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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended January 28, 1998
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 NO. 0-21203
DIEDRICH COFFEE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0086628
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2144 MICHELSON DRIVE
IRVINE, CALIFORNIA 92612
(949) 260-1600
(Address of principal executive offices, including zip code
and telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value per share
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(Title of Class)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the registrant's Common Stock held by
non-affiliates, based upon the closing sale price of the registrant's Common
Stock on April 20, 1998, as reported on the NASDAQ National Market System, was
$21,219,203.
The number of shares of the registrant's Common Stock outstanding, as of
April 20, 1998, was 5,941,650.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates certain information by reference from the
registrant's definitive proxy statement pursuant to Schedule 14A for its annual
meeting of stockholders to be held on June 23, 1998, which proxy statement will
be filed not later than 120 days after the close of the registrant's fiscal year
ended January 28, 1998.
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TABLE OF CONTENTS
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PART I PAGE
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Item 1. Business.................................................... 1
Item 2. Properties.................................................. 8
Item 3. Legal Proceedings........................................... 8
Item 4. Submission of Matters to a Vote of Security Holders......... 9
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 10
Item 6. Selected Financial Data..................................... 11
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 12
Item 7A Quantitative and Qualitative Disclosures About Market Price. 18
Item 8. Financial Statements and Supplementary Data................. 18
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 18
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 18
Item 11. Executive Compensation...................................... 18
Item 12. Security Ownership of Certain Beneficial Owners
and Management.............................................. 18
Item 13. Certain Relationships and Related Transactions.............. 18
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K................................................. 19
Signatures.................................................. 22
Financial Statements........................................ F-1
Index to Exhibits........................................... S-1
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PART I
ITEM 1. BUSINESS.
GENERAL
From time to time, in both written reports and oral statements, the
Company makes "forward-looking statements" within the meaning of Federal and
state securities laws. Disclosures that use words such as the Company
"believes," "anticipates," "expects," "may" or "plans" and similar expressions
are intended to identify forward-looking statements. These forward-looking
statements reflect the Company's current expectations and are based upon data
available at the time of the statements. Such statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from expectations. Any such forward-looking statements, whether made in this
report or elsewhere, should be considered in context with the various
disclosures made by the Company about its business, including the factors
discussed below. 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.
Diedrich Coffee, Inc. ("Diedrich Coffee" or the "Company") is a
specialty coffee roaster, wholesaler, retailer and franchisor that currently
operates thirty-six retail coffeehouses, seven coffee carts and services
approximately 225 wholesale accounts. The retail units are located in Southern
California, Colorado and Texas. Wholesale accounts are primarily located in
Southern California. Diedrich Coffee sells premium quality coffee beverages made
from its own freshly roasted select coffee beans. In addition to brewed coffee,
the Company offers a broad range of Italian-style beverages such as espresso,
cappuccino, cafe latte, cafe mocha and espresso machiato. To complement beverage
sales, the Company sells light food items, whole bean coffee and accessories
through its coffeehouses. The Company's objective is to be the leading national
chain of neighborhood coffeehouses.
To deliver and serve the high quality coffee for which the Company is
known, the Company obtains its premium "green" or unroasted coffee beans from
specialty coffee brokers and directly from coffee-producing nations through its
contacts with exporters and growers in the United States and abroad. The beans
purchased by the Company are of the premium grade arabica variety. These green
coffee beans are custom roasted in carefully controlled batches according to the
Company's proprietary recipes and standards.
The Company seeks to differentiate itself and build brand name
recognition by selling and serving the finest coffee and espresso drinks,
selling only fresh custom roasted coffee beans and by developing and operating
attractive coffeehouses intended, in most cases, to serve as neighborhood
gathering places. Diedrich Coffee stresses the quality of its products through
experienced sourcing of the green beans and its proprietary roasting methods.
The Company believes that this strategy, together with enthusiastic and friendly
customer service, creates a loyal customer base. Diedrich coffeehouses are
generally established in high-visibility locations, consistent with the
Company's strategy of developing a substantial repeat customer base. The
Company's coffeehouses average approximately 1,300 square feet, ranging in size
from 725 to 2,654 square feet.
The first retail store operating under the name Diedrich Coffee
commenced operations in Orange County, California in 1972. On September 11,
1996, the Company completed its initial public offering of 2,530,000 shares of
Common Stock. The offering consisted of 1,600,000 shares sold on behalf of the
Company and 930,000 shares sold on behalf of certain stockholders. The net
proceeds of the offering to the Company, after deducting related expenses, were
approximately $12.6 million. The Company used a portion of the net proceeds to
repay all indebtedness outstanding. The remaining net proceeds were used to fund
the opening of additional coffeehouses and to provide working capital.
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
not meeting management's long-term operational expectations. At that time, five
coffeehouses had been identified on a preliminary basis for possible closure in
the first quarter of fiscal 1998. Subsequently, as announced by the Company on
April 29, 1997, seven additional coffeehouses were targeted for closure during
fiscal 1998. In connection with the planned coffeehouse closures, the Company
recorded an impairment provision and a restructuring charge totaling
approximately $4.6 million in the first quarter of fiscal 1998. The coffeehouse
closures, which were undertaken to streamline operations and improve
profitability, began in late March 1997. Eleven of the original twelve
coffeehouses identified for closure were closed in fiscal 1998, with leases
terminated in most cases. In January, management reviewed the progress of all
retail operations and decided that one of the twelve coffeehouses originally
designated for closure would remain open. At year-end most of the lease
terminations provided for in the restructuring had been completed at less cost
than originally anticipated. As a result of these two factors, management
determined that the remaining restructuring reserve of $885,000 could be reduced
by $648,000. As of January 28, 1998, the Company had a remaining restructuring
reserve of $237,000 and had incurred charges under its impairment provision and
restructuring reserve totaling $3,665,000 of which $945,000 were cash and
$2,720,000 were non-cash.
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On March 12, 1997, the Company announced the resignation of Steven A.
Lupinacci as its President, Chief Executive Officer, Chief Financial Officer and
Director and the appointment of Lawrence Goelman, one of the Company's board
members, to serve as interim Chief Executive Officer. On April 25, 1997, the
Company's Board of Directors (the "Board") approved the appointment of Kerry W.
Coin as President and Chief Operating Officer and the appointment of John B.
Bayley as Acting Vice President, Finance and Controller.
At the direction of the Board, the Company's interim management team
took steps to renew and strengthen the Company. Those steps included: (1)
closing coffeehouses which did not meet the Company's performance standards; (2)
developing new retail points of distribution such as "co-branding," carts and
kiosks; (3) building the wholesale division's revenues by growing the core
business as well as through new channels such as office coffee service; (4)
improving cost controls by hiring an experienced purchasing manager and
installing upgraded software point-of-sale systems; (5) developing and
implementing enhanced training and human resources systems to strengthen and
build the Company's operations staff; and (6) concentrating on building brand
awareness and equity.
Retail comparable unit revenues improved slightly in fiscal 1998 while
controllable operating expenses at the coffeehouse level were significantly
reduced. The Company experienced lower than expected retail sales in the third
quarter due to unusually warm weather in the Company's core Southern California
markets. Cost of sales were adversely affected by green coffee inventory expense
that exceeded average historical costs which also reduced earnings. The Company
did not meet its revenue targets in the fourth quarter for several reasons,
including delays in opening of coffee carts, weaker results than projected from
marketing programs, and slower than expected responses to improvements in
operations and customer service, as well as delays in establishing certain
wholesale relationships.
On November 18, 1997 the Company announced that former Taco Bell
Worldwide Chairman and Chief Executive Officer John E. Martin agreed to join the
Company's Board as Chairman, replacing Lawrence Goelman who remains a Director.
The Company also announced on November 18, 1997 that it named Timothy J. Ryan,
former President of Sizzler USA and former Senior Vice President at Taco Bell
Worldwide, as the Company's President and Chief Executive Officer to replace
Lawrence Goelman, who had been serving as Interim Chief Executive Officer. Mr.
Ryan also joined the Board. On January 22, 1998 the Company announced the
resignation of Kerry Coin, Executive Vice President and Chief Operating Officer.
The new executive team prepared a revised strategic plan for fiscal 1999
and beyond. That plan focuses on positioning Diedrich Coffee coffeehouses as the
consumer's place of choice to get the best coffee and enjoy it in attractive
coffeehouse surroundings. The Company plans to expand nationally through
franchise area development agreements with large multi-unit franchise operators.
The Company will concentrate on expansion in its core market area in Southern
California and hopes to enter into some franchise area development agreements in
the second half of fiscal 1999. In the first two quarters of fiscal 1999
management's emphasis will be on: (1) improving operations and customer service
through new training programs and new hires; (2) developing new coffee and
espresso drinks; (3) executing a new marketing plan; (4) developing and
optimizing a prototype coffeehouse design; (5) expanding its wholesale
activities; and (6) optimizing its product sourcing.
DIEDRICH COFFEE'S BUSINESS
The Company's retail stores accounted for 90.3% of net sales during the
fiscal year ended January 28, 1998. The Company's objective is to become the
leading national chain of neighborhood coffeehouses. The Company's strategy to
accomplish this goal is to expand in the Company's core market and by entering
into franchise area development agreements in other markets as well as by
selling the finest quality coffees and related products with a superior level of
customer service.
THE COFFEEHOUSE CONCEPT. The Company's coffeehouses attempt to reflect
the character of the community or neighborhood in which they are located through
the design and construction of the coffeehouse. The Company tailors the
coffeehouse to the surrounding neighborhood. The coffeehouse concept and designs
are being reviewed and refined in fiscal 1999 to arrive at a prototype that
optimizes its use and can be adapted to a wider variety of
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neighborhoods. The coffeehouses feature varying amenities to promote this
environment, such as tables for conversation and laptop computers, live music or
outdoor patios where customers can enjoy their coffee and food.
Diedrich Coffee's coffeehouse concept, however, is not limited to the
physical structure of the coffeehouse. The relaxed and inviting environment is
created in part by the employees in each coffeehouse. Employees are encouraged
to know their customers and are trained to promote customer service. To further
enhance the Company's market penetration, the Company intends to expand the use
of alternative concepts such as kiosks and carts.
COFFEEHOUSE OPERATIONS. The typical Diedrich coffeehouse is staffed with
one to two managers, and a staff of ten to fifteen part-time hourly employees
from which the operating shifts are filled. The hours for each coffeehouse are
established based upon the locations and customer demand, but typically are from
6:00 a.m. to 10:00 p.m. in residential locations and from 6:00 a.m. to 5:00 p.m.
Monday through Friday in commercial locations. The coffeehouse managers are
overseen by Regional Directors of Operations (RDOs) and by District Managers in
Denver, Colorado and Houston, Texas.
In addition to coffee beverages, all Diedrich coffeehouses serve a
select offering of light food items (bagels, croissants and pastries) and
dessert items (pastries and cakes) to complement beverage sales. Management is
working with selected suppliers to consolidate sources of these items. The
Company is also working to improve the merchandising of food items. Diedrich
coffeehouses also sell more than twenty different selections of regular and
decaffeinated roasted whole bean coffee. The Company's coffeehouses also carry
select coffee related merchandise items. In fiscal 1998, the Company's retail
sales mix was 71.7% coffee beverages, 19.9% food items, 6.3% whole bean coffee
and 2.1% accessories and clothing.
FRANCHISING AND AREA DEVELOPMENT
In July 1996, the Company signed a franchise development agreement with
a company based in Singapore. The agreement called for the development of a
total of at least thirty Diedrich coffeehouses in Singapore, Malaysia and
Indonesia over the following five years. In late 1997 the Company notified the
area developer that it was in default of the development requirements of the
area development agreement. Diedrich Coffee subsequently terminated that
agreement.
The Company's new strategic plan stresses the development of
Company-owned coffeehouses, kiosks and carts in its core Southern California
market, and franchise area development in other markets, including overseas
markets. Franchise area development attention and discussions in fiscal 1999
will focus on experienced and well-capitalized franchisees and area developers.
The Company plans to enter into several franchise area development agreements
between the third quarter of fiscal 1999 and the first quarter of fiscal 2000.
WHOLESALE
In fiscal 1998 the Company took significant steps to build its wholesale
sales organization and grow this business channel. A new director of the
Wholesale Division with substantial experience in the coffee business was hired
and the sales staff expanded. These efforts were successful in fiscal 1998, when
wholesale sales grew to $2.2 million of total sales, an increase of 31.1% from
the prior year. Further growth is planned for fiscal 1999, including growth
outside of Southern California, in office coffee service and sales to restaurant
chains.
PRODUCT SUPPLY
Coffee beans are an agricultural product grown commercially in over
fifty countries in the tropical regions of the world. There are many varieties
of coffee and a range of quality grades within each variety. While the broader
coffee market generally treats coffee as a fungible commodity, the specialty
coffee industry focuses on the highest grades of coffee. Diedrich Coffee
purchases only premium grade arabica coffee beans and believes these beans are
the best available from each producing region. The premium grade arabica bean is
a higher quality variety than the average grade arabica or robusta variety
coffee bean, which are typically found in non-specialty or mass-merchandised
commercial coffees. These premium coffees are available in relatively small
quantities. The
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Company seeks to purchase the finest qualities and varieties of coffee by
identifying the unique characteristics and flavor of the varieties available
from each region of the world. The background and experience of the Company's
personnel allow Diedrich Coffee to maintain its commitment to serve and sell
only the highest quality coffee.
During the buying season, the Company may enter into forward commitments
for the purchase of more than a dozen different types of coffee plus specially
featured coffees that may only be available in small quantities. Rotating its
coffee selection enables the Company to provide its customers with a wider
variety of coffees as well as certain coffees that are available only on a
seasonal basis. The Company contracts for future delivery of green coffee to
help ensure adequacy of supply and typically maintains a minimum six week supply
of each variety of whole beans then available.
Diedrich Coffee is committed to serving its customers beverages and
whole bean products from freshly roasted coffee beans. The Company's coffee is
delivered to its coffeehouses promptly after roasting to enable the Company to
guarantee the freshness of each cup of coffee or package of whole coffee beans
sold in its coffeehouses. Serving only freshly roasted coffee is imperative
because roasted coffee is a highly perishable product, which steadily loses
quality after being roasted, at a rate depending on exposure to oxygen in
storing, packaging and handling. To maintain freshness, the Company had a
multi-regional roasting approach to ensure freshness. In fiscal 1999 the Company
plans to acquire sophisticated vacuum pack and nitrogen flush packing equipment
that can extend roasted coffee shelf life from two weeks in the current
packaging to approximately 90-150 days in the new packaging. In the interim,
some roasting was outsourced, under the supervision of the Company's master
roasters, to obtain the advantages of advanced packaging. Upon acquisition and
implementation of the new packaging equipment in the second quarter, the Company
plans to centralize roasting and packaging.
COMPETITION
The Company competes directly against all other premium coffee roasters,
coffeehouses and coffee bars as well as against all restaurant and beverage
outlets that serve coffee and a growing number of espresso stands, carts and
stores. The Company's whole bean coffees compete directly against specialty
coffees sold at retail through supermarkets, specialty retailers and a growing
number of specialty coffee stores. Both the Company's whole bean coffees and its
coffee beverages compete to a greater or lesser extent against all other coffees
on the market. The Company believes that its customers choose among retailers
primarily on the basis of product quality, service and convenience and, to a
lesser extent, on price.
Although competition in the specialty coffee market is currently
fragmented, the Company competes with Starbucks Corporation, the market leader,
and other competitors who have significantly greater financial, marketing and
other resources than the Company. The Company believes that Starbucks has
increased the public awareness and experience of premium coffee nationwide,
helping to create demand for Diedrich Coffee's coffee drinks, roasted whole
beans and coffeehouses. In addition to these competitors, the attractiveness of
the gourmet specialty coffeehouse market could draw additional competitors with
substantially greater financial, marketing and operating resources than the
Company. In the wholesale and office coffee service markets, the Company
competes against well established providers, including Starbucks. Wholesale and
office coffee service competition tends to revolve around price, product quality
and customer service.
The Company expects that competition for suitable sites for new
coffeehouses will continue to be intense. The Company competes against other
specialty retailers and restaurants for these sites, and there can be no
assurance that management will be able to continue to secure adequate sites at
acceptable rent levels.
TRADEMARKS
The Company owns several trademarks and servicemarks that have been
registered with the United States Patent and Trademark Office, including
Diedrich Coffee(R), Wiener Melange(R) and Flor de Apanas(R). In addition, the
Company has applications pending with the United States Patent and Trademark
Office for a number of additional marks. The Diedrich Coffee trademark is
material to the Company's business. The Company also has applications
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pending overseas for trademark protection of the Diedrich Coffee trademark and
the related designs. Trademark registrations can generally be renewed for so
long as the marks are in use. The Company owns copyrights on its promotional
materials, coffeehouse graphics and operational and training materials. The
Company does not believe that any of these copyrights, valuable as they are, are
material to its business.
EMPLOYEES
At January 28, 1998, the Company employed a work force of 749 persons,
103 of whom were employed full-time. None of the Company's employees is
represented by a labor union, no employees are currently covered by collective
bargaining agreements, and the Company considers its relations with its
employees to be good. The Company is improving employee benefits, training and
other aspects of employment to attract and retain valuable employees and
managers.
RISK FACTORS AND TRENDS AFFECTING DIEDRICH COFFEE AND ITS BUSINESS
LIMITED OPERATING HISTORY; HISTORY OF OPERATIONS. As of April 20, 1998,
the Company operated thirty-six coffeehouses, only eight of which had been open
more than three years. The Company had a net loss of $9,113,000 in fiscal 1998;
a net loss of $986,000 in fiscal 1997; net income of $186,000 and $324,000 in
fiscal 1996 and 1995, respectively, and a net loss of $89,000 in fiscal 1994.
The Company went through a restructuring in fiscal 1998 and significant changes
in executive, middle and coffeehouse management. The past successes of the new
executive team members will not necessarily lead to similar results at the
Company. Although the Company believes it is positioned for growth in fiscal
1999 there can be no assurances that the Company will meet that objective.
PRIOR GROWTH STRATEGY; RAPID EXPANSION AND LOSSES. From the end of the
fiscal 1992 through fiscal 1997, the Company expanded the number of its
coffeehouses from three to forty-seven (now thirty-six) while incurring
accumulated losses. The Company pursued an aggressive growth strategy in fiscal
years 1997 and 1998 that was not successful for a number of reasons. Some
locations acquired were not suitable for Diedrich Coffee coffeehouses. Company
management and infrastructure did not keep pace with the growth, leading to
inefficiencies and losses. Commencing in March, 1997, the Company's interim
management developed a new strategy based upon focus on core markets, and
building other channels of distribution, including but not limited to, new
wholesale categories such as chain restaurants and office coffee service. The
Company did not succeed in its objective of returning to positive cash flow by
the last period of fiscal 1998, due in part to the one-time costs associated
with the addition of a new permanent management team and related changes to its
strategy. Even if the Company is successful in returning to profitability, there
can be no assurances as to how long this will take or of the future profits that
can be achieved.
SITE SELECTION. The most important variable in the success of a new
coffeehouse is its location. A poor location will prevent a coffeehouse from
achieving the sales and earnings the Company expects from every coffeehouse.
New management intends to make site selection
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systematic and comparatively objective, but there can be no assurances that this
project will be successful or yield consistent results. A new site selection
model developed by the Company for its use will also be made available to
franchise area developers.
FRANCHISING. Franchise area development involves a number of risks,
including the diversion of management's attention and resources. The Company has
no prior experience in franchising, although certain executives and managers
have substantial franchisor experience in other companies.
NEED FOR CONTINUED IMPROVEMENTS IN OPERATIONS AND MANAGEMENT. The
Company's new strategy presents numerous operational and competitive challenges
to the Company's senior management and employees as a prototype store design is
selected, operations are improved, potential sites are evaluated, developed and
operated for Company-owned locations and in selecting the right franchise area
developers. The Company's results of operations will be adversely affected if
revenues do not increase sufficiently to compensate for the increase in
operating expenses attributable to new management and new programs. There can be
no assurances that any growth will be profitable or that it will not adversely
affect the Company's results of operations. In addition, the success of the
Company's new plan depends in part upon the Company's ability to: (1) continue
to improve and expand its management and financial control systems, (2)
attract, retain and motivate key employees and (3) raise additional capital.
There can be no assurances that the Company will be successful in these regards.
Successful execution of the Company's new plan depends in part upon its
ability to: (1) compete successfully in new markets; (2) obtain (or have its
franchise area developers obtain) suitable sites at acceptable costs in highly
competitive real estate markets; (3) hire, train and retain qualified
personnel; (4) integrate franchised locations into new as well as existing
product distribution, improve inventory control, marketing and information
systems; (5) expand roasting capacity and upgrade packaging capabilities to
enable freshly roasted coffee deliveries wherever needed; and (6) impose and
maintain strict quality control from green coffee acquisition to the fresh cup
of perfectly brewed coffee in a customer's hand. There can be no assurances that
the Company will achieve its planned expansion goals, manage its growth
effectively or operate its existing and new coffeehouses profitably. The failure
of the Company to manage its growth effectively or operate existing or any new
coffeehouses profitably would have a material adverse effect on the Company's
financial condition and results of operations.
NEED FOR ADDITIONAL FINANCING. In order to achieve and maintain the
Company's anticipated growth and the expansion of its wholesale business in
fiscal 1999, including new coffeehouse construction and franchising, the Company
will need to incur debt or issue additional equity securities in public or
private financings. There can be no assurances that any such additional
financing will be available on terms satisfactory to the Company. (See Note 12,
Subsequent Event.)
FLUCTUATIONS IN AVAILABILITY AND COST OF UNROASTED COFFEE. The Company
depends upon both its outside brokers and its direct contacts with exporters and
growers in countries of origin for the supply of its green coffee. Coffee supply
and price are subject to significant volatility beyond the control or influence
of the Company. During fiscal 1998 worldwide coffee commodity prices were at
high levels. Although prices have since come down, worldwide demand for high
quality coffee remains strong. In fiscal 1998, the Company mitigated the effect
of green coffee price increases through moderate price increases in the
wholesale and retail sales prices of its roasted coffee beans, as well as for
its brewed coffee and espresso drinks and related products. Demand for the
Company's coffee was not adversely affected by these price increases. Although
most coffee trades in the commodity market, coffee of the quality sought by the
Company tends to trade on a negotiated basis at a substantial premium above
commodity coffee pricing, depending upon the origin, supply and demand at the
time of purchase. Supply and price can be affected by multiple factors in the
producing countries, including weather and political and economic conditions. In
addition, green coffee prices have been affected in the past, and may be
affected in the future, by the actions of certain organizations and
associations, such as the International Coffee Organization or the Association
of Coffee Producing Countries, that have historically attempted to establish
commodity price controls of green coffee through agreements establishing export
quotas or restricting coffee supplies worldwide. No assurance can be given that
these organizations (or others) will not succeed in raising green coffee prices
or that, in such events, the Company will be
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able or choose to maintain its gross margins by raising prices without affecting
demand. Increases in the price of green coffee, or the unavailability of
adequate supplies of green coffee of the quality sought by the Company whether
due to the failure of its suppliers to perform, conditions in the
coffee-producing countries, or otherwise - could have a material adverse effect
on the Company's results of operations.
To mitigate the risks associated with increases in coffee prices and to
provide greater predictability in the prices the Company pays for its coffee,
the Company has from time to time, depending upon market volatility, entered
into fixed-price purchase commitments for a portion of its green coffee
requirements. At January 28, 1998 these commitments totaled $451,500. There can
be no assurances that these activities will significantly protect the Company
against the risks of increase in coffee prices or that they will not result in
the Company having to pay substantially more for its supply of coffee than would
have been required absent such activities.
COMPETITION. The market for prepared specialty coffee beverages is
fragmented and highly competitive. Competition is expected to increase
substantially. The Company's coffee beverages compete directly against all
restaurant and beverage outlets that serve coffee as well as a growing number of
espresso stands, carts and stores. The Company's whole bean coffees compete
directly against specialty coffee sold at retail through supermarkets and a
growing number of specialty coffee stores. The coffee industry is currently
dominated by several large companies, such as Kraft Foods, Inc., Proctor &
Gamble Co. and Nestle S.A., many of which have begun aggressively marketing
gourmet coffee products. While the market for specialty gourmet coffee stores
remains fragmented, the Company competes directly with Starbucks Corporation,
the largest U.S. specialty coffee retailer and numerous other regional coffee
bar and coffeehouse chains. Starbucks Corporation has substantially greater
financial, marketing and other resources than the Company and has operations in
the markets in which the Company currently operates or intends to expand.
One of the main areas of competition in the specialty coffee retail
store marketplace is in the procurement of prime retail store premises. The
Company competes against other specialty retailers and restaurants for store
sites, and there can be no assurance that management will be able to secure
adequate, additional sites at acceptable costs.
GEOGRAPHIC CONCENTRATION; FLUCTUATIONS IN REGIONAL ECONOMIC CONDITIONS.
The Company's coffeehouses are currently located in Southern California,
Colorado and Texas. As a result, the Company's success will also depend in large
part upon factors affecting general economic conditions and discretionary
consumer spending in these regions. Any economic downturn or reduction in
consumer spending in those regions could have a material adverse effect on the
Company.
SEASONALITY. The Company's business is subject to seasonal fluctuations
as well as general trends and fluctuations that affect retail restaurants and
retailers in general. Hot weather tends to depress sales of hot coffee and
espresso drinks, especially unseasonably warm weather in any season. The Company
intends to develop and promote new iced blended coffee and espresso drinks in
warm weather to counterbalance this effect, but there can be no assurances that
such products will be successful.
LACK OF DIVERSIFICATION. The Company's business is centered on one
product: premium fresh custom roasted coffee. To date, the Company's operations
have been limited to the purchase and roasting of green coffee beans and the
sale of whole bean coffee and coffee beverages and espresso drinks, together
with other food products, through its coffeehouses and its wholesale and mail
order businesses. Any decrease in demand for coffee would have a material
adverse effect on the Company's business, operating results and financial
condition.
LEASES; UNCERTAINTY OF RENEWAL TERMS. The Company's thirty-six operating
coffeehouses are all on leased premises. Upon the expiration of certain of these
leases, there is no automatic renewal or option to renew. No assurances can be
given that these leases can be renewed or, if renewed, that rents will not
increase substantially, either of which could adversely affect the Company.
Other leases are subject to renewal at fair market value, which could involve
substantial rent increases, or are subject to renewal with scheduled rent
increases, which could result in rents being above fair market value.
7
<PAGE> 10
EFFECTS OF COMPLIANCE WITH GOVERNMENT REGULATIONS. The Company is
subject to various federal, state and local laws, rules and regulations
affecting its business and operations. Each Diedrich coffeehouse and roasting
facility is and will be subject to licensing and reporting requirements by
numerous governmental authorities which may include the building, land use,
environmental protection, health, safety and fire agencies of the state or
municipality in which each is located. Difficulties in obtaining or failure to
obtain the necessary licenses or approvals could delay or prevent the
development or operation of a given coffeehouse, or limit the products available
in a coffeehouse. Any problems that the Company may encounter in renewing such
licenses in one jurisdiction, may adversely affect its licensing status on a
federal, state or municipal level in other relevant jurisdictions.
RELIANCE ON KEY EXISTING AND FUTURE PERSONNEL. The Company's success
will depend to a large degree upon the efforts and abilities of its officers and
key management employees, particularly John E. Martin, (Chairman of the Board),
Martin Diedrich (Chief Coffee Officer), and Timothy J. Ryan (President and Chief
Executive Officer). The loss of the services of one or more of its key employees
could have a material adverse effect on the Company's business prospects and
potential earnings capacity. The Company has entered into employment agreements
with Messrs. Martin, Diedrich and Ryan, which include, among other things,
provisions restricting them from competing with the Company during the terms of
their respective agreements. As discussed elsewhere in this report, Mr. Martin
invested $1 million in the Company through a private placement in January 1998
and Mr. Ryan invested $50,000. Messrs. Martin and Ryan have significant stock
options to purchase Company stock pursuant to stock option agreements (see Item
4 below). The Company maintains and is sole beneficiary of key person life
insurance in the amount of $1,000,000 on the life of Mr. Diedrich. The Company
will need to continue to recruit and retain additional key senior managers to
manage anticipated growth, but there can be no assurance that the Company will
be able to recruit or retain additional members of senior management on terms
suitable to the Company.
YEAR 2000. The Year 2000 problem is the result of computer programs
using two digits to define the applicable year. Computer programs with
date-sensitive software could recognize a year indicator of "00" as the year
1900 instead of the year 2000. This could result in miscalculations or program
failures. The potential impact of such miscalculations or program failures
cannot be quantified at this time. The Company is addressing the Year 2000
problem as part of a comprehensive enterprise architecture review and upgrade
of its data processing hardware and software. Systems and programs purchased,
replaced or developed under this program will, in addition to being Year 2000
compliant, provide significantly enhanced performance which will benefit the
Company in future years. We do not expect the Year 2000 issue to materially
affect the total cost of this project.
ITEM 2. PROPERTIES.
The Company leases approximately 25,000 square feet of office space for
administrative offices, warehousing, roasting and training facilities in Irvine,
California. The lease for this facility expires in October 2000, with an option
for one additional five-year term. The Company also leases a 2,500 square foot
facility in Denver, Colorado for warehousing and roasting. This lease was
terminated as of April 1, 1998. In addition, as of January 28, 1998, the Company
was a party to various leases for a total of forty-four retail locations
including thirty-eight operating coffeehouses, three subleased units, and three
carts. The Company closed eleven retail locations in fiscal 1998 of which eight
leases were terminated. All of the Company's operating coffeehouses are on
leased premises and are subject to varying arrangements specified in property
specific leases. For example, some of the leases require a flat rent, subject to
regional cost-of-living increases, while others are based upon a percentage of
gross sales. In addition, certain of these leases expire in the near future, and
there is no automatic renewal or option to renew. No assurance can be given that
leases can be renewed, or if renewed, that rents will not increase
substantially, both of which would adversely affect the Company. Other leases
are subject to renewal at fair market value, which could involve substantial
increases or are subject to renewal with a scheduled rent increase, which could
result in rents being above fair market value.
ITEM 3. LEGAL PROCEEDINGS.
In the ordinary course of its business, the Company may become involved
in legal proceedings from time to time. As of April 20, 1998, the Company was
not a party to any material pending legal proceedings.
8
<PAGE> 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On January 22, 1998, there was a Special Meeting of Stockholders called
to vote upon the following matters:
1. To approve the Stock Option Plan and Agreement by and between the
Company and John E. Martin, dated as of November 17, 1997,
granting Mr. Martin options to purchase up to 850,000 shares of
common stock, $0.01 par value per share, (the "Common Stock") of
the Company; and
2. To approve the Stock Option Plan and Agreement by and between the
Company and Timothy J. Ryan, dated as of November 17, 1997,
granting Mr. Ryan options to purchase up to 600,000 shares of the
Common Stock of the Company.
Voting was as follows, as recorded and reported by the Inspector of
Elections:
Approval of the Stock Option Plan and Agreement by and between the Company and
John E. Martin.
<TABLE>
<CAPTION>
FOR AGAINST OR WITHHELD ABSTAIN BROKER NON-VOTES
--- ------------------- ------- ----------------
<S> <C> <C> <C>
3,259,592 220,725 17,206 0
</TABLE>
Approval of the Stock Option Plan and Agreement by and between the Company and
Timothy J. Ryan.
<TABLE>
<CAPTION>
FOR AGAINST OR WITHHELD ABSTAIN BROKER NON-VOTES
--- ------------------- ------- ----------------
<S> <C> <C> <C>
3,255,967 224,415 17,141 0
</TABLE>
9
<PAGE> 12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is reported on the NASDAQ National Market
System under the symbol "DDRX." The following table sets forth, for the
quarterly periods indicated, the range of high and low closing sale prices for
the Common Stock as reported on the NASDAQ National Market System since
September 11, 1996. Prior to September 11, 1996, there was no established public
trading market for the Company's Common Stock.
<TABLE>
<CAPTION>
PRICE RANGE
-----------------------
PERIOD HIGH LOW
--------------------------------------- -------- -------
<S> <C> <C>
FISCAL YEAR 1997
Third Quarter (beginning September 11) 12 9 1/2
Fourth Quarter 10 1/2 8
FISCAL YEAR 1998
First Quarter 8 3/4 2 5/8
Second Quarter 3 1/2 2 5/8
Third Quarter 3 15/16 2 7/16
Fourth Quarter 9 3 1/8
</TABLE>
At January 28, 1998, there were 5,741,650 shares outstanding and 112
stockholders of record of Diedrich Coffee's Common Stock. The Company has not
paid dividends on its Common Stock and does not anticipate paying dividends in
the foreseeable future.
10
<PAGE> 13
ITEM 6. SELECTED FINANCIAL DATA.
The following five-year selected financial data should be read in
conjunction with the Company's financial statements.
<TABLE>
<CAPTION>
YEAR YEAR
ENDED ENDED
JANUARY JANUARY
28, 29, YEARS ENDED JANUARY 31,
-------- ------- --------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Net sales:
Retail $ 20,760 $ 18,118 $ 8,879 $ 6,673 $ 3,912
Wholesale and other 2,222 1,694 1,365 918 502
-------- -------- -------- -------- --------
Total 22,982 19,812 10,244 7,591 4,414
-------- -------- -------- -------- --------
Cost and expenses:
Cost of sales and related
occupancy costs 11,458 9,263 4,409 3,164 1,796
Store operating expenses 10,447 8,280 3,520 2,584 1,594
Other operating expenses 290 240 277 282 146
Depreciation and amortization 1,785 1,054 354 255 102
Provision for asset impairment
and restructuring costs 3,902 -- -- -- --
General and administrative
expenses 4,006 2,003 1,335 851 809
-------- -------- -------- -------- --------
Total 31,888 20,840 9,895 7,136 4,447
-------- -------- -------- -------- --------
Operating (loss) income (8,906) (1,028) 349 455 (33)
Interest expense and other, net (205) 86 34 78 55
-------- -------- -------- -------- --------
(Loss) income before income taxes (9,111) (1,114) 315 377 (88)
Income tax provision (benefit) 1 (128) 129 53 1
-------- -------- -------- -------- --------
Net (loss) income $ (9,112) $ (986) $ 186 $ 324 $ (89)
-------- -------- -------- -------- --------
Basic (loss) income per share (1) (1.69) (.22)
Diluted (loss) income per share (1.69) (.22)
Pro forma net income per share (2) .06
BALANCE SHEET DATA
Working capital (deficiency) $ (959) $ 1,949 $ (53) $ (418) $ (564)
Total assets 13,948 17,471 5,316 2,503 2,163
Long-term obligations, less
current portion 2,817 -- 829 471 544
Total stockholders' equity 6,835 14,898 3,304 973 649
</TABLE>
- ----------
(1) Net income (loss) per share for periods prior to the year ended January
31, 1996 is not presented due to the noncomparable capital structure.
