<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
----------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
COMMISSION FILE NUMBER 0-21203
DIEDRICH COFFEE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0086628
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
2144 MICHELSON DRIVE
IRVINE, CALIFORNIA 92612
(Address of Principal Executive Offices including Zip Code)
(714) 260-1600
(Registrant's Telephone Number including Area Code)
----------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
As of September 10, 1997, there were 5,391,650 shares of common stock of
the registrant outstanding.
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1
<PAGE> 2
DIEDRICH COFFEE, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets.............................................................3
Condensed Statements of Operations...................................................4
Condensed Statements of Cash Flows...................................................5
Notes to Condensed Financial Statements..............................................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................9
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders............................14
Item 6. Exhibits and Reports on Form 8-K...............................................15
Signatures.............................................................................15
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DIEDRICH COFFEE, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JULY 30, 1997 JANUARY 29, 1997
------------- ----------------
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 571,752 $ 2,071,904
Accounts receivable 178,256 210,363
Inventories (Note 2) 1,572,795 1,615,145
Prepaid expenses 340,195 185,063
Other current assets 202,419 285,072
------------ ------------
Total current assets 2,865,417 4,367,547
Property and equipment, net 10,323,525 11,962,752
Costs in excess of net assets acquired, net 403,350 796,178
Other assets 351,370 344,942
------------ ------------
Total assets $ 13,943,662 $ 17,471,419
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,498,357 $ 1,800,292
Accrued compensation 418,640 417,028
Accrued expenses 316,397 201,487
Note Payable 1,250,000
Restructuring liabilities 1,483,073 --
------------ ------------
Total current liabilities 4,966,467 2,418,807
Deferred rent 160,238 154,384
------------ ------------
Total liabilities 5,126,705 2,573,191
------------ ------------
Stockholders' Equity:
Preferred stock -- --
Common stock 53,917 53,917
Additional paid-in capital 15,882,046 15,882,046
Accumulated deficit (7,119,006) (1,037,735)
------------ ------------
Total stockholders' equity 8,816,957 14,898,228
------------ ------------
Commitments and contingencies
Total liabilities and stockholders' equity $ 13,943,662 $ 17,471,419
============ ============
</TABLE>
See accompanying Notes to condensed financial statements.
3
<PAGE> 4
DIEDRICH COFFEE, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THIRTEEN THIRTEEN TWENTY-SIX TWENTY-SIX
WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED
JULY 30, 1997 JULY 31, 1996 JULY 30, 1997 JULY 31, 1996
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Net Sales:
Retail $ 5,258,780 $ 4,269,206 $ 10,643,405 $ 8,171,203
Wholesale and other 551,742 398,155 1,034,837 770,888
----------- ----------- ------------ -----------
Total 5,810,522 4,667,361 11,678,242 8,942,091
----------- ----------- ------------ -----------
Cost and Expenses:
Cost of sales and related
occupancy costs 2,860,893 2,135,990 5,902,708 3,908,882
Store operating expenses 2,126,728 1,872,544 4,506,955 3,607,423
Other operating expenses 75,764 63,265 140,089 122,585
Depreciation and amortization 439,077 210,626 886,516 364,551
Provision for store closings
and restructuring costs -- -- 4,550,068 --
General and administrative
expenses 969,554 310,085 1,743,879 647,460
----------- ----------- ------------ -----------
Total 6,472,016 4,592,510 17,730,215 8,650,901
----------- ----------- ------------ -----------
Operating income (loss) (661,494) 74,851 (6,051,973) 291,190
Interest expense (21,651) (69,891) (21,651) (108,732)
Interest and other income
(expense) (12,417) 742 (4,757) 2,006
----------- ----------- ------------ -----------
Income (loss) before income
taxes (695,562) 5,702 (6,078,381) 184,464
Provision for income taxes 2,890 -- 2,890 71,649
----------- ----------- ------------ -----------
Net income (loss) $ (698,452) $ 5,702 $ (6,081,271) $ 112,815
=========== =========== ============ ===========
Per share information:
Net income (loss) per share $ (.13) $ .00 $ (1.13) $ .03
=========== =========== ============ ===========
Weighted average
shares outstanding 5,391,650 3,903,000 5,391,650 3,903,000
=========== =========== ============ ===========
</TABLE>
See accompanying Notes to condensed financial statements.
4
<PAGE> 5
DIEDRICH COFFEE, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
TWENTY-SIX TWENTY-SIX
WEEKS ENDED WEEKS ENDED
JULY 30, 1997 JULY 31, 1996
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(6,081,271) $ 112,815
Adjustments to reconcile net income (loss) to cash
(used in) provided by operating activities:
Depreciation and amortization 886,516 364,551
Restructuring charge 2,329,113 --
Impairment on long-lived assets 2,220,955 --
Increase (decrease) from changes in:
Accounts receivable 32,107 (16,580)
Inventories (27,043) (307,143)
Prepaid expenses (155,132) (64,634)
Other current assets 82,653 (118,387)
Other assets (6,428) (316,668)
Accounts payable (301,935) 1,059,666
Accrued compensation (96,183) 100,990
Accrued expenses 114,910 99,422
Income taxes payable -- (24,916)
Deferred rent 5,854 6,546
----------- -----------
Net cash provided by (used in) operating activities (995,884) 895,662
----------- -----------
Cash flows from investing activities:
Capital expenditures for property and equipment (1,150,095) (3,609,893)
Property disposition (604,173) --
Acquisition of coffeehouses -- (1,800,000)
----------- -----------
Net cash provided by (used in) investing activities (1,754,268) (5,409,893)
----------- -----------
Cash flows from financing activities:
Checks issued against future deposits -- 204,145
Proceeds from notes payable -- 10,000
Proceeds from line of credit -- 3,386,530
Proceeds from long-term debt 1,250,000 1,422,520
Principal payments on long-term debt -- (546,565)
----------- -----------
Net cash provided by financing activities 1,250,000 4,476,630
----------- -----------
Net decrease in cash (1,500,152) (37,601)
Cash at beginning of period 2,071,904 94,659
----------- -----------
Cash at end of period $ 571,752 $ 57,058
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ -- $ 86,021
Income taxes $ 2,890 $ 62,500
</TABLE>
See accompanying Notes to condensed financial statements.
5
<PAGE> 6
DIEDRICH COFFEE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
JULY 30, 1997
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The unaudited condensed financial statements of Diedrich Coffee,
Inc. (the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information. In the
opinion of management, all adjustments (consisting of normal, recurring
adjustments and accruals) considered necessary for a fair presentation
of the Company's financial position at July 30, 1997 and the results of
operations and cash flows for the twenty-six weeks ended July 30, 1997
and July 31, 1996 have been included. Results for the interim periods
are not necessarily indicative of the results for an entire year. This
information should be read in conjunction with the financial statements
and the notes thereto included in the Company's Annual Report on Form
10-K for the year ended January 29, 1997.
In June 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 130,
Reporting Comprehensive Income, which establishes standards for
reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general-purpose
financial statements. SFAS No. 130 is effective for financial statements
issued for periods beginning after December 15, 1997. The Company has
not determined the impact of SFAS No. 130 on its consolidated financial
statements.
In June 1997, the FASB issued SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. SFAS No. 131
establishes standards for the way that public business enterprises
report information about operating segments in annual financial
statements and requires that those enterprises report information about
operating segments in annual financial statements and requires that
those enterprises report selected information about operating segments
in interim financial reports issued to shareholders. SFAS No. 131 is
effective for financial statements issued for periods beginning after
December 15, 1997. The Company has not determined the impact of SFAS No.
131 on its consolidated financial statements.
Net Income (Loss) per Common Share
The calculation of net income (loss) per share was determined by
dividing the net income (loss) by the weighted average common and common
equivalent shares outstanding when dilutive. In accordance with
Securities and Exchange Commission Staff Accounting Bulletin No. 83,
shares issued and share options granted within one year of the Company's
initial public offering ("IPO") have been included in the calculation of
common share equivalents, using the treasury stock method to determine
the dilutive effect of the issuance's, as if they were outstanding for
all periods presented even if they were antidilutive. The calculation of
common share equivalents assumes that the proceeds of common shares and
share options issued within one year of the IPO were used to repurchase
common shares at the IPO price of $9.50 per share. Primary earnings
(loss) per share approximate fully diluted earnings (loss) per share for
all periods presented.
6
<PAGE> 7
DIEDRICH COFFEE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
JULY 30, 1997
(UNAUDITED)
In February 1997, the FASB issued SFAS No. 128, "Earnings Per
Share." SFAS No. 128 specifies new standards designed to improve the
earnings per share ("EPS") information provided in financial statements
by simplifying the existing computational guidelines, revising the
disclosure requirements and increasing the comparability of EPS data on
an international basis. SFAS No. 128 is effective for financial
statements issued for periods ending after December 15, 1997, including
interim periods. The Company does not believe the implementation of SFAS
No. 128 will have a material effect on net income (loss) per share.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JULY 30, JANUARY 29,
1997 1997
---------- -----------
<S> <C> <C>
Green coffee $ 528,573 $ 357,255
Roasted coffee 72,413 90,536
Accessory and specialty items 446,859 454,946
Other food, beverage and supplies 524,950 712,408
---------- ----------
$1,572,795 $1,615,145
========== ==========
</TABLE>
3. DEBT
On May 27, 1997, the Company made a promissory note (the "Note")
for the benefit of The Palm Trust of which Paul Heeschen, a director, is
a trustee. Mr. Heeschen has no beneficial interest in the Palm Trust.
The Note provides for borrowings by the Company up to $1,500,000 with
interest accruing at the prime rate plus 3-1/2%. All outstanding
principal and accrued interest is due and payable on January 27, 1998 or
promptly after the closing of any new debt or equity financing in an
amount exceeding $1,500,000. The amount outstanding as of July 30, 1997
was $1,250,000. On August 19, 1997 the Company borrowed an additional
$250,000 under the facility. The Company is presently negotiating a
possible debt facility with unrelated parties that will replace the
Note. The Company is also exploring possible private placements of
convertible debt or equity.
4. RESTRUCTURING CHARGE
On March 12, 1997, the Company announced that it was reviewing
the performance of all of the Company's coffeehouses to determine which
units were meeting or not meeting management's long-term operational
expectations. As a result of this review, twelve stores were identified
to be closed. In connection with the store closures, the Company
recorded an impairment provision and a restructuring charge totaling
approximately $4,600,000 in the first quarter of fiscal 1998. The store
closures, which were undertaken to streamline operations and improve
profitability, began in late March 1997 and are expected to be completed
during fiscal 1998. As of July 30, 1997, the Company had closed nine of
the twelve stores and had a remaining reserve of $1,483,073.
7
<PAGE> 8
DIEDRICH COFFEE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
JULY 30, 1997
(UNAUDITED)
5. SUBSEQUENT EVENTS
On August 19, 1997, the Company entered into a promissory note,
term loan agreement, and security agreement with the Virginia R. Cirica
Trust (the "Cirica Trust Loan Documents"). That trust is controlled by
Ms. Cirica, who is the spouse of Lawrence Goelman, Chairman. The loan is
secured and provides for borrowings up to $500,000 with interest
accruing at the prime rate plus 3 1/2 %. All outstanding principal and
accrued interest is due and payable on August 19, 2002. In connection
with the Cirica Trust Loan Documents, the Company issued a warrant to
the Cirica Trust to purchase up to 170,000 shares of the Company's
common stock at a price of $2.25 a share.
The Company closed the tenth store under its restructuring plan
and opened a new store, as planned, in Houston, Texas.
8
<PAGE> 9
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
In addition to historical information, management's discussion and
analysis includes certain forward-looking statements, including those related to
the Company's growth and strategies, that involve risks and uncertainties. These
projections or forward looking statements fall under the safe harbors of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. The Company's actual results and financial
position could differ materially from those anticipated in the forward-looking
statements as a result of a number of factors, such as unexpected delays in
implementing the new systems or in obtaining additional working capital, failure
of the wholesale business to meet targets and volatile world coffee prices. The
need for additional financing and other risks and uncertainties are described
elsewhere in this report and in detail under "Certain Factors and Trends
Affecting Diedrich Coffee and Its Business" in the Company's annual report on
Form 10-K for the fiscal year ended January 29, 1997 and in reports filed by the
Company with the Securities and Exchange Commission.
GENERAL
The Company commenced operations in 1972 as a private company. The
Company went public in September 1996. The Company sells high quality coffee
beverages made with its own freshly roasted coffee. In addition to brewed
coffee, the Company offers a broad range of espresso drinks. To complement
beverage sales, the Company sells light food items and whole bean coffee through
its coffeehouses. At the conclusion of fiscal 1997 (January 29, 1997), the
Company operated forty-seven coffeehouses or carts in operation, located in
California, Colorado and Texas. As of July 30, 1997, the Company operated a
total of thirty-nine coffeehouses as a result of the closure of nine of the
twelve locations identified for closure under the previously announced
restructuring plan (see Note 4 of Notes to Condensed Financial Statements) and
the opening of one new coffeehouse in Houston, Texas in July, 1997.
In the first two quarters of the current fiscal year the Company
experienced losses related to underperforming stores and a $4,600,000
restructuring charge. The Company is executing a new business plan designed to
return the Company to profitability by the end of fiscal 1998 (January 28,
1998). The business plan targets significant growth in several markets or
channels of distribution. Achieving these goals depends upon, among other
things, obtaining sufficient working capital, successful implementation of new
systems and of the new store management approach and team.
New management team. A new management team took over following the
resignation of Steven A. Lupinacci, the Company's Chief Executive Officer
("CEO") in March, 1997. In addition to Lawrence Goelman, Chairman and Interim
CEO, Kerry W. Coin, President and Chief Operating Officer, and John Bayley, Vice
President of Finance and Controller, the Company hired in the second quarter
Michael P. Reeves, Vice President of Human Resources and Marketing, Jonathan B.
Eddison, Vice President and General Counsel, Edward A. Apffel, Director of the
Wholesale Division, and Philip R. Williams, Director of Purchasing. The Company
believes that its new senior management team has the skills, experience and
ability to execute the business plan.
New business plan. At the direction of the Board of Directors, the
Company's new management developed and is implementing a new business plan for
renewing and strengthening the Company while attempting to return it to
profitability. As previously announced, the new business plan includes: (1)
closing stores which do not meet the Company's performance standards; (2)
developing new channels of distribution such as "co-branding", franchising,
carts, kiosks, and office coffee service; (3) accelerating growth in wholesale
sales; (4) improved cost controls through installing upgraded software and new
management information and point-of-sale systems; (5) rolling out an enhanced
training and human resources systems so as to strengthen and build the Company's
operating management and staff; and (6) concentrating on building brand
awareness and brand equity.
Progress against the plan. Nine of the twelve stores targeted for
closure were closed by July 30, 1997. Management remains confident that the
remaining stores to be closed will be closed before the end of the fiscal year.
On a period-to-period comparative basis the Company is operating according to
the new business plan since the plan was put into place. The Company's plan
projects operating losses to steadily diminish and end in the fourth quarter if
all targets are met and sufficient working capital is obtained. Retail revenues
are ramping up while controllable operating expenses at the store level are
decreasing. Wholesale sales are increasing. The new business plan emphasizes
growth in wholesale sales.
9
<PAGE> 10
Green coffee prices. In the second quarter of fiscal 1998, worldwide
coffee commodity prices were at the highest levels since 1992. The Company
usually pays a premium over the commodity price for the select and high quality
coffee beans that it purchases. As worldwide demand for coffee of all types
remains strong, the Company expects the prices that it pays to remain
comparatively high into the foreseeable future. The Company has so far mitigated
the effect of the green coffee price increases by increasing the wholesale and
retail sales prices of its roasted coffee beans, brewed coffee and related
products in the second quarter. Demand for the Company's coffee was not
adversely affected by the price increase.
Roast capacity and packaging. The Company is actively seeking cost
effective ways to expand its coffee roasting capacity and upgrade its packaging
capabilities. These improvements are needed to enable the Company to expand and
diversify its wholesale business. These steps are to take place following
management's review of the costs and benefits of purchasing or contracting for
these added capabilities.
RESULTS OF OPERATIONS
Thirteen Weeks Ended July 30, 1997 Compared with the Thirteen Weeks Ended
July 31, 1996
Net sales. Net sales for the thirteen weeks ended July 30, 1997,
increased 24.5% to $5,811,000 from $4,667,000 for the thirteen weeks ended July
31, 1996. During this most recent quarter, the Company derived 90.5% of net
sales from its retail coffeehouse operations. The Company's wholesale and mail
order sales accounted for the remainder of net sales. Net retail sales for the
thirteen weeks ended July 30, 1997 increased 23.2% to $5,259,000 from $4,269,000
in the thirteen weeks ended July 31, 1996 primarily due to the increase in the
number of coffeehouses as well as replacing the closed coffeehouses with higher
volume coffeehouses. The Company's ability to continue to increase net sales
depends upon many factors, including existing and emerging competition. There
can be no assurance that the Company's net sales will continue to increase.
Wholesale and mail order sales combined increased 38.7% to $552,000 in
the thirteen weeks ended July 30, 1997 from $398,000 in the thirteen weeks ended
July 31, 1996. The increase was due to a more active sales effort, the hiring of
a director of wholesale and continued favorable customer response from new and
existing wholesale accounts. A moderate price increase on roasted whole bean
coffee was implemented during the quarter in response to industry wide cost
pressures resulting from increases in the price of green coffee.
The percentage increase in second quarter of fiscal 1998 comparable
store sales was 0.8%. Due to the remodeling of stores in Denver, only 22 of the
Company's 38 coffeehouses were open for the full period in the second quarter in
fiscal 1997. On average these comparable stores have been open for more than 3.5
years and had sales of approximately $170,000 per store for the thirteen weeks
ended July 30, 1997.
10
<PAGE> 11
Net sales for the twenty-six weeks ended July 30, 1997 increased 30.6%
to $11,678,000 from $8,942,000 for the twenty-six weeks ended July 31, 1996. Net
retail sales for the twenty-six weeks ended July 30, 1997 increased 30.3% to
$10,643,000 from $8,171,000 for the twenty-six weeks ended July 31, 1996 due to
an increase in the number of coffeehouses and in coffeehouse sales. Wholesale
and mail order sales for the twenty-six weeks ended July 30, 1997 increased
34.2% to $1,035,000 from $771,000 for the twenty-six weeks ended July 31, 1996.
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 thirteen weeks ended July 30, 1997
increased to $2,861,000 from $2,136,000 for the thirteen weeks ended July 31,
1996. As a percentage of retail net sales, cost of sales and related occupancy
costs increased to 54.4% in the second quarter of fiscal 1998 from 50.0% for the
second quarter of fiscal 1997. These figures include non-recurring expenses of
closing stores, such as continuing lease payments.
Cost of sales and related occupancy costs for the twenty-six weeks ended
July 30, 1997 increased to $5,903,000 from $3,909,000 for the twenty-six weeks
ended July 31, 1996. As a percentage of retail net sales, cost of sales and
related occupancy costs increased to 55.5% for the first two quarters in fiscal
1998 from 47.8% for the first two fiscal quarters in fiscal 1997. This increase
stems from the result of higher green coffee costs that were not entirely offset
by the menu price increase implemented in the second quarter of fiscal 1998.
Additionally, the increase was also attributable to some increases in related
occupancy costs.
Store operating expenses. Store operating expenses increased to
$2,127,000 for the thirteen weeks ended July 30, 1997 from $1,873,000 for the
thirteen weeks ended July 31, 1996. As a percentage of retail net sales, store
operating expenses decreased to 40.4% in the second quarter of fiscal 1998 from
43.9% in the prior fiscal year's second quarter. For the twenty-six weeks ended
July 31, 1997, store operating expenses, as a percentage of retail net sales,
similarly decreased to 42.3% from 44.1% for the twenty-six weeks ended July 31,
1996. These decreases were due to improved sales projection methods and labor
scheduling techniques.
