-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BjxRXQpfVBrXuiADQaqT1jBewwcOSsVIVwa5taeS7D3JSb+LGXfLArm+tA5q6JCs H6Ft7yXtOUp7ky5T28EZkg== 0000892569-96-002640.txt : 19961217 0000892569-96-002640.hdr.sgml : 19961217 ACCESSION NUMBER: 0000892569-96-002640 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961030 FILED AS OF DATE: 19961216 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIEDRICH COFFEE INC CENTRAL INDEX KEY: 0000947661 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-FOOD STORES [5400] IRS NUMBER: 330086628 STATE OF INCORPORATION: CA FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-21203 FILM NUMBER: 96681118 BUSINESS ADDRESS: STREET 1: 2144 MICHELSON DRIVE STREET 2: STE A CITY: IRVINE STATE: CA ZIP: 9262682612 BUSINESS PHONE: 7142601600 MAIL ADDRESS: STREET 1: 2144 MICHELSON DRIVE CITY: IRVINE STATE: CA ZIP: 92612 10-Q 1 FORM 10-Q FOR QUARTER ENDED OCTOBER 30, 1996 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 OCTOBER 30, 1996 [ ] 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 (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) 2144 MICHELSON DRIVE IRVINE, CALIFORNIA 92612 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 260-1600 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [ ] NO [X] As of December 1, 1996, there were 5,391,650 shares of common stock of the registrant outstanding. =============================================================================== 2 DIEDRICH COFFEE, INC. INDEX
PAGE NO. -------- PART I - FINANCIAL INFORMATION Item 1. Financial Statements Condensed Balance Sheets . . . . . . . . . . . . . . . . . . 3 Condensed Statements of Income . . . . . . . . . . . . . . . 4 Condensed Statements of Cash Flows . . . . . . . . . . . . . 5 Notes to Condensed Financial Statements . . . . . . . . . . 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . 8 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 14 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS DIEDRICH COFFEE, INC. CONDENSED BALANCE SHEETS
OCTOBER 30, 1996 JANUARY 31, 1996 ---------------- ---------------- (Unaudited) ASSETS Current Assets: Cash $ 5,113,553 $ 94,659 Accounts receivable 189,863 134,573 Inventories (Note 2) 1,454,143 645,493 Deferred income taxes 14,079 14,079 Prepaid expenses 430,990 106,367 Other current assets 5,943 12,890 ----------- ----------- Total current assets 7,208,571 1,008,061 Property and equipment, net 10,945,748 4,100,898 Costs in excess of net assets acquired, net (Note 3) 810,312 - Deferred income taxes 34,113 34,113 Other assets 258,166 172,600 ----------- ---------- $19,256,910 $5,315,672 =========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current portion of long-term debt $ - $ 117,538 Notes payable - 39,398 Accounts payable 2,647,347 635,428 Accrued compensation 218,058 184,891 Accrued expenses 78,175 32,237 Income taxes payable 40,665 51,235 ----------- ----------- Total current liabilities 2,984,245 1,060,727 Long-term debt, less current portion - 829,320 Deferred rent 152,206 121,144 ----------- ----------- Total liabilities 3,136,451 2,011,191 ----------- ----------- Commitments and contingencies Stockholders' Equity (Note 5): Series A convertible cumulative preferred stock, no par value; liquidation preference of $1.00 per share, aggregating $1,000,000; authorized, 1,000,000 shares; issued and outstanding none at October 30, 1996 and 1,000,000 shares at January 31, 1996 - 800,000 Series B convertible cumulative preferred stock, no par value; liquidation preference of $1.433 per share, aggregating $2,305,000; authorized, 1,608,568 shares; issued and outstanding none at October 30, 1996 and 1,608,568 shares at January 31, 1996 - 2,225,813 Preferred stock, $.01 par value; authorized, 3,000,000 shares; no shares issued and outstanding - - Common stock, $.01 par value; authorized, 25,000,000 shares; issued and outstanding, 5,391,650 shares at October 30, 1996 and 1,183,082 shares at January 31, 1996 16,014,099 330,698 Retained earnings (accumulated deficit) 106,360 (52,030) ----------- ----------- Total stockholders' equity 16,120,459 3,304,481 ----------- ----------- $19,256,910 $ 5,315,672 =========== ===========
See accompanying notes to condensed financial statements. 3 4 DIEDRICH COFFEE, INC. CONDENSED STATEMENTS OF INCOME (UNAUDITED)
