<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 28, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
COMMISSION FILE NUMBER 0-21203
DIEDRICH COFFEE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0086628
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
2144 MICHELSON DRIVE
IRVINE, CALIFORNIA 92612
(Address of Principal Executive Offices including Zip Code)
(949) 260-1600
(Registrant's Telephone Number including Area Code)
----------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
As of June 4, 1999, there were 6,173,538 shares of common stock of the
registrant outstanding.
<PAGE> 2
DIEDRICH COFFEE, INC.
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE NO.
- ------------------------------ --------
<S> <C>
Item 1. Financial Statements
Condensed Balance Sheets....................................................... 3
Condensed Statements of Operations............................................. 4
Condensed Statements of Cash Flows............................................. 5
Notes to Condensed Financial Statements........................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................................... 9
Liquidity and Capital Resources................................................ 12
Item 3 Quantitative and Qualitative Disclosures About Market Risk..................... 12
PART II - OTHER INFORMATION
Item 1 Legal Proceedings.............................................................. 13
Item 5 Other Information.............................................................. 13
Item 6 Exhibits and Reports on Form 8-K............................................... 13
Signatures..................................................................... 14
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DIEDRICH COFFEE, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS (Note 3) APRIL 28, 1999 JANUARY 27, 1999
-------------- ----------------
Current Assets:
<S> <C> <C>
Cash $ 786,356 $ 1,200,861
Accounts receivable 295,910 263,651
Note receivable 100,000 100,000
Inventories (Note 2) 1,417,429 1,279,436
Prepaid expenses 527,696 188,993
Income taxes receivable 17,686 17,686
------------ ------------
Total current assets 3,145,077 3,050,627
Property and equipment, net 8,872,401 9,119,859
Costs in excess of net assets acquired, net 322,280 329,086
Note receivable - long-term 40,000 --
Other assets 248,253 236,880
------------ ------------
Total assets $ 12,628,011 $ 12,736,452
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current installments of obligations under capital lease $ 169,488 $ 169,488
Current note payable (Note 3) 1,000,000 --
Accounts payable 1,217,387 1,415,067
Accrued compensation 672,668 970,034
Accrued expenses 1,018,541 1,039,097
Provision for store closings and restructuring costs 103,143 112,400
------------ ------------
Total current liabilities 4,181,227 3,706,086
Obligation under capital lease - long term 259,049 283,106
Long term debt (Note 3) 2,500,000 2,500,000
Deferred rent 228,179 219,865
------------ ------------
Total liabilities 7,168,455 6,709,057
------------ ------------
Stockholders' Equity: (Note 4)
Common stock 61,736 61,674
Additional paid-in capital 18,716,951 18,708,032
Accumulated deficit (13,319,131) (12,742,311)
------------ ------------
Total stockholders' equity 5,459,556 6,027,395
------------ ------------
Commitments and contingencies
Total liabilities and stockholders' equity $ 12,628,011 $ 12,736,452
============ ============
</TABLE>
See accompanying notes to financial statements.
3
<PAGE> 4
DIEDRICH COFFEE, INC.
CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THIRTEEN WEEKS THIRTEEN WEEKS
ENDED APRIL 28, ENDED APRIL 29,
1999 1998
--------------- ---------------
<S> <C> <C>
Revenues:
Retail $ 5,189,865 $ 5,285,060
Wholesale and other 858,408 638,301
Franchise revenue 50,030 --
----------- -----------
Total revenues 6,098,303 5,923,361
----------- -----------
Cost and Expenses:
Cost of sales and related occupancy costs 2,758,104 2,682,665
Store operating expenses 2,288,028 2,283,903
Other operating expenses 157,508 148,785
Depreciation and amortization 506,935 482,222
General and administrative expenses 857,267 974,848
----------- -----------
Total 6,567,842 6,572,423
----------- -----------
Operating loss (469,539) (649,062)
Interest expense (96,097) (97,273)
Interest and other income 597 1,510
----------- -----------
Loss before income taxes (565,039) (744,825)
Income tax provision 2,800 800
----------- -----------
Net loss (567,839) $ (745,625)
=========== ===========
Basic net loss per share: $ (0.09) $ (0.13)
=========== ===========
Diluted net loss per share: $ (0.09) $ (0.13)
=========== ===========
Weighted average shares outstanding 6,172,512 5,800,991
=========== ===========
</TABLE>
See accompanying notes to financial statements.