Other operating expenses. Other operating expenses (those associated
with wholesale and mail order sales) increased to $76,000 for the second quarter
of fiscal 1998 from $63,000 in the second quarter of fiscal 1997. These
expenses, as a percentage of the net sales from the wholesale division,
decreased to 13.8% from 15.8%. These decreases are due to an increase in
wholesale sales. For the twenty-six weeks ended July 30, 1997, other operating
expenses, as a percentage of wholesale net sales, decreased to 13.5% from 16.0%
for the twenty-six weeks ended July 31, 1996. These decreases are a result of an
increased in volume and prices, as well as an increase in equipment sales.
Depreciation and Amortization. Depreciation and amortization increased
to $439,000 for the thirteen weeks ended July 30, 1997 from $211,000 for the
thirteen weeks ended July 31, 1996. As a percentage of net sales, depreciation
and amortization increased to 7.6% from 4.5% for the same period in the prior
year, principally due to depreciable assets related to the addition of the
conversion costs for the acquired locations. Depreciation and amortization
increased to $887,000 for the twenty-six weeks ended July 30, 1997 from $365,000
for the twenty-six weeks ended July 31, 1996.
General and administrative expenses. General and administrative expenses
increased to $970,000 for the second quarter of fiscal 1998 from $310,000 for
the second quarter of fiscal 1997. As a percentage of net sales, general and
administrative expenses increased to 16.7% from 6.6% due to the adding of
selected resources and personnel in order to implement the policies and
procedures necessary for the effective control of multi-state operations and new
points of distribution operating at various volume levels. Similarly, as a
percentage of net sales, general and administrative expenses increased to 14.9%
in the twenty-six weeks ended July 30, 1997 from 7.2% for the twenty-six weeks
ended July 31, 1996. The Company expects to see a reduction in general and
administrative expenses relative to sales over the next several quarters as
revenue flows increase assuming continued successful execution of the new
business plan.
11
<PAGE> 12
Provision for store closings and restructuring costs. In response to
lower than expected profitability in certain of its operations the Company
commenced a restructuring program which includes store closures, lease
terminations and the write off of fixed assets. The $4.6 million, or $.84 per
share provision for store closings and restructuring costs reflects anticipated
expenses related to the program. The restructuring charge primarily includes
lease termination and other costs associated with store closures as well as a
provision for the impairment of long-lived assets in accordance with SFAS No.
121.
Interest expense. Interest expense decreased to $22,000 for the thirteen
weeks ended July 30, 1997 from $70,000 for the thirteen weeks ended July 31,
1996.
Operating (loss) income. Operating loss for the thirteen weeks ended
July 30, 1997 was $698,000 compared to operating income of $6,000 for the
thirteen weeks ended July 31, 1996. This change was primarily the result of
increases in cost of sales and related occupancy, depreciation and amortization,
and general and administrative costs as a percentage of sales.
Operating loss for the twenty-six ended July 30, 1997 was $6,081,000
compared to operating income of $113,000 for the twenty-six weeks ended July 31,
1996. This change was principally the result of the restructuring provision
discussed above as well as increases in cost of sales and related occupancy,
depreciation and amortization, and general and administrative costs as a
percentage of sales.
LIQUIDITY AND CAPITAL RESOURCES
The Company had a working capital deficiency of $2,101,000 as of July
30, 1997 compared to working capital of $1,949,000 as of January 29, 1997. The
current period working capital deficiency includes remaining restructuring
liabilities of $1,483,000. Cash used by operating activities for the twenty-six
weeks ended July 30, 1997 totaled $996,000.
On May 27, 1997, the Company made a promissory note to The Palm Trust.
The Note provides for borrowings up to $1,500,000 with interest accruing at the
prime rate plus 3 1/2%. All outstanding principal and accrued interest is due
and payable on January 27, 1998 or promptly after the closing of any new
financing, debt or equity, in an amount exceeding $1,500,000. The amount
outstanding as of July 30, 1997 was $1,250,000. On August 19, 1997 the Company
borrowed an additional $250,000 under the facility.
On August 19, 1997, the Company entered into a promissory note, term
loan agreement, and a security agreement with the Virginia R. Cirica Trust. The
loan provides for borrowings up to $500,000 with interest accruing at the prime
rate plus 3-1/2%. All outstanding principal and accrued interest is due and
payable on August 19, 2002. In connection with the loan, the Company issued a
warrant to the Cirica Trust to purchase up to 170,000 shares of the Company's
common stock at a price of $2.25 a share. The Company borrowed the full amount
of the loan.
The Company is actively pursuing additional working capital, which may
include additional loans on similar terms, convertible debt or private placement
of securities pursuant to Regulation D of the Securities Act of 1933. The
Company expects this financing to be completed before the end of this year.
The Company believes that cash from operations and these financing
activities, if and when completed, will be sufficient to satisfy the Company's
working capital needs for the remainder of the fiscal year. The Company
anticipates that it will need to seek additional debt or equity financing to
fund new retail locations and additional capital expenditures currently
projected for fiscal 1999.
12
<PAGE> 13
GREEN COFFEE AVAILABILITY
The Company believes that it has adequate sources of supply of high
quality green arabica coffee to meet its projected needs for the foreseeable
future. While the Company seeks to carefully anticipate its green coffee needs,
there can be no assurance that supplies and prices will not be affected by
weather in coffee growing regions of the world, unexpected demand or incorrect
forecasts.
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 have not been realized proportionately in each quarter, with
net sales being the highest during the last fiscal quarter which includes the
December holiday season. Hot weather tends to reduce sales. 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, the financial results
for any individual quarter may not be indicative of the results that may be
achieved for a full fiscal year.
13
<PAGE> 14
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on June 26, 1997
at the Disneyland Hotel in Anaheim, California. Lawrence Goelman, Martin
Diedrich, Paul Heeschen, and Peter Churm were elected to the Board of Directors
to serve until the next Annual Meeting. In addition to the election of
directors, the stockholders voted upon the following propositions:
Voting was as follows, as recorded and reported by the inspector of
elections:
For the Board of Directors
<TABLE>
<CAPTION>
ABSTAIN OR BROKER
NAME FOR WITHHELD NON-VOTES
---- --- -------- ---------
<S> <C> <C> <C>
Peter Churm 4,498,355 36,505 --
Martin R. Diedrich 4,499,105 35,755 --
Lawrence Goelman 4,500,105 34,755 --
Paul C. Heeschen 4,501,555 33,305 --
</TABLE>
Approval of an Amendment to the Diedrich Coffee, Inc. 1996 Stock Incentive Plan
to increase by 300,000 shares the total number of shares of the Company's Common
Stock that may be issued pursuant to such a plan.
<TABLE>
<CAPTION>
AGAINST OR
FOR WITHHELD ABSTAIN BROKER NON-VOTES
--- -------- ------- ----------------
<S> <C> <C> <C>
2,847,799 156,561 19,677 1,510,823
</TABLE>
Ratification of the Selection of KPMG Peat Marwick LLP as independent
accountants for the company for the fiscal year ending January 28, 1998.
<TABLE>
<CAPTION>
AGAINST OR
FOR WITHHELD ABSTAIN BROKER NON-VOTES
--- -------- ------- ----------------
<S> <C> <C> <C>
4,510,150 16,060 8,650 --
</TABLE>
14
<PAGE> 15
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Set forth below is a list of the exhibits included as part of this
Quarterly Report:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
3.1 Certificate of Incorporation of the Company(1)
3.2 Bylaws of the Company(1)
10.13 Employment Letter to Jonathan B. Eddison dated June 4, 1997
10.14 Employment Letter to John Bayley dated July 21, 1997
10.15 Employment Letter to Michael Reeves dated May 5, 1997
10.16 Form of Promissory Note made in favor of the Palm Trust
10.17 Form of Term Loan Agreement made to the Virginia R. Cirica Trust
10.18 Form of Security Agreement made to the Virginia R. Cirica Trust
10.19 Form of Warrant Agreement made to the Virginia R. Cirica Trust
10.20 Form of Promissory Note made in favor of the Virginia R. Cirica Trust
27 Financial data schedule
</TABLE>
(1) Incorporated by reference to the exhibit of the same number to the
Company's Registration Statement on Form S-1 ( No. 333-08633), as
amended, as declared effective by the Securities and Exchange
Commission on September 11, 1996.
(b) REPORTS ON FORM 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: September 11, 1997 DIEDRICH COFFEE, INC.
/s/ Lawrence Goelman
----------------------------------------
Lawrence Goelman,
Chairman of the Board and Interim Chief
Executive Officer
/s/ John Bayley
----------------------------------------
John Bayley,
Vice President of Finance and
Controller (principal financial officer)
15
<PAGE> 1
EXHIBIT 10.13
[DIEDRICH COFFEE LETTERHEAD]
June 4, 1997
Mr. Jonathan Eddison
227 S. Norton Avenue
Los Angeles, CA 90004
Dear Jonathan:
On behalf of Diedrich Coffee (Company), it is with great pleasure that we offer
you the position as Vice President and General Counsel. In this role, you will
have responsibility for legal guidance in areas such as contract development,
trademark infringement, labor law compliance, and various other legal
applications.
Your cash compensation in this position will consist of a base of $100,000 per
annum earned and paid ratably on a biweekly basis, and an annual incentive
component of up to $20,000 or 20% of your base pay. Payment of the incentive
component of your compensation will be based upon financial performance of the
Company and the Company's assessment of your performance versus specific
objectives set for your areas of responsibility.
In addition to the cash compensation defined above, you will be granted stock
options under the Company's 1996 Stock Incentive Plan. Your initial grant is for
35,000 shares at market closing price on the date that you accept this offer is
subject to approval of the Compensation Committee of the Board of Directors.
These options will vest 33 1/3% annually over the next three years. During
subsequent years, you will qualify for an additional annual stock option grant
for 5,000 shares at the then current price. Subsequent option awards will
likewise vest over a 3 years period at 33 1/3% per year. The award of these
subsequent year options will be based upon the Company's assessment of your
performance versus specific objectives set for your areas of responsibility.
As part of your employment, the Company will provide for accelerated vesting of
your stock options in the event of a change of control. Furthermore, you will be
entitled to standard insurance coverages equal to those provided to other
members of senior management. If Diedrich Coffee terminates your employment for
any reason other than fraud or other illegal acts, you will be eligible for a
severance package equivalent to three months of your annual salary. This will be
paid in a lump sum at the time of separation.
<PAGE> 2
Jonathan Eddison
Page 2
Jonathan, you know that I am personally excited about the prospects of you
joining the Diedrich Coffee team. I truly feel that you can make a material
difference in taking our Diedrich Coffee to the next level. Further, I trust
that you would grow personally and professionally with these responsibilities.
It would be a pleasure to have the opportunity to work with you. Please sign
this letter and mail it back to me at your earliest convenience. Congratulations
and welcome aboard!
Sincerely,
Kerry Coin
President, Chief Operating Officer
- ---------------------------------- -------------------------
Jonathan Eddison Date
<PAGE> 1
EXHIBIT 10.14
[DIEDRICH COFFEE LETTERHEAD]
July 21, 1997
Mr. John B. Bayley
2144 Michelson Drive
Irvine, CA 92612
Dear John:
On April 25, 1997, the Compensation Committee of the Board of Directors
of Diedrich Coffee, Inc. (the "Company") approved certain changes to your
compensation and employment status with the Company. If you are in agreement
with the changes set forth below, please sign a copy of this letter (the
"Letter") and return it to me.
1. Effective April 28, 1997, you shall assume the position of Acting
Vice President of Finance and Controller of the Company.
2. Effective May 1, 1997, your annual base salary shall be adjusted from
$75,000 to $85,000.
3. Upon the specific achievement of criteria to be developed between you
and the Company, you shall be entitled to a "success bonus" in an amount up to
20% of your annual base salary. These criteria are to be developed in connection
with the rebudgeting process for fiscal 1998 that is currently underway. You
shall not be entitled to any bonus hereunder unless you and the Company's Chief
Executive Officer have agreed upon specific criteria that are set forth in
writing and you fulfill the requirements set forth in such document for
receiving the success bonus.
4. Effective April 25, 1997, the Compensation Committee of the Board of
Directors of the Company granted stock options to you pursuant to the terms and
conditions of the Diedrich Coffee, Inc. 1996 Stock Incentive Plan and upon the
following additional terms and conditions. You are granted options to purchase
20,000 shares of the Company's common stock at an exercise price of $3.17 (the
average closing price of the Company's common stock reported on the NASDAQ
National Market for the period beginning 15 trading days prior to April 25, 1997
and ending 15 trading days after April 25, 1997) with the following vesting
schedule: 30% of the option shares vest on the first anniversary of the date of
grant, 30% of the option shares vest on the second anniversary of the date of
grant and 40% of the option shares vest on the third anniversary of the date of
grant. These options shall expire on April 24, 2007.
Congratulations and I look forward to working with you to build Diedrich
Coffee into a thriving and profitable company.
Sincerely,
/s/ LAWRENCE GOELMAN
--------------------------------------------
Lawrence Goelman
Chairman and Interim Chief Executive Officer
I have reviewed the foregoing and agree to be bound by the terms hereof:
/s/ JOHN B. BAYLEY 2/23/97
- -------------------------------- ------------------------
John B. Bayley Date
<PAGE> 1
EXHIBIT 10.15
[DIEDRICH COFFEE LETTERHEAD]
May 5, 1997
Mr. Michael Reeves
Platinum Rotisserie
100 Cambridge Plaza Drive
Winston Salem, NC 27104
Dear Mike:
On behalf of Diedrich Coffee (Company), it is with great pleasure that we offer
you the position as Vice President of Marketing and Human Resources. In this
role, you will have responsibility for development and implementation of brand
development initiatives in marketing, merchandising, and public relations. In
addition, you will have responsibility for development and implementation of
human resources initiatives in such areas as recruitment and selection,
compensation and benefits, labor law compliance, and employee welfare.
Your cash compensation in this position will consist of a base of $120,000 per
annum earned and paid ratably on a biweekly basis, and an annual incentive
component of up to $24,000 or 20% of your base pay. Payment of the incentive
component of your compensation will be based upon financial performance of the
Company and the Company's assessment of your performance versus specific
objectives set for your areas of responsibility.
In addition to the cash compensation defined above, you will be granted stock
options under the Company's 1996 Stock Incentive Plan. Your initial grant is for
50,000 shares at market closing price on the date that you accept this offer.
These options will vest 33 1/3% annually over the next three years. During
subsequent years, you will qualify for an additional annual stock option grant
for 10,000 shares at the then current price. Subsequent option awards will
likewise vest over a 3 years period at 33 1/3% per year. The award of these
subsequent year options will be based upon the Company's assessment of your
performance versus specific objectives set for your areas of responsibility.
As part of your employment, the Company will provide for accelerated vesting of
your stock options in the event of a change of control. Furthermore, you will be
entitled to
<PAGE> 2
Michael Reeves
Page 2
standard insurance coverages equal to those provided to other members of senior
management. If Diedrich Coffee terminates your employment for any reason other
than fraud or other illegal acts, you will be eligible for a severance package
equivalent to four months of your annual salary. This will be paid in a lump sum
at the time of separation.
Mike, you know that I am personally excited about the prospects of you joining
the Diedrich Coffee team. I truly feel that you can make a material difference
in taking our Marketing, Human Resources, and Training Departments to the next
level. Further, I trust that you would grow personally and professionally with
these responsibilities. It would be a pleasure to have the opportunity to work
with you. Please sign this letter and mail it back to me at your earliest
convenience. Congratulations and welcome aboard!
Sincerely,
/s/ KERRY COIN
- ----------------------------------
Kerry Coin
President, Chief Operating Officer
- ------------------------------- ------------------------
Michael Reeves Date
<PAGE> 1
EXHIBIT 10.16
PROMISSORY NOTE
MADE BY DIEDRICH COFFEE, INC.
IN FAVOR OF
THE PALM TRUST
$1,500,000 Maximum Principal Amount May 27, 1997
Irvine, California
1. OBLIGATION. FOR VALUE RECEIVED, the undersigned Borrower hereby
promises to pay to the order of The Palm Trust ("Holder") or their
successors or assigns, the principal sum of up to One Million Five
Hundred Thousand Dollars ($1,500,000) 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 and
unpaid interest, shall become due and payable on January 27, 1998 or
promptly after closing of new financing, debt or equity, in an amount
exceeding $1,500,000 (excluding lease financing). Interest shall
become due and payable monthly as it is accrued, beginning May 27,
1997.
2. INTEREST. The principal amount of this Note shall bear interest at
the Note Rate. The "Note Rate" shall be the prime rate plus three and
one-half 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.
3. DISBURSEMENTS. Borrower may borrow any amount up to an aggregate
amount of $1,500,000 by providing notice to Holder 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 $25,000 or any
larger multiple of $5,000. Within the limits set forth in this Note,
Borrower may borrow amounts under this Note, provided that the
aggregate principal balance outstanding under this Note at any given
time shall not exceed $1,500,000.
All loans made by Holder and all repayments of the principal thereof
shall be recorded by the Holder and endorsed by an officer of the
Borrower on the Schedule attached hereto, or on a continuation of
such schedule
<PAGE> 2
attached to and made a part hereof; provided that the failure of
Holder to make any such recordation or of Borrower to make any such
endorsement shall not affect the obligations of Borrower hereunder.
4. EFFECT OF NON-PAYMENT OF PRINCIPAL AND INTEREST. In the event that
any principal and/or interest is not paid when due, without affecting
any of Holder'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 Holder until such unpaid amount is paid in full.
5. PAYMENT OF PRINCIPAL AND INTEREST. Principal and interest shall be
payable in lawful money of the United States at Holder's offices
located at 450 Newport Center Drive, #450, Newport Beach, California
92660.
6. PREPAYMENT. This Note may be prepaid at any time without penalty.
7. DEFAULT. Borrower will be deemed to be in default under this Note
upon the occurrence of any event of default as defined below:
(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) calendar days; or
(b) Any representation or warranty made by or on behalf of
Borrower in the Note or in any statement or certificate
given in writing pursuant thereto or in connection therewith
is false, misleading or incomplete in any material respect
when made (or deemed to have been made); or
(c) Borrower breaches or fails, or neglects to perform, keep
or observe any covenant set forth in the Note and the same
has not been cured within ten (10) calendar days after
Borrower receives notice thereof from Lender; or
(d) 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
2
<PAGE> 3
assignment for the benefit of creditors, or shall fail to
pay its debts as they become due, or shall take any
corporate action to authorize any of the foregoing; or
(e) An involuntary case or other proceeding shall be commenced
against Borrower seeking liquidation, reorganization or
other relief with respect to 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 Borrower under the federal bankruptcy laws
as now or hereafter in effect; or
(f) The Note for any reason (other than the satisfaction in full
of all amounts owing in connection with the Note) ceases to
be, or is asserted by Borrower not to be, a legal, valid and
binding obligation of Borrower, enforceable in accordance
with its terms; of
(g) Borrower has fraudulently conveyed or concealed any material
property to prevent attachment or execution by its
creditors; or
(h) Borrower is insolvent and fails to satisfy or obtain the
release of any judicial lien within 30 days of such lien
coming into existence; or
(i) Borrower has admitted to any person in writing that it is
unable to pay its debts and that it is willing to be
adjudged a bankrupt.
8. REMEDIES OF LENDER. If an Event of Default shall occur and be
continuing or shall exist, the principal amount of the 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.
9. GOVERNING LAW. This Note shall be governed by, and construed and
enforced in accordance wit, the internal laws (excluding the laws of
conflict and choice of law) of the State of California.
