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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-21203
DIEDRICH COFFEE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C>
DELAWARE 33-0086628
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
2144 MICHELSON DRIVE
IRVINE, CALIFORNIA 92612
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 260-1600
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 [ ] NO [x]
As of October 1, 1996, there were 5,391,650 shares of common stock of
the registrant outstanding.
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DIEDRICH COFFEE, INC.
INDEX
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PART I - FINANCIAL INFORMATION PAGE NO.
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Item 1. Financial Statements
Condensed Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Statements of Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Condensed Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Condensed Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DIEDRICH COFFEE, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS JULY 31, 1996 JANUARY 31, 1996
------------- ---------------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash $ 57,058 $ 94,659
Accounts receivable 151,153 134,573
Inventories (Note 2) 952,636 645,493
Deferred income taxes 14,079 14,079
Prepaid expenses 171,001 106,367
Other current assets 131,277 12,890
------------ ----------
Total current assets 1,477,204 1,008,061
Property and equipment, net 8,321,795 4,100,898
Costs in excess of net assets acquired, net (Note 3) 824,445 -
Deferred income taxes 34,113 34,113
Other assets 489,268 172,600
------------ ----------
$11,146,825 $5,315,672
============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Checks issued against future deposits $ 204,145 $ -
Current portion of long-term debt and line of credit (Notes 4 4,926,588 117,538
and 5)
Notes payable 49,398 39,398
Accounts payable 1,695,094 635,428
Accrued compensation 285,881 184,891
Accrued expenses 131,659 32,237
Income taxes payable 26,319 51,235
------------ ----------
Total current liabilities 7,319,084 1,060,727
Long-term debt, less current portion 282,755 829,320
Deferred rent 127,690 121,144
------------ ----------
Total liabilities 7,729,529 2,011,191
------------ ----------
Commitments and contingencies
Subsequent events (Note 5)
Stockholders' Equity (Note 5):
Series A convertible cumulative preferred stock, no par value:
liquidation preference of $1.00 per share, aggregating
$1,000,000; authorized, 1,000,000 shares; issued and
outstanding, 1,000,000 shares 800,000 800,000
Series B convertible cumulative preferred stock, no par value;
liquidation preference of $1.433 per share, aggregating
$2,305,000; authorized, 1,608,568 shares; issued and
outstanding, 1,608,568 shares 2,225,813 2,225,813
Preferred stock, $.01 par value; authorized, 3,000,000 shares;
no shares issued and outstanding - -
Common stock, no par value; authorized, 25,000,000 shares;
issued and outstanding, 1,183,082 shares 330,698 330,698
Retained earnings (accumulated deficit) 60,785 (52,030)
------------ ----------
Total stockholders' equity 3,417,296 3,304,481
------------ ----------
$11,146,825 $5,315,672
============ ==========
</TABLE>
See accompanying notes to condensed financial statements.
3
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DIEDRICH COFFEE, INC.
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
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THIRTEEN TWELVE TWENTY-SIX TWENTY-FOUR
WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED
JULY 31, 1996 JULY 18, 1995 JULY 31, 1996 JULY 18, 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net Sales:
Retail $4,269,206 $1,884,559 $8,171,203 $3,641,764
Wholesale and other 398,155 281,597 770,888 582,560
----------- ---------- ---------- ----------
Total 4,667,361 2,166,156 8,942,091 4,224,324
----------- ---------- ---------- ----------
Cost and Expenses:
Cost of sales and related
occupancy costs 2,135,990 935,735 3,908,882 1,807,949
Store operating expenses 1,872,544 695,436 3,607,423 1,364,426
Other operating expenses 63,265 44,612 122,585 109,022
Depreciation and amortization 210,626 85,826 364,551 147,821
General and administrative
expenses 310,085 300,600 647,460 577,335
----------- ---------- ---------- ----------
Total 4,592,510 2,062,209 8,650,901 4,006,553
----------- ---------- ---------- ----------
Operating income 74,851 103,947 291,190 217,771
Interest expense (69,891) (9,153) (108,732) (24,085)
Interest and other income 742 7,361 2,006 9,154
----------- ---------- ---------- ----------
Income before income taxes 5,702 102,155 184,464 202,840
Provision for income taxes - 41,942 71,649 83,223
----------- ---------- ---------- ----------
Net income $ 5,702 $ 60,213 $ 112,815 $ 119,617
=========== ========== ========== ==========
Pro forma information:
Net income per share $ - $ .03
=========== ==========
