<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 29, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
COMMISSION FILE NUMBER 0-21203
DIEDRICH COFFEE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0086628
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
2144 MICHELSON DRIVE
IRVINE, CALIFORNIA 92612
(Address of Principal Executive Offices including Zip Code)
(949) 260-1600
(Registrant's Telephone Number including Area Code)
----------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
As of June 10, 1998, there were 5,941,650 shares of common stock of the
registrant outstanding.
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<PAGE> 2
DIEDRICH COFFEE, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets......................................... 3
Condensed Statements of Operations............................... 4
Condensed Statements of Cash Flows............................... 5
Notes to Condensed Financial Statements.......................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 11
Item 3 Quantitative and Qualitative Disclosures About Market Risk....... 15
PART II- OTHER INFORMATION
Item 1 Legal Proceedings................................................ 15
Item 6 Exhibits and Reports on Form 8-K................................. 15
Signatures....................................................... 17
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DIEDRICH COFFEE, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS APRIL 29, 1998 JANUARY 28, 1998
-------------- ----------------
<S> <C> <C>
Current Assets:
Cash $ 1,913,609 $ 1,408,161
Accounts receivable 197,658 181,628
Inventories (Note 2) 1,201,472 1,375,119
Prepaid expenses 184,403 157,393
Income taxes receivable 19,363 42,528
-------------- -------------
Total current assets 3,516,505 3,164,829
Property and equipment, net 9,594,202 10,104,843
Costs in excess of net assets acquired, net 349,545 389,651
Other assets 260,391 289,103
-------------- -------------
Total assets $ 13,720,643 $ 13,948,426
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current installments of obligations under capital $ 169,488 $ 168,139
lease
Accounts payable 1,150,696 1,204,366
Accrued compensation 586,202 716,742
Accrued expenses 1,258,824 1,796,869
Restructuring charge 159,394 237,320
-------------- -------------
Total current liabilities 3,324,604 4,123,436
Obligation under capital lease - long term 349,457 317,292
Long term debt (Note 3) 2,500,000 2,500,000
Deferred rent 181,739 172,231
-------------- -------------
Total liabilities 6,355,800 7,112,959
-------------- -------------
Stockholders' Equity: (Note 4)
Common stock 59,417 57,417
Additional paid-in capital 18,204,113 16,928,546
Accumulated deficit (10,898,687) (10,150,496)
--------------- --------------
Total stockholders' equity 7,364,843 6,835,457
-------------- -------------
Commitments and contingencies
Total liabilities and stockholders' equity $ 13,720,643 $ 13,948,426
============== =============
</TABLE>
See accompanying notes to financial statements.
3
<PAGE> 4
DIEDRICH COFFEE, INC.
CONDENSED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THIRTEEN WEEKS THIRTEEN WEEKS
ENDED APRIL 29, ENDED APRIL 30,
1998 1997
--------------- ---------------
<S> <C> <C>
Net Sales:
Retail $ 5,285,060 $ 5,384,625
Wholesale and other 638,301 483,095
------------ ------------
Total 5,923,361 5,867,720
------------ ------------
Cost and Expenses:
Cost of sales and related occupancy costs 2,682,665 3,041,815
Store operating expenses 2,283,903 2,380,227
Other operating expenses 148,785 64,325
Depreciation and amortization 482,222 447,439
Provision for store closings and restructuring costs -- 4,550,068
General and administrative expenses 974,848 774,325
------------ ------------
Total 6,572,422 11,258,199
------------ ------------
Operating loss (649,061) (5,390,479)
Interest expense (97,273) --
Interest and other income 1,510 7,660
------------ ------------
Loss before income taxes (744,825) (5,382,819)
Income tax provision 800 --
------------ ------------
Net Loss (745,625) $ (5,382,819)
============ ============
Basic net loss per share: $ (0.13) $ (1.00)
============ ============
Diluted net loss per share:
$ (0.13) $ (1.00)
============ ============
Weighted average shares outstanding 5,800,991 5,391,650
============ ============
</TABLE>
See accompanying notes to financial statements.
4
<PAGE> 5
DIEDRICH COFFEE, INC.
CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THIRTEEN WEEKS THIRTEEN WEEKS
ENDED APRIL 29, ENDED APRIL 30,
1998 1997
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (745,625) $(5,382,819)
Adjustments to reconcile net loss to cash used
in operating activities:
Depreciation and amortization 482,222 447,439
Provision for asset impairment and
restructuring costs -- 4,287,660
Changes in assets and liabilities:
Accounts receivable (16,030) 11,274
Inventories 173,647 94,130
Prepaid expenses (27,010) (31,354)
Income taxes receivable 23,165 82,653
Other assets 430 (7,531)
Accounts payable (53,670) (715,545)
Accrued compensation (189,616) (168,751)
Accrued expenses (32,385) 78,374
Deferred rent 9,508 --
----------- -----------
Net cash used in operating activities (375,364) (1,304,470)
----------- -----------
Cash flows from investing activities:
Capital expenditures for property and equipment (373,575) (623,625)
----------- -----------
Net cash used in investing activities $ (373,575) $ (623,625)
=========== ===========
Cash flows from financing activities:
Proceeds from issuance of common stock, net fees 1,275,000 --
paid
Payment on capital lease obligation (20,613) --
----------- -----------
Net cash provided by financing activities $ 1,254,387 $ --
----------- -----------
Net increase (decrease) in cash 505,448 (1,928,095)
----------- -----------
Cash at beginning of period 1,408,161 2,071,904
----------- -----------
Cash at end of period 1,913,609 $ 143,809
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 75,000 $ --
=========== ===========
Income taxes 800 $ --
=========== ===========
Non-cash Transactions
Equipment Purchased under Capital Lease $ 54,127 $ --
=========== ===========
</TABLE>
See accompanying notes to financial statements
5
<PAGE> 6
DIEDRICH COFFEE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
APRIL 29, 1998
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The unaudited condensed financial statements of Diedrich Coffee, Inc.
(the "Company") have been prepared in accordance with generally accepted
accounting principles for interim financial information. In the opinion of
management, all adjustments (consisting of normal, recurring adjustments and
accruals) considered necessary for a fair presentation of the Company's
financial position at April 29, 1998 and the results of operations and cash
flows for the thirteen weeks ended April 29, 1998 and April 30, 1997 have been
included. Results for the interim periods are not necessarily indicative of the
results for an entire year. This information should be read in conjunction with
the financial statements and the notes thereto included in the Company's Annual
Report on Form 10-K for the year ended January 28, 1998.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. SFAS No. 130 is effective
for financial statements issued for periods beginning after December 15, 1997.
The Company has determined that the impact of SFAS No. 130 on its consolidated
financial statements is not material.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. SFAS No. 131 is
effective for financial statements issued for periods beginning after December
15, 1997. The Company has not determined the impact of SFAS No. 131 on its
consolidated financial statements. SFAS No. 131 will be applied in the
preparation of the Company's annual financial statements for the year ending
January 27, 1999.
