<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 24, 1996
REGISTRATION NO. 333-08633
- --------------------------------------------------------------------------------
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
DIEDRICH COFFEE
(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>
CALIFORNIA 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
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
DIEDRICH COFFEE
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K SHOWING LOCATIONS IN THE
PROSPECTUS OF INFORMATION REQUIRED IN PART I OF FORM S-1.
<TABLE>
<CAPTION>
ITEM NUMBER AND HEADING IN LOCATION OR
REGISTRATION STATEMENT CAPTIONS IN PROSPECTUS
--------------------------------------------- ------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus....... Facing Page; Cross Reference Sheet;
Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus................................... Inside Front Cover Page of Prospectus;
Table of Contents; Additional Information;
Outside Back Cover Page of Prospectus
3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges................. Prospectus Summary; Risk Factors
4. Use of Proceeds.............................. Prospectus Summary; Use of Proceeds
5. Determination of Offering Price.............. Outside Front Cover Page of Prospectus;
Underwriting
6. Dilution..................................... Risk Factors; Dilution
7. Selling Security Holders..................... Principal and Selling Stockholders
8. Plan of Distribution......................... Outside Front Cover Page of Prospectus;
Underwriting
9. Description of Securities to be Registered... Outside Front Cover Page of Prospectus;
Description of Capital Stock
10. Interests of Named Experts and Counsel....... Not Applicable
11. Information with Respect to the Registrant... Outside Front Cover Page of Prospectus;
Prospectus Summary; Risk Factors; Use of
Proceeds; Dividend Policy; Capitalization;
Dilution; Selected Financial Data;
Management's Discussion and Analysis of
Financial Condition and Results of
Operations; Business; Management; Certain
Transactions; Principal and Selling
Stockholders; Description of Capital
Stock; Shares Eligible for Future Sale;
Underwriting; Legal Matters; Experts;
Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.................................. Not Applicable
</TABLE>
<PAGE> 3
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 JULY 24, 1996
2,200,000 SHARES
[LOGO]
DIEDRICH COFFEE, INC.
COMMON STOCK
------------------------
Of the 2,200,000 shares of common stock, no par value (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 between 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." Application has been made for quotation of the Common Stock on
the Nasdaq National Market under the proposed symbol "DDRX."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" ON PAGE 7.
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>
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- --------------------------------------------------------------------------------------------------
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS
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<S> <C> <C> <C> <C>
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 the Price to Public
per share or $11.50 ("Representative's Warrants"). For indemnification and
contribution arrangements with the Underwriters, see "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $900,000,
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> 4
[GRAPHICS]
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.
2
<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 to 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 on or prior to the consummation of this
Offering. Prospective investors should carefully consider the information
discussed under "Risk Factors."
THE COMPANY
Diedrich Coffee is one of the leading specialty coffee roaster/retailers in
the United States and currently operates thirty-six coffeehouses located in
Southern California, Colorado and Texas. At each of the Diedrich coffeehouses,
the Company sells high quality coffee beverages made with its own freshly
roasted coffee. 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. 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-six coffeehouses as of July 19, 1996
through the construction of new coffeehouses and recent acquisitions. In
addition, the Company has entered into leases that will permit the opening of
six 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 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 through
experienced sourcing of the unroasted beans and its proprietary roasting formula
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. 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 1,540 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.
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 19, 1996, the
conversion of eleven stores had been completed. Management believes that the
addition of the Denver stores
3
<PAGE> 6
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.
Diedrich Coffee, the predecessor of the Company, was incorporated in
California in April 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................... Repayment of the amounts outstanding under
the Company's short-term revolving credit
facility and a revolving promissory note
and funding for the opening of additional
coffeehouses (through new store
construction and acquisitions),
infrastructure enhancements, repayment of
certain other indebtedness, working
capital and other general corporate
purposes. See "Use of Proceeds" and
"Certain Transactions."
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>
- ---------------
(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, 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 has applied to list the Common Stock on the Nasdaq
National Market, there can be no assurance that if the stock is listed on
such exchange, 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 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 1,402 277 337
Operating income (loss)... (33) 455 349 (194) 114 216
Net income (loss)......... $ (89) $ 324 $ 186 $ (135) $ 59 $ 107
======== ======== ========== ========== ======== ==========
Pro forma net income
(loss) per share (4).... $ 0.06 $ (0.04) $ 0.03
========== ========== ==========
Shares used in pro forma
per share calculation
(4)..................... 3,153,000 3,153,000 3,906,000
========== ========== ==========
OTHER DATA:
Average sales per store
(5)..................... $ 883 $ 946 $ 1,002 $ 216 $ 223(6)
Percentage change in
comparable store sales
(7)..................... 8.0% 17.0% 10.2% 19.8% 8.5%(8)
Number of stores open for
full period............. 4 7 8(9) 8(9) 12
Number of stores open at
end of period........... 7 7 12 8 33(10)
Pre-opening expenses...... $ 68 $ 0 $ 87 $ 15 $ 44
</TABLE>
<TABLE>
<CAPTION>
JANUARY 31, MAY 1,
-------------------- --------------------------
PRO FORMA AS ADJUSTED
1996 1996(1) 1996(2)(3) 1996(11)
------ --------- ---------- -----------
<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.
(2) 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 13
5
<PAGE> 8
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 acquisitions 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) 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.
(5) Includes only stores open for the entire period indicated.
(6) 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 $4,263 while average
weekly per store sales for the Company, excluding such stores, were
$17,167.
(7) Includes only stores open one year or more at the beginning of the period.
(8) The percentage change in comparable store sales has been adjusted for the
additional week in the quarterly period ended May 1, 1996.
(9) Includes one store opened on the second day of the period and considered to
have been open for the entire period.
(10) 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.
(11) 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
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. 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. Management anticipates that
profitability may be adversely affected during the fiscal year ended January 31,
1997 ("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."
Rapid Expansion; Growth Strategy. 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 19, 1996, the Company
expanded the number of coffeehouses from three to forty-two, of which six are
not yet open but are subject to a binding lease. 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 19, 1996, the
Company had completed eleven 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, 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 motivate key employees and to raise additional capital.
There can be no assurance the Company will be
7
<PAGE> 10
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. In order to achieve and maintain the
Company's anticipated growth rate, 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 coffees, or the unavailability of adequate
supplies of unroasted coffees 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 coffees,
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 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
8
<PAGE> 11
supply of coffee than would have been required absent such activities. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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,
consumer factors 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. 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. The Company's thirty-six 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 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 substantial rent increases, or are subject to
renewal with a scheduled rent increase, which could result in rents being above
fair market value.
9
<PAGE> 12
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 regulation 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 its products and services available
at such 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 and 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
"Business -- Employees" and "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." Furthermore, certain other provisions of the Company's Certificate of
Incorporation and Bylaws may have the effect of delaying or preventing changes
in control or management of the Company, which could adversely affect the market
price of the Company's Common 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."
10
<PAGE> 13
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 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."
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
between 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.
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, the Senior Vice
President of Trading and the 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
11
<PAGE> 14
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."
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
$15,644,000. The Company will not receive any proceeds from the sale of shares
of Common Stock by the Selling Stockholders, including any shares issued 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 $3,137,000 with an
interest rate of 7.7% as of July 19, 1996). The funds borrowed under this
facility, which matures on November 1, 1996 (extended to October 31, 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 July 19, 1996). 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 July 19, 1996, amounted
to an aggregate of approximately $433,000 which bore interest at a weighted
average interest rate of 13.6%. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
The remainder of the net proceeds will be used to fund expansion (through
new store construction and acquisitions), infrastructure enhancements,
development of additional distribution channels and product development, as well
as working capital for general corporate purposes. Although the Company from
time to time evaluates potential acquisitions of other existing specialty coffee
retail businesses, as of July 19, 1996, it has no understandings, commitments or
agreements with respect to any acquisition. The Company intends to use
approximately $1.5 million of the net proceeds to fund the 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. 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 and 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.
12
<PAGE> 15
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 on or 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, 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; 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; 1,608,568
shares outstanding (actual); no shares
outstanding (pro forma and as adjusted).......... 2,225,813 -- --
Preferred stock, no par value; no shares authorized
(actual); 3,000,000 shares authorized (pro forma
and as adjusted); no shares outstanding.......... -- -- --
Common stock, no par value; 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 3,356,511 19,000,511
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>
13
<PAGE> 16
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 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, 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>
14
<PAGE> 17
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 1,402 277 337
------ ------ ------ ------ ------ ------- ------ ------
Total.................. 2,348 3,115 4,447 7,136 9,895 12,795 1,944 4,059
------ ------ ------ ------ ------ ------- ------ ------
Operating income (loss)......... 34 (176) (33) 455 349 (194) 114 216
Interest expense and other...... 80 72 55 78 34 34 13 37
------ ------ ------ ------ ------ ------- ------ ------
Income (loss) before income
taxes......................... (46) (248) (88) 377 315 (228) 101 179
Provision (benefit) for income
taxes......................... 1 (15) 1 53 129 (93) 42 72
------ ------ ------ ------ ------ ------- ------ ------
Net income (loss)............... $ (47) $ (233) $ (89) $ 324 $ 186 $ (135) $ 59 $ 107
====== ====== ====== ====== ====== ======= ====== ======
Pro forma net income (loss) per
share(4)...................... $ .06 $ (.04) $ .03
====== ======= ======
Shares used in pro forma per
share calculation(4).......... 3,153,000 3,153,000 3,906,000
========= ========= =========
</TABLE>
15
<PAGE> 18
<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 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 acquisitions 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) 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.
16
<PAGE> 19
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 the fiscal year ended January 31, 1996
("fiscal 1996") there were twelve coffeehouses in operation, all of which were
located in Southern California, and as of July 19, 1996, the Company operated a
total of thirty-six coffeehouses located in California, Colorado and Texas, with
six additional locations subject to a binding lease.
On February 15, 1996, the Company acquired seven retail locations in
Denver, Colorado that were former bakery-espresso cafes (the "Acquired Cafes").
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"). 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 concept. As of July
19, 1996, eleven of the eighteen remaining acquired stores have been converted
to Diedrich coffeehouses which included new signage, decor, recipes, products
and service standards. 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 concept 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.
At the end of fiscal 1996, there were twelve coffeehouses in operation,
including ten which were located in suburban sites such as neighborhood shopping
centers, one which was located in a regional mall and one which 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.
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.
17
<PAGE> 20
RESULTS OF OPERATIONS
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>
TWELVE THIRTEEN WEEKS ENDED 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 0.0 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 15.8 N/A 15.9
Depreciation and Amortization.... 2.3 3.4 3.5 4.0 3.0 3.6 3.4 3.6
General and Administrative
Expenses....................... 18.3 11.2 13.0 11.1 13.4 10.3 N/A 7.9
Operating Income (Loss).......... (0.7) 6.0 3.4 (1.5) 5.5 6.0 2.1 5.1
Net Income (Loss)................ (2.0) 4.3 1.8 (1.1) 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 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 increased transaction volume.
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
18
<PAGE> 21
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.
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 increased transaction volume 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 increased transaction volume. 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.
19
<PAGE> 22
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.
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
20
<PAGE> 23
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 $59,000
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 the sales management overhead
component.
Depreciation and amortization. Depreciation and amortization excluding the
acquired stores increased by 93.5% to $120,000 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 $34,000, or 3.4% 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 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.
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
21
<PAGE> 24
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. Infrastructure additions consist principally
of additional roasting and packaging capacity as well as development of
enhancements to the management information systems 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 capital assets. 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.
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 19, 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 expire 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
July 19, 1996, borrowings under this facility were approximately $3,137,000 at
an interest rate of 7.7% and $963,000 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 expires 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 31, 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, requires the
delivery of regular financial information and the
22
<PAGE> 25
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 expires on September 30, 1996. The
outstanding balance on the note as of July 15, 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, other financing sources, 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.
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.
23
<PAGE> 26
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.
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) with an adjustment of $380,000 which
eliminates management's estimation of the duplicated overhead and administrative
burden, for a combined amount of $1,402,000, which reflects management's
estimate of the appropriate on-going overhead expense level at 11.1%.
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
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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 one of the leading specialty coffee roaster/retailers in
the United States and currently operates thirty-six coffeehouses located in
Southern California, Denver, Colorado and Houston, Texas. At each of the
Diedrich coffeehouses, the Company sells high quality coffee beverages made with
its own freshly roasted coffee. 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. 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-six coffeehouses as of July 19, 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 six 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 1,540 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 19, 1996, the conversion of eleven 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 eleven 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. 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, January 1993, a
report published by the Specialty Coffee Association of America (the "SCAA
Report"), 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. The SCAA 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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<PAGE> 30
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 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 roasted coffee beans are delivered
promptly 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 19, 1996, the
Company had executed leases for six 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 six newly
constructed coffeehouses as of July 19, 1996. Six 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 achieve its new store goals through
a combination of original construction and its ongoing evaluation of
potential acquisitions that bring accelerated critical mass to 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
acquiring any existing coffeehouses.
- 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. 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
anticipates 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
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purchase only the finest qualities and varieties of coffee generally available
to this industry by sampling the 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
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characteristics of the coffee during the roasting process and develop the
optimal flavor conditions that a coffee has to offer.
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 has coffeehouses. 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
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coffeehouses feature varying amenities to promote this environment, such as live
music or outdoor patios where customers can enjoy their coffee.
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 sales of $7,292,000 or an
average of $729 per square foot. These stores earned an average operating profit
after depreciation of approximately $275,000 per store.
During the same year, 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 stores 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
develop a selection of food items that will complement beverage sales. The
Company also currently operates three Diedrich Espresso Cafes. These stores
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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Diedrich Coffeehouse Locations
Set forth below is a list of each of the Company's coffeehouse locations as
of July 19, 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 19, 1996, the Company was operating
thirty-six coffeehouses and had entered into leases that will permit the opening
of six additional coffeehouses this year.
<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-Spectrum............................................................ 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
San Juan Capistrano........................................................ February 1996 Open
Trabuco Hills.............................................................. August 1992 Open
Tustin..................................................................... August 1986 Open
Irvine-Park Place.......................................................... N/A Under Construction
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 (2)
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 has the right to terminate the
agreement if the Developer fails to meet this schedule. 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 it 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 (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 the
coffeehouse profit center. These improvements have enabled continued daily
managerial supervision and control without 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
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<PAGE> 37
and requests and problem solving forums. The Company intends to utilize a
portion of the net proceeds of this Offering to complete this phase of MIS
upgrades and to continue to exploit 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 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
35
<PAGE> 38
distinctions between Diedrich Coffee and prepackaged ground coffee. In markets
that are more knowledgeable 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 19, 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,
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<PAGE> 39
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.
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 that affect its business. Each of the Company's coffeehouses and
roasting facilities is subject to licensing and regulation by a number of
governmental authorities, which may include building, land use, health, safety
and fire agencies in the state or municipality in which the coffeehouse or
facility is located. Difficulties obtaining the required licenses or approvals
could delay or prevent the development of a new coffeehouse in a particular
area, the conversion of the remaining Acquired Cafes and Brothers Stores or
could adversely affect the operation of an existing 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
materially adverse effect upon the operations of the Company.
EMPLOYEES
As of July 15, 1996, the Company employed a work force of 627 persons, 80
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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<PAGE> 40
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 15, 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
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
</TABLE>
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.
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 in a
financial capacity for Taco Bell (a division of PepsiCo), the Sizzler Restaurant
Division of Collins Foodservice International, El Torito Restaurants (W.R.
Grace) and 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, 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."
The Company intends to elect two independent directors within 90 days after
the completion of the Offering. 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.
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<PAGE> 41
BOARD COMMITTEES
Shortly after completion of the Offering, the Board of Directors intends to
establish an Audit Committee composed of at least two independent directors and
a Compensation Committee composed of a majority of independent directors. 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 and the
two independent directors to be appointed shortly after completion of the
Offering. Mr. Heeschen was not, nor shall any other member of the Compensation
Committee have been, 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.
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 expires on September 30, 1996. The outstanding
balance on the note as of July 19, 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 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 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 which acknowledged
that the Company owed D.C.H., L.P. ("D.C.H.") $200,000 as a result of a
post-closing adjustment to the purchase price for the 1,000,000 shares of Series
A Preferred Stock purchased on December 11, 1992. D.C.H. purchased from the
Company 268,097 shares of Common Stock in consideration for the $200,000
purchase price refund. 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 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.
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<PAGE> 42
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 15, 1996 was $36,150.
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."
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 5,000 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.
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<PAGE> 43
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").
SUMMARY COMPENSATION TABLE
<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................................ $ 113,720 131,350
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 ("SARs") 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 Agreement 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 $3,557,111, respectively. The actual value
realized may be greater or less than the potential realizable values set
forth in the table.
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<PAGE> 44
Aggregated Stock Option Exercises in Last Fiscal Year and Fiscal Year End
Option Values
The following table sets forth the number and value of the exercisable and
unexercisable options held by each of the Named Executive Officers at January
31, 1996. None of the Named Executive Officers exercised any options during the
fiscal year ended January 31, 1996.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUES OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT FISCAL YEAR-END (#) FISCAL YEAR-END ($)(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. 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 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 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
42
<PAGE> 45
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 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 Steven A. Lupinacci, the Company's President, Chief Executive Officer and
Chief Financial Officer. 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.
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 indemnification
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
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<PAGE> 46
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
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, $3,000 and $16,000 in fiscal years 1996, 1995 and 1994, respectively.
As of April 30, 1996, the Company had purchased approximately $29,000 worth of
goods from Diedrich Coffee Roasters in fiscal 1997.
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. Mr. Holly was formerly a director and Chief
Financial Officer of the Company.
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."
Reference is hereby made to the transactions described under
"Management -- Compensation Committee Interlocks and Insider Participation."
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.
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<PAGE> 47
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of July 15, 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 (iv) by all
directors 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.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED
PRIOR TO THE OFFERING NUMBER OF AFTER OFFERING
NAME AND ADDRESS OF BENEFICIAL --------------------- SHARES BEING ---------------------
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. ............ 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................... 229,878 6.1 -- 244,103(3) 4.5
Paul C. Heeschen...................... 2,072,381(4) 54.7 432,247 1,640,134 30.4
All directors and executive officers
as a group (3 persons).............. 2,987,366 78.8 432,247 2,569,344(3) 47.5
</TABLE>
- ---------------
(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) Includes 14,225 shares that Mr. Lupinacci has the right to acquire within 60
days of the consummation of the Offering upon exercise of stock options.
(4) Includes 1,268,097 shares beneficially owned by D.C.H., L.P. and 804,284
shares beneficially owned by 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.
45
<PAGE> 48
DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon 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, no par value per share, and 3,000,000 shares of preferred stock, no par
value 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 19, 1996, there were 1,183,082 shares of Common Stock
outstanding held of record by three stockholders and three stockholders who held
the right to receive 2,608,568 shares of Common Stock upon the conversion of
preferred stock. 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,
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<PAGE> 49
of such shares. The issuance of preferred stock could adversely affect, among
other things, the rights of 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 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.
47
<PAGE> 50
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 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 1996 Stock Incentive Plan and the 1996 Non-Employee Directors
Stock Option 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 19, 1996, there were no shares subject to options which had been
granted under either of the 1996 plans.
48
<PAGE> 51
UNDERWRITING
The Underwriters named below, represented by The Boston Group, L.P. (the
"Representative"), 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.
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, at 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.
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
49
<PAGE> 52
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 between 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 the actual public
offering price or $11.50. The Representative's Warrants are exercisable for a
period of two years beginning one year from the date of this Prospectus, and are
not transferable except to the officers or 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 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.
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<PAGE> 53
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.
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<PAGE> 54
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, 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-24
Pro Forma Condensed Balance Sheet as of January 31, 1996.............................. F-25
Pro Forma Condensed Statement of Operations for the year ended January 31, 1996....... F-26
Notes to Pro Forma Condensed Financial Statements..................................... F-27
</TABLE>
F-1
<PAGE> 55
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> 56
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> 57
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> 58
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> 59
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> 60
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> 61
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.
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> 62
DIEDRICH COFFEE
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JANUARY 31,
------------------------- MAY 1,
1995 1996 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>
JANUARY 31,
------------------------- MAY 1,
1995 1996 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> 63
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> 64
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> 65
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.
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 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.
F-12
<PAGE> 66
DIEDRICH COFFEE
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(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") agreed to a postclosing 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 an option 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 option has exercise
provisions pursuant to certain events, including an initial public offering and
a change in control (as defined). If not exercisable earlier, the option is
exercisable in June 2003, and expires 10 years from the date of grant.
F-13
<PAGE> 67
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> 68
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
----------------
<S> <C>
(UNAUDITED)
Net sales.................................................. $ 12,600,572
Net loss................................................... $ (134,724)
Net loss per share......................................... $ (.04)
Shares used in per share calculation....................... 3,153,000
</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> 69
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.
F-16
<PAGE> 70
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> 71
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> 72
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> 73
ACQUIRED STORES OF BROTHERS GOURMET COFFEES, INC.
STATEMENTS OF CASH FLOWS
<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>
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> 74
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
F-21
<PAGE> 75
ACQUIRED STORES OF BROTHERS GOURMET COFFEES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
operating entities, on a company-wide basis. Brothers also paid for the
build-out of the Acquired Stores as well as operating equipment.
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.
F-22
<PAGE> 76
ACQUIRED STORES OF BROTHERS GOURMET COFFEES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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-23
<PAGE> 77
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 real property
leasehold interests for twelve coffeehouse stores (the "Acquired Stores"), and
assumed certain liabilities 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-24
<PAGE> 78
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-25
<PAGE> 79
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.......................... 1,334,694 447,306 (380,210)(3) 1,401,790
----------- ----------- -----------
Operating income (loss)............. 349,228 (1,406,068) (193,972)
Interest expense.................... (50,187) -- (50,187)
Interest and other income........... 15,814 -- 15,814
----------- ----------- -----------
Income (loss) before income taxes... 314,855 (1,406,068) (228,345)
Provision (benefit) for income
taxes............................. 129,211 -- (222,832)(4) (93,621)
----------- ----------- -----------
Net income (loss)................... $ 185,644 $(1,406,068) $ (134,724)
=========== =========== ===========
Pro forma information:
Net income (loss) per
share................... $ .06 $ (.04)
=========== ===========
Shares used in per share
calculation............. 3,153,000 3,153,000
=========== ===========
</TABLE>
See accompanying notes to pro forma condensed financial statements.
F-26
<PAGE> 80
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 to eliminate 85% of the Brothers corporate allocation of general and
administrative expenses for the Acquired Stores that is estimated to be non-continuing
subsequent to the acquisition.
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.
</TABLE>
F-27
<PAGE> 81
- ------------------------------------------------------
- ------------------------------------------------------
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.......................... 7
Use of Proceeds....................... 12
Dividend Policy....................... 12
Capitalization........................ 13
Dilution.............................. 14
Selected Financial Data............... 15
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 17
Business.............................. 26
Management............................ 38
Certain Transactions.................. 44
Principal and Selling Stockholders.... 45
Description of Capital Stock.......... 46
Shares Eligible for Future Sale....... 47
Underwriting.......................... 49
Legal Matters......................... 50
Experts............................... 51
Additional Information................ 51
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> 82
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................................ *
Blue Sky fees and expenses........................................ *
Accounting fees and expenses...................................... *
Legal fees and expenses........................................... *
Transfer Agent and registrar fees................................. *
Printing and engraving expenses................................... *
Officers and directors insurance.................................. *
Representative's nonaccountable expense allowance................. *
Miscellaneous..................................................... *
-----------
Total................................................... $ *
===========
</TABLE>
- ---------------
* To be provided by amendment.
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> 83
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 VII 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 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.
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.
II-2
<PAGE> 84
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*
3.1 Certificate of Incorporation of the Company*
3.2 Bylaws of the Company*
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.
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.
4.3 Representative's Warrant Agreement*
5.1 Opinion of Gibson, Dunn & Crutcher LLP*
10.1 Martin R. Diedrich Employment Agreement dated June 29, 1995
10.2 Steven A. Lupinacci Employment Agreement, dated June 29, 1995*
10.3 Stock Option Plan and Agreement of Steven A. Lupinacci, dated June 29, 1995*
10.4 Form of Indemnification Agreement
10.5 Diedrich Coffee 1996 Stock Incentive Plan
10.6 Diedrich Coffee 1996 Non-Employee Directors Stock Option Plan
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*
10.8 Revolving Promissory Note dated May 20, 1996 by Diedrich Coffee in favor of
Redwood Enterprises VII, L.P.
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
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 (contained on page II-5)
</TABLE>
- ---------------
* To be filed by amendment.
II-3
<PAGE> 85
(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> 86
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 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 July 24, 1996.
DIEDRICH COFFEE
By: /s/ STEVEN A. LUPINACCI
----------------------------------
Steven A. Lupinacci
Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Steven
A. Lupinacci and Martin R. Diedrich his true and lawful attorneys-in-fact and
agents, each acting alone, with full powers of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments (including post-effective amendments) to this Registration
Statement, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, each acting alone, with full powers and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming that all said
attorneys-in-fact and agents, each acting alone, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 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>
/s/ MARTIN R. DIEDRICH Chairman of the Board, Secretary and
- ----------------------------------- Director of Coffee
Martin R. Diedrich July 24, 1996
/s/ STEVEN A. LUPINACCI President, Chief Executive Officer, Chief
- ----------------------------------- Financial Officer and Director (Principal
Steven A. Lupinacci Executive Officer and Principal Financial July 24, 1996
Officer)
/s/ EDWIN P. OTT Controller (Principal Accounting Officer)
- -----------------------------------
Edwin P. Ott July 24, 1996
/s/ PAUL C. HEESCHEN Director
- -----------------------------------
Paul C. Heeschen July 24, 1996
</TABLE>
II-5
<PAGE> 87
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*...............................
3.1 Certificate of Incorporation of the Company*........................
3.2 Bylaws of the Company*..............................................
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. ............................
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. ...............................................................
4.3 Representative's Warrant Agreement*.................................
5.1 Opinion of Gibson, Dunn & Crutcher LLP*.............................
10.1 Martin R. Diedrich Employment Agreement dated June 29, 1995.........
10.2 Steven A. Lupinacci Employment Agreement, dated June 29, 1995*......
10.3 Stock Option Plan and Agreement of Steven A. Lupinacci, dated June
29, 1995*...........................................................
10.4 Form of Indemnification Agreement...................................
10.5 Diedrich Coffee 1996 Stock Incentive Plan...........................
10.6 Diedrich Coffee 1996 Non-Employee Directors Stock Option Plan.......
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*.............................................................
10.8 Revolving Promissory Note dated May 20, 1996 by Diedrich Coffee in
favor of Redwood Enterprises VII, L.P. .............................
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..............................
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 (contained on page II-5).........................
</TABLE>
- ---------------
* To be filed by amendment.
<PAGE> 1
EXHIBIT 4.1
PURCHASE AGREEMENT
This Purchase Agreement (the "Agreement") is made and entered
into as of the 11th day of December, 1992, by and among Diedrich Coffee, a
California corporation (the "Company"), Martin R. Diedrich, Donald M. Holly and
SNV Enterprises, a California corporation (the "Shareholders"), and D.C.H.,
L.P., a California limited partnership (the "Purchaser").
In consideration of the mutual covenants and agreements
hereinafter set forth, the parties to this Agreement agree as follows:
1. Sale and Purchase of the Series A Preferred Stock.
Subject to the terms and conditions set forth in this Agreement, the Company
hereby agrees to sell and issue at the Closing to the Purchaser, and the
Purchaser hereby agrees to purchase at the Closing from the Company, for one
dollar ($1.00) per share, one million (1,000,000) shares of the Company's
Series A Preferred Stock (the "Series A Preferred Stock"). The Series A
Preferred Stock has the rights, preferences, privileges and restrictions set
forth in the Restated Articles of Incorporation attached hereto as Exhibit 1,
which has been filed with the California Secretary of State. The Company
acknowledges receipt of Purchaser's check for one million dollars ($1,000,000)
representing the purchase price for the Series A Preferred Stock and Purchaser
acknowledges receipt of the Company's stock certificate representing the Series
A Preferred Stock.
2. Representations and Warranties of the Company and the
Shareholders. Except as set forth in the Schedule of Exceptions attached
hereto as Schedule 2, the Company and each of the Shareholders jointly and
severally represent and warrant to the Purchaser that:
(a) Organization and Standing; Articles and
Bylaws. The Company is a corporation duly organized, validly existing under
and by virtue of the laws of the State of California and is in good standing
under such laws.
(b) Authorization. This Agreement and each of
the other agreements referred to herein (the "Other Agreements") have been duly
authorized, executed and delivered by the Company and the Shareholders, and
constitute valid and binding obligations of the Company and the Shareholders,
enforceable in accordance with their respective terms.
The shares of the Series A Preferred Stock are duly
authorized and, when delivered, will be duly and validly issued and
outstanding, fully paid and nonassessable, and are free to the holder thereof
of any liens, encumbrances or restrictions. The rights, privileges and
preferences of the
<PAGE> 2
Series A Preferred Stock are as set forth in the Restated Articles of
Incorporation. The Common Stock of the Company issuable upon conversion of the
Series A Preferred Stock (the "Conversion Shares") have been duly authorized
and, when delivered, will be duly and validly issued and outstanding, fully
paid and nonassessable and will be free to the holder thereof of any liens,
encumbrances or restrictions.
(c) Capital Stock. The authorized capital of the
Company consists of one million (1,000,000) shares of Series A Preferred Stock,
all of which are outstanding after the sale contemplated by this Agreement, and
two million one hundred twenty-seven thousand six hundred sixty (2,127,660)
shares of Common Stock (the "Common Stock"), of which 1,127,660 are
outstanding. The Company has neither issued nor granted any option, warrant,
convertible security or other right or agreement which affords any person the
right to purchase or otherwise acquire any shares of the Common Stock, the
Series A Preferred Stock, or any other security of the Company and the Company
is not subject to any obligation (contingent or otherwise) to purchase or
otherwise acquire or retire any shares of its securities except as set forth on
Schedule 2(c). No person has any right of first refusal or any preemptive
rights in connection with the issuance of the Series A Preferred Stock or the
Conversion Shares, or with respect to any future offer, sale or issuance of
securities by the Company, or its shareholders, other than as provided in this
Agreement or the agreements referred to herein to be executed at or prior to
the date hereof.
(d) Compliance With Other Instruments. The
Company is not in violation of any term of its Articles of Incorporation or
Bylaws, or any agreement, mortgage, indenture, debenture, trust, instrument,
judgment, decree, order, statute, rule or governmental regulation to which it
is subject (the "Other Instruments"). The execution, delivery and performance
of this Agreement and the Other Agreements, the issuance and sale of the Series
A Preferred Stock, the issuance of the Conversion Shares, or the taking of any
other action contemplated by this Agreement or the Other Agreements will not
result in any violation of or be in conflict with or constitute a default (with
or without notice, lapse of time or both) under any of the Other Instruments.
(e) Financial Statements. Attached to this
Agreement as Schedule 2(e) is (i) the year-end balance sheet of the Company at
January 31, 1992, and related statements of operation and cash flows of the
Company for the year then ended, accompanied by notes thereto, and (ii) the
balance sheet of the Company at September 30, 1992, (the "Latest Balance
Sheet") and related statements of operation and changes in financial condition
of the Company for the eight-month period then ended, accompanied by notes
thereto. Each of the foregoing Financial Statements (the "Financial
Statements") are accompanied by a certificate signed by the Company's chief
executive officer and
2
<PAGE> 3
chief financial officer which confirms that they have reviewed the Financial
Statements and that, to the best of their knowledge, such Financial Statements
fairly present the financial condition and results of operations of the Company
at the dates and for the periods covered thereby.
The Financial Statements are in accordance with the
books and records of the Company (which, in turn, are accurate and complete in
all material respects), have been prepared in accordance with generally
accepted accounting principles, consistently applied over the periods covered
thereby, and fairly present the financial condition of the Company as of the
dates thereof and the periods covered thereby. Other than liabilities which
have arisen since the Latest Balance Sheet in the ordinary course of the
business of the Company (none of which relates to a liability for breach of
contract, breach of warranty, infringement of proprietary rights, lawsuits or
similar claims), the Company has no material obligation or liability (whether
accrued, contingent, unliquidated or otherwise, whether or not known to the
Company, whether due or to become due) which is not reflected in the Financial
Statements.
(f) Absence of Changes. Since the Latest Balance
Sheet: (i) the Company has not entered into any transaction which was not in
the ordinary course of its business; (ii) there has been no materially adverse
change in the condition (financial or otherwise), business, properties, assets,
or liabilities of the Company; and (iii) to the best knowledge of the Company
or the Shareholders, after due inquiry, there has been no event or condition of
any character specifically relating to the Company which pertains to and
materially adversely affects its businesses, properties, prospects, or
condition, financial or otherwise.
(g) Good and Marketable Title. The Company owns,
or has a valid leasehold interest in, all assets necessary for the conduct of
its business as presently conducted, in each case free and clear of all liens,
claims, security interests, royalty payments, charges and encumbrances. All of
such assets are reflected on the Financial Statements, except those acquired in
the ordinary course of business subsequent to the Latest Balance Sheet.
(h) Litigation. There are no litigation, claims,
actions, proceedings or investigations pending against the Company or the
Shareholders (or, to the best knowledge of the Company or the Shareholders,
after due inquiry, any basis therefor or threat thereof).
(i) Tax Matters. The Company (i) has timely
filed all tax returns that are required to have been filed by it with all
appropriate federal, state, county and local governmental agencies (and all
such returns are true and correct in all material respects) and (ii) has timely
paid all taxes owed
3
<PAGE> 4
by it or which it is obligated to withhold from amounts owing to any employee
(including, but not limited to, social security taxes), creditor or third
party.
(j) Registration Rights. Except as set forth in
Section 4(g), the Company is not a party to any agreement or commitment which
obligates the Company to register under the Securities Act of 1933, as amended,
(the "Securities Act") any of its presently outstanding securities or any of
its securities which may hereafter be issued.