THIRTEEN TWELVE THIRTY-NINE THIRTY-SIX WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED OCTOBER 30, OCTOBER 10, OCTOBER 30, OCTOBER 10, 1996 1995 1996 1995 ----------- ----------- ----------- ----------- Net Sales : Retail $4,716,301 $1,939,865 $12,887,504 $5,581,629 Wholesale and other 388,386 317,683 1,159,274 900,243 ---------- ---------- ----------- ---------- Total 5,104,687 2,257,548 14,046,778 6,481,872 ---------- ---------- ----------- ---------- Cost and Expenses: Cost of sales and related occupancy costs 2,096,321 984,705 6,005,203 2,792,654 Store operating expenses 2,226,610 763,352 5,834,033 2,127,778 Other operating expenses 53,244 67,836 175,829 176,858 Depreciation and amortization 238,798 83,649 603,349 231,470 General and administrative expenses 407,532 312,870 1,054,992 890,205 ---------- ---------- ----------- ---------- Total 5,022,505 2,212,412 13,673,406 6,218,965 ---------- ---------- ----------- ---------- Operating income 82,182 45,136 373,372 262,907 Interest expense (78,119) (9,619) (186,851) (33,704) Interest and other income 73,182 806 75,188 9,960 ---------- ---------- ----------- ---------- Income before income taxes 77,245 36,323 261,709 239,163 Provision for income taxes 31,670 14,913 103,319 98,136 ---------- ---------- ----------- ---------- Net income $ 45,575 $ 21,410 $ 158,390 $ 141,027 ========== ========== =========== ========== Pro forma information: Net income per share $.01 $.04 ========== ========== Weighted average shares outstanding 4,764,491 4,190,131 ========== ==========
See accompanying notes to condensed financial statements. 4 5 DIEDRICH COFFEE, INC. CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
THIRTY-NINE THIRTY-SIX WEEKS ENDED WEEKS ENDED OCTOBER 30, 1996 OCTOBER 10, 1995 ---------------- ---------------- Cash flows from operating activities: Net income $ 158,390 $ 141,027 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 603,349 231,470 Increase (decrease) from changes in: Accounts receivable (55,290) (22,885) Inventories (808,650) (62,067) Prepaid expenses (324,623) (143,429) Other current assets 6,947 (14,782) Other assets (85,566) (182,611) Accounts payable 2,011,919 635,711 Accrued compensation 33,167 64,687 Accrued expenses 45,938 112,278 Income taxes payable (10,570) (69,945) Deferred rent 31,062 8,527 ----------- ----------- Cash provided by operating activities 1,606,073 697,981 ----------- ----------- Cash flows from investing activities: Capital expenditures for property and equipment (6,458,511) (1,479,374) Acquisition of coffeehouses (1,800,000) - ----------- ----------- Cash used in investing activities (8,258,511) (1,479,374) ----------- ----------- 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 1,622,520 89,555 Principal payments on long-term debt (2,569,378) (130,888) Proceeds from issuance of common stock, net of fees paid 12,657,588 - Proceeds from sale of preferred stock - 2,225,813 Repurchase of common stock - (280,000) ----------- ----------- Net cash provided by financing activities 11,671,332 1,904,480 ----------- ----------- Net increase (decrease) in cash 5,018,894 1,123,087 Cash at beginning of period 94,659 58,884 ----------- ----------- Cash at end of period $ 5,113,553 $ 1,181,971 =========== =========== Supplemental Disclosure of Cash Flow Information: Cash paid during the period for: Interest $ 164,140 $ 33,704 Income taxes $ 80,129 $ 106,110
See accompanying notes to condensed financial statements. 5 6 DIEDRICH COFFEE, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS OCTOBER 30, 1996 (UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Interim Financial Information The unaudited condensed financial statements of Diedrich Coffee, Inc. (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information. Certain information normally included in annual financial statements prepared in accordance with generally accepted accounting principles has been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The financial information as of January 31, 1996 is derived from the Company's audited financial statements for the year ended January 31, 1996 included in the Company's final Prospectus prepared in connection with its initial public offering declared effective on September 11, 1996 and should be read in conjunction with such financial statements. In the opinion of management, all adjustments (consisting of normal, recurring adjustments and accruals) considered necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods have been included. Results for the interim periods are not necessarily indicative of the results for an entire year. Pro Forma Net Income per Share Pro forma net income per share is based on the weighted average number of shares outstanding during the period after consideration of the dilutive effect, if any, of stock options granted and after giving pro forma effect to the conversion of the Company's outstanding preferred stock to common stock in connection with the initial public offering. Dividends on the preferred stock have been excluded from the computation since the preferred stock has been assumed to have been converted to common stock. Historical net income per share has not been presented as such amount is based on a calculation that is not reflective of the Company's ongoing capital structure. 2. INVENTORIES Inventories consist of the following:
