<PAGE> 1
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 29, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
COMMISSION FILE 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
(714) 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
- --------------------------------------------------------------------------------
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value per share
- --------------------------------------------------------------------------------
(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 18, 1997, as reported on the NASDAQ National Market System, was
$6,497,244.
The number of shares of the registrant's Common Stock outstanding, as
of April 18, 1997, was 5,391,650.
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 26, 1997, which proxy statement will
be filed not later than 120 days after the close of the registrant's fiscal
year ended January 29, 1997.
<PAGE> 2
TABLE OF CONTENTS
-----------------
<TABLE>
<S> <C> <C>
PART I PAGE
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . 8
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . 8
Item I-A. Executive Officers and Key Employees of Diedrich Coffee, Inc. . . . 9
PART II
Item 5. Market for Registrant's Common Equity and Related 10
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . .
Item 6. Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . . 11
Item 7. Management's Discussion and Analysis of Financial Condition 13
and Results of Operations . . . . . . . . . . . . . . . . . . . . .
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . 17
Item 9. Changes in and Disagreements with Accountants on Accounting 17
and Financial Disclosure. . . . . . . . . . . . . . . . . . . . . .
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . 17
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . 17
Item 12. Security Ownership of Certain Beneficial Owners and Management . . . 17
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . 17
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K . . 18
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
Index to Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
</TABLE>
<PAGE> 3
PART I
ITEM 1. BUSINESS.
GENERAL
Diedrich Coffee, Inc. ("Diedrich Coffee" or the "Company") is a
specialty coffee roaster, wholesaler and retailer that currently operates
forty-four retail units and services over one hundred fifty wholesale accounts.
The retail units are located in Southern California, Colorado and Texas.
Diedrich Coffee sells premium quality coffee beverages made from its own
freshly roasted coffee beans. In addition to brewed coffee, the Company offers
a broad range of Italian-style beverages such as espresso, cappuccino, caffe
latte, caffe mocha and espresso machiato. To complement beverage sales, the
Company sells light food items, whole bean coffee and accessories through its
coffeehouses.
In its continuing efforts to ensure the highest possible standards of
quality, the Company sources its unroasted coffee beans directly from
coffee-producing nations through its contacts with exporters and growers
located in certain of these countries and through specialty coffee brokers.
These unroasted coffee beans are custom roasted in carefully controlled batches
according to the Company's standards and proprietary recipes. The beans
purchased by the Company are of the premium grade arabica variety, which are of
a higher quality than the robusta variety of coffee typically found in
non-specialty or mass-merchandised coffees.
The Company seeks to differentiate itself and build strong brand name
recognition by developing and operating sophisticated and inviting coffeehouses
intended to serve as neighborhood gathering places. Additionally, Diedrich
Coffee focuses heavily on the quality of its products through experienced
sourcing of the unroasted beans and its proprietary roasting formula. To
ensure freshness, the Company has roasting facilities in its current principal
regions of operation (Orange County and Denver) and plans to add roasting
facilities in each of its future significant regions of operation. The Company
believes that this strategy, together with enthusiastic and friendly customer
service, creates a loyal customer base. Diedrich coffeehouses are generally
established in high-visibility locations, consistent with the Company's
strategy of developing a substantial repeat client base. The Company's
coffeehouses average approximately 1,500 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. The Company grew
from three coffeehouses in fiscal 1992 to forty-seven coffeehouses as of
January 29, 1997 through the construction of new coffeehouses and acquisitions.
However, during the first quarter of fiscal 1998, the Company closed three
coffeehouses and therefore, as of April 28, 1997, the Company was operating
forty-four coffeehouses. Recently, the Company has entered into leases that
will permit the opening of three additional coffeehouses in the next several
months. The Company's expansion strategy is to own and operate newly-developed
coffeehouses and to acquire existing specialty coffee retailers in geographic
regions where it has existing coffeehouses. The Company also evaluates new
geographic regions (and analyzes entry through new store openings or
acquisitions) where it believes it can operate profitably.
On September 11, 1996, the Company successfully completed an 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 and continue to be used to
fund the opening of additional coffeehouses, as well as providing working
capital for general corporate purposes and infrastructure enhancements.
1
<PAGE> 4
RECENT DEVELOPMENTS
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 have been targeted for
closure during fiscal 1998. In connection with the store closures, the Company
expects to record an impairment provision and a restructuring charge totaling
approximately $4.5 million in the first quarter of fiscal 1998. The store
closures, which were undertaken to streamline operations and improve
profitability, began in late March 1997 and are expected to be substantially
completed during fiscal 1998.
On March 12, 1997, the Company also 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 President and Chief Executive
Officer. On April 25, 1997, the Company's Board of Directors 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.
DIEDRICH COFFEE'S BUSINESS
The Company's retail stores accounted for 91.4% of net sales during
the fiscal year ended January 29, 1997. The Company's objective is to become
the leading retailer and wholesaler of coffee in each of its target markets by
selling the finest quality coffees and related products, and by providing a
superior level of customer service, thereby building a high degree of customer
loyalty and repeat business.
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. In order to
avoid the labor-intensive work that would be required to design completely
original coffeehouses for each new store opening, the Company will utilize one
of its numerous design layouts which allows the Company to tailor the
coffeehouse to the specific site and the surrounding neighborhood. The
coffeehouses feature varying amenities to promote this environment, such as
live music or outdoor patios where customers can enjoy their coffee.
The coffeehouse concept, however, is not limited to the physical
structure of the store. The relaxed and inviting environment is created in
large part by the employees in each coffeehouse. Employees are encouraged to
know their customers and are trained to promote customer service. To further
enhance the Company's brand awareness and market penetration, the Company
intends to expand the use of alternative concepts such as kiosks, carts and
smaller coffeehouses.
COFFEEHOUSE OPERATIONS. The typical Diedrich coffeehouse is staffed
with one to three managers, and a staff of ten to fifteen part- time hourly
employees from which the operating shifts are filled. The hours for each store
are established based upon the locations and customer demand, but typically are
from 6:00 a.m. to 9:00 p.m. (or later) in residential locations and from 6:00
a.m. to 6:00 p.m. in commercial locations. The store managers are overseen by
district managers, who are responsible for supervising the operations of up to
ten coffeehouses. District managers report to one of the two regional
directors of operations.
In addition to coffee beverages, all Diedrich coffeehouses serve a
select offering of light food items (bagels, croissants and pastries) and
dessert items (pastries and cakes). Management is continuously working with
its suppliers to enhance its selection of food items to complement beverage
sales. 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
1997, the Company's retail sales mix was 69.3% coffee beverages, 21.7% food
items, 6.5% whole bean coffee and 2.5% accessories and clothing.
2
<PAGE> 5
STRATEGIC ALLIANCES. The Company believes that development of
strategic alliances will enhance its brand equity while enabling it to take
advantage of an increased number of expansion opportunities. In fiscal 1996,
the Company opened its first two shared retail spaces utilizing interior
passways and open common walls. These spaces, shared with Barnes & Noble and
Sports Chalet, illustrate the Company's desire and ability to design unique
coffeehouses for its customers. While the Company does not have any current
commitments to develop additional shared spaces with these retailers, it is
actively pursuing similar relationships with other retailers. In addition, the
Company believes that it can increase brand awareness, revenues and earnings
through a focused program of full image co-branding with selected strategic
partners. Management is actively pursuing a program which would include full
branded execution of the Diedrich Coffee product line on the premises of the
Company's strategic partners.
In July 1996, the Company signed a franchise development agreement
with a company based in Singapore. The agreement calls for the development of
a total of at least thirty Diedrich coffeehouses in Singapore, Malaysia and
Indonesia within the next five years. The development agreement also provides
for the possible expansion into Japan, China, Hong Kong and other Asian
countries.
In February 1997, the Company announced an exclusive agreement to
establish full service Diedrich coffeehouses in select Home Savings of America
financial service centers in California. The Company has identified the first
three sites for the pilot program and expects that each of the sites will open
during fiscal year 1998.
OTHER DISTRIBUTION CHANNELS. The Company is actively seeking new
distribution channels for its products. The Company has engaged in wholesale
and mail order distribution of its products for more than five years. In
fiscal 1997, these activities accounted for 8.6% of total Company sales. The
Company intends to continue to pursue appropriate growth opportunities in the
wholesale and mail order distribution channels. In 1996, the Company
introduced a proprietary, branded coffee ice cream which it currently sells in
selected Diedrich coffeehouses. The Diedrich Coffee ice cream is also the base
component of the new Diedrich ice cream shakes, parfaits and floats, which were
introduced in Southern California stores in May 1996. The Company is exploring
distribution of this branded ice cream product through other retail channels,
although it has not entered into any binding commitments or agreements with
respect to such distribution.