Net loss per share for fiscal 1998 and 1997 is presented as Basic EPS
under the provisions of SFAS 128.
(2) Pro forma net income per share is computed by dividing net income by the
weighted average number of common and common equivalent shares
outstanding during the respective period, assuming the conversion of the
Series A and Series B Preferred Stock into Common Stock as of the date
of issuance. Dividends on
11
<PAGE> 14
the Series A and Series B Preferred Stock have been excluded from the
computation since the preferred stock has been assumed to have been
converted to Common Stock.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
From time to time, in both written reports and oral statements, the
Company makes "forward-looking statements" within the meaning of Federal and
state securities laws. Disclosures that use words such as the Company
"believes," "anticipates," "expects," "may" or "plans" and similar expressions
are intended to identify forward-looking statements. These forward-looking
statements reflect the Company's current expectations and are based upon data
available at the time of the statements. Such statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from expectations. Any such forward-looking statements, whether made in this
report or elsewhere, should be considered in context with the various
disclosures made by the Company about its business, including the factors
discussed below. 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.
Effective February 1, 1996, the Company changed its fiscal year end from
January 31 to a fiscal year ending on the Wednesday nearest January 31. In
connection with the change in fiscal year end, the Company began reporting
quarterly results in thirteen-week periods. Prior to the change in fiscal year
end, the Company's quarterly periods included twelve weeks, except for the
fourth quarter, which had approximately sixteen weeks.
The first retail store operating under the name of Diedrich Coffee
commenced operations in 1972. At the conclusion of fiscal 1998, the Company
operated a total of thirty-eight coffeehouses and three coffee carts located in
California, Colorado and Texas. Diedrich Coffee sells high quality coffee
beverages made with its own freshly roasted coffee. In addition to brewed
coffee, the Company offers a broad range of Italian-style beverages such as
espresso, cappuccino, cafe latte, cafe mocha and espresso machiato. To
complement beverage sales, the Company sells light food items and whole bean
coffee through its coffeehouses.
The Company grew rapidly in fiscal 1997 and experienced difficulties
associated with that growth in fiscal 1998. In March 1997, the Company announced
the resignation of Steven Lupinacci, President and Chief Executive Officer and
that it would take a restructuring charge of $4.6 million for closing 12
coffeehouses. In addition to closing 11 of these 12 coffeehouses, the Company
opened new coffeehouses in Houston, Texas as well as Irvine and Santa Monica,
California. The Company also entered into an agreement to place coffee carts at
premium office facilities of the Irvine Company in Orange County, California;
two carts were operating under this agreement at fiscal year-end.
Lawrence Goelman became Chairman of the Board and Interim Chief
Executive Officer on March 12, 1997. Kerry Coin was appointed President and
Chief Operating Officer on April 25, 1997. Pursuant to the direction of the
Board of Directors, the Company developed and executed a turnaround plan
intended to return the Company to operating profitability. Pursuant to this
plan, underperforming stores were closed, leases assigned, terminated or sublet
and new channels of distribution were developed. Experienced professional
managers were recruited. The Wholesale Division was given aggressive growth
targets and resources to meet them. New management and training systems were
developed and implemented. In the third quarter of fiscal year 1998 the Company
raised $3 million of working capital through private placement of secured debt
(see Note 5 of Notes to the Financial Statements).
Mr. John E. Martin was appointed as Chairman of the Board, replacing
Larry Goelman, by the Board as of November 17, 1997. From 1983 to 1996, Mr.
Martin was Chairman and Chief Executive Officer of Taco Bell Worldwide. From
October 1996 to June 1997, Mr. Martin was president of PepsiCo's Casual Dining
Division. Mr. Martin is also Chairman of publicly traded Newriders Inc., which
owns and operates Easyriders Cafes, and Chairman of Pacific Restaurant
Adventures, a privately held company in Newport Beach,
12
<PAGE> 15
California. Mr. Martin serves on the Boards of Directors of the following public
companies: Williams Sonoma, Inc., Franchise Mortgage Acceptance Company and The
Good Guys! Inc.
Mr. Timothy J. Ryan was appointed as President and Chief Executive
Officer replacing Larry Goelman, Interim Chief Executive Officer, by the Board
effective November 17, 1997. From December 1995 to December 1996, Mr. Ryan was
President of Sizzler U.S.A., a division of Sizzler International, Inc., of which
he was also Senior Vice President. From November 1998 to December 1993, Mr. Ryan
was Senior Vice President of Marketing at Taco Bell Worldwide, and from December
1993 to December 1995, he was Senior Vice President of Taco Bell's Casual Dining
Division.
Despite the efforts of the interim management team led by Messrs.
Goelman and Coin, the Company did not meet its stated goal of cash-flow positive
operating results by the end of the last accounting period of fiscal 1998. The
reasons for the shortfall are several: the increased one-time general and
administrative costs associated with the addition of the new executive
management team headed by John Martin and Tim Ryan, inadequate and unsuccessful
marketing, delays in installation of coffee carts in Orange County and
inadequate management of certain labor costs.
Messrs. Martin and Ryan determined that, while the turnaround plan
implemented by the interim management team had stabilized the Company
operationally, it was not likely to result in profitable growth in the near
future. Accordingly, they initiated a business planning process that resulted in
a strategic five-year plan directed toward growth through franchise area
development agreements combined with focused Company unit growth and
centralization of production facilities. This plan also built on the interim
management strategy of developing new wholesale business channels. New
management also reviewed the existing asset base and determined that one
coffeehouse designated for closure would remain open and two additional
coffeehouses and the Denver warehouse would be closed. Charges for these
closures as well as provisions for other contingencies resulted in additional
operating expenses of approximately $1.7 million in the fourth quarter.
The Company plans to focus, in the first half of fiscal 1999, on
significant improvements in operations and customer service, to design and
develop prototype optimized coffeehouses, kiosks and carts, to continue the
automation and improvement of management information systems, to acquire and use
modern vacuum packaging equipment, to develop a site selection model for its own
use and use by franchise area developers, to test relationships with Arrowhead
Water (office coffee service and brewing water) and selected suppliers for
premium baked goods and develop and implement a comprehensive marketing plan.
There can be no assurances of positive year-end earnings or as to when the
Company will be cash flow positive.
RESULTS OF OPERATIONS
YEAR ENDED JANUARY 28, 1998 COMPARED TO YEAR ENDED JANUARY 29, 1997
Net sales. Net sales for the year ended January 28, 1998 increased 16.0%
to $22,982,000 from $19,812,000 for the year ended January 29, 1997. Net retail
sales for the year ended January 28, 1998 increased 14.6% to $20,760,000 from
$18,118,000 for the year ended January 29, 1997, despite closing 11 stores in
fiscal 1998. Wholesale and mail order sales for the year ended January 28, 1998
increased 31.1% to $2,222,000 from $1,694,000 for the year ended January 29,
1997.
The percentage increase in comparable coffeehouse sales comparing net
sales for stores open during the full year in fiscal 1998 to net sales for the
same stores in fiscal 1997 was 0.1%. The number of coffeehouses involved in this
calculation ranged from 12 to 33 reflecting the number of stores added during
fiscal 1997.
Cost of sales and related occupancy costs. Cost of sales and related
occupancy costs for the year ended January 28, 1998 increased to $11,458,000
from $9,263,000 for the year ended January 29, 1997. As a percentage of net
sales, cost of sales and related occupancy costs increased to 49.9% for fiscal
1998 from 46.8% for fiscal 1997. This increase was primarily the result of
increased costs related to higher green coffee prices, increased retail
13
<PAGE> 16
discounting, an increased percentage of wholesale sales as a percentage of total
company sales as well as scheduled rent increases.
Store operating expenses. For the year ended January 28, 1998,
coffeehouse-operating expenses, as a percentage of retail net sales, increased
to 50.3% from 45.7% for the year ended January 29, 1997. The year end one time
charge of $1.7 million described above accounted for 8.2% of retail net sales
and more than offset decreases achieved during the year primarily as a result of
improved labor scheduling methods.
Other operating expenses. For the year ended January 28, 1998, other
operating expenses, as a percentage of wholesale and other net sales, decreased
to 13.0% from 14.2% for the year ended January 29, 1997. This decrease reflects
the fact that the cost of the additional management and sales staff was more
than offset by the growth in sales for the Wholesale Division.
Depreciation and amortization. Depreciation and amortization increased
to $1,785,000 for the year ended January 28, 1998 from $1,054,000 for the year
ended January 29, 1997, principally due to depreciable assets related to the
addition of new coffeehouses during fiscal 1997 and the conversion costs of the
acquired locations being depreciated for the full year.
Provision for store closings and restructuring costs. On March 12, 1997
the Company announced that it was reviewing the performance of all coffeehouses
to determine which units were not meeting management's long-term operational
expectations. Subsequently, on April 29, 1997, the Company recorded an
impairment provision and a restructuring charge of approximately $4.6 million in
connection with the closure of 12 coffeehouses and other related expenses.
Eleven of the original 12 coffeehouses identified for closure were closed in
fiscal 1998 with leases terminated in most cases. In January the new management
reviewed the progress of all retail operations and determined that one
coffeehouse originally designed for closure would remain open. At year end, most
of the lease terminations provided for in the restructuring had been completed
at less cost than originally anticipated. As a result of these two factors,
management determined that the remaining restructuring reserve could be reduced
by $648,000.
General and administrative expenses. As a percentage of net sales,
general and administrative expenses increased to 17.4% in the year ended January
28, 1998 from 10.1% for the year ended January 29, 1997 due to adding the
resources and senior executive personnel required to manage the business more
effectively, turn the Company around and position it for future growth.
Interest expense. Interest expense decreased to $182,000 for the year
ended January 28, 1998 from $190,000 for the year ended January 29, 1997.
Income taxes. Net operating losses generated in fiscal 1998, fiscal
1997, fiscal 1994 and prior were carried back or forward, as the case may be,
and utilized to offset the allowable portion of income tax in fiscal 1996. As of
January 28, 1998, a net operating loss for Federal income tax purposes of
$8,007,000 is available to be utilized against future taxable income for years
through fiscal 2013, subject to a possible annual limitation due to the change
in ownership rules under the Internal Revenue Code.
Net loss. The net loss for the year ended January 28, 1998 was
$9,113,000 compared to net loss of $986,000 for the year ended January 29, 1997.
YEAR ENDED JANUARY 29, 1997 COMPARED TO YEAR ENDED JANUARY 31, 1996
Net sales. Net sales for the year ended January 29, 1997 increased 93.4%
to $19,812,000 from $10,244,000 for the year ended January 31, 1996. Net retail
sales for the year ended January 29, 1997 increased 104.1% to $18,118,000 from
$8,879,000 for the year ended January 31, 1996 due to the opening of new
coffeehouses and the addition of the stores acquired in Denver and Houston as
well as one store acquired in Orange County (the "Acquired Stores"). Wholesale
and mail order sales for the year ended January 29, 1997 increased 24.1% to
$1,694,000 from $1,365,000 for the year ended January 31, 1996.
14
<PAGE> 17
The percentage decrease in comparable store sales comparing net sales
for stores open during the full year in fiscal 1997 to net sales for the same
stores in fiscal 1996 was 2.7%. Only eight of the Company's forty-seven
coffeehouses were open for the full year in fiscal 1996 and are therefore
included in the base for comparable store sales. On average these stores have
been open for five years and had sales of approximately $1 million per store for
the year ended January 29, 1997.
Cost of sales and related occupancy costs. Cost of sales and related
occupancy costs for the year ended January 29, 1997 increased to $9,263,000 from
$4,409,000 for the year ended January 31, 1996. As a percentage of net sales,
cost of sales and related occupancy costs increased to 46.8% for fiscal 1997
from 43.0% for fiscal 1996. This increase was primarily the result of three
factors: low sales volume for the acquired stores which resulted in
substantially higher rent as a percentage of sales; newly opened stores with
higher initial product costs during the growth period in their early months of
operation and increased costs related to lower than expected holiday specialty
sales.
Store operating expenses. For the year ended January 29, 1997, store
operating expenses, as a percentage of retail net sales, similarly increased to
45.7% from 39.6% for the year ended January 31, 1996. As in the case of cost of
sales, these increases were due to increased labor and other start-up costs
relating to the opening of fifteen new Diedrich coffeehouses in fiscal 1997, and
additional store operating expenses for the Acquired Stores.
Other operating expenses. For the year ended January 29, 1997, other
operating expenses, as a percentage of wholesale and other net sales, decreased
to 14.2% from 20.3% for the year ended January 31, 1996. These decreases were a
result of a decrease in the overall salary expense of the sales force due to the
reduction of sales management personnel.
Depreciation and amortization. Depreciation and amortization increased
to $1,054,000 for the year ended January 29, 1997 from $354,000 for the year
ended January 31, 1996, primarily as a result of the Company's opening or
acquiring an additional thirty-four coffeehouses.
General and administrative expenses. As a percentage of net sales,
general and administrative expenses decreased to 10.1% in the year ended
January 29, 1997 from 13.0% for the year ended January 31, 1996 due to the
increase in sales volume without a concomitant increase in management staff. The
Company added 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.
Interest expense. Interest expense increased to $190,000 for the year
ended January 29, 1997 from $50,000 for the year ended January 31, 1996. The
increase was due primarily to higher average debt outstanding principally as a
result of the acquisition of the Acquired Stores. This debt was entirely repaid
with proceeds from the initial public offering.
Net loss. The net loss for the year ended January 29, 1997 was $986,000
compared to net income of $186,000 for the year ended January 31, 1996. Net
income for the year ended January 29, 1997, excluding the results of operations
of the Acquired Stores and new stores opened during fiscal 1997 decreased by
$207,000 to a net loss of $21,000 for the year ended January 29, 1997 from net
income of $186,000 for the year ended January 31, 1996. This decrease was
primarily due to increases in depreciation and amortization and general and
administrative expenses.
LIQUIDITY AND CAPITAL RESOURCES
On September 11, 1996, the Company completed its initial public offering
of 2,530,000 shares of common stock. The offering consisted of 1,600,000 shares
sold on behalf of the Company and 930,000 shares sold on behalf of certain
stockholders. The net proceeds of the offering to the Company, after deducting
related expenses, were $12,579,000. These net proceeds were used to repay
indebtedness outstanding under the Company's short-term revolving credit
facility in the amount of approximately $4.1 million, to repay indebtedness
outstanding under a subordinated revolving promissory note with one of the
Company's stockholders in the amount of
15
<PAGE> 18
approximately $1,615,000 and to repay the outstanding balance on several other
items of indebtedness in the amount of approximately $373,000. The Company used
the remaining net proceeds to fund the opening of additional coffeehouses,
infrastructure enhancements and to provide working capital for general corporate
purposes.
The Company had working capital (deficit), as of January 28, 1998, of
$(959,000) compared to $1,949,000 at January 29, 1997. Cash (used in) provided
by operating activities totaled $(2,489,000) for the year ended January 28, 1998
as compared to $113,000 for the year ended January 29, 1997.
Net cash used in investing activities for the year ended January 28,
1998 totaled $1,724,000 which consisted entirely of capital expenditures for
property and equipment. Net cash provided by financing activities for the year
ended January 28, 1998 totaled $3,550,000. This consists of the net proceeds
from the private placement of secured debt after repayment of an unsecured loan
of $1.5 million and a secured loan of $500,000 and the sale of restricted stock
to Messrs. Martin and Ryan.
Future cash requirements, other than normal operating expenses, are
expected to consist primarily of capital expenditures related to the
construction of new coffeehouses, working capital to support the growth of the
wholesale business, and the continued development of infrastructure to support
the Company's expansion. The Company also anticipates additional expenditures
for enhancing its roasting and packaging facilities. Management estimates that
capital expenditures through fiscal 1999 will be approximately $2.9 million to
$3.5 million. The Company presently is evaluating various financing
alternatives. (See Note 12, Subsequent Event.)
In July 1996, the Company entered into a revolving line of credit with
Bank of America that permitted the Company to borrow up to $6 million upon
completion of the Company's initial public offering. The Company's credit
agreement in connection with this line of credit contained various covenants
which, among other things, required the delivery of regular financial
information, the maintenance of positive net income and the maintenance of
unencumbered liquid assets. In addition, the credit agreement imposed certain
restrictions on the Company, including, with respect to the incurrence of
additional indebtedness, the payment of dividends and the ability to make
acquisitions. On March 31, 1997, the Company was notified that it was in breach
of its covenant to maintain the required level of net income pursuant to the
credit agreement. In light of this fact, the additional fact that the Company
had no outstanding borrowings under this line of credit and the fact that the
credit agreement continued to impose numerous restrictions upon the Company, the
Company determined that it was in its best interest to terminate this line of
credit on April 21, 1997.
In March 1997, the Company received a commitment for a $1 million line
of credit on arms-length terms from a significant stockholder of the Company.
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%. The Company borrowed the full amount under the Note. All
outstanding principal and accrued interest was 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. This indebtedness was fully paid and discharged on
October 20, 1997 with the proceeds of borrowing from the Ocean and Grandview
Trusts described below.
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") (collectively the "Cirica Trust Loan Documents"). That trust is
controlled by Ms. Cirica, who is the spouse of Lawrence Goelman, then Chairman
and Interim Chief Executive Officer of the Company.
Shortly before the Cirica Trust entered into the Cirica Trust Loan
Documents, Mr. Goelman loaned Ms. Cirica approximately $250,000. Some of those
funds were transferred by Ms. Cirica to the Cirica Trust and advanced to the
Company pursuant to the Cirica Trust Loan Documents. The loan was secured by the
assets of the Company and provided for borrowings up to $500,000 with interest
accruing at the prime rate plus 3 1/2%. As of October 29, 1997 the Company
borrowed the entire $500,000 available. This Note was fully paid and discharged
on December 17, 1997.
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<PAGE> 19
In connection with the Cirica Trust Loan Documents, the Company issued a
warrant to the Cirica Trust to purchase up to 85,000 shares of the Company's
common stock if the loan were repaid in full within 120 days of closing, or up
to 170,000 shares of the Company's common stock if the loan was not repaid
within 120 days, all at a price of $2.25 a share. The warrants are exercisable
immediately and expire on the later of August 19, 2003 or one year following
payment in full of the loan. Mr. Goelman disclaims any pecuniary interest in the
loan to the Company and any beneficial interest in the Cirica Trust, except to
the extent to which Mr. Goelman is a contingent beneficiary under the terms of
the Cirica Trust. The warrants were reduced to 85,000 shares of the Company's
Common Stock by virtue of the December repayment of the Note in full.
On September 30, 1997 the Company entered into a promissory note, term
loan agreement and security agreement with Nuvrty, Inc., a Colorado corporation
controlled by Amre Youness, a former director of the Company (the "Nuvrty Loan
Documents"). All outstanding principal and accrued interest is due and payable
on September 30, 2002. The loan is secured by the assets of the Company and
provides for borrowings up to $1,000,000 with interest accruing and paid monthly
at the prime rate plus 3 1/2%. The Company borrowed the full amount under the
loan.
In connection with the Nuvrty Loan Documents, the Company issued a
warrant to Nuvrty to purchase up to 170,000 shares of the Company's common stock
if the Loan were repaid in full within 120 days of closing and up to 340,000
shares of the Company's common stock if the loan was not repaid within 120 days,
all at a price of $2.25 per share. The warrants are exercisable immediately and
expire on the later of September 30, 2003 or one year following payment in full
of the loan.
On October 16, 1997 the Company entered into parallel promissory notes,
term loan agreements and security agreements with the Ocean and Grandview Trusts
on terms identical to those entered into with the Cirica Trust and Nuvrty, Inc.
(the "Ocean Trust Loan Documents" and the "Grandview Trust Loan Documents",
respectively). The Ocean Trust Loan Documents and the Grandview Trust Loan
Documents provide for borrowing up to $750,000 from each Trust. Each loan is
secured by the assets of the Company. Interest on advances is accrued and
payable monthly at the prime rate plus 3 1/2%. The Company borrowed $750,000
under each facility. All outstanding principal and accrued interest is due and
payable to each of the Ocean and Grandview Trusts on October 16, 2002.
In connection with the Ocean Trust Loan Documents and the Grandview
Trust Loan Documents the Company issued warrants to each Trust respectively to
purchase up to 127,500 shares each of the Company's common stock if the loan is
repaid in full within 120 days of closing, or up to 255,000 shares respectively
of the Company's common stock if the loan is not repaid in full within 120 days
of closing, all at a price of $2.25 per share. The warrants are exercisable
immediately and expire on the later of October 16, 2003 or one year following
payment in full of the respective loans. The Company used the proceeds from the
Ocean Trust and Grandview Trusts Loans to pay off and discharge the outstanding
indebtedness to the Palm Trust.
On March 30, 1998 the Company agreed to a private placement of 200,000
shares of the Company's common stock to Franchise Mortgage Acceptance
Company ("FMAC") at a price of $6.375 (the stock's closing sale price for
that day on the Nasdaq National Stock Market). In addition, FMAC also received
an option to purchase 100,000 additional shares of the Company's common stock;
this option may be exercised in increments of 25,000 shares or more and expires
on April 3, 2000. The exercise prices of this option are as follows: 50,000
shares are exercisable at $10.00 per share and $12.50 per share, respectively.
This transaction was completed on April 3, 1998.
The Company believes that cash from operations, existing working
capital, the additional equity described above and an anticipated line of credit
will be sufficient to satisfy the Company's working capital needs at the
anticipated operating levels for the next twelve months. The Company announced
on April 14, 1998 that it is in the process of obtaining a line of credit from
FMAC adequate to meet its expected capital requirements. This line of credit is
expected to be closed in the second quarter following approval of the final
documentation by both FMAC and the Company.
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB")
released Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income." The new statement is effective for fiscal
years beginning after December 15, 1997. When adopted, SFAS No. 130 will
require restatement of prior years' statements to report any applicable
comprehensive income. Management has not determined the impact of SFAS 130 on
its financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information". SFAS 131 establishes standards for
the way public business enterprises are to report information about operating
segments in annual financial statements and requires those enterprises to
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
Statement 131 uses a "management approach" concept as the basis for identifying
reportable segments.
The management approach is based on the way that management organizes
the segments within the enterprise for making operating decisions and assessing
performance. Consequently, the segments are evident from the structure of the
enterprise's internal organization. Furthermore, the management approach
facilitates consistent descriptions of an enterprise in its annual report and
various other published information. It focuses on financial information that
an enterprise's decision makers use to make decisions about the enterprise's
operating matters.
Statement 131 is effective for financial statements for periods
beginning after December 15, 1997. Management has not determined the effect of
SFAS No. 131 on its financial statements.
In February 1998, the FASB released SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits". The new
statement is effective for fiscal years beginning after December 15, 1997. When
adopted, SFAS No. 132 will require restatement of disclosures regarding
pensions and other postretirement benefits for each year that is reported.
Management has determined SFAS 132 will not have a material impact on its
financial statements.
AICPA Statement of Position (SOP), "Reporting on the Costs of Start Up
Activities," will require that costs incurred during a start-up activity
(including organization costs) be expensed as incurred. Anticipated release of
the SOP is in the second quarter of 1998. The SOP will be effective for
financial statements issued for fiscal years beginning after December 15, 1998.
The Company's policy is consistent with the SOP.
Year 2000
The Year 2000 problem is the result of computer programs using
two digits to define the applicable year. Computer programs with date-sensitive
software could recognize a year indicator of "00" as the year 1900 instead of
the year 2000. This could result in miscalculations or program failures. The
potential impact of such miscalculations or program failures cannot be
quantified at this time. The Company is addressing the Year 2000 problem as
part of a comprehensive enterprise architecture review and upgrade of its data
processing hardware and software. Systems and programs purchased, replaced or
developed under this program will, in addition to being Year 2000 compliant,
provide significantly enhanced performance which will benefit the Company in
future years. We expect this project to be completed in 12 months. We do not
expect the Year 2000 issue to materially affect the total cost of this project.
Any costs that are specific to the resolution of the Year 2000 problem will be
expensed as incurred.
17
<PAGE> 20
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
DERIVATIVE INSTRUMENTS. The Company does not and did not invest in
market risk sensitive instruments in fiscal 1998. From time to time, the Company
enters into agreements to purchase green coffee in the future at prices to be
determined within two to twelve months of the time of actual purchase. At
January 28, 1998 these commitments totaled $451,500. These agreements are tied
to specific market prices (defined by both the origin of the coffee and the
month of delivery) but the Company has significant flexibility in selecting the
date of the market price to be used in each contract. The Company does not use
commodity based financial instruments to hedge coffee or any other commodity as
the Company believes there will continue to be a high probability of maintaining
a strong correlation between increases in green coffee prices and the final
selling prices of the Company's products.
MARKET RISK. The Company's market risk exposure with regard to financial
instruments is to changes in the "prime rate" in the United States. The Company
borrowed $2,500,000 at the prime rate plus 3 1/2%. At January 28, 1998, a
hypothetical 100 basis point increase in the prime rate would result in
additional interest expense of $25,278 on an annualized basis.
The Company does not and has not used derivative financial instruments
for any purpose, including hedging or mitigating interest rate risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data required by this item
are set forth at the end of this Annual Report on Form 10-K beginning on page
F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information required by this item is incorporated herein by reference
from the portions of the Company's definitive proxy statement pursuant to
Schedule 14A for its annual meeting of stockholders to be held on June 23, 1998
(the "Definitive Proxy Statement") captioned "Election of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance." The Definitive Proxy
Statement will be filed with the Securities and Exchange Commission not later
than 120 days after the close of the Company's fiscal year ended January 28,
1998.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated herein by
reference from the portions of the Definitive Proxy Statement captioned
"Executive Compensation and Other Information" and "Director Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated herein by
reference from the portion of the Definitive Proxy Statement captioned "Security
Ownership of Certain Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated herein by
reference from the portion of the Definitive Proxy Statement captioned "Certain
Transactions."
18
<PAGE> 21
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements.
The financial statements required to be filed hereunder are set
forth at the end of this Report beginning on page F-1.
2. Exhibits.
2.1 Form of Agreement and Plan of Merger(1)
3.1 Certificate of Incorporation of the Company(1)
3.2 Bylaws of the Company(1)
4.1 Purchase Agreement for Series A Preferred Stock dated as of
December 11, 1992 by and among Diedrich Coffee, Martin R.
Diedrich, Donald M. Holly, SNV Enterprises and D.C.H., L.P.
(1)
4.2 Purchase Agreement for Series B Preferred Stock dated as of
June 29, 1995 by and among Diedrich Coffee, Martin R.
Diedrich, Steven A. Lupinacci, Redwood Enterprises VII, L.P.
and Diedrich Partners I, L.P.(1)
4.3 Representative's Warrant Agreement(1)
4.4 Specimen Stock Certificate(1)
4.5 Form of Conversions Agreement in connection with the
conversion of Series A and Series B Preferred Stock into
Common Stock(1)
10.1 Martin R. Diedrich Employment Agreement, dated June 29, 1995
(1)
10.2 Steven A. Lupinacci Employment Agreement, dated June 29, 1995
(1)
10.3 Stock Option Plan and Agreement of Steven A. Lupinacci, dated
June 29, 1995(1)
10.4 Form of Indemnification Agreement(1)
10.5 Diedrich Coffee 1996 Stock Incentive Plan(1)
10.6 Diedrich Coffee 1996 Non-Employee Directors Stock Option Plan
(1)
10.7 Business Loan Agreement dated as of July 19, 1996 by and
between Bank of America National Trust and Savings Association
and Diedrich Coffee(1)
10.8 Revolving Promissory Note dated May 20, 1996 by Diedrich
Coffee in favor of Redwood Enterprises VII, L.P.(1)
10.9 Agreement of Sale dated as of February 23, 1996 by and among
Diedrich Coffee (as purchaser) and Brothers Coffee Bars, Inc.
and Brothers Gourmet Coffees, Inc. (as sellers)(1)
10.10 Kerry W. Coin Employment Agreement, dated August 26, 1996(1)
10.11 Letter Agreement between Diedrich Coffee and Lawrence Goelman,
dated April 23, 1997, regarding appointment as Interim
President and Chief Executive Officer(2)
10.12 Separation agreement dated May 13, 1997 between Steven A.
Lupinacci and Diedrich Coffee, Inc.(3)
10.13 Employment Letter to Jonathan B. Eddison dated June 4, 1997
(4)
10.14 Employment Letter John Bayley dated July 21, 1997(4)
10.15 Employment Letter to Michael Reeves dated May 5, 1997(4)
10.16 Form of Promissory Note made in favor of the Palm Trust(4)
10.17 Form of Term Loan Agreement made to the Virginia R. Cirica
Trust(4)
10.18 Form of Security Agreement made to the Virginia R. Cirica
Trust(4)
10.19 Form of Warrant Agreement made to the Virginia R. Cirica Trust
(4)
10.20 Form of Promissory Note made in favor of the Virginia R.
Cirica Trust(4)
10.21 Letter agreement by and between the Company and John E. Martin
appointing Mr. Martin Chairman of the Board, dated as of
November 17, 1997(5)
10.22 Stock Option Plan and Agreement by and between the Company and
John E. Martin granting Mr. Martin the option to purchase up
to 850,000 shares of the Common Stock of the Company, dated as
of November 17, 1997(5)
19
<PAGE> 22
10.23 Common Stock Purchase Agreement by and between the Company and
John E. Martin under which Mr. Martin agrees to purchase
333,333 shares of the Common Stock of the Company, dated as of
November 17, 1997(5)
10.24 Employment Agreement by and between the Company and Timothy J.
Ryan retaining Mr. Ryan as Chief Executive Officer, dated as
of November 17, 1997(5)
10.25 Stock Option Plan and Agreement by and between the Company and
Timothy J. Ryan granting Mr. Ryan the option to purchase up to
600,000 shares of the Common Stock of the Company, dated as of
November 17, 1997(5)
10.26 Common Stock Purchase Agreement by and between the Company and
Timothy J. Ryan under which Mr. Ryan agrees to purchase 16,667
shares of the Common Stock of the Company, dated as of
November 17, 1997(5)
10.27 Form of Promissory Note made in favor of Nuvrty, Inc., the
Ocean Trust and the Grandview Trust(6)
10.28 Form of Term Loan Agreement made in favor of Nuvrty, Inc., the
Ocean Trust and the Grandview Trust(6)
10.29 Form of Security Agreement made in favor of Nuvrty, Inc., the
Ocean Trust and the Grandview Trust(6)
10.30 Form of Warrant Agreement made in favor of Nuvrty, Inc., the
Ocean Trust and the Grandview Trust(6)
10.31 Form of Intercreditor Agreement made in favor of Nuvrty, Inc.,
the Ocean Trust and the Grandview Trust(6)
10.32 Amendment to Kerry Coin's employment agreement dated September
24, 1997(6)
10.33 Form of Indemnification Agreement - John Bayley(6)
10.34 Form of Indemnification Agreement - Jonathan B. Eddison(6)
10.35 Form of Indemnification Agreement - John E. Martin(6)
10.36 Form of Indemnification Agreement - Timothy J. Ryan(6)
10.37 Form of Common Stock and Option Purchase Agreement with
Franchise Mortgage Acceptance Company dated as of April 3,
1998
10.38 Separation and Release Agreement dated January 28, 1998 with
Kerry W. Coin
10.39 Separation and Release Agreement dated January 30, 1998 with
Jonathan B. Eddison
11.1 Statement re Computation of Per Share Earnings
27 Financial Data Schedule
- ----------
(1) Incorporated by reference to the exhibit of the same number of
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.
(2) Incorporated by reference to the exhibit of the same number to
the Company's annual report on Form 10-K for the fiscal year
ended January 29, 1997.
(3) Incorporated by reference to the exhibit of the same number to
the Company's Quarterly Report on Form 10-Q, for the period
ended April 30, 1997, filed with the Securities and Exchange
Commission on June 13, 1997.
(4) Incorporated by reference to the exhibit of the same number to
the Company's Quarterly Report on Form 10-Q, for the period
ended July 30, 1997, filed with the Securities and Exchange
Commission on September 12, 1997.
(5) Incorporated by reference to the exhibit of the same number to
the Company's Current Report on Form 8-K, filed with the
Securities and Exchange Commission on November 25, 1997.
20
<PAGE> 23
(6) Incorporated by reference to the exhibit of the same number to
the Company's Quarterly Report on Form 10-Q, for the period
ended October 29, 1997, filed with the Securities and Exchange
Commission on December 11, 1997.
(b) Reports on Form 8-K.
On March 13, 1997, the Company filed a Current Report on Form
8-K, reporting Item 5, in connection with the resignation of
Steven A. Lupinacci as a director, President, Chief Executive
Officer and Chief Financial Officer of the Company and the
appointment of Lawrence Goelman as Interim President and
Chief Executive Officer.
On November 25, 1997, the Company filed a Current Report on Form
8-K reporting Item 5, in connection with the appointment of John
E. Martin as Chairman of the Board, replacing Lawrence Goelman
and the appointment of Timothy J. Ryan as President and CEO,
replacing Lawrence Goelman as Interim CEO. The report also
described the employment, stock option and stock purchase
agreements entered into with each of Mr. Martin and Mr. Ryan.
21
<PAGE> 24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
DIEDRICH COFFEE, INC.
April 27, 1998 By: /s/ TIMOTHY J. RYAN
--------------------------------------
Timothy J. Ryan
President, Chief Executive Officer and
Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ JOHN E. MARTIN Chairman of the Board April 27, 1998
- -------------------------
John E. Martin
/s/ TIMOTHY J. RYAN President, Chief
- ------------------------- Executive Officer and April 27, 1998
Timothy J. Ryan Director (Principal
Executive Officer)
/s/ JOHN B. BAYLEY Vice President, Finance
- ------------------------- and Controller (Principal April 27, 1998
John B. Bayley Financial and Accounting
Officer)
/s/ MARTIN R. DIEDRICH Chief Coffee Officer,
- ------------------------- Vice Chairman of the April 24, 1998
Martin R. Diedrich Board of Directors and
Secretary
/s/ LAWRENCE GOELMAN Director
- ------------------------- April 24, 1998
Lawrence Goelman
/s/ PETER CHURM Director
- ------------------------- April 24, 1998
Peter Churm
/s/ PAUL C. HEESCHEN Director April 24, 1998
- -------------------------
Paul C. Heeschen
</TABLE>
22
<PAGE> 25
DIEDRICH COFFEE, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report F-2
Report of Independent Certified Public Accountants F-3
Balance Sheets F-4
Statements of Operations F-5
Statements of Stockholders' Equity F-6
Statements of Cash Flows F-7
Notes to Financial Statements F-8
</TABLE>
F-1
<PAGE> 26
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Diedrich Coffee, Inc.:
We have audited the accompanying balance sheets of Diedrich Coffee, Inc. as of
January 28, 1998 and January 29, 1997, and the related statements of operations,
stockholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Diedrich Coffee, Inc. as of
January 28, 1998 and January 29, 1997, and the results of its operations and its
cash flows for the years then ended, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Orange County, California
March 28, 1998
F-2
<PAGE> 27
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Diedrich Coffee, Inc.
