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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended January 28, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
COMMISSION FILE NO. 0-21203
DIEDRICH COFFEE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0086628
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2144 MICHELSON DRIVE
IRVINE, CALIFORNIA 92612
(949) 260-1600
(Address of principal executive offices, including zip code
and telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value per share
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(Title of Class)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the registrant's Common Stock held by
non-affiliates, based upon the closing sale price of the registrant's Common
Stock on April 20, 1998, as reported on the NASDAQ National Market System, was
$21,219,203.
The number of shares of the registrant's Common Stock outstanding, as of
April 20, 1998, was 5,941,650.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates certain information by reference from the
registrant's definitive proxy statement pursuant to Schedule 14A for its annual
meeting of stockholders to be held on June 23, 1998, which proxy statement will
be filed not later than 120 days after the close of the registrant's fiscal year
ended January 28, 1998.
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TABLE OF CONTENTS
PART I PAGE
----
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 8
Item 3. Legal Proceedings........................................... 8
Item 4. Submission of Matters to a Vote of Security Holders......... 9
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 10
Item 6. Selected Financial Data..................................... 11
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 12
Item 7A Quantitative and Qualitative Disclosures About Market Price. 18
Item 8. Financial Statements and Supplementary Data................. 18
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 18
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 18
Item 11. Executive Compensation...................................... 18
Item 12. Security Ownership of Certain Beneficial Owners
and Management.............................................. 18
Item 13. Certain Relationships and Related Transactions.............. 18
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K................................................. 19
Signatures.................................................. 22
Financial Statements........................................ F-1
Index to Exhibits........................................... S-1
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PART I
ITEM 1. BUSINESS.
GENERAL
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.
Diedrich Coffee, Inc. ("Diedrich Coffee" or the "Company") is a
specialty coffee roaster, wholesaler, retailer and franchisor that currently
operates thirty-six retail coffeehouses, seven coffee carts and services
approximately 225 wholesale accounts. The retail units are located in Southern
California, Colorado and Texas. Wholesale accounts are primarily located in
Southern California. Diedrich Coffee sells premium quality coffee beverages made
from its own freshly roasted select coffee beans. In addition to brewed coffee,
the Company offers a broad range of Italian-style beverages such as espresso,
cappuccino, cafe latte, cafe mocha and espresso machiato. To complement beverage
sales, the Company sells light food items, whole bean coffee and accessories
through its coffeehouses. The Company's objective is to be the leading national
chain of neighborhood coffeehouses.
To deliver and serve the high quality coffee for which the Company is
known, the Company obtains its premium "green" or unroasted coffee beans from
specialty coffee brokers and directly from coffee-producing nations through its
contacts with exporters and growers in the United States and abroad. The beans
purchased by the Company are of the premium grade arabica variety. These green
coffee beans are custom roasted in carefully controlled batches according to the
Company's proprietary recipes and standards.
The Company seeks to differentiate itself and build brand name
recognition by selling and serving the finest coffee and espresso drinks,
selling only fresh custom roasted coffee beans and by developing and operating
attractive coffeehouses intended, in most cases, to serve as neighborhood
gathering places. Diedrich Coffee stresses the quality of its products through
experienced sourcing of the green beans and its proprietary roasting methods.
The Company believes that this strategy, together with enthusiastic and friendly
customer service, creates a loyal customer base. Diedrich coffeehouses are
generally established in high-visibility locations, consistent with the
Company's strategy of developing a substantial repeat customer base. The
Company's coffeehouses average approximately 1,300 square feet, ranging in size
from 725 to 2,654 square feet.
The first retail store operating under the name Diedrich Coffee
commenced operations in Orange County, California in 1972. On September 11,
1996, the Company 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, were
approximately $12.6 million. The Company used a portion of the net proceeds to
repay all indebtedness outstanding. The remaining net proceeds were used to fund
the opening of additional coffeehouses and to provide working capital.
On March 12, 1997, the Company announced that it was reviewing the
performance of all of the Company's coffeehouses to determine which units were
not meeting management's long-term operational expectations. At that time, five
coffeehouses had been identified on a preliminary basis for possible closure in
the first quarter of fiscal 1998. Subsequently, as announced by the Company on
April 29, 1997, seven additional coffeehouses were targeted for closure during
fiscal 1998. In connection with the planned coffeehouse closures, the Company
recorded an impairment provision and a restructuring charge totaling
approximately $4.6 million in the first quarter of fiscal 1998. The coffeehouse
closures, which were undertaken to streamline operations and improve
profitability, began in late March 1997. Eleven of the original twelve
coffeehouses identified for closure were closed in fiscal 1998, with leases
terminated in most cases. In January, management reviewed the progress of all
retail operations and decided that one of the twelve coffeehouses originally
designated for closure would remain open. At year-end most of the lease
terminations provided for in the restructuring had been completed at less cost
than originally anticipated. As a result of these two factors, management
determined that the remaining restructuring reserve of $885,000 could be reduced
by $648,000. As of January 28, 1998, the Company had a remaining restructuring
reserve of $237,000 and had incurred charges under its impairment provision and
restructuring reserve totaling $3,665,000 of which $945,000 were cash and
$2,720,000 were non-cash.
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On March 12, 1997, the Company announced the resignation of Steven A.
Lupinacci as its President, Chief Executive Officer, Chief Financial Officer and
Director and the appointment of Lawrence Goelman, one of the Company's board
members, to serve as interim Chief Executive Officer. On April 25, 1997, the
Company's Board of Directors (the "Board") approved the appointment of Kerry W.
Coin as President and Chief Operating Officer and the appointment of John B.
Bayley as Acting Vice President, Finance and Controller.
At the direction of the Board, the Company's interim management team
took steps to renew and strengthen the Company. Those steps included: (1)
closing coffeehouses which did not meet the Company's performance standards; (2)
developing new retail points of distribution such as "co-branding," carts and
kiosks; (3) building the wholesale division's revenues by growing the core
business as well as through new channels such as office coffee service; (4)
improving cost controls by hiring an experienced purchasing manager and
installing upgraded software point-of-sale systems; (5) developing and
implementing enhanced training and human resources systems to strengthen and
build the Company's operations staff; and (6) concentrating on building brand
awareness and equity.
Retail comparable unit revenues improved slightly in fiscal 1998 while
controllable operating expenses at the coffeehouse level were significantly
reduced. The Company experienced lower than expected retail sales in the third
quarter due to unusually warm weather in the Company's core Southern California
markets. Cost of sales were adversely affected by green coffee inventory expense
that exceeded average historical costs which also reduced earnings. The Company
did not meet its revenue targets in the fourth quarter for several reasons,
including delays in opening of coffee carts, weaker results than projected from
marketing programs, and slower than expected responses to improvements in
operations and customer service, as well as delays in establishing certain
wholesale relationships.
On November 18, 1997 the Company announced that former Taco Bell
Worldwide Chairman and Chief Executive Officer John E. Martin agreed to join the
Company's Board as Chairman, replacing Lawrence Goelman who remains a Director.
The Company also announced on November 18, 1997 that it named Timothy J. Ryan,
former President of Sizzler USA and former Senior Vice President at Taco Bell
Worldwide, as the Company's President and Chief Executive Officer to replace
Lawrence Goelman, who had been serving as Interim Chief Executive Officer. Mr.
Ryan also joined the Board. On January 22, 1998 the Company announced the
resignation of Kerry Coin, Executive Vice President and Chief Operating Officer.
The new executive team prepared a revised strategic plan for fiscal 1999
and beyond. That plan focuses on positioning Diedrich Coffee coffeehouses as the
consumer's place of choice to get the best coffee and enjoy it in attractive
coffeehouse surroundings. The Company plans to expand nationally through
franchise area development agreements with large multi-unit franchise operators.
The Company will concentrate on expansion in its core market area in Southern
California and hopes to enter into some franchise area development agreements in
the second half of fiscal 1999. In the first two quarters of fiscal 1999
management's emphasis will be on: (1) improving operations and customer service
through new training programs and new hires; (2) developing new coffee and
espresso drinks; (3) executing a new marketing plan; (4) developing and
optimizing a prototype coffeehouse design; (5) expanding its wholesale
activities; and (6) optimizing its product sourcing.
DIEDRICH COFFEE'S BUSINESS
The Company's retail stores accounted for 90.3% of net sales during the
fiscal year ended January 28, 1998. The Company's objective is to become the
leading national chain of neighborhood coffeehouses. The Company's strategy to
accomplish this goal is to expand in the Company's core market and by entering
into franchise area development agreements in other markets as well as by
selling the finest quality coffees and related products with a superior level of
customer service.
THE COFFEEHOUSE CONCEPT. The Company's coffeehouses attempt to reflect
the character of the community or neighborhood in which they are located through
the design and construction of the coffeehouse. The Company tailors the
coffeehouse to the surrounding neighborhood. The coffeehouse concept and designs
are being reviewed and refined in fiscal 1999 to arrive at a prototype that
optimizes its use and can be adapted to a wider variety of
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neighborhoods. The coffeehouses feature varying amenities to promote this
environment, such as tables for conversation and laptop computers, live music or
outdoor patios where customers can enjoy their coffee and food.
