
No labor dispute with the employees of the Company is pending, threatened or
contemplated.
(r) Except as disclosed in the Registration Statement or
Prospectus, the Company does not maintain, sponsor, contribute, have any
obligation to contribute or have any obligation with respect to, or at any time
previously maintained, sponsored, contributed, had any obligation to contribute
or had any obligation with respect to, any program or arrangement that is an
"employee pension benefit plan," an "employee welfare benefit plan" or a
"multi-employer plan" (each an "ERISA Plan"), as such terms are defined in
Sections 3(2), 3(l) and 3(37), respectively, of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"). Except as disclosed in the
Registration Statement or Prospectus, the Company does not maintain, sponsor,
contribute, have any obligation to contribute or have any obligation with
respect to or has it at any time previously maintained, sponsored, contributed,
had any obligation to contribute or had any obligation with respect to, a
"defined
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<PAGE> 9
benefit plan," as defined in section 3(35) of ERISA. No ERISA Plan (or any
trust created thereunder) has engaged in a "prohibited transaction" within the
meaning of Section 406 of ERISA or Section 4975 of the Code which could subject
the Company to any tax penalty on prohibited transactions and which has not
adequately been corrected. Each ERISA Plan is in compliance with all material
reporting, disclosure and other requirements of the Code and ERISA as they
relate to any such ERISA Plan. Determination letters have been received from
the Internal Revenue Service with respect to each ERISA Plan which is intended
to comply with Code Section 401(a), stating that such ERISA Plan and the
attendant trust are qualified thereunder. The Company is not in any way liable
in connection with a "multiemployer plan" from which it has ever completely or
partially withdrawn.
(s) Neither the Company nor any of its employees,
directors, stockholders or affiliates (within the meaning of the Rules and
Regulations) of any of the foregoing, has taken, directly or indirectly, any
action designed to or which has constituted or which might be expected to cause
or result in, under the Exchange Act or otherwise, the illegal stabilization or
manipulation of the price of any security of the Company to facilitate the sale
or resale of the Securities or otherwise.
(t) The Company and its subsidiaries own or possess
adequate licenses or other rights to use all patents, trademarks, trademark
registrations, service marks, service mark registrations, trade names,
copyrights, licenses, inventions, trade secrets, and knowhow or other similar
rights ("Intellectual Property") described in the Prospectus as being owned or
possessed by them, or necessary for the conduct of its business as described in
the Prospectus, the Company has not infringed, is not now infringing, and its
business as presently conducted and as proposed to be conducted will not cause
it to infringe, any Intellectual Property belonging to any other person, which
infringement or infringements, either individually or in the aggregate, could
reasonably be expected to have a Material Adverse Effect; the Company has not
received any claim or notice of infringement or potential infringement of any
Intellectual Property of any other person which could reasonably be expected to
have a Material Adverse Effect; and neither the Company nor any of its
subsidiaries has any claim against a third party with respect to the
infringement by such third party of Intellectual Property of the Company or any
such subsidiary material to the business or prospects of the Company and its
subsidiaries considered as a whole.
(u) The Company has the unrestricted right to use all
trade secrets, knowhow (including, without limitation, all unpatented and/or
unpatentable proprietary or confidential information, systems or procedures),
inventions, technology, designs, processes, works of authorship, computer
programs and technical data and information that are material to the
development, manufacture, operation and sale of all products and services sold
or proposed to be sold by the Company, free and clear of and without violating
any right, lien or claim of others, including, without limitation, former
employers of their employees.
(v) The Company has good and marketable title to, or
valid and enforceable leasehold estates in, all items of real and personal
property described in the Registration Statement and Prospectus as owned or
leased by it and such property is owned by it free and clear of all liens,
charges, claims, encumbrances, pledges, security interests,
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<PAGE> 10
defects, or other restrictions or equities of any kind whatsoever, other than
those referred to in the Prospectus and liens for taxes not yet payable.
(w) BDO Seidman, LLP whose report is filed with the
Commission as a part of the Registration Statement, each Preliminary Prospectus
and the Prospectus, is an accounting firm of independent certified public
accountants as required by the Act and the Rules and Regulations.
(x) The Company has caused to be executed agreements
pursuant to which the Company, the Selling Stockholders, Martin R. Diedrich
and Steven A. Lupinacci, who, prior to the execution of this Agreement,
collectively own all of the issued and outstanding shares of Common Stock have
agreed, for a period of one hundred eighty (180) days following the effective
date of the Registration Statement, not to, directly or indirectly, offer,
offer to sell, sell, grant an option for the purchase or sale of, transfer,
assign, pledge, exercise any registration rights or deliver any notice
regarding registration, hypothecate or otherwise encumber or enter into any
agreement to do any of the foregoing with respect to any securities issued or
issuable by the Company, whether or not owned by or registered in the name of
such person, or dispose of any interest therein (whether pursuant to Rule 144
under the Act or otherwise), without the prior written consent of the
Representative (collectively, the "Lock-Up Agreements").
(y) There are no claims, payments, issuances, agreements,
arrangements or understandings, whether oral or written, for services in the
nature of a finder's fee, brokerage fee, origination fee or otherwise with
respect to the offerings contemplated by this Agreement, the Representative's
Warrant Agreement, the Registration Statement and the Prospectus or any other
arrangements, agreements, understandings, payments or issuances that may affect
the Underwriters' compensation as determined by the NASD other than as
disclosed in the Registration Statement and Prospectus and other than as the
Representative may itself have agreed to with third parties.
(z) The Securities have been approved for quotation,
subject to official notice of issuance, on the Nasdaq National Market (the
"NNM") and the Company has obtained CUSIP numbers for the Securities. The
Certificates for the Securities conform to the requirement of the Delaware
General Corporation Law and the NNM.
(aa) Neither the Company nor any officer, stockholder,
employee, agent nor any other person acting on behalf of the Company has,
directly or indirectly, given or agreed to give any money, gift or similar
benefit (other than legal price concessions to customers in the ordinary course
of business) to any customer, supplier, employee or agent of a customer or
supplier, or any official or employee of any governmental agency or
instrumentality of any government or any political party or candidate for
office or any other person who was, is or may be in a position to help or
hinder the business of the Company (or assist them in connection with any
actual or proposed transactions) which might subject the Company or any other
such person to any damage or penalty in any civil, criminal or governmental
action, suit, inquiry, investigation, litigation or proceeding.
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<PAGE> 11
(ab) Except as set forth in the Prospectus under "Certain
Transactions" and "Management - Compensation Committee Interlocks and Insider
Participation," and except for transaction(s) that would not be required to be
disclosed in the Registration Statement pursuant to the Rules and Regulations,
no officer, director or stockholder of the Company, and no affiliate or
associate (as those terms are defined in the Rules and Regulations) of any of
the foregoing persons or entity, has or has had, either directly or indirectly,
(i) an interest in any person or entity which (A) furnishes or sells services
or products which are furnished or sold or are proposed to be furnished or sold
by the Company or (B) purchases from or sells or furnishes to the Company any
products or services or (ii) a beneficial interest in any contract,
arrangement, understanding or agreement to which the Company is a party or by
which the Company or any of its property or assets (tangible or intangible) may
be bound or affected. Except as set forth in the Prospectus under "Certain
Transactions" and "Management - Compensation Committee Interlocks and Insider
Participation," there are no existing agreements, arrangements, understandings
or transactions, or proposed agreements, arrangements, understandings or
transactions, between or among the Company and any officer or director of the
Company or any person listed in the "Principal and Selling Stockholders"
section of the Prospectus, or any affiliate or associate of any of the
foregoing persons or entity.
(ac) The minute books of the Company have been made
available to the Representative and contain a complete summary of all meetings
and actions of the directors, including any committee thereof, and stockholders
of the Company since the time of its incorporation, and reflect all
transactions referred to in such minutes accurately in all material respects.
(ad) Except as described in the Registration Statement, no
person, corporation, trust, partnership, association or other entity has the
right to include or register any securities of the Company in the Registration
Statement or to require that any registration statement be filed by the Company
or, if filed, to include any security in such registration statement. Except
as described in the Registration Statement, no person, corporation, trust,
partnership, association or other entity holds any antidilution rights with
respect to any securities of the Company.
(ae) Any certificate signed by any officer of the Company,
and delivered to the Representative or to the Underwriters' Counsel shall be
deemed a representation and warranty by the Company to the Underwriters as to
the matters covered thereby.
(af) The Company has (i) entered into an employment
agreement with each of Martin R. Diedrich and Steven A. Lupinacci in
substantially the same forms filed as Exhibits 10.1 and 10.2, respectively, to
the Registration Statement, and (ii) purchased key-man life insurance on the
life of Martin R. Diedrich in the amount of one million dollars ($1,000,000)
which policy names the Company as the sole beneficiary thereof.
(ag) The Representative's Warrant Agreement has been duly
and validly authorized by the Company and, assuming due execution by the
Representative, constitutes or will constitute a valid and legally binding
agreement of the Company, enforceable against the Company in accordance with
its terms (except as such enforceability may be limited by
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<PAGE> 12
applicable bankruptcy, insolvency, reorganization, moratorium or other laws of
general application relating to or affecting enforcement of creditors' rights
and the application of equitable principles in any action, legal or equitable,
and except as rights to indemnity or contribution may be limited by applicable
law). The Company has reserved and available for issuance a sufficient number
of shares of Common Stock to be issued upon exercise of the Representative's
Warrants.
(ah) The Company is familiar with the Investment Company
Act of 1940, as amended (the "1940 Act"), and the rules and regulations
thereunder, and has in the past conducted, and intends in the future to
conduct, its affairs in such a manner as to ensure that it will not become an
"investment company" within the meaning of the 1940 Act and such rules and
regulations.
(ai) The books, records and accounts of the Company
accurately and fairly reflect, in reasonable detail, the transactions and
dispositions of the assets of the Company. The system of internal accounting
controls maintained by the Company is sufficient to provide reasonable
assurances that (i) transactions are executed in accordance with management's
general or specific authorization; (ii) transactions are recorded as necessary
(A) to permit preparation of financial statements in accordance with generally
accepted accounting principles and (B) to maintain accountability for assets;
(iii) access to assets is permitted only in accordance with management's
general or specific authorization; and (iv) the recorded accountability for
assets is compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any difference.
(aj) All transactions necessary to complete the merger
(the "Merger") of Diedrich California with and into the Company in accordance
with the terms of that certain Agreement and Plan of Reorganization, dated
August 29, 1996 (the "Merger Agreement"), between the Company and Diedrich
California have been consummated and the Merger was effectuated on September 6,
1996 (the "Merger Date"). Each of the Company and Diedrich California had all
requisite corporate power and authority to execute, deliver and perform the
Merger Agreement. All necessary corporate proceedings of the Company and
Diedrich California had been duly taken to authorize the execution, delivery
and performance of the Merger Agreement. The Merger Agreement had been duly
authorized, executed and delivered by the Company and/or Diedrich California,
as the case may be, is the legal, valid and binding obligation of the Company
and/or Diedrich California, as the case may be, and is enforceable as to the
Company and/or Diedrich California, as the case may be, in accordance with its
terms. The Company has obtained all consents, authorizations, approvals,
orders, licenses, certificates or permits of or from, or declaration or filing
with, any federal, state, local or other governmental authority or any court of
other tribunal which is required by the Company or Diedrich California for the
execution, delivery, or performance of any Merger Agreement. The Company has
obtained all consents, approvals or authorizations of any party to any material
license, contract, indenture, mortgage, installment sale agreement, lease, deed
of trust, voting trust agreement, stockholders agreement, purchase order, note,
loan or credit agreement or any other material agreement or instrument
evidencing an obligation for borrowed money, or any other material agreement or
instrument to which the Company or Diedrich California is a party or by which
either of them is or may be bound or to which either of their properties or
assets (tangible or
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<PAGE> 13
intangible) are or may be subject, necessary for the execution, delivery or
performance by the Company or Diedrich California of the Merger Agreement. The
execution, delivery and performance of the Merger Agreement by the Company and
Diedrich California did not conflict with and did not result in any breach or
violation of any of the terms, covenants, conditions or provisions of, did not
constitute (with notice, the lapse of time or both) a default under, result in
the creation or imposition of any lien, charge, claim, encumbrance, pledge,
security interest, defect or other restriction or equity of any kind whatsoever
upon any property or assets (tangible or intangible) of the Company or Diedrich
California pursuant to the terms of, (i) the Certificate or Articles of
Incorporation or bylaws of the Company or Diedrich California, (ii) any
material contract, license, indenture, mortgage, installment sale agreement,
lease, deed of trust, voting trust agreement, stockholders' agreement, purchase
order, note, loan or credit agreement or any other material agreement or
instrument evidencing an obligation for borrowed money, or any other material
agreement or instrument to which the Company or Diedrich California was a party
at the Merger Date or by which they were bound at the Merger Date or to which
any of their properties or assets (tangible or intangible) were subject at the
Merger Date or (iii) any law, statute, judgment, decree, order, rule or
regulation applicable to the Company or Diedrich California at the Merger Date
of any arbitrator, court, administrative agency or other governmental or
regulatory official, agency authority or body (including, without limitation,
those having jurisdiction over environmental, health or similar matters) having
jurisdiction over the Company, Diedrich California or either of their
activities or properties.
(ak) The Company has all manufacturer, vendor and
distributor authorizations, permits, licenses and other approvals necessary for
the Company to conduct its business as described in the Prospectus other than
those authorizations, approvals, licenses and permits of and from
manufacturers, vendors and distributors which, singularly or in the aggregate,
the failure to obtain would not have a Material Adverse Effect. The Company is
and has been doing business in substantial compliance with all such
authorizations, approvals, licenses, and permits; and the Company has not
received any notice of violation, revocation or modification of any such
authorizations, approvals, licenses or permits which, singularly or in the
aggregate, would materially and adversely affect the condition (financial or
otherwise), earnings, business affairs, position, prospects, stockholders'
equity, operations, properties, businesses or results of operations of the
Company.
2. Representations and Warranties of the Selling Stockholders.
Each Selling Stockholder, severally and not jointly, represents and warrants
to, and covenants and agrees with, each of the Underwriters as of the date
hereof and as of the Closing Date, with respect to such portion of the Selling
Shares being sold by such Selling Stockholder, as follows:
(a) All authorizations, orders, consents and other
approvals necessary for the execution and delivery of this Agreement and the
sale and delivery of the Selling Shares by such Selling Stockholder, including,
but not limited to, approvals under relevant partnership agreements and
partnership law, have been duly and validly given, and such Selling Stockholder
has full legal right, power and authority to enter into this Agreement and to
sell and deliver the Selling Shares to the Underwriters. This Agreement
constitutes a legal, valid and binding agreement of such Selling Stockholder
enforceable against such Selling Stockholder in accordance with its terms
(except as such enforceability may be
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<PAGE> 14
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other laws of general application relating to or affecting enforcement of
creditors' rights and the application of equitable principles in any action
legal or equitable, and except as rights to indemnity or contribution may be
limited by applicable law).
(b) Such Selling Stockholder has and on the Closing Date
will have, good, valid and marketable title to the Selling Shares. The Selling
Shares, as of the date of this Agreement and as of the Closing Date, have not
previously been sold except pursuant to and as contemplated by this Agreement;
and upon the delivery of and payment for the Selling Shares, good, valid and
marketable title thereto, free and clear of all liens, charges, claims,
encumbrances, pledges, security interests, defects or other restrictions or
equities of any kind whatsoever, will pass to the Underwriters.
(c) Neither the execution, delivery or performance of
this Agreement, any Power of Attorney and Custody Agreement to be executed by
such Selling Stockholder in connection with the transactions contemplated by
this Agreement (the "Power-of-Attorney" and the "Custody Agreement,"
respectively), the delivery and sale of the Selling Shares nor the consummation
of the transactions contemplated by this Agreement, the Registration Statement
and the Prospectus conflicts or will conflict with or results or will result in
any breach or violation of any of the terms, covenants, conditions or
provisions of, or constitutes or will constitute (with notice, the lapse of
time or both) a default under, or results or will result in the creation or
imposition of any lien, charge, claim, encumbrance, pledge, security interest,
defect or other restriction or equity of any kind whatsoever upon any property
or assets (tangible or intangible) of such Selling Stockholder pursuant to the
terms of (i) any material license, contract, indenture, mortgage, installment
sale agreement, lease, deed of trust, voting trust agreement, purchase order,
note, loan or credit agreement or any other material agreement or instrument
evidencing an obligation for borrowed money, or any other material agreement or
instrument to which such Selling Stockholder is a party or by which he, she or
it is or may be bound or to which any of its properties or assets (tangible or
intangible) is or may be subject or (ii) any law, statute, judgment, decree,
order, rule or regulation applicable to such Selling Stockholder of any
arbitrator, court, administrative agency or other governmental official,
agency, authority or body (including, without limitation, those having
jurisdiction over environmental, health or similar matters) having jurisdiction
over the Selling Stockholder or any of his, her or its activities or
properties.
(d) Such Selling Stockholder has not taken, and will not
take, directly or indirectly, any action designed to or which has constituted
or which might be expected to cause or result in, under the Exchange Act or
otherwise, the stabilization or manipulation of the price of any security of
the Company to facilitate the sale or resale of the Securities or otherwise and
has not effected any sales of shares of Common Stock which, if effected by the
issuer, would be required to be disclosed in response to Item 701 of Regulation
S-K.
(e) Certificates in negotiable form for such Selling
Shareholder's Securities have been placed in custody, for delivery pursuant to
the terms of this Agreement, under a Power of Attorney and Custody Agreement
executed and delivered by such Selling Shareholder, in the form heretofore
furnished to you (the "Custody Agreement"), with Steven A. Lupinacci, as
Custodian (the "Custodian"); the Securities represented by the
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<PAGE> 15
certificates so held in custody for each Selling Shareholder are subject to the
interests hereunder of the Underwriters, the Company, and the other Selling
Shareholders; the arrangements for custody and delivery of such certificates,
made by such Selling Shareholder hereunder and under the Custody Agreement, are
not subject to termination by any acts of such Selling Shareholder, or by
operation of law, whether by the death or incapacity of such Selling
Shareholder or the occurrence of any other event; and if any such death,
incapacity or any other such event shall occur before the delivery of such
Securities hereunder, certificates for the Securities will be delivered by the
Custodian in accordance with the terms and conditions of this Agreement and the
Custody Agreement as if such death, incapacity or other event had not occurred,
regardless of whether or not the Custodian shall have received notice of such
death, incapacity or other event.
(f) There is no action, suit, proceeding, inquiry,
arbitration, investigation, litigation or governmental or other proceeding
pending, contemplated or threatened (or circumstances that may give rise to the
same), to which such Selling Stockholder is subject or to which any property or
assets (tangible or intangible) of such Selling Stockholder is subject (or
circumstances that may give rise to the same) which questions the validity of
this Agreement or of any action or transaction contemplated by this Agreement,
the Registration Statement or the Prospectus.
(g) Such Selling Stockholder represents and warrants to,
and agrees with, the Underwriters to the same effect as the representation and
warranties of the Company set forth in Section 1 of this Agreement; provided,
however, that such Selling Stockholder shall be liable for breach of the
representations and warranties in this Section 2(g) only for an amount not
exceeding the proceeds received by such Selling Stockholder from the sale of
the Selling Shares hereunder.
(h) Such Selling Stockholder has reviewed the Prospectus
(or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus) and the Registration Statement, and the information regarding such
Selling Stockholder set forth therein under the caption "Principal and Selling
Stockholders" is complete and accurate.
(i) In order to document the Underwriters' compliance
with the reporting and withholding provisions of the Internal Revenue Code of
1986, as amended, with respect to the transactions herein contemplated, such
Selling Stockholder shall deliver to the Representative prior to or on the
Closing Date, a properly completed and executed United States Treasury
Department Form W-8 or W-9 (or other applicable form of statement specified by
Treasury Department regulations in lieu thereof).
3. Representations and Warranties of the Overallotment Sellers.
Each Overallotment Seller, severally and not jointly, represents and warrants
to, and covenants and agrees with, each of the Underwriters as of the date
hereof and as of each Option Closing Date, with respect to such portion of the
Option Shares being sold by such Overallotment Seller, as follows:
(a) All authorizations, orders, consents and other
approvals necessary for the execution and delivery of this Agreement and the
sale and delivery of the Option Shares
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<PAGE> 16
by such Overallotment Seller, including, but not limited to, approvals under
relevant partnership agreements and partnership law, have been duly and validly
given, and such Overallotment Seller has full legal right, power and authority
to enter into this Agreement and to sell and deliver the Option Shares to the
Underwriters. This Agreement constitutes a legal, valid and binding agreement
of such Overallotment Seller enforceable against such Overallotment Seller in
accordance with its terms (except as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other laws of
general application relating to or affecting enforcement of creditors' rights
and the application of equitable principles in any action legal or equitable,
and except as rights to indemnity or contribution may be limited by applicable
law).
(b) Such Overallotment Seller has and on each Option
Closing Date will have, good, valid and marketable title to the Option Shares.
The Option Shares, as of the date of this Agreement and as of each Option
Closing Date, have not previously been sold except pursuant to and as
contemplated by this Agreement; and upon the delivery of and payment for the
Option Shares, good, valid and marketable title thereto, free and clear of all
liens, charges, claims, encumbrances, pledges, security interests, defects or
other restrictions or equities of any kind whatsoever, will pass to the
Underwriters.
(c) Neither the execution, delivery or performance of
this Agreement, any Power of Attorney and Custody Agreement to be executed by
such Overallotment Seller in connection with the transactions contemplated by
this Agreement (the "Power-of-Attorney" and the "Custody Agreement,"
respectively), the delivery and sale of the Option Shares nor the consummation
of the transactions contemplated by this Agreement, the Registration Statement
and the Prospectus conflicts or will conflict with or results or will result in
any breach or violation of any of the terms, covenants, conditions or
provisions of, or constitutes or will constitute (with notice, the lapse of
time or both) a default under, or results or will result in the creation or
imposition of any lien, charge, claim, encumbrance, pledge, security interest,
defect or other restriction or equity of any kind whatsoever upon any property
or assets (tangible or intangible) of such Overallotment Seller pursuant to the
terms of (i) any material license, contract, indenture, mortgage, installment
sale agreement, lease, deed of trust, voting trust agreement, purchase order,
note, loan or credit agreement or any other material agreement or instrument
evidencing an obligation for borrowed money, or any other material agreement or
instrument to which such Overallotment Seller is a party or by which he, she or
it is or may be bound or to which any of its properties or assets (tangible or
intangible) is or may be subject or (ii) any law, statute, judgment, decree,
order, rule or regulation applicable to such Overallotment Seller of any
arbitrator, court, administrative agency or other governmental official,
agency, authority or body (including, without limitation, those having
jurisdiction over environmental, health or similar matters) having jurisdiction
over the Overallotment Seller or any of his, her or its activities or
properties.
(d) Such Overallotment Seller has not taken, and will not
take, directly or indirectly, any action designed to or which has constituted
or which might be expected to cause or result in, under the Exchange Act or
otherwise, the stabilization or manipulation of the price of any security of
the Company to facilitate the sale or resale of the Securities or otherwise and
has not effected any sales of shares of Common Stock which, if effected by the
issuer, would be required to be disclosed in response to Item 701 of Regulation
S-K.