In April 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-5, "Reporting on the Costs of
Start-up Activities". This SOP requires that costs incurred during start-up
activities, including organization costs, be expensed as incurred. SOP 98-5 is
effective for financial statements for fiscal years beginning after December 15,
1998. Initial application of the SOP should be as of the beginning of the fiscal
year in which the SOP is first adopted and should be reported as a cumulative
effect of a change in accounting principle. The Company has adopted SOP 98-5
which had an impact of $22,000 in the thirteen weeks ended April 29, 1998.
Net Loss Per Common Share
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share." SFAS No. 128 specifies new
6
<PAGE> 7
DIEDRICH COFFEE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
APRIL 29, 1998
(UNAUDITED)
standards designed to improve the earnings per share ("EPS") information
provided in financial statements by simplifying the existing computational
guidelines, revising the disclosure requirements and increasing the
comparability of EPS data on an international basis. Some of the changes made to
simplify the EPS computations include: (a) eliminating the presentation of
primary EPS and replacing it with basic EPS, with the principal difference being
that the common stock equivalents are not considered in computing basic EPS, (b)
eliminating the modified treasury stock method and the three percent materiality
provision and (c) revising the contingent share provisions and the supplemental
EPS data requirements. SFAS No. 128 also makes a number of changes to existing
disclosure requirements. SFAS No. 128 is effective for financial statements
issued for periods ending after December 15, 1997, including interim periods.
Basic earnings per share are presented for the thirteen weeks ended April 29,
1998 and April 30, 1997; diluted earnings per share are not presented as losses
were incurred in those years.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
APRIL 29, 1998 JANUARY 28, 1998
-------------- ----------------
<S> <C> <C>
Green coffee $ 406,725 $ 535,885
Roasted coffee 91,348 67,965
Accessory and specialty items 194,843 230,502
Other food, beverage and supplies 508,556 540,767
--------------- --------------
$ 1,201,472 $ 1,375,119
=============== ==============
</TABLE>
3. DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
APRIL 29, 1998 JANUARY 28, 1998
-------------- ----------------
<S> <C> <C>
NUVRTY, INC.
Note payable bearing interest at prime rate
plus 3 1/2%, interest payable monthly. Note
is secured by the assets of the Company. $1,000,000 $1,000,000
Due September 30, 2002
GRANDVIEW TRUST
Note payable bearing interest at prime rate
plus 31/2%, interest payable monthly. Note 750,000 750,000
is secured by the assets of the Company.
Due October 15, 2002
OCEAN TRUST
Note payable bearing interest at prime rate
plus 31/2%, interest payable monthly. Note 750,000 $750,000
is secured by the assets of the Company.
Due October 16, 2002
---------- ----------
$2,500,000 $2,500,000
========== ==========
</TABLE>
In March 1997, the Company received a commitment for a $1 million line
of credit on arms-length terms from a significant stockholder of the Company.
7
<PAGE> 8
DIEDRICH COFFEE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
APRIL 29, 1998
(UNAUDITED)
On May 27, 1997, the Company made a promissory note (the "Note") for the
benefit of The Palm Trust of which Paul Heeschen, a director, is a trustee. Mr.
Heeschen has no beneficial interest in the Palm Trust. The Note provided for
borrowings by the Company up to $1,500,000 with interest accruing at the prime
rate plus 3 1/2%. All outstanding principal and accrued interest was due and
payable on January 27, 1998 or promptly after the closing of any new debt or
equity financing in an amount exceeding $1,500,000. This indebtedness was fully
paid and discharged on October 20, 1997 with the proceeds of borrowing from the
Ocean and Grandview Trusts described below.
On August 19, 1997, the Company entered into a promissory note, term
loan agreement, and security agreement with the Virginia R. Cirica Trust (the
"Cirica Trust") (collectively the "Cirica Trust Loan Documents"). That trust is
controlled by Ms. Cirica, who is the spouse of Lawrence Goelman, then Chairman
and Interim Chief Executive Officer of the Company.
Shortly before the Cirica Trust entered into the Cirica Trust Loan
Documents, Mr. Goelman loaned Ms. Cirica approximately $250,000. Some of those
funds were transferred by Ms. Cirica to the Cirica Trust and advanced to the
Company pursuant to the Cirica Trust Loan Documents. The loan was secured by the
assets of the Company and provided for borrowings up to $500,000 with interest
accruing at the prime rate plus 3 1/2 %. As of October 29, 1997 the Company
borrowed the entire $500,000 available.
In connection with the Cirica Trust Loan Documents, the Company issued a
warrant to the Cirica Trust to purchase up to 85,000 shares of the Company's
common stock if the loan was repaid in full within 120 days of closing, or up to
170,000 shares of the Company's common stock if the loan was not repaid within
120 days, all at a price of $2.25 a share. The warrants are exercisable
immediately and expire on the later of August 19, 2003 or one year following
payment in full of the loan. Mr. Goelman disclaims any pecuniary interest in the
loan to the Company and any beneficial interest in the Cirica Trust, except to
the extent to which Mr. Goelman is a contingent beneficiary under the terms of
the Cirica Trust. The loan was repaid in full and discharged on December 17,
1997.
On September 30, 1997 the Company entered into a promissory note, term
loan agreement and security agreement with Nuvrty, Inc., a Colorado corporation
controlled by Amre Youness, a former director of the Company (the "Nuvrty Loan
Documents"). All outstanding principal and accrued interest is due and payable
on September 30, 2002. The loan is secured by the assets of the Company and
provides for borrowings up to $1,000,000 with interest accruing and paid monthly
at the prime rate plus 3 1/2%. The Company borrowed the full amount under the
loan.
In connection with the Nuvrty Loan Documents, the Company issued a
warrant to Nuvrty to purchase up to 170,000 shares of the Company's common stock
if the Loan was repaid in full within 120 days of closing and up to 340,000
shares of the Company's common stock if the loan was not repaid within 120 days,
all at a price of $2.25 per share. The warrants are exercisable immediately and
expire on the later of September 30, 2003 or one year following payment in full
of the loan.
On October 16, 1997 the Company entered into parallel promissory notes,
term loan agreements and security agreements with the Ocean and Grandview Trusts
on terms identical to those entered into with the Cirica Trust and Nuvrty, Inc.
(the "Ocean Trust Loan Documents" and the "Grandview Trust Loan Documents",
respectively). The Ocean Trust Loan Documents and the Grandview Trust Loan
Documents provide for borrowing up to $750,000 from each Trust. Each loan is
secured by the assets of the Company. Interest on advances is accrued and
payable monthly at the prime rate plus 3 1/2%. The Company borrowed $750,000
under each facility. All outstanding principal and accrued interest is due and
payable to each of the Ocean and Grandview Trusts on October 16, 2002.
8
<PAGE> 9
DIEDRICH COFFEE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
APRIL 29, 1998
(UNAUDITED)
In connection with the Ocean Trust Loan Documents and the Grandview
Trust Loan Documents the Company issued warrants to each Trust respectively to
purchase up to 127,500 shares each of the Company's common stock if the loans
were repaid in full within 120 days of closing, or up to 255,000 shares
respectively of the Company's common stock if the loans were not repaid in full
within 120 days of closing, all at a price of $2.25 per share. The warrants are
exercisable immediately and expire on the later of October 16, 2003 or one year
following payment in full of the respective loans. The Company used the proceeds
from the Ocean Trust and Grandview Trusts Loans to pay off and discharge the
outstanding indebtedness to the Palm Trust.
