<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 7, 1999
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
DIEDRICH COFFEE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 5400 33-0086628
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
2144 MICHELSON DR.
IRVINE, CALIFORNIA 92612
(949) 260-1600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S AND CO-REGISTRANT'S PRINCIPAL EXECUTIVE
OFFICES)
ANN WRIDE
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
DIEDRICH COFFEE, INC.
2144 MICHELSON DR.
IRVINE, CALIFORNIA 92612
(949) 260-1600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
WITH COPIES TO:
JOHN M. WILLIAMS, ESQ.
GIBSON, DUNN & CRUTCHER LLP
4 PARK PLAZA, SUITE 1400
IRVINE, CALIFORNIA 92614
(949) 451-3800
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
------------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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<S> <C> <C>
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- ----------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED PRICE(1)(2) REGISTRATION FEE
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Common stock, $.01 par value................................ $28,750,000 $7,992.50
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</TABLE>
(1) Includes shares that the underwriters have the option to purchase to cover
over-allotments, if any.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(o).
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO
SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL SECURITIES, AND WE ARE NOT SOLICITING
OFFERS TO BUY THESE SECURITIES, IN ANY STATE WHERE THE OFFER OR SALE IS
NOT PERMITTED.
SUBJECT TO COMPLETION, DATED MAY 7, 1999
[DIEDRICH LOGO] TM
SHARES
COMMON STOCK
Diedrich Coffee, Inc. is offering shares of common stock.
Concurrently with the closing of this offering, we will acquire Coffee People,
Inc. by way of a merger in which Coffee People will become a wholly-owned
subsidiary of Diedrich Coffee. We will use the net proceeds from this offering
to finance a portion of the cash payment to Coffee People stockholders in the
merger. This offering is contingent upon the completion of the merger with
Coffee People.
Diedrich Coffee common stock is traded on the Nasdaq National Market under
the symbol "DDRX." On May , 1999 the last reported sale price of Diedrich
Coffee's common stock on the Nasdaq National Market was $ per share.
------------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 10.
------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
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<S> <C> <C>
Public Offering Price....................................... $ $
Underwriting Discounts and Commissions...................... $ $
Proceeds to Diedrich Coffee................................. $ $
</TABLE>
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS
IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
Diedrich Coffee has granted the underwriters the right to purchase up to an
additional shares of common stock to cover over-allotments.
expects to deliver the shares of common stock to purchasers on
, 1999.
------------------------
THE DATE OF THIS PROSPECTUS IS , 1999.
<PAGE> 3
[INSERT ARTWORK]
2
<PAGE> 4
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE
PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF
THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS
PROSPECTUS OR OF ANY SALE OF OUR COMMON STOCK. IN THIS PROSPECTUS, "DIEDRICH
COFFEE," "WE," "US" AND "OUR" REFER TO DIEDRICH COFFEE, INC., AS IT EXISTS
BEFORE THE OFFERING OR, TOGETHER WITH COFFEE PEOPLE INC., AS THEY WILL EXIST
AFTER THE MERGER AND THE OFFERING, AS THE CONTEXT REQUIRES.
UNTIL , 1999 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS THAT BUY, SELL OR TRADE OUR COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS REQUIREMENT IS
IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------------
TABLE OF CONTENTS
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PAGE
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<S> <C>
Summary..................................................... 4
Risk Factors................................................ 10
A Warning about Forward-Looking Statements.................. 14
The Coffee People Merger.................................... 15
Use of Proceeds............................................. 16
Price Range of Diedrich Coffee Common Stock................. 16
Dividend Policy............................................. 16
Capitalization.............................................. 17
Dilution.................................................... 18
Unaudited Pro Forma Combined Condensed Financial
Information............................................... 19
Diedrich Coffee Selected Financial Data..................... 24
Diedrich Coffee Management's Discussion and Analysis of
Financial Condition and Results of Operations............. 25
Coffee People Selected Financial Data....................... 32
Coffee People Management's Discussion and Analysis of
Financial Information and Results of Operations........... 33
Business.................................................... 42
Management.................................................. 54
Transactions Involving Officers, Directors and Principal
Stockholders.............................................. 63
Principal Stockholders...................................... 64
Description of Capital Stock................................ 66
Shares Eligible for Future Sale............................. 68
Underwriting................................................ 69
Legal Matters............................................... 71
Experts..................................................... 71
Where You Can Find Additional Information................... 71
Index to Financial Statements............................... F-1
</TABLE>
------------------------
"Diedrich Coffee," "Wiener Melange," "Harvest Peak," "SCOOP-A-CCINO" and
"Flor de Apanas" are registered trademarks and service marks of Diedrich Coffee.
"Coffee People," "Coffee Plantation" and "Gloria Jean's" are registered
trademarks of Coffee People. This prospectus contains other trademarks, service
marks and tradenames of Diedrich Coffee, Coffee People and of other companies.
3
<PAGE> 5
SUMMARY
Because this is only a summary, it does not contain all the information
that may be important to you. You should read the entire prospectus, including
"Risk Factors" and the financial statements and related notes, before deciding
to invest in our common stock. Except as otherwise noted, all information in
this prospectus assumes the underwriters will not exercise their over-allotment
option.
DIEDRICH COFFEE
Diedrich Coffee roasts and sells specialty coffee beans for its retail and
wholesale customers. We also sell brewed coffee, espresso-based beverages and
light food items through our 40 company-owned retail locations and two
franchised retail locations in California, Texas and Colorado. In addition, we
have over 300 wholesale accounts with businesses and restaurant chains, such as
Ruth's Chris Steakhouses, El Torito, Claim Jumper and Islands Restaurants. We
differentiate ourselves from other specialty coffee producers by roasting our
coffee beans in accordance with proprietary recipes developed over three
generations by the Diedrich family. Our roasting recipes take into account the
specific variety, origin and physical characteristics of each coffee bean to
maximize its unique flavor.
On March 16, 1999, we entered into a merger agreement with Coffee People,
Inc. Upon completion of the merger, Coffee People will be a wholly-owned
subsidiary of Diedrich Coffee. Coffee People is a specialty coffee retailer with
320 franchised and company-owned retail locations throughout the United States
and in six foreign countries. The common stock of Coffee People is currently
traded on the Nasdaq SmallCap market under the symbol "MOKA." After the merger
with Coffee People, Diedrich Coffee will be the second largest specialty coffee
company in the United States with annual systemwide sales of more than $150
million through 363 retail outlets in 38 states and seven countries.
SPECIALTY COFFEE MARKET
The Specialty Coffee Association of America estimates that the number of
specialty coffee beverage outlets in the United States was approximately 4,000
in 1995 and projects this number to increase to 10,000 by the end of 2000. We
believe that as the specialty coffee market has matured, distinct segments have
emerged: espresso/coffee bars, coffeehouses and mall-based coffee stores.
Espresso/coffee bars offer limited seating to facilitate quick customer
turnover, are generally less than 1,200 square feet in size and are usually
located in densely populated urban areas. Coffeehouses are generally greater
than 1,200 square feet in size, located in suburban areas, and encourage
customers to linger and enjoy a more relaxed, comfortable atmosphere. Mall-based
coffee stores place a heavier emphasis on the sale of flavored whole bean coffee
and coffee-related merchandise. Based on the number of domestic retail coffee
locations, Starbucks is the leader in the espresso/coffee bar segment, Gloria
Jean's is the leader in the mall-based coffee store segment and there is
presently no leader in the coffeehouse segment.
GROWTH STRATEGY
In November 1997, the Diedrich Coffee board of directors retained John
Martin as Chairman of the Board and Tim Ryan as President and Chief Executive
Officer. Messrs. Martin and Ryan collectively bring more than 55 years of
multi-unit food service experience to our company. They joined our founder,
Martin Diedrich, a recognized expert in sourcing, tasting and roasting coffee,
and began the process of building a team of experienced restaurant industry
executives. The growth strategy developed by our management team emphasizes
large area franchise development with experienced, well-capitalized, multi-unit
franchise operators interested in opening between 30 and 70 retail outlets over
a five to seven year period. During the second half of fiscal 1999, we announced
two area development agreements with franchisees located in North Carolina and
Southern California. These agreements call for the development of up to 139
coffeehouses, as well as carts and kiosks, over the next five years.
4
<PAGE> 6
We seek to differentiate our coffeehouses by offering our customers a broad
line of superior tasting coffee products and a high level of personalized
customer service, which generates strong sales and customer loyalty. Diedrich
Coffee coffeehouses offer a warm, friendly environment specifically designed to
encourage guests to linger with friends and business associates or to relax
alone in comfort. Ample seating is augmented by cozy sofas and comfortable
chairs to create intimate nooks for meeting and relaxing. The critical
components of our coffeehouse concept include high quality, fresh roasted coffee
and superior customer service by knowledgeable employees.
We believe that the coffeehouse segment has broad national and
international potential. Consequently, our objective is to expand our operations
to over 1,200 coffeehouses, as well as additional carts and kiosks through large
area development agreements with experienced multi-unit franchise operators. We
also believe that the mall-based coffee store segment is capable of additional
growth through owner-operator franchise agreements for Gloria Jean's. Our
business objective is to become the leading specialty coffee company in both the
coffeehouse and mall-based coffee store market segments. In order to implement
our growth strategy, we intend to:
- Focus on franchising to large, experienced area developers;
- Initiate internal growth of company-owned locations;
- Continue expanding our wholesale distribution channel; and
- Acquire complementary coffee retailers.
THE COFFEE PEOPLE MERGER
In the third quarter of 1998, our management team recognized the value of
an acquisition of Coffee People as a strategic opportunity to:
- quickly achieve economies of scale in purchasing, roasting, packaging and
distribution;
- accelerate the growth of our core coffeehouse concept; and
- assume a market leadership position in an additional
segment -- mall-based coffee stores.
In March 1999, we agreed to acquire Coffee People through a merger in which
Coffee People will become a wholly-owned subsidiary of Diedrich Coffee. Coffee
People operates three retail brands -- Gloria Jean's, Coffee People and Coffee
Plantation. We intend to convert Coffee People and Coffee Plantation
coffeehouses to the Diedrich Coffee brand. Founded in 1979, the Gloria Jean's
concept offers a recognized brand name with solid growth potential. Gloria
Jean's outlets generally offer a full range of flavored and unflavored coffee
beans, coffee beverages, and a variety of related gifts, supplies and
accessories. We do not intend to convert the Gloria Jean's brand to the Diedrich
Coffee brand in the near future. Rather, we intend to implement new strategies
to strengthen and reposition this brand within its market segment. However, we
believe the coffeehouse segment offers the most significant opportunities for
our future growth.
As a result of the merger, Coffee People stockholders will receive in the
aggregate for their shares:
- $23.0 million in cash; and
- 1.5 million shares of Diedrich Coffee common stock.
The completion of this equity offering is contingent upon the merger's
completion. The merger's completion is subject to a number of conditions,
including Diedrich Coffee and Coffee People stockholder approval and regulatory
approval.
------------------------
We are a Delaware corporation. Our principal executive offices are located
at 2144 Michelson Drive, Irvine, California 92612, and our telephone number is
(949) 260-1600.
5
<PAGE> 7
THE OFFERING
Common stock offered by Diedrich
Coffee................................ shares
Common stock outstanding after this
offering.............................. shares(1)
Over-allotment option................. shares
Use of proceeds....................... We intend to use the estimated net
proceeds of approximately $22.5
million to finance a portion of the
cash payment to Coffee People
stockholders in the merger. See "Use
of Proceeds."
Nasdaq National Market symbol......... DDRX
- ---------------
(1) Based on shares outstanding as of , 1999. Excludes
2,057,267 shares of common stock reserved for issuance upon the exercise of
options outstanding, 850,000 shares of common stock issuable upon the
exercise of an outstanding warrant and 326,917 shares of common stock
available for issuance under our stock option plans.
6
<PAGE> 8
SUMMARY FINANCIAL DATA
We are providing the following financial information to aid you in your
analysis of your investment in Diedrich Coffee common stock. This information is
only a summary and you should read it in conjunction with the historical
financial statements and related notes contained in this document.
DIEDRICH COFFEE FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
AT OR FOR FISCAL YEARS ENDED
------------------------------------------------------
JANUARY 29, 1997 JANUARY 28, 1998 JANUARY 27, 1999
---------------- ---------------- ----------------
<S> <C> <C> <C>
STATEMENT OF INCOME DATA:
Total revenues................................... $19,812 $22,982 $24,215
Provision for asset impairment and restructuring
costs......................................... -- (3,902) --
Income (loss) from continuing operations......... (1,028) (8,907) (2,265)
Net income (loss)................................ (986) (9,113) (2,562)
Weighted average shares outstanding -- basic and
diluted....................................... 4,414 5,393 5,934
Earnings (loss) per share -- basic and
diluted(1).................................... (0.22) (1.69) (0.43)
BALANCE SHEET DATA:
Total assets..................................... 17,471 13,948 12,736
Long-term debt and long-term obligations for
capital leases................................ -- 2,817 2,783
Total stockholders' equity....................... $14,898 $ 6,835 $ 6,027
OPERATING DATA (UNAUDITED):
Retail locations open (at end of period):
Company-operated locations.................... 47 41 43
Systemwide sales(2):
Company-operated locations.................... $19,812 $22,982 $24,215
EBITDA(3)........................................ $ 26 $(3,219) $ (324)
</TABLE>
- -------------------------
(1) Net loss per share for fiscal 1997, 1998 and 1999 is presented as basic
earnings per share under the provisions of SFAS 128.
(2) As the first Diedrich Coffee franchised retail location opened after January
27, 1999, systemwide sales consist of total revenues.
(3) EBITDA represents earnings before interest, taxes, depreciation,
amortization, provision for asset impairment and restructuring costs,
acquisition and integration expenses, and cumulative effect of changes in
accounting principles. EBITDA is not a measure of financial performance
under U.S. generally accepted accounting principles, or GAAP, and should not
be considered an alternative to, or more meaningful than, income from
operations, net income or cash flows as defined by GAAP or as a measure of
Diedrich Coffee's profitability or liquidity. All companies do not calculate
EBITDA in the same manner and, accordingly, EBITDA may not be comparable
with other companies. We have included information concerning EBITDA in this
document because we believe that such data is commonly used by some
investors to evaluate the ability of a company's earnings from its core
business operations to satisfy its debt, capital expenditure and working
capital requirements.
7
<PAGE> 9
COFFEE PEOPLE FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
AT OR FOR
-------------------------------------------------------------------------
PRO FORMA(1)
39 WEEKS 52 WEEKS 52 WEEKS 36 WEEKS 36 WEEKS 52 WEEKS
ENDED ENDED ENDED ENDED ENDED ENDED
JUNE 29, JUNE 28, JUNE 27, MARCH 7, MARCH 6, DECEMBER 12,
1996 1997 1998 1998 1999 1998
-------- -------- -------- ----------- ----------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Total revenues.......................... $24,957 $ 30,579 $ 35,051 $25,495 $40,129 $53,096
Acquisition and integration expense..... -- -- 437 -- 950 1,236
Income (loss) from operations........... 1,986 (1,185) 1,197 3,310 986 (1,467)
Cumulative effect of change in
accounting principle.................. -- (427) -- -- -- --
Net income (loss)....................... 1,224 (1,190) 738 2,005 400 (1,212)
Weighted average shares
outstanding -- basic and diluted...... 7,461 7,461 7,812 7,461 10,755 10,764
Earnings (loss) per share-basic and
diluted............................... 0.16 (0.16) 0.09 0.27 0.04 (0.11)
BALANCE SHEET DATA:
Total assets............................ 40,219 38,923 55,695 40,746 54,288 56,613
Long-term debt.......................... -- -- 3,798 -- 2,727 4,853
Total stockholders' equity.............. $35,487 $ 34,297 $ 43,502 $37,840 $43,919 $43,488
OPERATING DATA (UNAUDITED)
Retail locations open (at end of
period):
Company-operated locations:
Gloria Jean's....................... 23 31 30 26 26 25
Coffee People (Oregon).............. -- -- 25 -- 26 26
Coffee Plantation................... -- -- 14 -- 13 14
------- -------- -------- ------- ------- -------
Total company-operated stores.... 23 31 69 26 65 65
Franchised locations:
Gloria Jean's....................... 224 236 246 254 254 257
Coffee Plantation................... -- -- -- -- 1 1
------- -------- -------- ------- ------- -------
Total franchised locations....... 224 236 246 254 255 258
------- -------- -------- ------- ------- -------
Total retail locations........... 247 267 315 280 320 323
======= ======== ======== ======= ======= =======
Systemwide sales(2):
Company-operated locations:
Gloria Jean's....................... $ 6,657 $ 7,631 $ 9,030 $ 6,846 $ 5,879 $ 8,627
Coffee People (Oregon).............. -- -- 1,594 -- 10,159 13,830
Coffee Plantation................... -- -- 849 -- 6,393 8,454
------- -------- -------- ------- ------- -------
Total company-operated
locations...................... 6,657 7,631 11,473 6,846 22,431 30,911
Franchised locations:
Gloria Jean's....................... 73,247 94,434 95,349 70,980 70,340 94,300
Coffee Plantation................... -- -- -- -- 143 30
------- -------- -------- ------- ------- -------
Total franchised locations.......... 73,247 94,434 95,349 70,980 70,483 94,330
------- -------- -------- ------- ------- -------
Total systemwide sales........... 79,904 102,065 106,822 77,286 92,914 125,241
======= ======== ======== ======= ======= =======
EBITDA(3)............................... $ 2,964 $ 547 $ 3,445 $ 4,419 $ 3,088 $ 2,311
</TABLE>
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(1) The pro forma information is as if the merger between Coffee People and
Gloria Jean's had been completed on December 13, 1997.
(2) Consists of retail sales from company-operated retail locations and reported
sales from franchised locations.
(3) EBITDA represents earnings before interest, taxes, depreciation,
amortization, provision for store closures, acquisition and integration
expenses, and cumulative effect of changes in accounting principles. EBITDA
is not a measure of financial performance under U.S. generally accepted
accounting principles, or GAAP, and should not be considered an alternative
to, or more meaningful than, income from operations, net income or cash
flows as defined by GAAP or as a measure of Coffee People's profitability or
liquidity. All companies do not calculate EBITDA in the same manner and,
accordingly, EBITDA may not be comparable with other companies. We have
included information concerning EBITDA in this document because we believe
that such data is commonly used by some investors to evaluate the ability of
a company's earnings from its core business operations to satisfy its debt,
capital expenditure and working capital requirements.
8
<PAGE> 10
SUMMARY UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
The merger will be accounted for as a purchase transaction, which means
that the purchase price will be allocated to assets acquired and liabilities
assumed based on their estimated fair values at the time Diedrich Coffee and
Coffee People are combined. We are providing the following financial information
to aid you in your analysis of the financial aspects of the merger and this
offering.
We derived this information from the audited financial statements for
Diedrich Coffee for the year ended January 27, 1999 and unaudited financial
statements for Coffee People for the 52 weeks ended December 12, 1998. The
unaudited pro forma combined condensed financial data give accounting effect as
if the merger had occurred on January 29, 1998 for the statement of income data,
and on January 27, 1999 for the balance sheet data, and reflect the sale of
shares in this offering and the application of the net proceeds. The unaudited
pro forma combined condensed statement of operations also gives accounting
effect as if the merger between Coffee People and Gloria Jean's had occurred on
December 13, 1997. This information is only a summary of the unaudited pro forma
combined condensed financial information presented in pages 20 to 24 and should
be read in conjunction with our historical financial statements and related
notes.
Although this pro forma financial information has been prepared based on
currently available information using assumptions we believe are appropriate,
you should note that this information may not be indicative of what actual
results would be in the future or would have been for the periods presented. You
should read the notes to the unaudited pro forma combined condensed financial
statements for further discussion of the assumptions we made to prepare this
information.
The unaudited pro forma combined financial data does not reflect certain
cost savings that management believes may be realized after the merger.
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
AT OR FOR FISCAL YEAR
ENDED JANUARY 27, 1999
ADJUSTED FOR THE MERGER
-----------------------
<S> <C>
STATEMENT OF INCOME DATA:
Total revenues............................................ $77,311
Acquisition and integration expense....................... 1,236
Loss from continuing operations........................... (4,182)
Net loss.................................................. (3,736)
Weighted average shares outstanding -- basic and
diluted................................................ 11,601
Loss from continuing operations per common and equivalent
share.................................................. (0.32)
BALANCE SHEET DATA:
Working capital(1)........................................ 5,628
Total assets.............................................. 62,312
Long-term debt including long-term obligations under
capital leases......................................... 10,674
Total stockholders' equity................................ $38,277
</TABLE>
- -------------------------
(1) Working capital is defined as current assets less current liabilities
derived from the unaudited pro forma combined condensed balance sheet.
9
<PAGE> 11
RISK FACTORS
You should consider carefully the following risks before you decide to buy
our common stock. Our business, financial condition and results of operations
could be materially and adversely affected by any of the following risks.
HISTORICAL LOSSES MAY CONTINUE.
We had a net loss of $2,562,000, $9,113,000, and $986,000 for the twelve
months ended January, 1999, 1998 and 1997, respectively. Coffee People reported
a net loss of $9,000 for the 24 weeks ended December 12, 1998, net income of
$738,000 for the 52 week period ended June 27, 1998, and a net loss of
$1,190,000 for the 52 week period ended June 28, 1997. See "Diedrich Coffee
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Coffee People Management's Discussion and Analysis of Financial
Condition and Results of Operations."
OUR GROWTH STRATEGY MAY BE DIFFICULT TO MANAGE.
As of March 6, 1999, we owned 40 retail locations, which we managed on a
day-to-day basis, and operated two franchised retail locations. We are acquiring
26 Coffee People brand retail locations, 14 Coffee Plantation retail locations
and 280 Gloria Jean's retail locations, which are predominantly mall-based and
franchised. Our growth strategy contemplates franchise area development for
additional Diedrich Coffee coffeehouses as well as opening new company-operated
coffeehouses. In addition, we plan to continue single store franchise
development for Gloria Jean's, and increase wholesale sales for both Diedrich
Coffee and Gloria Jean's. Implementation of our growth strategies may divert
management's attention from other aspects of our business and place a strain on
management, operational and financial resources, and accounting systems. Our
continued growth will require us to:
- attract franchise area developers for Diedrich Coffee;
- attract single store franchisees for Gloria Jean's;
- continue to upgrade products and programs at Gloria Jean's;
- expand wholesale sales of Diedrich Coffee and Gloria Jean's;
- evaluate the potential acquisition of complementary coffee retailers;
- obtain (or have our franchise area developers obtain) suitable sites at
acceptable costs in highly competitive real estate markets;
- hire, train and retain qualified personnel;
- integrate newly franchised or corporate locations into existing product
distribution;
- improve inventory control, marketing and information systems; and
- impose and maintain strict quality control from green coffee acquisition
to the fresh cup of perfectly brewed coffee in a customer's hand.
Should our franchisees encounter business or operational difficulties,
anticipated revenues from franchise fees and product sales to franchisees could
be adversely affected. These adverse results also could affect our ability to
sell additional franchises.
IF WE ARE UNABLE TO OBTAIN ACCEPTABLE FINANCING, IT COULD HAVE A MATERIAL
ADVERSE EFFECT ON OUR GROWTH STRATEGY.
In order to achieve our anticipated growth and the expansion of our
wholesale and retail business in fiscal 2000, including new coffeehouse
construction and franchising, we will need to incur debt or issue additional
stock in public or private financings. If additional funds are raised through
the issuance of stock, dilution to stockholders may result. If additional funds
are raised through the incurrence of debt, these debt instruments will likely
contain restrictive financial, maintenance and security covenants, which
10
<PAGE> 12
could have a material adverse effect on our business, financial condition and
results of operations. This additional financing may not be available at all or
on terms satisfactory to us.
OUR SUPPLY COSTS MAY BE HIGHER THAN WE EXPECT BECAUSE OF FLUCTUATIONS IN
AVAILABILITY AND COST OF UNROASTED COFFEE.
Increases in the price of green coffee, or the unavailability of adequate
supplies of green coffee of the quality we seek, whether due to the failure of
our suppliers to perform, conditions in coffee-producing countries, or
otherwise, could have a material adverse effect on our results of operations. We
depend upon both outside brokers and our direct contacts with exporters and
growers in countries of origin for our supply of green coffee. Coffee supply and
price are subject to significant volatility beyond our control. Although most
coffee trades in the commodity market, coffee of the quality we seek 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, political and economic conditions. In addition, green coffee
prices have been affected in the past, and may be affected in the future, by the
actions of certain organizations and associations, such as the International
Coffee Organization or the Association of Coffee Producing Countries. These
organizations have historically attempted to establish commodity price controls
of green coffee through agreements establishing export quotas or restricting
coffee supplies worldwide. These organizations, or others, may succeed in
raising green coffee prices. Should this happen, we may not be able to maintain
our gross margins by raising prices without affecting demand.
WE ARE LIKELY TO CONTINUE EXPERIENCING FLUCTUATIONS IN QUARTERLY RESULTS BECAUSE
THE SALES OF COFFEE PRODUCTS ARE SEASONAL.
Our business is subject to seasonal fluctuations as well as general trends
and fluctuations that affect retail restaurants and retailers in general. The
fall-winter holiday season generally experiences the highest sales. Hot weather
tends to depress sales of hot coffee and espresso drinks, especially
unseasonably warm weather in any season. Consequently, we will continue to
experience significant fluctuations in quarterly results.
OUR INDUSTRY IS HIGHLY COMPETITIVE AND WE MAY NOT COMPETE EFFECTIVELY.
The highly competitive nature of the retail specialty coffee market could
adversely affect our business and financial condition. Our beverages compete
directly against restaurant and other retail locations that serve coffee. Our
whole coffee beans compete directly against specialty coffee beans sold at
retail through supermarkets and a growing number of specialty coffee stores.
Barriers to entry are low, and we expect competition to increase substantially.
The coffee industry is currently dominated by several large companies, such as
Kraft Foods, Inc., Proctor & Gamble Co. and Nestle S.A., many of which have
begun aggressively marketing gourmet coffee products. Although the retail
specialty coffee market remains fragmented, we compete directly with Starbucks
Corporation, the largest U.S. specialty coffee retailer, and numerous other
regional coffee bar and coffeehouse operators. Starbucks Corporation has
substantially greater financial, marketing and other resources than we do and
has operations in the markets in which we currently operate or intend to expand.
THE LOSS OF KEY PERSONNEL OR OUR INABILITY TO ATTRACT AND RETAIN QUALIFIED
PERSONNEL COULD SIGNIFICANTLY DISRUPT OUR BUSINESS.
Our continued success largely will depend on the efforts and abilities of
our executive officers and other key employees, particularly John E. Martin,
Chairman of the Board, Timothy J. Ryan, President and Chief Executive Officer,
and Martin Diedrich, Chief Coffee Officer. The loss of services of these
individuals could disrupt operations. Although Diedrich Coffee has employment
agreements with Messrs. Martin, Ryan and Diedrich, any of its executive officers
can terminate their employment if they choose to do so. See
"Management -- Executive Compensation -- Employment Agreements and Compensatory
Arrangements."
11
<PAGE> 13
In addition, our success and the success of our franchisees will depend
upon our and their ability to attract and retain highly motivated,
well-qualified retail operators and other management personnel, as well as a
sufficient number of qualified employees. Qualified individuals needed to fill
these positions are in short supply in some geographic areas. Our inability to
recruit and retain such individuals may delay the planned openings of new retail
locations or result in higher employee turnover in existing retail locations,
which could have a material adverse effect on our business or results of
operations.
OUR LACK OF DIVERSIFICATION MAY AFFECT BUSINESS IF DEMAND IS REDUCED.
Our business is primarily centered on one product: fresh premium
custom-roasted coffee. To date, our operations have been limited to primarily
the purchase and roasting of green coffee beans and the sale of whole bean
coffee, coffee beverages and espresso drinks through our coffeehouses and our
wholesale coffee and mail order businesses. Any decrease in demand for coffee
would have a material adverse effect on our business, operating results and
financial condition.
WE MAY NOT BE ABLE TO RENEW LEASES OR CONTROL RENTS INCREASES AT OUR RETAIL
LOCATIONS.
All of our thirty-three company-operated coffeehouses are on leased
premises. With the exception of two retail locations, all Coffee People brand
and Coffee Plantation retail locations are also leased. Gloria Jean's stores are
generally leased by an indirect subsidiary of Coffee People and then sublet to
franchisees. Upon the expiration of some of these leases, there is no automatic
renewal or option to renew. Consequently, these leases may not be renewed. If
they are renewed, rents may increase substantially. Either of these events could
adversely affect us. Other leases are subject to renewal at fair market value,
which could involve substantial rent increases, or are subject to renewal with
scheduled rent increases, which could result in rents being above fair market
value.
COMPLIANCE WITH HEALTH AND FRANCHISING GOVERNMENT REGULATIONS APPLICABLE TO US
COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Each retail location and roasting facility is and will be subject to
licensing and reporting requirements by numerous governmental authorities. These
governmental authorities include federal, state and local health, environmental,
labor relations, sanitation, building, zoning, fire and safety departments.
Difficulties in obtaining or failure to obtain the necessary licenses or
approvals could delay or prevent the development or operation of a given retail
location or roasting facility. Any problems that we may encounter in renewing
such licenses in one jurisdiction, may adversely affect our licensing status on
a federal, state or local level in other relevant jurisdictions.
We are also subject to federal regulation and certain state laws that
govern the offer and sale of franchises. Many state franchise laws impose
substantive requirements on franchise agreements, including limitations on
noncompetition provisions and on provisions concerning the termination or
nonrenewal of a franchise. Some states require companies to register certain
materials before franchises can be offered or sold in that state. The failure to
obtain or retain licenses or approvals to sell franchises could adversely affect
our business, financial condition and results of operations.
OUR RETAIL LOCATIONS ARE CONCENTRATED IN THE WESTERN REGION OF THE UNITED
STATES, AND THEREFORE OUR BUSINESS IS SUBJECT TO FLUCTUATIONS IF ADVERSE
BUSINESS CONDITIONS OCCUR IN THAT REGION.
After the merger, our retail locations will be primarily located in the
western region of the United States. Accordingly, we are susceptible to
fluctuations in our business caused by adverse economic or other conditions in
this region, including natural or other disasters. In addition, some of our
competitors have many more retail locations than we do. Consequently, adverse
economic or other conditions in a region, a decline in the profitability of
several existing retail locations or the introduction of several unsuccessful
new retail locations in a geographic area could have a more significant effect
on our results of operations than would be the case for a company with a larger
number of retail locations or with more geographically dispersed retail
locations.
12
<PAGE> 14
WE COULD BE SUBJECT TO ADVERSE PUBLICITY OR CLAIMS FROM OUR GUESTS.
We may be the subject of complaints or litigation from guests alleging
beverage and food-related illness, injuries suffered on the premises or other
quality, health or operational concerns. Adverse publicity resulting from such
allegations may materially adversely affect us, regardless of whether such
allegations are true or whether we are ultimately held liable. We may also be
the subject of complaints or allegations from current, former or prospective
employees from time-to-time. A lawsuit or claim could result in an adverse
decision against us that could have a material adverse effect on our business
and results of operations.
CHANGES IN CONSUMER PREFERENCES OR DISCRETIONARY SPENDING COULD NEGATIVELY
AFFECT OUR RESULTS.
Our retail locations offer specialty coffee beans, brewed coffee beverages,
expresso-based beverages, blended drinks and light food items served in a casual
setting. Our continued success depends, in part, upon the popularity of these
types of coffee-based beverages and this style of casual dining. Shifts in
consumer preferences away from our coffee-based beverages or casual setting
could materially adversely affect our future profitability. Also, our success
depends to a significant extent on numerous factors affecting discretionary
consumer spending, including economic conditions, disposable consumer income and
consumer confidence. Adverse changes in these factors could reduce guest traffic
or impose practical limits on pricing, either of which could adversely affect
our business, financial condition, operating results and cash flows.
WE MAY EXPERIENCE DIFFICULTIES IN INTEGRATING COFFEE PEOPLE AFTER THE MERGER.
We may experience difficulties in integrating our operations with those of
Coffee People, and there can be no assurance that we will realize the operating
efficiencies and cost savings that we believe the merger will provide. After the
merger's completion, we may integrate, among other things, roasting, packaging,
purchasing, product development and administrative functions with those of
Coffee People. The integration of the combined operations may temporarily
distract management from the day-to-day business of the combined company after
the merger. For example, Coffee People's integration will require the experience
and expertise of certain key managers of Coffee People whom we expect to retain.
There is no assurance that these Coffee People managers will remain with us for
the time period necessary to successfully integrate Coffee People's operations.
We expect to incur restructuring and integration costs from combining Coffee
People's operations with ours. These costs may be substantial and may include
costs for employee severance, relocation and disposition of excess equipment and
other merger-related costs. We have not yet determined the total amount of these
costs.
WE MAY BE REQUIRED TO SPEND MORE OF OUR CASH RESERVES BECAUSE OF THE MERGER THAN
WE ANTICIPATED.
Even if we are able to successfully integrate the operations of Coffee
People, there is no assurance that such integration will result in the
realization of the full benefits of the cost savings, efficiencies, or revenue
enhancements that we currently expect or that such benefits will be achieved
within the time frame that we currently anticipate. The cost savings and other
benefits from the merger may be offset by costs incurred in integrating Coffee
People's operations, as well as by increases in other expenses, by operating
losses or by problems in the business unrelated to the merger.
WE MAY LOSE CUSTOMERS WHEN WE CONVERT COFFEE PEOPLE AND COFFEE PLANTATION BRAND
COFFEEHOUSES TO THE DIEDRICH COFFEE BRAND.
Most Coffee People brand and Coffee Plantation retail locations are
neighborhood coffeehouses, which have loyal customers that are accustomed to and
expect Coffee People and Coffee Plantation brand products. We may lose these
customers when we convert the coffeehouses to the Diedrich Coffee brand.
13
<PAGE> 15
SOME STOCKHOLDERS WILL CONTINUE TO INFLUENCE MATTERS AFFECTING US, WHICH MAY
CONFLICT WITH YOUR INTERESTS.
Our current directors and officers beneficially own 58% of our outstanding
shares of common stock before the merger and this offering. After giving effect
to the merger and this offering, these stockholders will own between 34% and 36%
of the voting power of our outstanding common stock, depending on the number of
shares sold in this offering and issued to Coffee People stockholders in the
merger. As a result of this stock ownership, these stockholders may act in
concert and continue to influence the vote on all matters submitted to a vote of
our stockholders, including the election of directors, amendments to the
certificate of incorporation and the by-laws and approval of significant
corporate mergers. See "Description of Capital Stock." This consolidation of
voting power could also delay, deter or prevent a change-in-control of Diedrich
Coffee that might be otherwise beneficial to stockholders.
SUBSTANTIAL SALES OF OUR COMMON STOCK COULD ADVERSELY AFFECT ITS MARKET PRICE.
We cannot predict the effect, if any, that future sales of shares of our
common stock or the availability of such shares for future sale will have on its
market price from time-to-time. Sales of substantial amounts of our common
stock, or the perception that such sales could occur, could adversely affect
prevailing market prices for the stock.
THE VALUE OF OUR STOCK AFTER THE MERGER AND THIS OFFERING COULD CONTINUE TO BE
VOLATILE.
The trading price of our common stock has fluctuated significantly in the
past. Often, these fluctuations have been greater than those experienced by the
stock market in general. The trading price of our common stock after the merger
and this offering is likely to continue experiencing wide price fluctuations in
response to factors such as:
- actual or anticipated variations in revenues or operating results;
- comments or recommendations issued by analysts who follow us and our
competitors;
- failure to meet analysts' expectations of performance; and
- our ability to execute our franchising strategy.
A WARNING ABOUT FORWARD-LOOKING STATEMENTS
We make forward-looking statements in this document that are subject to
risks and uncertainties. These forward-looking statements include information
about possible or assumed future results of our and the combined company's
financial condition, operations, plans, objectives and performance.
Additionally, when we make statements about the merger, such as anticipated cost
savings or restructuring charges associated with the merger, we are making
forward-looking statements. When we use the words "believe," "expect,"
"anticipate," "estimate" or similar expressions, we are also making
forward-looking statements. Many possible events or factors could affect the
future financial results and performance of each of Diedrich Coffee and Coffee
People and the combined company after the merger. This could cause our results
or performance to differ materially from those expressed in our forward-looking
statements. You should consider these risks when you vote, along with the
following possible events or factors:
1. Our revenues after the merger could be lower than we expect, our
restructuring charges could be higher than we expect and our operating
costs could be greater than we expect.
2. Our growth strategy may not be as successful as we expect if we are
unable to attract franchise area developers or single store franchisees.
3. We may encounter difficulties and incur additional expenses, integrating
Diedrich Coffee's and Coffee People's business, brands or operating
systems or retaining key personnel.
4. Inclement weather or adverse political changes may significantly
increase our coffee costs.
5. Competition within the retail specialty coffee market may intensify.
6. Adverse changes may occur in the securities or financial markets.
14
<PAGE> 16
THE COFFEE PEOPLE MERGER
On March 16, 1999, we signed a merger agreement with Coffee People that
contemplates our acquisition of Coffee People. Coffee People operates three
retail brands -- Gloria Jean's, Coffee People and Coffee Plantation. We intend
to convert Coffee People and Coffee Plantation coffeehouses to the Diedrich
Coffee brand. Founded in 1979, the Gloria Jean's concept offers a recognized
brand name with solid growth potential. Gloria Jean's outlets generally offer a
full range of flavored and unflavored coffee beans, coffee beverages, and a
variety of related gifts, supplies and accessories. We do not intend to convert
the Gloria Jean's brand to the Diedrich Coffee brand in the near future. Rather,
we intend to implement new strategies to strengthen and reposition this brand
within its market segment.
The acquisition will occur through a merger in which Coffee People will
become a wholly-owned subsidiary of Diedrich Coffee. As a result of the merger,
Coffee People stockholders will receive in the aggregate for their shares:
- $23 million in cash; and
- 1.5 million shares of Diedrich Coffee common stock.
In connection with the merger, Second Cup Ltd. and our directors, officers
and their affiliates have agreed to vote the shares they own in favor of the
merger agreement and the transactions contemplated by it. Second Cup owns
approximately 69% of the outstanding Coffee People common stock through its
wholly-owned subsidiary, while our directors, officers and their affiliates own
approximately 42% of the outstanding Diedrich Coffee common stock. Additionally,
Second Cup has entered into a lock-up agreement with us that restricts its
ability to sell the shares of Diedrich Coffee common stock it will receive in
the merger. In conjunction with the lock-up agreement, we have agreed to grant
Second Cup unlimited piggy-back registration rights and two demand registration
rights with respect to the shares it will receive in the merger in order to
mitigate the lock-up agreement's sale restrictions and the impact of Second
Cup's affiliate status.
Upon completion of the merger, we have agreed to create a vacancy on the
Diedrich Coffee board and appoint a director designated by Second Cup. Our
directors, officers and a significant stockholder have agreed to vote their
shares of Diedrich Coffee common stock in favor of Second Cup's designee at any
election of directors, for so long as Second Cup owns at least 50% of the shares
it will receive in the merger.
The completion of this equity offering is contingent upon the merger's
completion. The merger's completion is subject to a number of conditions,
including Diedrich Coffee and Coffee People stockholder approval and regulatory
approval.
15
<PAGE> 17
USE OF PROCEEDS
We estimate the net proceeds from this offering, after deduction of
discounts, commissions and expenses, will be approximately $22.5 million. We
intend to use the net proceeds to finance a portion of the cash payment to
Coffee People stockholders in the merger.
PRICE RANGE OF DIEDRICH COFFEE COMMON STOCK
Diedrich Coffee common stock is reported on the Nasdaq National Market
under the symbol "DDRX." The following table sets forth the high and low bid
information for the quarterly periods indicated for our common stock as reported
on the Nasdaq National Market since January 30, 1997.