Diedrich Coffee's coffeehouse concept, however, is not limited to the
physical structure of the coffeehouse. The relaxed and inviting environment is
created in part by the employees in each coffeehouse. Employees are encouraged
to know their customers and are trained to promote customer service. To further
enhance the Company's market penetration, the Company intends to expand the use
of alternative concepts such as kiosks and carts.
COFFEEHOUSE OPERATIONS. The typical Diedrich coffeehouse is staffed with
one to two managers, and a staff of ten to fifteen part-time hourly employees
from which the operating shifts are filled. The hours for each coffeehouse are
established based upon the locations and customer demand, but typically are from
6:00 a.m. to 10:00 p.m. in residential locations and from 6:00 a.m. to 5:00 p.m.
Monday through Friday in commercial locations. The coffeehouse managers are
overseen by Regional Directors of Operations (RDOs) and by District Managers in
Denver, Colorado and Houston, Texas.
In addition to coffee beverages, all Diedrich coffeehouses serve a
select offering of light food items (bagels, croissants and pastries) and
dessert items (pastries and cakes) to complement beverage sales. Management is
working with selected suppliers to consolidate sources of these items. The
Company is also working to improve the merchandising of food items. Diedrich
coffeehouses also sell more than twenty different selections of regular and
decaffeinated roasted whole bean coffee. The Company's coffeehouses also carry
select coffee related merchandise items. In fiscal 1998, the Company's retail
sales mix was 71.7% coffee beverages, 19.9% food items, 6.3% whole bean coffee
and 2.1% accessories and clothing.
FRANCHISING AND AREA DEVELOPMENT
In July 1996, the Company signed a franchise development agreement with
a company based in Singapore. The agreement called for the development of a
total of at least thirty Diedrich coffeehouses in Singapore, Malaysia and
Indonesia over the following five years. In late 1997 the Company notified the
area developer that it was in default of the development requirements of the
area development agreement. Diedrich Coffee subsequently terminated that
agreement.
The Company's new strategic plan stresses the development of
Company-owned coffeehouses, kiosks and carts in its core Southern California
market, and franchise area development in other markets, including overseas
markets. Franchise area development attention and discussions in fiscal 1999
will focus on experienced and well-capitalized franchisees and area developers.
The Company plans to enter into several franchise area development agreements
between the third quarter of fiscal 1999 and the first quarter of fiscal 2000.
WHOLESALE
In fiscal 1998 the Company took significant steps to build its wholesale
sales organization and grow this business channel. A new director of the
Wholesale Division with substantial experience in the coffee business was hired
and the sales staff expanded. These efforts were successful in fiscal 1998, when
wholesale sales grew to $2.2 million of total sales, an increase of 31.1% from
the prior year. Further growth is planned for fiscal 1999, including growth
outside of Southern California, in office coffee service and sales to restaurant
chains.
PRODUCT SUPPLY
Coffee beans are an agricultural product grown commercially in over
fifty countries in the tropical regions of the world. There are many varieties
of coffee and a range of quality grades within each variety. While the broader
coffee market generally treats coffee as a fungible commodity, the specialty
coffee industry focuses on the highest grades of coffee. Diedrich Coffee
purchases only premium grade arabica coffee beans and believes these beans are
the best available from each producing region. The premium grade arabica bean is
a higher quality variety than the average grade arabica or robusta variety
coffee bean, which are typically found in non-specialty or mass-merchandised
commercial coffees. These premium coffees are available in relatively small
quantities. The
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Company seeks to purchase the finest qualities and varieties of coffee by
identifying the unique characteristics and flavor of the varieties available
from each region of the world. The background and experience of the Company's
personnel allow Diedrich Coffee to maintain its commitment to serve and sell
only the highest quality coffee.
During the buying season, the Company may enter into forward commitments
for the purchase of more than a dozen different types of coffee plus specially
featured coffees that may only be available in small quantities. Rotating its
coffee selection enables the Company to provide its customers with a wider
variety of coffees as well as certain coffees that are available only on a
seasonal basis. The Company contracts for future delivery of green coffee to
help ensure adequacy of supply and typically maintains a minimum six week supply
of each variety of whole beans then available.
Diedrich Coffee is committed to serving its customers beverages and
whole bean products from freshly roasted coffee beans. The Company's coffee is
delivered to its coffeehouses promptly after roasting to enable the Company to
guarantee the freshness of each cup of coffee or package of whole coffee beans
sold in its coffeehouses. Serving only freshly roasted coffee is imperative
because roasted coffee is a highly perishable product, which steadily loses
quality after being roasted, at a rate depending on exposure to oxygen in
storing, packaging and handling. To maintain freshness, the Company had a
multi-regional roasting approach to ensure freshness. In fiscal 1999 the Company
plans to acquire sophisticated vacuum pack and nitrogen flush packing equipment
that can extend roasted coffee shelf life from two weeks in the current
packaging to approximately 90-150 days in the new packaging. In the interim,
some roasting was outsourced, under the supervision of the Company's master
roasters, to obtain the advantages of advanced packaging. Upon acquisition and
implementation of the new packaging equipment in the second quarter, the Company
plans to centralize roasting and packaging.
COMPETITION
The Company competes directly against all other premium coffee roasters,
coffeehouses and coffee bars as well as against all restaurant and beverage
outlets that serve coffee and a growing number of espresso stands, carts and
stores. The Company's whole bean coffees compete directly against specialty
coffees sold at retail through supermarkets, specialty retailers and a growing
number of specialty coffee stores. Both the Company's whole bean coffees and its
coffee beverages compete to a greater or lesser extent against all other coffees
on the market. The Company believes that its customers choose among retailers
primarily on the basis of product quality, service and convenience and, to a
lesser extent, on price.
Although competition in the specialty coffee market is currently
fragmented, the Company competes with Starbucks Corporation, the market leader,
and other competitors who have significantly greater financial, marketing and
other resources than the Company. The Company believes that Starbucks has
increased the public awareness and experience of premium coffee nationwide,
helping to create demand for Diedrich Coffee's coffee drinks, roasted whole
beans and coffeehouses. In addition to these competitors, the attractiveness of
the gourmet specialty coffeehouse market could draw additional competitors with
substantially greater financial, marketing and operating resources than the
Company. In the wholesale and office coffee service markets, the Company
competes against well established providers, including Starbucks. Wholesale and
office coffee service competition tends to revolve around price, product quality
and customer service.
The Company expects that competition for suitable sites for new
coffeehouses will continue to be intense. The Company competes against other
specialty retailers and restaurants for these sites, and there can be no
assurance that management will be able to continue to secure adequate sites at
acceptable rent levels.
TRADEMARKS
The Company owns several trademarks and servicemarks that have been
registered with the United States Patent and Trademark Office, including
Diedrich Coffee(R), Wiener Melange(R) and Flor de Apanas(R). In addition, the
Company has applications pending with the United States Patent and Trademark
Office for a number of additional marks. The Diedrich Coffee trademark is
material to the Company's business. The Company also has applications
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pending overseas for trademark protection of the Diedrich Coffee trademark and
the related designs. Trademark registrations can generally be renewed for so
long as the marks are in use. The Company owns copyrights on its promotional
materials, coffeehouse graphics and operational and training materials. The
Company does not believe that any of these copyrights, valuable as they are, are
material to its business.
EMPLOYEES
At January 28, 1998, the Company employed a work force of 749 persons,
103 of whom were employed full-time. None of the Company's employees is
represented by a labor union, no employees are currently covered by collective
bargaining agreements, and the Company considers its relations with its
employees to be good. The Company is improving employee benefits, training and
other aspects of employment to attract and retain valuable employees and
managers.
RISK FACTORS AND TRENDS AFFECTING DIEDRICH COFFEE AND ITS BUSINESS
LIMITED OPERATING HISTORY; HISTORY OF OPERATIONS. As of April 20, 1998,
the Company operated thirty-six coffeehouses, only eight of which had been open
more than three years. The Company had a net loss of $9,113,000 in fiscal 1998;
a net loss of $986,000 in fiscal 1997; net income of $186,000 and $324,000 in
fiscal 1996 and 1995, respectively, and a net loss of $89,000 in fiscal 1994.
The Company went through a restructuring in fiscal 1998 and significant changes
in executive, middle and coffeehouse management. The past successes of the new
executive team members will not necessarily lead to similar results at the
Company. Although the Company believes it is positioned for growth in fiscal
1999 there can be no assurances that the Company will meet that objective.