(k) Offering. Subject to the accuracy of the
Purchasers' representations in Section 3 of this Agreement, the offer, issuance
and sale of the Series A Preferred Stock and the Conversion Shares constitute,
and will constitute, transactions exempt from the registration and prospectus
delivery requirements of Section 5 of the Securities Act and the Company has
obtained (or is exempt from the requirement to obtain) all qualifications,
permits, and other consents required by all applicable state laws governing the
offer, sale or issuance of securities.
(l) Insurance. The Company maintains (i)
adequate insurance on all assets and activities of a type customarily insured,
covering property damage and loss of income by fire or other casualty, and (ii)
adequate insurance protection against all liabilities (including products
liability), claims and risks against which it is customary for companies
similarly situated as the Company to insure.
(m) Certain Transactions. The Company is not
indebted, either directly or indirectly, to any of the officers, directors or
shareholders of the Company, or to members of their respective immediate
families, in any amount whatsoever, other than for payment of salary for
services rendered and reasonable expenses; none of said officers, directors, or
shareholders, or any members of their immediate families, are indebted to the
Company or, to the best knowledge of the Company, after due inquiry, have any
direct or indirect ownership interest in, or any contractual relationship with,
any firm, corporation or other person with which the Company is or was
affiliated or with which the Company has a business relationship, or any firm,
corporation or other person which, directly or indirectly, competes with the
Company. No such officer, director or shareholder, or any member of their
immediate families, is, directly or indirectly, a party to or otherwise an
interested party with respect to any contract with the Company.
(n) Contracts and Commitments. Except as
expressly contemplated by this Agreement, or as set forth in the Contracts
Schedule attached to this Agreement as Schedule 2(n) (which is a list of all
material agreements to which the Company is party or by which the Company or
any of its property is bound), the Company is not presently a party to, or
bound by, any written or oral contract, agreement, lease, guarantee, credit or
4
<PAGE> 5
security instrument or employee plan or arrangement pursuant to which the
Company has payment or performance obligations in excess of $10,000 in value or
is entitled to receive payment or services in excess of $10,000 in value.
(o) Governmental Consents. No permit, consent,
approval or authorization of, or declaration to or filing with, any
governmental authority is required in connection with the execution, delivery
or performance of this Agreement or any of the other agreements referred to
herein or the consummation of any transaction contemplated hereby or thereby,
except as have been obtained or accomplished.
(p) Compliance with Laws. The Company is not in
violation of any law or any regulation or requirement (including, but not
limited to, any law, regulation or requirement governing the quality of the
environment) which might have a material adverse effect upon its business, and
has not received notice of any such violation.
(q) Patents, Copyrights and Trademarks. Except
as set forth in the Schedule of Exceptions, the Company owns and possesses or
is licensed under all patents, patent applications, licenses, trademarks, trade
names, brand names, inventions and copyrights necessary for the operation of
its business as now conducted and as proposed to be conducted, with no
infringement of or conflict with the rights of others; the Company is not
obligated or under any liability whatsoever to make any payments by way of
royalties, fees or otherwise to any owner, licensor of, or other claimant to
any patent, trademark, trade name, copyright or other intangible asset, with
respect to the use thereof or in connection with the conduct of its business,
or otherwise; and there have been no claims made against the Company for the
assertion of the invalidity, abuse, misuse or unenforceability of any of its
patent, trademark, copyright, trade secret or other proprietary rights and
there are no grounds for the same.
(r) Brokers. No finder, broker, agent, financial
advisor or other intermediary has acted on behalf of the Company in connection
with the offering of the Series A Preferred Stock or the negotiation or
consummation of this Agreement or any of the transactions contemplated hereby.
(s) Diedrich Name. Martin R. Diedrich has, to
the extent to which he is personally capable, granted to the Company the
exclusive right in perpetuity to use his name as part of Company's name for and
in connection with all business of whatever kind and character conducted
previously or in the future by Company, and has not granted and will not grant
to any other person, firm or corporation the right to use, and will not himself
use (except in connection with Company), his name as part of the corporate or
firm name of any other firm, entity, corporation or business, or as part of any
trade name or trademark not belonging to Company or any subsidiary of Company.
5
<PAGE> 6
(t) Disclosure. Neither this Agreement nor any
exhibit or schedule hereto nor any certificate, document, writing or other
instrument referred to herein or furnished to the Purchaser by the Company or
any employee or shareholder thereof, contains any untrue statement of any
material fact or omits to state a material fact necessary in order to make the
statements contained herein or therein, in light of the circumstances under
which they were made, not misleading and there is no fact material to the
Purchaser's decision to purchase the Series A Preferred Stock known to the
Company which has not been disclosed to the Purchaser in writing by the
Company.
3. Representations and Warranties of the Purchaser. The
Purchaser represents and warrants to the Company that:
(a) Investment Intent. The Series A Preferred
Stock to be purchased by the Purchaser pursuant to this Agreement is being
acquired by the Purchaser solely for its own account, for investment purposes
only, and with no present intention of distributing, selling or otherwise
disposing of it.
(b) Sophistication. The Purchaser is able to
bear the economic risk of an investment in the Series A Preferred Stock
acquired by it pursuant to this Agreement, has been given sufficient access to
records and information concerning the Company for purposes of evaluating such
investment and can afford to sustain a total loss on such investment, and
either (i) has such knowledge and experience in financial and business matters
that it is capable of evaluating the merits and risks of the proposed
investment and therefore has the capacity to protect its own interests in
connection with the purchase of the Series A Preferred Stock; or (ii) has a
pre-existing personal or business relationship with the Company or one or more
of its officers, directors or controlling persons.
4. Covenants of the Company. The Company agrees as
follows, and each of the Shareholders agrees to use his or its best efforts to
cause the Company to perform or observe the following agreements:
(a) Financial Statements; Other Information; and
Inspection Rights.
(i) Financial Statements. The Company
shall deliver to the Purchaser such monthly, quarterly and annual financial
statements of the Company as Purchaser shall reasonably request. Such
Financial Statements shall be in reasonable detail and shall be accompanied by
a certificate of the Chief Financial Officer of the Company to the effect that
such Financial Statements have been prepared from the books and records of the
Company and in accordance with generally accepted accounting principles
consistently applied, and that such Financial Statements are true and correct
in all material respects. Upon the written request of holders of at least
66-2/3% of the
6
<PAGE> 7
outstanding Series A Preferred Stock, the Company's annual financial statements
shall be audited by a firm of independent certified public accountants approved
by such holders.
(ii) Other Information. The Company
shall deliver to the Purchaser, promptly after the occurrence thereof, written
notice and a description of any default or other event which might have a
materially adverse impact upon the Company, its financial condition, results of
operations, prospects or business.
(iii) Annual Operating Plan.
(A) The Company has prepared and
delivered to the Purchaser a Business Plan dated __________, 1992 (the
"Business Plan"), including a cash flow budget (the "Budget") and other
financial information and projections. The Company agrees to conduct its
business in conformity with the Business Plan. Prior to each January 1, the
Company shall prepare an operating plan, including a budget, for each
succeeding thirty-six month period commencing each subsequent February 1, which
shall meet the approval of a majority of the members of the Company's Board of
Directors and which shall be in at least as much detail as the Business Plan
and Budget. The Company agrees to conduct its business in conformity with said
operating plan. The Company shall furnish to the Purchaser (in person or by
first-class mail) a copy of such operating plan at least 45 days prior to the
commencement of the period covered by such operating plan.
(iv) Inspection Rights. The Company
shall permit any representative designated by the Purchaser, at Purchaser's
expense, to visit and inspect any of the properties of the Company or any of
its subsidiaries, including its and their books of account (and to make copies
thereof and to take extracts therefrom), and to discuss its and their affairs,
finances and accounts with its and their officers or employees, all at such
reasonable times and as often as may be reasonably requested, and with
representatives of the Company's lenders; provided that such rights shall be
exercised in a manner so as not to materially and adversely disrupt the
ordinary course of business of the Company or any of its subsidiaries.
(b) Amendment to Articles of Incorporation,
By-Laws, and Certificate of Amendment. The Company shall not amend, and shall
not permit any of its subsidiaries to amend, its Articles of Incorporation,
Certificate of Amendment or By-Laws, in any manner whatsoever without the prior
written consent of the Purchaser.
(c) Proprietary Information Agreements. The
Company shall require, as a condition to employment with the Company, or
continued employment with the Company, that each of its managers and all
employees having access to the Company's
7
<PAGE> 8
proprietary information, and each of the managers or employees having access to
proprietary information of each of its subsidiaries, enter into Proprietary
Information Agreements in form and substance identical to Exhibit 4(c) to this
Agreement.
(d) Shareholder Agreement. Concurrently with the
execution and delivery of this Agreement, the Company and the Shareholders have
executed and delivered a Shareholder Agreement (the "Shareholder Agreement"),
substantially in the form attached hereto as Exhibit 4(d), covering certain
voting agreements and rights of first refusal with respect to the Company's
Common Stock owned by the Shareholders. The Company shall enforce each and
every one of its obligations under the Shareholder Agreement and shall not,
without the consent of the holders of at least 66-2/3% of the Series A
Preferred Stock, amend, modify or waive any of its rights thereunder.
(e) Right of First Refusal.
(i) If the Company determines to issue
any additional shares of its capital stock, or warrants, options, rights or
other securities convertible into its capital stock, (collectively the "Equity
Securities") from and after the date of this Agreement, the Company shall first
give the Purchaser the right to purchase such Equity Securities by delivering
to it a written offer which shall state the price and other terms and
conditions of the proposed issuance. If the Company proposes to issue the
Equity Securities for consideration other than solely cash and/or promissory
notes, the offer to the Purchaser shall, to the extent of such consideration,
permit the Purchaser to pay in lieu thereof, cash equal to the fair market
value of such consideration, and the offer shall state the Company's estimate
of such fair market value. The Board of Directors shall fix the period of the
offer which shall be a minimum of 30 days or such longer period as is necessary
to determine the fair market value of the consideration referred to in the
preceding sentence. The Purchaser shall have the right to assign any of the
rights the Purchaser may have to purchase Equity Securities under this Section
4(e) to any person affiliated with such holder.
(ii) The Purchaser may accept an offer
only by giving written notice to the Company before the offer expires that the
Purchaser has accepted the offer to purchase some or all of the securities
offered (the "Accepted Securities"). Within 10 days following receipt of such
notice, the Purchaser shall deliver to the Company payment in full for the
Accepted Securities purchased by it against delivery by the Company to the
Purchaser of a certificate or certificates evidencing the Accepted Securities
purchased by it.
To the extent the offer is not subscribed in
full by the Purchaser, the Company may, for a period of 90 days thereafter,
issue and sell the unaccepted securities, or any of
8
<PAGE> 9
them, at the same price, and upon the other terms and conditions specified in
such offer, to any person or persons.
(iii) Notwithstanding the provisions of this
Section 4(e), the Company shall not be required to first offer the Equity
Securities to the Purchaser if the issuance is pursuant to the conversion of
any shares of the Series A Preferred Stock.
(f) Termination of Certain Company Agreements.
The provisions of Sections 4(a) through 4(e) above shall terminate upon the
consummation of a Qualified Public Offering, which means a firmly underwritten
public offering of the Company's Common Stock registered under the Securities
Act of 1933, as amended (the "Act") and involving net proceeds to the Company
of at least $5,000,000 and a price to the public of at least $5.00 per share.
(g) Registration Rights.
(i) Required Registration. The Company
agrees that, at any time after the earlier to occur of January 1, 1998 or the
effective date of a Qualified Public Offering, it shall register under the Act
and take all necessary steps to facilitate the public sale (the "Public
Offering"), at the Company's sole cost and expense, of all or any portion of
the Conversion Shares designated in writing for such sale by the Purchaser,
provided that the Company shall not be required to undertake and complete (A)
more than three such registrations or (B) prior to a Qualified Public Offering,
any such registration, unless an underwriter of national or regional reputation
shall have agreed to serve as an underwriter for purposes of such registration.
If the Purchaser is precluded from including any Conversion Shares in any
Public Offering as a result of the request or decision of the underwriters
involved therein, such Public Offering shall not count against the three Public
Offerings limit available to the Purchaser.
(ii) Incidental Registration. If the Company
at any time proposes to register any of its securities for sale for its own
account or for the account of any other person, it shall each such time give
written notice (the "Company's Notice"), at its expense, to the Purchaser of
its intention to do so at least 45 days prior to the filing of a registration
statement with respect to such registration with the Commission. If the
Purchaser desires to dispose of all or part of its Conversion Shares, it may
request registration thereof in connection with the Company's registration by
delivering to the Company, within 30 days after receipt of the Company's
Notice, written notice of such request (the "Investors' Notice"). The Company
shall use its best efforts to cause all shares of Conversion Shares specified
in the Investors' Notice to be registered under the Securities Act so as to
permit the sale or other disposition by the Purchaser.
9
<PAGE> 10
(iii) Indemnification. In connection with
any Public Offering, the Company agrees to indemnify the Purchaser to the same
extent as the Company indemnifies any underwriter participating therein (or as
the Purchaser shall reasonably request in the absence of underwriter
participation therein).
(h) Rule 144 Compliance. At all times after
completion of a Qualified Public Offering, the Company agrees to take such
action as may be necessary to enable the Purchaser to complete the public sale
of Conversion Shares in accordance with Rule 144 of the Securities and Exchange
Commission under the Act.
(i) Key Man Life Insurance. The Company shall
obtain and keep in effect term life insurance in the amount of one million
dollars ($1,000,000) on the life of Martin R. Diedrich with the proceeds
payable to the Company.
(j) Actions Requiring Notice and Approval.
(i) Anything in this Agreement to the
contrary notwithstanding, the following actions may be taken by the Company only
with prior notice to and approval of the Purchaser, as provided in Section
4(j)(iii) hereof:
(A) the filing on behalf of the
Company of an application for bankruptcy or similar relief;
(B) any confession of a judgment
against the Company;
(C) any purchase of equity
securities or instruments representing indebtedness of any Person;
(D) any amendment of this
Agreement;
(E) the appointment, employment,
removal and compensation of, and approval of any employment contracts with, the
Chief Executive Officer of the Company, any other officers of the Company and
the Shareholders; and
(ii) In addition to the other requirements
of this Section 4(j), the Purchaser may demand at any time that the following
actions be taken by the Company only with prior notice to and approval of the
Purchaser, as provided in Section 4(j)(iii) hereof:
(A) the incurrence of any
obligation in a principal amount of more than $20,000 at any time outstanding.
10
<PAGE> 11
Such obligation may include, but is not limited to, any contract (or series of
related contracts), lease or form of indebtedness; and
(B) any expenditure (or series of
related expenditures) involving more than $20,000;
(iii) In the event that the Company
determines to take any of the actions specified in Section 4(j)(i) (or Section
4(j)(ii) if the Purchaser has made a demand as provided for therein), the
following procedures shall be applicable:
(A) The Company shall deliver to
Purchaser written notice of the proposed action (the "Company Notice"),
specifying the dollar amount and terms and conditions of the proposed action.
(B) If Purchaser disapproves of
such action, it shall do so by delivering a written notice signed by Purchaser
(the "Disapproval Notice"). The Disapproval Notice must be delivered to the
Company within 10 business days from the receipt by Purchaser of the Company
Notice. Receipt of the Disapproval Notice by the Company shall prohibit the
Company from undertaking the action specified in the Company Notice.
(C) If the Purchaser does not
tender a Disapproval Notice within the 10 business day period, the Company
shall be entitled to undertake the action specified in the Company Notice after
the end of the 10 business day period, but only upon terms and conditions which
are in all material respects (including, without limitation, price and interest
rates) identical to those set forth in the Company Notice; provided, that if
the Company does not undertake the action specified in the Company Notice
within 30 days following the expiration of the 10 business day period, any
approval theretofore extended pursuant to this section shall be deemed
rescinded and any subsequent actions shall again be subject to all of the
restrictions set forth herein.
(iv) The Purchaser may, by prior written
consent, waive its rights under this Section 4(j), provided that, unless
otherwise specifically agreed to by the Purchaser in writing, such waivers
shall be on a case-by-case basis and shall be limited to the corporate acts
specified therein.
11
<PAGE> 12
(k) Chief Executive Officer.
(i) The Chief Executive Officer shall be
the chief executive officer of the Company and, subject to the control of the
Board, shall have general and active supervision and management over the
business of the Company and over its officers and employees. The Chief
Executive Officer shall be Steven Lupinacci, who shall receive restricted stock
pursuant to the terms and conditions of a restricted stock agreement in the
form attached as Exhibit 4(k) hereto.
(ii) The Chief Executive Officer shall be
appointed only with the approval of Purchaser and may be removed, with or
without cause, only with Purchaser's approval. In addition, Purchaser shall
have the right independently, in Purchaser's sole discretion, to require the
removal of the Chief Executive Officer.
5. Restrictions on Transfer. None of the shares of the
Series A Preferred Stock purchased hereunder or the Conversion Shares shall be
sold, transferred, assigned, pledged, hypothecated or otherwise disposed of
unless and until one of the following events shall have occurred:
(a) Such securities are disposed of pursuant to
and in conformity with an effective registration statement filed with the
Commission pursuant to the Securities Act or pursuant to Rule 144 of the
Securities and Exchange Commission (the "Commission") thereunder; or
(b) The seller shall have delivered to the
Company a written opinion by counsel which is reasonably acceptable to the
Company to the effect that the proposed transfer is exempt from the
registration and prospectus delivery requirements of the Securities Act; or
(c) The seller shall have transferred such
securities to an affiliate of the seller and such affiliate has delivered to
the Company a written agreement making the representations set forth in
Sections 3(a) and 3(b) and agreeing to be bound by the restrictions of this
Section 5 with respect to the shares so transferred. For purposes of this
Agreement, the definition of "Purchaser" as used herein shall be deemed to
include any such affiliate of Purchaser.
The parties hereto further agree that any certificate
evidencing the Series A Preferred Stock or the Conversion Shares shall bear the
following legend:
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, HAVE BEEN
12
<PAGE> 13
TAKEN FOR INVESTMENT, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED,
HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT IN ACCORDANCE WITH THE TERMS OF AN
AGREEMENT BETWEEN THE COMPANY AND THE REGISTERED HOLDER HEREOF, A COPY OF WHICH
AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICES OF THE COMPANY.
The Company shall, within 10 days of the request of
any holder of a certificate bearing the foregoing legend and the surrender of
such certificate, issue a new stock certificate without the foregoing legend if
any of the events set forth in Sections 5(a) or (b) above have occurred.
6. The Closing. The closing of the transactions
contemplated by this Agreement (the "Closing") shall take place on December 11,
1992, at the offices of Gibson, Dunn & Crutcher, 4 Park Plaza, Irvine,
California, or at such other place and at such time and date as Purchaser,
Company and Shareholders shall mutually agree.
7. Conditions to Obligations of Purchaser. The
obligations of Purchaser to purchase the Series A Preferred Stock at the
Closing and the other obligations of Purchaser under this Agreement are subject
to the fulfillment at or prior to the Closing of the following conditions, any
of which may be waived in writing in whole or in part by Purchaser:
(a) Representations and Warranties. On the date
of the Closing, the representations and warranties of Company and Shareholders
set forth in this Agreement shall be true and correct in all respects with the
same effect as though such representations and warranties had been made at and
as of such time, except to the extent that any changes therein are specifically
contemplated by this Agreement.
(b) Performance. The Company and Shareholders
shall have performed and complied in all respects with all agreements and
conditions contained herein required to be performed or complied with by them
prior to or at the Closing.
(c) Absence of Litigation. No suit, action,
proceeding or investigation shall have occurred, be pending or threatened which
would or seeks to prevent or delay beyond the date of the Closing the
consummation of the transactions contemplated by this Agreement.
(d) Opinion of Counsel to Company and
Shareholders. Purchaser shall have received from Voss, Cook, Casselberry &
Thel, counsel for Company and Shareholders, a written opinion, substantially
identical in form and substance to that attached hereto as Exhibit 7(d).
(e) Contemporaneous Transactions. Prior to or
contemporaneously with the Closing, the Company and Shareholders
13
<PAGE> 14
shall have executed and delivered to Purchaser the Other Agreements
contemplated by this Agreement.
(f) Closing Papers. Company and Shareholders
shall have delivered to Purchaser all of the following:
(A) a certificate signed by the Chairman
of the Board and President of Company, dated the date of the Closing, stating
that (i) the persons signing such certificate have made or have caused to be
made such investigations as are necessary to permit them to certify the
accuracy of the information set forth therein, (ii) such certificate does not
misstate any material fact and does not omit to state any fact necessary to
make the certificate not misleading and (iii) the conditions specified in
Sections 7(a), 7(b), 7(c), 7(d) and 7(e) of this Agreement have been satisfied;
(B) copies (certified by the President,
Secretary or Assistant Secretary of the Company) of the resolutions duly
adopted by the board of directors and shareholders of Company authorizing, as
appropriate, the execution, delivery and performance of this Agreement and the
Other Agreements referred to in this Agreement as being executed at or prior to
the Closing;
(C) copies (certified by the President,
Secretary or Assistant Secretary of the Company) of the Company's Articles of
Incorporation and Bylaws as amended through the date of the Closing;
(D) a certified copy of the Restated
Articles of Incorporation (identical in form to Exhibit 1 attached hereto) as
filed with the California Secretary of State; and
(E) such other documents relating to the
transactions contemplated by this Agreement as Purchaser may reasonably
request.
(g) Proceedings. All corporate and other
proceedings taken or to be taken by the Company in connection with the
transactions contemplated hereby to be consummated at the Closing and all
documents incident thereto shall be reasonably satisfactory in form and
substance to Purchaser.
8. Conditions to Obligations of Company and
Shareholders. The obligations of Company and Shareholders under this Agreement
are subject to the fulfillment at or prior to the date of the Closing of the
following conditions, any of which may be waived in writing, in whole or in
part, by Company and Shareholders:
(a) Representations and Warranties. On the date
of the Closing, the representations and warranties of Purchaser
14
<PAGE> 15
set forth in this Agreement shall be true and correct in all respects with the
same effect as though such representations and warranties were made at and as
of such time, except to the extent that any changes therein are contemplated by
this Agreement.
(b) Performance. Purchaser shall have performed
and complied in all respects with all agreements and conditions contained
herein required to be performed by or complied with by it prior to the Closing.
(c) Contemporaneous Transaction. Prior to or
contemporaneously with the Closing, the Purchaser shall have executed and
delivered to the Company and Shareholders the Other Agreements contemplated by
this Agreement.
9. Miscellaneous Provisions.
(a) Notices. All notices, demands or other
communications hereunder shall be in writing and shall be deemed to have been
duly given if delivered in person, or by United States mail, certified or
registered, with return receipt requested, or otherwise actually delivered:
If to the Purchaser: D.C.H., L.P.
450 Newport Center Drive, Suite 570
Newport Beach, CA 92660
With Copies to: E. Michael Greaney, Esq.
Gibson, Dunn & Crutcher
4 Park Plaza
Irvine, CA 92714
If to the Company: Diedrich Coffee
474 E. 17th Street
Costa Mesa, CA 92627
If to Shareholders: Martin R. Diedrich
474 E. 17th Street
Costa Mesa, CA 92627
Donald M. Holly
474 E. 17th Street
Costa Mesa, CA 92627
SNV Enterprises
474 E. 17th Street
Costa Mesa, CA 92627
With Copies to: Raymond Lee
Voss, Cook, Casselberry & Thel
840 Newport Center Drive, Suite 700
Newport Beach, CA 92660
15
<PAGE> 16
or at such other address as may have been furnished by such person in writing
to the other parties. Any such notice, demand or other communication shall be
deemed to have been given on the date actually delivered or as of the date
mailed, as the case may be.
(b) Severability and Governing Law. Should any Section
or any part of a Section within this Agreement be rendered void, invalid or
unenforceable by any court of law for any reason, such invalidity or
unenforceability shall not void or render invalid or unenforceable any other
Section or part of a Section in this Agreement. This Agreement is made and
entered into in the State of California and the laws of said state shall govern
the validity and interpretation hereof and the performance by the parties
hereto of their respective duties and obligations hereunder.
(c) Amendments and Waivers. The provisions of this
Agreement may not be changed, waived, discharged or terminated orally or in
writing, except with (but only with) the written consent of the Company and the
holders of at least 66-2/3% of the Series A Preferred Stock then outstanding;
provided, however, that no such amendment or waiver shall affect the provisions
of this Section 9(c) and no such waiver shall extend to or affect any
obligation not expressly waived or impair any right consequent therein.
(d) Survival of Representations and Warranties, Etc. All
agreements, representations and warranties contained herein shall survive the
execution and delivery of this Agreement, any investigation at any time made,
the sale and purchase of the Series A Preferred Stock and payment therefor, the
conversion or redemption of the Series A Preferred Stock as provided for in the
Restated Articles of Incorporation, and, as to the Purchaser as defined herein,
any disposition of the Series A Preferred Stock or the Conversion Shares. All
statements contained in any certificate or other instrument executed and
delivered by the Company or its duly authorized officers pursuant to this
Agreement in connection with the transactions contemplated hereby shall
constitute additional representations and warranties by the Company hereunder.
(e) Expenses. The Company agrees to pay, and save any
Purchaser (or any subsequent holder of Series A Preferred Stock or Conversion
Shares) harmless against liability for the payment of, (i) the fees and
expenses of the Purchasers' special counsel, Messrs. Gibson, Dunn & Crutcher,
arising in connection with the negotiation, execution and consummation of the
transactions contemplated by this Agreement, (ii) reasonable fees and expenses
of counsel incurred with respect to any amendments or waivers (whether or not
they become effective) under or in respect of the Articles of Incorporation,
Bylaws, Certificate of Amendment, or this Agreement or any of the Other
Agreements, and (iii) in the event of breach or default of the
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<PAGE> 17
Company's obligations to the Purchaser under the Articles of Incorporation, the
Bylaws, Certificate of Amendment, or this Agreement or any agreement
contemplated hereby, fees and expenses of the Purchasers or such holders
incurred in respect of the enforcement of the rights granted under any of the
foregoing whether or not suit is brought.
(f) Exercise of Contractual Rights. Each of the Company
and the Shareholders recognize, acknowledge and agree that the Purchaser has a
major financial interest in the Company to preserve and that the exercise by
Purchaser of any of its contractual rights under this Agreement or any of the
Other Agreements contemplated hereby shall not be deemed to constitute a lack
of good faith or unfair dealing.
(g) Entire Agreement. This Agreement and the attached
Schedules and Exhibits contain the entire understanding of the parties and
there are no further or other agreements or understandings, written or oral, in
effect between the parties relating to the subject matter hereof unless
expressly referred to herein.
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Agreement as of the date first above written.
<TABLE>
<S> <C>
"SHAREHOLDERS" "COMPANY"
MARTIN R. DIEDRICH DIEDRICH COFFEE
- ------------------------- --------------------------------
Martin R. Diedrich By:
----------------------------
Name:
--------------------------
Title:
-------------------------
DONALD M. HOLLY
- -------------------------
Donald M. Holly By:
---------------------------
Name:
--------------------------
Title:
-------------------------
SNV ENTERPRISES "PURCHASER"
By: D.C.H., L.P.
---------------------
Steven Lupinacci
President --------------------------------
By:
----------------------------
Name:
--------------------------
Title:
-------------------------
</TABLE>
17
<PAGE> 1
EXHIBIT 4.2
SERIES B PREFERRED STOCK
PURCHASE AGREEMENT
------------------
This Series B Preferred Stock Purchase Agreement (the
"Agreement") is made and entered into as of the 29th day of June, 1995, by and
among Diedrich Coffee, a California corporation (the "Company"), Martin R.
Diedrich ("Diedrich") and Steven A. Lupinacci ("Lupinacci"), (Diedrich and
Lupinacci are collectively referred to herein as the "Management
Shareholders"), and Redwood Enterprises VII, L.P., a California limited
partnership ("Redwood") and Diedrich Partners I, L.P., a Delaware limited
partnership ("DPL") (Redwood and DPL are collectively referred to herein as the
"Purchasers").
In consideration of the mutual covenants and agreements
hereinafter set forth, the parties to this Agreement agree as follows:
1. Sale and Purchase of the Series B Preferred Stock.
Subject to the terms and conditions set forth in this Agreement, the Company
agrees to sell and issue at the Closing to each of the Purchasers, and each of
the Purchasers severally and not jointly agrees to purchase at the Closing from
the Company, 804,284 shares of the Company's Series B Preferred Stock (the
"Series B Preferred Stock") in exchange for the payment of an aggregate
purchase price of one million one hundred fifty-two thousand five hundred
dollars ($1,152,500), resulting in a total purchase by the Purchasers
collectively of 1,608,568 shares of Series B Preferred Stock in exchange for
the payment of an aggregate total purchase price of two million three hundred
five thousand dollars ($2,305,000). The Series B Preferred Stock has the
rights, preferences, privileges and restrictions set forth in the Amended and
Restated Articles of Incorporation attached hereto as Exhibit 1, which have
been filed with the California Secretary of State.
2. Representations and Warranties of the Company.
Except as set forth in the Schedule of Exceptions attached hereto as Schedule 2
which exceptions specifically identify the relevant subparagraph hereof, the
Company represents and warrants to the Purchasers, and each of them, that:
(a) Organization and Standing. The Company is a
corporation duly organized, validly existing under and by virtue of the laws of
the State of California and is in good standing under such laws. The Company
is qualified, licensed or domesticated as a foreign corporation in all
jurisdictions where the failure to be so qualified, licensed or domesticated
would have a material adverse effect upon its businesses, properties,
prospects, or condition, financial or otherwise. The Company holds all
franchises, grants, licenses, certificates, permits, consents and orders, all
of which are valid and in full force and effect, from all state, federal and
other domestic and foreign regulatory authorities necessary to own and operate
its properties and to conduct its business in the manner and at the places
presently conducted, except where the failure to hold such franchises, grants,
licenses, certificates, permits, consents and orders would not, in the
aggregate, result in a material adverse change in the condition (financial or
other), business, prospects, assets, liabilities or operations of the Company
taken as a whole ("Material Adverse Change"). The Company has full power and
authority (corporate and other) to own, lease and operate its properties and
assets and to carry on its business as presently conducted and as proposed to
be conducted, except where the failure to have such power and authority would
not, in the aggregate, result in a Material Adverse Change.
<PAGE> 2
(b) Authorization.
(i) The Company and the Management
Shareholders have the right, power and authority (corporate and other) to enter
into and carry out the terms and conditions of this Agreement and each of the
other agreements referred to herein to be entered into at or prior to the
Closing (the "Other Agreements") and all of the transactions contemplated
hereunder and thereunder, including the sale and issuance of the Series B
Preferred Stock to be purchased by the Purchasers at the Closing, without
obtaining the approval or consent of any other party or governmental authority.
All corporate proceedings have been taken and all corporate authorizations have
been secured which are necessary to authorize the execution, delivery and
performance of this Agreement and each of the Other Agreements.
(ii) This Agreement and each of
the Other Agreements have been duly and validly executed and delivered by the
Company and the Management Shareholders and this Agreement constitutes, and
each of the Other Agreements when executed and delivered by the Company and the
Management Shareholders will constitute, valid and binding obligations of the
Company and the Management Shareholders, enforceable in accordance with their
respective terms, except that such enforceability may be limited by (A)
bankruptcy, insolvency, reorganization, moratorium or other similar laws, or by
equitable principles, relating to or limiting the rights of creditors generally
and (B) limitations imposed by law or equitable principles upon the
availability of specific performance, injunctive relief or other equitable
remedies.
(iii) The shares of Series B Preferred
Stock to be purchased by the Purchasers at the Closing have been duly authorized
and, when delivered, will be duly and validly issued and outstanding, fully paid
and nonassessable, and will be free to the holder thereof of any liens,
encumbrances and restrictions. The rights, privileges and preferences of the
Series B Preferred Stock are as set forth in the Amended and Restated Articles
of Incorporation. The Common Stock of the Company issuable upon conversion of
the Series B Preferred Stock (the "Conversion Shares") have been duly authorized
and, when delivered in accordance with the provisions of the Amended and
Restated Articles of Incorporation, will be duly and validly issued and
outstanding, fully paid and nonassessable and will be free to the holder thereof
of any liens, encumbrances or restrictions.
(c) Capital Stock. The authorized capital stock
of the Company consists of 1,000,000 shares of Series A Preferred Stock, all of
which are issued and outstanding, 1,608,568 shares of Series B Preferred Stock,
all of which will be issued and outstanding immediately after the sale
contemplated by this Agreement and 4,021,437 shares of Common Stock (the
"Common Stock"), of which 1,412,869 shares will be issued and outstanding
immediately after the consummation of the transactions contemplated in that
certain Common Stock Purchase Agreement of even date herewith (the "Common
Stock Agreement") by and among the Company, D.C.H., L.P., a California limited
partnership ("DCH") and Lupinacci. All of the outstanding securities of the
Company have been duly authorized and validly issued, are fully paid and
nonassessable and were issued in compliance with all applicable state and
federal laws regulating the offer, sale or issuance of securities. Except as
set forth in the Amended and Restated Articles of Incorporation, that certain
purchase agreement for Series A Preferred Stock between D.C.H., Diedrich,
Donald M. Holly ("Holly"), SNV Enterprises, a California corporation, and the
Company dated December 11, 1992 (the "Series A Purchase Agreement"), the Common
Stock Agreement, this Agreement or that certain Redemption Agreement dated as
of June 13, 1995 by and between the Company and Holly (the "Redemption
Agreement"), the Company has neither issued nor granted any option, warrant,
convertible security or other right or agreement which affords any person the
right to purchase or otherwise acquire any shares of the Common Stock, the
Series A
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<PAGE> 3
Preferred Stock, the Series B Preferred Stock or any other security of the
Company and the Company is not subject to any obligation (contingent or
otherwise) to purchase or otherwise acquire or retire any shares of its
securities. No person has any right of first refusal or any preemptive rights
in connection with the issuance of the Series B Preferred Stock or the
Conversion Shares, or with respect to any future offer, sale or issuance of
securities by the Company, or its shareholders, other than as provided in the
Series A Purchase Agreement, the Common Stock Agreement, this Agreement or the
Other Agreements to be executed at or prior to the date hereof.