<TABLE>
<CAPTION>
PRICE RANGE
----------------
PERIOD HIGH LOW
------ ------ ------
<S> <C> <C>
FISCAL YEAR ENDED JANUARY 28, 1998
First Quarter............................................. $8 3/4 $2 3/8
Second Quarter............................................ 4 2 1/2
Third Quarter............................................. 4 1/16 2 7/16
Fourth Quarter............................................ 9 2 3/4
FISCAL YEAR ENDED JANUARY 27, 1999
First Quarter............................................. 8 5 11/1
Second Quarter............................................ 8 1/4 6 9/16
Third Quarter............................................. 7 1/4 3 3/8
Fourth Quarter............................................ 6 1/2 3 7/8
FISCAL YEAR ENDING FEBRUARY 2, 2000
First Quarter............................................. 6 7/8 3 7/8
</TABLE>
At April 7, 1999, there were 6,173,538 shares outstanding and 147
stockholders of record of our common stock.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
do not expect to pay any cash dividends for the foreseeable future. We currently
intend to retain any future earnings to finance our growth. Any future
determination to pay cash dividends will be at the discretion of our board of
directors and will be dependent on earnings, financial condition, operating
results, capital requirements, any contractual restrictions and other factors
that our board deems relevant.
16
<PAGE> 18
CAPITALIZATION
The following table sets forth our capitalization as of January 27, 1999 on
an actual basis and as adjusted to give effect to the receipt by us of the
estimated net proceeds from the sale of shares offered at an assumed
public offering price of $ per share and the merger. This information should
be read in conjunction with our consolidated financial statements and the notes
relating to such statements appearing elsewhere in this prospectus. This
information is based on the number of shares of common stock outstanding on
January 27, 1999. It excludes:
- 2,057,267 shares of common stock issuable upon the exercise of options
outstanding at a weighted average exercise price of $6.17 per share;
- 850,000 shares of common stock issuable upon the exercise of an
outstanding warrant at an exercise price of $2.25 per share; and
- 326,917 shares available for issuance under our stock option plans.
<TABLE>
<CAPTION>
JANUARY 27, 1999
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................... $ 1,201 $ --
======== ====
Long-term debt and capital lease obligations, less current
portion................................................... 2,783 --
Stockholders' equity:
Common stock, $0.01 par value, 25,000,000 shares
authorized on an actual and adjusted basis; 6,167,313
shares issued and outstanding on an actual basis;
11,834,313 shares issued and outstanding on an as
adjusted basis......................................... 61 --
Additional paid-in capital................................ 18,708 --
Accumulated deficit....................................... (12,742) --
-------- ----
Total stockholders' equity........................ 6,027 --
======== ====
Total capitalization.............................. $ 8,810 $ --
======== ====
</TABLE>
17
<PAGE> 19
DILUTION
Our net tangible book value as of January 27, 1999 was approximately $5.7
million, or $0.92 per share of common stock based on 6,167,000 shares of common
stock outstanding. Net tangible book value per share represents the amount of
our total tangible assets less total liabilities, divided by the number of
shares of common stock outstanding as of January 27, 1999. Assuming the sale by
us of the shares offered at an assumed offering price of $ per
share and after deducting underwriting discounts and estimated offering
expenses, and the application of the estimated net proceeds and after giving
effect to the merger, our pro forma net tangible book value as of
, 1999 would have been $ , or $ per share
of common stock. This represents an immediate increase in net tangible book
value of $ per share to existing stockholders and an immediate dilution in
the pro forma net tangible book value of $ per share to new investors. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share..................... $
Pro forma net tangible book value per share before this
offering............................................... $
-------
Increase attributable to the merger and offering.......... $
-------
Pro forma net tangible book value per share after the merger
and this offering......................................... $
-------
Pro forma dilution per share to new investors............... $
=======
</TABLE>
The following table summarizes the differences as of ,
1999, on a pro forma basis giving effect to the merger, between the total
consideration paid and the average price per share paid by the existing
stockholders and the new investors with respect to the number of shares of
common stock purchased from Diedrich Coffee based on an assumed public offering
price of $ per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------- ------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------- ------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders........................
New investors................................
------- --- ------- --- -------
Total.............................. 100% $ 100% $
======= === ======= === =======
</TABLE>
We expect there to be shares of common stock outstanding after
the offering. The tables and calculations above assume no exercise of
outstanding options or warrants unless otherwise set forth in this prospectus.
On January 27, 1999, there were:
- 2,057,267 shares issuable upon the exercise of options outstanding at a
weighted average exercise price of $6.17 per share;
- 850,000 shares issuable upon the exercise of an outstanding warrant at an
exercise price of $2.25 per share; and
- 326,917 shares available for issuance under our stock option plans.
To the extent that these options or warrants are exercised, there will be
further dilution to new investors. Please see "Management -- Benefit Plans" and
"-- Employment Agreements and Compensatory Arrangements" for a discussion of our
stock option plans.
18
<PAGE> 20
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
The following tables present summary historical information for Diedrich
Coffee and Coffee People derived from financial statements. The unaudited pro
forma combined condensed balance sheet as of January 27, 1999 gives effect to
the merger between Diedrich Coffee and Coffee People as of that date and
reflects the sale of the shares in this offering and the application of the net
proceeds. The unaudited pro forma combined condensed statement of operations
presents the results for Diedrich Coffee and Coffee People as if the merger
between Coffee People and Gloria Jean's had occurred on December 13, 1997 and
the merger between Diedrich Coffee and Coffee People had occurred on January 29,
1998 and reflects the sale of the shares in this offering and the application of
the net proceeds.
This unaudited pro forma financial information presented is based on the
assumptions and adjustments described in the accompanying notes. The unaudited
pro forma statement of operations does not purport to represent what our results
of operations actually would have been if the events described above had
occurred as of the dates indicated or what such results would be for any future
periods. The unaudited pro forma financial statements are based upon assumptions
and adjustments that we believe are reasonable. The unaudited pro forma
financial statements, and the accompanying notes, should be read in conjunction
with the historical financial statements and related notes, included elsewhere
in this document. In addition, the unaudited pro forma combined condensed
financial information does not reflect certain cost savings that management
believes may be realized following the merger of Diedrich Coffee and Coffee
People. These savings are expected to be realized primarily through combining
the operations of the companies and implementing Diedrich Coffee's management
practices.
The merger with Coffee People will be accounted for using the purchase
method of accounting and, accordingly, the assets acquired and liabilities
assumed will be recorded at their fair values as of the date of the merger which
are not expected to differ significantly from historical costs. The excess of
the purchase price over the fair value of the assets acquired and liabilities
assumed will be recorded as goodwill.
19
<PAGE> 21
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF JANUARY 27, 1999
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
HISTORICAL FOR MERGER
------------------------------- OF DIEDRICH PRO FORMA
DIEDRICH COFFEE COFFEE PEOPLE COFFEE AND COMBINED
JANUARY 27, DECEMBER 12, COFFEE ADJUSTED FOR
1999 1998 PEOPLE THE MERGER
--------------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash & cash equivalents................... $ 1,201 $ 2,224 $ 450(1) $ 3,875
Accounts and notes receivable............. 364 5,184 5,548
Inventories............................... 1,279 4,304 5,583
Other current assets...................... 207 3,410 3,617
------- ------- -------- -------
Total current assets............ 3,051 15,122 450 18,623
Property and equipment, net............... 9,120 12,240 21,360
Costs in excess of net assets of business
acquired, net........................... 329 25,684 (7,488)(2) 18,525
Other assets.............................. 237 3,567 3,804
------- ------- -------- -------
$12,737 $56,613 $ (7,038) $62,312
======= ======= ======== =======
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt &
capital lease obligations............ $ 170 $ 1,368 $ 1,162(3) $ 2,700
Accounts payable and accrued
compensation......................... 2,454 4,951 7,405
Other current liabilities............... 1,083 1,807 2,890
------- ------- -------- -------
Total current liabilities....... 3,707 8,126 1,162 12,995
Capital lease obligations, less current
portion................................. 283 792 1,075
Long-term debt............................ 2,500 4,061 3,038(3) 9,599
Other liabilities......................... 220 146 366
Total stockholders' equity................ 6,027 43,488 (11,238)(4) 38,277
------- ------- -------- -------
$12,737 $56,613 $ (7,038) $62,312
======= ======= ======== =======
</TABLE>
- -------------------------
(1) Pro forma adjustments to cash based on the terms of the agreement are as
follows:
<TABLE>
<CAPTION>
AS OF
JANUARY 27, 1999
----------------
<S> <C>
Cash received from this offering*........................... $ 23,250
Cash paid for acquisition+.................................. (23,000)
Cash received for new debt issued........................... 12,000
Cash paid to retire debt.................................... (7,800)
Transaction and severance costs............................. (4,000)
--------
Pro forma cash adjustment................................... $ 450
========
</TABLE>
------------------------------
* Represents estimated cash proceeds from this offering, assuming that
4,167 shares are issued at a public offering price of $6.00 per share,
less fees and expenses estimated at 7%.
+ Represents purchase price, subject to adjustments based on the actual
proceeds and share price of this offering, less 1,500 shares issued to
Coffee People stockholders in the merger at $6.00 per share.
20
<PAGE> 22
(2) Reflects adjustments to assets and liabilities assumed based on their
estimated fair values under the purchase method of accounting. The
allocation of the aggregate purchase cost below is preliminary. The final
allocation will be based on appraisals and other studies that will be
completed after the merger's completion and management's final evaluation of
such assets and liabilities. Some portion of the excess of purchase cost
over the historical cost of the net assets acquired will ultimately be
allocated to specific tangible and intangible assets and liabilities,
including inventory, land, property and equipment, and deferred taxes and
liabilities. The final allocation of purchase cost and the resulting effect
on net income may differ significantly from the pro forma amounts included
herein.
<TABLE>
<CAPTION>
AS OF
JANUARY 27, 1999
----------------
<S> <C>
Purchase price*............................................. $ 32,000
Direct acquisition costs.................................... 4,000
--------
Total consideration and direct acquisition
costs........................................... 36,000
Less: historical cost of net assets acquired................ (43,488)
--------
Net adjustment.............................................. $ (7,488)
========
</TABLE>
---------------------------------
* The purchase price assumes a $6.00 per share price for our common
stock at the time of the merger. The purchase price is subject to
adjustment based on the actual share price of our common stock at the
time of the merger.
(3) These adjustments record (i) the proceeds of a new $12,000 credit facility
and (ii) the use of a portion of the proceeds to repay existing
indebtedness. The table below reflects the financing transactions.
<TABLE>
<CAPTION>
AS OF
JANUARY 27, 1999
----------------
<S> <C>
Current:
Current portion of new debt issued.......................... $ 2,400
Current portion of debt retired............................. (1,238)
-------
Net current adjustment............................ $ 1,162
=======
Long-term:
Long-term portion of new debt issued........................ $ 9,600
Long-term portion of debt retired........................... (6,562)
-------
Net long-term adjustment.......................... $ 3,038
=======
</TABLE>
(4) Adjustments to stockholders' equity based on the pro forma capitalization of
Diedrich Coffee are as follows:
<TABLE>
<CAPTION>
AS OF
JANUARY 27, 1999
----------------
<S> <C>
Coffee People stockholders' equity*......................... $(43,488)
Stock issued in purchase+................................... 32,250
--------
Pro Forma equity adjustment................................. $(11,238)
========
</TABLE>
---------------------------------
* Represents the elimination of Coffee People's common stock of $44,637
and accumulated deficit of $1,149.
+ Represents 4,167 shares issued in this offering at $6.00 per share,
less expenses estimated at 7%, plus an additional 1,500 shares issued
to Coffee People stockholders in the merger at $6.00 per share.
21
<PAGE> 23
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED JANUARY 27, 1999
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
-------------------------- PRO FORMA PRO FORMA(2)
DIEDRICH COFFEE ADJUSTMENTS COFFEE PRO FORMA
COFFEE PEOPLE TO COFFEE PEOPLE ADJUSTMENTS
----------- ------------ PEOPLE ------------ FOR MERGER
12 MONTHS 12 MONTHS HISTORICAL 12 MONTHS OF DIEDRICH PRO FORMA
ENDED ENDED FOR MERGER ENDED COFFEE AND COMBINED
JANUARY 27, DECEMBER 12, WITH GLORIA DECEMBER 12, COFFEE ADJUSTED FOR
1999 1998 JEAN'S(1) 1998 PEOPLE THE MERGER
----------- ------------ ------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Total Revenues..................... $24,215 $44,341 $8,755 $53,096 $ $77,311
------- ------- ------ ------- ------ -------
Cost of sales and related occupancy
costs............................ 10,955 26,415 4,408 30,823 41,778
Store operating expenses........... 8,936 11,275 2,972 14,247 23,183
Other operating expenses........... 634 -- 634
Depreciation....................... 1,885 1,300 499 1,799 3,684
Amortization....................... 56 587 156 743 (280)(3) 519
General and administrative
expenses......................... 4,014 4,760 955 5,715 9,729
Acquisition and integration
expenses......................... -- 1,236 -- 1,236 1,236
------- ------- ------ ------- ------ -------
Total costs and expenses....... 26,480 45,573 8,990 54,563 (280) 80,763
------- ------- ------ ------- ------ -------
Operating (loss) income............ (2,265) (1,232) (235) (1,467) (280) (3,452)
Interest (expense) and other
income........................... (293) (39) (156) (195) (242)(4) (730)
------- ------- ------ ------- ------ -------
Loss from continuing operations.... (2,558) (1,271) (391) (1,662) 38 (4,182)
Income tax provision (benefit)..... 4 (450) -- (450) (446)
------- ------- ------ ------- ------ -------
Net income (loss).................. $(2,562) $ (821) $ (391) $(1,212) $ 38 $(3,736)
======= ======= ====== ======= ====== =======
Basic and diluted loss per common
share............................ $ (0.43) $ (0.32)
======= =======
Weighted average number of common
shares outstanding............... 5,934 11,601
======= =======
</TABLE>
- -------------------------
(1) These pro forma adjustments represent the results of operations from
December 13, 1997 through May 19, 1998 for Coffee People (Oregon) and Coffee
Plantation which were merged with Gloria Jeans' on May 19, 1998.
(2) The pro forma information is as if the merger between Coffee People and
Gloria Jean's had been completed on December 13, 1997.
(3) Represents the reduction in amortization of goodwill based on preliminary
estimated fair values of the assets acquired and liabilities assumed. The
final allocation will be based upon appraisals and other studies that will
be completed subsequent to the acquisition and management's final evaluation
of such assets and liabilities. The final allocation of the purchase cost
and the resulting effect on net income may differ significantly from the pro
forma amounts indicated herein.
Amortization expense is summarized below:
<TABLE>
<S> <C>
Costs in excess of net assets of business acquired, net.... $18,525
Amortization period in years............................... 40
-------
463
Less amortization recorded by Coffee People................ (743)
-------
$ (280)
=======
</TABLE>
22
<PAGE> 24
(4) Interest expense based on the pro forma capitalization of Diedrich Coffee is
summarized in the table below:
<TABLE>
<CAPTION>
YEAR ENDED
JANUARY 27, 1999
----------------
<S> <C>
Term loan *................................................. $ 960
Existing debt +............................................. (718)
-----
Pro Forma interest expense adjustment..................... $ 242
=====
</TABLE>
---------------------------------
* Represents interest on new debt of $12,000, assumed to be entered
into in association with the acquisition of Coffee People. Assumes
an interest rate of 8.00%.
+ Represents interest paid on existing debt that will be retired as
result of the acquisition. Based on a blended interest rate of 9.2%.
23
<PAGE> 25
DIEDRICH COFFEE SELECTED FINANCIAL DATA
The following historical financial information may not be indicative of our
future financial results of operations and should be read in conjunction with
"Diedrich Coffee Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the consolidated financial statements and related
notes.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
JANUARY 31, JANUARY 31, JANUARY 29, JANUARY 28, JANUARY 27,
1995 1996 1997 1998 1999
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATE)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales:
Retail........................................ $6,673 $8,879 $18,118 $20,760 $21,248
Wholesale and other........................... 918 1,365 1,694 2,222 2,767
Franchise area development fees............... -- -- -- -- 200
------ ------ ------- ------- -------
Total.................................. 7,591 10,244 19,812 22,982 24,215
------ ------ ------- ------- -------
Cost and expenses:
Cost of sales and related occupancy costs..... 3,164 4,409 9,263 11,458 10,955
Store operating expenses...................... 2,584 3,520 8,280 10,448 8,936
Other operating expenses...................... 282 277 240 290 634
Depreciation and amortization................. 255 354 1,054 1,785 1,941
Provision for asset impairment and
restructuring costs......................... -- -- -- 3,902 --
General and administrative expenses........... 851 1,335 2,003 4,006 4,014
------ ------ ------- ------- -------
Total.................................. 7,136 9,895 20,840 31,889 26,480
------ ------ ------- ------- -------
Operating (loss) income......................... 455 349 (1,028) (8,907) (2,265)
Interest expense and other, net................. (78) (34) (86) (205) (293)
------ ------ ------- ------- -------
(Loss) income before income taxes............... 377 315 (1,114) (9,112) (2,558)
Income tax provision (benefit).................. 53 129 (128) 1 4
------ ------ ------- ------- -------
Net (loss) income............................... $ 324 $ 186 $ (986) $(9,113) $(2,562)
====== ====== ======= ======= =======
Basic (loss) income per share(1)................ (.22) (1.69) (.43)
======= ======= =======
Diluted (loss) income per share................. (.22) (1.69) (.43)
======= ======= =======
Pro forma net income per share(2)............... .06
======
BALANCE SHEET DATA:
Working capital (deficiency).................. $ (418) $ (53) $ 1,949 $ (959) $ (655)
Total assets.................................. 2,503 5,316 17,471 13,948 12,736
Long-term debt and long-term obligations under
capital leases.............................. 471 829 -- 2,817 2,783
Total stockholders' equity.................... 973 3,304 14,898 6,835 6,027
</TABLE>
- -------------------------
(1) Net income (loss) per share for periods before the year ended January 31,
1996 is not presented due to the noncomparable capital structure. Net loss
per share for fiscal 1999, 1998 and 1997 is presented as basic earnings per
share under the provisions of SFAS 128.
(2) Pro forma net income per share is computed by dividing net income by the
weighted average number of common and common equivalent shares outstanding
during the respective period, assuming the conversion of the series A and
series B preferred stock into common stock as of the date of issuance.
Dividends on 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.
24
<PAGE> 26
DIEDRICH COFFEE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Effective February 1, 1996, Diedrich Coffee 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, we began reporting quarterly
results in thirteen-week periods. Before the change in fiscal year end, our
quarterly periods included twelve weeks, except for the fourth quarter, which
had approximately sixteen weeks. References to fiscal 1999 refer to the fiscal
year ended January 27, 1999, references to fiscal 1998 refer to the fiscal year
ended January 28, 1998 and references to fiscal 1997 refer to the fiscal year
ended January 29, 1997.
The first retail store operating under the name of Diedrich Coffee
commenced operations in 1972. At the conclusion of fiscal 1999, we operated a
total of thirty-six coffeehouses and seven coffee carts located in California,
Colorado and Texas. We sell high quality coffee beverages made with our own
freshly roasted coffee. In addition to brewed coffee, we offer a broad range of
espresso based beverages such as cappuccino, cafe latte, cafe mocha and espresso
machiato. To complement beverage sales, we sell light food items and whole bean
coffee through our coffeehouses. In addition, we have a strong wholesale
division that markets our products directly to independent and chain food
service establishments, as well as to businesses for office coffee systems
through brokers and sales representatives.
We grew rapidly in fiscal 1997 and experienced difficulties associated with
that growth in fiscal 1998. In March 1997, we announced the resignation of
Steven Lupinacci, President and Chief Executive Officer. We took a restructuring
charge of $3.9 million for closing 12 coffeehouses in fiscal 1997. In addition
to closing 11 of these 12 coffeehouses, we opened new coffeehouses in Houston,
Texas as well as Irvine and Santa Monica, California. We also entered into an
agreement to place coffee carts at premium office facilities of the Irvine
Company in Orange County, California; seven carts were operating under this
agreement at fiscal year-end 1999.
Mr. Lawrence Goelman became Chairman of the Board and Interim Chief
Executive Officer on March 12, 1997. Kerry Coin was appointed President and
Chief Operating Officer on April 25, 1997. Under the board's direction,
management developed and executed a turnaround plan intended to return Diedrich
Coffee to operating profitability. Underperforming stores were closed, leases
assigned, terminated or sublet and new channels of distribution were developed.
Experienced professional managers were recruited. The wholesale division was
given aggressive growth targets and the resources needed to meet them. New
management and training systems were developed and implemented. In the third
quarter of fiscal 1998, we raised $3 million of working capital through the
private placement of secured debt. On November 17, 1997, the board appointed Mr.
John E. Martin as Chairman of the Board and Mr. Timothy J. Ryan as President and
Chief Executive Officer.
Despite the efforts of the interim management team led by Messrs. Goelman
and Coin, Diedrich Coffee did not meet its stated goal of cash-flow positive
operating results by the end of the last quarter of fiscal 1998. The reasons for
the shortfall are several: the increased one-time general and administrative
costs associated with the addition of the new executive management team headed
by John Martin and Tim Ryan, inadequate and unsuccessful marketing programs,
delays in the installation of coffee carts in Orange County and inadequate
management of certain labor costs.
Messrs. Martin and Ryan determined that, while the turnaround plan
implemented by the interim management team had stabilized Diedrich Coffee
operationally, it was not likely to result in profitable growth in the near
future. Accordingly, they initiated a business planning process that resulted in
a strategic five-year plan directed toward growth through franchise area
development agreements combined with focused company unit growth and
centralization of production facilities. This plan also built on the interim
management strategy of developing new wholesale business channels. New
management also reviewed the existing asset base and determined that one
coffeehouse designated for closure would remain open and two additional
coffeehouses and the Denver warehouse would be closed. Charges for these
25
<PAGE> 27
closures as well as provisions for other contingencies resulted in additional
operating expenses of approximately $1.7 million in the fourth quarter of fiscal
1998.
According to our strategic plan, the roasting facility in Denver, Colorado
was closed in the first quarter of fiscal 1999 and roasting was consolidated in
Southern California. We also closed an under-performing store in San Diego and
one in Denver, Colorado. We opened four coffee cart locations at premium office
locations in the first quarter of fiscal 1999, and additional coffee cart and
kiosk locations are under consideration and in discussion with commercial
property managers. However, no assurances can be given as to when or how many
more coffee carts may be installed. We also recruited several senior level
executives during fiscal 1999 as part of our strategic growth plan in the areas
of finance, marketing and franchise development.
Management undertook several steps to ensure that the base business was
operating well before initiating the franchising sales program. It upgraded the
quality of the store management teams and then undertook a program to retrain
every Diedrich Coffee coffeehouse employee. This program was completed during
fiscal 1999. The team also developed, tested and introduced several new product
programs, including:
- Martin Diedrich Signature Coffee Selections featuring coffee beans that
were only available in the United States at Diedrich Coffee coffeehouses;
- a line of five new Icy Blended drinks to address seasonal softness in the
warmer months;
- Chai Tea and new mocha products, including white chocolate mocha, were
added to the menu; and
- a new line of holiday merchandise was introduced in November.
On March 16, 1999, we signed a merger agreement with Coffee People that
contemplates a merger in which Coffee People will become a wholly-owned
subsidiary of our company. Completion of the merger is subject to a number of
conditions, including securing financing and obtaining regulatory and
stockholder approval.
FRANCHISE AREA DEVELOPMENT AGREEMENTS
Management's franchise area development goal is to enter into franchise
area development agreements covering most major U.S. markets. On September 16,
1998, we announced our first franchise area development agreement, which calls
for the development of 44 coffeehouses and an undisclosed number of carts and
kiosks in the state of North Carolina over a five year period. In connection
with the signing of this agreement, we recorded and collected area development
fee income of $100,000. On November 16, 1998, we announced our second franchise
area development agreement, which provides for the development of 50
coffeehouses and an undisclosed number of carts and kiosks in San Diego, Palm
Springs and Temecula, California over the next five years. This franchise area
development agreement includes a one-year option to begin development of 45
coffeehouses in Arizona. In connection with the signing of this agreement, we
recorded area development fee income of $100,000 and a note receivable for
$100,000.
Management is currently in various stages of discussion and negotiations
with several additional potential area developers. It has recently added two
franchise sales organizations to assist in the sales program. These sales
organizations are compensated through success-fees based on the execution of
area development agreements. There can be no assurances that positive sales will
result from these activities.
WHOLESALE
In fiscal 1998, we also took significant steps to build our wholesale sales
organization and grow this business channel. A new director of the wholesale
division, with substantial experience in the coffee business, was hired and the
sales staff was expanded. These efforts proved successful in fiscal 1998, when
wholesale sales grew to $2,222,000, an increase of 31.1% from the prior year.
The new management team focused on continued sales growth in the wholesale sales
division in fiscal 1999 and delivered improved
26
<PAGE> 28
results: $2,767,000 in total sales, an increase of 24.5% from fiscal 1998. In
fiscal 1999, the wholesale division placed its emphasis on upgrading coffee
consumed at chain restaurants. As a result, we added regional divisions of a
number of well-known restaurant groups as wholesale customers such as: Islands
Restaurants, Inc., Ruth's Chris Steakhouses, Culinary Adventures and Claim
Jumper. In addition, we recently announced an alliance with El Torito to provide
coffee to their locations nationwide.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship to total sales,
unless otherwise indicated, of certain items included in Diedrich Coffee's
statements of income for the years indicated:
<TABLE>
<CAPTION>
YEAR YEAR YEAR
ENDED ENDED ENDED
JANUARY 27, JANUARY 28, JANUARY 29,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net Sales:
Retail.................................................. 87.8% 90.3% 91.4%
Wholesale and Other..................................... 11.4 9.7 8.6
Franchise area development fees......................... 0.8 -- --
----- ----- -----
Total........................................... 100.0% 100.0% 100.0%
----- ----- -----
Cost and Expenses:
Cost of sales and related occupancy costs(1)............ 45.6% 49.9% 46.8%
Store operating expenses(2)............................. 42.1 50.3 45.7
Other operating expenses(3)............................. 22.9 13.0 14.2
Depreciation and amortization........................... 8.0 7.8 5.3
Asset impairment and restructuring costs................ -- 17.0 --
General and administrative expenses..................... 16.6 17.4 10.1
Operating (loss) income................................... (9.4) (38.8) (5.2)
Interest expense.......................................... (1.6) (0.8) (1.0)
Interest and other (expense) income....................... 0.4 (0.1) 0.5
----- ----- -----
Loss before income taxes.................................. (10.6) (39.6) (5.6)
----- ----- -----
Income tax provision (benefit)............................ -- -- (0.6)
----- ----- -----
Net (loss) income......................................... (10.6)% (39.7)% (5.0)%
===== ===== =====
</TABLE>
- ---------------
(1) As a percentage of sales from retail and wholesale operations
(2) As a percentage of sales from retail operations
(3) As a percentage of sales from wholesale operations
FISCAL YEAR ENDED JANUARY 27, 1999 COMPARED TO FISCAL YEAR ENDED JANUARY 28,
1998
Net sales. Net sales for fiscal 1999 increased 5.4% to $24,215,000 from
$22,982,000 for fiscal 1998. Net retail sales for fiscal 1999 increased 2.4% to
$21,248,000 from $20,760,000 for fiscal 1998, despite closing 2 stores in fiscal
1999. Wholesale and mail order sales for the year ended January 27, 1999
increased 24.5% to $2,767,000 from $2,222,000 for the year ended January 28,
1998.
The percentage increase in comparable coffeehouse sales comparing net sales
for stores open during the full year in fiscal 1999 to net sales for the same
stores in fiscal 1998 was 1.5%. The number of coffeehouses involved in this
calculation ranged from 33 to 37, reflecting the number of stores added during
fiscal 1998 and closed during fiscal 1999.
Cost of sales and related occupancy costs. Cost of sales and related
occupancy costs for fiscal 1999 decreased to $10,955,000 from $11,458,000 for
fiscal 1998. As a percentage of net sales from retail and wholesale, cost of
sales and related occupancy costs decreased to 45.6% for fiscal 1999 from 49.9%
for fiscal 1998. This decrease resulted from average unit volume efficiencies
associated with the closure of low
27
<PAGE> 29
volume locations, lower green coffee prices and other efficiencies gained at the
coffeehouse level. Interactive training programs were developed during fiscal
1999 covering guest satisfaction and product training. These programs assisted
management in scrutinizing and reducing the cost of sales. This reduction more
than offset the impact of increased occupancy costs, and an increase in the
percentage of total revenues contributed by wholesale sales.
Store operating expenses. For fiscal 1999, coffeehouse-operating expenses,
as a percentage of retail net sales, decreased to 42.1% from 50.3% for fiscal
1998. In fiscal 1998, the company recorded a one-time charge of $1,700,000
associated with the closure of two coffeehouses and the Denver warehouse, which
accounted for 8.2% of retail net sales.
Other operating expenses. For fiscal 1999, other operating expenses, as a
percentage of wholesale and other net sales, increased to 22.9% from 13.0% for
fiscal 1998. This increase reflects the costs of additional management and sales
staff recruited to further develop the sales of the wholesale division. In
general, as chain accounts are based on negotiated pricing structures, the
margins may not be quite as favorable. As a percentage of net sales, these costs
should decrease as wholesale sales increase.
Depreciation and amortization. Depreciation and amortization increased to
$1,941,000 for fiscal 1999 from $1,785,000 for fiscal 1998, principally due to
the write-off of $55,000 associated with the remodel of one of the coffeehouses
to demonstrate the new Diedrich Coffee prototype.
General and administrative expenses. As a percentage of net sales, general
and administrative expenses decreased to 16.6% in fiscal 1999 from 17.4% for
fiscal 1998 due to the increase in sales and successful execution of the new
business plan. The current level of general and administrative expense is a
direct result of management's commitment to grow the company through franchise
area development and the development of new retail locations and wholesale
channels.
Interest expense. Interest expense increased to $385,000 for fiscal 1999
from $182,000 for fiscal 1998. The increase reflects a full year of interest on
the $2,500,000 in long-term debt and $553,000 in assets under capital leases.
Income taxes. Net operating losses generated in fiscal 1999, fiscal 1998,
fiscal 1997, fiscal 1994 and prior were carried back or forward, as the case may
be, and utilized to offset the allowable portion of income tax in fiscal 1996.
As of January 27, 1999, a net operating loss for federal income tax purposes of
$10,655,000 is available to be utilized against future taxable income for years
through fiscal 2013, subject to a possible annual limitation due to the change
in ownership rules under the Internal Revenue Code.
Net loss. The net loss for fiscal 1999 was $2,562,000 compared to a net
loss of $9,113,000 for fiscal 1998. This change is primarily the result of the
restructuring charge taken in the first quarter of fiscal 1998 and an additional
$1,700,000 of operating expenses recorded in the fourth quarter of fiscal 1998.
In addition, store level margins improved during fiscal 1999 and comparable
sales increased 1.5%. The current year's net loss is principally related to an
increase in interest expense and general and administrative expenses.
FISCAL YEAR ENDED JANUARY 28, 1998 COMPARED TO FISCAL YEAR ENDED JANUARY 29,
1997
Net sales. Net sales for fiscal 1998 increased 16.0% to $22,982,000 from
$19,812,000 for fiscal 1997. Net retail sales for fiscal 1998 increased 14.6% to
$20,760,000 from $18,118,000 for fiscal 1997, despite the closure of 11 stores
in fiscal 1998. Wholesale and mail order sales for fiscal 1998 increased 31.1%
to $2,222,000 from $1,694,000 for fiscal 1997.
The percentage increase in comparable coffeehouse sales comparing net sales
for stores open during the full year in fiscal 1998 to net sales for the same
stores in fiscal 1997 was 0.1%. The number of coffeehouses involved in this
calculation ranged from 12 to 33, reflecting the number of stores added during
fiscal 1997.
Cost of sales and related occupancy costs. Cost of sales and related
occupancy costs for fiscal 1998 increased to $11,458,000 from $9,263,000 for
fiscal 1997. As a percentage of net sales, cost of sales and
28
<PAGE> 30
related occupancy costs increased to 49.9% for fiscal 1998 from 46.8% for fiscal
1997. This increase was primarily the result of increased costs related to
higher green coffee prices, increased retail discounting, an increased
percentage of wholesale sales as a percentage of total company sales as well as
scheduled rent increases.
Store operating expenses. For fiscal 1998, coffeehouse operating expenses,
as a percentage of retail net sales, increased to 50.3% from 45.7% for fiscal
1997. The year-end one-time charge of $1.7 million, described above, accounted
for 8.2% of retail net sales and more than offset decreases achieved during the
year primarily as a result of improved labor scheduling methods.
Other operating expenses. For fiscal 1998, other operating expenses, as a
percentage of wholesale and other net sales, decreased to 13.0% from 14.2% for
fiscal 1997. This decrease reflects the fact that the cost of the additional
management and sales staff was more than offset by the growth in sales for the
wholesale division.
Depreciation and amortization. Depreciation and amortization increased to
$1,785,000 for fiscal 1998 from $1,054,000 for fiscal 1997, principally due to
the addition of depreciable assets related to new coffeehouses added during
fiscal 1997 and the conversion costs of the acquired locations being depreciated
for the full year.
Provision for store closings and restructuring costs. On March 12, 1997, we
announced that we were reviewing the performance of all coffeehouses to
determine which units were not meeting management's long-term operational
expectations. Subsequently, on April 29, 1997, we recorded an impairment
provision and a restructuring charge of approximately $4.6 million in connection
with the closure of 12 coffeehouses and other related expenses. Eleven of the
original 12 coffeehouses identified for closure were closed in fiscal 1998 with
leases terminated in most cases. In January 1998, the new management reviewed
the progress of all retail operations and determined that one coffeehouse
originally designated for closure would remain open. At year end, most of the
lease terminations provided for in the restructuring had been completed at a
lower cost than originally anticipated. As a result of these two factors,
management determined that the remaining restructuring reserve could be reduced
by $648,000.
General and administrative expenses. As a percentage of net sales, general
and administrative expenses increased to 17.4% in fiscal 1998 from 10.1% for
fiscal 1997, due to the addition of senior executive personnel and other
resources required to manage the business more effectively, turn Diedrich Coffee
around and position it for future growth.
Interest expense. Interest expense decreased to $182,000 for fiscal 1998
from $190,000 for fiscal 1997.
Income taxes. Net operating losses generated in fiscal 1998, fiscal 1997,
fiscal 1994 and prior were carried back or forward, as the case may be, and
utilized to offset the allowable portion of income tax in fiscal 1996. As of
January 28, 1998, a net operating loss for federal income tax purposes of
$8,007,000 is available to be utilized against future taxable income for years
through fiscal 2013, subject to a possible annual limitation due to the change
in ownership rules under the Internal Revenue Code.
Net loss. The net loss for fiscal 1998 was $9,113,000 compared to net loss
of $986,000 for fiscal 1997 due to the previously described factors.
LIQUIDITY AND CAPITAL RESOURCES
Diedrich Coffee had a working capital deficit, as of January 27, 1999, of
$655,000 compared to $959,000 at January 28, 1998. Cash used in operating
activities totaled $351,000 for fiscal 1999 as compared to $2,489,000 for fiscal
1998.
Net cash used in investing activities for fiscal 1999 totaled $1,523,000,
which consisted entirely of capital expenditures for property and equipment. Net
cash provided by financing activities for fiscal 1999 totaled $1,667,000. This
consists of the net proceeds from the issuance of common stock and stock options
exercised.
29
<PAGE> 31
On March 30, 1998, we agreed to a private placement of 200,000 shares of
our common stock to Franchise Mortgage Acceptance Company, or FMAC, at a price
of $6.375 (the stock's closing sale price for that day on the Nasdaq National
Market). In addition, FMAC also received an option to purchase 100,000
additional shares of our 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. We completed this transaction on
April 3, 1998.
We announced on April 14, 1998 that we were in the process of obtaining a
financing from FMAC to meet its expected capital requirements. After extensive
discussions, we determined that the structure required by FMAC was not in our
best interest. In anticipation of this possible outcome, we engaged an
investment banker in November 1998 to seek alternative sources of capital.
On April 6, 1999, Diedrich Coffee entered into a $1,000,000 loan agreement
and security agreement with Amre Youness, a former director of Diedrich Coffee.
All outstanding principal and interest is due and payable on April 6, 2000. The
loan is secured by our assets with interest accruing and paid monthly at the
prime rate plus 3%. In connection with the loan agreement, we issued warrants to
Mr. Youness to purchase 70,000 shares of our common stock at a price of $5.625
per share.
We believe that cash from operations, the additional loan described above
and the net proceeds from this offering will be sufficient to finance the cash
payment to Coffee People stockholders, to pay related fees and expenses and to
satisfy our working capital needs at the anticipated operating levels for the
next twelve months.
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." or SOP 98-5. SOP 98-5 provides
guidance on accounting for the costs of computer software developed or obtained
for internal use. It is effective for fiscal years beginning after December 15,
1998. We currently do not have any computer software developed internally.
In June 1998, FASB issues SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" was issued. This statement established
standards for derivative instruments and for hedging activities and requires
that an entity recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value. We have no
instruments or transactions subject to this statement.
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise." This statement requires that
after the securitization of a mortgage loan held for sale, an entity engaged in
mortgage banking activities classify the resulting mortgage-backed security as a
trading security. This statement is not applicable to Diedrich Coffee.
YEAR 2000
We are currently working to resolve the potential impact of the year 2000
on the processing of data-sensitive information by our computerized information
systems. The year 2000 problem is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of our
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000, which could result in miscalculations
or system failures. We are investigating the impact of the year 2000 problem on
our business, including our operational, information and financial systems.
Based on the preliminary review of our existing businesses, we do not expect the
year 2000 problem, including the cost of making our computerized information
systems year 2000 compliant, to have a material adverse impact on our financial
position or results of operations in future periods. However, our inability to
resolve all potential year 2000 problems in a timely manner could have a
material adverse impact on Diedrich Coffee. We have also initiated
communications with significant suppliers and key
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business partners on which we rely in an effort to determine the extent to which
our business is vulnerable to the failure by these third parties' to remediate
their year 2000 problems. Although we have not been informed of any material
risks associated with the year 2000 problem on these entities, there can be no
assurance that the computerized information systems of these third parties' will
be year 2000 compliant on a timely basis. The inability of these third parties
to remediate their year 2000 problems could have a material adverse impact on
Diedrich Coffee.
We will have to modify certain applications and replace some of the
hardware used in the processing of financial information. In conjunction with
these upgrades, which are expected to be completed by the end of June 1999, we
believe we will have addressed any potential significant year 2000 issues. Total
expenditures related to the upgrade of the information systems are expected to
cost less than $20,000. As of January 27, 1999, we had incurred and expensed
approximately $34,000 of expenditures consisting of internal staff costs,
outside consulting and other expenditures related to this upgrade process. These
costs are being funded through operating cash flows. To the extent possible, we
will be developing and executing contingency plans designed to allow continued
operation in the event of failure of our or third parties' computer information
systems.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DERIVATIVE INSTRUMENTS
We do not and have not invested in market risk sensitive instruments in
fiscal 1999. From time to time, we enter into agreements to purchase green
coffee in the future at prices to be determined within two to twelve months of
the time of actual purchase. At January 27, 1999, these commitments totaled
$1,135,000. These agreements are tied to specific market prices, defined by both
the origin of the coffee and the month of delivery, but we have significant
flexibility in selecting the date of the market price to be used in each
contract. We do not use commodity based financial instruments to hedge coffee or
any other commodity, as we believe 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 our products.
We do not and have not used derivative financial instruments for any
purpose, including hedging or mitigating interest rate risk.
MARKET RISK
Diedrich Coffee's market risk exposure with regard to financial instruments
is to changes in the "prime rate" in the United States. We borrowed $2,500,000
at the prime rate plus 3 1/2%. At January 27, 1999, a hypothetical 100 basis
point increase in the prime rate would result in additional interest expense of
$25,000 on an annualized basis.
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COFFEE PEOPLE SELECTED FINANCIAL DATA
The selected financial data should be read in conjunction with "Coffee
People Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the consolidated financial statements and related notes.
