Exhibit 10.7
FORM OF
COSI, INC.
SENIOR SECURED NOTE AND WARRANT
PURCHASE AGREEMENT
THIS SENIOR SECURED NOTE AND WARRANT PURCHASE AGREEMENT (the
"Agreement") is made as of the 12th day of August, 2002, by and between Cosi,
Inc., a Delaware corporation (the "Company"), and each of the Purchasers named
on Schedule I attached hereto (the "Purchasers").
WHEREAS, the Company desires to enter into a financing with the
Purchasers in an amount of up to $15,000,000, or such additional amount approved
by the Company's Board of Directors not to exceed $25,000,000.
WHEREAS, the Company and the Purchasers desire to set forth herein the
terms and conditions of such financing.
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein, and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto, intending to be
legally bound, agree as follows:
AGREEMENT
SECTION 1
AMOUNT AND TERMS OF THE LOANS
1.1 The Loans. Subject to the terms of this Agreement, the Company may
borrow from the Purchasers, and each Purchaser shall lend to the Company, the
maximum principal loan amount set forth on Schedule I following such Purchasers
name (as to each Purchaser, the "Commitment"), pursuant to one or more senior
secured promissory notes in the form attached hereto as Exhibit A (the "Notes").
Each of the Purchasers hereby agrees to purchase a Note, subject to the terms
and conditions hereof, on the Closing Date in an original maximum principal
amount equal to such Purchaser's Commitment.
(a) The amount of any such borrowing from each Purchaser shall
be referred to herein as such Purchaser's "Loan" with respect to such
borrowing, and each event of borrowing shall be referred to herein as a
"Loan Disbursement" and shall be documented on Schedule A to the Note
as provided in Section 2 of each Note.
(b) The Company may at its sole discretion draw down one or
more Loan Disbursements on a pro rata basis from the Purchasers from
time to time during the period commencing on the date hereof and ending
on the earlier of an initial public offering or August 12, 2003,
provided that the amount of any Loan requested from any
Purchaser may not exceed the excess, if any, of such Purchaser's
Commitment over the aggregate principal amount of all Loans theretofore
made by such Purchaser, and the aggregate amount of Loans requested and
made by all Purchasers in connection with any Loan Disbursement shall
not exceed the excess of the aggregate Commitments of the Purchasers
over the principal amount of all Loans theretofore made by the
Purchasers.
1.2 Borrowing Mechanics of the Loans.
(a) Whenever the Company desires that the Purchasers make a
Loan Disbursement, the Company shall so notify each Purchaser, in
writing, no later than 10:00 a.m. (New York City time) at least five
Business Days in advance of the proposed date of financing (the "Credit
Date"), the aggregate amount of such Loan Disbursement and the amount
of each such Purchaser's requested Loan.
(b) Each Purchaser shall make the amount of its Loan available
to the Company not later than 12:00 p.m. (New York City time) on the
applicable Credit Date by wire transfer of same day funds in dollars.
SECTION 2
ISSUANCE OF WARRANT
2.1 Issuance of Warrants. Subject to the terms and conditions of this
Agreement, the Company shall issue to each Purchaser warrants, as set forth in
Sections 2.2 and 2.3 below, each in the form attached hereto as Exhibit B (the
"Warrant" or "Warrants"). The Warrants shall, (i) unless sooner terminated as
provided therein, not be exercisable until one year and a day from the day that
each such Warrant is issued, (ii) have a term commencing upon issuance and
expiring August 12, 2007, and (iii) be exercisable at an exercise price (subject
to adjustment as set forth in the Warrants) equal to $6.00 per share.
2.2 Initial Warrants. At the Closing (as defined below) the Company
will issue Warrants pro rata to each Purchaser (the "Initial Warrants") in an
amount representing the right to purchase 60,000 shares of Common Stock, $0.01
par value per share, of the Company, for each $1,000,000 of such Purchaser's
Commitment, or a proportional share thereof. Such amount of Initial Warrants
shall be set forth following such Purchaser's name under the column captioned
"Number of Initial Warrants" on Schedule I hereto.
2.3 Draw Warrants. At the time of a Loan Disbursement the Company shall
issue to each Purchaser additional Warrants (the "Draw Warrants") in an amount
representing the right to purchase 60,000 shares of Common Stock, $0.01 par
value per share, of the Company, for each $1,000,000 of each Purchaser's Loan
Disbursement, or a proportional share thereof.
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SECTION 3
THE CLOSING
3.1 Closing Date. The closing or the issuance of the Notes and the
Initial Warrants (the "Closing") shall be held as of the date of execution and
delivery of this Agreement by the Company and the Purchasers.
3.2 Delivery. At the Closing the Company shall deliver to each
Purchaser such Purchaser's Note and Initial Warrants.