ACQUISITIONS DURING FISCAL 1997
In February 1996, the Company consummated the acquisition of nineteen
retail coffeehouse locations from two separate specialty coffee chains.
Seventeen of the acquired stores are located in Denver, Colorado and the
remaining two stores are located in Houston, Texas. Each of the Denver and
Houston markets had been previously identified by the Company as targets for
expansion. Subsequently, one of the acquired stores in Denver was closed
during fiscal 1997. An additional number of the acquired stores are expected
to be closed in the first and second quarter of fiscal 1998 as part of the
store closures discussed above. As of January 29, 1997, all but one of the
acquired stores in operation had been converted to the Diedrich coffeehouse
format. The Company believes that the remaining stores in Denver continue to
position Diedrich Coffee as a major competitor in this market. The two Houston
locations are forming the basis for further expansion. In the fourth quarter
of fiscal 1997, the Company opened a third coffeehouse in Houston and has
recently entered into binding leases to open two new coffeehouses there. In
December 1996, the Company also acquired a single coffeehouse in Orange County,
California from an unrelated third party.
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 broad range of quality grades within each variety. While the
broader coffee market generally treats coffee as a fungible commodity, the
specialty coffee industry focuses on the highest grades of coffee. These
coffees are available in relatively small quantities. The Company seeks to
purchase the finest qualities and varieties of coffee by identifying the unique
characteristics and flavor of the
3
<PAGE> 6
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.
In any given month, 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. Diedrich Coffee purchases only premium grade arabica coffee
beans and believes these beans are the best available from each producing
region. The premium grade arabica bean is a higher quality variety than the
average grade arabica or robusta variety coffee bean. These lower quality
beans are typically found in non-specialty or mass-merchandised commercial
coffees. The Company contracts for future delivery of unroasted 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 coffee beans that are freshly roasted. Serving only
freshly roasted coffee is imperative because roasted coffee is a highly
perishable product which loses a significant amount of quality within two weeks
of being roasted. To address this concern, the Company has developed a
multiregional roasting approach to ensure freshness. The Company presently has
roasting facilities in its principal regions of operation, Orange County and
Denver; the Company plans to add a roasting facility in Houston, Texas. The
Company believes that its freshly roasted product is superior to product
offerings that use various types of packaging in an effort to preserve
freshness rather than more frequent roasting. The Company's coffee is
delivered to its coffeehouses promptly after roasting to enable the Company to
guarantee the freshness of each cup of coffee or whole coffee beans sold in its
coffeehouses.
COMPETITION
The Company competes directly against all restaurant and beverage
outlets that serve coffee and a growing number of espresso stands, carts and
stores. The company's whole bean coffees compete directly against specialty
coffees sold at retail through supermarkets, specialty retailers and a growing
number of specialty coffee stores. Both the Company's whole bean coffees and
its coffee beverages compete to a greater or lesser extent against all other
coffees on the market. The Company believes that its customers choose among
retailers primarily on the basis of quality, taste and convenience and, to a
lesser extent, on price.
Although competition in the specialty coffee market is currently
fragmented, the Company competes with Starbucks Corporation, the market's
largest retailer and other competitors who have significantly greater
financial, marketing and other resources than the Company. In addition to
these competitors, the attractiveness of the gourmet specialty coffee store
market could draw additional competitors with substantially greater financial,
marketing and operating resources than the Company.
The Company expects that competition for suitable sites for new stores
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, including Harvest Peak(TM) and
Ambrosia Blend(TM). The Company has also made application in Canada for
trademark protection of Flor de Apanas(R) and the related design. W.R. Grace &
Co. has alleged that Ambrosia Blend(TM) infringes one of its registered
trademarks. The Company disputes this allegation, but believes that if such
allegation were confirmed, it would not result in a material adverse effect on
the Company's financial position or results of operations.
4
<PAGE> 7
EMPLOYEES
At January 29, 1997, the Company employed a work force of 850 persons,
129 of whom are 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.
CERTAIN FACTORS AND TRENDS AFFECTING DIEDRICH COFFEE AND ITS BUSINESS
Certain disclosures made by the Company in this report and in other
reports and statements released by the Company are and will be forward-looking
in nature, such as comments which express the Company's opinion about trends
and factors which may impact future operating results. Disclosures which use
words such as the Company "believes," "anticipates," "expects" and similar
expressions are intended to identify forward-looking statements. Such
statements are subject to certain risks and uncertainties which 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.
LIMITED OPERATING HISTORY; HISTORY OF OPERATIONS. As of April 28,
1997, the Company operated forty-four coffeehouses, only eight of which had
been open more than two years. The Company had 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. Although the Company
has experienced significant recent revenue growth, there can be no assurance
that this growth will continue or that the Company will become profitable on a
quarterly or annual basis in the future. At January 29, 1997, the Company had
an accumulated deficit of $1,038,000. Management anticipates that
profitability will be adversely affected during fiscal 1998 due to the
restructuring charge planned for the first quarter.
RELIANCE ON GROWTH STRATEGY; ACQUISITIONS AND RAPID EXPANSION. The
Company has been pursuing an aggressive growth strategy, the success of which
will depend in large part upon its ability to open and operate new coffeehouses
and to operate a larger business profitably. From the end of the fiscal 1992
through fiscal 1997, the Company expanded the number of coffeehouses from three
to forty-seven. Although the Company has executed additional leases for future
coffeehouses, there can be no assurances that the Company will be successful in
developing and operating additional sites. As of January 29, 1997, the Company
had completed all but one of the conversions of acquired locations into
Diedrich coffeehouses. Prior to acquisition by the Company, these stores were
not profitable, and no assurances can be given that the Company's efforts to
operate these stores will be successful or result in profitability. Even if
the Company is successful in enhancing profitability, there can be no
assurances as to how long a period of time accomplishing such profitability
will take or the level of future profitability that can be achieved.
Acquisitions involve a number of risks, including the diversion of
management's attention, issues related to the assimilation of the operations
and personnel of the acquired businesses, and potential adverse effects on the
Company's operating results. The Company's acquisitions during fiscal 1997
have resulted in greater general and administrative expense and diversion of
management resources. Furthermore, the Company has not yet fully completed the
conversion of the Denver coffeehouses to the Company's financial and management
control systems. There can be no assurances that the Company will find
attractive acquisition candidates in the future, that acquisitions can be
consummated on acceptable terms, that any acquired companies can be integrated
successfully into the Company's operations or that any such acquisitions will
not have an adverse effect on the Company's financial condition or results of
operations.
The Company's planned expansion will present numerous operational and
competitive challenges to the Company's senior management and employees as new
potential sites are evaluated, developed and operated. Among other challenges,
the Company anticipates that expansion into new geographic regions will entail
opening multiple coffeehouses in those other regions in a relatively short
period of time. Such growth has and will continue to place significant demands
on the Company's management, working capital and financial and management
control systems. Failure to upgrade the Company's operating, management and
financial control systems or
5
<PAGE> 8
difficulties encountered during such upgrades could adversely affect the
Company's business and results of operations. The Company's results of
operations will be adversely affected if revenues do not increase sufficiently
to compensate for the increase in operating expenses resulting from expansion
and there can be no assurances that any expansion will be profitable or that it
will not adversely affect the Company's results of operations. In addition,
the success of any expansion plans will depend in part upon the Company's
ability to continue to improve and expand its management and financial control
systems, to attract, retain and motivate key employees and to raise additional
capital. There can be no assurances that the Company will be successful in
these regards.