The warrants associated with all the above debt were accounted for in
accordance with the provisions of APB 14, "Accounting for Convertible Debt and
Debt Issued Stock Purchase Warrants." In accordance with APB 14, none of the
proceeds from issuance of the debt was allocated to the warrants based on their
relative fair value calculated using both a Cost of Replacement Model and the
Monte Carlo simulation of possible warrant exercise and no expense was
recognized.
4. STOCKHOLDERS' EQUITY
On April 25, 1997, the Company's Board of Directors approved the 1997
Non-Employee Director's Stock Option Plan under which options for 10,000 shares
each were granted to two non-employee directors. These options have an exercise
price of $2.75, became vested on April 25, 1998 and expire on April 25, 2007.
On November 18, 1997, Mr. John E. Martin joined the Company's Board of
Directors as Chairman, replacing Lawrence Goelman. On November 17, 1997, Mr.
Martin entered into a letter agreement with the Company appointing him Chairman
of the Board of the Company. The Company and Mr. Martin also entered into an
agreement under which Mr. Martin would be granted the option to purchase up to
850,000 shares of the common stock of the Company subject to stockholder
approval. Mr. Martin and the Company also agreed to terms under which Mr. Martin
would purchase 333,333 shares of the Company's common stock at $3.00 per share,
following stockholder approval of the Martin Option Agreement.
On November 18, 1997, Mr. Timothy J. Ryan joined the Company as Diedrich
Coffee's President and Chief Executive Officer to replace Lawrence Goelman,
Interim Chief Executive Officer. Subject to stockholder approval, the Company
entered into a performance based Stock Option Plan and Agreement under which Mr.
Ryan would be granted the option to purchase up to 600,000 shares of the common
stock of the Company and Mr. Ryan would purchase 16,667 shares at $3.00 per
share in the Company pursuant to a private sale of restricted stock.
On January 22, 1998 the stockholders of the Company approved the stock
option plans and agreements with John Martin and Timothy Ryan. On January 28,
1998 Messrs. Martin and Ryan completed their respective private purchases of
Company stock of $1,000,000 and $50,000, respectively.
On March 30, 1998 the Company agreed to a private placement of 200,000
shares of the Company's common stock to Franchise Mortgage Acceptance Company
("FMAC") at a price of $6.375 (the stock's closing sale price for that day on
the Nasdaq National Stock Market). In addition, FMAC also received an option to
purchase 100,000 additional shares of the Company's common stock; this option
may be exercised in increments of 25,000 shares or more and expires on April 3,
2000. The exercise prices of this option are as follows: 50,000 shares are
exercisable at $10.00 per share and $12.50 per share, respectively.
9
<PAGE> 10
DIEDRICH COFFEE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
APRIL 29, 1998
(UNAUDITED)
The fair value of this option is estimated to be $72,042. The estimated fair
value of the option has been charged to equity and will be amortized ratably
over the two year life of the option. Amortization for the period ended April
29, 1998 totaled $2,566. This transaction was completed on April 3, 1998.
10
<PAGE> 11
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
From time to time, in both written reports and oral statements, the
Company makes "forward-looking statements" within the meaning of Federal and
state securities laws. Disclosures that use words such as the Company
"believes," "anticipates," "expects," "may" or "plans" and similar expressions
are intended to identify forward-looking statements. These forward-looking
statements reflect the Company's current expectations and are based upon data
available at the time of the statements. Such statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from expectations. Any such forward-looking statements, whether made in this
report or elsewhere, should be considered in context with the various
disclosures made by the Company about its business, including the factors
discussed below. These projections or forward looking statements fall under the
safe harbors of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Foreseeable
risks and uncertainties are described elsewhere in this report and in detail
under "Risk Factors and Trends Affecting Diedrich Coffee and Its Business" in
the Company's annual report on Form 10-K for the fiscal year ended January 28,
1998 and in reports filed by the Company with the Securities and Exchange
Commission.
GENERAL
The Company commenced operations in 1972 as a private company and
completed its initial public offering in September 1996. The Company, a custom
roaster of specialty coffee, sells coffee and a broad range of espresso drinks
through its own coffeehouses. The Company's objective is to be the leading
national chain of neighborhood coffeehouses serving the best coffee
possible-technically and by consumer choice. To complement beverage sales, the
Company sells light food items and whole bean coffee through its coffeehouses.
The Company also sells roasted coffee as well as coffee brewing and espresso
equipment through a wholesale sales force. As of April 29, 1998, the Company
operated thirty-six coffeehouses and seven coffee carts located in California,
Colorado and Texas.
First Quarter. In the first quarter of the current fiscal year the
Company experienced losses of approximately $740,000 principally related to an
increase in interest expense and general and administrative expense. The level
of general and administrative expense is directly related to management's
commitment to grow the Company through retail coffeehouse development, new
wholesale channels, and franchise area development. Achieving this goal depends
upon, among other things, obtaining and maintaining sufficient working capital,
aggressive growth in the wholesale division, execution of new store management
systems, successful negotiation of franchise area development agreements and
improved store management and customer satisfaction.
Developments in the First Quarter. Pursuant to the Company's strategic
plan, the roasting facility in Denver, Colorado was closed in the first quarter
and the roasting was consolidated in Southern California. The Company also
closed an under-performing store in San Diego and one in Denver, Colorado. Four
coffee cart locations at premium Irvine Office Company locations were opened in
the first quarter. Additional coffee cart locations are under
11
<PAGE> 12
consideration and in discussion with the Irvine Office Company and similar
commercial property managers, but no assurances can be given as to when or how
many more coffee carts may be installed.
Area Development Objectives. Management's franchise area development
goals are to enter into fifteen to seventeen franchise area development
agreements covering most major U. S. markets by the end of fiscal year 2000.
Although the Company is engaged in preliminary discussions with potential area
developers, there can be no assurances given as to when or at what rate area
development agreements are entered into. Successful area development depends
significantly upon the expertise, staff and capital of the area developer as
well as all of the contingencies and uncertainties to which the Company and its
business are subject.
Management plans to continue to develop, over the next five years,
Company-owned coffee houses, kiosks and mobile carts in Orange County,
California and in two to four other major U. S. markets. Outside of Orange
County, Company-owned store development will depend upon franchise area
development revenues and continued growth and improvements in Company operations
and coffee house-level execution.
Franchise Area Development Financing. On April 14, 1998 the Company
announced a strategic relationship with the Franchise Mortgage Acceptance
Company ("FMAC") located in Los Angeles. FMAC stated its willingness to finance,
through secured lending, franchise area developers selected by the Company. FMAC
is a leading company in multi-unit restaurant franchise financing. The Company
believes that this relationship will facilitate the Company's planned program of
franchise area development, but no assurances can be given as to actual
financing commitments or the effects of any such commitment. The Company does
not anticipate entering into any franchise area development agreement before the
latter half of the fiscal year. Area development agreements commit the area
developer to build and open coffeehouses in the agreed-upon territory according
to an agreed-upon schedule covering several years. No assurances can be given as
to the rate of new coffeehouse construction, much less related franchise
revenues.