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<PAGE> 17
(e) Certificates in negotiable form for such
Overallotment Seller's Securities have been placed in custody, for delivery
pursuant to the terms of this Agreement, under a Power of Attorney and Custody
Agreement executed and delivered by such Overallotment Seller, in the form
heretofore furnished to you (the "Custody Agreement"), with Steven A.
Lupinacci, as Custodian (the "Custodian"); the Securities represented by the
certificates so held in custody for each Overallotment Seller are subject to
the interests hereunder of the Underwriters, the Company, the Selling
Shareholders and the other Overallotment Sellers; the arrangements for custody
and delivery of such certificates, made by such Overallotment Seller hereunder
and under the Custody Agreement, are not subject to termination by any acts of
such Overallotment Seller, or by operation of law, whether by the death or
incapacity of such Overallotment Seller or the occurrence of any other event;
and if any such death, incapacity or any other such event shall occur before
the delivery of such Securities hereunder, certificates for the Securities will
be delivered by the Custodian in accordance with the terms and conditions of
this Agreement and the Custody Agreement as if such death, incapacity or other
event had not occurred, regardless of whether or not the Custodian shall have
received notice of such death, incapacity or other event.
(f) There is no action, suit, proceeding, inquiry,
arbitration, investigation, litigation or governmental or other proceeding
pending, contemplated or threatened (or circumstances that may give rise to the
same), to which such Overallotment Seller is subject or to which any property
or assets (tangible or intangible) of such Overallotment Seller is subject (or
circumstances that may give rise to the same) which questions the validity of
this Agreement or of any action or transaction contemplated by this Agreement,
the Registration Statement or the Prospectus.
(g) Such Overallotment Seller represents and warrants to,
and agrees with, the Underwriters to the same effect as the representation and
warranties of the Company set forth in Section 1 of this Agreement; provided,
however, that such Overallotment Seller shall be liable for breach of the
representations and warranties in this Section 3(g) only for an amount not
exceeding the proceeds received by such Overallotment Seller from the sale of
the Option Shares hereunder.
(h) Such Overallotment Seller has reviewed the Prospectus
(or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus) and the Registration Statement, and the information regarding such
Overallotment Seller set forth therein under the caption "Principal and Selling
Stockholders" is complete and accurate.
(i) In order to document the Underwriters' compliance
with the reporting and withholding provisions of the Internal Revenue Code of
1986, as amended, with respect to the transactions herein contemplated, such
Overallotment Seller shall deliver to the Representative prior to or on the
Option Closing Date, a properly completed and executed United States Treasury
Department Form W-8 or W-9 (or other applicable form of statement specified by
Treasury Department regulations in lieu thereof).
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4. Purchase, Sale and Delivery of the Securities.
(a) On the basis of the representations, warranties,
covenants and agreements herein contained, but subject to the terms and
conditions herein set forth, the Company and the Selling Stockholders agree,
severally and not jointly, to sell to the Underwriters the Firm Shares, and
each of the Underwriters agrees, severally and not jointly, to purchase from
the Company and the Selling Stockholders that number of the Firm Shares set
forth opposite such Underwriter's and Selling Stockholders name, in Schedule I
to this Agreement at a price equal to $_____ per Share.
(b) In addition, on the basis of the representations,
warranties, covenants and agreements herein contained, but subject to the terms
and conditions herein set forth, the Overallotment Sellers hereby grant an
option to the Underwriters to purchase all or any part of the Option Shares at
a price equal to $____ per share. The Option Shares shall be purchased, if the
option is exercised as provided herein, from the Overallotment Sellers, as set
forth in Schedule II hereto, for the accounts of the several Underwriters,
severally and not jointly, in proportion to the aggregate number of Firm Shares
set forth opposite such Underwriter's name in Schedule I to this Agreement,
except that the respective purchase obligations of each Underwriter may be
adjusted by the Representative so that no Underwriter shall be obligated to
purchase fractional Option Shares. The option granted hereby will expire, to
the extent unexercised, thirty (30) days after the date hereof, and may be
exercised, in the Representative's sole discretion, in whole or in part from
time to time, but only for the purpose of covering over-allotments which may be
made in connection with the offering and distribution of the Firm Shares, upon
notice by the Representative to the Company setting forth the number of Option
Shares as to which the Underwriters are then exercising the option and the time
and date of payment for and delivery of any such Option Shares. Any such time
and date of delivery (an "Option Closing Date") shall be determined by the
Representative, but shall not be later than five (5) full business days after
the exercise of said option, or in any event prior to the Closing Date, unless
otherwise agreed upon by the Representative and the Company. Nothing herein
contained shall in any way obligate the Underwriters to exercise the option
granted hereby. No Option Shares shall be delivered unless the Firm Shares
shall be simultaneously delivered or shall theretofore have been delivered as
herein provided.
(c) Payment of the purchase price for, and delivery of
certificates evidencing, the Firm Shares shall be made at the offices of
Munger, Tolles & Olson, 355 South Grand Avenue, Los Angeles, California or at
such other place as shall be agreed upon by the Representative and the Company.
Such delivery and payment shall be made at 6:30 a.m. (Los Angeles time) on
September ___, 1996 or at such other time and date as shall be agreed upon by
the Representative, the Company and the Selling Stockholders (such time and
date of payment and delivery being herein called the "Closing Date"). In
addition, in the event that any or all of the Option Shares are purchased by
the Underwriters, payment of the purchase price for, and delivery of
certificates for, such Option Shares shall be made at the above-mentioned
office of the counsel to the Underwriters or at such other place as shall be
agreed upon by the Representative and the Company with respect to each
applicable Option Closing Date as specified in the relevant notice from the
Representative to the Company and the Overallotment Sellers. Delivery of the
certificates representing the Firm
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<PAGE> 19
Shares and the Option Shares, if any, shall be made to the Representative
against payment by the Underwriters of the purchase price for the Firm Shares
and the Option Shares, if any, respectively, to the order of the Company, the
Selling Stockholders and/or the Overallotment Sellers, as applicable, by
certified or official bank checks payable in Los Angeles Clearing House funds
(next day funds). Certificates representing the Firm Shares and the Option
Shares, if any, respectively, shall be in definitive, fully registered form,
shall bear no restrictive legends and shall be in such denominations and
registered in such names as the Representative may request in writing at least
two (2) business days prior to the Closing Date or the relevant Option Closing
Date, as the case may be. The certificates representing the Firm Shares and the
Option Shares, if any, shall be made available to the Representative at such
offices or such other place as the Representative may designate for inspection,
checking and packaging no later than 9:30 a.m. Los Angeles time on the last
business day prior to the Closing Date or the relevant Option Closing Date, as
the case may be. If settlement for the Option Shares occurs after the Closing
Date, the obligation of the Underwriters to purchase the Option Shares shall be
conditioned upon receipt of, supplemental opinions, certificates and letters
confirming as of such date, the opinions, certificates and letters delivered on
the Closing Date pursuant to Section 8.
(d) On the Closing Date, the Company shall issue and sell
to The Boston Group L.P., individually and not in its capacity as the
Representative, or to its designees, the Representative's Warrants for an
aggregate purchase price of fifty dollars ($50), which warrant shall entitle
the holders thereof to purchase an aggregate of an additional one hundred sixty
thousand (160,000) shares of Common Stock. The Representative's Warrants shall
be issued pursuant to the Representative's Warrant Agreement. Payment for the
Representative's Warrants shall be made on the Closing Date.
5. Public Offering of the Securities. As soon after the
Registration Statement becomes effective as the Representative deems advisable,
the Underwriters shall make a public offering of the Firm Shares and such of
the Option Shares as the Representative may determine at the initial price and
upon the other terms set forth in the Prospectus. The Underwriters may from
time to time increase or decrease the public offering price of the Securities
to such extent as the Representative, in its sole discretion, deems advisable.
The Underwriters may enter into one or more agreements as they, in their sole
discretion, deem advisable with one or more broker-dealers who shall act as
dealers in connection with such public offering.
6. Covenants and Agreements of the Company. The Company
covenants and agrees with each of the Underwriters as follows:
(a) The Company shall use all reasonable efforts to cause
the Registration Statement and any amendments thereto to become effective
simultaneously with or as promptly as practicable after the date of this
Agreement and will not at any time after the earlier of the date of this
Agreement or the effective date of the Registration Statement, file any
amendment to the Registration Statement or Term Sheet or supplement to the
Prospectus or file any document under the Act or the Exchange Act before
termination of the offering of the Securities to the public by the Underwriters
of which the Representative shall not previously have been advised and
furnished with a copy or to which the Representative shall
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<PAGE> 20
have reasonably objected (unless the Company's outside counsel reasonably
determines in a written opinion that such amendment or supplement is required
to be filed pursuant to applicable law) or which is not in compliance with the
Act, the Exchange Act or the Rules and Regulations.
(b) As soon as the Company is advised or obtains
knowledge thereof, the Company will advise the Representative and confirm the
same in writing (i) when the Registration Statement, as amended, becomes
effective, when any post-effective amendment to the Registration Statement
becomes effective and, if the provisions of Rule 430A promulgated under the Act
will be relied upon, when the Prospectus has been filed in accordance with said
Rule 430A, (ii) of the issuance by the Commission or any State or other
regulatory body of any stop order or other order, or of the initiation or the
threat or contemplation of any proceeding, the outcome of which may result in
the suspension of the effectiveness of the Registration Statement or any order
preventing or suspending the use of the Preliminary Prospectus or the
Prospectus, or any amendment or supplement or Term Sheet thereto, or the
institution of any proceedings for that purpose, (iii) of the issuance by the
Commission or any State or other regulatory body of any proceedings for the
suspension of the qualification of any of the Securities for offering or sale
in any jurisdiction or of the initiation or the threat or contemplation of any
proceeding for that purpose, (iv) of the receipt of any comments from the
Commission and (v) of any request by the Commission for any amendment to the
Registration Statement or any amendment or supplement to the Prospectus or for
additional information. If the Commission or any state or other regulatory
body shall enter a stop order or other order suspending the effectiveness of
the Registration Statement or preventing or suspending the use of the
Preliminary Prospectus or the Prospectus, or any amendment or supplement
thereto, or suspend such qualification at any time, the Company will make every
effort to obtain promptly the lifting of such order or suspension.
(c) The Company shall file the Prospectus (in form and
substance satisfactory to the Representative) with the Commission, or transmit
the Prospectus by a means reasonably calculated to result in filing the same
with the Commission, pursuant to Rule 424(b)(1) under the Act (or, if
applicable and if consented to by the Representative, pursuant to Rule
424(b)(4)) within the time period specified in Rule 424(b)(1) (or if
applicable, Rule 424(b)(4)) or shall deliver and shall file with the Commission
a Term Sheet (in form and substance satisfactory to the Representative) in
accordance with Rule 434 under the Act.
(d) The Company will give the Representative notice of
its intention to file or prepare any amendment to the Registration Statement
(including any post-effective amendments) or any amendment or supplement or
Term Sheet to the Prospectus (including any revised prospectus which the
Company proposes for use in connection with the offering of any of the
Securities which differs from the corresponding prospectus on file at the
Commission at the time the Registration Statement becomes effective, whether or
not such revised prospectus is required to be filed pursuant to Rule 424(b)
under the Act), and will furnish the Representative with copies of any such
amendment or supplement or Term Sheet a reasonable amount of time prior to such
proposed filing or use, as the case may be, and will not file any such
amendment or supplement to which the Representative or Munger, Tolles & Olson,
the Underwriters' counsel (the "Underwriters' Counsel"), shall reasonably
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<PAGE> 21
object unless the Company's outside counsel reasonably determines in a written
opinion that such amendment or supplement or Term Sheet is required to be filed
pursuant to applicable law.
(e) The Company shall cooperate with the Representative
and its counsel in any efforts to qualify the Securities for offering and sale
under the securities or "blue sky" laws of such jurisdictions as the
Representative may reasonably designate to permit the continuance of sales and
dealings therein for as long as may be necessary to complete the distribution,
and shall make such applications, file such documents and furnish such
information as may be required for such purpose; provided, however, the Company
shall not be required to qualify as a foreign corporation or to execute a
general consent to service of process in any such jurisdiction. In each
jurisdiction where such qualification shall be effected, the Company will use
all reasonable efforts to file and make such statements or reports at such
times as are or may be required by the laws of such jurisdiction to continue
such qualification.
(f) During the time when a prospectus is required to be
delivered under the Act, the Company shall comply with all requirements imposed
upon it by the Act and the Exchange Act, as now and hereafter amended, and by
the Rules and Regulations, as from time to time in force, so far as necessary
to permit the continuance of sales of or dealings in the Securities in
accordance with the provisions hereof and the Prospectus, or any amendments or
supplements thereto. If at any time when a prospectus relating to the
Securities is required to be delivered under the Act, any event shall have
occurred as a result of which, in the opinion of the Company or counsel for the
Company or the Representative or the Underwriters' Counsel, the Prospectus, as
then amended or supplemented, would include an untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances in
which they were made, not misleading, or if it is necessary at any time to
amend or supplement the Prospectus to comply with the Act, the Company will
promptly notify the Representative and prepare and file, at the Company's
expense, with the Commission an appropriate amendment or supplement to the
Registration Statement or an amendment or supplement to the Prospectus which
will correct such statement or omission, or effect such compliance, each such
amendment or supplement to be reasonably satisfactory to the Representative and
the Underwriters' Counsel, and the Company will furnish to the Underwriters
copies of such amendment or supplement as soon as available and in such
quantities as the Underwriters may request.
(g) As soon as practicable, but in any event not later
than forty-five (45) days after the end of the twelve (12) month period
beginning after the effective date of the Registration Statement, the Company
shall make generally available to its security holders, in the manner specified
in Rule 158(b) under the Act, and to the Representative, an earnings statement
which will comply with the provisions of Section 11(a) of the Act and Rule
158(a) promulgated under the Act.
(h) During the five (5) year period commencing on the
date hereof, so long as the Company has securities which are registered under
the Act or the Exchange Act or otherwise publicly tradeable and Common Stock
continues to be outstanding, the Company,
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<PAGE> 22
at its expense, will furnish to its stockholders, as soon as practicable,
annual reports (including financial statements audited by independent certified
public accountants) and unaudited quarterly reports for each of the first three
(3) fiscal quarters of the Company (such reports, whether or not the Company is
then subject to the periodic reporting requirements of the Exchange Act, are to
be in conformity with the requirements of the Exchange Act) and will deliver to
the Representative:
(i) concurrently with furnishing such quarterly
reports to its stockholders, balance sheets, statements of operations and cash
flow of the Company for such quarter and any year to date period in the form
furnished to the Company's stockholders and certified by the Company's
principal financial or accounting officer;
(ii) concurrently with furnishing such annual
reports to its stockholders, a balance sheet of the Company as at the end of
the preceding fiscal year, together with statements of operations,
stockholders' equity and cash flows of the Company for such fiscal year,
accompanied by a copy of the report thereon of independent certified public
accountants;
(iii) as soon as they are available, copies of all reports (financial or
other) mailed to stockholders;
(iv) as soon as they are available, copies of all
reports and financial statements furnished to or filed with the Commission, the
NASD, the NMS or any securities exchange;
(v) as soon as they are available, all press
releases, material news items or articles of interest to the financial
community in respect of the Company or its affairs which are released or
prepared by or on behalf of the Company; and
(vi) any additional information of a public nature
concerning the Company or its businesses which the Representative may request.
During such five (5) year period, if the Company has active
subsidiaries or is a partner or member in any venture or limited liability
company, the foregoing financial statements will be on a consolidated basis to
the extent that the accounts of the Company and its subsidiaries (including any
venture or company of which it is a partner or member) are consolidated, and
will be accompanied by similar financial statements for any significant
subsidiary (as defined in the Rules and Regulations) which is not so
consolidated.
(i) The Company will maintain a transfer agent and, if
necessary under the jurisdiction of incorporation of the Company, a registrar
(which may be the same entity as the transfer agent) for the Common Stock.
(j) The Company will furnish to the Representative and
the Underwriters, without charge and at such place as the Representative may
designate, copies of each Preliminary Prospectus, the Registration Statement
and any pre-effective or post-effective amendments thereto (two of which will
be signed and will include all financial statements and
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<PAGE> 23
exhibits), the Prospectus, and all amendments and supplements thereto,
including any prospectus prepared after the effective date of the Registration
Statement and any Term Sheet, in each case as soon as available and in such
quantities as the Representative may request.
(k) The Company agrees that, for a period of one hundred
eighty (180) days commencing with the effective date of the Registration
Statement, except as contemplated hereby, it shall not, without the prior
written consent of the Representative, issue, sell, grant an option for the
sale of, assign, transfer, pledge, distribute or otherwise dispose of, directly
or indirectly, or agree or offer to do any of the foregoing, any shares of
Common Stock or any option, warrant or other contract right or security
convertible, directly or indirectly, into shares of Common Stock, except for
shares issuable upon the exercise of issued and outstanding options and the
issuance of options to any newly hired officer, director or employee.
(l) Neither the Company nor any of its officers,
directors, stockholders or affiliates (within the meaning of the Rules and
Regulations) will take, directly or indirectly, any action designed to
illegally stabilize or manipulate the price of any securities of the Company or
which might be expected to cause or result in, under the Exchange Act or
otherwise, the illegal stabilization or manipulation of the price of any
security of the Company.
(m) The Company shall apply the net proceeds from the
sale of the Securities offered to the public substantially in the manner set
forth under the caption "Use of Proceeds" in the Prospectus and will file any
and all required Form SRs in a timely manner. No portion of the net proceeds
will be used, directly or indirectly, to acquire any securities issued by the
Company.
(n) The Company shall timely file all registrations,
reports, forms or other documents as may be required (including, without
limitation, any Form SR required by Rule 463 under the Act) from time to time
under the Act, the Exchange Act and the Rules and Regulations, all such
registrations, reports, forms and other documents shall comply as to form and
substance with the applicable requirements under the Act, the Exchange Act and
the Rules and Regulations. The Company shall promptly provide to the
Representative and, upon request, the Underwriters copies of such
registrations, regulations, reports, forms or other documents.
(o) The Company shall furnish to the Representative as
early as practicable but in no event later than two (2) full business days
prior to the Closing Date and each Option Closing Date, a copy of the latest
available preliminary unaudited interim financial statements of the Company
(which in no event shall be as of a date more than forty-five (45) days prior
to the date hereof, the Closing Date or the relevant Option Closing Date, as
the case may be) which have been read by the Company's independent certified
public accountants, as stated in their letters to be furnished pursuant to
Sections 8(i) and 8(j) hereof.
(p) The Company shall cause the Securities to be quoted
on the NNM and for a period of five (5) years from the date hereof, the Company
shall maintain the
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<PAGE> 24
appropriate NNM or stock exchange listing of the Securities so long as the
Company continues to have securities registered under the Act or the Exchange
Act or otherwise publicly tradeable and such securities continue to be
outstanding and shall comply with all registration, filing, reporting and other
requirements of the NNM, which may from time to time be applicable to the
Company.
(q) For a period of five (5) years from the Closing Date,
the Company shall furnish or cause to be furnished to the Representative, upon
any and all reasonable requests of the Representative and at the Company's sole
expense, (i) daily consolidated transfer sheets relating to the Common Stock
and (ii) a list of holders of all of the Company's securities.
(r) For a period of five (5) years from the Closing Date,
so long as the Company continues to have securities registered under the Act or
the Exchange Act or otherwise publicly tradeable and Common Stock continues to
be outstanding, the Company shall, at the Company's sole expense, (i) provide
the Representative, upon any and all reasonable requests of the Representative,
with a "blue sky trading survey" for secondary sales of the Company's
securities prepared by counsel to the Company, and (ii) take all necessary and
appropriate actions to further qualify the Company's securities in all
jurisdictions of the United States in order to permit secondary sales of such
securities pursuant to the securities or "blue sky" laws of those
jurisdictions, provided, however, that the Company shall not be required to
qualify as a foreign corporation or to execute a general consent to service of
process in any jurisdiction. In the event that the Company does not comply
with the provisions of this Section 6(r), the Company authorizes the
Underwriters' Counsel to take all necessary and appropriate actions to comply
with the provisions of this Section 6(r), at the Company's sole expense payable
in advance, provided that in no event shall the Company be obligated for
expenses in excess of Ten Thousand Dollars ($10,000) per year.
(s) As soon as practicable, but in no event more than one
hundred twenty (120) days after the effective date of the Registration
Statement, the Company shall take all necessary and appropriate actions to be
included in Standard & Poor's Corporation Manual and Moody's Investors
Services, Inc. Manual and to continue such inclusion for a period of not less
than seven (7) years or so long as the Company has securities which are
registered under the Act or the Exchange Act or otherwise publicly tradeable
and Common Stock continues to be outstanding.
(t) The Company hereby agrees that it will not, for a
period of twenty-four (24) months commencing with the effective date of the
Registration Statement, without the Representative's written approval,
provided, that no written approval shall be required for any of the following
matters as provided in and pursuant to the Incentive Plans as in effect as of
the date of this Agreement and as described in the Registration Statement or if
approval of a majority of the independent members of the Board of Directors has
been obtained, (i) adopt, propose to adopt or otherwise permit to exist any
employee, officer, director, consultant or compensation plan, agreement,
understanding or arrangement permitting the grant, issue, sale or entry into
any agreement, understanding or arrangement to grant, issue or sell any option,
warrant or other contract right (x) at an exercise price that is less than the
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<PAGE> 25
greater of the initial public offering price of the Securities as set forth
herein or the fair market value per share of Common Stock on the date of grant
or sale or (y) to any of its executive officers or directors or to any holder
of five percent (5%) or more of the Common Stock or any holder of five percent
(5%) or more of the Common Stock as the result of the exercise or conversion of
equivalent securities, including, without limitation, options, warrants or
other contract rights or securities convertible, directly or indirectly, into
shares of Common Stock; (ii) permit the maximum number of shares of Common
Stock or other securities of the Company purchasable at any time pursuant to
options, warrants or other contract rights or securities convertible, directly
or indirectly, into shares of Common Stock to exceed fifteen percent (15%) of
the outstanding shares of Common Stock; (iii) permit the payment for such
securities, including, without limitation, upon the exercise of any option,
warrant or other contract right upon the conversion of any security
convertible, directly or indirectly, into shares of Common Stock, with any form
of consideration other than cash ; or (iv) permit the existence of stock
appreciation rights, phantom options or similar arrangements. The provisions
of this Section 6(t) shall not apply to grants, issuances or sales to, or
agreements with, the Underwriters or you, individually and not in your capacity
as the Representative.
(u) Until the completion of the distribution (as such
term would be applied under Rule 10b-6 promulgated under the Exchange Act) of
the Firm Shares and, if applicable, the Option Shares, to the public, the
Company shall not, without the prior written consent of the Representative,
issue, directly or indirectly, any press release or other communication or hold
any press conference with respect to the Company or its activities or the
offering contemplated hereby, other than trade releases issued in the ordinary
course of the Company's business consistent with past practices with respect to
the Company's operations or except as specifically required by law as advised
to the Company by its outside counsel.
(v) Prior to the earlier of (i) the date which is seven
(7) years from the date hereof and (ii) the date of the completion of the sale
to the public of all of the Representative's Shares, the Company will not take
any action or actions which may prevent or disqualify the Company's use of Form
S-1 or, commencing one year from the date hereof, Form S-3 (or other
appropriate form) for the registration under the Act of the Representative's
Shares.