<TABLE>
<CAPTION>
OWNED BY BROTHERS(1) OWNED BY SECOND CUP
------------------------- -------------------------
FISCAL 39-WEEK 39-WEEK FISCAL FISCAL 36 WEEKS 36 WEEKS
YEAR ENDED PERIOD ENDED PERIOD ENDED YEAR ENDED YEAR ENDED ENDED ENDED
DEC. 30, SEPT. 29, JUN. 29, JUN. 28, JUN. 27, MARCH 7, MARCH 6,
1994 1995 1996 1997 1998 1998 1999
---------- ------------ ------------ ---------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Franchise revenues............. $ 6,804 $ 3,442 $ 4,971 $ 5,869 $ 6,035 $ 4,584 $ 4,756
Retail sales................... 8,935 4,704 6,657 7,631 11,436 6,891 22,429
Wholesale sales................ 15,054 8,595 13,329 17,079 17,580 14,020 12,944
------- ------- ------- ------- ------- ------- -------
Total revenues........... 30,793 16,741 24,957 30,579 35,051 25,495 40,129
Expenses:
Cost of goods sold............. 16,240 9,614 14,389 18,494 19,296 13,210 18,384
Store and other operating
expenses..................... 5,993 4,081 4,779 6,080 8,231 5,735 15,605
Depreciation and
amortization................. 1,837 1,127 978 1,152 1,811 1,109 1,152
General and administrative
expenses..................... 6,288 4,552 2,825 5,458 4,079 2,131 3,052
Provision for store closures... -- -- -- 580 -- -- --
Acquisition and integration
expenses..................... -- -- -- -- 437 -- 950
------- ------- ------- ------- ------- ------- -------
Total expenses........... 30,358 19,374 22,971 31,764 33,854 22,185 39,143
------- ------- ------- ------- ------- ------- -------
Income (loss) from operations.... 435 (2,633) 1,986 (1,185) 1,197 3,310 986
Interest and other income........ -- -- 203 426 315 207 92
Interest expense................. 351 888 -- -- 46 -- 368
------- ------- ------- ------- ------- ------- -------
Income (loss) before income
taxes.......................... 84 (3,521) 2,189 (759) 1,466 3,517 710
Income tax provision (benefit)... 383 -- 965 4 728 1,512 310
Cumulative effect of change in
accounting principle........... -- -- -- (427) -- -- --
------- ------- ------- ------- ------- ------- -------
Net income (loss)................ $ (299) $(3,521) $ 1,224 $(1,190) $ 738 $ 2,005 $ 400
======= ======= ======= ======= ======= ======= =======
Net income (loss) per
share -- basic and diluted:
Income (loss) before cumulative
effect of change in
accounting principle......... $ .16 $ (.10) $ .09 $ 0.27 $ 0.04
Cumulative effect of change in
accounting principle......... -- (.06) -- -- --
------- ------- ------- ------- -------
Net income (loss).............. $ .16 $ (.16) $ .09 $ .27 $ 0.04
======= ======= ======= ======= =======
BALANCE SHEET DATA:
Working capital (deficiency)..... (3,227) (7,741) 7,777 10,802 5,277 15,074 6,285
Total assets..................... $51,636 $46,043 $40,219 $38,923 $55,695 $40,746 $54,288
Long-term debt obligations, less
current portion................ 84 25 -- -- 3,798 -- 2,727
Total stockholders' equity....... 35,419 31,898 35,487 34,297 43,502 37,840 43,919
</TABLE>
- -------------------------
(1) Due to the September 30, 1995 acquisition of Gloria Jean's Inc., formerly
Edglo Enterprises, by Second Cup, the financial statements of Coffee People
are not comparable to those of the prior periods.
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<PAGE> 34
COFFEE PEOPLE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
As of March 6, 1999, Coffee People had 254 franchised and 26
company-operated stores operating under the Gloria Jean's brand in 38 states,
one U.S. territory, and six foreign countries, 26 company-operated stores
operating in Oregon under the Coffee People brand and one franchised and 13
company-operated stores operating in Arizona under the Coffee Plantation brand.
Coffee People also operates a coffee roasting facility in Castroville,
California.
Gloria Jean's retail outlets generally offer a full range of gourmet
coffees, hot and cold beverages, teas, and food, as well as a variety of related
gifts, supplies, equipment and accessories. Coffee People (Oregon) and Coffee
Plantation stores sell coffee beverages, coffee beans, cookies, pastries and
coffee related merchandise.
The merger between Coffee People and Gloria Jean's on May 19, 1998 was
accounted for as a reverse merger in which Gloria Jean's was treated as the
acquiror for financial reporting purposes. As a result of this accounting
treatment, the historical financial statements of Gloria Jean's became the
historical financial statements of the combined company. Also consistent with
this accounting treatment, the fiscal year end for Coffee People was changed
from December 31 to the last Saturday in June, to conform to the year-end used
by Gloria Jean's.
Because of the reverse merger accounting treatment, the financial results
for the twenty-six week periods ended March 6, 1999 reflect the operations of
the combined companies while the financial results for the twenty-six week
periods ended March 7, 1998 reflect the operations of Gloria Jean's only.
Because the merger closed on May 19, 1998, approximately six weeks before the
1998 fiscal year-end, the operating results attributable to the acquired Coffee
People (Oregon) and Coffee Plantation operations have had only a limited impact
on the overall operating results of the combined company for the fiscal year
ended June 27, 1998. Certain costs associated with the acquisition and
integration of Coffee People operations have been accounted for as acquisition
and integration expenses.
On March 16, 1999, Coffee People signed a merger agreement with Diedrich
Coffee that contemplates the acquisition of Coffee People by Diedrich Coffee.
The acquisition will occur through a merger in which Coffee People will become a
wholly-owned subsidiary of Diedrich Coffee. The merger's completion is subject
to a number of conditions, including:
- obtaining sufficient funds to finance the cash payment to Coffee People
stockholders in the merger;
- Coffee People and Diedrich Coffee stockholder approval; and
- regulatory approval.
If these conditions are met, the merger is expected to close during the
summer of 1999.
RESULTS OF OPERATIONS
THIRTY-SIX WEEKS ENDED MARCH 6, 1999 COMPARED TO THIRTY-SIX WEEKS ENDED MARCH
7, 1998
Revenues. Total revenues increased 57.4% to $40,129,000 for the thirty-six
week period ended March 6, 1999, from $25,495,000 for the same period in fiscal
1998. The increase in total revenues was due primarily to an increase in retail
sales from company-operated stores, offset by a decrease in wholesale revenue.
Retail sales at company-operated stores increased 225.5% to $22,429,000 for
the fiscal 1999 thirty-six week period from $6,891,000 in the fiscal 1998
thirty-six week period. The increase in retail sales was due primarily to sales
of $16,563,000 at the Coffee People (Oregon) and Coffee Plantation stores
acquired on May 19, 1998.
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<PAGE> 35
Wholesale revenue consists primarily of sales of roasted coffee and other
products and supplies to franchisees. Wholesale revenue decreased 7.7% to
$12,944,000 for the thirty-six weeks ended March 6, 1999 from $14,020,000 for
the same thirty-six week period in fiscal 1998. The decrease was primarily due
to decreased sales to franchise stores because of lower sales volume and a shift
from the sale of whole beans to drink sales.
Franchise revenue consists primarily of initial franchise fees and
royalties received by Coffee People on sales made at each franchise location.
Franchise revenue increased 3.8% to $4,756,000 for the thirty-six week period
ended March 6, 1999 from $4,584,000 for the same thirty-six week period in
fiscal 1998. The components of this increase were an increase in franchise and
other fees in the amount of $202,000, offset by a reduction of $30,000 in
royalty revenue. The increase in franchise fees was primarily from a territory
fee in the amount of $150,000 and a Coffee Plantation initial franchise fee in
the amount of $50,000. Royalty revenues remained relatively constant at
$4,050,000 in 1999 compared to $4,080,000 for the same period in 1998, due
primarily to the addition of one Coffee Plantation store and eight international
stores, offset by a decrease of five domestic stores.
Costs and Expenses. Cost of goods sold increased 39.2% to $18,384,000 for
the thirty-six weeks ended March 6, 1999, from $13,210,000 in the same period of
fiscal 1998, due to increases associated with the increase in retail sales
attributed to the Coffee People (Oregon) and Coffee Plantation stores acquired
on May 19, 1998. Cost of goods sold as a percentage of corporate store sales and
wholesale revenue decreased to 52.0% in the thirty-six week period ended March
6, 1999, from 63.2% in the thirty-six week period ended March 7, 1998. The
decrease was due primarily to a more favorable cost relationship associated with
retail sales generated at the Coffee People (Oregon) and Coffee Plantation
stores acquired on May 19, 1998.
Store and other operating expenses increased 172.1% to $15,605,000 in the
thirty-six week period ended March 6, 1999, from $5,735,000 in the same period
of fiscal 1998. The increase was due primarily to store operating expenses
attributable to the Coffee People (Oregon) and Coffee Plantation stores acquired
on May 19, 1998, increased store operating expenses at Gloria Jean's
company-operated stores, and increased franchise administration expenses
necessary to support the planned growth in the franchise business. As a
percentage of total revenues, store and other operating expenses increased to
38.9% in the fiscal 1999 thirty-six week period from 22.5% in the fiscal 1998
thirty-six week period.
Depreciation and amortization increased 3.9% to $1,152,000 in the
thirty-six week period ended March 6, 1999 from $1,109,000 in the thirty-six
week period ended March 7, 1998. Depreciation and amortization increased
primarily due to an increase in goodwill amortization resulting from the reverse
merger with Gloria Jean's. As a percentage of total revenues, depreciation and
amortization expense decreased to 2.9% for the thirty-six week period ended
March 6, 1999 from 4.3% in the same thirty-six week period of fiscal 1998. The
decrease in depreciation was due primarily to the suspension of depreciation at
the Gloria Jean's company-operated stores, which are being held for sale to
franchisees.
General and administrative expenses increased 43.2% to $3,052,000 in the
thirty-six week period ended March 6, 1999 from $2,131,000 in the same period of
fiscal 1998 primarily because of general and administrative infrastructure
acquired as part of the Coffee People acquisition completed in May 1998.
Additionally, general and administrative expenses were favorably impacted in
1998 due to a reimbursement of pre-merger related expenses from Brothers Gourmet
Coffee in the amount of $276,000. As a percentage of total revenues, general and
administrative expenses decreased to 7.6% in the fiscal 1999 thirty-six week
period compared to 8.4% for the same period in fiscal 1998.
Acquisition and integration expenses amounted to $950,000 in the fiscal
1999 thirty-six week period. This consists of $799,000 in one-time costs
associated with integrating Coffee People operations and a portion of costs
associated with exiting certain Coffee People activities, including relocating
the administrative function from Beaverton, Oregon to Castroville, California
and franchising Coffee People (Oregon) and Coffee Plantation retail stores, and
$151,000 in expenses relating to the anticipated merger with Diedrich Coffee.
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<PAGE> 36
Interest and Other Income. Interest income as a percentage of total
revenues decreased to 0.2% for the thirty-six week period ended March 6, 1999
from 0.8% for the same period in fiscal 1998, due to the overall increase in
revenues and a reduction in cash balances available for short-term investment in
interest-bearing instruments.
Interest Expense. Interest expense as a percentage of total revenues
increased to 0.9% for the thirty-six week period ended March 6, 1999 from 0.0%
for the same period in fiscal 1998, as a result of interest incurred on
long-term debt obligations acquired as part of the Coffee People acquisition on
May 19, 1998 and the November 1998 sale-leaseback transaction.
Income Taxes. The provision for income taxes was $310,000 for the
thirty-six week period ended March 6, 1999, compared to $1,512,000 for the same
period in fiscal 1998. The effective tax rates of 43.7% for the thirty six week
period ended March 6, 1999 and 43.0% for the thirty six week period ended March
7, 1998, result from federal and state income taxes and nondeductible goodwill
amortization.
FISCAL YEAR ENDED JUNE 27, 1998 COMPARED TO FISCAL YEAR ENDED JUNE 28, 1997
Revenues. Total revenues increased 14.6% to $35,051,000 for the fiscal year
ended June 27, 1998, from $30,579,000 for the fiscal year ended June 28, 1997.
The increase in total revenues was due primarily to an increase in retail sales
from company-operated stores.
Retail sales at company-operated stores increased 49.9% to $11,436,000 for
the 1998 fiscal year from $7,631,000 in the 1997 fiscal year. The increase in
retail sales was due primarily to sales of $2,406,000 at Coffee People (Oregon)
and Coffee Plantation stores acquired on May 19, 1998, and to an increase in the
weighted average number of company-operated Gloria Jean's stores -- 31 during
the fiscal year ended June 27, 1998 as compared to 25 during the fiscal year
ended June 28, 1997.
Wholesale sales consist primarily of sales of roasted coffee and other
products and supplies to franchisees. Wholesale sales for the fiscal year ended
June 27, 1998 increased 2.9% to $17,580,000 for the fiscal year ended June 27,
1998 from $17,079,000 for the fiscal year ended June 28, 1997. This increase was
due to increased sales of coffee beans as a result of new franchisees as well as
a general price increase for products sold to franchised stores.
Franchise revenues consist primarily of initial franchise fees and
royalties received by Gloria Jean's on sales made at each franchise location.
Franchise revenue increased 2.8% to $6,035,000 for the fiscal year ended June
27, 1998 from $5,869,000 for the fiscal year ended June 28, 1997. The components
of this increase were a 27.7% increase in franchise fees to $640,000 in the 1998
fiscal year from $501,000 in the 1997 fiscal year and a 0.5% increase in
royalties to $5,395,000 in the 1998 fiscal year from $5,368,000 in the 1997
fiscal year. The increase in franchise fees was due to an increase in the number
of new stores franchised during the 1998 fiscal year over the number franchised
in the 1997 fiscal year. The increase in royalties was due to an increase in the
number of franchised stores, which was offset by a decline of approximately one
percent in comparable store sales at franchised stores.
Costs and expenses. Cost of goods sold increased 4.3% to $19,296,000 for
the fiscal year ended June 27, 1998, from $18,494,000 in the fiscal year ended
June 28, 1997, due to increases associated with the increases in retail sales.
These increases were partially offset by a reduction in cost of goods sold
associated with wholesale sales. Cost of goods sold as a percentage of retail
and wholesale sales decreased to 66.5% in the fiscal year ended June 27, 1998,
from 74.8% in the fiscal year ended June 28, 1997, due primarily to improvements
in production controls, plant efficiencies and a general increase in prices on
sales of products to franchised stores and also due to a more favorable cost
relationship associated with retail sales generated at the Coffee People
(Oregon) and Coffee Plantation stores acquired on May 19, 1998. Product costs as
a percentage of retail sales are lower at Coffee People (Oregon) and Coffee
Plantation stores than at Gloria Jean's company-operated stores.
Store and other operating expenses increased 35.4% to $8,231,000 in the
fiscal year ended June 27, 1998, from $6,080,000 in the fiscal year ended June
28, 1997, primarily as a result of increased store operating expenses at Gloria
Jean's company-operated stores and store operating expenses attributable to
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<PAGE> 37
the Coffee People (Oregon) and Coffee Plantation stores acquired on May 19,
1998, and also to an increase in operating expenses associated with franchise
administration. These increases were partially offset by a decline in franchise
bad debt expense due to improved credit and collection efforts. As a percentage
of total revenues, store and other operating expenses increased to 23.5% in the
1998 fiscal year from 19.9% in the 1997 fiscal year.
Depreciation and amortization increased 57.2% to $1,811,000 in the fiscal
year ended June 27, 1998 from $1,152,000 in the fiscal year ended June 28, 1997,
due to depreciation and amortization expense associated with the Coffee People
(Oregon) and Coffee Plantation stores acquired in May 1998 and an increase in
depreciation associated with new company-operated Gloria Jean's stores opened
during the year. These Gloria Jean's company-operated store assets were
depreciated until Coffee People decided at the end of fiscal year 1998 to
actively market all company-operated stores to franchisees. As a percentage of
total revenues, depreciation and amortization expense increased to 5.2% for the
fiscal year ended June 27, 1998 from 3.8% in the fiscal year ended June 28,
1997, primarily due to depreciation and amortization associated with the
increased number of company-operated stores opened or acquired during the year,
which generally have higher depreciation expense as a percentage of retail
sales.
General and administrative expenses decreased to $4,079,000 in the 1998
fiscal year from $5,458,000 in the 1997 fiscal year primarily as a result of
expenses charged to general and administrative expense during the 1997 fiscal
period which were not incurred in the 1998 fiscal period, and as a result of a
$643,000 reimbursement received from Brothers in fiscal year 1998 in connection
with indemnification agreements associated with the 1995 acquisition of the
Gloria Jean's business from Brothers. The Brothers reimbursement in fiscal year
1998 represents a recovery of costs previously charged to general and
administrative expenses. Charges incurred in fiscal year 1997 that were not
incurred in fiscal year 1998 consisted of $420,000 associated with the
reacquisition and closure of a Gloria Jean's store pursuant to a repurchase
agreement and expenses associated with building a new management team and
implementing systems, standards and controls throughout the organization.
General and administrative expense reductions in fiscal year 1998 were offset
somewhat by general and administrative expense increases arising as a result of
the Coffee People acquisition completed in May 1998. In addition, during fiscal
years 1998 and 1997, Coffee People recorded charges to general and
administrative expense of $223,000 and $198,000, respectively, for costs
associated with the write down of certain Gloria Jean's company-operated store
assets. General and administrative expenses as a percentage of total revenues
decreased because of the foregoing factors to 11.6% in the 1998 fiscal year from
17.8% in the 1997 fiscal year.
Provision for store closures. Coffee People took a charge of $580,000 in
fiscal year 1997 to provide for the closure of eight company-operated Gloria
Jean's stores. Costs relating to these stores incurred during the fiscal year
ended June 27, 1998 were $530,000. These costs were charged against the accrual
established at the end of the 1997 fiscal year. As of June 27, 1998, five of the
eight stores had been disposed of pursuant to lease termination agreements.
As of June 27, 1998, all of the Gloria Jean's company-operated stores are
held for sale to franchisees. For the 1998 fiscal year, revenues and operating
losses for these stores were $9,030,000 and $(1,204,000), respectively. While
management intends to sell these stores during fiscal year 1999, there can be no
assurance that all of these actions can be taken by Coffee People or that, if
taken, such actions will improve Coffee People's financial position, results of
operations or cash flows.
Acquisition and integration expenses. Acquisition and integration expenses
of $437,000 consist of costs associated with integrating Coffee People
operations and a portion of costs associated with exiting Coffee People
activities, including relocating the administrative functions from Beaverton,
Oregon to Castroville, California and franchising Coffee People (Oregon) and
Coffee Plantation retail stores. The exit costs have been capitalized and
recorded as an increase to goodwill to the extent of Second Cup's 69.4%
ownership interest. The remaining exit costs have been expensed and are included
in acquisition and integration expenses.
Interest and other income. Interest and other income as a percentage of
total revenues decreased to 0.9% for the fiscal year ended June 27, 1998 from
1.4% for the fiscal year ended June 28, 1997, due to a
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<PAGE> 38
reduction in interest-bearing loans receivable from an affiliated company
resulting from the repayment of such loans in fiscal year 1997.
Interest expense. Interest expense as a percentage of total revenues was
0.1% for the fiscal year ended June 27, 1998, as a result of interest incurred
on long-term debt obligations acquired as part of the Coffee People acquisition
on May 19, 1998, and there was no interest expense in the fiscal year ended June
28, 1997.
Income taxes. The provision for income taxes increased to $728,000 for the
fiscal year ended June 27, 1998, from $4,000 for the fiscal year ended June 28,
1997, due to Coffee People generating taxable income during the 1998 period. The
effective tax rate of 49.7% for fiscal year 1998 primarily results from federal
and state income taxes and nondeductible goodwill amortization.
FIFTY-TWO WEEK PERIOD ENDED JUNE 28, 1997 COMPARED TO THE THIRTY-NINE WEEK
PERIOD ENDED JUNE 29, 1996.
The data presented for fiscal year 1996 consists of the thirty-nine week
period ended June 29, 1996, due to the acquisition of Gloria Jean's by Second
Cup effective September 30, 1995. Fiscal year 1997 consists of a full fifty-two
weeks. Approximately 30% to 35% of annual sales typically occur in the eight
week period preceding the year-end holidays. This seasonal trend together with
the substantial differences arising from the comparison of two periods of
differing lengths should be considered when reviewing the following discussion.
Revenues. Total revenues increased 22.5% to $30,579,000 for the fiscal year
ended June 28, 1997 from $24,957,000 for the 39 week period ended June 29, 1996,
due primarily to the impact of a full year of reported results in 1997 versus
thirty-nine weeks in 1996. An additional 14 new franchises opened during fiscal
year 1997 also contributed to the increases in wholesale and other revenue and
franchise revenues. Retail sales increased to $7,631,000 for the fiscal year
ended June 29, 1997 from $6,657,000 for the thirty-nine week period ended June
29, 1996. Wholesale and other revenues increased to $17,079,000 for the
fifty-two week period ended June 28, 1997 from $13,329,000 for the period ended
June 29, 1996. Franchise revenues increased to $5,869,000 for the 1997 period
from $4,971,000 for the thirty-nine week period ended June 29, 1996.
Costs and expenses. Cost of goods sold increased to $18,494,000 for the
fifty-two week period ended June 28, 1997 from $14,389,000 for the thirty-nine
week period ended June 29, 1996. Cost of goods sold increased to 74.8% as a
percentage of retail and wholesale sales for the 1997 period from 72.0% for the
1996 period due primarily to a write down of approximately $600,000 for holiday
gift pack inventory, which did not meet Gloria Jean's quality standards, and due
to a larger number of underperforming company-operated stores that had poor
operating efficiencies and higher coffee costs.
Store and other operating expenses increased to $6,080,000 for the 1997
period from $4,779,000 for the 1996 period. Store and other operating expenses
as a percentage of total revenues increased to 19.9% in 1997 from 19.2% in 1996
primarily due to a larger number of underperforming company-operated stores
incurring higher operating expenses.
General and administrative expenses increased to $5,458,000 for the period
ended June 28, 1997 from $2,825,000 for the period ended June 29, 1996. General
and administrative expenses as a percentage of total revenues increased to 17.8%
in 1997 from 11.3% in 1996, due primarily to the investment undertaken in
building a new management team and implementing improved systems, standards and
controls throughout the organization. The increase also related to a $198,000
write-down to market value of assets at company-operated stores which were held
for sale and a provision of $420,000 related to reacquisition and store closure
costs associated with a repurchase agreement.
Provision for store closures. The provision for store closures of $580,000
consisted primarily of lease termination costs for eight of the company-operated
stores held for disposal. As of June 28, 1997, management determined it was not
feasible to sell these stores and implemented a plan to close them during fiscal
year 1998.
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<PAGE> 39
Revenues and operating income (losses) for the 24 company-operated stores
held for disposal, including the eight company-operated stores slated for
closure at June 28, 1997, were $7,051,000 and $(368,000) respectively, for the
fiscal year ended June 28, 1997 and $5,592,000 and $176,000, respectively, for
the thirty-nine week period ended June 29, 1996.
Cumulative effect of change in accounting principle. Effective as of the
beginning of fiscal year 1997, Gloria Jean's adopted the provisions of Statement
of Financial Accounting Standards No. 121, "Accounting for Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"). The
initial application of SFAS 121 to long-lived assets held for disposal at June
29, 1996 resulted in a non-cash charge of $427,000 (net of tax benefit of
$262,000), which represents the adjustment required to remeasure such assets at
the lower of carrying amount or fair value less costs to sell. Long-lived assets
held for disposal consist of leasehold improvements and furniture and other
property at company-operated stores, which were held for sale. Assets held for
disposal at June 28, 1997 had an adjusted carrying value of $1,560,000.
Income taxes. The provision for income taxes decreased to $4,000 for the
fiscal year ended June 28, 1997 from $965,000 for the thirty-nine week period
ended June 29, 1996. The decrease is due to Gloria Jean's reporting a net loss
before income taxes during fiscal 1997 as compared to income before income taxes
during the thirty-nine week period ended June 29, 1996. The effective income tax
rate decreased to 0% during fiscal year 1997 from 44.1% during the thirty-nine
week period ended June 29, 1996. During fiscal 1997, the federal and state
income tax benefit from the loss before income taxes was offset by amortization
of nondeductible goodwill and the write-off of an uncollectible income tax
receivable. During the thirty-nine week period ended June 29, 1996, the
effective income tax rate was comprised of federal and state income taxes and
amortization of nondeductible goodwill.
During fiscal 1997, management determined that no valuation allowance was
required for Gloria Jean's deferred tax assets of $2,592,000 since, based on
internal forecasts, management believes it is more likely than not the deferred
tax assets will be realized through future taxable income. The adjustment to the
valuation allowance during fiscal 1997 of $1,619,000 was recorded as a reduction
in goodwill since the prior year's valuation allowance related to net operating
loss carry forwards acquired from Brothers.
LIQUIDITY AND CAPITAL RESOURCES
As of March 6, 1999, all seven of the Coffee People (Oregon) stores located
outside of Oregon that Coffee People had identified for closure or disposition
in its quarter ended June 30, 1997 had been closed. Of these stores, three had
been sold and their store leases assigned and one store lease had been
terminated by agreement. Eight Gloria Jean's stores were identified for disposal
during fiscal year 1997. Five were disposed of during fiscal year 1998 pursuant
to lease termination agreements. Of the three remaining Gloria Jean's stores,
one was disposed of after June 27, 1998 pursuant to a lease termination
agreement and two remain open. Coffee People continues to make payments on the
lease obligations for the three remaining Coffee People stores and for the two
remaining Gloria Jean's stores. Coffee People will continue to make cash outlays
for these stores for such items as rent, utilities and insurance until such time
as it is able to sell the stores or until it can negotiate satisfactory
arrangements with landlords for re-leasing the store premises or for otherwise
terminating the leases. Such costs are charged against the accrual for store
closures. There can be no assurance that Coffee People will be successful at
selling these stores or in negotiating with landlords for the re-leasing of the
store premises or for terminating the leases. If Coffee People is not successful
in these efforts, such cash outlays could continue for an indeterminate period
during the term of the store leases. Coffee People is working with local real
estate brokers to market, re-lease or sublease these stores. The lease terms for
these stores range from two and one-half to nine years with expiration dates
ranging from January 2001 through May 2007. Minimum future rental payments as of
March 6, 1999 under the five leases total $1,272,000.
As of March 6, 1999, Coffee People had $2,773,000 in cash and equivalents.
Coffee People had working capital of $6,285,000 as of March 6, 1999, as
compared to working capital of $5,277,000 at June 27, 1998.
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For the thirty-six week period ended March 6, 1999, cash provided by
operating activities was $398,000, as compared to cash provided by operating
activities of $2,875,000 for the same period in fiscal 1998. Cash provided by
operating activities for the thirty-six week period ended March 6, 1999,
consisted primarily of net income and depreciation, offset by accrued
liabilities, prepaid expenses and a decrease in payable to a related party.
For the thirty-six week periods ended March 6, 1999 and March 7, 1998, net
cash used in investing activities was $266,000 and $1,302,000, respectively,
primarily as a result of the purchase of property, plant and equipment offset by
proceeds from disposal of equipment.
For the thirty-six week period ended March 6, 1999, Coffee People had cash
used in financing activities of $181,000, primarily as a result of borrowings
under long-term debt and a capital lease obligation in the amount of $2,334,000,
offset by principal payments on long-term debt in the amount of $2,525,000. For
the thirty-six week period ended by March 7, 1998, Coffee People had neither
cash used nor generated by financing activities.
Coffee People has a line of credit with one of its primary banks providing
for borrowings through August 1, 1999 of up to $500,000. Borrowings bear
interest at the rate of 0.5% over the bank's reference rate, which was 7.75% as
of March 6, 1999, and are secured by substantially all of Coffee People's
assets, including accounts receivable, inventory trade fixtures and equipment.
As of March 6, 1999, there were no borrowings outstanding under the line of
credit; however, $73,000 of the line was reserved for a letter of credit dated
September 1998.
At the time of the merger with Gloria Jean's, Coffee People entered into a
loan agreement with The Second Cup Ltd., which provides for a credit facility of
up to $4,000,000 over a five year term. The facility expires May 19, 2003. The
interest rate for amounts drawn under the line is 11.5%. As of March 6, 1999,
Coffee People had no borrowings under this agreement.
On November 24, 1998, Coffee People entered into a sale-leaseback
transaction involving equipment at twelve company-operated Gloria Jean's retail
stores. The $922,000 proceeds received by Coffee People from the lease
transaction were used for working capital and general corporate purposes. The
interest rate on the capital lease obligation is 10.5%. The capital lease assets
are recorded in property, plant and equipment. At the end of the lease term,
Coffee People has an option to purchase the equipment for the greater of fair
market value or 10% of the lessor's original cost, or renew the lease for an
additional eight months.
Coffee People believes that anticipated cash flow from operations, existing
cash and bank debt and the credit facility will be sufficient to meet its cash
requirements through the end of the next twelve months.
SEASONALITY
Coffee People's business is subject to seasonal fluctuations, due to
seasonal changes and general economic conditions, among other factors.
Historically, net sales from Coffee People (Oregon) stores have been highest
during the first and fourth fiscal quarters, which include the spring and summer
months. Gloria Jean's highest sales and earnings have historically occurred in
the second and third fiscal quarters, which include the peak holiday shopping
months. Coffee Plantation sales are also seasonal with higher sales and earnings
occurring in the second and third fiscal quarters when the weather is cooler and
more favorable to drinking hot beverages.
In addition, quarterly results have been substantially affected by the
timing of new store openings. This trend is likely to continue. Because of the
seasonality of Gloria Jean's business and the impact of new store openings,
results for any quarter do not necessarily indicate the results that may be
achieved for a full fiscal year, and cannot be used to indicate financial
performance for an entire year.
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YEAR 2000
The "year 2000 problem" refers to the possible failure of many computer
systems that may arise as a result of many existing computer programs using only
the last two digits to refer to a year. Coffee People has undertaken an initial
review of the potential effects on it of the year 2000 problem. These potential
problems are being addressed on a system-by-system basis.
Coffee People has determined that its general accounting system, which
includes invoicing, accounts receivable and inventory control, must be upgraded
to make the system year 2000 compliant. Coffee People estimates that the cost of
upgrading the accounting system will be approximately $10,000 and that the
upgrade will be completed before the end of the current fiscal year. As of
December 12, 1998, Coffee People had expended approximately $5,000 to remedy
this problem.
Coffee People is continuing to review its information technology hardware
and software, including personal computers, application and network software for
year 2000 compliance readiness. The review process entails evaluation of
hardware/software and testing. Coffee People believes its information technology
review will be completed by the end of the current fiscal year. While the review
process is ongoing, Coffee People believes that the cost to bring its
information technology systems into year 2000 compliance will be under $50,000
and it does not foresee any material difficulties with completing the necessary
changes before January 1, 2000.
Coffee People expects that its review of non-information technology systems
(including voice communications and security) will be completed before the end
of the current fiscal year. The estimated cost to remedy non-information
technology systems is not expected to be material.
Coffee People expects that the source of funds for evaluation and
remediation of year 2000 compliance issues will be cash flows from operations.
Coffee People believes that its most significant internal risk posed by the
year 2000 Problem is the possibility of a failure of its accounting system. If
the accounting system were to fail, Coffee People would have to implement manual
processes, which may slow the timeliness of information needed to manage the
business. As discussed above, Coffee People plans to avoid this risk by
upgrading its accounting systems; however, there can be no assurance that such
actions will avoid problems that may arise.
The third parties whose year 2000 problems could have the greatest effect
on Coffee People are believed by Coffee People to be banks that maintain Coffee
People's depository accounts and credit card processing systems, the company
that processes Coffee People's payroll and which maintains Coffee People's human
resource databases, and companies that supply or distribute coffee beans and
other goods. Coffee People is in the process of confirming the state of year
2000 readiness of these parties. It is anticipated Coffee People will complete
this process prior to the end of the fiscal year.
Coffee People is in the process of developing a contingency plan to address
potential year 2000 problems. The contingency plan is anticipated to be
completed prior to the end of the fiscal year.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DERIVATIVE INSTRUMENTS
The supply and price of green coffee beans is subject to significant
volatility, generally caused by multiple factors beyond Coffee People's control,
including weather, political and economic conditions in coffee producing
countries, and other supply-related matters. Because Coffee People's coffee
roasting operation supplies products to franchisees on a cost-plus basis, Coffee
People believes that its gross profit on wholesale sales is generally insulated
from the risk of volatility in prices of green coffee beans, except to the
extent that such fluctuation affects the demand for specialty coffee.
Company-operated stores are not so similarly insulated. In addition, other
factors may affect gross profit, such as production efficiencies or
inefficiencies, including roasting shrinkage, and write-offs of excess coffee
inventories. During fiscal year 1997, worldwide coffee prices increased
significantly.
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In order to avoid speculation on spot coffee prices, Coffee People
typically undertakes to lock in the cost of a portion of its future coffee
purchases by entering into contracts to purchase green coffee over future
periods at fixed prices, or at future prices to be determined within one to 12
months from the time of the actual purchase. At March 6, 1999, these purchase
commitments totaled approximately $2,930,000 for approximately 2,540,000 pounds
of green coffee, at an average contract cost per pound of $1.21. These
commitments together with existing inventory represent approximately 80% of
Coffee People's estimated coffee requirements through March 3, 2000. These
commitments are not currently favorable to market at March 6, 1999, as the
current market price for a pound of green coffee is approximately $1.03 per
pound.
Coffee People does not use commodity based financial instruments to hedge
coffee purchases.
FINANCIAL MARKET RISK
Coffee People does not maintain a substantial investment portfolio.
However, it does have arrangements with its primary bank to invest monies on
deposit in overnight repurchase agreements and in other marketable short-term
securities with maturities of generally less than 90 days. Based upon the
current portfolio, a 100 basis point move in short-term interest rates would not
have a material effect on Coffee People's financial condition or results of
operations.
Coffee People's principal market risk with respect to its financial debt
instruments is to changes in the prime rate charged by major banks in the United
States and to other benchmark rates to which interest rates under Coffee
People's loan agreements may be tied. In June 1998, Coffee People elected to
have a portion of its term loan with Bank of America bear interest at 2.25% over
IBOR, an offshore rate used by the bank that is similar to LIBOR. Under the
current arrangement, this rate will be adjusted periodically.
On April 9, 1999, Coffee People elected to have the interest rate on
$3,000,000 of its term loan continue to be referenced to the IBOR. The rate on
has been fixed at 7.18% through May 10, 1999. The rate on the remaining balance
of $674,500 is 8.25%, 0.5% over the bank's prime rate of 7.75% as of March 6,
1999. At March 6, 1999, a 100 basis point increase in the IBOR would result in
additional interest expense of $30,000 on an annualized basis. A return to the
8.25% floating rate tied to the prime rate, which was 7.75% at March 6, 1999,
would have a similar impact on Coffee People's results of operations.
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BUSINESS
GENERAL
Diedrich Coffee roasts and sells specialty coffee beans for its retail and
wholesale customers. We also sell brewed coffee, espresso-based beverages such
as cappuccinos, lattes, mochas and espressos and various blended drinks through
our 40 company-owned retail locations and two franchised retail locations in
California, Texas and Colorado. To complement beverage sales, we sell light food
items, whole bean coffee and accessories through our coffeehouses. In addition,
we have over 300 wholesale accounts with businesses and restaurant chains, such
as Ruth's Chris Steakhouses, El Torito, Claim Jumper and Islands Restaurants. We
differentiate ourselves from other specialty coffee producers by roasting our
coffee beans in accordance with proprietary recipes developed over three
generations by the Diedrich family. Our roasting recipes take into account the
specific variety, origin and physical characteristics of each coffee bean to
maximize its unique flavor.
On March 16, 1999, we entered into a merger agreement with Coffee People,
Inc. Upon completion of the merger, Coffee People will be a wholly-owned
subsidiary of Diedrich Coffee. Coffee People is a specialty coffee retailer with
320 franchised and company-owned retail locations throughout the United States
and in six foreign countries. The common stock of Coffee People is currently
traded on the Nasdaq SmallCap market under the symbol "MOKA." After the merger
with Coffee People, Diedrich Coffee will be the second largest specialty coffee
company in the United States with annual systemwide sales of more than $150
million through 363 retail outlets in 38 states and seven countries. In addition
to its network of retail outlets, Coffee People operates a large coffee roasting
facility located in Castroville, California.
We believe that as the specialty coffee market has matured, distinct
segments have emerged: espresso/coffee bars, coffeehouses and mall-based coffee
stores. Espresso/coffee bars offer limited seating to facilitate quick customer
turnover, are generally less than 1,200 square feet in size and are usually
located in densely populated urban areas. Coffeehouses are generally greater
than 1,200 square feet in size, located in suburban areas, and encourage
customers to linger and enjoy a more relaxed, comfortable atmosphere. Mall-based
coffee stores place a heavier emphasis on the sale of flavored whole bean coffee
and coffee-related merchandise. Based on the number of domestic retail coffee
locations, Starbucks is the leader in the espresso/coffee bar segment, Gloria
Jean's is the leader in the mall-based coffee store segment and there is
presently no leader in the coffeehouse segment. Our business objective is to
become the leading specialty coffee company in both the coffeehouse and
mall-based coffee store segments.
We seek to differentiate our coffeehouses by offering our customers a broad
line of superior tasting coffee products and a high level of personalized
customer service, which generates strong sales and customer loyalty. Diedrich
Coffee coffeehouses offer a warm, friendly environment specifically designed to
encourage guests to linger with friends and business associates or to relax
alone in comfort. Ample seating is augmented by cozy sofas and comfortable
chairs to create intimate nooks for meeting and relaxing. The critical
components of our coffeehouse concept include high quality, fresh roasted coffee
and superior customer service by knowledgeable employees.
INDUSTRY OVERVIEW
According to the National Coffee Association's 1999 study, 48% of Americans
drink coffee. On average they drink 1.4 cups per day. The U.S. coffee market
consists of two distinct product categories: (1) commercial ground roast,
mass-merchandised coffee and (2) specialty coffees, which include gourmet
coffees (premium grade arabica coffees sold in whole bean and ground form) and
premium coffees (upscale coffees mass-marketed by the leading coffee companies).
According to the National Coffee Association's 1999 study, 4.9% of U.S.
consumers stated that they drank a specialty coffee "yesterday." This figure is
up sharply from 3.3% in 1998.
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We believe that several factors have contributed to the increase in demand
for gourmet coffee including:
- greater consumer awareness of gourmet coffee as a result of its
increasing availability;
- increased quality differentiation over commercial grade coffees by
consumers;
- increased demand for all premium food products, including gourmet
coffee, where the differential in price from the commercial brands is
small compared to the perceived improvement in product quality and
taste;
- ease of preparation of gourmet coffees resulting from the increased
use of automatic drip coffee makers and home espresso machines; and
- the decline in alcoholic beverage consumption.
The Specialty Coffee Association of America estimates that the number of
specialty coffee beverage outlets in the United States jumped from approximately
200 in 1989 to approximately 4,000 in 1995, and projects this number to increase
to over 10,000 by the end of 1999. We believe that, despite the increase in the
number of specialty coffee stores, the market is highly fragmented and, with the
exception of Starbucks with less than 20% of the total retail locations, remains
relatively unbranded.
BUSINESS STRATEGY
Our business objective is to become the leading specialty coffee company in
both the coffeehouse and mall-based coffee store segments. Each element of
Diedrich Coffee's business strategy is designed to differentiate and reinforce
our brand identity by offering our customers a broad line of superior tasting
coffee products and a high level of customer service, which generates strong
sales and customer loyalty. The key elements of this strategy include:
High Quality, Fresh Proprietary Roasted Coffee. To deliver and serve the
high quality coffee for which Diedrich Coffee is known, two essential elements
are required: (1) using the finest quality green coffee beans and (2) ensuring
that these are freshly roasted, using proprietary recipes.
Superior Customer Service. The friendliness, speed and consistency of the
service and the coffee knowledge of our employees are critical to developing
Diedrich Coffee's quality brand identity and to building a loyal customer base.
We emphasize identifying, hiring and retaining employees and invest substantial
resources in training them in personalized customer service, sales skills,
coffee knowledge and beverage preparation. Our store employees receive ongoing
customer service training as part of our efforts to enable employees to take on
increasing levels of responsibility within stores. We are able to provide fast,
efficient morning service in coffeehouses and through conveniently located carts
and kiosks.