Irvine, California
We have audited the accompanying statements of operations, stockholders'
equity and cash flows of Diedrich Coffee, Inc. for the year ended January 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Diedrich Coffee, Inc. for the year ended January 31, 1996 in conformity with
generally accepted accounting principles.
BDO SEIDMAN, LLP
Costa Mesa, California
March 11, 1996
F-3
<PAGE> 28
DIEDRICH COFFEE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS (Note 5) JANUARY 28, 1998 JANUARY 29, 1997
---------------- ----------------
<S> <C> <C>
Current Assets:
Cash $ 1,408,161 $ 2,071,904
Accounts receivable, less allowance for doubtful
accounts of $22,134 and $4,000 181,628 210,363
Inventories (Note 2) 1,375,119 1,615,145
Prepaid expenses 157,393 185,063
Income taxes receivable 42,528 285,072
------------ ------------
Total current assets 3,164,829 4,367,547
Property and equipment, net (Note 3) 10,104,843 11,962,752
Costs in excess of net assets acquired, net (Note 4) 389,651 796,178
Other assets 289,103 344,942
------------ ------------
Total assets $ 13,948,426 $ 17,471,419
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current installments of obligations under
capital leases (Note 6) $ 168,139 $ --
Accounts payable 1,204,366 1,800,292
Accrued compensation 716,742 417,028
Accrued expenses (Note 7) 1,796,869 201,487
Restructuring charge (Note 10) 237,320 --
------------ ------------
Total current liabilities 4,123,436 2,418,807
Obligations under capital leases - long-term (Note 6) 317,292 --
Long term debt (Note 5) 2,500,000 --
Deferred rent 172,231 154,384
------------ ------------
Total liabilities 7,112,959 2,573,191
------------ ------------
Stockholders' Equity:
Common stock, $.01 par value; authorized
25,000,000 shares; issued and outstanding
5,741,650 shares at January 28, 1998 and
5,391,650 at January 29, 1997 57,417 53,917
Additional paid-in capital 16,928,546 15,882,046
Accumulated deficit (10,150,496) (1,037,735)
------------ ------------
Total stockholders' equity 6,835,467 14,898,228
Commitments and contingencies (Note 6)
------------ ------------
Total liabilities and stockholders' equity $ 13,948,426 $ 17,471,419
============ ============
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 29
DIEDRICH COFFEE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JANUARY 28, JANUARY 29, JANUARY 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net Sales:
Retail $ 20,759,993 $ 18,117,720 $ 8,878,904
Wholesale and other 2,221,704 1,694,686 1,365,271
------------ ------------ ------------
Total 22,981,697 19,812,406 10,244,175
------------ ------------ ------------
Cost and Expenses:
Cost of sales and related occupancy costs 11,457,612 9,263,286 4,409,485
Store operating expenses 10,447,349 8,279,621 3,520,140
Other operating expenses 289,867 240,227 276,788
Depreciation and amortization 1,785,271 1,053,770 353,840
Provision for asset impairment and restructuring costs 3,902,332 -- --
General and administrative expenses 4,005,853 2,003,483 1,334,694
------------ ------------ ------------
Total 31,888,284 20,840,387 9,894,947
------------ ------------ ------------
Operating (loss) income (8,906,587) (1,027,981) 349,228
Interest expense (182,135) (189,549) (50,187)
Interest and other (expense) income (23,239) 103,718 15,814
------------ ------------ ------------
(Loss) income before income taxes (9,111,961) (1,113,812) 314,855
Income tax provision (benefit) 800 (128,107) 129,211
------------ ------------ ------------
Net (loss) income $ (9,112,761) $ (985,705) $ 185,644
============ ============ ============
Basic net (loss) income per share $ (1.69) $ (0.22) $ --
============ ============ ============
Diluted net (loss) income per share $ (1.69) $ (0.22) $ --
============ ============ ============
Pro forma information (Note 1):
Net income per share -- -- $ 0.06
============ ============ ============
Weighted average shares outstanding 5,392,609 4,414,000 3,153,000
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 30
DIEDRICH COFFEE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Series A Preferred Stock Series B Preferred Stock Common Stock
-------------------------- -------------------------- --------------------------
Shares Amount Shares Amount Shares Amount
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 31, 1995 1,000,000 $ 800,000 -- $ -- 1,127,660 $ 11,277
Repurchase of common stock -- -- -- -- (229,787) (2,298)
Issuance of Series B preferred stock -- -- 1,608,568 2,225,813 -- --
Common stock issued -- -- -- -- 285,209 2,852
Net income for the year -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Balance, January 31, 1996 1,000,000 800,000 1,608,568 2,225,813 1,183,082 11,831
Initial public offering net -- -- -- -- 1,600,000 16,000
Conversion of Series A and
B preferred stock (1,000,000) (800,000) (1,608,568) (2,225,813) 2,608,568 26,086
Net loss for the year -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Balance, January 29, 1997 -- -- -- -- 5,391,650 53,917
Common stock issued -- -- -- -- 350,000 3,500
Net loss for the year -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Balance, January 28, 1998 -- $ -- -- $ -- 5,741,650 $ 57,417
=========== =========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Additional Accumulated Stockholder Total
Paid In Deficit Receivable
Capital
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Balance, January 31, 1995 $ 135,723 $ 51,024 $ (25,000) $ 973,024
Repurchase of common stock (14,004) (288,698) 25,000 (280,000)
Issuance of Series B preferred stock -- -- -- 2,225,813
Common stock issued 197,148 -- -- 200,000
Net income for the year -- 185,644 -- 185,644
----------- ------------ ----------- -----------
Balance, January 31, 1996 318,867 (52,030) -- 3,304,481
Initial public offering net 12,563,452 -- -- 12,579,452
Conversion of Series A and
B preferred stock 2,999,727 -- -- --
Net loss for the year -- (985,705) -- (985,705)
----------- ------------ ----------- -----------
Balance, January 29, 1997 15,882,046 (1,037,735) -- 14,898,228
Common stock issued 1,046,500 -- -- 1,050,000
Net loss for the year -- (9,112,761) -- (9,112,761)
----------- ------------ ----------- -----------
Balance, January 28, 1998 $16,928,546 $(10,150,496) $ -- $ 6,835,467
=========== ============ =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 31
DIEDRICH COFFEE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JANUARY 28, 1998 JANUARY 29, 1997 JANUARY 31, 1996
---------------- ---------------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (9,112,761) $ (985,705) $ 185,644
Adjustments to reconcile net (loss) income
to cash (used in) provided by operating activities:
Depreciation and amortization 1,785,271 1,053,770 353,840
Deferred income taxes -- 48,192 (8,218)
Restructuring charge 987,590 -- --
Impairment on long-lived assets 2,203,217 -- --
Changes in assets and liabilities:
Accounts receivable 28,735 (75,790) (68,031)
Inventories 150,804 (969,652) (345,390)
Prepaid expenses 27,670 (78,696) (35,614)
Income taxes receivable 242,544 (272,182) 13,095
Other assets 26,637 (121,881) (12,768)
Accounts payable (595,926) 1,164,864 218,371
Accrued compensation 186,971 232,137 83,505
Accrued expenses 1,562,055 136,250 4,572
Income taxes payable -- (51,235) (37,042)
Deferred rent 17,847 33,240 10,766
------------ ------------ ------------
Net cash (used in) provided by
operating activities (2,489,346) 113,312 362,730
------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures for property and equipment (1,724,397) (7,813,263) (2,673,634)
Acquisition of coffeehouses -- (1,916,000) --
------------ ------------ ------------
Net cash (used in) investing activities (1,724,397) (9,729,263) (2,673,634)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from notes payable -- 10,000 --
Payments on notes payable -- (49,398) --
Proceeds from line of credit -- 4,100,000 --
Payments on line of credit -- (4,100,000) --
Proceeds from long-term debt 4,500,000 1,622,520 580,000
Principal payments on long-term debt (2,000,000) (2,569,378) (179,134)
Proceeds from issuance of common stock, net of
fees paid 1,050,000 12,579,452 --
Proceeds from sale of preferred stock -- -- 2,225,813
Repurchase of common stock -- -- (280,000)
------------ ------------ ------------
Net cash provided by financing activities 3,550,000 11,593,196 2,346,679
------------ ------------ ------------
Net (decrease) increase in cash (663,743) 1,977,245 35,775
Cash at beginning of year 2,071,904 94,659 58,884
------------ ------------ ------------
Cash at end of year $ 1,408,161 $ 2,071,904 $ 94,659
============ ============ ============
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 154,999 $ 164,140 $ 50,187
============ ============ ============
Income taxes $ 800 $ 108,773 $ 89,458
============ ============ ============
Non-cash Transactions
Equipment Purchased under Capital Leases $ 498,513 $ -- $ --
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE> 32
DIEDRICH COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 28, 1998, JANUARY 29, 1997 AND JANUARY 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Diedrich Coffee, Inc. (the "Company") operates a chain of
coffeehouses located in Southern California, Colorado and Texas, which sell
coffee beverages made with its own freshly roasted coffee. In addition, the
Company sells light food items and whole bean coffee through its coffeehouses.
The Company also operates a wholesale and mail order business in Southern
California, which sells whole bean coffee and related supplies and equipment.
Change in Fiscal Year
Effective February 1, 1996, the Company changed its year-end from
January 31 to a fiscal year ending on the Wednesday nearest January 31.
Inventories
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out method for all inventories.
Property and Equipment
Property and equipment are stated at cost. Depreciation is
calculated using the straight-line method over estimated useful lives of five to
seven years. Property and equipment held under capital leases and leasehold
improvements are amortized straight-line over the shorter of their estimated
useful lives or the term of the related leases.
Major renewals and improvements are capitalized. Maintenance and
repairs that do not improve or extend the life of the respective assets are
charged to expense as incurred.
Store Pre-opening Costs
Certain direct and incremental costs incurred prior to the
opening of a coffeehouse location are expensed as incurred.
Fair Value of Financial Instruments
The carrying amounts of cash, accounts receivable, accounts
payable and accrued expenses approximate fair value because of the short-term
maturity of these financial instruments. The Company believes the carrying
amounts of the Company's notes payable and long-term debt approximate fair value
because the interest rates on these instruments are subject to change with, or
approximate, market interest rates.
Rent Expense
Certain of the Company's lease agreements provide for scheduled
rent increases during the lease terms or for rental payments commencing on a
date other than the date of initial occupancy. Rent expense is recorded on a
straight-line basis over the respective terms of the leases.
F-8
<PAGE> 33
DIEDRICH COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Net Income (Loss) per Common Share
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("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. Some of the
changes made to simplify the EPS computations include: (a) eliminating the
presentation of primary EPS and replacing it with basic EPS, with the principal
difference being that the common stock equivalents are not considered in
computing basic EPS, (b) eliminating the modified treasury stock method and the
three percent materiality provision and (c) revising the contingent share
provisions and the supplemental EPS data requirements. SFAS No. 128 also makes a
number of changes to existing disclosure requirements. SFAS No. 128 is effective
for financial statements issued for periods ending after December 15, 1997,
including interim periods. Basic earnings per share are presented for the fiscal
years ended January 28, 1998 and January 29, 1997; diluted earnings per share
are the same as basic as losses were incurred in those years.
Pro Forma Net Income per Share
Pro forma net income per share for fiscal 1996 is based on the
weighted average number of shares outstanding during the period after
consideration of the dilutive effect, if any, of stock options granted and after
giving pro forma effect to the conversion of the Company's outstanding preferred
stock to common stock in connection with the initial public offering. Dividends
on the preferred stock have been excluded from the computation since the
preferred stock has been assumed to have been converted to common stock.
Historical net income per share has not been presented as such amount is based
on a calculation that is not reflective of the Company's ongoing capital
structure.
Costs in Excess of Net Assets Acquired
Costs in excess of net assets acquired are amortized on a
straight-line basis over the expected periods to be benefited, generally 15
years. The Company assesses the recoverability of this intangible asset by
determining whether the amortization of the goodwill balance over its remaining
life can be recovered through undiscounted future operating cash flows of the
acquired operations. The amount of goodwill impairment, if any, is measured
based on projected discounted future operating cash flows using a discount rate
reflecting the Company's average cost of funds. The assessment of the
recoverability of goodwill will be impacted if estimated future operating cash
flows are not achieved.
F-9
<PAGE> 34
DIEDRICH COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Stock Option Plans
Prior to February 1, 1996, the Company accounted for its stock
option plans in accordance with the provisions of Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. As such, compensation expense would be recorded on the date of
grant only if the current market price of the underlying stock exceeded the
exercise price. On February 1, 1996, the Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation," which permits entities to recognize
as expense over the vesting period the fair value of all stock-based awards on
the date of the grant. Alternatively, SFAS No. 123 also allows entities to
continue to apply the provisions of APB Opinion No. 25 and provide pro forma net
income and pro forma earnings per share disclosures for employee stock option
grants made in fiscal 1996 and future years as if the fair-value-based method
defined in SFAS No. 123 had been applied. The Company has elected to continue to
apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure
provisions of SFAS No. 123.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company adopted the provisions of SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," on February 1, 1996. This statement requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amounts of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. The Company recorded an impairment provision of $2,203,000 in fiscal 1998.
Advertising and Promotion Costs
Advertising costs are expensed as incurred. Promotion costs are
charged to income in the period of the promotional event. General and
administrative expenses include advertising and promotion costs of approximately
$377,000 for the year ended January 28, 1998 and $157,000 for the year ended
January 29, 1997. Advertising and promotion costs were insignificant for the
year ended January 31, 1996.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
Revenue is recognized at the point of sale.
Reincorporation
In connection with the Company's September 1996 IPO, the Company
reincorporated in Delaware thereby changing its common stock from no par value
to $.01 par value per share. All stockholders' equity and share data have been
retroactively adjusted to give effect to the reincorporation.
F-10
<PAGE> 35
DIEDRICH COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JANUARY 28, 1998 JANUARY 29, 1997
---------------- ----------------
<S> <C> <C>
Unroasted coffee $ 535,885 $ 357,255
Roasted coffee 67,965 90,536
Accessory and specialty
items 230,502 454,946
Other food, beverage and supplies 540,767 712,408
---------- ----------
$1,375,119 $1,615,145
========== ==========
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment, net, consist of the following:
<TABLE>
<CAPTION>
JANUARY 28, 1998 JANUARY 29, 1997
---------------- ----------------
<S> <C> <C>
Leasehold improvements $ 7,017,125 $ 7,528,844
Equipment 4,047,109 4,085,947
Furniture and fixtures 2,022,252 2,121,702
Construction in progress 250,716 144,068
Assets under capital lease 498,513 --
------------ ------------
13,835,715 13,880,561
Accumulated depreciation
and amortization (3,730,872) (1,917,809)
------------ ------------
$ 10,104,843 $ 11,962,752
============ ============
</TABLE>
4. ACQUISITIONS
On February 23, 1996, the Company purchased substantially all of the
assets of twelve coffeehouses previously owned by Brothers Gourmet Coffees, Inc.
The cash consideration paid by the Company totaled $1,350,000.
On February 15, 1996, the Company purchased substantially all of the
assets of seven bakery-espresso cafes from an unrelated third party for cash
consideration of $450,000.
On December 18, 1996, the Company purchased substantially all of the
assets of one coffeehouse located in Orange County, California from an unrelated
third party for cash consideration of $116,000.
These acquisitions have been accounted for using the purchase method of
accounting and, accordingly, the results of operations of the coffeehouses
acquired have been included with those of the Company as of their respective
acquisition date.
F-11
<PAGE> 36
DIEDRICH COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JANUARY 28, 1998 JANUARY 29, 1997
---------------- ----------------
<S> <C> <C>
NUVRTY, INC
Note payable bearing interest at prime rate
plus 3 1/2%, interest payable monthly. Note
is secured by the assets of the Company.
Due September 30, 2002 $1,000,000 $--
GRANDVIEW TRUST
Note payable bearing interest at prime rate
plus 3 1/2%, interest payable monthly. Note
is secured by the assets of the Company. Due
October 16, 2002 750,000 --
OCEAN TRUST
Note payable bearing interest at prime rate
plus 3 1/2%, interest payable monthly. Note
is secured by the assets of the Company Due
October 16, 2002 750,000 --
---------- ---
$2,500,000 $--
========== ===
</TABLE>
In March 1997, the Company received a commitment for a $1 million line
of credit on arms-length terms from a significant stockholder of the Company.
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 provided 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 was 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. This indebtedness was fully
paid and discharged on October 20, 1997 with the proceeds of borrowing from the
Ocean and Grandview Trusts described below.
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") (collectively the "Cirica Trust Loan Documents"). That trust is
controlled by Ms. Cirica, who is the spouse of Lawrence Goelman, then Chairman
and Interim Chief Executive Officer of the Company.
Shortly before the Cirica Trust entered into the Cirica Trust Loan
Documents, Mr. Goelman loaned Ms. Cirica approximately $250,000. Some of those
funds were transferred by Ms. Cirica to the Cirica Trust and advanced to the
Company pursuant to the Cirica Trust Loan Documents. The loan was secured by the
assets of the Company and provided for borrowings up to $500,000 with interest
accruing at the prime rate plus 3 1/2 %. As of October 29, 1997 the Company
borrowed the entire $500,000 available.
In connection with the Cirica Trust Loan Documents, the Company issued a
warrant to the Cirica Trust to purchase up to 85,000 shares of the Company's
common stock if the loan was repaid in full within 120 days of closing, or up to
170,000 shares of the Company's common stock if the loan was not repaid within
120 days, all at a price of $2.25 a share. The warrants are exercisable
immediately and expire on the later of August 19, 2003 or one year following
payment in full of the loan. Mr. Goelman disclaims any pecuniary interest in the
loan to the Company and any beneficial interest in the Cirica Trust, except to
the extent to which Mr. Goelman is a contingent beneficiary under the terms of
the Cirica Trust. The loan was repaid in full and discharged on December 17,
1997.
F-12
<PAGE> 37
DIEDRICH COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
On September 30, 1997 the Company entered into a promissory note, term
loan agreement and security agreement with Nuvrty, Inc., a Colorado corporation
controlled by Amre Youness, a former director of the Company (the "Nuvrty Loan
Documents"). All outstanding principal and accrued interest is due and payable
on September 30, 2002. The loan is secured by the assets of the Company and
provides for borrowings up to $1,000,000 with interest accruing and paid monthly
at the prime rate plus 3 1/2%. The Company borrowed the full amount under the
loan.
In connection with the Nuvrty Loan Documents, the Company issued a
warrant to Nuvrty to purchase up to 170,000 shares of the Company's common stock
if the Loan was repaid in full within 120 days of closing and up to 340,000
shares of the Company's common stock if the loan was not repaid within 120 days,
all at a price of $2.25 per share. The warrants are exercisable immediately and
expire on the later of September 30, 2003 or one year following payment in full
of the loan.
On October 16, 1997 the Company entered into parallel promissory notes,
term loan agreements and security agreements with the Ocean and Grandview Trusts
on terms identical to those entered into with the Cirica Trust and Nuvrty, Inc.
(the "Ocean Trust Loan Documents" and the "Grandview Trust Loan Documents",
respectively). The Ocean Trust Loan Documents and the Grandview Trust Loan
Documents provide for borrowing up to $750,000 from each Trust. Each loan is
secured by the assets of the Company. Interest on advances is accrued and
payable monthly at the prime rate plus 3 1/2%. The Company borrowed $750,000
under each facility. All outstanding principal and accrued interest is due and
payable to each of the Ocean and Grandview Trusts on October 16, 2002.
In connection with the Ocean Trust Loan Documents and the Grandview
Trust Loan Documents the Company issued warrants to each Trust respectively to
purchase up to 127,500 shares each of the Company's common stock if the loans
were repaid in full within 120 days of closing, or up to 255,000 shares
respectively of the Company's common stock if the loans were not repaid in full
within 120 days of closing, all at a price of $2.25 per share. The warrants are
exercisable immediately and expire on the later of October 16, 2003 or one year
following payment in full of the respective loans. The Company used the proceeds
from the Ocean Trust and Grandview Trusts Loans to pay off and discharge the
outstanding indebtedness to the Palm Trust.
The warrants associated with all the above debt were accounted for in
accordance with the provisions of APB 14, "Accounting for Convertible Debt and
Debt Issued with Stock Purchase Warrants." In accordance with APB 14, none of
the proceeds from issuance of the debt was allocated to the warrants based on
their relative fair value calculated using both a Cost of Replacement model and
a Monte Carlo simulation of possible warrant exercise and no expense was
recognized.
At January 28, 1998 the prime rate was 8.5%.
6. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
As of January 28, 1998, the Company leases warehouse and office space in
Irvine, California, warehouse space in Denver, Colorado, and thirty-eight
coffeehouse locations in Southern California, Colorado and Texas expiring
through December 2007. The leases for five of the coffeehouse locations are
guaranteed by an officer/director of the Company. Certain of the coffeehouse
leases require the payment of property taxes, normal maintenance and insurance
on the properties and additional rents based on percentages of sales in excess
of various specified retail sales levels. Contingent rent expense was
insignificant for all periods presented.
The Company purchased point-of-sale equipment and other operating
assets under capital leases.
Future minimum lease payments under non-cancelable operating leases as
of January 28, 1998 are as follows:
<TABLE>
<CAPTION>
Year Ending January Non-cancellable
Operating Leases Capital Leases
---------------- --------------
<S> <C> <C>
1999 ...................................... $ 1,946,000 $168,139
2000 ...................................... 1,954,000 153,301
2001 ...................................... 1,811,000 153,301
2002 ...................................... 1,502,000 149,485
2003 ...................................... 1,227,000 53,365
Thereafter ................................ 3,146,000 --
----------- --------
$11,586,000 $676,591
=========== ========
Less amount representing interest.......... 191,160
--------
Present value of minimum lease payments.... 485,431
Less current portion....................... 168,139
--------
Long-term portion.......................... $317,292
========
</TABLE>
Rent expense under operating leases approximated $2,232,000, $1,772,000,
and $667,000 for the years ended January 28, 1998 and January 29, 1997 and
January 31, 1996, respectively.
F-13
<PAGE> 38
DIEDRICH COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
PURCHASE COMMITMENTS
As of January 28, 1998, the Company had entered into fixed price
purchase contracts for unroasted coffee aggregating approximately $451,500. Such
contracts are generally short-term in nature and the Company believes that their
cost approximates fair market value.
CONTINGENCIES
In the ordinary course of its business, the Company may become involved
in legal proceedings from time to time. As of April 20, 1998, the Company was
not party to any material pending legal proceedings.
7. ACCRUED EXPENSES
The following table sets forth details of accrued expenses:
<TABLE>
<S> <C>
Accrued costs for store/warehouse closures $ 986,000
Other accrued taxes 331,224
Accrued worker's compensation insurance 147,532
Other accrued expenses 332,113
----------
Total accrued expenses $1,796,869
==========
</TABLE>
8. STOCKHOLDERS' EQUITY
In June 1995 the Company repurchased 229,787 shares of common stock from
a stockholder for $305,000 which consideration was offset by a $25,000
Stockholder receivable related to the original purchase of the shares.
In June 1995, the Company amended and restated its articles of
incorporation and authorized the issuance of 1,608,568 shares of new preferred
stock designated as Series B Preferred Stock ("Series B"). The amended and
restated articles of incorporation also changed the characteristics of the
previously issued Series A Preferred Stock ("Series A") to conform with that of
the newly authorized Series B, except for the liquidation preference.
In June 1995, the Company entered into a Series B Preferred Stock
Purchase Agreement for the sale of 1,608,568 shares of Series B Preferred Stock
in exchange for an aggregate purchase price of $2,305,000. Issuance costs of
approximately $79,000 have been netted against the proceeds received.
During fiscal 1994, the Company and the original purchaser of the Series
A Preferred Stock (the "Purchaser") acknowledged a purchase price overpayment
and agreed to a post-closing adjustment to the purchase price from the terms of
the original stock purchase. The Company and the Purchaser agreed to reduce the
original purchase price of the Series A by $200,000. Accordingly, the Company
recorded this transaction by reducing the cost basis of the Series A by $200,000
and recording a payable to the stockholder. The Company settled the obligation
by issuing 268,097 shares of common stock in June 1995. Additionally, to address
the dilution resulting from the issuance of shares to the Purchaser, the Company
issued an additional 17,112 shares of common stock to a stockholder.
In June 1995, one executive officer was granted options to purchase
131,350 shares of the Company's common stock at $1.45 per share, the estimated
fair value of the common stock on the grant date. The options become exercisable
upon the occurrence of certain events, including the IPO and a change in control
(as defined). If not exercisable earlier, the options become exercisable in June
2003 and expire 10 years from the date of grant. In May, 1997 the Company and
the executive agreed to terms under which 52,167 options were forfeited and the
expiration date for the remaining 79,183 was changed to March 12, 1999.
In July 1996, the Company adopted the 1996 Stock Incentive Plan (the
"Incentive Plan"), which authorized the granting of a variety of stock-based
incentive awards, including incentive and nonstatutory stock options. A total of
775,000 shares have been reserved for issuance under the Incentive Plan. The
stockholders approved at the 1997 annual meeting of stockholders, an increase of
300,000 shares reserved for issuance pursuant to the Incentive Plan. The
Incentive Plan is administered by a committee of the Board of Directors, who
determine the recipients and terms of the awards granted. Under the Incentive
Plan, options to purchase common stock may be granted with an exercise price
below market value of such stock on the grant date.
In July 1996, the Company adopted the 1996 Non-Employee Directors Stock
Option Plan (the "Directors Plan"), which authorizes the granting of
non-qualified stock options to independent directors. A total of 125,000 shares
have been reserved for issuance under the Directors Plan. Pursuant to the
Directors Plan, each non-employee director receives certain automatic grants of
options, which generally vest over two years. All non-employee director options
have a term of ten years and an exercise price equal to the fair market value of
the Company's common stock on the date of grant.
In August 1996, one executive officer was granted options to purchase
120,000 shares of the Company's common stock at an exercise price equal to the
initial public offering price per share. The options become exercisable as
follows:
F-14
<PAGE> 39
DIEDRICH COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(a) 100,000 share options vest monthly over three years at the rate of 30% in
the first year, 30% in the second year and 40% in the third year, (b) 10,000
share options of which 5,000 options vest immediately upon the commencement of
employment and the remaining 5,000 options vest monthly over the first six
months of employment and (c) 10,000 share options which fully vest 65 days after
the commencement of employment. On September 24, 1997 the Company and the
executive agreed to revise the exercise price of these options to $3.00 per
share (the closing price of the Company's stock on that date). In January, 1998
the Company and the executive agreed to terms under which the employee retained
the 62,500 options vested under the foregoing schedule and to grant the right
to an additional 17,500 shares vesting on August 31, 1998. The expiration date
of these options was changed to November 1, 1998. The remaining 40,000 options
listed on the foregoing schedule were canceled.
In September 1996, the holders of the Series A and Series B converted
their shares into shares of common stock on a one-for-one basis.
On September 11, 1996, the Company completed an initial public offering
of 2,530,000 shares (including an over-allotment option). The offering consisted
of 1,600,000 shares of common stock sold on behalf of the Company and 930,000
shares of common stock sold on behalf of certain selling stockholders. The net
proceeds of the offering to the Company, after deducting approximately
$2,621,000 in related expenses, were approximately $12,579,000.
In connection with the IPO, the managing underwriter received warrants
exercisable for 160,000 shares of the Company's common stock at $11.50 per
share. The warrants are exercisable commencing September 1997. The warrants were
repriced to $5.25 pursuant to written agreement on December 10, 1997 and expire
on December 10, 1998.
On April 25, 1997 the Company's Board of Directors approved the 1997
Non-Employee Director's Stock Option Plan under which options for 10,000 shares
each were granted to two non-employee directors. These options have an exercise
price of $2.75, became vested on April 25, 1998 and expire on April 25, 2007.
On November 18, 1997, Mr. John E. Martin joined the Company's Board
of Directors as Chairman, replacing Lawrence Goelman. On November 17,
1997, Mr. Martin entered into a letter agreement with the Company appointing him
Chairman of the Board of the Company. The Company and Mr. Martin after entered
into an agreement under which Mr. Martin would be granted the option to purchase
up to 850,000 shares of the common stock of the Company subject to stockholder
approval. Mr. Martin and the Company also agreed to terms under which Mr. Martin
would purchase 333,333 shares of the Company's common stock at $3.00 per share,
following stockholder approval of the Martin Option Agreement.
On November 18, 1997, Mr. Timothy J. Ryan joined the Company as
President and Chief Executive Officer to replace Lawrence Goelman,
Interim CEO. Subject to stockholder approval, the Company entered into a
performance based Stock Option Plan and Agreement under which Mr. Ryan would be
granted the option to purchase up to 600,000 shares of the common stock of the
Company and Mr. Ryan would purchase 16,667 shares of the Company's stock at
$3.00 per share pursuant to a private sale of restricted stock.
On January 22, 1998 the stockholders of the Company approved the stock
option plans and agreements with John Martin and Timothy Ryan. On January 28,
1998 Messrs. Martin and Ryan completed their respective private purchases of
Company stock of $1,000,000 and $50,000, respectively.
F-15
<PAGE> 40
DIEDRICH COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Information regarding the Company's stock option plan is summarized
below:
<TABLE>
<CAPTION>
Weighted 1996 Weighted 1997 Weighted
1995 Average Directors Average Directors Average 1996 Stock
Stock Exercise Stock Exercise Stock Exercise Incentive
Options Price Option Plan Price Option Plan Price Option Plan
------- ----- ----------- ----- ----------- ----- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Shares authorized 131,350 125,000 20,000 775,000
Shares under option
Outstanding at:
January 31, 1995
Granted 131,350 $ 1.45 -- -- -- -- --
Exercised -- -- -- -- -- --
Forfeited -- -- -- -- -- --
Outstanding at:
January 31, 1996 131,250 $ 1.45 30,000 $ 10.00 -- -- --
Granted -- -- 140,000
Exercised -- -- --
Forfeited -- -- --
Outstanding at:
January 29, 1997 131,350 $ 1.45 30,000 $ 10.00 -- 140,000
Granted -- 10,000 2.75 20,000 $ 2.75 405,000
Exercised -- -- -- --
Forfeited 52,167 -- 10,000 $ 10.25 -- -- 140,000
Outstanding at:
January 28, 1998 79,183 $ 1.45 30,000 $ 7.50 20,000 $ 2.75 405,000
Weighted-average
fair value of
options granted
during the fiscal
year:
1995 1.33 -- -- -- -- --
1997 -- -- $ 5.28 -- -- -- $ 5.01
1998 -- -- $ 1.47 -- $ 1.47 -- $ 2.61
Options exercisable:
At January 31, 1996 -- -- -- -- -- --
At January 29, 1997 79,183 -- -- -- -- 31,667
At January 28, 1998 79,183 10,000 -- -- -- 237,500
</TABLE>
<TABLE>
<CAPTION>
Weighted Weighted Weighted
Average John E. Average Timothy J. Average
Exercise Martin Exercise Ryan Option Exercise
Price Option Plan Price Plan Price
----- ----------- ----- ---- -----
<S> <C> <C> <C> <C> <C>
Shares authorized 850,000 600,000
Shares under option -- --
Outstanding at:
January 31, 1995
Granted -- -- --
Exercised -- -- --
Forfeited -- -- --
Outstanding at:
January 31, 1996 -- -- --
Granted 9.61 -- --
Exercised -- --
Forfeited -- --
Outstanding at:
January 29, 1997
Granted 9.61 -- --
Exercised 5.65 850,000 $ 5.88 600,000 $ 7.15
Forfeited 9.61
Outstanding at:
January 28, 1998 2.90 850,000 $ 5.88 600,000 $ 7.15
Weighted-average
fair value of
options granted
during the fiscal
year:
1995 --
1997 --
1998 -- $ 2.83 $ 2.79
Options exercisable:
At January 31, 1996
At January 29, 1997
At January 28, 1998 550,000 250,000
</TABLE>
F-16
<PAGE> 41
DIEDRICH COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about stock options
outstanding on January 28, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- ------------------------------------
WEIGHTED
NUMBER OUTSTANDING WEIGHTED AVERAGE NUMBER EXERCISABLE WEIGHTED AVERAGE
AT AVERAGE REMAINING EXERCISE AT EXERCISE
JANUARY 28, 1998 LIFE (YEARS) PRICE JANUARY 28, 1998 PRICE
---------------- ------------- ------ ---------------- -----
<S> <C> <C> <C> <C> <C>
$ 1.45 79,183 1.12 $ 1.45 79,183 $ 1.45
$ 2.75 - $ 4.00 935,000 5.54 $ 3.47 737,500 $ 3.58
$ 4.01 - $ 6.00 300,000 9.81 $ 4.88 300,000 $ 4.88
$ 6.01 - $ 9.00 325,000 9.81 $ 8.00 -- --
$ 9.01 - $10.50 345,000 9.74 $ 9.99 10,000 $ 9.88
</TABLE>
Pro forma income and pro forma income per share, as if the fair value-based
method has been applied in measuring compensation cost for stock-based awards:
<TABLE>
<CAPTION>
1998
-------------
REPORTED
<S> <C>
Net Loss $ (9,112,761)
Basic loss per share $(1.69)
PRO FORMA
Net Loss $(13,588,746)
Basic loss per share $ (2.52)
</TABLE>
The pro forma net income (loss) and net income (loss) per share calculated
pursuant to the provisions of SFAS No. 123 for the year ended January 29, 1997
would not be significantly different from amounts reported and therefore are not
included herein.