SECTION 4
REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS
4.1 Purchase for Own Account. By each Purchaser's execution of this
Agreement, each Purchaser hereby confirms that the Notes, the Warrants and the
Common Stock issuable upon exercise of the Warrants (collectively, the
"Securities") to be received by such Purchaser, shall be acquired solely for its
own account and beneficial interest, not as a nominee or agent, for investment
and not for sale or with a view to the resale or distribution of the Securities
or any part thereof, such Purchaser has no present intention of selling (in
connection with a distribution or otherwise), granting any participation in, or
otherwise distributing the same, and does not presently have reason to
anticipate a change in such intention. By executing this Agreement, each
Purchaser further represents that each Purchaser does not have any contract,
undertaking, agreement or arrangement with any person to sell, transfer or grant
participation to such person or to any third person, with respect to any of the
Securities. Each Purchaser represents that it has full power and authority to
enter into this Agreement.
4.2 Accredited Investor. Each Purchaser is an "accredited investor"
within the meaning of Securities and Exchange Commission Rule 501 of Regulation
D, as now in effect.
The undersigned represents and warrants that the undersigned falls within the
category (or categories) marked. PLEASE INDICATE EACH CATEGORY OF ACCREDITED
INVESTOR THAT YOU, THE UNDERSIGNED, SATISFY, BY PLACING AN "X" ON THE
APPROPRIATE LINE
_______ Category 1. A bank as defined in Section 3(a)(2) of the Act
whether acting in its individual or fiduciary
capacity; or
_______ Category 2. A savings and loan association or other institution
as defined in Section 3(a)(5)(A) of the Act whether
acting in its individual or fiduciary capacity; or
_______ Category 3. A broker or dealer registered pursuant to Section 15
of the Securities Exchange Act of 1934; or
_______ Category 4. An insurance company as defined in Section 2(13) of
the Act; or
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_______ Category 5. An investment company registered under the Investment
Company Act of 1940; or
_______ Category 6. A business development company as defined in Section
2(a)(48) of the Investment Company Act of 1940; or
_______ Category 7. A small business investment company licensed by the
U.S. Small Business Administration under Section
301(c) or (d) of the Small Business Investment Act of
1958; or
_______ Category 8. A plan established and maintained by a state, its
political subdivision or any agency or
instrumentality of a state or its political
subdivisions, for the benefit of its associates, with
assets in excess of $5,000,000; or
_______ Category 9. An employee benefit plan within the meaning of the
Employee Retirement Income Security Act of 1974 in
which the investment decision is made by a plan
fiduciary, as defined in Section 3(21) of such Act
which is either a bank, savings and loan association,
insurance company or registered investment advisor,
or an employee benefit plan with total assets in
excess of $5,000,000 or, if a self-directed plan, the
investment decisions are made solely by persons who
are accredited investors; or
_______ Category 10. A private business development company as defined in
Section 202(a)(22) or the Investment Advisers Act of
1940; or
_______ Category 11. An organization described in Section 501(c)(3) of the
Internal Revenue Code, a corporation, a Massachusetts
or similar business trust, or a partnership, not
formed for the specific purpose of acquiring the
Notes, with total assets in excess of $5,000,000; or
_______ Category 12. A director or executive officer of the Company; or
_______ Category 13. A natural person whose individual net worth, or joint
net worth with that person's spouse, at the time of
his or her purchase exceeds $1,000,000; or
_______ Category 14. A natural person who had an individual income in
excess of $200,000 in each of the two most recent
years or joint income with that person's spouse in
excess of $300,000 in each of those years and has a
reasonable expectation of reaching the same income
level in the current year; or
_______ Category 15. A trust, with total assets in excess of $5,000,000,
not formed for the specific purpose of acquiring the
Notes, whose purchase is directed by a sophisticated
person as described in SEC Rule 506(b)(2)(ii); or
_______ Category 16. An entity in which all the equity owners are
accredited investors.
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4.3 Information and Sophistication. Each Purchaser acknowledges that it
has received all the information it has requested from the Company (including
the risk factors set forth in Schedule II attached hereto) and that it considers
necessary or appropriate for deciding whether to acquire the Securities.
Purchaser further represents that it 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 any additional information
necessary to verify the accuracy of the information given to such Purchaser.
4.4 Investment Experience. Each Purchaser represents that it has such
knowledge and experience in financial and business matters that it is capable of
evaluating the merits and risk of the investment in the Securities.
4.5 Ability to Bear Economic Risk. Each Purchaser acknowledges that
investment in the Securities involves a high degree of risk, and represents that
such Purchaser is able, without materially impairing its financial condition, to
hold the Securities for an indefinite period of time and to suffer a complete
loss of its investment.
4.6 Further Limitations on Disposition. Without in any way limiting the
representations set forth above, each Purchaser further agrees not to make any
disposition of all or any portion of the Securities unless and until:
(i) There is then in effect a Registration Statement under the
Securities Act of 1933 (the "Act"), as amended, covering such proposed
disposition and such disposition is made in accordance with such
Registration Statement; or
(ii) Such Purchaser shall have notified the Company of the
proposed disposition and shall have furnished the Company with a
detailed statement of the circumstances surrounding the proposed
disposition, and if requested by the Company, such Purchaser shall have
furnished the Company with an opinion of counsel, satisfactory to the
Company, that such disposition will not require registration under the
Act, as amended.