Brand Marketing. Our marketing strategy is to differentiate our concept and
create brand name recognition based upon the quality of our coffee products and
the image of our coffeehouses as neighborhood gathering places. We promote the
distinctive qualities of our products, educate customers about our offerings of
various coffees and roasts, promote our image of coffeehouses as neighborhood
gathering places and deliver enthusiastic customer service.
The Coffeehouse Concept. A Diedrich Coffee coffeehouse experience is
strongly influenced by three components: hospitality, ambiance and coffee
knowledge. Each component is made up of elements that are unique to Diedrich
Coffee:
Hospitality. Our coffeehouses deliver specific consumer benefits that
address a wide range of otherwise unmet needs in the suburban neighborhoods
of America. As a neighborhood coffeehouse chain, Diedrich Coffee is the
non-alcoholic answer to the corner pub. Coffeehouse employees greet regular
customers by name and acknowledge all patrons by name at the point of drink
pick-up. While approximately 35% of coffeehouse business is quick morning
coffee pick-up, the coffeehouse focus on hospitality encourages development
of strong afternoon and evening business, complemented by the availability
of desserts, pastries and quality, non-caffeinated beverages. Surveys and
customer
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comments indicate that patrons are treated as part of the Diedrich Coffee
community and frequently revisit the coffeehouse.
Ambiance. Diedrich Coffee guest comments indicate taste superiority of
our products versus the competition. Moreover, surveys also indicate that
customers are not only loyal to a better, specialty cup of coffee, but also
to the ambiance provided by the comfortable surroundings designed into
every Diedrich Coffee coffeehouse. Our coffeehouses are specifically
designed to encourage guests to linger with friends and business
associates, or to relax alone in comfort.
The architectural design of the Diedrich Coffee prototype is a
contemporary American interpretation of the European colonial plantation
style of the 1800's. Ample seating is augmented with cozy sofas and
comfortable chairs to create intimate nooks for meeting and relaxing. A
weekly entertainment schedule is provided to encourage patrons to revisit
on weekend evenings.
Coffee Knowledge. Diedrich Coffee is the only specialty retailer whose
founder, Martin Diedrich, comes from three generations of coffee growing,
roasting and global relationships. Mr. Diedrich, currently Chief Coffee
Officer, is intimately involved in the daily business of sourcing, tasting
and roasting coffees. He is also directly involved in the training of
coffeehouse team members. The coffee knowledge and expertise that is
transferred from coffeehouse to customer is a competitive advantage, as the
interest in specialty coffee continues to develop. Like the wine industry,
as customer sophistication grows, so does the customer's desire for more
and better information, and for a wider selection of quality coffee
varieties. We are is able to identify and secure exceptional, rare coffees,
roast them to perfection, and then offer them for sale fresh to our
customers.
GROWTH STRATEGY
In November 1997, our board of directors retained John Martin as Chairman
of the Board and Tim Ryan as President and Chief Executive Officer. Messrs.
Martin and Ryan collectively bring more than 55 years of multi-unit food service
experience to our company. They joined our founder, Martin Diedrich, a
recognized expert in sourcing, tasting and roasting coffee, and began the
process of building a team of experienced restaurant industry executives. In
order to achieve our objective to become the leading specialty coffee company in
both the coffeehouse and mall-based coffee store segments, our management team
implemented a growth strategy to increase our number of retail locations and the
sale of coffee products through other distribution channels. The growth strategy
developed by our management team includes:
Franchising and Area Development. Our strategic plan stresses franchise
area development in markets outside of the core Southern California market. Our
objective is to expand our operations to over 1,200 coffeehouses, as well as
additional carts and kiosks through large area development agreements with
experienced multi-unit franchise operators. The franchise area development
program is focused on experienced and well-capitalized franchise operators and
area developers who are interested in opening between 30 and 70 retail outlets
within their area over a 5 to 7 year period. Diedrich Coffee has registered, is
exempt or is not required to register to sell franchises in 38 states. In
September 1998, we announced our first franchise area development agreement
which calls for the development of at least 44 coffeehouses, as well as coffee
carts and kiosks in the state of North Carolina over the next five years. In
November 1998, we announced our second franchise area development agreement
which provides for the development of 50 coffeehouses, as well as coffee carts
and kiosks in San Diego, Palm Springs and Temecula, California over the next
five years. This area development agreement includes a one-year option to begin
development of 45 coffeehouses in Arizona.
We are currently in various stages of discussion and negotiations with
several additional potential area developers. We have recently added two
franchise sales organizations to assist in the sales program. These sales
organizations are compensated through success-fees based on executed franchise
area development agreements. We intend to enter into franchise area development
agreements covering most major U.S. markets in order to complete the national
expansion of Diedrich Coffee coffeehouses, carts, kiosks and wholesale sales.
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We have identified area development franchising with experienced multi-unit
franchise operators as our preferred growth vehicle for several reasons:
- familiarity with the trade areas and commitment to community
businesses;
- existing operating, financial, real estate, construction, training,
accounting, human resources and management functions that are ready to
expand; and
- better operators in their own markets than a national corporation; and
The franchisee component of our growth strategy is critical to our success.
We believe that the unit level economics of our area development franchising
strategy are compelling enough to attract experienced multi-unit franchise
operators who will play an integral role in completing our planned expansion.
Internal Growth. We will also continue to stress the development of
company-owned coffeehouses, kiosks and carts in its core Southern California
market and possibly other markets. Diedrich Coffee seeks to build additional
retail outlets in high visibility, high traffic locations ranging from 1,200 to
1,800 square feet plus an exterior patio. We are currently in lease negotiations
on four additional sites in Orange County.
Expand Wholesale Distribution Channel. We have taken significant steps to
build our wholesale sales organization and to grow this business channel. The
new director of the wholesale division has substantial experience in the coffee
business and the sales staff also has been expanded. Wholesale sales accounted
for approximately 11% of sales in fiscal 1999. We have added regional divisions
of a number of well-known restaurant groups as wholesale customers, including
Islands Restaurants, Inc., Ruth's Chris Steakhouses, El Torito and Claim Jumper.
The sale of Diedrich Coffee products at these restaurant chains helps solidify
brand recognition and demand for our coffee. Additionally, we are actively
seeking new distribution channels for our products. For example, we now offer
our coffee on our website, www.diedrich.com, and are seeking to expand this
rapidly growing channel of distribution.
Selective Acquisitions. We evaluate potential acquisitions that may
accelerate our critical mass in existing or new markets. We believe our unique,
high-quality product and efficient operational system can add value to an
acquired location. We also believe that acquisitions will continue to be
available at a discount to the cost of constructing new stores, especially where
targets may be currently underperforming despite attractive real estate
attributes. To this end, we entered into the merger agreement with Coffee
People. The acquisition of Coffee People will add 40 new coffeehouses to the
Diedrich Coffee brand. Additionally, it will make Diedrich Coffee the leader in
the mall-based coffee store segment with the acquisition of 280 retail locations
operating under the Gloria Jean's name.
PRODUCT SUPPLY AND ROASTING
Sourcing. Coffee beans are an agricultural product grown commercially in
over fifty countries in tropical regions of the world. Coffee is the world's
second largest traded commodity. Its price and supply are subject to significant
volatility. There are many varieties of coffee and a range of quality grades
within each variety. Although the broader coffee market generally treats coffee
as a fungible commodity, the specialty coffee industry focuses on the highest
grades of coffee. Diedrich Coffee purchases only premium grade arabica coffee
beans and believes these beans are the best available from each producing
region. The premium grade arabica bean is a higher quality variety than the
average grade arabica or robusta variety coffee bean, which are typically found
in non-specialty or mass-merchandised commercial coffees. We seek to purchase
the finest qualities and varieties of coffee by identifying the unique
characteristics and flavor of the varieties available from each region of the
world. The background and experience of our personnel allows Diedrich Coffee to
maintain its commitment to serve and sell only the highest quality coffee.
During the buying season, we 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 our coffee
selection enables us to provide our customers with a wider variety of coffees,
as well as certain coffees that are available only on a seasonal basis. We
contract for future delivery of green coffee to help ensure adequacy of supply
and typically maintain a minimum six week supply of each variety of whole beans
then available.
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Roasting. Diedrich Coffee employs a roasting process that varies based upon
the variety, quality, origin and physical characteristics of the coffee beans
being roasted. We utilize formulas and recipes that have been developed over
three generations to bring out the best characteristics of the coffee during the
roasting process and to develop the optimal flavor conditions that a coffee has
to offer. This approach differentiates Diedrich Coffee from commercial coffee
producers and other specialty producers employing uniform roasting processes
that do not differentiate between the types of coffee being roasted.
We have master roasters trained by the company who are directly responsible
for overseeing the roasting process. They are craftsmen who employ our
proprietary roasting formulas while adjusting the formula to take into account
the specific attributes of each coffee bean being roasted. Each coffee bean
contains aromatic oils and flavor characteristics that develop from the soil,
climate and environment where the bean is gown. The skilled roastmaster analyzes
the unroasted beans and carefully controls the roasting process in an effort to
maximize the flavor potential of the coffee. The roastmaster hears how the roast
pops, smells the developing aroma, and identifies the right shades of color. He
draws upon experience and knowledge to properly adjust airflow, time and
temperature while the roast is in progress in order to optimize each roast.
Coffee People operates its own coffee roasting facility in Castroville,
California, from which it supplies all of its franchised and company-operated
stores. Following its merger with Gloria Jean's, Coffee People integrated the
Coffee People (Oregon) and Coffee Plantation roasting requirements into its
Castroville roasting facility. In addition, Coffee People has begun roasting
some of Diedrich Coffee's coffee requirements in its Castroville facility. The
green coffee being roasted for Diedrich Coffee has been sourced by Diedrich
Coffee. The roasting facility has the capacity to roast up to ten million pounds
annually. Currently, less than four million pounds are being roasted at this
facility annually.
Freshness. We are committed to serving our customers beverages and whole
bean products from freshly roasted coffee beans. Our coffee is delivered to our
coffeehouses promptly after roasting to guarantee the freshness of each cup of
coffee or package of whole coffee beans sold in our coffeehouses. Serving only
freshly roasted coffee is imperative because roasted coffee is a highly
perishable product, which steadily loses quality after being roasted at a rate
that varies in relation to its exposure to oxygen in storing, packaging and
handling. We recently acquired new vacuum pack and nitrogen flush packing
equipment that can extend roasted coffee shelf life from two weeks to
approximately 90 - 150 days.
RETAIL LOCATION OPERATIONS
We operate or franchise 35 coffeehouses in three states. The typical
Diedrich Coffee coffeehouse is staffed with one or two managers, and a staff of
ten to fifteen part-time hourly employees from which the operating shifts are
filled. Additionally, informal local entertainment is utilized on the weekends
to enhance the neighborhood environment. The hours for each coffeehouse are
established based upon the locations and customer demand, but typically are from
6:00 a.m. to 11:00 p.m., Monday through Saturday, in residential locations and
from 6:00 a.m. to 5:00 p.m., Monday through Friday, in commercial locations.
In addition to coffee beverages, all Diedrich Coffee coffeehouses offer a
limited selection of light food items, such as bagels, croissants and pastries,
and dessert items, such as cookies and cakes, to complement beverage sales. Our
coffeehouses also sell more than twenty different selections of regular and
decaffeinated roasted whole bean coffees, and they carry select coffee related
merchandise items. The following table sets forth, as percentages, the
approximate sales mix by categories of Diedrich Coffee's principal products in
fiscal 1999:
<TABLE>
<S> <C>
Beverages................................................... 73%
Coffee beans................................................ 6%
Food items.................................................. 19%
Accessories and clothing.................................... 2%
---
100%
===
</TABLE>
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Coffee People's retail locations all sell coffee and coffee beverages,
although the product line differs somewhat among the three brands. Gloria Jean's
retail outlets generally offer a full range of coffee beans, coffee beverages,
teas and food as well as a variety of related gifts, supplies, equipment and
accessories. The Coffee People (Oregon) and Coffee Plantation stores sell coffee
beverages, coffee beans, cookies, pastries, ice cream, shakes and coffee-related
merchandise. Some Coffee Plantation stores offer an expanded menu including
soups, salads, sandwiches and light meals.
The following table sets forth, as percentages, the approximate sales mix
by category of Coffee People's principal products sold in company-operated
stores for its 36 weeks ended March 6, 1999:
<TABLE>
<CAPTION>
COFFEE PEOPLE (OREGON)
GLORIA JEAN'S AND COFFEE PLANTATION
% OF SALES % OF SALES
------------- ----------------------
<S> <C> <C>
Beverages................................... 63% 68%
Coffee beans................................ 17% 6%
Food items.................................. 6% 24%
Gifts and other merchandise................. 14% 2%
--- ---
Total............................. 100% 100%
=== ===
</TABLE>
FRANCHISES
While Diedrich Coffee has only recently adopted a franchise strategy, the
majority of Gloria Jean's retail locations are franchised.
FRANCHISE OPERATIONS
Our current franchise agreements require franchisees to purchase all of
their coffee from Diedrich Coffee or Coffee People. In addition, we supply
franchisees with other non-coffee products, such as cups, bags and napkins.
Suppliers of products sold in its franchised stores are subject to our approval
to ensure that quality standards and product consistency are maintained at all
times.
We have the first right to purchase any existing franchise store that a
franchisee wishes to sell. If we do not choose to purchase the franchise, it has
the right to approve the new franchisee before the franchise transfer.
Management believes that store profitability and the quality of customer
service are maximized when stores are operated by talented and committed
management. We have implemented a rigorous screening process for the selection
of qualified franchisees and management.
FRANCHISE SUPPORT PROGRAMS
We provide a variety of support services to its franchisees. These services
include:
- training,
- supervision,
- business consultation,
- strategic direction,
- marketing,
- product sourcing, and
- volume purchasing savings.
We have established an intensive three week training program for its
franchisees, which includes training on in-store operations, coffee knowledge,
merchandising, buying, controls and accounting. Management works closely with
franchisee representatives on issues that affect the operations of stores.
Franchisees are surveyed regularly to provide feedback on subjects that affect
the operations of their stores.
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<PAGE> 49
FRANCHISE ECONOMICS
The franchisee is responsible for all of the capital expenditures
associated with the store, although we usually coordinate construction and
development of new stores to ensure consistency. For drive-through units, we
plan to use both a single store and an area development approach, under which
the area developer agrees to develop a specified number of units in a
geographical territory and obtains certain rights to that territory. Ongoing
charges to franchisees include a royalty of 6% of gross sales for Gloria Jean's
and 5% for Diedrich Coffee, and an advertising fund contribution of up to 3% of
gross sales.
FACILITIES AND RETAIL LOCATIONS
DIEDRICH COFFEE
Diedrich Coffee 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. As of January 27, 1999, we were also a party
to various leases for a total of forty-five retail locations, including
thirty-six operating coffeehouses, two subleased units and seven carts. We
converted and subleased two retail locations to a franchisee after the year
ended January 27, 1999. This was part of a signed area development agreement
that also includes the addition of 48 more locations throughout the San Diego
area. We closed two retail locations and the Denver warehouse in fiscal 1999 and
eleven retail locations in fiscal 1998 of which nine leases were terminated. All
of our 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, some of these
leases expire in the near future, and there is no automatic renewal or option to
renew.
Set forth below is a list of each of our retail locations as of March 6,
1999, separated by the states in which they are located. As indicated in the
table, as of March 6, 1999, we were operating thirty-three coffeehouses and
seven carts and had two franchised coffeehouses.
<TABLE>
<CAPTION>
NUMBER
------
<S> <C>
COFFEEHOUSES
California (franchised)................................... 2
California (company-operated)............................. 22
Colorado.................................................. 7
Texas..................................................... 4
COFFEE CARTS
California................................................ 7
--
Total Retail Locations............................ 42
==
</TABLE>
COFFEE PEOPLE
Coffee People has five retail operating systems:
Mall-based Store/Kiosk/Cafe. Coffee People's mall-based stores consist
primarily of Gloria Jean's outlets. Mall-based stores generally are
full-service stores with limited seating, selling coffee-related
merchandise and whole beans along with prepared espresso-based drinks and
other hot and cold beverages. As of March 6, 1999, Coffee People had 269
Gloria Jean's and four Coffee Plantation mall-based stores.
Neighborhood Coffeehouses. Neighborhood coffeehouses, located in both urban
and suburban neighborhoods and business districts, offer a complete line of
coffee products, including beverages, beans and merchandise. As of March 6,
1999, Coffee People had 18 neighborhood coffee houses: seven in the
Portland area and one in Eugene, Oregon operating under the Coffee People
brand, eight
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<PAGE> 50
neighborhood coffee houses in Arizona operating under the Coffee Plantation
brand and two operating under the Gloria Jean's brand.
Drive-Through Espresso Bar. The drive-through espresso bar operates under
the Motor Moka(R) sub-brand. As of March 6, 1999, Coffee People operated
ten of these stores in Portland, two of which have indoor seating.
Drive-through stores without indoor seating generally have a walk-up
window. These stores are designed to maximize customer convenience by
eliminating the need to park a car and walk into a store.
Airport Store. Coffee People (Oregon) operates seven stores at Portland
International Airport operating under the sub-brand name Aero Moka(R).
These stores include quick grab-and-go kiosks, coffee bars and a
sit-and-relax cafe. Gloria Jean's has two airport stores and is in the
process of opening more. Coffee People believes these types of stores
provide increased brand recognition.
Specialty Kiosk or Cart. Coffee People's specialty kiosk or cart format is
designed for placement in high-traffic locations such as supermarkets,
university campuses and office building lobbies. Kiosks primarily sell
coffee beverages and pastries. As of March 6, 1999, Coffee People has ten
kiosks -- seven operating under the Gloria Jean's brand, one in Portland
operating under the Coffee People brand and two Coffee Plantation kiosks in
Phoenix. Coffee People intends to expand in this area as opportunities
arise.
All of the Gloria Jean's locations are operated in leased premises, most
situated in regional malls. Virtually all of the leased premises occupied by
franchised outlets are leased by Gloria Jean's which then enters into sublease
agreements with the franchisee on a cost pass-through basis. Gloria Jean's,
however, remains obligated under the lease. Gloria Jean's stores are designed to
accommodate locations in various sizes, ranging from 170 square foot kiosk
outlets, which sell principally coffee drinks and other beverages, to 2,000
square foot coffeehouses which also provide limited food offerings.
Coffee People owns the land and buildings on which two of its
company-operated Coffee People brand drive-through Motor Moka(R) espresso bars
are operated. In addition, it owns the building and leases the underlying land
for five additional company-operated facilities. Existing company-operated
retail stores range from 150 to 2,850 square feet. The monthly lease rate for
certain stores is based on that store's monthly sales revenue. Some of Coffee
People's leases expire in the near future.
One of the Coffee People (Oregon) company-operated stores is operated in a
shopping mall undergoing redevelopment for which rent is paid month-to-month.
The lessor, at any time, could demand that Coffee People vacate the premises on
30 days prior written notice. Coffee People has periodic discussions with the
lessor relative to entering into a long-term lease.
Under its lease with the Port of Portland for the seven Aero Moka stores at
Portland International Airport, Coffee People (Oregon) is required to enter into
a joint venture with a certified disadvantaged business enterprise for one of
its airport stores. Upon entry into the joint venture, Coffee People will have a
49% ownership in that store.
Coffee People's corporate offices and roasting facilities in Castroville,
California consist of approximately 60,000 square feet and are leased through
December 31, 2005. Coffee People currently leases approximately 9,400 square
feet of office space in Beaverton, Oregon and 1,888 square feet of office space
in Tempe, Arizona for its regional offices. Coffee People is seeking to sublet
or assign the lease, which expires in February 2004, for portions of its
Beaverton office. Approximately 2,660 square feet is currently subleased to a
third party.
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<PAGE> 51
Coffee People's stores as of March 6, 1999 were located as follows:
GLORIA JEAN'S STORES
<TABLE>
<CAPTION>
LOCATION NUMBER OF STORES
-------- ----------------
<S> <C>
United States:
Midwest............................................ 78
West............................................... 53
East............................................... 47
Southeast.......................................... 32
Northeast.......................................... 17
Southwest.......................................... 16
---
Total...................................... 243
United States Territory (Guam)....................... 1
International
Ireland............................................ 3
Japan.............................................. 15
Korea.............................................. 2
Mexico............................................. 6
Australia.......................................... 7
United Arab Emirates............................... 3
---
Total...................................... 36
---
All Gloria Jean's stores............................. 280
===
COFFEE PEOPLE (OREGON) STORES
Coffeehouses......................................... 8
Drive-through Espresso Bar........................... 10
Airport Store........................................ 7
Coffee Carts......................................... 1
---
Total Retail Locations..................... 26
===
COFFEE PLANTATION STORES
Coffeehouses......................................... 8
Mall-based stores.................................... 4
Coffee Carts......................................... 2
---
Total Retail Locations..................... 14
===
</TABLE>
MARKETING THE BUSINESS
Our marketing strategy is to differentiate Diedrich Coffee and build a
strong brand identity for our freshly roasted coffee and our coffeehouses. We
implement this strategy by promoting the distinctive qualities of Diedrich
Coffee products, educating consumers about our offering of various coffees,
including private estate coffees and roasts, and delivering enthusiastic
customer service. Our marketing efforts are based upon the belief that the fresh
roasted flavor achieved by our commitment to quality and freshness delivers a
distinctive advantage in coffee flavor. A steady introduction of new coffee,
drink and food products is part of our marketing strategy to keep the concept
fresh and drive incremental sales volume.
In addition, we do not intend to convert the Gloria Jean's stores that we
are acquiring in the merger to the Diedrich Coffee brand in the near future.
Rather, we intend to implement new strategies to strengthen and reposition this
brand within its market segment. However, we believe the coffeehouse segment
offers the most significant opportunities for growth.
To date, we have relied primarily upon the high visibility of our real
estate locations, word-of-mouth, public relations, local store marketing and the
inviting atmosphere of our coffeehouses to drive growth. We also conduct
in-store coffee tastings, provide brewed coffee at local neighborhood events,
donate coffee to local charities and mail periodic announcements to neighborhood
residents to announce a store opening or
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<PAGE> 52
the introduction of a new product. The costs of these promotions do not have a
material impact on our operating results. In addition, we seek to develop our
brand identity through participation in local and regional community events.
As we enter new markets, we plan to tailor our marketing strategy to the
overall level of awareness and availability of specialty coffee in that market.
Our promotions will focus on the superior proprietary roast recipes and taste of
Diedrich Coffee. In markets that are more knowledgeable about specialty coffees,
our advertising will focus on the superiority of our guaranteed freshly roasted
products versus competitive specialty brands. We plan to utilize print and other
mass media advertising to expand brand awareness when Diedrich Coffee has
achieved sufficient market penetration, in our judgment, to make such efforts
cost-effective.
COMPETITION
The specialty coffee market is intensely competitive and highly fragmented.
With low barriers to entry, competition in the industry is expected to increase
from national and regional chains, franchise operators and local specialty
coffee stores. We compete directly against all other premium coffee roasters,
coffeehouses, espresso/coffee bars and mall-based stores, as well as against
restaurant and beverage outlets that serve coffee and a growing number of
espresso stands, carts and stores. In addition, we compete to draw consumers of
standard or commercial coffee to premium coffee. Our whole bean coffees compete
directly against specialty coffees sold at retail through supermarkets,
specialty retailers and a growing number of specialty coffee stores. We believe
that our customers choose among retailers primarily on the basis of product
quality, service, coffeehouse ambiance, convenience and, to a lesser extent, on
price.
We compete with a growing number of specialty coffee retailers including
Starbucks, Seattle's Best Coffee, Barnie's, Coffee Beanery Ltd, Caribou, Peet's
Coffee and many others. The attractiveness of the gourmet specialty coffeehouse
market may draw additional competitors with substantially greater financial,
marketing and operating resources than us. A number of nationwide coffee
manufacturers, such as Kraft General Foods, Proctor & Gamble, and Nestle,
distribute coffee products in supermarkets and convenience stores, which may
serve as substitutes for our coffees. Other specialty coffee companies including
Starbucks, Seattle's Best Coffee, Bucks County, Brothers Gourmet Coffees and
Green Mountain Coffee Roasters, sell whole bean coffees in supermarkets and
variety and discount stores.
TRADEMARKS
We own several trademarks and service marks that have been registered with
the United States Patent and Trademark Office, including Diedrich Coffee(R),
Wiener Melange(R), Harvest Peak(R), SCOOP-A-CCINO(R) and Flor de Apanas(R). In
addition, we have applications pending with the United States Patent and
Trademark Office for a number of additional marks. The Diedrich Coffee trademark
is material to our business. We also own registrations and has applications
pending in numerous foreign countries for trademark protection of the Diedrich
Coffee trademark and service mark. Trademark registrations can generally be
renewed so long as we continue to use the marks. We own copyrights on our
promotional materials, coffeehouse graphics and operational and training
materials. We do not believe that any of these copyrights, valuable as they are,
are material to our business.
Coffee People owns federal trademark registrations for "Coffee People,"
"Coffee Plantation," and "Gloria Jean's" as well as several other slogans,
product names, design marks and logos. Coffee People also owns a number of
common law service marks and trademarks in the United States including "Gloria
Jean's Coffee Bean." Several federal trademark applications are pending,
including one for "Gloria Jean's Coffees." Coffee People has also received
trademark and service mark protection for the name Coffee People and related
marks in Canada and Japan.
GOVERNMENT REGULATION
In addition to the laws and regulations relating to the food service
industry, we are subject to Federal Trade Commission, or FTC, regulation and
state laws that regulate the offer and sale of franchises.
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<PAGE> 53
The FTC's Trade Regulation Rule relating to Disclosure Requirements and
Prohibitions Concerning Franchising and Business Opportunity Ventures generally
requires us to give prospective franchisees a franchise offering circular
containing information prescribed by the rule. In addition, several states
regulate the offer and sale of franchises and require registration of the
franchise offering with state authorities.
State laws that regulate the offer and sale of franchises and the
franchisor-franchisee relationship exist in a substantial number of states.
These laws generally require registration of the franchise offering with state
authorities before making offers or sales and regulate the franchise
relationship by, for example:
- requiring the franchisor to deal with its franchisees in good faith,
- prohibiting interference with the right of free association among
franchisees,
- prohibiting discrimination in fees and charges,
- regulating the termination of the relationship,
- requiring repurchase of inventories in some circumstances,
- restricting nonrenewal by the franchisor,
- limiting restrictions on transfers or inheritance of the franchisee's
interests, and
- regulating placement of competing units that might adversely affect the
franchisee's results.
These laws have not prevented us or Coffee People from seeking franchisees
in any given area. Although the laws may restrict a franchisor in the
termination of a franchise agreement by, for example, requiring "good cause" to
exist as a basis for the termination, advance notice to the franchisee of the
termination, an opportunity to cure a default and repurchase of inventory or
other compensation, these provisions have not had a significant effect on our or
Coffee People's franchise-related operations.
We believe that our and Coffee People's operations comply in all material
respects with the FTC rule and state franchise laws. Any changes to the FTC rule
or state franchise laws, or future court or administrative decisions, however,
could affect our franchise business.
There are also extensive federal, state and local government regulations
relating to the development and operation of food service outlets, including
laws and regulations relating to:
- building and seating requirements,
- the preparation and sale of food,
- cleanliness,
- safety in the workplace, and
- accommodations for the disabled.
Our relationship with our employees is also subject to regulation, such as:
- minimum wage requirements,
- anti-discrimination laws,
- overtime and working conditions, and
- citizenship requirements.
EMPLOYEES
At January 27, 1999, we employed a work force of 830 persons, 114 of whom
were employed full-time. None of our employees is represented by a labor union,
no employees are currently covered by collective bargaining agreements, and we
consider our relations with employees to be good. We are improving employee
benefits, training and other aspects of employment to attract and retain
valuable employees and managers.
As of March 6, 1999, Coffee People had 893 employees, of which 364 were
full time and 529 were part time employees. None of the employees are covered by
a collective bargaining agreement. Coffee People believes that its employee
relations are good.
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<PAGE> 54
LEGAL PROCEEDINGS
In the ordinary course of our business, we may become involved in legal
proceedings from time-to-time. As of March 6, 1999, Diedrich Coffee was not a
party to any material pending legal proceedings.
Coffee People has been a defendant and a plaintiff in various lawsuits from
time to time. No legal proceedings are in progress or pending against Coffee
People, other than proceedings set forth below or proceedings incidental to
carrying on its business and operations in the ordinary course which,
individually or in the aggregate, are not material to Coffee People.
Security Trust Company v. Gloria Jean's Gourmet Coffees Corporation. The
claimant filed a claim in the Superior Court of the State of California, County
of Contra Costa, asking for unpaid rent and late charges for a Gloria Jean's
store in Richmond, California vacated by Coffee People. Gloria Jean's has
requested that the landlord mitigate damages caused by early termination of the
lease by seeking to relet the premises. Unpaid rent plus rent through the
remainder of the original lease term would be approximately $175,000. Management
does not believe the outcome of this litigation will have a material adverse
effect on Coffee People.
KKW Enterprises, Inc. v. Gloria Jean's Gourmet Coffee Franchising Corp. On
or about May 7, 1998, plaintiff filed a complaint against Franchising Corp. in
the Superior Court of the State of Rhode Island for Providence County alleging
that Franchising Corp. by making certain misrepresentations fraudulently induced
plaintiff to enter into franchise agreements for Gloria Jean's stores. Plaintiff
seeks damages for the losses it purportedly incurred in obtaining and operating
its Gloria Jean's stores and rescission of its two remaining franchise
agreements. On Franchising Corp.'s motion, the case was removed to the United
States District Court for the District of Rhode Island. Franchising Corp. has
filed a Demand for Arbitration with the Chicago office of the American
Arbitration Association, seeking a declaration that Franchising Corp. has no
liability for the claims asserted and has demanded that plaintiff submit the
claims pending in the District Court to arbitration in accordance with the
franchising agreements. This case is still in the early stages of litigation and
there can be no assurance that a favorable outcome will be obtained or that if
the matter were resolved in favor of the plaintiff there would not be a material
adverse effect on Coffee People.
Sugai Products, Inc. v. Kona Kai Farms, Inc., Regton Companies, Inc.,
Starbucks Corp., Peet's Coffee and Tea, Inc., Gloria Jean's Gourmet Coffees
Corp. On January 9, 1997, the plaintiffs filed a putative class action against
the defendants alleging violation of the Lanham Act, the Hawaii Uniform
Deceptive Trade Practices Act and the Hawaii Unfair Trade Practices Act. The
plaintiffs, who purport to represent a class of Kona coffee growers, wholesalers
and retailers, allege that the defendants sold coffee beans grown in Central
America under the false label "Kona coffee" and seek an injunction, unspecified
damages, attorneys' fees and costs. In March, Gourmet Coffees Corp. and certain
other defendants moved to dismiss the complaint or, in the alternative, for a
more definitive statement of the claim. The plaintiffs filed a motion for class
certification in July 1997. In January 1998, the United States District Court
for the District of Hawaii denied class certification.
In June of last year, Gloria Jean's, Brothers Gourmet Coffees, and Brothers
Retail Corp. agreed on present and future indemnification in connection with the
settlement of the escrow account established pursuant to The Second Cup's
purchase of Gloria Jean's stock from Brothers. As consideration for the
settlement, Gloria Jean's has released Brothers from further liability for all
pending and future legal proceedings. Brothers has agreed to continued
indemnification of Gloria Jean's in connection with the Kona litigation as it
relates to the period ended November 9, 1995 and for amounts owed on California
and Illinois sales tax audits, currently under way, in excess of $130,000. On
August 27, 1998, Brothers filed a voluntary petition for relief under Chapter 11
of Title 11 of the United States Code with the United States Bankruptcy Court
for the District of Delaware. However, Coffee People intends to take such legal
measures management believes appropriate to protect any claims it may have
against Brothers.
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<PAGE> 55
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Diedrich Coffee's directors, executive officers and other key employees and
their ages are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S) HELD
---- --- ----------------
<S> <C> <C>
John E. Martin..... 53 Chairman of the Board and Director
Timothy J. Ryan.... 59 President, and Chief Executive Officer and Director
Martin R. 40 Vice Chairman of the Board, Secretary, Chief Coffee Officer
Diedrich......... and Director
Peter Churm........ 73 Director
Lawrence Goelman... 58 Director
Paul C. Heeschen... 42 Director
Ann Wride.......... 37 Vice President and Chief Financial Officer
Dolf Berle......... 36 Vice President of Franchise Development and Operations
Catherine Saar..... 40 Vice President of Marketing and Wholesale Sales
</TABLE>
The principal occupation for the last five years of each director and
executive officer of Diedrich Coffee, as well as some other information, is set
forth below.
JOHN E. MARTIN was appointed Chairman of the Board of Directors by the
board as of November 17, 1997. From 1983 to 1996, Mr. Martin was Chairman and
Chief Executive Officer of Taco Bell Worldwide. From October 1996 to June 1997,
Mr. Martin was Chairman of PepsiCo's Casual Dining Division. Mr. Martin is also
Chairman of publicly held Easyriders, Inc., a publishing company, and Chairman
of Culinary Adventures, a privately held company that owns and operates several
restaurants in Southern California. In addition, Mr. Martin serves on the boards
of directors of: Williams Sonoma, Inc., Franchise Mortgage Acceptance Company
and The Good Guys! Inc.
TIMOTHY J. RYAN was appointed as President and Chief Executive Officer by
the board effective November 1997. From December 1995 until his retirement in
December 1996, Mr. Ryan was president of Sizzler U.S.A., a division of Sizzler
International, Inc. of which he was also Senior Vice President. From November
1988 to December 1993, Mr. Ryan was Senior Vice President of Marketing at Taco
Bell Worldwide, and from December 1993 to December 1995, he was Senior Vice
President of Taco Bell's Casual Dining Division.
MARTIN R. DIEDRICH has served as an officer and director of Diedrich Coffee
since 1985. In April 1997, he became Vice Chairman of the Board and Chief Coffee
Officer, as well as continuing as Diedrich Coffee's Corporate Secretary. Before
that time, Mr. Diedrich served as Director of Coffee. In addition, he served as
Chairman of the Board from January 1996 to April 1997. Mr. Diedrich is an
internationally recognized specialty coffee expert who is a frequent speaker at
industry and trade association functions.
PETER CHURM joined the board of directors in October 1996. He has been
Chairman Emeritus of Furon Company since 1992. He served as Chairman of the
Board of Furon Company from May 1980 through February 1992 and was President of
that company for more than sixteen years before that time. He also serves on the
boards of directors of Furon Company and CKE Restaurants, Inc.
LAWRENCE GOELMAN was the interim Chief Executive Officer of Diedrich Coffee
from March 1997 to November 1997 and has served as a member of the board since
October 1996. He assumed the position of Chairman of the Board in March 1997
until he was replaced by John E. Martin on November 17, 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. Before that, he served as Chairman,
President and Chief Executive Officer of CostCare, Inc. for fourteen years. Mr.
Goelman also serves on the board of Imagyn Medical Technologies, Inc.
PAUL C. HEESCHEN became a director of Diedrich Coffee in January 1996. For
the past five years, Mr. Heeschen has been a principal of Heeschen & Associates,
a private investment firm. He is also the
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<PAGE> 56
sole general partner of D.C.H., L.P. and Redwood Enterprises VII, L.P., and a
trustee of the Palm Trust, each of which are stockholders of Diedrich Coffee.
ANN WRIDE joined Diedrich Coffee in April 1998 as Vice President and Chief
Financial Officer. Previously, Ms. Wride was Vice President and Chief Financial
Officer of Advantica Restaurant Group Inc.'s Coco's/Carrows Division from May
1996 to March 1998. Before joining Advantica, Ms. Wride served as Vice
President, Finance of Family Restaurants Inc., where she worked in various
capacities since 1989.
DOLF A. BERLE was appointed Vice President of Franchise Development in May
1998. Additionally, Mr. Berle assumed responsibility for Company Operations in
June 1998. Before joining Diedrich Coffee, Mr. Berle was Senior Director of
Operations for Pepsi Restaurants International from July 1997 to May 1998. From
September 1996 to June 1997, Mr. Berle was Director of Operations for Taco Bell
International. Before joining the international division, Mr. Berle served as
Market Manager for Taco Bell in Nashville, Tennessee between June 1994 and
August 1996.
CATHERINE A. SAAR was appointed Vice President of Marketing and Wholesale
Sales in July 1998. Ms. Saar was Vice President Marketing and Merchandising for
Frame-N-Lens from January 1998 to June 1998. From May 1993 to December 1997, Ms.
Saar was Director of Corporate Marketing for Smart and Final, Inc. Before this,
Ms. Saar held various marketing positions at Taco Bell Corporation.
BOARD COMMITTEES
Audit Committee. The audit committee of the board currently consists of Mr.
Churm, Mr. Heeschen and Mr. Goelman, each of whom have been a member of the
audit committee since its formation. The audit committee reviews the results and
scope of the audit and other services provided by our independent auditors,
reviews and evaluates our internal control functions and monitors transactions
between Diedrich Coffee and its employees, officers and directors.
Compensation Committee. The compensation committee of the board consists of
Messrs. Churm, Goelman and Heeschen. The compensation committee administers our
stock option plans and sets compensation levels for our executive officers.
DIRECTOR COMPENSATION
Directors who are also employees of Diedrich Coffee receive no extra
compensation for their service on the board. Non-employee directors receive
reimbursement for out-of-pocket expenses incurred in attending board meetings
and receive stock option grants under our 1996 Non-Employee Directors Stock
Option Plan.
Under our non-employee directors plan, each non-employee director
automatically receives, upon becoming a director, a one-time grant of an option
to purchase up to 10,000 shares of Diedrich Coffee common stock. These initial
options will vest and become exercisable with respect to 50% of the underlying
shares upon the earlier of (1) the first anniversary of the grant date or (2)
immediately before the first annual meeting of stockholders following the grant
date, if the recipient has remained a non-employee director for the entire
period from the grant date to such earlier date, and with respect to the
remaining 50% of the underlying shares upon the earlier of (1) the second
anniversary of the grant date or (2) immediately before the second annual
meeting of stockholders following the grant date, if the recipient has remained
a non-employee director for the entire period from the grant date to such
earlier date. In addition to an initial grant, each non-employee director will
also receive, upon re-election to the board, an automatic grant of an option to
purchase up to 5,000 additional shares of our common stock. These additional
options will vest and become exercisable upon the earlier of (1) the first
anniversary of the grant date or (2) immediately before the annual meeting of
stockholders following the grant date, if the recipient has remained a
non-employee director for the entire period from the grant date to such earlier
date.
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All non-employee director options have a term of ten years and an exercise
price equal to the fair market value of Diedrich Coffee common stock on the date
of grant. The non-employee directors plan provides that the exercise price may
be paid by company loan or withholding of underlying stock, or deferred until
completion of broker-assisted exercise and sale transactions. Vesting of
non-employee director options accelerates if the recipient of the option ceases
to be a director of Diedrich Coffee in connection with a change-in-control.
During the fiscal year ended January 27, 1999, options to purchase an aggregate
of 15,000 shares of our common stock were issued to non-employee directors
according to the terms of the non-employee directors plan.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth compensation earned during the last three
fiscal years by our Chief Executive Officer and our next most highly compensated
persons who were serving as executive officers of Diedrich Coffee on January 27,
1999 and whose total annual salary and bonus for fiscal 1999 exceeded $100,000.
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION
COMPENSATION AWARDS
FISCAL ------------ ------------
YEAR SECURITIES
ENDED UNDERLYING
NAME AND PRINCIPAL POSITION JANUARY SALARY($) OPTIONS(#)
--------------------------- ------- ------------ ------------
<S> <C> <C> <C>
John E. Martin(1)........................................... 1999 $100,000 --
Chairman of the Board 1998 20,385 850,000
1997 -- --
Timothy J. Ryan(2).......................................... 1999 $200,000 --
Chief Executive Officer and President 1998 33,035 600,000
1997 -- --
Martin R. Diedrich.......................................... 1999 $111,692 4,000
Vice Chairman of the Board, Secretary and Chief Coffee
Officer 1998 100,000 --
1997 100,000 --
Ann Wride(3)................................................ 1999 $122,808 54,000
Vice President and Chief Financial Officer 1998 -- --
1997 -- --
Dolf Berle(4)............................................... 1999 $105,519 54,000
Vice President of Franchise Development and Operations 1998 -- --
1997 -- --
</TABLE>
- ---------------
(1) Mr. Martin was appointed Chairman of the Board on November 17, 1997.