4
<PAGE> 5
DIEDRICH COFFEE, INC.
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THIRTEEN WEEKS THIRTEEN WEEKS
ENDED APRIL 28, ENDED APRIL 29,
1999 1998
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (567,839) $ (745,625)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization 506,935 482,222
Changes in assets and liabilities:
Accounts receivable (32,259) (16,030)
Inventories (137,993) 173,647
Prepaid expenses (338,703) (27,010)
Income taxes receivable -- 23,165
Note receivable - long-term (40,000) --
Other assets (13,922) 430
Accounts payable (197,680) (53,670)
Accrued compensation (297,366) (189,616)
Accrued expenses (23,007) (32,385)
Deferred rent 8,314 9,508
----------- -----------
Net cash used in operating activities (1,133,520) (375,364)
----------- -----------
Cash flows from investing activities:
Capital expenditures for property and equipment (256,928) (373,575)
Property disposition -- --
----------- -----------
Net cash used in investing activities $ (256,928) $ (373,575)
=========== ===========
Cash flows from financing activities:
Proceeds from issuance of common stock, net fees paid -- 1,275,000
Proceeds from long-term debt 1,000,000 --
Payment on capital lease obligation (24,057) (20,613)
----------- -----------
Net cash provided by financing activities $ 975,943 $ 1,254,387
----------- -----------
Net increase (decrease) in cash (414,505) 505,448
----------- -----------
Cash at beginning of period 1,200,861 1,408,161
----------- -----------
Cash at end of period 786,356 $ 1,913,609
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 71,641 $ 75,000
=========== ===========
Income taxes $ 2,800 $ 800
=========== ===========
Non-cash transactions
Equipment purchased under capital lease $ -- $ 54,127
=========== ===========
</TABLE>
See accompanying notes to financial statements
5
<PAGE> 6
DIEDRICH COFFEE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
APRIL 28, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The unaudited condensed financial statements of Diedrich Coffee, Inc.
(the "Company") have been prepared in accordance with generally accepted
accounting principles for interim financial information. In the opinion of
management, all adjustments (consisting of normal, recurring adjustments and
accruals) considered necessary for a fair presentation of the Company's
financial position at April 28,1999 and the results of operations and cash flows
for the thirteen weeks ended April 28,1999 and April 29,1998 have been included.
Results for the interim periods are not necessarily indicative of the results
for an entire year. This information should be read in conjunction with the
financial statements and the notes thereto included in the Company's Annual
Report on Form 10-K for the year ended January 27,1999.
Net Loss Per Common Share
The computation of basic earnings per share is based on the weighted
average number of common shares outstanding during the periods presented. All
periods presented have been calculated in accordance with SFAS No. 128.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
APRIL 28, 1999 JANUARY 27, 1999
-------------- ----------------
<S> <C> <C>
Green coffee (raw materials) $ 532,132 $ 412,103
Roasted coffee (finished goods) 181,799 115,979
Accessory and specialty items 220,168 275,386
Other food, beverage and supplies 483,330 475,968
---------- ----------
$1,417,429 $1,279,436
========== ==========
</TABLE>
6
<PAGE> 7
DIEDRICH COFFEE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
APRIL 28, 1999
3. NOTE PAYABLE
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 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 warrants to Mr. Youness to purchase 70,000 shares of the Company's common
stock at a price of $5.625 per share. The fair value of the warrants is
estimated to be $100,000. This estimated fair value will be charged to interest
expense and amortized ratably over the life of the loan.
4. DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
APRIL 28, 1999 JANUARY 27, 1999
-------------- ----------------
<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
---------- ----------
Total long term debt $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
controlled by Amre Youness, a former director of the Company (the "Nuvrty Loan
Documents"). All outstanding principal and accrued interest is due and payable
on September 30, 2002. The loan is secured by the assets of the Company and
provides for borrowings up to $1,000,000 with interest accruing and paid monthly
at the prime rate plus 3 1/2%. The Company borrowed the full amount under the
loan.