(d) Compliance With Other Instruments. The
Company is not in violation of any term of its Amended and Restated Articles of
Incorporation or Bylaws, or any agreement, mortgage, indenture, debenture,
trust, instrument, judgment, decree, order, statute, rule or governmental
regulation to which it is subject (the "Other Instruments"), except for such
violations which would not, in the aggregate, result in a Material Adverse
Change. The execution, delivery and performance of this Agreement and the
Other Agreements, the issuance and sale of the Series B Preferred Stock, the
issuance of the Conversion Shares, or the taking of any other action
contemplated by this Agreement or the Other Agreements will not (i) result in
any violation of or be in conflict with or constitute a default (with or
without notice, lapse of time or both) under any of the Other Instruments,
except for such violations, conflicts or defaults which would not, in the
aggregate, result in a Material Adverse Change, (ii) accelerate or constitute
an event entitling the holder of any indebtedness of the Company to accelerate
the maturity of any such indebtedness or to increase the rate of interest
presently in effect with respect to such indebtedness, or (iii) result in the
creation of any mortgage, lien, charge, security interest or encumbrance upon
any of the properties or assets of the Company, except for those which would
not, in the aggregate, result in a Material Adverse Change.
(e) Financial Statements. Attached to this
Agreement as Schedule 2(e) is (i) the audited year-end balance sheet of the
Company at January 31, 1995, (the "Balance Sheet Date") and related statements
of operations and cash flows of the Company for the year then ended,
accompanied by notes and the certificate of BDO Seidman, independent certified
public accountants (the "Audited Financial Statements"), and (ii) the unaudited
balance sheet of the Company at May 31, 1995 and related statements of
operations, cash flows and changes in financial condition of the Company for
the four-month period then ended, accompanied by notes thereto (the "Interim
Financial Statements"). Each of the Audited Financial Statements and the
Interim Financial Statements (collectively, the "Financial Statements") are
accompanied by a certificate signed by the Company's chief executive officer
and chief financial officer which confirms that they have reviewed the
Financial Statements and that, such Financial Statements fairly present the
financial condition and results of operations of the Company at the dates and
for the periods covered thereby. The Interim Financial Statements have been
prepared in accordance with the books and records of the Company (which, in
turn, are accurate and complete in all material respects) and are consistent
with the Audited Financial Statements. Other than liabilities which have
arisen since the period covered by the Interim Financial Statements in the
ordinary course of the business of the Company (none of which relates to a
liability for breach of contract, breach of warranty, infringement of
proprietary rights, lawsuits or similar claims), the Company has no material
obligation or liability (whether accrued, contingent, unliquidated or
otherwise, whether or not known to the Company, whether due or to become due)
which is not reflected in the Financial Statements other than liabilities which
are not required to be reflected on the Financial Statements in accordance with
Generally Accepted Accounting Principles, consistently applied ("GAAP") and
liabilities which individually or in the aggregate do not exceed the sum of
$50,000.
(f) Absence of Changes. Since the Balance Sheet
Date: (i) the Company has not entered into any material transaction which was
not in the ordinary course of
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<PAGE> 4
its business; (ii) there has been no Material Adverse Change; (iii) the Company
has not declared or paid any dividend or made any distribution on its capital
stock; redeemed, purchased or otherwise acquired any of its capital stock;
granted any options, warrants or other rights to purchase shares of its capital
stock except in connection with the transactions contemplated herein; or issued
any shares of its capital stock; (iv) there has been no material labor dispute
involving the Company or any of its employees and none is pending or, to the
best knowledge of the Company and the Management Shareholders, after due
inquiry, threatened; (v) there has been no material change, except in the
ordinary course of its business, in the contingent obligations of the Company,
by way of guaranty, endorsement, indemnity, warranty, or otherwise; (vi) there
have been no loans or guarantees made by the Company to or for the benefit of
its employees, officers or directors, or any members of their immediate
families, other than travel advances and other similar advances made in the
ordinary course of its business; (vii) the Company has not mortgaged, pledged,
transferred a security interest in, or subjected to lien any of its properties
or assets, except liens for taxes not yet due or payable; and (viii) the
Company has not sold, assigned or transferred any patents, trademarks,
copyrights, trade secrets or other intangible assets, or disclosed any
proprietary confidential information to any person.
(g) Good and Marketable Title. The Company has
good and marketable title to, or a valid leasehold interest in, all properties
and assets used by it, or located on its premises, or shown on the Financial
Statements or acquired by the Company thereafter, in each case free and clear
of all liens, claims, security interests, royalty payments, charges and
encumbrances. All of such assets are reflected on the Financial Statements,
except those acquired in the ordinary course of business subsequent to the
period covered by the Interim Financial Statements. The Company's buildings,
equipment and other tangible assets are in all material respects in good
operating condition and are usable in the ordinary course of its business; and
the Company owns, or has a valid leasehold interest in, all assets necessary
for the conduct of its business as presently conducted.
(h) Litigation. There are no litigation, claims,
actions, proceedings or investigations (collectively, "Claims") pending against
the Company or the Management Shareholders (or, to the best knowledge of the
Company and the Management Shareholders, after due inquiry, any basis therefor
or threat thereof), except for Claims which, if adversely determined, would
not, individually or in the aggregate, result in a Material Adverse Change.
(i) Tax Matters. The Company (i) has timely
filed all tax returns that are required to have been filed by it with all
appropriate federal, state, county and local governmental agencies (and all
such returns are true and correct in all material respects); (ii) has timely
paid when due all taxes owed by it or which it is obligated to withhold from
amounts owing to any employee (including, but not limited to, social security
taxes), creditor or third party; and (iii) has not waived any statute of
limitations with respect to taxes or agreed to any extension of time with
respect to a tax assessment or deficiency. The assessment of any additional
taxes for periods for which returns have been filed is not expected to exceed
the recorded liability therefor, and there are no material unresolved questions
or claims concerning the Company's tax liability. There is no pending dispute
with any taxing authority relating to any of said returns which if determined
adversely to the Company would result in the assertion by any taxing authority
of any valid deficiency in a material amount for taxes, and the Company and the
Management Shareholders do not, after due inquiry, have any knowledge of any
proposed liability for any such deficiency.
(j) Registration Rights. Except as set forth in
this Agreement or the Series A Purchase Agreement, the Company is not a party
to any agreement or commitment which obligates the Company to register under
the Securities Act of 1933, as amended, (the
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<PAGE> 5
"Securities Act") any of its presently outstanding securities or any of its
securities which may hereafter be issued.
(k) Offering. Subject to the accuracy of the
Purchasers' representations in Section 3 of this Agreement, the offer, issuance
and sale of the Series B Preferred Stock and the Conversion Shares constitute,
and will constitute, transactions exempt from the registration and prospectus
delivery requirements of Section 5 of the Securities Act and the Company has
obtained (or is exempt from the requirement to obtain) all qualifications,
permits, and other consents required by all applicable state laws governing the
offer, sale or issuance of securities.
(l) Insurance. The Company maintains to the
extent and in a manner customary for the industry in which the Company is
engaged (i) insurance on all assets and activities of a type customarily
insured, covering property damage and loss of income by fire or other casualty,
and (ii) insurance protection against all liabilities (including products
liability), claims and risks against which it is customary for companies
similarly situated as the Company to insure.
(m) Certain Transactions. Except as disclosed in
the Audited Financial Statements, the Company is not indebted, either directly
or indirectly, to any of the officers, directors or shareholders of the
Company, or to members of their respective immediate families, in any amount
whatsoever, other than for payment of salary for services rendered and
reasonable expenses; none of said officers, directors, or shareholders, or any
members of their immediate families, are indebted to the Company or, to the
best knowledge of the Company and the Management Shareholders, after due
inquiry, have any direct or indirect ownership interest in, or any contractual
relationship with, any firm, corporation or other person with which the Company
is or was affiliated or with which the Company has a business relationship, or
any firm, corporation or other person which, directly or indirectly, competes
with the Company. No such officer, director or shareholder, or any member of
their immediate families, is, directly or indirectly, a party to or otherwise
an interested party with respect to any contract with the Company.
(n) Contracts and Commitments. Except as
expressly contemplated by this Agreement, or as set forth in the Contracts
Schedule attached to this Agreement as Schedule 2(n) (which is a list of all
material agreements to which the Company is party or by which the Company or
any of its property is bound), the Company is not presently a party to, or
bound by, any written or oral contract, agreement, lease, guarantee, credit or
security instrument or employee plan or arrangement (i) with any employee,
director or shareholder of the Company or (ii) pursuant to which the Company
has payment or performance obligations in excess of $60,000 in value or is
entitled to receive payment or services in excess of $60,000 in value.
(o) Governmental Consents. No permit, consent,
approval or authorization of, or declaration to or filing with, any
governmental authority is required in connection with the execution, delivery
or performance of this Agreement or any of the Other Agreements or the
consummation of any transaction contemplated hereby or thereby, except as have
been obtained or accomplished.
(p) Compliance with Laws. The Company is not in
violation of any law or any regulation or requirement (including, but not
limited to, any law, regulation or requirement governing the quality of the
environment) which might result in a Material Adverse Change, and has not
received notice of any such violation.
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(q) Patents, Copyrights and Trademarks. The
Company owns and possesses or is licensed under all patents, patent
applications, licenses, trademarks, trade names, brand names, inventions and
copyrights necessary for the operation of its business as now conducted and as
proposed to be conducted, with no infringement of or conflict with the rights
of others, except such infringements or conflicts which would not in the
aggregate result in a Material Adverse Change; except as disclosed in the
Audited Financial Statements, the Company is not obligated or under any
liability whatsoever to make any payments by way of royalties, fees or
otherwise to any owner, licensor of, or other claimant to any patent,
trademark, trade name, copyright or other intangible asset, with respect to the
use thereof or in connection with the conduct of its business, or otherwise;
and there have been no claims made against the Company for the assertion of the
invalidity, abuse, misuse or unenforceability of any of its patent, trademark,
copyright, trade secret or other proprietary rights and to the best knowledge
of the Company and the Management Shareholders, there are no grounds for the
same.
(r) Brokers. No finder, broker, agent, financial
advisor or other intermediary has acted on behalf of the Company in connection
with the offering of the Series B Preferred Stock or the negotiation or
consummation of this Agreement or any of the transactions contemplated hereby.
(s) Subsidiaries. The Company has no
subsidiaries and does not control, directly or indirectly, any other
corporation, association, partnership or other business entity or own any
shares of capital stock or other securities of any other person.
(t) Employees and Labor. Neither the Company nor
the Management Shareholders, after due inquiry, are aware that any officer,
director, executive or key employee of the Company or any group of employees of
the Company has any plans to terminate his, her or its employment with the
Company. The Company has complied in all material respects with all laws
relating to the employment of labor, including provisions thereof relating to
wages, hours, equal opportunity and collective bargaining. The Company does
not have any material labor relations problems. The Company is not, and has
not been, subject to any pension, profit sharing or other similar plan which is
subject to the Employee Retirement Income Security Act of 1974, as amended.
(u) Disclosure. Neither this Agreement nor any
exhibit or schedule hereto nor any certificate or other instrument delivered
hereunder to the Purchasers by the Company or the Management Shareholders,
contains any untrue statement of any material fact or omits to state a material
fact necessary in order to make the statements contained herein or therein, in
light of the circumstances under which they were made, not misleading and there
is no fact that would be material to the Purchasers' decision to purchase the
Series B Preferred Stock known to the Company or the Management Shareholders
which has not been disclosed to the Purchasers in writing by the Company or the
Management Shareholders.
3. Representations and Warranties of the Purchasers.
Each Purchaser, severally and not jointly, represents and warrants to the
Company that:
(a) Investment Intent. The shares of Series B
Preferred Stock to be purchased by such Purchaser pursuant to this Agreement
(the "Shares") are being acquired by such Purchaser solely for its own account,
for investment purposes only, and not with a view to the distribution of such
shares within the meaning of the Securities Act of 1933, as amended (the
"Securities Act"). Such Purchaser acknowledges that the sale of the Shares to
it is not being registered under the Securities Act or qualified under any
applicable state securities laws.
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(b) Sophistication. Such Purchaser is able to
bear the economic risk of an investment in the Shares and is able to bear the
risk of losing part or all of such Purchaser's investment in the Shares, and
the inability to sell or transfer the Shares for an indefinite period of time
or at a price which would enable such Purchaser to recoup its investment in the
Shares, and either (i) has such knowledge and experience in financial and
business matters that it is capable of evaluating the merits and risks of the
proposed investment and therefore has the capacity to protect its own interests
in connection with the purchase of the Shares; or (ii) has a pre-existing
personal or business relationship with the Company or one or more of its
officers, directors or controlling persons. SUCH PURCHASER UNDERSTANDS THAT NO
PUBLIC MARKET NOW EXISTS FOR THE SHARES.
(c) Shares not Registered. Such Purchaser has
been advised that the Shares have not been registered under the Securities Act
or under the securities laws of any state, and that the Shares must be held
until the Shares are registered under the Securities Act and applicable state
securities law or an exemption from such registration is available.
(d) Restricted Securities. Such Purchaser has
been advised that the Shares are deemed "restricted securities" as that term is
defined in Rule 144 promulgated under the Securities Act; that the exemption
from registration under Rule 144 will not be available in any event for at
least two years from the date of issuance, and even then will not be available
unless (i) a public trading market then exists for such Shares (ii) adequate
information concerning the Company is then available to the public, and (iii)
other terms and conditions of Rule 144 are complied with; and that any sale of
the Shares may be made by such Purchaser only in accordance with such terms and
conditions.
(e) Information Regarding the Company. Such
Purchaser has received such information as it deems necessary in order to
understand the nature and scope of the properties and business owned and
operated by the Company, has been provided with the opportunity to obtain any
additional information deemed necessary by such Purchaser and has been advised
by the Company that such Purchaser may ask, and the Company will answer to the
best of its knowledge, any questions from such Purchaser or from any person
acting on behalf of such Purchaser, concerning the Company. Based on such
information, and the representations and warranties contained herein, such
Purchaser acknowledges that it has acquired sufficient information about the
Company to reach an informed and knowledgeable decision to acquire the Shares.
(f) Accredited Investor. Such Purchaser is an
"accredited investor" within the meaning of Rule 501(a) of Regulation D
promulgated under the Securities Act and an "excluded purchaser" as defined in
Section 260.102.13 of Title 10 of the California Code of Regulations.
4. Covenants of the Company. The Company agrees as
follows, and each of the other parties to this Agreement agrees to use his or
its best efforts to cause the Company to perform or observe the following
agreements:
(a) Financial Statements, Other Information and
Inspection Rights.
(i) Financial Statements. The Company
shall deliver to the Purchasers and Diedrich such monthly, quarterly and annual
financial statements of the Company as the Purchasers and Diedrich shall
reasonably request. Such financial statements shall be in reasonable detail and
shall be accompanied by a certificate of the Chief Financial Officer of the
Company to the effect that such financial statements have been prepared from the
books and records of the Company and in accordance with generally accepted
accounting principles consistently applied, and that such financial statements
fairly present the financial
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condition and results of operations of the Company at the dates and for the
periods covered thereby. Upon the written request of holders of at least
66-2/3% of the outstanding Series A Preferred Stock and Series B Preferred
Stock, the Company's annual financial statements shall be audited by a firm of
independent certified public accountants approved by such holders.
(ii) Other Information. The Company shall
deliver to the Purchasers and Diedrich, promptly after the occurrence thereof,
written notice and a description of any default or other event which, in the
reasonable judgment of the Company, might have a materially adverse impact upon
the Company, its financial condition, results of operations, prospects or
business.
(iii) Annual Operating Plan. The Company
shall prepare an operating plan, including a budget, for each thirty-six month
period commencing each February 1, which shall be approved by a majority of the
members of the Company's Board of Directors. The Company agrees to conduct its
business in conformity with said operating plan. The Company shall furnish to
the Purchasers and Diedrich (in person or by first-class mail) a copy of such
operating plan at least 45 days prior to the commencement of the period covered
by such operating plan.
(iv) Inspection Rights. The Company shall
permit any representative designated by the Purchasers or Diedrich, at
Purchasers' or Diedrich's, as applicable, expense, to visit and inspect any of
the properties of the Company or any of its subsidiaries, including its and
their books of account (and to make copies thereof and to take extracts
therefrom), and to discuss its and their affairs, finances and accounts with its
and their officers or employees, all at such reasonable times and as often as
may be reasonably requested, and with representatives of the Company's lenders;
provided that such rights shall be exercised in a manner so as not to materially
and adversely disrupt the ordinary course of business of the Company or any of
its subsidiaries.
(v) Termination of Diedrich's Rights.
The rights provided to Diedrich pursuant to this Section 4(a) shall terminate
(but only with respect to Diedrich) in the event that he is no longer an officer
of the Company and he is carrying on any business directly or indirectly
competitive with the business of the Company (or any subsidiary or affiliate
thereof) as previously or currently conducted or as currently proposed to be
conducted. Each of the following categories of activity shall, without
limitation, be deemed to constitute carrying on business within the meaning of
this paragraph: to engage in, work for or with, have an interest or concern in,
advise, lend money to, guarantee the debts or obligations of, or permit one's
name or any part thereof to be used in connection with, an enterprise or
endeavor, either individually, in partnership, or in conjunction with any person
or persons, firm, association, company or corporation, whether as a principal,
agent, shareholder, partner, employee, consultant, independent contractor or in
any other manner whatsoever; provided, however, that nothing herein shall
prohibit Diedrich from owning less than five percent (5%) of the capital stock
of a corporation the common stock of which is publicly traded on a national
securities exchange or through NASDAQ. Without limiting the foregoing,
involvement in the production, roasting, pricing, marketing or sale of coffee or
coffee-related products shall be deemed to be competitive with the business of
the Company (or any subsidiary or affiliate thereof) within the meaning of this
paragraph.
(b) Amendment to Amended and Restated Articles of
Incorporation and By-Laws. The Company shall not amend, and shall not permit
any of its subsidiaries to amend, its Amended and Restated Articles of
Incorporation or By-Laws, in any manner whatsoever except in accordance with
the provisions of the Amended and Restated Articles of Incorporation and
Bylaws. Notwithstanding the foregoing, the Company shall not amend Sections
1(a), 1(d), 2(a), 2(d), 4(b) or 4(c) of Article III of its Amended and Restated
Articles
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of Incorporation without obtaining the prior written consent of Diedrich to
such amendment, provided that Diedrich and any of his spouse, parents, lineal
descendants or whole blood siblings or a trust established for the benefit of
any such persons collectively own at least 10% of the outstanding voting
capital stock of the Company.
(c) Shareholder Agreement. Concurrently with the
execution and delivery of this Agreement, the Company, the Purchasers and the
Management Shareholders have executed and delivered the Amended and Restated
Shareholder Agreement (the "Shareholder Agreement"), substantially in the form
attached hereto as Exhibit 4(c), covering certain voting rights and rights of
first refusal with respect to the Company's capital stock. The Company shall
enforce each and every one of its obligations under the Shareholder Agreement
and shall not amend, modify or waive any of its rights thereunder except in
accordance with the provisions thereof.
(d) Termination of Certain Company Agreements.
The provisions of Sections 4(a) through 4(c) above shall terminate upon the
consummation of a Qualified Public Offering, which means a firmly underwritten
public offering of the Common Stock on a Form S-1, Form SB-1 or Form SB-2
Registration Statement filed with the Securities and Exchange Commission under
the Securities Act with respect to which the Company receives net proceeds of
at least $10,000,000 and the price to the public is at least $6.00 per share.
(e) Registration Rights.
(i) Required Registration. The Company
agrees that, at any time after the earlier to occur of June 1, 2000 or the
effective date of a Qualified Public Offering, it shall register under the
Securities Act and take all necessary steps to facilitate the public sale (the
"Public Offering"), at the Company's sole cost and expense except for
underwriting discounts and commissions, of all or any portion of the Conversion
Shares or any shares of Common Stock issued or issuable with respect to the
Conversion Shares by reason of a stock dividend or stock split or in connection
with a combination of shares, recapitalization, merger, consolidation or other
reorganization (the "Registrable Stock") designated in writing for such sale by
the holders of 50% of the Registrable Stock, provided that the Company shall not
be required to undertake and complete (A) more than three such registrations,
(B) prior to a Qualified Public Offering, any such registration, unless an
underwriter of national or regional reputation shall have agreed to serve as an
underwriter for purposes of such registration or (C) any such registration
within six months following the consummation of a Qualified Public Offering. If
the Purchasers are precluded from including any Registrable Stock in any Public
Offering as a result of the request or decision of the underwriters involved
therein, such Public Offering shall not count against the three Public Offerings
limit available to the Purchasers.
(ii) Incidental Registration. If the
Company at any time proposes to register any of its securities for sale for its
own account or for the account of any other person, it shall each such time give
written notice (the "Company's Notice"), at its expense, to all holders of
Registrable Stock of its intention to do so at least 45 days prior to the filing
of a registration statement with respect to such registration with the
Commission. If any holder of Registrable Stock desires to dispose of all or
part of its Registrable Stock, it may request registration thereof in connection
with the Company's registration by delivering to the Company, within 30 days
after receipt of the Company's Notice, written notice of such request (the
"Investors' Notice"). The Company shall use its best efforts to cause all
shares of Registrable Stock specified in the Investors' Notice to be registered
under the Securities Act so as to permit the sale or other disposition by such
holder or holders of the shares so registered.
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<PAGE> 10
Notwithstanding the foregoing, if an
underwriter involved with any registered offering of shares of the Company
advises the Company in writing that marketing factors (including, without
limitation, an adverse effect on the per share offering price) require a
limitation of the number of shares to be underwritten, then the Company shall
so advise the holders of Registrable Stock and the number of shares of
registrable securities that may be included in the registration and
underwriting shall be reduced accordingly. For purposes of any underwriter
cutback, all shares of Registrable Stock for which an Investor Notice has been
delivered to the Company and all shares which the Company intended to register
shall be cut back on a pro rata basis calculated based on the ratio which the
number of shares which each holder of Registrable Stock requested or the
Company intended, as applicable, to be included in the registered offering
bears to the total number of shares which were requested and intended to be
included in the registered offering.
(iii) Indemnification. In connection with
any Public Offering, the Company agrees to indemnify the holders of Registrable
Stock to the same extent as the Company indemnifies any underwriter
participating therein (or as the holders of Registrable Stock shall reasonably
request in the absence of underwriter participation therein).
(f) Rule 144 Compliance. At all times after
completion of a Qualified Public Offering, the Company agrees to take such
action as may be necessary to enable the holders of Registrable Stock to
complete the public sale of Registrable Stock in accordance with Rule 144
promulgated by the Securities and Exchange Commission under the Securities Act.
(g) Key Man Life Insurance. The Company shall
obtain and keep in effect term life insurance in the amount of one million
dollars ($1,000,000) on the life of Martin R. Diedrich with the proceeds
payable to the Company.
(h) Employee Stock Arrangements. The Company
will not, without the approval of the Board of Directors, issue any of its
capital stock, or grant an option or rights to subscribe for, purchase or
acquire any of its capital stock, to any employee, consultant, officer or
director of the Company. The Company shall, however, establish a stock option
plan for management and key employees (the "Option Plan") to be administered by
the Board of Directors. The Option Plan shall provide that the Company will
enter into an agreement with each employee of the Company who receives options
pursuant to the Option Plan (an "Optionee") whereby the shares of the Company's
capital stock issued to such Optionee upon exercise of any options may be
redeemed, at the option of the Company, upon the employee's cessation of
employment at its then current market value. The Company may, if determined
necessary by the Board of Directors, maintain a life insurance policy with the
proceeds payable to the Company on each Optionee during the term of his or her
employment in an amount sufficient to pay for the redemption of such Optionee's
shares.
(i) Actions Requiring Notice and Approval.
(i) Anything in this Agreement to the
contrary notwithstanding, the following actions may be taken by the Company only
with prior notice to and approval of 66-2/3% of the Shares and Conversion Shares
held by the Purchasers, as provided in Section 4(i)(ii) hereof:
(A) the filing on behalf of the
Company of an application for bankruptcy or similar relief;
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<PAGE> 11
(B) any confession of a judgment
against the Company;
(C) any purchase of equity
securities or instruments representing indebtedness of any Person;
(D) the creation by the Company of
any subsidiaries;
(E) any amendment of this
Agreement; and
(F) the appointment, employment,
removal and compensation of, and approval of any employment contracts with, the
Chief Executive Officer of the Company, any other officers of the Company and
the Management Shareholders.
(ii) In the event that the Company
determines to take any of the actions specified in Section 4(i)(i), the
following procedures shall be applicable:
(A) The Company shall deliver to
the Purchasers written notice of the proposed action (the "Company Notice"),
specifying the dollar amount and terms and conditions of the proposed action.
(B) If Purchasers disapprove of
such action, they shall do so by delivering a written notice signed by either
Purchaser (the "Disapproval Notice"). The Disapproval Notice must be delivered
to the Company within 10 business days from the receipt by Purchasers of the
Company Notice. Receipt of the Disapproval Notice by the Company shall
prohibit the Company from undertaking the action specified in the Company
Notice.
(C) If the Purchasers do not tender
a Disapproval Notice within the 10 business day period, the Company shall be
entitled to undertake the action specified in the Company Notice after the end
of the 10 business day period, but only upon terms and conditions which are in
all material respects (including, without limitation, price and interest rates)
identical to those set forth in the Company Notice; provided, that if the
Company does not undertake the action specified in the Company Notice within 30
days following the expiration of the 10 business day period, any approval
theretofore extended pursuant to this section shall be deemed rescinded and any
subsequent actions shall again be subject to all of the restrictions set forth
herein.
(iii) The Purchasers may, by prior written
consent, waive their rights under this Section 4(i), provided that, unless
otherwise specifically agreed to by the Purchasers in writing, such waivers
shall be on a case-by-case basis and shall be limited to the corporate acts
specified therein.
(j) Other Affirmative Covenants.
The Company shall:
(i) at all times cause to be done all
things necessary to maintain, preserve and renew its corporate existence and all
licenses and permits necessary to the conduct of its businesses;
(ii) maintain and keep its properties in
good repair, working order and condition excepting ordinary wear and tear, and
from time to time make all necessary or desirable repairs, renewals and
replacements;
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<PAGE> 12
(iii) pay and discharge, when payable, all
taxes, assessments and governmental charges imposed upon its properties or upon
the income or profits therefrom (in each case before the same become delinquent
and before penalties accrue thereon), and all claims for labor, materials or
supplies, which if unpaid might by law become a lien upon any of its properties,
unless and only to the extent that the same are being contested in good faith
and by appropriate proceedings and adequate reserves have been set aside on its
books with respect thereto;
(iv) comply with all other obligations
which it incurs or to which it becomes subject pursuant to any contract or
agreement, whether oral or written, express or implied, the breach of which
might result in a Material Adverse Change, unless and only to the extent that
the same are being contested in good faith and by appropriate proceedings and
adequate reserves have been set aside on its books with respect thereto;
(v) comply with all applicable laws,
rules and regulations of all governmental authorities, the violation of which
might result in a Material Adverse Change;
(vi) apply for and, when obtained,
continue in force, with good and reputable insurance companies, adequate
insurance covering risks of such types and in such amounts as are referred to in
Section 2(l) hereof; and
(vii) operate its business only in the
ordinary course, substantially as presently operated under its existing
management, preserve intact its present business organization and all licenses
and permits necessary to the conduct of its business, and use its best efforts
to keep available on customary terms the services of its present officers and
key employees.
(k) Release of Diedrich as Guarantor of Certain
Company Obligations. The Company shall use its best efforts to obtain the
release of Diedrich as a guarantor of certain Company obligations under the
guaranty agreements set forth on Schedule 4(k) hereto.
5. Restrictions on Transfer. None of the shares of the
Series B Preferred Stock purchased hereunder or the Conversion Shares shall be
sold, transferred, assigned, pledged, hypothecated or otherwise disposed of
unless and until one of the following events shall have occurred:
(a) Such securities are disposed of pursuant to
and in conformity with an effective registration statement filed with the
Securities and Exchange Commission pursuant to the Securities Act or pursuant
to Rule 144 promulgated thereunder; or
(b) The seller shall have delivered to the
Company a written opinion by counsel which is reasonably acceptable to the
Company to the effect that the proposed transfer is exempt from the
registration and prospectus delivery requirements of the Securities Act; or
(c) The seller shall have transferred such
securities to an Affiliate (as defined in Section 10(h) below) of the seller
and such Affiliate has delivered to the Company a written agreement making the
representations set forth in Section 3 and agreeing to be bound by the
restrictions of this Section 5 with respect to the shares so transferred. For
purposes of this Agreement, the definition of "Purchaser" as used herein shall
be deemed to include any such Affiliate of Purchaser.
12
<PAGE> 13
The parties hereto further agree that any certificate
evidencing the Series B Preferred Stock or the Conversion Shares shall bear the
following legend:
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, HAVE BEEN
TAKEN FOR INVESTMENT, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED,
PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT IN ACCORDANCE
WITH THE TERMS OF AN AGREEMENT BETWEEN THE COMPANY AND THE REGISTERED
HOLDER HEREOF, A COPY OF WHICH AGREEMENT IS ON FILE AT THE PRINCIPAL
OFFICES OF THE COMPANY.
The Company shall, within 10 days of the request of
any holder of a certificate bearing the foregoing legend and the surrender of
such certificate, issue a new stock certificate without the foregoing legend if
any of the events set forth in Sections 5(a) or (b) above have occurred.
6. The Closing; Delivery. The closing of the
transactions contemplated by this Agreement (the "Closing") shall take place on
June 26, 1995, at the offices of Gibson, Dunn & Crutcher, 4 Park Plaza, Irvine,
California, or at such other place and at such time and date as Purchasers,
Company and Management Shareholders shall mutually agree. At the Closing, the
Company shall deliver to each Purchaser a certificate or certificates
evidencing the Series B Preferred Stock being purchased by such Purchaser
against delivery to the Company of the purchase price therefor, by a check
payable to the order of the Company.
7. Conditions to Obligations of Purchasers. The
obligations of Purchasers to purchase the Series B Preferred Stock at the
Closing and the other obligations of Purchasers under this Agreement are
subject to the fulfillment at or prior to the Closing of the following
conditions, any of which may be waived in writing in whole or in part by
Purchasers:
(a) Representations and Warranties. On the date
of the Closing, the representations and warranties of Company and Management
Shareholders set forth in this Agreement shall be true and correct in all
respects with the same effect as though such representations and warranties had
been made at and as of such time, except to the extent that any changes therein
are specifically contemplated by this Agreement.
(b) Performance. The Company and Management
Shareholders shall have performed and complied in all respects with all
agreements and conditions contained herein required to be performed or complied
with by them prior to or at the Closing.
(c) Absence of Litigation. No suit, action,
proceeding or investigation shall have occurred, be pending or threatened which
would or seeks to prevent or delay beyond the date of the Closing the
consummation of the transactions contemplated by this Agreement.
(d) Opinion of Counsel to the Company and
Management Shareholders. Purchasers shall have received from Allen, Matkins,
Leck, Gamble & Mallory, counsel for the Company and Management Shareholders, a
written opinion, substantially identical in form and substance to that attached
hereto as Exhibit 7(d).
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<PAGE> 14
(e) Consents and Waivers. The Company shall have
obtained any and all consents, permits and waivers, and made any and all
filings, necessary or appropriate for the consummation of the transactions
contemplated by this Agreement.
(f) Contemporaneous Transactions. Prior to or
contemporaneously with the Closing, the Company and Management Shareholders
shall have executed and delivered to Purchasers the Other Agreements
contemplated by this Agreement.
(g) Closing Papers. The Company and Management
Shareholders shall have delivered to Purchasers all of the following:
(i) a certificate signed by the
President and Secretary of the Company, dated the date of the Closing, stating
that (A) the persons signing such certificate have made or have caused to be
made such investigations as are necessary to permit them to certify the
accuracy of the information set forth therein, (B) such certificate does not
misstate any material fact and does not omit to state any fact necessary to
make the certificate not misleading and (C) the conditions specified in
Sections 7(a), 7(b), 7(c), 7(e) and 7(i) of this Agreement have been satisfied;
(ii) copies (certified by the President,
Secretary or Assistant Secretary of the Company) of the resolutions duly adopted
by the board of directors and shareholders of the Company authorizing, as
appropriate, the execution, delivery and performance of this Agreement and the
Other Agreements referred to in this Agreement as being executed at or prior to
the Closing;
(iii) copies (certified by the President,
Secretary or Assistant Secretary of the Company) of the Company's Articles of
Incorporation and Bylaws as amended through the date of the Closing; and
(iv) such other documents relating to the
transactions contemplated by this Agreement as Purchasers may reasonably
request.
(h) Proceedings. All corporate and other
proceedings taken or to be taken by the Company in connection with the
transactions contemplated hereby to be consummated at the Closing and all
documents incident thereto shall be reasonably satisfactory in form and
substance to Purchaser.
(i) Redemption. The Company shall have entered
into the Redemption Agreement pursuant to the terms of which the Company shall
be permitted to redeem, following the Closing, all of the shares of the
Company's capital stock owned directly or indirectly by Donald M. Holly.
8. Conditions to Obligations of the Company and
Management Shareholders. The obligations of the Company and Management
Shareholders under this Agreement are subject to the fulfillment at or prior to
the date of the Closing of the following conditions, any of which may be waived
in writing, in whole or in part, by the Company and Management Shareholders:
(a) Representations and Warranties. On the date
of the Closing, the representations and warranties of Purchasers set forth in
this Agreement shall be true and correct in all respects with the same effect
as though such representations and warranties were made at and as of such time.
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<PAGE> 15
(b) Performance. Purchasers shall have performed
and complied in all respects with all agreements and conditions contained
herein required to be performed by or complied with by it prior to the Closing.