The fair values of the options granted were estimated using the Black-Scholes
option-pricing model based on the following weighted average assumptions:
<TABLE>
<CAPTION>
1998
--------------
<S> <C>
Risk free interest rate 5.5%
Expected Life 6 years
Expected volatility 128%
Expected dividend yield 0%
</TABLE>
9. INCOME TAXES
The components of the income tax provision (benefit) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JANUARY 28, 1998 JANUARY 29, 1997 JANUARY 31, 1996
---------------- ---------------- ----------------
<S> <C> <C> <C>
Current:
Federal ... $ -- $(171,284) $ 106,297
State ..... 800 (5,015) 31,132
--------- --------- ---------
800 (176,299) 137,429
--------- --------- ---------
Deferred:
Federal ... -- 40,542 (6,483)
State ..... -- 7,650 (1,735)
--------- --------- ---------
48,192 (8,218)
--------- ---------
$ 800 $(128,107) $ 129,211
========= ========= =========
</TABLE>
F-17
<PAGE> 42
DIEDRICH COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting and income tax purposes. The significant components of deferred tax
assets and liabilities are as follows:
<TABLE>
<CAPTION>
JANUARY 28, 1998 JANUARY 29, 1997
---------------- ----------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards ........ $ 2,965,213 $ 317,604
Accrued expenses ........................ 456,844 90,574
Restructure and Store closure Reserves . 410,933 --
AMT credit .............................. 1,069 14,236
----------- -----------
Total deferred tax assets .................... 3,834,059 422,414
----------- -----------
Deferred tax liabilities:
Depreciation and amortization ........... (199,432) (175,006)
State income taxes ...................... -- (14,556)
----------- -----------
Total deferred tax liabilities ............... (199,432) (189,562)
----------- -----------
Total deferred tax assets .................... 3,634,627 232,852
Less: Valuation allowance .................... (3,634,627) (232,852)
----------- -----------
Net deferred tax assets ...................... $ -- $ --
=========== ===========
</TABLE>
A reconciliation of the statutory Federal income tax rate with the
Company's effective income tax provision (benefit) rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JANUARY 28, 1998 JANUARY 29, 1997 JANUARY 31, 1996
---------------- ---------------- ----------------
<S> <C> <C> <C>
Federal statutory rate ........................... (34.0)% (34.0)% 34.0%
State income taxes, net of Federal benefit ....... (3.3) 2.6 6.1
Net operating loss carryforward .................. -- -- (2.0)
Other ............................................ (0.1) (1.0) 2.9
Valuation allowance .............................. 37.4 20.9 --
---------------- ---------------- ------------
-- (11.5)% 41.0%
================ ================ ============
</TABLE>
As of January 28, 1998, the Company had net operating loss (NOL)
carryforwards of approximately $8,007,000 and $4,160,000 for Federal and state
purposes, respectively. The Federal NOL is available to offset future federal
taxable income through 2013, and the state NOL is available to offset future
state taxable income through 2003. The utilization of certain NOL carryforwards
could be limited due to restriction imposed under Federal and state laws upon a
change in ownership.
A valuation allowance against deferred tax assets of $3,634,627 was
recorded in fiscal 1998 to fully offset NOL carryforwards and other net deferred
tax assets at January 28, 1998.
10. 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
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 and other related expenses, the Company recorded an impairment
provision and restructuring charge totaling approximately $4.6 million in the
first quarter of fiscal 1998. Eleven of the twelve stores were closed with eight
leases terminated and three locations subleased. In January, the new management
reviewed the progress of all retail operations and determined that one
coffeehouse originally designated for closure would remain open. At year end,
most of the lease terminations provided for in the restructuring had been
completed at less cost than originally anticipated. As a result of these two
factors, management determined that the remaining restructuring reserve could be
reduced by $648,000 to $237,000. The remaining balance is designated for
severance payments and costs related to three closed locations currently
under sublease.
11. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
January 28, 1998 January 29, 1997
---------------- ----------------
<S> <C> <C>
NUMERATOR:
Net (loss) income (9,112,761) (985,705)
DENOMINATOR:
Basic weighted average
common shares outstanding 5,392,609 4,414,000
Effect of dilutive securities -- --
Diluted weighted average common
shares outstanding 5,392,609 4,414,000
Basic (loss) earnings per share (1.69) (0.22)
Diluted (loss) earnings per share (1.69) (0.22)
</TABLE>
The January 31, 1996 basic and dilutive earnings per share are not
shown due to the noncomparative capital structure.
For the years ended January 28, 1998 and January 29, 1997, employee
stock options of 1,984,183 and 301,350 respectively, were not included in the
computation of diluted earnings per share as losses were incurred in those
years.
12. SUBSEQUENT EVENT (UNAUDITED)
On March 30, 1998 the Company agreed to a private placement of 200,000
shares of the Company's common stock to Franchise Mortgage Acceptance
Company ("FMAC") at a price of $6.375 (the stock's closing sale price for
that day on the Nasdaq National Market). In addition, FMAC also received an
option to purchase 100,000 additional shares of the Company's common stock;
this option may be exercised in increments of 25,000 shares or more and expire
on April 3, 2000. The exercise prices of this option are as follows: 50,000
shares are exercisable at $10.00 per share and $12.50 per share respectively.
This transaction was completed on April 3, 1998. Mr. John E. Martin, Chairman
of Diedrich Coffee, Inc., serves on the Board of Directors of FMAC.
13. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The results of operations for fiscal 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Fiscal 1998:
Net sales $ 5,868 $ 5,811 $ 5,563 $ 5,740
Operating (loss) (5,390) (661) (654) (2,202)
Net (loss) (5,383) (698) (739) (2,293)
Basic net (loss) per share (1.00) (.13) (.14) (.42)
Fiscal 1997:
Net sales $ 4,275 4,667 5,105 5,765
Operating income (loss) 216 75 82 (1,401)
Net income (loss) 107 6 46 (1,145)
Basic net income (loss) per share .03 -- .01 (.21)
</TABLE>
F-18
<PAGE> 43
DIEDRICH COFFEE, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGES
------ ----------- -----
<S> <C> <C>
2.1 Form of Agreement and Plan of Merger (1)
3.1 Certificate of Incorporation of the Company (1)
3.2 Bylaws of the Company (1)
4.1 Purchase Agreement for Series A Preferred Stock dated as of
December 11, 1992 by and among Diedrich Coffee, Martin R.
Diedrich, Donald M. Holly, SNV Enterprises and D.C.H., L.P.
(1)
4.2 Purchase Agreement for Series B Preferred Stock dated as of
June 29, 1995 by and among Diedrich Coffee, Martin R.
Diedrich, Steven A. Lupinacci, Redwood Enterprises VII, L.P.
and Diedrich Partners I, L.P. (1)
4.3 Representative's Warrant Agreement (1)
4.4 Specimen Stock Certificate (1)
4.5 Form of Conversions Agreement in connection with the
conversion of Series A and Series B Preferred Stock into
Common Stock (1)
10.1 Martin R. Diedrich Employment Agreement, dated June 29, 1995
(1)
10.2 Steven A. Lupinacci Employment Agreement, dated June 29, 1995
(1)
10.3 Stock Option Plan and Agreement of Steven A. Lupinacci, dated
June 29, 1995 (1)
10.4 Form of Indemnification Agreement (1)
10.5 Diedrich Coffee 1996 Stock Incentive Plan (1)
10.6 Diedrich Coffee 1996 Non-Employee Directors Stock Option Plan
(1)
10.7 Business Loan Agreement dated as of July 19, 1996 by and
between Bank of America National Trust and Savings Association
and Diedrich Coffee (1)
10.8 Revolving Promissory Note dated May 20, 1996 by Diedrich
Coffee in favor of Redwood Enterprises VII, L.P. (1)
10.9 Agreement of Sale dated as of February 23, 1996 by and among
Diedrich Coffee (as purchaser) and Brothers Coffee Bars, Inc.
and Brothers Gourmet Coffees, Inc. (as sellers) (1)
10.10 Kerry W. Coin Employment Agreement, dated August 26, 1996 (1)
10.11 Letter Agreement between Diedrich Coffee and Lawrence Goelman,
dated April 23, 1997, regarding appointment as Interim
President and Chief Executive Officer (2)
10.12 Separation agreement dated May 13, 1997 between Steven A.
Lupinacci and Diedrich Coffee, Inc. (3)
10.13 Employment Letter to Jonathan B. Eddison dated June 4, 1997
(4)
10.14 Employment Letter John Bayley dated July 21, 1997 (4)
10.15 Employment Letter to Michael Reeves dated May 5, 1997 (4)
10.16 Form of Promissory Note made in favor of the Palm Trust (4)
10.17 Form of Term Loan Agreement made to the Virginia R. Cirica
Trust (4)
10.18 Form of Security Agreement made to the Virginia R. Cirica
Trust (4)
10.19 Form of Warrant Agreement made to the Virginia R. Cirica Trust
(4)
10.20 Form of Promissory Note made in favor of the Virginia R.
Cirica Trust (4)
10.21 Letter agreement by and between the Company and John E. Martin
appointing Mr. Martin Chairman of the Board, dated as of
November 17, 1997 (5)
10.22 Stock Option Plan and Agreement by and between the Company and
John E. Martin granting Mr. Martin the option to purchase up
to 850,000 shares of the Common Stock of the Company, dated as
of November 17, 1997 (5)
10.23 Common Stock Purchase Agreement by and between the Company and
John E. Martin under which Mr. Martin agrees to purchase
333,333 shares of the Common Stock of the Company, dated as of
November 17, 1997 (5)
</TABLE>
S-1
<PAGE> 44
<TABLE>
<S> <C> <C>
10.24 Employment Agreement by and between the Company and Timothy J.
Ryan retaining Mr. Ryan as Chief Executive Officer, dated as
of November 17, 1997 (5)
10.25 Stock Option Plan and Agreement by and between the Company and
Timothy J. Ryan granting Mr. Ryan the option to purchase up to
600,000 shares of the Common Stock of the Company, dated as of
November 17, 1997 (5)
10.26 Common Stock Purchase Agreement by and between the Company and
Timothy J. Ryan under which Mr. Ryan agrees to purchase 16,667
shares of the Common Stock of the Company, dated as of
November 17, 1997 (5)
10.27 Form of Promissory Note made in favor of Nuvrty, Inc., the
Ocean Trust and the Grandview Trust (6)
10.28 Form of Term Loan Agreement made in favor of Nuvrty, Inc., the
Ocean Trust and the Grandview Trust (6)
10.29 Form of Security Agreement made in favor of Nuvrty, Inc., the
Ocean Trust and the Grandview Trust (6)
10.30 Form of Warrant Agreement made in favor of Nuvrty, Inc., the
Ocean Trust and the Grandview Trust (6)
10.31 Form of Intercreditor Agreement made in favor of Nuvrty, Inc.,
the Ocean Trust and the Grandview Trust (6)
10.32 Amendment to Kerry Coin's employment agreement dated September
24, 1997 (6)
10.33 Form of Indemnification Agreement - John Bayley (6)
10.34 Form of Indemnification Agreement - Jonathan B. Eddison (6)
10.35 Form of Indemnification Agreement - John E. Martin (6)
10.36 Form of Indemnification Agreement - Timothy J. Ryan (6)
10.37 Form of Common Stock and Option Purchase Agreement with
Franchise Mortgage Acceptance Company dated as of April 3,
1998
10.38 Separation and Release Agreement dated January 28, 1998 with
Kerry W. Coin
10.39 Separation and Release Agreement dated January 30, 1998 with
Jonathan B. Eddison
11.1 Statement re Computation of Per Share Earnings
27 Financial Data Schedule
</TABLE>
- ----------
(1) Incorporated by reference to the exhibit of the same number of
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.
(2) Incorporated by reference to the exhibit of the same number to
the Company's annual report on Form 10-K for the fiscal year
ended January 29, 1997.
(3) Incorporated by reference to the exhibit of the same number to
the Company's Quarterly Report on Form 10-Q, for the period
ended April 30, 1997, filed with the Securities and Exchange
Commission on June 13, 1997.
(4) Incorporated by reference to the exhibit of the same number to
the Company's Quarterly Report on Form 10-Q, for the period
ended July 30, 1997, filed with the Securities and Exchange
Commission on September 12, 1997.
(5) Incorporated by reference to the exhibit of the same number to
the Company's Current Report on Form 8-K, filed with the
Securities and Exchange Commission on November 25, 1997.
(6) Incorporated by reference to the exhibit of the same number to
the Company's Quarterly Report on Form 10-Q, for the period
ended October 29, 1997, filed with the Securities and Exchange
Commission on December 11, 1997.
S-2
<PAGE> 1
EXHIBIT 10.37
COMMON STOCK AND OPTION PURCHASE AGREEMENT
BY AND AMONG
DIEDRICH COFFEE, INC.
"COMPANY"
AND
FRANCHISE MORTGAGE ACCEPTANCE COMPANY
"PURCHASER"
APRIL 3, 1998
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
1. DEFINITIONS...............................................................1
2. PURCHASE AND SALE OF STOCK................................................3
2.1 Sale and Issuance of Common Stock.....................................3
2.2 Closing...............................................................3
3. RIGHT TO PURCHASE.........................................................3
3.1 Right to Purchase.....................................................3
3.2 Exercise of Option....................................................3
3.3 Exercise Prices.......................................................3
3.4 Procedure.............................................................4
3.5 Form of Payment: "Cashless" Exercise..................................4
3.6 Protection Against Dilution...........................................4
3.7 Reservation of Common Stock...........................................6
3.8 Transferability of The Option.........................................6
3.9 No Rights as Stockholder..............................................7
4. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER...........................7
4.1 Reliance Upon Purchaser's Representations.............................7
4.2 Receipt of Information................................................8
4.3 Investment Experience.................................................8
4.4 Organization; Good Standing; Qualification...........................8
4.5 Authorization; No Conflict............................................8
4.6 Restricted Securities.................................................8
4.7 Legend................................................................9
4.8 No Conflict...........................................................9
5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.............................9
5.1 Valid Issuance of Shares..............................................9
5.2 Organization; Good Standing; Qualification............................9
5.3 Authorization; No Conflict............................................9
5.4 Governmental Consents................................................10
5.5 Capitalization.......................................................10
5.6 Registration Rights..................................................10
5.7 Registration Statement...............................................10
6. CONDITIONS OF THE COMPANY'S OBLIGATIONS AT CLOSING.......................10
6.1 Representations and Warranties.......................................10
7. CONDITIONS OF PURCHASER'S OBLIGATIONS AT CLOSING.........................10
7.1 Representations and Warranties.......................................11
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
8. REGISTRATION RIGHTS......................................................11
8.1 Company Registration.................................................11
8.2 Demand Registration..................................................12
8.3 Expenses of Registration.............................................15
8.4 Company Obligations..................................................15
8.5 Indemnification......................................................16
8.6 Information by Holder................................................18
8.7 Transfer or Assignment of Registration Rights........................18
8.8 "Market Stand-Off" Agreement.........................................19
8.9 Allocation of Registration Opportunities.............................19
8.10 Delay of Registration...............................................19
8.11 Termination of Registration Rights..................................20
9. MARKET TRADING...........................................................20
10. MISCELLANEOUS............................................................20
10.1 Entire Agreement....................................................20
10.2 Survival of Warranties..............................................20
10.3 Governing Law.......................................................20
10.4 Counterparts........................................................20
10.5 Titles and Subtitles................................................20
10.6 Severability........................................................21
10.7 Expenses............................................................21
10.8 Attorneys' Fees.....................................................21
10.9 Amendment and Waivers...............................................21
10.10 Successors and Assigns.............................................21
10.11 Notices............................................................21
10.12 California Corporate Securities Law................................23
</TABLE>
SCHEDULES
A. Registration Rights Agreements
EXHIBITS
1. Representative's Warrant Agreement By And Between The Company
And The Boston Group, L.P., Dated As Of September 17, 1996
2. Warrant Granted To Nuvrty, Inc., A Colorado Corporation, Dated
September 30, 1997
ii
<PAGE> 4
DIEDRICH COFFEE, INC.
COMMON STOCK AND OPTION PURCHASE AGREEMENT
THIS COMMON STOCK AND OPTION PURCHASE AGREEMENT (this "AGREEMENT") is
made as of the 3rd day of April, 1998, (the "EFFECTIVE DATE") by and between
Diedrich Coffee, Inc., a Delaware corporation (the "COMPANY") and Franchise
Mortgage Acceptance Company, a Delaware corporation (the "PURCHASER"). In
consideration of the mutual promises and covenants set forth herein, and
pursuant to the terms and subject to the conditions hereinafter set forth, the
parties agree as follows:
RECITALS
A. The Company is a leading roaster, wholesaler and retailer of premium
coffee.
B. The Company needs working capital to enable it to complete its
turnaround and position the Company for growth.
C. The Purchaser is a sophisticated investor within the meaning of the
securities laws and wishes to invest in the Company on the terms and conditions
described below.
1. DEFINITIONS
As used in this Agreement, the following terms shall have the meanings
set forth below:
"AFFILIATE" shall mean a person or entity controlling, controlled by, or
under common control with a specified person.
"COMMISSION" shall mean the Securities and Exchange Commission.
"COMMON STOCK" shall mean the Company's common stock, par value $0.01
per share.
"DETERMINATION DATE" shall mean the date on which the Company receives
the Purchaser's written notice of an exercise of the Option pursuant to Section
3.4 hereof.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended.
"EXERCISE SHARES" shall mean those shares of Common Stock with respect
to which the Option is being exercised.
"EXTENSION DATE" shall mean the first date on which a Registration
Statement of the Company on a form permitting resales, in which participation
was offered to the Holders of Registrable Securities, is declared effective.
"FORM S-3" shall mean a Form S-3 registration statement under the
Securities Act, or any similar successor form.
"HOLDER" shall mean the Purchaser and any Holder of Registrable
Securities to whom the registration rights conferred by this Agreement have been
transferred in compliance with Section 8.7 hereof.
<PAGE> 5
"INITIATING HOLDER" shall mean any Holder or Holders who in the
aggregate hold not less than fifty-one percent (51%) of the outstanding
Registrable Securities.
"OPTION" shall have the meaning set forth in Section 3.1.
"OPTION SHARES" shall have the meaning set forth in Section 3.1.
"OTHER STOCKHOLDERS" shall mean persons other than Holders who, by
virtue of agreements with the Company, are entitled to include their securities
in certain registrations hereunder.
"REGISTRABLE SECURITIES" shall mean the following shares of Common Stock
of the Company: (i) the Shares, (ii) the Option Shares, and (iii) any Common
Stock issued as a dividend or other distribution with respect to or in exchange
for or in replacement of the Shares or Option Shares, provided, however, that
Registrable Securities shall not include any shares of Common Stock which have
previously been registered or which have been sold either pursuant to a
registration statement or Rule 144, or which have been sold in a private
transaction in which the transferor's registration rights under this Agreement
are not assigned.
"REGISTER," "REGISTERED" and "REGISTRATION" shall refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act and applicable rules and regulations
thereunder, and the declaration or ordering of the effectiveness of such
registration statement.
"REGISTRATION EXPENSES" shall mean all expenses incurred in effecting
any registration pursuant to this Agreement, including, without limitation, all
registration, qualification, and filing fees, printing expenses, escrow fees,
fees and disbursements of counsel for the Company, blue sky fees and expenses,
and expenses of any regular or special audits incident to or required by any
such registration, but shall not include Selling Expenses and the compensation
of regular employees of the Company, which shall be paid in any event by the
Company.
"RULE 145" shall mean Rule 145 as promulgated by the Commission under
the Securities Act, as such rule may be amended from time to time, or any
similar successor rule that may be promulgated by the Commission.
"RULE 415" shall mean Rule 415 as promulgated by the Commission under
the Securities Act, as such rule may be amended from time to time, or any
similar successor rule that may be promulgated by the Commission.
"SECURITIES" shall mean the Shares, the Option and the Option Shares.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended.
"SELLING EXPENSES" shall mean all underwriting discounts, selling
commissions and stock transfer taxes applicable to the sale of Registrable
Securities and fees and disbursements of counsel for any Holder (other than the
fees and disbursements of counsel included in Registration Expenses).
2
<PAGE> 6
"SHARES" shall have the meaning set forth in Section 2.1.
2. PURCHASE AND SALE OF STOCK
2.1 SALE AND ISSUANCE OF COMMON STOCK.
Subject to the terms and conditions of this Agreement, the
Purchaser shall purchase at the Closing, and the Company shall issue and sell to
the Purchaser at the Closing, 200,000 shares of the Common Stock (the "SHARES")
at a per share purchase price of $6.375, which is equal to the closing sale
price per share for the Common Stock on the Nasdaq National Market on March 30,
1998 as reported in the Transaction Index of the Wall Street Journal.
2.2 CLOSING.
(a) The purchase and sale of the Shares shall take place at
the offices of the Company in Irvine, California, at 2:00 p.m., on April 3,
1998, subject to satisfaction or waiver of all the conditions set forth in
Sections 5 and 6; or at such other time and place as the Company and the
Purchaser shall mutually agree, either orally or in writing (which time and
place are designated as the "CLOSING").
(b) At the Closing, the Company shall instruct its transfer
agent to deliver to the Purchaser a certificate representing the Shares that
such Purchaser is purchasing against payment of the purchase price in good funds
therefor by wire transfer or such other form of payment as shall be mutually
agreed upon by the Purchaser and the Company.
3. RIGHT TO PURCHASE
3.1 RIGHT TO PURCHASE.
After the Closing, the Purchaser shall also have the right to
purchase from the Company One Hundred Thousand (100,000) shares of Common Stock
(as presently constituted and subject to subsequent adjustments for stock
splits, stock dividends, reverse stock splits and similar transactions) (the
"OPTION SHARES") on the terms and conditions set forth in this Section 3 (the
"OPTION").
3.2 EXERCISE OF OPTION.
The purchase rights represented by the Option are exercisable by
the Purchaser in whole or in part, but not less than 25,000 shares at a time (or
such lesser number of shares which may then constitute the maximum number
purchasable; such number being subject to adjustment as provided in Section 3.6
below), at any time, or from time to time during the term commencing on the
Effective Date and ending at 5:00 p.m. Pacific standard time on the day that is
two (2) years after the Effective Date, and shall be void thereafter.
3.3 EXERCISE PRICES.
The Option may be exercised as follows: Fifty thousand (50,000)
shares shall be exercisable at $10.00 per share of Common Stock and Fifty
Thousand (50,000) shares shall be
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exercisable at $12.50 per share of Common Stock, each as adjusted from time to
time pursuant to Section 3.6 hereof (the "EXERCISE PRICES").
3.4 PROCEDURE.
Upon receipt by the Company of the Purchaser's written notice of
exercise, which notice shall contain the number of Option Shares to be exercised
and the Exercise Price, the Company shall, within ten (10) days from the date of
the Company's receipt of such notice issue and deliver to the Purchaser
certificates evidencing the Option Shares. For the purpose of this Section 3.4,
the purchase shall be deemed to occur at the close of business on the
Determination Date. In the event that the Purchaser shall elect to exercise its
right with respect to less than the entire number of shares covered by the
Option, such partial exercise shall not be interpreted to prevent the Purchaser
or its transferees, successors or assignees from asserting the then unexercised
rights or constitute a waiver of such unexercised rights.
3.5 FORM OF PAYMENT: "CASHLESS" EXERCISE.
The payment for the Option Shares with respect to which the
Option is exercised shall be made by surrendering a portion of the Option Shares
with respect to which the Option is exercised. The value attributed to Option
Shares so surrendered shall be the closing sale price for the Common Stock on
the Nasdaq National Market as reported in the Transaction Index of the Wall
Street Journal on the Determination Date. By way of illustration only, and
without limitation thereto, if the Purchaser exercises 50,000 Option Shares with
an exercise price of $10.00 per share of Common Stock, and the closing sale
price for the Common Stock on the Nasdaq National Market, as reported in the
Transaction Index of the Wall Street Journal on the Determination Date is
$20.00, the Purchaser shall surrender 25,000 Option Shares and receive a
certificate evidencing 25,000 Option Shares. No fractional shares or scrip
representing fractional shares shall be issued upon exercise of the Option. In
lieu of any fractional share to which the Purchaser would otherwise be entitled,
the Company shall make a cash payment equal to the product of the sale price set
forth above and such fraction.
3.6 PROTECTION AGAINST DILUTION.
(a) ADJUSTMENT FOR STOCK SPLITS AND COMBINATIONS. If the
Company at any time or from time to time after the Effective Date effects a
subdivision of the outstanding Common Stock the numbers of shares of Common
Stock available for purchase upon exercise of the Option as of the effective
time of such subdivision shall be proportionately increased, and the Exercise
Prices per share then in effect immediately before the subdivision shall be
proportionately decreased, and conversely, if the Company at any time or from
time to time after the Effective Date combines the outstanding shares of Common
Stock, the number of shares of Common Stock available for purchase upon exercise
of this Option as of the effective time of such combination shall be
proportionately decreased, and the Exercise Prices then in effect immediately
before the combination shall be proportionately increased. Any adjustment under
this Section 3.6(a) shall become effective as of the date and time the
subdivision or combination becomes effective.
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(b) ADJUSTMENT FOR CERTAIN DIVIDENDS AND DISTRIBUTIONS. If the
Company at any time or from time to time after the Effective 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 number of shares of Common Stock
available for purchase upon exercise of the Option as of the record date for
such dividend or distribution shall be proportionately increased and the
Exercise Prices then in effect shall be proportionately 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, 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 number of shares of Common Stock available
for purchase upon exercise of the Option as of the record date and the Exercise
Prices shall be computed 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 number of Option Shares and the Exercise Prices
shall be adjusted pursuant to this Section 3.6(b) as of the time of actual
payment of such dividends or distributions.
(c) ADJUSTMENTS FOR OTHER DIVIDENDS AND DISTRIBUTIONS. In the
event the Company at any time or from time to time after the Effective 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
the Company other than shares of Common Stock, then and in each such event
provision shall be made so that the Purchaser shall receive upon exercise of the
Option, in addition to the number of shares of Common Stock receivable
thereupon, the amount of securities of the Company which the Purchaser would
have received had the Option been fully exercised for Common Stock on the date
of such event and had the Purchaser 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 3.6 with respect to
the Purchaser.
(d) ADJUSTMENT FOR RECLASSIFICATION, EXCHANGE AND
SUBSTITUTION. If the Common Stock issuable upon the exercise of the Option 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
3.6), then, and in any such event, the Purchaser shall have the right
thereafter, upon exercise of the Option 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 the
Purchaser would have been entitled to had the Purchaser immediately prior to
such reorganization, reclassification or change exercised the Purchaser's rights
to purchase under the Option, but only at such time and to the extent the Option
is actually exercised, all subject to further adjustment as provided herein.
(e) REORGANIZATIONS, MERGERS, CONSOLIDATIONS OR SALES OR
ASSETS. If at any time or from time to time there is a capital reorganization of
the Common Stock (other than a recapitalization, subdivision, combination,
reclassification or exchange of the Common Stock provided for elsewhere in this
Section 3.6) or merger or consolidation of the Company with or into another
entity, or the sale of all or substantially all of the Company's properties and
assets to any other person, then, as a part of such reorganization, merger,
consolidation or sale, provision shall be made so that the Purchaser shall
thereafter be entitled to receive, upon exercise of rights to purchase
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<PAGE> 9
under the Option (but only to the extent such rights are exercised), the number
of shares of stock or other securities or property of the Company, or of the
successor entity resulting from such merger or consolidation or sale, to which a
holder of Common Stock, or other securities, deliverable upon the exercise of
purchase rights under the Option 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 3.6 (including adjustment of the Exercise Prices 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 3.6 applicable after such events shall be as
equivalent as may be practicable to the provisions of this Section 3.6
applicable before such events.
(f) OFFICER'S CERTIFICATE OF ADJUSTMENT. In any event of an
adjustment or readjustment of the Exercise Prices, or the number of shares of
Common Stock or other securities issuable upon exercise of the Option, the
Company's chief financial officer, at the Company's 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 deliver
such certificate as provided in Section 10.11, to the Purchaser's address as
shown in the 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 the Company for any Common Stock issued or sold or
deemed to have been issued or sold, (b) the Exercise Prices 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 the Option. Notwithstanding the above, the
Purchaser 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 Purchaser shall determine that the
computation performed by the Company's chief financial officer was incorrect by
at least five percent (5%) and such inaccuracy was prejudicial to the Purchaser,
then, at the option of the Purchaser, the cost of the Purchaser's computation
and certificate preparation shall be borne by the Company and shall be due and
owing upon demand.
(g) RESERVATION OF SHARES. The Company recognizes that 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 3.7 for issuance upon exercise of the Option.
3.7 RESERVATION OF COMMON STOCK.
The 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 the Option, such number
of shares of Common Stock as shall be issuable upon the exercise hereof.
3.8 TRANSFERABILITY OF THE OPTION.
(a) TRANSFER. Subject to Section 3.8(b), the Purchaser may
make an assignment or transfer of the Option, in whole or in part, provided that
such assignment or transfer is for a minimum of fifty percent (50%) of the
Option Shares (the "TRANSFER"). Except as set forth in this
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Section 3.8(a), the Option is not assignable or transferable, in whole or in
part, including, without limitation, by any holder subsequent to the Transfer
(the "TRANSFER HOLDER"), and may not, directly or indirectly, be offered,
transferred, sold, pledged, assigned, alienated, hypothecated or otherwise
disposed of or encumbered (including without limitation by gift, operation of
law or otherwise) other than by will or by the laws of descent and distribution
to the estate of the Purchaser or Transfer Holder, if applicable, upon his or
her death, provided that the deceased Purchaser's beneficiary, Transfer Holder's
beneficiary or the representative of his or her estate acknowledge and agree in
writing, in a form reasonably acceptable to the Company to be bound by this
Agreement as if such beneficiary or estate were the Purchaser or Transfer
Holder.
(b) NOTICE OF PROPOSED TRANSFERS. Prior to any transfer or
attempted transfer of the Option, the Purchaser shall give the Company written
notice of his intention to do so, describing briefly the nature of any such
proposed transfer. If, in the written opinion of counsel for the Purchaser, in
form and substance reasonably satisfactory to the Company or its counsel,
addressed to the Company or the Purchaser, the proposed transfer may be effected
without registration of the Option, the Option may be transferred in accordance
with the terms of said notice and in compliance with applicable state securities
laws and regulations. The 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 Commission, or any
successor rule, such opinion shall not be required, but the 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.
3.9 NO RIGHTS AS STOCKHOLDER.
The Purchaser will have no voting or other rights as a
stockholder of the Company with respect to any shares of Common Stock covered by
the Option until the exercise of such Option and the issuance of a certificate
or certificates to him for such shares of Common Stock. Except as expressly
provided in Section 3.6(b), no adjustment will be made for dividends or other
rights for which the record date is prior to the issuance of such certificate or
certificates.
4. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
The Purchaser hereby represents and warrants to the Company that:
4.1 RELIANCE UPON PURCHASER'S REPRESENTATIONS.
The Purchaser understands that the Securities are not registered
under the Securities Act on the ground that the sale provided for in this
Agreement and the issuance of securities hereunder is exempt from registration
under the Securities Act pursuant to Section 4(2) thereof, and that the
Company's reliance on such exemption is predicated on the Purchaser's
representations set forth herein. The Purchaser realizes that the basis for the
exemption may not be present if, notwithstanding such representations, the
Purchaser has in mind merely acquiring the Securities for a fixed or
determinable period in the future, or for a market rise, or for sale if the
market does not rise. The Purchaser represents that such Purchaser has no such
intention. The Securities to be acquired by the Purchaser hereunder will be
acquired for Purchaser's own account for investment purposes and not with a view
to or for sale in connection with any distribution of the Securities.
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<PAGE> 11
4.2 RECEIPT OF INFORMATION.
The Purchaser represents such Purchaser has received all the
information such Purchaser considers necessary or appropriate for deciding
whether to purchase the Securities. The Purchaser further represents that such
Purchaser has had an opportunity to ask questions and receive answers from the
Company regarding the terms and conditions of the offering of the Securities,
and the business, properties, prospects, and financial condition of the Company
and to obtain additional information (to the extent the Company possessed such
information or could acquire it without unreasonable effort or expense)
necessary to verify the accuracy of any information furnished to such Purchaser
or to which such Purchaser had access.
4.3 INVESTMENT EXPERIENCE.
The Purchaser represents that such Purchaser is experienced in
evaluating and investing in private placement transactions of securities of
companies and acknowledges that such Purchaser is able to fend for itself, can
bear the economic risk of such Purchaser's investment in the Securities and can
afford to sustain a total loss of such investment, and has such knowledge and
experience in financial and business matters that such Purchaser is capable of
evaluating the merits and risks of the investment in the Securities.
4.4 ORGANIZATION; GOOD STANDING; QUALIFICATION.
The Purchaser is a corporation duly organized, validly existing,
and in good standing under the laws of the State of Delaware, has all requisite
corporate power and authority to own and operate its properties and assets and
to carry on its business as now conducted and to execute and deliver this
Agreement. The Purchaser is duly qualified, is authorized to transact business
and is in good standing as a foreign corporation in each jurisdiction in which
the failure so to qualify would have a material adverse effect on its business,
properties, prospects, or financial condition.
4.5 AUTHORIZATION; NO CONFLICT.
All corporate action on the part of the Purchaser necessary for
the authorization, execution and delivery of this Agreement and the performance
of all obligations of the Purchaser hereunder has been taken or will be taken
prior to the Closing. The execution, delivery, and performance by the Purchaser
of this Agreement and the consummation of the transactions contemplated hereby
will not result in any violation or default in any material respect of any
provision of its organizational documents or in any material respect of any
provision of any material mortgage, indenture, agreement, instrument, or
contract to which it is a party.
4.6 RESTRICTED SECURITIES.
The Purchaser understands that the Securities may not be sold,
transferred, or otherwise disposed of without registration under the Securities
Act or an exemption therefrom, and that in the absence of an effective
registration statement covering the Securities or an available exemption from
registration under the Securities Act, the Securities must be held indefinitely.
In particular, the Purchaser is aware that the Securities may not be sold
pursuant to Rule 144 promulgated under the Securities Act unless all of the
conditions of that Rule are met.
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4.7 LEGEND.
Each certificate or other document evidencing any of the Shares
and the Option Shares shall be endorsed with a legend substantially in the form
set forth below:
"THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD,
TRANSFERRED, ASSIGNED, PLEDGED, OR HYPOTHECATED UNLESS AND UNTIL
REGISTERED UNDER SUCH ACT, OR UNLESS THE COMPANY HAS RECEIVED AN OPINION
OF COUNSEL OR OTHER EVIDENCE, SATISFACTORY TO THE COMPANY AND ITS
COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED."
4.8 NO CONFLICT.
The execution, delivery, and performance by the Purchaser of this
Agreement and the consummation of the transactions contemplated hereby will not
result in any violation or default in any material respect of any provision of
any material mortgage, indenture, agreement, instrument, or contract to which
the Purchaser or his Affiliates are a party.
5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to the Purchaser that:
5.1 VALID ISSUANCE OF SHARES.
The Shares and the Option Shares being purchased by the Purchaser
hereunder, when issued, sold, and delivered in accordance with the terms of this
Agreement for the consideration expressed herein, will be duly and validly
issued, fully paid, and nonassessable, and will be free of restrictions on
transfer other than restrictions on transfer under this Agreement and under
applicable state and federal securities laws.