Successful achievement of the Company's expansion plans will depend in
part upon its ability to: (i) select and compete successfully in new markets;
(ii) obtain suitable sites at acceptable costs in highly competitive real
estate markets; (iii) hire, train and retain qualified personnel; (iv)
integrate new stores into existing distribution, inventory control and
information systems; (v) expand roasting facilities in current and new regions
to enable freshly roasted coffee deliveries to coffeehouses in those regions;
and (vi) maintain quality control. The Company will incur significant start-up
costs in connection with entering new markets, including costs associated with
establishing new regional infrastructure that will permit the Company to
maintain its strategy of being a regional roaster. In addition, the opening of
additional coffeehouses in current markets could detract from sales at certain
of the Company's existing coffeehouses. 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. The proceeds of the initial public
offering and cash flow from operations were sufficient to fund the Company's
capital expenditures for the fourth quarter of fiscal 1997 and the first
quarter of fiscal 1998. In order to achieve and maintain the Company's
anticipated growth rate thereafter, including geographic expansion through
acquisitions or new store construction, the Company will need to incur debt or
issue additional equity (or hybrid) securities in future public or private
financings. There can be no assurances that any such additional financing will
be available on terms satisfactory to the Company, if at all.
FLUCTUATIONS IN AVAILABILITY AND COST OF UNROASTED COFFEE. The
Company depends upon both its outside brokers and its direct contacts with
exporters and growers in countries of origin for the supply of its primary raw
material, "green" or "unroasted" coffee. Coffee supply and price are subject
to significant volatility beyond the control or influence of the Company.
Although most coffee trades in the commodity market, coffee of the quality
sought by the Company tends to trade on a negotiated basis at a substantial
premium above commodity coffee pricing, depending upon the origin, supply and
demand at the time of purchase. Supply and price can be affected by multiple
factors in the producing countries, including weather and political and
economic conditions. In addition, unroasted coffee prices have been affected
in the past, and may be affected in the future, by the actions of certain
organizations and associations, such as the International Coffee Organization
or the Association of Coffee Producing Countries, that have historically
attempted to establish commodity price controls of unroasted coffee through
agreements establishing export quotas or restricting coffee supplies worldwide.
No assurance can be given that these organizations (or others) will not succeed
in raising unroasted coffee prices or that, in such events, the Company will be
able or choose to maintain its gross margins quickly by raising prices without
affecting demand. Increases in the price of unroasted coffee, or the
unavailability of adequate supplies of unroasted 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 unroasted
coffee requirements. 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.
LIMITATIONS AND VULNERABILITY AS A RESULT OF GEOGRAPHIC CONCENTRATION
OF MANAGEMENT'S EXPERIENCE. Until recently, management's experience was
limited to operating coffeehouses in Orange County, California.
6
<PAGE> 9
Because the Company's management has limited operating experience outside of
Orange County, California, there can be no assurance that the Company will be
successful in other geographic areas. For example, the Company's experience
with construction and development outside Orange County, California is limited,
which may increase associated risks of development and construction as the
Company expands. Expansion to other geographic areas may require substantially
more funds for advertising and marketing since the Company will not initially
have name recognition or word-of-mouth advertising as it does in Orange County,
California. The centralization of the Company's senior management in Southern
California may pose difficulties in terms of the Company's current and future
expansion to new geographic areas. In addition, the Company lacks experience
with distributors, suppliers and consumers located outside Southern California.
The combination of these factors could impede the growth of the Company and
could have an adverse effect on the Company's results of operations.
COMPETITION. The market for prepared specialty coffee beverages is
fragmented and highly competitive and competition is expected to continue to
increase substantially. The Company's coffee beverages compete directly
against all restaurant and beverage outlets that serve coffee as well as a
growing number of espresso stands, carts and stores. The Company's whole bean
coffees compete directly against specialty 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
General Foods, Inc., Proctor & Gamble Co. and Nestle S.A., many of which have
begun aggressively marketing gourmet coffee products. While the market for
specialty gourmet coffee stores remains fragmented, the Company competes
directly with Starbucks Corporation, the largest U.S. specialty coffee
retailer. Starbucks Corporation has substantially greater financial, marketing
and other resources than the Company and may also enter the markets in which
the Company currently operates or intends to expand.
One of the main areas of competition in the specialty coffee retail
store marketplace is in the procurement of prime retail store premises. The
Company competes against other specialty retailers and restaurants for store
sites, and there can be no assurance that management will be able to secure
adequate, additional sites at acceptable costs.
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.
LACK OF DIVERSIFICATION. The Company's business is centered around
essentially one product: coffee. To date, the Company's operations have been
limited to the purchase and roasting of raw coffee beans and the sale of whole
bean coffees and coffee beverages, together with other food products, through
its coffeehouses and its wholesale and mail order business. 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 forty-four
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 be subject to renewal with
scheduled rent increases, which could result in rents being above fair market
value.
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 shall 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 failures
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 which the Company may encounter in
renewing such licenses in one
7
<PAGE> 10
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 Lawrence Goelman (Chairman and interim
Chief Executive Officer), Martin Diedrich (Vice Chairman and Chief Coffee
Officer) and Kerry Coin (President and Chief Operating 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. Diedrich and Coin,
which include, among other things, provisions restricting them from competing
with the Company during the terms of their respective agreements. The Company
has also entered into a stock option agreement with Mr. Coin. 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 members of senior management to manage
anticipated growth, but there can be no assurance that the Company will be able
to recruit or retain additional members of senior management on terms suitable
to the Company.
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 expires on May 31, 1999. In addition, as of January 29, 1997, the
Company was a party to various leases for a total of forty-six retail
locations. 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 28, 1997, the
Company was not a party to any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the year ended January 29, 1997.
8
<PAGE> 11
ITEM I-A. EXECUTIVE OFFICERS AND KEY EMPLOYEES OF DIEDRICH COFFEE, INC.
The executive officers and other key employees of the Company, and
their ages as of April 28, 1997, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S) HELD
- ---- --- ----------------
<S> <C> <C>
Martin R. Diedrich 38 Vice Chairman of the Board, Secretary and Chief Coffee Officer
Lawrence Goelman(1) 56 Chairman of the Board and Interim Chief Executive Officer
Steven A. Lupinacci(2) 44 Former President, Chief Executive Officer, Chief Financial Officer and
Director
Kerry W. Coin 49 President and Chief Operating Officer
John B. Bayley 48 Acting Vice President, Finance and Controller
Patrick D. Inaba 35 Manager of Store Construction
Edwin P. Ott 38 Regional Director of Operations - Colorado and Texas
Jeanne M. Hood 44 Regional Director of Operations - California
</TABLE>
- --------------------
(1) Mr. Goelman was appointed as interim President and Chief Executive
Officer by the Board of Directors, effective March 12, 1997. On April
25, 1997, the Company's Board of Directors appointed Kerry W. Coin to
the office of President and appointed Mr. Goelman Chairman of the
Board.
(2) Mr. Lupinacci resigned as President, Chief Executive Officer, Chief
Financial Officer and Director, effective March 12, 1997.
MARTIN R. DIEDRICH has been the Secretary and Chief Coffee Officer and
has served on the Company's Board of Directors since its incorporation. He
served as Chairman of the Board from January 1996 until April 1997 and also
presently serves on the Real Estate Committee. Mr. Diedrich is an
internationally recognized specialty coffee expert who is a frequent speaker
at industry functions.
LAWRENCE GOELMAN has been the interim Chief Executive Officer since
March 1997 and has served as a member of the Board of Directors since October
1996. He was elected as Chairman of the Board in April 1997. Most recently,
Mr. Goelman served as President and Chief Executive Officer of Pinnacle Micro,
Inc. from May 1996 to December 1996. Mr. Goelman has also been a managing
partner of Tremont Partners, Inc. since June 1995. Prior to that, he served as
Chairman, President and Chief Executive Officer of CostCare, Inc. for fourteen
years. In addition to his present positions with the Company, Mr. Goelman is
also a director of Urohealth, Inc.
STEVEN A. LUPINACCI served as President, Chief Executive Officer and
Chief Financial Officer of the Company from December 1992 until March 1997.
Mr. Lupinacci also served as a member of the Board of Directors from December
1992 until March 1997, with the exception of the a six-month period from
January to July 1996. From July 1990 to December 1992, Mr. Lupinacci was a
private investor and prior to July 1990, he was a partner with Price Waterhouse
where his practice primarily focused on mergers and acquisitions.
KERRY W. COIN was appointed President and Chief Operating Officer by
the Company's Board of Directors in April 1997. Mr. Coin joined the Company as
Executive Vice President and Chief Operating Officer in August 1996. From May
1996 until joining the Company, he was President and General Manager of the
restaurant subsidiary of Synerdyne Corporation. From January 1994 to February
1996, he was President and Chief Executive
9
<PAGE> 12
Officer of Boston West, LLC, a franchisee of Boston Chicken, Inc. From
February 1993 to January 1994, Mr. Coin served as Vice President of Strategic
Development for CKE Restaurants, Inc., a Southern California-based chain of
quick-service restaurants, and from June 1987 until February 1993, he was a
principal at A.T. Kearney, Inc., a private management consulting firm.
