-----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, CAMUpnfZBwrzOTip6QtUJR1LXecyYKa5CJ8WF/r9YP65gTdOhqGfZNIYIT2mEnb8 VkKHQYUkbhVQKrQFEf/JGg== 0000892569-99-001673.txt : 19990608 0000892569-99-001673.hdr.sgml : 19990608 ACCESSION NUMBER: 0000892569-99-001673 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990428 FILED AS OF DATE: 19990607 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: 0127 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21203 FILM NUMBER: 99641126 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 PERIOD END APRIL 28, 1999 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. 2 DIEDRICH COFFEE, INC. INDEX
PART I - FINANCIAL INFORMATION PAGE NO. - ------------------------------ -------- 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
2 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS DIEDRICH COFFEE, INC. CONDENSED BALANCE SHEETS
ASSETS (Note 3) APRIL 28, 1999 JANUARY 27, 1999 -------------- ---------------- Current Assets: 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 ============ ============
See accompanying notes to financial statements. 3 4 DIEDRICH COFFEE, INC. CONDENSED STATEMENT OF OPERATIONS
THIRTEEN WEEKS THIRTEEN WEEKS ENDED APRIL 28, ENDED APRIL 29, 1999 1998 --------------- --------------- 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 =========== ===========
See accompanying notes to financial statements. 4 5 DIEDRICH COFFEE, INC. CONDENSED STATEMENTS OF CASH FLOWS
THIRTEEN WEEKS THIRTEEN WEEKS ENDED APRIL 28, ENDED APRIL 29, 1999 1998 --------------- --------------- 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 =========== ===========
See accompanying notes to financial statements 5 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:
APRIL 28, 1999 JANUARY 27, 1999 -------------- ---------------- 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 ========== ==========
6 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:
APRIL 28, 1999 JANUARY 27, 1999 -------------- ---------------- 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 ========== ==========
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 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 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 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 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 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 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.
EXHIBIT NO. DESCRIPTION ----------- ----------- 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
(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 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 15 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - ----------- ----------- 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
(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. EX-27.1 2 FINANCIAL DATA SCHEDULE
5 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. 3-MOS FEB-02-2000 JAN-28-1999 APR-28-1999 786,356 0 295,910 0 1,417,429 3,145,077 14,369,283 5,496,882 12,628,011 4,181,227 0 0 0 61,736 0 5,459,556 6,098,303 6,098,303 2,758,104 2,758,104 3,809,738 0 96,097 (565,039) 2,800 (567,839) 0 0 0 (567,839) (0.09) (0.09)
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