3
<PAGE> 4
11. WAIVER. 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.
12. AMENDMENT. This Note may be amended or modified only upon the
written consent of both Borrower and Holder. Any amendment must
specifically state the provision or provisions to be amended and the
manner in which such provisions(s) are to be amended.
[Signature Page Follows]
4
<PAGE> 5
[SIGNATURE PAGE TO PROMISSORY NOTE]
IN WITNESS WHEREOF, Borrower has executed this Note in favor of The Palm
Trust as of the date and year first above written.
BORROWER:
DIEDRICH COFFEE, INC., a Delaware
corporation
By: /s/ KERRY W. COIN
-----------------------------------------
Name: Kerry W. Coin
---------------------------------------
Title: President and Chief Operating Officer
-------------------------------------
5
<PAGE> 6
PROMISSORY NOTE
MADE BY DIEDRICH COFFEE, INC.
IN FAVOR OF
THE PALM TRUST
MAY 27, 1997
LOANS OF PRINCIPAL
<TABLE>
<CAPTION>
Holder of Borrower
Date Amount of Loan Principal Balance Recordation Endorsement By
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
5/27/97 $350,000 $350,000 The Palm Trust
- ---------------------------------------------------------------------------------------------
6/11/97 $600,000 $950,000 The Palm Trust
- ---------------------------------------------------------------------------------------------
6/26/97 $300,000 $1,250,000 The Palm Trust
- ---------------------------------------------------------------------------------------------
8/19/97 $250,000 $1,500,000 The Palm Trust
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE> 1
EXHIBIT 10.17
TERM LOAN AGREEMENT
THIS TERM LOAN AGREEMENT (the "Agreement") is made and entered into as
of the 29th day of August, 1997, by and between DIEDRICH COFFEE, INC., a
Delaware corporation (the "Borrower"), and THE VIRGINIA R. CIRICA TRUST, a trust
organized under the laws of the State of California (the "Lender").
RECITALS
A. WHEREAS, Borrower desires to borrow Five Hundred Thousand Dollars
($500,000) for working capital purposes from Lender.
B. WHEREAS, Lender advanced Two Hundred Fifty Thousand Dollars
($250,000) to the Borrower pursuant to the Secured Promissory Note dated August
19, 1997 (the "Note"), a copy of which is attached hereto as Exhibit A, and has
agreed to advance an additional Two Hundred Fifty Thousand Dollars ($250,000) to
Borrower in accordance with the terms and conditions provided herein.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing premises and the
mutual covenants, agreements, representations and warranties hereinafter set
forth, the parties hereto agree as follows:
1. Definitions.
1.1 Action. The term "Action" has the meaning given in Section
11.11.
1.2 Business Day. The term "Business Day" means a day other than a
Saturday, Sunday or other day on which commercial banks in the State of
California are required by law to close.
1.3 Closing Date. The term "Closing Date" has the meaning given in
Section 3.1.
1.4 Closing. The term "Closing" has the meaning given in Section
3.1.
1.5 Common Stock. The term "Common Stock" means the Common Stock,
$0.01 par value per share, of Borrower as hereafter modified and any other class
of stock of Borrower or of any other entity into which such stock shall be
converted or for which it shall be exchanged.
1.6 Event of Default. The term "Event of Default" has the meaning
given in Section 10.1.
<PAGE> 2
1.7 Final Advance. The term "Final Advance" has the meaning given in
Section 2.1.
1.8 GAAP. The term "GAAP" means Generally Accepted Account- ing
Principles.
1.9 Intellectual Property. The term "Intellectual Property" has the
meaning given in Section 4.25.
1.10 Intercreditor Agreement. The term "Intercreditor Agreement"
means the Intercreditor Agreement to be entered into between Lender and the
Other Lenders.
1.11 Initial Advance. The term "Initial Advance" has the meaning
given in Section 2.1.
1.12 Loan. The term "Loan" means Lender's $500,000 loan to Borrower
subject to and upon the terms and conditions set forth herein.
1.13 Loan Documents. The term "Loan Documents" means this Agreement,
the Note, the Warrant Agreement, the Warrants and the Security Agreement.
1.14 Maturity Date. The term "Maturity Date" means August 19, 2002.
1.15 Note. The term "Note" has the meaning given in the recitals.
1.16 Note Rate. The term "Note Rate" has the meaning given in
Section 2.3.
1.17 Other Agreements. The term "Other Agreements" means two or more
term loan agreements, on substantially the same terms as this Agreement except
for amounts, between Borrower and the Other Lenders.
1.18 Other Lenders. The term "Other Lenders" means the lenders
identified on Schedule 1.18 that may loan up to $2,500,000 to the Company on
terms substantially similar to those contained in this Agreement.
1.19 Security Agreement. The term "Security Agreement" means the
Security Agreement dated as of August 19, 1997, entered into and between Lender
and Borrower, a copy of which is attached hereto as Exhibit B.
1.20 Warrant Agreement. The term "Warrant" means the Warrant issued
to Lender by Borrower of even date, in the form of Exhibit C attached hereto.
1.21 Warrant Stock. The term "Warrant Stock" means Borrower's
authorized and unissued Common Stock reserved for issuance upon exercise of the
Warrant, subject to the terms and conditions of this Agreement.
-2-
<PAGE> 3
2. Amount and Basic Terms of the Loan.
2.1 Basic Loan Terms. The terms of the Loan shall be as set forth in
this Agreement and in the Note. As more fully described below and in the Note,
Lender advanced to Borrower Two Hundred Fifty Thousand Dollars ($250,000) on
August 19, 1997 pursuant to the Note (the "Initial Advance") and shall advance
to Borrower an additional Two Hundred Fifty Thousand Dollars ($250,000) at the
Closing (the "Final Advance") and Borrower shall repay that aggregate amount,
together with interest from the date of each such advance until fully paid.
2.2 Payments. The entire principal of the Loan, together with all
accrued and unpaid interest, shall be due and payable on August 19, 2002.
Interest shall be due and payable on the first day of each month as it is
accrued, beginning September 1, 1997; provided, however, that if any interest
payment is due on a day which is not a Business Day, such payment shall be
considered timely if paid on the next Business Day.
2.3 Rate of Interest. The principal balance of the Loan shall bear
interest at the "Note Rate," which shall be the "Prime Rate" (as defined below)
plus three and one-half percent (3.5%) or the maximum rate allowable by law,
whichever is less. The Prime Rate as of any date shall be the base rate on
corporate loans posted by at least 75% of the thirty largest U.S. banks as
reported by The Wall Street Journal. 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 advanced to Borrower is unpaid, computed on the basis of a
360-day year.
2.4 Security Agreement. The Loan shall be secured by the Security
Agreement executed by Borrower as debtor to Lender as a secured party, granting
Lender a first-priority security interest (subject to certain limitations
contained in the Security Agreement), to the extent of the amount of the
indebtedness, in the collateral described in the Security Agreement.
2.5 Warrants. Concurrently with the execution of this Agreement,
Borrower will issue the Warrant to purchase 170,000 shares of Warrant Stock of
Borrower to Lender pursuant to the terms of the Warrant.
3. Closing Date Delivery.
3.1 Closing Date. The consummation of the transactions contemplated
by this Agreement (the "Closing") shall take place at the time and place
mutually agreed upon by the parties hereto on September __, 1997 (the "Closing
Date").
3.2 Delivery. At the Closing, each party will deliver the Loan
Documents (other than the Note and the Security Agreement which have previously
been delivered) for which it is a party, and Lender will make the Final Advance
under the Loan by check payable to Borrower or by wire transfer to an account
designated by Borrower and acceptable to Lender. Borrower shall endorse the
schedule attached to the Note to record the amount of the Final Advance.
-3-
<PAGE> 4
4. Representations and Warranties of Borrower. Borrower represents and
warrants to Lender that:
4.1 Organization and Standing; Charter Documents. Borrower is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware, and has all requisite corporate power and authority to
own, lease and operate its property and to conduct its business as such is
presently conducted and as proposed to be conducted. Borrower is duly qualified
to do business as a foreign corporation in any state or jurisdiction in the
United States in which such qualification is required by the nature of
Borrower's business. True and accurate copies of the Certificate of
Incorporation and Bylaws of Borrower, each as currently in effect, have been
made available to Lender and its Counsel.
4.2 Capitalization. Immediately prior to the Closing, the authorized
capital of Borrower will consist only of 25,000,000 shares of Common Stock and
3,000,000 shares of Preferred Stock.
4.3 Authorization. All corporate action on the part of Borrower and
its officers, directors and shareholders that is necessary for the
authorization, execution, delivery and performance of the Loan Documents by
Borrower has been taken; and the Loan Documents, when executed and delivered,
will constitute valid and legally binding obligations of Borrower, enforceable
in accordance with their terms. The Warrant Stock of Borrower issuable upon
exercise of the Warrant has been duly authorized and reserved and, when and if
delivered, will be duly and validly issued and outstanding, fully paid and
non-assessable, subject to the rights and restrictions described in the Warrant.
4.4 Validity of the Note. The Note, when endorsed by Borrower in
accordance with the terms of this Agreement, will be duly and validly issued for
the full amount of the Loan.
4.5 Consents. All consents, approvals, orders, waivers of authoriza-
tions of, or registrations, qualifications, designations, declarations or
filings with, any court or any federal or state governmental authority or third
party required on the part of Borrower or any of its subsidiaries in connection
with the consummation of the transactions contemplated by this Agreement and the
other Loan Documents will have been obtained prior to and be effective as of the
Closing Date.
4.6 Compliance with Other Instruments. Borrower is not in viola-
tion of or default under any provision of its Certificate of Incorporation or
Bylaws, each as amended. Borrower is not in material violation of or default
under any provision of any instrument or contract to which it is a party or by
which it is bound, or, to Borrower's knowledge, of any provision of any federal
or state statute, rule, governmental regulation, order or decree, applicable to
it.
4.7 Litigation. There is no material claim, action, suit,
proceeding, arbitration or investigation pending or to the knowledge of Borrower
currently threatened by or against Borrower or any of its affiliates which, if
adversely determined, is likely to have an adverse effect upon Borrower.
Borrower is not a party to or subject to the provisions of any order, writ,
injunction, judgment or decree of any court or government
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<PAGE> 5
agency or instrumentality which may have a material effect upon the Loan or
Borrower's ability to enter into and perform its obligations under the Loan
Documents.
4.8 Conduct of Business. The conduct of Borrower's business, as now
conducted and as proposed to be conducted, and the closing of the transactions
completed hereby, will not conflict with or result in a breach of the terms,
conditions or provisions of, or constitute a default under, any contract,
covenant or instrument under which Borrower is now obligated.
4.9 Title to Property and Assets. Except as described in Schedule
4.9 attached hereto, Borrower owns all its property and assets in its own name
free and clear of all mortgages, liens, claims, loans and encumbrances, except
for liens for taxes not yet due and payable which are contested in good faith
and mechanics liens, materialmen's liens and dairyman's liens for amounts
incurred in the ordinary course of business, and for amounts that either are not
delinquent or will be repaid with proceeds of the Loan promptly following the
Closing. All material contracts of Borrower containing obligations in excess of
$50,000 are listed on Schedule 4.9 hereto. Each of the outstanding liens or
claims in excess of $50,000, which have been or may be asserted against Borrower
or its assets is listed on Schedule 4.9.
4.10 Information; Misleading Statements. No representation, warranty
or statement by Borrower in this Agreement or the other Loan Documents, or in
any written statement or certificate furnished or to be furnished to Lender
pursuant thereto contains or will contain any untrue statement of a material
fact or, when taken together, omits or will omit to state a material fact
necessary to make the statements made herein or therein, in light of the
circumstances in which made, not misleading.
4.11 Offering. Subject to the accuracy of Lender's representations
in Section 5 of this Agreement, the offer, issuance and sale of the Note, and
the Warrant constitutes, and will constitute, transactions exempt from the
registration and prospectus delivery requirement of Section 5 of the Securities
Act of 1933, as amended, and Borrower 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.
4.12 Accuracy of Financial Records. Each of (a) the financial state-
ments of Borrower attached to Schedule 4.12 hereto, (b) the financial statements
of Borrower provided to Lender prior to the date hereof, and (c) the financial
statements of Borrower to be provided to Lender under this Agreement, shall have
been prepared in accordance with GAAP (except as disclosed therein and except
that interim financial statements do not and will not contain footnotes and are
subject to year-end adjustments) and fairly in all material respects (or, as to
financial statements to be provided in the future, will fairly in all material
respects) represent the financial condition of Borrower as at the dates thereof
and the results of operations for the periods then ended. Borrower is not aware
of any fact or claim that when reasonably applied would render the information
contained in any of the financial statements delivered to Lender on or prior to
the date hereof materially false or misleading.
4.13 No Material Adverse Change. Except as disclosed in any of
Borrower's financial statements delivered to Lender prior to the date hereof,
Borrower has
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<PAGE> 6
no actual knowledge of any fact or claim that has occurred that will cause a
material change in Borrower's business, or its ability to operate.
4.14 Lender to Have First-Priority Lien; No Junior Liens. Except as
disclosed on Schedule 4.9 and subject to the terms of the Intercreditor
Agreement, this Agreement and the other Loan Documents give Lender a
first-priority security interest in all of the collateral identified in the
Security Agreement, and there are no junior liens presently existing with
respect to such collateral.
4.15 No Other Encumbrances on Borrowers Leases. Except as described
in Schedule 4.15, none of Borrower's rights under any of its leases are or will
be subject to a sublease, assignment or agreement, or have otherwise been or
will be otherwise transferred or encumbered, except to Lender (or to the Other
Lenders pursuant to the Other Agreements).
4.16 No Outstanding Warrants or Options. Except for the Warrant
granted to Lender (and the similar warrants granted to the Other Lenders in
connection with the Other Agreements), options issued to underwriters, and the
rights of Borrower's employees as set forth in various stock option plans and
agreements, there are no outstanding warrants, stock options, or other similar
rights outstanding as of the date of this Agreement with respect to any
securities of Borrower.
4.17 Outstanding Obligations. Except for (a) this Agreement and the
other Loan documents, (b) the Other Agreements, (c) the leases identified in
Schedule 4.9, (d) the co-branding relationships described on Schedule 4.15, (e)
contracts for the purchase of inventory in the ordinary course of business, and
(f) such other obligations as are identified on Schedule 4.17, Borrower has not
entered into any contract, agreement or commitment which obligates or may
obligate borrower to pay, now or in the future, a total of $100,000 or more to
any person or entity or which would require Borrower to pay, now or in the
future, a total of $100,000 or more to any group of persons or entities for the
same or related goods and/or services.
4.18 Financial Information. Borrower shall make all of its books and
financial records available for inspection by Lender or its authorized agents
and representatives within seven days following a written request by Lender.
Promptly upon its receipt of a written request from Lender therefor, Borrower
shall provide Lender with copies of final and interim balance sheets, final and
interim profit and loss statements (broken down on a month-by-month and/or a
store-by-store basis if so requested); final and interim budgets; narrative
explanations by a senior executive of Borrower setting forth why Borrower's
budgets and projections are believed to be accurate and Borrower's plans for
expansion of its business or the closing of any of its stores, leases,
contracts, agreements or other commitments (including "soft commitments") which
obligate or might obligate Borrower to pay, during the term of such lease,
contract, agreement or other commitment, a total of $100,000 or more to any
person or entity (or which would require Borrower to pay a total of $100,000 or
more to any group of persons or entities for the same or related goods and/or
services); explanations of any fact, claim or circumstance which could have a
material adverse effect on Lender, its business or its ability to satisfy its
obligations under this Agreement, the Note, or any of the other Loan Documents,
and all such similar financial records and information as Lender may reasonably
request. Borrower shall promptly furnish Lender with the information identified
in this Section
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<PAGE> 7
upon Lender's agreement that, with respect to any material inside information
which Lender may receive pursuant to this section, Lender will retain such
information in confidence and use it solely in connection with the enforcement
of Lender's rights under this Agreement and the other Loan Documents.
4.19 Inspections. Borrower shall grant Lender reasonable access to
all of Borrower's places of business to inspect the premises and the collateral
described in the Security Agreement.
4.20 Notice of Certain Events. Borrower shall promptly notify Lender
of any fact, occurrence or event which (a) constitutes (or which would, with the
passage of time, constitute) an Event of Default under this Agreement or a
breach of or default under any of the other Loan documents, (b) results in a
fire or other casualty of any of its assets which caused or is expected to cause
damages of $100,000 or more to Borrower, or (c) would render any fact,
representation or warranty contained in any of the Loan documents or otherwise
conveyed to Lender false or misleading. Borrower shall also promptly notify
Lender of each fire, casualty or accident which has caused or is expected to
cause damages or liabilities of $100,000 or more.
4.21 Notification of Governmental Claims; Compliance with Govern-
mental Directives. Lender shall promptly notify Lender of any eminent domain or
similar proceedings which are brought or threatened against any of its
properties or assets and of each other court or governmental notice, order,
ruling or directive which would prevent or have a material adverse effect on
Borrower's ability to carry on its business at any of its stores or otherwise
conducts its affairs. Except as Borrower may contest in good faith, Borrower
shall comply with all notices, orders, rulings and directives made by any court
or governmental authority relating to the conduct of its business or the
maintenance of any license, permit or authorization which Borrower is or may be
required to maintain.
4.22 Payment of Taxes and Assessments. Borrower has filed all
necessary federal, state and local tax returns and similar filings within the
times and in the manner prescribed by law and has paid all taxes and assessments
(including without limitation, all payroll and income taxes and all taxes on
sales, inventory and fixtures) and any penalties and interest relating thereto,
that are or were due and payable.
4.23 Provisions for Obligations. Borrower has made and shall con-
tinue to make adequate provisions for the payment of all tax obligations which
are not yet due and payable. Borrower has made and shall continue to make
adequate provisions for the payment or other full satisfaction of all mechanics'
liens, landlord liens, dairymen's liens and similar obligations which it has
incurred or will incur in the future.
4.24 Names; Subsidiaries. Borrower has not, does not and will not do
business under any name or trade name other than its own. Borrower does not own,
directly or indirectly, any interest or investment (whether equity or debt) in
any corporation, partnership, business, trust, joint venture or any other entity
or subsidiary.
4.25 Intellectual Property. Borrower owns, and/or has applied for,
the trademarks, service marks, copyrights, patents, inventions and processes
which are listed on Schedule 4.25 (collectively, "Intellectual Property").
Except with respect to
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<PAGE> 8
certain co-branding relationships described on Schedule 4.15, no person other
than Borrower owns any trademark, service mark, copyright, patent, invention or
process the use of which is necessary or contemplated in connection with the
operation of Borrower's business or in connection with the performance of any
contract to which Borrower is a party. Borrower has not infringed, and is not
now infringing, on any trademark, service mark, copyright, patent, invention or
process which is protected by federal trademark, copyright or patent protection;
and there are no pending or threatened actions against Borrower relating to any
alleged infringement.
4.26 No Guarantees. Borrower is not a guarantor, surety, co-obligor
or otherwise responsible, directly or indirectly, primarily or secondarily, for
the obligation, debt or liability of any other person or entity.
4.27 Insurance. As set forth in greater detail in the Security
Agree- ment, Borrower: (a) maintains and shall continue to maintain adequate
insurance protection against all damages, losses, liabilities, claims and risks
against which it is customary to insure, all in amounts as are adequate given
the nature and size of Borrower's business and its foreseeable risks and (b)
shall cause Lender and its successors and assigns to be named as additional
insureds on all of Borrower's insurance policies.
5. Representations, Warranties and Covenants of Lender. Lender repre-
sents and warrants to Borrower that:
5.1 Organization. Lender is a trust duly formed under the laws of
the State of California and has the requisite power and authority to own, lease
and operate its property and to conduct its business as such is presently
conducted and is proposed to be conducted.