JOHN B. BAYLEY was appointed Acting Vice President, Finance and
Controller in April 1997. Mr. Bayley joined the Company in November 1996 as
Controller. From January 1996 until joining the Company, he was self-employed
as a consultant. He served as Vice President, Treasurer of Sizzler
International, Inc. from February 1991 through December 1995.
PATRICK D. INABA joined the Company in January 1993 as a general
manager of one of the Diedrich coffeehouses. In February 1995, Mr. Inaba was
promoted to Manager of New Store Operations and in October 1995, he assumed the
position of Manager of Store Construction. Prior to joining the Company, Mr.
Inaba served as Director of Operations at Wahoo's Fish Taco from 1989. As
Director of Operations, Mr. Inaba designed menus and recipes, operating
systems, purchasing systems, marketing and advertising programs and staff
training procedures.
EDWIN P. OTT joined the Company in January 1993 as Controller and was
promoted to a Regional Director of Operations in November 1996. From 1991
until joining the Company, Mr. Ott served as a law clerk for the law firm of
Hannan & Cote. Prior to that time, Mr. Ott worked for twelve years in the
restaurant industry serving as a Promotions Accountant for Taco Bell (a
division of PepsiCo), Accounting Manager/Financial Analyst for the Sizzler
Restaurant Division of Collins Foods International, Financial Analyst for El
Torito Restaurants (a division of W.R. Grace) and the Controller for
International Onion, Inc.
JEANNE M. HOOD joined the Company in January 1996, assisting in the
conversion of the acquired stores in the Denver and Houston markets. She was
promoted to a Regional Director of Operations in November 1996. From January
1984 to June 1995, she was employed by Au Bon Pain, where she served as
Regional Director of Operations during the last six years.
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, the date on which the Company's shares first became
publicly traded. 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) $12.00 $9.50
Fourth Quarter $10.50 $8.00
</TABLE>
At January 29, 1997, there were 5,391,650 shares outstanding and
approximately 53 stockholders of record of Diedrich Coffee's Common Stock. The
Company has not paid dividends on its Common Stock and does not anticipate
paying dividends in the foreseeable future.
10
<PAGE> 13
ITEM 6. SELECTED FINANCIAL DATA.
The following five-year selected financial data should be read in
conjunction with the Company's financial statements. The financial data as of
and for the year ended January 31, 1993 was derived from unaudited financial
statements. The unaudited financial statements include all adjustments,
consisting of normal recurring accruals, which the Company considers necessary
for a fair presentation of the financial position and results of operations for
these periods.
<TABLE>
<CAPTION>
YEAR ENDED
JANUARY 29, YEARS ENDED JANUARY 31,
----------- -------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
($ in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Net sales:
Retail $18,118 $ 8,879 $6,673 $3,912 $2,906
Wholesale and other 1,694 1,365 918 502 33
------- ------- ------ ------ ------
Total 19,812 10,244 7,591 4,414 2,939
------- ------- ------ ------ ------
Cost and expenses:
Cost of sales and related
occupancy costs 9,263 4,409 3,164 1,796 1,140
Store operating expenses 8,280 3,520 2,584 1,594 1,064
Other operating expenses 240 277 282 146 6
Depreciation and amortization 1,054 354 255 102 143
General and administrative expenses 2,003 1,335 851 809 762
------- ------- ------ ------ ------
Total 20,840 9,895 7,136 4,447 3,115
------- ------- ------ ------ ------
Operating income (loss) (1,028) 349 455 (33) (176)
Interest expense and other, net 86 34 78 55 72
------- ------- ------ ------ ------
Income (loss) before income taxes (1,114) 315 377 (88) (248)
Income tax provision (benefit) (128) 129 53 1 (15)
------- ------- ------ ------ ------
Net income (loss) $ (986) $ 186 $ 324 $(89) $ (233)
------- ------- ------ ------ ------
Income (loss) per common and common (.22)
equivalent share (1)
Pro forma net income per common
and common equivalent share (2) .06
BALANCE SHEET DATA
Working capital (deficiency) $ 1,949 $ (53) $ (418) $ (564) $ 470
Total assets 17,471 5,316 2,503 2,163 1,790
Long-term obligations, less current
portion -- 829 471 544 453
Total stockholders' equity 14,898 3,304 973 649 938
</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.
11
<PAGE> 14
(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 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.
12
<PAGE> 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
The first retail store operating under the name of Diedrich Coffee
commenced operations in 1972. At the conclusion of fiscal 1997, the Company
operated a total of forty-seven coffeehouses 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, 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 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 ("Brothers") for cash consideration of $1,350,000. Ten of
the stores acquired from Brothers were located in Denver, Colorado and two were
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. As of January
29, 1997, all of the acquired locations in Denver and Houston, except one, were
converted and re-opened under the Diedrich trade name. Conversion costs were
approximately $1,219,000.
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.
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 caption "Certain
Factors and Trends Affecting Diedrich Coffee and Its Business" contained in
Item 1 of this Annual Report on Form 10-K.
RESULTS OF OPERATIONS
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.
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.
13
<PAGE> 16
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 are 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
and/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 is currently adding 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.
These increases were 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.
Income taxes. Net operating losses generated in 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
29, 1997, a net operating loss for Federal income tax purposes of $756,000
remains to be utilized against future taxable income for years through fiscal
2012, 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 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.
YEAR ENDED JANUARY 31, 1996 COMPARED TO YEAR ENDED JANUARY 31, 1995
Net sales. Net sales for the year ended January 31, 1996 were
$10,244,000, an increase of $2,653,000, or 35.0% over net sales for fiscal
1995 which were $7,591,000. Retail sales increased 33.1% to $8,879,000 in
fiscal 1996 from $6,673,000 in fiscal 1995. The increase resulted from a
combination of sales growth at existing locations and sales from new locations.
Comparable fiscal 1996 over fiscal 1995 store sales for the seven stores opened
prior to fiscal 1995 showed an increase of 10.2% primarily due to an increased
number of sales transactions. During fiscal 1996, the Company added five new
coffeehouses. These five new stores contributed
14
<PAGE> 17
$1,451,000 to fiscal 1996 sales. The Company's retail sales mix for fiscal
1996 included whole bean coffee (8.6%), brewed coffee and espresso beverages
(70.6%), food items (18.9%), and accessories and clothing (1.9%).
Wholesale and mail order sales combined increased 48.8% to $1,365,000
in fiscal 1996 from $917,000 in fiscal 1995. The increase was due to a more
active sales effort as well as the increased brand recognition resulting from
the addition of new coffeehouse locations within the Southern California
market.
Cost of sales and related occupancy costs. Cost of roasted coffee,
dairy, food, paper and other bar supplies, accessories and clothing (cost of
sales) and rent (related occupancy costs) for the Company increased to
$4,409,000 for the year ended January 31, 1996 from $3,164,000 for the
comparable period in 1995, an increase of $1,245,000 or 39.4%. As a percentage
of net sales, cost of sales and related occupancy costs increased to 43.0% for
the year ended January 31, 1996, from 41.7% for the comparable period in 1995.
The dollar increase was primarily due to the addition of five new locations
during 1996. The percentage increase was primarily due to a shift of the sales
mix resulting from the addition of two stores which provide more extensive food
menus combined with an increase in the cost of paper, cups, and bar supplies
which resulted from an industrywide price increase in the cost of paper.
Store operating expenses. Store operating expenses increased to
$3,520,000 for the year ended January 31, 1996, from $2,584,000 for the
comparable period in 1995. The $936,000 or 36.2% increase was due primarily to
the addition of five locations in 1996. Store operating expenses consist of
the store-level components of direct and indirect labor, marketing, utilities,
maintenance, supplies, district supervision and overhead, and pre-opening
expenses. Pre-opening expenses are comprised of training labor, advertising
and marketing and supplies which are accumulated and expensed when a store is
opened. In fiscal 1996, store operating expenses as a percent of retail net
sales increased to 39.6% from 38.7% in the prior year. The percentage increase
was due to an increase in pre-opening expenses over the prior year which was
partially offset by a decrease in store labor.