Weighted average
shares outstanding 3,903,000 3,903,000
=========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
4
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DIEDRICH COFFEE, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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<CAPTION>
TWENTY-SIX TWENTY-FOUR
WEEKS ENDED WEEKS ENDED
JULY 31, 1996 JULY 18, 1995
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 112,815 $ 119,617
Adjustments to reconcile net income to cash
provided by operating activities :
Depreciation and amortization 364,551 147,821
Increase (decrease) from changes in :
Accounts receivable (16,580) 11,452
Inventories (307,143) 219
Prepaid expenses (64,634) (90,789)
Other current assets (118,387) (175,130)
Other assets (316,668) (93,385)
Accounts payable 1,059,666 224,153
Accrued compensation 100,990 4,745
Accrued expenses 99,422 99,464
Income taxes payable (24,916) (19,221)
Deferred rent 6,546 5,685
----------- -----------
Cash provided by operating activities 895,662 234,631
----------- -----------
Cash flows from investing activities:
Capital expenditures for property and equipment (3,609,893) (461,335)
Acquisition of coffeehouses (1,800,000) -
----------- -----------
Cash used in investing activities (5,409,893) (461,335)
----------- -----------
Cash flows from financing activities:
Checks issued against future deposits 204,145 -
Proceeds from notes payable 10,000 -
Proceeds from line of credit 3.386,530 -
Proceeds from long-term debt 1,422,520 89,555
Principal payments on long-term debt (546,565) (119,603)
Proceeds from sale of preferred stock - 2,225,813
Repurchase of common stock - (280,000)
----------- -----------
Net cash provided by financing activities 4,476,630 1,915,765
----------- -----------
Net increase (decrease) in cash (37,601) 1,689,061
Cash at beginning of period 94,659 58,884
----------- -----------
Cash at end of period $ 57,058 $ 1,747,945
=========== ===========
Supplemental Disclosure of Cash Flow Information :
Cash paid during the period for:
Interest $ 86,021 $ 24,085
Income taxes $ 62,500 $ 82,250
</TABLE>
See accompanying notes to condensed financial statements.
5
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DIEDRICH COFFEE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
JULY 31, 1996
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Information
The unaudited condensed financial statements of Diedrich
Coffee, Inc. (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial
information. Certain information normally included in annual
financial statements prepared in accordance with generally accepted
accounting principles has been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission. The
financial information as of January 31, 1996 is derived from the
Company's audited financial statements for the year ended January 31,
1996 included in the Company's final Prospectus prepared in
connection with its initial public offering declared effective on
September 11, 1996 and should be read in conjunction with such
financial statements. In the opinion of management, all adjustments
(consisting of normal, recurring adjustments and accruals) considered
necessary for a fair presentation of the financial position, results
of operations and cash flows for the interim periods have been
included. Results for the interim periods are not necessarily
indicative of the results for an entire year.
Pro Forma Net Income per Share
Pro forma net income per share is based on the weighted
average number of shares outstanding during the period after
consideration of the dilutive effect, if any, of stock options granted
and after giving pro forma effect to the conversion of the Company's
outstanding preferred stock to common stock in connection with the
initial public offering. Dividends on the preferred stock have been
excluded from the computation since the preferred stock has been
assumed to have been converted to common stock. Historical net income
per share has not been presented as such amount is based on a
calculation that is not reflective of the Company's ongoing capital
structure.
2. INVENTORIES
Inventories consist of the following:
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JULY 31, JANUARY 31,
1996 1996
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(Unaudited)
<S> <C> <C>
Unroasted coffee $117,563 $128,369
Roasted coffee 53,235 24,274
Accessory and specialty items 170,185 74,299
Other food, beverage and supplies 611,653 418,551
--------- ---------
$952,636 $645,493
========= =========
</TABLE>
6
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DIEDRICH COFFEE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
JULY 31, 1996
(UNAUDITED)
3. 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.
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. The costs in excess of the net
assets acquired, aggregating $848,000, is being amortized on a
straight-line basis over fifteen years.