OCTOBER 30, JANUARY 31, 1996 1996 ----------- ----------- (UNAUDITED) Unroasted coffee $ 206,619 $128,369 Roasted coffee 62,125 24,274 Accessory and specialty items 383,919 74,299 Other food, beverage and supplies 801,480 418,551 ---------- -------- $1,454,143 $645,493 ========== ========
6 7 DIEDRICH COFFEE, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED) OCTOBER 30, 1996 (UNAUDITED) 3. ACQUISITIONS On February 23, 1996, the Company purchased substantially all of the assets of twelve coffeehouses previously owned by Brothers Gourmet Coffees, Inc. The cash consideration paid by the Company totaled $1,350,000. On February 15, 1996, the Company purchased substantially all of the assets of seven bakery-espresso cafes from an unrelated third party for cash consideration of $450,000. These acquisitions have been accounted for using the purchase method of accounting, and accordingly the results of operations of the coffeehouses acquired have been included with those of the Company as of their respective acquisition date. The costs in excess of the net assets acquired, aggregating $848,000, is being amortized on a straight-line basis over fifteen years. 4. DEBT On May 20, 1996, the Company entered into a revolving promissory note with a shareholder. The note provided for borrowings up to $2,000,000 with interest accruing at the prime rate plus 3%. All outstanding principal and accrued interest was repaid in full from the proceeds of the initial public offering and this revolving promissory note expired September 30, 1996. (see Note 5) On July 19, 1996, the Company entered into a bank revolving line of credit agreement which provided for borrowings up to $4,100,000 with interest payable monthly at the bank's reference rate plus .25% or, at the Company's option, certain other international interest rates established by the bank plus 2.25%. Upon consummation of the Company's initial public offering, the maturity date was extended to October 1, 1997 and the maximum borrowings were increased to $6 million. As of October 30, 1996, the Company had no outstanding borrowings under this revolving line of credit. 5. INITIAL PUBLIC OFFERING On September 11, 1996, the Company completed an initial public offering of 2,530,000 shares (including an over-allotment option). The offering consisted of 1,600,000 shares of common stock sold on behalf of the Company and 930,000 shares of common stock sold on behalf of certain selling stockholders. The net proceeds of the offering to the Company, after deducting related expenses, were approximately $12,658,000. A portion of the proceeds was used to repay outstanding indebtedness. 7 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The first retail store operating under the name Diedrich Coffee commenced operations in 1972. At the conclusion of fiscal 1996, there were twelve coffeehouses in operation, all of which were located in Southern California, and as of October 30, 1996, the Company operated a total of forty coffeehouses located in California, Colorado and Texas, with three additional locations subject to binding leases. Diedrich Coffee sells high quality coffee beverages made with its own freshly roasted coffee. In addition to brewed coffee, the Company offers a broad range of Italian-style beverages such as espresso, cappuccino, caffe latte, cafe mocha and espresso machiato. To complement beverage sales, the Company sells light food items and whole bean coffee through its coffeehouses. On February 15, 1996, the Company acquired seven retail locations in Denver, Colorado that were former bakery-espresso cafes (the "Acquired Cafes") for cash consideration of $450,000. On February 23, 1996, the Company acquired twelve retail locations from Brothers Gourmet Coffees, Inc., doing business as Brothers Gourmet Coffee Bars (the "Brothers Stores") for cash consideration of $1,350,000. Ten of the Brothers Stores are located in Denver, Colorado and two are in Houston, Texas. Both of the transactions took the form of asset acquisitions, accounted for under the purchase method, in which the principal assets acquired were leasehold interests, furniture and fixtures, and equipment. No material liabilities were assumed except for the remaining obligations under the operating leases for