In connection with the Nuvrty Loan Documents, the Company issued a
warrant to Nuvrty to purchase up to 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.
7
<PAGE> 8
DIEDRICH COFFEE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
APRIL 28, 1999
In connection with the Ocean Trust Loan Documents and the Grandview
Trust Loan Documents the Company issued warrants to each Trust respectively to
purchase up to 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 Company used the proceeds from the Ocean Trust and Grandview Trust loans to
pay off and discharge outstanding indebtedness.
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." Due to the relative immateriality of the
fair value of the warrants, none of the proceeds from issuance of the debt were
allocated to the warrants. The determination of fair value was calculated using
both a Cost of Replacement Model and the Monte Carlo simulation of possible
warrant exercise.
5. STOCKHOLDERS' EQUITY
On March 30, 1998 the Company agreed to a private placement of 200,000
shares of the Company's common stock to Franchise Mortgage Acceptance Company
("FMAC") at a price of $6.375 (the stock's closing sale price for that day on
the Nasdaq National Stock Market). In addition, FMAC also received an option to
purchase 100,000 additional shares of the Company's common stock; this option
may be exercised in increments of 25,000 shares or more and expires on April 3,
2000. The exercise prices of this option are as follows: 50,000 shares are
exercisable at $10.00 per share and $12.50 per share, respectively. The fair
value of this option is estimated to be $72,042. The estimated fair value of the
option has been charged to equity and will be amortized ratably over the two
year life of the option. This transaction was completed on April 3, 1998.
On September 22, 1998, 6,140 shares of common stock were issued
pursuant to the exercise of certain Boston Group warrants. On October 28, 1998,
18,382 shares of common stock were issued pursuant to the exercise of certain
options granted under the Company's 1996 Stock Incentive Plan.
During the last quarter of fiscal 1999, an additional 15,120 shares of
common stock were issued pursuant to the exercise of certain Boston Group
warrants and 7,472 shares of common stock were issued pursuant to the exercise
of options granted under the Company's 1996 Stock Incentive Plan.
On February 12, 1999, 6,225 shares of common stock were issued pursuant
to the exercise of options granted under the Company's 1996 Stock Incentive
Plan.
8
<PAGE> 9
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
From time to time, in both written reports and oral statements, the
Company makes "forward-looking statements" within the meaning of Federal and
state securities laws. Disclosures that use words such as the Company
"believes," "anticipates," "expects," "may" or "plans" and similar expressions
are intended to identify forward-looking statements. These forward-looking
statements reflect the Company's current expectations and are based upon data
available at the time of the statements. Such statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from expectations. Any such forward-looking statements, whether made in this
report or elsewhere, should be considered in context with the various
disclosures made by the Company about its business, including the factors
discussed below. These projections or forward looking statements fall under the
safe harbors of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Foreseeable
risks and uncertainties are described elsewhere in this report and in detail
under "Risk Factors and Trends Affecting Diedrich Coffee and Its Business" in
the Company's annual report on Form 10-K for the fiscal year ended January 27,
1999 and in reports filed by the Company with the Securities and Exchange
Commission.
GENERAL
The first retail store operating under the name of Diedrich Coffee
commenced operations in 1972. As of April 28, 1999, we operated thirty-three
coffeehouses, two franchised retail locations and seven coffee carts located in
California, Colorado and Texas. We sell high quality coffee beverages made with
our own freshly roasted coffee. We sell specialty coffee beans, brewed coffee
and espresso-based beverages such as cappuccinos, lattes, mochas and espressos
and various blended drinks through these company-owned and franchised retail
locations. To complement beverage sales, we also sell light food items, whole
bean coffee and accessories at our retail locations. In addition, we have a
strong wholesale division that markets its products directly to independent and
chain food service establishments, as well as to businesses for office coffee
systems through brokers and sales representatives.