5.2 Authorization. All action on the part of Lender and its
representatives necessary for the authorization, execution, delivery and
performance of the Loan Documents by Lender has been taken; and the Loan
Documents, when executed and delivered, will constitute valid and legally
binding obligations of Lender, enforceable in accordance with their terms.
5.3 Consents. All consents, approvals, orders or authorizations of,
or registrations, qualifications, designations, declarations or filings with,
any court or any federal or state governmental authority required on the part of
Lender in connection with the consummation of the transactions contemplated by
this Agreement and the other Loan Documents will have been obtained prior to and
be effective as of the Closings.
5.4 Investment Intent. The Note has been and the Warrant to be
issued to Lender pursuant to this Agreement and the Warrant Stock issuable upon
exercise of the Warrant are being acquired by Lender solely for its own account,
for investment purposes only, and with no present intention of distributing,
selling or otherwise disposing of the Note, the Warrant or the Warrant Stock
issuable upon exercise of the Warrant.
5.5 Sophistication. Lender is able to bear the economic risk of the
investment required pursuant to this Agreement and can afford to sustain a total
loss on such investment, and has such knowledge and experience in financial and
business matters
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<PAGE> 9
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 Loan.
6. Conditions Precedent to Lender's Obligations at Closing. The obliga-
tion of Lender to make the Final Advance under the Loan is subject to the
satisfaction (or written waiver by Lender) of all the following conditions
precedent:
6.1 Representations True. All representations and warranties of Bor-
rower contained in this Agreement and all other Loan Documents will be true,
correct and complete in all respects with the same effect as though such
representations and warranties had been made on and as of the Closing and Lender
will have received a certificate from the President or Chief Executive Officer
of Borrower certifying the foregoing.
6.2 Note. A duly-authorized officer of Borrower will have endorsed
the schedule attached to the Note to record the amount of the Final Advance.
6.3 Corporate Documents. Lender will have received, in form and
substance satisfactory to Lender and its counsel, a copy of the records of all
actions taken by Borrower, including corporate resolutions of Borrower
authorizing or relating to the execution, delivery and performance of the Loan
Documents and the consummation of the transactions contemplated thereby, and a
certified copy of the Certificate of Incorporation and Bylaws of Borrower.
6.4 Qualifications and Consents. All authorizations, approvals,
permits, consents or waivers if any, of (i) governmental authority or regulatory
body of the United States or of any state or (ii) any third party that are
required on the part of Borrower in connection with the receipt of the Loan or
the issuance of the Note and the Warrant will have been duly obtained and will
be effective on and as of the Closing Date.
6.5 Proceedings and Documents. All corporate and other proceed- ings
in connection with the transaction contemplated by this Agreement and all
documents incident to such transaction, including but not limited to the Note
and the Security Agreement are and the Warrant will be in form and substance
satisfactory to Lender and its counsel, and Lender will have received all
counterpart originals or certified or other copies of such documents as it may
reasonably request.
6.6 Performance. Borrower shall have performed and complied with all
terms and conditions required to be performed or complied with by it prior to or
at the Closing, and no Event of Default shall exist.
6.7 Absence of Litigation. No suit, action, proceeding, court order,
administrative order 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 or
the operation of Borrower's business.
6.8 Opinion of Borrower's General Counsel. Borrower's General
Counsel shall deliver to Lender a legal opinion substantially in the form of
Exhibit D hereto.
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<PAGE> 10
6.9 No Material Changes. No fact or event has occurred or been
discovered which would have a material adverse effect on the accuracy of the
financial information provided by Borrower to Lender or which would have a
material adverse effect on the liability or conduct of Borrower's business.
7. Conditions Precedent to Borrower's Obligation at the Closing. The
obligation of Borrower at the Closing is subject to fulfillment, at or before
the Closing, of each of the following conditions:
7.1 Representations and Warranties True. The representations and
warranties of Lender contained in Section 5 hereof will be true and correct at
and as of the Closing Date.
7.2 Funds Disbursed. Borrower will receive from Lender the principal
sum of the Final Advance at the Closing.
7.3 Performance. Lender 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.
8. Covenants of Borrower. Borrower hereby covenants and agrees with
Lender as follows:
8.1 Corporate Rights; Facilities; Conduct of Business. Borrower
shall:
(a) Maintain and preserve in full force and effect its corporate
existence and all rights, licenses, leases qualifications, privileges,
franchises and other authority necessary or appropriate for the conduct of its
business;
(b) Subject to Borrower's reasonable business judgment as to
opening new business sites and closing those that do not meet Borrower's
financial requirements, Borrower will maintain, preserve and protect all its
properties, assets, equipment and facilities in good order and working repair
and condition (taking into consideration ordinary wear and tear) and from time
to time make, or cause to be made, all needful and proper repairs, renewals and
replacements thereto;
(c) Maintain, preserve and protect its goodwill and all of its
rights to enjoy and use patents, copyrights, trademarks, trade names, service
marks, licenses, leases, and franchises;
(d) Promptly pay and discharge all taxes, including taxes on
inventories and fixtures, when due and payable, except such as may be contested
in good faith by appropriate proceedings and for which an adequate reserve has
been established and is maintained in accordance with GAAP. Borrower will
promptly notify Lender of any challenge, contest or proceeding pending by or
against Borrower before any taxing authority;
(e) Maintain all banking accounts at FDIC- or FSLIC-insured
banks or other financial institutions;
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<PAGE> 11
(f) From time to time as may be necessary, disclose to Lender in
writing any material matter hereafter arising which, if existing or occurring at
the date of this Agreement, would have been required to be set forth or
described by Borrower in this Agreement or any of the other Loan Documents
(including all schedules and exhibits hereto or thereto) or which is necessary
to correct any information set forth or described by Borrower hereunder or
thereunder which has been rendered inaccurate thereby.
8.2 Expenses. Borrower shall immediately pay Lender upon demand all
costs and expenses incurred by Lender in connection with: (a) the preparation of
this Agreement and all other Loan Documents contemplated hereby; and (b) the
administration of this Agreement and the other Loan Documents for the term of
the Loan. For all purposes of this Agreement, Lender's costs and expenses shall
include, without limitation, all legal fees and expenses, accounting fees and
auditor fees. In no event shall such expenses to Borrower exceed Five Thousand
Dollars ($5,000).
8.3 Reservation of Warrant Stock. Borrower, during the period within
which the Warrant may be exercised, shall at all times have authorized and
reserved, for the purpose of issuance upon the exercise of the Warrant, a
sufficient number of shares of Common Stock to provide for such exercise.
8.4 Negative Covenants. So long as any portion of the Loan remains
outstanding, Borrower will not, without first obtaining Lender's prior written
consent, which consent will not be unreasonably withheld:
(a) declare or pay any dividend on or declare or make any
distribution on account of, any shares of any class of stock now or hereafter
outstanding, or set apart any sum for such purpose, except for shares of Common
Stock issued by Borrower to its employees or other participants pursuant to
Borrower's existing stock option plans; or
(b) issue or enter into any agreement that restricts its ability
to repay the Loan.
8.5 Further Assurances. In addition to the obligations and documents
which this Agreement expressly requires Borrower to execute, deliver and
perform, Borrower will execute, deliver and perform, and will cause its
subsidiaries to execute, deliver and perform, any and all further acts or
documents which Lender may reasonably require to effectuate the purposes of this
Agreement or any of the other Loan Documents.
9. Prepayment of the Note.
9.1 Mandatory Prepayments. Borrower shall prepay up to the $500,000
aggregate principal amount (or such lesser principal amount as shall then be
outstanding) of the Note immediately upon the issuance, offer or sale of any
shares of its capital stock pursuant to a secondary offering to the public with
net proceeds of greater than Ten Million Dollars ($10,000,000); excluding,
however, any offering of Common Stock of Borrower pursuant to stock option,
bonus, award or other employee benefit plan and existing options to purchase the
Common Stock of Borrower held by officers, directors or employees of Borrower.
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<PAGE> 12
9.2 Optional Prepayment. Borrower may prepay the Loan in any amount
which is an integral multiple of $10,000 at any time without penalty.
10. Events of Default of Borrower.
10.1 Events of Default. Each of the following shall constitute an
event of default ("Event of Default") under this Agreement:
(a) Borrower shall fail to pay when due (whether by
acceleration or otherwise) principal or interest on this Note, and such default
shall have continued for a period of fifteen (15) days; or
(b) Any representation or warranty made by or on behalf of
Bor- rower in this Agreement, the Note or in any other Loan Document or in any
statement or certificate given in writing pursuant thereto or in connection
therewith is false, misleading or incomplete in any material respect when made
(or deemed to have been made); or
(c) Borrower breaches or fails or neglects to perform, keep or
observe any covenant set forth in this Agreement, the Note, or any other Loan
Document other than Borrower's obligation to make all payments due under the
Note when due and the same has not been cured within ten (10) calendar days
after Borrower receives notice thereof from Lender; or
(d) Borrower shall commence a voluntary case or other proceed-
ing 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
(e) An involuntary case or other proceeding shall be commenced
against 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 Borrower under the federal bankruptcy laws as now or
hereafter in effect; or
(f) This Agreement, the Note or any other Loan Document for
any reason (other than the satisfaction in full of all amounts owing in
connection with the Loan) ceases to be, or is asserted by Borrower not to be, a
legal, valid and binding obligation of Borrower, enforceable in accordance with
its terms, and such occurrence has not been cured to Lender's satisfaction
within five (5) calendar days after Borrower receives notice thereof from
Lender; or
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<PAGE> 13
(g) Borrower has fraudulently conveyed or concealed its
property to prevent attachment or execution by its creditors; or
(h) Borrower is insolvent and fails to satisfy or obtain the
release of any judicial lien within 30 days of such lien coming into existence;
or
(i) Borrower has admitted to any person in writing that it is
unable to pay its debts and that it is willing to be adjudged a bankrupt.
10.2 Remedies of Lender. If an Event of Default shall occur and be
continuing or shall exist, the principal amount of the 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.
10.3 Indemnification. Borrower hereby agrees to defend, indemnify
and hold harmless Lender, its officers, employees, agents, successors and
assigns from and against any and all losses, damages, liabilities, claims,
actions, judgments, court costs and legal or other expenses (including, without
limitation, attorneys' fees and expenses) which Lender may incur as a direct or
indirect consequence of: (a) the purpose to which Borrower applies proceeds of
the Loans; (b) the material failure of Borrower to perform any obligations as
and when required by this Agreement, the Note or any of the other Loan
Documents; (c) any failure at any time of any of Borrower's representations or
warranties to be materially true and correct; or (d) any act or omission by
Borrower.
Borrower shall immediately pay to Lender upon demand any
amounts owing under this indemnity, together with interest from the date the
indebtedness arises until paid at the rate of interest applicable to the
principal balance of the Note.
11. Miscellaneous.
11.1 Survival of Representations and Warranties. The
representations and warranties contained herein or made pursuant to this
Agreement and all other Loan Documents shall survive the Closing.
11.2 Notices. All notices and other communications hereunder shall
be in writing and shall be deemed given upon personal delivery, facsimile
transmission (with written or facsimile confirmation of receipt), telex or
delivery by a reputable overnight commercial delivery service (delivery, postage
or freight charges prepaid), or on the fourth day following deposit in the
United States mail (if sent by registered or certified mail, return receipt
requested, delivery, postage or freight charges prepaid), addressed to the
parties at the following addresses (or at such other address for a party as
shall be specified by like notice):
(a) if to Lender, to: The Virginia R. Cirica Trust
Attention: Virginia R. Cirica
___________________________________
___________________________________
___________________________________
Fax: (714) ___-____
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<PAGE> 14
with a copy to: __________________________________
__________________________________
__________________________________
(b) if to Borrower, to: Diedrich Coffee, Inc.
Attention: President
2144 Michelson Drive
Irvine, California 92612
Fax: (714) 756-1144
with a copy to: Paul, Hastings, Janofsky & Walker LLP
Attention: Peter J. Tennyson, Esq.
695 Town Center Drive, 17th Floor
Costa Mesa, CA 92626-1924
Fax: (714) 979-1921
11.3 Interpretation. When a reference is made in this Agreement to
an Article, Section, Exhibit or Schedule, such reference shall be to an Article,
Section, Exhibit or Schedule to this Agreement unless otherwise indicated. The
words "include," "includes" and "including" when used herein shall be deemed in
each case to be followed by the words "without limitation."
11.4 Counterparts; Faxes. This Agreement may be executed on any
number of separate counterparts and all of said counterparts taken together
shall be deemed to constitute one and the same document and shall become
effective when each party has delivered to the other party a counterpart duly
executed by it, it being understood that all parties need not sign the same
counterpart. An executed signature page of this Agreement which is transmitted
by fax shall be treated for all purposes as containing an original signature of
the party whose signature appears thereon; as a courtesy, however, when a
signature is initially provided by fax, an original, hand-signed signature page
shall also be provided.
11.5 Integration. This Agreement, the Note, the Security Agreement
and the Warrant and the exhibits and schedules attached hereto and thereto
constitute the entire agreement among the parties with respect to the subject
matter set forth herein or therein and supersede all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter hereof or thereof.
11.6 Amendment. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto.
11.7 Governing Law. This Agreement and the rights and obligations
of the parties hereunder shall be governed in all respects, including validity,
interpretation and effect, by the laws of the State of California, including its
rules of conflicts of law or choice of law.
11.8 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 party.
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<PAGE> 15
11.9 Severability. Any portion or provision of this Agreement which
is invalid, illegal or unenforceable in any jurisdiction shall, as to that
jurisdiction, be ineffective to the extent of such invalidity, illegality or
unenforceability, without affecting in any way the remaining portions or
provisions hereof in such jurisdiction or, to the extent permitted by law,
rendering that or any other portion or provision of this Agreement invalid,
illegal or unenforceable in any other jurisdiction.
11.10 Brokers. No finder, broker, agent, financial advisor or other
intermediary has acted on behalf of Lender in connection with the transactions
contemplated by this Agreement. Borrower and Lender acknowledge that Gregg
Rondinelli and Gregg Rondinelli & Associates (collectively, "Rondinelli") has
provided services to Borrower in connection with the negotiations and
transactions which led to the execution of this Agreement and the other Loan
documents, and agree that Borrower shall be solely responsible for the payment
of all sums, if any, which are due to Rondinelli in this regard. Borrower and
Lender further agree that, at all times, Rondinelli was acting exclusively for
Borrower and not at the request of or for the benefit of Lender.
11.11 Attorneys' Fees. If any party to this Agreement 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 attorney's 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.
(Signature Page Follows)
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<PAGE> 16
[SIGNATURE PAGE - TERM LOAN AGREEMENT]
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
BORROWER: LENDER:
DIEDRICH COFFEE, INC., THE VIRGINIA R. CIRICA TRUST
a Delaware corporation
By:______________________________ By: ______________________________
Name: ___________________________ Virginia R. Cirica, Trustee
Title: __________________________
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<PAGE> 17
EXHIBIT TO TERM LOAN AGREEMENT
FORM OF OPINION OF
DIEDRICH COFFEE, INC.
This opinion is delivered in connection with that certain Loan and
Security Agreement, dated as of August , 1997 (the "Loan Agreement") between
Diedrich Coffee, Inc., a Delaware corporation (the "Borrower"), and Newco, LP
(the "Lender"). Initially capitalized terms used herein shall have the meaning
given such terms in the Loan Agreement, unless specifically defined herein.
I have acted as General Counsel to the Borrower in connection with the
negotiation, execution and delivery of the following documents:
The Loan Agreement; the Note, of even date therewith, in the original
principal amount of One Million Five Hundred Thousand Dollars ($1,500,000),
executed by Borrower in favor of Lender, the Security Agreement executed by
Borrower in favor of Lender, the financing statement(s) executed by the Borrower
(collectively, the "Financing Statements"), and the Warrant Agreement and
Warrant in favor of the Lender of even date herewith. The Loan Agreement, the
Note, the Security Agreement, the Financing Statements, the Warrant Agreement,
and the Warrant are referred to herein collectively as the "Loan Documents."
This opinion is furnished to you as required by Section 7.1(h) of the
Loan Agreement.
The documents I examined in rendering this opinion, and upon which I
relied, are the following:
(i) the Loan Documents;
(ii) the Articles of Incorporation of the Company certified by the
Delaware Secretary of State on ___________________________;
(iii) the Bylaws of the Company as of this date;
(iv) certificate from the Delaware Secretary of State indicating that
the Company is in good standing as of ____________; certificate from California
Secretary of State indicating that the Company is in good standing as of
____________; certificate from the Colorado Secretary of State indicating that
the Company is in good standing as of ____________; and certificate from the
<PAGE> 18
EXHIBIT TO TERM LOAN AGREEMENT
Texas Secretary of State indicating that the Company is in good standing as of
____________.
(v) certificate dated ________________ of the Franchise Tax Board
attesting to the current payment by the Company of all franchise and similar
state taxes of the State of California;
(vi) minutes of meetings of the Board of Directors and Shareholders of
the Company at which actions were taken with respect to the Loan Documents;
(vii) certificates of responsible officers of the Company as to factual
matters; and
(vii) UCC Search Report on Diedrich Coffee as debtor by CSC Networks
dated __________________ (financing statements, financing statements change
documents, federal or state tax liens, certain judgment liens, and attachment
liens).
Insofar as this opinion relates to the absence of actions, liabilities,
mortgages, security interests, chattel mortgages, conditional sales agreements,
pledges, liens, leases, agreements or encumbrances (the foregoing types of
claims are collectively referred to as the "Enumerated Interests"), I have
relied upon, and assumed the accuracy of, the Reports and Certificates of
responsible officers of the Company. I searched only under those corporate names
of the Company shown in its Articles of Incorporation as certified by the office
of the Secretary of State of California. Information regarding the Enumerated
Interests does not include any filings filed, indexed or terminated in the State
of California after the effective dates indicated for each of the Reports, and
accordingly, I express no opinion relating to the existence or absence of any
Enumerated Interests filed, indexed or recorded after the effective dates.
I assumed that the following facts are true in rendering this opinion:
(i) the Borrower owns the assets to be subject to Lender's security
interests (as described in the Loan Documents) free and clear of any liens,
encumbrances, or claims, except as shown in the Reports; (b) the Company has
good and sufficient title to these assets; and (c) these assets exist.
(ii) Lender has no notice of any security interest in the Collateral in
favor of any third person;
<PAGE> 19
EXHIBIT TO TERM LOAN AGREEMENT
(iii) Lender has taken possession of the Notes for new value and in good
faith;
(iv) the due authorization, execution, and delivery of, and the
validity and binding effect of, the Loan Documents with regard to Lender;
(v) the delivery to, or for the benefit of the Borrower at the
closing of the funds to be loaned pursuant to the Loan Documents;
(vi) the filing of the Financing Statements with the California,
Colorado and Texas Secretaries of State and the proper indexing of the Financing
Statements by that office;
(vii) the representations contained in the Loan Documents;
(viii) the genuineness of all signatures of parties on all documents
(other than the Loan Documents to the extent signed);
(ix) the authenticity of all documents submitted to me as originals
(other than the Loan Documents);
(x) the conformity to the originals of all documents submitted to me
as copies;
(xi) the correctness and accuracy of all facts set forth in all
certificates and reports identified in this opinion;
(xii) regarding documents executed by parties other than the Borrower,
that those parties had the individual capacity and corporate power to enter into
and perform all obligations under those documents, the due authorization by all
requisite corporate action of the execution and delivery of those documents, and
the validity and bindings effect of those documents on those persons;
(xiii) that except as stated in the Loan Documents, there are no other
documents or agreements between Borrower and Lender which would have an effect
on the opinions expressed in this opinion; and
(xiv) that Lender is _________________________________________________,
a ___________________________ Ltd. Partnership and has qualified to do business
in the state of California, has obtained all necessary permits in that state to
make the Loan, and has paid all taxes due and owing on its activities in
California.