PRIOR GROWTH STRATEGY; RAPID EXPANSION AND LOSSES. From the end of the
fiscal 1992 through fiscal 1997, the Company expanded the number of its
coffeehouses from three to forty-seven (now thirty-six) while incurring
accumulated losses. The Company pursued an aggressive growth strategy in fiscal
years 1997 and 1998 that was not successful for a number of reasons. Some
locations acquired were not suitable for Diedrich Coffee coffeehouses. Company
management and infrastructure did not keep pace with the growth, leading to
inefficiencies and losses. Commencing in March, 1997, the Company's interim
management developed a new strategy based upon focus on core markets, and
building other channels of distribution, including but not limited to, new
wholesale categories such as chain restaurants and office coffee service. The
Company did not succeed in its objective of returning to positive cash flow by
the last period of fiscal 1998, due in part to the one-time costs associated
with the addition of a new permanent management team and related changes to its
strategy. Even if the Company is successful in returning to profitability, there
can be no assurances as to how long this will take or of the future profits that
can be achieved.
SITE SELECTION. The most important variable in the success of a new
coffeehouse is its location. A poor location will prevent a coffeehouse from
achieving the sales and earnings the Company expects from every coffeehouse.
New management intends to make site selection
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systematic and comparatively objective, but there can be no assurances that this
project will be successful or yield consistent results. A new site selection
model developed by the Company for its use will also be made available to
franchise area developers.
FRANCHISING. Franchise area development involves a number of risks,
including the diversion of management's attention and resources. The Company has
no prior experience in franchising, although certain executives and managers
have substantial franchisor experience in other companies.
NEED FOR CONTINUED IMPROVEMENTS IN OPERATIONS AND MANAGEMENT. The
Company's new strategy presents numerous operational and competitive challenges
to the Company's senior management and employees as a prototype store design is
selected, operations are improved, potential sites are evaluated, developed and
operated for Company-owned locations and in selecting the right franchise area
developers. The Company's results of operations will be adversely affected if
revenues do not increase sufficiently to compensate for the increase in
operating expenses attributable to new management and new programs. There can be
no assurances that any growth will be profitable or that it will not adversely
affect the Company's results of operations. In addition, the success of the
Company's new plan depends in part upon the Company's ability to: (1) continue
to improve and expand its management and financial control systems, (2)
attract, retain and motivate key employees and (3) raise additional capital.
There can be no assurances that the Company will be successful in these regards.
Successful execution of the Company's new plan depends in part upon its
ability to: (1) compete successfully in new markets; (2) obtain (or have its
franchise area developers obtain) suitable sites at acceptable costs in highly
competitive real estate markets; (3) hire, train and retain qualified
personnel; (4) integrate franchised locations into new as well as existing
product distribution, improve inventory control, marketing and information
systems; (5) expand roasting capacity and upgrade packaging capabilities to
enable freshly roasted coffee deliveries wherever needed; and (6) impose and
maintain strict quality control from green coffee acquisition to the fresh cup
of perfectly brewed coffee in a customer's hand. There can be no assurances that
the Company will achieve its planned expansion goals, manage its growth
effectively or operate its existing and new coffeehouses profitably. The failure
of the Company to manage its growth effectively or operate existing or any new
coffeehouses profitably would have a material adverse effect on the Company's
financial condition and results of operations.
NEED FOR ADDITIONAL FINANCING. In order to achieve and maintain the
Company's anticipated growth and the expansion of its wholesale business in
fiscal 1999, including new coffeehouse construction and franchising, the Company
will need to incur debt or issue additional equity securities in public or
private financings. There can be no assurances that any such additional
financing will be available on terms satisfactory to the Company. (See Note 12,
Subsequent Event.)
FLUCTUATIONS IN AVAILABILITY AND COST OF UNROASTED COFFEE. The Company
depends upon both its outside brokers and its direct contacts with exporters and
growers in countries of origin for the supply of its green coffee. Coffee supply
and price are subject to significant volatility beyond the control or influence
of the Company. During fiscal 1998 worldwide coffee commodity prices were at
high levels. Although prices have since come down, worldwide demand for high
quality coffee remains strong. In fiscal 1998, the Company mitigated the effect
of green coffee price increases through moderate price increases in the
wholesale and retail sales prices of its roasted coffee beans, as well as for
its brewed coffee and espresso drinks and related products. Demand for the
Company's coffee was not adversely affected by these price increases. Although
most coffee trades in the commodity market, coffee of the quality sought by the
Company tends to trade on a negotiated basis at a substantial premium above
commodity coffee pricing, depending upon the origin, supply and demand at the
time of purchase. Supply and price can be affected by multiple factors in the
producing countries, including weather and political and economic conditions. In
addition, green coffee prices have been affected in the past, and may be
affected in the future, by the actions of certain organizations and
associations, such as the International Coffee Organization or the Association
of Coffee Producing Countries, that have historically attempted to establish
commodity price controls of green coffee through agreements establishing export
quotas or restricting coffee supplies worldwide. No assurance can be given that
these organizations (or others) will not succeed in raising green coffee prices
or that, in such events, the Company will be
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able or choose to maintain its gross margins by raising prices without affecting
demand. Increases in the price of green coffee, or the unavailability of
adequate supplies of green coffee of the quality sought by the Company whether
due to the failure of its suppliers to perform, conditions in the
coffee-producing countries, or otherwise - could have a material adverse effect
on the Company's results of operations.
To mitigate the risks associated with increases in coffee prices and to
provide greater predictability in the prices the Company pays for its coffee,
the Company has from time to time, depending upon market volatility, entered
into fixed-price purchase commitments for a portion of its green coffee
requirements. At January 28, 1998 these commitments totaled $451,500. There can
be no assurances that these activities will significantly protect the Company
against the risks of increase in coffee prices or that they will not result in
the Company having to pay substantially more for its supply of coffee than would
have been required absent such activities.
COMPETITION. The market for prepared specialty coffee beverages is
fragmented and highly competitive. Competition is expected to increase
substantially. The Company's coffee beverages compete directly against all
restaurant and beverage outlets that serve coffee as well as a growing number of
espresso stands, carts and stores. The Company's whole bean coffees compete
directly against specialty coffee sold at retail through supermarkets and a
growing number of specialty coffee stores. The coffee industry is currently
dominated by several large companies, such as Kraft Foods, Inc., Proctor &
Gamble Co. and Nestle S.A., many of which have begun aggressively marketing
gourmet coffee products. While the market for specialty gourmet coffee stores
remains fragmented, the Company competes directly with Starbucks Corporation,
the largest U.S. specialty coffee retailer and numerous other regional coffee
bar and coffeehouse chains. Starbucks Corporation has substantially greater
financial, marketing and other resources than the Company and has operations in
the markets in which the Company currently operates or intends to expand.
One of the main areas of competition in the specialty coffee retail
store marketplace is in the procurement of prime retail store premises. The
Company competes against other specialty retailers and restaurants for store
sites, and there can be no assurance that management will be able to secure
adequate, additional sites at acceptable costs.
GEOGRAPHIC CONCENTRATION; FLUCTUATIONS IN REGIONAL ECONOMIC CONDITIONS.
The Company's coffeehouses are currently located in Southern California,
Colorado and Texas. As a result, the Company's success will also depend in large
part upon factors affecting general economic conditions and discretionary
consumer spending in these regions. Any economic downturn or reduction in
consumer spending in those regions could have a material adverse effect on the
Company.
SEASONALITY. The Company's business is subject to seasonal fluctuations
as well as general trends and fluctuations that affect retail restaurants and
retailers in general. Hot weather tends to depress sales of hot coffee and
espresso drinks, especially unseasonably warm weather in any season. The Company
intends to develop and promote new iced blended coffee and espresso drinks in
warm weather to counterbalance this effect, but there can be no assurances that
such products will be successful.
LACK OF DIVERSIFICATION. The Company's business is centered on one
product: premium fresh custom roasted coffee. To date, the Company's operations
have been limited to the purchase and roasting of green coffee beans and the
sale of whole bean coffee and coffee beverages and espresso drinks, together
with other food products, through its coffeehouses and its wholesale and mail
order businesses. Any decrease in demand for coffee would have a material
adverse effect on the Company's business, operating results and financial
condition.
LEASES; UNCERTAINTY OF RENEWAL TERMS. The Company's thirty-six operating
coffeehouses are all on leased premises. Upon the expiration of certain of these
leases, there is no automatic renewal or option to renew. No assurances can be
given that these leases can be renewed or, if renewed, that rents will not
increase substantially, either of which could adversely affect the Company.
Other leases are subject to renewal at fair market value, which could involve
substantial rent increases, or are subject to renewal with scheduled rent
increases, which could result in rents being above fair market value.
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EFFECTS OF COMPLIANCE WITH GOVERNMENT REGULATIONS. The Company is
subject to various federal, state and local laws, rules and regulations
affecting its business and operations. Each Diedrich coffeehouse and roasting
facility is and will be subject to licensing and reporting requirements by
numerous governmental authorities which may include the building, land use,
environmental protection, health, safety and fire agencies of the state or
municipality in which each is located. Difficulties in obtaining or failure to
obtain the necessary licenses or approvals could delay or prevent the
development or operation of a given coffeehouse, or limit the products available
in a coffeehouse. Any problems that the Company may encounter in renewing such
licenses in one jurisdiction, may adversely affect its licensing status on a
federal, state or municipal level in other relevant jurisdictions.