(w) For a period of twenty-four (24) months after the
effective date of the Registration Statement, the Company shall not, without
the written consent of the Representative, restate, amend, modify or otherwise
alter any term of any written employment, consulting or similar agreement
entered into between the Company and any officer, director or key employee as
of the effective date of the Registration Statement in a manner which is more
favorable to such officer, director or key employee, provided, that no written
approval shall be required for any of the foregoing matters if approval of a
majority of the independent members of the Board of Directors has been
obtained. For a period of twenty-four (24) months from the effective date of
the Registration Statement, the Company shall not enter into a written
employment, consulting or similar agreement with any officer, director or key
employee with whom the Company has entered into a written employment,
consulting or similar agreement as of the effective date of the Registration
Statement other
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<PAGE> 26
than the renewal of such agreement on terms which are no more favorable to such
officer, director or key employee unless agreed upon in writing by the
Representative, provided, that no written approval shall be required for any of
the foregoing matters if approval of a majority of the independent members of
the Board of Directors has been obtained..
(x) For a period of seven (7) years from the effective
date of the Registration Statement, the Company and all of its subsidiaries
shall obtain and maintain insurance policies, including, without limitation,
general liability, property, and personal liability insurance, and surety bonds
which insure such entities, their employees and such other persons to whom such
entities may become liable against such losses and risks generally insured
against by comparable businesses.
(y) For a period of five (5) years from the date hereof,
the Company will retain BDO Seidman, LLP (or such other nationally-recognized
accounting firm qualified to practice in front of the Commission) as its
independent certified public accountants and, during such period, the Company
will promptly submit to the Representative copies of all accountant's
management reports, Company representation letters and similar correspondence
between the Company's accountants and the Company.
(z) For a period of two (2) years after the effective
date of the Registration Statement, the Company shall provide you with copies
of the minutes of each meeting of its board of directors and any committees
thereof or any written consents signed by the board of directors or any
committee thereof along with any attachments thereto within a reasonable time
of the holding of any meeting or the entering into of such consent.
(aa) The Company will cause its transfer agent to mark an
appropriate legend on the face of the stock certificates representing all of
the securities subject to Lock-Up Agreements and to place "stop transfer"
orders on the Company's stock ledgers.
(ab) The Company shall at all times following the Closing
Date have reserved and available for issuance a sufficient number of shares of
Common Stock to be issued upon exercise of the Representative's Warrants.
(ac) When the Registration Statement becomes effective and
at all times subsequent thereto up to and including the Closing Date and each
Option Closing Date, if any, and during such other periods as a prospectus may
be required to be delivered in connection with sales by any Underwriter or a
dealer, the Registration Statement and the Prospectus will contain all
statements which are required to be stated therein in accordance with the Act
and the Rules and Regulations, and will comply with the requirements of the Act
and the Rules and Regulations, and at and through such dates, neither the
Registration Statement, the Prospectus nor any amendment thereof or supplement
thereto will contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which they were made, not
misleading.
The Company confirms as of the date hereof that it is in
compliance with all provisions of Section 1 of Laws of Florida, Chapter 92-198,
An Act Relating to Disclosure
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of Doing Business with Cuba, and the Company further agrees that if it
commences engaging in business with the government of Cuba or with any person
or affiliate located in Cuba after the date the Registration Statement becomes
or has become effective with the Securities and Exchange Commission or with the
Florida Department of Banking and Finance (the "Department"), whichever date is
later, or if the information reported in the Prospectus, if any, concerning the
Company's business with Cuba or with any person or affiliate located in Cuba
changes in any material way, the Company will provide the Department notice of
such business or change, as appropriate, in a form acceptable to the
Department.
7. Payment of Expenses.
(a) The Company hereby agrees to pay (such payment to be
made on the Closing Date as part of the closing on such date and on each Option
Closing Date as part of the closing on such date (to the extent not paid on the
Closing Date or a previous Option Closing Date)) all out-of-pocket expenses and
fees (other than fees of the Underwriters' Counsel not specifically provided
for in this Section 7) incident to the issuance, offer, sale and delivery of
the Securities and the performance of the obligations of the Company under this
Agreement and the Representative's Warrant Agreement, including, without
limitation, (i) the fees and expenses of accountants and counsel for the
Company, (ii) all costs and expenses incurred in connection with the
preparation, duplication, printing (including mailing and handling charges),
filing, delivery and mailing (including the payment of postage with respect
thereto) of each Preliminary Prospectus, the Registration Statement and the
Prospectus and any amendments and supplements or Term Sheets thereto and the
printing, mailing (including the payment of postage with respect thereto) and
delivery of this Agreement, all other underwriting documents (including
Agreements Among Underwriters, Underwriter's Questionnaires, Underwriter's
Powers of Attorneys and Selected Dealer Agreements), the Representative's
Warrant Agreement and agreements with selected dealers, and related documents,
including the cost of all copies thereof and of each Preliminary Prospectus and
of the Prospectus and any amendments thereof or supplements thereto supplied to
each of the Underwriters and such dealers as the Underwriters may request, in
such quantities as the Underwriters may reasonably request, (iii) all costs and
expenses (including issue and transfer taxes) incurred in connection with the
printing, engraving, issuance, sale and delivery of the Securities, including
(x) the purchase by each of the Underwriters, severally and not jointly, of the
number of the Securities from the Company and the Selling Stockholders set
forth opposite its name on Schedules I and II to this Agreement, (y) the
consummation by the Company of any of its obligations under this Agreement and
the Representative's Warrant Agreement and (z) the resale of the Securities by
each of the Underwriters in connection with the distribution contemplated
hereby, (iv) all costs and expenses incurred in connection with the
qualification of the Securities under state securities or "blue sky" laws and
the determination of the status of such securities under legal investment laws,
including the costs of printing and mailing the "Preliminary Blue Sky
Memorandum," the "Supplemental Blue Sky Memorandum" and the "Legal Investments
Survey," if any, and fees of Munger, Tolles & Olson in connection with such
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determinations, filings, documents and qualifications of the Securities, (v)
the fees, costs and expenses incurred in connection with any required filing
with the NASD and obtaining a determination from the NASD with respect to the
fairness and reasonableness of the underwriting terms and arrangements and
disbursements and fees of Munger, Tolles & Olson in connection with such
determinations, filings, documents and qualifications of the Securities, (vi)
all advertising costs and expenses, including costs and expenses in connection
with "road shows," information meetings and presentations, bound volumes and
prospectus memorabilia and "tombstone" advertisements, (vii) all costs and
expenses incurred in connection with due diligence investigations by an
independent third party, subject to the Company's prior approval which shall
not be unreasonably withheld, including the fees of any independent counsel
(other than Munger, Tolles & Olson) or consultants, (viii) the fees and
expenses of a transfer agent and registrar for the Securities, (ix) the fees
payable to the Commission and (x) the fees and expenses incurred in connection
with the listing of the Securities on the NNM and any other exchange.
(b) If this Agreement is terminated by the Underwriters
in accordance with the provisions of Section 8 hereof or if the transactions
contemplated hereby are not consummated by the Company for any reason, the
Company shall reimburse and indemnify the Underwriters for all of their
accountable expenses, including, without limitation, all of the fees and
disbursements of Underwriters' Counsel (including, without limitation, the fees
of the Underwriters' Counsel specifically provided for herein).
(c) The Company and the Selling Shareholders further
agree that, in addition to the expenses payable pursuant to Section 7(a)
hereof, they will pay to you, individually and not in your capacity as the
Representative, on the Closing Date by certified or bank cashier's check, or,
at your election, by deduction from the proceeds of the offering of the Firm
Shares, a non-accountable expense allowance (the "Firm Share Allowance") equal
to the lesser of (i) two (2%) of the aggregate offering proceeds from the sale
of the Firm Shares and (ii) five hundred thousand dollars ($500,000). In the
event the Underwriters elect to exercise all or any part of the over-allotment
option described in Section 4(b) hereof and so long as the Firm Share Allowance
plus any additional Option Share Allowance (as defined herein) previously paid
for the prior sale of any Option Shares is less than five hundred thousand
dollars ($500,000), the Company agrees to pay to you, individually and not in
your capacity as the Representative, on each Option Closing Date, by certified
or bank cashier's check, a non-accountable expense allowance (the "Option
Share Allowance") equal to the lesser of (x) two percent (2%) of the aggregate
offering proceeds from the sale of such Option Shares and (y) five hundred
thousand dollars ($500,000) minus the Firm Share Allowance and any Option Share
Allowance previously paid for the prior sale of any Option Shares.
8. Conditions of the Underwriters' Obligations. The obligations
of each of the Underwriters hereunder shall be subject to the continuing
accuracy of the representations and warranties of the Company, the Selling
Stockholders and the Overallotment Sellers herein as of the date hereof and as
of the Closing Date and each Option Closing Date, if any, as if they had been
made on and as of the Closing Date, except with respect to the Overallotment
Sellers, or each Option Closing Date, except with respect to the Selling
Stockholders, as the case may be; the accuracy on and as of the Closing Date
and each Option Closing Date, if any, of the statements of officers of the
Company made and certificates of officers of the Company and/or the Selling
Stockholders and/or the Overallotment Sellers delivered pursuant to the
provisions hereof; and the performance by the Company, the Selling Stockholders
and the Overallotment Sellers on and as of the Closing Date and each Option
Closing Date, if
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any, of all of its covenants and obligations hereunder which are possible to
perform on and as of such date and to the following further conditions:
(a) The Registration Statement shall have become
effective not later than 5:00 p.m., New York time, on the date of this
Agreement or such later date and time as shall be consented to in writing by
the Representative, and, at the Closing Date and each Option Closing Date, if
any, no stop order suspending the effectiveness of the Registration Statement
or any part thereof shall have been issued and no proceedings for that purpose
shall have been initiated or shall be pending, threatened or contemplated by
the Commission or any State or other regulatory body and any request on the
part of the Commission or any State or other regulatory body for additional
information shall have been complied with to the reasonable satisfaction of the
Representative and the Underwriters' Counsel. If the Company has elected to
rely upon Rule 430A under the Act, the price of the Securities and any
price-related information previously omitted from the effective Registration
Statement pursuant to such Rule 430A shall have been transmitted to the
Commission for filing pursuant to Rule 424(b) under the Act within the
prescribed time period or shall have been delivered and shall have been filed
with the Commission as required by Rule 434 under the Act, as applicable, and,
prior to the Closing Date, the Company shall have provided evidence
satisfactory to the Representative of such timely filing, or a post-effective
amendment providing such information shall have been promptly filed and
declared effective in accordance with the requirements of Rule 430A under the
Act. Neither the Registration Statement nor the Prospectus nor any amendment
thereto or supplement thereof (including a Term Sheet) shall have been filed to
which the Representative shall have reasonably objected after it shall have had
the chance to review such amendment or supplement unless the Company's outside
counsel reasonably determines in a written opinion that such amendment or
supplement is required to be filed pursuant to applicable law.
(b) No Underwriter shall have advised the Company that
the Registration Statement, or any amendment thereto, contains an untrue
statement of fact which, in the Representative's opinion, is material, or omits
to state a fact which, in the Representative's opinion, is material and is
required to be stated therein or is necessary to make the statements therein,
in light of the circumstances in which they were made, not misleading, or that
the Prospectus, or any amendment or supplement (including any Term Sheet)
thereto, contains an untrue statement of fact which, in the Representative's
opinion, is material, or omits to state a fact which, in the Representative's
opinion, is material and is required to be stated therein or is necessary to
make the statements therein, in light of the circumstances in which they were
made, not misleading.
(c) On or prior to the Closing Date, the Representative
shall have received from the Underwriters' Counsel such opinion or opinions
with respect to the issuance and sale of the Securities, the Registration
Statement, the Prospectus and such other related matters as the Representative
may reasonably request and the Underwriters' Counsel shall have received such
papers and information as it may request in order to enable it to pass upon
such matters.
(d) At the Closing Date, the Representative shall have
received the favorable opinion of Gibson, Dunn & Crutcher LLP, counsel to the
Company, dated the
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Closing Date, addressed to the Representative, in form and substance
satisfactory to the Underwriters' Counsel and subject to customary
qualifications and conditions, with respect to the matters set forth in
Schedule III attached hereto and incorporated herein by this reference.
In rendering such opinion, such counsel may rely (A) as to
matters involving the application of laws other than the laws of the United
States and jurisdictions in which it is admitted, to the extent such counsel
deems proper and to the extent specified in such opinion, if at all, upon an
opinion or opinions (in form and substance satisfactory to the Underwriters'
Counsel) of other counsel, acceptable to the Underwriters' Counsel, familiar
with the applicable laws; and (B) as to matters of fact, to the extent it deems
proper, on certificates and written statements of responsible officers of the
Company and certificates or other written statement of officers of departments
of various jurisdictions having custody of documents respecting the corporate
existence or good standing of the Company, provided that copies of any such
opinions, statements or certificates shall be delivered to the Representative
and the Underwriters' Counsel. The opinion of such counsel for the Company
shall state that the opinion of any such other counsel is in form satisfactory
to such counsel and that the Underwriters and the Underwriters' Counsel are
justified in relying thereon.
At each Option Closing Date, if any, the Representative shall
have received the favorable opinion of Gibson, Dunn & Crutcher LLP, counsel to
the Company, dated such Option Closing Date, addressed to the Representative
and in form and substance satisfactory to Underwriters' Counsel confirming as
of such Option Closing Date the statements made by Gibson, Dunn & Crutcher LLP
in its opinion delivered on the Closing Date.
(e) On or prior to the Closing Date and each Option
Closing Date, if any, the Underwriters' Counsel shall have been furnished with
such documents, certificates and opinions as it may reasonably require for the
purpose of enabling it to review or pass upon the matters referred to in
Section 8(c) hereof, or in order to evidence the accuracy, completeness or
satisfaction of any of the representations, warranties or conditions of the
Company herein contained.
(f) Prior to the Closing Date and each Option Closing
Date, if any, (i) there shall have been no material adverse change or
development involving a prospective material adverse change in the condition
(financial or otherwise), earnings, business affairs, position, prospects,
stockholders' equity, operations, properties, businesses or results of
operations of the Company from the latest dates as of which such matters are
set forth in the Registration Statement and the Prospectus; (ii) there shall
have been no transaction, not in the ordinary course of business and consistent
with past practices, entered into by the Company, from the latest date as of
which the financial condition of the Company is set forth in the Registration
Statement and the Prospectus, which may in any way be materially adverse to the
Company; (iii) the Company shall not be in default, and no event shall have
occurred which, with notice, lapse of time or both, would constitute a default,
under any provision of any agreement, instrument or other document relating to
any outstanding material indebtedness; (iv) the Company shall not have issued
any securities (other than the Securities or pursuant to the Incentive Plans)
or declared or paid any dividend or made any distribution in respect of its
capital stock of any class, and there shall not have been any
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<PAGE> 31
change in the capital stock except as described in the Prospectus, or any
change in the debt (long- or short-term) or liabilities or obligations
(contingent or otherwise), of the Company except as incurred in the ordinary
course of business; (v) no material amount of the property or assets (tangible
or intangible) of the Company shall have been pledged, mortgaged or otherwise
encumbered; and (vi) no action, suit, proceeding, inquiry, arbitration,
investigation, litigation or governmental or other proceeding (including,
without limitation, those pertaining to environmental, health or similar
matters) shall be pending, contemplated or threatened (or circumstances giving
rise to same) to which the Company is subject or to which any property or
assets (tangible or intangible) of the Company are subject wherein an
unfavorable decision, ruling or finding may be reasonably expected to have a
material adverse effect on the condition (financial or otherwise), earnings,
business affairs, position, prospects, stockholders' equity, operations,
properties, businesses or results of operations of the Company taken as a
whole, except as set forth in the Registration Statement and Prospectus and
except for debts, liabilities and obligations incurred in the normal course of
business consistent with past practices.
(g) At the Closing Date the Representative shall have
received (i) a certificate of the Company, signed by the principal executive
officer, the chief financial or chief accounting officer of the Company, and
(ii) a certificate of the Selling Stockholders. At each Option Closing Date,
if any, the Representative shall have received (i) a certificate of the
Company, signed by the principal executive officer, the chief financial or
chief accounting officer of the Company, and (ii) a certificate of each
Overallotment Seller. Each such certificate shall be dated the Closing Date or
the such Option Closing Date, as the case may be, to the effect that the
person(s) executing the certificate has carefully examined the Registration
Statement, the Prospectus and this Agreement, and that:
(A) the representations and warranties of the
Company, the Selling Stockholders or the Overallotment Sellers, as the case may
be, in this Agreement are true and correct, as if made on and as of the Closing
Date or such Option Closing Date, and that the Company, the Selling
Stockholders or the Overallotment Sellers, as the case may be, has complied
with all agreements and covenants and satisfied all conditions contained in
this Agreement on its, their or his part to be performed or satisfied at or
prior to the Closing Date or such Option Closing Date, as the case may be;
(B) no stop order suspending the effectiveness of
the Registration Statement or any part thereof has been issued, and no
proceedings for that purpose have been initiated or are pending, contemplated
or threatened;
(C) the Registration Statement, the Prospectus
and each amendment and supplement thereto, if any, contain all statements and
information required to be included therein, and neither the Registration
Statement nor any amendment thereto, at the time such Registration Statement or
amendment became effective and as of the date of such certificate included any
untrue statement of a material fact or omitted to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading and neither any Prospectus nor any supplement thereto, at the date
of such Prospectus or supplement thereto and at the date of such certificate,
included any untrue statement of a material fact or
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omitted to state any material fact necessary to make the statements therein, in
light of the circumstances in which they were made, not misleading; and
(D) subsequent to the latest respective dates as
of which information is given in the Registration Statement and the Prospectus,
(A) the Company has not incurred any liabilities or obligations, direct,
indirect or contingent, other than in the ordinary course of business; (B) the
Company has not paid or declared any dividends or other distributions on its
capital stock or other ownership interests; (C) the Company has not entered
into any transactions not in the ordinary course of business; (D) there has not
been any change in the capital stock, long-term debt or short-term debt (other
than any increase in short-term debt in the ordinary course of business) of the
Company; (E) other than ordinary wear and tear, the Company has not sustained
any material loss or damage to its property or assets (tangible and
intangible), whether or not insured; (F) there is no litigation which is
pending, threatened or contemplated (or circumstances giving rise to same)
against the Company which is required to be set forth in an amended or
supplemented Prospectus which has not been so set forth; and (G) there has
occurred no event required to be set forth in an amended or supplemented
Prospectus which has not been so set forth.
References to the Registration Statement and the Prospectus in this Section
8(g) are to such documents as amended and supplemented at the date of such
certificate.
(h) By the effective date of the Registration Statement,
the Representative shall have received clearance from the NASD as to the amount
of compensation allowable or payable to the Underwriters, in the amount as
described in the Registration Statement.
(i) At or prior to the time this Agreement is executed,
the Representative shall have received a letter, dated such date, addressed to
the Representative and in form and substance satisfactory in all respects to
the Representative from BDO Seidman, LLP:
(i) confirming that it is an accounting firm of
independent certified public accountants with respect to the Company within the
meaning of the Act and the Rules and Regulations;
(ii) stating its opinion that the financial
statements and schedules of the Company included in the Registration Statement
comply as to form in all material respects with the applicable accounting
requirements of the Act and the Rules and Regulations and that each of the
Underwriters may rely upon the opinion of BDO Seidman, LLP with respect to such
financial statements and schedules included in the Registration Statement;
(iii) stating that, on the basis of a limited
review which included a reading of the latest available unaudited interim
financial statements of the Company (with an indication of the date of the
latest available unaudited interim financial statements), a reading of the
latest available minutes of the stockholders and the board of directors,
including any committees of the board of directors, of the Company,
consultations with officers and other employees of the Company responsible for
financial and accounting matters and other specified procedures and inquiries,
nothing has come to its attention which would lead it to
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<PAGE> 33
believe that (A) the unaudited financial statements and schedules of the
Company included in the Registration Statement do not comply as to form in all
material respects with the applicable accounting requirements of the Act and
the Rules and Regulations or are not fairly presented in conformity with
generally accepted accounting principles applied on a basis substantially
consistent with that of the audited financial statements of the Company
included in the Registration Statement or (B) at a specified date not more than
five (5) days prior to the effective date of the Registration Statement, there
has been any change in the capital stock, short-term debt or long-term debt of
the Company, or any decrease in the stockholders' equity or net current assets
or net assets of the Company as compared with amounts shown in the January 31,
1996 balance sheet included in the Registration Statement or, if there was any
change or decrease, setting forth the amount of such change or decrease, or (C)
during the period from February 1, 1996 to a specified date not more than five
(5) days prior to the effective date of the Registration Statement, there was
any decrease in revenues, net income or net earnings per share of Common Stock,
in each case as compared with the corresponding period beginning February 1,
1996, or, if there was any such decrease, setting forth the amount of such
decrease;
(iv) stating that it has compared specific dollar
amounts, numbers of shares, percentages, statements and other financial
information pertaining to the Company set forth in the Registration Statement,
in each case to the extent that such amounts, numbers, percentages, statements
and information may be derived from the general accounting records, including
work sheets or analysis, of the Company with the results obtained from the
application of specific readings, inquiries and other appropriate procedures
(which procedures do not constitute an examination in accordance with generally
accepted auditing standards) set forth in the letter and found them to be in
agreement;
(v) stating it has read the unaudited financial
statements referred to in Section 6(o) hereof; and
(vi) statements as to such other matters as the
Representative may reasonably request.
(j) At the Closing Date and each Option Closing Date, if
any, the Representative shall have received from BDO Seidman, LLP a letter,
dated as of the Closing Date or such Option Closing Date, as the case may be,
to the effect that (i) it reaffirms that statements made in the letter
furnished pursuant to Section 8(i) hereof, (ii) if the Company has elected to
rely on Rule 430A under the Act or a Term Sheet under Rule 434, to the further
effect that it has carried out procedures as specified in clause (iv) of such
Section 8(i) with respect to certain amounts, numbers, percentages, statements
and other financial information as specified by the Representative and deemed
to be a part of the Registration Statement pursuant to Rule 430A(b) or 434 and
has found such amounts, numbers, percentages, statements and other financial
information to be in agreement with the documents specified in such clause
(iv); and (iii) it has read the unaudited financial statements referred to in
Section 6(o) hereof.
(k) On the Closing Date and each Option Closing Date, if
any, there shall have been duly tendered to the Representative the appropriate
number of Securities.
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(l) No order suspending the sale of the shares in any
jurisdiction designated by the Representative pursuant to Section 6(e) hereof
shall have been issued on either the Closing Date or any Option Closing Date,
and no proceedings for that purpose shall have been initiated or shall be
pending, contemplated or threatened.
(m) On or before the Closing Date, the Company shall have
executed and delivered to you, individually and not in your capacity as the
Representative, the Representative's Warrant Agreement, substantially in the
form filed as Exhibit 4.3 to the Registration Statement. The executed version
of the Representative's Warrant Agreement shall be satisfactory to you.
(n) On or before the effective date of the Registration
Statement, the Securities shall have been duly approved for quotation on the
NNM.