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 as well as a 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 as
well as a number of carts and kiosks in San Diego, Palm Springs and Temecula,
California over the next five years. This franchise area development agreement
also 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 as well as a note receivable for $100,000. On
May 17, 1999, we announced our third franchise area development agreement
which provides for the development of 50 coffeehouses in the northern portion of
Florida. On May 26, 1999, we announced our fourth franchise area development
agreement which calls for the development of 80 coffeehouses in the Los Angeles,
California market. This agreement also gives the franchisee an option to develop
up to 103 additional stores in the Bay Area of Northern California. In
connection with the signing of this agreement, we will record an area
development fee of $32,000 in fiscal 2000. On June 1, 1999, we announced our
fifth franchise area development agreement which provides for the development of
50 coffeehouses in the states of Kentucky and Tennessee. In connection with the
signing of this agreement, we will record an area development fee of $20,000 in
fiscal 2000.
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.
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 acquisition is subject to a number
of conditions, including securing financing and obtaining stockholder approval.
9
<PAGE> 10
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 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 the summer
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 April 28, 1999, we have 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.
SEASONALITY AND QUARTERLY RESULTS
The Company's business is subject to seasonal fluctuations as well as
economic trends that affect retailers in general. Historically, the Company's
net sales have not been realized proportionately in each quarter, with net sales
being the highest during the last fiscal quarter which includes the December
holiday season. Hot weather tends to reduce sales. Quarterly results are
affected by the timing of the opening of new stores, which may not occur as
anticipated due to events outside the Company's control. As a result of these
factors, and of the other contingencies and risk factors described elsewhere in
this report, the financial results for any individual quarter may not be
indicative of the results that may be achieved in a full fiscal year.
10
<PAGE> 11
RESULTS OF OPERATIONS
Thirteen Weeks Ended April 28, 1999 Compared with the Thirteen Weeks Ended
April 29, 1998
Total Revenues. Total revenues for the thirteen weeks ended April 28,
1999 increased 3.0% to $6,098,000 from $5,923,000 for the thirteen weeks ended
April 29, 1998 principally due to an increase in comparable store sales. During
this most recent quarter, we derived 85.1% of total revenues from our retail
coffeehouse operations. Wholesale and other revenue accounted for 14.1% of total
revenues and franchise revenues accounted for 0.8% of total revenues. Retail
revenues for the thirteen weeks ended April 28, 1999 decreased 1.8% to
$5,190,000 from $5,285,000 in the thirteen weeks April 29, 1998. This decrease
was a result of three fewer company-operated coffeehouses during the most recent
quarter. Two of these retail locations were franchised during the quarter ended
April 28, 1999 and one was closed. As of April 28, 1999, we operated 33
coffeehouses and 7 carts; whereas on April 29, 1998, we operated 36 coffeehouses
and 7 carts. The percentage increase in comparable store sales was 3.2% during
the first quarter of fiscal 2000. This increase was principally a result of
improved targeted marketing programs.
Wholesale and other revenues increased 34.5% to $858,000 for the
thirteen weeks ended April 28, 1999 from $638,000 for the thirteen weeks ended
April 29, 1998. The increase reflects increasing demand for our wholesale coffee
products and increased sales efforts. Although we anticipate continued
improvement in wholesale sales, this will depend upon successful marketing of
products produced using the new packaging equipment that we acquired and
installed during the latter part of fiscal 1999. There can be no assurances that
strong increases in wholesale revenues will continue.
Franchise revenue was $50,000 for the thirteen weeks ended April 28,
1999. Franchise revenue consists of initial franchise fees and royalties
received on sales made at each franchise location. Since we first recorded
franchise revenue in the third quarter of fiscal 1999, there was no franchise
revenue for the thirteen weeks ended April 29, 1998. As of April 28, 1999, we
had two franchised coffeehouses.
Cost of Sales and Related Occupancy Costs. Cost of roasted coffee,
dairy, food, paper and bar supplies, accessories and clothing (cost of sales)
and rent (related occupancy costs) for the thirteen weeks ended April 28, 1999
increased to $2,758,000 from $2,683,000 for the thirteen weeks ended April 29,
1998. As a percentage of total revenue, cost of sales and related occupancy
costs decreased slightly to 45.2% in the first quarter of fiscal 2000 from 45.3%
for the first quarter of fiscal 1999. Better average unit volume efficiencies
resulting from lower green coffee prices and the addition of franchise revenues
offset an increase in labor costs resulting from new training programs
implemented at the store level.