<PAGE> 20
EXHIBIT TO TERM LOAN AGREEMENT
On the basis of the foregoing, and in reliance thereon, and subject to
the assumptions qualifications, exceptions and limitations set forth in this
opinion, I am of the opinion that:
1. The Borrower is a corporation which has been duly incorporated and
organized as validly existing, and in good standing under the laws of the State
of Delaware and has the corporate power and authority to enter into and perform
under the Loan Documents, to the extent it is a party thereto.
2. The Borrower is duly qualified to own and operate its properties and
assets and to carry on its business as they are currently being conducted (as
described in the Company's Annual Report on Form 10-K) and as they are
contemplated to be conducted pursuant to the terms of the Loan Documents, and is
in good standing in the States of California, Colorado, and Texas.
3. The Loan Documents, to the extent the Borrower is a party thereto,
have been duly authorized by all necessary corporate action on the part of the
Borrower, under the laws of Delaware, and have been duly executed and delivered
by the Borrower.
4. The Loan Documents, to the extent the Borrower is a party thereto,
constitute the legal, valid, and binding obligations of the Borrower,
enforceable against the Borrower in accordance with their respective terms.
5. The execution, delivery, and performance of the Loan Documents by the
Borrower, to the extent it is a party thereto, the compliance with the terms and
conditions thereof, and the consummation of the transactions contemplated
thereby, do not and will not conflict with, result in a breach of, or constitute
a default under (i) any existing statute, rule, or regulation applicable to the
Borrower; (ii) the certificate or articles of incorporation or bylaws of the
Borrower; or (iii) to the best of my knowledge, after reasonable inquiry, any
agreement or instrument to which the Borrower is a party or by which it or its
assets are bound, or any order, judgment, or decree which is binding on the
Borrower.
6. Subject to the exceptions and facts acknowledged below, the Loan
Documents create a valid, perfected security interest in and to the personal
property described.
<PAGE> 21
EXHIBIT TO TERM LOAN AGREEMENT
7. No governmental consents, approvals, authorization, registrations,
declarations, or filings are required by the Borrower in connection with the
extensions of credit under the Loan Documents or the consummation of the
transactions contemplated by the Loan Documents, except for filings required for
the perfection of Lender's liens and security interests.
8. To the best of my knowledge, after due inquiry, there are no material
actions, suits, proceedings, or investigations pending or threatened against the
Borrower except:
Qualifications and Exceptions
(i) The opinions expressed herein are qualified to the extent that
the validity, binding nature, and enforceability of any of the terms of the Loan
Documents may be limited or otherwise affected by:
(a) general principles of equity (regardless of whether
enforceability is considered in a proceeding in equity or at law);
(b) bankruptcy, insolvency, reorganization, arrangement,
moratorium, fraudulent transfer or other similar laws generally affecting
creditors' rights at the time in effect; and
(ii) Except as expressly stated in this opinion, I neither express nor
imply any opinion as to the creation, perfection or priority of any purported
security interest in any property.
(iii) Insofar as they relate to the creation, perfection and effect of
perfection or non-perfection of a security interest, the opinions set forth are
limited to Collateral consisting of personal property which is subject to
California law on the creation, perfection and effect of perfection or
non-perfection of a security interest in personal property, as set forth in
Article 9 of the California Uniform Commercial Code ("CUCC").
(iv) Expect as specifically stated in this opinion, the opinions given
above as to the perfection and priority of security interests apply only to
property in which a security interest may be perfected by the filing of a
financing statement pursuant to Section 9-302, and I call to your attention that
the Collateral is defined to include items in which a security interest may not
be perfected by such a filing.
<PAGE> 22
EXHIBIT TO TERM LOAN AGREEMENT
(v) The opinions expressed herein are further qualified by
limitations imposed by California law on a secured lender's right to enforce
collection of, or collect, any deficiency remaining after a foreclosure sale or
the conclusions of any action to enforce an obligation if there has not been
compliance with the procedural requirements of state law.
(vi) I express no opinion as to the laws of any other state or the
perfection and effect of perfection or non-perfection of a security interest in
Collateral subject to the laws of another state; and (a) Uniform Commercial Code
9-501 et seq. relating to the exercise of remedies by a lender; the possible
application of requirements to marshall its claim; and (b) the possible
subordination of lender's claims or security interest based on its future
conduct;
(vii) I express no opinion on: limitations based on statutes or on
public policy limiting a person's right to waive the benefits of statutory
provisions or common law rights; nor on
(a) Limitations on the right of Lender to exercise rights and
remedies under the Loan Documents for defaults by Borrower if it is determined
that the defaults are not material;
(b) Limitations on Lender's right to exercise rights and remedies
under the Loan Documents for defaults by the Borrower if it is determined that
any late charges or penalties bear no reasonable relation to the damage suffered
by the lender as a result of delinquencies or defaults;
(c) Limitations on Lender's right to exercise rights and remedies
under the Loan Documents for defaults by Borrower if it is determined that the
performance or enforcement of the covenants or provisions would violate Lender's
implied covenant of good faith and fair dealing;
(d) The unenforceability under certain circumstances of
provisions releasing a party from, or indemnifying a party against, liability
for its own wrongful or negligent acts or where such release or indemnification
is contrary to public policy; and
In rendering this opinion, I assumed Lender is an sophisticated investor
represented by counsel experienced in secured lending, and thus have not
attempted to call to your attention particularly to the limits imposed by
California law on the exercise of a secured lender's rights, including
requirements of notice and commercially reasonable
<PAGE> 23
EXHIBIT TO TERM LOAN AGREEMENT
conduct. Such limitations do not render the Loan Documents invalid as a whole
and, in the event of a material breach of a material covenant in the Loan
Documents, Lender may exercise remedies that would be normally available to a
secured lender.
The opinions expressed herein are solely for the benefit of, and may not
be relied on in any manner or for any purpose by any person other than Lender,
its counsel, and its participants, successors and assigns. The opinions
expressed herein relate only to the laws of the State of California, the General
Corporation Law of the State of Delaware, and the federal laws of the United
States of America.
By:
--------------------------------------
Jonathan B. Eddison
Its: Vice President and General Counsel
Date:
------------------------------------
<PAGE> 1
EXHIBIT 10.18
SECURITY AGREEMENT
The parties to this Security Agreement ("Agreement") are:
SECURED PARTY: The Virginia Cirica Trust
DEBTOR: Diedrich Coffee, Inc., a Delaware Corporation
TERMS
1. Definitions.
(a) "Collateral" refers to all of Debtor's assets, both tangible and
intangible, whether on Debtor's premises or elsewhere, including, without
limitation:
(i) all of Debtor's present and future accounts receivable,
including accounts, instruments, documents, chattel paper, and general
intangibles in which Debtor, has or later acquires rights
(collectively, "Accounts");
(ii) all present and future proceeds of all Accounts;
(iii) all of Debtor's present and future contract rights,
including, without limitation, all rights under any insurance policy;
(iv) all of Debtor's present and future rights as lessee under
any lease, including furnishings, fixtures, improvements, and personal
property;
(v) all of Debtor's present and future rights as lessor under
any lease, including furnishings, fixtures, improvements, and personal
property;
(vi) all of Debtor's present and future equipment, fixtures, and
trade fixtures;
(vii) all of Debtor's present and future inventory;
<PAGE> 2
(viii) all of Debtor's present and future bank accounts,
deposits, and certificates of any kind;
(ix) all of Debtor's present and future brokerage accounts of
any kind;
(x) all shares, bonds, securities, or other indicia of ownership
in or rights with respect to any corporation or business entity owned
by Debtor, now or in the future;
(xi) all interests which Debtor has or may acquire in any real
property, wherever located;
(xii) all books, records, ledger cards, computer programs, and
other property and general intangibles evidencing or relating to the
Accounts, any account debtor, or any form of Collateral, including all
file cabinets or containers in which they are stored (collectively,
"Records");
(xiii) all of Debtor's present and future rights with respect to
intellectual property, including, without limitation, all trade names
and trademarks (and the goodwill of the business they symbolize),
patents, copyrights, and licenses, as well as all applications for any
of the above;
(xiv) all of Debtor's present and future Federal, State and
local tax refund claims of all kinds, insurance claims; and
condemnation awards;
(xv) all of Debtor's other present and future property rights
and general intangibles of every kind, including without limitation,
goodwill, judgments and choses in action, whether tangible or
intangible, vested or contingent;
(xvi) all of Debtor's present and future rights of stoppage in
transit, replevin, repossession and reclamation and other rights and
remedies of an unpaid vendor, lienor or secured party, guaranties or
other contracts of suretyship with respect to the Accounts, deposits or
other security for the obligation of any account debtor, and credit and
other insurance;
(xvii) all proceeds of any of the Collateral, including sale
proceeds, claims against third parties for loss or damage to or
destruction of Collateral, and insurance proceeds;
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<PAGE> 3
(xviii) to the extent permitted by law, all of Debtor's
licenses, permits, qualifications, privileges, rights, franchises,
authority, and authorizations which are adequate, necessary or
appropriate for the conduct of Debtor's business;
(xix) to the extent permitted by applicable leases, all of
Debtor's present and future rights to possess, occupy, or conduct
business on the real property owned, leased, or occupied by Debtor for
use in the continued operation of any or all of Secured Party's stores
or in connection with the operation of any other lawful business
thereon; and
(xx) all of Debtor's present and future rights to possess and
use the personal property and fixtures owned, leased, or possessed by
the Company for use in connection with the continued operation of any
or all of Secured Party's stores or in connection with the operation of
any other lawful business.
(b) "Indebtedness" means all of the Obligations (as defined below)
of Debtor to Secured Party under the Secured Promissory Note between the parties
of even date (the "Promissory Note") and the Term Loan Agreement to be entered
into between Debtor and Secured Party (the "Term Loan Agreement") (including,
without limitation, attorneys' fees and out-of-pocket costs and interest on
those fees and costs at annual rate of 10% from the date incurred), or any other
agreement between the parties, including future agreements by which Debtor
becomes indebted or otherwise obligated to Secured Party.
(c) "Obligations" means existing and future Indebtedness, including
any non-monetary liabilities of Debtor to Secured Party, and obligations under
the Term Loan Agreement and the Promissory Note, including attorneys' fees and
costs incurred in enforcing this Agreement or collecting payment under it.
(d) Terms defined in the California Commercial Code not otherwise
defined in this Agreement are used in this Agreement as defined in that Code on
the date of this Agreement.
2. Security Interest. In consideration for Secured Party's commitment
to loan Debtor monies under the Promissory Note and under the Term Loan
Agreement, Debtor grants Secured Party a first-priority security interest in the
Collateral to secure payment of the Obligations. The first-priority security
interest is subject to the following:
(a) Debtor represents that, with the exception of UCC filings of
record, liens for taxes not yet due and payable, and mechanics' liens, it is the
sole
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<PAGE> 4
legal and equitable owner of 100% of the Collateral and has not previously
transferred, assigned, pledged, or hypothecated any interest in any of the
Collateral.
(b) Except for (i) the property to be disposed of as set forth in
Schedule A attached hereto, (ii) sales of inventory in the ordinary course of
business, and (iii) sales of used equipment or furnishings in the ordinary
course of business (and not in full or partial liquidation of Borrower's
business), Debtor will not, without the written consent of Secured Party,
transfer, assign, pledge or hypothecate any interest in the Collateral until it
satisfies the Indebtedness owed to Secured Party, except that:
(i) Borrower may grant or suffer the existence of mechanics'
liens and landlord liens in the ordinary course of its business,
provided that Borrower makes adequate provisions for the payment or
other satisfaction of such liens;
(ii) Borrower may grant purchase money liens in the ordinary
course of its business, provided that such purchase money liens shall
have priority over the rights of Secured Creditor only to the extent of
the portion of the purchase price which was advanced to Borrower by the
purchase money lender and if such purchase money lender shall require
Borrower to convey security other than the goods sold to Borrower, the
agreement between Borrower and the purchase money lender shall
expressly acknowledge that the Borrower money lender's rights with
respect to any such additional security shall be junior to the rights
of Secured Party; and
(iii) Borrower may enter into certain sale and leaseback
agreements with respect to equipment as set forth in Schedule B
attached hereto.
(c) If any of the Collateral, or any interest in it, is conveyed,
pledged or alienated by the Debtor, by operation of law or otherwise, except as
set forth above, the Indebtedness shall immediately become due at the option of
Secured Party, and without demand or notice.
(d) In the event of a default (as defined in Section 8 below)
Secured Party shall have the right to occupy, possess, use, or sublet any or all
of Debtor's present or future real or personal property (whether owned or
leased) as Secured Party, in its sole an absolute discretion, as Secured Party
deems appropriate or desirable (provided such action is not prohibited by any
underlying lease) and such right is a material part of the consideration for
Secured Party's loan to Debtor. This is because Secured Party's ability to
operate some or all of Debtor's stores (or to sublet the premises or use such
property as may be permitted by any underlying lease)
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<PAGE> 5
may, under certain circumstances, be the best or only way that Secured Party can
protect its rights as a practical matter.
3. Covenants of Debtor. Debtor promises:
(a) To pay the Indebtedness to Secured Party when it is due, time
being of the essence.
(b) To pay all expenses, including attorneys' fees, incurred by
Secured Party in the perfection, preservation, realization, enforcement, and
exercise of its rights under this Agreement.
(c) To indemnify Secured Party against actual loss of any kind,
including reasonable attorneys' fees, caused to Secured Party by reason of its
interest in the Collateral.
(d) Not to sell, lease, transfer, or otherwise dispose of any
Collateral except for (i) the property to be disposed of as set forth in
Schedule A, (ii) sales of inventory in the ordinary course of business, (iii)
sales of used equipment or furnishings in the ordinary course of business (and
not in full or partial liquidation of Borrower's business), and (iv) the sale
and leaseback agreements as set forth in Schedule B.
(e) Not to permit liens on the Collateral, except existing liens,
liens for taxes not yet due and payable, mechanics' liens, landlord liens, and
purchase- money liens.
(f) To execute and deliver to Secured Party all financing statements
and other documents that Secured Party requests, in order to maintain a
first-perfected security interest in the Collateral in all appropriate
jurisdictions.
(g) To maintain, satisfactory and complete books and records of all
Accounts, and to make all records available as Lender may reasonably request;
provided, however, that Lender may only use the information contained in such
records for purposes consistent with this Agreement.
(h) That it has made adequate provisions to pay or otherwise fully
satisfy all tax obligations, mechanics' liens, and landlord liens.
4. Insurance. Debtor represents, warrants, and covenants that, at
present and for so long as any of the Indebtedness remains unsatisfied:
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<PAGE> 6
(a) Debtor maintains and shall continue to maintain adequate
insurance protection against all damages, losses, liabilities, claims, and risks
against which it is customary to insure, all in amounts as is adequate given the
nature and size of Debtor's business and its foreseeable risks. In this regard,
Debtor shall, at a minimum, carry (i) fire, casualty, and loss of income
insurance on all its business and assets, including all items of Collateral as
is customary for Debtor's business and all of Debtor's insurable interests in
its real and personal property (whether owned or leased), in amounts which are
customary and (ii) general liability insurance against all liabilities to
insure, in amounts which are customary.
(b) Debtor is not in default with respect to payment of premiums on
any insurance policy held by Debtor.
(c) Debtor shall cause Secured Party and its successors and assigns
to be named as additional insureds on each of the insurance policies described
above. Debtor shall likewise cause Secured Party and its successors and assigns
to be named as additional insureds on each subsequent, replacement, or
additional insurance policies which it may later acquire.
5. Appointment of Attorney in Fact. In the event of a default (as
defined in Section 8 below), and subject to the terms of the Intercreditor
Agreement between Secured Party and the other parties thereto to be entered into
as of a later date ("the Intercreditor Agreement"), Debtor appoints Secured
Party as Debtor's attorney in fact, with the following powers:
(a) To perform any of the Obligations of Debtor under the Agreement,
the Term Loan Agreement, or the Promissory Note in Debtor's name or otherwise;
(b) To collect any payments due to and to enforce all of the rights
of Creditor with respect to any of the Collateral;
(c) To give notice of Secured Creditor's right to payment, to
enforce that right, and to make extension agreements with respect to it;
(d) To prepare and file financing statements, continuation
statements, statements of assignment, termination statements, and the like as
necessary, appropriate, or helpful to perfect, protect, preserve, or release
Secured Party's interest in the Collateral;
(e) To endorse Debtor's name on instruments, documents, or other
forms of payment or security that come into Secured Party's possession; and
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<PAGE> 7
(f) To accept cash in payment of Obligations.
6. Termination. This Agreement and the Secured Party's security
interest hereunder shall be extinguished when Debtor satisfies the Indebtedness
in full and completes performance of all Obligations to Secured Party.
7. Documents to Perfect. Debtor shall execute all documents, including
UCC-1 form financing statements, requested by Secured Party to effectuate and
perfect the security interest, as may be necessary, appropriate, or helpful to
secure the benefits to be provided to Secured Party under this Agreement, the
Term Loan Agreement, or the Promissory Note.
8. Default. Debtor will be in default under this Agreement if:
(a) Debtor fails to satisfy any Obligation on or before the required
date of performance thereof and such default remains uncured for a period of at
least 15 days;
(b) There shall occur any event which constitutes an "Event of
Default" under the Promissory Note; or
(c) There shall occur any event which constitutes an "Event of
Default" under the Term Loan Agreement.
9. Remedies for Default. Upon the occurrence of any default, and
subject to the Intercreditor Agreement:
(a) Secured Party shall have all rights of a secured creditor under
the California Commercial Code and under the Uniform Commercial Code of any
other jurisdiction as may be necessary, appropriate, or helpful to enforce this
Agreement. These rights include, but are not limited to, the right to take
possession, appropriate or sell any of the Collateral and apply proceeds of the
Collateral toward payment of the underlying obligation; the right to settle and
compromise any claims of the Debtor regarding the Collateral; the right to
prosecute any action, suite or proceeding with respect to the Collateral; and
the right to sell the Collateral at a public or private sale and to purchase
Collateral at such a sale.
(b) Debtor waives any bond that might be required if Secured Party
seeks to take possession of Collateral through judicial process.
(c) All rights, powers and remedies shall be cumulative and may be
exercised successively or concurrently in Secured Party's sole discretion
without impairing its security interest, rights or available remedies. Secured
Party's
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<PAGE> 8
forbearance, failure or delay in exercising any right, power, or remedy shall
not preclude further exercise of that or any other right, power, or remedy,
which shall continue in effect until Secured Party specifically waives it in
writing. Secured Party has the right to decide, in its sole discretion, which
remedies it will pursue and when. Debtor will remain liable for any deficiency
after disposition of the Collateral.
(d) Debtor agrees that each of the following procedures will be
considered "commercially reasonable" within the meaning of the California
Commercial Code, the Uniform Commercial Code of any other state or jurisdiction,
and any similar statutes, rules, or regulations which may be applicable:
(i) The giving of notice of any sale of any of the Collateral by
Secured Party to Debtor, in the manner set forth in Paragraph 16 of
this Agreement, which is at least 5 days before the date of any public
sale (or 5 days before the time after which a private sale will be
made); or
(ii) The sale of any Collateral to a supplier, including sale in
bulk or in parcels, as may be provided in any agreement between Secured
Party and the supplier.
If Secured Party disposes of any Collateral other than as set out in
this subparagraph, the commercial reasonableness of the disposition will be
determined under California law.