RELIANCE ON KEY EXISTING AND FUTURE PERSONNEL. The Company's success
will depend to a large degree upon the efforts and abilities of its officers and
key management employees, particularly John E. Martin, (Chairman of the Board),
Martin Diedrich (Chief Coffee Officer), and Timothy J. Ryan (President and Chief
Executive Officer). The loss of the services of one or more of its key employees
could have a material adverse effect on the Company's business prospects and
potential earnings capacity. The Company has entered into employment agreements
with Messrs. Martin, Diedrich and Ryan, which include, among other things,
provisions restricting them from competing with the Company during the terms of
their respective agreements. As discussed elsewhere in this report, Mr. Martin
invested $1 million in the Company through a private placement in January 1998
and Mr. Ryan invested $50,000. Messrs. Martin and Ryan have significant stock
options to purchase Company stock pursuant to stock option agreements (see Item
4 below). The Company maintains and is sole beneficiary of key person life
insurance in the amount of $1,000,000 on the life of Mr. Diedrich. The Company
will need to continue to recruit and retain additional key senior managers to
manage anticipated growth, but there can be no assurance that the Company will
be able to recruit or retain additional members of senior management on terms
suitable to the Company.
YEAR 2000. The Year 2000 problem is the result of computer programs
using two digits to define the applicable year. Computer programs with
date-sensitive software could recognize a year indicator of "00" as the year
1900 instead of the year 2000. This could result in miscalculations or program
failures. The potential impact of such miscalculations or program failures
cannot be quantified at this time. The Company is addressing the Year 2000
problem as part of a comprehensive enterprise architecture review and upgrade
of its data processing hardware and software. Systems and programs purchased,
replaced or developed under this program will, in addition to being Year 2000
compliant, provide significantly enhanced performance which will benefit the
Company in future years. We do not expect the Year 2000 issue to materially
affect the total cost of this project.
ITEM 2. PROPERTIES.
The Company leases approximately 25,000 square feet of office space for
administrative offices, warehousing, roasting and training facilities in Irvine,
California. The lease for this facility expires in October 2000, with an option
for one additional five-year term. The Company also leases a 2,500 square foot
facility in Denver, Colorado for warehousing and roasting. This lease was
terminated as of April 1, 1998. In addition, as of January 28, 1998, the Company
was a party to various leases for a total of forty-four retail locations
including thirty-eight operating coffeehouses, three subleased units, and three
carts. The Company closed eleven retail locations in fiscal 1998 of which eight
leases were terminated. All of the Company's operating coffeehouses are on
leased premises and are subject to varying arrangements specified in property
specific leases. For example, some of the leases require a flat rent, subject to
regional cost-of-living increases, while others are based upon a percentage of
gross sales. In addition, certain of these leases expire in the near future, and
there is no automatic renewal or option to renew. No assurance can be given that
leases can be renewed, or if renewed, that rents will not increase
substantially, both of which would adversely affect the Company. Other leases
are subject to renewal at fair market value, which could involve substantial
increases or are subject to renewal with a scheduled rent increase, which could
result in rents being above fair market value.
ITEM 3. LEGAL PROCEEDINGS.
In the ordinary course of its business, the Company may become involved
in legal proceedings from time to time. As of April 20, 1998, the Company was
not a party to any material pending legal proceedings.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On January 22, 1998, there was a Special Meeting of Stockholders called
to vote upon the following matters:
1. To approve the Stock Option Plan and Agreement by and between the
Company and John E. Martin, dated as of November 17, 1997,
granting Mr. Martin options to purchase up to 850,000 shares of
common stock, $0.01 par value per share, (the "Common Stock") of
the Company; and
2. To approve the Stock Option Plan and Agreement by and between the
Company and Timothy J. Ryan, dated as of November 17, 1997,
granting Mr. Ryan options to purchase up to 600,000 shares of the
Common Stock of the Company.
Voting was as follows, as recorded and reported by the Inspector of
Elections:
Approval of the Stock Option Plan and Agreement by and between the Company and
John E. Martin.
FOR AGAINST OR WITHHELD ABSTAIN BROKER NON-VOTES
--- ------------------- ------- ----------------
3,259,592 220,725 17,206 0
Approval of the Stock Option Plan and Agreement by and between the Company and
Timothy J. Ryan.
FOR AGAINST OR WITHHELD ABSTAIN BROKER NON-VOTES
--- ------------------- ------- ----------------
3,255,967 224,415 17,141 0
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is reported on the NASDAQ National Market
System under the symbol "DDRX." The following table sets forth, for the
quarterly periods indicated, the range of high and low closing sale prices for
the Common Stock as reported on the NASDAQ National Market System since
September 11, 1996. Prior to September 11, 1996, there was no established public
trading market for the Company's Common Stock.
PRICE RANGE
-----------------------
PERIOD HIGH LOW
--------------------------------------- -------- -------
FISCAL YEAR 1997
Third Quarter (beginning September 11) 12 9 1/2
Fourth Quarter 10 1/2 8
FISCAL YEAR 1998
First Quarter 8 3/4 2 5/8
Second Quarter 3 1/2 2 5/8
Third Quarter 3 15/16 2 7/16
Fourth Quarter 9 3 1/8
At January 28, 1998, there were 5,741,650 shares outstanding and 112
stockholders of record of Diedrich Coffee's Common Stock. The Company has not
paid dividends on its Common Stock and does not anticipate paying dividends in
the foreseeable future.
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ITEM 6. SELECTED FINANCIAL DATA.
The following five-year selected financial data should be read in
conjunction with the Company's financial statements.
YEAR YEAR
ENDED ENDED
JANUARY JANUARY
28, 29, YEARS ENDED JANUARY 31,
-------- ------- --------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
STATEMENT OF OPERATIONS DATA
Net sales:
Retail $ 20,760 $ 18,118 $ 8,879 $ 6,673 $ 3,912
Wholesale and other 2,222 1,694 1,365 918 502
-------- -------- -------- -------- --------
Total 22,982 19,812 10,244 7,591 4,414
-------- -------- -------- -------- --------
Cost and expenses:
Cost of sales and related
occupancy costs 11,458 9,263 4,409 3,164 1,796
Store operating expenses 10,447 8,280 3,520 2,584 1,594
Other operating expenses 290 240 277 282 146
Depreciation and amortization 1,785 1,054 354 255 102
Provision for asset impairment
and restructuring costs 3,902 -- -- -- --
General and administrative
expenses 4,006 2,003 1,335 851 809
-------- -------- -------- -------- --------
Total 31,888 20,840 9,895 7,136 4,447
-------- -------- -------- -------- --------
Operating (loss) income (8,906) (1,028) 349 455 (33)
Interest expense and other, net (205) 86 34 78 55
-------- -------- -------- -------- --------
(Loss) income before income taxes (9,111) (1,114) 315 377 (88)
Income tax provision (benefit) 1 (128) 129 53 1
-------- -------- -------- -------- --------
Net (loss) income $ (9,112) $ (986) $ 186 $ 324 $ (89)
-------- -------- -------- -------- --------
Basic (loss) income per share (1) (1.69) (.22)
Diluted (loss) income per share (1.69) (.22)
Pro forma net income per share (2) .06
BALANCE SHEET DATA
Working capital (deficiency) $ (959) $ 1,949 $ (53) $ (418) $ (564)
Total assets 13,948 17,471 5,316 2,503 2,163
Long-term obligations, less
current portion 2,817 -- 829 471 544
Total stockholders' equity 6,835 14,898 3,304 973 649
- ----------
(1) Net income (loss) per share for periods prior to the year ended January
31, 1996 is not presented due to the noncomparable capital structure.
Net loss per share for fiscal 1998 and 1997 is presented as Basic EPS
under the provisions of SFAS 128.
(2) Pro forma net income per share is computed by dividing net income by the
weighted average number of common and common equivalent shares
outstanding during the respective period, assuming the conversion of the
Series A and Series B Preferred Stock into Common Stock as of the date
of issuance. Dividends on
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the Series A and Series B Preferred Stock have been excluded from the
computation since the preferred stock has been assumed to have been
converted to Common Stock.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
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.
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. 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.
The first retail store operating under the name of Diedrich Coffee
commenced operations in 1972. At the conclusion of fiscal 1998, the Company
operated a total of thirty-eight coffeehouses and three coffee carts located in
California, Colorado and Texas. 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, cafe latte, cafe mocha and espresso machiato. To
complement beverage sales, the Company sells light food items and whole bean
coffee through its coffeehouses.
The Company grew rapidly in fiscal 1997 and experienced difficulties
associated with that growth in fiscal 1998. In March 1997, the Company announced
the resignation of Steven Lupinacci, President and Chief Executive Officer and
that it would take a restructuring charge of $4.6 million for closing 12
coffeehouses. In addition to closing 11 of these 12 coffeehouses, the Company
opened new coffeehouses in Houston, Texas as well as Irvine and Santa Monica,
California. The Company also entered into an agreement to place coffee carts at
premium office facilities of the Irvine Company in Orange County, California;
two carts were operating under this agreement at fiscal year-end.