Store Operating Expenses. Store operating expenses increased to
$2,288,000 for the thirteen weeks ended April 28, 1999 from $2,284,000 for the
thirteen weeks ended April 29, 1998. As a percentage of retail and franchise
revenues, store operating expenses increased to 43.7% in the first quarter of
fiscal 2000 from 43.2% in the prior fiscal year's first quarter. These increases
were due to additional personnel and expenses related to our increased
franchising activities.
Other Operating Expenses. Other operating expenses (those associated
with wholesale and other revenues) increased to $158,000 for the first quarter
of fiscal 2000 from $149,000 in the first quarter of fiscal 1999. These
expenses, as a percentage of revenues from the wholesale division, decreased to
18.4% from 23.3%. The decrease as a percentage of revenues from the wholesale
division reflects the increase in wholesale revenues, as a result of the
emphasis placed on adding new chain restaurant accounts.
Depreciation and Amortization. Depreciation and amortization increased
to $507,000 for the thirteen weeks ended April 28, 1999 from $482,000 for the
thirteen weeks ended April 29, 1998. As a percentage of total revenue,
depreciation and amortization increased to 8.3% in comparison to 8.1% for the
prior quarter.
General and Administrative Expenses. General and administrative
expenses decreased to $857,000 for the first quarter of fiscal 2000 from
$975,000 for the first quarter of fiscal 1999. As a percentage of total revenue,
general and administrative expenses decreased to 14.1% from 16.5%. This decrease
was primarily a result of the elimination of management personnel that were not
essential to our current growth strategy.
Interest Expense. Interest expense decreased to $96,000 for the
thirteen weeks ended April 28, 1999 from $97,000 for the thirteen weeks ended
April 29, 1998. This slight decrease is a result of a lower prime rate in 1999
from 1998.
11
<PAGE> 12
LIQUIDITY AND CAPITAL RESOURCES
We have funded our capital requirements in recent years principally
through private placements of our common stock and long-term debt. We had a
working capital deficit of $1,036,000 as of April 28, 1999 compared to a working
capital deficit of $655,000 as of January 27, 1999. The current period working
capital includes remaining restructuring liabilities of $103,000. Cash used by
operating activities for the thirteen weeks ended April 28, 1999 totaled
$1,134,000 as compared to $375,000 for the thirteen weeks ended April 29, 1998.
Net cash used in investing activities for the thirteen weeks ended
April 28, 1999 totaled $257,000, which consisted of capital expenditures for
property and equipment. Net cash provided by financing activities for the
thirteen weeks ended April 28, 1999 totaled $976,000 which consisted of proceeds
from debt.
As of April 28, 1999, we had $2,500,000 of long-term debt that
consisted of three term loans with three separate investors on substantially
similar terms. Each of the loans bears interest at the prime rate plus 3-1/2%
with interest only payable monthly. The principal is due in one lump sum at
maturity. The loans mature at different times in September and October of 2002
and are secured by all of our assets.
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.
On April 9, 1999, we received a statement of proposed terms and
conditions from BankBoston, N.A. to establish new credit facilities for Diedrich
Coffee after the completion of the acquisition of Coffee People. The new credit
facilities are conditioned upon the completion of the acquisition of Coffee
People, the completion of a public equity offering with gross proceeds of at
least $18.0 million and other usual and customary conditions for credit
facilities. The credit facilities will be secured by all of our assets. These
credit facilities would be established concurrently with the completion of the
public equity offering and would consist of a term loan and a revolving credit
facility. The term loan would be in the principal amount of $12 million fully
amortized over five years. The term loan would bear interest at the rate of
approximately 8% per annum. The revolving credit facility would provide for a
maximum borrowing of $3 million. The revolving credit facility would bear
interest at the rate of BankBoston's base rate plus 1.25% or Libor plus 3.00%
and would terminate in five years unless extended by the mutual agreement of us
and BankBoston. If advances under the revolving credit facility are to be used
to finance additional company-owned retail locations, at least 90% of existing
company-owned retail locations must then have positive cash flow. We intend to
use the proceeds from these new credit facilities to repay our existing
indebtedness, finance additional company-owned retail locations and for general
corporate purposes.