4. DEBT
On May 20, 1996, the Company entered into a revolving
promissory note with a shareholder. The note provided for borrowings
up to $2,000,000 with interest accruing at the prime rate plus 3%. As
of July 31, 1996, the Company had outstanding borrowings under this
note which totaled $1,415,000. All outstanding principal and accrued
interest was repaid in full from the proceeds of the initial public
offering. (see Note 5)
On July 19, 1996, the Company entered into a bank revolving
line of credit agreement which provided for borrowings up to
$4,100,000 with interest payable monthly at the bank's reference rate
plus .25% or, at the Company's option, certain other international
interest rates established by the bank plus 2.25%. As of July 31,
1996, the Company had outstanding borrowings which totaled $3,386,530.
All outstanding principal and accrued interest was repaid in full from
the proceeds of the initial public offering. (see Note 5)
5. INITIAL PUBLIC OFFERING
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 related expenses, were approximately $12.7
million. A portion of the proceeds was used to repay outstanding
indebtedness.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The first retail store operating under the name Diedrich Coffee
commenced operations in 1972. At the conclusion of fiscal 1996, there were
twelve coffeehouses in operation, all of which were located in Southern
California, and as of July 31, 1996, the Company operated a total of
thirty-seven coffeehouses located in California, Colorado and Texas, with five
additional locations subject to binding leases. Diedrich Coffee sells high
quality coffee beverages made with its own freshly roasted coffee. In addition
to brewed coffee, the Company offers a broad range of Italian-style beverages
such as espresso, cappuccino, caffe latte, cafe mocha and espresso machiato. To
complement beverage sales, the Company sells light food items and whole bean
coffee through its coffeehouses.
On February 15, 1996, the Company acquired seven retail locations in
Denver, Colorado that were former bakery-espresso cafes (the "Acquired Cafes")
for cash consideration of $450,000. On February 23, 1996, the Company acquired
twelve retail locations from Brothers Gourmet Coffees, Inc., doing business as
Brothers Gourmet Coffee Bars (the "Brothers Stores") for cash consideration of
$1,350,000. Ten of the Brothers Stores are located in Denver, Colorado and two
are in Houston, Texas. Both of the transactions took the form of asset
acquisitions, accounted for under the purchase method, in which the principal
assets acquired were leasehold interests, furniture and fixtures and equipment.
No material liabilities were assumed except for the remaining obligations under
the operating leases for each of the stores.
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 and, accordingly, the quarterly
period ended July 31, 1996 includes thirteen weeks. Prior to the change in
fiscal year end, the Company's quarterly periods included twelve weeks, except
for the fourth quarter which had approximately sixteen weeks.
In addition to historical information, management's discussion and
analysis includes certain forward-looking statements, including those related to
the Company's growth and strategies, that involve risks and uncertainties. The
Company's actual results and financial position could differ materially from
those anticipated in the forward-looking statements as a result of a number of
factors, including but not limited to, the price and availability of coffee and
other raw materials, successful execution of the Company's expansion plans, the
impact of competition, the availability of additional financing and other risks
and uncertainties as described in detail under the "Risk Factors" section and
elsewhere in the Company's Prospectus dated September 11, 1996.
RESULTS OF OPERATIONS
Net sales. Net sales for the thirteen weeks ended July 31, 1996,
increased 115.5% to $4,667,000 from $2,166,000 for the twelve weeks ended July
18, 1995. During this most recent quarter, the Company derived 91.5% of net
sales from its retail coffeehouse operations. The Company's wholesale and mail
order sales account for the remainder of net sales. Net retail sales for the
thirteen weeks ended July 31, 1996 increased 126.5% to $4,269,000 from
$1,885,000 in the twelve weeks ended July 18, 1995 due to the opening of new
coffeehouses and the addition of the Acquired Cafes and Brothers Stores. During
the thirteen weeks ended July 31, 1996, the Company opened five Diedrich
coffeehouses. The increase in net retail sales due to reporting thirteen weeks
rather than twelve weeks was $251,000 and therefore, if the reporting period
for the second quarter of fiscal 1997 had been twelve weeks rather than
thirteen weeks, the increase in net retail sales would have been 113.2%.
8
<PAGE> 9
Wholesale and mail order sales combined increased 41.4% to $398,000 in
the thirteen weeks ended July 31, 1996 from $282,000 in the twelve weeks ended
July 18, 1995. The increase was due to a more active sales effort and the
addition of sales staff. No wholesale or mail order activities were contributed
by the recently acquired Brothers Stores or Acquired Cafes.