(iii) Notwithstanding the provisions of paragraphs (a) and (b)
above, no such registration statement or opinion of counsel shall be
necessary for a transfer by Purchaser to a shareholder or partner (or
retired partner) of such Purchaser, or transfers by gift, will or
intestate succession to any spouse or lineal descendants or ancestors,
if all transferees agree in writing to be subject to the terms hereof
to the same extent as if they were the Purchaser hereunder and, prior
to any such transfer, such Purchaser delivers such written agreement to
the Company.
4.7 Company's Reliance. Each Purchaser understands that the Company
will rely upon the accuracy and truth of the foregoing representations, and the
Purchaser hereby consents to such reliance.
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4.8 No Brokers. The Purchasers have not employed any broker or finder
in connection with the transactions contemplated by this Agreement.
4.9 Lock-Up Agreement. Each Purchaser, if requested of such Purchaser
and all employees of the Company holding equal or larger numbers of shares of
the Company's Common Stock by an underwriter of Common Stock or other securities
of the Company, shall agree not to sell or otherwise transfer or dispose of any
Securities of the Company acquired hereunder (except Securities included in such
registration) during such 180 day period following the effective date of a
registration statement of the Company filed under the Act, as amended, or such
shorter period of time as the underwriter shall require. Such agreement shall be
in writing in the form satisfactory to such underwriter. The Company may impose
stop-transfer instructions with respect to such Securities subject to the
foregoing restriction until the end of said period.
4.10 Due Authorization. Each Purchaser is duly organized and validly
existing under the laws of the state of its organization and has all power and
authority to enter into and consummate the transactions contemplated by this
Agreement and the agreements contemplated herein. This agreement and each of the
agreements and documents referenced hereto to which such Purchaser is a party
has been duly authorized by all necessary action on the part of such Purchaser.
This Agreement and each of the documents referenced herein to which such
Purchaser is a party constitutes a valid and binding agreement of such Purchaser
enforceable against such Purchaser in accordance with its terms, except to the
extent that enforceability may be limited by bankruptcy, insolvency or other
similar laws affecting creditors' right generally.
4.11 Legend. Each Purchaser understands that the certificates
evidencing the Securities (other than the Notes) will bear a legend in
substantially the following form:
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT") OR THE SECURITIES LAWS OF ANY STATE OF THE UNITED
STATES. THE SECURITIES EVIDENCED BY THIS CERTIFICATE MAY NOT
BE OFFERED, SOLD OR TRANSFERRED FOR VALUE, DIRECTLY OR
INDIRECTLY, IN THE ABSENCE OF SUCH REGISTRATION UNDER THE ACT
AND QUALIFICATION UNDER APPLICABLE STATE LAWS, OR PURSUANT TO
AN EXEMPTION FROM REGISTRATION UNDER THE ACT AND QUALIFICATION
UNDER APPLICABLE STATE LAWS, THE AVAILABILITY OF WHICH IS TO
BE ESTABLISHED TO THE REASONABLE SATISFACTION OF COSI, INC.
4.12 No General Solicitation. Each Purchaser acknowledges that it has
not been offered or sold any Securities pursuant to any advertisement, article,
notice or other communication published in any newspaper, magazine, or similar
media or broadcast over
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television or radio, nor any seminar or meeting whose attendees have been
invited by any general solicitation or general advertising.
SECTION 5
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to the Purchasers that:
5.1 Organization, Good Standing and Qualification. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and has all requisite corporate power and authority to
carry on its business as now conducted and as proposed to be conducted. The
Company is duly qualified to transact business and is in good standing in each
jurisdiction in which the failure to so qualify would have a material adverse
effect on its business or properties. 5.2 Authorization. All corporate action on
the part of the Company, its officers, directors and stockholders necessary for
the authorization, execution and delivery of this Agreement, the performance of
all obligations of the Company hereunder and the authorization, issuance, sale
and delivery of the Notes and Warrants being sold hereunder has been taken or
will be taken prior to the Closing, and this Agreement and each Note constitutes
a valid and legally binding obligation of the Company, enforceable in accordance
with its terms, except as limited by applicable bankruptcy, insolvency,
reorganization, moratorium, and other laws of general application affecting
enforcement of creditors' rights generally.
5.3 Litigation. There is no action, suit, proceeding or investigation
pending or currently threatened against the Company that questions the validity
of this Agreement, or the right of the Company to enter into this Agreement, or
to consummate the transactions contemplated hereby, or that might result, either
individually or in the aggregate, in any material adverse change in the assets,
condition, affairs or prospects of the Company, financially or otherwise, nor is
the Company aware that there is any basis for the foregoing. The Company is not
a party or subject to the provisions of any order, writ, injunction, judgment or
decree of any court or government agency or instrumentality. There is no action,
suit, proceeding or investigation by the Company currently pending or that the
Company intends to initiate.