each of the stores. As of October 30, 1996, all of the acquired locations in Denver and Houston, except one, were converted and re-opened under the Diedrich trade name. Conversion costs were approximately $1,050,000 which were slightly less than anticipated. Effective February 1, 1996, the Company changed its fiscal year end from January 31 to a fiscal year ending on the Wednesday nearest January 31. In connection with the change in fiscal year end, the Company began reporting quarterly results in thirteen week periods and, accordingly, the quarterly period ended October 30, 1996 includes thirteen weeks. Prior to the change in fiscal year end, the Company's quarterly periods included twelve weeks, except for the fourth quarter which had approximately sixteen weeks. In addition to historical information, management's discussion and analysis includes certain forward-looking statements, including those related to the Company's growth and strategies, that involve risks and uncertainties. The Company's actual results and financial position could differ materially from those anticipated in the forward-looking statements as a result of a number of factors, including but not limited to, the price and availability of coffee and other raw materials, successful execution of the Company's expansion plans, the impact of competition, the availability of additional financing and other risks and uncertainties as described in detail under the "Risk Factors" section and elsewhere in the Company's Prospectus dated September 11, 1996. RESULTS OF OPERATIONS Net sales. Net sales for the thirteen weeks ended October 30, 1996, increased 126.1% to $5,105,000 from $2,258,000 for the twelve weeks ended October 10, 1995. During this most recent quarter, the Company derived 92.4% of net sales from its retail coffeehouse operations. The Company's wholesale and mail order sales account for the remainder of net sales. Net retail sales for the thirteen 8 9 weeks ended October 30, 1996 increased 143.1% to $4,716,000 from $1,940,000 in the twelve weeks ended October 10, 1995 due to the opening of new coffeehouses and the addition of the Acquired Cafes and Brothers Stores. During the thirteen weeks ended October 30, 1996, the Company completed the conversion of all but one of the locations acquired in Denver and Houston and opened three new Diedrich coffeehouses. The increase in net retail sales due to reporting thirteen weeks rather than twelve weeks was $430,000 and therefore, if the reporting period for the third quarter of fiscal 1997 had been twelve weeks rather than thirteen weeks, the increase in net retail sales would have been 121.0%. Wholesale and mail order sales combined increased 22.3% to $388,000 in the thirteen weeks ended October 30, 1996 from $318,000 in the twelve weeks ended October 10, 1995. The increase was due to a more active sales effort and the addition of sales staff. No wholesale or mail order activities were contributed by the recently acquired Brothers Stores or Acquired Cafes. The percentage increase in comparable store sales comparing net sales for stores open during the full period in the third quarter in fiscal 1996 to net sales for the same stores in the third quarter of fiscal 1997 was 0.6% versus 0.7% for the second quarter in fiscal 1996 compared to the second quarter of fiscal 1997. Only nine of the Company's forty coffeehouses were open for the full period in the third quarter in fiscal 1996 and are therefore included in the base for comparable store sales. On average these stores have been open for 4.5 years and had sales of approximately $1,020,000 per store for the twelve months ended October 30, 1996. Management believes that the variation in comparable store sales results in part from the over-representation of mature, revenue-stable stores in the computation base. Furthermore, given the small number of stores included in the base for comparable store sales, management believes that this percentage will remain volatile until the base contains a more statistically meaningful number of stores that more accurately reflects the overall composition of the Company. Net sales for the thirty-nine weeks ended October 30, 1996 increased 116.7% to $14,047,000 from $6,482,000 for the thirty-six weeks ended October 10, 1995. Net retail sales for the thirty-nine weeks ended October 30, 1996 increased 130.9% to $12,888,000 from $5,582,000 for the thirty-six weeks ended October 10, 1995 due to the opening of new coffeehouses and the addition of the Acquired Cafes and Brothers Stores. Wholesale and mail order sales for the thirty-nine weeks ended October 30, 1996 increased 28.8% to $1,159,000 from $900,000 for the thirty-six weeks ended October 10, 1995. The increase in net retail sales due to reporting thirty-nine weeks rather than thirty-six weeks was $1,252,000 and therefore, if the reporting period for the first three quarters of fiscal 1997 had been thirty-six weeks, the increase in net retail sales would have been 108.5%. 