Lawrence Goelman became Chairman of the Board and Interim Chief
Executive Officer on March 12, 1997. Kerry Coin was appointed President and
Chief Operating Officer on April 25, 1997. Pursuant to the direction of the
Board of Directors, the Company developed and executed a turnaround plan
intended to return the Company to operating profitability. Pursuant to this
plan, underperforming stores were closed, leases assigned, terminated or sublet
and new channels of distribution were developed. Experienced professional
managers were recruited. The Wholesale Division was given aggressive growth
targets and resources to meet them. New management and training systems were
developed and implemented. In the third quarter of fiscal year 1998 the Company
raised $3 million of working capital through private placement of secured debt
(see Note 5 of Notes to the Financial Statements).
Mr. John E. Martin was appointed as Chairman of the Board, replacing
Larry Goelman, by the Board as of November 17, 1997. From 1983 to 1996, Mr.
Martin was Chairman and Chief Executive Officer of Taco Bell Worldwide. From
October 1996 to June 1997, Mr. Martin was president of PepsiCo's Casual Dining
Division. Mr. Martin is also Chairman of publicly traded Newriders Inc., which
owns and operates Easyriders Cafes, and Chairman of Pacific Restaurant
Adventures, a privately held company in Newport Beach,
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California. Mr. Martin serves on the Boards of Directors of the following public
companies: Williams Sonoma, Inc., Franchise Mortgage Acceptance Company and The
Good Guys! Inc.
Mr. Timothy J. Ryan was appointed as President and Chief Executive
Officer replacing Larry Goelman, Interim Chief Executive Officer, by the Board
effective November 17, 1997. From December 1995 to December 1996, Mr. Ryan was
President of Sizzler U.S.A., a division of Sizzler International, Inc., of which
he was also Senior Vice President. From November 1998 to December 1993, Mr. Ryan
was Senior Vice President of Marketing at Taco Bell Worldwide, and from December
1993 to December 1995, he was Senior Vice President of Taco Bell's Casual Dining
Division.
Despite the efforts of the interim management team led by Messrs.
Goelman and Coin, the Company did not meet its stated goal of cash-flow positive
operating results by the end of the last accounting period of fiscal 1998. The
reasons for the shortfall are several: the increased one-time general and
administrative costs associated with the addition of the new executive
management team headed by John Martin and Tim Ryan, inadequate and unsuccessful
marketing, delays in installation of coffee carts in Orange County and
inadequate management of certain labor costs.
Messrs. Martin and Ryan determined that, while the turnaround plan
implemented by the interim management team had stabilized the Company
operationally, it was not likely to result in profitable growth in the near
future. Accordingly, they initiated a business planning process that resulted in
a strategic five-year plan directed toward growth through franchise area
development agreements combined with focused Company unit growth and
centralization of production facilities. This plan also built on the interim
management strategy of developing new wholesale business channels. New
management also reviewed the existing asset base and determined that one
coffeehouse designated for closure would remain open and two additional
coffeehouses and the Denver warehouse would be closed. Charges for these
closures as well as provisions for other contingencies resulted in additional
operating expenses of approximately $1.7 million in the fourth quarter.
The Company plans to focus, in the first half of fiscal 1999, on
significant improvements in operations and customer service, to design and
develop prototype optimized coffeehouses, kiosks and carts, to continue the
automation and improvement of management information systems, to acquire and use
modern vacuum packaging equipment, to develop a site selection model for its own
use and use by franchise area developers, to test relationships with Arrowhead
Water (office coffee service and brewing water) and selected suppliers for
premium baked goods and develop and implement a comprehensive marketing plan.
There can be no assurances of positive year-end earnings or as to when the
Company will be cash flow positive.
RESULTS OF OPERATIONS
YEAR ENDED JANUARY 28, 1998 COMPARED TO YEAR ENDED JANUARY 29, 1997
Net sales. Net sales for the year ended January 28, 1998 increased 16.0%
to $22,982,000 from $19,812,000 for the year ended January 29, 1997. Net retail
sales for the year ended January 28, 1998 increased 14.6% to $20,760,000 from
$18,118,000 for the year ended January 29, 1997, despite closing 11 stores in
fiscal 1998. Wholesale and mail order sales for the year ended January 28, 1998
increased 31.1% to $2,222,000 from $1,694,000 for the year ended January 29,
1997.
The percentage increase in comparable coffeehouse sales comparing net
sales for stores open during the full year in fiscal 1998 to net sales for the
same stores in fiscal 1997 was 0.1%. The number of coffeehouses involved in this
calculation ranged from 12 to 33 reflecting the number of stores added during
fiscal 1997.
Cost of sales and related occupancy costs. Cost of sales and related
occupancy costs for the year ended January 28, 1998 increased to $11,458,000
from $9,263,000 for the year ended January 29, 1997. As a percentage of net
sales, cost of sales and related occupancy costs increased to 49.9% for fiscal
1998 from 46.8% for fiscal 1997. This increase was primarily the result of
increased costs related to higher green coffee prices, increased retail
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discounting, an increased percentage of wholesale sales as a percentage of total
company sales as well as scheduled rent increases.
Store operating expenses. For the year ended January 28, 1998,
coffeehouse-operating expenses, as a percentage of retail net sales, increased
to 50.3% from 45.7% for the year ended January 29, 1997. The year end one time
charge of $1.7 million described above accounted for 8.2% of retail net sales
and more than offset decreases achieved during the year primarily as a result of
improved labor scheduling methods.
Other operating expenses. For the year ended January 28, 1998, other
operating expenses, as a percentage of wholesale and other net sales, decreased
to 13.0% from 14.2% for the year ended January 29, 1997. This decrease reflects
the fact that the cost of the additional management and sales staff was more
than offset by the growth in sales for the Wholesale Division.
Depreciation and amortization. Depreciation and amortization increased
to $1,785,000 for the year ended January 28, 1998 from $1,054,000 for the year
ended January 29, 1997, principally due to depreciable assets related to the
addition of new coffeehouses during fiscal 1997 and the conversion costs of the
acquired locations being depreciated for the full year.
Provision for store closings and restructuring costs. On March 12, 1997
the Company announced that it was reviewing the performance of all coffeehouses
to determine which units were not meeting management's long-term operational
expectations. Subsequently, on April 29, 1997, the Company recorded an
impairment provision and a restructuring charge of approximately $4.6 million in
connection with the closure of 12 coffeehouses and other related expenses.
Eleven of the original 12 coffeehouses identified for closure were closed in
fiscal 1998 with leases terminated in most cases. In January the new management
reviewed the progress of all retail operations and determined that one
coffeehouse originally designed for closure would remain open. At year end, most
of the lease terminations provided for in the restructuring had been completed
at less cost than originally anticipated. As a result of these two factors,
management determined that the remaining restructuring reserve could be reduced
by $648,000.
General and administrative expenses. As a percentage of net sales,
general and administrative expenses increased to 17.4% in the year ended January
28, 1998 from 10.1% for the year ended January 29, 1997 due to adding the
resources and senior executive personnel required to manage the business more
effectively, turn the Company around and position it for future growth.
Interest expense. Interest expense decreased to $182,000 for the year
ended January 28, 1998 from $190,000 for the year ended January 29, 1997.
Income taxes. Net operating losses generated in fiscal 1998, fiscal
1997, fiscal 1994 and prior were carried back or forward, as the case may be,
and utilized to offset the allowable portion of income tax in fiscal 1996. As of
January 28, 1998, a net operating loss for Federal income tax purposes of
$8,007,000 is available to be utilized against future taxable income for years
through fiscal 2013, subject to a possible annual limitation due to the change
in ownership rules under the Internal Revenue Code.
Net loss. The net loss for the year ended January 28, 1998 was
$9,113,000 compared to net loss of $986,000 for the year ended January 29, 1997.
YEAR ENDED JANUARY 29, 1997 COMPARED TO YEAR ENDED JANUARY 31, 1996
Net sales. Net sales for the year ended January 29, 1997 increased 93.4%
to $19,812,000 from $10,244,000 for the year ended January 31, 1996. Net retail
sales for the year ended January 29, 1997 increased 104.1% to $18,118,000 from
$8,879,000 for the year ended January 31, 1996 due to the opening of new
coffeehouses and the addition of the stores acquired in Denver and Houston as
well as one store acquired in Orange County (the "Acquired Stores"). Wholesale
and mail order sales for the year ended January 29, 1997 increased 24.1% to
$1,694,000 from $1,365,000 for the year ended January 31, 1996.
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The percentage decrease in comparable store sales comparing net sales
for stores open during the full year in fiscal 1997 to net sales for the same
stores in fiscal 1996 was 2.7%. Only eight of the Company's forty-seven
coffeehouses were open for the full year in fiscal 1996 and are therefore
included in the base for comparable store sales. On average these stores have
been open for five years and had sales of approximately $1 million per store for
the year ended January 29, 1997.