5.2 ORGANIZATION; GOOD STANDING; QUALIFICATION.
The Company is a corporation duly organized, validly existing,
and in good standing under the laws of the State of Delaware, has all requisite
corporate power and authority to own and operate its properties and assets and
to carry on its business as now conducted and to execute and deliver this
Agreement. The Company is duly qualified, is authorized to transact business and
is in good standing as a foreign corporation in each jurisdiction in which the
failure so to qualify would have a material adverse effect on its business,
properties, prospects, or financial condition.
5.3 AUTHORIZATION; NO CONFLICT.
All corporate action on the part of the Company necessary for the
authorization, execution and delivery of this Agreement and the performance of
all obligations of the Company hereunder has been taken or will be taken prior
to the Closing. The execution, delivery, and performance by the Company of this
Agreement and the consummation of the transactions contemplated hereby will not
result in any violation or default in any material respect of any provision of
its organizational documents or in any material respect of any
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provision of any material mortgage, indenture, agreement, instrument, or
contract to which it is a party.
5.4 GOVERNMENTAL CONSENTS.
No consent, approval, qualification, order or authorization of,
or filing with, any (a) state or federal governmental authority or (b) stock
exchange or market system is required on the part of the Company in connection
with the Company's valid execution, delivery, or performance of this Agreement,
the offer, sale or issuance of the Securities by the Company, except certain
post-Closing filings which the Company agrees to make on a timely basis.
5.5 CAPITALIZATION.
As of March 31, 1998, there were 5,741,650 shares of the Common
Stock outstanding. From such date to the Effective Date, there has not been any
issuance by the Company of a material number of shares of the Common Stock.
5.6 REGISTRATION RIGHTS.
Except for registration rights provided pursuant to the
agreements set forth on Schedule A hereto, the Company is presently not under
any obligation and has not granted any rights to register under the Securities
Act any of its presently outstanding securities or any of its securities that
may subsequently be issued.
5.7 REGISTRATION STATEMENT.
The Company has a good faith intention to file a Form S-3
registering Common Stock to be offered for resale pursuant to Rule 415 within
one hundred twenty (120) days of the Effective Date in response to a demand for
registration from the Boston Group, L.P. pursuant to that certain
Representative's Warrant Agreement by and between the Company and the Boston
Group, L.P., dated as of September 17, 1996, as amended.
6. CONDITIONS OF THE COMPANY'S OBLIGATIONS AT CLOSING
The obligations of the Company under this Agreement are subject
to the fulfillment on or before the Closing of each of the following conditions,
the waiver of which shall not be effective unless the Company consents in
writing thereto.
6.1 REPRESENTATIONS AND WARRANTIES.
The representations and warranties of the Purchaser contained in
Section 4 shall be true on and as of the Closing with the same effect as though
such representations and warranties had been made on and as of the date of the
Closing.
7. CONDITIONS OF PURCHASER'S OBLIGATIONS AT CLOSING
The obligations of Purchaser under this Agreement are subject to
the fulfillment on or before the Closing of each of the following conditions,
the waiver of which shall not be effective unless the Purchaser consents in
writing thereto.
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7.1 REPRESENTATIONS AND WARRANTIES.
The representations and warranties of the Company contained in
Section 5 shall be true on and as of the Closing with the same effect as though
such representations and warranties had been made on and as of the date of the
Closing.
8. REGISTRATION RIGHTS
8.1 COMPANY REGISTRATION.
(a) If the Company shall determine to register any of its
Common Stock either for its own account or the account of Holders or Other
Stockholders exercising their respective demand registration rights (other than
pursuant to Section 8.2 hereof), other than a registration relating solely to
employee benefit plans, or a registration relating to a corporate reorganization
or other transaction under Rule 145, or a registration on any registration form
that does not permit secondary sales (a "COMPANY REGISTRATION"), the Company
will:
(i) promptly give to each Holder written notice thereof;
and
(ii) use its best efforts to include in such registration
(and any related qualification under blue sky laws or other compliance), except
as set forth in Sections 8.1(b) and (c) below, and in any underwriting involved
therein, all the Registrable Securities specified in a written request or
requests, made by any Holder and received by the Company within ten (10) days
after the written notice from the Company described in clause (i) above is
mailed or delivered by the Company. Such written request may specify all or a
part of such Registrable Securities.
(b) If the registration of which the Company gives notice is
for an offering involving an underwriting, the Company shall so advise the
Holders as a part of the written notice given pursuant to this Section 8.1. In
such event, the right of any Holder to registration pursuant to this Section 8.1
shall be conditioned upon such Holder's participation in such underwriting and
the inclusion of such Holder's Registrable Securities in the underwriting to the
extent provided herein. All Holders proposing to distribute their securities
through such underwriting shall (together with the Company and the Other
Stockholders distributing their securities through such underwriting) enter into
an underwriting agreement in customary form with the representative of the
underwriter or underwriters selected by the Company which agreement shall
include, without limitation, customary indemnities reasonably requested by the
underwriter.
Notwithstanding any other provision of this Section 8.1, the
offer and sale of securities in a Company Registration may be effected through
an offering not involving an underwriting, which shall be determined in the
Company's sole discretion.
(c) Notwithstanding any other provision of this Section 8.1,
if the representative of the underwriters advises the Company in writing that
marketing factors require a limitation on the number of shares to be
underwritten, the representative may (subject to the limitations set forth
below) exclude all Registrable Securities from, or limit the number of
Registrable Securities to be included in, the registration and underwriting. The
Company shall so
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advise all Holders and Other Stockholders requesting registration, and the
number of shares of securities that are entitled to be included in the
registration and underwriting shall be allocated first to the Company for
securities being sold for its own account and thereafter as set forth in Section
8.9. If any person does not agree to the terms of any such underwriting, such
person shall be excluded therefrom by written notice from the Company or the
underwriter. Any Registrable Securities or other securities excluded or
withdrawn from such underwriting shall be withdrawn from such registration.
(d) If shares are withdrawn from the registration or if the
number of shares of securities to be included in a registration was previously
reduced as a result of marketing factors and as a result the registration can
accommodate additional securities, the Company shall then offer to all persons
who have retained the right to include securities in the registration the right
to include additional securities in the registration in an aggregate amount
equal to the additional number of shares the registration can accommodate, with
such shares to be allocated among the persons requesting additional inclusion in
accordance with Section 8.9 hereof.
(e) Any Company registration and related offering shall be
managed by the Company; the Company shall have the power to select the managing
underwriter(s), if any, for such offering, and shall, in consultation with the
managing underwriter(s), where applicable, have the power to determine the
offering price, the underwriting discounts and commissions, the terms of the
underwriting agreement, the timing of the registration and related offering,
counsel to the Company, and all other administrative matters related to the
registration and related offering. To the extent that the Holders participate in
an underwritten Company registration and related offering pursuant to this
Section 8.1, the Holders shall enter into, and sell their Registrable Securities
only pursuant to, the underwriting arranged by the Company, and shall either
commit to attend the closing of the offering and take such other actions as may
be reasonably necessary to effect the Holder's participation in the offering and
to provide any assurances reasonably requested by the Company and the managing
underwriter(s) in that regard, or shall deliver to the Company in custody
certificates representing all Registrable Securities to be included in the
registration and shall execute and deliver to the Company a custody agreement
and a power of attorney, each in form and substance appropriate for the purpose
of effecting the Holder's participation in the Company registration and related
offering and otherwise reasonably satisfactory to the Company.
8.2 DEMAND REGISTRATION.
(a) REQUEST FOR REGISTRATION. The Company shall use its best
efforts to qualify and remain qualified for registration of the Registrable
Securities on a Form S-3 (or similar short-form registration statement). If the
Company shall receive from Initiating Holders at any time or times not earlier
than six (6) months after the Effective Date, a written request that the Company
effect any registration, including, if so requested by the Initiating Holders, a
registration under Rule 415, with respect to all, or a part of the Registrable
Securities having aggregate proceeds of which (after deduction for underwriter's
discounts and expenses related to the issuance) could reasonably be expected to
exceed $500,000 (a "DEMAND REGISTRATION"), the Company will:
(i) promptly give written notice of the proposed
registration to all other Holders; and
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(ii) as soon as practicable, use its best efforts to
effect such registration including, without limitation, filing post-effective
amendments, appropriate qualifications under applicable blue sky or other state
securities laws, and appropriate compliance with the Securities Act, as would
permit or facilitate the sale and distribution of all or such portion of such
Registrable Securities as are specified in such request, together with all or
such portion of the Registrable Securities of any Holder or Holders joining in
such request who, within ten (10) days after receipt of written notice from the
Company of such request, deliver to the Company a request to include some or all
of his, her or its Registrable Securities in the registration, stating the
number of Registrable Securities proposed to be included (such Holders,
collectively with the Initiating Holders, the "REGISTERING HOLDERS".)
Each Holder desiring to participate in such registration shall
deliver to the Company, within the time specified by the Company, such other
information as may reasonably be requested by the Company.
The Company shall not be obligated to effect, or to take any action to
effect, any such registration pursuant to this Section 8.2:
(A) In any particular jurisdiction in which the
Company would be required to execute a general consent to service of process in
effecting such registration, qualification, or compliance, unless the Company is
already subject to service in such jurisdiction and except as may be required by
the Securities Act;
(B) After the Company has initiated one such
registration pursuant to this Section 8.2 (counting for this purpose (i)
registrations which have been declared or ordered effective and pursuant to
which securities have been sold and (ii) registrations which have been withdrawn
by the Holders as to which the Holders have not elected to bear the Registration
Expenses pursuant to Section 8.3 hereof);
(C) During the period starting with the date sixty
(60) days prior to the Company's good faith estimate of the date of filing of,
and ending on a date one hundred eighty (180) days after the effective date of,
a Company-initiated registration; provided that the Company is actively
employing in good faith all reasonable efforts to cause such registration
statement to become effective;
Subject to the foregoing clauses (A) through (C), the Company shall file
a registration statement covering the Registrable Securities so requested to be
registered as soon as practicable after receipt of the request or requests of
the Initiating Holders; provided, however, that if (i) in the good faith
judgment of the Board of Directors of the Company, such registration would be
seriously detrimental to the Company and the Board of Directors of the Company
concludes, as a result, that it is essential to defer the filing of such
registration statement at such time, and (ii) the Company shall furnish to such
Holders a certificate signed by the President of the Company stating that in the
good faith judgment of the Board of Directors of the Company, it would be
seriously detrimental to the Company for such registration statement to be filed
in the near future and that it is, therefore, essential to defer the filing of
such registration statement, then the Company shall have the right to defer such
filing (except as provided in clause (C) above) for a period of not more than
one hundred eighty (180) days after receipt of the request of the Initiating
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Holders, and, provided further, that the Company shall not defer its obligation
in this manner more than once in any twelve-month period.
The registration statement filed pursuant to the request of the
Initiating Holders may, subject to the provisions of Sections 8.2 and 8.9
hereof, include other securities of the Company, with respect to which
registration rights have been granted, and may include securities of the Company
being sold for the account of the Company.
Notwithstanding anything to the contrary herein, the offer and sale of
Registrable Securities included in a Demand Registration shall not be effected
through an underwritten public offering without the Company's written consent,
which may be withheld by the Company in its sole discretion. For purposes
hereof, offers and sales to a reasonably limited number of selected buyers will
not be deemed to be an underwritten public offering, notwithstanding any
participation by brokers, investment bankers, or other intermediaries.
(b) UNDERWRITING. If the Registering Holders determine that the
Registrable Securities to be registered should be sold through an underwriting
and the Company has consented to such an underwriting of the offering covered by
the requested Demand Registration, the right of any Holder to registration
pursuant to this Section 8.2 shall be conditioned upon such Holder's
participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting (unless otherwise mutually agreed by
a majority in interest of the Registering Holders and such Holder with respect
to such participation and inclusion) to the extent provided herein. A Holder may
elect to include in such underwriting all or a part of the Registrable
Securities such Holder holds.
(c) PROCEDURES. If the Company shall request inclusion in any
registration pursuant to this Section 8.2 of securities being sold for its own
account, or if other persons shall request inclusion in any registration
pursuant to Section 8.2, the Initiating Holders shall, on behalf of all Holders,
offer to include such securities in any underwriting and may condition such
offer on their acceptance of the further applicable provisions of this Section
8. The Company shall (together with all Holders and other persons proposing to
distribute their securities through such underwriting) enter into an
underwriting agreement in customary form with the representative of the
underwriter or underwriters selected for such underwriting by a majority in
interest of the Registering Holders, which underwriters are reasonably
acceptable to the Company. Such agreement shall include, without limitation,
customary indemnities reasonably requested by the underwriter. Notwithstanding
any other provision of this Section 8.2, if the representative of the
underwriters advises the Registering Holders in writing that marketing factors
require a limitation on the number of shares to be underwritten, the number of
shares to be included in the underwriting or registration shall be allocated as
set forth in Section 8.9 hereof. If a person who has requested inclusion in such
registration as provided above does not agree to the terms of any such
underwriting, such person shall be excluded therefrom by written notice from the
Company, the underwriter or the Registering Holders. Any Registrable Securities
or other securities excluded or withdrawn from such underwriting shall also be
withdrawn from such registration. If shares are so withdrawn from the
registration or if the number of shares to be included in such registration was
previously reduced as a result of marketing factors pursuant to this Section
8.2(c) and as a result the registration can accommodate additional Registrable
Securities,
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<PAGE> 18
then the Company shall offer to all holders who have retained rights to include
securities in the registration the right to include additional securities in the
registration in an aggregate amount equal to the additional number of shares the
registration can accommodate, with such shares to be allocated among such
holders requesting additional inclusion in accordance with Section 8.9.
8.3 EXPENSES OF REGISTRATION.
All Registration Expenses incurred in connection with any registration,
qualification or compliance pursuant to Sections 8.1 or 8.2 hereof shall be
borne by the Company; provided, however, that if the Holders bear the
Registration Expenses for any registration proceeding begun pursuant to Section
8.2 and subsequently withdrawn by the Holders registering shares therein, such
registration proceeding shall not be counted as a requested registration
pursuant to Section 8.2 hereof. All Selling Expenses relating to securities so
registered shall be borne by the holders of such securities pro rata on the
basis of the number of shares of securities so registered on their behalf, as
shall any other expenses in connection with the registration required to be
borne by the Holders of such securities.
8.4 COMPANY OBLIGATIONS.
In the case of each registration effected by the Company pursuant to
this Section 8, the Company will keep each Holder advised in writing as to the
initiation of each registration and as to the completion thereof. At its
expense, the Company will use its best efforts to:
(a) Keep such registration effective for either, as applicable
(i) a period of one hundred twenty (120) days or until the Registering Holder or
Registering Holders have completed the distribution described in the
registration statement relating thereto, whichever first occurs; provided,
however, that such 120-day period shall be extended for a period of time equal
to the period the Registering Holder refrains from selling any securities
included in such registration at the request of an underwriter of Common Stock
(or other securities) of the Company or, (ii) if the registration is effected
pursuant to Rule 415, for the longest period permitted by such rule or until the
Holders listed in the registration statement no longer hold the Registrable
Securities described in the registration statement, whichever first occurs;
(b) Prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement;
(c) Furnish such number of prospectuses and other documents
incident thereto, including any amendment of or supplement to the prospectus, as
a Holder from time to time may reasonably request;
(d) Notify the Holders covered by such registration statement
at any time when a prospectus relating thereto is required to be delivered under
the Securities Act of the happening of any event as a result of which the
prospectus included in such registration statement, as then in effect, includes
an untrue statement of a material fact or omits to state a material fact
required to be stated therein or necessary to make the statements therein not
15
<PAGE> 19
misleading or incomplete in the light of the circumstances then existing, and at
the request of any such Holder, prepare and furnish to such Holder a reasonable
number of copies of a supplement to or an amendment of such prospectus as may be
necessary so that, as thereafter delivered to the purchasers of the Registrable
Securities, such prospectus shall not include an untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein not misleading or incomplete in the light of the
circumstances then existing;
(e) Cause all such Registrable Securities registered pursuant
hereunder to be listed on the primary securities exchange on which the Common
Stock is then listed;
(f) Provide a transfer agent and registrar for all Registrable
Securities registered pursuant to such registration statement and a CUSIP number
for all such Registrable Securities, in each case not later than the effective
date of such registration; and
(g) Otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission, and make available to its
security holders, as soon as reasonably practicable, an earnings statement
covering the period of at least twelve months, but not more than eighteen
months, beginning with the first fiscal quarter after the effective date of the
Registration Statement, which earnings statement shall satisfy the provisions of
Section 11(a) of the Securities Act.
8.5 INDEMNIFICATION.
(a) The Company will indemnify each Holder, each of its
officers, directors, partners, legal counsel, and accountants and each person
controlling such Holder within the meaning of Section 15 of the Securities Act,
with respect to which registration, qualification, or compliance has been
effected pursuant to this Section 8, and each underwriter, if any, and each
person who controls within the meaning of Section 15 of the Securities Act any
underwriter, against all expenses, claims, losses, damages, and liabilities (or
actions, proceedings, or settlements in respect thereof) arising out of or based
on any untrue statement (or alleged untrue statement) of a material fact
contained in any prospectus, offering circular, or other document (including any
related registration statement, notification, or the like) incident to any such
registration, qualification, or compliance, or based on any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or any violation by the
Company of the Securities Act or any rule or regulation thereunder applicable to
the Company and relating to action or inaction required of the Company in
connection with any such registration, qualification, or compliance, and will
reimburse each such Holder, each of its officers, directors, partners, legal
counsel, and accountants and each person controlling such Holder, each such
underwriter, and each person who controls any such underwriter, for any legal
and any other expenses reasonably incurred in connection with investigating and
defending or settling any such claim, loss, damage, liability, or action,
provided that the Company will not be liable in any such case to the extent that
any such claim, loss, damage, liability, or expense arises out of or is based on
any untrue statement or omission (i) based upon written information furnished to
the Company by such Holder or underwriter and stated to be specifically for use
therein, or (ii) made in any preliminary prospectus, which did not appear in the
final prospectus, if the party seeking indemnification delivered a copy of the
16
<PAGE> 20
preliminary prospectus to the person alleging such claim, loss, damage,
liability, or action and failed to deliver a copy of the final prospectus as
amended or supplemented, if applicable, to such person at or prior to the
written confirmation of the sale to such person. The indemnity agreement
contained in this Section 8.5(a) shall not apply to amounts paid in settlement
of any such loss, claim, damage, liability, (or actions in respect thereof) if
such settlement is effected without the consent of the Company (which consent
shall not be unreasonably withheld).
(b) Each Holder will, if Registrable Securities held by such
Holder are included in the securities as to which such registration,
qualification, or compliance is being effected, indemnify the Company, each of
its directors, officers, partners, legal counsel, and accountants and each
underwriter, if any, of the Company's securities covered by such a registration
statement, each person who controls the Company or such underwriter within the
meaning of Section 15 of the Securities Act, each other such Holder and Other
Stockholder, and each of their officers, directors, partners, legal counsel, and
accountants , and each person controlling such Holder or Other Stockholder,
against all claims, losses, damages and liabilities (or actions in respect
thereof) arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any such registration statement,
prospectus, offering circular, or other document, or any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and will reimburse the
Company and such Holders, Other Stockholders, directors, officers, partners,
legal counsel, and accountants, persons, underwriters, or control persons for
any legal or any other expenses reasonably incurred in connection with
investigating or defending any such claim, loss, damage, liability, or action,
in each case to the extent, but only to the extent, that such untrue statement
(or alleged untrue statement) or omission (or alleged omission) is made in such
registration statement, prospectus, offering circular, or other document in
reliance upon and in conformity with written information furnished to the
Company by such Holder and stated to be specifically for use therein. The
Holders shall not have any liability under this Section 8.5 if the untrue
statement (or allegedly untrue statement) or omission (or alleged omission) was
made in any preliminary prospectus, and which did not appear in the final
prospectus, if the party seeking indemnification delivered a copy of the
preliminary prospectus to the person alleging such claim, loss, damage,
liability (or actions in respect thereof) and failed to deliver a copy of the
final prospectus, as amended or supplemented, as applicable, to such person at
or prior to the written confirmation of the sale to such person. The obligations
of such Holder hereunder shall not apply to amounts paid in settlement of any
such claims, losses, damages, or liabilities (or actions in respect thereof) if
such settlement is effected without the consent of such Holder (which consent
shall not be unreasonably withheld).
(c) Each party entitled to indemnification under this Section
8.5 (the "INDEMNIFIED PARTY") shall give notice to the party required to provide
indemnification (the "INDEMNIFYING PARTY") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or any litigation resulting
therefrom, shall be approved by the Indemnified Party (whose approval shall not
be unreasonably withheld), and the Indemnified Party may participate in such
defense at such party's sole expense, and provided further that the failure of
any Indemnified Party to give notice as provided herein
17
<PAGE> 21
shall not relieve the Indemnifying Party of its obligations under this Section
8, to the extent such failure is not prejudicial. No Indemnifying Party, in the
defense of any such claim or litigation, shall, except with the consent of each
Indemnified Party, consent to entry of any judgment or enter into any settlement
that does not include as an unconditional term thereof the giving by the
claimant or plaintiff to such Indemnified Party of a release from all liability
in respect to such claim or litigation. Each Indemnified Party shall furnish
such information regarding itself or the claim in question as an Indemnifying
Party may reasonably request in writing and as shall be reasonably required in
connection with defense of such claim and litigation resulting therefrom.
(d) If the indemnification provided for in this Section 8.5 is
held by a court of competent jurisdiction to be unavailable to an Indemnified
Party with respect to any loss, liability, claim, damage, or expense referred to
therein, then the Indemnifying Party, in lieu of indemnifying such Indemnified
Party hereunder, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such loss, liability, claim, damage, or expense
in such proportion as is appropriate to reflect the relative fault of the
Indemnifying Party on the one hand and of the Indemnified Party on the other in
connection with the statements or omissions that resulted in such loss,
liability, claim, damage, or expense as well as any other relevant equitable
considerations. The relative fault of the Indemnifying Party and of the
Indemnified Party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the
Indemnifying Party or by the Indemnified Party and the parties' relative intent,
knowledge, access to information, and opportunity to correct or prevent such
statement or omission.
(e) Notwithstanding the foregoing, to the extent that the
provisions on indemnification and contribution contained in the underwriting
agreement entered into in connection with an underwritten offering are in
conflict with the foregoing provisions, the provisions in the underwriting
agreement shall control.
(f) The indemnification provided by this Section 8.5 shall be
a continuing right to indemnification and shall survive the registration and
sale of any securities by any person entitled to indemnification hereunder and
the expiration or termination of this Agreement.
8.6 INFORMATION BY HOLDER.
Each Holder of Registrable Securities shall furnish to the Company such
information regarding such Holder and the distribution proposed by such Holder
as the Company may reasonably request in writing and as shall be reasonably
required in connection with any registration, qualification, or compliance
referred to in this Section 8.
8.7 TRANSFER OR ASSIGNMENT OF REGISTRATION RIGHTS.
The rights to cause the Company to register Registrable Securities
granted to a Holder by the Company under this Section 8 may be transferred or
assigned by a Holder only to a transferee or assignee of not less than 50,000
shares of Registrable Securities (as presently constituted and subject to
subsequent adjustments for stock splits, stock dividends, reverse stock splits,
or similar events), provided that the Company is given written notice at the
time of or within a reasonable time after such transfer or assignment, stating
the name and address of the transferee or assignee
18
<PAGE> 22
and identifying the securities with respect to which such registration rights
are being transferred or assigned, and, provided further, that the transferee or
assignee of such rights assumes in writing the obligations of such Holder under
this Section 8. A Holder shall retain all rights to cause the Company to
register Registrable Securities granted to the Holder by the Company pursuant to
this Section 8 with respect to all Registrable Securities retained by such
Holder.
8.8 "MARKET STAND-OFF" AGREEMENT.
If requested by the Company and an underwriter of Common Stock (or other
securities) of the Company, a Holder shall not sell or otherwise transfer or
dispose of any Common Stock (or other securities) of the Company held by such
Holder (other than those included in the registration) during the one hundred
eighty (180) day period following the effective date of a registration statement
of the Company filed under the Securities Act, provided that all officers and
directors of the Company and holders of at least one percent 1% of the Company's
voting securities are bound by and have entered into similar agreements.
8.9 ALLOCATION OF REGISTRATION OPPORTUNITIES.
In any circumstance of which all of the Registrable Securities and other
shares of Common Stock of the Company with registration rights (the "OTHER
SHARES") requested to be included in a registration on behalf of the Holders or
other selling stockholders (collectively "PARTICIPATING HOLDERS") cannot be so
included as a result of limitations of the aggregate number of shares of
Registrable Securities and Other Shares that may be so included, subject to the
rights of other selling shareholders under the Registration Rights Agreements
listed in Schedule A, the number of shares of Registrable Securities and Other
Shares that may be so included shall be allocated among the Participating
Holders pro rata based upon the ratio of the number of shares of Registrable
Securities or Other Shares held by such Participating Holder and the total
number of Registrable Securities and Other Shares then outstanding and owned by
all the Participating Holders; provided, however, that such allocation shall not
operate to reduce the aggregate number of Registrable Securities and Other
Shares to be included in such registration, and if any Participating Holder does
not request inclusion of the maximum number of shares of Registrable Securities
and Other Shares allocated to such Participating Holder pursuant to the
above-described procedure, the remaining portion of such Participating Holder's
allocation shall be reallocated among those Participating Holders whose
allocations did not satisfy their requests, up to that number that can be
accommodated pro rata based upon the ratio of the number of Registrable
Securities or Other Shares already included of a Participating Holder and the
total number of Registrable Securities and Other Shares already included of
Participating Holders desiring to participate in the additional allocation and
this procedure shall be repeated until all of the shares of Registrable
Securities and Other Shares which may be included in the registration on behalf
of the Participating Holders have been so allocated.
8.10 DELAY OF REGISTRATION.
No Holder shall have any right to take any action to restrain, enjoin,
or otherwise delay any registration as the result of any controversy that might
arise with respect to the interpretation or implementation of this Section 8.
19
<PAGE> 23
8.11 TERMINATION OF REGISTRATION RIGHTS.
A Holder shall not have the right to request registration or inclusion
in any registration pursuant to Section 8.1 or 8.2 at any time when all shares
of Registrable Securities of such Holder may immediately be sold under Rule 144
during the 90 days succeeding the date of a request, and a Holder shall have the
right to request registration or inclusion in any registration pursuant to
Section 8.1 or 8.2 at any time, not earlier than six months after the Effective
Date, when all shares of Registrable Securities of such Holder may not
immediately be sold under Rule 144 during the 90 days immediately succeeding the
date of such request.
9. MARKET TRADING
No Holder, or any affiliate of a Holder, for any period in which such
Holder retains the right to purchase any Option Shares from the Company pursuant
to this Agreement, shall not directly or indirectly participate in any
short-sale or similar disposition with respect to the Common Stock or derivative
product of the Common Stock.
10. MISCELLANEOUS
10.1 ENTIRE AGREEMENT.
This Agreement and the documents referred to herein constitute
the entire agreement among the parties with respect to the subject matter hereof
and no party shall be liable or bound to any other party in any manner by any
warranties, representations, or covenants except as specifically set forth
herein or therein.
10.2 SURVIVAL OF WARRANTIES.
The representations and warranties of the Purchaser and the
Company contained in or made pursuant to this Agreement shall survive the
execution and delivery of this Agreement and the Closing.
10.3 GOVERNING LAW.
This Agreement shall be governed by and construed under the laws
of the State of California as applied to agreements among California residents
entered into and to be performed entirely within California.
10.4 COUNTERPARTS.
This Agreement may be executed in two or more counterparts, each
of which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
10.5 TITLES AND SUBTITLES.
The titles and subtitles used in this Agreement are used for
convenience only and are not to be considered in construing or interpreting this
Agreement.
20
<PAGE> 24
10.6 SEVERABILITY.
If one or more provisions of this Agreement are held to be
unenforceable under applicable law, such provision shall be excluded from this
Agreement and the balance of this Agreement shall be interpreted as if such
provision were so excluded and shall be enforceable in accordance with its
terms.
10.7 EXPENSES.
Each of the parties shall pay its own expenses incurred in
connection with the negotiation and preparation of this Agreement, the
performance of the covenants herein, including without limitation, all fees and
disbursements of its respective legal counsel, advisors and accountants.
10.8 ATTORNEYS' FEES.
If any action at law or in equity is necessary to enforce or
interpret the terms of this Agreement, the prevailing party shall be entitled to
reasonable attorneys' fees, costs, and disbursements in addition to any other
relief to which such party may be entitled.
10.9 AMENDMENT AND WAIVERS.
Neither this Agreement nor any term hereof may be amended,
waived, discharged or terminated, except by a written instrument signed by the
Company and the Holders of greater than fifty percent (50%) of the Registrable
Securities and any such amendment, waiver, discharge or termination shall be
binding on all the Holders, but in no event shall the obligation of any Holder
hereunder be materially increased, except upon the written consent of such
Holder.
10.10 SUCCESSORS AND ASSIGNS.
Except as otherwise provided herein, the terms and conditions of
this Agreement shall inure to the benefit of and be binding upon the respective
successors and assigns of the parties (including permitted transferees of any
Registrable Securities). Nothing in this Agreement, express or implied, is
intended to confer upon any party other than the parties hereto or their
respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.
10.11 NOTICES.
Unless otherwise provided, all notices and other communications
required or permitted under this Agreement shall be in writing and shall be
mailed by United States registered or certified mail, postage prepaid, return
receipt requested, sent by facsimile or delivered personally by hand or by a
nationally recognized courier addressed to the party to be notified at the
address or facsimile number set forth below for such person, or at such other
address or facsimile number as such party may designate in accordance with this
paragraph. All such notices and other written communications shall be effective
upon actual receipt.
21
<PAGE> 25
To the Company: Diedrich Coffee, Inc.
2144 Michelson Drive
Irvine, CA 92612
Telephone: (714) 260-1600
Facsimile: (714) 260-1610
Attention: President
with copy to: Gibson, Dunn & Crutcher LLP
Jamboree Center, 4 Park Plaza
Irvine, CA 92614
Telephone: (714) 451-3923
Facsimile: (714) 451-4220
Attention: John M. Williams, Esq.
22
<PAGE> 26
To the Purchaser: Franchise Mortgage Acceptance Company
1888 Century Park East, 3rd Floor
Los Angeles, CA 90067
Telephone:
Facsimile:
Attention: Wayne L. Knyal, President
with a copy to: Orloff, Lowenbach, Stifelman & Siegel
101 Eisenhower Parkway
Roseland, NJ 07068
Telephone: (973) 622-6200
Facsimile: (973) 622-3073
Attention: Stanley Schwartz, Esq.
10.12 CALIFORNIA CORPORATE SECURITIES LAW.
THE SALE OF THE SECURITIES HAS NOT BEEN QUALIFIED WITH THE
COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF THE
SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION FOR SUCH
SECURITIES PRIOR TO SUCH QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF
SECURITIES IS EXEMPT FROM THE QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF
THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT
ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, UNLESS THE
SALE IS SO EXEMPT.
IN WITNESS WHEREOF, this Agreement has been executed in counterparts,
each of which shall be deemed an original, by each of the parties on the
Effective Date.
DIEDRICH COFFEE, INC.
By: /s/Timothy J. Ryan
------------------------------------------
Timothy J. Ryan
President and Chief Executive Officer
FRANCHISE MORTGAGE ACCEPTANCE COMPANY
By: /s/Wayne L. Knyal
------------------------------------------
Wayne L. Knyal
President
23
<PAGE> 27
SCHEDULE A
REGISTRATION RIGHTS AGREEMENTS
1. Representative's Warrant Agreement by and between the Company and the
Boston Group, L.P., dated as of September 17, 1996, as amended. (A
copy of which is attached as Exhibit 1).
2. Warrant granted to Nuvrty, Inc., a Colorado corporation, dated
September 30, 1997. (A copy of which is attached as Exhibit 2).
3. Warrant granted to Ocean Trust, a trust organized under the laws of
the State of California, dated October 16, 1997. (The form of which
is substantially similar to that set forth in Exhibit 2).
4. Warrant granted to Grandview Trust, a trust organized under the laws
of the State of California dated October 16, 1997. (The form of which
is substantially similar to that set forth in Exhibit 2).
5. Warrant granted to Virginia R. Cirica Trust, a California dated
August 29, 1997. (The form of which is substantially similar to that
set forth in Exhibit 2).
<PAGE> 28
EXHIBIT 1
REPRESENTATIVE'S WARRANT AGREEMENT
BY AND BETWEEN
THE COMPANY AND THE BOSTON GROUP, L.P.,
DATED AS OF SEPTEMBER 17, 1996
<PAGE> 29
- --------------------------------------------------------------------------------
DIEDRICH COFFEE, INC.
AND
THE BOSTON GROUP, L.P.
--------------------
REPRESENTATIVE'S WARRANT AGREEMENT
DATED AS OF SEPTEMBER 17, 1996
--------------------
- --------------------------------------------------------------------------------
<PAGE> 30
REPRESENTATIVE'S WARRANT AGREEMENT
THIS REPRESENTATIVE'S WARRANT AGREEMENT (the "Agreement"), dated as of
September 17, 1996, is made and entered into by and between DIEDRICH COFFEE,
INC., a Delaware corporation (the "Company"), and THE BOSTON GROUP, L.P. (the
"Representative").
The Company agrees to issue and sell to the Representative and the
Representative agrees to purchase from the Company, for the price of $50, a
warrant, as hereinafter described (the "Warrant" and together with any warrants
subsequently issued hereunder, the "Warrants"), to purchase up to 160,000
shares, as may be adjusted from time to time as set forth herein, of the
Company's common stock, $0.01 par value (the "Common Stock"), in connection with
a public offering (the "Offering") by the Company and certain stockholders of
the Company of 2,200,000 shares of Common Stock (plus 330,000 shares subject to
an over-allotment option of the Underwriters named therein) pursuant to an
underwriting agreement (the "Underwriting Agreement"), dated as of September 11,
1996, by and among the Company, certain stockholders of the Company and the
Representative, as one of the representatives of the several Underwriters named
therein. The shares of Common Stock purchasable upon exercise of the Warrants,
as may be adjusted from time to time as set forth herein, are hereinafter
referred to as the "Warrant Stock." The Warrant shall be issued pursuant to this
Agreement on the closing date of the Offering (the "Closing Date").
In consideration of the foregoing and for the purpose of defining the
terms and provisions of the Warrants, the Warrant Stock and the respective
rights and obligations thereunder, the Company and the Representative, for value
received, hereby agree as follows:
SECTION 1. TRANSFERABILITY AND FORM OF WARRANTS.