10. Assignment of Rights of Secured Party. Secured Party may, at any
time, sell, assign, convey, alienate, pledge, hypothecate, borrow against, or
otherwise transfer or encumber any or all of the interests, rights, and powers
granted to Secured Party by this Agreement without any need to obtain Debtor's
consent or approval to such transfer or encumbrance and regardless of whether
Secured Party has provided Debtor with prior notice of that or any transfer or
encumbrance.
11. Transfers Requiring Consent, Approval, or Waiver. Notwithstanding
any other provision of this Agreement to the contrary, if it should be
determined that any right of Debtor lessee under any lease of Debtor ("Leasehold
Right") is not assignable or transferable pursuant to the terms of such lease
without the consent, approval, or waiver of a third party, or if an assignment
or other transfer ("Transfer") of, or an agreement to Transfer, any Leasehold
Right would constitute a breach thereof or a violation of law, nothing in this
Agreement will constitute a Transfer of, or an agreement to Transfer, such
Leasehold Right.
12. Defenses. In the event of any default, Debtor will fulfill all of
Obligations and commitments to Secured Party regardless of whether any
Collateral is defective or worth less than believed or anticipated and will
indemnify and hold
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<PAGE> 9
Secured Party harmless against any claims or defenses asserted by any buyer of
the Collateral relating to the condition of, or representations made by Debtor
about, any Collateral. Debtor waives all rights of offset against Secured Party
and agrees that it will not assert against Secured Party any claim or defense
Debtor has or may have against any third party.
13. Further Acts; Cooperation. The parties will execute all further
documents reasonable, convenient, necessary, or desirable to carry out this
Agreement. The parties shall cooperate to effectuate the intent of this
Agreement and the mutual benefits intended to be conferred under it.
14. Successors and Assigns. This Agreement shall be binding upon and
insure to the benefit of the parties and their respective heirs, successors, and
assigns.
15. Jurisdiction and Venue for Disputes. Any action relating to any
dispute under this Agreement shall be litigated solely in the courts located in
Orange County, California. All parties consent to the jurisdiction in the State
of California over all disputes and consent that venue is proper in Los Angeles
County, California.
16. Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given upon personal delivery, facsimile transmission
(with written or facsimile confirmation of receipt), telex or delivery by a
reputable overnight commercial delivery service (delivery, postage or freight
charges prepaid), or on the fourth day following deposit in the United States
mail (if sent by registered or certified mail, return receipt requested,
delivery, postage or freight charges prepaid), addressed to the parties at the
following addresses (or at such other address for a party as shall be specified
by like notice):
IF TO SECURED PARTY:
______________________________
______________________________
______________________________
______________________________
-9-
<PAGE> 10
IF TO DEBTOR:
Diedrich Coffee, Inc.
2144 Michelson Drive
Irvine, California 92612
Attention: President
Fax: (714) 756-1144
WITH A COPY TO:
Peter J. Tennyson, Esq.
Paul, Hastings, Janofsky & Walker LLP
695 Town Center Drive, 17th Floor
Costa Mesa, California 92626
Fax: (714) 979-1921
17. Headings. Headings in this Agreement are for convenience only and
shall not be deemed a part of this Agreement.
18. Governing Law. This Agreement shall be interpreted and enforced in
accordance with the laws of California.
19. Construction. All parties have cooperated in the drafting and
preparation of this Agreement. Accordingly, no provision of this Agreement shall
be construed for or against either party by virtue of its having drafted a
specific provision.
20. Attorneys' Fees. Debtor promises to pay all of the costs and
expense, including reasonable attorneys's fees, incurred in connection with the
perfection and enforcement of this Agreement or in connection with the
collection or enforcement of the Promissory Note. The obligation to pay
attorneys; fees as set forth herein shall not be construed as an agreement
authorizing an award of attorneys' fees incurred in connection with any
controversy or dispute concerning the interpretation, breach, or enforceability
of the Term Loan Agreement even if such fees are incurred in connection with
proceedings seeking the perfection or enforcement of this Agreement or the
collection or enforcement of the Note.
21. No Waiver. Secured Party's waiver, forbearance, failure, or delay
in exercising any right, power, or remedy shall not preclude further exercise of
that or any other right, power, or remedy, which shall continue in effect until
Secured Party specifically waives it in writing. Secured Party has the right to
decide, in its sole discretion, which remedies it will pursue and when.
-10-
<PAGE> 11
22. Survival of Representations and Warranties. Debtor's
representations and warranties in this Agreement, the Term Loan Agreement, and
the Promissory Note will survive the execution, delivery, and termination of
this Agreement.
23. Integration. This Agreement all prior agreement or understandings
between Secured Party and Debtor relating to its subject matter, except for
those agreements contained in the Term Loan Agreement or the Promissory Note.
There are no oral agreements pertaining to the subject matter of this Agreement,
and this Agreement shall supersede all oral representations and statements by
the parties. This Agreement may be modified only by a writing signed by the
party to be charged.
Dated: August 19, 1997
DIEDRICH COFFEE INC. (DEBTOR)
By: /s/ KERRY W. COIN
-----------------------------------
Kerry Coin, its
President and Chief Operating Officer
THE VIRGINIA R. CIRICA TRUST
(SECURED PARTY)
By: /s/ VIRGINIA R. CIRICA
-----------------------------------
Trustee for Virginia R. Cirica Trust
-11-
<PAGE> 12
FORM OF SCHEDULE A TO SECURITY AGREEMENT:
PROPERTY TO BE DISPOSED
<PAGE> 13
PLANNED CLOSURES
RESTRUCTURING COSTS
<TABLE>
<S> <C> <C>
DEL MAR 1555 Camino Del Mar, Del Mar, CA 92014
- -------
Equipment
Furn/Fixtures
Leasehold
ADDISON 5100 Beltline Road, Addison, TX 75240
- -------
Equipment
Furn/Fixtures
Leasehold
GREEN MOUNTAIN 12095 West Alameda Pkwy, Lakewood, CO 80228
- --------------
Equipment
Furn/Fixtures
Leasehold
CHERRY CREEK 2626 East Third Avenue, Denver, CO 80206
- ------------
Equipment
Furn/Fixtures
Leasehold
LARIMER SQUARE 1224 15th Street, Denver, CO 80202
- --------------
Equipment
Furn/Fixtures
Leasehold
</TABLE>
Page 1
<PAGE> 14
PLANNED CLOSURES
RESTRUCTURING COSTS
<TABLE>
<S> <C> <C>
EQUITABLE BLDG 724 17th Street, Denver, CO 80202
- --------------
Equipment
Furn/Fixtures
Leasehold
COLORADO BLVD 700 Colorado Blvd., Denver, CO 80206
- -------------
Equipment
Furn/Fixtures
Leasehold
JEWEL & SHERIDAN 1945 So Sheridan Blvd, Unit 105-A, Denver, Co
- ---------------- (Location closed in fiscal 1997)
Equipment
Furn/Fixtures
Leasehold
MISSION PLAZA 15473-I East Hampden, Aurora, CO 80013
- -------------
Equipment
Furn/Fixtures
Leasehold
</TABLE>
Page 2
<PAGE> 15
PLANNED CLOSURES
RESTRUCTURING COSTS
<TABLE>
<S> <C> <C>
BLVD CENTER 1685 South Colorado Blvd., Denver, CO 80222
- -----------
Equipment
Furn/Fixtures
Leasehold
TIFFANY PLAZA 7400 East Hampden Avenue, Denver, CO 80231
- -------------
Equipment
Furn/Fixtures
Leasehold
</TABLE>
Page 3
<PAGE> 16
WATCH LIST
LOCATION A
- ----------
Equipment
Furn/Fixtures
Leasehold
LOCATION B
- ----------
Equipment
Furn/Fixtures
Leasehold
Page 4
<PAGE> 17
SCHEDULE B TO SECURITY AGREEMENT:
PROPOSED EQUIPMENT FINANCING
<PAGE> 18
FORM OF SCHEDULE B(1)
COFFEEHOUSE FF&E TO BE LEASED -- FISCAL 1998
<TABLE>
<CAPTION>
Item Vendor Invoice(s) Description
---- ------ ---------- -----------
<S> <C> <C> <C>
1 Raygal Package 1 Clearlake* Package
1 Irvine (Jitters)** Package
1 Santa Monica (Home Savings)*** Pkg
2 Diedrich Package 1 Clearlake* Package
1 Irvine (Jitters) Package
1 Santa Monica (Home Savings) Pkg
3 Sign Vendors 1 Clearlake Package
1 Irvine (Jitters) Package
1 Santa Monica (Home Savings) Pkg
</TABLE>
- ---------------------
* Clearlake refers to the Diedrich coffeehouse located on Bay Area Blvd. in
Houston, Texas which opened in July 1997
** Jitters refers to a Diedrich coffeehouse to be established in the
University Center in Irvine, CA in the fall of 1997
*** Santa Monica (Home Savings) refers to a Diedrich coffeehouse to be
established at 26th & Wilshire Blvd. in Santa Monica in the fall or winter
of 1997/8
Page 1 of 3
<PAGE> 19
FORM OF SCHEDULE B(2)
HOME OFFICE DATA PROCESSING HARDWARE & SOFTWARE TO BE LEASED - FISCAL 1998
<TABLE>
<CAPTION>
Item Vendor Invoice(s) Description
---- ------ ---------- -----------
<S> <C> <C> <C>
1 Data Enhancement International, Inc. Xcellenet & Related Software*
(Vendor not yet selected - may vary) Implementation**
Hardware***
2 Lotus Development 15 Organizer GS*
75 Notes 4.5 client*
(includes software for coffeehouses)
3 Microsoft 35 Office 97*
1 SQL Server*
</TABLE>
- --------------------
* Software to be purchased from third parties
** Third party time to install, test and debug software and hardware
*** PC based server, modem pool and telecommunications equipment
Page 2 of 3
<PAGE> 20
FORM OF SCHEDULE B(3)
COFFEE CARTS TO BE LEASED - FISCAL 1998
<TABLE>
<CAPTION>
Item Vendor Invoice(s) Description
---- ------ ---------- -----------
<S> <C> <C> <C>
1 VanSan 6 8' Carts
2 Various 6 Cart Equipment Packages
Rio or La Mazzorco Espresso Machines
Bunn-O-Matic Grinder
Curtis Brewer
Vita Mix Blender
Mazer Grinder
Other Water Conditioner & Other
3 Microsoft 6 Javelin Terminals
6 Modem
6 Cash drawers
</TABLE>
Page 3 of 3
<PAGE> 1
EXHIBIT 10.19
EXHIBIT C
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED OR
QUALIFIED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES
LAWS AND THUS MAY NOT BE TRANSFERRED UNLESS REGISTERED UNDER THAT ACT OR SUCH
LAWS OR UNLESS AN EXEMPTION FROM REGISTRATION OR QUALIFICATION IS AVAILABLE.
- --------------------------------------------------------------------------------
WARRANT
- --------------------------------------------------------------------------------
August 29, 1997
Diedrich Coffee, Inc., a Delaware corporation ("Company"), hereby
grants to The Virginia R. Cirica Trust, a trust organized under the laws of the
State of California ("Holder" or the "Trust"), or its registered assigns the
right to acquire the shares of Common Stock issuable upon exercise hereof,
subject to the terms and conditions set forth below:
1. Definitions. As used in this Warrant, the following terms shall
mean:
1.1 "Agreement" -- shall mean the Term Loan Agreement dated as the
date hereof, between Company and the Trust.
1.2 "Common Stock" -- shall mean the Common Stock, $0.01 par value
issued by Company issuable on exercise of this Warrant.
1.3 "Company" shall include Diedrich Coffee, Inc. and each successor
corporation or Diedrich Coffee, Inc. under this Warrant, whether such assumption
is express, implied, or by operation of law.
1.4 "Determination Date" -- shall mean the date on which Company
receives Holder's written notice of an exercise of the stock purchase right
pursuant to Section 2.1 hereof.
1.5 "Indemnified Person" -- shall have the meanings given in Section
3.7(a) and Section 3.7(b).
1.6 "Issuance Date" -- shall mean the date of this Warrant.
<PAGE> 2
1.7 "Note" -- shall mean the Secured Promissory Note issued by
Company to the Trust as further described in the Agreement.
1.8 "Liability" -- shall have the meaning given in Section 3.7.
1.9 "Purchase Price" -- shall mean initially $2.25 per share, as
adjusted in accordance with Section 5, depending upon the context.
1.10 "Registration Expenses" -- shall have the meaning given in
Section 3.6.
1.11 "SEC" -- shall mean the Securities Exchange Commission.
1.12 "Securities Act" -- shall mean the Securities Act of 1933, as
amended.
1.13 "Shares" -- shall mean the shares of Warrant Stock for which
this Warrant may be exercised pursuant to Section 2.1 hereof.
1.14 "Subsidiary" -- shall mean any corporation, association or
other business entity at least fifty percent (50%) of the outstanding voting
stock of which is at the time owned or controlled directly or indirectly by
Company or by one or more of such subsidiary entities or both.
1.15 "Warrant Amount" -- shall mean an amount equal to the initial
Purchase Price times 170,000 shares, as reduced by the exercise of rights
hereunder; provided however that if Company repays the Trust all amounts due
under the Note within 120 days of the date hereof, thereafter the term "Warrant
Amount" shall mean an amount equal to the initial Purchase price times 85,000
shares, as reduced by the exercise of rights hereunder.
1.16 "Warrant Stock" -- shall mean the authorized and unissued
Common Stock reserved for issuance upon exercise of the Warrant.
2. Right to Purchase.
2.1 Exercise. Holder shall have the right to purchase for all or any
portion of the Warrant Amount that number of shares of fully paid and
nonassessable Warrant Stock of Company which is determined by dividing the
Warrant Amount by the Purchase Price. Such right shall be exercisable at any
time through and including August 19, 2003, or, if later, one year after the
final payment of all principal and accrued interest on the Secured Promissory
Note issued to the Trust pursuant to the Agreement (the "Note"). Upon the
surrender of this Warrant
-2-
<PAGE> 3
to Company, accompanied by Holder's written notice of exercise and a payment of
the Purchase Price for the Shares identified in the notice, Company shall,
within ten (10) days from the date of Company's receipt of such notice (a) issue
and deliver to Holder certificates evidencing the Shares (as hereinafter set
forth) and (b) if any or all of rights to purchase evidenced by this Warrant
remain unexercised, return this Warrant or a substitute Warrant to Holder with
such notation thereon as appropriate to indicate that partial exercise has
occurred and to purchase rights. For the purpose of this Section 2, the purchase
shall be deemed to occur at the close of business on the Determination Date. In
the event that Holder shall elect to exercise its right with respect to less
than the entire number of shares covered by this Warrant, such partial exercise
shall not be interpreted to prevent Holder or its transferees, successors or
assignees from asserting the then unexercised rights or constitute a waiver of
such unexercised rights.
2.2 Form of Payment: "Cashless" Exercise. Payment on exercise of
this Warrant may be in cash, by check payable to the order of the Company, by
surrender of one or more of the Company's promissory notes (or portion thereof),
securities, or other obligations (or portion thereof), or any combination of the
above. At Purchaser's option, exercisable in the notice delivered pursuant to
Section 2.1, all or a portion of the Purchase Price may be paid by surrendering
a portion of the Shares. The value attributed to any Shares so surrendered shall
be the closing bid price on the date of the notice.
2.3 Fractional Shares. No fractional shares of Warrant Stock, or
other class of capital stock, will be issued in connection with any exercise
hereunder, but in lieu of such fractional shares, Company shall make a cash
payment therefor upon the basis of the fair market value of each Share as of the
Determination Date, as determined in good faith by the Board of Directors of
Company less the Purchase Price.
2.4 Interest Adjustment. The parties agree that if the Note was not
accompanied by this Warrant, the interest rate would be not more than one
percent (1%) higher.
2.5 Surrender Warrant Following Kickout. If Company repays the Trust
all amounts due under the Note within 120 days of the date hereof, the Trust
shall immediately surrender this Warrant to Company and Company shall reissue to
the Trust a replacement Warrant reflecting the change in the Warrant Amount.
3. Registration Rights; Transfer of Securities. This Warrant and the
Warrant Stock to be issued pursuant to exercise of this Warrant is not
transferable except, to the extent such transfers would not violate the
provisions of the Securities Act or any applicable state securities laws, (a) to
affiliates (as such term is defined
-3-
<PAGE> 4
in Rule 144 of the Securities Act) of the Holder who are accredited investors
within the meaning of Regulation D of the Securities Act, (b) such other persons
upon the prior written consent of Company, which consent shall not be
unreasonably be withheld, or (c) upon the conditions specified in this Section
3, which conditions are intended to assure compliance with the provisions of the
Securities Act and state securities laws in respect of the transfer of any such
Warrants or Warrant Stock.
3.1 Restrictive Legends. Unless and until they are registered under
the Securities Act, this Warrant (and any replacement therefor) and the Shares
issued upon the exercise of this Warrant shall be stamped or otherwise imprinted
with legends in substantially the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED OR QUALIFIED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAWS AND THUS MAY NOT BE
TRANSFERRED UNLESS REGISTERED OR QUALIFIED UNDER THAT ACT OR SUCH
LAWS OR UNLESS AN EXEMPTION FROM REGISTRATION OR QUALIFICATION IS
AVAILABLE.
Company may cause its transfer agent to stop the transfer of such
Warrants or Warrant Stock if Holder or the owner of Warrant Stock wishing to
make the transfer fails to provide the Company with such a written opinion of
counsel.
3.2 Notice of Proposed Transfers. Subject to Section 3.1, prior to
any transfer or attempted transfer of this Warrant (or any Warrant Stock)
bearing the legend described in Section 3.1, Holder (or the owner of Warrant
Stock) shall give the Company written notice of its intention so to do,
describing briefly the nature of any such proposed transfer. If, in the written
opinion of counsel for Holder (or the owner of Warrant Stock), in form and
substance reasonably satisfactory to the Company or its counsel, addressed to
the Company or Holder (or the owner of Warrant Stock), the proposed transfer may
be effected without registration of this Warrant (or such Warrant Stock), this
Warrant (or the Warrant Stock proposed to be transferred) may be transferred in
accordance with the terms of said notice and in compliance with applicable state
securities laws and regulations. Company shall not be required to effect any
such transfer prior to the receipt of such favorable opinion; provided that if
the proposed transfer is governed by Rule 144 promulgated by the SEC, or any
successor rule, such opinion shall not be required, but Company may prevent such
transfer until it receives evidence satisfactory to it and its counsel that the
transfer complies with Rule 144. Each transfer shall comply with all applicable
state securities laws and regulations.
-4-
<PAGE> 5
3.3 Piggyback Registration. If Company at any time prior to August
19, 2003 proposes to register any of its securities under the Securities Act
(other than a registration effected solely to implement an employee benefit
plan, a transaction to which Rule 145 of the SEC is applicable or any other form
or type of registration in which the Warrant Stock cannot be included pursuant
to SEC rule or practice), it will give a written notice to Holder and the
registered owners of Warrant Stock of its intention to do so. If such
registration is proposed on a form which permits inclusion of the Warrant Stock,
upon the written request of Holder or any owner of Warrant Stock given within 30
days after the transmittal by Company to such Holder or owner of such notice,
the Company will, subject to the limits contained in this Section 3.3, use its
best efforts to cause all Warrant Stock which said requesting Holder or owner
identifies in its request (including Warrant Stock to be issued upon exercise of
this Warrant) to be registered under the Securities Act and qualified for sale
under any state blue sky law, all to the extent requisite to permit such sale or
other disposition by such Holder or owner. Notwithstanding the above, however,
if the underwriter managing such registration gives a written notice to the
person requesting registration pursuant to this Section 3.3 that market or
economic conditions limit the amount of securities of the Company which may
reasonably be expected to be sold, the underwriter shall first exclude from the
proposed registration the shares of Common Stock which persons other than (a)
such requesting Holder or owners of Warrant Stock, (b) the holders of the
warrants issued pursuant to the Other Agreements (as that term is defined in the
Agreement) or (c) Company have requested to be registered. If, after such
exclusion, the total number of shares of Common Stock to be registered still
exceeds the number of shares of Common Stock which the underwriter will permit
to be registered, each requesting Holder or owner will be allowed to register
Warrant Stock pro rata according to the proportion which the number of shares of
Warrant Stock held (including shares issuable upon exercise of this Warrant) by
such requesting Holder or owner bears to the total number of shares of Common
Stock which were proposed to be sold by the underwriter. Company may for any
reason determine not to proceed with a proposed registration of its securities
even though Holder or one or more owners of Warrant Stock has requested the
inclusion of Warrant Stock in such proposed registration. However, if Company
determines not to proceed and withdraws the Company's registration statement,
Company shall pay all fees and expenses reasonably incurred by the requesting
Holder or owner(s) in connection with the proposed registration.