(o) On or before the effective date of the Registration
Statement, the Company shall provide the Representative with true copies of
valid, duly executed, legally binding and enforceable Lock-Up Agreements. On
or before the Closing Date, the Company shall deliver instructions to its
transfer agent authorizing such transfer agent to place appropriate legends on
the certificates representing the securities subject to the Lock-Up Agreements
and to place appropriate stop transfer orders on the Company's ledgers.
(p) The Company shall provide the Representative with
such additional documents and certificates as the Representative may reasonably
request.
If any condition to the Underwriters' obligations hereunder to be
fulfilled prior to or at the Closing Date or at any Option Closing Date, as the
case may be, is not so fulfilled, the Underwriters may terminate this
Agreement, without liability to any of the Underwriters, or, if the
Representative so elects in its sole discretion, it may waive any such
conditions which have not been fulfilled or extend the time for their
fulfillment.
9. Indemnification and Contribution.
(a) The Company, the Selling Stockholders and the
Overallotment Sellers jointly and severally agree to indemnify and hold
harmless each Underwriter (for purposes of this Section 9, "Underwriters" shall
include the officers, directors, partners, employees, agents and counsel of
each Underwriter), and each person, if any, who controls any of the
Underwriters, as applicable ("controlling person"), within the meaning of
Section 15 of the Act or Section 20(a) of the Exchange Act, from and against
any and all losses, claims, damages, expenses (including, without limitation,
reasonable attorneys, fees and expenses) or liabilities and all actions, suits,
proceedings, inquiries, arbitrations, investigations, litigation or
governmental or other proceedings (in this Section 9, collectively, "actions")
in respect thereof, whatsoever (including, without limitation, any and all
expenses whatsoever reasonably incurred in investigating, preparing or
defending against any action, commenced or threatened, or any claim
whatsoever), as such are incurred, to which any Underwriter or such controlling
person may become subject under the Act, the Exchange Act or any other statute
or at common law or otherwise, arising out of or based upon any untrue
statement or alleged untrue statement of a material fact contained (i) in any
Preliminary Prospectus, the
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Registration Statement or the Prospectus (as from time to time amended and
supplemented); (ii) in any post-effective amendment or amendments or any new
registration statement and prospectus in which is included securities of the
Company issued or issuable upon exercise of the Securities; (iii) in any
application or other document or written communication (in this Section 9,
collectively, "application") executed by the Company or based upon written
information furnished by the Company in any jurisdiction in order to qualify
the Securities under the securities or "blue sky" laws thereof or filed with
the Commission, any state securities commission or agency, the NASD or the NNM
or any other securities exchange; or the omission or alleged omission therefrom
of a material fact required to be stated therein or necessary to make the
statements therein not misleading (in light of the circumstances in which they
were made), unless such statement or omission was made in reliance upon and in
conformity with written information furnished to the Company by the
Representative with respect to an Underwriter expressly for use in any
Preliminary Prospectus, the Registration Statement or the Prospectus, or any
amendment thereof or supplement (including any Term Sheet) thereto, or in any
application, as the case may be. In addition to its other obligations under
this Section 9(a), the Company agrees that, as an interim measure during the
pendency of any action arising out of or based upon any untrue statement or
omission, or alleged untrue statement or alleged omission as described in this
Section 9(a), it will reimburse each Underwriter (and, to the extent
applicable, each controlling person), on a monthly basis for all reasonable
legal or other expenses incurred in connection with investigating or defending
any such action, notwithstanding the absence of a judicial determination as to
the propriety and enforceability of the Company's obligations to reimburse each
Underwriter and (and, to the extent applicable, each controlling person), for
such expenses and the possibility that such payments might later be held to
have been improper by a court of competent jurisdiction. To the extent that
any such interim reimbursement is so held to have been improper as to the
Company, each Underwriter (and, to the extent applicable, each controlling
person), shall promptly return it to the Company together with interest
compounded daily, based on the "reference rate" announced from time to time by
Bank of America NTSA (the "Prime Rate"), but in no case more than is allowed by
applicable law. Any such interim reimbursement payments which are not made to
an Underwriter, or a controlling person, as applicable, within thirty (30) days
of a request for reimbursement shall bear interest at the Prime Rate from the
date of such request. In no event, however, shall the liability of the Selling
Stockholders or Overallotment Sellers for indemnification under this Section
9(a), when added to any amounts paid by the Selling Stockholder or
Overallotment Seller under Section 9(d), exceed the lesser of (i) that
proportion of the total of such losses, claims, damages or liabilities
indemnified against equal to the proportion of the total Securities sold
hereunder which is being sold by the Selling Stockholder or Overallotment
Seller, or (ii) the proceeds received by the Selling Stockholders or
Overallotment Sellers from the Underwriters in the offering.
The indemnity agreement in this Section 9(a) shall be in addition to
any liability which the Company, the Selling Stockholders and the Overallotment
Sellers, jointly and severally, may have at common law or otherwise.
(b) Each Underwriter severally, but not jointly, agrees
to indemnify and hold harmless the Company (for purposes of this Section 9(b),
"Company" shall include the officers, directors, partners, employees, agents
and counsel of the Company), the Selling
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<PAGE> 36
Stockholders, the Overallotment Sellers and each other person, if any, who
control the Company, a Selling Stockholder or an Overallotment Seller
("controlling person") within the meaning of the Act, to the same extent as the
foregoing indemnity from the Company to each Underwriter, but only with respect
to statements or omissions, if any, made in any Preliminary Prospectus, the
Registration Statement or the Prospectus or any amendment thereof or supplement
(including any Term Sheet) thereto or in any application made in reliance upon,
and in strict conformity with, written information furnished to the Company by
the Representative with respect to such Underwriter expressly for use in any
Preliminary Prospectus, the Registration Statement or the Prospectus or any
amendment thereof or supplement (including any Term Sheet) thereto or in any
application. The Company acknowledges that the statements with respect to the
Underwriters and the public offering of the Securities set forth under the
headings "Underwriting" and "Risks Factors - Recently Formed Representative May
Be Unable to Complete Offering or Make a Market," and the stabilization legend
in the Prospectus have been furnished by the Representative with respect to the
Underwriters expressly for use therein and constitute the only information
furnished in writing by the Representative with respect to the Underwriters for
inclusion in any Preliminary Prospectus, the Registration Statement or the
Prospectus. In addition to its other obligations under this Section 9(b), each
Underwriter severally, but not jointly, agrees that, as an interim measure
during the pendency of any action arising out of or based upon any untrue
statement or omission, or alleged untrue statement or alleged omission as
described in this Section 9(b), it will reimburse Company and (and, to the
extent applicable, each controlling person) on a monthly basis for all
reasonable legal or other expenses incurred in connection with investigating or
defending any such action, notwithstanding the absence of a judicial
determination as to the propriety and enforceability of such Underwriter's
obligations to reimburse the Company (and, to the extent applicable, each
controlling person) for such expenses and the possibility that such payments
might later be held to have been improper by a court of competent jurisdiction.
To the extent that any such interim reimbursement is so held to have been
improper as to such Underwriter, the Company (and, to the extent applicable,
each controlling person) shall promptly return it to such Underwriter, together
with interest compounded daily, based on the Prime Rate announced from time to
time by Bank of American NTSA, but in no case more than is allowed by
applicable law. Any such interim reimbursement payments which are not made to
the Company within thirty (30) days of a request for reimbursement shall bear
interest at the Prime Rate from the date of such request. Notwithstanding the
provisions of this Section 9(b), no Underwriter shall be required to indemnify
or hold harmless the Company, or any controlling person for, in the aggregate,
any amounts in excess of the underwriting discount applicable to the Securities
purchased by such Underwriter hereunder.
The indemnity agreement in this Section 9(b) shall be in addition to
any liability which each Underwriter severally, but not jointly, may have at
common law or otherwise.
(c) Promptly after receipt by an indemnified party under
this Section 9 of notice of the commencement of any action, such indemnified
party shall notify each party against whom indemnification is to be sought in
writing of the commencement thereof (but the failure to so notify an
indemnifying party shall not relieve it from any liability which it may have
under this Section 9 except to the extent that it has been materially
prejudiced by such failure). In case any such action is brought against any
indemnified party, and it
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notifies an indemnifying party or parties of the commencement thereof, the
indemnifying party or parties shall be entitled to participate therein, and to
the extent it or they may elect by written notice delivered to the indemnified
party or parties promptly after receiving the aforesaid notice from such
indemnified party or parties, to assume the defense thereof with counsel
reasonably satisfactory to such indemnified party. Notwithstanding the
foregoing, an indemnified party shall have the right to employ its own counsel
in any such case, but the fees and expenses of such counsel shall be at the
expense of such indemnified party unless (i) the employment of such counsel
shall have been authorized in writing by the indemnifying party or parties in
connection with the defense of such action at the expense of the indemnifying
party or parties, (ii) the indemnifying party or parties shall not have
employed counsel reasonably satisfactory to such indemnified party to have
charge of the defense of such action within a reasonable time after notice of
commencement of the action or (iii) such indemnified party shall have
reasonably concluded that there may be one or more defenses available to it
which are different from or additional to those available to one or all of the
indemnifying parties (in which case the indemnifying parties shall not have the
right to direct the defense of such action on behalf of the indemnified party
or parties), in any of which events such fees and expenses of one additional
counsel (in addition to appropriate local counsel) shall be borne by the
indemnifying parties. In no event shall the indemnifying parties be liable for
fees and expenses of more than one counsel (in addition to appropriate local
counsel) separate from their own counsel for all indemnified parties in
connection with any one action or separate but similar or related actions in
the same jurisdiction arising out of the same general allegations or
circumstances. Anything in this Section 9 to the contrary notwithstanding, an
indemnifying party shall not be liable for any settlement of any claim or
action effected without its written consent; provided, however, that such
consent may not be unreasonably withheld or delayed.
(d) In order to provide for just and equitable
contribution in any case in which (i) an indemnified party makes a claim for
indemnification pursuant to this Section 9, but it is judicially determined (by
the entry of a final judgment or decree by a court of competent jurisdiction
and the expiration of time to appeal or the denial of the last right of appeal)
that such indemnification may not be enforced in such case notwithstanding the
fact that the express provisions of this Section 9 provide for indemnification
in such case or (ii) contribution under the Act may be required on the part of
any indemnified party, then each indemnifying party shall contribute to the
amount paid as a result of such losses, claims, damages, expenses or
liabilities (or actions in respect thereof) (A) in such proportion as is
appropriate to reflect the relative benefits received by each of the
contributing parties, on the one hand, and the party to be indemnified, on the
other hand, from the offering of the Securities or (B) if the allocation
provided by clause (A) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (A) above but also the relative fault of each of the contributing
parties, on the one hand, and the party to be indemnified, on the other hand,
in connection with the statements or omissions that resulted in such losses,
claims, damages, expenses or liabilities (or actions in respect thereof), as
well as any other relevant equitable considerations. The relative benefits
received by the Company, the Selling Stockholders and the Overallotment
Sellers, on the one hand, and the Underwriters, on the other hand, shall be
deemed to be in the same proportion as the total net proceeds from the offering
of the Securities (before deducting expenses) bear to the total underwriting
discounts received by the Underwriters hereunder, in
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<PAGE> 38
each case as set forth in the table on the cover page of the Prospectus.
Relative fault shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by
the Company, the Selling Stockholders, the Overallotment Sellers or by the
Representative with respect to an Underwriter, and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such untrue statement or omission. The amount paid by an indemnified party as
a result of the losses, claims, damages, expenses or liabilities (or actions in
respect thereof) referred to in the first sentence of this Section 9(d) shall
be deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such action
or claim. Notwithstanding the provisions of this Section 9(d), no Underwriter
shall be required to contribute any amount in excess of the underwriting
discount applicable to the Securities purchased by such Underwriter hereunder.
No person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act and the cases and promulgations thereunder) shall be entitled
to contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this Section 9(d), each person, if any, who
controls the Company, a Selling Stockholder, an Overallotment Seller or an
Underwriter within the meaning of the Act, each officer of the Company who has
signed the Registration Statement and each director of the Company shall have
the same rights to contribution as the Underwriters, or the Company, as the
case may be, subject in each case to the provisions of this Section 9(d). Any
party entitled to contribution will, promptly after receipt of notice of
commencement of any action against such party in respect to which a claim for
contribution may be made against another party or parties under this Section
9(d), notify such party or parties from whom contribution may be sought, but
the omission to so notify such party or parties shall not relieve the party or
parties from whom contribution may be sought from any obligation it or they may
have hereunder or otherwise than under this Section 9(d) except to the extent
it has been materially prejudiced by such failure. The contribution agreement
set forth above shall be in addition to any liabilities which any indemnifying
party may have at common law or otherwise. Notwithstanding anything to the
contrary contained in this Agreement, a Selling Stockholder and/or
Overallotment Seller shall not be required to contribute any amount which when
added to any amounts paid by the Selling Stockholder and/or Overallotment
Seller under Section 9(a), would be in excess of the lesser of (i) that
proportion of the total of such losses, claims, damages or liabilities
indemnified or contributed against equal to the proportion of the total
Securities sold hereunder which is being sold by it, him or her (as the case
may be), or (ii) the proceeds received by it, him, or her (as the case may be)
from the Underwriters in the offering. The Underwriters' obligations in this
Section 9(d) to contribute are several in proportion to their respective
underwriting obligations and not joint.
(e) The indemnity and contribution agreements contained
in this Section 9 and the representations and warranties of the Company and the
Selling Stockholders set forth in this Agreement shall remain operative and in
full force and effect, regardless of (i) any investigation made by or on behalf
of any Underwriter or any person controlling any Underwriter, the Company, its
directors or officers or the Selling Stockholders or any person controlling the
Company, (ii) acceptance of any Securities and payment therefor hereunder, and
(iii) any termination of this Agreement. A successor to any Underwriter or any
person controlling any Underwriter, or to the Company, its directors or
officers, the Selling
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<PAGE> 39
Stockholders, the Overallotment Sellers or any person controlling the Company,
the Selling Stockholders or the Overallotment Sellers, shall be entitled to the
benefits of the indemnity, contribution and reimbursement agreements contained
in this Section 9.
(f) In any proceeding relating to the Registration
Statement, any Preliminary Prospectus, the Prospectus or any amendment or
supplement (including any Term Sheet) thereto, each party against whom
contribution may be sought under this Section 9 hereby consents to the
jurisdiction of any court having jurisdiction over any other contributing
party, agrees that process issuing from such court may be served upon him or it
by any other contributing party and consents to the service of such process and
agrees that any other contributing party may join him or it as an additional
defendant in any such proceeding in which such other contributing party is a
party.
10. Representations, Warranties and Agreements to Survive
Delivery. All representations, warranties, covenants and agreements contained
in this Agreement, or contained in certificates of officers of the Company, the
Selling Stockholders or the Overallotment Sellers delivered pursuant hereto,
shall be deemed to be representations, warranties, covenants and agreements at
the Closing Date and at each Option Closing Date, as the case may be, and such
representations, warranties, covenants and agreements of the Company, the
Selling Stockholders and the Overallotment Sellers and the respective indemnity
and contribution agreements contained in Section 9 hereof, shall remain
operative and in full force and effect regardless of any investigation made by
or on behalf of the Representative, any of the Underwriters or the Company, the
Selling Stockholders or the Overallotment Sellers, and shall survive the
termination of this Agreement and the issuance, sale and delivery of the
Securities to the Underwriters.
11. Effective Date. This Agreement shall become effective at
10:00 a.m., New York City time, on the date hereof, or at such earlier time
after the Registration Statement becomes effective as the Representative, in
its sole discretion, shall release the Securities for sale to the public;
provided, however, that the provisions of Sections 7, 9 and 12 hereof shall at
all times be effective. For purposes of this Section 11, the Securities to be
purchased hereunder shall be deemed to have been so released upon the earlier
of dispatch by the Representative of telegrams or facsimile transmissions to
securities dealers releasing such Securities for offering or the release by the
Representative for publication of the first newspaper advertisement which is
subsequently published relating to the Securities.
12. Termination.
(a) The Representative shall have the right to terminate
this Agreement after it becomes effective, the exercise of which shall be
determined in the Representative's sole discretion, if: (i) any domestic or
international event or act or occurrence has, as determined in the
Representative's sole judgment, disrupted, or in the Representative's sole
judgment will in the immediate future materially disrupt, the financial
markets; or (ii) any material adverse change, as determined in the
Representative's sole judgment, in the financial markets shall have occurred;
or (iii) trading on the New York Stock Exchange, the American Stock Exchange,
the NNM or the over-the-counter market shall have been suspended, or minimum or
maximum prices for trading shall have been fixed, or maximum ranges for
-39-
<PAGE> 40
prices for securities shall have been required on the over-the-counter market
by the NASD or the Commission or any other governmental authority having
jurisdiction; or (iv) the United States shall have become involved in a war or
in hostilities, or there shall have been an escalation in an existing war or
hostilities or a national emergency shall have been declared in the United
States; or (v) a banking moratorium shall have been declared by any state or
federal authority or body; or (vi) a moratorium in foreign exchange trading
shall have been declared; or (vii) the Company shall have sustained a material
or substantial loss by fire, flood, accident, hurricane, earthquake, theft,
sabotage or other calamity or malicious act which, whether or not such loss
shall have been insured, will, in the Representative's sole judgment, make it
inadvisable to proceed with the offering, sale or delivery of the Securities;
or (viii) there shall have been a material adverse change or development
involving a material prospective change, in the condition (financial or
otherwise), earnings, business affairs, position, prospects, stockholders'
equity, operations, obligations, properties, businesses, management or results
of operations of the Company taken as a whole, whether or not arising in the
ordinary course of business, or (ix) if there shall have been a material
adverse change in the general market, political or economic conditions, whether
in the United States or elsewhere, as in the Representative's sole judgment
would make it inadvisable to proceed with the offering, sale or delivery of the
Securities.
(b) Notwithstanding any contrary provision contained in
this Agreement, in the event of any termination of this Agreement (including,
without limitation, pursuant to Sections 8, 12(a) or 13 hereof), and whether or
not this Agreement is otherwise carried out, the provisions of Sections 7 and 9
hereof shall remain effective and shall not in any way be affected by such
termination or failure to carry out the terms of this Agreement or any part
hereof.
13. Default by the Company. If the Company, any Selling
Stockholders or any Overallotment Sellers shall fail at the Closing Date or any
Option Closing Date, as applicable, to sell and deliver the number of
Securities which it or he or she is obligated to sell and deliver hereunder on
such date, then this Agreement shall terminate (or, if such default shall occur
with respect to any Option Shares to be purchased on an Option Closing Date,
the Underwriters may, in the Representative's sole discretion, by notice from
the Representative to the Company and Overallotment Seller, terminate the
Underwriters' obligation to purchase such Option Shares from the Overallotment
Seller on such date) with no liability whatsoever on the part of any
non-defaulting party other than pursuant to Sections 7, 9 and 12 hereof. No
action taken pursuant to this Section 13 shall relieve the Company, the Selling
Stockholders or the Overallotment Sellers from liability, if any, in respect of
such default.
14. Substitution of Underwriters. If any Underwriter defaults in
its obligation to purchase the number of Securities which it has agreed to
purchase under this Agreement, the non-defaulting Underwriters shall be
obligated to purchase (in the respective proportions which the number of
Securities set forth opposite the name of each non-defaulting Underwriter in
Schedule I to this Agreement bears to the total number of Securities set forth
opposite the names of all the non-defaulting Underwriters in Schedule I to this
Agreement) the Securities which the defaulting Underwriter agreed but failed to
purchase; except that the non-defaulting Underwriters shall not be obligated to
purchase any of the Securities if the
-40-
<PAGE> 41
total number of Securities which the defaulting Underwriter or Underwriters
agreed but failed to purchase exceeds 10% of the total number of Securities,
and any non-defaulting Underwriter shall not be obligated to purchase more than
110% of the number of Securities set forth opposite its name in Schedule I to
this Agreement plus the total number of Option Shares purchasable by it
pursuant to the terms of Section 4(b) hereof. If the foregoing maximums are
exceeded, the non-defaulting Underwriters, and any other underwriters
satisfactory to you who so agree, shall have the right, but shall not be
obligated, to purchase (in such proportions as may be agreed upon among them)
all the Securities. If the non- defaulting Underwriters or the other
underwriters satisfactory to you do not elect to purchase the Securities which
the defaulting Underwriter or Underwriters agreed but failed to purchase, this
Agreement shall terminate without liability on the part of any non-defaulting
Underwriter, the Company except for the payment of expenses to be borne by the
Company as provided in Section 7(a) hereof and the indemnify and contribution
agreements of the Company and the Underwriters contained in Section 9 hereof;
provided, however, that this provision shall not affect any Closing which at
the time of such termination already shall have taken place.
Nothing contained herein shall relieve a defaulting
Underwriter of any liability it may have for damages caused by its default. If
the other underwriters satisfactory to you are obligated or agreed to purchase
the Securities of a defaulting Underwriter, either you or the Company may
postpone the Closing Date for up to seven full Business Days in order to effect
any changes that may be necessary in the Registration Statement, the Prospectus
or in any other document or agreement, and to file promptly any amendments or
any supplements to the Registration Statement or the Prospectus which in your
opinion may thereby be made necessary.
15. Notices. All notices and communications hereunder, except as
herein otherwise specifically provided, shall be in writing and shall be deemed
to have been duly given if mailed, delivered by hand or transmitted by any
standard form of telecommunication. Notices to the Underwriters shall be
directed to the Representative at 1999 Avenue of the Stars, Suite 2800, Los
Angeles, California 90067, Attention: Anthony K. Soich, with a copy to Munger,
Tolles & Olson, 355 South Grand Avenue, Los Angeles, California 90071,
Attention: Sandra A. Seville-Jones, Esq. Notices to the Company shall be
directed to the Company at 2144 Michelson Drive, Irvine, California 92175,
Attention: Steven A. Lupinacci, with a copy to Gibson, Dunn & Crutcher LLP, 4
Park Plaza, Irvine, California 92614, Attention: John M. Williams, Esq.
16. Parties. This Agreement shall inure solely to the benefit of
and shall be binding upon, the Underwriters, the Company, the Selling
Stockholders and the Overallotment Sellers and the controlling persons,
officers, directors and others referred to in Section 9 hereof, and their
respective successors, legal representatives and assigns, and no other person
shall have or be construed to have any legal or equitable right, remedy or
claim under or in respect of or by virtue of this Agreement or any provisions
herein contained. No purchaser of Securities from an Underwriter shall be
deemed to be a successor merely by reason of such purchase.
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<PAGE> 42
17. Construction. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of California,
without giving effect to conflict of laws principles thereof.
18. Counterparts; Facsimile Signatures. This Agreement may be
executed in any number of counterparts, each of which shall be deemed to be an
original, and all of which taken together shall be deemed to be one and the
same instrument. Delivery of executed copies of this Agreement by facsimile
transmission shall be deemed to be delivery of an original, executed copy of
this Agreement by the transmitting party.
19. Entire Agreement; Amendments. This Agreement and the
Representative's Warrant Agreement constitute the entire agreement of the
parties hereto concerning the subject matter hereof and supersede all prior
written or oral agreements, understandings and negotiations with respect to the
subject matter hereof. This Agreement may not be amended, modified or altered
except in a writing signed by the Representative and the Company.