Cost of sales and related occupancy costs. Cost of sales and related
occupancy costs for the year ended January 29, 1997 increased to $9,263,000 from
$4,409,000 for the year ended January 31, 1996. As a percentage of net sales,
cost of sales and related occupancy costs increased to 46.8% for fiscal 1997
from 43.0% for fiscal 1996. This increase was primarily the result of three
factors: low sales volume for the acquired stores which resulted in
substantially higher rent as a percentage of sales; newly opened stores with
higher initial product costs during the growth period in their early months of
operation and increased costs related to lower than expected holiday specialty
sales.
Store operating expenses. For the year ended January 29, 1997, store
operating expenses, as a percentage of retail net sales, similarly increased to
45.7% from 39.6% for the year ended January 31, 1996. As in the case of cost of
sales, these increases were due to increased labor and other start-up costs
relating to the opening of fifteen new Diedrich coffeehouses in fiscal 1997, and
additional store operating expenses for the Acquired Stores.
Other operating expenses. For the year ended January 29, 1997, other
operating expenses, as a percentage of wholesale and other net sales, decreased
to 14.2% from 20.3% for the year ended January 31, 1996. These decreases were 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 $1,054,000 for the year ended January 29, 1997 from $354,000 for the year
ended January 31, 1996, primarily as a result of the Company's opening or
acquiring an additional thirty-four coffeehouses.
General and administrative expenses. As a percentage of net sales,
general and administrative expenses decreased to 10.1% in the year ended
January 29, 1997 from 13.0% for the year ended January 31, 1996 due to the
increase in sales volume without a concomitant increase in management staff. The
Company added selected resources and personnel in order to implement the
policies and procedures necessary for the effective control of multi-state
operations and new points of distribution operating at various volume levels.
Interest expense. Interest expense increased to $190,000 for the year
ended January 29, 1997 from $50,000 for the year ended January 31, 1996. The
increase was due primarily to higher average debt outstanding principally as a
result of the acquisition of the Acquired Stores. This debt was entirely repaid
with proceeds from the initial public offering.
Net loss. The net loss for the year ended January 29, 1997 was $986,000
compared to net income of $186,000 for the year ended January 31, 1996. Net
income for the year ended January 29, 1997, excluding the results of operations
of the Acquired Stores and new stores opened during fiscal 1997 decreased by
$207,000 to a net loss of $21,000 for the year ended January 29, 1997 from net
income of $186,000 for the year ended January 31, 1996. This decrease was
primarily due to increases in depreciation and amortization and general and
administrative expenses.
LIQUIDITY AND CAPITAL RESOURCES
On September 11, 1996, the Company 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, were $12,579,000. 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
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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 used
the remaining net proceeds to fund the opening of additional coffeehouses,
infrastructure enhancements and to provide working capital for general corporate
purposes.
The Company had working capital (deficit), as of January 28, 1998, of
$(959,000) compared to $1,949,000 at January 29, 1997. Cash (used in) provided
by operating activities totaled $(2,489,000) for the year ended January 28, 1998
as compared to $113,000 for the year ended January 29, 1997.
Net cash used in investing activities for the year ended January 28,
1998 totaled $1,724,000 which consisted entirely of capital expenditures for
property and equipment. Net cash provided by financing activities for the year
ended January 28, 1998 totaled $3,550,000. This consists of the net proceeds
from the private placement of secured debt after repayment of an unsecured loan
of $1.5 million and a secured loan of $500,000 and the sale of restricted stock
to Messrs. Martin and Ryan.
Future cash requirements, other than normal operating expenses, are
expected to consist primarily of capital expenditures related to the
construction of new coffeehouses, working capital to support the growth of the
wholesale business, and the continued development of infrastructure to support
the Company's expansion. The Company also anticipates additional expenditures
for enhancing its roasting and packaging facilities. Management estimates that
capital expenditures through fiscal 1999 will be approximately $2.9 million to
$3.5 million. The Company presently is evaluating various financing
alternatives. (See Note 12, Subsequent Event.)
In July 1996, the Company entered into a revolving line of credit with
Bank of America that permitted the Company to borrow up to $6 million upon
completion of the Company's initial public offering. The Company's credit
agreement in connection with this line of credit contained various covenants
which, among other things, required the delivery of regular financial
information, the maintenance of positive net income and the maintenance of
unencumbered liquid assets. In addition, the credit agreement imposed certain
restrictions on the Company, including, with respect to the incurrence of
additional indebtedness, the payment of dividends and the ability to make
acquisitions. On March 31, 1997, the Company was notified that it was in breach
of its covenant to maintain the required level of net income pursuant to the
credit agreement. In light of this fact, the additional fact that the Company
had no outstanding borrowings under this line of credit and the fact that the
credit agreement continued to impose numerous restrictions upon the Company, the
Company determined that it was in its best interest to terminate this line of
credit on April 21, 1997.
In March 1997, the Company received a commitment for a $1 million line
of credit on arms-length terms from a significant stockholder of the Company.
On May 27, 1997, the Company made a promissory note (the "Note") for the
benefit of The Palm Trust of which Paul Heeschen, a director, is a trustee. Mr.
Heeschen has no beneficial interest in the Palm Trust. The Note provides for
borrowings by the Company up to $1,500,000 with interest accruing at the prime
rate plus 3 1/2%. The Company borrowed the full amount under the Note. All
outstanding principal and accrued interest was due and payable on January 27,
1998 or promptly after the closing of any new debt or equity financing in an
amount exceeding $1,500,000. This indebtedness was fully paid and discharged on
October 20, 1997 with the proceeds of borrowing from the Ocean and Grandview
Trusts described below.
On August 19, 1997, the Company entered into a promissory note, term
loan agreement, and security agreement with the Virginia R. Cirica Trust (the
"Cirica Trust") (collectively the "Cirica Trust Loan Documents"). That trust is
controlled by Ms. Cirica, who is the spouse of Lawrence Goelman, then Chairman
and Interim Chief Executive Officer of the Company.
Shortly before the Cirica Trust entered into the Cirica Trust Loan
Documents, Mr. Goelman loaned Ms. Cirica approximately $250,000. Some of those
funds were transferred by Ms. Cirica to the Cirica Trust and advanced to the
Company pursuant to the Cirica Trust Loan Documents. The loan was secured by the
assets of the Company and provided for borrowings up to $500,000 with interest
accruing at the prime rate plus 3 1/2%. As of October 29, 1997 the Company
borrowed the entire $500,000 available. This Note was fully paid and discharged
on December 17, 1997.
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In connection with the Cirica Trust Loan Documents, the Company issued a
warrant to the Cirica Trust to purchase up to 85,000 shares of the Company's
common stock if the loan were repaid in full within 120 days of closing, or up
to 170,000 shares of the Company's common stock if the loan was not repaid
within 120 days, all at a price of $2.25 a share. The warrants are exercisable
immediately and expire on the later of August 19, 2003 or one year following
payment in full of the loan. Mr. Goelman disclaims any pecuniary interest in the
loan to the Company and any beneficial interest in the Cirica Trust, except to
the extent to which Mr. Goelman is a contingent beneficiary under the terms of
the Cirica Trust. The warrants were reduced to 85,000 shares of the Company's
Common Stock by virtue of the December repayment of the Note in full.
On September 30, 1997 the Company entered into a promissory note, term
loan agreement and security agreement with Nuvrty, Inc., a Colorado corporation
controlled by Amre Youness, a former director of the Company (the "Nuvrty Loan
Documents"). All outstanding principal and accrued interest is due and payable
on September 30, 2002. The loan is secured by the assets of the Company and
provides for borrowings up to $1,000,000 with interest accruing and paid monthly
at the prime rate plus 3 1/2%. The Company borrowed the full amount under the
loan.
In connection with the Nuvrty Loan Documents, the Company issued a
warrant to Nuvrty to purchase up to 170,000 shares of the Company's common stock
if the Loan were repaid in full within 120 days of closing and up to 340,000
shares of the Company's common stock if the loan was not repaid within 120 days,
all at a price of $2.25 per share. The warrants are exercisable immediately and
expire on the later of September 30, 2003 or one year following payment in full
of the loan.
On October 16, 1997 the Company entered into parallel promissory notes,
term loan agreements and security agreements with the Ocean and Grandview Trusts
on terms identical to those entered into with the Cirica Trust and Nuvrty, Inc.
(the "Ocean Trust Loan Documents" and the "Grandview Trust Loan Documents",
respectively). The Ocean Trust Loan Documents and the Grandview Trust Loan
Documents provide for borrowing up to $750,000 from each Trust. Each loan is
secured by the assets of the Company. Interest on advances is accrued and
payable monthly at the prime rate plus 3 1/2%. The Company borrowed $750,000
under each facility. All outstanding principal and accrued interest is due and
payable to each of the Ocean and Grandview Trusts on October 16, 2002.
In connection with the Ocean Trust Loan Documents and the Grandview
Trust Loan Documents the Company issued warrants to each Trust respectively to
purchase up to 127,500 shares each of the Company's common stock if the loan is
repaid in full within 120 days of closing, or up to 255,000 shares respectively
of the Company's common stock if the loan is not repaid in full within 120 days
of closing, all at a price of $2.25 per share. The warrants are exercisable
immediately and expire on the later of October 16, 2003 or one year following
payment in full of the respective loans. The Company used the proceeds from the
Ocean Trust and Grandview Trusts Loans to pay off and discharge the outstanding
indebtedness to the Palm Trust.