1.1 Registration. All Warrants shall be numbered and shall be
registered on the books of the Company when issued.
1.2 Transfer. The Warrants shall be transferable only on the
books of the Company maintained at its principal office, wherever its principal
office may then be located, upon delivery thereof duly endorsed by a Warrant
holder (a "Warrantholder") or by its duly authorized attorney or representative
and with the signatures properly guaranteed, accompanied by proper evidence of
succession, assignment or authority to transfer. Upon any registration of
transfer, the Company shall execute and deliver a new certificate evidencing
each such Warrant to each person entitled thereto.
1.3 Limitations on Transfer of the Warrants. Warrants shall not
be sold, transferred, assigned or hypothecated by the Representative, except
that Warrants may be transferred (i) to one or more officers or partners of the
Representative, and after 9:00 a.m. Pacific time on September 11, 1997 to
employees of the Representative; (ii) to a purchaser of all or substantially all
of the assets of a Warrantholder; or (iii) by will, pursuant to the laws of
descent or distribution or by operation of law. The Warrants may be divided or
combined, upon
<PAGE> 31
request to the Company by a Warrantholder, into a certificate or certificates
representing the right to purchase the same aggregate number of Warrant Stock.
Unless the context indicates otherwise, the term "Warrantholder" shall include
the Representative and any transferee or transferees of the Warrants pursuant to
this subsection 1.3 and as otherwise permitted by this Agreement, and the term
"Warrants" shall include any and all Warrants outstanding pursuant to this
Agreement, including those evidenced by a certificate or certificates issued
upon division, exchange, substitution or transfer pursuant to this Agreement.
1.4 Form of Warrants. The text of the Warrants and of the form of
election to purchase Warrant Stock shall be substantially as set forth in
Exhibit A attached hereto. The aggregate number of shares of Common Stock
issuable upon exercise of the Warrants is subject to adjustment upon the
occurrence of certain events, all as hereinafter provided. The Warrants shall be
executed on behalf of the Company by its Chief Executive Officer or its
President and attested to by its Secretary. A Warrant bearing the signature of
an individual who was at any time the proper officer of the Company shall bind
the Company, notwithstanding that such individual shall have ceased to hold such
office prior to the delivery of such Warrant or did not bold such office on the
date of this Agreement or at any time thereafter.
The Warrants shall be dated as of the date of signature thereof
by the Company either upon initial issuance or upon division, exchange,
substitution or transfer.
1.5 Legend on Warrants and Warrant Stock. Each certificate
evidencing a Warrant (or Warrant Stock issued upon exercise of a Warrant)
initially issued upon exercise of a Warrant shall bear the following legend,
unless, at the time of exercise, such Warrant Stock is subject to a currently
effective Registration Statement under the Securities Act of 1933, as amended
(the "Act"):
"'THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE SOLD,
EXCHANGED, HYPOTHECATED OR TRANSFERRED IN ANY MANNER EXCEPT IN
COMPLIANCE WITH SECTION 11 OF THE REPRESENTATIVE'S WARRANT
AGREEMENT PURSUANT TO WHICH THEY WERE ISSUED."
Any certificate issued at any time in exchange or substitution for any
certificate bearing such legend (except a new certificate issued upon completion
of a public distribution pursuant to an effective registration statement under
the Act of the securities represented thereby) shall also bear the above legend
unless, in the opinion of the Company's counsel, the securities represented
thereby need no longer be subject to such restrictions.
SECTION 2. EXCHANGE OF WARRANT CERTIFICATE. Any Warrant certificate may
be exchanged for another certificate or certificates entitling the Warrantholder
to purchase a like aggregate number of shares of Warrant Stock as the
certificate or certificates surrendered then entitled such Warrantholder to
purchase. Any Warrantholder desiring to exchange a Warrant certificate shall
make such request in writing delivered to the Company, and shall surrender,
properly endorsed, the certificate evidencing the Warrant to be so exchanged.
Thereupon, the
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Company shall execute and deliver to the person entitled thereto a new Warrant
certificate or certificates as so requested.
SECTION 3. TERM OF WARRANTS; EXERCISE OF WARRANTS.
(a) Subject to the terms of this Agreement, the Warrantholder
shall have the right, at any time during the period commencing at 6:30 a.m.,
Pacific Time, on September 11, 1997 (the "Commencement Date") and ending at 5:00
p.m., Pacific Time, on September 10, 1999 (the "Termination Date"), to purchase
from the Company up to the number of fully paid and nonassessable shares of
Warrant Stock to which the Warrantholder may at the time be entitled to purchase
pursuant to this Agreement, upon surrender to the Company, at its principal
office, of the certificate evidencing the Warrants to be exercised, together
with the purchase form on the reverse thereof duly completed and executed, and
upon payment to the Company of the Warrant Price (as defined in and determined
in accordance with the provisions of this Section 3 and Sections 7 and 8 hereof)
for the number of shares of Warrant Stock in respect of which such Warrants are
then exercised, but in no event for less than 100 shares of Warrant Stock
(unless less than an aggregate of 100 shares of Warrant Stock are then
purchasable under all outstanding Warrants held by such Warrantholder). This
Warrant, when exercisable, may be exercised from time to time in whole or in
part.
(b) Payment of the Warrant Price shall be made in cash, by
certified or official bank check in Los Angeles Clearing House funds (next day
funds), or any combination thereof.
(c) In addition to the method of payment set forth in Section
3(b) above and in lieu of any cash payment required thereunder, unless otherwise
prohibited by law, the Warrantholders shall have the right at any time, when
exercisable, and from time to time to exercise the Warrants in full or in part
(i) by receiving from the Company the number of shares of Warrant Stock equal to
the number of shares of Warrant Stock otherwise issuable upon such exercise less
the number of shares of Warrant Stock having an aggregate value on the date of
exercise equal to the Warrant Price multiplied by the number of shares of
Warrant Stock for which this Warrant is being exercised and/or (ii) by
delivering to the Company the number of shares of Common Stock having an
aggregate value on the date of exercise equal to the Warrant Price multiplied by
the number of shares of Warrant Stock for which this Warrant is being exercised.
For purposes hereof, the "value" of a share of Common Stock on a given date
shall be equal to the Current Market Price on such date as defined in Section 9
of this Agreement.
(d) Upon surrender of the Warrants and payment of the Warrant
Price as aforesaid, the Company shall issue and cause to be delivered with all
reasonable dispatch to or upon the written order of the Warrantholder, and in
such name or names as the Warrantholder may designate, a certificate or
certificates for the number of full shares of Warrant Stock so purchased upon
such exercise of the Warrant, together with cash, as provided in Section 9
hereof, in respect of any fractional shares otherwise issuable upon such
surrender. Such certificate or certificates, to the extent permitted by law,
shall be deemed to have been issued and any person so designated to be named
therein shall be defined to have become a holder of record of such securities as
of the date of surrender of the Warrants and payment of the Warrant Price, as
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aforesaid, notwithstanding that the certificate or certificates representing
such securities shall not actually have been delivered or that the stock
transfer books of the Company shall then be closed. The Warrants shall be
exercisable, at the election of the Warrantholder, either in full or from time
to time in part and, in the event that a Warrant is exercised in respect of less
than all of the shares of Warrant Stock specified therein at any time prior to
the Termination Date, a new Warrant evidencing the remaining shares of the
Warrant Stock purchasable by such Warrantholders hereunder shall be issued by
the Company to such Warrantholders.
SECTION 4. VALIDITY; PAYMENT OF TAXES. All securities delivered upon
exercise of a Warrant shall be duly and validly issued and non-assessable. The
Company shall pay all documentary stamp taxes, if any, attributable to the
initial issuance of the Warrants and the shares of Warrant Stock issuable upon
the exercise of the Warrants; provided, however, the Company shall not be
required to pay any tax which may be payable in respect of any secondary
transfer of the Warrants or the Warrant Stock.
SECTION 5. MUTILATED OR MISSING WARRANTS. In case the certificate or
certificates evidencing the Warrants shall be mutilated, lost, stolen or
destroyed, the Company shall, at the request of the Warrantholder, issue and
deliver in exchange and substitution for and upon cancellation of the mutilated
certificate or certificates, or in lieu of and substitution for the certificate
or certificates lost, stolen or destroyed, a new Warrant certificate or
certificates of like tenor and representing an equivalent right or interest, but
only upon receipt of evidence reasonably satisfactory to the Company of such
loss, theft or destruction of such Warrant and a reasonable indemnification
undertaking.
SECTION 6. RESERVATION OF SHARES; NO CONTRARY ACTION. The Company
represents and warrants to the Warrantholder that there has been reserved, and
the Company shall at all times keep reserved so long as and to the extent the
Warrants remain outstanding, out of its authorized Common Stock, such number of
shares of Common Stock as shall be or remain subject to purchase under the
outstanding Warrants. Every transfer agent for the Common Stock and other
securities of the Company issuable upon the exercise of the Warrants shall be
irrevocably authorized and directed at all times to reserve such number of
authorized shares and other securities as shall be requisite for such purpose.
The Company shall keep a copy of this Agreement on file with every transfer
agent for the Common Stock and other securities of the Company issuable upon the
exercise of the Warrants. The Company shall supply every such transfer agent
with duly executed stock and other certificates, as appropriate, for such
purpose and shall provide or otherwise make available any cash which may be
payable in lieu of the issuance of fractional shares, as provided in Section 9
hereof.
SECTION 7. WARRANT PRICE. The price per share at which shares of
Warrantt Stock shall be purchasable upon the exercise of the Warrants shall be $
13.80, subject to adjustment pursuant to Section 8 hereof (as so adjusted from
time to time, the "Warrant Price").
SECTION 8. ADJUSTMENTS OF NUMBER OF SHARES OF WARRANT STOCK AND WARRANT
PRICE. The number and kind of securities purchasable upon the exercise of the
Warrants and the Warrant Price shall be subject to adjustment from time to time
upon the happening of certain events, as follows:
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8.1 Adjustments. The number of shares of Warrant Stock
purchasable upon the exercise of each Warrant and the Warrant Price shall be
subject to adjustment as follows:
(a) In case the Company shall (i) pay a dividend or make a
distribution on its Common Stock in shares of its capital stock or other
securities, (ii) subdivide its outstanding shares of Common Stock into a greater
number of shares, (iii) combine its outstanding Common Stock into a smaller
number of shares or (iv) issue, by reclassification of its Common Stock, shares
of its capital stock or other securities of the Company (including any such
reclassification in connection with a consolidation or merger in which the
Company is the continuing corporation), the number of shares of Warrant Stock
purchasable upon exercise of a Warrant immediately prior thereto shall be
adjusted so that the Warrantholder shall be entitled to receive the kind and
number of shares of Warrant Stock, shares of its capital stock and other
securities of the Company which such holder would have owned or would have been
entitled to receive immediately after the happening of any of the events
described above, had the Warrant been exercised immediately prior to the
happening of such event or any record date with respect thereto. Any adjustment
made pursuant to this subsection 8.1(a) shall become effective immediately after
the effective date of such event retroactive to the record date, if any, for
such event.
(b) In case the Company shall issue rights, options (other
than options issued under, and pursuant to, the Company's Stock Incentive Option
Plan (the "Incentive Plan") or the Company's 1996 Non-Employee Directors Stock
Option Plan (the "Non-Employee Directors Plan" and together with the Incentive
Plan, the "Option Plans"), both as in effect as of the date of this Agreement),
warrants or convertible securities to holders of its Common Stock, without any
charge to such holders, containing the right to subscribe for or purchase Common
Stock, the number of shares of Warrant Stock thereafter purchasable upon the
exercise of each Warrant shall be determined by multiplying the number of shares
of Warrant Stock theretofore purchasable upon exercise of a Warrant by a
fraction, of which the numerator shall be the number of shares of Common Stock
outstanding immediately prior to the issuance of such rights, options, warrants
or convertible securities plus the number of additional shares of Common Stock
offered for subscription or purchase, and of which the denominator shall be the
number of shares of Common Stock outstanding immediately prior to the issuance
of such rights, options, warrants or convertible securities. Such adjustment
shall be made whenever such rights, options, warrants or convertible securities
are issued, and shall become effective immediately upon issuance of such rights,
options, warrants or convertible securities.
(c) In case the Company shall distribute to holders of its
Common Stock evidences of its indebtedness or assets (excluding cash dividends
or distributions out of current earnings made in the ordinary course of business
consistent with past practices), then in each case the number of shares of
Warrant Stock thereafter purchasable upon the exercise of each Warrant shall be
determined by multiplying the number of shares of Warrant Stock theretofore
purchasable upon exercise of such Warrant by a fraction, of which the numerator
shall be the then Current Market Price (as defined below) on the date of such
distribution, and of which the denominator shall be such Current Market Price on
such date minus the then fair value (determined as provided in subsection 8(f)
below) of the portion of the assets or evidences of indebtedness so distributed
applicable to one share of Common Stock. Such adjustment shall be
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<PAGE> 35
made whenever any such distribution is made and shall become effective on the
date of distribution.
(d) No adjustment in the number of shares of Warrant Stock
purchasable pursuant to subsections 8.1(b) or (c) hereof shall be required
unless such adjustment would require an increase or decrease of at least one
percent in the number of shares of Warrant Stock then purchasable upon the
exercise of the Warrants or, if the Warrants are not then exercisable, the
number of shares of Warrant Stock purchasable upon the exercise of the Warrants
on the first date thereafter that the Warrants would become exercisable;
provided, however, that any adjustments which by reason of this subsection
8.1(d) are not required to be made immediately shall be carried forward and
taken into account in any subsequent adjustment.
(e) Whenever the number of shares of Warrant Stock
purchasable upon the exercise of a Warrant is adjusted as herein provided, the
Warrant Price payable upon exercise of the Warrant shall be adjusted by
multiplying such Warrant Price immediately prior to such adjustment by a
fraction, of which the numerator shall be the number of shares of Warrant Stock
purchasable upon the exercise of such Warrant immediately prior to such
adjustment, and of which the denominator shall be the number of shares of
Warrant Stock purchasable immediately thereafter.
(f) To the extent not covered by subsections 8.1(b) or (c)
hereof, in case the Company shall sell or issue Common Stock or rights, options
(other than Common Stock or options issued under and pursuant to the Option
Plans), warrants or convertible securities containing the right to subscribe
for, purchase or exchange into shares of Common Stock at a price per share
(determined, in the case of such rights, options, warrants or convertible
securities, by dividing (i) the total amount received or receivable by the
Company in consideration of the sale or issuance of such rights, options,
warrants or convertible securities, plus the total consideration payable to the
Company upon exercise, conversion or exchange thereof, by (ii) the total number
of shares of Common Stock covered by such rights, options, warrants or
convertible securities) lower than the greater of the then Current Market Price
or the Warrant Price in effect immediately prior to such sale or issuance, then
the Warrant Price shall be reduced to a price (calculated to the nearest cent)
determined by dividing (I) an amount equal to the sum of (A) the number of
shares of Common Stock outstanding immediately prior to such sale or issuance
multiplied by the then existing Warrant Price, plus (B) the consideration
received or receivable by the Company upon such sale or issuance, by (II) the
total number of shares of Common Stock outstanding immediately after such sale
or issuance. The number of shares of Warrant Stock purchasable upon the exercise
of a Warrant shall thereafter be that number determined by multiplying the
number of shares of Warrant Stock purchasable upon exercise immediately prior to
such adjustment by a fraction, of which the numerator shall be the Warrant Price
in effect immediately prior to such adjustment and the denominator shall be the
Warrant Price as so adjusted. For the purposes of such adjustments, the Common
Stock which the holders of any such rights, options, warrants or convertible
securities shall be entitled to subscribe for, purchase or exchange into shall
be deemed issued and outstanding as of the date of such sale or issuance and the
consideration received by the Company therefor shall be deemed to be the
consideration received by the Company for such rights, options, warrants or
convertible securities, plus the consideration or premiums stated in such
rights, options, warrants or
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<PAGE> 36
convertible securities to be payable for the Common Stock covered thereby. In
case the Company shall sell or issue Common Stock or rights, options, warrants
or convertible securities containing the right to subscribe for, purchase or
exchange into Common Stock for a consideration consisting, in whole or in part,
of property other than cash or its equivalent, then, in determining the "price
per share" of Common Stock and the "consideration received by the Company" for
purposes of the first sentence of this subsection 8.1(f), the Board of Directors
shall determine the fair value of said property, and such determination, if
based upon the Board of Directors' good faith business judgment, shall be
binding upon the Warrantholders. In determining the "price per share" of Common
Stock, any underwriting discounts or commissions paid to brokers, dealers or
other selling agents shall not be deducted from the price received by the
Company for sales of securities registered under the Act or issued in a private
placement. There shall be no adjustment of the Warrant Price pursuant to this
subsection 8.1(f) if the amount of such adjustment would be less than $.05 per
share of Common Stock; provided, however, that any adjustment which by reason of
this provision is not required to be made immediately shall be carried forward
and taken into account in any subsequent adjustment.
(g) For the purpose of this Section 8, the term "Common
Stock" shall mean (i) the class of stock designated as the Common Stock of the
Company at the date of this Agreement or (ii) any other class of stock resulting
from successive changes or reclassifications of such Common Stock consisting
solely of changes in par value, or from par value to no par value, or from no
par value to par value. In the event that at any time, as a result of an
adjustment made pursuant to this Section 8, a Warrantholder shall become
entitled to purchase any securities of the Company other than Common Stock, (i)
if the Warrantholder's right to purchase is on any other basis than that
available to all holders of the Company's Common Stock, the Company shall obtain
an opinion of a reputable investment banking firm valuing such other securities
and (ii) thereafter the number of such other securities so purchasable upon
exercise of a Warrant and the Warrant Price of such securities shall be subject
to adjustment from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the Common Stock contained in this
Section 8.
(h) Upon the expiration of any rights, options, warrants or
conversion privileges, if such shall not have been exercised, the number of
shares of Warrant Stock purchasable upon exercise of a Warrant and the Warrant
Price, to the extent a Warrant has not then been exercised, shall, upon such
expiration, be readjusted and shall thereafter be such number and such price as
they would have been had they been originally adjusted (or had the original
adjustment not been required, as the case may be) on the basis of (A) the fact
that the only shares of Common Stock issued in respect of such rights, options,
warrants or conversion privileges were the shares of Common Stock, if any,
actually issued or sold upon the exercise of such rights, options, warrants or
conversion privileges, and (B) the fact that such shares of Common Stock, if
any, were issued or sold for the consideration actually received by the Company
upon such exercise plus the consideration, if any, actually received by the
Company for the issuance, sale or grant of all such rights, options, warrants or
conversion privileges whether or not exercised; provided, however, that no such
readjustment shall have the effect of decreasing the numbers of shares of
Warrant Stock purchasable upon exercise of a Warrant or increasing the Warrant
Price by an amount in excess of the amount of the adjustment made in respect of
the issuance, sale or grant of such rights, options, warrants or conversion
privileges.
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(i) Whenever the number of shares of Warrant Stock
purchasable upon the exercise of a Warrant or the Warrant Price is adjusted
pursuant to this Section 8, the Company shall cause to be promptly mailed to
each Warrantholder by first class mail, postage prepaid, notice of such
adjustment or adjustments and a certificate of the chief financial officer of
the Company setting forth the number of shares of Common Stock, capital stock
and other securities purchasable upon the exercise of such Warrantholder's
Warrant and the applicable Warrant Price after such adjustment, a brief
statement of the facts requiring such adjustment and the computation by which
such adjustment was made.
8.2 No Adjustment for Dividends, Incentive Plan, Non-Employee
Directors Plan. Except as specifically provided in subsection 8.1, no adjustment
in respect of any cash dividends or distributions on the Company's Common Stock
out of current earnings made in the ordinary course of business consistent with
past practices shall be made during the term of the Warrants or upon the
exercise of the Warrants. No adjustment in respect to options issued under, and
pursuant to, the Option Plans, both as in effect as of the date of this
Agreement, shall be made during the term of the Warrants or upon the exercise of
the Warrants.
8.3 Preservation of Purchase Rights Upon Reclassification,
Consolidation, etc. At any time following the date of this Agreement, in case of
any consolidation of the Company with or merger of the Company into another
corporation or other entity or in case of any sale, lease, conveyance or other
transfer to another corporation, person or other entity of the property, assets
or business of the Company as an entirety or substantially as an entirety, the
Company or such successor or purchasing corporation, person or other entity, as
the case may be, shall execute with the Warrantholder, and the agreements
governing such consolidation, merger, sale, lease, conveyance or other transfer
shall require such execution of, an agreement that the Warrantholder shall have
the right thereafter upon payment of the Warrant Price in effect immediately
prior to such event, upon exercise of the Warrants, to receive the kind and
amount of shares and other securities and property which it would have owned or
have been entitled to receive after the happening of such consolidation, merger,
sale, lease, conveyance or other transfer had the Warrants (and each underlying
security) been exercised immediately prior to such action. The Company shall
promptly mail to each Warrantholder by first class mail, postage prepaid, notice
of the execution of any such agreement. In the event of a merger described in
Section 368(a)(2)(E) of the Internal Revenue Code of 1986, in which the Company
is the surviving corporation, the right to purchase shares of Warrant Stock
under the Warrants shall terminate on the date of such merger and thereupon the
Warrants shall become null and void, but only if the controlling corporation
shall agree to substitute for the Warrants its warrant which entitles the holder
thereof to purchase upon its exercise the kind and amount of shares and other
securities and property which it would have owned or been entitled to receive
had the Warrants been exercised immediately prior to such merger. Any such
agreements referred to in this subsection 8.3 shall provide for adjustments,
which shall be as nearly equivalent as may be practicable to the adjustments
provided for in Section 8 hereof, and shall provide for terms and provisions at
least as favorable to the Warrantholder as those contained in this Agreement.
The provisions of this subsection 8.3 shall similarly apply to successive
consolidations, mergers, sales, leases, conveyances or other transfers.
8.4 Par Value of Shares of Common Stock. Before taking any action
which
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would cause an adjustment effectively reducing the portion of the Warrant Price
allocable to each share of Warrant Stock below the then par value per share, if
any, of the Warrant Stock issuable upon exercise of the Warrants, the Company
shall take any corporate action which may, in the opinion of its counsel, be
necessary in order that the Company may validly and legally issue fully paid and
nonassessable Warrant Stock upon exercise of the Warrants.
8.5 Independent Public Accountants. The Company may retain BDO
Seidman, LLP (or such other accounting firm qualified to practice in front of
the Securities and Exchange Commission (the "Commission") as is reasonably
acceptable to the Representative) to make any computation required under this
Section 8, and a certificate signed by such firm shall be conclusive evidence of
the correctness of any computation made under this Section 8.
8.6 Statement on Warrant Certificates. Irrespective of any
adjustments in the number of securities issuable upon exercise of Warrants,
Warrant certificates theretofore or thereafter issued may continue to express
the same number of securities as are stated in the similar Warrant certificates
initially issuable pursuant to this Agreement, provided that such expression
shall in no way affect the number of shares of Warrant Stock actually
purchasable upon the exercise of such Warrants.
SECTION 9. FRACTIONAL SHARES; CURRENT MARKET PRICE. The Company shall
not be required to issue fractional shares of Common Stock on the exercise of a
Warrant. If any fraction of a share of Common Stock would, except for the
provisions of this Section 9, be issuable upon the exercise of a Warrant (or
specified portion thereof), the Company shall in lieu thereof pay an amount in
cash equal to the then Current Market Price multiplied by such fraction. For
purposes of this Agreement, the term "Current Market Price" shall mean (i) if
the Common Stock is traded on the Nasdaq National Market ("NNM") or on a
national securities exchange, the per share closing price of the Common Stock in
the NNM or on the principal stock exchange on which it is listed, as the case
may be, on the date of exercise of the Warrant or, with respect to any
adjustment pursuant to Section 8.1 hereof, on the date immediately preceding the
announcement of the event causing such adjustment or (ii) if the Common Stock is
traded in the over-the-counter market and not in the NNM or on any national
securities exchange, the average of the per share closing bid prices of the
Common Stock on the thirty (30) consecutive trading days immediately preceding
the date in question, as reported by The Nasdaq Small Cap Market (or an
equivalent generally accepted reporting service if quotations are not reported
on The Nasdaq Small Cap Market). The closing price referred to in clause (i)
above shall be the last reported sale price or, in the case no such reported
sale takes place on such day, the average of the reported closing bid and asked
prices, in either case in the NNM or on the principal stock exchange on which
the Common Stock is then listed. For purposes of clause (ii) above, if trading
in the Common Stock is not reported by The Nasdaq Small Cap Market, the bid
price referred to in said clause shall be the lowest bid price as reported in
the Nasdaq Electronic Bulletin Board or, if not reported thereon, as reported in
the "pink sheets" published by National Quotation Bureau, Incorporated, and, if
such Common Stock is not so reported, shall be the price of a share of Common
Stock determined by the Company's Board of Directors in good faith.
SECTION 10. NO RIGHTS AS STOCKHOLDER; NOTICES TO WARRANTHOLDER. Except
as expressly provided herein, nothing contained in this Agreement or in the
Warrants shall be
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<PAGE> 39
construed as conferring upon the Warrantholder or its transferees any rights as
a stockholder of the Company, including the right to vote, receive dividends,
consent or receive notices as a stockholder in respect of any meeting of
stockholders for the election of directors of the Company or any other matter.
If, however, at any time prior to the expiration of the Warrants and prior to
their exercise, any one or more of the following events shall occur:
(a) any action which would require an adjustment pursuant to
Section 8 hereof;
(b) an issuance by the Company of rights, options, warrants
or convertible securities to all or substantially all holders of its Common
Stock, without any charge to such holders, containing the right to subscribe for
or purchase Common Stock; or
(c) a dissolution, liquidation or winding up of the Company
(other than in connection with a consolidation, merger or sale of its property,
assets and business as an entirety or substantially as an entirety) shall be
proposed;
then the Company shall give notice in writing of such event to the
Warrantholder, as provided in Section 13 hereof, at least 20 days prior to the
date fixed as a record date or the date of closing the transfer books for the
determination of the stockholders entitled to any relevant dividend,
distribution or other rights or for the determination of stockholders entitled
to vote on such proposed dissolution, liquidation or winding up. Such notice
shall specify such record date or the date of closing of the transfer books, as
the case may be.
SECTION 11. RESTRICTIONS ON TRANSFER; REGISTRATION RIGHTS; OBLIGATIONS
IN REGISTRATION.
(a) The Warrantholder agrees that prior to making any
disposition of the Warrants or the Warrant Stock, other than to persons or
entities identified in the first sentence of Section 1.3, the Warrantholder
shall give written notice to the Company describing briefly the manner in which
any such proposed disposition is to be made; and no such disposition shall be
made unless the Warrantholder has notified, or currently with such disposition
notifies, the Company that in the opinion of counsel reasonably satisfactory to
the Company a registration statement, application or other notification, filing
or post-effective amendment or supplement thereto (hereinafter collectively a
"Registration Statement") under the Act or the state securities or 'blue sky"
laws of any applicable jurisdiction is not required with respect to such
disposition and no such Registration Statement has been filed by the Company
with, and declared effective, if necessary, by, the Commission or state
securities commission or agency. The Warrantholder agrees that it shall obtain
from any transferee who acquires any Warrants in a private transaction with the
Warrantholder an agreement by such transferee that it agrees to be bound by any
transfer restrictions set forth in this subsection 11(a) then applicable to such
transferees.
(b) The Company shall be obligated to the registered holders
of the Warrants and the Warrant Stock as follows:
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(i) During the period beginning on the Commencement Date
and ending four years following the Commencement Date, the Company will, as
promptly as practicable (but in any event within sixty (60) days), after written
request (the "Request") by a person or persons holding (or having the right to
acquire by virtue of holding the warrants) more than sixty percent (60%) of the
shares of Warrant Stock which have been (or may be) issued upon exercise of the
Warrants, prepare and file at the expense of the holder(s) making the Request a
Registration Statement with the Commission and such applications or other
filings as required under applicable state securities or blue sky laws
sufficient to permit the public offering of the Warrants and the Warrant Stock,
and shall use its reasonable best efforts (at the expense of the holder making
the Request) through its officers, directors, auditors and counsel, in all
matters necessary or advisable, to cause such Registration Statement to become
effective as promptly as practicable and to maintain such effectiveness so as to
permit resale of the securities covered by the Request until the earlier of the
time that all such Warrant Stock has been sold or the expiration of twelve (12)
months from the effective date of the Registration Statement; provided, however,
that the Company shall only be obligated to file one such Registration Statement
under this Section 11(b)(i). Notwithstanding the foregoing, once and only once
during the period the Company would have an obligation to register the Warrants
and the Warrant Stock pursuant to this Section 11(b)(i), the Company shall not
be obligated to effect a registration pursuant to this Section 11(b)(i) during
the three (3) month period starting with the date thirty (30) days prior to the
Company's estimated date of filing of an underwritten public offering of
securities for the account of the Company; provided that the Company is actively
employing in good faith all reasonable efforts to cause such registration
statement to become effective and that the Company's estimate of the date of
filing such registration statement is made in good faith; provided further, that
the Company shall furnish to the Warrantholder and each holder of Warrant Stock
a certificate signed by the managing underwriter stating that it would be
seriously detrimental to the Company or its stockholders for the registration
statement to be filed in the near future.
(ii) In addition to any Registration Statement pursuant to
subparagraph (i) above, whenever during the period beginning on the Commencement
Date and ending four years following the commencement date, the Company proposes
to file with the Commission a Registration Statement under the Act (other than
as to securities issued pursuant to an employee benefit plan or as to a
transaction subject to Rule 145 promulgated under the Act), it shall, regardless
of whether a Request has been made pursuant to Section 11(a)(i) hereof, at least
thirty (30) days prior to each such filing, give written notice of such proposed
filing to each Warrantholder and each holder of the Warrant Stock at their
respective addresses as they appear on the records of the Company, and shall
offer to include and shall include in such filing any proposed disposition of
the Warrants and Warrant Stock upon receipt by the Company, not more than twenty
(20) days following the receipt of such notice, of a request therefor setting
forth the facts with respect to such proposed disposition and all other
information with respect to such person reasonably necessary to be included in
such Registration Statement. In the event that such registration statement
relates to an underwritten offering on a "firm commitment" basis and the
managing underwriter for said offering advises the Company in writing that the
inclusion of such securities in the offering would be materially and
substantially detrimental to the completion of the offering, such securities
shall nevertheless be included in the Registration Statement,
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provided that the Warrantholder and each holder of Warrant Stock desiring to
have such securities included in the Registration Statement agrees in writing
for a period of ninety (90) days following such offering not to sell or
otherwise dispose of such securities pursuant to such Registration Statement,
which Registration Statement the Company shall keep effective for a period of at
least twelve (12) months following the expiration of such ninety (90) day
period. In the event that the total size of any offering contemplated by the
Company is reduced by the managing underwriter, the number of Warrants or
Warrant Stock eligible to be included in such registration or offering shall be
reduced in the same proportion and in part passu with the reduction in the
number of shares being offered by any other entity or person offering shares in
the offering. Notwithstanding the foregoing, in the event that an offering is
made pursuant to Regulation A promulgated under the Act, the Company shall be
obligated to offer only those Warrants which, in conjunction with the proposed
offering by the Company, would allow the Company to remain within the
restrictions contained in Regulation A, including but not limited limitations as
to the number of shares and dollar amount to be offered.
(c) With respect to any registration described in Section
11(b)(i) hereof, all fees, disbursements and out-of-pocket expenses in
connection with the filing of any Registration Statement or maintaining the
currency and effectiveness of the Registration Statement (or obtaining the
opinion of counsel and any no-action position of the commission with respect to
sales under Rule 144) and in complying with applicable federal securities and
state securities and blue sky laws shall be borne by the Warrantholder. With
respect to any registration, offering or notification described in Section
11(b)(ii) hereof, all fees, disbursements and out-of-pocket expenses (other than
the Warrantholder's brokerage fees and commissions and legal fees of counsel to
the Warrantholder, if any) in connection with the filing of any Registration
Statement or maintaining the currency and effectiveness of the Registration
Statement and in complying with applicable federal securities and state
securities and blue sky laws shall be borne by the Company, and the Company at
its expense shall supply any Warrantholder and any holder of Warrant Stock with
copies of such Registration Statement and the prospectus included therein and
other related documents and any opinions and no-action letters in such
quantities as may be reasonably requested by such Warrantholder or holder of
Warrant Stock.
(d) The Company shall not be required by this Section 11 to
file such Registration Statement if, in the opinion of counsel for the
Warrantholders, which counsel shall be reasonably satisfactory to the Company,
or in the opinion of another counsel experienced in securities law matters
acceptable to counsel for such Warrantholders and the Company, the proposed
public offering or other transfer as to which such Registration Statement is
requested is exempt, or without adverse economic effect could be structured to
be exempt, from applicable federal securities and state securities and blue sky
laws and would result in all proposed sales being made under Rule 144 under the
Act.
(e) The provisions of this Section 11 and of Section 12
hereof shall apply to the extent provided herein if the Company chooses to file
an Offering Statement under Regulation A promulgated under the Act.
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(f) The Company agrees that until all the Warrants and
Warrant Stock have been sold under a Registration Statement or pursuant to Rule
144 under the Act, it shall keep current in filing all materials required to be
filed with the Commission in order to permit the holders of such securities to
sell the same under Rule 144.