5.4 Absence of Required Consents; No Violations. No consent or approval
of any third party, any court or tribunal, or any administrative, governmental
or regulatory body, agency or authority is required for the execution, delivery
and performance of this Agreement by the Company. Neither the execution,
delivery nor performance of this Agreement by the Company will conflict with or
result in any breach of any provisions of the Certificate of Incorporation, as
amended, (except for any conflict or breach that has been waived) or By-laws of
the Company or violate any order, writ, injunction or decree applicable to the
Company.
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SECTION 6
COVENANTS OF THE COMPANY
6.1 Covenants. The Company hereby incorporates by reference the
covenants contained in the Series C Preferred Stock Purchase Agreement dated
March 30, 1999, as amended. The Company shall provide a copy of such covenants
to the Purchasers upon request.
6.2 Additional Covenant. At the time of each Loan Disbursement the
Company shall certify to the Purchasers, that since the date hereof, no
circumstance or event has occurred which has had a material adverse effect on
the business, assets, results of operations or financial condition of the
Company, taken as a whole.
SECTION 7
PRO RATA TREATMENT AND PAYMENTS
7.1 Pro Rata Treatment and Payments. Each Loan Disbursement from the
Purchasers hereunder shall be made pro rata in accordance with the respective
Commitments of the Purchasers. Each payment by the Company on account of
principal of and interest on the Loans shall be made pro rata in accordance with
the respective outstanding principal amount of the Loans of the Purchasers. All
payments to be made by the Company hereunder, whether on account of principal or
interest, shall be made without set-off or counterclaim and shall be made prior
to 12:00 noon, New York City time, on the due date thereof to the Purchasers, at
the addresses specified on Schedule A hereto, in same day funds. If any payment
hereunder becomes due and payable on a day other than a Business Day, such
payment shall be extended to the next succeeding Business Day and, with respect
to payments of principal, interest thereon shall be payable at the then
applicable rate during such extension.
SECTION 8
EVENT OF DEFAULT
8.1 Event of Default. An Event of Default exists if any of the
following events shall occur and be continuing:
(a) The Company shall fail to pay the principal of the Loans
when due in accordance with the terms hereof; or the Company shall fail
to pay any interest on the Loans within 10 Business Days of the date
thereof; or
(b) the Company, pursuant to or within the meaning of any
Bankruptcy Law (defined to include any existing or future law of any
jurisdiction, domestic or foreign, relating to bankruptcy, insolvency,
reorganization or relief of debtors):
(i) commences a voluntary case;
(ii) consents to the entry of an order for relief
against it in an involuntary case;
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(iii) consents to the appointment of a Custodian of
it or for any substantial part of its property; or
(iv) makes a general assignment for the benefit of
its creditors or takes any comparable action under any foreign
laws relating to insolvency;
(c) the Company breaches any provision of the Borrower
Security Agreement, dated as of August 12, 2002, among the Company and
the Purchasers hereto (as amended supplemented or otherwise modified
from time to time, the "Security Agreement") in any material respect,
and such breach shall continue in effect for 30 days following notice
to the Company thereof by any Purchaser; or
(d) any representation of warranty made by the Company in this
Agreement or the Security Agreement shall have been incorrect in any
material respect as of the date made.
8.2 Acceleration. If an Event of Default occurs and is continuing, (A)
if such event is an Event of Default specified in clause (i) or (ii) of Section
8.1(b), automatically the Loans (with accrued interest thereon) shall
immediately become due and payable and (B) if such event is an Event of Default
the Purchasers may, by notice to the Company, declare the principal of and
accrued but unpaid interest on all the Securities to be due and payable. Upon
such a declaration, such principal and interest shall be due and payable
immediately.
8.3 Other Remedies. If an Event of Default occurs and is continuing,
the Purchasers may pursue any available remedy to collect the payment of
principal of or interest on the Notes, or to enforce the performance of any
provision of this Agreement. A delay or omission by the Purchasers in exercising
any right or remedy accruing upon an Event of Default shall not impair the right
or remedy or constitute a waiver of or acquiescence in the Event of Default. No
remedy is exclusive of any other remedy. All available remedies are cumulative.
SECTION 9
MISCELLANEOUS
9.1 Binding Agreement. 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. Nothing in this Agreement, express or implied, is
intended to confer upon any third party any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.
9.2 Termination. This Agreement shall terminate at an initial public
offering, provided that the Company has complied in all material respects with
its obligations hereunder.
9.3 Successors and Assigns. Other than as specifically provided for
herein, this Agreement, and the rights and obligations of each of the parties
hereunder, may not be assigned by any Purchaser without the prior written
consent of the Company. Subject to the foregoing sentence, this Agreement shall
insure to the benefit of, and shall be binding upon, the parties and their
successors and assigns.