Private Placement. On April 3, 1998 the Company closed a private
placement with Franchise Mortgage Acceptance Company ("FMAC"). FMAC purchased
200,000 shares of restricted stock at a price of $6.675 per share and received
50,000 options exercisable at $10 per share and 50,000 options exercisable at
$12.50 per share. FMAC is the leading mortgage lender to the multi-unit
restaurant industry.
Secured Debt. On April 14, 1998 the Company announced FMAC's commitment,
subject to approval of final documentation by the Boards of Directors of both
companies, to make a secured revolving loan of up to $5 million to the Company.
When closed in the second quarter, management believes that this facility will
provide sufficient working capital, along with other anticipated internal
sources, for the balance of the fiscal year.
Master License Agreement with Home Savings. Home Savings notified the
Company in the first quarter that, in light of changes related to Home Savings
merger with Washington Mutual, the Master License Agreement dated January 29,
1997 between the Company and Home Savings was terminated. The termination does
not affect the existing Santa Monica coffeehouse. Although it is possible that
the successor in interest to Home Savings and the Company may enter into future
real estate and coffee house transactions, there can be no assurance as to when
or whether there will be any future agreements between the parties.
12
<PAGE> 13
Green Coffee Prices. Worldwide coffee commodity prices moderated from
the record levels reached in the second and third quarters of fiscal 1998. In
the first quarter of fiscal year 1999, however, the Company's cost of green
coffee exceed prior year levels by approximately 7%. The Company usually pays a
premium over the commodity price for the select grade coffee beans that it
purchases. As worldwide demand for coffee of all types remains strong, the
Company expects the prices that it pays to remain comparatively high into the
foreseeable future.
Green Coffee Availability. The Company believes that it has adequate
sources of supply of high quality, green arabica coffee to meet its projected
needs for the foreseeable future. While the Company seeks to carefully
anticipate its green coffee needs, there can be no assurance that supplies and
prices will not be affected by political and social events, the weather in the
coffee growing regions of the world, unexpected demand or other market forces.
Green coffee is an international agricultural commodity product subject to
considerable price fluctuations.
Seasonality and Quarterly Results. The Company's business is subject to
seasonal fluctuations as well as economic trends that affect retailers in
general. Historically, the Company's net sales have not been realized
proportionately in each quarter, with net sales being the highest during the
last fiscal quarter which includes the December holiday season. Hot weather
tends to reduce sales. Quarterly results are affected by the timing of the
opening of new stores, which may not occur as anticipated due to events outside
the Company's control. As a result of these factors, and of the other
contingencies and risk factors described elsewhere in this report, the financial
results for any individual quarter may not be indicative of the results that may
be achieved in a full fiscal year. Due to all of the foregoing and variables,
the Company's future earnings and the market price of the Company's securities
are subject to change. There can be no assurance of when the Company will return
to profitability nor of future growth rate.
RESULTS OF OPERATIONS
Thirteen Weeks Ended April 29; 1998 Compared with the Thirteen Weeks Ended
April 30, 1997
Net sales. Net sales for the thirteen weeks ended April 29, 1998
increased 1.0% to $5,923,000 from $5,868,000 for the thirteen weeks ended April
30, 1997. During this most recent quarter, the Company derived 89.2% of net
sales from its retail coffeehouse operations. The Company's wholesale and mail
order sales accounted for the remainder of net sales. Net retail sales for the
thirteen weeks ended April 29, 1998 decreased 1.9% to $5,285,000 from $5,385,000
in the thirteen weeks ended April 30, 1997. As of April 29, 1998, the Company
operated 36 coffeehouses and seven carts; as of April 30, 1997, the Company
operated 44 coffeehouses and one cart. The percentage increase in first quarter
of fiscal 1999 comparable store sales was 2.2%.
Wholesale and other sales increased 32.1% to $638,000 in the thirteen
weeks ended April 29, 1998 from $483,000 in the thirteen weeks ended April 30,
1997. The increase reflects increasing demand for the Company's wholesale coffee
products and increased sales efforts. Although the Company anticipates continued
improvement in wholesale sales, this depends upon successful acquisition,
installation and operation of new packaging equipment scheduled for the second
quarter. There can be no assurances that the anticipated wholesale sales gains
will happen.
Cost of Sales and Related Occupancy Costs. Cost of roasted coffee,
dairy, food, paper and bar supplies, accessories and clothing (cost of sales)
and rent (related occupancy costs) for the thirteen weeks ended April 29, 1998
decreased to $2,683,000 from $3,042,000 for the thirteen weeks ended April 30,
1997. As a percentage of net sales, cost of sales and related
13
<PAGE> 14
occupancy costs decreased to 45.3% in the first quarter of fiscal 1999 from
51.8% for the first quarter of fiscal 1998. This decreased percentage was the
result of average unit volume efficiencies resulting from the closure of low
volume locations as well as purchasing efficiencies. These more than offset the
impact of higher green coffee prices, increased occupancy costs, and an increase
in the percentage of total revenues contributed by wholesale sales.
Store operating expenses. Store operating expenses decreased to
$2,284,000 for the thirteen weeks ended April 29, 1998 from $2,380,000 for the
thirteen weeks ended April 30, 1997. As a percentage of retail net sales, store
operating expenses decreased to 43.2% in the first quarter of fiscal 1999 from
44.2% in the prior fiscal year's first quarter.
Other Operating Expenses. Other operating expenses (those associated
with wholesale and other sales) increased to $149,000 for the first quarter of
fiscal 1999 from $64,000 in the first quarter of fiscal 1998. These expenses, as
a percentage of the net sales from the wholesale division, increased to 23.4%
from 13.3%. This increase reflects the cost of additional management and sales
staff recruited to further develop the sales of the wholesale division. As a
percentage of net sales these costs should decrease as wholesale sales increase.
Depreciation and Amortization. Depreciation and amortization increased
to $482,000 for the thirteen weeks ended April 29, 1998 from $447,000 for the
thirteen weeks ended April 30, 1997. As a percentage of net sales, depreciation
and amortization increased to 8.1% from 7.6% for the same period in the prior
year, principally due to higher average store volumes.
General and Administrative Expenses. General and administrative expenses
increased to $975,000 for the first quarter of fiscal 1999 from $774,000 for the
first quarter of fiscal 1998. As a percentage of net sales, general and
administrative expenses increased to 16.4% from 13.2% due to the adding of
selected resources and personnel in order to implement the Company's business
plan. The Company believes that it will see a reduction in general and
administrative expenses relative to sales over the next several quarters as
revenue flows increase - assuming successful execution of the new business plan.
Provision for Store Closings and Restructuring Costs. The restructuring
charge recorded in fiscal 1998 included primarily lease termination and other
costs associated with store closures as well as a provision for the impairment
of long-lived assets in accordance with SFAS No. 121.
Interest Expense. Interest expense increased to $97,000 for the thirteen
weeks ended April 29, 1998 from $0 for the thirteen weeks ended April 30, 1997
reflecting the addition of the $2.5 million in long-term debt and $500,000 in
assets under capital leases.