Other operating expenses. Other operating expenses decreased to
$277,000 for fiscal 1996 from $283,000 in the comparable period in 1995. Other
operating expenses include the wholesale division operating costs which consist
principally of labor, advertising and supplies. These expenses decreased, as a
percent of the net sales from the wholesale division, to 20.3% from 30.8% as a
result of increased sales volume.
Depreciation and amortization. Depreciation and amortization
increased to $354,000 for fiscal 1996 from $255,000 for fiscal 1995. As a
percentage of net sales, depreciation and amortization increased to 3.5% from
3.4% in the prior year reflecting the early sales growth stages for the five
stores added during the year.
General and administrative expenses. General and administrative
expenses increased to $1,335,000 for fiscal 1996 from $851,000 for fiscal 1995.
As a percentage of net sales, general and administrative expenses increased to
13.0% from 11.2% principally due to the additions to the infrastructure in
anticipation of growth and also due to higher occupancy costs as a result of
the move of the Company's headquarters to larger facilities. Infrastructure
increases consisted primarily of additional salaries associated with personnel
additions in the real estate, recruiting and training and accounting
departments.
Interest expense. Interest expense decreased to $50,000 for fiscal
1996 from $83,000 for fiscal 1995. The $33,000 or 39.4% decrease was due
primarily to lower average debt outstanding during the year.
Net income. Net income decreased to $186,000 for fiscal 1996 from
$324,000 in the comparable period in fiscal 1995, a decrease of $138,000 or
42.7%. As a percentage of net sales, net income decreased to 1.8% for fiscal
1996 from 4.3% for fiscal 1995. The decrease in net income is primarily
attributable to increased general and administrative expenses resulting from
the Company's move to a larger principal executive office and the addition of
corporate office personnel in anticipation of the Company's expansion plans.
15
<PAGE> 18
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, 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
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 is
using 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, as of January 29, 1997, of $1,949,000
compared to a deficiency of $53,000 at January 31, 1996. Cash provided by
operating activities totaled $113,000 for the year ended January 29, 1997 as
compared to $363,000 for the year ended January 31, 1996.
Net cash used in investing activities for the year ended January 29,
1997 totaled $9,729,000. This included capital expenditures for property and
equipment of $7,813,000 and the acquisition of the Acquired Stores of
$1,916,000. Capital expenditures included the costs to open fifteen new
coffeehouses, complete the conversion of seventeen of the Acquired Stores to
the Diedrich coffeehouse format and purchase roasting and packaging equipment.
Net cash provided by financing activities for the year ended January
29, 1997 totaled $11,593,000. This is due primarily to the net proceeds from
the initial public offering.
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 $6 million to $8 million. The Company presently has no long-term
debt and is evaluating various secured and unsecured financing alternatives.
In July 1996, the Company entered into a revolving line of credit with
Bank of America which 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 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.
The Company has no outstanding borrowings under this commitment.
The Company believes that cash from operations, existing working
capital and the stockholder line of credit commitment will be sufficient to
satisfy the Company's working capital needs for the anticipated operating
levels for the next twelve months. However, the Company anticipates it will
need to seek additional financing or equity to fund additional acquisitions or
capital expenditures for new retail stores during the next twelve months.
16
<PAGE> 19
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.
The information required by this item has been previously reported by
the Company under Item 4 of the Current Report on Form 8-K, filed with the
Securities and Exchange Commission on January 24, 1997.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information concerning the Company's executive officers is included
under the caption "Executive Officers and Key Employees of Diedrich Coffee,
Inc." in Part I, following Item 4. Other 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 26, 1997 (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 29, 1997.
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."
17
<PAGE> 20
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*
3.1 Certificate of Incorporation of the Company*
3.2 Bylaws of the Company*
4.1 Purchase Agreement for Series A Preferred Stock dated
as of December 11, 1992 by and among Diedrich Coffee,
Martin R. Diedrich, Donald M. Holly, SNV Enterprises
and D.C.H., L.P.*
4.2 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.*
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 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)*
10.10 Kerry W. Coin Employment Agreement, dated August 26,
1996*
10.11 Letter Agreement between Diedrich Coffee and Lawrence
Goelman, dated April 23, 1997, regarding appointment
as Interim President and Chief Executive Officer
27 Financial Data Schedule
---------------------
* 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.
18
<PAGE> 21
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K with the
Securities and Exchange Commission during the fourth quarter
of the fiscal year ended January 29, 1997. On January 24,
1997, the Company filed a Current Report on Form 8-K,
reporting Items 4 and 7, in connection with the dismissal of
independent accountants BDO Seidman, LLP as the principal
accountant to audit the Company's financial statements and the
engagement of independent accountants KPMG Peat Marwick LLP as
such principal accountant. In addition, 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.
19
<PAGE> 22
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 29, 1997 By: /s/ LAWRENCE GOELMAN
-----------------------------------
Lawrence Goelman
Chairman of the Board of Directors
and Interim Chief Executive Officer
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/ LAWRENCE GOELMAN
- -------------------------- Chairman of the Board April 29, 1997
Lawrence Goelman of Directors and
Interim Chief Executive
Officer
(Principal Executive
Officer)
/s/ JOHN B. BAYLEY
- -------------------------- Acting Vice President, April 29, 1997
John B. Bayley Finance and Controller
(Principal Financial and
Accounting Officer)
/s/ MARTIN R. DIEDRICH
- -------------------------- Vice Chairman of the Board April 29, 1997
Martin R. Diedrich of Directors and Secretary
- -------------------------- Director April 29, 1997
Peter Churm
/s/ PAUL C. HEESCHEN
- -------------------------- Director April 29, 1997
Paul C. Heeschen
</TABLE>
20
<PAGE> 23
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> 24
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Diedrich Coffee, Inc.:
We have audited the accompanying balance sheet of Diedrich Coffee, Inc. as of
January 29, 1997, and the related statements of operations, stockholders'
equity, and cash flows for the year 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 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 financial position of Diedrich Coffee, Inc. as of
January 29, 1997, and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Orange County, California
March 14, 1997 except for the
penultimate paragraph of note 5, which
date is April 21, 1997 and note 10,
which date is April 29, 1997
F-2
<PAGE> 25
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Diedrich Coffee, Inc.
Irvine, California
We have audited the accompanying balance sheet of Diedrich Coffee,
Inc. as of January 31, 1996, and the related statements of operations,
stockholders' equity and cash flows for each of the two years in the period
ended January 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Diedrich Coffee,
Inc. at January 31, 1996, and the results of its operations and its cash flows
for each of the two years in the period ended January 31, 1996 in conformity
with generally accepted accounting principles.