(g) In the event any Warrantholder timely elects to make a
Request for registration or include Warrant Stock in a Registration Statement
pursuant to subsection 11(b) above, the Company shall use its reasonable best
efforts to effect such registration to permit the sale of Warrant Stock in
accordance with the intended method or methods of disposition thereof, and
pursuant thereto, the Company shall, as expeditiously as possible:
(i) Prepare and file with the Commission a Registration
Statement or Registration Statements on a form available for the sale of the
Warrant Stock, and to cause any such Registration Statement filed under the Act
pursuant to subsection 11(b) above to become effective at the earliest possible
date after the filing thereof and remain effective as provided herein and to
comply with all applicable rules and regulations of the Commission (the "Rules
and Regulations") in connection therewith, provided, however, that before filing
a Registration Statement or prospectus or any amendments or supplements thereto,
including documents which would be incorporated or deemed to be incorporated by
reference in the Registration Statement after the initial filing of any
Registration Statement, the Company will furnish to the Warrantholders, their
respective counsel, and the underwriters, if any, to be engaged in connection
with the offering and sale by the Company (for purposes of this subsection
11(g), the "Public Underwriter"), copies of all such documents proposed to be
filed, which documents will be subject to the review of the Warrantholders,
their respective counsel and the Public Underwriter, if any, and the Company
will not file any Registration Statement, amendment thereto, any prospectus or
any supplement thereto (including such documents incorporated or deemed to be
incorporated by reference) to which the Public Underwriter, if any, shall
reasonably object;
(ii) Prepare and promptly file with the Commission such
amendments and post-effective amendments to a Registration Statement as may be
necessary to keep such Registration Statement continuously effective for a
period of twelve (12) months or, if earlier, until all the Warrant Stock has
been sold; cause the related prospectus to be supplemented, by any required
prospectus supplement, and as so supplemented, to be filed pursuant to Rule 424
under the Act; and comply with the provisions of the Act with respect to the
disposition of all Warrant Stock covered by such Registration Statement during
the applicable period in accordance with the intended methods of disposition as
set forth in such Registration Statement or supplement to such prospectus. The
Company shall not be deemed to have used its reasonable best efforts to keep a
Registration Statement effective during the applicable period if it
intentionally or voluntarily takes any action that would result in such
Warrantholders not being able to sell such Warrant Stock;
(iii) As soon as the Company is advised or obtains
knowledge thereof, advise the Warrantholders and confirm the same in writing (A)
when the Registration Statement, as amended, becomes effective and when any
post-effective amendment to the Registration Statement becomes effective, (B) of
the issuance by the Commission or any State or
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other regulatory body of any stop order or other order, or of the initiation or
the threat or contemplation of any proceeding, the outcome of which may result
in the suspension of the effectiveness of the Registration Statement or the
issuance of any order preventing or suspending the use of any preliminary
prospectus or the prospectus, or any amendment or supplement thereto, or the
institution of any proceedings for that purpose, (C) of the issuance by the
Commission or any State or other regulatory body of any proceedings for the
suspension of the qualification of any of the Warrant Stock for offering or sale
in any jurisdiction or of the initiation or the threat or contemplation of any
proceeding for that purpose, (D) of the receipt of any comments from the
Commission and (E) of any request by the Commission for any amendment to the
Registration Statement or any amendment or supplement to the prospectus related
thereto or for additional information; if the commission or any State or other
regulatory body shall enter a stop order or other order suspending the
effectiveness of the Registration Statement or preventing or suspending the use
of any preliminary prospectus or the prospectus, or any amendment or supplement
thereto, or suspend such qualification at any time, make every effort to obtain
promptly the lifting of such order or suspension;
(iv) If requested by the Public Underwriter, if any, or
any Warrantholder (1) immediately incorporate in a prospectus supplement or
post-effective amendment such information as such Warrantholder and the Public
Underwriter, if any, agree should be included therein relating to such sale and
distribution of the Warrant Stock, including, without limitation, information
with respect to the number of shares of Warrant Stock being sold to such Public
Underwriter, the purchase price being paid therefor by such Public Underwriter
and with respect to any other terms of the underwritten offering of the Warrant
Stock to be sold in such offering; (2) make all required filings of such
prospectus supplement or post-effective amendment as soon as notified of the
matters to be so incorporated in such prospectus supplement or post-effective
amendment; and (3) supplement or amend any Registration Statement if requested
by the Warrantholders or any Public Underwriter;
(v) Furnish to each of the Warrantholders and their
respective counsel, without charge in the case of a Registration Statement under
Section 1 l(b)(ii) hereof, and at such place as such Warrantholders may
designate, copies of each preliminary prospectus, the Registration Statement
(and any pre-effective or post-effective amendments thereto), the Prospectus,
and all amendments and supplements thereto, including any prospectus prepared
after the effective date of the Registration Statement and any term sheet, in
each case as soon as available and in such quantities as each Warrantholder may
request;
(vi) During the time when a prospectus is required to be
delivered under the Act, the Company shall comply with all requirements imposed
upon it by the Act and the Securities Exchange Act, 1934, as amended (the
"Exchange Act"), as now and hereafter amended, and by the Rules and Regulations,
as from time to time in force, so far as necessary to permit the continuance of
sales of or dealings in the Warrant Stock in accordance with the provisions
hereof and the prospectus, or any amendments or supplements thereto; if at any
time when a prospectus relating to the Warrant Stock is required to be delivered
under the Act, any event shall have occurred as a result of which, in the
opinion of the Company or counsel for the Company or counsel for the
Warrantholders, the prospectus, as then amended or supplemented, would include
an untrue statement of a material fact or omit to state any material
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<PAGE> 44
fact required to be stated therein or necessary to make the statements therein,
in the light of the circumstances in which they were made, not misleading, or if
it is necessary at any time to amend or supplement the prospectus to comply with
the Act, notify the Public Underwriter and prepare and file, at the Company's
expense, with the Commission an appropriate amendment or supplement to the
Registration Statement or an amendment or supplement to the prospectus which
will correct such statement or omission, or effect such compliance, each such
amendment or supplement to be reasonably satisfactory to the Warrantholders and
the counsel for the Warrantholders; and furnish to the Warrantholders copies of
such amendment or supplement as soon as available and in such quantities as the
Warrantholders may request;
(vii) As soon as practicable, but in any event not later
than forty-five (45) days after the end of the twelve (12) month period
beginning after the effective date of the Registration Statement occurs, make
generally available to its security holders, in the manner specified in Rule
158(b) promulgated under the Act, and to the Representative, an earnings
statement which will comply with the provisions of Section 11(a) of the Act and
Rule 158(a) promulgated under the Act;
(viii) Deliver to each of the Warrantholders, their
respective counsel and the Public Underwriter, if any, without charge in the
case of a Registration Statement under Section 11(b)(ii) hereof, as many copies
of the prospectus or prospectuses (including each preliminary prospectus) and
any amendment or supplement thereto as such persons may reasonably request; the
Company consents to the use of any such prospectus or any amendment or
supplement thereto by the Warrantholders and the Public Underwriter, if any, in
connection with the offering and sale of the Warrant Stock covered by such
prospectus or any amendment or supplement thereto;
(ix) Prior to any public offering of Warrant Stock, use
its reasonable best efforts, at or prior to the time the Registration Statement
becomes effective, to qualify the Warrant Stock for offering and sale under the
securities or "blue sky" laws of such jurisdictions as the Warrantholders may
reasonably designate to permit the continuance of sales and dealings therein for
as long as may be necessary to complete the distribution, and make such
applications, file such documents and furnish such information as may be
required for such purpose; provided, however, the Company shall not be required
to qualify as a foreign corporation or to execute a general consent to service
of process in any such jurisdiction; in each jurisdiction where such
qualification shall be effected, use its reasonable best efforts to file and
make such statements or reports at such times as are or may be required by the
laws of such jurisdiction to continue such qualification;
(x) Cooperate with the Warrantholders and the Public
Underwriter, if any, to facilitate the timely preparation and delivery of
certificates representing Warrant Stock to be sold, which certificates shall not
bear any restrictive legends; and enable such Warrant Stock to be in such
denominations and registered in such names as the Public Underwriter, if any,
may request at least two (2) business days prior to any sale of Warrant Stock;
(xi) Use its reasonable best efforts to cause the Warrant
Stock covered by the Registration Statement to be registered with or approved by
such other
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<PAGE> 45
governmental bodies, agencies or authorities as may be necessary to enable the
Warrantholders or the Public Underwriter, if any, to consummate the disposition
of such Warrant Stock;
(xii) Make every reasonable effort to cause all Warrant
Stock covered by such Registration Statement to be (1) listed on each securities
exchange, if any, in which equity securities issued by the Company are then
listed or (2) authorized to be quoted on the NNM or Nasdaq Small Cap Market or
any exchange if the Company's Common Stock is then authorized to be quoted on
the NNM or Nasdaq Small Cap Market or any exchange;
(xiii) Enter into such agreements (including, without
limitation, if applicable, an underwriting agreement, in form, scope and
substance as is customary in underwritten offerings) and take all such other
actions in connection therewith in order to expedite or facilitate the
disposition of such Warrant Stock and, in such connection, whether or not an
underwriting agreement is entered into and whether or not the registration is an
underwritten registration, (1) make such representations and warranties to the
Warrantholders and the Public Underwriter, if any, with respect to the business
of the Company and its subsidiaries and the Registration Statement, the
prospectus, the prospectus supplement (if any) and documents, if any,
incorporated or deemed to be incorporated by reference in the Registration
Statement, in each case in such form, substance and scope as are customarily
made by issuers to underwriters in underwritten offerings and confirm the same
if and when requested; (2) obtain opinions of counsel to the Company and updates
thereof (which counsel and opinions (in form, scope and substance) shall be
reasonably satisfactory to the Warrantholders), addressed to the Warrantholders
with respect to the matters referred to in the preceding clause in such form,
scope and substance as are customarily rendered to underwriters in underwritten
offerings and such other matters as may be reasonably requested by counsel to
the Warrantholders or the Public Underwriter, if any; (3) obtain "cold comfort"
letters and updates thereof from the independent certified public accountants of
the Company (and, if necessary, any other independent certified public
accountants of any subsidiary of the Company or of any business acquired by the
Company for which financial statements and financial data is, or is required to
be, included in or incorporated by reference into the Registration Statement)
addressed to the Warrantholders and each of the Public Underwriters, if any,
such letters to be in customary form and covering matters of the type
customarily covered in "cold comfort" letters to underwriters in connection with
underwritten offerings; (4) if an underwriting agreement is entered into, the
same shall set forth in full the indemnification and contribution provisions and
procedures of Section 12 hereof (or such other provisions and procedures as
shall be acceptable to the Warrantholders and to the Public Underwriter of such
underwritten offering) with respect to all parties to be indemnified pursuant to
said section; and (5) deliver such documents and certificates as may be
reasonably requested by the Warrantholders and the Public Underwriter, if any,
to evidence the continued validity of the representations and warranties made
pursuant to clause (1) above and to evidence compliance with any customary
conditions contained in the underwriting agreement or other agreement entered
into by the Company; the above shall be done at each closing under such
underwriting or similar agreement or as and to the extent required thereunder;
(xiv) Make available for inspection by a representative of
the Warrantholders or any Public Underwriter participating in any disposition
pursuant to such Registration Statement, and any attorney or accountant retained
by the Warrantholders or such
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<PAGE> 46
Public Underwriter, all financial and other records, pertinent corporate
documents and properties and assets of the Company and its subsidiaries and
cause the officers, directors, agents and employees of the Company and its
subsidiaries to supply all information reasonably requested by any such
representative, Public Underwriter, attorney or accountant in connection with
any registration of Warrant Stock; provided, however, that any records,
information or documents that are designated by, the Company in writing at the
time of delivery of such records, information or documents as confidential shall
be kept confidential by such persons unless (1) disclosure of such records,
information or documents is required by court or administrative order or is
necessary to respond to inquiries of governmental or regulatory bodies, agencies
or authorities, (2) disclosure of such records, information or documents is, in
the opinion of counsel to the Warrantholders or to any Public Underwriter,
required by law regulations or legal process, (3) such records, information or
documents are otherwise publicly available or (4) such records, information or
documents become available to such person from a source other than the Company,
and such source is not bound by a confidentiality agreement or law prohibiting
such disclosure; and
(xv) If the Company, in the exercise of its reasonable
judgment, objects to any change reasonably requested by the Warrantholders or
the Public Underwriter, if any, to any Registration Statement or prospectus or
any amendments or supplements thereto (including documents incorporated or
deemed to be incorporated therein by reference) as provided for in this
Subsection 11(g), the Company shall not be obligated to make any such change and
the Warrantholders may withdraw the Warrants and Warrant Stock from such
registration, in which event the Company shall pay all registration expenses
(including, without limitation, attorneys' fees and expenses) incurred by the
Warrantholders in connection with such Registration Statement or prospectus or
any amendment thereto or supplement thereof; provided, that if the Company
provides the Warrantholders, as applicable, with a written opinion of
independent counsel (which counsel may be the Company's regular outside
counsel), upon which such Warrantholders may rely, that the change so requested
is not required in order that the Registration Statement comply with all
applicable securities laws (including any rules and regulations promulgated
thereunder), such Warrantholders may withdraw the Warrants and the Warrant Stock
from such registration but the Company shall not be obligated to pay any
registration expenses incurred by the Warrantholders; and
(xvi) Pay all costs and expenses incident to the
performance of or compliance with the Company's obligations under the second
sentence of subsection 11(c) above and under this subsection 11(g)
(collectively, "Registration Expenses") whether or not any Registration
Statement is filed or becomes effective, including, without limitation, the fees
and disbursements of the Company's auditors, legal counsel, special legal
counsel, legal counsel responsible for qualifying the Warrants and the Warrant
Stock under blue sky laws and with the NASD, all filing fees (including, without
limitation, the Commission, states, NASD, the Nasdaq Stock Market or any
exchange) and printing expenses, all expenses in connection with the transfer
and delivery of the Warrant Stock, and all expenses in connection with the
qualification of the Warrants and the Warrant Stock under applicable blue sky
laws and with the NASD; provided, however, that the Company shall not bear the
Public Underwriter's discount or commission with respect to, or any transfer
taxes imposed on, the Warrant Stock or the fees and expenses of counsel to the
Warrantholders; provided, further, however, that the Company shall
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not be responsible in any way for any fees or expenses of counsel to the
Warrantholders or any Public Underwriter, except, in each case, as provided in
Subsection 11(g)(xv) above.
SECTION 12. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company agrees to indemnify and hold harmless the
Representative, the Warrantholder, and any Holder of Warrant Stock (for purposes
of this Section 12, "Holder" shall include the officers, directors, partners,
employees, agents and counsel of a Warrantholder or a holder of Warrant Stock),
and each person, if any, who controls a Holder ("controlling person") within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, from and
against any and all losses, claims, damages, expenses (including, without
limitation, reasonable attorneys' fees and expenses) or liabilities and all
actions, suits, proceedings, injuries, arbitrations, investigations, litigation
or governmental or other proceedings (in this Section 12, collectively,
"actions") in respect thereof, whatsoever (including, without limitation, any
and all expenses whatsoever reasonably incurred in investigating preparing or
defending against any action, commenced or threatened, or any claim whatsoever),
as such are incurred, to which a Holder or such controlling person may become
subject under the Act, the Exchange Act or any other statute or at common law or
otherwise, arising out of or based upon any untrue statement or alleged untrue
statement of a material tact contained (i) in any preliminary prospectus, any
Registration Statement, the Registration Statement or any prospectus (as from
time to time amended and supplemented); (ii) in any post-effective amendment or
amendments or any new registration statement and prospectus in which is included
securities of the Company issued or issuable upon exercise of the Warrants; or
(iii) in any application or other document or written communication (in this
Section 12, collectively, "application") executed by the Company or based upon
written information furnished by the Company in any jurisdiction in order to
qualify the Warrants or the Warrant Stock under the securities or blue sky laws
thereof or filed with the Commission, any state securities commission or agency,
the National Association of Securities Dealers, Inc. (the "NASD") or the NNM,
Nasdaq Small Cap Market or any other securities exchange; or the omission or
alleged omission therefrom of a material fact required to be stated therein or
necessary to make the statements therein not misleading (in light of the
circumstances in which they were made), unless such statement or omission was
made in reliance upon and in conformity with written information furnished to
the Company with respect to a Holder by or on behalf of such Holder expressly
for use in any preliminary prospectus, the registration statement or any
prospectus, or any amendment thereof or supplement thereto, or in any
application, as the case may be. In addition to its other obligations under this
subsection 12(a), the Company agrees that, as an interim measure during the
pendency of any action arising out of or based upon any untrue statement or
omission, or alleged untrue statement or alleged omission as described in this
subsection 12(a), it shall reimburse the Holders (and, to the extent applicable,
each controlling person) on a monthly basis for all reasonable legal or other
expenses incurred in connection with investigating or defending any such action
notwithstanding the absence of a judicial determination as to the propriety and
enforceability of the Company's obligations to reimburse the Holders (and, to
the extent applicable, each controlling person) for such expenses and the
possibility that such payments might later be held to have been improper by a
court of competent jurisdiction. To the extent that any such interim
reimbursement is so held to have been improper as to the Company, the Holders
(and, to the extent applicable, each controlling person) shall promptly return
it to the Company, together with interest compounded
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daily, based on the "reference rate" announced from time to time by Bank of
America NTSA (the "Prime Rate"). Any such interim reimbursement payments which
are not made to the applicable Holder within thirty (30) days of a request for
reimbursement shall bear interest at the Prime Rate from the date of such
request. In no case shall any interest be in excess of that permitted by law.
The indemnity agreement in this subsection 12(a) shall be in
addition to any liability which the Company may have at common law or otherwise.
(b) Each Holder severally agrees to indemnify and hold
harmless the Company (for purposes of this Section 12, "Company" shall include
the officers, directors, partners, employees, agents and counsel of the Company)
and each other person, if any, who controls the Company ("controlling person")
within the meaning of the Act, to the same extent as the foregoing indemnity
from the Company to the Holders, but only with respect to statements or
omissions, if any, made in any preliminary prospectus, any Registration
Statement, or any prospectus or any amendment thereof or supplement thereto or
in any application made in reliance upon, and in strict conformity with, written
information furnished to the Company with respect to such Holder by or on behalf
of such Holder expressly for use in any preliminary prospectus, any Registration
Statement or any prospectus or any amendment thereof or supplement thereto or in
any application, provided that such written information or omissions only
pertain to disclosures in any preliminary prospectus, any Registration Statement
or any prospectus directly relating to the transactions in connection with the
offering contemplated hereby. In addition to its other obligations under this
subsection 12(b), each Holder severally agrees that, as an interim measure
during the pendency of any action arising out of or based upon any untrue
statement or omission, or alleged untrue statement or alleged omission as
described in this subsection 12(b), it shall reimburse the Company (and, to the
extent applicable, each controlling person) on a monthly basis for all
reasonable legal or other expenses incurred in connection with investigating or
defending any action with respect to such Holder notwithstanding the absence of
a judicial determination as to the propriety and enforceability of such Holder's
obligations to reimburse the Company (and, to the extent applicable, each
controlling person) for such expenses and the possibility that such payments
might later be held to have been improper by a court of competent jurisdiction.
To the extent that any such interim reimbursement is so held to have been
improper as to such Holder, the Company (and, to the extent applicable, each
controlling person) shall promptly return it to such Holder, together with
interest compounded daily, based on the Prime Rate. Any such interim
reimbursement payments which are not made to the company within thirty (30) days
of a request for reimbursement shall bear interest at the Prime Rate from the
date of such request. In no case shall any interest be in excess of that
permitted by law. Notwithstanding the provisions of this subsection 12(b), in
connection with a registration which includes the Warrants or Warrant Stock
pursuant to Subsection 11(b)(i) hereof, no such Holder shall be required to
indemnify or hold harmless the Company or any controlling person for any amounts
in excess of the net proceeds (before deducting expenses) applicable to the
Warrants or Warrant Stock sold by such Holder pursuant to the Registration
Statement. Notwithstanding the provisions of this subsection 12(b), in
connection with a registration that includes a Holder's Warrants or Warrant
Stock pursuant to subsection 11(b)(ii) hereof, no such Holder shall be required
to indemnify and hold harmless the Company or any controlling person for any
amounts in excess of that portion of all expenses as to which indemnification is
properly claimed under this Agreement equal to such Holder's
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relevant proportion of all net proceeds (before deduction of expenses)
applicable to all securities sold pursuant to any Registration Statement or the
Registration Statement, as applicable.
(c) Promptly after receipt by an indemnified party under this
Section 12 of notice of the commencement of any action, such indemnified party
shall notify each party against whom indemnification is to be sought in writing
of the commencement thereof (but the failure to so notify an indemnifying party
shall not relieve it from any liability which it may have under this Section 12
except to the extent that it has been materially prejudiced by such failure). In
case any such action is brought against any indemnified party, and it notifies
an indemnifying party or parties of the commencement thereof, the indemnifying
party or parties shall be entitled to participate therein, and to the extent it
or they may elect by written notice delivered to the indemnified party or
parties promptly after receiving the aforesaid notice from such indemnified
party or parties, to assume the defense thereof with counsel reasonably
satisfactory to such indemnified party. Notwithstanding the foregoing, an
indemnified party shall have the right to employ its own counsel in any such
case, but the fees and expenses of such counsel shall be at the expense of such
indemnified party unless (i) the employment of such counsel shall have been
authorized in writing by the indemnifying party or parties in connection with
the defense of such action at the expense of the indemnifying party or parties,
(ii) the indemnifying party or parties shall not have employed counsel
reasonably satisfactory to such indemnified party to have charge of the defense
of such action within a reasonable time after notice of commencement of the
action or (iii) such indemnified party shall have reasonably concluded that
there may be one or more defenses available to it which are different from or
additional to those available to one or all of the indemnifying parties (in
which case the indemnifying parties shall not have the right to direct the
defense of such action on behalf of the indemnified party or parties), in any of
which events such fees and expenses of one additional counsel (in addition to
appropriate local counsel) shall be borne by the indemnifying parties. In no
event shall the indemnifying parties be liable for fees and expenses of more
than one counsel (in addition to appropriate local counsel) separate from their
own counsel for all indemnified parties in connection with any one action or
separate but similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances. Anything in this Section 12 to
the contrary notwithstanding, an indemnifying party shall not be liable for any
settlement of any claim or action effected without its written consent;
provided, however, that such consent may not be unreasonably withheld or
delayed.
(d) In order to provide for just and equitable contribution
in any case in which (i) an indemnified party makes a claim for indemnification
pursuant to this Section 12, but it is judicially determined (by the entry of a
final judgment or decree by a court of competent jurisdiction and the expiration
of time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding the fact that
the express provisions of this Section 12 provide for indemnification in such
case or (ii) contribution under the Act may be required on the part of any
indemnified party, then each indemnifying party shall contribute to the amount
paid as a result of such losses, claims, damages, expenses or liabilities (or
actions in respect thereof) in such proportion as is appropriate to reflect the
relative fault of each of the contributing parties, on the one hand, and the
party to be indemnified, on the other hand, in connection with the statements or
omissions that resulted in such losses, claims, damages, expenses or liabilities
(or actions in respect thereof), as well as any other relevant equitable
considerations. Relative fault shall be determined by reference to, among other
things,
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whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or by such Holder, and the parties' relative intent,
knowledge, state of mind and access to information and opportunity to correct or
prevent such untrue statement or omission. The amount paid by an indemnified
party as a result of the losses, claims, damages, expenses or liabilities (or
actions in respect thereof) referred to in the first sentence of this subsection
12(d) shall be deemed to include any legal or other expenses reasonably incurred
by such indemnified party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this subsection 12(d), in a
registration that includes a Holder's Warrants or Warrant Stock pursuant to
subsection 11(b)(i) hereof, no Holder shall be required to contribute any amount
in excess of the net proceeds (before deducting expenses) applicable to the
shares of Warrants and Warrant Stock sold by such Holder pursuant to such
registration statement and prospectus. Notwithstanding the provisions of this
subsection 12(d), in a registration that includes a Holder's Warrant Stock
pursuant subsection 11(b)(ii) hereof, no such Holder shall be required to
contribute any amount in excess of that portion of all expenses as to which
contribution is properly claimed under this Agreement equal to such Holder's
relevant portion of all net proceeds (before deducting expenses) applicable to
all securities sold pursuant to the Registration Statement, as applicable. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act and the cases and promulgations thereunder) shall be entitled
to contribution from any person who was not guilty of such fraudulent
misrepresentation. Any party entitled to contribution will, promptly after
receipt of notice of commencement of any action against such patty in respect to
which a claim for contribution may be made against another party or parties
under this subsection 12(d), notify such party or parties from whom contribution
may be sought, but the omission to so notify such party or parties shall not
relieve the parry or parties from whom contribution may be sought from any
obligation it or they may have hereunder or otherwise than under this subsection
12(d) except to the extent it has been materially prejudiced by such failure.
The contribution agreement set forth above shall be in addition to any
liabilities which any indemnifying party may have at common law or otherwise.
Notwithstanding anything to the contrary contained in this Agreement, no Holder
shall be required to contribute any amount in excess of the lesser of (i) that
proportion of the total of such losses, claims, damages or liabilities
indemnified or contributed against equal to the proportion of the total
securities sold pursuant to the Registration Statement, as the case may be,
which is being sold by it, or (ii) the proceeds received by it in any such
offering. The Holders' obligations in this Section 12(d) to contribute are
several in proportion to the number of Warrants or Warrant Shares registered on
their behalf and not joint.
(e) The indemnity and contribution agreements contained in
this Section 12 and the representations shall remain operative and in full force
and effect, regardless of (i) any investigation made by or on behalf of any
Holder or any person controlling any Holder, the Company, its directors or
officers or any Public Underwriter or any person controlling such Public
Underwriter, (ii) acceptance of any Warrants or Warrant Shares and payment
therefor hereunder, and (iii) any termination of this Agreement. A successor to
any Holder or any person controlling any Holder, or to the Company, its
directors or officers, or any person controlling the Company, shall be entitled
to the benefits of the indemnity, contribution and reimbursement agreements
contained in this Section 12.
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<PAGE> 51
(f) In any proceeding relating to any Registration Statement
or any prospectus or any amendment or supplement thereto, each party against
whom contribution may be sought under this Section 12 hereby consents to the
jurisdiction of any court having jurisdiction over any other contributing party,
agrees that process issuing from such court may be served upon him or it by any
other contributing party and consents to the service of such process and agrees
that any other contributing party may join him or it as an additional defendant
in any such proceeding in which such other contributing party is a party.
SECTION 13. NOTICES. All notices and communications hereunder, except as
herein otherwise specifically provided, shall be in writing and shall be deemed
to have been duly given if mailed, delivered by hand or transmitted by any
standard form of telecommunication. Notices to the Warrantholders or a holder of
Warrant Stock shall be directed to The Boston Group, L.P. at 1999 Avenue of the
Stars, Suite 2550, Los Angeles, California 90067, Attention: Mr. Robert A.
DiMinico, with a copy to Munger, Tolles & Olson, 355 South Grand Avenue, 35th
Floor, Los Angeles, California 90071, Attention: Sandra A. Seville-Jones, Esq.
Notices to the Company shall be directed to the Company at 2144 Michelson Drive,
Irvine, California 92612, Attention: Mr. Steven A. Lupinacci, with a copy to
Gibson, Dunn & Crutcher LLP, 4 Park Plaza, Irvine, California 92614, Attention:
John M. Williams, Esq;
SECTION 14. PARTIES. This Agreement shall inure solely to the benefit of
and shall be binding upon, the Representative, the Company and the
Warrantholders and the holders of Warrant Stock and the controlling persons,
officers, directors and others referred to in Section 12 hereof, and their
respective successors, legal representatives and assigns, and no other person
shall have or be construed to have any legal or equitable right, remedy or claim
under or in respect of or by virtue of this Agreement or any provisions herein
contained.
SECTION 15. MERGER OR CONSOLIDATION OF THE COMPANY. The Company shall
not merge or consolidate with or into any other corporation or sell all or
substantially all of its property to another corporation, unless the provisions
of Section 8.3 hereof are complied with.
SECTION 16. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All statements
contained in the Underwriting Agreement, any schedule, exhibit, certificate or
other instrument delivered by or on behalf of the parties hereto, or in
connection with the transactions contemplated by this Agreement, shall be deemed
to be representations and warranties hereunder. Notwithstanding any
investigations made by or on behalf of the parties to this Agreement, all
representations, warranties and agreements made by the parties to this Agreement
or pursuant hereto shall survive the termination of this Agreement and the
issuance, sale and delivery of the Warrant and the Warrant Stock.
SECTION 17. CONSTRUCTION. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of California,
without giving effect to conflict of laws principles thereof.
SECTION 18. COUNTERPARTS. This Agreement may be executed in any number
of counterparts, each of which shall be deemed to be an original, and all of
which taken together shall be deemed to be one and the same instrument.
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<PAGE> 52
SECTION 19. ENTIRE AGREEMENT, AMENDMENTS. This Agreement and the
Underwriting Agreement constitute the entire agreement of the parties hereto
concerning the subject matter hereof and supersede all prior written or oral
agreements, understandings and negotiations with respect to the subject matter
hereof. This Agreement may not be amended, modified or altered except in a
writing signed by the Representative and the Company.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed, all as of the day and year first above written.
DIEDRICH COFFEE, INC.
By:_________________________________
President and CEO
THE BOSTON GROUP, L.P.
By:_________________________________
Name:_______________________________
Title:______________________________
-23-
<PAGE> 53
THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT
BE SOLD, EXCHANGED, HYPOTHECATED OR TRANSFERRED IN
ANY MANNER EXCEPT IN COMPLIANCE WITH SECTIONS 1.3 AND
11(a) OF THE REPRESENTATIVE'S WARRANT AGREEMENT
PURSUANT TO WHICH THEY WERE ISSUED.
WARRANT CERTIFICATE NO. 1
WARRANT TO PURCHASE 160,000
SHARES OF COMMON STOCK
VOID AFTER 5:00 P.M.
PACIFIC TIME, ON SEPTEMBER 10, 1999
DIEDRICH COFFEE, INC.
INCORPORATED UNDER THE LAWS
OF THE STATE OF DELAWARE
This certifies that, for value received, THE BOSTON GROUP, L.P.. the
registered holder hereof or assigns (the "Warrantholder"), is entitled to
purchase from DIEDRICH COFFEE, INC. (the "Company"), at any time during the
period commencing at 6:30 am., Pacific time, on September 11, 1997, and before
5:00 p.m., Pacific time, on September 10, 1999, at the purchase price per share
of Common Stock of $13.80 (the "Warrant Price"), 160,000 shares of Common Stock
of the Company (the "Warrant Stock"). The number of shares of Common Stock of
the Company purchasable upon exercise of each Warrant evidenced hereby shall be
subject to adjustment from time to time as set forth in the Representative's
Warrant Agreement, dated as of September 11, 1996, by and between the Company
and the Representative (the "Representative's Warrant Agreement").
The Warrants evidenced hereby represent the right to purchase an
aggregate of up to 160,000 shares of Warrant Stock (subject to adjustment as
provided in the Representative's Warrant Agreement) and are issued under and in
accordance with the Representative's Warrant Agreement, and are subject to the
terms and provisions contained in the Representative's Warrant Agreement, to all
of which the Warrantholder by acceptance hereof consents.
The Warrants evidenced hereby may be exercised in whole or in part by
presentation of this Warrant Certificate with the Purchase Form attached hereto
duly executed (with a signature guarantee as provided hereon) and simultaneous
payment of the Warrant Price at the principal office of the Company. Payment of
such price shall be made at the option of the Warrantholder in any manner
allowed in the Representative's Warrant Agreement.
Upon any partial exercise of the Warrants evidenced hereby, there shall
be signed and issued to the Warrantholder a new Warrant Certificate in respect
of the shares of Warrant Stock as to which the Warrants evidenced hereby shall
not have been exercised. These Warrants may
<PAGE> 54
be exchanged at the office of the Company by surrender of this Warrant
Certificate properly endorsed for one or more new Warrants of the same aggregate
number of shares of Warrant Stock as evidenced by the Warrant or Warrants
exchanged. No fractional securities shall be issued upon the exercise of rights
to purchase hereunder, but the Company shall pay the cash value of any fraction
upon the exercise of one or more Warrants. These Warrants are transferable at
the office of the Company in the manner and subject to the limitations set forth
in the Warrant Agreement.
This Warrant Certificate does not entitle any Warrantholder to any of
the rights of a stockholder of the Company.
DIEDRICH COFFEE, INC.
By:_________________________________
Steven A. Lupinacci
President and Chief Executive Officer
Dated: September 17, 1996
ATTEST: [Seal]
____________________________________
Martin R. DIEDRICH
Secretary
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<PAGE> 55
DIEDRICH COFFEE, INC.
PURCHASE FORM
DIEDRICH COFFEE, INC. (the "Company")
_______________________________________
_______________________________________
Attention:_____President
The undersigned hereby irrevocably elects to exercise the right of
purchase represented by the within Warrant Certificate for, and to purchase
thereunder, shares of common stock of the Company (the "Warrant Stock") provided
for therein, and requests that certificates for the Warrant Stock be issued in
the name of:
__________________________________________
(Please print or Type Name, Address and
Social Security Number)
__________________________________________
__________________________________________
and, if said number of shares of Warrant Stock shall not be all the Warrant
Stock purchasable hereunder, that a new Warrant Certificate for the balance of
the Warrant Stock purchasable under the within Warrant Certificate be registered
in the name of the undersigned Warrantholder or his Assignee as below indicated
and delivered to the address stated below.
Dated:
Name of Warrantholder
or Assignee: _____________________________
(Please Print)
Address: _____________________________
_____________________________
Signature: _____________________________
Note: The above signature must correspond with the name as it appears upon the
face of this Warrant Certificate in every particular, without alteration or
enlargement or any change whatever, unless these Warrants have been assigned.
Signature Guaranteed:____________________________________________
<PAGE> 56
(Signature must be guaranteed by a bank or trust company having an office or
correspondent in the United States or by a member firm of a registered
securities exchange of the National Association of Securities Dealers, Inc.)
-2-
<PAGE> 57
ASSIGNMENT
(To be signed only upon assignment of Warrants)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
the right to purchase _____ shares of Warrant Stock represented by the within
Warrant Certificate unto, and requests that a certificate for such Warrant be
issued in the name of:
__________________________________________
(Name and Address of Assignee Must
be Printed or Typewritten)
__________________________________________
__________________________________________
hereby irrevocably constituting and appointing ______________ Attorney to
transfer said Warrants on the books of the Company, with full power of
substitution in the premises and, if said number of Warrant Stock shall not bear
all of the Warrant Stock purchasable under the within Warrant Certificate, that
a new Warrant Certificate for the balance of the Warrant Stock purchasable under
the within Warrant Certificate be registered in the name of the undersigned
Warrantholder and delivered to such Warrantholder's address as then set forth on
the Company's books.
Dated:________________ ______________________________
Signature of Registered Holder
Note: The above signature must correspond with the name as it appears upon the
face of this Warrant Certificate in every particular, without alteration or
enlargement or any change whatever.
Signature Guaranteed:________________________________
(Signature must be guaranteed by a bank or trust company having an office or
correspondent in the United States or by a member firm of a registered
securities exchange or the National Association of Securities Dealers, Inc.)
<PAGE> 58
EXHIBIT 2
WARRANT GRANTED TO NUVRTY, INC., A COLORADO CORPORATION,
DATED SEPTEMBER 30, 1997
<PAGE> 59
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
- --------------------------------------------------------------------------------
September 30, 1997
Diedrich Coffee, Inc., a Delaware corporation ("Company"), hereby grants
to Nuvrty, Inc., a Colorado corporation ("Holder"), 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 of even
date, between Company and Holder.
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.
1.7 "Note" - shall mean the Secured Promissory Note issued by
Company to Holder as further described in the Agreement.
1.8 "Liability" - shall have the meaning given in Section 3.7.