Accordingly, he did not earn or receive any compensation from Diedrich
Coffee before fiscal 1998.
(2) Mr. Ryan was appointed President and Chief Executive Officer on November 17,
1997. Accordingly, he did not earn or receive any compensation from Diedrich
Coffee before fiscal 1998.
(3) Ms. Wride joined Diedrich Coffee as Vice President and Chief Financial
Officer in April 1998. Accordingly, she did not earn or receive any
compensation from Diedrich Coffee until fiscal 1999.
(4) Mr. Berle joined Diedrich Coffee as Vice President of Franchise Development
in May 1998. Accordingly, he did not earn or receive any compensation from
Diedrich Coffee until fiscal 1999.
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<PAGE> 58
STOCK OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information regarding stock options granted
to the following executive officers during the fiscal year ended January 27,
1999.
<TABLE>
<CAPTION>
POTENTIAL
PERCENT OF REALIZABLE VALUE AT
TOTAL ASSUMED ANNUAL RATES
NUMBER OF OPTIONS OF STOCK PRICE
SECURITIES GRANTED TO APPRECIATION FOR OPTION
UNDERLYING EMPLOYEES EXERCISE TERM(1)
OPTIONS IN FISCAL PRICE EXPIRATION -----------------------
NAME GRANTED(#) YEAR ($/SHARE) DATE 5%($) 10%($)
---- ---------- ---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
John E. Martin..................... -- -- -- -- -- --
Timothy J. Ryan.................... -- -- -- -- -- --
Martin R. Diedrich(2).............. 4,000 2.1% $7.00 6/23/08 $ 16,209 $ 41,825
Ann Wride(3)....................... 50,000 25.9% 5.81 3/25/08 168,169 433,932
4,000 2.1% 7.00 6/23/08 16,209 41,825
Dolf Berle(4)...................... 50,000 25.9% 6.25 3/23/08 180,905 466,795
4,000 2.1% 7.00 6/23/08 16,209 41,825
</TABLE>
- ---------------
(1) The potential realizable values listed are based on an assumption that the
market price of Diedrich Coffee common stock appreciates at the stated rate,
compounded annually, from the date of grant to the expiration date. The 5%
and 10% assumed rates of appreciation are determined by the rules of the
Commission and do not represent our estimate of the future market price of
our common stock.
(2) All of Mr. Diedrich's options were granted pursuant to the 1996 Stock
Incentive Option Plan which was approved by our board of directors on June
23, 1998.
(3) 50,000 of Ms. Wride's options were granted pursuant to her employment letter
dated April 8, 1998, the terms of which are described under "-- Employment
Agreements and Compensatory Arrangements." 4,000 of Ms. Wride's options were
granted pursuant to the 1996 Stock Incentive Option Plan.
(4) 50,000 of Mr. Berle's options were granted pursuant to her employment letter
dated April 8, 1998, the terms of which are described under "-- Employment
Agreements and Compensatory Arrangements." 4,000 of Mr. Berle's options were
granted pursuant to the 1996 Stock Incentive Option Plan.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth information concerning the number and value
of unexercised options held by the following executive officers on January 27,
1999. None of these executive officers exercised options to purchase common
stock during fiscal year 1999.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
FISCAL YEAR END(#) FISCAL YEAR END($)(1)
------------------------------- -------------------------------
NAME EXERCISABLE UNEXERCISABLE(2) EXERCISABLE UNEXERCISABLE(2)
---- ----------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C>
John E. Martin........................ 550,000 300,000 $198,000 --
Timothy J. Ryan....................... 250,000 350,000 47,000 --
Martin Diedrich....................... -- 4,000 -- --
Ann Wride............................. -- 54,000 -- --
Dolf Berle............................ -- 54,000 -- --
</TABLE>
- ---------------
(1) These amounts represent the difference between the exercise price of the
in-the-money options and the market price of Diedrich Coffee common stock on
January 27, 1999. The closing price of our common stock on that day on the
Nasdaq National Market was $4.44. Options are in-the-money if the market
value of the shares covered by the option is greater than the option
exercise price.
(2) Future exercisability is subject to a number of factors, including, but not
limited to, the optionee remaining employed by Diedrich Coffee.
57
<PAGE> 59
BENEFIT PLANS
1996 STOCK INCENTIVE PLAN
In July 1996, we adopted the 1996 Stock Incentive Plan, which authorized
the granting of a variety of stock-based incentive awards, including incentive
and nonstatutory stock options. The purpose of the incentive plan is to promote
the interests of Diedrich Coffee and our stockholders by using investment
interests in Diedrich Coffee to attract, retain and motivate its management and
other persons, to encourage and reward their contributions to the performance of
Diedrich Coffee and to align their interests with the interests of our
stockholders. A total of 775,000 shares have been reserved for issuance under
the incentive plan. The incentive plan is administered by the compensation
committee of the board, who determine the recipients and terms of the awards
granted. The compensation committee is comprised of disinterested directors. The
disinterested directors are eligible only to receive automatic nondiscretionary
awards under the 1996 Non-Employee Directors Stock Option Plan described below.
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. No such
below market options have been granted.
The board or the compensation committee may amend, suspend or terminate the
incentive plan at any time. Only the compensation committee, however, may take
actions affecting the selection of award recipients or the timing, pricing and
amounts of any awards. In addition, the maximum number of shares that may be
sold or issued under the incentive plan may be increased and the class of
persons eligible to participate in the incentive plan may be altered only with
the approval of our stockholders. With respect to all other amendments to the
incentive plan, the board may, in its discretion, determine that the amendment
shall only become effective upon approval by our stockholders.
1996 NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN
In July 1996, we adopted the 1996 Non-Employee Directors Stock Option Plan,
which authorizes the granting of non-qualified stock options to disinterested
directors. The purpose of the directors plan is to promote the interests of
Diedrich Coffee and our stockholders by using investment interests in Diedrich
Coffee to attract and retain highly qualified 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 automatically
receives an initial, one-time grant of an option to purchase up to 10,000 shares
of Diedrich Coffee common stock. In addition to the initial grant, each
non-employee director will also receive, upon each re-election to our board, an
automatic grant of an option to purchase up to 5,000 additional shares of our
common stock. The initial grant vests over two years. The automatic re-election
grant vests immediately before the next annual meeting of stockholders. All
disinterested employee director options have a term of ten years and an exercise
price equal to the fair market value of our common stock on the date of grant.
1997 NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN AND AGREEMENT
In April 1997, the disinterested directors on the board adopted and
approved the 1997 Non-Employee Directors' Stock Option Plan and Agreement to
recognize and compensate the disinterested directors for their service to
Diedrich Coffee above and beyond normal requirements. Pursuant to that plan,
one-time grants of options to purchase up to 10,000 shares of our common stock
were granted to each of Mr. Churm and Mr. Heeschen. These options vested on
April 25, 1998, twelve months after they were granted. No additional options are
available for grant under the 1997 Non-Employee Directors Stock Option Plan and
Agreement.
EMPLOYMENT AGREEMENTS AND COMPENSATORY ARRANGEMENTS
JOHN E. MARTIN
On November 17, 1997, John E. Martin entered into a letter agreement with
Diedrich Coffee appointing him as a director and as Chairman of the Board. The
agreement provides for a base salary of
58
<PAGE> 60
$100,000 per year for so long as Mr. Martin continues as Chairman of the Board.
Mr. Martin is not to receive employee benefits nor any other compensation to
which he would otherwise be entitled for serving on the board, and the board may
terminate him in its discretion at any time with or without reason. We have
agreed to employ a full-time executive assistant on his behalf with an annual
salary not to exceed $72,000 per year. We have also agreed (1) to reimburse Mr.
Martin for all reasonable and necessary travel and other business expenses
incurred in connection with the performance of services under the agreement; (2)
to enter into an indemnification agreement with Mr. Martin in the form provided
to each of our other directors and executive officers; and (3) to reimburse Mr.
Martin for reasonable legal and accounting fees incurred in connection with the
negotiation and execution of the agreement in an amount not to exceed $10,000.
Finally, the agreement recognizes that Mr. Martin's other business interests
relate to restaurants and provides that we waive any rights or claims to other
business opportunities involving the restaurant business that may become
available to Mr. Martin, other than opportunities involving the coffeehouse
business or other businesses in which the principal activity involves the sale
of coffee and coffee beverages.
On November 17, 1997, Mr. Martin also entered into a stock option plan and
agreement with Diedrich Coffee. Our stockholders approved Mr. Martin's option
agreement at a special meeting held on January 22, 1998. We granted Mr. Martin
options to purchase an aggregate of 850,000 shares of our common stock for the
purpose of encouraging and rewarding Mr. Martin's contributions to the
performance of the company and to align Mr. Martin's interests with the
interests of our stockholders. The options granted to Mr. Martin are
exercisable, at the following exercise prices:
- 450,000 shares of common stock at an exercise price of $4.00 per share;
- 100,000 shares of common stock at an exercise price of $5.00 per share;
- 150,000 shares of common stock at an exercise price of $8.00 per share;
and
- 150,000 shares of common stock at an exercise price of $10.00 per share.
All of the options granted to Mr. Martin become exercisable on the earlier
of May 15, 2002 or as soon as the closing price of our common stock on the
Nasdaq National Market exceeds the respective exercise price for at least seven
trading days in any period of ten consecutive trading days. All options are to
terminate if unexercised on November 17, 2002 or, if Mr. Martin resigns from
Diedrich Coffee or we terminate Mr. Martin's employment for cause, the options
will become unexercisable within sixty days. Only Mr. Martin is eligible to
receive options under his option agreement and the options are not transferable
or assignable. Subject to the discretion of the compensation committee of the
board, Mr. Martin may pay the exercise price for his options with cash or by
delivery of shares of our common stock with a value equal to the exercise price
or through a combination of cash and shares.
TIMOTHY J. RYAN
On November 17, 1997, Timothy J. Ryan entered into a two-year employment
agreement with Diedrich Coffee as our President and Chief Executive Officer. The
agreement provides for an annual salary of $200,000 per year, a discretionary
performance bonus which may be awarded by the compensation committee after
twelve months of employment (not to initially exceed 25% of Mr. Ryan's base
salary), and employee benefits that include three weeks annual vacation leave,
reimbursement for all reasonable and necessary travel and other business
expenses incurred in connection with the performance of services under the
agreement, and the payment of a monthly car allowance of $600.00. The employment
agreement may be terminated before the completion of two years in the event of
Mr. Ryan's sustained incapacity as defined in the agreement or by us for cause
as defined in the agreement. We may also terminate Mr. Ryan for any other
reason, however, in such event, Mr. Ryan will be entitled to receive a severance
payment equal to fifty percent of his base salary.
On November 17, 1997, Mr. Ryan also entered into a stock option plan and
agreement with Diedrich Coffee. Our stockholders approved Mr. Ryan's option
agreement at a special meeting held on January 22, 1998. We granted Mr. Ryan
options to purchase an aggregate of 600,000 shares of our common stock for the
purpose of encouraging and rewarding Mr. Ryan's contributions to the performance
of the company
59
<PAGE> 61
and to align Mr. Ryan's interests with the interests of our stockholders. The
options granted to Mr. Ryan are exercisable, at the following exercise prices:
- 50,000 shares of common stock at an exercise price of $3.50 per share;
- 75,000 shares of common stock at an exercise price of $4.50 per share;
- 125,000 shares of common stock at an exercise price of $5.00 per share;
- 175,000 shares of common stock at an exercise price of $8.00 per share;
and
- 175,000 shares of common stock at an exercise price of $10.00 per share.
The options become exercisable on the earlier of May 15, 2002 or upon the
satisfaction of two conditions: (1) the options having vested pursuant to a
vesting schedule set forth in the agreement, and (2) after the date of the
agreement, the closing price of the common stock on the Nasdaq National Market
shall have exceeded the option price per share for at least seven trading days
in any period of ten consecutive trading days. All options are to terminate if
unexercised on November 17, 2002 or, if Mr. Ryan resigns from Diedrich Coffee
without good cause or we terminate Mr. Ryan's employment for cause, the options
will become unexercisable within sixty days. Only Mr. Ryan is eligible to
receive options under the his option agreement and the options are not
transferable or assignable. Subject to the discretion of the compensation
committee of the board, Mr. Ryan may pay the exercise price for his options with
cash or by delivery of shares of our common stock with a value equal to the
exercise price or through a combination of cash and shares.
MARTIN R. DIEDRICH
Martin R. Diedrich entered into a new employment agreement with Diedrich
Coffee, which appointed him as Diedrich Coffee's Chief Coffee Officer beginning
as of June 29, 1998. The term of the agreement is three years. The agreement
provides for a base salary of $120,000 per annum, increasing to $140,000 per
annum beginning in the second year of the agreement, and to $160,000 in the
third year. Mr. Diedrich receives employee benefits consistent with the
company's policies for other senior executives.
ANN WRIDE
In April 1998, Ann Wride entered into an employment agreement with Diedrich
Coffee appointing her Vice President and Chief Financial Officer. The agreement
provides for a base salary of $155,000 per annum and an annual incentive bonus
of up to 25% of base salary based on the company's performance and Ms. Wride's
performance against objectives approved by the board. If terminated without
cause, Ms. Wride is entitled to six months salary as severance compensation. Ms.
Wride also received options to purchase up to 50,000 shares of our common stock
at an exercise price of $5.8125, vesting over two years. Ms. Wride receives
employee benefits consistent with the company's policies for other senior
executives.
DOLF BERLE
In April 1998, Dolf Berle entered into an employment agreement with
Diedrich Coffee appointing him Vice President of Franchise Development. The
agreement provides for a base salary of $155,000 per annum and an annual
incentive bonus of up to 25% of base salary based on the company's performance
and Mr. Berle's performance against objectives approved by the board. If
terminated without cause, Mr. Berle is entitled to six months salary as
severance compensation. Mr. Berle also received options to purchase up to 50,000
shares of our common stock at an exercise price of $6.25, vesting over two
years. According to the terms of the employment agreement, Mr. Berle was also
granted 10,000 stock options annually for each of the five years following the
end of the two-year vesting period of the initial grant. The exercise price of
those options will be the date of the annual grant. Mr. Berle receives employee
benefits consistent with the company's policies for other senior executives.
60
<PAGE> 62
CATHERINE SAAR
On June 11, 1998, Catherine Saar entered into an employment agreement with
Diedrich Coffee appointing her Vice President, Marketing. The agreement provides
for a base salary of $120,000 per annum and an annual incentive bonus of up to
25% of base salary based on the company's performance and Ms. Saar's performance
against objectives approved by the board. If terminated without cause, Ms. Saar
is entitled to four months salary as severance compensation. Ms. Saar also
received options to purchase up to 20,000 shares of our common stock at an
exercise price of $7.75, vesting over two years. Ms. Saar is eligible for
subsequent option grants. Ms. Saar receives employee benefits consistent with
the company's policies for other senior executives.
REPORT OF THE COMPENSATION COMMITTEE
The compensation committee consists of Messrs. Churm, Goelman and Heeschen.
The compensation committee administers our stock option plans and sets
compensation levels for our executive officers. The company's executive
compensation policies and programs are designed to:
- provide competitive levels of overall compensation that will attract
and retain the best executive talent in the industry;
- motivate executive officers to perform at their highest level;
- align executive officer and stockholder interests to create
stockholder value; and
- reward executive officers for achievement of corporate and individual
objectives.
To achieve these goals, the compensation committee and the board have
established an executive compensation program consisting primarily of three
integrated components: base salary, annual bonus and stock options.
Base Salary. Base salaries for executive officers are set by the
compensation committee after considering factors such as competitive
environment, experience level, position, responsibility and overall contribution
of the executive. Base salaries for the executive officers were established in
their respective employment agreements.
Annual Bonus. All executive officers, including the Chief Executive
Officer, are eligible to receive an annual bonus. The employment agreements for
the executive officers provide for discretionary performance bonuses based upon
the company's performance and the respective executive officer's contribution
thereto. The board awarded annual bonuses to sixteen employees, including three
of the executive officers, for the fiscal year ended January 27, 1999, because
of outstanding performance by such persons during the year. These bonuses were
paid after the fiscal year ended January 27, 1999, but related to performance
during the fiscal year.
Stock Options. The third component of the compensation program for
executive officers is in the form of stock option awards. Diedrich Coffee's 1996
Stock Incentive Plan provides for long-term incentive compensation for our
employees, including executive officers. Stock option awards align the interests
of executive officers with those of our stockholders by providing an equity
interest in the company, thereby providing incentive for the executive officers
to maximize stockholder value. Option awards directly tie executive compensation
to the value of our common stock. The compensation committee is responsible for
determining, subject to the terms of the 1996 Stock Incentive Plan, the
individuals to whom grants are made, the timing of grants and the number of
shares per grant. The number of shares are determined based upon the
individual's position in the company, competitive company practices and the
number of unvested shares already held by the individual. Stock options are
generally granted with an exercise price equal to the fair market value of our
common stock on the date of grant. During fiscal 1999, the compensation
committee granted stock options to approximately 76 employees. This was a wider
employee base than in past years. The goal of the compensation committee was to
ensure employees were focused on increasing stockholder value. The group
included the majority of corporate office employees as well as general managers
and assistant managers at the coffeehouse level.
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<PAGE> 63
Chief Executive Officer. In November 1997, Diedrich Coffee entered into an
employment agreement as well as a stock option plan and agreement with Mr. Ryan.
Our stockholders approved the stock option plan and agreement at a special
meeting called for that purpose on January 22, 1998. The terms of Mr. Ryan's
employment agreement and stock option plan and agreement were previously
described above. The process of establishing the Chief Executive Officer's
compensation parallels the process and criteria used in establishing
compensation levels for other executive officers. There were no changes made
during the fiscal year ended January 27, 1999 to Mr. Ryan's employment agreement
or his compensation package.
Policy with Respect to Internal Revenue Code Section 162(m). In 1993,
Congress amended the Internal Revenue Code to add Section 162(m). Section 162(m)
and the regulations thereunder place a limit of $1 million on the amount of
compensation that Diedrich Coffee may deduct in any year with respect to some of
our most highly compensated officers. Section 162(m) does not, however, disallow
a deduction for qualified "performance-based compensation," the material terms
of which are disclosed to and approved by stockholders. Currently, our executive
officer compensation levels, other than "performance-based compensation," do not
exceed $1 million. The compensation committee and the board plan to take such
actions in the future to minimize the loss of tax deductions related to
compensation as they deem necessary and appropriate in light of specific
compensation objectives.
Respectfully submitted,
Peter Churm
Paul C. Heeschen
Lawrence Goelman
KEY MAN LIFE INSURANCE
We currently maintain a term life insurance policy in the amount of
$10,000,000 on the life of Mr. Diedrich under which Diedrich Coffee is the sole
beneficiary.
COMPENSATION COMMITTEE INTERLOCKS
During the fiscal year ended January 27, 1999, the compensation committee
of our board consisted of Mr. Churm, Mr. Goelman and Mr. Heeschen. No member of
the compensation committee was, at any time during the fiscal year ended January
27, 1999 or at any other time, an officer or employee of Diedrich Coffee. There
are no compensation committee interlocks between Diedrich Coffee and other
entities involving our executive officers and board members who serve as
executive officers or board members of such other entities.
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<PAGE> 64
STOCK PERFORMANCE GRAPH
The following graph shows a comparison of the cumulative total returns for
the period beginning on September 12, 1996, the date our common stock was first
publicly traded, and ending on January 27, 1999 for:
- Diedrich Coffee common stock;
- the Total Return Index for the Nasdaq National Market (U.S. companies);
and
- the Total Return Index for Nasdaq Retail Trade Stocks.
Each of the above assumes an initial value of $100 and reinvestment of
dividends. Although the graph would normally cover a five-year period, our
common stock has been publicly traded only since September 12, 1996, so the
graph begins on that date. The comparisons in the graph are required by the
Commission and are not intended to forecast or be indicative of possible future
performance of our common stock.
<TABLE>
<CAPTION>
RETAIL NASDAQ DDRX
------ ------ ----
<S> <C> <C> <C>
'9/12/96' 100.00 100.00 100.00
'10/30/96' 98.41 102.88 97.62
'1/29/97' 97.34 116.09 80.95
'4/30/97' 88.70 107.83 25.00
'7/30/97' 107.69 136.25 27.38
'10/29/97' 111.49 137.99 26.79
'1/28/98' 114.79 139.16 59.52
'4/29/98' 134.05 159.67 76.19
'7/29/98' 131.19 161.73 64.89
'10/28/98' 108.69 150.99 40.48
'1/27/99' 136.62 209.69 42.27
</TABLE>
TRANSACTIONS INVOLVING OFFICERS,
DIRECTORS AND PRINCIPAL STOCKHOLDERS
On April 6, 1999, we entered into a $1,000,000 loan agreement and security
agreement with Amre Youness, a former director of Diedrich Coffee and the
beneficial owner of approximately 6.6% of the outstanding shares of our common
stock. Under the loan agreement, all outstanding principal and interest is due
and payable on April 6, 2000. The loan is secured by the assets of Diedrich
Coffee with interest accruing and paid monthly at the prime rate plus 3%. In
connection with the loan agreement, we issued warrants to Mr. Youness to
purchase 70,000 shares of Diedrich Coffee common stock at a price of $5.625 per
share.
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<PAGE> 65
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of April 7, 1999, and as adjusted to reflect
the sale of the shares of common stock offered in this offering, by:
- each person or group of affiliated persons who we know owns beneficially
5% or more of our common stock;
- each of our directors;
- each of our executive officers listed in the summary compensation table;
and
- all of our directors and executive officers as a group.
Percentage of ownership is calculated as required by Commission Rule
13d-3(d)(1). Except as indicated in the footnotes to this table, the persons
named in the table have sole voting and investment power with respect to all
shares of common stock shown as beneficially owned by them, subject to community
property laws. The table below includes the number of shares underlying options
that are exercisable within 60 days from the date of this offering.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
BEFORE THIS OFFERING AFTER THIS OFFERING
---------------------------------------- -------------------------------------
NAME AND ADDRESS AMOUNT AND NATURE PERCENT OF AMOUNT AND NATURE PERCENT OF
OF BENEFICIAL OWNER(1) OF BENEFICIAL OWNERSHIP(2) CLASS OF BENEFICIAL OWNERSHIP CLASS
---------------------- -------------------------- ---------- ----------------------- ----------
<S> <C> <C> <C> <C>
D.C.H., L.P................... 1,473,197(3) 23.9% %
450 Newport Center Drive
Suite 450
Newport Beach, CA 92660
Amre A. Youness............... 430,958(4) 6.6% %
301 North Lake Avenue
Suite 910
Pasadena, CA 91101
Cosleno, Inc. ................ 340,000(5) 5.2% %
3753 Howard Hughes Parkway
Suite 200
Las Vegas, NV 89109
Dolf A. Berle................. 25,000(6) *
Peter Churm................... 45,000(7) *
Martin Diedrich............... 655,107 10.6% %
Lawrence Goelman.............. 112,700(8) 1.8% %
Paul C. Heeschen.............. 1,786,480(9) 28.8% %
Steven A. Lupinacci........... 309,061(10) 5.0% %
John E. Martin................ 1,258,533(11) 17.9% %
Timothy J. Ryan............... 629,367(12) 9.3% %
Ann Wride..................... 25,000(13) *
All directors and executive
officers as a group (8
persons).................... 4,537,187(14) 58.0% %
</TABLE>
- ---------------
* Less than 1%
(1) Unless otherwise indicated, the address of each person in this table is c/o
Diedrich Coffee, 2144 Michelson Dr., Irvine, California 92612.
(2) Calculated pursuant to Rule 13d-3(d) under the Securities Exchange Act.
Shares not outstanding that are subject to options or warrants exercisable
by the holder thereof within 60 days of April 7, 1999 are deemed
outstanding for the purposes of calculating the number and percentage owned
by such stockholder, but not deemed outstanding for the purpose of
calculating the percentage owned
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<PAGE> 66
by each other stockholder listed. Unless otherwise noted, all shares listed
as beneficially owned by a stockholder are actually outstanding.
(3) Paul C. Heeschen, a director of Diedrich Coffee, is the sole general
partner of this limited partnership with voting and investment power as to
all shares beneficially owned by the limited partnership.
(4) Pursuant to Schedule 13D filed with the Commission and dated as of October
14, 1997, includes 340,000 shares that are subject to warrants exercisable
within 60 days of which he has shared voting and dispositive power with
Cosleno, Inc.
(5) Pursuant to Schedule 13D as filed with the Commission and dated as of
October 14, 1997, Cosleno, Inc. and Amre A. Youness, who is the sole
stockholder of Cosleno, Inc., have shared voting and dispositive power of
the 340,000 shares that are subject to warrants exercisable within 60 days.
(6) Includes 25,000 shares subject to options that are exercisable within 60
days.
(7) Includes 25,000 shares subject to options that are exercisable within 60
days.
(8) Includes 100,000 shares subject to options that are exercisable within 60
days. This number does not include 85,000 shares held by the Virginia R.
Cirica Trust. Ms. Cirica is Mr. Goelman's wife. Mr. Goelman disclaims any
beneficial interest in the Virginia R. Cirica Trust, except to the extent
to which Mr. Goelman is a contingent beneficiary under the terms of that
trust.
(9) Includes 1,473,197 shares beneficially owned by D.C.H., L.P. and 255,914
shares beneficially owned by Redwood Enterprises VII, L.P. Mr. Heeschen is
the sole general partner of each of these partnerships with voting and
investment power as to all of such shares. Also includes 25,000 shares held
personally by Mr. Heeschen subject to options that are exercisable within
60 days and 25,000 shares purchased on the open market by the Palm Trust,
of which Mr. Heeschen is a trustee with shared voting and investment power
as to all of such shares.
(10) Mr. Lupinacci resigned as Chief Executive Officer, President and Chief
Financial Officer effective March 12, 1997.
(11) Includes 850,000 shares subject to options that are exercisable within 60
days.
(12) Includes 600,000 shares subject to options that are exercisable within 60
days.
(13) Includes 25,000 shares subject to options that are exercisable within 60
days.
(14) Includes 1,650,000 shares subject to options that are exercisable within 60
days.
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<PAGE> 67
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 25 million shares of common stock,
$0.01 par value per share, and 3 million shares of preferred stock, $0.01 par
value per share.
DIEDRICH COFFEE COMMON STOCK
At April 7, 1999, there were approximately 6.2 million shares of our common
stock outstanding held of record by 147 persons. Exercisable stock options and
stock warrants to purchase an aggregate of approximately 2.1 million shares of
common stock were also outstanding.
Diedrich Coffee common stockholders are entitled to one vote per share on
all matters to be voted upon by our stockholders. Our common stockholders may
not cumulate votes for the election of directors. Any action taken by common
stockholders must be taken at an annual or special meeting and may not be taken
by written consent.
Our common stockholders are entitled to receive ratably any dividends as
may be declared from time-to-time by our board out of funds legally available
for dividend payments, subject to any dividend preferences of any holders of
preferred stock. In the event of liquidation or dissolution of Diedrich Coffee,
our common stockholders are entitled to share ratably in all assets remaining
after payment of liabilities and liquidation preferences of any preferred stock.
Our common stockholders do not have any preemptive or conversion rights or other
subscription rights. Neither redemption nor sinking fund provisions apply to our
common stock.
All outstanding shares of our common stock are fully paid and
non-assessable, and the shares of Diedrich Coffee common stock that will be
outstanding after the merger will be fully paid and non-assessable.
DIEDRICH COFFEE PREFERRED STOCK
At April 7, 1999, no shares of our preferred stock were outstanding. Our
board may issue up to 3 million shares of preferred stock in one or more series
and, subject to the Delaware General Corporation Law, may:
- fix the number of shares and designation of any series;
- fix its preferences, limitations, rights, qualifications and
restrictions; and
- determine the voting powers of any such series.
Although we presently do not intend to do so, the board may issue preferred
stock with voting and conversion rights, which could negatively affect the
voting power or other rights of our common stockholders without stockholder
approval. For example, the issuance of preferred stock could decrease the amount
of earnings and assets available for distribution to our common stockholders. In
addition, any such issuance could have the effect of making removal of the
present management more difficult, or resulting in restrictions upon the payment
of dividends and other distributions to our common stockholders. The issuance of
preferred stock may delay or prevent a change-in-control of Diedrich Coffee.
CERTAIN PROVISIONS OF DELAWARE LAW
The company is a Delaware corporation and is subject to the provisions of
Section 203 of the Delaware General Corporation Law, an anti-takeover law. In
general, the statute prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction by which that person
became an interested stockholder, unless the business combination is approved in
a prescribed manner. For purposes of Section 203, a "business combination"
includes a merger, asset sale or other transaction resulting in a financial
benefit to the interested stockholder, and an "interested stockholder" is a
person who, together
66
<PAGE> 68
with affiliates and associates, owns, or within three years prior did own, 15%
or more of the company's voting stock.
CERTAIN CHARTER AND BYLAW PROVISIONS
Special Meetings. Our bylaws provide that special meetings of the
stockholders may be called only by the board of directors or the president of
the company. This provision may make it more difficult for stockholders to take
action opposed by the board.
Indemnification of Directors and Officers. Our bylaws provide a right to
indemnification to the full extent permitted by law for expenses, attorney's
fees, damages, punitive damages, judgments, penalties, fines and amounts paid in
settlement actually and reasonably incurred by any director or officer whether
or not the indemnified liability arises or arose from any threatened, pending or
completed proceeding by or in the company's right by reason of the fact that
such director or officer is or was serving as a director or officer at the
company's request, as a director, officer, partner, venturer, proprietor,
employee, agent, or trustee of another corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise. Our bylaws also provide for
the advancement of expenses to an indemnified party upon receipt of an
undertaking by the party to repay those amounts if it is finally determined that
the indemnified party is not entitled to indemnification.
Our bylaws authorize us to take steps to ensure that all persons entitled
to the indemnification are properly indemnified, including, if the board of
directors so determines, purchasing and maintaining insurance.
LIMITATION OF LIABILITY
Our articles of incorporation provide that no director shall be personally
liable to the company or its stockholders for monetary damages for a breach of
fiduciary duty as a director, except for liability:
- for any breach of such person a duty of loyalty;
- for acts or omissions not in good faith or involving intentional
misconduct or a knowing violation of law;
- for the payment of unlawful dividends and certain other actions
prohibited by Delaware corporate law; and
- for any transaction resulting in receipt by such person of an improper
personal benefit.
TRANSFER AGENT
The transfer agent and registrar for the common stock is U.S. Stock
Transfer Corporation.
67
<PAGE> 69
SHARES ELIGIBLE FOR FUTURE SALE
SHARES OUTSTANDING AND FREELY TRADEABLE AFTER OFFERING
Upon completion of this offering, we will have approximately
shares of common stock outstanding. The shares of
common stock to be sold by the company in this offering will be freely tradeable
without restriction or limitation under the Securities Act, except for any such
shares held by "affiliates" of the company, as such term is defined under Rule
144 of the Securities Act. The shares held by affiliates will be subject to the
resale limitations under Rule 144. Of the remaining outstanding shares,
approximately shares of common stock are "restricted securities"
within the meaning of Rule 144 and may be publicly sold only if registered under
the Securities Act or sold in accordance with an applicable exemption from
registration, such as Rule 144. All of these restricted shares of common stock
will become eligible for resale under Rule 144 commencing , 1999.
Diedrich Coffee's directors, executive officers and its existing stockholders
have agreed not to sell, directly or indirectly, any shares owned by them for a
period of 180 days after the date of this prospectus without the prior written
consent of . See "Underwriting." Upon the expiration of this 180
days lock-up period, or earlier upon the consent of the representative, all of
these shares will become eligible for sale subject to the restrictions of Rule
144.
RULE 144
In general, under Rule 144, as currently in effect, a person, or persons
whose shares are aggregated, who has beneficially owned shares for at least one
year, including an affiliate of the company, would be entitled to sell, within
any three-month period, that number of shares that does not exceed the greater
of 1% of the then-outstanding shares of common stock (approximately
shares of common stock after this offering) and the average
weekly trading volume in the common stock during the four calendar weeks
immediately preceding the date on which the notice of sale is filed with the
Commission, provided certain manner of sale and notice requirements and
requirements as to the availability of current public information about the
company are satisfied. In addition, affiliates of the company must comply with
the restrictions and requirements of Rule 144, other than the one-year holding
period requirement, in order to sell shares of common stock. As defined in Rule
144, an "affiliate" of an issuer is a person who, directly or indirectly,
through the use of one or more intermediaries controls, or is controlled by, or
is under common control with, such issuer. Under Rule 144(k), a holder of
"restricted securities" who is not deemed an affiliate of the issuer and who has
beneficially owned shares for a least two years would be entitled to sell shares
under Rule 144(k) without regard to the limitations described in this paragraph.
EFFECT OF SUBSTANTIAL SALES ON MARKET PRICE OF COMMON STOCK
The company is unable to estimate the number of shares that may be sold in
the future by its existing stockholders or the effect, if any, that such sales
will have on the market price of the common stock prevailing from time-to-time.
Sales of substantial amounts of common stock, or the prospect of such sales,
could adversely affect the market price of our common stock.
68
<PAGE> 70
UNDERWRITING
The underwriters named below, acting through their representatives,
and , have severally agreed with us, subject to the terms
and conditions of the underwriting agreement, to purchase from us the number of
shares of common stock set forth opposite their names below. The underwriters
are committed to purchase and pay for all these shares if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
---------
Total.............................................
=========
</TABLE>
The representatives have advised us that the underwriters propose to offer
the shares of common stock to the public at the public offering price on the
cover page of this prospectus and to some dealers at such price less a
concession of not in excess of $ per share, of which $ may be
reallowed to other dealers. After this offering, the public offering price,
concession, and reallowance to dealers may be reduced by the representatives.
This reduction will not change the amount of proceeds we will receive as stated
on the cover page of this prospectus. The common stock is offered by the
underwriters as stated in this prospectus, subject to receipt and acceptance by
them and subject to their right to reject any order in whole or in part.
Over-Allotment Option. We have granted to the underwriters an option,
exercisable during the 30-day period after the date of this prospectus, to
purchase up to additional shares of common stock at the same price per
share as we will receive for the shares that the underwriters have
agreed to purchase. To the extent that the underwriters exercise this option,
each of the underwriters will have a firm commitment to purchase approximately
the same percentage of the additional shares that the number of shares of common
stock to be purchased by it shown in the above table represents as a percentage
of the shares offered hereby. If purchased, those additional shares
will be sold by the underwriters on the same terms as those on which the
shares are being sold. We will be obligated, pursuant to the option,
to sell shares to the extent the option is exercised. The underwriters may
exercise this option only to cover over-allotments made in connection with the
sale of the shares of common stock offered in this prospectus. If this option is
exercised in full, the total price to public, underwriting discounts and
commissions and proceeds to company will be $ million, $
million and $ million, respectively.
Directed Share Program. At our request, the underwriters have reserved up
to shares of common stock to be issued by us and offered for sale in
this prospectus, at the initial public offering price, to our directors,
officers, employees, business associates and persons otherwise related to
Diedrich Coffee. The number of shares of common stock available for sale to the
general public will be reduced to the extent these individuals purchase these
reserved shares. The underwriters will offer any reserved shares that are not so
purchased to the general public on the same basis as the other shares offered in
this prospectus.
Indemnity. The underwriting agreement contains covenants of indemnity among
the underwriters and us against various civil liabilities, including liabilities
under the Securities Act and liabilities arising from breaches of
representations and warranties contained in the underwriting agreement.
Lock-Up Agreements. Each executive officer and director of Diedrich Coffee
has agreed, during the period ending 180 days after the date of this prospectus
subject to various exceptions, not to offer to sell, contract to sell, or
otherwise sell, dispose of, loan, pledge or grant any rights with respect to any
shares of common stock or any options or warrants to purchase any shares of
common stock, or any securities convertible into or exchange for shares of
common stock owned as of the date of this prospectus or thereafter acquired
directly by these holders or with respect to which they have the power of
disposition, without the prior written consent of . may, in
its sole discretion and at any time or
69
<PAGE> 71
from time-to-time without notice, release all or any portion of the securities
subject to the lock-up agreements. There are no existing agreements between the
representatives and any of our stockholders who have executed a lock-up
agreement providing consent to the sale of shares before the expiration of the
lock-up period.
In addition, we have agreed that during the lock-up period we will not,
without the prior written consent of , subject to various exceptions,
- consent to the disposition of any shares held by stockholders subject to
lock-up agreements before the expiration of the lock-up period; or
- issue, sell, contract to sell, or otherwise dispose of, any shares of
common stock, any options to purchase any shares of common stock or any
securities convertible into, exercisable for or exchangeable for shares
of common stock other than our sale of shares in this offering, the
issuance of common stock upon the exercise of outstanding options, and
the issuance of options under existing stock option and incentive plans
provided the options do not vest before the expiration of the lock-up
period. See "Shares Eligible for Future Sale."
The underwriters have advised us that they do not intend to confirm sales
of more than 5% of the common stock offered in this offering to accounts over
which they exercise discretionary authority.
Stabilization. The representatives have advised us that, pursuant to
Regulation M under the Securities Act, some persons participating in this
offering may engage in transactions, including stabilizing bids, syndicate
covering transactions or the imposition of penalty bids that may have the effect
of stabilizing or maintaining the market price of the common stock at a level
above that which might otherwise prevail in the open market. A "stabilizing bid"
is a bid for or the purchase of shares of common stock on behalf of the
underwriters for the purpose of fixing or maintaining the price of the common
stock. A "syndicate covering transaction" is the bid for or the purchase of
common stock on behalf of the underwriters to reduce a short position incurred
by the underwriters in connection with this offering. A "penalty bid" is an
arrangement permitting the representatives to reclaim the selling concession
otherwise accruing to an underwriter or syndicate member in connection with this
offering if the common stock originally sold by such underwriter or syndicate
member is purchased by the representatives in a syndicate covering transaction
and has therefore not been effectively placed by such underwriter or syndicate
member. The representatives have advised us that these transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
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<PAGE> 72
LEGAL MATTERS
The validity of our common stock offered hereby will be passed upon for us
by Gibson, Dunn & Crutcher LLP, Orange County, California. has
acted as counsel to the underwriters in connection with certain legal matters
related to this offering.
EXPERTS
The financial statements of Diedrich Coffee, Inc. as of January 27, 1999
and January 28, 1998, and for each of the years ended January 27, 1999, January
28, 1998 and January 27, 1997, have been included herein and in the registration
statement in reliance upon the report of KPMG LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
The consolidated financial statements of Coffee People, Inc. as of June 27,
1998 and June 28, 1997 and for each of the two years in the period ended June
27, 1998 included in this prospectus have been so included in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
The consolidated financial statements of Coffee People, Inc. (formerly
Gloria Jean's, Inc.) for the 39-week period ended June 29, 1996 included in this
prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Commission a registration statement on Form S-1
under the Securities Act that registers the shares of our common stock to be
sold in this offering. The registration statement, including the attached
exhibits and schedules, contain additional relevant information about us and our
capital stock. The rules and regulations of the Commission allow us to omit
certain information included in the registration statement from this document.
In addition, we file reports, proxy statements and other information with
the Commission under the Securities Exchange Act. You may read and copy this
information at the following public reference rooms of the Commission:
<TABLE>
<S> <C> <C>
Washington, D.C. New York, New York Chicago, Illinois
450 Fifth Street, N. W. 7 World Trade Center 500 West Madison Street
Room 1024 Suite 1300 Suite 1400
Washington, D.C. 20549 New York, NY 10048 Chicago, IL 60661-2511
</TABLE>
You may also obtain copies of this information by mail from the Public
Reference Section of the Commission, 450 Fifth Street, N.W. Room 1024,
Washington, D.C. 20549, at prescribed rates. You may obtain information on the
operation of the public reference rooms by calling the Commission at
1-800-SEC-0330.
The Commission also maintains an internet world wide web site that contains
reports, proxy statements and other information about issuers, like Diedrich
Coffee, who file electronically with the Commission. The address of that site is
http://www.sec.gov.