BDO SEIDMAN, LLP
Costa Mesa, California
March 11, 1996
F-3
<PAGE> 26
DIEDRICH COFFEE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 29, JANUARY 31,
ASSETS 1997 1996
------------ -----------
<S> <C> <C>
Current assets:
Cash $ 2,071,904 $ 94,659
Accounts receivable 210,363 134,573
Inventories 1,615,145 645,493
Deferred income taxes -- 14,079
Prepaid expenses 185,063 106,367
Income taxes receivable 285,072 12,890
------------ -----------
Total current assets 4,367,547 1,008,061
Property and equipment, net 11,962,752 4,100,898
Costs in excess of net assets acquired, net 796,178 --
Deferred income taxes -- 34,113
Other assets 344,942 172,600
------------ -----------
Total assets $ 17,471,419 $ 5,315,672
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ -- $ 117,538
Notes payable -- 39,398
Accounts payable 1,800,292 635,428
Accrued compensation 417,028 184,891
Accrued expenses 201,487 32,237
Income taxes payable -- 51,235
------------ -----------
Total current liabilities 2,418,807 1,060,727
Long-term debt, less current portion -- 829,320
Deferred rent 154,384 121,144
------------ -----------
Total liabilities 2,573,191 2,011,191
------------ -----------
Stockholders' equity:
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 none at January 29, 1997 and 1,000,000 at January
31, 1996 -- 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 none at January 29, 1997 and 1,608,568 shares at
January 31, 1996 -- 2,225,813
Preferred stock, $.01 par value; authorized, 3,000,000 shares;
no shares issued and outstanding -- --
Common stock, $.01 par value; authorized 25,000,000 shares;
issued and outstanding 5,391,650 shares at January 29, 1997 and
1,183,082 shares at January 31, 1996 53,917 11,831
Additional paid-in capital 15,882,046 318,867
Accumulated deficit (1,037,735) (52,030)
------------ -----------
Total stockholders' equity 14,898,228 3,304,481
------------ -----------
Commitments and contingencies
Subsequent events
Total liabilities and stockholders' equity $ 17,471,419 $ 5,315,672
============ ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 27
DIEDRICH COFFEE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JANUARY 29, 1997 JANUARY 31, 1996 JANUARY 31, 1995
---------------- ---------------- ----------------
<S> <C> <C> <C>
Net sales :
Retail $ 18,117,720 $ 8,878,904 $ 6,673,330
Wholesale and other 1,694,686 1,365,271 917,423
------------ ------------ -----------
Total 19,812,406 10,244,175 7,590,753
------------ ------------ -----------
Cost and expenses:
Cost of sales and related
occupancy costs 9,263,286 4,409,485 3,163,812
Store operating expenses 8,279,621 3,520,140 2,583,998
Other operating expenses 240,227 276,788 282,603
Depreciation and amortization 1,053,770 353,840 254,708
General and administrative
expenses 2,003,483 1,334,694 851,011
------------ ------------ -----------
Total 20,840,387 9,894,947 7,136,132
------------ ------------ -----------
Operating income (loss) (1,027,981) 349,228 454,621
Interest expense (189,549) (50,187) (82,788)
Interest and other income 103,718 15,814 4,702
------------ ------------ -----------
Income (loss) before income (1,113,812) 314,855 376,535
taxes
Income tax provision (benefit) (128,107) 129,211 52,704
------------ ------------ -----------
Net income (loss) $ (985,705) $ 185,644 $ 323,831
------------ ------------ -----------
Loss per common and common
equivalent share:
Net loss $(.22)
=====
Weighted average shares
outstanding 4,414,000
=========
Pro forma information:
Net income per common and
common equivalent share $ .06
=====
Weighted average shares
outstanding 3,153,000
=========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 28
DIEDRICH COFFEE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Series A Preferred Stock Series B Preferred Stock Common Stock
------------------------ ------------------------ ------------
Additional
Paid In
Shares Amount Shares Amount Shares Amount Capital
------ ------ ------ ------ ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 31, 1994 1,0000,000 $800,000 -- $ -- 1,127,660 $11,277 $ 135,723
Net income for the year -- -- -- -- -- -- --
----------- -------- --------- ---------- --------- ------- ---------
Balance, January 31, 1995 1,000,000 800,000 -- -- 1,127,660 11,277 135,723
Repurchase of common stock -- -- -- -- (229,787) (2,298) (14,004)
Issuance of Series B preferred
stock -- -- 1,608,568 2,225,813 -- -- --
Common stock issued -- -- -- -- 285,209 2,852 197,148
Net income for the year -- -- -- -- -- -- --
----------- -------- --------- ---------- --------- ------- ---------
Balance, January 31, 1996 1,000,000 800,000 1,608,568 2,225,813 1,183,082 11,831 318,867
Initial public offering, net -- -- -- -- 1,600,000 16,000 12,563,452
Conversion of Series A and
B preferred stock (1,000,000) (800,000) (1,608,568) (2,225,813) 2,608,568 26,086 2,999,727
Net loss for the year -- -- -- -- -- -- --
----------- -------- --------- ---------- --------- ------- ---------
Balance, January 29, 1997 -- $ -- -- $ -- 5,391,650 $53,917 $15,882,046
=========== ======== ========= ========== ========= ======== ===========
</TABLE>
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
Accumulated Stockholder
Deficit Receivable Total
----------- ----------- -----
<S> <C> <C> <C>
Balance, January 31, 1994 $(272,807) $(25,000) $649,193
Net income for the year 323,831 -- 323,831
--------- -------- --------
Balance, January 31, 1995 51,024 (25,000) 973,024
Repurchase of common stock (288,698) 25,000 (280,000)
Issuance of Series B preferred
stock -- -- 2,225,813
Common stock issued -- -- 200,000
Net income for the year 185,644 -- 185,644
---------- -------- ---------
Balance, January 31, 1996 (52,030) -- 3,304,481
Initial public offering, net -- -- 12,579,452
Conversion of Series A and
B preferred stock -- -- --
Net loss for the year (985,705) -- (985,705)
---------- -------- ---------
Balance, January 29, 1997 $(1,037,735) $ -- $14,898,228
=========== ======== ===========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 29
DIEDRICH COFFEE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JANUARY YEAR ENDED JANUARY YEAR ENDED JANUARY
29, 1997 31, 1996 31, 1995
------------------ ------------------ ------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (985,705) $ 185,644 $ 323,831
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 1,053,770 353,840 254,708
Deferred income taxes 48,192 (8,218) (39,974)
Changes in assets and liabilities:
Accounts receivable (75,790) (68,031) (2,924)
Inventories (969,652) (345,390) (123,623)
Prepaid expenses (78,696) (35,614) (42,570)
Income taxes receivable (272,182) 13,095 6,541
Other assets (121,881) (12,768) (13,301)
Accounts payable 1,164,864 218,371 (97,624)
Accrued compensation 232,137 83,505 67,651
Accrued expenses 136,250 4,572 (1,371)
Income taxes payable (51,235) (37,042) 88,277
Deferred rent 33,240 10,766 27,592
----------- ----------- ---------
Net cash provided by operating activities 113,312 362,730 447,213
----------- ----------- ---------
Cash flows from investing activities:
Capital expenditures for property and equipment (7,813,263) (2,673,634) (342,110)
Acquisition of coffeehouses (1,916,000) -- --
----------- ----------- ---------
Net cash used by investing activities (9,729,263) (2,673,634) (342,110)
----------- ----------- ---------
Cash flows from financing activities: --
Proceeds from notes payable 10,000 -- 13,500
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 1,622,520 580,000 62,446
Principal payments on long-term debt (2,569,378) (179,134) (144,082)
Proceeds from issuance of common stock, net 12,579,452 -- --
Proceeds from sale of preferred stock -- 2,225,813 --
Repurchase of common stock -- (280,000) --
----------- ----------- ---------
Net cash provided (used) by financing activities 11,593,196 2,346,679 (68,136)
----------- ----------- ---------
Net increase in cash 1,977,245 35,775 36,967
Cash at beginning of year 94,659 58,884 21,917
----------- ----------- ---------
Cash at end of year $ 2,071,904 $ 94,659 $ 58,884
=========== =========== =========
Supplemental disclosure of cash flow information :
Cash paid during year for:
Interest $ 164,140 $ 50,187 $ 82,384
=========== =========== =========
Income taxes $ 108,773 $ 89,458 $ 4,440
=========== =========== =========
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE> 30
DIEDRICH COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 29, 1997, JANUARY 31, 1996 AND JANUARY 31, 1995
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. 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 which 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 deferred and expensed upon the opening of
the coffeehouse.
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> 31
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
The calculation of net income (loss) per share was determined
by dividing the net income (loss) by the weighted average common and common
equivalent shares outstanding when dilutive. In accordance with Securities and
Exchange Commission Staff Accounting Bulletin No. 83, shares issued and share
options granted within one year of the initial public offering ("IPO") have
been included in the calculation of common share equivalents, using the
treasury stock method to determine the dilutive effect of the issuances, as if
they were outstanding for all periods presented even if they were antidilutive.
The calculation of common share equivalents assumes that the proceeds of common
shares and share options issued within one year of the IPO were used to
repurchase common shares at the IPO price of $9.50 per share. Primary earnings
per share approximates fully diluted earnings per share for all periods
presented. Earnings per share for the year ended January 31, 1995 is not
presented due to the noncomparable capital structure.
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. The Company has not yet
determined the impact of the implementation of SFAS No. 128.
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 for the year ended January 31, 1996
as such amount is based on a calculation that is not reflective of the
Company's ongoing capital structure.
Goodwill
Goodwill, which represents the excess of purchase price over
fair value of net assets acquired is 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> 32
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 amount of the assets exceed the
fair value of the assets. Assets to be disposed of are reported at the lower
of the carrying amount of fair value less costs to sell. Adoption of the
statement did not have a material impact on the Company's financial position,
results of operations or liquidity.
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 $157,000 for the year ended January 29, 1997. Advertising and
promotion costs were insignificant for the years ended January 31, 1996 and
1995.