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 October 30, 1996 increased to $2,096,000 from $985,000 for the twelve weeks ended October 10, 1995 primarily due to the operation of Diedrich coffeehouses which were opened in California in the latter part of fiscal 1996 and during the first three quarters of fiscal 1997 and the operation of the Acquired Cafes and Brothers Stores. As a percentage of retail net sales, cost of sales and related occupancy costs decreased to 44.4% in the third quarter of fiscal 1997 from 50.8% for the third quarter of fiscal 1996. This decrease was primarily the result of volume purchasing efficiencies and a decrease in the percentage of coffeehouses with significant food sales. Cost of sales and related occupancy costs for the thirty-nine weeks ended October 30, 1996 increased to $6,005,000 from $2,793,000 for the thirty-six weeks ended October 10, 1995. As a percentage of retail net sales, cost of sales and related occupancy costs decreased to 46.6% for the first three quarters in fiscal 1997 from 50.0% for the first three fiscal quarters in fiscal 1996. This decrease stems from lower costs for raw coffee beans and paper products as well as a decrease in the percentage of coffeehouses with significant food sales. 9 10 Store operating expenses. Store operating expenses increased to $2,227,000 for the thirteen weeks ended October 30, 1996 from $763,000 for the twelve weeks ended October 10, 1995. As a percentage of retail net sales, store operating expenses increased to 47.2% in the third quarter of fiscal 1997 from 39.4% in the prior fiscal year's third quarter. For the thirty-nine weeks ended October 30, 1996, store operating expenses, as a percentage of retail net sales, similarly increased to 45.3% from 38.1% for the thirty-six weeks ended October 10, 1995. These increases were due to increased labor and opening costs relating to the opening of five Diedrich coffeehouses in the second quarter of fiscal 1997, the opening of three Diedrich coffeehouses in the third quarter of fiscal 1997, and additional store operating expenses for the Brothers Stores and Acquired Cafes Other operating expenses. Other operating expenses (those associated with wholesale and mail order sales) decreased to $53,000 for the third quarter of fiscal 1997 from $68,000 in the third quarter of fiscal 1996. These expenses, as a percentage of the net sales from the wholesale division, decreased to 13.7% from 21.4%. For the thirty-nine weeks ended October 30, 1996, other operating expenses, as a percentage of wholesale net sales, decreased to 15.2% from 19.6% for the thirty-six weeks ended October 10, 1995. These decreases are a result of a decrease in the overall salary expense of the sales force due to the reduction of sales management personnel. Depreciation and Amortization. Depreciation and amortization increased to $239,000 for the thirteen weeks ended October 30, 1996 from $84,000 for the twelve weeks ended October 10, 1995. As a percentage of net sales, depreciation and amortization increased to 4.7% from 3.7% in the prior year, principally due to the increase in depreciable assets as a result of the Company operating thirty-one more coffeehouses this quarter than during the third quarter in the prior fiscal year. Depreciation and amortization increased to $603,000 for the thirty-nine weeks ended October 30, 1996 from $231,000 for the thirty-six weeks ended October 10, 1995. General and administrative expenses. General and administrative expenses increased to $408,000 for the third quarter of fiscal 1997 from $313,000 for the third quarter of fiscal 1996. As a percentage of net sales, general and administrative expenses decreased to 8.0% from 13.9% due to the addition of sales from the Acquired Cafes and Brother Stores in the revenue base while general and administrative expenses increased only 30.2% in comparison with the third quarter level of the prior fiscal year. Similarly, as a percentage of net sales, general and administrative expenses decreased to 7.5% in the thirty-nine weeks ended October 30, 1996 from 13.7% for the thirty-six weeks ended October 10, 1995. Management is currently adding selected resources and personnel to aid in the conversion and control of the new markets according to the integration plan