If the foregoing correctly sets forth the understanding among the
parties hereto, please so indicate in the space provided below for that
purpose, whereupon this letter shall constitute a binding agreement among us.
Very truly yours,
DIEDRICH COFFEE, INC.
a Delaware corporation
By:_______________________________________
Name: Steve Lupinacci
Title: Chief Executive Officer
D.C.H., L.P.
a California limited partnership
By:_______________________________________
Name: Paul C. Heeschen
Title: General Partner
REDWOOD ENTERPRISES VII, L.P.
a California limited partnership
By:_______________________________________
Name: Paul C. Heeschen
Title: General Partner
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<PAGE> 43
DIEDRICH PARTNERS I, L.P.
a California limited partnership
By:_______________________________________
Name:
Title: General Partner
__________________________________________
Martin R. Diedrich
Confirmed and accepted as of
the date first above written.
THE BOSTON GROUP, L.P.
AS REPRESENTATIVE FOR THE
SEVERAL UNDERWRITERS NAMED
IN SCHEDULE I ATTACHED HERETO
By:____________________________________
Anthony K. Soich,
Director of Corporate Finance
-43-
<PAGE> 44
SCHEDULE I
<TABLE>
<CAPTION>
Underwriter Number of Selling Shares
- ----------- ------------------------
<S> <C>
The Boston Group, L.P.
[List others]
=========
TOTAL 2,200,000
Shares To Be Sold
<CAPTION>
Company Shares Number of Selling Shares
- -------------- ------------------------
<S> <C>
Diedrich Coffee, Inc. 1,600,000
Selling Shares
- --------------
D.C.H., L.P. 100,000
Redwood Enterprises VII, L.P. 332,247
Diedrich Partners I, L.P. 167,753
---------
2,200,000
SCHEDULE II
<CAPTION>
Overallotment Sellers Number of Option Shares
- --------------------- -----------------------
<S> <C>
Redwood Enterprises VII, L.P. 216,123
Diedrich Partners I, L.P. 83,877
Martin R. Diedrich 30,000
-------
TOTAL 330,000
=======
</TABLE>
<PAGE> 45
SCHEDULE III
Opinion to Underwriters
-45-
<PAGE> 1
DIEDRICH COFFEE, INC.
and
THE BOSTON GROUP, L.P.
____________________
REPRESENTATIVE'S WARRANT AGREEMENT
Dated as of September ___, 1996
____________________
<PAGE> 2
REPRESENTATIVE'S WARRANT AGREEMENT
THIS REPRESENTATIVE'S WARRANT AGREEMENT (the "Agreement"), dated as of
September ___, 1996, is made and entered into by and between DIEDRICH COFFEE,
INC., a Delaware corporation (the "Company"), and THE BOSTON GROUP, L.P. (the
"Representative").
The Company agrees to issue and sell to the Representative and the
Representative agrees to purchase from the Company, for the price of $50, a
warrant, as hereinafter described (the "Warrant" and together with any warrants
subsequently issued hereunder, the "Warrants"), to purchase up to 160,000
shares, as may be adjusted from time to time as set forth herein, of the
Company's common stock, $0.01 par value (the "Common Stock"), in connection
with a public offering (the "Offering") by the Company and certain stockholders
of the Company of 2,200,000 shares of Common Stock (plus 330,000 shares subject
to an over-allotment option of the Underwriters named therein) pursuant to an
underwriting agreement (the "Underwriting Agreement"), dated as of September
___, 1996, by and among the Company, certain stockholders of the Company and
the Representative, as one of the representatives of the several Underwriters
named therein. The shares of Common Stock purchasable upon exercise of the
Warrants, as may be adjusted from time to time as set forth herein, are
hereinafter referred to as the "Warrant Stock." The Warrant shall be issued
pursuant to this Agreement on the closing date of the Offering (the "Closing
Date").
In consideration of the foregoing and for the purpose of defining the
terms and provisions of the Warrants, the Warrant Stock and the respective
rights and obligations thereunder, the Company and the Representative, for
value received, hereby agree as follows:
SECTION 1. TRANSFERABILITY AND FORM OF WARRANTS.
1.1 Registration. All Warrants shall be numbered and
shall be registered on the books of the Company when issued.
1.2 Transfer. The Warrants shall be transferable only on
the books of the Company maintained at its principal office, wherever its
principal office may then be located, upon delivery thereof duly endorsed by a
Warrant holder (a "Warrantholder") or by its duly authorized attorney or
representative and with the signatures properly guaranteed, accompanied by
proper evidence of succession, assignment or authority to transfer. Upon any
registration of transfer, the Company shall execute and deliver a new
certificate evidencing each such Warrant to each person entitled thereto.
1.3 Limitations on Transfer of the Warrants. Warrants
shall not be sold, transferred, assigned or hypothecated by the Representative,
except that Warrants may be transferred (i) to one or more officers or
partners of the Representative, and after 9:00 a.m. Pacific time on September
___, 1997 to employees of the Representative; (ii) to a purchaser of all or
substantially all of the assets of a Warrantholder; or (iii) by will, pursuant
to the laws of descent or distribution or by operation of law. The Warrants
may be divided or combined, upon request to the Company by a Warrantholder,
into a certificate or certificates
<PAGE> 3
representing the right to purchase the same aggregate number of Warrant Stock.
Unless the context indicates otherwise, the term "Warrantholder" shall include
the Representative and any transferee or transferees of the Warrants pursuant
to this subsection 1.3 and as otherwise permitted by this Agreement, and the
term "Warrants" shall include any and all Warrants outstanding pursuant to this
Agreement, including those evidenced by a certificate or certificates issued
upon division, exchange, substitution or transfer pursuant to this Agreement.
1.4 Form of Warrants. The text of the Warrants and of
the form of election to purchase Warrant Stock shall be substantially as set
forth in Exhibit A attached hereto. The aggregate number of shares of Common
Stock issuable upon exercise of the Warrants is subject to adjustment upon the
occurrence of certain events, all as hereinafter provided. The Warrants shall
be executed on behalf of the Company by its Chief Executive Officer or its
President and attested to by its Secretary. A Warrant bearing the signature of
an individual who was at any time the proper officer of the Company shall bind
the Company, notwithstanding that such individual shall have ceased to hold
such office prior to the delivery of such Warrant or did not hold such office
on the date of this Agreement or at any time thereafter.
The Warrants shall be dated as of the date of
signature thereof by the Company either upon initial issuance or upon division,
exchange, substitution or transfer.
1.5 Legend on Warrants and Warrant Stock. Each
certificate evidencing a Warrant (or Warrant Stock issued upon exercise of a
Warrant) initially issued upon exercise of a Warrant shall bear the following
legend, unless, at the time of exercise, such Warrant Stock is subject to a
currently effective Registration Statement under the Securities Act of 1933, as
amended (the "Act"):
"'THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE
SOLD, EXCHANGED, HYPOTHECATED OR TRANSFERRED IN ANY MANNER
EXCEPT IN COMPLIANCE WITH SECTION 11 OF THE REPRESENTATIVE'S
WARRANT AGREEMENT PURSUANT TO WHICH THEY WERE ISSUED."
Any certificate issued at any time in exchange or substitution
for any certificate bearing such legend (except a new certificate issued upon
completion of a public distribution pursuant to an effective registration
statement under the Act of the securities represented thereby) shall also bear
the above legend unless, in the opinion of the Company's counsel, the
securities represented thereby need no longer be subject to such restrictions.
SECTION 2. EXCHANGE OF WARRANT CERTIFICATE. Any Warrant certificate
may be exchanged for another certificate or certificates entitling the
Warrantholder to purchase a like aggregate number of shares of Warrant Stock as
the certificate or certificates surrendered then entitled such Warrantholder to
purchase. Any Warrantholder desiring to exchange a
-2-
<PAGE> 4
Warrant certificate shall make such request in writing delivered to the
Company, and shall surrender, properly endorsed, the certificate evidencing the
Warrant to be so exchanged. Thereupon, the Company shall execute and deliver
to the person entitled thereto a new Warrant certificate or certificates as so
requested.
SECTION 3. TERM OF WARRANTS; EXERCISE OF WARRANTS.
(a) Subject to the terms of this Agreement, the
Warrantholder shall have the right, at any time during the period commencing at
6:30 a.m., Pacific Time, on September ___, 1997 (the "Commencement Date") and
ending at 5:00 p.m., Pacific Time, on September ___, 1999 (the "Termination
Date"), to purchase from the Company up to the number of fully paid and
nonassessable shares of Warrant Stock to which the Warrantholder may at the
time be entitled to purchase pursuant to this Agreement, upon surrender to the
Company, at its principal office, of the certificate evidencing the Warrants to
be exercised, together with the purchase form on the reverse thereof duly
completed and executed, and upon payment to the Company of the Warrant Price
(as defined in and determined in accordance with the provisions of this Section
3 and Sections 7 and 8 hereof) for the number of shares of Warrant Stock in
respect of which such Warrants are then exercised, but in no event for less
than 100 shares of Warrant Stock (unless less than an aggregate of 100 shares
of Warrant Stock are then purchasable under all outstanding Warrants held by
such Warrantholder). This Warrant, when exercisable, may be exercised from
time to time in whole or in part.
(b) Payment of the Warrant Price shall be made in
cash, by certified or official bank check in Los Angeles Clearing House funds
(next day funds), or any combination thereof.
(c) In addition to the method of payment set
forth in Section 3(b) above and in lieu of any cash payment required
thereunder, unless otherwise prohibited by law, the Warrantholders shall have
the right at any time, when exercisable, and from time to time to exercise the
Warrants in full or in part (i) by receiving from the Company the number of
shares of Warrant Stock equal to the number of shares of Warrant Stock
otherwise issuable upon such exercise less the number of shares of Warrant
Stock having an aggregate value on the date of exercise equal to the Warrant
Price multiplied by the number of shares of Warrant Stock for which this
Warrant is being exercised and/or (ii) by delivering to the Company the number
of shares of Common Stock having an aggregate value on the date of exercise
equal to the Warrant Price multiplied by the number of shares of Warrant Stock
for which this Warrant is being exercised. For purposes hereof, the "value" of
a share of Common Stock on a given date shall be equal to the Current Market
Price on such date as defined in Section 9 of this Agreement.
(d) Upon surrender of the Warrants and payment of
the Warrant Price as aforesaid, the Company shall issue and cause to be
delivered with all reasonable dispatch to or upon the written order of the
Warrantholder, and in such name or names as the Warrantholder may designate, a
certificate or certificates for the number of full shares of Warrant Stock so
purchased upon such exercise of the Warrant, together with cash, as provided in
Section 9 hereof, in respect of any fractional shares otherwise issuable upon
such
-3-
<PAGE> 5
surrender. Such certificate or certificates, to the extent permitted by law,
shall be deemed to have been issued and any person so designated to be named
therein shall be defined to have become a holder of record of such securities
as of the date of surrender of the Warrants and payment of the Warrant Price,
as aforesaid, notwithstanding that the certificate or certificates representing
such securities shall not actually have been delivered or that the stock
transfer books of the Company shall then be closed. The Warrants shall be
exercisable, at the election of the Warrantholder, either in full or from time
to time in part and, in the event that a Warrant is exercised in respect of
less than all of the shares of Warrant Stock specified therein at any time
prior to the Termination Date, a new Warrant evidencing the remaining shares of
the Warrant Stock purchasable by such Warrantholders hereunder shall be issued
by the Company to such Warrantholders.
SECTION 4. VALIDITY; PAYMENT OF TAXES. All securities delivered upon
exercise of a Warrant shall be duly and validly issued and non- assessable.
The Company shall pay all documentary stamp taxes, if any, attributable to the
initial issuance of the Warrants and the shares of Warrant Stock issuable upon
the exercise of the Warrants; provided, however, the Company shall not be
required to pay any tax which may be payable in respect of any secondary
transfer of the Warrants or the Warrant Stock.
SECTION 5. MUTILATED OR MISSING WARRANTS. In case the certificate or
certificates evidencing the Warrants shall be mutilated, lost, stolen or
destroyed, the Company shall, at the request of the Warrantholder, issue and
deliver in exchange and substitution for and upon cancellation of the mutilated
certificate or certificates, or in lieu of and substitution for the certificate
or certificates lost, stolen or destroyed, a new Warrant certificate or
certificates of like tenor and representing an equivalent right or interest,
but only upon receipt of evidence reasonably satisfactory to the Company of
such loss, theft or destruction of such Warrant and a reasonable
indemnification undertaking.
SECTION 6. RESERVATION OF SHARES; NO CONTRARY ACTION. The Company
represents and warrants to the Warrantholder that there has been reserved, and
the Company shall at all times keep reserved so long as and to the extent the
Warrants remain outstanding, out of its authorized Common Stock, such number of
shares of Common Stock as shall be or remain subject to purchase under the
outstanding Warrants. Every transfer agent for the Common Stock and other
securities of the Company issuable upon the exercise of the Warrants shall be
irrevocably authorized and directed at all times to reserve such number of
authorized shares and other securities as shall be requisite for such purpose.
The Company shall keep a copy of this Agreement on file with every transfer
agent for the Common Stock and other securities of the Company issuable upon
the exercise of the Warrants. The Company shall supply every such transfer
agent with duly executed stock and other certificates, as appropriate, for such
purpose and shall provide or otherwise make available any cash which may be
payable in lieu of the issuance of fractional shares, as provided in Section 9
hereof.
SECTION 7. WARRANT PRICE. The price per share at which shares of
Warrant Stock shall be purchasable upon the exercise of the Warrants shall be $
[GREATER OF: (I) 120% OF IPO PRICE OR (II) 120% OF 12.50], subject to
adjustment pursuant to Section 8 hereof (as so adjusted from time to time, the
"Warrant Price").
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<PAGE> 6
SECTION 8. ADJUSTMENTS OF NUMBER OF SHARES OF WARRANT STOCK AND
WARRANT PRICE. The number and kind of securities purchasable upon the exercise
of the Warrants and the Warrant Price shall be subject to adjustment from time
to time upon the happening of certain events, as follows:
8.1 Adjustments. The number of shares of Warrant Stock
purchasable upon the exercise of each Warrant and the Warrant Price shall be
subject to adjustment as follows:
(a) In case the Company shall (i) pay a dividend
or make a distribution on its Common Stock in shares of its capital stock or
other securities, (ii) subdivide its outstanding shares of Common Stock into a
greater number of shares, (iii) combine its outstanding Common Stock into a
smaller number of shares or (iv) issue, by reclassification of its Common
Stock, shares of its capital stock or other securities of the Company
(including any such reclassification in connection with a consolidation or
merger in which the Company is the continuing corporation), the number of
shares of Warrant Stock purchasable upon exercise of a Warrant immediately
prior thereto shall be adjusted so that the Warrantholder shall be entitled to
receive the kind and number of shares of Warrant Stock, shares of its capital
stock and other securities of the Company which such holder would have owned or
would have been entitled to receive immediately after the happening of any of
the events described above, had the Warrant been exercised immediately prior to
the happening of such event or any record date with respect thereto. Any
adjustment made pursuant to this subsection 8.1(a) shall become effective
immediately after the effective date of such event retroactive to the record
date, if any, for such event.
(b) In case the Company shall issue rights,
options (other than options issued under, and pursuant to, the Company's Stock
Incentive Option Plan (the "Incentive Plan") or the Company's 1996 Non-Employee
Directors Stock Option Plan (the "Non-Employee Directors Plan" and together
with the Incentive Plan, the "Option Plans"), both as in effect as of the date
of this Agreement), warrants or convertible securities to holders of its Common
Stock, without any charge to such holders, containing the right to subscribe
for or purchase Common Stock, the number of shares of Warrant Stock thereafter
purchasable upon the exercise of each Warrant shall be determined by
multiplying the number of shares of Warrant Stock theretofore purchasable upon
exercise of a Warrant by a fraction, of which the numerator shall be the number
of shares of Common Stock outstanding immediately prior to the issuance of such
rights, options, warrants or convertible securities plus the number of
additional shares of Common Stock offered for subscription or purchase, and of
which the denominator shall be the number of shares of Common Stock outstanding
immediately prior to the issuance of such rights, options, warrants or
convertible securities. Such adjustment shall be made whenever such rights,
options, warrants or convertible securities are issued, and shall become
effective immediately upon issuance of such rights, options, warrants or
convertible securities.
(c) In case the Company shall distribute to
holders of its Common Stock evidences of its indebtedness or assets (excluding
cash dividends or distributions out of current earnings made in the ordinary
course of business consistent with past practices), then in each case the
number of shares of Warrant Stock thereafter purchasable upon the exercise
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<PAGE> 7
of each Warrant shall be determined by multiplying the number of shares of
Warrant Stock theretofore purchasable upon exercise of such Warrant by a
fraction, of which the numerator shall be the then Current Market Price (as
defined below) on the date of such distribution, and of which the denominator
shall be such Current Market Price on such date minus the then fair value
(determined as provided in subsection 8(f) below) of the portion of the assets
or evidences of indebtedness so distributed applicable to one share of Common
Stock. Such adjustment shall be made whenever any such distribution is made
and shall become effective on the date of distribution.
(d) No adjustment in the number of shares of
Warrant Stock purchasable pursuant to subsections 8.1(b) or (c) hereof shall be
required unless such adjustment would require an increase or decrease of at
least one percent in the number of shares of Warrant Stock then purchasable
upon the exercise of the Warrants or, if the Warrants are not then exercisable,
the number of shares of Warrant Stock purchasable upon the exercise of the
Warrants on the first date thereafter that the Warrants would become
exercisable; provided, however, that any adjustments which by reason of this
subsection 8.1(d) are not required to be made immediately shall be carried
forward and taken into account in any subsequent adjustment.
(e) Whenever the number of shares of Warrant
Stock purchasable upon the exercise of a Warrant is adjusted as herein
provided, the Warrant Price payable upon exercise of the Warrant shall be
adjusted by multiplying such Warrant Price immediately prior to such adjustment
by a fraction, of which the numerator shall be the number of shares of Warrant
Stock purchasable upon the exercise of such Warrant immediately prior to such
adjustment, and of which the denominator shall be the number of shares of
Warrant Stock purchasable immediately thereafter.
(f) To the extent not covered by subsections
8.1(b) or (c) hereof, in case the Company shall sell or issue Common Stock or
rights, options (other than Common Stock or options issued under and pursuant
to the Option Plans), warrants or convertible securities containing the right
to subscribe for, purchase or exchange into shares of Common Stock at a price
per share (determined, in the case of such rights, options, warrants or
convertible securities, by dividing (i) the total amount received or receivable
by the Company in consideration of the sale or issuance of such rights,
options, warrants or convertible securities, plus the total consideration
payable to the Company upon exercise, conversion or exchange thereof, by (ii)
the total number of shares of Common Stock covered by such rights, options,
warrants or convertible securities) lower than the greater of the then Current
Market Price or the Warrant Price in effect immediately prior to such sale or
issuance, then the Warrant Price shall be reduced to a price (calculated to the
nearest cent) determined by dividing (I) an amount equal to the sum of (A) the
number of shares of Common Stock outstanding immediately prior to such sale or
issuance multiplied by the then existing Warrant Price, plus (B) the
consideration received or receivable by the Company upon such sale or issuance,
by (II) the total number of shares of Common Stock outstanding immediately
after such sale or issuance. The number of shares of Warrant Stock purchasable
upon the exercise of a Warrant shall thereafter be that number determined by
multiplying the number of shares of Warrant Stock purchasable upon exercise
immediately prior to such adjustment by a fraction, of which the numerator
shall be the Warrant Price in effect
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<PAGE> 8
immediately prior to such adjustment and the denominator shall be the Warrant
Price as so adjusted. For the purposes of such adjustments, the Common Stock
which the holders of any such rights, options, warrants or convertible
securities shall be entitled to subscribe for, purchase or exchange into shall
be deemed issued and outstanding as of the date of such sale or issuance and
the consideration received by the Company therefor shall be deemed to be the
consideration received by the Company for such rights, options, warrants or
convertible securities, plus the consideration or premiums stated in such
rights, options, warrants or convertible securities to be payable for the
Common Stock covered thereby. In case the Company shall sell or issue Common
Stock or rights, options, warrants or convertible securities containing the
right to subscribe for, purchase or exchange into Common Stock for a
consideration consisting, in whole or in part, of property other than cash or
its equivalent, then, in determining the "price per share" of Common Stock and
the "consideration received by the Company" for purposes of the first sentence
of this subsection 8.1(f), the Board of Directors shall determine the fair
value of said property, and such determination, if based upon the Board of
Directors' good faith business judgment, shall be binding upon the
Warrantholders. In determining the "price per share" of Common Stock, any
underwriting discounts or commissions paid to brokers, dealers or other selling
agents shall not be deducted from the price received by the Company for sales
of securities registered under the Act or issued in a private placement. There
shall be no adjustment of the Warrant Price pursuant to this subsection 8.1(f)
if the amount of such adjustment would be less than $.05 per share of Common
Stock; provided, however, that any adjustment which by reason of this provision
is not required to be made immediately shall be carried forward and taken into
account in any subsequent adjustment.
(g) For the purpose of this Section 8, the term
"Common Stock" shall mean (i) the class of stock designated as the Common Stock
of the Company at the date of this Agreement or (ii) any other class of stock
resulting from successive changes or reclassifications of such Common Stock
consisting solely of changes in par value, or from par value to no par value,
or from no par value to par value. In the event that at any time, as a result
of an adjustment made pursuant to this Section 8, a Warrantholder shall become
entitled to purchase any securities of the Company other than Common Stock, (i)
if the Warrantholder's right to purchase is on any other basis than that
available to all holders of the Company's Common Stock, the Company shall
obtain an opinion of a reputable investment banking firm valuing such other
securities and (ii) thereafter the number of such other securities so
purchasable upon exercise of a Warrant and the Warrant Price of such securities
shall be subject to adjustment from time to time in a manner and on terms as
nearly equivalent as practicable to the provisions with respect to the Common
Stock contained in this Section 8.
(h) Upon the expiration of any rights, options,
warrants or conversion privileges, if such shall not have been exercised, the
number of shares of Warrant Stock purchasable upon exercise of a Warrant and
the Warrant Price, to the extent a Warrant has not then been exercised, shall,
upon such expiration, be readjusted and shall thereafter be such number and
such price as they would have been had they been originally adjusted (or had
the original adjustment not been required, as the case may be) on the basis of
(A) the fact that the only shares of Common Stock issued in respect of such
rights, options, warrants or conversion privileges were the shares of Common
Stock, if any, actually issued or sold
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<PAGE> 9
upon the exercise of such rights, options, warrants or conversion privileges,
and (B) the fact that such shares of Common Stock, if any, were issued or sold
for the consideration actually received by the Company upon such exercise plus
the consideration, if any, actually received by the Company for the issuance,
sale or grant of all such rights, options, warrants or conversion privileges
whether or not exercised; provided, however, that no such readjustment shall
have the effect of decreasing the numbers of shares of Warrant Stock
purchasable upon exercise of a Warrant or increasing the Warrant Price by an
amount in excess of the amount of the adjustment made in respect of the
issuance, sale or grant of such rights, options, warrants or conversion
privileges.