(c) Contemporaneous Transaction. Prior to or
contemporaneously with the Closing, the Purchasers shall have executed and
delivered to the Company and Management Shareholders the Other Agreements
contemplated by this Agreement.
(d) Employment Agreement. The Company and Martin
R. Diedrich shall have entered into the Employment Agreement in the form
attached hereto as Exhibit 8(d).
(e) Absence of Litigation. No suit, action,
proceeding or investigation shall have occurred, be pending or threatened which
would or seeks to prevent or delay beyond the date of the Closing the
consummation of the transactions contemplated by this Agreement.
(f) Closing Papers. The Purchasers shall have
delivered to Company and Management Shareholders a certificate signed by each
such Purchaser, dated the date of the Closing, stating that (A) the persons
signing such certificate have made or have caused to be made such
investigations as are necessary to permit them to certify the accuracy of the
information set forth therein, (B) such certificate does not misstate any
material fact and does not omit to state any fact necessary to make the
certificate not misleading and (C) the conditions specified in Sections 8(a),
8(b) and 8(e) of this Agreement have been satisfied.
(g) Consents and Waivers. The Purchasers shall
have obtained any and all consents, permits and waivers, and made any and all
filings, necessary or appropriate for the consummation of the transactions
contemplated by this Agreement.
9. Indemnity.
(a) The Company agrees to indemnify and hold
harmless the Purchasers, and each of them, and any of their affiliates harmless
from and against any and all losses, claims, damages or liabilities (or actions
in respect thereof) ("Losses") to which the Purchasers, or either of them, or
any of their affiliates may become subject under any statute or at common law,
or otherwise to the extent that such Losses arise out of or are based upon (i)
any inaccuracy in any representation or warranty made by the Company or the
Management Shareholders in this Agreement, or (ii) any breach by the Company or
the Management Shareholders of any of the terms or provisions of this Agreement
or the Other Agreements, and in each case the Company further agrees to
reimburse the Purchasers or any of their affiliates for any legal or other
expenses reasonably incurred in connection with investigating, prosecuting or
defending any such Loss.
(b) The Company agrees to indemnify and hold
harmless Diedrich from and against any and all Losses to which Diedrich may
become subject to the extent that such Losses arise out of or are based upon
his guaranty of certain Company obligations under the guaranty agreements set
forth on Schedule 4(k) to this Agreement.
10. Miscellaneous Provisions.
(a) Notices. All notices, demands or other
communications hereunder shall be in writing and shall be deemed to have been
duly given if delivered in person, by reputable overnight commercial delivery
service or by United States mail, certified or registered, with return receipt
requested, or otherwise actually delivered:
15
<PAGE> 16
If to Redwood: Redwood Enterprises VII, L.P.
450 Newport Center Drive, Suite 570
Newport Beach, CA 92660
With Copies to: E. Michael Greaney, Esq.
Gibson, Dunn & Crutcher
4 Park Plaza
Irvine, CA 92714
If to DPL: Diedrich Partners I, L.P.
3 Civic Plaza, Suite 170
Newport Beach, CA 92660
If to the Company: Diedrich Coffee
350 Clinton Street, Suite A
Costa Mesa, CA 92626
If to Management
Shareholders: Martin R. Diedrich
350 Clinton Street, Suite A
Costa Mesa, CA 92626
Steven A. Lupinacci
350 Clinton Street, Suite A
Costa Mesa, CA 92626
With Copies to: Jeremy D. Glaser, Esq.
Allen, Matkins, Leck, Gamble & Mallory
18400 Von Karman Avenue, 4th Floor
Irvine, California 92715
or at such other address as may have been furnished by such person in writing
to the other parties. Any such notice, demand or other communication shall be
deemed to have been given on the date actually delivered or as of the date
mailed, as the case may be.
(b) Severability and Governing Law. Should any
Section or any part of a Section within this Agreement be rendered void,
invalid or unenforceable by any court of law for any reason, such invalidity or
unenforceability shall not void or render invalid or unenforceable any other
Section or part of a Section in this Agreement. This Agreement and the rights
and obligations of the parties under this Agreement shall be governed by and
construed in accordance with the laws of the State of California, excluding its
rules of conflicts of law.
(c) Amendments and Waivers. The provisions of
this Agreement may not be changed, waived, discharged or terminated orally or
in writing, except with (but only with) the written consent of the Company, the
Management Shareholders and the holders of at least 66-2/3% of the Series B
Preferred Stock then outstanding; provided, however, that no such amendment or
waiver shall affect the provisions of this Section 10(c) and no such waiver
shall extend to or affect any obligation not expressly waived or impair any
right consequent therein. No failure to exercise and no delay in exercising,
on the part of any party, any right, remedy, power or privilege hereunder,
shall operate as a waiver thereof; nor shall any single or partial exercise of
any right, remedy, power or privilege hereunder preclude any other or further
exercise thereof or the exercise of any other right, remedy, power or
privilege. The rights, remedies, powers and privileges herein provided are
16
<PAGE> 17
cumulative and not exclusive of any rights, remedies, powers and privileges
provided by law. The failure of any party to insist upon a strict performance
of any of the terms or provisions of this Agreement, or to exercise any option,
right or remedy herein contained, shall not be construed as a waiver or as a
relinquishment for the future of such term, provision, option, right or remedy,
but the same shall continue and remain in full force and effect.
(d) Survival of Representations and Warranties.
All agreements, representations and warranties contained herein shall survive
the execution and delivery of this Agreement, any investigation at any time
made, the sale and purchase of the Series B Preferred Stock and payment
therefor, the conversion or redemption of the Series B Preferred Stock as
provided for in the Articles of Incorporation, and, as to the Purchasers as
defined herein, any disposition of the Series B Preferred Stock or the
Conversion Shares and (i) the representations and warranties set forth in
Sections 2(c), 2(g), 2(i), 2(k) and 2(q) shall survive until the expiration of
the respective statute of limitations with respect to such matters and (ii) all
other representations and warranties set forth herein will expire on the third
anniversary of the date hereof; unless prior to the stated time of expiration,
a claim specifying a breach of any of the representations or warranties
described above is submitted in writing to the indemnifying party. All
statements contained in any certificate or other instrument executed and
delivered by the Company or its duly authorized officers pursuant to this
Agreement in connection with the transactions contemplated hereby shall
constitute additional representations and warranties by the Company hereunder.
(e) Expenses. The Company agrees to pay, and
save either Purchaser (or any subsequent holder of Series B Preferred Stock or
Conversion Shares) harmless against liability for the payment of, (i) fees and
expenses not to exceed $20,000 of the Purchasers' special counsel, Gibson, Dunn
& Crutcher, arising in connection with the negotiation, execution and
consummation of the transactions contemplated by this Agreement, (ii)
reasonable fees and expenses of counsel incurred with respect to any amendments
or waivers (whether or not they become effective) under or in respect of the
Articles of Incorporation, Bylaws, this Agreement or any of the Other
Agreements, and (iii) in the event of breach or default of the Company's
obligations to the Purchasers under the Articles of Incorporation, the Bylaws,
this Agreement or any of the Other Agreements, fees and expenses of the
Purchasers or such holders incurred in respect of the enforcement of the rights
granted under any of the foregoing whether or not suit is brought; provided,
however, that the Company shall not pay such fees and expenses if such
Purchasers or holders are not "prevailing parties" as defined in Section 10(k)
of this Agreement. The Company agrees to pay fees and expenses not to exceed
$1,000 of Diedrich's special counsel, Allen, Matkins, Leck, Gamble & Mallory,
arising in connection with the negotiation and execution of Diedrich's
Employment Agreement with the Company.
(f) Exercise of Contractual Rights. Each of the
Company and the Management Shareholders recognize, acknowledge and agree that
the Purchasers have a major financial interest in the Company to preserve and
that the exercise by Purchasers of any of their contractual rights under this
Agreement or any of the Other Agreements contemplated hereby shall not be
deemed to constitute a lack of good faith or unfair dealing.
(g) Entire Agreement. This Agreement, the
attached Schedules and Exhibits and the Other Agreements contain the entire
understanding of the parties and there are no further or other agreements or
understandings, written or oral, in effect between the parties relating to the
subject matter hereof unless expressly referred to herein.
17
<PAGE> 18
(h) Assignment. No party hereto shall assign or
transfer or permit the assignment or transfer of this Agreement without the
prior written consent of the other parties. Notwithstanding the foregoing,
nothing contained herein shall prevent the transfer of this Agreement or any
portion hereof by a Purchaser to any entity or person that, directly or
indirectly, through one or more intermediaries, controls, or is controlled by,
or is under common control with such Purchaser (an "Affiliate"), but no such
assignment shall operate to relieve Purchaser from any obligation, liability,
indemnity, warranty, covenant, promise or agreement hereunder.
(i) Counterparts. This Agreement may be executed
by one or more of the parties hereto on any number of separate counterparts and
all of said counterparts taken together shall be deemed to constitute one and
the same instrument.
(j) Further Assurances. Each party hereto agrees
to execute any and all documents and to perform such other acts as may be
necessary or expedient to further the purposes of this Agreement and the
transactions contemplated hereby.
(k) Attorneys' Fees. If either party to this
Agreement shall bring any action, suit, counterclaim or appeal for any relief
against the other, declaratory or otherwise, to enforce the terms hereof or to
declare rights hereunder (collectively, an "Action"), the prevailing party
shall be entitled to recover as part of any such Action its reasonable
attorneys' fees and costs, including any fees and costs incurred in bringing
and prosecuting such Action and/or enforcing any order, judgment, ruling or
award granted as part of such Action. "Prevailing party" within the meaning of
this section includes, without limitation, a party who agrees to dismiss an
Action upon the other party's payment of all or a portion of the sums allegedly
due or performance of the covenants allegedly breached, or who obtains
substantially the relief sought by it.
(l) Captions. The captions of the Sections of
this Agreement are for convenience only and shall not be considered or referred
to in resolving questions of construction.
(m) Acknowledgment. Each Purchaser acknowledges
and agrees that it has, independently and without reliance upon any other
Purchaser, made its own evaluation and decision to purchase the Series B
Preferred Stock purchased by it pursuant to this Agreement. Each Purchaser
further acknowledges that no other Purchaser has acted as an agent for such
Purchaser in connection with the purchase of the Series B Preferred Stock
hereunder and will not be acting as an agent for such Purchaser in connection
with monitoring its investment hereunder.
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<PAGE> 19
IN WITNESS WHEREOF, the parties hereto have executed and
delivered this Agreement as of the date first above written.
"MANAGEMENT SHAREHOLDERS" "COMPANY"
MARTIN R. DIEDRICH DIEDRICH COFFEE
- ---------------------------- ------------------------------
Martin R. Diedrich Steven A. Lupinacci
President, Chief Executive
Officer and Chief Financial
Officer
STEVEN A. LUPINACCI
------------------------------
Martin R. Diedrich
- ---------------------------- Chairman of the Board and
Steven A. Lupinacci Secretary
"PURCHASERS"
REDWOOD ENTERPRISES VII, L.P.
-------------------------------
Paul C. Heeschen
General Partner
DIEDRICH PARTNERS I, L.P.
-------------------------------
Name:
-------------------------
General Partner
19
<PAGE> 1
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into
as of June 29, 1995, by and between DIEDRICH COFFEE, a California corporation
("Employer"), and MARTIN R. DIEDRICH ("Employee").
R E C I T A L S :
Employer and Employee desire to enter into this Agreement to establish
the terms and conditions of Employee's employment by Employer 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) Employer hereby employs Employee as its Vice
President, Quality Control, and Corporate Spokesperson and 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 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) Employee shall perform such duties and functions
consistent with his role as Vice President, Quality Control, and
Corporate Spokesperson of Employer as may from time to time be
assigned to him by the Chief Executive Officer or the Board of
Directors of the Employer (the "Board") which duties and functions are
intended to include oversight of all material aspects of the following
matters as they relate to the Employer's business and products sold or
otherwise distributed by Employer: (i) product quality control, (ii)
new product development, (iii) logos, trade names and imagery, and
(iv) selection of additional spokespersons for Employer. Employee
agrees that during the course of the Employer's business hours
throughout the Term, he will devote the whole of his time, attention
and efforts to the performance of his duties and obligations
hereunder. Employee shall not, during the Term, without the written
approval of the Board first had and obtained in each instance,
directly or indirectly (A) accept employment or receive any
compensation for the performance of services from any business
enterprise other than Employer or (B) enter into or be concerned or
interested in any trade or business or public or private work (whether
for profit or otherwise and whether as partner, principal, shareholder
or otherwise), which may, in the absolute discretion of the Board,
hinder or otherwise interfere with the performance by the Employee of
his duties and obligations hereunder, except as a holder of not more
than five percent (5%) of any class of stock or other securities in
any company which is listed and/or traded on any securities market.
<PAGE> 2
2. Compensation. Employee shall be paid a salary (the "Base
Salary") in an amount that initially shall be equal to One Hundred Thousand
Dollars ($100,000) 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 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
Employer's performance and Employee's contribution thereto in such amounts and
at such times as the Board may determine.
3. Employee Benefits. During the Term of Employee's employment
hereunder:
(a) Employee shall be entitled to vacation leave
consistent with Employer's policies for other senior executives of
Employer.
(b) Employer shall pay or reimburse Employee for all
reasonable and necessary travel and other business expenses incurred
or paid by Employee in connection with the performance of his services
under this Agreement consistent with Employer's policies for other
senior executives of Employer.
(c) Employer shall provide and pay for the annual cost of
premiums for health, dental and medical insurance coverage for
Employee and Employee's dependents consistent with the coverage
generally made available by Employer to senior executives of Employer
and providing benefits at least as favorable to Employee as the
coverage that is in effect at the date of this Agreement.
(d) In addition to the benefits set forth above, Employee
shall be entitled to participate in any other policies, programs and
benefits which Employer 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.
4. Termination of Employment.
(a) Notwithstanding any other provision of this
Agreement, Employee's employment under this Agreement may be
terminated as follows:
(i) Upon the death of Employee, this Agreement
and Employee's employment hereunder shall terminate
immediately and without notice by Employer; or
(ii) In the event of the inability of 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
<PAGE> 3
and Employee's employment hereunder shall terminate upon
delivery of written notice to Employee or
(iii) By Employer for Cause (as defined below) in
accordance with the provisions of Section 4(b) hereof.
(b) The parties agree that for purposes of this
Agreement, the term "Cause" shall mean the following:
(i) 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 Employer's business; and
(iii) Commission by the Employee of any felony or
intentionally fraudulent or other act against Employer, or its
employees, agents or customers which demonstrates Employee's
untrustworthiness or lack of integrity.
With respect to events described in subparagraph
4(b)(i) and (ii) above, Employer shall give written notice to Employee
of any such event and 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,
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 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 Employee's employment under this Agreement
may be terminated by Employer by delivery to 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, Employee's employment under
this Agreement may be terminated by Employer by delivery to Employee
of written notice of termination and such termination will be
effective as of the date of delivery of such written notice.
5. Relocation; Travel. In connection with the performance of his
employment duties under the terms of this Agreement, Employee shall not be
required to relocate to an office of Employer outside of the Orange County,
California area.
6. Arbitration. 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
3
<PAGE> 4
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, 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.
7. Notices. All notices, requests, demands and other
communications under this Agreement must be in writing and shall be deemed to
have been duly given on the date of service if served personally on the party
to whom notice is to be given, or on the date indicated on the return receipt
as the date of receipt or refusal if mailed to the party to whom notice is to
be given by first class mail, registered or certified, postage prepaid, return
receipt requested, and properly addressed as follows:
To the Employer: Diedrich Coffee
350 Clinton Street, Suite A
Costa Mesa, California 92626
Attention: President
To the Employee: Martin R. Diedrich
(at the Employer's address)
Any party may change its address for the purpose of this Paragraph 7
by giving the other party written notice of the new address in the manner set
forth above.
8. Enforceability. If any of the covenants contained in this
Agreement, for any reason and to any extent, are construed to be invalid or
unenforceable, the remainder of this Agreement, and the application of the
remaining covenants to other persons or circumstances shall not be affected
hereby, but rather shall be enforced to the greatest extent permitted by law.
9. Assignment; Binding Effect. This Agreement shall inure to the
benefit of, and be enforceable by, the Employer and its successors and assigns;
however, this Agreement is personal to Employee and may not be assigned by
Employee in whole or in part. In the event of the sale of all or substantially
all of the assets of Employer or other transaction in which Employer will not
continue as a surviving corporate entity engaged in a substantially similar
business as it is engaged in prior to such transaction, Employer will use
commercially reasonable efforts to obtain from the acquiring person or entity,
before the succession takes place, an agreement to assume and perform all of
the terms and conditions of this Agreement.
4
<PAGE> 5
10. Entire Agreement; Amendment. This Agreement contains the
entire agreement between Employer and Employee with respect to the subject
matters hereof and supersedes all prior or contemporaneous agreements,
arrangements or understandings written or oral, with respect to the subject
matters hereof. This Agreement may not be amended, waived, changed, modified
or discharged except by an instrument in writing executed by or on behalf of
the party or parties against whom any amendment, waiver, change, modification
or discharge is sought to be enforced.
11. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of California.
12. Counterparts. This Agreement may be executed simultaneously
in one or more counterparts, each of which shall be deemed an original, but all
of which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
"EMPLOYER" DIEDRICH COFFEE, a California corporation
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
"EMPLOYEE" /s/ Martin R. Diedrich
----------------------------------------
MARTIN R. DIEDRICH
5
<PAGE> 1
Exhibit 10.4
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is made as of this ______
day of _______, 1996 by and between DIEDRICH COFFEE, a California corporation
(the "Company") and __________________________ ("Indemnitee"), with reference
to the following:
RECITALS
A. The Indemnitee is currently serving as a Director and/or Officer of
the Company and the Company wishes the Indemnitee to continue in such capacity.
The Indemnitee is willing, under certain circumstances, to continue in such
capacity.
B. The Indemnitee has indicated his concern that the indemnities
available under the Company's bylaws and available insurance, if any, may not be
adequate to protect him against the risks associated with his service to the
Company. The Indemnitee may not be willing to continue in office in the absence
of the benefits accorded to Indemnitee under this Agreement.
AGREEMENT
In order to induce the Indemnitee to continue to serve as Director
and/or Officer for the Company and in consideration for his continued service,
the Company hereby agrees to indemnify the Indemnitee as follows:
1. The Company shall indemnify, and advance expenses to, Indemnitee as
provided in this Agreement and to the fullest extent permitted by applicable law
in effect on the date hereof and to such greater extent as applicable law may
thereafter from time to time permit. The rights of Indemnitee provided under the
preceding sentence shall include, but shall not be limited to, the rights set
forth in the other Sections of this Agreement. The indemnification and
advancement of expenses contemplated by this Agreement are intended to be
provided in accordance with the terms and conditions of this Agreement
regardless of whether any of the events underlying the indemnified claims or
actions or advanced expenses occurred before or after the date of this
Agreement. The rights of Indemnitee under this Agreement shall survive
termination of his status as a director, officer, employee or agent of the
Company.
2. Indemnitee shall be entitled to the rights of indemnification
provided in this Section 2 if, by reason of the fact that he is or was a
director, officer, employee or agent of the Company, he is, or is threatened to
be made, a party to any threatened, pending, or completed action, suit or
proceeding, other than an action by or in the right of the Company. Pursuant to
this Section 2, Indemnitee shall be indemnified against expenses (including
attorneys' fees), judgments, damages, penalties, fines and amounts paid in
settlement actually and reasonably incurred by him or on his behalf in
connection with such proceeding or any claim, issue or matter therein, if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Company, and, with respect to any criminal
proceeding, had no reasonable cause to believe his conduct was unlawful.
<PAGE> 2
3. Indemnitee shall be entitled to the rights of indemnification
provided in this Section 3 if, by reason of the fact that he is or was a
director, officer, employee or agent of the Company, he is, or is threatened to
be made, a party to any threatened, pending or completed action, suit or
proceeding brought by or in the right of the Company to procure a judgment in
its favor. Pursuant to this Section, Indemnitee shall be indemnified against
expenses actually and reasonably incurred by him or on his behalf in connection
with such action, suit or proceeding if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
Company and its shareholders. Notwithstanding the foregoing, no indemnification
against such expenses shall be made in respect of any claim, issue or matter in
such proceeding as to which Indemnitee shall have been adjudged to be liable to
the Company in the performance of his duty to the Company and its shareholders
if applicable law prohibits such indemnification; provided, however, that, if
applicable law so permits, indemnification against expenses shall nevertheless
be made by the Company in such event if and only to the extent that the court in
which such proceeding shall have been brought or is pending, shall determine.
4. Any indemnification under Sections 2 and 3 of this Agreement, unless
ordered by a court, shall be made by the corporation only as authorized by the
specific case upon a determination that indemnification of the director,
officer, employee or agent is proper in the circumstances because he has met the
applicable standard of conduct set forth in Sections 2 and 3 of this agreement.
Such determination shall be made (1) by a majority vote of the directors who are
not parties to such action, suit or proceeding, even though less than a quorum,
or (2) if there are no such directors, or if such directors so direct, by
independent legal counsel, in a written opinion, or (3) by the stockholders.
5. If the Company does not respond to a written claim for payment under
this Agreement within sixty (60) days of having received a claim under this
Agreement, it shall be deemed to have waived any right to refuse to pay such
claim under this Agreement. If a claim under this Agreement is not paid by the
Company, or on its behalf, within ninety (90) days after a written claim has
been received by the Company, the claimant may at any time thereafter bring suit
against the Company to recover the unpaid amount of the claim and, if successful
in whole or in part, the claimant shall be entitled to be paid also the expense
of prosecuting such claim.
6. In the event of payment under this Agreement, the Company shall be
subrogated to the extent of such payment to all of the rights of recovery of the
Indemnitee, who shall execute all papers required and shall do everything that
may be necessary to secure such rights, including the execution of such
documents necessary to enable the Company effectively to bring suit to enforce
such rights.
7. Notwithstanding anything to the contrary herein, the Company shall
not be liable under this Agreement to make any payment in connection with any
claim made against the Indemnitee:
2
<PAGE> 3
(a) for which payment is actually made to the Indemnitee under a
valid and collectible insurance policy, except in respect of
any excess beyond the amount of payment under such insurance;
(b) for which the Indemnitee is indemnified by the Company
otherwise than pursuant to this Agreement;
(c) based upon or attributable to the Indemnitee or any member of
his immediate family gaining in fact any personal profit or
advantage to which he was not legally entitled;
(d) for an accounting of profits made from the purchase or sale by
the Indemnitee of securities of the Corporation within the
meaning of Section 16(b) of the Securities Exchange Act of 1934
and amendments thereto or similar provisions of any state
statutory law or common law; or
(e) brought about or contributed to by the dishonesty of the
Indemnitee seeking payment hereunder; however, notwithstanding
the foregoing, the Indemnitee shall be protected under this
Agreement as to any claims upon which suit may be brought
against him by reason of any alleged dishonesty on his part,
unless a judgment or other final adjudication thereof adverse
to the Indemnitee shall establish that he committed (i) acts of
active and deliberate dishonesty or (ii) acts with actual
dishonest purpose and intent, which acts were material to the
cause of action so adjudicated.
8. No costs, charges or expenses for which indemnity shall be sought
hereunder shall be incurred without the Company's consent, which consent shall
not be unreasonably withheld.
9. The Indemnitee, as a condition precedent to his right to be
indemnified under this Agreement, shall give to the Company notice in writing as
soon as practicable of any claim made against him for which indemnity will or
could be sought under this Agreement. Notice to the Company shall be directed to
Diedrich Coffee, 2144 Michelson Drive, Irvine, CA 92715, Attention: Corporate
Secretary (or such other addresses as the Company shall designate in writing to
the Indemnitee); notice shall be deemed received if sent by prepaid mail
properly addressed, the date of such notice being the date postmarked. In
addition, the Indemnitee shall give the Company such information and cooperation
as it may reasonably require and as shall be within the Indemnitee's power.
10. Costs and expenses (including attorneys' fees) incurred by the
Indemnitee in defending or investigating any action, suit, proceeding or
investigation shall be paid by the Company in advance of the final disposition
of such matter, if the Indemnitee shall undertake in writing to repay any such
advances in the event that it is ultimately determined that the Indemnitee is
not entitled to indemnification under the terms of this Agreement.
Notwithstanding the foregoing or any other provision of this Agreement, no
advance shall be made by the Company if a determination is reasonably promptly
made (1) by a majority vote of the directors who are not parties to such action,
suit or proceeding, even though less than a quorum, or (2) if there are no
3
<PAGE> 4
such directors, or if such directors so direct, by independent legal counsel in
a written opinion that, based upon the facts known to the board or counsel at
the time such determination is made, (a) the Indemnitee acted in bad faith or
deliberately breached his duty to the Company or its stockholders, and (b) as a
result of such actions by the Indemnitee, it is more likely than not that it
will ultimately be determined that the Indemnitee is not entitled to
indemnification under the terms of this Agreement.
11. Nothing herein shall be deemed to diminish or otherwise restrict
the Indemnitee's right to indemnification under any provision of the certificate
of incorporation or bylaws of the Company or under Delaware law.
12. This Agreement shall be governed by and construed in accordance
with Delaware law, but without reference to the conflicts of law's principles of
that jurisdiction.
13. This Agreement shall be binding upon all successors and assigns of
the Corporation (including any transferee of all or substantially all of its
assets and any successor by merger or operation or law) and shall inure to the
benefit of the heirs, personal representatives and estates of Indemnitee.
14. If any provision or provisions of this Agreement shall be held to
be invalid, illegal or unenforceable for any reason whatsoever (a) the validity,
legality and enforceability of the remaining provisions of this Agreement
(including, without limitation, all portions of any paragraphs of this Agreement
containing any such provision held to be invalid, illegal or unenforceable, that
are not themselves invalid, illegal or unenforceable) shall not in any way be
affected or impaired thereby, and (b) to the fullest extent possible, the
remaining provisions of this Agreement (including, without limitation, all
portions of any paragraphs of this Agreement containing any such provision held
to be invalid, illegal or unenforceable, that are not themselves invalid,
illegal or unenforceable) shall be construed so as to give effect to the intent
of the parties that the Company provide protection to Indemnitee to the fullest
enforceable extent.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed and signed as of the day and year first above written.
DIEDRICH COFFEE
2144 Michelson Drive
Irvine, CA 92712
---------------------------------------
Martin R. Diedrich, Corporate Secretary
4
<PAGE> 5
AGREED TO AND ACCEPTED:
INDEMNITEE
Signed:
----------------------------
Name:
------------------------------
- -----------------------------------
- -----------------------------------
(address)
5
<PAGE> 1
EXHIBIT 10.5
DIEDRICH COFFEE, INC.
1996 STOCK INCENTIVE PLAN
ARTICLE I
PURPOSE OF PLAN
The Company has adopted this Plan 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.
ARTICLE II
EFFECTIVE DATE AND TERM OF PLAN
2.1 TERM OF PLAN. This Plan became effective as of the Effective
Date and shall continue in effect until the Expiration Date, at which time this
Plan shall automatically terminate.
2.2 EFFECT ON AWARDS. Awards may be granted during the Plan Term,
but no Awards may be granted after the Plan Term. Notwithstanding the foregoing,
each Award properly granted under this Plan during the Plan Term shall remain in
effect after termination of this Plan until such Award has been exercised,
terminated, or expired in accordance with its terms and the terms of this Plan.
2.3 STOCKHOLDER APPROVAL. This Plan shall be approved by the
Company's stockholders within 12 months after the Effective Date. The
effectiveness of any Awards granted prior to such stockholder approval shall be
subject to such stockholder approval.
ARTICLE III
SHARES SUBJECT TO PLAN
3.1 NUMBER OF SHARES. The maximum number of shares of Common Stock
that may be issued pursuant to Awards granted under this Plan shall be 475,000,
subject to adjustment as set forth in Section 3.4.
3.2 SOURCE OF SHARES. The Common Stock to be issued under this Plan
will be made available, at the discretion of the Board, either from authorized
but unissued shares of Common Stock or from previously issued shares of Common
Stock reacquired by the Company, including without limitation shares purchased
on the open market.
3.3 AVAILABILITY OF UNUSED SHARES. Shares of Common Stock subject to
unexercised portions of any Award granted under this Plan that expire, terminate
or are cancelled, and shares of Common Stock issued pursuant to an Award under
this Plan that are reacquired by the Company pursuant to the terms of the Award
under which such shares were issued, will again become available for the grant
of further Awards under this Plan.
<PAGE> 2
3.4 ADJUSTMENT PROVISIONS.
(a) If (i) the outstanding shares of Common Stock of the Company are
increased, decreased or exchanged for a different number or kind of shares or
other securities, or if additional shares or new or different shares or other
securities are distributed in respect of such shares of Common Stock (or any
stock or securities received with respect to such Common Stock), through merger,
consolidation, sale or exchange of all or substantially all of the properties of
the Company, reorganization, recapitalization, reclassification, stock dividend,
stock split, reverse stock split, spin-off or other distribution with respect to
such shares of Common Stock (or any stock or securities received with respect to
such Common Stock), or (ii) the value of the outstanding shares of Common Stock
of the Company is reduced by reason of an extraordinary cash dividend, an
appropriate and proportionate adjustment may be made in (1) the maximum number
and kind of shares subject to this Plan as provided in Section 3.1, (2) the
number and kind of shares or other securities subject to then outstanding
Awards, and/or (3) the price for each share or other unit of any other
securities subject to then outstanding Awards.
(b) No fractional interests will be issued under the Plan resulting
from any adjustments.
(c) To the extent any adjustments relate to stock or securities of
the Company, such adjustments shall be made by the Administering Body, whose
determination in that respect shall be final, binding and conclusive.
(d) The grant of an Award pursuant to this Plan shall not affect in
any way the right or power of the Company to make adjustments,
reclassifications, reorganizations or changes of its capital or business
structure or to merge or to consolidate or to dissolve, liquidate or sell, or
transfer all or any part of its business or assets.
(e) No adjustment to the terms of an Incentive Stock Option shall be
made unless such adjustment either (i) would not cause the Option to lose its
status as an Incentive Stock Option or (ii) is agreed to in writing by the
Administering Body and the Recipient.
3.5 RESERVATION OF SHARES. The Company will at all times reserve and
keep available such number of shares of Common Stock as shall equal at least the
number of shares of Common Stock subject to then outstanding Awards issuable in
shares of Common Stock under this Plan.
ARTICLE IV
ADMINISTRATION OF PLAN
4.1 ADMINISTERING BODY.
(a) Subject to the provisions of Section 4.1(b)(ii), this Plan shall
be administered by the Board or by a Committee of the Board appointed pursuant
to Section 4.1(b).
(b) (i) The Board in its sole discretion may from time to time
appoint a Committee of not less than two Board members to administer this Plan
and, subject to applicable law, to exercise all of the powers, authority and
discretion of the Board under this Plan. The Board may from time to time
increase or decrease (but not below two) the number of members of the Committee,
remove from membership on the Committee all or any portion of its members,
and/or appoint such person or persons as it desires to fill any vacancy existing
2
<PAGE> 3
on the Committee, whether caused by removal, resignation or otherwise. The Board
may disband the Committee at any time and revest in the Board the administration
of this Plan.
(ii) Notwithstanding the foregoing provisions of this Section
4.1(b) to the contrary, as long as the Company is an Exchange Act Registered
Company, (1) the Board shall appoint the Committee, (2) this Plan shall be
administered by the Committee, and (3) each of the Committee's members shall be
Disinterested Directors, and in addition, if Awards are to be made to persons
subject to Section 162(m) of the IRC and such Awards are intended to constitute
Performance Based Compensation, then each of the Committee's members shall, in
addition to being a Disinterested Director, also be an Outside Director.
(iii) The Committee shall report to the Board the names of
Eligible Persons granted Awards, the number of shares of Common Stock covered by
each Award, and the terms and conditions of each such Award.
4.2 AUTHORITY OF ADMINISTERING BODY.
(a) Subject to the express provisions of this Plan, the
Administering Body shall have the power to interpret and construe this Plan and
any Award Documents or other documents defining the rights and obligations of
the Company and Recipients hereunder and thereunder, to determine all questions
arising hereunder and thereunder, to adopt and amend such rules and regulations
for the administration hereof and thereof as it may deem desirable, and
otherwise to carry out the terms of this Plan and such Award Documents and other
documents. The interpretation and construction by the Administering Body of any
provisions of this Plan or of any Award shall be conclusive and binding. Any
action taken by, or inaction of, the Administering Body relating to this Plan or
any Awards shall be within the absolute discretion of the Administering Body and
shall be conclusive and binding upon all persons. Subject only to compliance
with the express provisions hereof, the Administering Body may act in its
absolute discretion in matters related to this Plan and any and all Awards.
(b) Subject to the express provisions of this Plan, the
Administering Body may from time to time in its discretion select the Eligible
Persons to whom, and the time or times at which, Incentive Awards shall be
granted or sold, the nature of each Incentive Award, the number of shares of
Common Stock or the number of rights that make up or underlie each Incentive
Award, the period for the exercise of each Incentive Award, and such other terms
and conditions applicable to each individual Incentive Award as the
Administering Body shall determine. The Administering Body may grant at any time
new Incentive Awards to an Eligible Person who has previously received Incentive
Awards or other grants (including other stock options) whether such prior
Incentive Awards or such other grants are still outstanding, have previously
been exercised as a whole or in part, or are cancelled in connection with the
issuance of new Incentive Awards. The Administering Body may grant Incentive
Awards singly or in combination or in tandem with other Incentive Awards as it
determines in its discretion. The purchase price, exercise price, initial value
and any and all other terms and conditions of the Incentive Awards may be
established by the Administering Body without regard to existing Incentive
Awards or other grants.
(c) Any action of the Administering Body with respect to the
administration of this Plan shall be taken pursuant to a majority vote of the
authorized number of members of the Administering Body or by the unanimous
written consent of its members; provided, however, that (i) if the Administering
Body is the Committee and consists of two members, then actions of the
Administering Body must be unanimous, and (ii) if the Administering Body is the
Board, actions taken at a meeting of the Board shall be valid if approved by
directors constituting a majority of the required quorum for such meeting.