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9.4 Governing Law. This Agreement shall be governed by and construed
under the laws of the State of New York as applied to agreements among New York
residents, made and to be performed entirely within the State of New York.
9.5 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.
9.6 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.
9.7 Notices. Any notice required or permitted under this Agreement
shall be given in writing and shall be deemed effectively given upon receipt or
upon deposit with the United States Post Office, by registered or certified
mail, postage prepaid, addressed to the Company at 242 West 36th Street, 11th
Floor, New York, New York, or to the Purchasers at the address set forth on
Schedule I hereto, or at such other address as such party may designate by ten
days advance written notice to the other party.
9.8 Modification; Waiver. No modification or waiver of any provision of
this Agreement or consent to departure therefrom shall be effective unless in
writing and approved by the Company and at least 50% of the Purchasers.
9.9 Entire Agreement. This Agreement, together with the agreements and
documents referred to herein, constitute the entire agreement among the parties
hereto with respect to the subject matter hereof and supersede all prior and
contemporaneous negotiations, agreements and understandings.
9.10 Expenses. Upon the Closing, the Company shall reimburse the
Purchasers' out-of-pocket expenses in connection with the transaction
contemplated by this Agreement, including reasonable legal fees of counsel
representing the Purchasers, provided the Loans, for such Purchaser, is at least
$5,000,000 pursuant to this Agreement.
9.11 No Third Party Beneficiaries. Nothing contained in this Agreement
shall be deemed to confer rights on any person or to indicate that this
Agreement has been entered into for the benefit of any person, other than the
parties hereto.
9.12 Further Assurances. At any time after the Closing, each party
shall upon request of another party, execute, acknowledge and deliver all such
further and other assurances and documents, and will take such action consistent
with the terms of this Agreement, as may be reasonably requested to carry out
the transactions contemplated herein and to permit each party to enjoy its
rights and benefits hereunder.
9.13 Nouns and Pronouns. Whenever the context may require, any pronouns
used herein shall include the corresponding masculine, feminine or neuter forms,
and the singular form of names and pronouns shall include the plural and vice
versa.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
SCHEDULE I
Number of Initial
Purchaser Commitment Warrants
--------- ---------- --------
Diamond Family Foundation $75,000 4,500
LJCB Nominees Pty Ltd $2,500,000 1,500
▇▇▇▇▇▇ ▇▇▇▇▇▇ $140,000 8,400
Talon Opportunity Fund, LP $750,000 45,000
Northwood Ventures LLC $240,000 14,400
Northwood Capital Partners LLC $60,000 3,600
▇▇▇▇ ▇▇▇▇▇▇▇▇ $1,500,000 90,000
EGI-Fund (02-04) Investors, LLC $256,000 15,360
Cosi Partners $250,000 15,000
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇ $579,570 34,774
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Number of Initial
Purchaser Commitment Warrants
▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇, MD Trustee for ▇▇▇▇▇▇ Family Trust $250,000 15,000
▇▇▇ ▇▇▇▇▇▇▇▇ $100,000 6,000
▇▇▇▇ ▇▇▇▇▇▇▇ $25,000 1,500
▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ $150,000 9,000
▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ $25,000 1,500
▇▇▇▇▇ ▇▇▇▇▇▇ $25,000 1,500
Cosi CH, LLC $4,095,314 245,719
LBJ Capital $500,000 30,000
▇▇▇▇ ▇. ▇▇▇▇▇▇▇ 1996 Revocable Trust $1,500,000 90,000
ZAM Holdings, LP $3,373,616 202,417
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SCHEDULE II
RISK FACTORS
You should carefully consider the following risks, with regard to the Company
(referred to herein as "we" and "our") before entering into the transactions
contemplated herein. If any of the following risks actually occur, the Company's
business could be harmed. In that case the Company could be unable to meet its
financial obligations and you might lose all or part of your investment.
IF WE ARE UNABLE TO ACHIEVE OUR RAPID GROWTH STRATEGY OUR BUSINESS COULD BE
MATERIALLY ADVERSELY AFFECTED.
We are planning a rapid growth strategy which will depend on our ability to open
new restaurants on a timely and profitable basis. We have experienced delays in
restaurant openings from time to time, we may experience delays in the future
and we cannot assure you that we will be able to achieve our expansion goals.
Any inability to implement our growth strategy could materially adversely affect
our business, financial condition, operating results or cash flows. Our ability
to expand successfully will depend on a number of factors, some of which are
beyond our control, including:
o identification and availability of suitable restaurant sites;
o competition for restaurant sites;
o negotiation of favorable leases;
o management of construction and development costs of new restaurants;
o securing required governmental approvals and permits;
o recruitment of qualified operating personnel;
o competition in new markets; and
o general economic conditions.