(i) Whenever the number of shares of Warrant
Stock purchasable upon the exercise of a Warrant or the Warrant Price is
adjusted pursuant to this Section 8, the Company shall cause to be promptly
mailed to each Warrantholder by first class mail, postage prepaid, notice of
such adjustment or adjustments and a certificate of the chief financial officer
of the Company setting forth the number of shares of Common Stock, capital
stock and other securities purchasable upon the exercise of such
Warrantholder's Warrant and the applicable Warrant Price after such adjustment,
a brief statement of the facts requiring such adjustment and the computation by
which such adjustment was made.
8.2 No Adjustment for Dividends, Incentive Plan,
Non-Employee Directors Plan. Except as specifically provided in subsection
8.1, no adjustment in respect of any cash dividends or distributions on the
Company's Common Stock out of current earnings made in the ordinary course of
business consistent with past practices shall be made during the term of the
Warrants or upon the exercise of the Warrants. No adjustment in respect to
options issued under, and pursuant to, the Option Plans, both as in effect as
of the date of this Agreement, shall be made during the term of the Warrants or
upon the exercise of the Warrants.
8.3 Preservation of Purchase Rights upon
Reclassification, Consolidation, etc. At any time following the date of this
Agreement, in case of any consolidation of the Company with or merger of the
Company into another corporation or other entity or in case of any sale, lease,
conveyance or other transfer to another corporation, person or other entity of
the property, assets or business of the Company as an entirety or substantially
as an entirety, the Company or such successor or purchasing corporation, person
or other entity, as the case may be, shall execute with the Warrantholder, and
the agreements governing such consolidation, merger, sale, lease, conveyance or
other transfer shall require such execution of, an agreement that the
Warrantholder shall have the right thereafter upon payment of the Warrant Price
in effect immediately prior to such event, upon exercise of the Warrants, to
receive the kind and amount of shares and other securities and property which
it would have owned or have been entitled to receive after the happening of
such consolidation, merger, sale, lease, conveyance or other transfer had the
Warrants (and each underlying security) been exercised immediately prior to
such action. The Company shall promptly mail to each Warrantholder by first
class mail, postage prepaid, notice of the execution of any such agreement. In
the event of a merger described in Section 368(a)(2)(E) of the Internal Revenue
Code of 1986, in which the Company is the surviving corporation, the right to
purchase shares of Warrant Stock under the Warrants shall terminate on the date
of such merger and thereupon the Warrants shall become null and void, but only
if the controlling
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<PAGE> 10
corporation shall agree to substitute for the Warrants its warrant which
entitles the holder thereof to purchase upon its exercise the kind and amount
of shares and other securities and property which it would have owned or been
entitled to receive had the Warrants been exercised immediately prior to such
merger. Any such agreements referred to in this subsection 8.3 shall provide
for adjustments, which shall be as nearly equivalent as may be practicable to
the adjustments provided for in Section 8 hereof, and shall provide for terms
and provisions at least as favorable to the Warrantholder as those contained in
this Agreement. The provisions of this subsection 8.3 shall similarly apply to
successive consolidations, mergers, sales, leases, conveyances or other
transfers.
8.4 Par Value of Shares of Common Stock. Before taking
any action which would cause an adjustment effectively reducing the portion of
the Warrant Price allocable to each share of Warrant Stock below the then par
value per share, if any, of the Warrant Stock issuable upon exercise of the
Warrants, the Company shall take any corporate action which may, in the opinion
of its counsel, be necessary in order that the Company may validly and legally
issue fully paid and nonassessable Warrant Stock upon exercise of the Warrants.
8.5 Independent Public Accountants. The Company may
retain BDO Seidman, LLP (or such other accounting firm qualified to practice in
front of the Securities and Exchange Commission (the "Commission") as is
reasonably acceptable to the Representative) to make any computation required
under this Section 8, and a certificate signed by such firm shall be conclusive
evidence of the correctness of any computation made under this Section 8.
8.6 Statement on Warrant Certificates. Irrespective of
any adjustments in the number of securities issuable upon exercise of Warrants,
Warrant certificates theretofore or thereafter issued may continue to express
the same number of securities as are stated in the similar Warrant certificates
initially issuable pursuant to this Agreement, provided that such expression
shall in no way affect the number of shares of Warrant Stock actually
purchasable upon the exercise of such Warrants.
SECTION 9. FRACTIONAL SHARES; CURRENT MARKET PRICE. The Company
shall not be required to issue fractional shares of Common Stock on the
exercise of a Warrant. If any fraction of a share of Common Stock would,
except for the provisions of this Section 9, be issuable upon the exercise of a
Warrant (or specified portion thereof), the Company shall in lieu thereof pay
an amount in cash equal to the then Current Market Price multiplied by such
fraction. For purposes of this Agreement, the term "Current Market Price"
shall mean (i) if the Common Stock is traded on the Nasdaq National Market
("NNM") or on a national securities exchange, the per share closing price of
the Common Stock in the NNM or on the principal stock exchange on which it is
listed, as the case may be, on the date of exercise of the Warrant or, with
respect to any adjustment pursuant to Section 8.1 hereof, on the date
immediately preceding the announcement of the event causing such adjustment or
(ii) if the Common Stock is traded in the over-the-counter market and not in
the NNM or on any national securities exchange, the average of the per share
closing bid prices of the Common Stock on the thirty (30) consecutive trading
days immediately preceding the date in question, as reported by The Nasdaq
Small Cap Market (or an equivalent generally accepted reporting
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<PAGE> 11
service if quotations are not reported on The Nasdaq Small Cap Market). The
closing price referred to in clause (i) above shall be the last reported sale
price or, in the case no such reported sale takes place on such day, the
average of the reported closing bid and asked prices, in either case in the NNM
or on the principal stock exchange on which the Common Stock is then listed.
For purposes of clause (ii) above, if trading in the Common Stock is not
reported by The Nasdaq Small Cap Market, the bid price referred to in said
clause shall be the lowest bid price as reported in the Nasdaq Electronic
Bulletin Board or, if not reported thereon, as reported in the "pink sheets"
published by National Quotation Bureau, Incorporated, and, if such Common Stock
is not so reported, shall be the price of a share of Common Stock determined by
the Company's Board of Directors in good faith.
SECTION 10. NO RIGHTS AS STOCKHOLDER; NOTICES TO WARRANTHOLDER.
Except as expressly provided herein, nothing contained in this Agreement or in
the Warrants shall be construed as conferring upon the Warrantholder or its
transferees any rights as a stockholder of the Company, including the right to
vote, receive dividends, consent or receive notices as a stockholder in respect
of any meeting of stockholders for the election of directors of the Company or
any other matter. If, however, at any time prior to the expiration of the
Warrants and prior to their exercise, any one or more of the following events
shall occur:
(a) any action which would require an adjustment
pursuant to Section 8 hereof;
(b) an issuance by the Company of rights,
options, warrants or convertible securities to all or substantially all holders
of its Common Stock, without any charge to such holders, containing the right
to subscribe for or purchase Common Stock; or
(c) a dissolution, liquidation or winding up of
the Company (other than in connection with a consolidation, merger or sale of
its property, assets and business as an entirety or substantially as an
entirety) shall be proposed;
then the Company shall give notice in writing of such event to the
Warrantholder, as provided in Section 13 hereof, at least 20 days prior to the
date fixed as a record date or the date of closing the transfer books for the
determination of the stockholders entitled to any relevant dividend,
distribution or other rights or for the determination of stockholders entitled
to vote on such proposed dissolution, liquidation or winding up. Such notice
shall specify such record date or the date of closing of the transfer books, as
the case may be.
SECTION 11. RESTRICTIONS ON TRANSFER; REGISTRATION RIGHTS;
OBLIGATIONS IN REGISTRATION.
(a) The Warrantholder agrees that prior to making
any disposition of the Warrants or the Warrant Stock, other than to persons or
entities identified in the first sentence of Section 1.3, the Warrantholder
shall give written notice to the Company describing briefly the manner in which
any such proposed disposition is to be made; and no such disposition shall be
made unless the Warrantholder has notified, or currently with such disposition
notifies, the Company that in the opinion of counsel reasonably satisfactory to
the Company a registration statement, application or other notification, filing
or post-effective
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<PAGE> 12
amendment or supplement thereto (hereinafter collectively a "Registration
Statement") under the Act or the state securities or "blue sky" laws of any
applicable jurisdiction is not required with respect to such disposition and no
such Registration Statement has been filed by the Company with, and declared
effective, if necessary, by, the Commission or state securities commission or
agency. The Warrantholder agrees that it shall obtain from any transferee who
acquires any Warrants in a private transaction with the Warrantholder an
agreement by such transferee that it agrees to be bound by any transfer
restrictions set forth in this subsection 11(a) then applicable to such
transferees.
(b) The Company shall be obligated to the registered holders of the
Warrants and the Warrant Stock as follows:
(i) During the period beginning on the
Commencement Date and ending four years following the Commencement Date, the
Company will, as promptly as practicable (but in any event within sixty (60)
days), after written request (the "Request") by a person or persons holding (or
having the right to acquire by virtue of holding the warrants) more than sixty
percent (60%) of the shares of Warrant Stock which have been (or may be) issued
upon exercise of the Warrants, prepare and file at the expense of the holder(s)
making the Request a Registration Statement with the Commission and such
applications or other filings as required under applicable state securities or
blue sky laws sufficient to permit the public offering of the Warrants and the
Warrant Stock, and shall use its reasonable best efforts (at the expense of the
holder making the Request) through its officers, directors, auditors and
counsel, in all matters necessary or advisable, to cause such Registration
Statement to become effective as promptly as practicable and to maintain such
effectiveness so as to permit resale of the securities covered by the Request
until the earlier of the time that all such Warrant Stock has been sold or the
expiration of twelve (12) months from the effective date of the Registration
Statement; provided, however, that the Company shall only be obligated to file
one such Registration Statement under this Section 11(b)(i). Notwithstanding
the foregoing, once and only once during the period the Company would have an
obligation to register the Warrants and the Warrant Stock pursuant to this
Section 11(b)(i), the Company shall not be obligated to effect a registration
pursuant to this Section 11(b)(i) during the three (3) month period starting
with the date thirty (30) days prior to the Company's estimated date of filing
of an underwritten public offering of securities for the account of the
Company; provided that the Company is actively employing in good faith all
reasonable efforts to cause such registration statement to become effective and
that the Company's estimate of the date of filing such registration statement
is made in good faith; provided further, that the Company shall furnish to the
Warrantholder and each holder of Warrant Stock a certificate signed by the
managing underwriter stating that it would be seriously detrimental to the
Company or its stockholders for the registration statement to be filed in the
near future.
(ii) In addition to any Registration
Statement pursuant to subparagraph (i) above, whenever during the period
beginning on the Commencement Date and ending four years following the
commencement date, the Company proposes to file with the Commission a
Registration Statement under the Act (other than as to securities issued
pursuant to an employee benefit plan or as to a transaction subject to Rule 145
promulgated under the Act), it shall, regardless of whether a Request has been
made pursuant to section
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<PAGE> 13
II(a)(i) hereof, at least thirty (30) days prior to each such filing, give
written notice of such proposed filing to each Warrantholder and each holder of
the Warrant Stock at their respective addresses as they appear on the records
of the Company, and shall offer to include and shall include in such filing any
proposed disposition of the Warrants and Warrant Stock upon receipt by the
Company, not more than twenty (20) days following the receipt of such notice,
of a request therefor setting forth the facts with respect to such proposed
disposition and all other information with respect to such person reasonably
necessary to be included in such Registration Statement. In the event that
such registration statement relates to an underwritten offering on a "firm
commitment" basis and the managing underwriter for said offering advises the
Company in writing that the inclusion of such securities in the offering would
be materially and substantially detrimental to the completion of the offering,
such securities shall nevertheless be included in the Registration Statement,
provided that the Warrantholder and each holder of Warrant Stock desiring to
have such securities included in the Registration Statement agrees in writing
for a period of ninety (90) days following such offering not to sell or
otherwise dispose of such securities pursuant to such Registration Statement,
which Registration Statement the Company shall keep effective for a period of
at least twelve (12) months following the expiration of such ninety (90) day
period. In the event that the total size of any offering contemplated by the
Company is reduced by the managing underwriter, the number of Warrants or
Warrant Stock eligible to be included in such registration or offering shall be
reduced in the same proportion and in pari passu with the reduction in the
number of shares being offered by any other entity or person offering shares in
the offering. Notwithstanding the foregoing, in the event that an offering is
made pursuant to Regulation A promulgated under the Act, the Company shall be
obligated to offer only those Warrants which, in conjunction with the proposed
offering by the Company, would allow the Company to remain within the
restrictions contained in Regulation A, including but not limited limitations
as to the number of shares and dollar amount to be offered.
(c) With respect to any registration described in
Section 11(b)(i) hereof, all fees, disbursements and out-of- pocket expenses in
connection with the filing of any Registration Statement or maintaining the
currency and effectiveness of the Registration Statement (or obtaining the
opinion of counsel and any no-action position of the commission with respect to
sales under Rule 144) and in complying with applicable federal securities and
state securities and blue sky laws shall be borne by the Warrantholder. With
respect to any registration, offering or notification described in Section
11(b)(ii) hereof, all fees, disbursements and out-of-pocket expenses (other
than the Warrantholder's brokerage fees and commissions and legal fees of
counsel to the Warrantholder, if any) in connection with the filing of any
Registration Statement or maintaining the currency and effectiveness of the
Registration Statement and in complying with applicable federal securities and
state securities and blue sky laws shall be borne by the Company, and the
Company at its expense shall supply any Warrantholder and any holder of Warrant
Stock with copies of such Registration Statement and the prospectus included
therein and other related documents and any opinions and no-action letters in
such quantities as may be reasonably requested by such Warrantholder or holder
of Warrant Stock.
(d) The Company shall not be required by this
Section 11 to file such Registration Statement if, in the opinion of counsel
for the Warrantholders, which
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<PAGE> 14
counsel shall be reasonably satisfactory to the Company, or in the opinion of
another counsel experienced in securities law matters acceptable to counsel for
such Warrantholders and the Company, the proposed public offering or other
transfer as to which such Registration Statement is requested is exempt, or
without adverse economic effect could be structured to be exempt, from
applicable federal securities and state securities and blue sky laws and would
result in all proposed sales being made under Rule 144 under the Act.
(e) The provisions of this Section 11 and of
Section 12 hereof shall apply to the extent provided herein if the Company
chooses to file an Offering Statement under Regulation A promulgated under the
Act.
(f) The Company agrees that until all the
Warrants and Warrant Stock have been sold under a Registration Statement or
pursuant to Rule 144 under the Act, it shall keep current in filing all
materials required to be filed with the Commission in order to permit the
holders of such securities to sell the same under Rule 144.
(g) In the event any Warrantholder timely elects
to make a Request for registration or include Warrant Stock in a Registration
Statement pursuant to subsection 11(b) above, the Company shall use its
reasonable best efforts to effect such registration to permit the sale of
Warrant Stock in accordance with the intended method or methods of disposition
thereof, and pursuant thereto, the Company shall, as expeditiously as possible:
(i) Prepare and file with the Commission
a Registration Statement or Registration Statements on a form available for the
sale of the Warrant Stock, and to cause any such Registration Statement filed
under the Act pursuant to subsection 11(b) above to become effective at the
earliest possible date after the filing thereof and remain effective as
provided herein and to comply with all applicable rules and regulations of the
Commission (the "Rules and Regulations") in connection therewith, provided,
however, that before filing a Registration Statement or prospectus or any
amendments or supplements thereto, including documents which would be
incorporated or deemed to be incorporated by reference in the Registration
Statement after the initial filing of any Registration Statement, the Company
will furnish to the Warrantholders, their respective counsel, and the
underwriters, if any, to be engaged in connection with the offering and sale by
the Company (for purposes of this subsection 11(g), the "Public Underwriter"),
copies of all such documents proposed to be filed, which documents will be
subject to the review of the Warrantholders, their respective counsel and the
Public Underwriter, if any, and the Company will not file any Registration
Statement, amendment thereto, any prospectus or any supplement thereto
(including such documents incorporated or deemed to be incorporated by
reference) to which the Public Underwriter, if any, shall reasonably object;
(ii) Prepare and promptly file with the
Commission such amendments and post-effective amendments to a Registration
Statement as may be necessary to keep such Registration Statement continuously
effective for a period of twelve (12) months or, if earlier, until all the
Warrant Stock has been sold; cause the related prospectus to be supplemented,
by any required prospectus supplement, and as so supplemented, to be filed
pursuant to Rule 424 under the Act; and comply with the provisions of the Act
with respect to the disposition of all Warrant Stock covered by such
Registration Statement during the
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<PAGE> 15
applicable period in accordance with the intended methods of disposition as set
forth in such Registration Statement or supplement to such prospectus. The
Company shall not be deemed to have used its reasonable best efforts to keep a
Registration Statement effective during the applicable period if it
intentionally or voluntarily takes any action that would result in such
Warrantholders not being able to sell such Warrant Stock;
(iii) As soon as the Company is advised or
obtains knowledge thereof, advise the Warrantholders and confirm the same in
writing (A) when the Registration Statement, as amended, becomes effective and
when any post-effective amendment to the Registration Statement becomes
effective, (B) of the issuance by the Commission or any State or other
regulatory body of any stop order or other order, or of the initiation or the
threat or contemplation of any proceeding, the outcome of which may result in
the suspension of the effectiveness of the Registration Statement or the
issuance of any order preventing or suspending the use of any preliminary
prospectus or the prospectus, or any amendment or supplement thereto, or the
institution of any proceedings for that purpose, (C) of the issuance by the
Commission or any State or other regulatory body of any proceedings for the
suspension of the qualification of any of the Warrant Stock for offering or
sale in any jurisdiction or of the initiation or the threat or contemplation of
any proceeding for that purpose, (D) of the receipt of any comments from the
Commission and (E) of any request by the Commission for any amendment to the
Registration Statement or any amendment or supplement to the prospectus related
thereto or for additional information; if the commission or any State or other
regulatory body shall enter a stop order or other order suspending the
effectiveness of the Registration Statement or preventing or suspending the use
of any preliminary prospectus or the prospectus, or any amendment or supplement
thereto, or suspend such qualification at any time, make every effort to obtain
promptly the lifting of such order or suspension;
(iv) If requested by the Public
Underwriter, if any, or any Warrantholder (1) immediately incorporate in a
prospectus supplement or post-effective amendment such information as such
Warrantholder and the Public Underwriter, if any, agree should be included
therein relating to such sale and distribution of the Warrant Stock, including,
without limitation, information with respect to the number of shares of Warrant
Stock being sold to such Public Underwriter, the purchase price being paid
therefor by such Public Underwriter and with respect to any other terms of the
underwritten offering of the Warrant Stock to be sold in such offering; (2)
make all required filings of such prospectus supplement or post-effective
amendment as soon as notified of the matters to be so incorporated in such
prospectus supplement or post-effective amendment; and (3) supplement or amend
any Registration Statement if requested by the Warrantholders or any Public
Underwriter;
(v) Furnish to each of the
Warrantholders and their respective counsel, without charge in the case of a
Registration Statement under Section 11(b)(ii) hereof, and at such place as
such Warrantholders may designate, copies of each preliminary prospectus, the
Registration Statement (and any pre-effective or post-effective amendments
thereto), the Prospectus, and all amendments and supplements thereto, including
any prospectus prepared after the effective date of the Registration Statement
and any term
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<PAGE> 16
sheet, in each case as soon as available and in such quantities as each
Warrantholder may request;
(vi) During the time when a prospectus is
required to be delivered under the Act, the Company shall comply with all
requirements imposed upon it by the Act and the Securities Exchange Act, 1934,
as amended (the "Exchange Act"), as now and hereafter amended, and by the Rules
and Regulations, as from time to time in force, so far as necessary to permit
the continuance of sales of or dealings in the Warrant Stock in accordance with
the provisions hereof and the prospectus, or any amendments or supplements
thereto; if at any time when a prospectus relating to the Warrant Stock is
required to be delivered under the Act, any event shall have occurred as a
result of which, in the opinion of the Company or counsel for the Company or
counsel for the Warrantholders, the prospectus, as then amended or
supplemented, would include an untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances in which they were made,
not misleading, or if it is necessary at any time to amend or supplement the
prospectus to comply with the Act, notify the Public Underwriter and prepare
and file, at the Company's expense, with the Commission an appropriate
amendment or supplement to the Registration Statement or an amendment or
supplement to the prospectus which will correct such statement or omission, or
effect such compliance, each such amendment or supplement to be reasonably
satisfactory to the Warrantholders and the counsel for the Warrantholders; and
furnish to the Warrantholders copies of such amendment or supplement as soon as
available and in such quantities as the Warrantholders may request;
(vii) As soon as practicable, but in any
event not later than forty-five (45) days after the end of the twelve (12)
month period beginning after the effective date of the Registration Statement
occurs, make generally available to its security holders, in the manner
specified in Rule 158(b) promulgated under the Act, and to the Representative,
an earnings statement which will comply with the provisions of Section 11(a) of
the Act and Rule 158(a) promulgated under the Act;
(viii) Deliver to each of the
Warrantholders, their respective counsel and the Public Underwriter, if any,
without charge in the case of a Registration Statement under Section 11(b)(ii)
hereof, as many copies of the prospectus or prospectuses (including each
preliminary prospectus) and any amendment or supplement thereto as such persons
may reasonably request; the Company consents to the use of any such prospectus
or any amendment or supplement thereto by the Warrantholders and the Public
Underwriter, if any, in connection with the offering and sale of the Warrant
Stock covered by such prospectus or any amendment or supplement thereto;
(ix) Prior to any public offering of
Warrant Stock, use its reasonable best efforts, at or prior to the time the
Registration Statement becomes effective, to qualify the Warrant Stock for
offering and sale under the securities or "blue sky" laws of such jurisdictions
as the Warrantholders may reasonably designate to permit the continuance of
sales and dealings therein for as long as may be necessary to complete the
distribution, and make such applications, file such documents and furnish such
information as may be required for such purpose; provided, however, the Company
shall not be required to qualify
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<PAGE> 17
as a foreign corporation or to execute a general consent to service of process
in any such jurisdiction; in each jurisdiction where such qualification shall
be effected, use its reasonable best efforts to file and make such statements
or reports at such times as are or may be required by the laws of such
jurisdiction to continue such qualification;
(x) Cooperate with the Warrantholders
and the Public Underwriter, if any, to facilitate the timely preparation and
delivery of certificates representing Warrant Stock to be sold, which
certificates shall not bear any restrictive legends; and enable such Warrant
Stock to be in such denominations and registered in such names as the Public
Underwriter, if any, may request at least two (2) business days prior to any
sale of Warrant Stock;
(xi) Use its reasonable best efforts to
cause the Warrant Stock covered by the Registration Statement to be registered
with or approved by such other governmental bodies, agencies or authorities as
may be necessary to enable the Warrantholders or the Public Underwriter, if
any, to consummate the disposition of such Warrant Stock;
(xii) Make every reasonable effort to
cause all Warrant Stock covered by such Registration Statement to be (1) listed
on each securities exchange, if any, in which equity securities issued by the
Company are then listed or (2) authorized to be quoted on the NNM or Nasdaq
Small Cap Market or any exchange if the Company's Common Stock is then
authorized to be quoted on the NNM or Nasdaq Small Cap Market or any exchange;
(xiii) Enter into such agreements
(including, without limitation, if applicable, an underwriting agreement, in
form, scope and substance as is customary in underwritten offerings) and take
all such other actions in connection therewith in order to expedite or
facilitate the disposition of such Warrant Stock and, in such connection,
whether or not an underwriting agreement is entered into and whether or not the
registration is an underwritten registration, (1) make such representations and
warranties to the Warrantholders and the Public Underwriter, if any, with
respect to the business of the Company and its subsidiaries and the
Registration Statement, the prospectus, the prospectus supplement (if any) and
documents, if any, incorporated or deemed to be incorporated by reference in
the Registration Statement, in each case in such form, substance and scope as
are customarily made by issuers to underwriters in underwritten offerings and
confirm the same if and when requested; (2) obtain opinions of counsel to the
Company and updates thereof (which counsel and opinions (in form, scope and
substance) shall be reasonably satisfactory to the Warrantholders), addressed
to the Warrantholders with respect to the matters referred to in the preceding
clause in such form, scope and substance as are customarily rendered to
underwriters in underwritten offerings and such other matters as may be
reasonably requested by counsel to the Warrantholders or the Public
Underwriter, if any; (3) obtain "cold comfort" letters and updates thereof from
the independent certified public accountants of the Company (and, if necessary,
any other independent certified public accountants of any subsidiary of the
Company or of any business acquired by the Company for which financial
statements and financial data is, or is required to be, included in or
incorporated by reference into the Registration Statement) addressed to the
Warrantholders and each of the Public
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<PAGE> 18
Underwriters, if any, such letters to be in customary form and covering matters
of the type customarily covered in "cold comfort" letters to underwriters in
connection with underwritten offerings; (4) if an underwriting agreement is
entered into, the same shall set forth in full the indemnification and
contribution provisions and procedures of Section 12 hereof (or such other
provisions and procedures as shall be acceptable to the Warrantholders and to
the Public Underwriter of such underwritten offering) with respect to all
parties to be indemnified pursuant to said section; and (5) deliver such
documents and certificates as may be reasonably requested by the Warrantholders
and the Public Underwriter, if any, to evidence the continued validity of the
representations and warranties made pursuant to clause (1) above and to
evidence compliance with any customary conditions contained in the underwriting
agreement or other agreement entered into by the Company; the above shall be
done at each closing under such underwriting or similar agreement or as and to
the extent required thereunder;
(xiv) Make available for inspection by a
representative of the Warrantholders or any Public Underwriter participating in
any disposition pursuant to such Registration Statement, and any attorney or
accountant retained by the Warrantholders or such Public Underwriter, all
financial and other records, pertinent corporate documents and properties and
assets of the Company and its subsidiaries and cause the officers, directors,
agents and employees of the Company and its subsidiaries to supply all
information reasonably requested by any such representative, Public
Underwriter, attorney or accountant in connection with any registration of
Warrant Stock; provided, however, that any records, information or documents
that are designated by, the Company in writing at the time of delivery of such
records, information or documents as confidential shall be kept confidential by
such persons unless (1) disclosure of such records, information or documents is
required by court or administrative order or is necessary to respond to
inquiries of governmental or regulatory bodies, agencies or authorities, (2)
disclosure of such records, information or documents is, in the opinion of
counsel to the Warrantholders or to any Public Underwriter, required by law
regulations or legal process, (3) such records, information or documents are
otherwise publicly available or (4) such records, information or documents
become available to such person from a source other than the Company, and such
source is not bound by a confidentiality agreement or law prohibiting such
disclosure; and
(xv) If the Company, in the exercise of
its reasonable judgment, objects to any change reasonably requested by the
Warrantholders or the Public Underwriter, if any, to any Registration Statement
or prospectus or any amendments or supplements thereto (including documents
incorporated or deemed to be incorporated therein by reference) as provided for
in this Subsection 11(g), the Company shall not be obligated to make any such
change and the Warrantholders may withdraw the Warrants and Warrant Stock from
such registration, in which event the Company shall pay all registration
expenses (including, without limitation, attorneys' fees and expenses) incurred
by the Warrantholders in connection with such Registration Statement or
prospectus or any amendment thereto or supplement thereof; provided, that if
the Company provides the Warrantholders, as applicable, with a written opinion
of independent counsel (which counsel may be the Company's regular outside
counsel), upon which such Warrantholders may rely, that the change so requested
is not required in order that the Registration Statement comply with all
applicable securities laws (including any rules and regulations promulgated
thereunder), such
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<PAGE> 19
Warrantholders may withdraw the Warrants and the Warrant Stock from such
registration but the Company shall not be obligated to pay any registration
expenses incurred by the Warrantholders; and
(xvi) Pay all costs and expenses incident
to the performance of or compliance with the Company's obligations under the
second sentence of subsection 11(c) above and under this subsection 11(g)
(collectively, "Registration Expenses") whether or not any Registration
Statement is filed or becomes effective, including, without limitation, the
fees and disbursements of the Company's auditors, legal counsel, special legal
counsel, legal counsel responsible for qualifying the Warrants and the Warrant
Stock under blue sky laws and with the NASD, all filing fees (including,
without limitation, the Commission, states, NASD, the Nasdaq Stock Market or
any exchange) and printing expenses, all expenses in connection with the
transfer and delivery of the Warrant Stock, and all expenses in connection with
the qualification of the Warrants and the Warrant Stock under applicable blue
sky laws and with the NASD; provided, however, that the Company shall not bear
the Public Underwriter's discount or commission with respect to, or any
transfer taxes imposed on, the Warrant Stock or the fees and expenses of
counsel to the Warrantholders; provided, further, however, that the Company
shall not be responsible in any way for any fees or expenses of counsel to the
Warrantholders or any Public Underwriter, except, in each case, as provided in
Subsection 11(g)(xv) above.