Loss Before Taxes. Loss before taxes for the thirteen weeks ended April
29, 1998 was $739,000 compared to loss before taxes of $5,383,000 for the
thirteen weeks ended April 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $192,000 as of April 29, 1998
compared to working capital deficit of $(959,000) as of January 28, 1998. The
current period working capital includes remaining restructuring liabilities of
$159,000. Cash used by operating activities for the thirteen weeks ended April
29, 1998 totaled $(375,364).
14
<PAGE> 15
On April 3, 1998, the Company closed a private placement with Franchise
Mortgage Acceptance Company of Los Angeles, California ("FMAC") of 200,000
shares of Company restricted common stock at a price of $6.675 a share, or
approximately a $1,275,000 equity investment in the Company. In addition to the
private purchase, FMAC also acquired options to purchase restricted shares of
the Company's common stock, 50,000 shares at $10.00 and 50,000 shares at $12.50.
John Martin, Chairman of the Board of the Company, serves as a member of the
Board of Directors of FMAC.
On April 14, 1998 the Company announced FMAC's commitment, subject to
approval of final documentation by the Boards of Directors of both companies, to
make a secured revolving loan of up to $5 million to the Company. When closed in
the second quarter, management believes that this facility will provide
sufficient working capital, along with other anticipated internal sources, for
the balance of the fiscal year.
The Company believes that cash from operations and the aforementioned
financing activities will be sufficient to satisfy the Company's working capital
needs for the remainder of the fiscal year.
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Derivative Instruments. The Company did not invest in market risk
sensitive instruments in fiscal 1998, nor in the first quarter of 1999. From
time to time, the Company enters into agreements to purchase green coffee in the
future at prices to be determined within two to twelve months of the time of
actual purchase. At April 29, 1998 these commitments totaled $987,000. These
agreements are tied to specific market prices (defined by both the origin of the
coffee and the month of delivery) but the Company has significant flexibility in
selecting the date of the market price to be used in each contract. The Company
does not use commodity based financial instruments to hedge coffee or any other
commodity as the Company believes there will continue to be a high probability
of maintaining a strong correlation between increases in green coffee prices and
the final selling prices of the Company's products.
Market Risk. The Company's market risk exposure with regard to financial
instruments is to changes in the "prime rate" in the United States. The Company
borrowed $2,500,000 at the prime rate plus 3 1/2%. At April 29, 1998, a
hypothetical 100 basis point increase in the prime rate would result in
additional interest expense of $25,278 on an annualized basis. At April 29, 1998
the prime rate was 8 1/2%.
The Company does not and has not used derivative financial instruments
for any purpose, including hedging or mitigating interest rate risk.
PART II- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the ordinary course of its business, the Company may become involved
in legal proceedings from time to time. As of June 8, 1998, the Company was not
a party to any material pending legal proceedings.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
None.
15
<PAGE> 16
(A) EXHIBITS
Set forth below is a list of the exhibits included as part of this
Quarterly Report.
EXHIBIT NO. DESCRIPTION
----------- -----------
3.1 Certificate of Incorporation of the Company (1)
3.2 Bylaws of the Company (1)
10.40 Employment Agreement - Ann Wride
10.41 Indemnification Agreement - Ann Wride
27 Financial data schedule
- ------------------------
(1) Incorporated by reference to the exhibit of the same number to
the Company's Registration Statement on Form S-1 ( No.
333-08633), as amended, as declared effective by the Securities
and Exchange Commission on September 11, 1996.
(B) REPORTS ON FORM 8-K
None.
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: June 11, 1998 DIEDRICH COFFEE, INC.
/s/ Timothy J. Ryan
-------------------------------------------
Timothy J. Ryan,
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Ann Wride
-------------------------------------------
Ann Wride
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
17
<PAGE> 18
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
3.1 Certificate of Incorporation of the Company (1)
3.2 Bylaws of the Company (1)
10.40 Employment Agreement - Ann Wride
10.41 Indemnification Agreement - Ann Wride
27 Financial data schedule
- ---------------------
(1) Incorporated by reference to the exhibit of the same number to
the Company's Registration Statement on Form S-1 ( No.
333-08633), as amended, as declared effective by the Securities
and Exchange Commission on September 11, 1996.
<PAGE> 1
EXHIBIT 10.40
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into as
of April 8, 1998, by and between DIEDRICH COFFEE, INC., a Delaware corporation
(the "Company") and ANN WRIDE ("the Employee").
R E C I T A L S:
The Company and the Employee desire to enter into this Agreement to
establish the terms and conditions of the Employee's employment by the Company
during the term hereof.
A G R E E M E N T:
NOW, THEREFORE, in consideration of the foregoing recital, and subject
to the conditions and covenants set forth herein, the parties agree as follows:
1. Employment and Term.
(a) The Company hereby employs the Employee as its Chief
Financial Officer and the Employee hereby accepts such employment upon the terms
and subject to the conditions set forth in this Agreement. Unless earlier
terminated as provided in this Agreement, the term of the Employee's employment
under this Agreement shall commence on the date hereof and shall continue for a
period of two (2) years from the date hereof (the "Term").
(b) The Employee shall perform such duties and functions
consistent with her role as Chief Financial Officer as may from time to time be
assigned to her by the President and Chief Executive Officer (CEO). The Employee
agrees that during the course of the Company's business hours throughout the
Term, she will devote the whole of her time, attention and efforts to the
performance of her duties and obligations hereunder. The Employee shall not,
during the Term, without the written approval of the Board, and obtained in each
instance, directly or indirectly (i) accept employment or receive any
compensation for the performance of services from any business enterprise other
than the Company or (ii) enter into or be concerned or interested in any trade
or business or public or private work (whether for profit or otherwise and
whether as partner, principal, shareholder or otherwise), which may, in the
absolute discretion of the CEO, hinder or otherwise interfere with the
performance by the Employee of her duties and obligations hereunder, except as a
holder of not more than five percent (5%) of any class of stock or other
securities in any company which is listed and/or traded on any securities
market.
2. Compensation.
2.1 Salary. For all services to be rendered by the Employee under
this Agreement, the Company agrees to pay the Employee a salary (the "Base
Salary") equal to One Hundred Fifty Five Thousand Dollars ($155,000) per year,
payable in bi-weekly installments,
<PAGE> 2
less all amounts required by law to be withheld or deducted. During the Term of
this Agreement, the CEO shall review the Employee's Base Salary with the
Compensation Committee on or about each anniversary date of the date of this
Agreement. The Compensation Committee, in its sole and absolute discretion from
time to time, may increase (but not decrease without the Employee's written
consent) the Employee's Base Salary.
2.2 Stock Options. Contemporaneously with the execution of this
Agreement, the Company and Employee shall enter into a Stock Option Agreement,
under the Company's 1996 Stock Incentive Plan, pursuant to which the Company
will grant Employee, upon the terms and other conditions set forth therein,
options to purchase 50,000 shares of the Company's Common Stock.
3. Employee Benefits. During the Term of the Employee's employment
hereunder:
(a) The Employee shall be entitled to three weeks annual vacation
leave consistent with the Company's policies for other senior executives of the
Company.