We believe that cash from operations, the credit facilities described
above and the net proceeds from the public equity offering will be sufficient to
satisfy our working capital needs at the anticipated operating levels for the
next twelve months.
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Derivative Instruments. We did not invest in market risk sensitive
instruments in fiscal 1999, nor in the first quarter of fiscal 2000. 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 April 28, 1999 these commitments totaled $1,602,000. 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 correlation between increases in green coffee prices and the final
selling prices of our products.
We have not used derivative financial instruments for any purpose,
including hedging or mitigating interest rate risk.
Market Risk. Our 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% and $1,000,000 at the prime rate plus
3%. At April 28, 1999, a hypothetical 100 basis point increase in the prime rate
would result in additional interest expense of $35,000 on an annualized basis.
At April 28, 1999 the prime rate was 7.75%.
12
<PAGE> 13
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the ordinary course of its business, the Company may become involved
in legal proceedings from time to time. As of June 4, 1999, the Company was not
a party to any material pending legal proceedings.
ITEM 5. OTHER INFORMATION
Minimum Advance Notice of Stockholder Proposals. Stockholders of the
Company are advised that the Company must be notified at least 45 days prior to
the month and day of mailing the prior year's proxy statement of any proposal or
solicitation that any stockholder intends to present at the next annual meeting
of stockholders and which the stockholder has not sought to have included in the
Company's Proxy Statement for the meeting in accordance with Rule 14a-8 under
the Securities Exchange Act. If a proponent fails to notify the Company before
the required deadline, management proxies will be allowed to use their
discretionary voting authority when the proposal is raised at the annual
meeting, without any discussion of the matter in the Company's Proxy Statement.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
Set forth below is a list of the exhibits included as part of this
Quarterly Report.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
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 Conversion 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)
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)
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)
27.1 Financial Data Schedule
</TABLE>
(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) REPORTS ON FORM 8-K
1. A report on Form 8-K was filed on February 10, 1999 reporting that
Diedrich Coffee had signed a letter of intent to acquire all of the
outstanding shares of common stock of Coffee People, Inc.
2. A report on Form 8-K was filed on March 25, 1999 reporting that
Diedrich Coffee has signed a definitive agreement to acquire all of
the outstanding shares of common stock of Coffee People, Inc.
13
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: June 4, 1999 DIEDRICH COFFEE, INC.
/s/ Timothy J. Ryan
-------------------------------------
Timothy J. Ryan,
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Ann Wride
-------------------------------------
Ann Wride
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
14
<PAGE> 15
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
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)
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)
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)
27.1 Financial Data Schedule
</TABLE>
(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.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DIEDRICH
COFFEE, INC. UNAUDITED FINANCIAL STATEMENTS FOR THE THIRTEEN WEEKS ENDED AND AS
OF APRIL 28, 1999 CONTAINED IN COMPANY'S 1ST QUARTER 2000 10-Q AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-02-2000
<PERIOD-START> JAN-28-1999
<PERIOD-END> APR-28-1999
<CASH> 786,356
<SECURITIES> 0
<RECEIVABLES> 295,910
<ALLOWANCES> 0
<INVENTORY> 1,417,429
<CURRENT-ASSETS> 3,145,077
<PP&E> 14,369,283
<DEPRECIATION> 5,496,882
<TOTAL-ASSETS> 12,628,011
<CURRENT-LIABILITIES> 4,181,227
<BONDS> 0
0
0
<COMMON> 61,736
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 5,459,556
<SALES> 6,098,303
<TOTAL-REVENUES> 6,098,303
<CGS> 2,758,104
<TOTAL-COSTS> 2,758,104
<OTHER-EXPENSES> 3,809,738
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 96,097
<INCOME-PRETAX> (565,039)
<INCOME-TAX> 2,800
<INCOME-CONTINUING> (567,839)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (567,839)
<EPS-BASIC> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