SECTION 12. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company agrees to indemnify and hold
harmless the Representative, the Warrantholder, and any Holder of Warrant Stock
(for purposes of this Section 12, "Holder" shall include the officers,
directors, partners, employees, agents and counsel of a Warrantholder or a
holder of Warrant Stock), and each person, if any, who controls a Holder
("controlling person") within the meaning of Section 15 of the Act or Section
20(a) of the Exchange Act, from and against any and all losses, claims,
damages, expenses (including, without limitation, reasonable attorneys' fees
and expenses) or liabilities and all actions, suits, proceedings, injuries,
arbitrations, investigations, litigation or governmental or other proceedings
(in this Section 12, collectively, "actions") in respect thereof, whatsoever
(including, without limitation, any and all expenses whatsoever reasonably
incurred in investigating preparing or defending against any action, commenced
or threatened, or any claim whatsoever), as such are incurred, to which a
Holder or such controlling person may become subject under the Act, the
Exchange Act or any other statute or at common law or otherwise, arising out of
or based upon any untrue statement or alleged untrue statement of a material
fact contained (i) in any preliminary prospectus, any Registration Statement,
the Registration Statement or any prospectus (as from time to time amended and
supplemented); (ii) in any post-effective amendment or amendments or any new
registration statement and prospectus in which is included securities of the
Company issued or issuable upon exercise of the Warrants; or (iii) in any
application or other document or written communication (in this Section 12,
collectively, "application") executed by the Company or based upon written
information furnished by the Company in any jurisdiction in order to qualify
the Warrants or the Warrant Stock under the securities or blue sky laws thereof
or filed with the Commission, any state securities commission or agency, the
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<PAGE> 20
National Association of Securities Dealers, Inc. (the "NASD") or the NNM,
Nasdaq Small Cap Market or any other securities exchange; or the omission or
alleged omission therefrom of a material fact required to be stated therein or
necessary to make the statements therein not misleading (in light of the
circumstances in which they were made), unless such statement or omission was
made in reliance upon and in conformity with written information furnished to
the Company with respect to a Holder by or on behalf of such Holder expressly
for use in any preliminary prospectus, the registration statement or any
prospectus, or any amendment thereof or supplement thereto, or in any
application, as the case may be. In addition to its other obligations under
this subsection 12(a), the Company agrees that, as an interim measure during
the pendency of any action arising out of or based upon any untrue statement or
omission, or alleged untrue statement or alleged omission as described in this
subsection 12(a), it shall reimburse the Holders (and, to the extent
applicable, each controlling person) on a monthly basis for all reasonable
legal or other expenses incurred in connection with investigating or defending
any such action notwithstanding the absence of a judicial determination as to
the propriety and enforceability of the Company's obligations to reimburse the
Holders (and, to the extent applicable, each controlling person) for such
expenses and the possibility that such payments might later be held to have
been improper by a court of competent jurisdiction. To the extent that any
such interim reimbursement is so held to have been improper as to the Company,
the Holders (and, to the extent applicable, each controlling person) shall
promptly return it to the Company, together with interest compounded daily,
based on the "reference rate" announced from time to time by Bank of America
NTSA (the "Prime Rate"). Any such interim reimbursement payments which are not
made to the applicable Holder within thirty (30) days of a request for
reimbursement shall bear interest at the Prime Rate from the date of such
request. In no case shall any interest be in excess of that permitted by law.
The indemnity agreement in this subsection 12(a)
shall be in addition to any liability which the Company may have at common law
or otherwise.
(b) Each Holder severally agrees to indemnify and
hold harmless the Company (for purposes of this Section 12, "Company" shall
include the officers, directors, partners, employees, agents and counsel of the
Company) and each other person, if any, who controls the Company ("controlling
person") within the meaning of the Act, to the same extent as the foregoing
indemnity from the Company to the Holders, but only with respect to statements
or omissions, if any, made in any preliminary prospectus, any Registration
Statement, or any prospectus or any amendment thereof or supplement thereto or
in any application made in reliance upon, and in strict conformity with,
written information furnished to the Company with respect to such Holder by or
on behalf of such Holder expressly for use in any preliminary prospectus, any
Registration Statement or any prospectus or any amendment thereof or supplement
thereto or in any application, provided that such written information or
omissions only pertain to disclosures in any preliminary prospectus, any
Registration Statement or any prospectus directly relating to the transactions
in connection with the offering contemplated hereby. In addition to its other
obligations under this subsection 12(b), each Holder severally agrees that, as
an interim measure during the pendency of any action arising out of or based
upon any untrue statement or omission, or alleged untrue statement or alleged
omission as described in this subsection 12(b), it shall reimburse the Company
(and, to the extent applicable, each controlling person) on a monthly
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basis for all reasonable legal or other expenses incurred in connection with
investigating or defending any action with respect to such Holder
notwithstanding the absence of a judicial determination as to the propriety and
enforceability of such Holder's obligations to reimburse the Company (and, to
the extent applicable, each controlling person) for such expenses and the
possibility that such payments might later be held to have been improper by a
court of competent jurisdiction. To the extent that any such interim
reimbursement is so held to have been improper as to such Holder, the Company
(and, to the extent applicable, each controlling person) shall promptly return
it to such Holder, together with interest compounded daily, based on the Prime
Rate. Any such interim reimbursement payments which are not made to the
company within thirty (30) days of a request for reimbursement shall bear
interest at the Prime Rate from the date of such request. In no case shall any
interest be in excess of that permitted by law. Notwithstanding the provisions
of this subsection 12(b), in connection with a registration which includes the
Warrants or Warrant Stock pursuant to Subsection 11(b)(i) hereof, no such
Holder shall be required to indemnify or hold harmless the Company or any
controlling person for any amounts in excess of the net proceeds (before
deducting expenses) applicable to the Warrants or Warrant Stock sold by such
Holder pursuant to the Registration Statement. Notwithstanding the provisions
of this subsection 12(b), in connection with a registration that includes a
Holder's Warrants or Warrant Stock pursuant to subsection 11(b)(ii) hereof, no
such Holder shall be required to indemnify and hold harmless the Company or any
controlling person for any amounts in excess of that portion of all expenses as
to which indemnification is properly claimed under this Agreement equal to such
Holder's relevant proportion of all net proceeds (before deduction of expenses)
applicable to all securities sold pursuant to any Registration Statement or the
Registration Statement, as applicable.
(c) Promptly after receipt by an indemnified
party under this Section 12 of notice of the commencement of any action, such
indemnified party shall notify each party against whom indemnification is to be
sought in writing of the commencement thereof (but the failure to so notify an
indemnifying party shall not relieve it from any liability which it may have
under this Section 12 except to the extent that it has been materially
prejudiced by such failure). In case any such action is brought against any
indemnified party, and it notifies an indemnifying party or parties of the
commencement thereof, the indemnifying party or parties shall be entitled to
participate therein, and to the extent it or they may elect by written notice
delivered to the indemnified party or parties promptly after receiving the
aforesaid notice from such indemnified party or parties, to assume the defense
thereof with counsel reasonably satisfactory to such indemnified party.
Notwithstanding the foregoing, an indemnified party shall have the right to
employ its own counsel in any such case, but the fees and expenses of such
counsel shall be at the expense of such indemnified party unless (i) the
employment of such counsel shall have been authorized in writing by the
indemnifying party or parties in connection with the defense of such action at
the expense of the indemnifying party or parties, (ii) the indemnifying party
or parties shall not have employed counsel reasonably satisfactory to such
indemnified party to have charge of the defense of such action within a
reasonable time after notice of commencement of the action or (iii) such
indemnified party shall have reasonably concluded that there may be one or more
defenses available to it which are different from or additional to those
available to one or all of the indemnifying parties (in which case the
indemnifying parties shall not have the right to direct the defense of such
action on behalf of the indemnified party
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<PAGE> 22
or parties), in any of which events such fees and expenses of one additional
counsel (in addition to appropriate local counsel) shall be borne by the
indemnifying parties. In no event shall the indemnifying parties be liable for
fees and expenses of more than one counsel (in addition to appropriate local
counsel) separate from their own counsel for all indemnified parties in
connection with any one action or separate but similar or related actions in
the same jurisdiction arising out of the same general allegations or
circumstances. Anything in this Section 12 to the contrary notwithstanding, an
indemnifying party shall not be liable for any settlement of any claim or
action effected without its written consent; provided, however, that such
consent may not be unreasonably withheld or delayed.
(d) In order to provide for just and equitable
contribution in any case in which (i) an indemnified party makes a claim for
indemnification pursuant to this Section 12, but it is judicially determined
(by the entry of a final judgment or decree by a court of competent
jurisdiction and the expiration of time to appeal or the denial of the last
right of appeal) that such indemnification may not be enforced in such case
notwithstanding the fact that the express provisions of this Section 12 provide
for indemnification in such case or (ii) contribution under the Act may be
required on the part of any indemnified party, then each indemnifying party
shall contribute to the amount paid as a result of such losses, claims,
damages, expenses or liabilities (or actions in respect thereof) in such
proportion as is appropriate to reflect the relative fault of each of the
contributing parties, on the one hand, and the party to be indemnified, on the
other hand, in connection with the statements or omissions that resulted in
such losses, claims, damages, expenses or liabilities (or actions in respect
thereof), as well as any other relevant equitable considerations. Relative
fault shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by
the Company or by such Holder, and the parties' relative intent, knowledge,
state of mind and access to information and opportunity to correct or prevent
such untrue statement or omission. The amount paid by an indemnified party as
a result of the losses, claims, damages, expenses or liabilities (or actions in
respect thereof) referred to in the first sentence of this subsection 12(d)
shall be deemed to include any legal or other expenses reasonably incurred by
such indemnified party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this subsection 12(d), in a
registration that includes a Holder's Warrants or Warrant Stock pursuant to
subsection 11(b)(i) hereof, no Holder shall be required to contribute any
amount in excess of the net proceeds (before deducting expenses) applicable to
the shares of Warrants and Warrant Stock sold by such Holder pursuant to such
registration statement and prospectus. Notwithstanding the provisions of this
subsection 12(d), in a registration that includes a Holder's Warrant Stock
pursuant subsection 11(b)(ii) hereof, no such Holder shall be required to
contribute any amount in excess of that portion of all expenses as to which
contribution is properly claimed under this Agreement equal to such Holder's
relevant portion of all net proceeds (before deducting expenses) applicable to
all securities sold pursuant to the Registration Statement, as applicable. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act and the cases and promulgations thereunder) shall be entitled
to contribution from any person who was not guilty of such fraudulent
misrepresentation. Any party entitled to contribution will, promptly after
receipt of notice of commencement of any action against such party in respect
to which a claim for contribution may be made against another party or parties
under this subsection 12(d), notify such party or parties from whom
contribution may
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<PAGE> 23
be sought, but the omission to so notify such party or parties shall not
relieve the party or parties from whom contribution may be sought from any
obligation it or they may have hereunder or otherwise than under this
subsection 12(d) except to the extent it has been materially prejudiced by such
failure. The contribution agreement set forth above shall be in addition to
any liabilities which any indemnifying party may have at common law or
otherwise. Notwithstanding anything to the contrary contained in this
Agreement, no Holder shall be required to contribute any amount in excess of
the lesser of (i) that proportion of the total of such losses, claims, damages
or liabilities indemnified or contributed against equal to the proportion of
the total securities sold pursuant to the Registration Statement, as the case
may be, which is being sold by it, or (ii) the proceeds received by it in any
such offering. The Holders' obligations in this Section 12(d) to contribute
are several in proportion to the number of Warrants or Warrant Shares
registered on their behalf and not joint.
(e) The indemnity and contribution agreements
contained in this Section 12 and the representations shall remain operative and
in full force and effect, regardless of (i) any investigation made by or on
behalf of any Holder or any person controlling any Holder, the Company, its
directors or officers or any Public Underwriter or any person controlling such
Public Underwriter, (ii) acceptance of any Warrants or Warrant Shares and
payment therefor hereunder, and (iii) any termination of this Agreement. A
successor to any Holder or any person controlling any Holder, or to the
Company, its directors or officers, or any person controlling the Company,
shall be entitled to the benefits of the indemnity, contribution and
reimbursement agreements contained in this Section 12.
(f) In any proceeding relating to any
Registration Statement or any prospectus or any amendment or supplement
thereto, each party against whom contribution may be sought under this Section
12 hereby consents to the jurisdiction of any court having jurisdiction over
any other contributing party, agrees that process issuing from such court may
be served upon him or it by any other contributing party and consents to the
service of such process and agrees that any other contributing party may join
him or it as an additional defendant in any such proceeding in which such other
contributing party is a party.
SECTION 13. NOTICES. All notices and communications hereunder,
except as herein otherwise specifically provided, shall be in writing and shall
be deemed to have been duly given if mailed, delivered by hand or transmitted
by any standard form of telecommunication. Notices to the Warrantholders or a
holder of Warrant Stock shall be directed to The Boston Group, L.P. at 1999
Avenue of the Stars, Suite 2550, Los Angeles, California 90067, Attention: Mr.
Robert A. DiMinico, with a copy to Munger, Tolles & Olson, 355 South Grand
Avenue, 35th Floor, Los Angeles, California 90071, Attention: Sandra A.
Seville-Jones, Esq. Notices to the Company shall be directed to the Company at
2144 Michelson Drive, Irvine, California 92612, Attention: Mr. Steven A.
Lupinacci, with a copy to Gibson, Dunn & Crutcher LLP, 4 Park Plaza, Irvine,
California 92614, Attention: John M. Williams, Esq.
SECTION 14. PARTIES. This Agreement shall inure solely to the
benefit of and shall be binding upon, the Representative, the Company and the
Warrantholders and the holders of Warrant Stock and the controlling persons,
officers, directors and others referred to in Section 12 hereof, and their
respective successors, legal representatives and assigns, and no
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<PAGE> 24
other person shall have or be construed to have any legal or equitable right,
remedy or claim under or in respect of or by virtue of this Agreement or any
provisions herein contained.
SECTION 15. MERGER OR CONSOLIDATION OF THE COMPANY. The Company
shall not merge or consolidate with or into any other corporation or sell all
or substantially all of its property to another corporation, unless the
provisions of Section 8.3 hereof are complied with.
SECTION 16. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All
statements contained in the Underwriting Agreement, any schedule, exhibit,
certificate or other instrument delivered by or on behalf of the parties
hereto, or in connection with the transactions contemplated by this Agreement,
shall be deemed to be representations and warranties hereunder.
Notwithstanding any investigations made by or on behalf of the parties to this
Agreement, all representations, warranties and agreements made by the parties
to this Agreement or pursuant hereto shall survive the termination of this
Agreement and the issuance, sale and delivery of the Warrant and the Warrant
Stock.
SECTION 17. CONSTRUCTION. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of California,
without giving effect to conflict of laws principles thereof.
SECTION 18. COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which shall be deemed to be an original, and
all of which taken together shall be deemed to be one and the same instrument.
SECTION 19. ENTIRE AGREEMENT, AMENDMENTS. This Agreement and the
Underwriting Agreement constitute the entire agreement of the parties hereto
concerning the subject matter hereof and supersede all prior written or oral
agreements, understandings and negotiations with respect to the subject matter
hereof. This Agreement may not be amended, modified or altered except in a
writing signed by the Representative and the Company.
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IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed, all as of the day and year first above written.
DIEDRICH COFFEE, INC.
By: ____________________________
Steven A. Lupinacci
President and CEO
THE BOSTON GROUP, L.P.
By: ____________________________
Name:
Title:
<PAGE> 26
THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, EXCHANGED,
HYPOTHECATED OR TRANSFERRED IN ANY MANNER EXCEPT IN COMPLIANCE WITH
SECTIONS 1.3 AND 11(a) OF THE REPRESENTATIVE'S WARRANT AGREEMENT PURSUANT TO
WHICH THEY WERE ISSUED.
WARRANT CERTIFICATE NO. 1
WARRANT TO PURCHASE 160,000
SHARES OF COMMON STOCK
VOID AFTER 5:00 P.M.
PACIFIC TIME, ON SEPTEMBER ___, 1999
DIEDRICH COFFEE, INC.
INCORPORATED UNDER THE LAWS
OF THE STATE OF DELAWARE
This certifies that, for value received, THE BOSTON GROUP, L.P., the
registered holder hereof or assigns (the "Warrantholder"), is entitled to
purchase from DIEDRICH COFFEE, INC. (the "Company"), at any time during the
period commencing at 6:30 am., Pacific time, on September ___, 1997, and before
5:00 p.m., Pacific time, on September ___, 1999, at the purchase price per
share of Common Stock of $_____ (the "Warrant Price"), 160,000 shares of Common
Stock of the Company (the "Warrant Stock "). The number of shares of Common
Stock of the Company purchasable upon exercise of each Warrant evidenced hereby
shall be subject to adjustment from time to time as set forth in the
Representative's Warrant Agreement, dated as of September ___, 1996, by and
between the Company and the Representative (the "Representative's Warrant
Agreement").
The Warrants evidenced hereby represent the right to purchase an
aggregate of up to 160,000 shares of Warrant Stock (subject to adjustment as
provided in the Representative's Warrant Agreement) and are issued under and in
accordance with the Representative's Warrant Agreement, and are subject to the
terms and provisions contained in the Representative's Warrant Agreement, to
all of which the Warrantholder by acceptance hereof consents.
The Warrants evidenced hereby may be exercised in whole or in part by
presentation of this Warrant Certificate with the Purchase Form attached hereto
duly executed (with a signature guarantee as provided hereon) and simultaneous
payment of the Warrant Price at the principal office of the Company. Payment
of such price shall be made at the option of the Warrantholder in any manner
allowed in the Representative's Warrant Agreement.