(b) The Company shall pay or reimburse the Employee for all
reasonable and necessary travel and other business expenses incurred or paid by
the Employee in connection with the performance of her services under this
Agreement consistent with the Company's policies for other senior executives of
the Company.
(c) Commencing three weeks after the date of this Agreement the
Company shall provide and pay for the annual cost of premiums for health, dental
and medical insurance coverage for the Employee and the Employee's dependents
consistent with the coverage generally made available by the Company to senior
executives of the Company and providing benefits at least as favorable to the
Employee as the coverage that is in effect at the date of this Agreement.
(d) In addition to the benefits set forth above, the Employee
shall be entitled to participate in any other policies, programs and benefits
which the Company may, in its sole and absolute discretion, make generally
available to its other senior executives from time to time including, but not
limited to, life insurance, disability insurance, pension and retirement plans,
stock plans and other similar programs.
4. Termination of Employment.
(a) Notwithstanding any other provision of this Agreement, the
Employee's employment under this Agreement may be terminated as follows:
(i) Upon the death of the Employee, this Agreement and the
Employee's employment hereunder shall terminate immediately and without
notice by the Company; or
(ii) In the event of the inability of the Employee to
perform her duties or responsibilities hereunder, as a result of mental
or physical ailment or incapacity, for an aggregate of ninety (90)
calendar days during any calendar year (whether or not consecutive) (a
"Disability") during which period of Disability the Employee shall be
2
<PAGE> 3
entitled to her compensation pursuant to this Agreement, this Agreement
and the Employee's employment hereunder shall terminate upon delivery of
written notice to the Employee; or
(iii) By the Company for Cause (as defined below) in
accordance with the provisions of Section 4(b) hereof
(b) The parties agree that for purposes of this Agreement, the
term "Cause" shall mean the following:
(i) The Employee's willful and repeated failure to
satisfactorily perform her job duties under this Agreement;
(ii) Failure by the Employee to comply with all material
applicable laws in performing her job duties or in directing the conduct
of the Company's business, or
(iii) Commission by the Employee of any felony or
intentionally fraudulent act against the Company, or its employees,
agents or customers.
(c) With respect to events described in subparagraph 4(b)(i) and
(ii) above, the Company shall give written notice to the Employee of any such
event and the Employee shall have thirty (30) days beginning on the date of
delivery of such written notice to cure same, or if such event cannot be cured
within said thirty (30) day period, the Employee shall commence her efforts to
cure the event within the thirty (30) day period and diligently work to cure
such event within a reasonable time period. If the Employee within said thirty
(30) day period or within a reasonable time period, as applicable, does not cure
the event for which notice has been provided under subparagraphs 4(b)(i) or (ii)
above, then the Employee's employment under this Agreement may be terminated by
the Company by delivery to the Employee of written notice of termination and
such termination will be effective as of the date of delivery of such written
notice. With respect to events described in subparagraph 4(b)(iii) above, the
Employee's employment under this Agreement may be terminated by the Company by
delivery to the Employee of written notice of termination and such termination
will be effective as of the date of delivery of such written notice. Upon the
effectiveness of termination pursuant to subparagraph 4(a), the Employee shall
not be entitled to receive any further compensation or benefits pursuant to this
Agreement except for payment within ten days after her termination date of all
accrued but unpaid Base Salary.
(d) In addition to its rights to terminate the Employee's
employment under this Agreement pursuant to subparagraph 4(a), the Company may
also terminate the Employee's employment under this Agreement for any other
reason, provided that, in such event, the Employee shall be entitled to receive
an amount equal to fifty percent of the Employee's Base Salary on the
termination date and the Employee shall not be entitled to receive any other
compensation or benefits hereunder, except with respect to accrued vacation. The
Employee acknowledges and agrees that the provisions of this paragraph 4 state
her entire and exclusive rights, entitlements, and remedies against the Company,
its successors, assigns, affiliates,
3
<PAGE> 4
officers, directors, employees and representatives for termination without any
cause shown by the Company.
(e) The Employee may terminate her employment for good cause or
without any cause. In the event the Employee terminates her employment for "good
cause" (as defined below), she shall be entitled to receive the severance
benefits described in subparagraph 4(d) above. If she terminates her employment
for any other reason, she shall not be entitled to receive any compensation
except for payment within ten days after her termination date of all accrued but
unpaid Base Salary. For purposes of this Agreement, "good cause" for termination
of employment by the Employee shall mean failure to maintain the Employee in the
position of an officer of the Company or a material breach of the provisions of
this Agreement by the Company. The Employee acknowledges and agrees that the
provisions of this subparagraph 4(e) state her entire and exclusive rights and
remedies under this Agreement against the Company, its successors, assigns,
affiliates, officers, directors, employees and representatives if she terminates
this Agreement.
5. Assignment of Rights and Duties. Neither the Employee nor the Company
may assign their rights or duties under this Agreement without prior written
consent of both parties, which consent may be withheld for any reason. Any
attempted assignment, transfer, conveyance, or other disposition of any interest
of either party in this Agreement shall be void. Notwithstanding the foregoing,
the Company may make such assignment to any affiliated company, but its
assignment of this Agreement to an affiliate does not relieve it of its
obligations under this Agreement if that affiliate fails to perform the
Company's obligations under this Agreement. In the event of the sale of all or
substantially all of the assets of the Company or other transaction in which the
Company will not continue as a surviving corporate entity engaged in a
substantially similar business as it is engaged in prior to such transaction,
the Company will use commercially reasonable efforts to obtain from the
acquiring person or entity, before the succession takes place, an agreement to
assume and perform all of the terms and conditions of this Agreement.
6. Confidential Information and Nonsolicitation.
(a) The Employee acknowledges and agrees that the Company has
developed and uses certain proprietary and confidential information, data,
processes, business methods, computer software, data bases, customer lists and
know-how ("Confidential Information"). The Employee agrees that the Confidential
Information is a trade secret of the Company which shall remain the sole
property of the Company notwithstanding that the Employee, as an employee of the
Company, may participate in the development of the Confidential Information.
During the term of this Agreement and at all times thereafter the Employee shall
not disclose any Confidential Information to any person or entity for any reason
or purpose whatsoever, nor shall the Employee make use of any Confidential
Information for the Employee's own benefit or for the benefit of any other
person or entity. Upon termination of this Agreement for any reason, the
Employee will promptly surrender to the Company all Confidential Information in
the Employee's possession or under the Employee's control, whether prepared by
the Employee or by others.
4
<PAGE> 5
7. Miscellaneous.
7.1 Modification and Waiver of Breach. No waiver or modification
of this Agreement or any term hereof shall be binding unless it is in writing
signed by the parties hereto. No failure to insist upon compliance with any
term, provision or condition to this Agreement, whether by conduct or otherwise,
in any one or more instances, shall be deemed to be or construed as a waiver of
any such term, provision or condition or as a waiver of any other term,
provision or condition of this Agreement.