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> 33
DIEDRICH COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Reclassifications
Certain amounts in the prior years have been reclassified to
conform to the current year presentation.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JANUARY 29, JANUARY 31,
1997 1996
------------ -----------
<S> <C> <C>
Unroasted coffee $ 357,255 $ 128,369
Roasted coffee 90,536 24,274
Accessory and specialty items 454,946 74,299
Other food, beverage and supplies 712,408 418,551
----------- ---------
$ 1,615,145 $ 645,493
=========== =========
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment, net, consist of the following:
<TABLE>
<CAPTION>
JANUARY 29, JANUARY 31,
1997 1996
------------ ------------
<S> <C> <C>
Leasehold improvements $ 7,528,844 $ 2,107,408
Equipment 4,085,947 1,542,436
Furniture and fixtures 2,121,702 772,936
Construction in progress 144,068 609,305
------------ ------------
13,880,561 5,032,085
(1,917,809) (931,187)
------------ ------------
Accumulated depreciation and amortization $ 11,962,752 $ 4,100,898
============ ============
</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.
The following pro forma results of operations assume the
acquisition of the Brothers coffeehouses occurred on February 1, 1995. The pro
forma results have been prepared for comparative purposes only and do not
purport to indicate the results of operations which would actually have
occurred had the combinations been in effect during the year ended January 31,
1996, or which may occur in the future. The pro forma results are as follows:
<TABLE>
<CAPTION>
Year ended
January 31, 1996
(Unaudited)
----------------
<S> <C>
Net sales $ 12,600,572
Net loss $ (2,758,202)
Net loss per share $ (.89)
Shares used in per share calculation 3,087,000
</TABLE>
The pro forma results of operations for the year ended January
29, 1997 did not differ materially from the historical results for such period
and, accordingly, have not been presented.
F-11
<PAGE> 34
DIEDRICH COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
On February 15, 1996, the Company purchased substantially all of the
assets of seven bakery-espresso cafes from an unrelated third party for cash
consideration of $450,000. This acquisition was immaterial and, accordingly,
pro forma results of operations have not been presented.
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. This acquisition was
immaterial and, accordingly, pro forma results of operations have not been
presented.
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.
Accumulated amortization and amortization expense totaled approximately $52,000
as of and for the year ended January 29, 1997.
5. DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JANUARY 29, JANUARY 31,
1997 1996
----------- -----------
<S> <C> <C>
$750,000 bank revolving line of credit, collateralized by
substantially all assets with interest at prime plus .75%.
Interest payable monthly; all outstanding principal and
accrued interest due and payable in October 1996. In
February 1996, the line of credit was amended and the
borrowing base was increased to $2,000,000 and the due
date was extended to February 1997. Repaid in fiscal
1997. $ -- $ 500,000
Notes payable to landlord, payable in monthly installments
aggregating $5,213 including interest at 15% per annum
through various dates ending December 2008. Notes are
collateralized by certain property and equipment used in
coffeehouse operations and personally guaranteed by a
stockholder/ officer of the Company. Repaid in fiscal
1997. -- 309,013
Note payable bearing interest at 12% per annum; payable in
monthly principal and interest installments of $3,725; all
unpaid principal and interest due July 1, 1997. Repaid in
fiscal 1997. -- 61,089
Unsecured notes payable to related parties, payable in
monthly installments aggregating $3,821 including 12%
interest, due through March 1997. Repaid in fiscal 1997. -- 49,699
Other. Repaid in fiscal 1997. -- 27,057
------- ----------
946,858
Less: current portion -- 117,538
-------- ----------
$ -- $ 829,320
======== ==========
</TABLE>
F-12
<PAGE> 35
DIEDRICH COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
On May 20, 1996, the Company entered into a revolving promissory note
with a stockholder. The note provided for borrowings up to $2,000,000 with
interest accruing at the prime rate plus 3%. All outstanding principal and
accrued interest was repaid in full from the proceeds of the IPO.
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%. Upon consummation of the Company's IPO, the maturity date was extended
to October 1, 1997 and the maximum borrowings were increased to $6 million. As
of January 29, 1997, the Company had no outstanding borrowings under this
revolving line of credit. As of January 29, 1997, the Company was in default
of certain covenants under the bank revolving line of credit. On April 21,
1997, the bank revolving line of credit was canceled.
In March 1997, the Company received a commitment for a $1 million line
of credit on arm's-length terms from a significant stockholder of the Company.
The Company has no outstanding borrowings under this commitment.
6. RELATED PARTY RECEIVABLE
The Company had an amount receivable pursuant to a
promissory note from a stockholder/officer aggregating $35,546 at January 31,
1996, which is included in other assets in the accompanying fiscal 1996 balance
sheet. The promissory note accrued interest at a rate of 5.19% and was repaid
in full during fiscal 1997.
7. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
As of January 29, 1997, the Company leases warehouse and
office space in Irvine, California, warehouse space in Denver, Colorado, and
forty-six 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.
Future minimum lease payments under non-cancelable operating leases as of
January 29, 1997 are as follows:
<TABLE>
<CAPTION>
Year Ending January
-------------------
<S> <C>
1998............................... $ 2,094,000
1999............................... 2,068,000
2000............................... 2,034,000
2001............................... 1,773,000
2002............................... 1,493,000
Thereafter......................... 3,822,000
-----------
$13,284,000
===========
</TABLE>
Subsequent to January 29, 1997, the Company entered into lease agreements
for additional coffeehouses in addition to the lease commitments above. The
locations, certain of which have not been constructed, generally require rental
payments to begin upon occupancy. The new leases will require minimum rental
payments aggregating approximately $1,468,000 over the lives of the leases.
Rent expense under operating leases approximated $1,772,000, $667,000 and
$479,000 in the years ended January 29, 1997 and January 31, 1996 and 1995,
respectively.
F-13
<PAGE> 36
DIEDRICH COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
PURCHASE COMMITMENTS
As of January 29, 1997, the Company had entered into fixed price
purchase contracts for unroasted coffee aggregating approximately $433,000.
Such contracts are generally short-term in nature and the Company believes that
their cost approximates fair market value.
CONTINGENCIES
The Company is subject to certain legal proceedings and claims arising
in connection with its business. In the opinion of management, the ultimate
resolution of these claims will not have a material adverse effect on the
Company's financial position, results of operations or liquidity.
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 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 475,000 shares have been reserved for issuance under the Incentive Plan.
The Incentive Plan is administered by a committee of the Board of Directors,
who determine the recipients and terms of the awards granted. Under the
Incentive Plan, options to purchase common stock may be granted with an
exercise price below market value of such stock on the grant date.
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.
F-14
<PAGE> 37
DIEDRICH COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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: (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.
The pro forma net income (loss) and net income (loss) per share
calculated pursuant to the provisions of SFAS No. 123 would not be
significantly different from amounts reported and therefore are not included
herein.
Information regarding the Company's stock option plans is summarized below:
<TABLE>
<CAPTION>
WEIGHTED 1996 WEIGHTED 1996 WEIGHTED
1995 AVERAGE DIRECTORS AVERAGE STOCK AVERAGE
STOCK EXERCISE STOCK EXERCISE INCENTIVE EXERCISE
OPTIONS PRICE OPTION PLAN PRICE OPTION PLAN PRICE
------- -------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Shares authorized 131,350 125,000 475,000
Shares under option
Outstanding at:
January 31, 1995
Granted 131,350 $1.45 ---
Exercised --- --- ---
Forfeited --- --- ---
Outstanding at:
January 31, 1996 131,350 $1.45 --- ---
Granted --- --- 20,000 $ 10.25 140,000 $ 9.61
Exercised --- --- --- --- ---
Forfeited --- --- --- --- ---
Outstanding at:
January 29, 1997 131,350 $1.45 20,000 $ 10.25 140,000 $ 9.61
Weighted-average fair value
of options granted
during the fiscal year:
1996 $1.33 --- ---
1997 --- $5.41 $5.01
Options exercisable:
At January 31, 1995 --- --- ---
At January 31, 1996 --- --- ---
At January 29, 1997 79,182 --- ---
</TABLE>
F-15
<PAGE> 38
The following table summarizes information about stock options outstanding at
January 29, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------- -----------------------------
NUMBER WEIGHTED WEIGHTED NUMBER WEIGHTED
OUTSTANDING AVERAGE AVERAGE EXERCISABLE AVERAGE
AT REMAINING EXERCISE AT EXERCISE
EXERCISE PRICES JANUARY 29, 1997 LIFE (YEARS) PRICE JANUARY 29, 1997 PRICE
--------------- ---------------- ------------ -------- ---------------- ---------
<S> <C> <C> <C> <C> <C>
$ 1.45 131,350 8.43 $ 1.45 79,182 $ 1.45
$ 9.50 120,000 9.55 $ 9.50 31,667 $ 9.50
$ 10.25 40,000 9.75 $ 10.25 --- $ 10.25
</TABLE>
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. A portion of the proceeds was used to repay outstanding
indebtedness (see note 5).