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<PAGE> 4
4.3 NO LIABILITY. No member of the Board or the Committee or any
designee thereof will be liable for any action or inaction with respect to this
Plan or any Award or any transaction arising under this Plan or any Award except
in circumstances constituting bad faith of such member.
4.4 AMENDMENTS.
(a) The Administering Body may, insofar as permitted by applicable
law, rule or regulation, from time to time suspend or discontinue this Plan or
revise or amend it in any respect whatsoever, and this Plan as so revised or
amended will govern all Awards hereunder, including those granted before such
revision or amendment; provided, however, that no such revision or amendment
shall alter, impair or diminish any rights or obligations under any Award
theretofore granted under this Plan without the written consent of the Recipient
to whom such Award was granted. Without limiting the generality of the
foregoing, the Administering Body is authorized to amend this Plan to comply
with or take advantage of amendments to applicable laws, rules or regulations,
including amendments to the Securities Act, Exchange Act or the IRC or any rules
or regulations promulgated thereunder. No stockholder approval of any amendment
or revision shall be required unless (i) such approval is required by applicable
law, rule or regulation or (ii) an amendment or revision to this Plan would
materially increase the number of shares subject to this Plan (as adjusted under
Section 3.4), materially modify the requirements as to eligibility for
participation in this Plan, extend the final date upon which Awards may be
granted under this Plan, or otherwise materially increase the benefits accruing
to Recipients in a manner not specifically contemplated herein, or affect this
Plan's compliance with Rule 16b-3 or applicable provisions of or regulations
under the IRC, and stockholder approval of the amendment or revision is required
to comply with Rule 16b-3 or applicable provisions of or rules under the IRC.
(b) The Administering Body may, with the written consent of a
Recipient, make such modifications in the terms and conditions of an Incentive
Award as it deems advisable. Without limiting the generality of the foregoing,
the Administering Body may, in its discretion with the written consent of the
Recipient, at any time and from time to time after the grant of any Incentive
Award accelerate or extend the vesting or exercise period of any Incentive Award
as a whole or in part, and adjust or reduce the purchase or exercise price of
Incentive Awards held by such Recipient by cancellation of such Incentive Awards
and granting of Incentive Awards at lower purchase or exercise prices or by
modification, extension or renewal of such Incentive Awards. In the case of
Incentive Stock Options, Recipients acknowledge that extensions of the exercise
period may result in the loss of the favorable tax treatment afforded incentive
stock options under Section 422 of the IRC.
(c) Except as otherwise provided in this Plan or in the applicable
Award Document, no amendment, revision, suspension or termination of this Plan
will, without the written consent of the Recipient, alter, terminate, impair or
adversely affect any right or obligation under any Award previously granted
under this Plan.
4.5 OTHER COMPENSATION PLANS. The adoption of this Plan shall not
affect any other stock option, incentive or other compensation plans in effect
for the Company, and this Plan shall not preclude the Company from establishing
any other forms of incentive or other compensation for employees, directors,
advisors or consultants of the Company, whether or not approved by stockholders.
4.6 PLAN BINDING ON SUCCESSORS. This Plan shall be binding upon the
successors and assigns of the Company.
4.7 REFERENCES TO SUCCESSOR STATUTES, REGULATIONS AND RULES. Any
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reference in this Plan to a particular statute, regulation or rule shall also
refer to any successor provision of such statute, regulation or rule.
4.8 ISSUANCES FOR COMPENSATION PURPOSES ONLY. This Plan constitutes
an "employee benefit plan" as defined in Rule 405 promulgated under the
Securities Act. Awards to eligible employees or directors shall be made for any
lawful consideration, including compensation for services rendered, promissory
notes or otherwise. Awards to consultants and advisors shall be made only in
exchange for bona fide services rendered by such consultants or advisors and
such services must not be in connection with the offer and sale of securities in
a capital-raising transaction.
4.9 INVALID PROVISIONS. In the event that any provision of this Plan
is found to be invalid or otherwise unenforceable under any applicable law, such
invalidity or unenforceability shall not be construed as rendering any other
provisions contained herein invalid or unenforceable, and all such other
provisions shall be given full force and effect to the same extent as though the
invalid and unenforceable provision were not contained herein.
4.10 GOVERNING LAW. This Agreement shall be governed by and
interpreted in accordance with the internal laws of the State of Delaware,
without giving effect to the principles of the conflicts of laws thereof.
ARTICLE V
GENERAL AWARD PROVISIONS
5.1 PARTICIPATION IN PLAN.
(a) A person shall be eligible to receive grants of Incentive Awards
under this Plan if, at the time of the grant of the Incentive Award, such person
is an Eligible Person.
(b) Incentive Stock Options may be granted only to Eligible Persons
meeting the employment requirements of Section 422 of the IRC.
(c) Notwithstanding anything to the contrary herein, the
Administering Body may, in order to fulfill the purposes of this Plan, modify
grants of Incentive Awards to Recipients who are foreign nationals or employed
outside of the United States to recognize differences in applicable law, tax
policy or local custom.
5.2 AWARD DOCUMENTS.
(a) Each Award granted under this Plan shall be evidenced by an
agreement duly executed on behalf of the Company and by the Recipient or, in the
Committee's discretion, a confirming memorandum issued by the Company to the
Recipient, setting forth such terms and conditions applicable to the Award as
the Committee may in its discretion determine. Award Documents may but need not
be identical and shall comply with and be subject to the terms and conditions of
this Plan, a copy of which shall be provided to each Recipient and incorporated
by reference into each Award Document. Any Award Document may contain such other
terms, provisions and conditions not inconsistent with this Plan as may be
determined by the Committee.
(b) In case of any conflict between this Plan and any Award
Document, this Plan shall control.
5.3 EXERCISE OF STOCK OPTIONS. No Stock Option shall be exercisable
except in respect of whole shares, and fractional share interests shall be
disregarded. Not less
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than 100 shares of Common Stock (or such other amount as is set forth in the
applicable Award Documents) may be purchased at one time and Stock Options must
be exercised in multiples of 100 unless the number purchased is the total number
at the time available for purchase under the terms of the Stock Option. A Stock
Option shall be deemed to be exercised when the Secretary or other designated
official of the Company receives written notice of such exercise from the
Recipient, together with payment of the exercise price made in accordance with
Section 5.4 and any amounts required under Section 5.11. Notwithstanding any
other provision of this Plan, the Administering Body may impose, by rule and/or
in Award Documents, such conditions upon the exercise of Stock Options
(including without limitation conditions limiting the time of exercise to
specified periods) as may be required to satisfy applicable regulatory
requirements, including without limitation Rule 16b-3 and Rule 10b-5 under the
Exchange Act, or as required under Section 5.12 hereof or other applicable
section of or regulation under the IRC.
5.4 PAYMENT FOR AWARDS.
(a) Payment of Exercise Price. The exercise price or other payment
for an Award shall be payable upon the exercise of a Stock Option or upon other
purchase of shares pursuant to an Award granted hereunder by delivery of legal
tender of the United States or payment of such other consideration as the
Administering Body may from time to time deem acceptable in any particular
instance.
(b) The Company may assist any person to whom an Award is granted
hereunder (including without limitation any officer or eligible director of the
Company) in the payment of the purchase price or other amounts payable in
connection with the receipt or exercise of that Award, by lending such amounts
to such person on such terms and at such rates of interest and upon such
security (if any) as shall be approved by the Administering Body.
(c) In the discretion of the Administering Body, Awards may be
exercised by capital stock of the Company delivered in transfer to the Company
by or on behalf of the person exercising the Award and duly endorsed in blank or
accompanied by stock powers duly endorsed in blank, with signatures guaranteed
in accordance with the Exchange Act if required by the Administering Body, or
retained by the Company from the stock otherwise issuable upon exercise or
surrender of vested and/or exercisable Awards or other equity incentive awards
previously granted to the Recipient and being exercised (if applicable) (in
either case valued at Fair Market Value as of the exercise date); or such other
consideration as the Administering Body may from time to time in the exercise of
its discretion deem acceptable in any particular instance; provided, however,
that the Administering Body may, in the exercise of its discretion, (i) allow
exercise of an Award in a broker-assisted or similar transaction in which the
exercise price is not received by the Company until promptly after exercise,
and/or (ii) allow the Company to loan the exercise price to the person entitled
to exercise the Award, if the exercise will be followed by a prompt sale of some
or all of the underlying shares and a portion of the sale proceeds is dedicated
to full payment of the exercise price and amounts required pursuant to Section
5.11.
5.5 NO EMPLOYMENT RIGHTS. Nothing contained in this Plan (or in
Award Documents or in any other documents related to this Plan or to Awards
granted hereunder) shall confer upon any Eligible Person or Recipient any right
to continue in the employ of the Company or any Affiliated Entity or constitute
any contract or agreement of employment or engagement, or interfere in any way
with the right of the Company or any Affiliated Entity to reduce such person's
compensation or other benefits or to terminate the employment or engagement of
such Eligible Person or Recipient, with or without cause. Except as expressly
provided in this Plan or in any statement evidencing the grant of an Award
pursuant to this
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Plan, the Company shall have the right to deal with each Recipient in the same
manner as if this Plan and any such statement evidencing the grant of an Award
pursuant to this Plan did not exist, including without limitation with respect
to all matters related to the hiring, discharge, compensation and conditions of
the employment or engagement of the Recipient. Any question(s) as to whether and
when there has been a termination of a Recipient's employment or engagement, the
reason (if any) for such termination, and/or the consequences thereof under the
terms of this Plan or any statement evidencing the grant of an Award pursuant to
this Plan shall be determined by the Administering Body and the Administering
Body's determination thereof shall be final and binding.
5.6 RESTRICTIONS UNDER APPLICABLE LAWS AND REGULATIONS.
(a) All Awards granted under this Plan shall be subject to the
requirement that, if at any time the Company shall determine, in its discretion,
that the listing, registration or qualification of the shares subject to Awards
granted under this Plan upon any securities exchange or under any federal, state
or foreign law, or the consent or approval of any government regulatory body, is
necessary or desirable as a condition of, or in connection with, the granting of
such an Award or the issuance, if any, or purchase of shares in connection
therewith, such Award may not be exercised as a whole or in part unless and
until such listing, registration, qualification, consent or approval shall have
been effected or obtained free of any conditions not acceptable to the Company.
During the term of this Plan, the Company will use its reasonable efforts to
seek to obtain from the appropriate regulatory agencies any requisite
qualifications, consents, approvals or authorizations in order to issue and sell
such number of shares of its Common Stock as shall be sufficient to satisfy the
requirements of this Plan. The inability of the Company to obtain from any such
regulatory agency having jurisdiction thereof the qualifications, consents,
approvals or authorizations deemed by the Company to be necessary for the lawful
issuance and sale of any shares of its Common Stock hereunder shall relieve the
Company of any liability in respect of the nonissuance or sale of such stock as
to which such requisite authorization shall not have been obtained.
(b) The Company shall be under no obligation to register or qualify
the issuance of Awards or underlying shares under the Securities Act or
applicable state securities laws. Unless the issuance of Awards and underlying
shares have been registered under the Securities Act and qualified or registered
under applicable state securities laws, the Company shall be under no obligation
to issue any Awards or underlying shares of Common Stock covered by any Award
unless the Awards and underlying shares may be issued pursuant to applicable
exemptions from such registration or qualification requirements. In connection
with any such exempt issuance, the Administering Body may require the Recipient
to provide a written representation and undertaking to the Company, satisfactory
in form and scope to the Company and upon which the Company may reasonably rely,
that such Recipient is acquiring such Awards and underlying shares for such
Recipient's own account as an investment and not with a view to, or for sale in
connection with, the distribution of any such shares of stock, and that such
person will make no transfer of the same except in compliance with any rules and
regulations in force at the time of such transfer under the Securities Act and
other applicable law, and that if shares of stock are issued without such
registration, a legend to this effect (together with any other legends deemed
appropriate by the Administering Body) may be endorsed upon the securities so
issued. The Company may also order its transfer agent to stop transfers of such
shares. The Administering Body may also require the Recipient to provide the
Company such information and other documents as the Administering Body may
request in order to satisfy the Administering Body as to the investment
sophistication and experience of the Recipient and as to any other conditions
for compliance with any such exemptions from registration or qualification.
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5.7 ADDITIONAL CONDITIONS. Any Incentive Award may also be subject
to such other provisions (whether or not applicable to any other Award or
Recipient) as the Administering Body determines appropriate including without
limitation provisions to assist the Recipient in financing the purchase of
Common Stock through the exercise of Stock Options, provisions for the
forfeiture of or restrictions on resale or other disposition of shares of Common
Stock acquired under any form of benefit, provisions giving the Company the
right to repurchase shares of Common Stock acquired under any form of benefit in
the event the Recipient elects to dispose of such shares, and provisions to
comply with federal and state securities laws and federal and state income tax
withholding requirements.
5.8 NO PRIVILEGES OF STOCK OWNERSHIP. Except as otherwise set forth
herein, a Recipient or a permitted transferee of an Award shall have no rights
as a stockholder with respect to any shares issuable or issued in connection
with the Award until the date of the receipt by the Company of all amounts
payable in connection with exercise of the Award and performance by the
Recipient of all obligations thereunder. Status as an Eligible Person shall not
be construed as a commitment that any Award will be granted under this Plan to
an Eligible Person or to Eligible Persons generally. No person shall have any
right, title or interest in any fund or in any specific asset (including shares
of capital stock) of the Company by reason of any Award granted hereunder.
Neither this Plan (or any documents related hereto) nor any action taken
pursuant hereto shall be construed to create a trust of any kind or a fiduciary
relationship between the Company and any person. To the extent that any person
acquires a right to receive an Award hereunder, such right shall be no greater
than the right of any unsecured general creditor of the Company.
5.9 NONASSIGNABILITY. No Award granted under this Plan shall be
assignable or transferable except (i) by will or by the laws of descent and
distribution, or (ii) subject to the final sentence of this Section 5.9, upon
dissolution of marriage pursuant to a qualified domestic relations order or, in
the discretion of the Administering Body and under circumstances that would not
adversely affect the interests of the Company, pursuant to a nominal transfer
that does not result in a change in beneficial ownership. During the lifetime of
a Recipient, an Award granted to such person shall be exercisable only by the
Recipient (or the Recipient's permitted transferee) or such person's guardian or
legal representative. Notwithstanding the foregoing, (i) no Award owned by a
Recipient subject to Section 16 of the Exchange Act may be assigned or
transferred in any manner inconsistent with Rule 16b-3, and (ii) Incentive Stock
Options (or other Awards subject to transfer restrictions under the IRC) may not
be assigned or transferred in violation of Section 422(b)(5) of the IRC (or any
comparable or successor provision) or the regulations thereunder, and nothing
herein is intended to allow such assignment or transfer.
5.10 INFORMATION TO RECIPIENTS.
(a) The Administering Body in its sole discretion shall determine
what, if any, financial and other information shall be provided to Recipients
and when such financial and other information shall be provided after giving
consideration to applicable federal and state laws, rules and regulations,
including without limitation applicable federal and state securities laws, rules
and regulations.
(b) The furnishing of financial and other information that is
confidential to the Company shall be subject to the Recipient's agreement that
the Recipient shall maintain the confidentiality of such financial and other
information, shall not disclose such information to third parties, and shall not
use the information for any purpose other than evaluating an investment in the
Company's securities under this Plan. The Administering Body may impose other
restrictions on the access to and use of such confidential information and may
require a
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Recipient to acknowledge the Recipient's obligations under this Section 5.10(b)
(which acknowledgment shall not be a condition to Recipient's obligations under
this Section 5.10(b)).
5.11 WITHHOLDING TAXES. Whenever the granting, vesting or exercise
of any Award granted under this Plan, or the transfer of any shares issued upon
exercise of any Award, gives rise to tax or tax withholding liabilities or
obligations, the Administering Body shall have the right to require the
Recipient to remit to the Company an amount sufficient to satisfy any federal,
state and local withholding tax requirements prior to issuance of such shares.
The Administering Body may, in the exercise of its discretion, allow
satisfaction of tax withholding requirements by accepting delivery of stock of
the Company or by withholding a portion of the stock otherwise issuable in
connection with an Award.
5.12 LEGENDS ON AWARDS AND STOCK CERTIFICATES. Each Award Document
and each certificate representing shares acquired upon vesting or exercise of an
Award shall be endorsed with all legends, if any, required by applicable federal
and state securities and other laws to be placed on the Award Document and/or
the certificate. The determination of which legends, if any, shall be placed
upon Award Documents or the certificates shall be made by the Administering Body
in its sole discretion and such decision shall be final and binding.
5.13 EFFECT OF TERMINATION OF EMPLOYMENT ON INCENTIVE AWARDS.
(i) Termination for Just Cause. Subject to subsection (iii)
below, and except as otherwise provided in a written agreement between the
Company and the Recipient, which may be entered into at any time before or after
termination of employment, in the event of a Just Cause Dismissal of a Recipient
all of the Recipient's unexercised Stock Options, whether or not vested, shall
expire and become unexercisable as of the date of such Just Cause Dismissal.
(ii) Termination other than for Just Cause. Subject to
subsection (iii) below, and except as otherwise provided in a written agreement
between the Company and the Recipient, which may be entered into at any time
before or after termination of employment, in the event of a Recipient's
termination of employment for:
(A) death, Permanent Disability or normal retirement, the
Recipient's unexercised Options shall, whether or not vested,
expire and become unexercisable as of the earlier of (1) the
date such Stock Options would expire in accordance with their
terms had the Recipient remained employed and (2) six months
after the date of employment termination.
(B) any reason other than for Just Cause Dismissal, death,
Permanent Disability or normal retirement, the Recipient's
Stock Options, whether or not vested, shall expire and become
unexercisable as of the earlier of (1) the date such Stock
Options would expire in accordance with their terms had the
Recipient remained employed and (2) thirty days after the date
of employment termination.
(iii) Alteration of Vesting and Exercise Periods.
Notwithstanding anything to the contrary in subsections (i) or (ii) above, the
Administering Body may in its discretion designate shorter or longer periods to
exercise Stock Options following a Recipient's termination of employment;
provided, however, that any shorter periods determined by the Administering Body
shall be effective only if provided for in the instrument that evidences the
grant to the Recipient of such Stock Options or if such shorter period is agreed
to in writing by the Recipient. Notwithstanding anything to the contrary herein,
Stock Options shall be exercisable by a Recipient (or the Recipient's successor
in interest) following such Recipient's termination of employment only to the
extent that installments thereof had become exercisable
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on or prior to the date of such termination; provided, however, that the
Administering Body may, in its discretion, elect to accelerate the vesting of
all or any portion of any Stock Options that had not become exercisable on or
prior to the date of such termination.
(iv) Leave of Absence. In the case of any employee on an
approved leave of absence, the Administering Body may make such provision
respecting continuance of a Stock Option as the Administering Body in its
discretion deems appropriate, except that in no event shall a Stock Option be
exercisable after the date such Stock Options would expire in accordance with
its terms had the Recipient remained continuously employed.
5.15 LIMITS ON AWARDS TO CERTAIN ELIGIBLE PERSONS. Notwithstanding
any other provision of this Plan, no one Eligible Person shall be granted any
Awards with respect to more than 200,000 shares of Common Stock in any one
calendar year; provided, however, that this limitation shall not apply if it is
not required in order for the compensation attributable to Awards hereunder to
qualify as Performance-Based Compensation. The limitation set forth in this
Section 5.15 shall be subject to adjustment as provided in Section 3.4 or under
Article VII, but only to the extent such adjustment would not affect the status
of compensation attributable to Awards hereunder as Performance-Based
Compensation.
5.16 SPECIAL PROVISIONS REGARDING CALIFORNIA PERMITTED PLAN.
Notwithstanding any provisions of this Plan to the contrary, during any period
that this Plan constitutes a California Permitted Plan, the terms of any Awards
granted during such period shall comply with the California Commissioner's
guidelines for options granted to and share purchases by employees, directors
and consultants as set forth in the California Securities Rules Sections
260.140.41 and 260.140.42 in effect at the time the California Commissioner
issues the qualification permit for this Plan, unless and to the extent any such
compliance is waived by the California Commissioner. As of the Effective Date,
such guidelines require, among other matters (i) that the option exercise price
of Stock Options be not less than 85% of the fair value of the underlying shares
as of the grant date of the Stock Option, with the exercise price to be not less
than 110% of the fair value as of such date in the case of Stock Options granted
to Significant Shareholders; (ii) the right to exercise a Stock Option at a rate
of at least 20% per year over a five-year period commencing with the option
grant date; (iii) in the case of stock purchases, a purchase price of at least
85% of the fair value of the shares at the time the stock purchase right is
granted or consummated, with the price to be 100% of the fair value of the
shares at such dates in the case of stock purchases by Significant Stockholders;
and (iv) that Recipients receive financial statements of the Company at least
annually.
ARTICLE VI
INCENTIVE AWARDS
6.1 STOCK OPTIONS.
(a) Nature of Stock Options. Stock Options may be Incentive Stock
Options or Nonqualified Stock Options.
(b) Option Exercise Price. The exercise price for each Stock Option
shall be determined by the Administering Body as of the date such Stock Option
is granted. The exercise price may be greater than or less than the Fair Market
Value of the Common Stock subject to the Option, provided that in no event shall
the exercise price be less than the par value of the shares of Common Stock
subject to the Stock Option. The Administering Body may, with the consent of the
Recipient and subject to compliance with statutory or administrative
requirements applicable to Incentive Stock Options, amend the terms of any Stock
Option to provide that the exercise price of the shares remaining subject to the
Stock Option shall be reestablished at a price not less than 100% of the Fair
Market Value of the
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Common Stock on the effective date of the amendment. No modification of any
other term or provision of any Stock Option which is amended in accordance with
the foregoing shall be required, although the Administering Body may, in its
discretion, make such further modifications of any such Stock Option as are not
inconsistent with this Plan.
(c) Option Period and Vesting. Stock Options granted hereunder shall
vest and may be exercised as determined by the Administering Body, except that
exercise of such Stock Options after termination of the Recipient's employment
shall be subject to Section 5.13. Each Stock Option granted hereunder and all
rights or obligations thereunder shall expire on such date as shall be
determined by the Administering Body, but not later than l0 years after the date
the Stock Option is granted and shall be subject to earlier termination as
provided herein or in the Award Document. The Administering Body may in its
discretion at any time and from time to time after the grant of a Stock Option
accelerate vesting of such Option as a whole or in part by increasing the number
of shares then purchasable, provided that the total number of shares subject to
such Stock Option may not be increased. Except as otherwise provided herein, a
Stock Option shall become exercisable, as a whole or in part, on the date or
dates specified by the Administering Body and thereafter shall remain
exercisable until the expiration or earlier termination of the Stock Option.
(d) Special Provisions Regarding Incentive Stock Options.
(i) Notwithstanding anything in this Section 6.1 to the
contrary, the exercise price and vesting period of any Stock Option intended to
qualify as an Incentive Stock Option shall comply with the provisions of Section
422 of the IRC and the regulations thereunder. As of the Effective Date, such
provisions require, among other matters, that (A) the exercise price must not be
less than the Fair Market Value of the underlying stock as of the date the
Incentive Stock Option is granted, and not less than 110% of the Fair Market
Value as of such date in the case of a grant to a Significant Stockholder; and
(B) that the Incentive Stock Option not be exercisable after the expiration of
five years from the date of grant in the case of an Incentive Stock Option
granted to a Significant Stockholder.
(ii) The aggregate Fair Market Value (determined as of the
respective date or dates of grant) of the Common Stock for which one or more
Options granted to any Recipient under this Plan (or any other option plan of
the Company or any of its subsidiaries or affiliates) may for the first time
become exercisable as Incentive Stock Options under the federal tax laws during
any one calendar year shall not exceed $100,000.
(iii) Any Options granted as Incentive Stock Options pursuant to
this Plan that for any reason fail or cease to qualify as such shall be treated
as Nonqualified Stock Options.
6.2 RESTRICTED STOCK.
(a) Award of Restricted Stock. The Administering Body shall
determine the Purchase Price (if any), the terms of payment of the Purchase
Price, the restrictions upon the Restricted Stock, and when such restrictions
shall lapse.
(b) Requirements of Restricted Stock. All shares of Restricted Stock
granted or sold pursuant to this Plan will be subject to the following
conditions:
(i) No Transfer. The shares may not be sold, assigned,
transferred, pledged, hypothecated or otherwise disposed of, alienated or
encumbered until the restrictions are removed or expire;
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(ii) Certificates. The Administering Body may require that the
certificates representing Restricted Stock granted or sold to a Recipient
pursuant to this Plan remain in the physical custody of an escrow holder or the
Company until all restrictions are removed or expire;
(iii) Restrictive Legends. Each certificate representing
Restricted Stock granted or sold to a Recipient pursuant to this Plan will bear
such legend or legends making reference to the restrictions imposed upon such
Restricted Stock as the Administering Body in its discretion deems necessary or
appropriate to enforce such restrictions; and
(iv) Other Restrictions. The Administering Body may impose such
other conditions on Restricted Stock as the Administering Body may deem
advisable including without limitation restrictions under the Securities Act,
under the Exchange Act, under the requirements of any stock exchange upon which
such Restricted Stock or shares of the same class are then listed and under any
blue sky or other securities laws applicable to such shares.
(c) Lapse of Restrictions. The restrictions imposed upon Restricted
Stock will lapse in accordance with such terms or other conditions as are
determined by the Administering Body.
(d) Rights of Recipient. Subject to the provisions of Section 6.2(b)
and any restrictions imposed upon the Restricted Stock, the Recipient will have
all rights of a stockholder with respect to the Restricted Stock granted or sold
to such Recipient under this Plan, including without limitation the right to
vote the shares and receive all dividends and other distributions paid or made
with respect thereto.
(e) Termination of Employment. Unless the Administering Body in its
discretion determines otherwise, upon a Recipient's termination of employment
for any reason, all of the Recipient's Restricted Stock remaining subject to
restrictions imposed pursuant to this Plan on the date of such termination of
employment shall be repurchased by the Company at the Purchase Price (if any).
6.3 STOCK APPRECIATION RIGHTS.
(a) Granting of Stock Appreciation Rights. The Administering Body
may at any time and from time to time approve the grant to Eligible Persons of
Stock Appreciation Rights, related or unrelated to Stock Options.
(b) SARs Related to Options.
(i) A Stock Appreciation Right granted in connection with a
Stock Option granted under this Plan will entitle the holder of the related
Stock Option, upon exercise of the Stock Appreciation Right, to surrender such
Stock Option, or any portion thereof to the extent previously vested but
unexercised, with respect to the number of shares as to which such Stock
Appreciation Right is exercised, and to receive payment of an amount computed
pursuant to Section 6.3(b)(iii). Such Stock Option will, to the extent
surrendered, then cease to be exercisable.
(ii) A Stock Appreciation Right granted in connection with a
Stock Option hereunder will be exercisable at such time or times, and only to
the extent that, the related Stock Option is exercisable, and will not be
transferable except to the extent that such related Stock Option may be
transferable.
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(iii) Upon the exercise of a Stock Appreciation Right related to
a Stock Option, the Recipient will be entitled to receive payment of an amount
determined by multiplying: (i) the difference obtained by subtracting the
exercise price of a share of Common Stock specified in the related Stock Option
from the Fair Market Value of a share of Common Stock on the date of exercise of
such Stock Appreciation Right (or as of such other date or as of the occurrence
of such event as may have been specified in the instrument evidencing the grant
of the Stock Appreciation Right), by (ii) the number of shares as to which such
Stock Appreciation Right is exercised.
(c) SARs Unrelated to Options. The Administering Body may grant
Stock Appreciation Rights unrelated to Stock Options to Eligible Persons.
Section 6.3(b)(iii) shall be used to determine the amount payable at exercise
under such Stock Appreciation Right, except that in lieu of the Option exercise
price specified in the related Stock Option the initial base amount specified in
the Incentive Award shall be used.
(d) Limits. Notwithstanding the foregoing, the Administering Body,
in its discretion, may place a dollar limitation on the maximum amount that will
be payable upon the exercise of a Stock Appreciation Right under this Plan.
(e) Payments. Payment of the amount determined under the foregoing
provisions may be made solely in whole shares of Common Stock valued at their
Fair Market Value on the date of exercise of the Stock Appreciation Right or,
alternatively, at the sole discretion of the Administering Body, in cash or in a
combination of cash and shares of Common Stock as the Administering Body deems
advisable. The Administering Body has full discretion to determine the form in
which payment of a Stock Appreciation Right will be made and to consent to or
disapprove the election of a Recipient to receive cash in full or partial
settlement of a Stock Appreciation Right. If the Administering Body decides to
make full payment in shares of Common Stock, and the amount payable results in a
fractional share, payment for the fractional share will be made in cash.
(f) Rule 16b-3. The Administering Body may, at the time a Stock
Appreciation Right is granted, impose such conditions on the exercise of the
Stock Appreciation Right as may be required to satisfy the requirements of Rule
16b-3 (or any other comparable provisions in effect at the time or times in
question).
6.4 STOCK PAYMENTS. The Administering Body may approve Stock
Payments of the Company's Common Stock to any Eligible Person for all or any
portion of the compensation (other than base salary) or other payment that would
otherwise become payable by the Company to the Eligible Person in cash.
6.5 DIVIDEND EQUIVALENTS. The Administering Body may grant Dividend
Equivalents to any Recipient who has received a Stock Option, SAR or other
Incentive Award denominated in shares of Common Stock. Such Dividend Equivalents
shall be effective and shall entitle the recipients thereof to payments during
the Applicable Dividend Period. Dividend Equivalents may be paid in cash, Common
Stock or other Incentive Awards; the amount of Dividend Equivalents paid other
than in cash shall be determined by the Administering Body by application of
such formula as the Administering Body may deem appropriate to translate the
cash value of dividends paid to the alternative form of payment of the Dividend
Equivalent. Dividend Equivalents shall be computed as of each dividend record
date and shall be payable to recipients thereof at such time as the
Administering Body may determine.
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6.6 STOCK BONUSES. The Administering Body may issue shares of Common
Stock to Eligible Persons as bonuses for services rendered or for any other
valid consideration on such terms and conditions as the Administering Body may
determine.
6.7 STOCK SALES. The Administering Body may sell to Eligible Persons
shares of Common Stock on such terms and conditions as the Administering Body
may determine.
6.8 PHANTOM STOCK. The Administering Body is authorized to grant
Awards of Phantom Stock. Phantom Stock is a cash bonus granted under this Plan
measured by the Fair Market Value of a specified number of shares of Common
Stock on a specified date, or measured by the excess of such Fair Market Value
over a specified minimum, which may but need not include a Dividend Equivalent.
6.9 OTHER STOCK-BASED BENEFITS. The Administering Body is authorized
to grant Other Stock-Based Benefits. Other Stock-Based Benefits are any
arrangements granted under this Plan not otherwise described above which (i) by
their terms might involve the issuance or sale of Common Stock or (ii) involve a
benefit that is measured, as a whole or in part, by the value, appreciation,
dividend yield or other features attributable to a specified number of shares of
Common Stock.
ARTICLE VII
REORGANIZATIONS
7.1 CORPORATE TRANSACTIONS NOT INVOLVING A CHANGE IN CONTROL. If the
Company shall consummate any Reorganization not involving a Change of Control in
which holders of shares of Common Stock are entitled to receive in respect of
such shares any securities, cash or other consideration (including without
limitation a different number of shares of Common Stock), each Award outstanding
under this Plan shall thereafter be exercisable, in accordance with this Plan,
only for the kind and amount of securities, cash and/or other consideration
receivable upon such Reorganization by a holder of the same number of shares of
Common Stock as are subject to that Award immediately prior to such
Reorganization, and any adjustments will be made in the sole discretion of the
Administering Body to the terms of the Award as the Administering Body may deem
appropriate to give effect to the Reorganization.
7.2 CORPORATE TRANSACTIONS INVOLVING A CHANGE IN CONTROL. As of the
effective time and date of any Change in Control this Plan and any then
outstanding Awards (whether or not vested) shall automatically terminate unless
(i) provision is made in writing in connection with such transaction for the
continuance of this Plan and for the assumption of such Awards, or for the
substitution for such Awards of new awards covering the securities of a
successor entity or an affiliate thereof, with appropriate adjustments as to the
number and kind of securities and exercise prices, in which event this Plan and
such outstanding Awards shall continue or be replaced, as the case may be, in
the manner and under the terms so provided; or (ii) the Board otherwise shall
provide in writing for such adjustments as it deems appropriate in the terms and
conditions of the then-outstanding Awards (whether or not vested), including
without limitation (A) accelerating the vesting of outstanding Awards, and/or
(B) providing for the cancellation of Awards and their automatic conversion into
the right to receive the securities, cash or other consideration that a holder
of the shares underlying such Awards would have been entitled to receive upon
consummation of such Change in Control had such shares been issued and
outstanding immediately prior to the effective date and time of the Change in
Control (net of the appropriate option exercise prices). If, pursuant to the
foregoing provisions of this Section 7.2, this Plan and the Awards shall
terminate by reason of the occurrence of a Change in Control without provision
for any of the action(s)
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described in clause (i) or (ii) hereof, then any Recipient holding outstanding
Awards shall have the right, at such time immediately prior to the consummation
of the Change in Control as the Board shall designate, to exercise the
Recipient's Awards to the full extent not theretofore exercised, including any
installments which have not yet become vested.
ARTICLE VIII
DEFINITIONS
Capitalized terms used in this Plan and not otherwise defined shall
have the meanings set forth below:
"ADMINISTERING BODY" shall mean, subject to the provisions of
Section 4.1(b)(ii) hereof, the Board as long as no Committee has been appointed
and is in effect and shall mean the Committee once the Committee has been
appointed and is in effect.
"AFFILIATED ENTITY" means any Parent Corporation or Subsidiary
Corporation.