7.2 Notices. All notices, requests, demands and other
communications under this Agreement must be in writing and shall be deemed given
upon personal delivery, facsimile transmission (with confirmation of receipt),
delivery by a reputable overnight courier service or five (5) days following
deposit in the United States mail (if sent by certified or registered mail,
postage prepaid, return receipt requested), in each case duly addressed to the
party to whom such notice or communication is to be given as follows:
To the Company: Diedrich Coffee, Inc.
2144 Michelson Drive
Irvine, California 92612
Attention: Chairman of the Board
Telecopy Number: (714) 260-1610
To the Employee: Ann Wride
516 13th St
Huntington Beach CA 92648
Any party may change its address for the purpose of this subparagraph
7.2 by giving the other party written notice of the new address in the manner
set forth above.
7.3. Enforceability. If any of the covenants contained in this
Agreement, for any reason and to any extent, are construed to be invalid or
unenforceable, the remainder of this Agreement, and the application of the
remaining covenants to other persons or circumstances shall not be affected
hereby, but rather shall be enforced to the greatest extent permitted by law.
7.4. Entire Agreement. This Agreement contains the entire
agreement between the Company and the Employee with respect to the subject
matters hereof and supersedes all prior or contemporaneous agreements,
arrangements or understandings, written or oral, with respect to the subject
matters hereof.
7.5. Legal Fees; Arbitration. The parties hereto expressly agree
that in the event of any dispute, controversy or claim by any party regarding
this Agreement, the prevailing party shall be entitled to reimbursement by the
other party to the proceeding of reasonable attorney's fees, expenses and costs
incurred by the prevailing party. Any controversy, dispute or claim arising out
of, in connection with, or in relation to the interpretation, performance or
breach of this Agreement or otherwise arising out of the execution hereof,
including any claim based on contract, tort or statute, shall be resolved, at
the request of any party, by submission to
5
<PAGE> 6
binding arbitration at the Orange County, California offices of Judicial
Arbitration & Mediation Services, Inc. ("JAMS"), and any judgment or award
rendered by JAMS shall be final, binding and unappealable, and judgment may be
entered by any state or federal court having jurisdiction thereof. Any party can
initiate arbitration by sending written notice of intention to arbitrate (the
"Demand") by registered or certified mail to all parties and to JAMS. The Demand
shall contain a description of the dispute, the amount involved, and the remedy
sought. The arbitrator shall be a retired or former judge agreed to between the
parties from the JAMS' panel. If the parties are unable to agree, JAMS shall
provide a list of three available judges and each party may strike one. The
remaining judge shall serve as the arbitrator. Each party hereto intends that
the provisions to arbitrate set forth herein be valid, enforceable and
irrevocable. In her award, the arbitrator shall allocate, in her discretion,
among the parties to the arbitration all costs of the arbitration, including the
fees of the arbitrator and reasonable attorneys' fees, costs and expert witness
expenses of the parties. The parties hereto agree to comply with any award made
in any such arbitration proceedings that has become final and agree to the entry
of a judgment in any jurisdiction upon any award rendered in such proceeding
becoming final.
7.6 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of California.
7.7. Counterparts. This Agreement may be executed simultaneously
in one or more counterparts, each of which shall be deemed an original, but all
of which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
"THE COMPANY" DIEDRICH COFFEE, INC., a California
corporation
By:________________________________________
Tim J. Ryan
President & CEO
"THE EMPLOYEE" ________________________________________
ANN WRIDE
6
<PAGE> 1
EXHIBIT 10.41
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is made as of this 8th day
of April 1998 by and between Diedrich Coffee, Inc., a Delaware corporation (the
"Company") and Ann Wride ("Indemnitee"), with reference to the following:
RECITALS
A. The Indemnitee is currently serving as an Officer of the Company and
the Company wishes the Indemnitee to continue in such capacity. The Indemnitee
is willing, under certain circumstances, to continue in such capacity.
B. The Indemnitee has indicated her concern that the indemnities
available under the Company's bylaws and available insurance, if any, may not be
adequate to protect her against the risks associated with her service to the
Company. The Indemnitee may not be willing to continue in office in the absence
of the benefits accorded to Indemnitee under this Agreement.
AGREEMENT
In order to induce the Indemnitee to join the company and to serve as an
Officer for the Company and in consideration for her continued service, the
Company hereby agrees to indemnify the Indemnitee as follows:
1. The Company shall indemnify, and advance expenses to, Indemnitee as
provided in this Agreement and to the fullest extent permitted by applicable law
in effect on the date hereof and to such greater extent as applicable law may
thereafter from time to time permit. The rights of Indemnitee provided under the
preceding sentence shall include, but shall not be limited to, the rights set
forth in the other Sections of this Agreement. The indemnification and
advancement of expenses contemplated by this Agreement are intended to be
provided in accordance with the terms and conditions of this Agreement
regardless of whether any of the events underlying the indemnified claims or
actions or advanced expenses occurred before or after the date of this
Agreement. The rights of Indemnitee under this Agreement shall survive
termination of her status as a director, officer, employee or agent of the
Company.
2. Indemnitee shall be entitled to the rights of indemnification
provided in this Section 2 if, by reason of the fact that she is or was a
director, officer, employee or agent of the Company, she is, or is threatened to
be made, a party to any threatened, pending, or completed action, suit or
proceeding, other than an action by or in the right of the Company. Pursuant to
this Section 2, Indemnitee shall be indemnified against expenses (including
attorneys' fees), judgments, damages, penalties, fines and amounts paid in
settlement actually and reasonably incurred by her or on her behalf in
connection with such proceeding or any claim, issue or matter therein, if she
acted in good faith and in a manner she reasonably believed to be in or not
opposed to the best
<PAGE> 2
interests of the Company, and, with respect to any criminal proceeding, had no
reasonable cause to believe her conduct was unlawful.
3. Indemnitee shall be entitled to the rights of indemnification
provided in this Section 3 if, by reason of the fact that she is or was a
director, officer, employee or agent of the Company, she is, or is threatened to
be made, a party to any threatened, pending or completed action, suit or
proceeding brought by or in the right of the Company to procure a judgment in
its favor. Pursuant to this Section, Indemnitee shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by her or
on her behalf in connection with the defense or settlement of such action, suit
or proceeding if she acted in good faith and in a manner she reasonably believed
to be in or not opposed to the best interests of the Company. Notwithstanding
the foregoing, no indemnification against such expenses shall be made in respect
of any claim, issue or matter in such proceeding as to which Indemnitee shall
have been adjudged to be liable to the Company in the performance of his duty to
the Company if applicable law prohibits such indemnification; provided, however,
that, if applicable law so permits, indemnification against expenses shall
nevertheless be made by the Company in such event if and only to the extent that
the court in which such proceeding shall have been brought or is pending, shall
determine.
4. Any indemnification under Sections 2 and 3 of this Agreement, unless
ordered by a court, shall be made by the corporation only as authorized by the
specific case upon a determination that indemnification of the director,
officer, employee or agent is proper in the circumstances because he has met the
applicable standard of conduct set forth in Sections 2 and 3 of this Agreement.
Such determination shall be made (1) by a majority vote of the directors who are
not parties to such action, suit or proceeding, even though less than a quorum,
or (2) if there are no such directors, or if such directors so direct, by
independent legal counsel, in a written opinion, or (3) by the stockholders.