established prior to the acquisitions. Interest expense. Interest expense increased to $78,000 for the thirteen weeks ended October 30, 1996 from $10,000 for the twelve weeks ended October 10, 1995 and increased to $187,000 for the thirty-nine weeks ended October 30, 1996 from $34,000 for the thirty-six weeks ended October 10, 1995. These increases were due primarily to higher average debt outstanding principally as a result of the acquisition of the Brothers Stores and Acquired Cafes. This debt was entirely repaid in September 1996 with proceeds from the initial public offering. Net income. Net income for the thirteen weeks ended October 30, 1996 increased to $46,000 from $21,000 for the twelve weeks ended October 10, 1995. As a percentage of net sales, net income remained constant at 0.9% in part as a result of costs incurred in connection with the conversion of the Acquired Cafes and Brothers Stores to the Diedrich coffeehouse format. In addition, as part of the scheduled conversion process, four of the acquired stores were temporarily closed for periods varying from nine days to thirty-seven days which resulted in a reduction in net sales despite the fact that certain operating expenses, such as occupancy costs and management salaries, continued to be incurred. 10 11 Net income for the thirteen weeks ended October 30, 1996 excluding the results of operations of the Brothers Stores and Acquired Cafes increased by $59,000 to $80,000 for the thirteen weeks ended October 30, 1996 from $21,000 for the twelve weeks ended October 10, 1995. Excluding these acquired stores, net income for the third quarter of fiscal 1997, as a percentage of net sales increased to 1.6% from 0.9% for the twelve weeks ended October 10, 1995. This percentage increase was primarily due to the reduction in general and administrative expenses as a percentage of net sales. Net loss from the operation of the Brothers Stores and Acquired Cafes for the thirteen weeks ended October 30, 1996 was $34,000 or 3.2 % of cumulative net sales for the Brothers Stores and Acquired Cafes for the period. A significant part of the net loss for these acquired stores is attributable to the planned temporary closures during the remodeling and renovation process during the quarter. This process continued during the third quarter and management expects renovations to be completed during the fourth quarter of the current fiscal year. Net income for the thirty-nine weeks ended October 30, 1996 increased to $158,000 from $141,000 for the thirty-six weeks ended October 10, 1995. This increase resulted from the increase in net income for the third quarter in fiscal 1997. As a percentage of net sales for the thirty-nine weeks ended October 30, 1996, net income decreased to 1.1% from 2.2% for the thirty-six weeks ended October 10, 1995. This decrease was due principally to the temporary closures during the conversion process of the acquired stores. Net income for the thirty-nine weeks ended October 30, 1996 excluding the results of operations of the Brothers Stores and Acquired Cafes increased to $363,000 from $141,000 for the thirty-six weeks ended October 10, 1995. Excluding these acquired stores, net income for the first three quarters of fiscal 1997, as a percentage of net sales, increased to 3.3% from 2.2% for the first three quarters of fiscal 1996. Income taxes. Net operating losses generated in fiscal 1994 and prior were carried forward and utilized to offset the allowable portion of income tax in fiscal 1996. As of January 31, 1996, a net operating loss for federal income tax purposes of $115,000 remains to be utilized against future taxable income for years through fiscal 2008, subject to an annual limitation due to the change in ownership rules under the Internal Revenue Code. As of October 30, 1996, the Company had deferred tax assets aggregating $48,000. Management has determined, based upon the Company's history of operating earnings and its expectations for the future, that operating income for the Company will more likely than not be sufficient to fully recognize these deferred assets. LIQUIDITY AND CAPITAL RESOURCES On September 11, 1996, the Company successfully completed its initial public offering of 2,530,000 shares of common stock. The offering consisted of 1,600,000 shares sold on behalf of the Company and 930,000 shares sold on behalf of certain stockholders. The net proceeds of the offering to the Company, after deducting related expenses, was $12,658,000. These net proceeds were used to repay indebtedness outstanding under the Company's short-term revolving credit facility in the amount of approximately $4.1 million, to repay indebtedness outstanding under a subordinated revolving promissory note with one of the Company's stockholders in the amount of approximately $1,615,000 and to repay the outstanding balance on several other items of indebtedness in the amount of approximately $373,000. The Company intends to use the remaining net proceeds to fund the opening of additional coffeehouses, infrastructure enhancements and to provide working capital for general corporate purposes. Management believes that the remaining net proceeds plus cash generated from operations should be sufficient to meet the Company's anticipated cash requirements for at least the next twelve months. 