3.4 Demand Registration. Company shall use its best efforts to
qualify and remain qualified for registration of the Warrant Stock on Form S-3
(or a similar short-form registration statement). If singly or in combination,
the Holder, holders of any other warrant issued pursuant to the Agreement or the
Other Agreements, or owners of Common Stock issued pursuant to this Warrant or
any other warrant issued pursuant to the Agreement or the Other Agreements
request
-5-
<PAGE> 6
to have 255,000 or more of their shares of Common Stock (or shares of Warrant
Stock which they are entitled to acquire under this or such other warrants)
registered, Company will use its best efforts to promptly register such shares
on Form S-3 (or a similar short-form registration statement). Such request(s)
shall be in writing and shall state the number of shares of Warrant Stock to be
registered and the intended method of disposition of such Warrant Stock in
sufficient detail to permit a description in a registration statement and shall
contain a statement of a good-faith intention to sell the Warrant Stock proposed
to be registered. The Company may delay registration pursuant to this Section
3.4 if, in the good-faith judgment of the Company, such registration will hinder
or interfere with a concurrent or proposed security issuance of, or acquisition
by, the Company; provided that the Company shall use its best efforts to effect
the registration following the completion of the transaction or transactions
involving such issuance or acquisition. The Company shall give notice to Holder
and all registered owners of Warrant Stock of the receipt of a request for
registration pursuant to this Section 3.4 and shall provide a reasonable
opportunity for such persons to participate in the registration. If any
requesting Holder or owner of Warrant Stock determines not to proceed with a
registration requested pursuant to this Section 3.4 and the registration is not
completed (or is completed but less than 255,000 shares of Warrant Stock are
registered), such withdrawing Holder or owner shall pay its proportionate share
of the expenses reasonably incurred by Company pursuant to the registration
request, unless the decision not to proceed is:
(a) based upon a material adverse fact or condition relating to
Company which was not disclosed to such Holder or owner of Warrant Stock prior
to the request for registration;
(b) based upon a written opinion of such Holder or owner's
counsel that one or more specific statements or omissions in the proposed
registration statement are materially misleading without changes which Company
declines to make after written request therefor; or
(c) followed by a decision by Company or other holders of
Company's Common Stock (or holders of rights to such stock) to proceed with the
registration in question, which results in the proposed registration statement
becoming effective with respect to shares of Common Stock to be issued by the
Company or held by others.
3.5 Registration Procedures. If and whenever Company proposes the
registration of any of its securities under the Securities Act, or is in receipt
of a request pursuant to Section 3.3 or 3.4, Company will, as expeditiously as
possible, subject in all cases to the right of Company to withdraw a proposed
registration as described in Section 3.3 or delay the registration as described
in Section 3.4.
-6-
<PAGE> 7
(a) prepare and file with the SEC a registration statement with
respect to such securities and use its best efforts to cause such registration
statement to become and remain effective for the period provided for in Section
3.5(g);
(b) prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective for
the period provided for in Section 3.5(g) and to otherwise comply with the
provisions of the Securities Act with respect to the sale or other disposition
of the securities covered by such registration statement;
(c) furnish to Holder and the owners of Warrant Stock whose
securities are to be included in the registration such number of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Securities Act, and such other documents, as Holder or such
owners may reasonably request to facilitate the sale or other disposition of the
Warrant Stock to be covered by such registration statement;
(d) use every reasonable effort to register or qualify the
securities covered by such registration statement under such other securities or
state blue sky laws of such jurisdictions as Holder or the owners of Warrant
Stock participating in such registration shall reasonably request and do any and
all other acts and things which may be necessary under such securities or blue
sky laws to enable such Holder or owners to consummate the sale or other
disposition in such jurisdictions of the securities owned by them which are
covered by the registration statement in question, except that the Company shall
not for any such purpose be required to qualify to do business as a foreign
corporation in any jurisdiction wherein it is not so qualified;
(e) before filing the registration statement or prospectus or
amendments or supplements thereto, furnish to one counsel selected by Holder and
the owners of Warrant Stock who have requested registration copies of such
documents proposed to be filed which shall be subject to the reasonable approval
of such counsel; and
(f) furnish to Holder and each requesting owner of Warrant Stock
a signed counterpart, addressed to such Holder or owner, of (i) an opinion of
counsel for Company, dated the effective date of the registration statement, and
(ii) a "comfort" letter signed by the independent public accountants who have
certified Company's financial statements included in the registration statement,
covering substantially the same matters with respect to the registration
statement (and the prospectus included therein) and (in case of the accountants'
-7-
<PAGE> 8
letter with respect to events subsequent to the date of the financial
statements, as are customarily covered (at the time of such registration) in
opinions of Company's counsel and in accountants' letters delivered to the
underwriters in underwritten public offerings of securities; and
(g) notwithstanding any other provision of this Section 3,
Company shall not in any event be required to us its best efforts to maintain
the effectiveness of any such registration statement for a period in excess of
90 days (or at the request of Holder or any owner of Warrant Stock who so
requests, an additional 90 days).
3.6 Expenses. All expenses incurred in effecting all registrations
provided for above, including without limitation, all registration and filing
fees, printing expenses, fees and disbursements of counsel for Company, expenses
of any audits incident to or required by any such registration and expenses of
complying with the securities or blue sky laws of any jurisdictions relating to
a registration pursuant to Section 3.3 or 3.4 hereof (all of such expenses
referred to as "Registration Expenses") shall be paid by Company; provided,
however, that Company shall bear the Registration Expenses for no more than two
registrations pursuant to Section 3.4 for all holders of this Warrant and the
warrants issued in connection with the Other Agreements. The Company shall not
pay any fees or expenses of counsel for Holder or the owners of Warrant Stock or
any counsel for underwriters or any fees or commissions due to any underwriter
with respect to any Warrant Stock.
3.7 Indemnification.
(a) In the event of any registration of any of its securities
under the Securities Act pursuant to Section 5, Company shall indemnify and hold
harmless the seller of such securities, each underwriter (as defined in the
Securities Act), and each other person, if any, who controls (within the meaning
of the Securities Act) such seller, underwriter or participating seller
(individually and collectively the "Indemnified Person") against any losses,
claims, damages or liabilities (collectively the "liability"), joint or several,
to which such Indemnified Person may become subject under the Securities Act or
any other statute or at common law, insofar as such liability (or action in
respect thereof) is caused by (i) any untrue statement of material fact
contained on the effective date thereof, in any registration statement under
which such securities were registered under the Securities Act, any preliminary
prospectus or final prospectus contained therein or any amendment or supplement
thereto, or (ii) any omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading.
Except as otherwise provided in Section 3.7(d), Company shall reimburse each
such Indemnified Person in connection with investigating or
-8-
<PAGE> 9
defending any such liability, provided, however, that Company shall not be
liable to any Indemnified Person in any such case to the extent that any such
liability is caused by any untrue statements or omissions made in such
registration statement, preliminary or final prospectus, or amendment or
supplement thereto in reliance upon and in conformity with information furnished
to Company by such Indemnified Person specifically for use therein; and provided
further, that Company shall not be required to indemnify any Indemnified Person
against any liability caused by any untrue or misleading statement or omission
contained in any preliminary prospectus if such deficiency is corrected in the
final prospectus or for any lability which is caused by the failure of any
person other than Company to deliver a prospectus as required by the Securities
Act. Such indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of such Indemnified Person and shall survive
transfer of such securities by such seller.
(b) If, at the request of Holder or any owner of Warrant Stock,
Company shall register any of the Warrant Stock of such requesting Holder or
owner, that requesting Holder or owner shall indemnify and hold harmless
Company, Company's directors and officers, each underwriter and each other
person, if any,who controls (within the meaning of the Securities Act) Company
or such underwriter (individually and collectively also the "Indemnified
Person") against any liability (or actions in respect thereof) was caused by (i)
the disposition of this Warrant or Warrant Stock by such Holder or owner in
violation of the provisions of Section 3.2; (ii) an untrue statement of material
fact contained in, on the effective date thereof, any registration statement of
material fact contained in, on the effective date thereof, any registration
statement under which such securities were registered, any preliminary
prospectus or final prospectus contained therein, or any amendment or supplement
thereto, which untrue statement was included therein in good faith reliance on
and in conformity with information furnished to Company in writing by such
Holder or owner specifically for use in such registration statement, preliminary
or final prospectus, or amendment or supplement thereto, or (iii) an omission of
material fact required to be stated in any registration statement under which
such securities were registered, an preliminary prospectus or final prospectus
contained therein, or any amendment or supplement thereto, which omission was
the result of the Indemnified Person's good-faith reliance on and in conformity
with information furnished to Company in writing by such Holder or owner
specifically for use in such registration statement, preliminary or final
prospectus, or amendment or supplement thereto. Notwithstanding the above,
however, no Holder or owner of Warrant Stock shall be required to indemnify any
Indemnified Person if any untrue statement or omission of material fact was made
in reliance on the advise, conclusions, calculations, determinations, or
authority of an expert so long as Holder or such owner of Warrant Stock had no
reasonable ground to disbelieve, and did not in fact disbelieve, the accuracy or
completeness of the information provided by the Holder or owner in reliance on
such expert. A
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<PAGE> 10
Holder or owner of Warrant Stock otherwise required to provide indemnification
pursuant to this Section 3.7(b) shall reimburse any Indemnified Person for any
legal fees incurred in investigating or defending any such liability,
provided,however, that no such Holder or owner of Warrant Stock shall be
required to indemnify any person against any liability arising form any untrue
or misleading statement or omission contained in any preliminary prospectus if
such deficiency is corrected in the final prospectus or for any liability which
arises out of thee failure of any person other than Holder (or the indemnity
obligation shall apply to the benefit of the Company, the Company's directors
and officers, each underwriter and each other person, if any, who controls the
Company or such underwriter and to no other persons or entities.
(c) Subject to such modifications as the context may require,
indemnification similar to that specified in Section 3.7(a) above shall be given
by Holder and owners of Warrant Stock who have indemnity obligations (but only
to the extent of such Holder or owner's obligations thereunder) with respect to
any required registration or other qualification of Warrant Stock under any
federal or state law or regulation of governmental authority other than the
Securities Act.
(d) If Company, Holder, or any owner of Warrant Stock receives a
complaint, claim or other notice of any liability or action, giving rise to a
claim for indemnification under Section 3.7(a), 3.7(b), or 3.7(c), the person
claiming indemnification under such sections shall promptly notify the person
against whom indemnification is sought of such complaint, notice, claim or
action and such indemnifying person shall have the right to investigate and
defend any such loss, claim, damage, liability, or action. The person claiming
indemnification shall have the right to employ separate counsel in any such
action and to participate in the defense thereof, but the fees and expenses
sought unless the indemnifying party fails to promptly defend (in which case the
fees and expenses of such separate counsel shall be borne by the person against
whom indemnification is sought). In no even shall a person against whom
indemnification is sought be obligated to indemnify any person for any
settlement of any claim or action effecting without indemnifying person's prior
written consent.
3.8 Contribution. If the indemnification by Company as provided for
in Sections 3.7(a) or 3.7(c) is unavailable or insufficient to hold harmless the
Indemnified Persons in respect of any liability, then Company shall contribute
to the amount paid or payable by such Indemnified Persons as a result of such
liability in such proportion as is appropriate to reflect the relative fault of
Company on the one hand and the Indemnified Person(s) on the other, in
connection with the statements or omissions which resulted in such losses,
claims, damages, liabilities, expenses or actions as well as any other relevant
equitable considerations, including the failure
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<PAGE> 11
to file the notice required hereunder. The relative fault of Company and the
Indemnified Person(s) shall be determined by reference to, among other things,
whether the untrue statement of material fact relates to the information
supplied by Company or the Indemnified Person(s) and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission. Company agrees that it would not be just and
equitable if contributions pursuant to this Section 3.8 were determined by pro
rata allocation or by any other method of allocation which did not take account
of the equitable considerations referred to above.
3.9 Registration Rights Do not Necessarily Follow the Warrant Stock.
Notwithstanding the provisions of this Section 3, if Holder causes Company to
issue any Warrant Stock to a third party, or if Holder transfers any Warrant
Stock issued to it to a third party, Holder shall retain the right to have those
shares registered as set forth in this Section 3, and the third-party owner of
such Warrant Stock shall not have any registration rights under this Warrant,
unless the Company shall give its written consent to the transfer of such
registration rights.
3.10 Termination of Registration Rights. Notwithstanding the
provisions of this Section 3, the rights to registration of the Warrant Stock
shall terminate, as to any particular Warrant Stock, when such Warrant Stock
shall have been lawfully sold by the holder pursuant to a registration statement
or Rule 144 or may be sold pursuant to Rule 144 during any three month period
or, if earlier, the later of August 19, 2003 and one year after the final
payment of all principal and accrued interest on the Note.
3.11 Compliance with Rule 144. At the request of Holder or any owner
of Warrant Stock who proposes to sell Warrant Stock in compliance with Rule 144
of the SEC, Company shall forthwith furnish to Holder or such owner a written
statement of compliance with the filing requirements of the SEC as set forth in
such Rule, as such Rule may be amended from time to time and make available to
the public and Holder or such owner such information as will enable holder of
the owner to make sales of Warrant Stock pursuant to Rule 144.
3.12 Consent to Be Bound. Each subsequent Holder and each transferee
of any Warrant Stock must consent in writing to be bound by the terms and
conditions of this Section 3 in order to acquire the registration rights granted
pursuant to this Section.
3.13 Investment Intent. Holder represents and warrants that this
Warrant and the Warrant Stock issuable upon exercise of the Warrant are being
acquired by Holder solely for Holder's own account, for investment purposes
only,
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<PAGE> 12
and with no present intention of distributing, selling or otherwise disposing of
the Warrant or the Warrant Stock issuable upon exercise of the Warrant.
3.14 Sophistication. Holder represents and warrants that Holder is
able to bear the economic risk of the investment required pursuant to this
Warrant and the Warrant Stock issuable upon exercise of the Warrant and can
afford to sustain a total loss on such investment, and 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 Warrant.
4. Replacement of Warrant. Upon receipt of evidence reasonably
satisfactory to Company of the ownership of and the loss, theft, destruction or
mutilation of this Warrant and (in the case of loss, theft or destruction) upon
delivery of an indemnity agreement in an amount reasonably satisfactory to
Company, or (in the case of mutilation) upon surrender and cancellation of the
mutilated Warrant, Company will execute and deliver, in lieu thereof, a new
Warrant of like tenor.
5. Protection Against Dilution.
5.1 Adjustment for Stock Splits and Combinations. If Company at any
time or from time to time after the Issuance Date effects a subdivision of the
outstanding Warrant Stock, the Purchase Price then in effect immediately before
the subdivision shall be proportionately decreased, and conversely, if Company
at any time or from time to time after the Issuance Date combines the
outstanding shares of Warrant Stock, the Purchase Price then in effect
immediately before the combination shall be proportionately increased. Any
adjustment under this Section 5.1 shall become effective as of the date and time
the subdivision or combination becomes effective.
5.2 Adjustment for Certain Dividends and Distributions. If Company
at any time or from time to time after the Issuance Date makes, or fixes a
record date for the determination of holders of Common Stock entitled to
receive, a dividend or other distribution payable in additional shares of Common
Stock, then and in each such event the Purchase Price then in effect shall be
decreased as of the time of such issuance or, in the event such a record date is
fixed, as of the close of business on such record date, by multiplying the
Purchase Price then in effect by a fraction (1) the numerator of which is the
total number of shares of Common Stock issued and outstanding immediately prior
to the time of such issuance or the close of business on such record date, and
(2) the denominator of which shall be the total number of shares of Common Stock
issued and outstanding immediately prior to the time of such issuance or the
close of business on such record date plus the number
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<PAGE> 13
of shares of Common Stock issuable in payment of such dividend or distribution;
provided, however, that if such record date is fixed and such dividend is not
fully paid, or if such distribution is not fully made on the date fixed
therefor, the Purchase Price shall be recomputed to reflect that such dividend
was not fully paid or that such distribution was not fully made as of the close
of business on such record date and thereafter the Purchase Price shall be
adjusted pursuant to this Section 5.2 as of the time of actual payment of such
dividends or distributions.
5.3 Adjustments for Other Dividends and Distributions. In the event
Company at any time or from time to time after the Issuance Date makes, or fixes
a record date for the determination of holders of Common Stock entitled to
receive, a dividend or other distribution payable in securities of Company other
than shares of Common Stock, then and in each such event provision shall be made
so that Holder shall receive upon exercise of this Warrant, in addition to the
number of shares of Common Stock receivable thereupon, the amount of securities
of Company which Holder would have received had the Warrant been fully exercised
for Common Stock on the date of such event and had Holder thereafter, during the
period from the date of such event to and including the date of exercise,
retained such securities receivable by it as aforesaid during such period,
subject to all other adjustments called for during such period under this
Section 5 with respect to the rights of Holder.
5.4 Adjustment for Reclassification, Exchange and Substitution. If
the Warrant Stock issuable upon the exercise of this Warrant is changed into the
same or a different number of shares of any class or classes of stock, whether
by recapitalization, reclassification or otherwise (other than a subdivision or
combination of shares or stock dividend or a reorganization, merger,
consolidation or sale of assets, provided for elsewhere in this Section 5),
then, and in any such event, Holder shall have the right thereafter, upon
exercise of this Warrant to receive the kind and amount of stock and other
securities and property receivable upon such reorganization, reclassification or
other change, in an amount equal to the amount that Holder would have been
entitled to had it immediately prior to such reorganization, reclassification or
change exercised Holder's rights to purchase under this Warrant, but only at
such time and to the extent this Warrant is actually exercised, all subject to
further adjustment as provided herein.
5.5 Reorganizations, Mergers, Consolidations or Sales of Assets. If
at any time or from time to time there is a capital reorganization of the
Warrant Stock (other than a recapitalization, subdivision, combination,
reclassification or exchange of the Warrant Stock provided for elsewhere in this
Section 5) or merger or consolidation of Company with or into another entity, or
the sale of all or substantially all of Company's properties and assets to any
other person then, as a part of such reorganization, merger, consolidation or
sale, provision shall be made
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<PAGE> 14
so that Holder shall thereafter be entitled to receive, upon exercise of rights
to purchase under this Warrant (but only to the extent such rights are
exercised), the number of shares of stock or other securities or property of
Company, or of the successor entity resulting from such merger or consolidation
or sale, to which a holder of Warrant Stock, or other securities, deliverable
upon the exercise of purchase rights under this Warrant would otherwise have
been entitled on such capital reorganization, merger, consolidation, or sale. In
any such case, appropriate adjustments shall be made in the application of the
provisions of this Section 5 (including adjustment of the Purchase Price then in
effect and number of shares purchasable) which shall be applicable after such
events; provided, however, that any such adjustments shall be made so as to
ensure that the provisions of this Section 5 applicable after such events shall
be as equivalent as may be practicable to the provisions of this Section 5
applicable before such events.