In addition, we contemplate entering new markets in which we have no operating
experience. These new markets may have different demographic characteristics,
competitive conditions, consumer tastes and discretionary spending patterns than
our existing markets, which may cause our new restaurants to be less successful
in these new markets than in our existing markets.
ANY INABILITY TO MANAGE OUR GROWTH EFFECTIVELY COULD MATERIALLY ADVERSELY AFFECT
OUR OPERATING RESULTS.
Failure to manage our growth effectively could harm our business. We have grown
significantly since our inception and intend to grow substantially in the
future. We have increased the number of our restaurants from 36 restaurants as
of December 31, 1999 to 72 restaurants currently. Our existing restaurant
management systems, financial and management controls and information systems
may not be adequate to support our planned expansion. Our ability to manage our
growth effectively will require us to continue to enhance these systems,
procedures and controls and to locate, hire, train and retain operating
personnel. We cannot assure you that we will be able to respond on a timely
basis to all of the changing demands that our planned expansion will impose on
management and on our existing infrastructure. If we are unable to manage our
growth effectively, our business and operating results could be materially
adversely impacted.
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YOU SHOULD NOT RELY ON PAST INCREASES IN OUR AVERAGE UNIT VOLUMES AS AN
INDICATION OF OUR FUTURE RESULTS OF OPERATIONS BECAUSE THEY MAY FLUCTUATE
SIGNIFICANTLY.
A number of factors have historically affected, and will continue to affect, our
average sales, including, among other factors:
o introduction of new menu items;
o unusually strong initial sales performance by new restaurants;
o competition;
o general regional and national economic conditions;
o consumer trends; and
o our ability to execute our business strategy effectively.
It is not reasonable to expect our average unit volumes to increase at rates
achieved over the past several years. Changes in our average sales results could
cause the price of our common stock to fluctuate substantially.
WE HAVE A LIMITED OPERATING HISTORY AND WE MAY BE UNABLE TO ACHIEVE
PROFITABILITY.
The first Xando Coffee and Bar was opened in October 1994 and the first Cosi
Sandwich Bar was opened in February 1996. We are currently operating 72
restaurants, 15 of which have been open for less than one year. Accordingly, you
have limited information with which to evaluate our business and prospects. As a
result, forecasts of our future revenues, expenses and operating results may not
be as accurate as they would be if we had a longer history of operations and of
combined operations. Since we were formed, we have incurred net losses of
approximately $104 million through the end of fiscal 2001, primarily due to new
restaurant opening expenses, impairment charges, the cost of our merger in 1999
and the costs of hiring senior management to develop and implement our expansion
strategy. We intend to continue to expend significant financial and management
resources on the development of additional restaurants. We cannot predict
whether we will be able to achieve or sustain revenue growth, profitability or
positive cash flow in the future.
OUR RESTAURANTS ARE CURRENTLY CONCENTRATED IN THE NORTHEASTERN AND MID-ATLANTIC
REGIONS OF THE UNITED STATES, PARTICULARLY IN THE NEW YORK CITY AREA.
ACCORDINGLY, WE ARE HIGHLY VULNERABLE TO NEGATIVE OCCURRENCES IN THESE REGIONS.
We currently operate 56 restaurants in Northeastern and Mid-Atlantic states, of
which 26 are located in the New York City area, 16 of which are located in New
York Central Business Districts. As a result, we are particularly susceptible to
adverse trends and economic conditions in these areas. In addition, given our
geographic concentration, negative publicity regarding any of our restaurants
could have a material adverse effect on our business and operations, as could
other regional occurrences impacting the local economies in these markets.
OUR OPERATIONS DEPEND ON GOVERNMENTAL LICENSES AND WE MAY FACE LIABILITY UNDER
"DRAM SHOP" STATUTES.
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We are subject to extensive federal, state and local government regulations,
including regulations relating to alcoholic beverage control, the preparation
and sale of food, public health and safety sanitation, building, zoning and fire
codes. Our business depends on obtaining and maintaining required food service
and/or liquor licenses for each of our restaurants. If we fail to hold all
necessary licenses, we may be forced to delay or cancel new restaurant openings
and close or reduce operations at existing locations. In addition, our sale of
alcoholic beverages subjects us to "dram shop" statutes in some states. These
statutes allow an injured person to recover damages from an establishment that
served alcoholic beverages to an intoxicated person. Although we take
significant precautions to ensure that all employees are trained in the
responsible service of alcohol and maintain insurance policies in accordance
with all state regulations regarding the sale of alcoholic beverages, the misuse
of alcoholic beverages by customers may create considerable risks for us. If we
are the subject of a judgment substantially in excess of our insurance coverage,
or if we fail to maintain our insurance coverage, our business, financial
condition, operating results or cash flows could be materially and adversely
affected
OUR RESTAURANT EXPANSION STRATEGY FOCUSES PRIMARILY ON FURTHER PENETRATING
EXISTING MARKETS. THIS STRATEGY CAN CAUSE SALES IN SOME OF OUR EXISTING
RESTAURANTS TO DECLINE, WHICH COULD RESULT IN RESTAURANT CLOSURES.