"APPLICABLE DIVIDEND PERIOD" means (i) the period between the date a
Dividend Equivalent is granted and the date the related Stock Option, SAR, or
other Incentive Award is exercised, terminates, or is converted to Common Stock,
or (ii) such other time as the Administering Body may specify in the written
instrument evidencing the grant of the Dividend Equivalent.
"AWARD" means any Incentive Award.
"AWARD DOCUMENT" means the agreement or confirming memorandum
setting forth the terms and conditions of an Award.
"BOARD" means the Board of Directors of the Company.
"CALIFORNIA COMMISSIONER" means the Commissioner of Corporations of
the State of California.
"CALIFORNIA PERMITTED PLAN" means this Plan when at any time the
issuance of securities under this Plan is not exempt from qualification under
the California Securities Law and the issuance of securities under this Plan is
subject to a qualification permit issued by the California Commissioner.
"CALIFORNIA SECURITIES LAW" means the California Corporate
Securities Law of 1968, as amended.
"CALIFORNIA SECURITIES RULES" means the Rules of the California
Commissioner adopted under the California Securities Law.
"CHANGE IN CONTROL" means the following and shall be deemed to occur
if any of the following events occur:
(i) Any Person becomes the beneficial owner (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of 50% or more
of either the then outstanding shares of Common Stock or the combined
voting power of the Company's then outstanding securities entitled to vote
generally in the election of directors; or
(ii) Individuals who, as of the effective date hereof,
constitute the Board of Directors of the Company ("Incumbent Board") cease
for any reason to
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constitute at least a majority of the Board of Directors of the Company,
provided that any individual who becomes a director after the effective
date hereof whose election, or nomination for election by the Company's
stockholders, is approved by a vote of at least a majority of the
directors then comprising the Incumbent Board shall be considered to be a
member of the Incumbent Board unless that individual was nominated or
elected by any Person having the power to exercise, through beneficial
ownership, voting agreement and/or proxy, 20% or more of either the then
outstanding shares of Common Stock or the combined voting power of the
Company's then outstanding voting securities entitled to vote generally in
the election of directors, in which case that individual shall not be
considered to be a member of the Incumbent Board unless such individual's
election or nomination for election by the Company's stockholders is
approved by a vote of at least two-thirds of the directors then comprising
the Incumbent Board; or
(iii) Consummation by the Company of the sale or other
disposition by the Company of all or substantially all of the Company's
assets or a Reorganization of the Company with any other person,
corporation or other entity, other than:
(A) a Reorganization that would result in the voting
securities of the Company outstanding immediately prior thereto (or, in
the case of a reorganization or merger or consolidation that is preceded
or accomplished by an acquisition or series of related acquisitions by any
Person, by tender or exchange offer or otherwise, of voting securities
representing 5% or more of the combined voting power of all securities of
the Company, immediately prior to such acquisition or the first
acquisition in such series of acquisitions) continuing to represent,
either by remaining outstanding or by being converted into voting
securities of another entity, more than 50% of the combined voting power
of the voting securities of the Company or such other entity outstanding
immediately after such reorganization or merger or consolidation (or
series of related transactions involving such a reorganization or merger
or consolidation), or
(B) a Reorganization effected to implement a
recapitalization or reincorporation of the Company (or similar
transaction) that does not result in a material change in beneficial
ownership of the voting securities of the Company or its successor; or
(iv) Approval by the stockholders of the Company or an order
by a court of competent jurisdiction of a plan of liquidation of the
Company.
"COMMISSION" means the Securities and Exchange Commission.
"COMMITTEE" means the committee appointed by the Board to administer
this Plan pursuant to Section 4.1.
"COMMON STOCK" means the common stock of the Company, $.01 par value
per share, as constituted on the Effective Date of this Plan, and as thereafter
adjusted as a result of any one or more events requiring adjustment of
outstanding Awards under Section 3.4 above.
"COMPANY" means Diedrich Coffee, Inc., a Delaware corporation.
"DISINTERESTED DIRECTOR" means any non-employee director of the
Company who qualifies as "disinterested" within the meaning of Rule 16b-3.
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"DIVIDEND EQUIVALENT" means a right granted by the Company under
Section 6.5 to a holder of a Stock Option, Stock Appreciation Right or other
Incentive Award denominated in shares of Common Stock to receive from the
Company during the Applicable Dividend Period payments equivalent to the amount
of dividends payable to holders of the number of shares of Common Stock
underlying such Stock Option, Stock Appreciation Right, or other Incentive
Award.
"EFFECTIVE DATE" means July 16, 1996, which is the date this Plan
was adopted by the Board.
"ELIGIBLE PERSON" shall include directors, officers, employees,
consultants and advisors of the Company or of any Affiliated Entity; provided,
however, that Disinterested Directors shall not be Eligible Persons at any time
the Company is an Exchange Act Registered Company.
"ERISA" means the Employee Retirement Income Security Act of 1974,
as amended.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
"EXCHANGE ACT REGISTERED COMPANY" means that the Company has any
class of any equity security registered pursuant to Section 12 of the Exchange
Act.
"EXPIRATION DATE" means the tenth anniversary of the Effective Date.
"FAIR MARKET VALUE" of a share of the Company's capital stock as of
a particular date shall be: (i) if the stock is listed on an established stock
exchange or exchanges (including for this purpose, the Nasdaq National Market),
the mean between the highest and lowest sale prices of the stock quoted for such
date in the Transactions Index of each such exchange as averaged with such mean
price as reported on any and all other exchanges, as published in The Wall
Street Journal and determined by the Administering Body, or, if no sale price
was quoted in any such Index for such date, then as of the next preceding date
on which such a sale price was quoted; or (ii) if the stock is not then listed
on an exchange or the Nasdaq National Market, the average of the closing bid and
asked prices per share for the stock in the over-the-counter market as quoted on
The Nasdaq Small Cap Market on such date (in the case of (i) or (ii), subject to
adjustment as and if necessary and appropriate to set an exercise price not less
than 100% of the fair market value of the stock on the date an option is
granted); or (iii) if the stock is not then listed on an exchange or quoted in
the over-the-counter market, an amount determined in good faith by the
Administering Body; provided, however, that (A) when appropriate, the
Administering Body in determining Fair Market Value of capital stock of the
Company may take into account such other factors as it may deem appropriate
under the circumstances and (B) if the stock is traded on the Nasdaq Small Cap
Market and both sales prices and bid and asked prices are quoted or available,
the Administering Body may elect to determine Fair Market Value under either
clause (i) or (ii) above. Notwithstanding the foregoing, the Fair Market Value
of capital stock for purposes of grants of Incentive Stock Options shall be
determined in compliance with applicable provisions of the IRC. The Fair Market
Value of rights or property other than capital stock of the Company means the
fair market value thereof as determined by the Committee on the basis of such
factors as it may deem appropriate.
"INCENTIVE AWARD" means any Stock Option, Restricted Stock, Stock
Appreciation Right, Stock Payment, Stock Bonus, Stock Sale, Phantom Stock,
Dividend Equivalent, or Other Stock-Based Benefit granted or sold to an Eligible
Person under this Plan.
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"INCENTIVE STOCK OPTION" means a Stock Option that qualifies as an
incentive stock option under Section 422 of the IRC.
"IRC" means the Internal Revenue Code of 1986, as amended.
"JUST CAUSE DISMISSAL" shall mean a termination of a Recipient's
employment for any of the following reasons: (i) the Recipient violates any
reasonable rule or regulation of the Board, the Company's Chief Executive
Officer or the Recipient's superiors that results in damage to the Company or
which, after written notice to do so, the Recipient fails to correct within a
reasonable time; (ii) any willful misconduct or gross negligence by the
Recipient in the responsibilities assigned to the Recipient; (iii) any willful
failure to perform the Recipient's job as required to meet Company objectives;
(iv) any wrongful conduct of a Recipient which has an adverse impact on the
Company or which constitutes a misappropriation of Company assets; (v) the
Recipient's performing services for any other person or entity which competes
with the Company while the Recipient is employed by the Company, without the
written approval of the Chief Executive Officer of the Company; or (vi) any
other conduct that the Administering Body determines constitutes Just Cause for
Dismissal; provided, however, that if a Recipient is party to an employment
agreement with the Company providing for just cause dismissal (or some
comparable notion) of Recipient from Recipient's employment with the Company,
"Just Cause Dismissal" for purposes of this Plan shall have the same meaning as
ascribed thereto or to such comparable notion in such employment agreement.
"NONQUALIFIED STOCK OPTION" means a Stock Option that is not an
Incentive Stock Option.
"OTHER STOCK-BASED BENEFITS" means an Incentive Award granted under
Section 6.9 of this Plan.
"OUTSIDE DIRECTOR" means an "outside director" as defined in the
regulations adopted under Section 162(m) of the IRC.
"PARENT CORPORATION" means any Parent Corporation as defined in
Section 424(e) of the IRC.
"PAYMENT EVENT" means the event or events giving rise to the right
to payment of a Performance Award.
"PERFORMANCE-BASED COMPENSATION" means performance-based
compensation as described in Section 162(m) of the IRC. If the amount of
compensation an Eligible Person will receive under any Award is not based solely
on an increase in the value of Common Stock after the date of grant or award,
the Committee, in order to qualify an Award as performance-based compensation
under Section 162(m) of the IRC, can condition the grant, award, vesting, or
exercisability of such an Award on the attainment of a preestablished, objective
performance goal. For this purpose, a preestablished, objective performance goal
may include one or more of the following performance criteria: (a) cash flow,
(b) earnings per share (including earnings before interest, taxes, and
amortization), (c) return on equity, (d) total stockholder return, (e) return on
capital, (f) return on assets or net assets, (g) income or net income, (h)
operating income or net operating income, (i) operating margin, (j) return on
operating revenue, and (k) any other similar performance criteria.
"PERSON" means any person, entity or group, within the meaning of
Section 13(d) or 14(d) of the Exchange Act, but excluding (i) the Company and
its subsidiaries, (ii) any employee stock ownership or other employee benefit
plan maintained by
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the Company that is qualified under ERISA and (iii) an underwriter or
underwriting syndicate that has acquired the Company's securities solely in
connection with a public offering thereof.
"PERMANENT DISABILITY" shall mean that the Recipient becomes
physically or mentally incapacitated or disabled so that the Recipient is unable
to perform substantially the same services as the Recipient performed prior to
incurring such incapacity or disability (the Company, at its option and expense,
being entitled to retain a physician to confirm the existence of such incapacity
or disability, and the determination of such physician to be binding upon the
Company and the Recipient), and such incapacity or disability continues for a
period of three consecutive months or six months in any 12-month period or such
other period(s) as may be determined by the Committee with respect to any Award,
provided that for purposes of determining the period during which an Incentive
Stock Option may be exercised pursuant to Section 5.13(ii) hereof, Permanent
Disability shall mean "permanent and total disability" as defined in Section
22(e) of the IRC.
"PHANTOM STOCK" means an Incentive Award granted under Section 6.8
of this Plan.
"PLAN" means this 1996 Stock Incentive Plan of the Company.
"PLAN TERM" means the period during which this Plan remains in
effect (commencing the Effective Date and ending on the Expiration Date).
"PURCHASE PRICE" means the purchase price (if any) to be paid by a
Recipient for Restricted Stock as determined by the Committee (which price shall
be at least equal to the minimum price required under applicable laws and
regulations for the issuance of Common Stock which is nontransferable and
subject to a substantial risk of forfeiture until specific conditions are met).
"RECIPIENT" means a person who has received an Award under this
Plan.
"REORGANIZATION" means any merger, consolidation or other
reorganization.
"RESTRICTED STOCK" means Common Stock that is the subject of an
Award made under Section 6.2 and which is nontransferable and subject to a
substantial risk of forfeiture until specific conditions are met as set forth in
this Plan and in any statement evidencing the grant of such Incentive Award.
"RULE 16B-3" means Rule 16b-3 promulgated under the Exchange Act.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SIGNIFICANT STOCKHOLDER" is an individual who, at the time a Stock
Option is granted to such individual under this Plan, owns more than ten percent
(10%) of the combined voting power of all classes of stock of the Company or of
any Parent Corporation or Subsidiary Corporation (after application of the
attribution rules set forth in Section 424(d) of the IRC).
"STOCK APPRECIATION RIGHT" or "SAR" means a right granted under
Section 6.3 to receive a payment that is measured with reference to the amount
by which the Fair Market Value of a specified number of shares of Common Stock
appreciates from a specified date, such as the date of grant of the SAR, to the
date of exercise.
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"STOCK BONUS" means an issuance or delivery of unrestricted or
restricted shares of Common Stock under Section 6.6 of this Plan as a bonus for
services rendered or for any other valid consideration under applicable law.
"STOCK PAYMENT" means a payment in shares of the Company's Common
Stock to replace all or any portion of the compensation (other than base salary)
that would otherwise become payable to a Recipient.
"STOCK OPTION" means a right to purchase stock of the Company
granted under Section 6.1 of this Plan.
"STOCK SALE" means a sale of Common Stock to an Eligible Person
under Section 6.7 of this Plan.
"SUBSIDIARY CORPORATION" means any Subsidiary Corporation as defined
in Section 425(f) of the IRC.
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EXHIBIT 10.6
DIEDRICH COFFEE, INC.
1996 NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN
ARTICLE I
GENERAL
1.01 ADOPTION. This 1996 Non-Employee Directors Stock Option Plan (the
"PLAN") has been adopted by the Board of Directors and approved by the
stockholders of Diedrich Coffee, Inc., a Delaware corporation (the "COMPANY"),
effective as of July 16, 1996, 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.
1.02 ADMINISTRATION. The Plan shall be administered by the Company,
which, subject to the express provisions of the Plan, shall have the power to
construe the Plan and any agreements or memoranda defining the rights and
obligations of the Company and option recipients, to determine all questions
arising thereunder, to adopt and amend such rules and regulations for the
administration thereof as it may deem desirable, and otherwise to carry out the
terms of the Plan and such agreements or memoranda. The interpretation and
construction by the administrator of any provisions of the Plan or of any option
granted under the Plan shall be final. Notwithstanding the foregoing, the
administrator shall have no authority or discretion as to the selection of
persons eligible to receive options granted under the Plan, the number of shares
covered by options granted under the Plan, the timing of such grants, or the
exercise price of options granted under the Plan, which matters are specifically
governed by the provisions of the Plan.
1.03 ELIGIBLE DIRECTORS. A person shall be eligible to receive grants
of options under the Plan (an "ELIGIBLE DIRECTOR") if, at the time of the
option's grant, he or she is a duly elected or appointed member of the Company's
Board of Directors, but is not and has not since the beginning of the Company's
most recently completed fiscal year been (a) granted or awarded any equity
securities of the Company (including, without limitation, stock options and
stock appreciation rights) except pursuant to the Plan or a similar plan for
directors of the Company, or (b) an employee of the Company or any of its
affiliates or otherwise eligible for selection as a person to whom equity
securities of the Company (including, without limitation, stock options and
stock appreciation rights) may be allocated or granted pursuant to any plan of
the Company or any of its affiliates (other than the Plan or a similar plan for
directors of the Company) entitling participants therein to acquire stock, stock
options, or stock appreciation rights of the Company or any of its affiliates.
1.04 SHARES OF COMMON STOCK SUBJECT TO THE PLAN AND GRANT LIMIT. The
shares that may be issued upon exercise of options granted under the Plan shall
be authorized and unissued shares of the Company's Common Stock, previously
issued shares of the Company's Common Stock reacquired by the Company and unused
option shares pursuant to Section 2.06. The aggregate number of shares that may
be issued upon exercise of options granted under the Plan shall not exceed
125,000 shares of Common Stock, subject to adjustment in accordance with Article
III.
1.05 AMENDMENTS. The Company's Board of Directors may, insofar as
permitted by law, from time to time suspend or discontinue the Plan or revise or
amend it in any respect whatsoever, and the Plan as so revised or amended will
govern all options thereunder, including those granted before such revision or
amendment, except that no such
<PAGE> 2
amendment shall alter or impair or diminish in any material respect any rights
or obligations under any option theretofore granted under the Plan without the
consent of the person to whom such option was granted. In addition, if an
amendment to the Plan would increase the number of shares subject to the Plan
(as adjusted under Article III), increase the number of shares for which an
option or options may be granted to any optionee (as adjusted under Article
III), change the class of persons eligible to receive options under the Plan,
provide for the grant of options having an exercise price per option share less
than the exercise price specified in the Plan, extend the final date upon which
options may be granted under the Plan, or otherwise materially increase the
benefits accruing to participants in a manner not specifically contemplated
herein or affect the Plan's compliance with Rule 16b-3 promulgated under Section
16 of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), and
the rules promulgated thereunder, the amendment shall be approved by the
Company's stockholders to the extent required to comply with Rule 16b-3 under
the Exchange Act ("RULE 16b-3"). Under no circumstances may the provisions of
the Plan that provide for the amounts, price, and timing of option grants be
amended more than once every six months, other than to comport with changes in
the Internal Revenue Code, the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), or the rules thereunder. The Plan is intended to qualify
as a formula plan under Rule 16b-3, but not to impose restrictions included in
the Plan for purposes of compliance with Rule 16b-3 if those restrictions become
unnecessary to compliance with Rule 16b-3. Accordingly, notwithstanding the
foregoing, the administrator may administer and amend the Plan to comply with or
take advantage of changes in the rules (or interpretations thereof) promulgated
by the Securities and Exchange Commission or its staff under Section 16 of the
Exchange Act, subject to the stockholder approval requirement described above.
1.06 TERM OF PLAN. Options may be granted under the Plan until the
earlier to occur of the tenth anniversary of the effective date of the Plan or
the date of a Change in Control, as defined in Section 3.02. In addition, no
options may be granted during any suspension of the Plan or after its
termination for any reason. Notwithstanding the foregoing, each option properly
granted under the Plan shall remain in effect until such option has been
exercised or terminated in accordance with its terms and the terms of the Plan.
1.07 RESTRICTIONS. All options granted under the Plan shall be subject
to the requirement that, if at any time the Company shall determine, in its
discretion, that the listing, registration or qualification of the shares
subject to options granted under the Plan upon any securities exchange or under
any state or federal law, or the consent or approval of any government or
regulatory body or authority, is necessary or desirable as a condition of, or in
connection with, the granting of such an option or the issuance, if any, or
purchase of shares in connection therewith, such option may not be exercised in
whole or in part unless such listing, registration, qualification, consent or
approval shall have been effected or obtained free of any conditions not
acceptable to the Company. Unless the shares of stock to be issued upon exercise
of an option granted under the Plan have been effectively registered under the
Securities Act of 1933, as amended (the "SECURITIES ACT") as now in force or
hereafter amended, the Company shall be under no obligation to issue any shares
of stock covered by any option unless the person who exercises such option, in
whole or in part, shall give a written representation and undertaking to the
Company satisfactory in form and scope to counsel to the Company and upon which,
in the opinion of such counsel, the Company may reasonably rely, that he or she
is acquiring the shares of stock issued to him or her pursuant to such exercise
of the option for his or her own account as an investment and not with a view
to, or for sale in connection with, the distribution of any such shares of
stock, and that he or she will make no transfer of the same except in compliance
with any rules and regulations in force at the time of such transfer under the
Securities Act, or any other applicable law or regulation,
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and that if shares of stock are issued without such registration, a legend to
this effect may be endorsed upon the securities so issued and the Company may
order its transfer agent to stop transfer of such shares.
1.08 NONASSIGNABILITY. No option granted under the Plan shall be
assignable or transferable by the grantee except by will or by the laws of
descent and distribution or pursuant to a qualified domestic relations order or,
in the discretion of the administrator and under circumstances that would not
adversely affect the interests of the Company, pursuant to a nominal transfer
that does not result in a change in beneficial ownership or as otherwise
permitted by rule or interpretation of the Securities and Exchange Commission or
its staff as an exception to the general proscription on transfer of derivative
securities set forth in Rule 16b-3 (or any successor rule) under the Exchange
Act or interpretation thereof. During the lifetime of the optionee, the option
shall be exercisable only by the optionee (or the optionee's permitted
transferee) or his or her guardian or legal representative.
1.09 WITHHOLDING TAXES. Whenever shares of stock are to be issued upon
exercise of an option granted under the Plan, the administrator shall have the
right to require the optionee to remit to the Company an amount sufficient to
satisfy any federal, state and local withholding tax requirements prior to such
issuance. The administrator may, in the exercise of its discretion, allow
satisfaction of tax withholding requirements by accepting delivery of stock of
the Company or by withholding a portion of the stock otherwise issuable upon
exercise of an option.
1.10 DEFINITION OF "FAIR MARKET VALUE." For purposes of the Plan, the
"FAIR MARKET VALUE" of a share of stock as of a particular date shall be: (a) if
the stock is listed on an established stock exchange or exchanges (including for
this purpose, The Nasdaq Stock Market), the mean between the highest and lowest
sale prices of the stock quoted for such date in the Transactions Index of each
such exchange as averaged with such mean price as reported on any and all other
exchanges, as published in The Wall Street Journal and determined by the
administrator, or, if no sale price was quoted in any such Index for such date,
then as of the next preceding date on which such a sale price was quoted; or (b)
if the stock is not then listed on an exchange, the average of the closing bid
and asked prices per share for the stock in the over-the-counter market as
quoted on the NASDAQ system on such date (in the case of (a) or (b), subject to
adjustment as and if necessary and appropriate to set an exercise price not less
than 100% of the fair market value of the stock on the date an option is
granted); or (c) if the stock is not then listed on an exchange or quoted in the
over-the-counter market, an amount determined in good faith by the
administrator. The Fair Market Value of rights or property other than stock
shall be determined by the administrator on the basis of such factors as it may
deem appropriate.
1.11 RIGHTS AS A STOCKHOLDER. An optionee or a permitted transferee of
an option shall have no rights as a stockholder with respect to any shares
issuable or issued upon exercise of the option until the date of the receipt by
the Company of all amounts payable in connection with exercise of the option,
including the exercise price and any amounts required pursuant to Section 1.09.
ARTICLE II
STOCK OPTIONS
2.01 GRANTS OF INITIAL OPTIONS. Each Eligible Director shall, upon
first becoming an Eligible Director, receive a one-time grant of an option to
purchase up to 5,000 shares of the Company's Common Stock at an exercise price
per share equal to the Fair
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Market Value of the Company's Common Stock on the date of grant, subject to (a)
vesting as set forth in Section 2.03, and (b) adjustment as set forth in Article
III. Options granted under this Section 2.01 are "INITIAL OPTIONS" for purposes
hereof.
2.02 GRANTS OF ADDITIONAL OPTIONS. Immediately after the annual meeting
of stockholders of the Company next following an Eligible Director's becoming an
Eligible Director, and immediately following each subsequent annual meeting of
stockholders of the Company, in each case if the Eligible Director has served as
a director since his or her election or appointment and has been re-elected as a
director at such annual meeting, such Eligible Director shall automatically
receive an option to purchase up to 5,000 shares of the Company's Common Stock
(an "ADDITIONAL OPTION"). In addition to the Additional Options described above,
an individual who was previously an Eligible Director and received an initial
grant of stock options under the Plan or pursuant to a prior option plan for the
Company's directors, who then ceased to be a director for any reason, and who
then again becomes an Eligible Director, shall upon again becoming an Eligible
Director automatically receive an Additional Option. The exercise price per
share for all Additional Options shall be equal to the Fair Market Value of the
Company's Common Stock on the date of grant, subject to (a) vesting as set forth
in Section 2.03, and (b) adjustment as set forth in Article III.
2.03 VESTING. Initial Options shall vest and become exercisable (a) 50%
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 optionee has remained an Eligible Director for
the entire period from the date of grant to such earlier date; and (b) 50% upon
the earlier of (i) the second anniversary of the grant date or (ii) immediately
prior to the second annual meeting of stockholders of the Company following the
grant date, if the optionee has remained an Eligible Director for the entire
period from the date of grant to such earlier date. Additional Options shall
vest and become exercisable upon the earlier of (y) the first anniversary of the
grant date or (z) immediately prior to the annual meeting of stockholders of the
Company next following the grant date, if the optionee has remained an Eligible
Director for the entire period from the date of grant to such earlier date.
Notwithstanding the foregoing, Initial Options and Additional Options that have
not vested and become exercisable at the time the optionee ceases to be a
director shall terminate.
2.04 EXERCISE. No option shall be exercisable except in respect of
whole shares, and fractional share interests shall be disregarded. Not less than
100 shares of stock (or such other amount as is set forth in the applicable
option agreement or confirming memorandum) may be purchased at one time and
options must be exercised in multiples of 100 unless the number purchased upon
exercise is the total number at the time available for purchase under the terms
of the option. An option shall be deemed to be exercised when the Secretary or
other designated official of the Company receives written notice of such
exercise from or on behalf of the optionee, together with payment of the
exercise price and any amounts required under Section 1.09. The option exercise
price shall be payable upon the exercise of an option in legal tender of the
United States or capital stock of the Company delivered in transfer to the
Company by or on behalf of the person exercising the option duly endorsed in
blank or accompanied by stock powers duly endorsed in blank, with signatures
guaranteed in accordance with the Exchange Act if required by the administrator
or retained by the Company from the stock otherwise issuable upon exercise or
surrender of vested and exercisable options previously granted to the recipient
and being exercised (in either case valued at Fair Market Value as of the
exercise date) or such other consideration as the administrator may from time to
time in the exercise of its discretion deem acceptable in any particular
instance, provided, however, that the administrator may, in the exercise of its
discretion, (a) allow exercise of an option in a broker-assisted or similar
transaction in which
4
<PAGE> 5
the exercise price is not received by the Company until promptly after exercise,
and/or (b) allow the Company to loan the exercise price to the person entitled
to exercise the option, if the exercise will be followed by a prompt sale of
some or all of the underlying shares and a portion of the sales proceeds is
dedicated to full payment of the exercise price and amounts required pursuant to
Section 1.09.
2.05 OPTION AGREEMENTS OR MEMORANDA. Each option granted under the Plan
shall be evidenced by an option agreement duly executed on behalf of the Company
and by the Eligible Director to whom such option is granted or, in the
administrator's discretion, a confirming memorandum issued by the Company to the
recipient, stating the number of shares of stock issuable upon exercise of the
option and the exercise price, and setting forth explicitly or by reference to
the Plan the time during which the option is exercisable and the times at which
the options vest and become exercisable. Such option agreements or confirming
memoranda may but need not be identical and shall comply with and be subject to
the terms and conditions of the Plan, a copy of which shall be provided to each
option recipient and incorporated by reference into each option agreement or
confirming memorandum. Any option agreement or confirming memorandum may contain
such other terms, provisions and conditions not inconsistent with the Plan as
may be determined by the administrator.
2.06 TERM OF OPTIONS AND EFFECT OF TERMINATION. Notwithstanding any
other provision of the Plan, no option granted under the Plan shall be
exercisable after the expiration of ten years from the effective date of its
grant. In the event that any outstanding option under the Plan expires by reason
of lapse of time or is otherwise terminated without exercise for any reason,
then the shares of Common Stock subject to such option that have not been issued
upon exercise of the option shall again become available in the pool of shares
of Common Stock for which options may be granted under the Plan. In the event
that the recipient of any options granted under the Plan shall cease to be a
director of the Company, and subject to Section 3.02, (a) all Initial Options
granted under this plan to such recipient shall be exercisable, to the extent
already exercisable at the date such recipient ceases to be a director and
regardless of the reason the recipient ceases to be a director, for a period of
365 days after that date (or, if sooner, until the expiration of the option
according to its terms), and shall then terminate; and (b) all Additional
Options granted under this Plan to such recipient shall be exercisable, to the
extent already exercisable at the date such recipient ceases to be a director,
for a period of 365 days after that date (or, if sooner, until the expiration of
the option according to its terms) if he or she ceases to be a director because
of death or permanent disability, or for a period of 90 days after that date
(or, if sooner, until the expiration of the option according to its terms) if he
or she ceases to be a director for any other reason, and shall then terminate.
In the event of the death of an optionee while such optionee is a director of
the Company or within the period after termination of such status during which
he or she is permitted to exercise an option, such option may be exercised by
any person or persons designated by the optionee on a beneficiary designation
form adopted by the administrator for such purpose or, if there is no effective
beneficiary designation form on file with the Company, by the executors or
administrators of the optionee's estate or by any person or persons who shall
have acquired the option directly from the optionee by his or her will or the
applicable laws of descent and distribution.
ARTICLE III
CORPORATE TRANSACTIONS
3.01 ANTI-DILUTION ADJUSTMENTS. The number of shares of Common Stock
available for issuance upon exercise of options granted under the Plan, the
number of shares for which each option can be exercised, and the exercise price
per share of options shall be
5
<PAGE> 6
appropriately and proportionately adjusted for any increase or decrease in the
number of issued and outstanding shares of Common Stock resulting from a
subdivision or consolidation of shares or the payment of a stock dividend or any
other increase or decrease in the number of issued and outstanding shares of
capital stock of the Company effected without receipt of consideration by the
Company. No fractional interests will be issued under the Plan resulting from
any such adjustments.
3.02 REORGANIZATIONS; MERGERS; CHANGES IN CONTROL. Subject to the other
provisions of this Section 3.02, if the Company shall consummate any
reorganization or merger or consolidation in which holders of shares of the
Company's Common Stock are entitled to receive in respect of such shares any
other consideration (including, without limitation, a different number of such
shares), each option outstanding under the Plan shall thereafter be exercisable,
in accordance with the Plan, only for the kind and amount of securities, cash
and/or other property receivable upon such reorganization or merger or
consolidation by a holder of the same number of shares of Common Stock as are
subject to that option immediately prior to such reorganization or merger or
consolidation, and any appropriate adjustments will be made to the exercise
price thereof. In addition, if a Change in Control occurs and in connection with
such Change in Control any recipient of an option granted under the Plan ceases
to be a director of the Company, then such recipient shall have the right to
exercise his or her options granted under the Plan in whole or in part during
the applicable time period provided in Section 2.06 without regard to any
vesting requirements. For purposes hereof, but without limitation, a director
will be deemed to have ceased to be a director of the Company in connection with
a Change in Control if such director (i) is removed by or resigns upon request
of a Person (as defined in paragraph (a) below) exercising practical voting
control over the Company following the Change in Control or a person acting upon
authority or at the instruction of such Person, or (ii) is willing and able to
continue as a director of the Company but is not re-elected to or retained on
the Company's Board of Directors by the Company's stockholders through the
stockholder vote or consent action for election of directors that precedes and
is taken in connection with, or next follows, the Change in Control. For
purposes hereof, a "CHANGE IN CONTROL" means the following and shall be deemed
to occur if any of the following events occur:
(a) Any person, entity or group, within the meaning of Section
13(d) or 14(d) of the Exchange Act, but excluding the Company and its
subsidiaries and any employee benefit or stock ownership plan of the
Company or its subsidiaries and also excluding an underwriter or
underwriting syndicate that has acquired the Company's securities
solely in connection with a public offering thereof (such person,
entity or group being referred to herein as a "PERSON"), becomes the
beneficial owner (within the meaning of Rule 13d-3 promulgated under
the Exchange Act) of 50% or more of either the then outstanding shares
of Common Stock or the combined voting power of the Company's then
outstanding securities entitled to vote generally in the election of
directors; or
(b) Individuals who, as of the effective date hereof,
constitute the Board of Directors of the Company (the "INCUMBENT
BOARD") cease for any reason to constitute at least a majority of the
Board of Directors of the Company, provided that any individual who
becomes a director after the effective date hereof whose election, or
nomination for election by the Company's stockholders, is approved by a
vote of at least a majority of the directors then comprising the
Incumbent Board shall be considered to be a member of the Incumbent
Board unless that individual was nominated or elected by any Person
having the power to exercise, through beneficial ownership, voting
agreement and/or proxy, 20% or more of either the then outstanding
shares of Common Stock or the combined voting power of the Company's
then
6
<PAGE> 7
outstanding voting securities entitled to vote generally in the
election of directors, in which case that individual shall not be
considered to be a member of the Incumbent Board unless such
individual's election or nomination for election by the Company's
stockholders is approved by a vote of at least two-thirds of the
directors then comprising the Incumbent Board; or
(c) Consummation by the Company of the sale or other
disposition by the Company of all or substantially all of the Company's
assets or a reorganization or merger or consolidation of the Company
with any other person, entity or corporation, other than
(i) a reorganization or merger or consolidation that
would result in the voting securities of the Company outstanding
immediately prior thereto (or, in the case of a reorganization or
merger or consolidation that is preceded or accomplished by an
acquisition or series of related acquisitions by any Person, by tender
or exchange offer or otherwise, of voting securities representing 5% or
more of the combined voting power of all securities of the Company,
immediately prior to such acquisition or the first acquisition in such
series of acquisitions) continuing to represent, either by remaining
outstanding or by being converted into voting securities of another
entity, more than 50% of the combined voting power of the voting
securities of the Company or such other entity outstanding immediately
after such reorganization or merger or consolidation (or series of
related transactions involving such a reorganization or merger or
consolidation), or
(ii) a reorganization or merger or consolidation
effected to implement a recapitalization or reincorporation of the
Company (or similar transaction) that does not result in a material
change in beneficial ownership of the voting securities of the Company
or its successor; or
(d) Approval by the stockholders of the Company or an order by
a court of competent jurisdiction of a plan of liquidation of the
Company.
3.03 DETERMINATION BY THE COMPANY. To the extent that the foregoing
adjustments relate to stock or securities of the Company, such adjustments shall
be made by the administrator, whose determination in that respect shall be
final, binding and conclusive. The grant of an option pursuant to the Plan shall
not affect in any way the right or power of the Company to make adjustments,
reclassifications, reorganizations or changes of its capital or business
structure or to merge, consolidate, dissolve, or liquidate or to sell or
transfer all or any part of its business or assets.