We intend to furnish our stockholders with annual reports containing
audited financial statements, and make available to our stockholders quarterly
reports for the first three quarters of each year containing unaudited interim
financial information.
71
<PAGE> 73
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DIEDRICH COFFEE
Independent Auditors' Report................................ F-3
Balance Sheets as of January 27, 1999 and January 28,
1998...................................................... F-4
Statements of Operations for the Years Ended January 27,
1999, January 28, 1998 and January 29, 1997............... F-5
Statements of Stockholders' Equity for the Years Ended
January 27, 1999, January 28, 1998 and January 29, 1997... F-6
Statements of Cash Flows for the Years Ended January 27,
1999, January 28, 1998 and January 29, 1997............... F-7
Notes to Financial Statements............................... F-8
COFFEE PEOPLE
Consolidated Reports of Independent Accountants............. F-21
Consolidated Balance Sheets as of June 27, 1998 and June 28,
1997...................................................... F-23
Consolidated Statements of Operations for the Years Ended
June 27, 1998 and June 28, 1997 and for the 39-week Period
June 29, 1996............................................. F-24
Consolidated Statements of Stockholders' Equity for the
Years Ended June 27, 1998 and June 28, 1997 and for the
39-week period June 29, 1996.............................. F-25
Consolidated Statements of Cash Flows for Years Ended June
27, 1998 and June 28, 1997 and for the 39-week period June
29, 1996.................................................. F-26
Notes to Financial Statements............................... F-27
Consolidated Balance Sheets as of June 27, 1998 and March 6,
1999 (unaudited).......................................... F-41
Consolidated Statements of Operations for the Thirty-Six
Weeks Ended March 6, 1999 and March 7, 1998 and the
Thirty-Six Weeks Ended March 6, 1999 and March 7, 1998
(unaudited)............................................... F-42
Consolidated Statements of Cash Flows for the Thirty-Six
Weeks Ended March 6, 1999 and March 7, 1998 (unaudited)... F-43
Notes to Financial Statements As of March 6, 1999 and June
27, 1998 (unaudited)...................................... F-44
</TABLE>
F-1
<PAGE> 74
DIEDRICH COFFEE, INC.
CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 27, 1999, JANUARY 28, 1998 AND JANUARY 29, 1997
F-2
<PAGE> 75
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders'
Diedrich Coffee, Inc.:
We have audited the accompanying balance sheets of Diedrich Coffee, Inc. as
of January 27, 1999 and January 28, 1998, and the related statements of
operations, stockholders' equity, and cash flows for the years ended January 27,
1999, January 28, 1998 and January 29, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Diedrich Coffee, Inc. as of
January 27, 1999 and January 28, 1998, and the results of its operations and its
cash flows for the years ended January 27, 1999, January 28, 1998 and January
29, 1997, in conformity with generally accepted accounting principles.
/s/ KPMG LLP
Orange County, California
March 26, 1999, except the
second paragraph of note 13
which is April 6, 1999
F-3
<PAGE> 76
DIEDRICH COFFEE, INC.
BALANCE SHEETS
ASSETS (NOTE 5)
<TABLE>
<CAPTION>
JANUARY 27, JANUARY 28,
1999 1998
------------ ------------
<S> <C> <C>
Current Assets:
Cash...................................................... $ 1,200,861 $ 1,408,161
Accounts receivable, less allowance for doubtful accounts
of $29,438 and $22,134................................. 263,651 181,628
Note receivable........................................... 100,000 --
Inventories (Note 2)...................................... 1,279,436 1,375,119
Prepaid expenses.......................................... 188,993 157,393
Income taxes receivable................................... 17,686 42,528
------------ ------------
Total current assets................................. 3,050,627 3,164,829
Property and equipment, net (Note 3)........................ 9,119,859 10,104,843
Costs in excess of net assets acquired, net (Note 4)........ 329,086 389,651
Other assets................................................ 236,880 289,103
------------ ------------
$ 12,736,452 $ 13,948,426
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current installments of obligations under capital leases
(Note 6)............................................... $ 169,488 $ 168,139
Accounts payable.......................................... 1,415,067 1,204,366
Accrued compensation...................................... 970,034 716,742
Accrued expenses (Note 7)................................. 1,039,097 1,796,869
Restructuring charge (Note 10)............................ 112,400 237,320
------------ ------------
Total current liabilities............................ 3,706,086 4,123,436
Obligations under capital lease -- long-term (Note 6)....... 283,106 317,292
Long term debt (Note 5)..................................... 2,500,000 2,500,000
Deferred rent............................................... 219,865 172,231
------------ ------------
Total liabilities.................................... 6,709,057 7,112,959
------------ ------------
Stockholders' Equity:
Common stock, $.01 par value; authorized 25,000,000
shares; issued and outstanding 6,167,313 shares at
January 27, 1999 and 5,741,650 at January 28, 1998..... 61,674 57,417
Additional paid-in capital................................ 18,708,032 16,928,546
Accumulated deficit....................................... (12,742,311) (10,150,496)
------------ ------------
Total stockholders' equity........................... 6,027,395 6,835,467
Commitments and contingencies (Note 6)
------------ ------------
$ 12,736,452 $ 13,948,426
============ ============
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 77
DIEDRICH COFFEE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JANUARY 27, JANUARY 28, JANUARY 29,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net Sales:
Retail............................................ $21,248,462 $20,759,993 $18,117,720
Wholesale and other............................... 2,766,741 2,221,704 1,694,686
Franchise area development fees................... 200,000 -- --
----------- ----------- -----------
Total........................................ 24,215,203 22,981,697 19,812,406
----------- ----------- -----------
Cost and Expenses:
Cost of sales and related occupancy costs......... 10,955,197 11,457,612 9,263,286
Store operating expenses.......................... 8,935,644 10,447,349 8,279,621
Other operating expenses.......................... 634,124 289,867 240,227
Depreciation and amortization..................... 1,941,020 1,785,271 1,053,770
Provision for asset impairment and restructuring
costs.......................................... -- 3,902,332 --
General and administrative expenses............... 4,013,809 4,005,853 2,003,483
----------- ----------- -----------
Total........................................ 26,479,794 31,888,284 20,840,387
----------- ----------- -----------
Operating (loss) income............................. (2,264,591) (8,906,587) (1,027,981)
Interest expense.................................... (384,544) (182,135) (189,549)
Interest and other (expense) income................. 90,517 (23,239) 103,718
----------- ----------- -----------
Loss before income taxes............................ (2,558,618) (9,111,961) (1,113,812)
Income tax provision (benefit)...................... 3,690 800 (128,107)
----------- ----------- -----------
Net loss............................................ $(2,562,308) $(9,112,761) $ (985,705)
=========== =========== ===========
Net loss per share -- basic & diluted:.............. $ (0.43) $ (1.69) $ (0.22)
=========== =========== ===========
Weighted average shares outstanding............... 5,934,287 5,392,609 4,414,000
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 78
DIEDRICH COFFEE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SERIES A PREFERRED SERIES B PREFERRED
STOCK STOCK COMMON STOCK
---------------------- ------------------------ ------------------- ADDITIONAL ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT PAID IN CAPITAL DEFICIT
---------- --------- ---------- ----------- --------- ------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 31,
1996................... 1,000,000 $ 800,000 1,608,568 $ 2,225,813 1,183,082 $11,831 $ 318,867 $ (52,030)
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.... -- -- -- -- -- -- -- (985,705)
---------- --------- ---------- ----------- --------- ------- ----------- ------------
Balance, January 29,
1997................... -- -- -- -- 5,391,650 53,917 15,882,046 (1,037,735)
Common stock issued...... -- -- -- -- 350,000 3,500 1,046,500 --
Net loss for the year.... -- -- -- -- -- -- -- (9,112,761)
---------- --------- ---------- ----------- --------- ------- ----------- ------------
Balance, January 28,
1998................... -- -- -- -- 5,741,650 57,417 16,928,546 (10,150,496)
Common stock issued...... -- -- -- -- 200,000 2,000 1,273,000 --
Exercise of options and
warrants............... -- -- -- -- 225,663 2,257 476,979 --
Amortization of
options................ -- -- -- -- -- -- 29,507 (29,507)
Net loss for the year.... -- -- -- -- -- -- -- (2,562,308)
---------- --------- ---------- ----------- --------- ------- ----------- ------------
Balance, January 27,
1999................... -- $ -- -- $ -- 6,167,313 $61,674 $18,708,032 $(12,742,311)
========== ========= ========== =========== ========= ======= =========== ============
<CAPTION>
TOTAL
-----------
<S> <C>
Balance, January 31,
1996................... $ 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)
-----------
Balance, January 29,
1997................... 14,898,228
Common stock issued...... 1,050,000
Net loss for the year.... (9,112,761)
-----------
Balance, January 28,
1998................... 6,835,467
Common stock issued...... 1,275,000
Exercise of options and
warrants............... 479,236
Amortization of
options................ --
Net loss for the year.... (2,562,308)
-----------
Balance, January 27,
1999................... $ 6,027,395
===========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 79
DIEDRICH COFFEE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JANUARY 27, 1999 JANUARY 28, 1998 JANUARY 29, 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income...................................... $(2,562,308) $(9,112,761) $ (985,705)
Adjustments to reconcile net (loss) income to cash
(used in) provided by operating activities:
Depreciation and amortization........................ 1,941,020 1,785,271 1,053,770
Deferred income taxes................................ -- -- 48,192
Restructuring charge................................. -- 987,590
Impairment on long-lived assets...................... -- 2,203,217
Changes in operating assets and liabilities:
Accounts and notes receivable...................... (182,023) 28,735 (75,790)
Inventories........................................ 95,683 150,804 (969,652)
Prepaid expenses................................... (31,600) 27,670 (78,696)
Income taxes receivable............................ 24,842 242,544 (272,182)
Other assets....................................... 12,392 26,637 (121,881)
Accounts payable................................... 210,701 (595,926) 1,164,864
Accrued compensation............................... 165,614 186,971 232,137
Accrued expenses................................... (73,236) 1,562,055 136,250
Income taxes payable............................... -- -- (51,235)
Deferred rent...................................... 47,634 17,847 33,240
----------- ----------- -----------
Net cash (used in) provided by operating activities.... (351,281) (2,489,346) 113,312
----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures for property and equipment...... (1,672,076) (1,724,397) (7,813,263)
Disposal of property and equipment................... 148,785
Acquisition of coffeehouses.......................... -- -- (1,916,000)
----------- ----------- -----------
Net cash (used in) investing activities.............. (1,523,291) (1,724,397) (9,729,263)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from notes payable.......................... -- -- 10,000
Payments on notes payable............................ -- -- (49,398)
Proceeds from line of credit......................... -- -- 4,100,000
Payments on line of credit........................... -- -- (4,100,000)
Proceeds from long-term debt......................... -- 4,500,000 1,622,520
Principal payments on long-term debt................. -- (2,000,000) (2,569,378)
Payments on capital lease obligations................ (86,964) -- --
Proceeds from issuance of common stock, net of fees
paid............................................... 1,275,000 1,050,000 12,579,452
Proceeds from stock options exercised................ 479,236 -- --
----------- ----------- -----------
Net cash provided by financing activities.............. 1,667,272 3,550,000 11,593,196
----------- ----------- -----------
Net (decrease) increase in cash........................ (207,300) (663,743) 1,977,245
Cash at beginning of year.............................. 1,408,161 2,071,904 94,659
----------- ----------- -----------
Cash at end of year.................................... $ 1,200,861 $ 1,408,161 $ 2,071,904
=========== =========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest........................................... $ 299,670 $ 154,999 $ 164,140
=========== =========== ===========
Income taxes....................................... $ 3,690 $ 800 $ 108,773
=========== =========== ===========
Non-cash Transactions
Equipment Purchased under Capital Leases........... $ 54,127 $ 498,513 --
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE> 80
DIEDRICH COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 27, 1999, JANUARY 28, 1998 AND JANUARY 29, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
Business
Diedrich Coffee, Inc. (the "Company") operates coffeehouses 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.
Fiscal Year
The Company's fiscal year ends on the Wednesday closest to January 31.
Inventories
Inventories are stated at the lower of cost or market. The cost for
inventories is determined using the first-in, first-out method.
Property and Depreciation
Property and equipment, including assets under capital leases are recorded
at cost. Depreciation is calculated using the straight-line method over
estimated useful lives of five to seven years. Property and equipment held under
capital leases and leasehold improvements are amortized straight-line over the
shorter of their estimated useful lives or the term of the related leases.
Major renewals and improvements are capitalized. Maintenance and repairs
that do not improve or extend the life of the respective assets are charged to
expense.
Store Pre-opening Costs
Direct and incremental costs prior to the opening of a coffeehouse location
are expensed as incurred.
Fair Value of Financial Instruments
The carrying amounts of cash, accounts receivable, accounts payable and
accrued expenses approximate fair value because of the short-term maturity of
these financial instruments. The Company believes the carrying amounts of the
Company's notes payable and long-term debt approximate fair value because the
interest rates on these instruments are subject to change with, or approximate,
market interest rates.
Rent Expense
Certain 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.
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.
F-8
<PAGE> 81
DIEDRICH COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 27, 1999, JANUARY 28, 1998 AND JANUARY 29, 1997 -- (CONTINUED)
Net Income (Loss) per Common Share
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings per Share" in fiscal 1998. SFAS 128 requires the presentation
of "basic" earnings per share which represents net earnings divided by the
weighted average shares outstanding excluding all common stock equivalents. Dual
presentation of "diluted" earnings per-share reflecting the dilutive effect of
all common stock equivalents is also required.
Costs in Excess of Net Assets Acquired
Costs in excess of net assets acquired is amortized on a straight-line
basis over the expected periods to be benefited. 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.
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.
Long-Lived Assets
It is the Company's policy to account for long-lived assets, including
intangibles, at the lower of amortized cost or fair value, less disposition
costs. Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. If this assessment indicates
that the intangibles will not be recoverable, as determined by a non-discounted
cash flow generated by the asset, the carrying value of the Company's long-lived
assets will be reduced to its estimated fair market value based on the
discounted cash flows.
Advertising and Promotion Costs
Advertising costs are expensed as incurred. Promotion costs are charged to
income in the period of the promotional event. During fiscal 1999, the retail
stores were charged approximately $427,000, which was included in store
operating expenses and wholesale was charged $56,000, which was included in
other operating expenses, with the remaining amount to general and
administrative expenses. General and administrative expenses included
approximately $98,000 for the year ended January 27, 1999, $377,000 for the year
ended January 28, 1998 and $157,000 for the year ended January 29, 1997.
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
F-9
<PAGE> 82
DIEDRICH COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 27, 1999, JANUARY 28, 1998 AND JANUARY 29, 1997 -- (CONTINUED)
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.
Business Segment Reporting
The Company adopted SFAS No. 131 "Disclosures About Segments of an
Enterprise and Related Information," effective in 1999. SFAS No. 131 establishes
new standards for reporting information about business segments and related
disclosures about products and services, geographic areas and major customers.
The business segments of the Company are wholesale and retail. Information
regarding these segments are in Note 11.
Revenue Recognition
Sales are recorded when payment is tendered at point of sale for retail and
upon shipment of product for wholesale.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JANUARY 27, JANUARY 28,
1999 1998
----------- -----------
<S> <C> <C>
Unroasted coffee............................................ $ 412,103 $ 535,885
Roasted coffee.............................................. 115,979 67,965
Accessory and specialty items............................... 275,386 230,502
Other food, beverage and supplies........................... 475,968 540,767
---------- ----------
$1,279,436 $1,375,119
========== ==========
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
<TABLE>
<CAPTION>
JANUARY 27, JANUARY 28,
1999 1998
----------- -----------
<S> <C> <C>
Leasehold improvements.................................... $ 6,475,369 $ 7,017,125
Equipment................................................. 4,555,017 4,047,109
Furniture and fixtures.................................... 1,948,423 2,022,252
Construction in progress.................................. 504,279 250,716
Assets under capital lease................................ 552,640 498,513
----------- -----------
14,035,728 13,835,715
Accumulated depreciation and amortization................. (4,915,869) (3,730,872)
----------- -----------
$ 9,119,859 $10,104,843
=========== ===========
</TABLE>
4. ACQUISITIONS
During fiscal 1997, the Company purchased substantially all assets of
twelve coffeehouses previously owned by Brothers Gourmet Coffees, Inc., seven
bakery-espresso cafes from an unrelated third party and another coffeehouse from
an unrelated third party for total cash consideration of $1,916,000.
These acquisitions have been accounted for using the purchase method of
accounting and, accordingly, the results of operations of the coffeehouses
acquired have been included with those of the Company as of their respective
acquisition date. The costs in excess of net assets acquired related to these
acquisitions was $874,000 and is being amortized over 15 years. The Company has
expensed or reserved these costs in connection with store closures. (See Note 7
and 10).
F-10
<PAGE> 83
DIEDRICH COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 27, 1999, JANUARY 28, 1998 AND JANUARY 29, 1997 -- (CONTINUED)
5. DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JANUARY 27, JANUARY 28,
1999 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. Due September 30, 2002....................... $1,000,000 $1,000,000
GRANDVIEW TRUST
Note payable bearing interest at prime rate plus 3 1/2%,
interest payable monthly. Note is secured by the assets of
the Company. Due October 15, 2002......................... 750,000 750,000
OCEAN TRUST
Note payable bearing interest at prime rate plus 3 1/2%,
interest payable monthly. Note is secured by the assets of
the Company. Due October 16, 2002......................... 750,000 750,000
---------- ----------
$2,500,000 $2,500,000
========== ==========
</TABLE>
On September 30, 1997 the Company entered into a promissory note, term loan
agreement and security agreement with Nuvrty, Inc., a Colorado corporation and
predecessor-in-interest to Cosleno, Inc. 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 340,000 shares of the Company's common stock 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 Nuvrty, Inc. (the "Ocean Trust
Loan Documents" and the "Grandview Trust Loan Documents," respectively). The
Ocean Trust Loan Documents and the Grandview Trust Loan Documents provide for
borrowing up to $750,000 from each Trust. Each loan is secured by the assets of
the Company. Interest on advances is accrued and payable monthly at the prime
rate plus 3 1/2%. The Company borrowed $750,000 under each facility. All
outstanding principal and accrued interest is due and payable to each of the
Ocean and Grandview Trusts on October 16, 2002.
In connection with the Ocean Trust Loan Documents and the Grandview Trust
Loan Documents the Company issued warrants to each Trust respectively to
purchase 255,000 shares of the Company's common stock 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 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, which is insignificant, calculated using both a Cost of
Replacement Model and the Monte Carlo simulation of possible warrant exercise
and no expense was recognized.
At January 27, 1999 the prime rate was 7.75%.
F-11
<PAGE> 84
DIEDRICH COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 27, 1999, JANUARY 28, 1998 AND JANUARY 29, 1997 -- (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES
Lease Commitments
As of January 27, 1999, the Company leases warehouse and office space in
Irvine, California, warehouse space in Denver, Colorado, and thirty-six
coffeehouse locations in Southern California, Colorado and Texas expiring
through February 2009. 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 27, 1999 are as follows:
<TABLE>
<CAPTION>
NON-CANCELABLE
YEAR ENDING JANUARY OPERATING LEASES CAPITAL LEASES
------------------- ---------------- --------------
<S> <C> <C>
2000.................................................... $1,842,000 $169,488
2001.................................................... 1,711,000 169,488
2002.................................................... 1,413,000 165,672
2003.................................................... 1,172,000 95,179
2004.................................................... 974,000 1,389
Thereafter.............................................. 1,957,000 --
---------- --------
$9,069,000 $601,216
========== ========
Less amount representing interest....................... 148,622
--------
Present value of minimum lease payments................. 452,594
Less current portion.................................... 169,488
--------
Long-term portion....................................... $283,106
========
</TABLE>
Rent expense under operating leases approximated $2,070,000, $2,232,000,
and $1,772,000 for the years ended January 27, 1999, January 28, 1998 and
January 29, 1997, respectively.
Purchase Commitments
As of January 27, 1999 and January 28, 1998, the Company had entered into
fixed price purchase contracts for unroasted coffee aggregating approximately
$1,135,000 and $451,500, respectively. Such contracts are generally short-term
in nature and the Company believes that their cost approximates fair market
value.
Contingencies
In the ordinary course of its business, the Company may become involved in
legal proceedings from time to time. As of March 26, 1999, the Company was not
aware of any pending legal proceedings which in the opinion of management would
adversely affect continuing operations.
F-12
<PAGE> 85
DIEDRICH COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 27, 1999, JANUARY 28, 1998 AND JANUARY 29, 1997 -- (CONTINUED)
7. ACCRUED EXPENSES
The following table sets forth details of accrued expenses:
<TABLE>
<CAPTION>
JANUARY 27, JANUARY 28,
1999 1998
----------- -----------
<S> <C> <C>
Accrued costs for store/warehouse closures.................. $ 471,915 $ 986,000
Other accrued taxes......................................... 113,664 331,224
Accrued worker's compensation insurance..................... 159,872 147,532
Other accrued expenses...................................... 293,646 332,113
---------- ----------
Total accrued expenses...................................... $1,039,097 $1,796,869
========== ==========
</TABLE>
8. STOCKHOLDERS' EQUITY
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 were to become
exercisable on the eighth anniversary of the date of grant or earlier upon the
occurrence of certain events, including an IPO or a change in control (as
defined). If not exercised earlier, the options were to expire 10 years from the
date of grant. In May 1997, in connection with the termination of the
executive's employment agreement, the Company and the executive agreed to terms
under which 52,167 options were forfeited and the expiration date for the
remaining 79,183 options was changed to March 12, 1999. During Fiscal 1999, the
options to purchase 79,183 shares were exercised.
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 were reserved for issuance under the Incentive Plan. The
stockholders approved at the 1997 annual meeting of stockholders, an increase of
300,000 shares for a total of 775,000 shares reserved for issuance pursuant to
the Incentive Plan. The Incentive Plan is administered by a committee of the
Board of Directors, who determine the recipients and terms of the awards
granted. Under the Incentive Plan, options to purchase common stock may be
granted with an exercise price below market value of such stock on the grant
date.
In July 1996, the Company adopted the 1996 Non-Employee Directors Stock
Option Plan (the "Directors Plan"), which authorizes the granting of
non-qualified stock options to independent directors. A total of 125,000 shares
have been reserved for issuance under the Directors Plan. Pursuant to the
Directors Plan, each non-employee director receives certain automatic grants of
options, which generally vest over two years. All non-employee director options
have a term of ten years and an exercise price equal to the fair market value of
the Company's common stock on the date of grant.
In August 1996, one executive officer was granted options to purchase
120,000 shares of the Company's common stock, subject to a specified vesting
schedule, at an exercise price equal to the public offering price per share in
the Company's initial public offering. On September 24, 1997 the Company and the
executive agreed to revise the exercise price of these options to $3.00 per
share (the closing price of the Company's stock on that date). In January 1998,
in connection with the termination of executive's employment agreement, the
Company and the executive agreed to terms under which the employee retained
options to purchase 80,000 shares. The remaining 40,000 options were canceled.
Options to purchase 62,500 shares were exercised in fiscal 1999 and options to
purchase 17,500 shares were exercised in fiscal 2000.
In September 1996, the holders of the Series A and Series B Preferred
Shares converted their shares into shares of common stock on a one-for-one
basis.
F-13
<PAGE> 86
DIEDRICH COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 27, 1999, JANUARY 28, 1998 AND JANUARY 29, 1997 -- (CONTINUED)
On September 11, 1996, the Company completed an initial public offering of
2,530,000 shares (including an over-allotment option). The offering consisted of
1,600,000 shares of common stock sold on behalf of the Company and 930,000
shares of common stock sold on behalf of certain selling stockholders. The net
proceeds of the offering to the Company, after deducting approximately
$2,621,000 in related expenses, were approximately $12,579,000.
In connection with the IPO, the managing underwriter received warrants
exercisable for 160,000 shares of the Company's common stock at $11.50 per
share. The warrants were exercisable commencing September 1997 and were to
expire in September 1999. The warrants were repriced to $5.25 and the exercise
period was shortened to provide for expiration in December 1998 pursuant to
written agreement on December 10, 1997. During fiscal 1999, 28,960 warrants were
exercised and the remaining 131,040 expired.
On April 25, 1997, the Company's Board of Directors approved the 1997
Non-Employee Director's Stock Option Plan which granted options to purchase
10,000 shares each 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. The Company and Mr. Martin entered into an agreement
under which Mr. Martin was granted the option to purchase 850,000 shares of the
common stock of the Company. Mr. Martin and the Company also agreed to terms
under which Mr. Martin purchased 333,333 shares of the Company's common stock at
$3.00 per share.
On November 18, 1997, Mr. Timothy J. Ryan joined the Company as Diedrich
Coffee's President and Chief Executive Officer. The Company entered into a
performance based Stock Option Plan and Agreement under which Mr. Ryan was
granted the option to purchase up to 600,000 shares of the common stock of the
Company. In addition, Mr. Ryan purchased 16,667 shares of common stock at $3.00
per share pursuant to a private sale of restricted stock.
On January 22, 1998 the stockholders of the Company approved the stock
option plans and agreements with John Martin and Timothy Ryan. On January 28,
1998 Messrs. Martin and Ryan completed their respective private purchases of
Company stock of $1,000,000 and $50,000, respectively.
On March 30, 1998 the Company agreed to a private placement of 200,000
shares of the Company's common stock to Franchise Mortgage Acceptance Company
("FMAC") at a price of $6.375 (the stock's closing sale price for that day on
the Nasdaq National Market). In addition, FMAC also received an option to
purchase 100,000 additional shares of the Company's common stock; this option
may be exercised in increments of 25,000 shares or more and expires on April 3,
2000. 50,000 shares are exercisable at $10.00 per share and 50,000 shares are
exercisable at $12.50 per share. This transaction was completed on April 3,
1998. Mr. John E. Martin, Chairman of Diedrich Coffee, Inc., serves on the Board
of Directors of FMAC.
F-14
<PAGE> 87
DIEDRICH COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 27, 1999, JANUARY 28, 1998 AND JANUARY 29, 1997 -- (CONTINUED)
Information regarding the Company's stock options plans is summarized
below:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
OPTIONS EXERCISE PRICE
--------- --------------
<S> <C> <C>
Shares authorized...................................... 2,601,350
Shares under option
Outstanding at: January 31, 1996....................... 161,250 $3.04
Granted........................................... 140,000 $9.61
Exercised......................................... -- --
Forfeited......................................... -- --
Outstanding at: January 29, 1997....................... 301,350 $6.09
Granted........................................... 1,885,000 $5.60
Exercised......................................... -- --
Forfeited......................................... 202,167 $7.53
Outstanding at: January 28, 1998....................... 1,984,183 $5.48
Granted........................................... 308,100 $7.81
Exercised......................................... 164,999 $2.26
Forfeited......................................... 70,017 $3.20
Outstanding at: January 27, 1999....................... 2,057,267 $6.17
Weighted-average fair value of options granted during
the fiscal year:
1997.............................................. $5.01
1998.............................................. $2.56
1999.............................................. $4.29
Options exercisable:
At January 29, 1997.................................. 110,850
At January 28, 1998.................................. 1,125,683
At January 27, 1999.................................. 1,169,152
</TABLE>
In connection with debt (Note 5) the Company issued warrants to purchase
common stock at a price of $2.25 expiring at various times. As of January 27,
1999, January 28, 1998 and January 29, 1997, warrants of 850,000, 1,095,000 and
160,000 are outstanding and vested.
The following table summarizes information about stock options outstanding
on January 27, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ ------------------------------
NUMBER WEIGHTED WEIGHTED NUMBER WEIGHTED
OUTSTANDING AVERAGE AVERAGE EXERCISABLE AVERAGE
AT REMAINING EXERCISE AT EXERCISE
JANUARY 27, 1999 LIFE (YEARS) PRICE JANUARY 27, 1999 PRICE
---------------- ------------ -------- ---------------- -----------
<S> <C> <C> <C> <C> <C>
$2.75 - $4.00...................... 779,167 5.97 $ 3.54 749,152 $ 3.57
$4.01 - $6.00...................... 376,500 7.02 $ 4.97 300,000 $ 4.88
$6.01 - $9.00...................... 456,600 6.58 $ 7.66 -- --
$9.01 - $10.50..................... 445,000 7.04 $10.22 120,000 $10.81
</TABLE>
F-15
<PAGE> 88
DIEDRICH COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 27, 1999, JANUARY 28, 1998 AND JANUARY 29, 1997 -- (CONTINUED)
Pro forma income and pro forma income per share, as if the fair value-based
method has been applied in measuring compensation cost for stock-based awards:
<TABLE>
<CAPTION>
1999 1998
----------- ------------
<S> <C> <C>
REPORTED
Net Loss............................................. $(2,562,308) $ (9,112,761)
Basic loss per share................................. $ (0.43) $ (1.69)
PRO FORMA
Net Loss............................................. $(3,082,569) $(13,588,746)
Basic loss per share................................. $ (0.52) $ (2.52)
</TABLE>
The pro forma net income (loss) and net income (loss) per share calculated
pursuant to the provisions of SFAS No. 123 for the year ended January 29, 1997
would not be significantly different from amounts reported and therefore are not
included herein.
The fair values of the options granted were estimated using the
Black-Scholes option-pricing model based on the following weighted average
assumptions:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Risk free interest rate..................................... 4.5% 5.5%
Expected Life............................................... 6 years 6 years
Expected volatility......................................... 53% 128%
Expected dividend yield..................................... 0% 0%
</TABLE>
9. INCOME TAXES
The components of the income tax provision (benefit) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JANUARY 27, JANUARY 28, JANUARY 29,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal........................................ $ -- $ -- $(171,284)
State.......................................... 3,690 800 (5,015)
------ ---- ---------
3,690 800 (176,299)
------ ---- ---------
Deferred:
Federal........................................ -- -- 40,542
State.......................................... -- -- 7,650
------ ---- ---------
48,192
---------
$3,690 $800 $(128,107)
====== ==== =========
</TABLE>
F-16
<PAGE> 89
DIEDRICH COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 27, 1999, JANUARY 28, 1998 AND JANUARY 29, 1997 -- (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 27, JANUARY 28,
1999 1998
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $ 3,900,495 $ 2,965,213
Accrued expenses.......................................... 457,872 456,844
Restructure and Store closure Reserves.................... 98,179 410,933
AMT credit................................................ 1,069 1,069
----------- -----------
Total deferred tax assets................................... 4,457,615 3,834,059
----------- -----------
Deferred tax liabilities:
Depreciation and amortization............................. 164,543 (199,432)
State income taxes........................................ -- --
----------- -----------
Total deferred tax liabilities.............................. 164,543 (199,432)
----------- -----------
Total deferred tax assets................................... 4,622,158 3,634,627
Less: Valuation allowance................................... (4,622,158) (3,634,627)
----------- -----------
Net deferred tax assets..................................... $ -- $ --
=========== ===========
</TABLE>
A reconciliation of the statutory Federal income tax rate with the
Company's effective income tax provision (benefit) rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JANUARY 27, JANUARY 28, JANUARY 29,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Federal statutory rate................................... (34.0)% (34.0)% (34.0)%
State income taxes, net of Federal benefit............... (1.6) (3.3) 2.6
Other.................................................... (2.8) (0.1) (1.0)
Valuation allowance...................................... 38.6 37.4 20.9
----- ----- -----
0.2% -- (11.5)%
----- ----- -----
</TABLE>
As of January 27, 1999, the Company had net operating loss (NOL)
carryforwards of approximately $10,655,000 and $4,760,000 for Federal and state
purposes, respectively. The Federal NOL is available to offset future federal
taxable income through 2013, and the state NOL is available to offset future
state taxable income through 2003. The utilization of certain NOL carryforwards
could be limited due to restriction imposed under Federal and state laws upon a
change in ownership.
A valuation allowance against deferred tax assets of $4,622,158 was
recorded in fiscal 1999 to fully offset NOL carryforwards and other net deferred
tax assets at January 27, 1999.
10. RESTRUCTURING CHARGE
On March 12, 1997, the Company announced that it was reviewing the
performance of all of the Company's coffeehouses to determine which units were
not meeting management's long-term operational expectations. As a result of this
review, twelve stores were identified to be closed. In connection with the store
closures and other related expenses, the Company recorded an impairment
provision and restructuring charge totaling approximately $4.6 million in the
first quarter of fiscal 1998. Eleven of the twelve stores were closed with eight
leases terminated and three locations subleased. In January, the new management
reviewed the progress of all retail operations and determined that one
coffeehouse originally designated for closure would remain open. During fiscal
1998, most of the lease terminations provided for in the restructuring had been
completed at less cost than originally anticipated. As a result of these two
F-17
<PAGE> 90
DIEDRICH COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 27, 1999, JANUARY 28, 1998 AND JANUARY 29, 1997 -- (CONTINUED)
factors, management determined that the remaining restructuring reserve could be
reduced by $648,000 to $237,000. The remaining balance of $112,000 at the end of
fiscal 1999 is designated for costs related to two closed locations currently
under sublease.
11. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
JANUARY 27, JANUARY 28, JANUARY 29,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
NUMERATOR:
Net (loss) income..................................... (2,562,308) (9,112,761) (985,705)
DENOMINATOR:
Basic and diluted weighted average common shares
outstanding........................................ 5,934,287 5,392,609 4,414,000
Basic and diluted loss per share...................... (0.43) (1.69) (0.22)
</TABLE>
For the years ended January 27, 1999, January 28, 1998 and January 29,
1997, stock options of 2,057,267, 1,984,183 and 301,350 respectively, and
warrants of 850,000, 1,095,000 and 160,000 respectively, were not included in
the computation of diluted earnings per share as losses were incurred in those
years.
12. SEGMENT INFORMATION
In accordance with the requirements of SFAS 131, "Disclosures about
Segments of an Enterprise and Related Information," the Company reportable
business segments and respective accounting policies, policies of the segments
are the same as those described in Note 1. Management evaluates segment
performance based primarily on revenue and earnings from operations. Interest
income and expenses is evaluated on a consolidated basis and not allocated to
the Company's business segments.
Segment information is summarized as follows for the years ended January
27, 1999, January 28, 1998 and January 29, 1997:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net Revenues:
Retail operations................................. $21,248,462 $20,759,993 $18,117,720
Wholesale operations.............................. 2,766,741 2,221,704 1,694,686
----------- ----------- -----------
24,015,203 22,981,697 19,812,406
----------- ----------- -----------
Earnings (loss) from operations:
Retail operations................................. 1,476,140 (5,160,947) 821,511
Wholesale operations.............................. 392,467 512,313 291,689
----------- ----------- -----------
Total.......................................... $ 1,868,607 $(4,648,634) $ 1,113,200
=========== =========== ===========
</TABLE>
13. SUBSEQUENT EVENT
On March 16, 1999, the Company signed a definitive agreement to acquire
Coffee People, Inc. Under the terms of the agreement, Coffee People stockholders
will receive $17.75 million in cash, 1,500,000 shares of Diedrich Coffee common
stock, and $5.25 million in cash or stock depending on the success of Diedrich
Coffee's financing efforts. The transaction is expected to close during the
Summer 1999, subject to a number of conditions including the securing of
financing and stockholder and regulatory approval.
On April 6, 1999, the Company entered into a $1,000,000 loan agreement and
security agreement with Amre Youness, a former director of the Company. All
outstanding principal and interest is due and payable on April 6, 2000. The loan
is secured by the assets of the Company with interest accruing and paid monthly
at the prime rate plus 3%. In connection with the loan agreement, the Company
issued
F-18
<PAGE> 91
DIEDRICH COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 27, 1999, JANUARY 28, 1998 AND JANUARY 29, 1997 -- (CONTINUED)
warrants to Mr. Youness to purchase 70,000 shares of the Company's common stock
at a price of $5.625 per share.
14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The results of operations for fiscal 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Fiscal 1999:
Net sales................................................. $ 5,923 $6,030 $6,043 $ 6,219
Operating (loss).......................................... (649) (677) (521) (418)
Net (loss)................................................ (746) (761) (609) (446)
Net (loss) per share...................................... (.13) (.13) (.10) (.07)
Fiscal 1998:
Net sales................................................. $ 5,868 $5,811 $5,563 $ 5,740
Operating (loss).......................................... (5,390) (661) (654) (2,202)
Net (loss)................................................ (5,383) (698) (739) (2,293)
Net (loss) per share...................................... (1.00) (.13) (.14) (.42)
</TABLE>
F-19
<PAGE> 92
COFFEE PEOPLE, INC.
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 27, 1998, JUNE 28, 1997 AND JUNE 29, 1996
F-20
<PAGE> 93
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of
Coffee People, Inc.
We have audited the accompanying consolidated statements of operations, of
stockholders' equity and of cash flows of Coffee People, Inc. (formerly Gloria
Jean's Inc.) and its subsidiaries for the 39-week period ended June 29, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards of the United States. 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.
In our opinion, the consolidated financial statements audited by us present
fairly, in all material respects, the results of operations and cash flows of
Coffee People, Inc. and its subsidiaries for the 39-week period ended June 29,
1996 in conformity with generally accepted accounting principles in the United
States.