The percentage increase in comparable store sales comparing net sales
for stores open during the full period in the second quarter in fiscal 1996 to
net sales for the same stores in the second quarter of fiscal 1997 was 0.7%
versus 8.5% for the first quarter in fiscal 1996 compared to the first quarter
of fiscal 1997. Only eight of the Company's thirty-seven coffeehouses were
open for the full period in the second quarter 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 $1,021,000 per store
for the twelve months ended July 31, 1996. Management believes that the
variation in comparable store sales results in part from the
over-representation of mature, revenue-stable stores in the computation base.
Furthermore, given the small number of stores included in the base for
comparable store sales, management believes that this percentage will remain
volatile until the base contains a more statistically meaningful number of
stores that more accurately reflects the overall composition of the Company
Net sales for the twenty-six weeks ended July 31, 1996 increased
111.7% to $8,942,000 from $4,224,000 for the twenty-four weeks ended July 18,
1995. If the reporting period for the first two quarters of fiscal 1997 had been
twenty-four weeks rather than twenty-six weeks, the increase would have been
97.0%. Net retail sales for the twenty-six weeks ended July 31, 1996 increased
124.4% to $8,171,000 from $3,642,000 for the twenty-four weeks ended July 18,
1995 due to the opening of new coffeehouses and the addition of the Acquired
Cafes and Brothers Stores. Wholesale and mail order sales for the twenty-six
weeks ended July 31, 1996 increased to $771,000 from $583,000 for the
twenty-four weeks ended July 18, 1995.
Cost of sales and related occupancy costs. Cost of roasted coffee,
dairy, food, paper and bar supplies, accessories and clothing (cost of sales)
and rent (related occupancy costs) for the thirteen weeks ended July 31, 1996
increased to $2,136,000 from $936,000 for the twelve weeks ended July 18, 1995
primarily due to the operation of Diedrich coffeehouses which were opened in
California in the latter part of fiscal 1996 and during the first two quarters
of fiscal 1997 and the operation of the Acquired Cafes and Brothers Stores. As a
percentage of retail net sales, cost of sales and related occupancy costs
increased to 50.0% in the second quarter of fiscal 1997 from 49.7% for the
second quarter of fiscal 1996. This increase was primarily the result of an
increase in the food cost of sales element caused by a shift in the product mix
due to the addition of several new stores which offer a more extensive food
menu.
Cost of sales and related occupancy costs for the twenty-six weeks
ended July 31, 1996 increased to $3,909,000 from $1,808,000 for the twenty-four
weeks ended July 18, 1995. As a percentage of retail net sales, cost of sales
and related occupancy costs decreased to 47.8% for the first two quarters in
fiscal 1997 from 49.6% for the first two fiscal quarters in fiscal 1996. This
decrease stems from lower costs for raw coffee beans and paper products.
Store operating expenses. Store operating expenses, increased to
$1,873,000 for the thirteen weeks ended July 31, 1996 from $695,000 for the
twelve weeks ended July 18, 1995. As a percentage of retail net sales, store
operating expenses increased to 43.9% in the second quarter of fiscal
1997 from 36.9% in the prior fiscal year's second quarter. This increase was
due to increased labor and opening costs relating to the opening of five
Diedrich coffeehouses in the second quarter of fiscal 1997 and additional store
operating expenses for the Brothers Stores and Acquired Cafes. For the
twenty-six weeks ended July 31, 1996, store operating expenses, as a percentage
of retail net sales, similarly increased to 44.1% from 37.5% for the twenty-four
weeks ended July 18, 1995.
9
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Other operating expenses. Other operating expenses (those associated
with wholesale and mail order sales) increased to $63,000 for the second quarter
of fiscal 1997 from $45,000 in the second quarter of fiscal 1996. These
expenses, as a percentage of the net sales from the wholesale division were the
same in both periods. For the twenty-six weeks ended July 31, 1996, other
operating expenses, as a percentage of wholesale net sales, decreased to 15.9%
from 18.7% for the twenty-four weeks ended July 18, 1995. The decrease is 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 $211,000 for the thirteen weeks ended July 31, 1996 from $86,000
for the twelve weeks ended July 18, 1995. As a percentage of net sales,
depreciation and amortization increased to 4.5% from 4.0% in the prior year,
principally due to the increase in depreciable assets as a result of the Company
operating twenty-eight more coffeehouses this quarter than during the second
quarter in the prior fiscal year. Depreciation and amortization increased to
$365,000 for the twenty-six weeks ended July 31, 1996 from $148,000 for the
twenty-four weeks ended July 18, 1995.