In accordance with our expansion strategy, we intend to open new restaurants
primarily in our existing markets. Since we typically draw customers from a
relatively small radius around each of our restaurants, the sales performance
and customer counts for restaurants near the area in which a new restaurant
opens may decline due to cannibalization, which could result in restaurant
closures.
OUR FAILURE OR INABILITY TO ENFORCE OUR TRADEMARKS OR OTHER PROPRIETARY RIGHTS
COULD ADVERSELY AFFECT OUR COMPETITIVE POSITION OR THE VALUE OF OUR BRAND.
We own certain common law trademark rights and a number of federal and
international trademark and service ▇▇▇▇ registrations, and proprietary rights
to certain of our core menu offerings. We believe that our trademarks and other
proprietary rights are important to our success and our competitive position.
We, therefore, devote appropriate resources to the protection of our trademarks
and proprietary rights. The protective actions that we take, however, may not be
enough to prevent unauthorized usage or imitation by others, which might cause
us to incur significant litigation costs and could harm our image or our brand
or competitive position. To date, we have not been notified that our trademarks
or menu offerings infringe the proprietary rights of third parties, but we
cannot assure you that third parties will not claim infringement by us. Any such
claim, whether or not it has merit, could be time-consuming, result in costly
litigation, cause product delays or require us to enter into royalty or
licensing agreements. As a result, any such claim could have a material adverse
effect on our business, results of operations and financial condition.
OUR QUARTERLY RESULTS MAY FLUCTUATE AND COULD FALL BELOW EXPECTATIONS OF
SECURITIES ANALYSTS AND INVESTORS DUE TO SEASONALITY AND OTHER FACTORS,
RESULTING IN A DECLINE IN OUR STOCK PRICE.
Our quarterly and yearly results have varied in the past, and we believe that
our quarterly operating results will vary in the future. Factors such as
seasonality, inclement weather, and
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unanticipated increases in labor, commodity, energy, insurance or other
operating costs may cause our quarterly results to fluctuate. For this reason,
you should not rely upon our quarterly operating results as indications of
future performance.
WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE AND IT MAY NOT BE AVAILABLE ON
ACCEPTABLE TERMS.
We do not presently have a credit facility available for general purposes. The
development of our business may require significant additional capital in the
future to, among other things, fund our operations, expand the range of services
we offer and finance future acquisitions and investments. We have historically
relied upon private sales of our equity and debt instruments to fund our
operations. There can be no assurance, however, that these sources of financing,
or alternative sources such as a credit facility, will be available on terms
favorable to us, or at all. Our ability to obtain additional financing will be
subject to a number of factors, including market conditions, our operating
performance and investor sentiment. These factors may make the timing, amount,
terms and conditions or additional financings unattractive to us. If we are
unable to raise additional capital, our growth could be impeded.
OUR BUSINESS IS AFFECTED BY CHANGES IN CONSUMER PREFERENCES AND DISCRETIONARY
SPENDING.
Our success depends, in part, upon the popularity of our food products and our
ability to develop new menu items that appeal to consumers. Shifts in consumer
preferences away from our restaurants or cuisine, our inability to develop new
menu items that appeal to consumers, or changes in our menu that eliminate items
popular with some consumers could harm our business. Also, our success depends
to a significant extent on discretionary consumer spending, which is influenced
by general economic conditions and the availability of discretionary income.
Accordingly, we may experience declines in sales during economic downturns or
during periods of uncertainty like that which followed the terrorist attacks on
the United States and the possibility of further terrorist attacks. Any material
decline in the amount of discretionary pending could have a material adverse
effect on our sales, results of operations, business and financial condition.
OUR SUCCESS DEPENDS ON OUR ABILITY TO COMPETE WITH MANY FOOD SERVICE BUSINESSES.
The restaurant industry is intensely competitive and we compete with many
well-established food service companies on the basis of taste, quality and price
of product offered, customer service, atmosphere, location and overall guest
experience. We compete with other sandwich retailers, specialty coffee
retailers, bagel shops, fast-food restaurants, delicatessens, cafes, bars,
take-out food service companies, supermarkets and convenience stores. Our
competitors change with each of the five dayparts (breakfast, lunch, afternoon
coffee, dinner and dessert), ranging from coffee bars and bakery cafes to casual
dining chains. Aggressive pricing by our competitors or the entrance of new
competitors into our markets could reduce our sales and profit margins. Many of
our competitors or potential competitors have substantially greater financial
and other resources than we do which may allow them to react to changes in
pricing, marketing and the quick service restaurant industry better than we can.
As our competitors expand their operations, we expect competition to intensify.
We also compete with other employers in our markets for hourly workers and may
be subject to higher labor costs.