5. If the Company does not respond to a written claim for payment under
this Agreement within sixty (60) days of having received a claim under this
Agreement, it shall be deemed to have waived any right to refuse to pay such
claim under this Agreement. If a claim under this Agreement is not paid by the
Company, or on its behalf, within ninety (90) days after a written claim has
been received by the Company, the claimant may at any time thereafter bring suit
against the Company to recover the unpaid amount of the claim and, if successful
in whole or in part, the claimant shall be entitled to be paid also the expense
of prosecuting such claim.
6. In the event of payment under this Agreement, the Company shall be
subrogated to the extent of such payment to all of the rights of recovery of the
Indemnitee, who shall execute all papers required and shall do everything that
may be necessary to secure such rights, including the execution of such
documents necessary to enable the Company effectively to bring suit to enforce
such rights.
Page 2 of 5
<PAGE> 3
7. Notwithstanding anything to the contrary herein, the Company shall
not be liable under this Agreement to make any payment in connection with any
claim made against the Indemnitee:
(a) for which payment is actually made to the Indemnitee under a
valid and collectible insurance policy, except in respect of any excess
beyond the amount of payment under such insurance;
(b) for which the Indemnitee is indemnified by the Company
otherwise than pursuant to this Agreement;
(c) based upon or attributable to the Indemnitee or any member of
his immediate family gaining in fact any personal profit or advantage to
which he was not legally entitled;
(d) for an accounting of profits made from the purchase or sale
by the Indemnitee of securities of the Corporation within the meaning of
Section 16(b) of the Securities Exchange Act of 1934 and amendments
thereto or similar provisions of any state statutory law or common law;
or
(e) brought about or contributed to by the dishonesty of the
Indemnitee seeking payment hereunder; however, notwithstanding the
foregoing, the Indemnitee shall be protected under this Agreement as to
any claims upon which suit may be brought against her by reason of any
alleged dishonesty on his part, unless a judgment or other final
adjudication thereof adverse to the Indemnitee shall establish that he
committed (i) acts of active and deliberate dishonesty or (ii) acts with
actual dishonest purpose and intent, which acts were material to the
cause of action so adjudicated.
8. No costs, charges or expenses for which indemnity shall be sought
hereunder shall be incurred without the Company's consent, which consent shall
not be unreasonably withheld.
9. The Indemnitee, as a condition precedent to his right to be
indemnified under this Agreement, shall give to the Company notice in writing as
soon as practicable of any claim made against her for which indemnity will or
could be sought under this Agreement. Notice to the Company shall be directed to
Diedrich Coffee, Inc., 2144 Michelson Drive, Irvine, CA 92612, Attention:
Corporate Secretary (or such other addresses as the Company shall designate in
writing to the Indemnitee); notice shall be deemed received if sent by prepaid
mail properly addressed, the date of such notice being the date postmarked. In
addition, the Indemnitee shall give the Company such information and cooperation
as it may reasonably require and as shall be within the Indemnitee's power.
10. Costs and expenses (including attorneys' fees) incurred by the
Indemnitee in defending or investigating any action, suit, proceeding or
investigation
Page 3 of 5
<PAGE> 4
shall be paid by the Company in advance of the final disposition of such matter,
if the Indemnitee shall undertake in writing to repay any such advances in the
event that it is ultimately determined that the Indemnitee is not entitled to
indemnification under the terms of this Agreement. Notwithstanding the foregoing
or any other provision of this Agreement, no advance shall be made by the
Company if a determination is reasonably promptly made (1) by a majority vote of
the directors who are not parties to such action, suit or proceeding, even
though less than a quorum, or (2) if there are no such directors, or if such
directors so direct, by independent legal counsel in a written opinion that,
based upon the facts known to the board or counsel at the time such
determination is made, (a) the Indemnitee acted in bad faith or deliberately
breached her duty to the Company or its stockholders, and (b) as a result of
such actions by the Indemnitee, it is more likely than not that it will
ultimately be determined that the Indemnitee is not entitled to indemnification
under the terms of this Agreement.
11. Nothing herein shall be deemed to diminish or otherwise restrict the
Indemnitee's right to indemnification under any provision of the certificate of
incorporation or bylaws of the Company or under Delaware law.
12. This Agreement shall be governed by and construed in accordance with
Delaware law, but without reference to the conflicts of law's principles of that
jurisdiction.
13. This Agreement shall be binding upon all successors and assigns of
the Corporation (including any transferee of all or substantially all of its
assets and any successor by merger or operation or law) and shall inure to the
benefit of the heirs, personal representatives and estates of Indemnitee.
14. If any provision or provisions of this Agreement shall be held to be
invalid, illegal or unenforceable for any reason whatsoever (a) the validity,
legality and enforceability of the remaining provisions of this Agreement
(including, without limitation, all portions of any paragraphs of this Agreement
containing any such provision held to be invalid, illegal or unenforceable, that
are not themselves invalid, illegal or unenforceable) shall not in any way be
affected or impaired thereby, and (b) to the fullest extent possible, the
remaining provisions of this Agreement (including, without limitation, all
portions of any paragraphs of this Agreement containing any such provision held
to be invalid, illegal or unenforceable, that are not themselves invalid,
illegal or unenforceable) shall be construed so as to give effect to the intent
of the parties that the Company provide protection to Indemnitee to the fullest
enforceable extent.
Page 4 of 5
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and signed as of the day and year first above written.
DIEDRICH COFFEE, INC.
2144 Michelson Drive
Irvine, CA 92612
-----------------------------------------
Timothy J. Ryan - Chief Executive Officer
AGREED TO AND ACCEPTED:
INDEMNITEE
Signed:_____________________________
Name:_______________________________
____________________________________
____________________________________
(address)
Page 5 of 5
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DIEDRICH
COFFEE, INC. UNAUDITED FINANCIAL STATEMENTS FOR THE THIRTEEN WEEKS ENDED AND AS
OF APRIL 29, 1998 CONTAINED IN THE COMPANY'S 1ST QUARTER 1999 10-Q AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-27-1999
<PERIOD-START> JAN-29-1998
<PERIOD-END> APR-29-1998
<CASH> 1,913,609
<SECURITIES> 0
<RECEIVABLES> 197,658
<ALLOWANCES> 0
<INVENTORY> 1,201,472
<CURRENT-ASSETS> 3,516,505
<PP&E> 13,676,407
<DEPRECIATION> 4,082,205
<TOTAL-ASSETS> 13,720,643
<CURRENT-LIABILITIES> 3,324,604
<BONDS> 0
0
0
<COMMON> 59,417
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 13,720,643
<SALES> 5,923,361
<TOTAL-REVENUES> 5,923,361
<CGS> 2,682,665
<TOTAL-COSTS> 2,682,665
<OTHER-EXPENSES> 3,889,757
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 97,273
<INCOME-PRETAX> (744,825)
<INCOME-TAX> 800
<INCOME-CONTINUING> (745,825)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (745,825)
<EPS-PRIMARY> (0.13)
<EPS-DILUTED> (0.13)
</TABLE>