General and administrative expenses. General and administrative
expenses increased to $310,000 for the second quarter of fiscal 1997 from
$301,000 for the second quarter of fiscal 1996. As a percentage of net sales,
general and administrative expenses decreased to 6.6% from 13.9% due to the
addition of sales from the Acquired Cafes and Brother Stores in the revenue
base while maintaining general and administrative expenses comparable to the
second quarter level of the prior fiscal year. Similarly, as a percentage of net
sales, general and administrative expenses decreased to 7.2% in the twenty-six
weeks ended July 31, 1996 from 13.7% for the twenty-four weeks ended July 18,
1995. Management is currently adding selected resources and personnel to aid in
the conversion and control of the new markets according to the integration plan
established prior to the acquisitions.
Interest expense. Interest expense increased to $70,000 for the
thirteen weeks ended July 31, 1996 from $9,000 for the twelve weeks ended July
18, 1995 and increased to $109,000 for the twenty-six weeks ended July 31, 1996
from $24,000 for the twenty-four weeks ended July 18, 1995. This increase was
due primarily to higher average debt outstanding principally as a result of the
acquisition of the Brothers Stores and Acquired Cafes.
Net income. Net income for the thirteen weeks ended July 31, 1996
decreased to $6,000 from $60,000 for the twelve weeks ended July 18, 1995. The
decrease in net income for the second quarter in fiscal 1997 was consistent
with the Company's growth strategy as the Company scheduled most of the
budgeted conversion expenses for the Company's acquisitions in Denver and
Houston to take place during this quarter and also opened five new stores in
California. In addition, the noncapitalized conversion costs of approximately
$76,000, plus pre-opening costs of approximately $60,000 in connection with the
new stores opened in California, during the quarter were significantly in
excess of the comparable expenses during the second quarter in fiscal 1996 of
$18,000 for pre-opening expenses. In addition, as part of the scheduled
conversion process, fifteen of the acquired stores were temporarily closed for
periods varying from five days to twenty-three days which resulted in a
reduction in net sales despite the fact that certain operating expenses, such
as occupancy costs and management salaries, continued to be incurred.
Net income for the thirteen weeks ended July 31, 1996 excluding the
results of operations of the Brothers Stores and Acquired Cafes increased by
$117,000 to $177,000 for the thirteen weeks ended July 31, 1996 from $60,000
for the twelve weeks ended July 18, 1995. Excluding these acquired stores, net
income for the second quarter of fiscal 1997, as a percentage of net sales
increased to 4.9% from 2.8% for the twelve weeks ended July 18, 1995. This
percentage increase was primarily due to the reduction in general and
administrative expenses as a percentage of net sales.
10
<PAGE> 11
Net loss from the operation of the Brothers Stores and Acquired Cafes
for the thirteen weeks ended July 31, 1996 was $171,000 or 16.5% of cumulative
net sales for the Brothers Stores and Acquired Cafes for the period. A
significant part of the net loss for these acquired stores is attributable to
the planned temporary closures during the remodeling and renovation process
during the quarter. This process will continue during the third quarter and
management expects renovations to be completed during the fourth quarter of the
current fiscal year.
Net income for the twenty-six weeks ended July 31, 1996 decreased to
$113,000 from $120,000 for the twenty-four weeks ended July 18, 1995. This
decrease resulted from the decrease in net income for the second quarter in
fiscal 1997. As noted above, the decrease in the second quarter of fiscal 1997
was the result of the opening of five new Diedrich coffeehouses and the planned
temporary closures of certain Brothers Stores and Acquired Cafes. Net income
for the twenty-six weeks ended July 31, 1996 excluding the results of operations
of the Brothers Stores and Acquired Cafes increased to $208,000 from $120,000
for the twenty-four weeks ended July 18, 1995. Excluding these acquired stores,
net income for the first two quarters of fiscal 1997, as a percentage of net
sales, increased to 3.0% from 2.8% for the first two quarters of fiscal 1996.
Income taxes. Net operating losses generated in fiscal 1994 and prior
were carried forward and utilized to offset the allowable portion of income tax
in fiscal 1996. As of January 31, 1996, a net operating loss for federal income
tax purposes of $115,000 remains to be utilized against future taxable income
for years through fiscal 2008, subject to an annual limitation due to the
change in ownership rules under the Internal Revenue Code. As of July 31,
1996, the Company had deferred tax assets aggregating $48,000. Management has
determined, based upon the Company's history of operating earnings and its
expectations for the future, that operating income for the Company will more
likely than not be sufficient to fully recognize these deferred assets.