11 12 The Company had working capital, as of October 30, 1996, of $4,224,000 compared to a deficiency of $53,000 at January 31, 1996. The increase in the working capital resulted from net proceeds of the initial public offering. Cash provided by operating activities totaled $1,606,000 for the first thirty-nine weeks ended October 30, 1996 as compared to $698,000 for the first thirty-six weeks ended October 10, 1995. Cash provided by financing activities for the first thirty-nine weeks ended October 30, 1996 totaled $11,671,000. This is due primarily to the net proceeds from the initial public offering. Cash used in investing activities for the first thirty-nine weeks ended October 30, 1996 totaled $8,259,000. This included capital expenditures for property and equipment of $6,459,000 and the acquisition of the Brother Stores and Acquired Cafes of $1,800,000. Capital expenditures included the costs to open ten new coffeehouses, complete the conversion of fifteen of the Acquired Cafes and Brothers Stores to the Diedrich coffeehouse format and purchase roasting and packaging equipment. Future cash requirements, other than normal operating expenses, are expected to consist primarily of capital expenditures related to the addition of new coffeehouses, through construction and acquisition, and the continued development of infrastructure to support the Company's expansion. The Company also anticipates additional expenditures for enhancing its roasting facilities. Management estimates that capital expenditures through fiscal 1998 will be approximately $10 million. In July 1996, the Company entered into a revolving line of credit which permitted maximum borrowings equal to $4.1 million and was scheduled to mature on November 1, 1996. Borrowings under the line of credit bear interest at the bank's prime rate plus 0.25% or, at the Company's option, certain other international interest rates established by the bank plus 2.25%. Upon consummation of the Company's initial public offering, the maturity date was extended to October 1,1997 and the maximum borrowings were increased to $6 million. The Company's credit agreement in connection with this line of credit contains various covenants which, among other things, require the delivery of regular financial information, the maintenance of positive net income and the maintenance of unencumbered liquid assets. In addition, the credit agreement imposes certain restrictions on the Company, including, with respect to the incurrence of additional indebtedness, the payment of dividends and the ability to make acquisitions. As of October 30, 1996, the Company had no outstanding borrowings under this revolving line of credit and was in compliance with all of its covenants. COFFEE PRICES AND AVAILABILITY The Company believes that it has adequate sources of supply of high quality arabica coffee to meet its expansion needs for the foreseeable future. The average cost of coffee acquired by the Company during the current fiscal year declined by approximately 15% as compared to fiscal 1996 principally due to fluctuations in the unroasted coffee market as well as economies of scale due to increasing order quantities. While the Company seeks to anticipate its coffee needs carefully, there can be no assurance that the prices it will have to pay for the highest quality coffee available will remain stable in the future. 