5.6 Officer's Certificate of Adjustment. In any case of an
adjustment or readjustment of the Purchase Price, the number of shares of
Warrant Stock or other securities issuable upon exercise of this Warrant, the
Company's chief financial officer at its expense shall compute such adjustment
or readjustment in accordance with the provisions hereof and shall prepare a
certificate showing such adjustment or readjustment, and shall mail such
certificate, by first class mail, postage prepaid, to Holder at Holder's address
as shown in Company's books. The certificate shall set forth such adjustment or
readjustment, showing in detail the facts upon which such adjustment or
readjustment is based including a statement of (a) the consideration received or
deemed to be received by Company for any Warrant Stock issued or sold or deemed
to have been issued or sold, (b) the Purchase Price at the time in effect, and
(c) the type and amount, if any, of other property which at the time would be
received upon exercise of this Warrant. Notwithstanding the above, the Holder
may select and cause independent public accountants of recognized standing also
to compute such adjustment or readjustment in accordance with the provisions
hereof and to prepare a certificate showing such adjustment or readjustment. If,
by such computation, the Holder shall determine that the computation performed
by the Company's chief financial officer was incorrect by five percent (5%) and
such inaccuracy was prejudicial to the Holder, then, at the option of Holder,
the cost of Holder's computation and certificate preparation shall be borne by
Company and shall be due and owing upon demand.
5.7 No Change in Warrant Required. The form of this Warrant need not
be changed because of any adjustment in the Purchase Price or in the number of
shares of Warrant Stock purchasable on its exercise. A Warrant issued after any
such adjustment on any partial exercise or in replacement may continue to
express the same Purchase Price and the same number of shares of Warrant Stock
(appropriately reduced in the case of partial exercise) as are stated on the
face of
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<PAGE> 15
this Warrant as initially issued, and that Purchase Price and number of shares
shall be considered to have been so changed as of the close of business on the
date of adjustment.
5.8 Reservation of Shares. Company recognizes that since the Warrant
Amount is a fixed number, the adjustments provided in this Section will alter
the number of shares subject to purchase rights and agrees to adjust the
appropriate number(s) of shares reserved pursuant to Section 7.1 for issuance
upon exercise of purchase rights.
6. Transfer of Securities.
6.1 Transfer. Subject to the restrictions on transfer contained in
the Agreement, this Warrant and all rights hereunder are transferable on the
books of Company maintained for such purpose at its principal office referred to
above by Holder in person or by duly authorized attorney, upon surrender of this
Warrant properly endorsed and upon payment of any necessary transfer tax or
other governmental charge imposed upon such transfer. Each taker and holder of
this Warrant, by taking or holding the same, consents and agrees that this
Warrant when endorsed in blank shall be deemed negotiable and that when this
Warrant shall have been so endorsed, Holder hereof may be treated by Company and
all other persons dealing with this Warrant, as the absolute owner hereof for
any purpose and as the person entitled to exercise the rights represented
hereby, or to the transfer hereof on the books of Company, any notice to the
contrary notwithstanding; but until such transfer on such books, Company may
treat the registered Holder hereof as the owner for all purposes.
6.2 Rights Under Agreement. The Shares issuable upon the exercise of
this Warrant are subject to the terms, conditions and limitations set forth in
the Agreement.
6.3 Payment of Taxes. All Shares issued upon the exercise of rights
under this Warrant shall be validly issued, fully paid and nonassessable, and
Company shall pay all taxes and other governmental charges that may be imposed
in respect of the issue or delivery thereof. Company shall not be required,
however, to pay any tax or other charge imposed in connection with any transfer
involved in the issuance of any certificate for Shares in any name other than
that of Holder surrendered in connection with the purchase of such Shares, and
in such case Company shall not be required to issue or deliver any stock
certificate until such tax or other charge has been paid or it has been
established to Company's satisfaction that no tax or other charge is due.
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<PAGE> 16
7. Affirmative Duties of Company.
7.1 Reservation of Warrant Stock. Company shall at all times
reserve and keep available out of its authorized but unissued shares of Common
Stock, solely for the purpose of issuance upon the exercise of the purchase
rights under this Warrant, such number of shares of Warrant Stock as shall be
issuable upon the exercise hereof. Company covenants and agrees that, upon such
exercise all Shares issuable upon such exercise shall be duly and validly
issued, fully paid and nonassessable.
7.2 No Dilution or Impairment. Company will not, by amendment of
its certificate of incorporation or through reorganization, consolidation,
merger, dissolution, sale of assets or any other voluntary action, avoid or seek
to avoid the observance or performance of any of the terms of this Warrant.
Without limiting the generality of the foregoing, Company will take all such
action as may be necessary or appropriate in order that Company may validly and
legally issue fully paid and nonassessable Warrant Stock upon the exercise of
the purchase rights in this Warrant.
8. Notices to Warrant Holder.
8.1 Notices to be Given. Nothing contained in this Warrant shall
be construed as conferring upon Holder hereof the right to vote or to consent or
to receive notice as a shareholder in respect of any meetings of shareholders
for the election of directors or any other matter or as having any rights
whatsoever as a shareholder of Company. If, however, at any time prior to the
expiration (by lapse of time or complete exercise) of the purchase right under
this Warrant, any of the following events shall occur:
(a) Company shall take a record of the holders of its
shares of Warrant Stock for the purpose of entitling them to receive a dividend
or distribution; or
(b) Company shall offer to the holders of its Common Stock
generally any additional shares of capital stock of Company or securities
convertible into or exchangeable for shares of capital stock of Company, or any
option, right or warrant to subscribe therefor; or
(c) Company shall reclassify its Common Stock; or
(d) Company shall engage in or enter into any capital
reorganization, consolidation or merger; or
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<PAGE> 17
(e) A dissolution, liquidation or winding up of Company
(other than in connection with a consolidation or merger) or a sale of all or
substantially all of its property, assets and business as an entirety shall be
proposed; then Company shall give written notice of such event to Holder at
least fifteen (15) days prior to the date fixed as a record date or the date of
closing the transfer books for the determination of the shareholders entitled to
receive such dividend, distribution, convertible or exchangeable securities or
subscription rights, or entitled to vote on such proposed dissolution,
liquidation, winding up or sale. Such notice shall specify such record date or
the date of closing the transfer books, as the case may be. Failure to give such
notice or any defect therein shall not affect the validity of any action taken
in connection with the declaration or payment of any such dividend, or the
issuance of any convertible or exchangeable securities, or subscription rights,
options or warrants, or any proposed dissolution, liquidation, winding up or
sale.
8.2 Listing on Stock Exchange. The Common Stock is currently listed
on NASDAQ. If the Company at any time lists any Common Stock or other securities
of the same class as those issuable on exercise of this Warrant on any national
securities (other than NASDAQ), the Company will, at its sole expense,
simultaneously list on that exchange, an official notice of issuance on exercise
of this Warrant and maintain such listing or inclusion of all shares of Warrant
Stock or other securities from time to time issuable on exercise of this
Warrant.
8.3 Methods; Addresses. Except as otherwise provided herein, any
notice or demand which, by the provisions hereof, is required or which may be
given to or served upon the parties hereto shall be in writing and, if by
telegram, telecopy or telex, shall be deemed to have been validly served, given
or delivered when delivery is confirmed electronically, if by personal delivery,
shall be deemed to have been validly served, given or delivered upon actual
delivery and, if mailed, shall be deemed to have been validly served, given or
delivered three (3) business days after deposit in the United States mails, as
registered or certified mail, with proper postage prepaid and addressed to the
party or parties to be notified, at the following addresses (or such other
address(es) as a party may designate for itself by like notice):
(a) If to Holder:
Virginia R. Cirica Trust
c/o Virginia R. Cirica
------------------------------
------------------------------
Facsimile: (714)
-------------
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<PAGE> 18
With copy to: _________________________
_________________________
_________________________
_________________________
_________________________
(b) If to Company:
Diedrich Coffee, Inc.
Attention: President
2144 Michelson Drive
Irvine, California 92612
Facsimile: (714) 756-1144
With copy to: Paul, Hastings, Janofsky & Walker LLP
Attention: Peter J. Tennyson
Seventeenth Floor
695 Town Center Drive
Costa Mesa, California 92626
Facsimile: (714) 979-1921
8.4 Warrant Agent. The Company may, on written notice to the Holder,
appoint an agent for the purposes of issuing Warrant Stock or other securities
on the exercise of this Warrant and/or replacing or exchanging this Warrant. If
any such appointment is made, any issuance, replacement, or exchange shall be
made at that office by that agent.
8.5 No Right as Shareholder. No Holder of this Warrant, as such,
shall be entitled to vote or receive dividends or be considered a shareholder of
the Company for the purposes, nor shall anything in this Warrant be construed to
confer on any Holder of this Warrant, as such, any rights of a shareholder of
the Company or any right to vote, to give or withhold consent to corporate
action, to receive notice of meetings of shareholders, or to receive dividends
or subscription rights or otherwise.
9. Miscellaneous.
9.1 Survival of Covenants. All agreements and covenants made herein
shall survive the execution and delivery hereof.
9.2 Failure or Indulgence Not Waiver. No failure or delay on the
part of Holder in the exercise of any power, right or privilege hereunder shall
operate as a waiver thereof, nor shall any one or more of such failures or
delays
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<PAGE> 19
constitute a course of performance or dealing on which Company is entitled to
rely, nor shall any single or partial exercise of any such power, right or
privilege preclude other or further exercises thereof or of any other right,
power or privilege. All rights and remedies existing hereunder are cumulative
to, and not exclusive of, any rights or remedies otherwise available.
9.3 Cost of Enforcement. If any default is made in the fulfillment
of Company's duties under this Warrant, Company shall pay Holder all costs of
enforcement, including, without limitation, reasonable attorneys' and
accountants' fees and costs of appeals and interest on any sums actually
disbursed at the rate set forth herein.
9.4 Governing Law. This Warrant has been executed in and shall be
governed by the laws of the State of California. As part of the consideration
for Holder's investment herein, Company and Holder hereby agree that all actions
or proceedings arising directly or indirectly hereunder, whether instituted by
Holder or Company, may, at the option of Holder, be litigated in courts having
situs within the State of California, County of Orange and Company hereby
expressly consents to the jurisdiction of any local, state or federal court
located within said state and county, and consents that any service of process
in such action or proceeding may be made by personal service upon Company
wherever Company may be located, or by certified or registered mail directed to
Company at its last known address. Company and Holder waive trial by jury, any
objection based on forum non conveniens, and any objection to venue of any
action instituted hereunder.
9.5 Modification. Neither this Warrant nor any provision hereof may
be amended, modified, waived, discharged or terminated with respect to Holder
unless agreed to by the Holder.
9.6 Severability. Whenever possible, each provision of this Warrant
will be interpreted in such manner as to be effective and valid under applicable
law, but, if any provision of this Warrant is held to be prohibited by or
invalid under applicable law, such provision will be ineffective only to the
extent of such prohibition or invalidity, without invalidating the remainder of
this Warrant.
9.7 Further Assurance. At any time or from time to time upon the
request of Holder, Company will execute and deliver such further documents and
do such other acts and things as Holder may reasonably request in order fully to
effectuate the purposes of this Warrant, the exercise of Holder's purchase
right.
9.8 Successors. All the covenants, agreements, representations and
warranties contained in this Note shall bind the parties hereto and their
respective heirs, executors, administrators, distributees, successors and
assigns.
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<PAGE> 20
9.9 Headings. The section headings in this Warrant are inserted for
purposes of convenience only and shall have no substantive effect.
9.10 Construction. Both of the parties have participated in the
drafting of this Warrant. Consequently, no provision of this Warrant shall be
construed in favor of or against any party by reason of his or its attorney
having drafting it.
[Signature Page Follows]
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<PAGE> 21
[SIGNATURE PAGE - WARRANT]
IN WITNESS WHEREOF, the parties hereto have caused this Warrant to be
executed as of the day and year first written above.
DIEDRICH COFFEE, INC.
By: ____________________________
Name: __________________________
Its: ___________________________
THE VIRGINIA R. CIRICA TRUST
By: ____________________________
Virginia R. Cirica, Trustee
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<PAGE> 1
EXHIBIT 10.20
SECURED PROMISSORY NOTE
$500,000 Maximum Principal Amount August 19, 1997
Irvine, California
FOR VALUE RECEIVED, the undersigned, Diedrich Coffee, Inc., a Delaware
corporation ("Borrower") hereby promises to pay to the order of The Virginia R.
Cirica Trust ("Holder") or its successors or assigns, the principal sum of up to
Five Hundred Thousand Dollars ($500,000) 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 and unpaid interest, shall become due and payable on
August 19, 2002. Interest shall become due and payable monthly as it is accrued,
beginning September 1, 1997.
1. LOAN AGREEMENT. Borrower and Holder intend to enter into a Term Loan
Agreement (the "Agreement") and this Note shall be entitled to all of rights and
benefits under such Agreement. Reference is made to the Agreement for a more
complete statement of the terms and conditions under which the loan evidenced
hereby is made and is to be repaid.
2. INTEREST. The principal amount of this Note shall bear interest at
the Note Rate. The "Note Rate" shall be the prime rate plus three and one-half
percent or the maximum rate allowed by law, whichever is less. 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.
3. DISBURSEMENTS. Holder shall advance $250,000 to Borrower upon the
execution by Borrower hereof. Holder shall advance Borrower up to the remaining
$250,000, upon Borrower's request, upon the execution by both Holder and
Borrower of the Agreement and the issuance of the Warrants thereunder.
All loans made by Holder and all repayments of the principal thereof
shall be recorded by the Holder 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 Holder to make any such
recordation or of
<PAGE> 2
Borrower to make any such endorsement shall not affect the obligations of
Borrower hereunder.
4. EFFECT OF NON-PAYMENT OF PRINCIPAL AND INTEREST. In the event that
any principal and/or interest is not paid when due, without affecting any of
Holder'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 Holder until such unpaid amount is paid
in full.
5. PAYMENT OF PRINCIPAL AND INTEREST. Principal and interest shall be
payable in lawful money of the United States at Holder's address located at
________________________________, _______, California _______ or at such other
place as is directed by Holder in writing.
6. PREPAYMENT.
(a) MANDATORY PREPAYMENTS. Borrower shall prepay the entire
principal balance of this Note (plus all interest then due hereunder)
immediately upon the issuance, offer or sale of any shares of Borrower's capital
stock pursuant to a secondary offering to the public with net proceeds of
greater than Ten Million Dollars ($10,000,000); excluding, however, any offering
of Borrower's common stock pursuant to a stock option, bonus, award or other
employee benefit plan and existing options to purchase any of Borrower's common
stock which are presently held by officers, directors or employees of Borrower.
(b) OPTIONAL PREPAYMENT. Borrower may prepay any portion of the
principal balance of this Note in any amount which is an integral multiple of
$10,000 at any time without penalty.
7. SECURITY. This Note and all of Borrower's obligations hereunder are
secured by the security interest granted by Borrower to Holder by that certain
Security Agreement dated August 19, 1997 in which Borrower is the Debtor and
Holder is the Secured Party(the "Security Agreement").
8. DEFAULT. 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 shall have
continued for a period of fifteen (15) days; or
(b) Any representation or warranty made by or on behalf of Borrower
in this Note, the Agreement, the Security Agreement or in any other Loan
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<PAGE> 3
Document (as defined in the Agreement) or in any statement or certificate given
in writing pursuant thereto or in connection therewith is false, misleading or
incomplete in any material respect when made (or deemed to have been made); or
(c) Borrower breaches or fails or neglects to perform, keep or
observe any covenant set forth in this Note, the Agreement, the Security
Agreement, or any other Loan Document (other than Borrower's obligation to make
all payments due under this Note which is governed by subparagraph (a) above)
and the same has not been cured within ten (10) calendar days after Borrower
receives notice thereof from Holder; or
(d) 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
(e) An involuntary case or other proceeding shall be commenced
against 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 Borrower under the federal bankruptcy laws as now or
hereafter in effect; or
(f) This Note, the Agreement, the Security Agreement or any other
Loan Document for any reason (other than the satisfaction in full of all amounts
owing in connection with the Loan) ceases to be, or is asserted by Borrower not
to be, a legal, valid and binding obligation of Borrower, enforceable in
accordance with its terms, and such occurrence has not been cured to Holder's
satisfaction within five (5) calendar days after Borrower receives notice
thereof from Holder; or
(g) Borrower has fraudulently conveyed or concealed its property to
prevent attachment or execution by its creditors; or
(h) Borrower is insolvent and fails to satisfy or obtain the release
of any judicial lien within 30 days of such lien coming into existence; or
-3-
<PAGE> 4
(i) Borrower has admitted to any person in writing that it is unable
to pay its debts and that it is willing to be adjudged a bankrupt.
If an Event of Default shall occur and be continuing or shall exist,
the principal amount of this Note and interest accrued hereon 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.
9. GOVERNING LAW. This Note shall be governed by, and construed and
enforced in accordance with, the internal laws (including the laws of conflict
and choice of law) of the State of California.
10. WAIVER. 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.
11. AMENDMENT. This Note may be amended or modified only upon the
written consent of both Borrower and Holder. Any amendment must specifically
state the provision or provisions to be amended and the manner in which such
provision(s) are to be amended.
12. FEES AND EXPENSES. 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.
13. AGREEMENT. This Note incorporates by reference all the provisions
of the Agreement, including but not limited to all provisions contained therein
with respect to Events of Default, waivers, remedies and covenants, and the
description of the benefits, rights and obligation of each of the Borrower and
Holder under the Agreement.
[Signature Page Follows]
-4-
<PAGE> 5
[SIGNATURE PAGE TO PROMISSORY NOTE]
IN WITNESS WHEREOF, Borrower has executed this Note as of the date and
year first above written.
BORROWER:
DIEDRICH COFFEE, INC., a Delaware
corporation
By: /s/ KERRY W. COIN
-------------------------------
Name: Kerry W. Coin
Title: President and Chief Operating
Officer
-5-
<PAGE> 6
PROMISSORY NOTE
LOANS OF PRINCIPAL
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Holder Borrower
Date Amount of Loan Principal Balance Recordation By Endorsement By
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
August 19, 1997 $250,000 $250,000 /s/ V.R. Cirica /s/ K. Coin
- ------------------------------------------------------------------------------------------------------------------------
August __, 1997 $250,000 $500,000 /s/ V.R. Cirica /s/ K. Coin
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
-6-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DIEDRICH
COFFEE, INC. UNAUDITED FINANCIAL STATEMENTS FOR THE TWENTY-SIX WEEKS ENDED AND
AS OF JULY 30, 1997 CONTAINED IN COMPANY'S 2ND QUARTER AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-28-1998
<PERIOD-START> JAN-30-1997
<PERIOD-END> JUL-30-1997
<CASH> 571,752
<SECURITIES> 0
<RECEIVABLES> 178,256
<ALLOWANCES> 0
<INVENTORY> 1,572,795
<CURRENT-ASSETS> 2,865,417
<PP&E> 12,936,700
<DEPRECIATION> 2,613,175
<TOTAL-ASSETS> 13,943,662
<CURRENT-LIABILITIES> 4,966,467
<BONDS> 0
0
0
<COMMON> 53,917
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 13,943,662
<SALES> 11,678,242
<TOTAL-REVENUES> 11,678,242
<CGS> 5,902,708
<TOTAL-COSTS> 5,902,708
<OTHER-EXPENSES> 11,827,507
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,651
<INCOME-PRETAX> (6,078,381)
<INCOME-TAX> 2,890
<INCOME-CONTINUING> (6,081,271)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,081,271)
<EPS-PRIMARY> (1.13)
<EPS-DILUTED> 0
</TABLE>