LIQUIDITY AND CAPITAL RESOURCES
On September 11, 1996, the Company successfully 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, was approximately $12.7 million.
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
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
intends to use the remaining net proceeds to fund the opening of additional
coffeehouses, infrastructure enhancements and to provide working capital for
general corporate purposes. Management believes that the remaining net proceeds
plus cash generated from operations should be sufficient to meet the Company's
anticipated cash requirements for at least the next twelve months.
Prior to the consummation of the Company's initial public offering in
September 1996, the Company had a working capital deficiency, as of July 31,
1996, of $5,842,000 compared to a deficiency of $53,000 at January 31, 1996. The
increase in the working capital deficiency resulted from funding the acquisition
of the Brothers Stores and Acquired Cafes with indebtedness under the Company's
short-term revolving credit facility. This indebtedness was repaid in full from
the net proceeds of the initial public offering. Cash provided by operating
activities totaled $896,000 for the first twenty-six weeks of fiscal 1997 as
compared to $235,000 for the first twenty-four weeks of fiscal 1996. A
significant part of the increase is due to the remaining progress payment on
construction contracts that are included in accounts payable.
11
<PAGE> 12
Cash provided by financing activities for the first twenty-six weeks
of fiscal 1997 totaled $4,477,000. This is due primarily to the Company's
borrowings under its short-term credit facility and its subordinated revolving
promissory note with one of its stockholders.
Cash used in investing activities for the first twenty-six weeks of
fiscal 1997 totaled $5,410,000. This included capital expenditures for property
and equipment of $3,610,000 and the acquisition of the Brothers Stores and
Acquired Cafes for $1,800,000. Capital expenditures included the costs to open
seven new coffeehouses, complete the conversion of ten of the Acquired Cafes and
Brothers Stores to the Diedrich coffeehouse format and purchase roasting and
packaging equipment.
Future cash requirements, other than normal operating expenses, are
expected to consist primarily of capital expenditures related to the addition
of new coffeehouses, through construction and acquisition, and the continued
development of infrastructure to support the Company's expansion. The Company
also anticipates additional expenditures for enhancing its roasting facilities.
Management estimates that capital expenditures through fiscal 1998 will be
approximately $12 million.
In July 1996, the Company entered into a revolving line of credit
which permitted maximum borrowings equal to $4.1 million and was scheduled to
mature on November 1, 1996. Borrowings under the line of credit bear interest at
the bank's prime rate plus 0.25% or, at the Company's option, certain other
international interest rates established by the bank plus 2.25%. Upon
consummation of the Company's initial public offering, the maturity date was
extended to October 1, 1997 and the maximum borrowings were increased to $6
million. The Company's credit agreement in connection with this line of credit
contains various covenants which, among other things, require the delivery of
regular financial information, the maintenance of positive net income and the
maintenance of unencumbered liquid assets. In addition, the credit agreement
imposes certain restrictions on the Company, including, with respect to the
incurrence of additional indebtedness, the payment of dividends and the ability
to make acquisitions. As of July 31, 1996, the Company was in compliance with
all of its covenants.
COFFEE PRICES AND AVAILABILITY
The Company believes that it has adequate sources of supply of high
quality arabica coffee to meet its expansion needs for the foreseeable future.
The average cost of coffee acquired by the Company during the current fiscal
year declined by approximately 15% as compared to fiscal 1996 principally due to
fluctuations in the unroasted coffee market as well as economies of scale due to
increasing order quantities. While the Company seeks to anticipate its coffee
needs carefully, there can be no assurance that the prices it will have to pay
for the highest quality coffee available will remain stable in the future.
SEASONALITY AND QUARTERLY RESULTS
The Company's business is subject to seasonal fluctuations as well as
general economic trends that affect retailers in general. Historically, the
Company's net sales are not realized ratably in each quarter, with net sales
being the highest during the last fiscal quarter which includes the December
holiday season. Quarterly results are affected by the timing of the opening of
new stores which may not occur as anticipated due to factors outside the
Company's control. As a result of the combination of the seasonality of the
retail operations and the high level of anticipated expansion, the financial
results for any individual quarter may not be indicative of the results that
may be achieved for a full fiscal year.