7
<PAGE> 1
EXHIBIT 10.8
REVOLVING PROMISSORY NOTE
$2,000,000 Maximum Principal Amount May 20, 1996
Non-negotiable Irvine, California
FOR VALUE RECEIVED, the undersigned, Diedrich Coffee, a California
corporation ("Borrower"), hereby promises to pay to the order of Redwood
Enterprises VII, L.P., a California limited partnership with offices at 450
Newport Center Drive, Suite 450, Newport Beach, California 92660 or its
successors or assigns ("Lender"), the principal sum of Two Million Dollars
($2,000,000) or such lesser amount as may be borrowed under the terms of this
Note, together with interest on the unpaid principal amount from time to time
outstanding from the date hereof until the principal amount of this Note is
paid in full, in accordance with the terms of this Note, at the Note Rate (as
defined below). The principal of this Note, together with all accrued
interest, shall become due and payable on September 30, 1996.
The "Note Rate" shall be the lesser of the prime rate plus three
percent or the maximum rate allowable by law. The prime rate as of any date
shall be determined by reference to the prime rate as published in the Wall
Street Journal (the base rate on corporate loans posted by at least 75% of the
thirty largest U.S. banks). Interest shall be computed daily at the Note Rate
on the basis of the actual number of days in which all or any portion of the
principal amount hereof is outstanding computed on the basis of a 360 day year.
Borrower may borrow any amount up to an aggregate amount of $2,000,000
by providing notice to Lender no less than three (3) business days prior to the
date of the borrowing, which notice shall include the amount of such borrowing
and the date of such borrowing; provided that each such borrowing shall be in a
minimum principal amount of $50,000 or any larger multiple of $10,000. Within
the limits set forth in this Note, Borrower may borrow, repay and reborrow
amounts under this Note, provided that the aggregate principal balance
outstanding under this Note at any given time shall not exceed $2,000,000.
All loans made by Lender and all repayments of the principal thereof
shall be recorded by the Lender and endorsed by an officer of the Borrower on
the schedule attached hereto, or on a continuation of such schedule attached to
and made a part hereof; provided that the failure of Lender to make any such
recordation or of Borrower to make any such endorsement shall not affect the
obligations of Borrower hereunder.
In the event that any principal and/or interest is not paid when due,
without affecting any of Lender's other rights and remedies, the unpaid
principal amount and, to the extent permitted by applicable law, interest,
shall bear interest at the Note Rate and shall be payable on demand of Lender
until such unpaid amount is paid in full.
Principal and interest shall be payable in lawful money of the United
States at Lender's offices located at the address set forth above.
This Note may be prepaid in full at any time by the Borrower without
penalty.
<PAGE> 2
Each of the following shall constitute an event of default ("Event
of Default") under this Note:
(a) Borrower shall fail to pay when due (whether by acceleration
or otherwise) principal or interest on this Note, and such default unless
otherwise cured shall have continued for a period of fifteen (15) days; or
(b) Borrower shall commence a voluntary case or other proceeding
seeking liquidation, reorganization or other relief with respect to itself or
its debts under any bankruptcy, insolvency or other similar law now or
hereafter in effect or seeking the appointment of a trustee, receiver,
liquidator, custodian or other similar official of it or any substantial part
of its property, or shall consent to any such relief or to the appointment of
or taking possession by any such official in an involuntary case or other
proceeding commenced against it, or shall make a general assignment for the
benefit of creditors, or shall fail generally to pay its debts as they become
due, or shall take any corporate action to authorize any of the foregoing; or
(c) an involuntary case or other proceeding shall be commenced
against the Borrower seeking liquidation, reorganization or other relief with
respect to it or its debts under any bankruptcy, insolvency or other similar
law now or hereafter in effect or seeking the appointment of a trustee,
receiver, liquidator, custodian or other similar official of it or any
substantial part of its property, and such involuntary case or other proceeding
shall remain undismissed and unstayed for a period of 60 days; or an order for
relief shall be entered against the Borrower under the federal bankruptcy laws
as now or hereafter in effect.
If an Event of Default shall occur and be continuing or shall exist,
the principal amount of the Promissory Note and interest accrued thereon shall
be immediately due and payable without presentment, demand, protest or further
notice of any kind, all of which are hereby expressly waived, and an action
therefor shall immediately accrue.
This Note shall be governed by, and construed and enforced in
accordance with, the internal laws (excluding the laws of conflict) of the
State of California.
All agreements between the undersigned and the holder hereof are
expressly limited so that in no contingency or event whatsoever, whether by
reason of advancement of the proceeds hereof, acceleration of maturity of the
unpaid principal balance hereof, or otherwise, shall the amount paid or agreed
to be paid to the holder hereof for the use, forbearance or detention of the
money to be advanced hereunder exceed the highest lawful rate permissible under
applicable usury laws. If, from any circumstances whatsoever, fulfillment of
any provision hereof, at the time performance of such provision shall be due,
shall involve transcending the limit of validity prescribed by law which a
court of competent jurisdiction may deem applicable hereto, then ipso facto,
the obligations to be fulfilled shall be reduced to the limit of such validity,
and if from any circumstances the holder hereof shall ever receive as interest
an amount which would exceed the highest lawful rate, such amount which would
be excessive interest shall be applied to the reduction of the unpaid principal
balance due hereunder and not to the payment of interest.
No failure to exercise and no delay in exercising any right, power or
privilege hereunder shall operate as a waiver thereof, nor shall any single or
partial exercise of any right, power or privilege hereunder preclude any other
or further exercise thereof or the exercise of any other right, power or
privilege. The rights and remedies herein provided are cumulative and not
exclusive of any rights or remedies provided by law.
This Note may be amended or modified only upon the written consent of
both Borrower and Lender. Any amendment must specifically state the provision
or provisions to be amended and the manner in which such provision(s) are to be
amended.
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<PAGE> 3
Borrower promises to pay all the cost and expenses, including
reasonable attorneys' fees, incurred in the collection and enforcement of this
Note. Borrower and each surety, endorser, guarantor, and other party ever
liable for payment of any sums of money payable under this Note, hereby,
jointly and severally, consent to renewal and extension of time at or after the
maturity hereof, without notice, and hereby, jointly and severally waive
diligence, presentment, protest, demand and notice of every kind and, to the
full extent permitted by law, the right to plead any statute of limitations as
a defense to any demand hereunder.
Borrower:
Diedrich Coffee
By:
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Name:
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Title:
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3
<PAGE> 4
REVOLVING PROMISSORY NOTE
LOANS AND PAYMENTS OF PRINCIPAL
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Amount of Principal Principal Lender Borrower
Date Loan Repaid Balance Recordation By Endorsement By
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<S> <C> <C> <C> <C> <C>
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</TABLE>
<PAGE> 1
EXHIBIT 10.9
AGREEMENT OF SALE
THIS AGREEMENT OF SALE (this "Agreement") is made this 23rd
day of February, 1996 by and among Brothers Coffee Bars, Inc. ("Bars"), and
Brothers Gourmet Coffees, Inc. ("Brothers"), each of which are Delaware
corporations whose principal places of business are located at 2255 Glades
Road, Boca Raton, Florida 33431 (each of Bars and Brothers is sometimes
individually referred to herein as a "Seller," and both of them are sometimes
collectively referred to herein as the "Sellers"), and Diedrich Coffee, a
California corporation having its principal place of business at 2144 Michelson
Drive, Irvine, California 92715 (referred to herein as "Purchaser"). Each of
the Sellers and the Purchaser is sometimes referred to herein as a "Party," and
all of them are sometimes collectively referred to herein as the "Parties."
RECITALS
WHEREAS, Sellers are engaged through the "Brothers" tradename
in the business of retail sales of coffee and other food, beverage, accessory
and specialty items, as conducted through twelve store locations (as more
specifically described in the leases set forth in Schedule 1(a)(i))
(individually, a "Store" and collectively, the "Stores") (collectively, the
"Business");
WHEREAS, Sellers desire (1) to sell to Purchaser certain of
their assets as more fully described in Paragraph 1(a) below, which assets
include, without limitation, real property leasehold interests for the twelve
(12) Stores, and (2) that Purchaser assume certain of the Sellers' liabilities
under the terms and conditions as hereinafter set forth; and
WHEREAS, Purchaser desires to purchase said assets, and is
willing to assume said liabilities, all under the terms and conditions as
hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual promises,
covenants and representations of the Parties contained herein and for other
good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, it is hereby agreed by the Parties as follows:
1. SALE OF ASSETS.
a. Transferred Assets. On the Closing Date (as
defined in Paragraph 5(c) below), Sellers shall sell, transfer, assign, convey
and deliver to Purchaser, for the consideration hereinafter provided, all
right, title and interest in and to all of the assets used in or useful to the
Business, as such assets are enumerated in Schedule 1(a) (the "Assets"), which
Assets specifically include:
(i) All of Sellers' right, title and
interest under the real property leases for the Store locations described in
Schedule 1(a)(i), true and complete copies of which leases have been delivered
by Sellers to Purchaser prior to the date hereof and true and complete copies
of which leases are attached to Schedule 1(a)(i) (the "Leases"), and the
related security deposits.
(ii) All the stock-in-trade, retail
inventory, supplies, furniture, fixtures and equipment, leasehold improvements,
telephone equipment, telephone numbers (if assignable), rights in and to
personal property and other property used in the Business, as described in
Schedule 1(a)(ii) (the "FF&E").
<PAGE> 2
(iii) All licenses and permits issued for
use by Sellers at the Stores, if and to the extent so assignable, as described
in Schedule 1(a)(iii) (the "Licenses").
(iv) All customer address cards,
profiles, mailing lists and all other information regarding Sellers' current
and potential customers at the Stores.
(v) All hiring, training, operations,
personnel, quality control, marketing and other manuals or systems owned by
Sellers, including any computer-based or on-line systems, that are used in or
were developed for the operation of the Stores.
(vi) All existing plans or designs for
the Stores and for capital and cost reduction projects in process at or
currently planned in connection with the Stores (collectively, the
"Blueprints"), as described in Schedule 1(a)(vi).
(vii) All cash registers and polling
systems used in or for the Stores, as described in Schedule 1(a)(vii) (the "POS
Equipment").
(viii) The personal computers used at the
Store locations, including, to the extent assignable, all related packaged and
developed software, analysis sheets and business forms (i.e., time sheets,
inventory control, etc.) used in Sellers' day-to-day operation of the Stores,
Lotus Notes and the specialized programming developed to download and process
Store operations data, as described in Schedule 1(a)(viii) (the "Computer
Equipment").
(ix) Subject to Paragraph 4(d) below,
all Brothers Keeper/Sleeper bean storage equipment.
(x) All training, operations, personnel,
quality control and marketing manuals and/or systems, including those which are
computer based.
(xi) All rights of Sellers under any and
all express or implied warranties from Sellers' suppliers with respect to the
Assets, if and to the extent assignable.
b. Excluded Assets. This sale does not include
any assets of Sellers other than those specifically described in Schedule 1(a).
c. Amendments to Schedule 1(a). Sellers shall
have the right to amend and update Schedule 1(a) through the Closing Date. No
such amendment to Schedule 1(a) shall reduce the number of Stores and related
Leases that are the subject of this Agreement, nor shall any such amendment have
the effect of reducing by more than $ 2,500 the value of the Assets or of any
particular Store, or adversely affecting by more than $ 2,500 the potential
future operations of any particular Store.
2. PURCHASE PRICE.
a. Calculation; Timing of Payment. The total
purchase price for the Assets payable by Purchaser shall be $1,350,000 (the
"Purchase Price") or $112,500 per Store (the "Store Price"). The Purchaser
shall pay the Purchase Price at the following times in the following manner and
subject to the following conditions:
(i) Subject to repayment by Sellers to
Purchaser pursuant to Paragraph 2(a)(iv), fifty percent (50%) of the Purchase
Price (the "Downpayment") shall be paid by Purchaser to Sellers at Closing in
cash by federal funds wire transfer pursuant to
2
<PAGE> 3
written wire instructions provided by Sellers to Purchaser at least three (3)
business days prior to Closing.
(ii) In addition to the Downpayment,
Purchaser shall pay to Sellers at Closing in cash, by federal funds wire
transfer pursuant to written wire instructions provided by Sellers to Purchaser
at least three (3) business days prior to Closing, the amount, if any, by which
the Assigned Lease Amount as of the Closing Date exceeds the Downpayment. The
"Assigned Lease Amount" shall be equal to the product of the Store Price
multiplied by the number of Leases for which the Parties shall have received
and executed a lease assignment and landlord consent to assignment in form
satisfactory to Purchaser and Sellers ("Lease Assignment") executed by the
landlord thereof.
(iii) The balance of the Purchase Price
(the "Purchase Reserve") shall be paid in cash by federal funds wire transfer
to Norwest Bank of Colorado, N.A. (the "Escrow Agent"), pursuant to written
wire instructions provided by Escrow Agent to Purchaser at least three business
days prior to Closing which amount shall be held in an interest bearing account
established for the benefit of Sellers and Purchaser, subject to the terms of
that certain escrow agreement by and among Sellers, Purchaser and Escrow Agent,
in the form and substance of Exhibit A hereto (the "Escrow Agreement"). The
Purchase Reserve shall be held in escrow to secure Sellers' obligations under
Paragraphs 3(a), 4(b), 4(k), 7(b), 9(b)(i) and 14(b) of this Agreement
("Sellers' Indemnification Obligations") and Sellers' obligations to obtain any
Lease Assignments which are not obtained prior to the Closing Date. At such
time as the Assigned Lease Amount equals or exceeds the Downpayment, then,
within five (5) business days after Purchaser receives a Lease Assignment
signed by the respective landlord with respect to any Lease that was not
assigned on or prior to the Closing Date, an amount equal to the Store Price
shall be transferred from the Purchase Reserve to Sellers pursuant to the terms
of the Escrow Agreement; provided, however, that no such transfer to Sellers
shall be permitted if such transfer shall result in the balance of funds held
in the Purchase Reserve being less than twenty percent (20%) of the Purchase
Reserve balance as of the day immediately following the Closing Date. After
the close of the period ending September 30, 1996 (the "Deadline"), if all
twelve (12) of the Leases have not been assigned as provided herein, the
balance of the Purchase Reserve shall be paid by the Escrow Agent pursuant to
the terms of the Escrow Agreement to Purchaser. In the event that all twelve
(12) of the Leases have been assigned prior to the Deadline as provided herein,
on the date that is six (6) months after the Closing Date, all amounts
remaining in the Purchase Reserve on such date shall be paid by Escrow Agent to
Sellers pursuant to the terms of the Escrow Agreement.
(iv) Notwithstanding the foregoing, in
the event that all twelve (12) of the Leases have not been assigned by the
Deadline as provided herein and the amount of the Downpayment exceeds the
Assigned Lease Amount as of the Deadline, then Sellers shall immediately pay
the amount of such excess to Purchaser.
b. Allocation of Purchase Price. Sellers and
Purchaser shall allocate the Purchase Price among the Assets as set forth on
Schedule 2(b) hereto, using the allocation method required by Section 1060 of
the Internal Revenue Code of 1986, as amended (the "Code"), and the regulations
thereunder. Sellers and Purchaser each agree to report the federal, state and
local income and other tax consequences of the transactions contemplated
herein, and in particular to report the information required by Code Section
1060(b), in a manner consistent with such allocation and will not take any
position inconsistent therewith.
c. Working Capital Adjustment. On or before the
date which is twenty (20) business days following the Closing Date, (i)
Purchaser shall pay to Sellers an amount equal to the aggregate amount of the
prepaid rents made by Sellers as of the Closing
3
<PAGE> 4
Date, with respect to the Leases for periods beyond the end of the month in
which the Closing occurs, and (ii) Purchaser shall pay to Sellers (or Sellers
shall pay to Purchaser) the increase (or decrease) in Sellers' retail inventory
at the Stores (valued at Sellers' invoice cost) at the Closing Date as compared
to Sellers' retail inventory at the Stores (valued at Sellers' invoice cost) as
of December 29, 1995, and as set forth on Schedule 2(c).
3. ASSUMPTION OF CERTAIN LIABILITIES.
a. Nonassumed Liabilities. Except as
specifically provided in Paragraph 3(b) below, Purchaser shall not assume and
shall not acquire, take over, or be responsible for any liabilities or
obligations of the Sellers presently in existence, including, without
limitation, all liabilities and obligations relating to the Business, Lease
related commitments to contractors and landlords for Store build-outs, deferred
rents or any other ongoing non-lease related items (such liabilities or
obligations not assumed by Purchaser hereunder being herein referred to as the
"Nonassumed Liabilities") and Sellers shall indemnify, defend and hold harmless
Purchaser from all loss, cost, damage or expense related to the Nonassumed
Liabilities. The parties intend for Purchaser to acquire ownership of the
Assets free and clear of all claims, liens or encumbrances, except those
claims, liens or encumbrances which the Purchaser has agreed to assume or take
subject to as provided in Paragraph 3(b) below. The Sellers shall prior to
Closing fulfill all construction, consulting and similar commitments (other
than the payment of rent for periods after the month in which the Closing
occurs) to landlords under the Leases.
b. Assumed Liabilities. At Closing, Purchaser
shall, pursuant to the terms of an Assumption Agreement in the form and
substance of Exhibit B hereto, (i) with respect to Leases that have been
assigned to Purchaser, assume and agree to perform the obligations set forth in
the applicable Lease Assignment arising after the date of effectiveness of such
Lease Assignment, (ii) assume and agree to perform obligations of Sellers
arising after the Closing Date under all personal property leases set forth on
Schedule 1(a)(ii) and (iii) satisfy all costs arising after the Closing Date
under service agreements set forth on Schedule 1(a)(ii) (collectively referred
to herein as the "Assumed Liabilities"), and shall indemnify, defend and hold
harmless Sellers from all loss, cost, damage or expense related to the Assumed
Liabilities, except as provided for in Paragraph 10(a) below.
4. OTHER AGREEMENTS.
a. Employee Matters. Purchaser shall not
assume, acquire, take over or be responsible for any liabilities or obligations
of Sellers pursuant to any contract between Sellers and any of their employees.
After the date hereof, Purchaser may interview any or all of Sellers' employees
involved in the day-to-day operations of the Stores; provided, that, if the
transaction contemplated by this Agreement does not close as provided herein,
Purchaser shall not initiate contact with any of such employees for the purpose
of inducing such employee to leave the employ of the Sellers until the date
that is eighteen (18) months after the date hereof.
b. Bulk Transfers. Purchaser and Sellers agree
to waive the Uniform Commercial Code provisions relating to bulk transfers
("Bulk Sales Laws") with respect to the transactions contemplated by this
Agreement. Sellers shall indemnify and hold Purchaser, its directors, officers,
employees and agents harmless from and against all damages, costs and expenses
arising out of the noncompliance with the Bulk Sales Laws.
c. License to Use Name. Sellers shall permit
Purchaser to use the "Brothers" trade name and trademark for a period not to
exceed six (6) months following the
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date that Purchaser has received all Lease Assignments executed by the
respective landlords, in displays, signage and postings and on cups,
stationary, packaging materials, supplies or inventory, and Purchaser shall
discontinue any use thereof upon the expiration of such six-month period.
Purchaser acknowledges that the failure to discontinue the use of the
"Brothers" trade name and trademark at such time will cause irreparable damage
to Sellers and that Sellers will be entitled to seek all available remedies at
law and in equity against Purchaser.
d. Brothers Keeper and Brothers Sleeper.
Purchaser shall have the royalty-free right and perpetual, worldwide license to
use the Brothers Keeper and Brothers Sleeper technology and equipment (as
described on Schedule 4(d) hereto) in all of Purchaser's retail stores,
existing and future (the "License"); provided, however, that Sellers shall
retain any and all patent and other intellectual property rights in such
equipment other than the License and, except as provided elsewhere herein,
shall not be responsible following the Closing for (i) any warranties with
respect to such technology and equipment, except as provided in this Agreement,
(ii) any enhancements or modifications to such technology and equipment
following the Closing or (iii) providing to Purchaser any additional technology
or equipment other than the technology and equipment in Sellers' retail stores
on the Closing Date as set forth on Schedule 4(d) hereto.
e. Access to Books and Records. Purchaser may,
prior to the Closing Date, through its representatives, review the properties,
books and records of Sellers as they relate to the Assets and the Stores to
inspect such Assets and Stores and familiarize itself with the Assets, the
Leases and other matters related to the Assets and the Stores. Sellers shall,
at Purchaser's expense, permit Purchaser and its representatives to have, from
time to time after the Closing Date, full access to the premises and to all the
books and records of Sellers related to the Assets and the Stores and to cause
the officers of Sellers to (i) cooperate with and to furnish Purchaser with
such financial and operating data and other information with respect to the
Financial Statements, Assets and the Stores as Purchaser shall from time to
time reasonably request for the purpose of conducting an audit or such other
purposes related to the Business and (ii) provide management representations to
Purchaser's auditors with respect to the Financial Statements provided that
such auditors apply generally accepted accounting principles on a basis
consistent with Seller's practice for the period preceding the Closing Date.
f. Preservation of Goodwill. After the date
hereof and through the Closing Date, Sellers shall use reasonable efforts to
preserve for Purchaser the goodwill the Sellers have developed with their
suppliers, customers and other persons having business relations with the
Sellers with respect to the Stores.
g. Non-Compete. Except as set forth in Schedule
4(g), Sellers shall not own, operate, license or franchise any retail locations
in the United States that sell prepared coffee beverages and/or food items
(whole beans only and the existing locations and licensing agreements listed in
Schedule 4(g) excepted) for a period of five (5) years from Closing.
Notwithstanding, Sellers may prepare or license the preparation and
distribution of coffee beverages with the Sellers' names and/or marks within
the indoor premises of its current and future wholesale customers whose
principal business is not the retail sale and/or preparation of coffee beans
and/or prepared coffee beverages nor the operation of a retail coffee
establishment, provided that such preparation and distribution is not towards
the effort of creating a retail presence so as to avoid the aforesaid
restriction. However, Sellers shall not sell to nor license a wholesale
customer which purchases whole beans for the purpose of obtaining the right to
sell coffee beverages in order to avoid the restriction contained herein.
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Sellers acknowledge that Purchaser is relying on this non-compete clause as a
material inducement to consummate this transaction.
h. Confidentiality. Purchaser and Sellers shall
hold in strict confidence (i) all documents and information obtained from the
other Parties hereto, their employees, agents and/or independent contractors,
(ii) the nature and content of this Agreement and all discussions between
Purchaser and Sellers regarding the transaction contemplated herein, whether
prior to or after the execution of this Agreement and (iii) the fact that
Sellers and Purchaser have entered into this Agreement (all of the above shall
collectively be referred to herein as "Confidential Information"), and shall
not disclose or convey any of such Confidential Information to any other
person, provided that Purchaser and Sellers may disclose Confidential
Information (x) to such of their employees, attorneys, accountants and
financial advisors as is reasonable to facilitate consummation of the
transactions contemplated by this Agreement, (y) to the extent any such
disclosure is required by law and (z) to landlords and other third parties as
necessary to facilitate obtaining such parties' consent to the transfer of
Assets hereunder.
i. Sellers to Operate in Ordinary Course of
Business. During the period from the date of this Agreement to the Closing
Date, Sellers shall (i) carry on the Business and conduct their operations of
the Assets and the Stores only in the ordinary and usual course of business
consistent with past practices, (ii) use their best efforts to (A) preserve
intact the Assets and the Stores, (B) keep available the services of their
officers and employees and (C) preserve existing relationships with licensors,
suppliers, distributors, customers, landlords and others having business
relationships with Sellers with respect to the Business, (iii) not waive any
right of substantial value related to the Business, and (iv) communicate on a
regular and frequent basis with one or more designated representatives of
Purchaser to report material operational matters and to report the general
status of ongoing operations of the Business. Prior to the Closing Date and
except as may be first approved by the Purchaser or as is otherwise permitted
or required by this Agreement, Sellers shall refrain from entering into or
amending or terminating any material contract or commitment with respect to the
Business, except in the ordinary course of business.
j. Operation of Stores Following the Closing for
Which No Lease Assignment Has Been Received.
(i) In connection with each Store as to
which the Seller does not deliver a Lease Assignment to Purchaser on the
Closing Date, commencing on the Closing Date and ending on the earlier of the
date that such Lease Assignment is delivered to the Purchaser or the Deadline,
Purchaser shall (A) assume the operation of each such Store, (B) reasonably
cooperate with Sellers in their efforts to obtain such Lease Assignment, (C)
not knowingly or intentionally take any actions that would impair Sellers'
ability to obtain such Lease Assignment and (D) use commercially reasonable
efforts to maintain the goodwill and going concern value of the Store. During
this period in which Purchaser is operating such Store, Purchaser shall have
sole discretion in all operations and management of such Store as though there
had been an assignment and (X) Sellers relinquish and Purchaser shall retain
all rights to any revenues and/or income from the sale of goods and services
from such Store and (Y) Purchaser shall be responsible for payment of all costs
and expenses incurred in the operation of such Store (except for rental
payments for the month in which the Closing occurs).
(ii) On the first day following the date
of the Deadline, Sellers shall resume operation of and responsibility for any
Store for which no Lease Assignment has been received. As a result,
notwithstanding anything in this Agreement to the
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contrary, Sellers shall assume all risk and obligation under the Leases for
such Stores on the first day following the date of the Deadline.
(iii) In the event that Purchaser occupies
any Store premises pursuant to this Paragraph 4(j), Sellers shall jointly and
severally indemnify, defend, protect and hold Purchaser, its directors,
officers, employees, agents and affiliates harmless from and against any and
all Damages (as defined in Paragraph 9(b)(i)) arising out of, resulting from or
in any way related to the non- assignment of any Lease on the Closing Date
and/or Purchaser's occupancy of such Store premises on or after the Closing
Date in violation of any Lease, including, but not limited to, Damages
resulting from a landlord's failure to perform any of its obligations under any
Lease. The foregoing indemnification is in addition to the indemnification
provided by Paragraph 9. Purchaser shall reimburse Sellers for any regularly
scheduled rental payments required to be made by Sellers to the landlord under
the terms of a Lease after the month in which the Closing occurs and during
Purchaser's occupancy of the related Store premises hereunder until such time
as such Lease is validly assigned to Purchaser.
(iv) The occupancy by Purchaser of any
Store premises pursuant hereto shall not be deemed an implied assumption of the
Lease. Sellers shall use their best efforts and shall take all necessary
actions to obtain the valid assignment of each Lease to Purchaser effective as
of the Closing Date or as soon thereafter as possible. Sellers shall bear all
costs, expenses and risks relating to obtaining the valid assignment to
Purchaser of each Lease.
k. Certain Defaults. Sellers will give prompt
notice to Purchaser of:
(i) any notice of default received
subsequent to the date of this Agreement (and prior to the Closing Date) under
any lease, instrument or agreement to which it is a party or by which it is
bound, which default would, if not remedied, result in a material adverse
effect on the Business, Assets or operation of any particular Store or which
would render materially incomplete or untrue any representation made herein;
and
(ii) any suit, action or proceeding
instituted or, to the knowledge of Sellers, threatened against or affecting
Sellers, the Business or the Assets subsequent to the date of this Agreement
(and prior to the Closing Date) which, if adversely determined, would result in
a material adverse effect on the Business, Assets or operation of any
particular Store or which would render materially incorrect any representation
made herein.
l. Additional Actions. Subject to the terms and
conditions of this Agreement, the parties hereto agree to use all reasonable
efforts to take, or cause to be taken, all reasonable action and to do, or
cause to be done, all things reasonably necessary, proper or advisable under
applicable laws and regulations to consummate and make effective the
transactions contemplated by this Agreement as promptly as reasonably
practicable. Such obligation shall include without limitation such efforts of
each of the parties, prior to the Closing Date, to obtain, to be effective
either at the Closing Date or as soon as practicable thereafter, any required
consents with respect to, or novations of, any contracts, agreements, plans,
leases, instruments, licenses, arrangements or commitments of Sellers in effect
prior to the Closing Date. In case at any time after the Closing Date any
further action is necessary or desirable to carry out the purposes of this
Agreement or to vest Purchaser with full title to all properties, assets,
rights, approvals, immunities and franchises of Sellers, the proper officers,
directors or employees of each party to this Agreement shall take all such
necessary action.
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5. CONDITIONS TO CLOSING, CLOSING AND DELIVERIES AT
CLOSING.
a. Conditions to Purchaser's Obligations.
Subject to the terms of Paragraph 5(c) below, the obligation of Purchaser to
consummate the transactions contemplated hereunder is expressly contingent upon
the satisfaction, or written waiver by Purchaser in its sole discretion, of the
following conditions precedent:
(i) Purchaser shall have received duly
executed originals of the following documents: (A) the opinion of Sellers'
counsel, Ballard Spahr Andrews & Ingersoll, dated as of the Closing Date, in
the form and substance of Exhibit C hereto, (B) Bills of Sale for the Assets in
the form and substance of Exhibit D hereto, and (C) the Escrow Agreement.
(ii) Sellers shall have performed in all
material respects the obligations required under this Agreement to be performed
by them at or prior to the Closing, and Sellers shall have provided Purchaser
an Officer's Certificate to such effect at Closing.
(iii) The representations and warranties
of the Sellers contained herein shall be true and correct in all material
respects at and as of the Closing Date as if made at and as of such time,
except to the extent that a different time is specifically stated in such
representations and warranties, and Sellers shall have provided to Purchaser an
Officer's Certificate to such effect at Closing.
(iv) No temporary restraining order,
preliminary injunction or permanent injunction or other order preventing the
consummation of the transactions contemplated by this Agreement shall have been
issued by any federal, state or foreign court or other governmental or
regulatory authority and remain in effect, and no litigation seeking the
issuance of such an order or injunction, or seeking substantial damages against
Purchaser or Sellers if the transactions contemplated by this Agreement are
consummated, shall be pending which, in the good faith judgment of Sellers and
Purchaser, has a reasonable probability of resulting in such order, injunction
or substantial damages. In the event any such order or injunction shall have
been issued, each party agrees to use its reasonable efforts to have any such
injunction lifted.
(v) No federal, state, local or foreign
statute, rule or regulation shall have been enacted which would make the
consummation of the transactions contemplated by this Agreement illegal.
(vi) Since the date hereof, there shall
not have been instituted and be continuing or threatened against any Seller,
any claim, action or proceeding related to the Business or the Assets, which if
determined adversely to such Seller could reasonably result in a material
adverse effect on the Business, the Assets or the operation of any particular
Store.
(vii) No material adverse change shall
have occurred related to the Business or the Assets or the operation of any
particular Store.
(viii) Except for Lease Assignments not
obtained from landlords on or before the Closing Date, any and all other
consents, assignments and releases required from third parties relating to
contracts, licenses and other agreements and instruments that are part of the
Assets shall have been obtained in form and substance satisfactory to
Purchaser.
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(ix) Sellers shall have delivered a final
version of Schedule 1(a) which shall set forth the Assets to be transferred
pursuant to this Agreement and such final version of Schedule 1(a) shall not
differ from the version of Schedule 1(a) delivered on the date hereof if such
difference results in a reduction in the value of the Assets being transferred
hereunder by more than $ 2,500 or adversely affects the potential future
operations of any Store by more than $ 2,500.
(x) Purchaser shall have received a duly
executed Officer's Certificate certifying that the conditions set forth in
Paragraphs 5(a)(iv), (v), (vi), (vii), (viii) and (ix) have been satisfied.
b. Conditions to Sellers' Obligations. Subject
to the terms of Paragraph 5(c) below, the obligations of Sellers to consummate
the transactions contemplated hereunder are expressly contingent upon the
satisfaction, or written waiver by Sellers in their sole discretion, of the
following conditions precedent:
(i) Sellers shall have received duly
executed originals of the following documents: (A) the Assumption Agreement,
(B) the Escrow Agreement and (C) the opinion of Purchaser's counsel dated as of
the Closing Date in substantially the form of Exhibit E.
(ii) Purchaser shall have performed in
all material respects its obligations required under this Agreement to be
performed by it at or prior to the Closing, and Purchaser shall have provided
to Sellers an Officer's Certificate to such effect at Closing.
(iii) The representations and warranties
of Purchaser contained herein shall be true and correct in all material
respects at and as of the Closing Date as if made at and as of such time,
except to the extent that a different time is specifically stated in such
representations and warranties, and Purchaser shall have provided to Sellers an
Officer's Certificate to such effect at Closing.
c. Location of Closing and Closing Date. Unless
otherwise agreed to by the Parties, the consummation of the transactions
contemplated by this Agreement (the "Closing") shall take place at on February
__, 1996, or such later date as is agreed to by the Parties in writing (the
"Closing Date"), at the offices of Ballard Spahr Andrews & Ingersoll, 1225 17th
Street, Suite 2300, Denver, Colorado.
d. Deliveries at Closing.
(i) Sellers shall execute and deliver or
cause to be executed and delivered, as the case may be, to Purchaser (or the
Escrow Agent) at Closing the following, each of which must be reasonably
satisfactory in form and substance to Purchaser and its legal counsel (A) the
Escrow Agreement, (B) the Bills of Sale for the Assets, (C) the Lease
Assignments, (D) the opinion of Sellers' counsel, dated as of the Closing Date,
(E) the Officer's Certificate described in Paragraphs 5(a)(iii) and (iv) above,
(F) certified copies of resolutions of the Board of Directors of each Seller
approving the execution and delivery of this Agreement and consummation of all
of the transactions contemplated hereby, duly certified by an officer of each
Seller and (G) all other documents or certificates required to be delivered to
Purchaser under the provisions of this Agreement.
(ii) Purchaser shall execute and deliver
or cause to be executed and delivered, as the case may be, to Sellers (or the
Escrow Agent) at Closing the following, each of which must be reasonably
satisfactory in form and substance to Sellers and
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their legal counsel (A) the Escrow Agreement, (B) the Assumption Agreement, (C)
the Lease Assignments, (D) the Officer's Certificate described in Paragraphs
5(b)(iii) and (iv) above, (E) a certified copy of resolutions of the Board of
Directors of Purchaser approving the execution and delivery of this Agreement
and consummation of all of the transactions contemplated hereby, duly certified
by an officer of Purchaser, (F) the opinion of Purchaser's counsel dated as of
the Closing Date and (G) all other documents or certificates required to be
delivered to Sellers under the provisions of this Agreement.