/s/ PricewaterhouseCoopers
Toronto, Ontario
August 16, 1996
F-21
<PAGE> 94
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Coffee People, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Coffee People, Inc. and its subsidiaries at June 27, 1998 and June 28, 1997, and
the results of their operations and their cash flows for the years then ended,
in conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audits 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As discussed in Note 5 to the consolidated financial statements, the
Company changed its method of accounting for long-lived assets to be disposed
of, effective as of the beginning of fiscal 1997.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
August 26, 1998
F-22
<PAGE> 95
COFFEE PEOPLE, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 27, JUNE 28,
1998 1997
-------- --------
(IN THOUSANDS EXCEPT
SHARE AMOUNTS)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 2,822 $ 7,281
Accounts receivable, net of allowance for doubtful
accounts of $1,156 and $1,660.......................... 3,262 2,233
Receivable from affiliate................................. -- 285
Inventories............................................... 4,052 3,563
Prepaid expenses and other assets......................... 713 424
------- -------
Deferred income taxes..................................... 2,621 1,342
Total current assets................................. 13,470 15,128
Property, plant and equipment, net.......................... 12,711 6,415
Goodwill, net............................................... 25,967 16,187
Other assets................................................ 113 60
Deferred income taxes....................................... 3,434 1,133
------- -------
Total assets......................................... $55,695 $38,923
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 1,279 $ --
Accounts payable.......................................... 1,421 1,550
Payable to related party.................................. 984 --
Accrued liabilities....................................... 1,010 1,038
Accrued payroll and employee benefits..................... 931 541
Accrued acquisition expenses.............................. 631 --
Accrual for store closures................................ 1,291 580
Franchisee deposits....................................... 459 486
Deferred franchise fee income............................. 187 131
------- -------
Total current liabilities............................ 8,193 4,326
Long-term debt, less current portion........................ 3,798 --
Deferred rent expense....................................... 202 300
------- -------
Total liabilities.................................... 12,193 4,626
------- -------
Commitments and contingencies (Note 9)
Stockholders' equity:
Preferred stock, no par value; authorized, 10,000,000
shares; none issued or outstanding..................... -- --
Common stock, no par value; authorized, 5,000,000 shares;
issued and outstanding, 10,746,040 and 7,460,679
shares................................................. 44,630 35,825
Stock subscription notes receivable....................... (338) --
Accumulated deficit....................................... (790) (1,528)
------- -------
Total stockholders' equity........................... 43,502 34,297
------- -------
Total liabilities and stockholders' equity........... $55,695 $38,923
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE> 96
COFFEE PEOPLE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE
FOR THE FISCAL 39-WEEK
YEAR ENDED PERIOD
-------------------- ENDED
JUNE 27, JUNE 28, JUNE 29,
1998 1997 1996
-------- -------- --------
(IN THOUSANDS
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues:
Franchise revenue......................................... $ 6,035 $ 5,869 $ 4,971
Corporate store sales..................................... 11,436 7,631 6,657
Wholesale sales........................................... 17,580 17,079 13,329
------- ------- -------
Total revenues....................................... 35,051 30,579 24,957
------- ------- -------
Expenses:
Cost of goods sold........................................ 19,296 18,494 14,389
Store and other operating expenses........................ 8,231 6,080 4,779
Depreciation and amortization............................. 1,811 1,152 978
General and administrative expenses....................... 4,079 5,458 2,825
Provision for store closures.............................. -- 580 --
Acquisition and integration expenses...................... 437 -- --
------- ------- -------
Total expenses....................................... 33,854 31,764 22,971
------- ------- -------
Income (loss) from operations............................. 1,197 (1,185) 1,986
Interest income............................................. 315 426 203
Interest expense............................................ (46) -- --
------- ------- -------
Income (loss) before income taxes........................... 1,466 (759) 2,189
Provision for income taxes.................................. 728 4 965
------- ------- -------
Income (loss) before cumulative effect of change in
accounting principle...................................... 738 (763) 1,224
Cumulative effect of change in accounting principle, net of
income tax benefit of $262................................ -- (427) --
------- ------- -------
Net income (loss)........................................... $ 738 $(1,190) $ 1,224
======= ======= =======
Net income (loss) per share -- basic and diluted:
Income (loss) before cumulative effect of change in
accounting principle................................... $ .09 $ (.10) $ .16
Cumulative effect of change in accounting principle....... -- (.06) --
------- ------- -------
Net income (loss)...................................... $ .09 $ (.16) $ .16
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE> 97
COFFEE PEOPLE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK STOCK
--------------------- SUBSCRIPTION
EQUIVALENT NOTES ACCUMULATED
SHARES AMOUNT RECEIVABLE DEFICIT TOTAL
---------- ------- ------------ ----------- -------
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Issuance of common stock......................... 7,460,679 $35,825 $ -- $ -- $35,825
Net income....................................... -- -- -- 1,224 1,224
Dividends........................................ -- -- -- (1,562) (1,562)
---------- ------- ----- ------- -------
Balance, June 29, 1996........................... 7,460,679 35,825 -- (338) 35,487
Net loss......................................... -- -- -- (1,190) (1,190)
---------- ------- ----- ------- -------
Balance, June 28, 1997........................... 7,460,679 35,825 -- (1,528) 34,297
Gloria Jean's, Inc. reverse merger, net of stock
issuance costs................................. 3,274,111 11,398 (313) -- 11,085
CP Old, Inc. merger.............................. -- 2,498 -- -- 2,498
Stock redemption from Second Cup, Inc............ -- (5,116) -- -- (5,116)
Exercise of stock options........................ 11,250 25 (25) -- --
Net income....................................... -- -- -- 738 738
---------- ------- ----- ------- -------
Balance, June 27, 1998........................... 10,746,040 $44,630 $(338) $ (790) $43,502
========== ======= ===== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE> 98
COFFEE PEOPLE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE FISCAL FOR THE
YEAR ENDED 39-WEEK
---------------------- PERIOD ENDED
JUNE 27, JUNE 28, JUNE 29,
1998 1997 1996
-------- -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ 738 $(1,190) $ 1,224
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization......................... 1,811 1,152 978
Provision for store closures.......................... -- 580 --
Deferred income taxes................................. 702 (414) 965
Write down of assets held for disposal................ 223 887 --
Loss (gain) on disposal of assets..................... 147 (65) (8)
Write off of uncollectible income taxes receivable.... -- 127 --
Changes in assets and liabilities, net of amounts
acquired:
Accounts receivable................................ (861) 423 1,588
Receivable from/due to affiliate................... 1,269 (285) --
Inventories........................................ 48 438 236
Prepaid expenses and other assets.................. 126 (14) 273
Income taxes receivable............................ -- 190 (23)
Accounts payable................................... (1,077) 493 (999)
Accrued liabilities................................ (1,617) 615 (482)
Accrual for store closures......................... (584) -- --
Income taxes payable............................... 26 -- --
Franchisee deposits................................ (27) (138) (208)
Deferred franchise fee income...................... 56 (129) --
Deferred rent expense.............................. (98) 35 (50)
------- ------- --------
882 2,705 3,494
------- ------- --------
Cash flows from investing activities:
Purchase of property, plant and equipment................. (2,260) (2,919) (1,179)
Proceeds from disposal of property, plant and equipment... 221 369 145
Acquisition of business................................... -- -- (29,597)
Loans to an affiliated company............................ -- 3,800 (3,800)
Cash acquired in Gloria Jean's, Inc. reverse merger, net
of transaction expenses................................. 1,258 -- --
Cash received in CP Old, Inc. merger...................... 226 -- --
------- ------- --------
(555) 1,250 (34,431)
------- ------- --------
Cash flows from financing activities:
Proceeds on issuance of shares............................ $ -- $ -- $ 35,825
Dividends paid............................................ -- (1,562) --
Stock redemption from Second Cup, Inc..................... (4,675) -- --
Payments on long-term debt................................ (111) -- --
------- ------- --------
(4,786) (1,562) 35,825
------- ------- --------
Increase (decrease) in cash and cash equivalents............ (4,459) 2,393 4,888
Cash and cash equivalents, beginning of period.............. 7,281 4,888 --
------- ------- --------
Cash and cash equivalents, end of period.................... $ 2,822 $ 7,281 $ 4,888
======= ======= ========
Supplemental cash flow information:
Cash paid for income taxes................................ $ -- $ -- $ 23
Noncash transactions:
Dividend declared....................................... $ -- $ -- $ 1,562
Accrual for stock redemption from Second Cup, Inc....... $ 441 $ -- $ --
Disposal of property, plant and equipment in exchange
for note receivable................................... $ 109 $ -- $ --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE> 99
COFFEE PEOPLE, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 27, 1998, JUNE 28, 1997 AND JUNE 29, 1996
(IN THOUSANDS)
1. ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND OPERATIONS
Coffee People, Inc. (Coffee People), formerly Gloria Jean's Inc. (Gloria
Jean's), an Oregon Corporation, is a retailer of gourmet coffee, with 246
franchised and 69 company-owned retail stores operating in 36 states and 6
foreign countries under the names of Gloria Jean's, Coffee People and Coffee
Plantation. The retail stores offer a full range of coffee beverages, coffee
beans, teas and food, as well as a variety of related gifts, supplies, equipment
and accessories.
On May 19, 1998, the Company issued 7,460,679 shares of its common stock to
Second Cup, Inc. (Second Cup), in exchange for 100% of the outstanding common
stock of Gloria Jean's, a wholly-owned subsidiary of Second Cup. After the
merger, Second Cup owned 69.5% of the outstanding common stock of the combined
company. The merger has been accounted for as a reverse merger in which Gloria
Jean's is the accounting acquirer.
Prior to the Gloria Jean's reverse merger, Gloria Jean's was merged with CP
Old, Inc., a wholly-owned subsidiary of Second Cup, and the combined company
continued as Gloria Jean's. At the time of the CP Old, Inc. merger, CP Old, Inc.
had no operations.
On October 16, 1995, the Company acquired all of the issued and outstanding
shares of stock of Edglo Enterprises (Edglo) and its wholly-owned subsidiary
companies, and certain other assets.
The consolidated financial statements include the accounts of Coffee People
and its wholly-owned subsidiaries (the Company). All significant intercompany
accounts and transactions have been eliminated in consolidation.
Under its franchise agreements, the Company develops and constructs a new
store, provides training, and assists in the grand opening and merchandising for
which it receives an initial franchise fee. Ongoing charges to franchisees
include a royalty fee of 6% of gross sales and an advertising fund contribution
of up to 3% of gross sales. Franchisees are required to purchase all of their
coffee from the Company, which is roasted in the Company's facility in
California, except for those franchisees who commenced operations prior to July
1993. These latter franchisees are required to purchase approximately 85% of
their coffee requirements from the Company.
FISCAL YEAR END
The Company's fiscal year is a fifty-two or fifty-three week period ending
on the last Saturday in June. Fiscal 1998 and 1997 each consisted of fifty-two
weeks.
FINANCIAL STATEMENT PRESENTATION
Certain reclassifications of prior period amounts have been made to conform
with the June 27, 1998 presentation.
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.
F-27
<PAGE> 100
COFFEE PEOPLE, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 27, 1998, JUNE 28, 1997 AND JUNE 29, 1996 -- (CONTINUED)
(IN THOUSANDS)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, accounts payable and debt instruments. At June 27, 1998 and
June 28, 1997, the fair value of the Company's receivables, accounts payable,
and debt under loans approximated the carrying value.
CONCENTRATION OF CREDIT
Accounts receivable primarily consist of amounts related to royalties and
sales of whole beans and related products to franchisees. The Company extends
credit to the majority of its franchisees. Credit losses are provided for in the
financial statements based upon the Company's previous experience and
management's expectations.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments with a maturity of
three months or less at the time of purchase to be cash equivalents. The
concentration of credit risk associated with cash and cash equivalents is low
due to the credit quality of the financial institutions and the liquidity of
these financial instruments.
INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out) or
market. Certain of the Company's inventories are subject to price fluctuations.
Cost includes materials, labor and manufacturing overhead.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation of property,
plant and equipment is provided using the straight-line method over the
estimated useful lives of the assets ranging from three to seven years for
equipment, furniture and fixtures, and twenty-five years for buildings.
Leasehold improvements are capitalized and amortized on a straight-line basis
over the shorter of the initial lease term or the estimated useful lives of the
assets, generally ten years. Maintenance and repairs are charged to expense as
incurred.
GOODWILL
Amortization of goodwill is provided using the straight-line method over 40
years. Accumulated amortization as of June 27, 1998 and June 28, 1997 was $1,276
and $801, respectively. Amortization expense for the fiscal years ended June 27,
1998 and June 28, 1997, and the 39-week period ended June 29, 1996 was $475,
$455 and $348, respectively.
The Second Cup Ltd., the largest specialty coffee retailer in Canada, has
been in operation since 1975. At the time of the acquisition of Gloria Jean's in
September 1995, the transaction was considered as a platform for the Second Cup
Ltd. to expand their well established operations into the United States. Since
specialty coffee's place in the North American marketplace has been established
over an extensive period and is not considered to be restricted by any existing
regulatory, contractual or market factors, management determined 40 years to be
an appropriate useful life over which to amortize the goodwill.
IMPAIRMENT OF LONG-LIVED ASSETS
Effective as of the beginning of fiscal 1997, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of" (SFAS 121), on a prospective basis. SFAS 121 requires the Company to review
long-lived assets and certain identifiable intangibles, including goodwill, for
impairment
F-28
<PAGE> 101
COFFEE PEOPLE, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 27, 1998, JUNE 28, 1997 AND JUNE 29, 1996 -- (CONTINUED)
(IN THOUSANDS)
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. The assessment of impairment is based on the
estimated undiscounted future cash flows from operating activities compared with
the carrying value of the assets. If the undiscounted future cash flows of an
asset are less than the carrying value, a write-down would be recorded, measured
by the amount of the difference between the carrying value of the asset and the
fair value of the asset. Management believes there has been no decline in the
carrying value of long-lived assets, including goodwill.
Assets to be disposed of are recorded at the lower of carrying amount or
fair value less cost to sell (Note 5). Such assets are not depreciated while
held for sale.
FRANCHISE OPERATIONS
Initial franchise fees for stores are deferred and recognized as income
when the store has opened. Franchise revenue consists of royalties and franchise
fees. Such amounts totaled $5,395 and $640, respectively, for the fiscal year
ended June 27, 1998, $5,368 and $501, respectively, for the fiscal year ended
June 28, 1997, and $4,242 and $729, respectively, for the 39-week period ended
June 29, 1996. Costs directly associated with franchise operations, excluding
cost of sales, were $1,745, $1,930 and $1,048, respectively, for the fiscal
years ended June 27, 1998 and June 28, 1997, and the 39-week period ended June
29, 1996. Cost of sales related to franchise operations was $14,020, $13,516 and
$11,551, respectively, for the fiscal years ended June 27, 1998 and June 28,
1997, and the 39-week period ended June 29, 1996.
DEFERRED RENT EXPENSE
Certain of the Company's lease agreements provide for scheduled rent
increases during the term of the lease. Rent is expensed on a straight-line
basis over the initial lease term.
STORE OPENING COSTS
Costs incurred in connection with start-up and promotion of new stores are
expensed as incurred.
ADVERTISING
Advertising costs are expensed as incurred. For the fiscal years ended June
27, 1998 and June 28, 1997, and the 39-week period ended June 29, 1996,
advertising costs were $325, $341 and $156, respectively.
INCOME TAXES
The Company accounts for income taxes using the liability method. Under
this method, deferred income taxes are provided for the temporary differences
between the financial reporting basis and the tax basis of the Company's assets
and liabilities. A valuation allowance is provided against deferred tax assets
to the extent that it is more likely than not that the asset will not be
realized.
The Company's results of operations were included in Second Cup's
consolidated federal and state income tax returns until the Gloria Jean's
reverse merger on May 19, 1998 (Note 2). For financial reporting purposes,
Second Cup allocated income taxes to the Company as though it were a separate
taxpayer.
Accounting for stock-based compensationThe Company measures compensation cost
for employee stock options and similar equity instruments using the intrinsic
value-based method of accounting.
EARNINGS PER SHARE
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" (SFAS 128) as of the beginning of the
second quarter of fiscal 1998. SFAS 128
F-29
<PAGE> 102
COFFEE PEOPLE, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 27, 1998, JUNE 28, 1997 AND JUNE 29, 1996 -- (CONTINUED)
(IN THOUSANDS)
required the Company to replace its traditional earnings per share (EPS)
disclosures with a dual presentation of basic and diluted EPS and to restate all
prior EPS data presented. During the fiscal years ended June 27, 1998 and June
28, 1997, and the 39-week period ended June 29, 1996, basic and diluted EPS are
the same. The number of shares used in the EPS calculation were 7,812,491
7,460,679 and 7,460,679, respectively, for the fiscal years ended June 27, 1998
and June 28, 1997, and the 39-week period ended June 29, 1996. Historical EPS
prior to the Gloria Jean's merger has been retroactively restated to reflect the
equivalent number of shares received in the reverse merger (Note 2).
2. MERGERS AND ACQUISITIONS
GLORIA JEAN'S REVERSE MERGER
On May 19, 1998, Coffee People, Inc. (Old Coffee People) issued 7,460,679
shares of common stock having a value of $11,398, net of stock issuance costs of
$1,330, to Second Cup in exchange for 100% of the outstanding common stock of
Gloria Jean's. The merger has been accounted for as a reverse merger in which
Gloria Jean's is the accounting acquirer. The historical records of Gloria
Jean's became the historical records of the company, and the purchase method of
accounting was applied to the Old Coffee People assets acquired and liabilities
assumed to the extent of Second Cup's 69.5% ownership interest. The results of
operations of Old Coffee People have been included with those of Gloria Jean's
beginning May 19, 1998. Historical stockholders' equity and EPS prior to the
merger have been retroactively restated for the equivalent number of shares
received in the merger after giving effect to the difference in par value of
Gloria Jean's common stock ($1 par value) and Old Coffee People's common stock
(no par value). Pursuant to the merger agreement, Gloria Jean's redeemed a
portion of its current outstanding common stock from Second Cup prior to the
merger. The stock was redeemed for an amount which left not less than $2,500 in
cash and cash equivalents in the accounts of Gloria Jean's after payment of
expenses incurred related to the merger. The stock redemption totaled $5,116.
Old Coffee People sells coffee beverages, coffee beans, cookies, pastries,
ice cream, shakes and coffee-related merchandise at company-owned retail stores
located principally in Oregon and Arizona. The following is the allocation of
the purchase price to the net assets acquired at fair value:
<TABLE>
<S> <C>
Issuance of common stock, net of stock issuance costs....... $11,398
Transaction costs........................................... 838
-------
Total purchase price...................................... 12,236
-------
Net assets acquired....................................... 2,003
-------
Cost in excess of net assets acquired....................... $10,233
=======
</TABLE>
The following unaudited pro forma information is presented to show the
results of operations had the acquisition occurred June 29, 1996:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR
ENDED
--------------------
JUNE 27, JUNE 28,
1998 1997
-------- --------
<S> <C> <C>
Total revenues.............................................. $56,147 $52,190
Income before cumulative effect of change in accounting
principle................................................. 520 (7,747)
Net income (loss)........................................... 520 (8,174)
Earnings (loss) per share -- basic and diluted.............. $ .05 $ (.76)
</TABLE>
The above results of operations are not intended to be indicative of the
results of operations which actually would have been realized had the
acquisition occurred as of June 29, 1996, nor of the future results of
operations of the combined company.
F-30
<PAGE> 103
COFFEE PEOPLE, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 27, 1998, JUNE 28, 1997 AND JUNE 29, 1996 -- (CONTINUED)
(IN THOUSANDS)
The Company has developed a plan to consolidate certain corporate functions
and to restructure Old Coffee People's operations. Such plan includes relocating
certain Old Coffee People corporate employees to the Company's Castroville,
California headquarters, terminating corporate employees with duplicative
functions, consolidating the roasting of coffee in the Company's Castroville
roasting facility and franchising Old Coffee People's retail stores. Management
anticipates that the relocation and termination of employees will be completed
by November 1998 and a majority of the retail stores will be franchised by the
end of 1999. As of June 27, 1998, the Company accrued $548 related to these
activities. These costs have been capitalized and recorded as an increase in
goodwill to the extent of Second Cup's 69.5% ownership interest. The remaining
costs were charged to expense and are included in acquisition and integration
expenses.
CP OLD, INC. MERGER
In May 1998, Gloria Jean's was merged with CP Old, Inc., a wholly-owned
subsidiary of Second Cup, and the combined company continued as Gloria Jean's.
At the time of the merger, CP Old, Inc. had no operations. Upon closing of the
merger, the assets and liabilities of CP Old, Inc. were transferred at their
historical carrying values with a corresponding increase in stockholders'
equity. Such assets and liabilities consisted of the following:
<TABLE>
<S> <C>
Cash........................................................ $ 226
Deferred tax assets......................................... 2,272
------
Net assets................................................ $2,498
======
</TABLE>
EDGLO ACQUISITION
On October 16, 1995, the Company acquired Edglo. The effective date of the
acquisition was designated as September 30, 1995 for convenience purposes. The
acquisition has been accounted for using the purchase method of accounting. The
following is the allocation to the net assets acquired at fair value of the
purchase price paid of $29,597 (including acquisition costs of $350):
<TABLE>
<S> <C>
Current assets.............................................. $10,723
Capital assets.............................................. 4,972
Other assets................................................ 68
Goodwill.................................................... 18,609
-------
34,372
-------
Current liabilities......................................... 4,460
Other liabilities........................................... 315
-------
4,775
-------
Net assets acquired......................................... $29,597
=======
</TABLE>
During the fiscal year ended June 27, 1998, the Company received $642
(included as a reduction in general and administrative expenses) from the former
owners of Edglo pursuant to an escrow agreement. This amount represents a
reimbursement for certain expenses incurred by Gloria Jean's as a result of the
Edglo acquisition. Such expenses were included in general and administrative
expenses in years prior to fiscal 1998.
F-31
<PAGE> 104
COFFEE PEOPLE, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 27, 1998, JUNE 28, 1997 AND JUNE 29, 1996 -- (CONTINUED)
(IN THOUSANDS)
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JUNE 27, JUNE 28,
1998 1997
-------- --------
<S> <C> <C>
Coffee
Unroasted............................................... $2,169 $1,175
Roasted................................................. 368 840
Other merchandise held for sale........................... 898 490
Supplies.................................................. 617 1,058
------ ------
$4,052 $3,563
====== ======
</TABLE>
During the fiscal year ended June 28, 1997, inventory writedowns resulting
from excess inventory totaled approximately $600.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
JUNE 27, JUNE 28,
1998 1997
-------- --------
<S> <C> <C>
Land..................................................... $ 786 $ --
Building................................................. 745 --
Manufacturing equipment.................................. 2,580 2,460
Leasehold improvements................................... 6,954 3,893
Furniture, fixtures and other............................ 4,572 2,044
------- -------
15,637 8,397
Less: Accumulated depreciation........................... (2,071) (1,095)
Less: Write down of assets held for disposal............. (855) (887)
------- -------
$12,711 $ 6,415
======= =======
</TABLE>
Included above in manufacturing equipment and leasehold improvements are
assets under construction of $89 at June 27, 1998 and $539 at June 28, 1997.
5. ASSETS HELD FOR SALE AND PROVISION FOR STORE CLOSURE COSTS
Effective as of the beginning of fiscal 1997, the Company adopted the
provisions of SFAS 121. The initial application of SFAS 121 to long-lived assets
held for disposal at June 30, 1996 resulted in a non-cash charge of $427 (net of
tax benefit of $262) which represents the adjustment required to remeasure such
assets at the lower of carrying amount or fair value less cost to sell.
Long-lived assets held for disposal consist of leasehold improvements and
furniture, fixtures and other property at the Company's corporate-owned stores
which management plans to sell to franchisees.
During fiscal 1998 and 1997, the Company recorded additional charges of
$223 and $198 (included in general and administrative expenses), respectively,
to remeasure long-lived assets at corporate-owned stores which management plans
to sell to franchisees or close, at the lower of carrying amount or fair value
less cost to sell. As of June 27, 1998, all of the Gloria Jean's corporate-owned
stores are held for sale to franchises. Assets held for sale at June 27, 1998
and June 28, 1997 had adjusted carrying values of $2,895 and $1,560,
respectively. Revenues and operating income (losses) for these stores totaled
$9,030 and $(1,204), respectively, for the fiscal year ended June 27, 1998,
$7,051 and $(368), respectively, for the fiscal year ended June 28, 1997, and
$5,592 and $176, respectively, for the 39-week period ended June 29,
F-32
<PAGE> 105
COFFEE PEOPLE, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 27, 1998, JUNE 28, 1997 AND JUNE 29, 1996 -- (CONTINUED)
(IN THOUSANDS)
1996. During the fiscal year ended June 27, 1998, the Company sold eight
corporate-owned stores. The Company is negotiating with a third-party equipment
leasing company for a sale-leaseback of substantially all of the Gloria Jean's
corporate-owned store assets. Management believes the selling price for these
store assets will approximate their carrying value at June 27, 1998. While the
corporate-owned stores are being actively marketed for sale, the Company expects
the period of sale may exceed one year for some of the stores.
As of June 28, 1997, the Company determined that it was not feasible to
sell eight of the corporate-owned stores held for disposal and recorded a
provision of $580 for store closure costs consisting primarily of lease
termination costs. The Company incurred costs of $530 for store closures during
fiscal 1998 and charged this amount against the accrual for store closures.
As of June 27, 1998, the accrual for store closures consists of closure
costs at the Old Coffee People corporate-owned stores which were closed as of
the Gloria Jean's reverse merger date. The accrual of $1,291 consists primarily
of lease termination costs. The Company is working with local real estate
brokers to market, re-lease or sublease all of these stores.
6. DEBT
The Company assumed debt in connection with the Gloria Jean's reverse
merger. Such debt consists of the following at June 27, 1998:
<TABLE>
<S> <C>
Note payable to bank, payable in monthly installments of $6
each, plus interest at 9.0%, commencing September 1, 1995,
due August 1, 1998........................................ $ 12
Note payable to bank, payable in monthly installments of
$100 each, plus interest at two different interest rates
(8.0% at June 27, 1998), commencing June 1, 1997, due May
1, 2002................................................... 4,700
Note payable to stockholder (also a director), payable in
monthly installments of $3, including interest at 2.0%
over the prime rate (10.50% at June 27, 1998), due
December 1, 2002.......................................... 149
Note payable to the Port of Portland, payable in monthly
installments of $5, commencing April 8, 1995, including
interest at 12.0%, due March 8, 2003...................... 216
-------
5,077
Less-current portion........................................ (1,279)
-------
$ 3,798
=======
</TABLE>
The Company has a line of credit agreement with a bank in the amount of
$500 expiring August 1999. The interest rate for amounts drawn under the line is
0.5% over the prime rate. There is no amount outstanding under the line of
credit at June 27, 1998. Of the $500 line, a total of $73 is reserved for use
under a letter of credit dated September 1998.
The Company has a revolving line of credit agreement with Second Cup
Limited in the amount of $4,000 expiring May 2003. The interest rate for amounts
drawn under the line is 11.5%. There is no amount outstanding under the line of
credit at June 27, 1998.
The bank notes and line of credit are secured by substantially all of Old
Coffee People's assets, including accounts receivable, inventories, trade
fixtures and equipment. These debt agreements contain restrictions relating to
specified financial ratios as well as the lender's standard covenants and
restrictions. As of June 27, 1998, the Company was in compliance with all debt
covenants.
The stockholder note is secured by substantially all of the Company's
assets and is subordinated to the bank notes.
F-33
<PAGE> 106
COFFEE PEOPLE, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 27, 1998, JUNE 28, 1997 AND JUNE 29, 1996 -- (CONTINUED)
(IN THOUSANDS)
The principal payments on long-term debt are as follows at June 27, 1998:
<TABLE>
<S> <C>
1999........................................................ $1,279
2000........................................................ 1,268
2001........................................................ 1,271
2002........................................................ 1,179
2003........................................................ 80
------
$5,077
======
</TABLE>
7. INCOME TAXES
The Company's provision (benefit) for income taxes consists of the
following:
<TABLE>
<CAPTION>
FOR THE FISCAL
YEAR ENDED FOR THE
-------------------- 39-WEEK
JUNE 27, JUNE 28, PERIOD ENDED
1998 1997 JUNE 29, 1996
-------- -------- -------------
<S> <C> <C> <C>
Current provision
Federal............................................ $ 26 $ 135 $ --
State.............................................. -- 21 --
---- ----- ----
26 156 --
---- ----- ----
Deferred provision (benefit)
Federal............................................ 628 (371) 863
State.............................................. 74 (43) 102
---- ----- ----
702 (414) 965
---- ----- ----
$728 $(258) $965
==== ===== ====
</TABLE>
The Company's provision (benefit) for income taxes is included in the
financial statements as follows:
<TABLE>
<CAPTION>
FOR THE FISCAL
YEAR ENDED FOR THE
-------------------- 39-WEEK
JUNE 27, JUNE 28, PERIOD ENDED
1998 1997 JUNE 29, 1996
-------- -------- -------------
<S> <C> <C> <C>
Continuing operations................................ $728 $ 4 $965
Cumulative effect of change in accounting
principle.......................................... -- (262) --
---- ----- ----
$728 $(258) $965
==== ===== ====
</TABLE>
The cumulative effect of change in accounting principle of $427 is net of
an income tax benefit of $262, comprised of federal and state income taxes.
The reconciliation of the statutory federal income tax rate to the
Company's effective income tax rate is as follows:
<TABLE>
<CAPTION>
FOR THE FISCAL FOR THE
YEAR ENDED 39-WEEK PERIOD
-------------------- ENDED
JUNE 27, JUNE 28, JUNE 29,
1998 1997 1996
-------- -------- --------------
<S> <C> <C> <C>
Federal statutory rate.............................. 34.0% (34.0)% 34.0%
State income taxes, net of federal benefit.......... 4.0 (4.0) 4.0
Amortization of nondeductible goodwill.............. 12.0 22.8 6.0
Write-off of uncollectible income taxes
receivable........................................ -- 16.7 --
Other............................................... (0.3) (1.5) 0.1
---- ----- ----
49.7% 0.0% 44.1%
==== ===== ====
</TABLE>
F-34
<PAGE> 107
COFFEE PEOPLE, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 27, 1998, JUNE 28, 1997 AND JUNE 29, 1996 -- (CONTINUED)
(IN THOUSANDS)
The components of the Company's net deferred tax assets and liabilities
consist of the following:
<TABLE>
<CAPTION>
JUNE 27, JUNE 28,
1998 1997
-------- --------
<S> <C> <C>
Deferred tax assets
Allowance for doubtful accounts........................... $ 588 $ 628
Net operating loss carryforwards (NOLs)................... 3,913 1,281
Asset write downs, store closures and relocation
provisions............................................. 1,748 635
Basis difference in property, plant and equipment......... 155 --
Employee benefits......................................... 151 --
Other..................................................... 199 48
------ ------
6,754 2,592
Valuation allowance......................................... (699) --
------ ------
Net deferred tax assets..................................... 6,055 2,592
Deferred tax liability
Basis difference in property, plant and equipment......... -- (117)
------ ------
Net deferred tax assets..................................... $6,055 $2,475
====== ======
</TABLE>
During the fiscal year ended June 28, 1997, the Company reversed a $1,619
valuation allowance related to NOLs acquired from Edglo. The non-cash adjustment
to the valuation allowance was recorded as a reduction in goodwill.
In connection with the Gloria Jean's reverse merger (Note 2), the Company
recorded a deferred tax asset of $2,010, net of a valuation allowance of $699.
This amount was recorded as a reduction to goodwill arising from the Gloria
Jean's reverse merger. The valuation allowance of $699 relates to NOLs of Old
Coffee People which, due to limitations on utilization of the NOLs, management
believes are not more likely than not realizable. To the extent these NOLs are
utilized, goodwill will be reduced.
In connection with the CP Old, Inc. merger, the Company recorded a deferred
tax asset of $2,272 related to CP Old, Inc. NOLs which management believes will
more likely than not be realized. The effect of recording this deferred tax
asset was an increase in stockholders' equity (common stock).
Based on internal forecasts and industry trends, management believes it is
more likely than not the deferred tax assets of $6,055 at June 27, 1998 will be
realized through future taxable income.
The Company has federal NOLs of approximately $10,298 which expire as
follows:
<TABLE>
<S> <C>
2010....................................................... $ 3,938
2011....................................................... 3,056
2012....................................................... 2,986
2013....................................................... 318
-------
$10,298
=======
</TABLE>
Approximately $1,840 of these NOLs are available to offset Old Coffee
People's future taxable income. Pursuant to Internal Revenue Code Section 382
(Section 382), utilization of these NOLs is limited to $700 per year.
Approximately $6,620 of these NOLs are available to offset Gloria Jean's future
taxable income. Pursuant to Section 382, utilization of these NOLs is limited to
$568 per year. Utilization of all of the Company's NOLs may be further limited
in the event of a change in ownership of the Company.
F-35
<PAGE> 108
COFFEE PEOPLE, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 27, 1998, JUNE 28, 1997 AND JUNE 29, 1996 -- (CONTINUED)
(IN THOUSANDS)
8. FRANCHISED AND COMPANY-OWNED STORES
The number of retail stores is as follows:
<TABLE>
<CAPTION>
COMPANY-
FRANCHISED OWNED
STORES STORES
---------- --------
<S> <C> <C>
Beginning of period, June 28, 1997.......................... 236 31
Opened/acquired............................................. 14 51
Franchised.................................................. 8 (8)
Closed...................................................... (12) (5)
--- --
End of period, June 27, 1998................................ 246 69
=== ==
</TABLE>
9. MINIMUM LEASE COMMITMENTS AND CONTINGENT LIABILITIES
The Company leases certain retail store, office and warehouse facilities
under operating leases expiring through 2008. The Company is the lessee in most
of the franchisees' lease agreements. The Company has sublease agreements with
individual franchisees, whereby the franchisee assumes responsibility for and
makes lease payments directly to the landlord. The Company also has sublease
agreements for certain company-owned stores and office facilities whereby the
sublease tenants are responsible for the lease payments. Rental expense is
reported net of sublease income in accordance with retail industry practice.
Most lease agreements contain renewal options at varying terms and rent
escalation clauses. Certain leases provide for contingent rentals based upon
gross sales.
Rental expense under lease agreements for the fiscal year ended June 27,
1998 and June 28, 1997, and the 39-week period ended June 29, 1996 was $2,159,
$1,700 and $1,540, respectively, net of sublease income.
Minimum future lease commitments as of June 27, 1998 are as follows:
<TABLE>
<CAPTION>
GROSS NET
MINIMUM LESS MINIMUM
LEASE SUBLEASE LEASE
COMMITMENTS RENTALS COMMITMENTS
----------- -------- -----------
<S> <C> <C> <C>
1999............................................. $11,853 $ 8,000 $ 3,853
2000............................................. 11,281 7,589 3,692
2001............................................. 10,033 6,708 3,325
2002............................................. 8,470 5,596 2,874
2003............................................. 7,158 4,490 2,668
Thereafter....................................... 15,720 8,438 7,282
------- ------- -------
$64,515 $40,821 $23,694
======= ======= =======
</TABLE>
As of June 28, 1997, the Company accrued $420 (included in accrued
liabilities) related to its obligation to repurchase a franchised store if the
franchised store did not meet certain financial targets. When this franchised
store was repurchased, the Company intended to close it. The amount accrued
consisted primarily of the estimated repurchase price and lease termination
costs. Costs incurred to repurchase and close the franchised store were $373 as
of June 27, 1998. During the fiscal year ended June 27, 1998, the Company was
reimbursed for such costs pursuant to an escrow agreement with the former owners
of Gloria Jean's (Note 2).
As of June 27, 1998, the Company has approximately $4,200 of outstanding
purchase commitments related to green coffee.
F-36
<PAGE> 109
COFFEE PEOPLE, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 27, 1998, JUNE 28, 1997 AND JUNE 29, 1996 -- (CONTINUED)
(IN THOUSANDS)
The Company has an agreement with a supplier to purchase substantially all
of the coffee requirements for its Oregon stores through January 1999.
As a requirement under a lease with the Port of Portland, the Company is
committed to enter into a joint venture with a third party for one of the
Company's stores at Portland International Airport. Once the agreement is
finalized, the Company will have a 49% ownership interest in that store.
The Company is subject to litigation in the ordinary course of business. In
the opinion of management, the ultimate outcome of existing litigation would not
have a material adverse effect on the Company's financial condition, results of
operations or cash flows.
10. STOCK SUBSCRIPTION NOTES RECEIVABLE
The Company has stock subscription notes receivable which were issued
primarily by Old Coffee People to certain officers and employees upon the
exercise of incentive stock options. The notes bear interest at the rate of 8.5%
per annum from the date of exercise and are due from December 1998 through May
2003. The notes provide that in the event any of the common stock is sold before
the notes mature, all accrued interest and a pro rata portion of the principal
balance must be paid.
11. INCENTIVE PLANS
STOCK OPTION PLANS
At the time of the Gloria Jean's reverse merger, Old Coffee People had four
stock option plans -- the 1993 Stock Option Plan, the 1994 Stock Option Plan,
the 1995 Stock Option Plan and the 1996 Stock Option Plan. These stock option
plans continued in effect subsequent to the Gloria Jean's reverse merger.
Optionholders as of the merger date were given the opportunity to reprice their
existing stock options at a price equal to the fair market value of the stock on
the date the repricing was approved by the Board of Directors. Optionholders
choosing to reprice their stock options cancelled their option shares and
received a reduced number of new option shares on the repricing date. No options
were repriced as of June 27, 1998. On August 1, 1998, seven optionholders
elected to reprice their stock options. As a result, 302,000 old option shares
with a weighted average price per share of $9.21 were surrendered and 77,850 new
option shares were issued at an exercise price of $3.20 per share. The exercise
price exceeded the fair market value on the grant date.
Effective May 19, 1998, the Company adopted the 1998 Stock Option Plan.
Under all five stock option plans, key employees and consultants may be granted
either incentive or nonqualified stock options. Incentive stock options must
comply with the requirements of the Internal Revenue Code, may be granted only
to employees and may be granted at not less than the fair market value of the
stock at the date of grant. Nonqualified options may be granted to employees and
consultants at not less than 85% of the fair market value of the stock at the
date of grant. Cancelled options are available for future grant. The number of
options granted, the option price, the term of the option and the vesting period
are determined by the Board of Directors.
F-37
<PAGE> 110
COFFEE PEOPLE, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 27, 1998, JUNE 28, 1997 AND JUNE 29, 1996 -- (CONTINUED)
(IN THOUSANDS)
Stock option activity under the aforementioned stock options plans was as
follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF PRICE PER
SHARES SHARE
--------- ---------
<S> <C> <C>
Outstanding at Gloria Jean's reverse merger date............ 342,439 $8.57
Granted..................................................... 248,000 3.20
Exercised................................................... (11,250) 2.22
------- -----
Outstanding at June 27, 1998.............................. 579,189 $6.39
======= =====
</TABLE>
For all five plans, there were 1,005,953 shares of unissued common stock
reserved for issuance at June 27, 1998. Options to purchase 188,565 shares with
a weighted average exercise price of $8.84 were exercisable at June 27, 1998.
Options outstanding and exercisable, and related weighted average life
information by grant price as of June 27, 1998 were as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
OPTION OPTIONS OPTIONS REMAINING LIFE
PRICE OUTSTANDING EXERCISABLE (YEARS)
- ------ ----------- ----------- ----------------
<S> <C> <C> <C>
$ 2.22 13,689 13,689 5
3.20 248,000 -- 10
4.75 5,000 1,000 9
5.56 2,000 400 9
6.50 30,000 6,000 9
6.94 16,500 3,300 9
8.00 21,000 18,376 6
9.00 63,000 37,800 8
10.00 150,000 90,000 7
10.00 30,000 18,000 8
------- -------
579,189 188,565
======= =======
</TABLE>
No compensation cost has been recognized for the 1998 Stock Option Plan. If
compensation cost for this plan had been determined based on the fair value at
the grant date, the Company's net income and net income per share for the fiscal
year ended June 27, 1998 would be as follows:
<TABLE>
<S> <C>
Net income.................................................. $696
Net income per share -- basic and diluted................... $.09
</TABLE>
The Company used the Black-Scholes option pricing model to estimate the
fair value of options granted during the fiscal year ended June 27, 1998 (no
options were granted during the fiscal year ended June 28, 1997 or the 39-week
period ended June 29, 1996). The weighted average assumptions used to compute
compensation cost in the above pro forma and to estimate the weighted average
fair market value of options granted are as follows:
<TABLE>
<S> <C>
Risk-free interest rate..................................... 5.5%
Dividend yield.............................................. 0%
Volatility.................................................. 70%
Expected term (years)....................................... 5
Weighted average fair market value.......................... $1.94
</TABLE>
F-38
<PAGE> 111
COFFEE PEOPLE, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 27, 1998, JUNE 28, 1997 AND JUNE 29, 1996 -- (CONTINUED)
(IN THOUSANDS)
EMPLOYEE STOCK PURCHASE PLAN
At the time of the Gloria Jean's reverse merger, Old Coffee People had an
Employee Stock Purchase Plan (the ESPP) under which 150,000 shares of common
stock have been reserved for issuance to and purchase by employees of Old Coffee
People. The ESPP continued after the reverse merger. All Old Coffee People
employees with over four months of service who work more than 20 hours per week
and who do not own stock and stock options for more than 5% of the Company's
stock are eligible to participate in the ESPP. The ESPP is intended to qualify
as an "employee stock purchase plan" under Section 423 of the Internal Revenue
Code. No shares were purchased under the ESPP during the fiscal year ended June
27, 1998.
12. RETIREMENT PLANS
Effective March 1, 1997, the Company adopted a tax deferred savings plan
(the 401(k) Plan). Substantially all employees with over one year of service are
eligible to participate in the 401(k) Plan. Participants who choose to
participate may contribute up to 15% of their pretax compensation to the 401(k)
Plan subject to the statutorily prescribed annual limits. All contributions to
the 401(k) Plan are fully vested and nonforfeitable at all times. The Company
does not match employee contributions.
Old Coffee People has a tax deferred savings plan (Old Coffee People 401(k)
Plan) which covers all employees of Old Coffee People with over six months of
service and who work an average of at least 30 hours per week. Participants may
contribute up to 20% of their pretax compensation to the Old Coffee People
401(k) Plan subject to the statutorily prescribed annual limits. All
contributions to the Old Coffee People 401(k) Plan, including company
contributions, are fully vested and nonforfeitable at all times. Company
contributions were immaterial during the fiscal year ended June 27, 1998.
13. RELATED PARTY TRANSACTIONS
During the period ended June 29, 1996, the Company issued 1,200 shares of
its common stock to Second Cup for cash of $35,825.
In February 1996, the Company commenced roasting coffee for CP Old, Inc.
The Company initially charged CP Old, Inc. a roasting fee and subsequently
sold roasted coffee to CP Old, Inc. For the fiscal year ended June 28, 1997 and
the 39-week period ended June 29, 1996, total sales to the affiliated company
were $823 and $56, respectively (none in fiscal 1998).