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FLUCTUATIONS IN COFFEE PRICES COULD ADVERSELY AFFECT OUR OPERATING RESULTS.
The price of coffee, one of our main products, can be highly volatile. Although
most coffee trades on the commodity markets, coffee of the quality we seek tends
to trade on a negotiated basis at a substantial premium above commodity coffee
pricing, depending on supply and demand at the time of the purchase. Supplies
and prices of green coffee can be affected by a variety of factors, such as
weather, politics and economics in the producing countries. Two organizations,
the Association of Coffee Producing Countries and the International Coffee
Organization, have sought with mixed success to coordinate production and
pricing of coffee among certain countries and to maintain pricing quotas among
coffee producers. An increase in pricing of specialty coffees could have a
significant adverse effect on our profitability. To mitigate the risks of
increasing coffee prices and to allow greater predictability in coffee pricing,
we typically enter into fixed price purchase commitments for a portion of our
green coffee requirements. We acquire coffee through a single supplier. We
cannot assure you that these activities will be successful or that they will not
result in our paying substantially more for our coffee supply than we would have
been required to pay absent such activities.
CHANGES IN FOOD AND SUPPLY COSTS COULD ADVERSELY AFFECT OUR RESULTS OF
OPERATIONS.
Our profitability depends in part on our ability to anticipate and react to
changes in food and supply costs. We rely on a single primary distributor of our
food and paper goods. Although we believe that alternative distribution sources
are available, any increase in distribution prices or failure by our distributor
to perform could adversely affect our operating results. In addition, we are
susceptible to increases in food costs as a result of factors beyond our
control, such as weather conditions and government regulations. Failure to
anticipate and adjust our purchasing practices to these changes could negatively
impact our business.
THE FOOD SERVICE INDUSTRY IS AFFECTED BY LITIGATION AND PUBLICITY CONCERNING
FOOD QUALITY, HEALTH AND OTHER ISSUES, WHICH CAN CAUSE CUSTOMERS TO AVOID OUR
PRODUCTS AND RESULT IN LIABILITIES.
Food service businesses can be adversely affected by litigation and complaints
from customers or government authorities resulting from food quality, illness,
injury or other health concerns or operating issues stemming from one restaurant
or a limited number of restaurants. Adverse publicity about these allegations
may negatively affect us, regardless of whether the allegations are true, by
discouraging customers from buying our products. We could also incur significant
liabilities if a lawsuit or claim results in a decision against us or litigation
costs regardless of the result.
OUR BUSINESS COULD BE ADVERSELY AFFECTED BY INCREASED LABOR COSTS OR LABOR
SHORTAGES.
Labor is a primary component in the cost of operating our business. We devote
significant resources to recruiting and training our managers and hourly
employees. Increased labor costs, due to competition, increased minimum wage or
employee benefits costs or otherwise, would adversely impact our operating
expenses. In addition, our success depends on our ability to attract, motivate
and retain qualified employees, including restaurant managers and staff, to keep
pace with our growth strategy. If we are unable to do so, our results of
operations may be adversely affected.
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PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY DELAY OR PREVENT OUR
ACQUISITION BY A THIRD PARTY.
Our certificate of incorporation, by-laws and shareholder rights agreement
contain several provisions that may make it more difficult for a third party to
acquire control of us without the approval of our board of directors. These
provisions include, among other things, a classified board of directors,
elimination of stockholder action by written consent, advance notice for raising
business or making nominations at meetings and "blank check" preferred stock.
Blank check preferred stock enables our board of directors to, without
shareholder approval, designate and issue additional series of preferred stock
with such dividend, liquidation, conversion, voting or other rights, including
the right to issue convertible securities with no limitations on conversion as
our board of directors may determine. The issuance of blank check preferred
stock may adversely affect the voting and other rights of the holders of our
capital stock as our board of directors may designate and issue preferred stock
with terms that are senior to our common stock. These provisions may make it
more difficult or expensive for a third party to acquire a majority of our
outstanding voting common stock. These provisions also may delay, prevent or
deter a merger, acquisition, tender offer, proxy contest or other transaction
that might otherwise result in our shareholders' receiving a premium over the
market price for their common stock.
WE MAY BE EXPOSED TO POTENTIAL LIABILITY UNDER THE SECURITIES LAWS AS A RESULT
OF HAVING MORE THAN 500 OPTIONHOLDERS.
We have sought to create a culture in which each employee has a shared sense of
ownership in our business. Part of this effort was the establishment of an
extensive employee option plan, in which each employee, including hourly-level
employees, is given the opportunity to participate. As our company has grown, we
have issued stock options to an increasing number of our employees. When the
number of our optionholders exceeded 500, we inadvertently failed to register
our options pursuant to Section 12(g) of the Exchange Act, as required by SEC
regulations. Our failure to so register our options may expose us to potential
liability under the securities laws. However, we believe that any such liability
would not be material to our financial condition or results of operations.
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