6. REPRESENTATIONS AND WARRANTIES OF SELLERS.
Brothers, jointly and severally, and Bars, severally,
make the following representations and warranties to Purchaser, with the
knowledge that all such representations and warranties made by Sellers shall,
subject to Paragraph 9(a) below, survive execution of this Agreement, and with
the full knowledge that Purchaser is entering into and consummating this
Agreement in full reliance thereon.
a. Due Incorporation and Authorization. Each of
the Sellers (i) has been duly incorporated, is validly existing and is in good
standing under the laws of the State of Delaware, (ii) is in good standing in
every jurisdiction in which the nature of the business conducted by it or the
character of the properties owned or leased by it makes such qualification
necessary, except where the failure to be in good standing does not have a
material adverse effect on the operation of any particular Store or on each
Seller's Business taken as a whole, and (iii) has the full power and authority
to enter into this Agreement and the documents referenced herein and to
consummate the transactions contemplated herein and otherwise to perform its
obligations hereunder. This Agreement has been duly authorized and executed by
each of the Sellers and constitutes the legal, valid and binding obligation of
each of the Sellers, enforceable against each Seller in accordance with its
terms.
b. Violation. The execution and delivery of
this Agreement by each of the Sellers, the assignment of the Leases and the
consummation of the sale of the Assets contemplated hereby do not and will not
(i) violate any provision of the Certificate of Incorporation or by-laws of any
of the Sellers, (ii) violate any material court or administrative order,
process, judgment or decree to which any of the Sellers is a party or by which
any of them (or any of their respective properties or assets) is bound or (iii)
except as disclosed on Schedule 6(b), violate any provision of, or result in
the acceleration of or entitle any party to accelerate (whether after notice or
lapse of time or both) any obligation under, or result in the creation or
imposition of any material lien, charge, pledge, security interest or other
encumbrance upon the property of any of the Sellers pursuant to any provision
of, any mortgage, lien, lease, agreement, license, or instrument to which any
of the Sellers is a party.
c. Consents. Except as disclosed on Schedule
6(c) hereto, no consent or approval by or of, or any notification or filing
with, any person (governmental or private) is required in connection with the
execution, delivery and performance by Sellers of this Agreement or the
consummation of the transactions contemplated hereby.
d. Schedule of Assets. Schedule 1(a) is true,
complete and correct in all material respects. All of the Assets are in
satisfactory condition and repair for the requirements of the Business as now
being conducted ordinary wear and tear excepted. There are no proceedings
affecting any of the Assets pending or, to the knowledge of Sellers, threatened
which may reasonably be expected to adversely curtail the use of the Assets for
the purpose for which they were acquired or the purpose for which they are now
used. The Assets constitute all of the assets and interests in assets that are
necessary in the conduct of the
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Business as currently being conducted, other than the Excluded Assets. Sellers
are in possession of all Assets leased to them by others.
e. Encumbrances. Except as disclosed on
Schedule 6(e) hereto, at Closing, each Seller shall have good and marketable
title to (or a valid leasehold or contractual interest in) its Assets, free and
clear of any and all liens, claims, encumbrances, debts or other adverse claims
or rights of any kind.
f. Misstatements and Omissions. No
representation or warranty by Sellers in this Agreement and/or any Exhibit,
addendum or attachment hereto contains any untrue statement of a material fact,
or omits any material fact necessary to make the statements contained therein
not misleading.
g. Litigation. Except as disclosed on Schedule
6(g), there is no action, suit or proceeding pending or, to Sellers' knowledge,
contemplated in or before any licensing, taxing or other governmental body or
any court of law or arbitrator which could result in the avoidance of any term
or condition hereunder, or create any liability on the part of Purchaser for
the actions or operations of the Assets or Stores either on or before or
following the Closing Date, or which challenges the right or ability of Sellers
to enter into this Agreement and perform their obligations hereunder, or which
relates in any manner to the Assets or the Business. Except as disclosed as
Schedule 6(g), to the knowledge of Sellers, there is no reasonable basis for a
claim, action or proceeding against or relating to Sellers, the Assets or the
Business which, if adversely determined, could, individually or in the
aggregate, reasonably be expected to result in a material adverse effect on the
Business, Assets or the operation of any particular Store. There is not in
existence any order, judgment or decree of any court or other tribunal or other
agency enjoining or requiring Sellers to take any action of any kind with
respect to the Business or the Assets.
h. Financial Information. Sellers have
previously delivered to Purchaser the financial information set forth on
Schedule 6(h) hereto with respect to the Assets and the Stores (the "Financial
Statements"). The Financial Statements are true, correct and complete and have
been prepared in conformity with generally accepted accounting principles
applied on a consistent basis throughout the periods involved, except as
otherwise noted therein and subject (in the case of interim financial
statements referred to above) to year-end audit adjustments.
i. Ordinary Course of Business. Except as set
forth in Schedule 6(i) hereto, since January 1, 1995, (i) each Seller has
operated its Assets and its Stores in the ordinary course, consistent with past
practice, (ii) there has not been any change in the operations or condition,
financial or otherwise, of the Business, including the Assets and the Stores,
other than changes, none of which, individually or in the aggregate, has been
materially adverse to each Seller's Assets or the operation of any particular
Store, and (iii) there has not been any material Asset sold or disposed of
(except inventory sold in the ordinary course of business), any material Asset
mortgaged, pledged or subjected to any lien, charge or other encumbrance.
j. Compliance with Laws.
(i) Except as disclosed on Schedule
6(j), each Seller has complied and the Business has been operated in compliance
with all applicable federal, state and local laws and regulations, including,
without limitation, Environmental Laws and the Americans with Disabilities Act
of 1990, and all applicable foreign laws and regulations relating to the
operation of the Business, its Assets and its Stores, except where failure to
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comply with such laws and regulations would not have a material adverse effect
on the Business or each Seller's operation of its Assets and its Stores, taken
as a whole, or a material adverse effect as to the continued operation of any
particular Store by Purchaser from and after the Closing Date. For purposes of
this Agreement, the term "Environmental Laws" shall mean any federal, state or
local statute, ordinance, rule, regulation, order, consent decree, judgment or
common-law doctrine, and provisions and conditions of permits, licenses and
other operating authorizations relating to (i) pollution or protection of the
environment, (ii) exposure of persons, including employees, to toxic or
hazardous substances or other products, raw materials, chemicals or other
substances, (iii) protection of the public health or welfare from the effects
of by-products, wastes, emissions, discharges or releases of chemical
substances from industrial or commercial activities or (iv) regulation of the
manufacture, use or introduction into commerce of chemical substances,
including, without limitation, their manufacture, formulation, labeling,
distribution, transportation, handling, storage and disposal.
(ii) Each Seller, its employees or agents
have not caused or, to such Seller's knowledge, allowed the generation,
treatment, storage, release or disposal of hazardous substances except in
compliance with all Environmental Laws. Each Seller, its employees or agents
have not received any written notice or, to the knowledge of such Seller, any
other communication, from any governmental authority alleging or concerning any
violation by such Seller of, or responsibility or liability of such Seller
under, any Environmental Law. There are no pending, or to the knowledge of
each Seller, threatened, claims, suits, proceedings or investigations with
respect to the Business or the Assets alleging or concerning any violation of
or responsibility or liability under any Environmental Law, nor does any Seller
have any knowledge of any fact or condition which might reasonably be expected
to give rise to such a claim, suit, proceeding or investigation. Each Seller
is in possession of all material approvals, permits and licenses from all
governmental authorities under statutes and regulations relating to the
environment and to workplace health and safety with respect to the operation of
the Business; there are no pending or, to the knowledge of each Seller,
threatened, actions, proceedings or investigations seeking to revoke or deny
renewal of any of such approvals, permits and licenses; and each Seller has no
knowledge of any fact or condition which would reasonably be expected to give
rise to any action, proceeding or investigation to revoke or deny renewal of
such approvals, permits or licenses.
(iii) Schedule 6(j) sets forth a true and
complete list of each health authority (including, without limitation, the
Department of Health) pending or actual review of or visitation to a Store on
or after January 1, 1995, and the date of such pending or actual review or
visitation and, in the case of a completed review or visitation, a summary of
the health authority's findings resulting therefrom. Except as set forth on
Schedule 6(j), there are not existing, nor to the knowledge of each Seller
threatened, any orders or requests by any health authority requiring or
requesting any action by such Seller relating in any manner to the Business or
the Assets. Prior to the Closing Date, the Sellers have provided Purchaser
with true and complete copies of all correspondence since January 1, 1995 with
any health authority relating in any manner to the Business or the Assets.
k. Inventories. All of the inventories included
in the Financial Statements are usable and salable in the ordinary course of
business, except for items of obsolete materials and materials of
below-standard quality, all of which have been written off or written down to
fair market value on the Financial Statements and in accordance with generally
accepted accounting principles and except for such lack of usability and
salability as would not have a material adverse affect on the value of the
inventory. No inventory has been pledged as collateral.
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l. Permits and Licenses. Except as disclosed on
Schedule 6(l), each Seller has all permits, governmental licenses,
registrations and approvals (collectively, "Approvals") necessary to carry on
the Business as operated at its Stores (as presently conducted) as required by
law or the rules and regulations of any federal, state, county or local
association, corporation or governmental agency, body, instrumentality or
commission having jurisdiction over them, except where the failure to have any
such Approvals would not have a material adverse affect on each Seller's
operation of its Stores, taken as a whole, or a material adverse effect as to
the continued operation of any particular Store by Purchaser from and after the
Closing Date.
m. Material Contracts. Schedule 6(m) hereto
sets forth a list of all material contracts and agreements, whether oral or
written, to which each of the Sellers is a party with respect to the Business.
With respect to such contracts, except as set forth in Schedule 6(m), Sellers
(with respect to the contracts to which each is a party) are not in breach
thereof or default thereunder and, to the best knowledge of Sellers, there does
not exist under any such contract any event which, with the giving of notice or
the lapse of time, would constitute such a breach or default, except for such
breaches, defaults and events as to which requisite waivers or consents have
been obtained or as to which do not or would not have a material adverse affect
on the Business or the operation of any particular Store.
n. Labor Matters. Schedule 6(n) hereto sets
forth all labor union and collective bargaining agreements and all employment
or consulting contracts to which any Seller is a party and which are related to
the Business.
o. Taxes. Each Seller has paid or accrued for
all applicable income, social security, withholding, sales, unemployment
insurance, and other taxes of any kind relating to the Business due through the
Closing Date, and each Seller has properly filed all required tax returns and
applicable regulatory filings as provided by law which are due to be filed as
of the Closing Date and shall file on a timely basis all such returns and
filings, and shall make all related payments, required to be filed or made by
such Seller with respect to the Assets and the Stores following the Closing
Date. All such filings were true, correct and complete when made.
p. Other Transactions. Sellers, individually
and in the aggregate, have not entered into any unterminated contract to sell
(other than this Agreement) the Assets or the Stores, or any portion thereof.
q. Leases and Real Property. Except as
disclosed on Schedule 6(q), the Leases are in full force and effect as written
and, at Closing, the Sellers will be in full compliance therewith. Schedule
6(q) lists each lease of real property related to the Business (including,
without limitation, the Leases) under which any Seller is a lessee, lessor,
sublessee or sublessor, as so designated therein. All leases, easements and
other real property interests held by each Seller are valid and subsisting and,
except as disclosed on Schedule 6(q), each Seller is not in default thereunder.
No Seller owns any real property used in the Business.
r. Absence of Undisclosed Liabilities. Except
as disclosed in the Financial Statements, no Seller has any material
liabilities or obligations (contingent or otherwise) relating to the Business
or the Assets.
s. Full Disclosure. All instruments, agreements
and other documents delivered or to be delivered, or made available, to
Purchaser pursuant to this Agreement are complete and correct in all material
respects. No representation or warranty made by Sellers in this Paragraph 6 or
the Schedules to this Agreement contains or will
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contain any untrue statement of a material fact or omits or will omit to state
a material fact required to be stated herein or therein necessary to make the
statements on behalf of Sellers in this Paragraph 6. and the Schedules to this
Agreement, in light of the circumstances in which they are made, not
misleading.
7. EXCLUSION OF WARRANTIES.
a. No Warranties. Provided that nothing in this
Paragraph 7(a) shall be deemed to limit the effect of the other covenants,
representations and warranties made by Sellers in Paragraph 6, Paragraph 7(b)
or elsewhere herein, the Parties agree that all FF&E shall be in good operating
condition on the Closing Date, and are otherwise sold pursuant to this
Agreement "AS IS."
EXCEPT AS TO THE OPERATING CONDITION ON THE DAY OF CLOSING,
THERE ARE NO WARRANTIES WITH RESPECT TO THE FF&E WHICH EXTEND BEYOND THE
DESCRIPTION UPON THE FACE HEREOF. EXCEPT AS PROVIDED ELSEWHERE IN THIS
AGREEMENT, SELLERS MAKE NO REPRESENTATIONS OR WARRANTIES OF ANY KIND, EXPRESS
OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, THOSE WITH RESPECT TO THE CONDITION
OF THE ASSETS, THEIR MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR
WITH RESPECT TO PATIENT INFRINGEMENT OR THE LIKE.
Except as provided in this Agreement, there shall be
no abatement of the Purchase Price and Sellers shall have no liability to
Purchaser for any claim, loss or damage as a result of (i) any non-operating
deficiency or defect in the FF&E, (ii) the use or performance of the FF&E or
(iii) any interruption or loss of service or of use of the FF&E; and
b. Limited Warranty. The Sellers hereby warrant
that all Assets, including, without limitation, all FF&E and buildouts in the
Stores, are in good operating condition as of the Closing Date, and Purchaser
shall have a period of six (6) months from the Closing Date to notify Seller of
any nonconforming Assets pursuant to this warranty. In the event that
Purchaser determines and establishes that any of such Assets were not in good
operating condition as of the Closing Date, Sellers shall reimburse Purchaser
within five (5) business days of Sellers' receipt of the reimbursement request
for any of Purchaser's reasonable costs related to repairing or replacing such
defective items. Sellers shall not be obligated to reimburse Purchaser for any
repairs and/or replacements of such items if such repair and/or replacement
shall cost less than one hundred dollars ($100) per item, except that the
Sellers shall reimburse Purchaser for any such repairs and/or replacements
which aggregate in excess of five hundred dollars ($500) in any one Store. All
equipment and construction warranties applicable to the Assets shall, to the
extent assignable, be assigned by the Sellers at Closing to Purchaser.
8. REPRESENTATIONS AND WARRANTIES OF PURCHASER.
Purchaser makes the following representations and
warranties to Sellers, with the knowledge that all such representations and
warranties made by Purchaser shall, subject to Paragraph 9(a) below, survive
execution of this Agreement, and with full knowledge that Sellers are entering
into and consummating this Agreement in full reliance thereon.
a. Due Incorporation and Authorization.
Purchaser (i) has been duly incorporated, is validly existing and is in good
standing under the laws of the State of California, (ii) is in good standing in
every jurisdiction in which the nature of the business conducted by it or the
character of the properties owned or leased by it makes such
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<PAGE> 15
qualification necessary, except where the failure to be in good standing does
not have a material adverse effect on Purchaser's business taken as a whole,
and (iii) has the full power and authority to enter into this Agreement and to
consummate the transactions contemplated herein and otherwise to perform its
obligations hereunder. This Agreement has been duly authorized and executed by
the Purchaser and constitutes the legal, valid and binding obligation of
Purchaser enforceable against it in accordance with its terms.
b. Violation. The execution and delivery of
this Agreement by the Purchaser, the acceptance of the valid assignment of the
Leases, the consummation of the purchase of the Assets and the assumption of
the Assumed Liabilities contemplated hereby will not (i) violate any provision
of the articles of incorporation or by-laws of the Purchaser or (ii) violate
any material court or administrative order, process, judgment or decree to
which either Purchaser is a party or by which Purchaser is bound.
c. Consents. No consent or approval by, or any
notification of or filing with, any person (governmental or private) is
required in connection with the execution, delivery and performance by
Purchaser of this Agreement or the consummation of the transactions
contemplated hereby, other than those consents which have been obtained.
d. Misstatements and Omissions. No
representation or warranty of Purchaser in this Agreement and/or any Exhibit,
addendum or attachment hereto, contains any untrue statement of a material
fact, or omits any material fact necessary to make the statements contained
therein not misleading.
e. Litigation. Purchaser is not aware of any
action, suit or proceeding pending or contemplated in or before any licensing,
taxing or other governmental body or any court of law which could result in the
avoidance of any term or condition hereunder or which challenges the right or
ability of Purchaser to enter into this Agreement and perform its obligations
hereunder.
f. Financing. There is no financing contingency
which may prohibit or delay Purchaser's ability to close the transactions
contemplated hereby.
9. INDEMNIFICATION.
a. Survival of Representations and Warranties.
Regardless of any investigations of any Party made prior to the Closing, all
representations and warranties made by Sellers and Purchaser herein shall
survive the Closing hereunder for a period of one (1) year following the
Closing Date, and any claim with respect to the inaccuracy of any such
representation or warranty must be made during such one-year period; provided,
however, that the representations and warranties contained in Paragraphs 6(d),
6(e), 6(j) and 6(o) hereof shall survive the closing until expiration of
applicable statutes of limitation.
b. Agreement to Indemnify.
(i) Subject to the limitations set forth
in this Paragraph 9, from and after the Closing, Brothers, jointly and
severally, and Bars, severally, agree to indemnify, defend and hold Purchaser
and its directors, officers, employees and agents harmless from and against any
and all demands, claims, losses, damages, costs and expenses of any kind,
including without limitation interest, costs, penalties and reasonable
attorneys' fees (collectively, "Damages"), asserted against, resulting from,
imposed upon or incurred or suffered by Purchaser and its directors, officers,
employees and agents as a result of or arising from (A) the Nonassumed
Liabilities, (B) the Assumed Liabilities on or prior to the Closing
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Date, (C) any inaccuracy in or breach or nonfulfillment in any material respect
of any representation, warranty, covenant or agreement of Sellers contained in
this Agreement, (D) the payment of any Taxes (including interest and penalties)
of any kind or nature imposed, whether before or after the Closing, by any
government or subdivision thereof upon the business, assets or employees or
independent contractors of Sellers or otherwise resulting from or relating to
the Business or the Assets prior to or on the Closing, (E) the death of or
injury to any person or damage to property that occurred prior to the Closing
and arose out of or in connection with the Business or the Assets (whether
asserted, discovered or established before or after the Closing, and whether or
not such claim or action is disclosed in the Schedules to this Agreement), (F)
all employment-related claims and causes of action, and all other claims and
causes of action, that have arisen or arise out of or in connection with the
Business or the Assets prior to the Closing (whether asserted, discovered or
established before or after the Closing, and whether or not such claim or
action is disclosed in the Schedules to this Agreement), (G) all intellectual
property-related claims and causes of action, and all other claims and causes
of action, that arise out of or in connection with the use by Purchaser of the
rights granted to it pursuant to Paragraphs 4(c) and 4(d), including, without
limitation, any claims and causes of action that the "Brothers", "Brothers
Keeper" or "Brothers Sleeper" name and related trademarks, tradenames and/or
logos infringe any United States or foreign trademark or other proprietary
right, and (H) the existence prior to the Closing Date of any hazardous or
toxic substances, wastes or materials, defined as such or governed by any
applicable Environmental Law ("Hazardous Materials") upon, about or beneath any
property of any Seller or migrating or threatening to migrate from any such
properties, or the existence of a violation of Environmental Laws pertaining to
such properties or the Business or the Assets, regardless of whether the
existence of such Hazardous Materials or the violation of Environmental Laws
arose prior to the present ownership or operation of such properties by Sellers
or was disclosed to Purchaser by any Seller. Subject to the provisions of this
Paragraph 9, Purchaser shall have the right to offset any amount due hereunder
by withdrawing such amount from the Purchase Reserve.
(ii) Subject to the limitations set forth
in this Paragraph 9, Purchaser agrees to indemnify, defend and hold Sellers
harmless from and against any and all Damages, asserted against, resulting
from, imposed upon or incurred or suffered by Sellers as a result of or arising
from (A) the Assumed Liabilities after the Closing Date and (B) any inaccuracy
in or breach or nonfulfillment in any material respect of any representation,
warranty, covenant or agreement of Purchaser contained in this Agreement.
(iii) For purposes of this Paragraph 9,
all Damages shall be computed net of (A) any insurance proceeds actually
received by the indemnified party with respect thereto and (B) any amounts
recovered from any third parties based on claims the indemnified party has
against such third parties which reduce the Damages that would otherwise be
sustained. Each indemnified party agrees to use reasonable efforts to pursue
any claims or rights it may have against any third party, or otherwise
cooperate with the indemnifying party, so as to reduce the amount of Damages
otherwise incurred by such indemnified party.
c. Procedure for Indemnification.
(i) In the event that any indemnified
party receives written notice of the commencement of any action or proceeding,
the assertion of any claim by a third party or the imposition of any penalty or
assessment for which indemnity may be sought pursuant to this Paragraph 9 (a
"Third Party Claim"), and such indemnified party intends to seek indemnity
pursuant to this Paragraph 9, such indemnified party shall promptly provide the
indemnifying party with written notice of such Third Party Claim (provided that
failure to
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provide such notice shall not effect the indemnified party's right to indemnity
hereunder), and such indemnifying party shall, upon receipt of such notice, be
entitled to participate in or, at the indemnifying party's option, assume the
defense, appeal or settlement of such Third Party Claim with respect to which
such indemnity has been invoked with counsel of its choosing, subject to the
consent of the indemnified party, which consent shall not be unreasonably
withheld, and such indemnified party shall fully cooperate with the
indemnifying party in connection therewith; provided that such indemnified
party shall be entitled to employ counsel to represent such indemnified party
if, in such indemnified party's reasonable judgment, a conflict of interest
between the indemnifying party and the indemnified party exists in respect of
such Third Party Claim and in that event the fees and expenses of such separate
counsel after the date on which the indemnifying party assumes the defense
shall be paid by the indemnified party. In the event that the indemnifying
party fails to assume the defense, appeal or settlement of such Third Party
Claim within twenty (20) days after receipt of written notice thereof from such
indemnified party, such indemnified party shall have the right to undertake the
defense or appeal of or settle or compromise such Third Party Claim on behalf
of, at the expense of, and for the account and risk of the indemnifying party.
The indemnifying party shall not settle or compromise any Third Party Claim
without such indemnified party's prior written consent, which shall not be
unreasonably withheld, unless the terms of such settlement or compromise
release such indemnified party from any and all liability with respect to such
Third Party Claim.
(ii) Any indemnifiable claim that is not
a Third Party Claim shall be asserted by the party entitled to indemnification
hereunder by written notice to the indemnifying party in compliance with the
terms of this Agreement. If the indemnifying party does not respond to such
notice within sixty (60) days, it shall have no further right to contest the
validity of such claim.
d. Limitations on Indemnification. Sellers
shall not be liable for Damages under Paragraph 9(b)(i), and Purchaser shall
not be liable for Damages under Paragraph 9(b)(ii), unless the aggregate amount
of Damages for which Sellers or Purchaser, as the case may be, would, but for
the provisions of this Paragraph 9(d), be liable exceeds, on an aggregate
basis, $20,000 and then only to the extent of any such excess; provided, that
such limitation shall not be applicable to Seller's limited warranty, set forth
in Paragraph 7(b), as to the good operating condition of the Assets as of the
Closing Date, nor shall such limitation restrict amounts paid to Purchaser
following the Closing Date from the Purchase Reserve under the Escrow Agreement
in satisfaction of Sellers' obligations under Paragraph 9(b)(i) or to Disputed
Amounts of the Purchase Reserve under the Escrow Agreement. The aggregate
liability of Sellers, on the one hand, and Purchaser, on the other hand, under
this Paragraph 9 shall in no event exceed the Purchase Price.
e. Remedies Exclusive. The remedies provided in
this Paragraph 9 shall be exclusive and shall preclude assertion by an
indemnified party of any other rights or the seeking of any and all other
remedies against an indemnifying party for claims based on this Agreement.
f. Payments. Payments of all amounts owing by
any indemnifying party pursuant to this Paragraph 9 relating to a Third Party
Claim shall be made within fifteen (15) days after the latest of (i) the
settlement of such Third Party Claim, (ii) the expiration of the period for
appeal of a final adjudication of such Third Party Claim or (iii) the
expiration of the period for appeal of a final adjudication of the indemnifying
party's liability to the indemnified party under this Agreement. Payments of
all amounts owing by any indemnifying party other than for a Third Party Claim
shall be made within fifteen (15) days after the later of (i) the expiration of
the 60- day indemnity notice period set forth in Paragraph 9(c)(ii) or (ii)
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the expiration of the period for appeal of a final adjudication of the
indemnifying party's liability to the indemnified party under this Agreement.
10. TRANSFER; RISK OF LOSS.
a. Transfer of Assets and Assumption of Assumed
Liabilities. Purchaser shall take over and assume management and operational
control of the Stores, shall acquire legal and beneficial ownership of the
Assets related to such Stores, and shall assume, acquire, take over and become
responsible for the Assumed Liabilities related thereto as of the end of the
day on the Closing Date. If Lease Assignments are not received with respect to
a particular Store or Stores on or before the Deadline (following which the
balance of the Purchase Reserve is disbursed to Purchaser), management,
operational control, ownership of the Assets and responsibility for the Assumed
Liabilities as to such Store or Stores shall revert to Sellers as of the first
day following the close of such period.
b. Risk of Loss. Sellers shall retain all risk
of destruction, loss or damage due to fire or other casualty with respect to
each Store and its related Assets through the Closing Date. Such risks shall
revert to Sellers as to any Store or Stores for which Lease Assignments are not
received on or before the Deadline, (following which the balance of the
Purchase Reserve is disbursed to Purchaser), as of the first day following the
close of such period.
11. CERTAIN TRANSITION PROVISIONS.
a. Taxes and Rents. Taxes, rent and all other
charges due under the Leases shall be paid by Sellers through the last day of
the month in which the Closing occurs, without reimbursement by Purchaser. All
utility and telephone service to the Stores premises shall be discontinued in
Sellers' names within a reasonable period following the Closing and Sellers
shall no longer be responsible for payment of the related charges effective, in
each case, on and as of the close of business on the last day of the month in
which the Closing occurs.
b. Pre-Closing Credits. Purchaser shall
reimburse Sellers within ten (10) business days of receipt of any retroactive
credits or other amounts (excluding security deposits) which all or partially
relate to any period prior to Closing (for example, a real estate tax credit
arising after the Closing that relates to the period nine (9) months before and
three (3) months after Closing will be reimbursed by Purchaser to Sellers to
the extent of seventy-five percent (75%) of such credit received by Purchaser).
c. Post-Closing Charges. Sellers shall
reimburse Purchaser within ten (10) business days after receiving written
notice from Purchaser of any charges which all or partially relate to any
period prior to Closing and which are not Assumed Liabilities (for example, a
real estate tax charge received from a landlord after the Closing that relates
to the period nine (9) months before and three (3) months after Closing will be
reimbursed by Sellers to the extent of seventy-five percent (75%) of the bill).
d. Supply Agreement. Commencing on the Closing
Date and continuing for a period of fourteen (14) days thereafter, Sellers
hereby agree to supply to the Purchaser and the Stores whole coffee beans on
substantially the same terms and conditions (i.e., quantity of beans, quality
of beans, type of beans and delivery terms) as Seller provided such whole
coffee beans to the Stores immediately prior to the Closing; provided, however,
that the price of such whole coffee beans to the Purchaser and/or the Stores
shall be Seller's cost for such beans plus ten percent (10%) (F.O.B. the
Seller's shipping dock or any third
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party coffee supplier's shipping dock, as the case may be). Seller shall not
be responsible or liable to the Purchaser and/or the Stores for any damages
suffered by the Purchaser and/or the Stores for late delivery or non-delivery
of such beans if such damages are attributable solely to the actions or
inactions of third parties unrelated to the Sellers.
e. Personnel Support. For a period of up to two
(2) months following the Closing, Sellers shall make the personnel listed on
Schedule 11(e), who are involved in the day-to-day operation of the Stores,
available to Purchaser during normal business hours upon reasonable notice, at
Purchaser's option and at Purchaser's sole cost and expense, for not in excess
of an aggregate of fifteen (15) hours per week, to answer questions and
otherwise assist in the transition.
12. TAXES AND EXPENSES. All sales, transfer, use and
similar taxes and recording and similar fees incurred in connection with the
sale, conveyance or transfer of the Assets to Purchaser, to the extent required
by the respective governmental authorities, shall be paid in full by Sellers.
Sellers shall also be responsible for any and all fees charged by the landlords
in their review and/or processing of the Leases and the Lease Assignments.
13. PUBLIC ANNOUNCEMENTS. Sellers and Purchaser shall
consult with each other before issuing any press releases or otherwise making
any public statements with respect to this Agreement or the transactions
contemplated hereby and shall not issue any such press release or make any such
public statement prior to such consultation, except to the extent required by
law.
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14. MISCELLANEOUS.
a. Waiver. Failure of a Party to insist upon
the strict performance of any covenant, term, condition, warranty, guarantee or
indemnification of this Agreement or to exercise any right or remedy accruing
therefrom, shall not constitute a waiver by such Party of any unremedied breach
or the performance of any such covenant, term, condition, warranty, guarantee
or indemnification. A waiver shall be effective only upon a written instrument
executed by all of the Parties. Any waiver of any breach shall not affect or
alter this Agreement, but rather each and every covenant, term, condition,
warranty, guarantee and indemnification shall continue in full force and effect
with respect to any other then existing or subsequent breach thereof.
b. Expenses and Absence of Commissions.
Purchaser and Sellers each agree to bear their own legal, accounting, and other
expenses in connection with the preparation of this Agreement and the
consummation of the transactions contemplated hereby. Purchaser and Sellers
also acknowledge and warrant to each other that none of them has incurred any
liability for commissions, finder's fees, or similar claims in connection with
this transaction, except that Sellers shall be responsible for and hereby
indemnify Purchaser against all of the fees of Donaldson, Lufkin & Jenrette in
connection herewith.
c. Notices. All notices, demands, or other
communications given under this Agreement shall be in writing, and shall be
effective either when hand-delivered, or one (1) day after sent by Federal
Express or such comparable overnight delivery service, or three (3) days after
mailed postage prepaid, certified or registered mail, return receipt requested,
to Purchaser at 2144 Michelson Drive, Irvine, California 92715, Attention:
Steven A. Lupinacci, President, with a copy to John M. Williams, III, Esq.,
Gibson, Dunn & Crutcher, 4 Park Plaza, Irvine, California 92714; and to the
Sellers at 2255 Glades Road, Boca Raton, Florida 33431, Attention: Donald D.
Breen, with a copy to John L. Ruppert, Esq., Ballard Spahr Andrews & Ingersoll,
1225 17th Street, Suite 2300, Denver, Colorado 80202.
d. Assignability and Benefit. All of the terms
of this Agreement shall be binding upon and inure to the benefit of, and be
enforceable by, the respective legal representatives, and the successors and
permitted assigns of the Sellers and Purchaser. Notwithstanding the above,
this Agreement shall not be assignable by any Party without the prior written
consent of all of the other Parties, which consent may be withheld by a Party
in its sole discretion; provided, however, that Sellers may assign their
rights, but not their obligations, under this Agreement to First Union National
Bank of North Carolina, N.A. and; provided that a reincorporation by any party
shall not be deemed an assignment.
e. Construction. This Agreement is being
delivered and is intended to be performed in the State of Colorado, and shall
be construed and enforced in accordance with the laws of such jurisdiction.
Captions used in this Agreement are for convenience of reference only, do not
constitute a part of this Agreement and will not be deemed to limit,
characterize or any way affect any provision of this Agreement. All provisions
of this Agreement will be enforced and construed as if no caption had been used
in this Agreement.
f. Entire Agreement. This Agreement, together
with all Schedules and Exhibits hereto which are incorporated herein by this
reference, contains all of the agreements and understandings between the
parties hereto, and no oral agreements or written correspondence shall be held
to affect the provisions hereof. All subsequent changes and modifications to
be valid shall be by written instrument executed by each of the Sellers and
Purchaser. If for any reason any provision of this Agreement should be
declared void, illegal
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or invalid, such declaration shall not affect the validity of the remainder of
this Agreement, which shall continue in force as if executed with the void,
illegal or invalid provision eliminated. The Parties agree to accept and be
bound by facsimile signatures, with originals to follow by overnight mail.
g. Counterparts. This Agreement may be executed
in counterparts, each of which shall be deemed an original and all of which
counterparts taken together shall constitute one and the same agreement.
h. Attorneys' Fees. If any Party shall bring
any action, suit, counterclaim or appeal for any relief against any other
Party, declaratory or otherwise, to enforce the terms hereof or to declare
rights hereunder (collectively, an "Action"), the prevailing party shall be
entitled to recover as part of any such Action its reasonable attorneys' fees
and costs, including any fees and costs incurred in bringing and prosecuting
such Action and/or enforcing any order, judgment, ruling or award granted as
part of such Action. "Prevailing party" within the meaning of this Paragraph
includes, without limitation, a party who agrees to dismiss an Action upon the
other party's payment of all or a portion of the sums allegedly due or
performance of the covenants allegedly breached, or who obtains substantially
the relief sought by it.
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IN WITNESS WHEREOF, Sellers and Purchaser have caused this
Agreement to be signed as of the date first set forth above.
BROTHERS COFFEE BARS, INC.
By:
--------------------------------------
Name (Print):
----------------------------
Title:
-----------------------------------
BROTHERS GOURMET COFFEES, INC.
By:
--------------------------------------
Name (Print):
----------------------------
Title:
-----------------------------------
DIEDRICH COFFEE
By:
--------------------------------------
Name (Print):
----------------------------
Title:
-----------------------------------
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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.
BDO SEIDMAN, LLP
Costa Mesa, California
July 22, 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.
BDO SEIDMAN, LLP
Costa Mesa, California
July 22, 1996