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 and expire
September 1998.
9. INCOME TAXES
The components of the income tax provision (benefit) are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JANUARY 29, 1997 JANUARY 31, 1996 JANUARY 31, 1995
---------------- ---------------- ----------------
<S> <C> <C> <C>
Current:
Federal $ (171,284) $ 106,297 $ 67,456
State (5,015) 31,132 25,222
----------- ---------- ---------
(176,299) 137,429 92,678
----------- ---------- ---------
Deferred:
Federal 40,542 (6,483) (33,972)
State 7,650 (1,735) (6,002)
----------- ---------- ---------
48,192 (8,218) (39,974)
----------- ---------- ---------
$ (128,107) $ 129,211 $ 52,704
=========== ========== =========
</TABLE>
F-16
<PAGE> 39
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 29, JANUARY 31,
1997 1996
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 317,604 $ 44,091
Accrued expenses 90,574 14,079
AMT credit 14,236 --
-------- --------
Total deferred tax assets 422,414 58,170
-------- --------
Deferred tax liabilities:
Depreciation and amortization (175,006) (9,978)
State income taxes (14,556) --
--------- --------
Total deferred tax liabilities (189,562) (9,978)
--------- --------
Total deferred tax assets 232,852 48,192
Less: Valuation allowance (232,852) --
--------- --------
Net deferred tax assets $ -- $ 48,192
========= ========
</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 29, 1997 JANUARY 31, 1996 JANUARY 31, 1995
---------------- ---------------- ----------------
<S> <C> <C> <C>
Federal statutory rate (34.0)% 34.0% 34.0%
State income taxes, net of Federal benefit 2.6 6.1 5.1
Net operating loss carryforward -- (2.0) (23.5)
Other (1.0) 2.9 (1.6)
Valuation allowance 20.9 -- --
------- ------ -----
(11.5)% 41.0% 14.0%
------- ------ -----
</TABLE>
As of January 29, 1997, the Company had net operating loss (NOL)
carryforwards of approximately $756,000 and $650,000 for Federal and
state purposes, respectively. The Federal NOL is available to offset future
federal taxable income through 2012, and the state NOL is available to offset
future state taxable income through 2002. 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 $232,852 was
established in fiscal 1997 to fully offset NOL carryforwards and other net
deferred tax assets at January 29, 1997.
F-17
<PAGE> 40
DIEDRICH COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. SUBSEQUENT EVENTS (UNAUDITED)
Restructuring
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, the board of directors has authorized the closure of
seven additional coffeehouses during fiscal 1998. In connection with the store
closures, the Company expects to record an impairment provision and a
restructuring charge totaling approximately $4.5 million in the first quarter
of fiscal 1998. The store closures, which were undertaken to streamline
operations and improve profitability, began in late March 1997 and are expected
to be substantially completed during fiscal 1998.
On March 12, 1997, the Company also announced the resignation
of the individual who was its President, Chief Executive Officer, Chief
Financial Officer and Director and the appointment of a board member to serve
as interim President and Chief Executive Officer.
11. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The results of operations for fiscal 1997 and 1996 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 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)
Net income (loss) per share .03 -- .01 (.21)
Fiscal 1996:
Net sales $2,058 2,166 2,258 3,762
Operating income 114 104 45 86
Net income 59 60 21 46
Pro forma net income per share .02 .02 .01 .01
</TABLE>
F-18
<PAGE> 41
DIEDRICH COFFEE, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
Exhibit NUMBERED
Number DESCRIPTION PAGES
------ ----------- ------------
<S> <C>
2.1 Form of Agreement and Plan of Merger*
3.1 Certificate of Incorporation of the Company*
3.2 Bylaws of the Company*
4.1 Purchase Agreement for Series A Preferred Stock dated as of December 11,
1992 by and among Diedrich Coffee, Martin R. Diedrich, Donald M. Holly,
SNV Enterprises and D.C.H., L.P.*
4.2 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.*
4.3 Representative's Warrant Agreement*
4.4 Specimen Stock Certificate*
4.5 Form of Conversions 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 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)*
10.10 Kerry W. Coin Employment Agreement, dated August 26, 1996*
10.11 Letter Agreement between Diedrich Coffee and Lawrence Goelman, dated
April 23, 1997, regarding appointment as Interim President and Chief
Executive Officer
27 Financial Data Schedule
</TABLE>
- -----------------------
* 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.
S-1
<PAGE> 1
[DIEDRICH LETTERHEAD]
April 23, 1997
Mr. Lawrence Goelman
Diedrich Coffee, Inc.
2144 Michelson Drive
Irvine, CA 92715
Dear Larry:
This letter shall set forth the understanding between you and the other
members of the Board of Directors of Diedrich Coffee, Inc., a Delaware
corporation (the "Company") regarding your role as interim President and Chief
Executive Officer (the "Agreement"). Subject to the terms and conditions set
forth herein, we agree as follows:
1. You are hereby appointed and agree to serve as the Company's
interim President and Chief Executive Officer for the near term period which is
not anticipated to exceed six months from the date hereof.
2. As compensation for serving as the Company's interim President
and Chief Executive Officer, you shall be entitled to the following:
(a) $10,000 per month (less all amounts required by law to be
withheld or deducted) payable on the last day of each month (or any pro
rata portion thereof for any month of partial service) for so long as
you continue in the role of interim Chief Executive Officer and/or
Chairman.
(b) The Company shall grant options to you pursuant to the
Company's 1996 Stock Incentive Plan in accordance with the following
terms and conditions: (i) you shall receive an option to purchase 25,000
shares of the Company's common stock, which shall become exercisable on
April 23, 1997 at an exercise price of $2.75, which represents the
closing price for the stock on the date hereof and (ii) you shall
receive options to purchase an additional 75,000 shares of the Company's
common stock which shall become exercisable in increments of 15,000
shares commencing on May 23, 1997 and on the 23rd day of each month
thereafter for so long as you continue in the role of interim Chief
Executive Officer and/or Chairman at an exercise price of $2.75, which
represents the closing price for the stock on the date hereof. In the
event that you cease to serve as the Company's interim President and
Chief Executive Officer and/or Chairman, all of the options that have
not otherwise become exercisable shall terminate on the effective date
of your cessation of employment with the Company. All of the options
that have become exercisable shall terminate on the date five years
following the date of your cessation of employment with the Company.
3. The Company shall pay or reimburse you for all reasonable and
necessary travel and other business expenses incurred or paid by you in
connection with the performance of your services under this Agreement
consistent with the Company's policies for other senior executives of the
Company.
<PAGE> 2
4. This Agreement is "at will" and it may be terminated, with or
without cause, at any time, by either you or the Company.
Thank you for your assistance to the Company at this important time. If
the provisions of this letter are consistent with your understanding of our
agreement, please sign and return the enclosed counterpart copy of this letter
to me at your earliest convenience.
Sincerely,
Martin R. Diedrich
Chairman of the Board of Directors
Accepted and agreed to:
- -------------------------------
Lawrence Goelman
Date: April 23, 1997
<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 29, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-29-1997
<PERIOD-START> FEB-01-1997
<PERIOD-END> JAN-29-1997
<CASH> 2,071,904
<SECURITIES> 0
<RECEIVABLES> 210,363
<ALLOWANCES> 0
<INVENTORY> 1,615,145
<CURRENT-ASSETS> 4,367,547
<PP&E> 13,880,561
<DEPRECIATION> 1,917,809
<TOTAL-ASSETS> 17,471,419
<CURRENT-LIABILITIES> 2,418,807
<BONDS> 0
0
0
<COMMON> 53,917
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 17,471,419
<SALES> 19,812,406
<TOTAL-REVENUES> 19,812,406
<CGS> 9,263,286
<TOTAL-COSTS> 9,263,286
<OTHER-EXPENSES> 11,577,101
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 189,549
<INCOME-PRETAX> (1,113,812)
<INCOME-TAX> (985,705)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (985,705)
<EPS-PRIMARY> (.22)
<EPS-DILUTED> 0
</TABLE>