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.
This transaction was completed on April 3, 1998.
The Company believes that cash from operations, existing working
capital, the additional equity described above and an anticipated line of credit
will be sufficient to satisfy the Company's working capital needs at the
anticipated operating levels for the next twelve months. The Company announced
on April 14, 1998 that it is in the process of obtaining a line of credit from
FMAC adequate to meet its expected capital requirements. This line of credit is
expected to be closed in the second quarter following approval of the final
documentation by both FMAC and the Company.
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB")
released Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income." The new statement is effective for fiscal
years beginning after December 15, 1997. When adopted, SFAS No. 130 will
require restatement of prior years' statements to report any applicable
comprehensive income. Management has not determined the impact of SFAS 130 on
its financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information". SFAS 131 establishes standards for
the way public business enterprises are to report information about operating
segments in annual financial statements and requires those enterprises to
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
Statement 131 uses a "management approach" concept as the basis for identifying
reportable segments.
The management approach is based on the way that management organizes
the segments within the enterprise for making operating decisions and assessing
performance. Consequently, the segments are evident from the structure of the
enterprise's internal organization. Furthermore, the management approach
facilitates consistent descriptions of an enterprise in its annual report and
various other published information. It focuses on financial information that
an enterprise's decision makers use to make decisions about the enterprise's
operating matters.
Statement 131 is effective for financial statements for periods
beginning after December 15, 1997. Management has not determined the effect of
SFAS No. 131 on its financial statements.
In February 1998, the FASB released SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits". The new
statement is effective for fiscal years beginning after December 15, 1997. When
adopted, SFAS No. 132 will require restatement of disclosures regarding
pensions and other postretirement benefits for each year that is reported.
Management has determined SFAS 132 will not have a material impact on its
financial statements.
AICPA Statement of Position (SOP), "Reporting on the Costs of Start Up
Activities," will require that costs incurred during a start-up activity
(including organization costs) be expensed as incurred. Anticipated release of
the SOP is in the second quarter of 1998. The SOP will be effective for
financial statements issued for fiscal years beginning after December 15, 1998.
The Company's policy is consistent with the SOP.
Year 2000
The Year 2000 problem is the result of computer programs using
two digits to define the applicable year. Computer programs with date-sensitive
software could recognize a year indicator of "00" as the year 1900 instead of
the year 2000. This could result in miscalculations or program failures. The
potential impact of such miscalculations or program failures cannot be
quantified at this time. The Company is addressing the Year 2000 problem as
part of a comprehensive enterprise architecture review and upgrade of its data
processing hardware and software. Systems and programs purchased, replaced or
developed under this program will, in addition to being Year 2000 compliant,
provide significantly enhanced performance which will benefit the Company in
future years. We expect this project to be completed in 12 months. We do not
expect the Year 2000 issue to materially affect the total cost of this project.
Any costs that are specific to the resolution of the Year 2000 problem will be
expensed as incurred.
17
20
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
DERIVATIVE INSTRUMENTS. The Company does not and did not invest in
market risk sensitive instruments in fiscal 1998. From time to time, the Company
enters into agreements to purchase green coffee in the future at prices to be
determined within two to twelve months of the time of actual purchase. At
January 28, 1998 these commitments totaled $451,500. These agreements are tied
to specific market prices (defined by both the origin of the coffee and the
month of delivery) but the Company has significant flexibility in selecting the
date of the market price to be used in each contract. The Company does not use
commodity based financial instruments to hedge coffee or any other commodity as
the Company believes there will continue to be a high probability of maintaining
a strong correlation between increases in green coffee prices and the final
selling prices of the Company's products.
MARKET RISK. The Company's market risk exposure with regard to financial
instruments is to changes in the "prime rate" in the United States. The Company
borrowed $2,500,000 at the prime rate plus 3 1/2%. At January 28, 1998, a
hypothetical 100 basis point increase in the prime rate would result in
additional interest expense of $25,278 on an annualized basis.
The Company does not and has not used derivative financial instruments
for any purpose, including hedging or mitigating interest rate risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data required by this item
are set forth at the end of this Annual Report on Form 10-K beginning on page
F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information required by this item is incorporated herein by reference
from the portions of the Company's definitive proxy statement pursuant to
Schedule 14A for its annual meeting of stockholders to be held on June 23, 1998
(the "Definitive Proxy Statement") captioned "Election of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance." The Definitive Proxy
Statement will be filed with the Securities and Exchange Commission not later
than 120 days after the close of the Company's fiscal year ended January 28,
1998.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated herein by
reference from the portions of the Definitive Proxy Statement captioned
"Executive Compensation and Other Information" and "Director Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated herein by
reference from the portion of the Definitive Proxy Statement captioned "Security
Ownership of Certain Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated herein by
reference from the portion of the Definitive Proxy Statement captioned "Certain
Transactions."
18
21
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements.
The financial statements required to be filed hereunder are set
forth at the end of this Report beginning on page F-1.
2. Exhibits.
2.1 Form of Agreement and Plan of Merger(1)
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 Representative's Warrant Agreement(1)
4.4 Specimen Stock Certificate(1)
4.5 Form of Conversions Agreement in connection with the
conversion of Series A and Series B Preferred Stock into
Common Stock(1)
10.1 Martin R. Diedrich Employment Agreement, dated June 29, 1995
(1)
10.2 Steven A. Lupinacci Employment Agreement, dated June 29, 1995
(1)
10.3 Stock Option Plan and Agreement of Steven A. Lupinacci, dated
June 29, 1995(1)
10.4 Form of Indemnification Agreement(1)
10.5 Diedrich Coffee 1996 Stock Incentive Plan(1)
10.6 Diedrich Coffee 1996 Non-Employee Directors Stock Option Plan
(1)
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(1)
10.8 Revolving Promissory Note dated May 20, 1996 by Diedrich
Coffee in favor of Redwood Enterprises VII, L.P.(1)
10.9 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)
10.10 Kerry W. Coin Employment Agreement, dated August 26, 1996(1)
10.11 Letter Agreement between Diedrich Coffee and Lawrence Goelman,
dated April 23, 1997, regarding appointment as Interim
President and Chief Executive Officer(2)
10.12 Separation agreement dated May 13, 1997 between Steven A.
Lupinacci and Diedrich Coffee, Inc.(3)
10.13 Employment Letter to Jonathan B. Eddison dated June 4, 1997
(4)
10.14 Employment Letter John Bayley dated July 21, 1997(4)
10.15 Employment Letter to Michael Reeves dated May 5, 1997(4)
10.16 Form of Promissory Note made in favor of the Palm Trust(4)
10.17 Form of Term Loan Agreement made to the Virginia R. Cirica
Trust(4)
10.18 Form of Security Agreement made to the Virginia R. Cirica
Trust(4)
10.19 Form of Warrant Agreement made to the Virginia R. Cirica Trust
(4)
10.20 Form of Promissory Note made in favor of the Virginia R.
Cirica Trust(4)
10.21 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)
10.22 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)
19
22
10.23 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)
10.24 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)
10.25 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)
10.26 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)
10.27 Form of Promissory Note made in favor of Nuvrty, Inc., the
Ocean Trust and the Grandview Trust(6)
10.28 Form of Term Loan Agreement made in favor of Nuvrty, Inc., the
Ocean Trust and the Grandview Trust(6)
10.29 Form of Security Agreement made in favor of Nuvrty, Inc., the
Ocean Trust and the Grandview Trust(6)
10.30 Form of Warrant Agreement made in favor of Nuvrty, Inc., the
Ocean Trust and the Grandview Trust(6)
10.31 Form of Intercreditor Agreement made in favor of Nuvrty, Inc.,
the Ocean Trust and the Grandview Trust(6)
10.32 Amendment to Kerry Coin's employment agreement dated September
24, 1997(6)
10.33 Form of Indemnification Agreement - John Bayley(6)
10.34 Form of Indemnification Agreement - Jonathan B. Eddison(6)
10.35 Form of Indemnification Agreement - John E. Martin(6)
10.36 Form of Indemnification Agreement - Timothy J. Ryan(6)
10.37 Form of Common Stock and Option Purchase Agreement with
Franchise Mortgage Acceptance Company dated as of April 3,
1998
10.38 Separation and Release Agreement dated January 28, 1998 with
Kerry W. Coin
10.39 Separation and Release Agreement dated January 30, 1998 with
Jonathan B. Eddison
11.1 Statement re Computation of Per Share Earnings
27 Financial Data Schedule
- ----------
(1) Incorporated by reference to the exhibit of the same number of
the Company's Registration Statement on Form S-1 (No.
333-08633), as amended, as declared effective by the
Securities and Exchange Commission on September 11, 1996.
(2) Incorporated by reference to the exhibit of the same number to
the Company's annual report on Form 10-K for the fiscal year
ended January 29, 1997.