The Company had demand loans to an affiliated company which bore interest
at 8.25% per annum. The loans were repaid during fiscal 1997. Interest received
was $280 for the fiscal year ended June 28, 1997 and $66 for the 39-week period
ended June 29, 1996.
During the fiscal year ended June 27, 1998, The Second Cup Ltd. incurred
costs on the Company's behalf. Such amounts are included in payable to related
party.
As of June 27, 1998, the Company had a lease with a stockholder who is a
director of the Company. Rental expense associated with this lease was
approximately $10,000 during the fiscal year ended June 27, 1998.
14. CASH HELD IN TRUST
The Company holds cash in trust on behalf of franchisees, which includes
the advertising fund and the construction trust account. The cash held in trust
amounted to $795 at June 27, 1998. These funds have not been included in the
Company's balance sheet.
F-39
<PAGE> 112
COFFEE PEOPLE, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 27, 1998, JUNE 28, 1997 AND JUNE 29, 1996 -- (CONTINUED)
(IN THOUSANDS)
15. UNAUDITED QUARTERLY DATA
<TABLE>
<CAPTION>
PER SHARE -- BASIC
AND DILUTED
-----------------------------
INCOME (LOSS) INCOME (LOSS)
BEFORE BEFORE
CUMULATIVE CUMULATIVE
INCOME (LOSS) EFFECT OF CHANGE EFFECT OF CHANGE
FROM IN ACCOUNTING NET INCOME IN ACCOUNTING NET INCOME
REVENUES OPERATIONS PRINCIPLE (LOSS) PRINCIPLE (LOSS)
-------- ------------- ---------------- ---------- ---------------- ----------
<S> <C> <C> <C> <C> <C> <C>
FISCAL 1998:
1st Quarter.................. $ 7,940 $ 784 $ 492 $ 492 $ .07 $ .07
2nd Quarter.................. 10,115 1,796 1,057 1,057 .14 .14
3rd Quarter.................. 7,394 730 456 456 .06 .06
4th Quarter.................. 9,602 (2,113) (1,267) (1,267) (.15) (.15)
------- ------- ------- -------
$35,051 $ 1,197 $ 738 $ 738 $ .09 $ .09
======= ======= ======= =======
FISCAL 1997:
1st Quarter.................. $ 5,493 $ (740) $ (629) $(1,056) $(.08) $(.14)
2nd Quarter.................. 11,230 1,947 2,041 2,041 .27 .27
3rd Quarter.................. 6,607 (438) (308) (308) (.04) (.04)
4th Quarter.................. 7,249 (1,954) (1,867) (1,867) (.25) (.25)
------- ------- ------- -------
$30,579 $(1,185) $ (763) $(1,190) $(.10) $(.16)
======= ======= ======= =======
</TABLE>
F-40
<PAGE> 113
COFFEE PEOPLE, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MARCH 6, JUNE 27,
1999 1998
----------- --------
(UNAUDITED)
(IN THOUSANDS
EXCEPT SHARE AMOUNTS)
<S> <C> <C>
Current Assets:
Cash and cash equivalents................................. $ 2,773 $ 2,822
Accounts receivable, net.................................. 3,149 3,262
Inventories............................................... 3,722 4,052
Prepaid expenses and other assets......................... 926 713
Deferred income taxes..................................... 2,427 2,621
------- -------
Total current assets.............................. 12,997 13,470
Property, plant and equipment, net.......................... 12,262 12,711
Goodwill, net............................................... 25,530 25,967
Other assets................................................ 114 113
Deferred income taxes....................................... 3,385 3,434
------- -------
Total assets...................................... $54,288 $55,695
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 1,237 $ 1,279
Current portion of capital lease obligations.............. 119 --
Accounts payable.......................................... 1,795 1,421
Payable to related party.................................. -- 984
Accrued liabilities....................................... 1,827 2,572
Provision for store closures.............................. 1,102 1,291
Franchisee deposits....................................... 538 459
Deferred franchise fee income............................. 94 187
------- -------
Total current liabilities......................... 6,712 8,193
Long-term debt.............................................. 2,727 3,798
Capital lease obligations................................... 784 --
Deferred rent expense....................................... 146 202
Stockholders' equity
Preferred stock, no par value; authorized 10,000,000 shares
none issued or outstanding................................ -- --
Common stock, no par value; authorized 50,000,000 shares
issued and outstanding, 10,762,757 and 10,746,040......... 44,659 44,630
Stock subscription notes receivable......................... (350) (338)
Accumulated deficit......................................... (390) (790)
------- -------
Total stockholders' equity........................ 43,919 43,502
------- -------
Total liabilities and stockholders' equity........ $54,288 $55,695
======= =======
</TABLE>
F-41
<PAGE> 114
COFFEE PEOPLE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED THIRTY-SIX WEEKS ENDED
--------------------------- ---------------------------
MARCH 6, MARCH 7, MARCH 6, MARCH 7,
1999 1998 1999 1998
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues:
Franchise revenue............................ $ 1,689 $ 1,589 $ 4,756 $ 4,584
Corporate store sales........................ 7,566 2,759 22,429 6,891
Wholesale revenue............................ 3,484 3,047 12,944 14,020
------- ------- ------- -------
Total revenues....................... 12,739 7,395 40,129 25,495
Expenses:
Cost of goods sold........................... 5,560 3,704 18,384 13,210
Store and other operating expenses........... 5,007 1,982 15,605 5,735
Depreciation and amortization................ 345 377 1,152 1,109
General and administrative expenses.......... 842 602 3,052 2,131
Acquisition and integration expenses......... 151 -- 950 --
------- ------- ------- -------
Total expenses....................... 11,905 6,665 39,143 22,185
Operating income............................... 834 730 986 3,310
------- ------- ------- -------
Interest and other income...................... 36 69 92 207
Interest expense............................... 143 -- 368 --
------- ------- ------- -------
Income before income taxes..................... 727 799 710 3,517
Provision for income taxes..................... 319 343 310 1,512
------- ------- ------- -------
Net income..................................... $ 408 $ 456 $ 400 $ 2,005
======= ======= ======= =======
Net income per share -- basic and diluted...... $ 0.04 $ 0.06 $ 0.04 $ 0.27
======= ======= ======= =======
Weighted average common shares -- basic........ 10,761 7,461 10,775 7,461
Weighted average common and common equivalent
shares outstanding -- diluted................ 10,776 7,461 10,771 7,461
</TABLE>
F-42
<PAGE> 115
COFFEE PEOPLE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THIRTY-SIX
WEEKS ENDED
-------------------------
MARCH 6, MARCH 7,
1999 1998
----------- -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 400 $ 2,005
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 1,152 1,109
Provision for uncollectible accounts................... 190 --
Deferred income taxes.................................. 243 880
Interest income on stock subscription notes
receivable............................................ (12) --
Change in assets and liabilities, net of amounts
acquired:
Accounts receivable.................................. (77) (88)
Receivable from/due to related party................. (984) 312
Inventories.......................................... 330 (503)
Prepaid expenses and other assets.................... (214) 221
Accounts payable..................................... 374 (247)
Accrued liabilities.................................. (745) (603)
Accrual for store closures........................... (189) (264)
Franchisee deposits.................................. 79 76
Deferred franchise fee income........................ (93) (28)
Deferred rent expense................................ (56) 5
------- -------
398 2,875
------- -------
Cash flows from investing activities:
Purchase of property, plant and equipment................. (752) (1,400)
Proceeds from disposal of property, plant and equipment... 511 98
Additions to goodwill..................................... (25) --
------- -------
(266) (1,302)
------- -------
Cash flows from financing activities:
Proceeds on issuance of shares............................ 29 --
Borrowings under capital lease obligation................. 922 --
Borrowings under long-term debt........................... 1,412 --
Payment on capital lease obligation....................... (19) --
Payment on long-term debt................................. (2,525) --
------- -------
(181) --
------- -------
Decrease in cash and cash equivalents....................... (49) 1,573
Cash and cash equivalents, beginning of period.............. 2,822 7,281
------- -------
Cash and cash equivalents, end of period.................... 2,773 8,854
======= =======
Supplemental cash flow information
Interest.................................................. 297 --
Cash paid for income taxes................................ 26 --
</TABLE>
F-43
<PAGE> 116
COFFEE PEOPLE, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 6, 1999 AND JUNE 27, 1998 (UNAUDITED)
(IN THOUSANDS)
NOTE 1. FINANCIAL STATEMENT PRESENTATION
The interim financial data is unaudited; however, in the opinion of
management, the interim data includes all adjustments, consisting only of normal
recurring adjustments, necessary for a fair statement of the results for the
interim periods. The financial statements included herein have been prepared by
the Company pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures included herein
are adequate to make the information presented not misleading. The operating
results for interim periods are not necessarily indicative of results to be
expected for an entire year. The aforementioned statements should be read in
conjunction with the consolidated financial statements for the fiscal year ended
June 27, 1998, appearing in the Company's Annual Report on Form 10-K.
Certain reclassifications of prior period amounts have been made to conform
with the March 6, 1999 presentation.
NOTE 2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
MARCH 6, JUNE 27,
1999 1998
------------ --------
(UNAUDITED)
<S> <C> <C>
Coffee:
Unroasted............................................ $1,429 $2,169
Roasted.............................................. 289 368
Other merchandise held for sale........................ 703 898
Supplies............................................... 1,301 617
------ ------
$3,722 $4,052
====== ======
</TABLE>
NOTE 3. FRANCHISING STRATEGY
On September 1, 1998, the Company announced that it was adopting a
franchising strategy in which it would offer existing Coffee People (Oregon) and
Coffee Plantation stores for sale to franchisees as well as offering new
franchise opportunities for these brands. As a result of the proposed and
pending merger with Diedrich Coffee, Inc., the Company has deferred execution of
this strategy. (See Note 5)
As a result of the decision to hold all existing Coffee People (Oregon) and
Coffee Plantation stores for sale, depreciation on these stores was suspended
effective September 1, 1998. In addition, as of March 6, 1999, the Coffee People
(Oregon) and Coffee Plantation store assets are stated at the lower of carrying
value or fair market value less cost to sell.
NOTE 4. SALE-LEASEBACK TRANSACTION
On November 24, 1998, the Company entered into a sale-leaseback transaction
involving equipment at twelve company-operated Gloria Jean's retail stores. The
$922,000 proceeds received by the Company from the lease transaction were used
for general corporate purposes and working capital. The interest rate on the
capital lease obligation is 10.5%. The capital lease assets are recorded in
property, plant and equipment. At the end of the lease term, the Company has an
option to purchase the equipment for the greater of fair market value or 10% of
the lessor's original cost, or renew the lease for an additional eight months.
F-44
<PAGE> 117
COFFEE PEOPLE, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 6, 1999 AND JUNE 27, 1998 (UNAUDITED)
(IN THOUSANDS)
NOTE 5. DIEDRICH COFFEE, INC. MERGER
On March 16, 1999, Coffee People, Inc. entered into an Agreement and Plan
of Merger with Diedrich Coffee, Inc. (NASDAQ:DDRX). Pursuant to the merger
agreement, Coffee People has agreed to merge with a subsidiary of Diedrich
Coffee. After the merger is effective Coffee People will be a wholly owned
subsidiary of Diedrich Coffee. Under the terms of the merger agreement, Coffee
People shareholders will receive $17.75 million in cash, 1,500,000 shares of
Diedrich Coffee common stock, and an additional $5.25 million in cash or a
combination of cash and stock based on the net proceeds of a public equity
offering planned by Diedrich Coffee prior to the completion of the merger.
Closing of the merger is subject to a number of conditions, including completion
of the public equity offering by Diedrich Coffee upon certain specified terms,
receipt of regulatory approvals and approval by the shareholders of Coffee
People and Diedrich Coffee. If these conditions are met, the transaction is
expected to close during the summer of 1999.
F-45
<PAGE> 118
[DIEDRICH LOGO] TM
<PAGE> 119
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses, other than the underwriting
discount, payable by the company in connection with the issuance and
distribution of the common stock being registered. All amounts are estimates
except the Securities and Exchange Commission registration fee, the NASD filing
fee and the Nasdaq listing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $7,992,50
NASD filing fee............................................. $ *
Nasdaq listing fee.......................................... $ *
Accounting fees and expenses................................ $ *
Legal fees and expenses..................................... $ *
Blue Sky qualification fees and expenses.................... $ *
Printing and engraving expenses............................. $ *
Transfer agent and registrar fees........................... $ *
Miscellaneous............................................... $ *
---------
Total............................................. $ *
=========
</TABLE>
- ---------------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Diedrich Coffee is a Delaware corporation. Section 145(a) of the DGCL
provides that a Delaware corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of Diedrich Coffee) by
reason of the fact that such person is or was a director, officer, employee or
agent of Diedrich Coffee, or is or was serving at the request of Diedrich Coffee
as a director, officer, employee or agent of another corporation or enterprise,
against expenses, judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding if he or she acted in good faith and in a manner he or she reasonably
believed to be in or not opposed to the best interests of Diedrich Coffee, and,
with respect to any criminal action or proceeding, had no cause to believe his
or her conduct was unlawful.
Section 145(b) of the DGCL provides that a Delaware corporation may
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of
Diedrich Coffee to procure a judgment in its favor by reason of the fact that
such person acted in any of the capacities set forth above, against expenses
actually and reasonably incurred by such person in connection with the defense
or settlement of such action or suit if he or she acted under similar standards,
except that no indemnification may be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be liable for
negligence or misconduct in the performance of his or her duty to Diedrich
Coffee unless and only to the extent that the court in which such action or suit
was brought shall determine that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to be indemnified for such expenses which the court shall deem proper.
Section 145 of the DGCL further provides that to the extent a director or
officer of a corporation has been successful in the defense of any action, suit
or proceeding referred to in subsections (a) and (b) or in the defense of any
claim, issue or matter therein, such officer or director shall be indemnified
against expenses actually and reasonably incurred by him or her in connection
therewith; that indemnification provided for by Section 145 shall not be deemed
exclusive of any other rights to which the indemnified party may be entitled;
and that Diedrich Coffee may purchase and maintain insurance on behalf of a
director or officer of Diedrich Coffee against any liability asserted against
such officer or director and
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<PAGE> 120
incurred by him or her in any such capacity or arising out of his or her status
as such, whether or not Diedrich Coffee would have the power to indemnify him or
her against such liabilities under Section 145.
INDEMNIFICATION OF DIRECTORS AND OFFICERS AND RELATED MATTERS
Diedrich Coffee's certificate of incorporation limits, to the maximum
extent permitted by the Delaware General Corporation Law, the personal liability
of directors and officers for monetary damages for breach of their fiduciary
duties as directors and officers, other than liabilities arising from acts or
omissions that involve intentional misconduct, fraud or knowing violations of
law or the payment of distributions in violation of Delaware law. The
certificate of incorporation provides further that Diedrich Coffee shall
indemnify, to the fullest extent permitted by Delaware law, any person made a
party to an action or proceeding by reason of the fact that such person was a
director, officer, employee or agent of Diedrich Coffee. Subject to Diedrich
Coffee's certificate of incorporation, the bylaws provide that Diedrich Coffee
shall indemnify directors and officers for all costs reasonably incurred in
connection with any action, suit or proceeding in which such director or officer
is made a party by virtue of his being an officer or director of Diedrich Coffee
except where such director or officer is finally adjudged to have been derelict
in the performance of his duties as such director or officer.
Diedrich Coffee has entered into separate indemnification agreements with
its directors and officers containing provisions that provide for the maximum
indemnity allowed to directors and officers by the Delaware law and Diedrich
Coffee's bylaws, subject to certain exceptions. The indemnification agreements
may require Diedrich Coffee, among other obligations, to indemnify such
directors and officers against certain liabilities that may arise by reason of
their status as directors and officers, other than liabilities arising from
willful misconduct of a culpable nature, provided that such person acted in good
faith and in a manner that he or she reasonably believed to be in or not opposed
to the best interests of Diedrich Coffee and, in the case of a criminal
proceeding, had no reasonable cause to believe that his conduct was unlawful. In
addition, the indemnification agreements provide generally that Diedrich Coffee
will, subject to certain exceptions, advance the expenses incurred by directors
and officers as a result of any proceeding against them as to which they may be
entitled to indemnification. Diedrich Coffee believes these agreements are
necessary to attract and retain qualified persons as directors and officers.
Diedrich Coffee also maintains directors' and officers' liability insurance.
The indemnification provisions in Diedrich Coffee's bylaws, and the
indemnity agreements entered into between Diedrich Coffee and its directors and
executive officers, may permit indemnification for liabilities arising under the
Securities Act. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of Diedrich Coffee pursuant to the foregoing provisions or otherwise, Diedrich
Coffee has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following is a summary of the sales during the past three years by
Diedrich Coffee of securities that were not registered under the Securities Act:
On January 28, 1998, we issued 333,333 shares of our common stock to John
E. Martin for an aggregate consideration of $999,999. Also on January 28, 1998,
we issued 16,667 shares of our common stock to Timothy J. Ryan for an aggregate
consideration of $50,001. With respect to the issuance of these shares, we
relied upon the provisions of Section 4(2) of the Securities Act, in that the
issuance did not involve a public offering and was thereby exempt from
registration under the Securities Act. The shares were not offered or sold by
means of a general solicitation, and Messrs. Martin and Ryan represented that
they were not acquiring the shares with a view towards their distribution. The
shares were issued with an investment legend.
On April 3, 1998, we issued 200,000 shares of our common stock to FMAC for
an aggregate consideration of $1,275,000. With respect to the issuance of these
shares, we relied upon the provisions of
II-2
<PAGE> 121
Section 4(2) of the Securities Act, in that the issuance did not involve a
public offering and was thereby exempt from registration under the Securities
Act. The shares were not offered or sold by means of a general solicitation, and
FMAC represented that it was not acquiring the shares with a view towards their
distribution. The shares were issued with an investment legend.
On August 24, 1998, we issued 5,120 shares of our common stock to John
Brady for an aggregate consideration of $26,880. The shares were issued upon
conversion of a warrant granted in connection with our initial public offering.
With respect to the issuance of these shares, we relied upon the provisions of
Section 4(2) of the Securities Act, in that the issuance did not involve a
public offering and was thereby exempt from registration under the Securities
Act. The shares were not offered or sold by means of a general solicitation, and
Mr. Brady represented that he was not acquiring the shares with a view towards
their distribution. The shares were issued with an investment legend
On August 24, 1998 and on December 23, 1998, we issued to Kye Hellmers
10,000 and 12,080 shares of our common stock, respectively, for an aggregate
consideration of $115,920. The shares were issued upon conversion of a warrant
granted in connection with our initial public offering. With respect to the
issuance of these shares, we relied upon the provisions of Section 4(2) of the
Securities Act, in that the issuance did not involve a public offering and was
thereby exempt from registration under the Securities Act. The shares were not
offered or sold by means of a general solicitation, and Mr. Hellmers represented
that he was not acquiring the shares with a view towards their distribution. The
shares were issued with an investment legend.
On September 22, 1998, we issued 6,140 shares of our common stock to Joseph
Donohue, Jr. for an aggregate consideration of $32,235. The shares were issued
upon conversion of a warrant granted in connection with our initial public
offering. With respect to the issuance of these shares, we relied upon the
provisions of Section 4(2) of the Securities Act, in that the issuance did not
involve a public offering and was thereby exempt from registration under the
Securities Act. The shares were not offered or sold by means of a general
solicitation, and Mr. Donohue represented that he was not acquiring the shares
with a view towards their distribution. The shares were issued with an
investment legend.
On December 21, 1998, we issued 85,000 shares of our common stock to the
Virginia R. Cirica Trust for an aggregate consideration of $191,250. Also on
December 21, 1998, we issued 7,700 shares of our common stock to Robert DiMinico
for an aggregate consideration of $40,425. We issued the shares to the trust as
an equity incentive in connection with a loan by the trust to the company. The
shares issued to Mr. DiMinico were issued upon conversion of a warrant granted
in connection with our initial public offering. With respect to the issuance of
these shares, we relied upon the provisions of Section 4(2) of the Securities
Act, in that the issuance did not involve a public offering and was thereby
exempt from registration under the Securities Act. The shares were not offered
or sold by means of a general solicitation, and the trust and Mr. DiMinico
represented that they were not acquiring the shares with a view towards their
distribution. The shares were issued with an investment legend.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<S> <C>
1.1 Underwriting Agreement*
2.1 Form of Agreement and Plan of Merger by and between Diedrich
Coffee, a California corporation, and Diedrich Coffee, Inc.,
a Delaware corporation(1)
2.2 Agreement and Plan of Merger dated as of March 16, 1999, by
and among Diedrich Coffee, CP Acquisition Corp., a wholly
owned subsidiary of Diedrich Coffee, and Coffee People(2)
3.1 Certificate of Incorporation of the company(1)
3.2 Bylaws of the company(1)
4.1 Purchase Agreement for Series A Preferred Stock dated as of
December 11, 1992 by and among Diedrich Coffee, Martin R.
Diedrich, Donald M. Holly, SNV Enterprises and D.C.H.,
L.P.(1)
</TABLE>
II-3
<PAGE> 122
<TABLE>
<S> <C>
4.2 Purchase Agreement for Series B Preferred Stock dated as of
June 29, 1995 by and among Diedrich Coffee, Martin R.
Diedrich, Steven A. Lupinacci, Redwood Enterprises VII, L.P.
and Diedrich Partners I, L.P.(1)
4.3 Specimen Stock Certificate(1)
4.4 Form of Conversions Agreement in connection with the
conversion of Series A and Series B Preferred Stock into
Common Stock(1)
4.5 Form of Lock-up Letter Agreement among The Second Cup, Ltd.
and Diedrich Coffee, Inc.(3)
4.6 Voting Agreement and Irrevocable Proxy dated as of March 16,
1999 by and among Diedrich Coffee, Inc., D.C.H., L.P., Peter
Churm, Martin R. Diedrich, Lawrence Goelman, Paul C.
Heeschen, John E. Martin, Timothy J. Ryan, and Second Cup
USA Holdings Ltd.(3)
4.7 Form of Lock-up Agreement among and Diedrich
Coffee officers and directors*
5.1 Opinion of Gibson, Dunn & Crutcher LLP*
10.1 Form of Indemnification Agreement(1)
10.2 Diedrich Coffee 1996 Stock Incentive Plan(1)
10.3 Diedrich Coffee 1996 Non-Employee Directors Stock Option
Plan(1)
10.4 Agreement of Sale dated as of February 23, 1996 by and among
Diedrich Coffee (as purchaser) and Brothers Coffee Bars,
Inc. and Brothers Gourmet Coffees, Inc. (as sellers)(1)
10.5 Separation agreement dated May 13, 1997 between Steven A.
Lupinacci and Diedrich Coffee, Inc.(4)
10.6 Letter agreement by and between the Company and John E.
Martin appointing Mr. Martin Chairman of the Board, dated as
of November 17, 1997(5)
10.7 Stock Option Plan and Agreement by and between the Company
and John E. Martin granting Mr. Martin the option to
purchase up to 850,000 shares of the Common Stock of the
Company, dated as of November 17, 1997(5)
10.8 Common Stock Purchase Agreement by and between the Company
and John E. Martin under which Mr. Martin agrees to purchase
333,333 shares of the Common Stock of the Company, dated as
of November 17, 1997(5)
10.9 Employment Agreement by and between the Company and Timothy
J. Ryan retaining Mr. Ryan as Chief Executive Officer, dated
as of November 17, 1997(5)
10.10 Stock Option Plan and Agreement by and between the Company
and Timothy J. Ryan granting Mr. Ryan the option to purchase
up to 600,000 shares of the Common Stock of the Company,
dated as of November 17, 1997(5)
10.11 Common Stock Purchase Agreement by and between the Company
and Timothy J. Ryan under which Mr. Ryan agrees to purchase
16,667 shares of the Common Stock of the Company, dated as
of November 17, 1997 (5)
10.12 Form of Promissory Note made in favor of Nuvrty, Inc., the
Ocean Trust and the Grandview Trust (6)
10.13 Form of Term Loan Agreement made in favor of Nuvrty, Inc.,
the Ocean Trust and the Grandview Trust (6)
10.14 Form of Security Agreement made in favor of Nuvrty, Inc.,
the Ocean Trust and the Grandview Trust (6)
10.15 Form of Warrant Agreement made in favor of Nuvrty, Inc., the
Ocean Trust and the Grandview Trust (6)
10.16 Form of Intercreditor Agreement made in favor of Nuvrty,
Inc., the Ocean Trust and the Grandview Trust (6)
10.17 Form of Common Stock and Option Purchase Agreement with
Franchise Mortgage Acceptance Company dated as of April 3,
1998 (7)
10.18 Separation and Release Agreement dated January 28, 1998 with
Kerry W. Coin (7)
</TABLE>
II-4
<PAGE> 123
<TABLE>
<S> <C>
10.19 Employment Agreement with Ann Wride dated April 8, 1998 (8)
10.20 Employment Agreement with Dolf Berle dated April 8, 1998 (9)
10.21 Employment Agreement with Catherine Saar dated June 11, 1998
(9)
10.22 Form of Franchise Agreement (10)
10.23 Form of Area Development Agreement (10)
10.24 Employment Agreement with Martin Diedrich dated June 29,
1998 (3)
11.1 Statement re: Computation of Per Share Earnings
21.1 List of Subsidiaries (3)
23.1 Consent of Gibson, Dunn & Crutcher LLP (included as part of
the opinion filed as Exhibit 5.1 and incorporated herein by
reference)
23.2 Consent of KPMG LLP
23.3 Consent of PricewaterhouseCoopers, Independent Accountants
(Toronto)
23.4 Consent of PricewaterhouseCoopers LLP, Independent
Accountants (San Francisco)
24.1 Power of Attorney (contained on signature page of this
document)
27.1 Financial Data Schedule
</TABLE>
- ---------------
* To be filed by amendment
(1) Previously filed as an exhibit to Diedrich Coffee's Registration Statement
on Form S-1(No. 333-08633), as amended, as declared effective by the
Securities and Exchange Commission on September 11, 1996.
(2) Previously filed as Appendix A to Diedrich Coffee's Registration Statement
on Form S-4, filed with the Securities and Exchange Commission on April 23,
1999.
(3) Previously filed as an exhibit to Diedrich Coffee's Registration Statement
on Form S-4, filed with the Securities and Exchange Commission on April 23,
1999.
(4) Previously filed as an exhibit to Diedrich Coffee's Quarterly Report on
Form 10-Q, for the period ended April 30, 1997, filed with the Securities
and Exchange Commission on June 13, 1997.
(5) Previously filed as an exhibit to Diedrich Coffee's Current Report on Form
8-K, filed with the Securities and Exchange Commission on November 25,
1997.
(6) Previously filed as an exhibit to Diedrich Coffee's Quarterly Report on
Form 10-Q, for the period ended October 29, 1997, filed with the Securities
and Exchange Commission on December 11, 1997.
(7) Previously filed as an exhibit to Diedrich Coffee's annual report on Form
10-K for the fiscal year ended January 28, 1998.
(8) Previously filed as an exhibit to Diedrich Coffee's Quarterly Report on
Form 10-Q, for the period ended April 29, 1998, filed with the Securities
and Exchange Commission on June 11, 1998.
(9) Previously filed as an exhibit to Diedrich Coffee's Quarterly Report on
Form 10-Q, for the period ended July 29, 1998, filed with the Securities
and Exchange Commission on September 10, 1998.
(10) Previously filed as an exhibit to Diedrich Coffee's Quarterly Report on
Form 10-Q, for the period ended October 28, 1998, filed with the Securities
and Exchange Commission on December 11, 1998.
(B) FINANCIAL STATEMENT SCHEDULES:
None
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement certificates
in the denominations and registered in the names as required by the Underwriters
to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 14 or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
II-5
<PAGE> 124
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
(c) The undersigned Registrant undertakes:
(1) For purposes of determining any liability under the Securities
Act, as amended, the information omitted from the form of prospectus filed
as part of a registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Act shall be deemed to be part of the
registration statement as of the time it was declared effective.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-6
<PAGE> 125
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
Diedrich Coffee has duly caused this Registration Statement on Form S-1 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Irvine, State of California, on the 7th day of May, 1999.
By: /s/ TIMOTHY J. RYAN
------------------------------------
Timothy J. Ryan
President and Chief Executive
Officer
POWER OF ATTORNEY
Each director and/or officer of Diedrich Coffee whose signature appears
below hereby constitutes and appoints TIMOTHY J. RYAN and ANN WRIDE as the true
and lawful attorneys-in-fact and agents for the undersigned, acting together or
alone, with full powers of substitution and resubstitution, for the undersigned
and in the undersigned's name, place and stead, in any and all capacities, to
sign and file any and all amendments (including post-effective amendments) and
exhibits to this Registration Statement on Form S-1, and any and all
applications and other documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorneys-in-fact and agents, acting
together or alone, full powers and authority to do and perform each and every
act and thing requisite and necessary or desirable to be done, hereby ratifying
and confirming all that said attorneys-in-fact and agents, acting together or
alone, or their substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JOHN E. MARTIN Chairman of the Board May 7, 1999
- ---------------------------------------------
John E. Martin
/s/ TIMOTHY J. RYAN President, Chief Executive Officer and May 7, 1999
- --------------------------------------------- Director (Principal Executive Officer)
Timothy J. Ryan
/s/ ANN WRIDE Vice President and Chief Financial May 7, 1999
- --------------------------------------------- Officer (Principal Financial and
Ann Wride Accounting Officer)
/s/ MARTIN R. DIEDRICH Chief Coffee Officer, Vice Chairman of May 7, 1999
- --------------------------------------------- the Board of Directors and Secretary
Martin R. Diedrich
/s/ LAWRENCE GOELMAN Director May 7, 1999
- ---------------------------------------------
Lawrence Goelman
/s/ PETER CHURM Director May 7, 1999
- ---------------------------------------------
Peter Churm
/s/ PAUL C. HEESCHEN Director May 7, 1999
- ---------------------------------------------
Paul C. Heeschen
</TABLE>
II-7
<PAGE> 126
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGES
- ------- ----------- ------------
<C> <S> <C>
1.1 Underwriting Agreement*
2.1 Form of Agreement and Plan of Merger by and between Diedrich
Coffee, a California corporation, and Diedrich Coffee, Inc.,
a Delaware corporation(1)
2.2 Agreement and Plan of Merger dated as of March 16, 1999, by
and among Diedrich Coffee, CP Acquisition Corp., a wholly
owned subsidiary of Diedrich Coffee, and Coffee People(2)
3.1 Certificate of Incorporation of the company(1)
3.2 Bylaws of the company(1)
4.1 Purchase Agreement for Series A Preferred Stock dated as of
December 11, 1992 by and among Diedrich Coffee, Martin R.
Diedrich, Donald M. Holly, SNV Enterprises and D.C.H.,
L.P.(1)
4.2 Purchase Agreement for Series B Preferred Stock dated as of
June 29, 1995 by and among Diedrich Coffee, Martin R.
Diedrich, Steven A. Lupinacci, Redwood Enterprises VII, L.P.
and Diedrich Partners I, L.P.(1)
4.3 Specimen Stock Certificate(1)
4.4 Form of Conversions Agreement in connection with the
conversion of Series A and Series B Preferred Stock into
Common Stock(1)
4.5 Form of Lock-up Letter Agreement among The Second Cup, Ltd.
and Diedrich Coffee, Inc.(3)
4.6 Voting Agreement and Irrevocable Proxy dated as of March 16,
1999 by and among Diedrich Coffee, Inc., D.C.H., L.P., Peter
Churm, Martin R. Diedrich, Lawrence Goelman, Paul C.
Heeschen, John E. Martin, Timothy J. Ryan, and Second Cup
USA Holdings Ltd.(3)
4.7 Form of Lock-up Agreement among and Diedrich
Coffee officers and directors*
5.1 Opinion of Gibson, Dunn & Crutcher LLP*
10.1 Form of Indemnification Agreement(1)
10.2 Diedrich Coffee 1996 Stock Incentive Plan(1)
10.3 Diedrich Coffee 1996 Non-Employee Directors Stock Option
Plan(1)
10.4 Agreement of Sale dated as of February 23, 1996 by and among
Diedrich Coffee (as purchaser) and Brothers Coffee Bars,
Inc. and Brothers Gourmet Coffees, Inc. (as sellers)(1)
10.5 Separation agreement dated May 13, 1997 between Steven A.
Lupinacci and Diedrich Coffee, Inc.(4)
10.6 Letter agreement by and between the Company and John E.
Martin appointing Mr. Martin Chairman of the Board, dated as
of November 17, 1997(5)
10.7 Stock Option Plan and Agreement by and between the Company
and John E. Martin granting Mr. Martin the option to
purchase up to 850,000 shares of the Common Stock of the
Company, dated as of November 17, 1997(5)
10.8 Common Stock Purchase Agreement by and between the Company
and John E. Martin under which Mr. Martin agrees to purchase
333,333 shares of the Common Stock of the Company, dated as
of November 17, 1997(5)
10.9 Employment Agreement by and between the Company and Timothy
J. Ryan retaining Mr. Ryan as Chief Executive Officer, dated
as of November 17, 1997(5)
</TABLE>
<PAGE> 127
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGES
- ------- ----------- ------------
<C> <S> <C>
10.10 Stock Option Plan and Agreement by and between the Company
and Timothy J. Ryan granting Mr. Ryan the option to purchase
up to 600,000 shares of the Common Stock of the Company,
dated as of November 17, 1997(5)
10.11 Common Stock Purchase Agreement by and between the Company
and Timothy J. Ryan under which Mr. Ryan agrees to purchase
16,667 shares of the Common Stock of the Company, dated as
of November 17, 1997(5)
10.12 Form of Promissory Note made in favor of Nuvrty, Inc., the
Ocean Trust and the Grandview Trust(6)
10.13 Form of Term Loan Agreement made in favor of Nuvrty, Inc.,
the Ocean Trust and the Grandview Trust(6)
10.14 Form of Security Agreement made in favor of Nuvrty, Inc.,
the Ocean Trust and the Grandview Trust(6)
10.15 Form of Warrant Agreement made in favor of Nuvrty, Inc., the
Ocean Trust and the Grandview Trust(6)
10.16 Form of Intercreditor Agreement made in favor of Nuvrty,
Inc., the Ocean Trust and the Grandview Trust(6)
10.17 Form of Common Stock and Option Purchase Agreement with
Franchise Mortgage Acceptance Company dated as of April 3,
1998(7)
10.18 Separation and Release Agreement dated January 28, 1998 with
Kerry W. Coin(7)
10.19 Employment Agreement with Ann Wride dated April 8, 1998(8)
10.20 Employment Agreement with Dolf Berle dated April 8, 1998(9)
10.21 Employment Agreement with Catherine Saar dated June 11,
1998(9)
10.22 Form of Franchise Agreement(10)
10.23 Form of Area Development Agreement(10)
10.24 Employment Agreement with Martin Diedrich dated June 29,
1998(3)
11.1 Statement re: Computation of Per Share Earnings
21.1 List of Subsidiaries(3)
23.1 Consent of Gibson, Dunn & Crutcher LLP (included as part of
the opinion filed as Exhibit 5.1 and incorporated herein by
reference)
23.2 Consent of KPMG LLP
23.3 Consent of PricewaterhouseCoopers, Independent Accountants
(Toronto)
23.4 Consent of PricewaterhouseCoopers LLP, Independent
Accountants (San Francisco)
24.1 Power of Attorney (contained on signature page of this
document)
27.1 Financial Data Schedule
</TABLE>
- ---------------
* To be filed by amendment
(1) Previously filed as an exhibit to Diedrich Coffee's Registration Statement
on Form S-1(No. 333-08633), as amended, as declared effective by the
Securities and Exchange Commission on September 11, 1996.
(2) Previously filed as Appendix A to Diedrich Coffee's Registration Statement
on Form S-4, filed with the Securities and Exchange Commission on April 23,
1999.
(3) Previously filed as an exhibit to Diedrich Coffee's Registration Statement
on Form S-4, filed with the Securities and Exchange Commission on April 23,
1999.
(4) Previously filed as an exhibit to Diedrich Coffee's Quarterly Report on
Form 10-Q, for the period ended April 30, 1997, filed with the Securities
and Exchange Commission on June 13, 1997.
<PAGE> 128
(5) Previously filed as an exhibit to Diedrich Coffee's Current Report on Form
8-K, filed with the Securities and Exchange Commission on November 25,
1997.
(6) Previously filed as an exhibit to Diedrich Coffee's Quarterly Report on
Form 10-Q, for the period ended October 29, 1997, filed with the Securities
and Exchange Commission on December 11, 1997.
(7) Previously filed as an exhibit to Diedrich Coffee's annual report on Form
10-K for the fiscal year ended January 28, 1998.
(8) Previously filed as an exhibit to Diedrich Coffee's Quarterly Report on
Form 10-Q, for the period ended April 29, 1998, filed with the Securities
and Exchange Commission on June 11, 1998.
(9) Previously filed as an exhibit to Diedrich Coffee's Quarterly Report on
Form 10-Q, for the period ended July 29, 1998, filed with the Securities
and Exchange Commission on September 10, 1998.
(10) Previously filed as an exhibit to Diedrich Coffee's Quarterly Report on
Form 10-Q, for the period ended October 28, 1998, filed with the Securities
and Exchange Commission on December 11, 1998.
<PAGE> 1
EXHIBIT 11.1
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
January 27, 1999 January 28, 1998 January 29, 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
NUMERATOR:
Net (loss) income (2,562,308) (9,112,761) (985,705)
DENOMINATOR:
Basic and diluted weighted
average common shares
outstanding 5,934,287 5,392,609 4,414,000
Basic and diluted loss earnings
per share (0.43) (1.69) (0.22)
</TABLE>
For the years ended January 27, 1999, January 28, 1998 and January 29,
1997, stock options of 2,057,267, 1,984,183 and 301,350 respectively, and
warrants of 850,000, 1,095,000 and 160,000 respectively, were not included in
the computation of diluted earnings per share as losses were incurred in those
years.
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors and Shareholders'
Diedrich Coffee, Inc.:
We consent to the use in the Registration Statement on Form S-1 of Diedrich
Coffee, Inc. of our report dated March 26, 1999, except for second paragraph of
Note 13 which is as of April 6, 1999, incorporated by reference herein and the
reference to our firm under the heading "Experts" in the Prospectus, which is a
part of the Registration Statement.
/s/ KPMG LLP
Orange County, California
May 6, 1999
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of our
report dated August 16, 1996 relating to the consolidated financial statements
of Coffee People, Inc. (formerly Gloria Jean's Inc.), which appears in such
Registration Statement. We also consent to the reference to us under the heading
"Experts" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
- -------------------------------------------------
PricewaterhouseCoopers LLP
Toronto, Ontario
May 6, 1999
<PAGE> 1
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of
our report dated August 26, 1998 relating to the consolidated financial
statements of Coffee People, Inc., which appears in such Prospectus. We also
consent to the reference to us under the heading "Experts" in such Prospectus.
/s/ PricewaterhouseCoopers LLP
- -------------------------------------------------
PricewaterhouseCoopers LLP
San Francisco, California
May 6, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DIEDRICH
COFFEE, INC. REGISTRATION STATEMENT ON FORM S-1 FILED HEREWITH AND IS QUALIFIED
IN IS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-27-1999
<PERIOD-START> JAN-29-1998
<PERIOD-END> JAN-27-1999
<CASH> 1,200,861
<SECURITIES> 0
<RECEIVABLES> 263,651
<ALLOWANCES> 0
<INVENTORY> 1,279,436
<CURRENT-ASSETS> 3,050,627
<PP&E> 14,035,728
<DEPRECIATION> 4,915,869
<TOTAL-ASSETS> 12,736,452
<CURRENT-LIABILITIES> 3,706,086
<BONDS> 0
0
0
<COMMON> 61,674
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 12,736,452
<SALES> 24,215,203
<TOTAL-REVENUES> 24,215,203
<CGS> 10,955,197
<TOTAL-COSTS> 10,955,197
<OTHER-EXPENSES> 15,524,597
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 384,544
<INCOME-PRETAX> (2,558,618)
<INCOME-TAX> 3,690
<INCOME-CONTINUING> (2,562,308)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,562,308)
<EPS-PRIMARY> (0.43)
<EPS-DILUTED> (0.43)
</TABLE>