12 13 SEASONALITY AND QUARTERLY RESULTS The Company's business is subject to seasonal fluctuations as well as general economic trends that affect retailers in general. Historically, the Company's net sales have not been realized ratably in each quarter, with net sales being the highest during the last fiscal quarter which includes the December holiday season. Quarterly results are affected by the timing of the opening of new stores which may not occur as anticipated due to factors outside the Company's control. As a result of the combination of the seasonality of the retail operations and the high level of anticipated expansion, the financial results for any individual quarter may not be indicative of the results that may be achieved for a full fiscal year. NEW ACCOUNTING STANDARDS Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of," requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company is in the process of analyzing the impact of this statement and does not believe that it will have a material impact on the Company's financial position or results of operations. The Company anticipates adopting the provisions of the statement for fiscal 1997. Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," established financial accounting and reporting standards for stock-based employee compensation plans and certain other transactions involving the issuance of stock. The Company is in the process of analyzing the impact of this statement and does not believe that it will have a material impact on the Company's financial position or results of operations. The Company anticipates adopting the provisions of the statement for fiscal 1997. 13 14 PART II - OTHER INFORMATION Item 2. Changes in Securities On September 11, 1996, the Company completed an initial public offering of 2,530,000 shares (including an over-allotment option). The offering consisted of 1,600,000 shares of common stock sold on behalf of the Company and 930,000 shares of common stock sold on behalf of certain selling stockholders. The net proceeds of the offering to the Company, after deducting related expenses, were approximately $12,658,000. A portion of the proceeds was used to repay outstanding indebtedness. Item 6. Exhibits and Reports on Form 8-K (a) EXHIBITS Set forth below is a list of the exhibits included as part of this Quarterly Report:
EXHIBIT NO. DESCRIPTION ----------- ----------- 2.1 Form of Agreement and Plan of Merger* 3.1 Certificate of Incorporation of the Company* 3.2 Bylaws of the Company* 4.1 Purchase Agreement for Series A Preferred Stock dated as of December 11, 1992 by and among Diedrich Coffee, Martin R. Diedrich, Steven A. Lupinacci, Redwood Enterprises and D.C.H., L.P.* 4.2 Series B Preferred Stock Purchase Agreement dated as of June 29, 1995 by and among Diedrich Coffee, Martin R. Diedrich, Steven A. Lupinacci, Redwood Enterprises VII, L.P. and Diedrich partners I, L.P.* 4.3 Representative's Warrant Agreement* 4.4 Specimen Stock Certificate* 4.5 Form of Conversion Agreement in connection with the conversion of Series A and Series B Preferred Stock into Common Stock* 10.1 Martin R. Diedrich Employment Agreement, dated June 29, 1995* 10.2 Steven A. Lupinacci Employment Agreement, dated June 29, 1995* 10.3 Stock Option Plan and Agreement of Steven A. Lupinacci, dated June 29, 1995* 10.4 Form of Indemnification Agreement* 10.5 Diedrich Coffee 1996 Stock Incentive Plan* 10.6 Diedrich Coffee 1996 Non-Employee Directors Stock Option Plan* 10.7 Business Loan Agreement dated as of July 19, 1996 by and between Bank of America National Trust and Savings Association and Diedrich Coffee* 10.8 Revolving Promissory Note dated May 20, 1996 by Diedrich Coffee in favor of Redwood Enterprises VII, L.P.* 10.9 Agreement of Sale by and among Diedrich Coffee (as purchaser) and Brothers Coffee Bars, Inc. and Brothers Gourmet Coffees, Inc. (as sellers) dated as of February 23, 1996* 10.10 Kerry W. Coin Employment Agreement, dated August 26, 1996* 27 Financial data schedule
--------------- * Incorporated by reference to the exhibit of the same number to the registrant's Registration Statement on Form S-1 (Reg. No. 333-08633), as amended. (b) REPORTS ON FORM 8-K No reports on Form 8-K were filed by the Company during the thirteen weeks ended October 30, 1996. 14 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: December 13, 1996 DIEDRICH COFFEE, INC. /s/ STEVEN A. LUPINACCI ---------------------------------- Steven A. Lupinacci, President, Chief Executive Officer and Chief Financial Officer Signing on behalf of the registrant and as principal financial officer 15 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DIEDRICH COFFEE, INC. UNAUDITED FINANCIAL STATEMENTS FOR THE THIRTY-NINE WEEKS ENDED AND AS OF OCTOBER 30, 1996 CONTAINED IN THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE THIRD QUARTER OF FISCAL 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS JAN-31-1997 FEB-01-1996 OCT-30-1996 5,113,553 0 189,863 0 1,454,143 7,208,571 12,458,428 1,512,680 19,256,910 2,984,245 0 0 0 16,014,099 0 19,256,910 14,046,778 14,046,778 6,005,203 6,005,203 7,668,203 0 186,851 261,709 103,319 158,390 0 0 0 158,390 .04 0
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