<PAGE> 60
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 340,000 shares, as reduced by the exercise of rights
hereunder; provided however that if Company repays Holder 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 170,000
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 September 30, 2003, or, if later, one year after the
final payment of all principal and accrued interest on the Secured Promissory
Note issued to Holder pursuant to the Agreement (the "Note"). Upon the surrender
of this Warrant 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
<PAGE> 61
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 offer 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 Holder
all amounts due under the Note within 120 days of the date hereof, Holder shall
immediately surrender this Warrant to Company and Company shall reissue to
Holder 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 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.
3
<PAGE> 62
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.
3.3 Piggyback Registration. If Company at any time prior to
September 30, 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
4
<PAGE> 63
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 to have 300,000 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 300,000 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.
5
<PAGE> 64
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.
(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' 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 accounts' letters
delivered to the underwriters in underwritten public offerings of securities;
and
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<PAGE> 65
(g) notwithstanding any other provision of this Section 3,
Company shall not in any event be required to use 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 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 liability 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.
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(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
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 tact disbelieve, the accuracy or
completeness of the information provided by the Holder or owner in reliance on
such expert. A 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 from 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 the 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
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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 event 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 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 September __, 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.
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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, 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 of shares of Common Stock
issuable in
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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 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
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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 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
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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.
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:
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(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
(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):
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(a) If to Holder:
Nuvrty, Inc.
Attention: Amre Youness
3 Civic Plaza, Suite 170
Newport Beach, California 92660
Facsimile: (714) 721-8102
With copy to:
Bernard I. Segal, A Professional Corporation
Attention: Bernard I. Segal
1900 Avenue of the Stars, 19th Floor
Los Angeles, California 90067
Facsimile: (310) 556-1418
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.
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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 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.
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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.
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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[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:_________________________________
Kerry Coin, President
NUVRTY, INC.
By:_________________________________
Amre Youness,____________________
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[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:_________________________________
Kerry Coin, President
NUVRTY, INC.
By:_________________________________
Amre Youness,____________________
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EXHIBIT 10.38
SEPARATION AND RELEASE AGREEMENT
The parties to this Separation and Release Agreement (the
"Agreement") are Kerry W. Coin ("Employee") and Diedrich Coffee, Inc. (the
"Company") who agree and state that:
(A) Employee has been employed by the Company in the position
of Chief Operating Officer since August 26, 1996.
(B) Employee and the Company entered into that certain
Employment Agreement, dated August 26, 1996 and amended September 24, 1997, (the
"Employment Agreement").
(C) Employee desires to resign all of his positions with the
Company effective January 28, 1998 to pursue other interests (and without cause
as defined in paragraph 4(e) of his Employment Agreement). A copy of the
memorandum of understanding signed by the parties is attached as Exhibit A
hereto.
(D) The Company desires to accept Employee's resignation.
(E) Employee and Company desire to terminate the Employment
Agreement and exchange the consideration set forth below upon the terms and
conditions set forth below in full satisfaction of Employee's and the Company's
rights and obligations set forth in the Employment Agreement.
NOW, THEREFORE, based on the following promises contained herein,
Employee and the Company hereby agree as follows:
1. PAYMENT. The Company agrees to pay Employee as separation
amount (the equivalent of 6 3/4 months salary), the total amount of which is
ninety thousand dollars ($90,000.00) (the "Separation Amount"). Except as
provided in Paragraph 11 below, the Separation Amount will be paid subject to
all appropriate withholdings in nine equal monthly installments on the first of
the month through October, 1998.
Employee and the Company acknowledge that the Employee is not yet
fully vested in the stock options granted Employee pursuant to the original
Stock Option Grant, as amended. As approved by the Board, the Company agrees
that the Employee shall retain the right to purchase sixty-two thousand five
hundred (62,500) shares at an exercise price of $3.00 per share as previously
granted under the Company's 1996 Stock Incentive Plan. Unless terminated earlier
pursuant to Paragraph 11, these options are exercisable through November 1,
1998. Employee is further granted an additional right to purchase up to 17,500
shares at an exercise price of $3.00 per share. This option vests
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as of August 31, 1998. Employee may exercise any of these stock options by
"cashless exercise" until November 1, 1998, whereby capital stock of the Company
will be retained by the Company from the stock otherwise issuable upon exercise
or surrender of vested and/or exercisable option shares. Employee further
acknowledges and agrees that the option to purchase 40,000 additional shares, as
previously granted under the Company's 1996 Stock Incentive Plan, is terminated
effective the date of his termination.
Unless terminated earlier pursuant to Paragraph 11, all exercised
option shares shall expire and terminate and not be exercisable as of January
28, 1999.
Employee shall have the personal use of the Company's PC
presently located at Employee's personal residence for nine months or until
November 1, 1998. On or before November 1, 1998 Employee shall either return
said PC to Company in good working condition, reasonable wear and tear excepted
or purchase the PC from the Company at book value.
Employee acknowledges that he received a final paycheck for all
wages due, including all accrued vacation, through the date of his termination.
Employee further acknowledges and agrees that the Separation Amount shall be the
sole amount paid to him, and he shall have no entitlement or claim to any
further compensation or benefits from the Company, including without
limitations, salary, bonuses, incentive compensation, vacation payments,
severance, unvested pension benefits, employer-paid health benefits or any other
employment benefits; provided, however, that if the Board of Directors of the
Company elects to award management bonuses for fiscal year 1998, the Board shall
grant an equitable bonus to Employee.
2. RELEASE. Except for any written Indemnification Agreement
entered into by the Company with Employee, Employee on behalf of himself and his
executors, legatees, devises, administrators, successors and assigns, does
hereby knowingly and willingly forever release and absolutely and forever fully
discharge the Company and all of its current and former officers, directors,
partners, agents, servants, lawyers, employees, assigns, insurers,
predecessors-in-interest, successors-in-interest, underwriters, and all of its
parent, affiliated and subsidiary entities from any and all causes of action,
judgements, liens, indebtedness, costs, damages, obligations, attorney's fees,
losses, claims, liabilities and demands of whatever kind and character, whether
known or unknown, suspected or unsuspected (including, for example, claims for
wrongful termination, unlawful discrimination, payment of wages, vacation pay,
health benefits, business and travel expenses, life insurance, disability
insurance, pension and retirement plans, severance pay, layoff benefit or other
entitlements), arising out of or in any way related to any of the circumstances
of Employee's relationship with the Company, up to the date he signs below.
Company on behalf of itself, its officers, directors, affiliates
and authorized agents and representatives does hereby knowingly and willingly
forever release and absolutely forever fully discharge Employee and his
successors and assigns
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<PAGE> 3
from any and all causes of action, judgments, liens, indebtedness, costs,
damages, obligations, attorney's fees, losses, claims, liabilities, and demands
of whatever kind and character, whether known or unknown, suspected or
unsuspected, arising out of or in any way related to any of the circumstances of
Company's relationship with the Employee, up to the date of this Agreement.
4. ADEA WAIVER. Employee specifically agrees that the foregoing
release includes any and all claims, rights and/or remedies arising under the
Age Discrimination in Employment Act ("ADEA") and the Older Workers Benefit
Protection Act. Employee acknowledges that, prior to signing this Agreement, he
was provided a period of twenty-one (21) days to consider its provisions,
including this ADEA wavier. Employee further acknowledges that he is entitled to
revoke this ADEA waiver within seven (7) days after he executes this Agreement,
and this ADEA waiver is not effective or enforceable until this seven-day
revocation period has expired. Employee also acknowledges that he has been
advised to consult with an attorney prior to signing this ADEA waiver and
Agreement.
5. ALL DISPUTES. This Agreement also extends to all disputes of
every nature and kind by employee against the Company whether known or unknown,
suspected or unsuspected, past or present, and regardless of whether they arise
out of or are attributable to the circumstances of Employee's employment or
termination of employment with Company. Specifically, Employee hereby expressly
waives any and all rights under Section 1542 of the California Civil Code, which
reads in full as follows:
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR
DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF
EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY
AFFECCTED HIS SETTLEMENT WITH THE DEBTOR."
Employee acknowledges that he has separately bargained for the
foregoing waiver of section 1542. Employee understands and agrees that the
provisions regarding the disputes released herein be construed as broadly as
possible, and incorporates herein similar federal, state or other laws, all of
which are similarly waived by Employee.
6. NO OTHER CHARGES OR CLAIMS. Employee represents that he
presently has no charges or claims of any kind against the Company (including
any of the Company's current or former employees, officers, directors and
affiliates) arising out of or related to any of the circumstances of his
relationship with the Company. If, arguendo, any such charges or claims are
pending, Employee agrees that he will withdraw the same with prejudice. Employee
further covenants that he will not hereafter pursue, initiate or cause to be
instituted any claim or charge before any state, federal or other court, or
state or federal agency or other governmental entity arising out of or related
to any of the circumstances of Employee's relationship or cessation or
termination of such relationship
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with the Company, up to the date he signs this Agreement, and that if any agency
or court assumes jurisdiction of any complaint, charge or lawsuit against any of
these entities or persons on behalf of Employee, he will promptly request such
agency or court to withdraw from the matter, with prejudice, and he will not
seek or accept any damages.
Company represents that it presently has no charges or claims of
any kind against Employee arising out of or related to any of the circumstances
of Employee's relationship with the Company. If, arguendo, any such charges or
claims are pending, Company agrees that it will withdraw the same with
prejudice. Company further covenants that it will not hereafter pursue, initiate
or cause to be instituted any claim or charge before any state, federal or other
court, or state or federal agency or other governmental entity arising out of or
related to any of the circumstances of Employee's employment or cessation or
termination of such relationship with Company, up to the date of this Agreement,
and further that if any agency or court assumes jurisdiction of any complaint,
charge or lawsuit by Company, its officers, directors, employees, authorized
agents for representatives against Employee, it will promptly request such
agency or court to withdraw from the matter, with prejudice, and it will not
seek or accept any damages.
7. COOPERATION AND ASSISTANCE. Employee agrees to provide
reasonable assistance to the Company as requested by and at the expense of the
Company to affect a smooth and orderly transition and continuation of the
business of the Company.
Employee will reasonably cooperate with and assist the Company,
its agents, owners, employee, and attorneys in the preparation and/or defense
and/or pursuit of any litigation involving the Company, and, in addition, with
respect to any issues related to his employment by the Company, his performance
as an employee/officer of the Company, or any related matters, except as he may
be prevented by law.
Employee further agrees that he will not voluntary aid, assist,
cooperate with or encourage any current, former or future employee or
independent contractor of the Company in connection with the pursuit of any
claim or dispute against the Company, unless compelled by deposition or other
legal process. Employee further agrees that, unless expressly requested in
writing to do so by the Company, he will not voluntarily involve himself in any
way with respect to any claim or dispute by any current, former or future
employee, officer, director or independent contractor of the Company, or by
other third party, against the Company. This paragraph is intended to preclude
the voluntary aid or involvement of Employee as described above, and nothing in
this paragraph is intended to influence the substance of such aid or involvement
which is properly compelled by legal process. The provisions of this paragraph
shall be continuing.
8. NON-SOLICITATION OF EMPLOYEES. Employee agrees not to solicit
or encourage employees of the Company to leave employment of the Company before
October 31, 1998. During such period, if Employee is contacted by employees of
the
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Company with regard to employment opportunities with Employee, Employee agrees
to inform such employees at the first discussion thereof that Employee cannot
encourage, follow up on, hire or promote the hiring of such employees unless
consent is provided to Employee by the Board of Directors of the Company to
continue such discussions.
9. TRADE SECRETS AND CONFIDENTIAL INFORMATION. During the term of
Employee's employment with the Company, Employee had access to and became
familiar with various secrets and other confidential information including, but
not limited to, coffee roasting recipes and processes, proposals, computer
software or programming, budgets or other financial information, product
pricing, growth strategies, contracts, and compilations of confidential
information, data and records which are owned by the Company and which are
regularly used in the operation of the business of the Company (the "Proprietary
Information"). Employee agrees not to disclose any of the Proprietary
Information directly or indirectly, nor use it in any way, except as required by
order of a court of competent jurisdiction or a federal governmental agency. All
files, records, document, data, and similar items relating to the Proprietary
Information or to the business of the Company, whether prepared by Employee or
otherwise coming into his possession, shall remain the exclusive property of the
Company. Employee agrees not to remove from the premises or otherwise take,
procure, or copy this property of the Company under any circumstances whatsoever
without authorization of an officer of the Company. Employee represents and
warrants that prior to or concurrently with the execution of this Agreement, he
will return to the Company any of said property in his possession.
10. NON-DISPARAGEMENT. Employee agrees that he shall not make any
untruthful or derogatory statements about, or otherwise disrupt, interfere,
impair or damage the business of the Company. This paragraph is not intended to
prohibit Employee from testifying truthfully about the Company when compelled to
testify by law. Company agrees that neither it nor its officers or directors
will make any untruthful or derogatory statements about, or otherwise disrupt,
interfere, impair or damage the business or reputation of Employee. This
paragraph is not intended to prohibit Company, its officers or directors from
testifying truthfully about Employee when compelled to testify by law.
11. TERMINATION OF PAYMENT OBLIGATIONS. Employee acknowledges and
agrees that all of the Company's obligations under Paragraph 1 of this Agreement
will terminate immediately if Employee breaches any provision if this Agreement.
The termination provisions of this Paragraph do not limit in any way the
Company's remedies provided in other provisions of this Agreement, all such
remedies being cumulative. The Company's decision to discontinue benefits to
Employee under this Paragraph shall not affect the remaining obligations and
benefits under this Agreement.
12. NO TRANSFER. Employee represents and warrants that he has not
heretofore assigned or transferred, or purported to have assigned or
transferred, to any firm, corporation, entity or person, any dispute released
herein. Employee agrees to
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indemnify, defend and hold the Company's harmless from and against any and all
claims based on or arising out of any such assignment or transfer, or purported
assignment or transfer of any claims or any portion thereof or interest therein.
13. NO ADMISSION. Employee understands and agrees that neither
the payment or promise of consideration, nor the execution of this Agreement
shall constitute or be construed as an admission of any alleged liability or
wrongdoing whatsoever by the Company or its employees, officers, directors, and
affiliates. The Company expressly denies it has committed any alleged liability
or wrongdoing. Company understands and agrees that execution of this Agreement
by Employee shall not constitute nor be construed as an admission of any alleged
liability or wrongdoing whatsoever by the Employee. Employee expressly denies
that he committed any alleged liability or wrongdoing.
14. ENFORCEMENT OF THIS AGREEMENT. This Agreement shall be
governed by the substantive law of the State of California. In the event of any
dispute concerning the validity, interpretation, enforcement or breach of this
Agreement or in any way related to Employee's employment or termination of
employment with the Company, the dispute shall be resolved by arbitration within
the County of Orange, California, in accordance with the then existing rules for
arbitration of employment disputes of the American Arbitration Association, and
judgement upon any arbitration award may be entered by any state or federal
court having jurisdiction thereof. The Arbitrator's decision in nay-such
arbitration shall be final and binding on the parties. The parties intend this
arbitration provision to be valid, enforceable, irrevocable and construed s
broadly as possible. The prevailing party in such arbitration shall recover its
reasonable costs and expenses (including, but not limited to arbitration fees
and expenses) and reasonable attorneys' fees.
15. INVALID PROVISIONS. If any provision of this Agreement is
determined to be invalid or unenforceable, all of the other provisions shall
remain valid and enforceable notwithstanding, unless the provisions found to be
unenforceable is of such material effect that this Agreement cannot be performed
in accordance with the intent of the parties in the absence thereof.
16. ENTIRE AGREEMENT. No promise, inducement or agreement other
than that expressed herein has been made by either party. This Agreement
constitutes a single integrated contract expressing the entire Agreement of the
parties hereto, and it supersedes all prior agreements and understandings
between the parties with respect to such subject matter, including the
Employment Agreement. Except for that certain Indemnification Agreement between
the parties dated as of [June 16, 1997,] there are no other agreements, written
or oral, express or implied, between the parties hereto concerning the subject
matter hereof, except the provisions set forth in this Agreement. This Agreement
may be executed in one or more counterparts, all of which shall constitute a
single original.
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17. AMENDMENTS. This Agreement can be amended, modified or
terminated only by a writing executed by Employee and the President of the
Company.
18. COMPETENCY. Employee represents that he is in good health and
fully competent to manage his business affairs, he has carefully read this
document, he understands all of its contents, he fully understands the final and
binding effect of this Agreement, he has been advised in writing to consult an
attorney, and he executes this Agreement freely and voluntarily. Employee
represents and acknowledges that in executing this Agreement he does not rely
and has not relied upon any representation or statement not set forth herein
made by the Company or by any of its agents, representatives or attorneys with
regard to the subject matter, basis or effect of this Agreement or otherwise.
Accordingly, the parties agree that the common-law principles of construing
ambiguities against the drafter shall have no application hereto. It should be
construed fairly and not in favor of or against one party as to the drafter
hereof.
19. SURVIVAL OF WARRANTIES. All representations and warranties
contained in this Agreement shall survive its execution, effectiveness and
delivery. It is expressly understood and agreed by the Parties hereto that none
of the releases set forth herein are intended to or do release any claims or
rights arising out of this Agreement or the breach of it.
AGREED AND ACCEPTED:
/s/ KERRY W. COIN
Dated: January 28, 1998 ------------------------------------
Kerry W. Coin
Dated: January 28, 1998 Diedrich Coffee, Inc.
By: /s/ TIMOTHY J. RYAN
--------------------------------
Timothy J. Ryan
President and
Chief Executive Officer
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<PAGE> 1
EXHIBIT 10.39
SEPARATION AND RELEASE AGREEMENT
The parties to this Separation and Release Agreement (the
"Agreement") are Jonathan B. Eddison ("Employee") and Diedrich Coffee, Inc. (the
"Company") who agree and state that:
(A) Employee has been employed by the Company in the position of
Vice President and General Counsel since June 29, 1997.
(B) Employee and the Company entered into that certain Employment
Agreement, dated June 16, 1997, (the "Employment Agreement").
(C) The position of Vice President and General Counsel is being
eliminated from the Company effective January 30, 1998, which is no reflection
on Employee or Employee's job performance.
(D) The elimination of the position will terminate the Employment
Agreement and exchange the consideration set forth below upon the terms and
conditions set forth below in full satisfaction of Employee's and the Company's
rights and obligations set forth in the Employment Agreement.
THEREFORE, based on the following promises contained herein,
Employee and the Company hereby agree as follows:
1. PAYMENT. The Company agrees to pay Employee as separation
amount (the equivalent of three months salary), the total amount of which is
twenty-five thousand dollars ($25,000.00) (the "Separation Amount"). The
Separation Amount was paid in full on February 20, 1998, receipt of which is
hereby acknowledged.
Employee and the Company acknowledge that the Employee has not
yet crossed the agreed upon vesting period pursuant to the original Stock Option
Grant. Contingent on Board approval, the Company agrees that the Employee shall
retain the right to purchase eleven thousand six hundred sixty-seven (11,667)
shares at an exercise price of $3.00 per share as previously granted under the
Company's 1996 Stock Incentive Plan. Unless terminated earlier pursuant to
Paragraph 10, this option will become exercisable one year from original hire
date (June 29, 1998). Options expire June 29, 2007. Employee may exercise these
stock options by "cashless exercise" whereby capital stock of the Company will
be retained by the Company from the stock otherwise issuable upon exercise or
surrender of vested and/or exercisable option shares. Employee further
acknowledges and agrees that the option to purchase 23,333 additional shares, as
previously granted under the Company's 1996 Stock Incentive Plan, is terminated
effective the date of his termination.
Company agrees to continue Employee's health insurance payments
and
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benefits from January 31, 1998 through February 28, 1998.
Employee acknowledges that he received a final paycheck for all
wages due, including all accrued vacation, through the date of his termination.
Employee further acknowledges and agrees that the Separation Amount shall be the
sole amount paid to him, and he shall have no entitlement or claim to any
further compensation or benefits from the Company, including without
limitations, salary, bonuses, incentive compensation, vacation payments,
severance, unvested pension benefits, employer-paid health benefits or any other
employment benefits; provided, however, that if the Board of Directors of the
Company elects to award management bonuses for fiscal year 1998, the Board shall
grant an equitable bonus to Employee.
2. WHOLESALE ACCOUNT. In consideration of Employee's service and
loyalty, Employee is granted the right to order roasted coffee for personal use
as a wholesale account without regard to the minimum purchase requirements which
are or may be imposed on wholesale accounts.
3. RELEASE. Except for that certain Indemnification Agreement
dated June 16, 1997, Employee on behalf of himself and his executors, legatees,
devises, administrators, successors and assigns, does hereby knowingly and
willingly forever release and absolutely and forever fully discharge the Company
and all of its current and former officers, directors, partners, agents,
servants, lawyers, employees, assigns, insurers, predecessors-in-interest,
successors-in-interest, underwriters, and all of its parent, affiliated and
subsidiary entities from any and all causes of action, judgements, liens,
indebtedness, costs, damages, obligations, attorney's fees, losses, claims,
liabilities and demands of whatever kind and character, whether known or
unknown, suspected or unsuspected (including, for example, claims for wrongful
termination, unlawful discrimination, payment of wages, vacation pay, health
benefits, business and travel expenses, life insurance, disability insurance,
pension and retirement plans, severance pay, layoff benefit or other
entitlements), arising out of or in any way related to any of the circumstances
of Employee's relationship with the Company, up to the date he signs below.
Company on behalf of itself, its officers, directors,
affiliates and authorized agents and representatives does hereby knowingly and
willingly forever release and absolutely forever fully discharge Employee and
his successors and assigns from any and all causes of action, judgments, liens,
indebtedness, costs, damages, obligations, attorney's fees, losses, claims,
liabilities, and demands of whatever kind and character, whether known or
unknown, suspected or unsuspected, arising out of or in any way related to any
of the circumstances of Company's relationship with the Employee, up to the date
of this Agreement.
4. ADEA WAIVER. Employee specifically agrees that the foregoing
release includes any and all claims, rights and/or remedies arising under the
Age Discrimination in Employment Act ("ADEA") and the Older Workers Benefit
Protection
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<PAGE> 3
Act. Employee acknowledges that, prior to signing this Agreement, he was
provided a period of twenty-one (21) days to consider its provisions, including
this ADEA wavier. Employee further acknowledges that he is entitled to revoke
this ADEA waiver within seven (7) days after he executes this Agreement, and
this ADEA waiver is not effective or enforceable until this seven-day revocation
period has expired. Employee also acknowledges that he has been advised to
consult with an attorney prior to signing this ADEA waiver and Agreement.
5. ALL DISPUTES. This Agreement also extends to all disputes of
every nature and kind by Employee against the Company whether known or unknown,
suspected or unsuspected, past or present, and regardless of whether they arise
out of or are attributable to the circumstances of Employee's employment or
termination of employment with Company. Specifically, Employee hereby expressly
waives any and all rights under Section 1542 of the California Civil Code, which
reads in full as follows:
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR
DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF
EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY
AFFECCTED HIS SETTLEMENT WITH THE DEBTOR."
Employee acknowledges that he has separately bargained for the
foregoing waiver of section 1542. Employee understands and agrees that the
provisions regarding the disputes released herein be construed as broadly as
possible, and incorporates herein similar federal, state or other laws, all of
which are similarly waived by Employee.
6. NO OTHER CHARGES OR CLAIMS. Employee represents that except
for ordinary minor business expenses he presently has no charges or claims of
any kind against the Company (including any of the Company's current or former
employees, officers, directors and affiliates) arising out of or related to any
of the circumstances of his relationship with the Company. If, arguendo, any
such charges or claims are pending, Employee agrees that he will withdraw the
same with prejudice. Employee further covenants that he will not hereafter
pursue, initiate or cause to be instituted any claim or charge before any state,
federal or other court, or state or federal agency or other governmental entity
arising out of or related to any of the circumstances of Employee's relationship
or cessation or termination of such relationship with the Company, up to the
date he signs this Agreement, and that if any agency or court assumes
jurisdiction of any complaint, charge or lawsuit against any of these entities
or persons on behalf of Employee, he will promptly request such agency or court
to withdraw from the matter, with prejudice, and he will not seek or accept any
damages.
Company represents that it presently has no charges or
claims of any kind against Employee arising out of or related to any of the
circumstances of Employee's relationship with the Company. If, arguendo, any
such charges or claims are
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<PAGE> 4
pending, Company agrees that it will withdraw the same with prejudice. Company
further covenants that it will not hereafter pursue, initiate or cause to be
instituted any claim or charge before any state, federal or other court, or
state or federal agency or other governmental entity arising out of or related
to any of the circumstances of Employee's employment or cessation or termination
of such relationship with Company, up to the date of this Agreement, and further
that if any agency or court assumes jurisdiction of any complaint, charge or
lawsuit by Company, its officers, directors, employees, authorized agents for
representatives against Employee, Company will promptly request such agency or
court to withdraw from the matter, with prejudice, and it will not seek or
accept any damages.
7. COOPERATION AND ASSISTANCE. Employee agrees to provide
reasonable assistance to the Company as requested by and at the expense of the
Company to affect a smooth and orderly transition and continuation of the
business of the Company. As of February 2, 1998, Employee shall be an
independent contractor and consultant to the Company as more particularly
described in that certain Consulting Agreement between the parties dated as of
February 2, 1998.
Employee will reasonably cooperate with and assist the
Company, its agents, owners, employee, and attorneys in the preparation and/or
defense and/or pursuit of any litigation involving the Company, and, in
addition, with respect to any issues related to his employment by the Company,
his performance as an employee/officer of the Company, or any related matters,
except as he may be prevented by law.
Employee further agrees that he will not voluntary aid,
assist, cooperate with or encourage any current, former or future employee or
independent contractor of the Company in connection with the pursuit of any
claim or dispute against the Company, unless compelled by deposition or other
legal process. Employee further agrees that, unless expressly requested in
writing to do so by the Company, he will not voluntarily involve himself in any
way with respect to any claim or dispute by any current, former or future
employee, officer, director or independent contractor of the Company, or by
other third party, against the Company. This paragraph is intended to preclude
the voluntary aid or involvement of Employee as described above, and nothing in
this paragraph is intended to influence the substance of such aid or involvement
which is properly compelled by legal process. The provisions of this paragraph
shall be continuing.
8. NON-SOLICITATION OF EMPLOYEES. Employee agrees not to solicit
or encourage employees of the Company to leave employment of the Company before
June 29, 1998. During such period, if Employee is contacted by employees of the
Company with regard to employment opportunities with Employee, Employee agrees
to inform such employees at the first discussion thereof that Employee cannot
encourage, follow up on, hire or promote the hiring of such employees unless
consent is provided to Employee by the Board of Directors of the Company to
continue such discussions.
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<PAGE> 5
9. TRADE SECRETS AND CONFIDENTIAL INFORMATION. During the term of
Employee's employment with the Company, Employee had access to and became
familiar with various secrets and other confidential information including, but
not limited to, coffee roasting recipes and processes, proposals, computer
software or programming, budgets or other financial information, product
pricing, growth strategies, contracts, and compilations of confidential
information, data and records which are owned by the Company and which are
regularly used in the operation of the business of the Company (the "Proprietary
Information"). Employee agrees no to disclose any of the Proprietary Information
directly or indirectly, nor use it in any way, except as required by order of a
court of competent jurisdiction or a federal governmental agency. All files,
records, document, data, and similar items relating to the Proprietary
Information or to the business of the Company, whether prepared by Employee or
otherwise coming into his possession, shall remain the exclusive property of the
Company. Employee agrees not to remove from the premises or otherwise take,
procure, or copy this property of the Company under any circumstances
whatsoever. Employee represents and warrants that prior to or concurrently with
the execution of this Agreement, he will return to the Company any of said
property in his possession.
10. NON-DISPARAGEMENT. Employee agrees that he shall not make any
untruthful or derogatory statements about, or otherwise disrupt, interfere,
impair or damage the business of the Company. This paragraph is not intended to
prohibit Employee from testifying truthfully about the Company when compelled to
testify by law. Company agrees that it will give Employee the best possible
references and recommendations to Employee's future employer(s) and agrees
further that, if it reestablishes the position of Vice President and General
Counsel within 24 months of the Effective Date of this Agreement, Employee will
be advised of the fact and seriously considered in good faith for the position.
11. TERMINATION OF PAYMENT OBLIGATIONS. Employee acknowledges and
agrees that all of the Company's obligations under Paragraph 1 of this Agreement
will terminate immediately if Employee materially breaches any provision if this
Agreement. The termination provisions of this Paragraph do not limit in any way
the Company's remedies provided in other provisions of this Agreement, all such
remedies being cumulative. The Company's decision to discontinue benefits to
Employee under this Paragraph shall not affect the remaining obligations and
benefits under this Agreement.
12. NO TRANSFER. Employee represents and warrants that he has not
heretofore assigned or transferred, or purported to have assigned or
transferred, to any firm, corporation, entity or person, any dispute released
herein. Employee agrees to indemnify, defend and hold the Company's harmless
from and against any and all claims based on or arising out of any such
assignment or transfer, or purported assignment or transfer of any claims or any
portion thereof or interest therein.
13. NO ADMISSION. Employee understands and agrees that neither
the
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<PAGE> 6
payment or promise of consideration, nor the execution of this Agreement shall
constitute or be construed as an admission of any alleged liability or
wrongdoing whatsoever by the Company or its employees, officers, directors, and
affiliates. The Company expressly denies it has committed any alleged liability
or wrongdoing. Company understands and agrees that execution of this Agreement
by Employee shall not constitute nor be construed as an admission of any alleged
liability or wrongdoing whatsoever by the Employee. Employee expressly denies
that he committed any alleged liability or wrongdoing.
14. ENFORCEMENT OF THIS AGREEMENT. This Agreement shall be
governed by the substantive law of the State of California. In the event of any
dispute concerning the validity, interpretation, enforcement or breach of this
Agreement or in any way related to Employee's employment or termination of
employment with the Company, the dispute shall be resolved by arbitration within
the County of Orange, California, in accordance with the then existing rules for
arbitration of employment disputes of the American Arbitration Association, and
judgement upon any arbitration award may be entered by any state or federal
court having jurisdiction thereof. The Arbitrator's decision in any such
arbitration shall be final and binding on the parties. The parties intend this
arbitration provision to be valid, enforceable, irrevocable and construed s
broadly as possible. The prevailing party in such arbitration shall recover its
reasonable costs and expenses (including, but not limited to arbitration fees
and expenses) and reasonable attorneys' fees.
15. INVALID PROVISIONS. If any provision of this Agreement is
determined to be invalid or unenforceable, all of the other provisions shall
remain valid and enforceable notwithstanding, unless the provisions found to be
unenforceable is of such material effect that this Agreement cannot be performed
in accordance with the intent of the parties in the absence thereof.
16. ENTIRE AGREEMENT. No promise, inducement or agreement other
than that expressed herein has been made by either party. This Agreement
constitutes a single integrated contract expressing the entire Agreement of the
parties hereto, and it supersedes all prior agreements and understandings
between the parties with respect to such subject matter, including the
Employment Agreement. Except for that certain Indemnification Agreement between
the parties dated as of June 16, 1997 and that certain Consulting Agreement
dated as of February 2, 1998, there are no other agreements, written or oral,
express or implied, between the parties hereto concerning the subject matter
hereof, except the provisions set forth in this Agreement. This Agreement may be
executed in one or more counterparts, all of which shall constitute a single
original.
17. AMENDMENTS. This Agreement can be amended, modified or
terminated only by a writing executed by Employee and the President of the
Company.
18. COMPETENCY. Employee represents that he is in good health and
fully competent to manage his business affairs, he has carefully read this
document, he
6
<PAGE> 7
understands all of its contents, he fully understands the final and binding
effect of this Agreement, he has been advised in writing to consult an attorney,
and he executes this Agreement freely and voluntarily. Employee represents and
acknowledges that in executing this Agreement he does not rely and has not
relied upon any representation or statement not set forth herein made by the
Company or by any of its agents, representatives or attorneys with regard to the
subject matter, basis or effect of this Agreement or otherwise. Accordingly, the
parties agree that the common-law principles of construing ambiguities against
the drafter shall have no application hereto. It should be construed fairly and
not in favor of or against one party as to the drafter hereof.
19. SURVIVAL OF WARRANTIES. All representations and warranties
contained in this Agreement shall survive its execution, effectiveness and
delivery. It is expressly understood and agreed by the Parties hereto that none
of the releases set forth herein are intended to or do release any claims or
rights arising out of this Agreement or the breach of it.
AGREED AND ACCEPTED:
/s/ JONATHAN B. EDDISON
Dated: January 30, 1998 ------------------------------------
Jonathan B. Eddison
Dated: January 30, 1998 Diedrich Coffee, Inc.
By: /s/ TIMOTHY J. RYAN
--------------------------------
Timothy J. Ryan
President and
Chief Executive Officer
7
<PAGE> 1
EXHIBIT 11.1
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
January 28, 1998 January 29, 1997
---------------- ----------------
<S> <C> <C>
NUMERATOR:
Net (loss) income (9,112,761) (985,705)
DENOMINATOR:
Basic weighted average
common shares outstanding 5,392,609 4,414,000
Effect of dilutive securities -- --
Diluted weighted average common
shares outstanding 5,392,609 4,414,000
Basic (loss) earnings per share (1.69) (0.22)
Diluted (loss) earnings per share (1.69) (0.22)
</TABLE>
The January 31, 1996 basic and dilutive earnings per share are not
shown due to the noncomparative capital structure.
For the years ended January 28, 1998 and January 29, 1997, employee
stock options of 1,984,183 and 301,350 respectively, were not included in the
computation of diluted earnings per share as losses were incurred in those
years.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DIEDRICH
COFFEE, INC. FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 28, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-28-1998
<PERIOD-START> JAN-30-1997
<PERIOD-END> JAN-28-1998
<CASH> 1,408,161
<SECURITIES> 0
<RECEIVABLES> 181,628
<ALLOWANCES> 0
<INVENTORY> 1,375,119
<CURRENT-ASSETS> 3,164,829
<PP&E> 13,835,715
<DEPRECIATION> 3,730,872
<TOTAL-ASSETS> 13,948,426
<CURRENT-LIABILITIES> 4,123,436
<BONDS> 0
0
0
<COMMON> 57,417
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 13,948,426
<SALES> 22,981,697
<TOTAL-REVENUES> 22,981,697
<CGS> 11,457,612
<TOTAL-COSTS> 11,457,612
<OTHER-EXPENSES> 20,430,672
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 182,135
<INCOME-PRETAX> (9,111,961)
<INCOME-TAX> 800
<INCOME-CONTINUING> (9,112,761)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,112,761)
<EPS-PRIMARY> (1.69)
<EPS-DILUTED> (1.69)
</TABLE>