12
<PAGE> 13
NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of,"
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The Company is in the process of analyzing the impact of this
statement and does not believe that it will have a material impact on the
Company's financial position or results of operations. The Company anticipates
adopting the provisions of the statement for fiscal 1997.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," established financial accounting and reporting
standards for stock-based employee compensation plans and certain other
transactions involving the issuance of stock. The Company is in the process of
analyzing the impact of this statement and does not believe that it will have a
material impact on the Company's financial position or results of operations.
The Company anticipates adopting the provisions of the statement for fiscal
1997.
13
<PAGE> 14
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) EXHIBITS
Set forth below is a list of the exhibits included as part of this
Quarterly Report:
EXHIBIT
NUMBER DESCRIPTION
------ -----------
2.1 Form of Agreement and Plan of Merger*
3.1 Certificate of Incorporation of the Company*
3.2 Bylaws of the Company*
4.1 Purchase Agreement for Series A Preferred Stock dated as of
December 11, 1992 by and among Diedrich Coffee, Martin
Diedrich, Donald M. Holly, SNV Enterprises and D.C.H., L.P.*
4.2 Series B Preferred Stock Purchase Agreement dated as of June
29, 1995 by and among Diedrich Coffee, Martin R. Diedrich,
Steven A. Lupinacci, Redwood Enterprises VII, L.P. and
Diedrich Partners I, L.P.*
4.3 Representative's Warrant Agreement*
4.4 Specimen Stock Certificate*
4.5 Form of Conversion Agreement in connection with the conversion
of Series A and Series B Preferred Stock into Common Stock*
10.1 Martin R. Diedrich Employment Agreement, dated June 29, 1995*
10.2 Steven A. Lupinacci Employment Agreement, dated June 29, 1995*
10.3 Stock Option Plan and Agreement of Steven A. Lupinacci, dated
June 29, 1995*
10.4 Form of Indemnification Agreement*
10.5 Diedrich Coffee 1996 Stock Incentive Plan*
10.6 Diedrich Coffee 1996 Non-Employee Directors Stock Option Plan*
10.7 Business Loan Agreement dated as of July 19, 1996 by and
between Bank of America National Trust and Savings Association
and Diedrich Coffee*
10.8 Revolving Promissory Note dated May 20, 1996 by Diedrich Coffee
in favor of Redwood Enterprises VII, L.P.*
10.9 Agreement of Sale by and among Diedrich Coffee (as purchaser)
and Brothers Coffee Bars, Inc. and Brothers Gourmet Coffees,
Inc. (as sellers) dated as of February 23, 1996*
10.10 Kerry W. Coin Employment Agreement, dated August 26, 1996*
27 Financial data schedule
- --------------
* Incorporated by reference to the exhibit of the same number to the
registrant's Registration Statement on Form S-1 (Reg. No. 333-08633), as
amended.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the thirteen
weeks ended July 31, 1996.
14
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: October 25, 1996 DIEDRICH COFFEE, INC.
/s/ STEVEN A. LUPINACCI
_______________________________________
Steven A. Lupinacci,
President, Chief Executive Officer and
Chief Financial Officer
Signing on behalf of the registrant and
as principal financial officer
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DIEDRICH
COFFEE, INC. UNAUDITED FINANCIAL STATEMENTS FOR THE TWENTY-SIX WEEKS ENDED AND
AS OF JULY 31, 1996 CONTAINED IN COMPANY'S SECOND QUARTER 1997 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000947661
<NAME> DIEDRICH COFFEE, INC.
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-01-1996
<PERIOD-END> JUL-31-1996
<EXCHANGE-RATE> 1
<CASH> 57,058
<SECURITIES> 0
<RECEIVABLES> 151,153
<ALLOWANCES> 0
<INVENTORY> 952,636
<CURRENT-ASSETS> 1,477,204
<PP&E> 9,607,429
<DEPRECIATION> 1,285,634
<TOTAL-ASSETS> 11,146,825
<CURRENT-LIABILITIES> 7,319,084
<BONDS> 0
0
3,025,813
<COMMON> 330,698
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 11,146,825
<SALES> 8,942,091
<TOTAL-REVENUES> 8,942,091
<CGS> 3,908,882
<TOTAL-COSTS> 3,908,882
<OTHER-EXPENSES> 4,742,019
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 108,732
<INCOME-PRETAX> 184,464
<INCOME-TAX> 71,649
<INCOME-CONTINUING> 112,815
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 112,815
<EPS-PRIMARY> .03
<EPS-DILUTED> 0
</TABLE>