Upon any partial exercise of the Warrants evidenced hereby, there
shall be signed and issued to the Warrantholder a new Warrant Certificate in
respect of the shares of Warrant Stock as to which the Warrants evidenced
hereby shall not have been exercised. These Warrants may be exchanged at the
office of the Company by surrender of this Warrant Certificate properly
endorsed for one or more new Warrants of the same aggregate number
<PAGE> 27
of shares of Warrant Stock as evidenced by the Warrant or Warrants exchanged.
No fractional securities shall be issued upon the exercise of rights to
purchase hereunder, but the Company shall pay the cash value of any fraction
upon the exercise of one or more Warrants. These Warrants are transferable at
the office of the Company in the manner and subject to the limitations set
forth in the Warrant Agreement.
This Warrant Certificate does not entitle any Warrantholder to any of
the rights of a stockholder of the Company.
DIEDRICH COFFEE, INC.
By: ________________________________
Steven A. Lupinacci
President and CEO
Dated: September ___, 1996
ATTEST: [Seal]
____________________________________
Martin R. Diedrich
Secretary
<PAGE> 28
DIEDRICH COFFEE, INC.
PURCHASE FORM
DIEDRICH COFFEE, INC. (the "Company")
___________________________________
___________________________________
Attention: President
The undersigned hereby irrevocably elects to exercise the right of
purchase represented by the within Warrant Certificate for, and to purchase
thereunder, _____ shares of common stock of the Company (the "Warrant Stock")
provided for therein, and requests that certificates for the Warrant Stock be
issued in the name of:
__________________________________________
(Please print or Type Name, Address and Social Security Number)
__________________________________________
__________________________________________
and, if said number of shares of Warrant Stock shall not be all the Warrant
Stock purchasable hereunder, that a new Warrant Certificate for the balance of
the Warrant Stock purchasable under the within Warrant Certificate be
registered in the name of the undersigned Warrantholder or his Assignee as
below indicated and delivered to the address stated below.
Dated:_________________
Name of Warrantholder
or Assignee: _________________________
(Please Print)
Address: _________________________
_________________________
Signature: _________________________
Note: The above signature must correspond with the name as it appears upon the
face of this Warrant Certificate in every particular, without alteration or
enlargement or any change whatever, unless these Warrants have been assigned.
Signature Guaranteed:_____________________________
(Signature must be guaranteed by a bank or trust company having an office or
correspondent in the United States or by a member firm of a registered
securities exchange of the National Association of Securities Dealers, Inc.)
<PAGE> 29
ASSIGNMENT
(To be signed only upon assignment of Warrants)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and
transfers the right to purchase _____ shares of Warrant Stock represented by
the within Warrant Certificate unto, and requests that a certificate for such
Warrant be issued in the name of:
_____________________________________
(Name and Address of Assignee Must be Printed or Typewritten)
_____________________________________
_____________________________________
hereby irrevocably constituting and appointing _______________ Attorney to
transfer said Warrants on the books of the Company, with full power of
substitution in the premises and, if said number of Warrant Stock shall not
bear all of the Warrant Stock purchasable under the within Warrant Certificate,
that a new Warrant Certificate for the balance of the Warrant Stock purchasable
under the within Warrant Certificate be registered in the name of the
undersigned Warrantholder and delivered to such Warrantholder's address as then
set forth on the Company's books.
Dated:________________________ _____________________________________
Signature of Registered Holder
Note: The above signature must correspond with the name as it appears upon the
face of this Warrant Certificate in every particular, without alteration or
enlargement or any change whatever.
Signature Guaranteed:_____________________________
(Signature must be guaranteed by a bank or trust company having an office or
correspondent in the United States or by a member firm of a registered
securities exchange or the National Association of Securities Dealers, Inc.)
<PAGE> 1
EXHIBIT 4.4
[SPECIMEN COMMON STOCK CERTIFICATE]
<TABLE>
<S> <C> <C>
COMMON STOCK [LOGO] DIEDRICH COFFEE, INC. COMMON STOCK
SHARES SHARES
[RT ] [ ]
SEE REVERSE FOR CERTAIN DEFINITIONS
INCORPORATED UNDER THE LAWS OF
THE STATE OF DELAWARE CUSIP 253675 10 2
</TABLE>
THIS CERTIFIES THAT
IS THE RECORD HOLDER OF
FULLY PAID AND NONASSESSABLE SHARES OF
COMMON STOCK, $0.01 VALUE OF
DIEDRICH COFFEE, INC.
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this certificate properly
endorsed. This certificate is not valid until countersigned by the Transfer
Agent and registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
/s/ Martin Diedrich [SEAL] /s/ Steven A. Lupinacci
- ---------------------- -----------------------
SECRETARY AND CHAIRMAN PRESIDENT AND CHIEF
OF THE BOARD EXECUTIVE OFFICER
COUNTERSIGNED AND REGISTERED:
U.S. STOCK TRANSFER CORPORATION
TRANSFER AGENT AND REGISTRAR
BY /s/
-----------------------------------
AUTHORIZED SIGNATURE
<PAGE> 2
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entireties
JT TEN -- as joint tenants with right of
survivorship and not as tenants
in common
UNIF GIFT MIN ACT -- _________________ Custodian _________________
(Cust) (Minor)
under Uniform Gifts to Minors
Act__________________________________________
(State)
UNIF TRF MIN ACT -- _________________ Custodian (until age______)
(Cust)
______________________under Uniform Transfers
(Minor)
to Minors Act________________________________
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, ____________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
[ ]
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
__________________________________________________________________________Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
________________________________________________________________________Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated________________________________
X_______________________________________________
X_______________________________________________
THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
NOTICE: CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE
FACE OF THE CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY
CHANGE WHATEVER.
Signature(s) Guaranteed
By_________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE> 1
EXHIBIT 5.1
Gibson, Dunn & Crutcher LLP
4 Park Plaza, Suite 1700
Irvine, California 92614
September 9, 1996
Telephone Our File Number
(714) 451-3800 22453-00004
Diedrich Coffee, Inc.
2144 Michelson Drive
Irvine, CA 92612
Re: Registration Statement on Form S-1
(Registration No. 333-08633)
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 (the
"Registration Statement") filed by Diedrich Coffee, Inc., a Delaware corporation
(the "Company") with the Securities and Exchange Commission on July 23, 1996
(Registration No. 333-08633), as amended to the date hereof, in connection with
the registration under the Securities Act of 1933, as amended, of up to an
aggregate of 2,530,000 shares of the Company's Common Stock, par value $0.01 per
share (the "Common Stock"), to be sold in a proposed public offering (the
"Offering"), consisting of (i) up to 1,600,000 shares of Common Stock to be
issued and sold by the Company, and (ii) up to 930,000 shares of Common Stock to
be sold by selling stockholders (such shares, together with the shares to be
issued and sold by the Company, being referred to herein as the "Shares"), all
as set forth in the Registration Statement.
As your counsel, we have examined the Company's Certificate of
Incorporation and Bylaws, each as amended to the date hereof, and the records of
corporate proceedings and other actions taken by the Company in connection with
the authorization and issuance of the Common
<PAGE> 2
Diedrich Coffee, Inc.
September 9, 1996
Page 2
Stock being sold by the Company and the sale of the Shares by the Company and
the selling stockholders. Based upon the foregoing and in reliance thereon,
and subject to (i) compliance with applicable state securities laws and (ii)
receipt from the Securities and Exchange Commission of an order declaring the
Registration Statement effective, it is our opinion that the Shares, when
issued, delivered and paid for pursuant to and in accordance with the
Registration Statement (and pertinent exhibits thereto), will be validly
issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement, and we further consent to the use of our name under the
caption "Legal Matters" in the Prospectus forming a part of said Registration
Statement. In giving this consent, we do not thereby admit that we are within
the category of persons whose consent is required under Section 7 of the
Securities Act or the Rules and Regulations of the Commission.
Very truly yours,
/s/ Gibson Dunn & Crutcher
GIBSON, DUNN & CRUTCHER LLP
MWS/JMW/AEM
<PAGE> 1
EXHIBIT 10.10
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into
as of August 26, 1996, by and between DIEDRICH COFFEE, a California corporation
(the "Company"), and KERRY W. COIN (the "Employee").
R E C I T A L S :
The Company and the Employee desire to enter into this Agreement to
establish the terms and conditions of the Employee's employment by the Company
during the term hereof.
A G R E E M E N T :
NOW, THEREFORE, in consideration of the foregoing recital, and subject
to the conditions and covenants set forth herein, the parties agree as follows:
1. Employment and Term.
(a) The Company hereby employs the Employee as its Chief
Operating Officer and the Employee hereby accepts such employment upon the terms
and subject to the conditions set forth in this Agreement. Unless earlier
terminated as provided in this Agreement, the term of the Employee's employment
under this Agreement shall commence on the date hereof and shall continue for a
period of three (3) years from the date hereof (the "Term").
(b) The Employee shall perform such duties and functions
consistent with his role as Chief Operating Officer as assigned to him by the
Board of Directors of the Company (the "Board").
2. Compensation.
2.1 Salary. For all services to be rendered by the
Employee under this Agreement, the Company agrees to pay the Employee a salary
(the "Base Salary") equal to One Hundred Twenty Thousand Dollars ($120,000) per
year, payable in semi-monthly installments, less all amounts required by law to
be withheld or deducted. During the Term of this Agreement, the Board shall
review the Employee's Base Salary on or about each anniversary date of the date
of this Agreement. The Board, in its sole and absolute discretion from time to
time, may increase (but not decrease without Employee's written consent)
Employee's Base Salary. The Board, in its sole and absolute discretion, also
may pay Employee performance bonuses based on the Company's performance and
Employee's contribution thereto in such amounts and at such times as the Board
may determine.
2.2 Stock Options. The Company shall grant options to the
Employee pursuant to the Company's 1996 Stock Incentive Plan in accordance with
the following terms and conditions:
(a) The Company shall grant to the Employee an
option to purchase Twenty Thousand (20,000) shares of the Company's common stock
as a signing bonus. Five Thousand (5,000) of these Twenty Thousand (20,000)
option shares shall become exercisable immediately upon grant, Ten Thousand
(10,000) of these Twenty Thousand (20,000) option shares shall become
exercisable sixty-five (65) days after the commencement of the Employee's
employment and the remaining Five Thousand (5,000) option shares shall become
exercisable ratably on the last day of each of the six months following the
Employee's
<PAGE> 2
commencement of employment. The option exercise price with respect to these
option shares shall be the per share offering price of the Company's common
stock in its initial public offering (the "IPO price").
(b) The Company shall grant to the Employee an
option to purchase an additional One Hundred Thousand (100,000) shares of the
Company's common stock, such option shares to become exercisable in accordance
with the following schedule: Sixty Thousand (60,000) option shares shall become
exercisable ratably on the last day of each of the twenty-four months following
the Employee's commencement of employment and Forty Thousand (40,000) option
shares shall become exercisable ratably on the last day of each of the
twenty-fifth through thirty-sixth months following the Employee's commencement
of employment. The option exercise price with respect to these option shares
shall also be the IPO price.
(c) Notwithstanding the foregoing, the option
shares referred to in subparagraphs 2.2(a) and (b) shall become exercisable
immediately upon the occurrence of a "Change in Control." For purposes hereof,
a "Change in Control" shall be deemed to mean (i) the acquisition, in a
transaction other than the initial public offering of the Company's common
stock, by any person, entity or "group" (within the meaning of section 13(d)(3)
of the Securities Exchange Act of 1934, as amended), of securities of the
Company representing 60% or more of the combined voting power of the then
outstanding securities of the Company, (ii) the merger or other business
combination of the Company with or into another corporation, a majority of the
directors of which were not directors of the Company immediately prior to the
merger and in which stockholders of the Company immediately prior to the
effective date of such merger directly or indirectly own less than 60% of the
voting power in such corporation, or (iii) the sale or other disposition of all
or substantially all of the assets of the Company.
(d) Unless terminated earlier pursuant to this
subparagraph 2.2(d), the option shares shall terminate on the tenth anniversary
of the date hereof. If the Employee's employment with the Company is terminated
prior to the expiration of the Term for any reason other than a reason set forth
in subparagraph 4(a), any option shares that have not yet become exercisable
shall not become exercisable after the effective date of Employee's termination
of employment and such option shares shall terminate on such date and any option
shares exercisable as of the effective date of Employee's termination of
employment shall terminate and not be exercisable on the date two years
following the effective date of such termination of employment. If the
Employee's employment is terminated by the Company for a reason set forth in
subparagraph 4(a), any option shares that are not yet exercisable shall not
become exercisable after the effective date of Employee's termination of
employment and such option shares shall terminate on such date and any option
shares exercisable as of the effective date of Employee's termination of
employment shall terminate and not be exercisable on the date sixty (60) days
following the effective date of such termination of employment.
2.3 Employee Benefits. During the Term of the Employee's
employment hereunder:
(a) The Employee shall be entitled to vacation
leave consistent with the Company's policies for other senior executives of the
Company.
(b) The Company shall pay or reimburse the
Employee for all reasonable and necessary travel and other business expenses
incurred or paid by the Employee in connection with the performance of his
services under this Agreement consistent with the Company's policies for other
senior executives of the Company.
2
<PAGE> 3
(c) The Company shall provide and pay for the
annual cost of premiums for health, dental and medical insurance coverage for
the Employee and the Employee's dependents consistent with the coverage
generally made available by the Company to senior executives of the Company and
providing benefits at least as favorable to the Employee as the coverage that is
in effect at the date of this Agreement.
(d) In addition to the benefits set forth above,
the Employee shall be entitled to participate in any other policies, programs
and benefits which the Company may, in its sole and absolute discretion, make
generally available to its other senior executives from time to time including,
but not limited to, life insurance, disability insurance, pension and retirement
plans, stock plans and other similar programs.
3. Confidential Information and Nonsolicitation.
(a) The Employee acknowledges and agrees that the Company
has developed and uses certain proprietary and confidential information, data,
processes, business methods, computer software, data bases, customer lists and
know-how ("Confidential Information"). The Employee agrees that the
Confidential Information is a trade secret of the Company which shall remain the
sole property of the Company notwithstanding that the Employee, as an employee
of the Company, may participate in the development of the Confidential
Information. During the term of this Agreement and at all times thereafter the
Employee shall not disclose any Confidential Information to any person or entity
for any reason or purpose whatsoever, nor shall the Employee make use of any
Confidential Information for the Employee's own benefit or for the benefit of
any other person or entity. Upon termination of this Agreement for any reason,
the Employee will promptly surrender to the Company all Confidential Information
in the Employee's possession or under the Employee's control, whether prepared
by the Employee or by others.
(b) The Employee agrees that for a period of three (3)
years following the termination of the Employee's employment hereunder, the
Employee will not directly or indirectly solicit or attempt to solicit any of
the employees of or consultants to the Company to leave the Company or to become
employees of or consultants to any other person or entity.
4. Termination of Employment.
(a) Notwithstanding any other provision of this Agreement,
the Employee's employment under this Agreement may be terminated as follows:
(i) Upon the death of the Employee, this
Agreement and the Employee's employment hereunder shall terminate immediately
and without notice by the Company; or
(ii) In the event of the inability of the Employee
to perform his duties or responsibilities hereunder, as a result of mental or
physical ailment or incapacity, for an aggregate of ninety (90) calendar days
during any calendar year (whether or not consecutive) (a "Disability") during
which period of Disability the Employee shall be entitled to his compensation
pursuant to this Agreement, this Agreement and the Employee's employment
hereunder shall terminate upon delivery of written notice to the Employee; or
(iii) By the Company for Cause (as defined below)
in accordance with the provisions of Section 4(b) hereof.
3
<PAGE> 4
(b) The parties agree that for purposes of this Agreement,
the term "Cause" shall mean the following:
(i) The Employee's willful and repeated failure
to satisfactorily perform his job duties under this Agreement;
(ii) Failure by the Employee to comply with all
material applicable laws in performing his job duties or in directing the
conduct of the Company's business; and
(iii) Commission by the Employee of any felony or
intentionally fraudulent act against the Company, or its employees, agents or
customers.
(c) With respect to events described in subparagraph
4(b)(i) and (ii) above, the Company shall give written notice to the Employee of
any such event and the Employee shall have thirty (30) days beginning on the
date of delivery of such written notice to cure same, or if such event cannot be
cured within said thirty (30) day period, the Employee shall commence his
efforts to cure the event within the thirty (30) day period and diligently work
to cure such event within a reasonable time period. If the Employee within said
thirty (30) day period or within a reasonable time period, as applicable, does
not cure the event for which notice has been provided under subparagraphs
4(b)(i) or (ii) above, then the Employee's employment under this Agreement may
be terminated by the Company by delivery to the Employee of written notice of
termination and such termination will be effective as of the date of delivery of
such written notice. With respect to events described in subparagraph 4(b)(iii)
above, the Employee's employment under this Agreement may be terminated by the
Company by delivery to the Employee of written notice of termination and such
termination will be effective as of the date of delivery of such written notice.
Upon the effectiveness of termination as set forth in this subparagraph 4(c),
the Employee shall not be entitled to receive any further compensation or
benefits pursuant to this Agreement except for payment within ten days after his
termination date of all accrued but unpaid Base Salary.
(d) In addition to its rights to terminate the Employee's
employment under this Agreement pursuant to subparagraph 4(a), the Company may
also terminate the Employee's employment under this Agreement for any other
reason, provided that, in such event, the Employee shall be entitled to receive
an amount equal to seventy-five percent of the Employee's Base Salary on the
termination date and the Employee shall not be entitled to receive any other
compensation or benefits hereunder. The Employee acknowledges and agrees that
the provisions of this paragraph 4 state his entire and exclusive rights,
entitlements, and remedies against the Company, its successors, assigns,
affiliates, officers, directors, employees and representatives for termination
without any cause shown by the Company.
(e) The Employee may terminate his employment for good
cause or without any cause. In the event the Employee terminates his employment
for "good cause" (as defined below), he shall be entitled to receive the
severance benefits described in subparagraph 4(d) above. If he terminates his
employment for any other reason, he shall not be entitled to receive any
compensation except for payment within ten days after his termination date of
all accrued but unpaid Base Salary. For purposes of this Agreement, "good
cause" for termination of employment by the Employee shall mean: failure to
maintain the Employee in the position of an officer of the Company or a material
breach of the provisions of this Agreement by the Company. The Employee
acknowledges and agrees that the provisions of this subparagraph 4(e) state his
entire and exclusive rights and remedies under this Agreement against the
Company, its successors, assigns, affiliates, officers, directors, employees and
representatives if he terminates this Agreement.
4
<PAGE> 5
5. Assignment of Rights and Duties. Neither the Employee nor the
Company may assign their rights or duties under this Agreement without prior
written consent of both parties, which consent may be withheld for any reason.
Any attempted assignment, transfer, conveyance, or other disposition of any
interest of either party in this Agreement shall be void. Notwithstanding the
foregoing, the Company may make such assignment to any affiliated company, but
its assignment of this Agreement to an affiliate does not relieve it of its
obligations under this Agreement if that affiliate fails to perform the
Company's obligations under this Agreement.
6. Miscellaneous.
6.1 Modification and Waiver of Breach. No waiver or
modification of this Agreement or any term hereof shall be binding unless it is
in writing signed by the parties hereto. No failure to insist upon compliance
with any term, provision or condition to this Agreement, whether by conduct or
otherwise, in any one or more instances, shall be deemed to be or construed as a
waiver of any such term, provision or condition or as a waiver of any other
term, provision or condition of this Agreement.
6.2 Notices. All notices and other communications
required or permitted under this Agreement shall be in writing and shall be
deemed given upon personal delivery, facsimile transmission (with confirmation
of receipt), delivery by a reputable overnight courier service or five (5) days
following deposit in the United States mail (if sent by certified or registered
mail, postage prepaid, return receipt requested), in each case duly addressed to
the party to whom such notice or communication is to be given as follows:
(a) If to the Company:
Diedrich Coffee
2144 Michelson Drive
Irvine, CA 92612
Attn: President
Telecopy Number: (714) 260-1610
(b) If to the Employee:
Kerry W. Coin
--------------------------
--------------------------
--------------------------
Either the Employee or the Company may change the address for purposes of this
Paragraph by giving to the other intended to be bound thereby, in the manner
provided herein, a written notice of such change.
6.3 Counterparts. This Agreement may be executed in one
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same Agreement.
6.4 Complete Agreement. This Agreement contains the
entire agreement between the parties hereto with respect to the transactions
contemplated by this Agreement and supersedes all previous and all
contemporaneous negotiations, commitments, writings, and understandings.
5
<PAGE> 6
6.5 Legal Fees; Arbitration. The parties hereto expressly
agree that in the event of any dispute, controversy or claim by any party
regarding this Agreement, the prevailing party shall be entitled to
reimbursement by the other party to the proceeding of reasonable attorneys'
fees, expenses and costs incurred by the prevailing party. Any controversy,
dispute or claim arising out of, in connection with, or in relation to the
interpretation, performance or breach of this Agreement or otherwise arising out
of the execution hereof, including any claim based on contract, tort or statute,
shall be resolved, at the request of any party, by submission to binding
arbitration at the Orange County, California offices of Judicial Arbitration &
Mediation Services, Inc. ("JAMS"), and any judgment or award rendered by JAMS
shall be final, binding and unappealable, and judgment may be entered by any
state or federal court having jurisdiction thereof. Any party can initiate
arbitration by sending written notice of intention to arbitrate (the "Demand) by
registered or certified mail to all parties and to JAMS. The Demand shall
contain a description of the dispute, the amount involved, and the remedy
sought. The arbitrator shall be a retired or former judge agreed to between the
parties from the JAMS' panel. If the parties are unable to agree, JAMS shall
provide a list of three available judges and each party may strike one. The
remaining judge shall serve as the arbitrator. Each party hereto intends that
the provisions to arbitrate set forth herein be valid, enforceable and
irrevocable. In his award, the arbitrator shall allocate, in his discretion,
among the parties to the arbitration all costs of the arbitration, including the
fees of the arbitrator and reasonable attorneys' fees, expenses, costs and
expert witness expenses of the parties. The parties hereto agree to comply with
any award made in any such arbitration proceedings that has become final and
agree to the entry of a judgment in any jurisdiction upon any award rendered in
such proceeding becoming final.
6.6 Severability. In the event any provision or
provisions of this Agreement is or are to be held invalid, the remaining
provisions of this Agreement shall not be affected thereby.
6.7 Governing Law. This Agreement shall be governed by
the laws of the State of California.
IN WITNESS WHEREOF, the undersigned have executed this Agreement on the
day and year first above written.
THE EMPLOYEE
------------------------------
Kerry W. Coin
DIEDRICH COFFEE
By:
---------------------------
Steven A. Lupinacci
President and Chief
Executive Officer
6
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Diedrich Coffee
Irvine, California
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated March 11, 1996, except as to Note 9,
which is as of July 19, 1996, relating to the financial statements of Diedrich
Coffee, which is contained in that Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/ BDO SEIDMAN, LLP
BDO SEIDMAN, LLP
Costa Mesa, California
September 9, 1996
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Diedrich Coffee
Irvine, California
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated April 19, 1996, relating to the
financial statements of the Acquired Stores of Brothers Gourmet Coffees, Inc.,
which is contained in that Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/ BDO SEIDMAN, LLP
BDO SEIDMAN, LLP
Costa Mesa, California
September 9, 1996