(3) Incorporated by reference to the exhibit of the same number to
the Company'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.
(4) Incorporated by reference to the exhibit of the same number to
the Company's Quarterly Report on Form 10-Q, for the period
ended July 30, 1997, filed with the Securities and Exchange
Commission on September 12, 1997.
(5) Incorporated by reference to the exhibit of the same number to
the Company's Current Report on Form 8-K, filed with the
Securities and Exchange Commission on November 25, 1997.
20
23
(6) Incorporated by reference to the exhibit of the same number to
the Company'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.
(b) Reports on Form 8-K.
On March 13, 1997, the Company filed a Current Report on Form
8-K, reporting Item 5, in connection with the resignation of
Steven A. Lupinacci as a director, President, Chief Executive
Officer and Chief Financial Officer of the Company and the
appointment of Lawrence Goelman as Interim President and
Chief Executive Officer.
On November 25, 1997, the Company filed a Current Report on Form
8-K reporting Item 5, in connection with the appointment of John
E. Martin as Chairman of the Board, replacing Lawrence Goelman
and the appointment of Timothy J. Ryan as President and CEO,
replacing Lawrence Goelman as Interim CEO. The report also
described the employment, stock option and stock purchase
agreements entered into with each of Mr. Martin and Mr. Ryan.
21
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
DIEDRICH COFFEE, INC.
April 27, 1998 By: /s/ TIMOTHY J. RYAN
--------------------------------------
Timothy J. Ryan
President, Chief Executive Officer and
Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ JOHN E. MARTIN Chairman of the Board April 27, 1998
- -------------------------
John E. Martin
/s/ TIMOTHY J. RYAN President, Chief
- ------------------------- Executive Officer and April 27, 1998
Timothy J. Ryan Director (Principal
Executive Officer)
/s/ JOHN B. BAYLEY Vice President, Finance
- ------------------------- and Controller (Principal April 27, 1998
John B. Bayley Financial and Accounting
Officer)
/s/ MARTIN R. DIEDRICH Chief Coffee Officer,
- ------------------------- Vice Chairman of the April 24, 1998
Martin R. Diedrich Board of Directors and
Secretary
/s/ LAWRENCE GOELMAN Director
- ------------------------- April 24, 1998
Lawrence Goelman
/s/ PETER CHURM Director
- ------------------------- April 24, 1998
Peter Churm
/s/ PAUL C. HEESCHEN Director April 24, 1998
- -------------------------
Paul C. Heeschen
22
25
DIEDRICH COFFEE, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report F-2
Report of Independent Certified Public Accountants F-3
Balance Sheets F-4
Statements of Operations F-5
Statements of Stockholders' Equity F-6
Statements of Cash Flows F-7
Notes to Financial Statements F-8
F-1
26
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Diedrich Coffee, Inc.:
We have audited the accompanying balance sheets of Diedrich Coffee, Inc. as of
January 28, 1998 and January 29, 1997, and the related statements of operations,
stockholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Diedrich Coffee, Inc. as of
January 28, 1998 and January 29, 1997, and the results of its operations and its
cash flows for the years then ended, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Orange County, California
March 28, 1998
F-2
27
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Diedrich Coffee, Inc.
Irvine, California
We have audited the accompanying statements of operations, stockholders'
equity and cash flows of Diedrich Coffee, Inc. for the year ended January 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Diedrich Coffee, Inc. for the year ended January 31, 1996 in conformity with
generally accepted accounting principles.
BDO SEIDMAN, LLP
Costa Mesa, California
March 11, 1996
F-3
28
DIEDRICH COFFEE, INC.
BALANCE SHEETS
ASSETS (Note 5) JANUARY 28, 1998 JANUARY 29, 1997
---------------- ----------------
Current Assets:
Cash $ 1,408,161 $ 2,071,904
Accounts receivable, less allowance for doubtful
accounts of $22,134 and $4,000 181,628 210,363
Inventories (Note 2) 1,375,119 1,615,145
Prepaid expenses 157,393 185,063
Income taxes receivable 42,528 285,072
------------ ------------
Total current assets 3,164,829 4,367,547
Property and equipment, net (Note 3) 10,104,843 11,962,752
Costs in excess of net assets acquired, net (Note 4) 389,651 796,178
Other assets 289,103 344,942
------------ ------------
Total assets $ 13,948,426 $ 17,471,419
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current installments of obligations under
capital leases (Note 6) $ 168,139 $ --
Accounts payable 1,204,366 1,800,292
Accrued compensation 716,742 417,028
Accrued expenses (Note 7) 1,796,869 201,487
Restructuring charge (Note 10) 237,320 --
------------ ------------
Total current liabilities 4,123,436 2,418,807
Obligations under capital leases - long-term (Note 6) 317,292 --
Long term debt (Note 5) 2,500,000 --
Deferred rent 172,231 154,384
------------ ------------
Total liabilities 7,112,959 2,573,191
------------ ------------
Stockholders' Equity:
Common stock, $.01 par value; authorized
25,000,000 shares; issued and outstanding
5,741,650 shares at January 28, 1998 and
5,391,650 at January 29, 1997 57,417 53,917
Additional paid-in capital 16,928,546 15,882,046
Accumulated deficit (10,150,496) (1,037,735)
------------ ------------
Total stockholders' equity 6,835,467 14,898,228
Commitments and contingencies (Note 6)
------------ ------------
Total liabilities and stockholders' equity $ 13,948,426 $ 17,471,419
============ ============
See accompanying notes to financial statements.
F-4
29
DIEDRICH COFFEE, INC.
STATEMENTS OF OPERATIONS
YEAR ENDED YEAR ENDED YEAR ENDED
JANUARY 28, JANUARY 29, JANUARY 31,
1998 1997 1996
------------ ------------ ------------
Net Sales:
Retail $ 20,759,993 $ 18,117,720 $ 8,878,904
Wholesale and other 2,221,704 1,694,686 1,365,271
------------ ------------ ------------
Total 22,981,697 19,812,406 10,244,175
------------ ------------ ------------
Cost and Expenses:
Cost of sales and related occupancy costs 11,457,612 9,263,286 4,409,485
Store operating expenses 10,447,349 8,279,621 3,520,140
Other operating expenses 289,867 240,227 276,788
Depreciation and amortization 1,785,271 1,053,770 353,840
Provision for asset impairment and restructuring costs 3,902,332 -- --
General and administrative expenses 4,005,853 2,003,483 1,334,694
------------ ------------ ------------
Total 31,888,284 20,840,387 9,894,947
------------ ------------ ------------
Operating (loss) income (8,906,587) (1,027,981) 349,228
Interest expense (182,135) (189,549) (50,187)
Interest and other (expense) income (23,239) 103,718 15,814
------------ ------------ ------------
(Loss) income before income taxes (9,111,961) (1,113,812) 314,855
Income tax provision (benefit) 800 (128,107) 129,211
------------ ------------ ------------
Net (loss) income $ (9,112,761) $ (985,705) $ 185,644
============ ============ ============
Basic net (loss) income per share $ (1.69) $ (0.22) $ --
============ ============ ============
Diluted net (loss) income per share $ (1.69) $ (0.22) $ --
============ ============ ============
Pro forma information (Note 1):
Net income per share -- -- $ 0.06
============ ============ ============
Weighted average shares outstanding 5,392,609 4,414,000 3,153,000
============ ============ ============
See accompanying notes to financial statements.
F-5
30
DIEDRICH COFFEE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Series A Preferred Stock Series B Preferred Stock Common Stock
-------------------------- -------------------------- --------------------------
Shares Amount Shares Amount Shares Amount
----------- ----------- ----------- ----------- ----------- -----------
Balance, January 31, 1995 1,000,000 $ 800,000 -- $ -- 1,127,660 $ 11,277
Repurchase of common stock -- -- -- -- (229,787) (2,298)
Issuance of Series B preferred stock -- -- 1,608,568 2,225,813 -- --
Common stock issued -- -- -- -- 285,209 2,852
Net income for the year -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Balance, January 31, 1996 1,000,000 800,000 1,608,568 2,225,813 1,183,082 11,831
Initial public offering net -- -- -- -- 1,600,000 16,000
Conversion of Series A and
B preferred stock (1,000,000) (800,000) (1,608,568) (2,225,813) 2,608,568 26,086
Net loss for the year -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Balance, January 29, 1997 -- -- -- -- 5,391,650 53,917
Common stock issued -- -- -- -- 350,000 3,500
Net loss for the year -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Balance, January 28, 1998 -- $ -- -- $ -- 5,741,650 $ 57,417
=========== =========== =========== =========== =========== ===========
Additional Accumulated Stockholder Total
Paid In Deficit Receivable
Capital
----------- ------------ ----------- -----------
Balance, January 31, 1995 $ 135,723 $ 51,024 $ (25,000) $ 973,024
Repurchase of common stock (14,004) (288,698) 25,000 (280,000)
Issuance of Series B preferred stock -- -- -- 2,225,813
Common stock issued 197,148 -- -- 200,000
Net income for the year -- 185,644 -- 185,644
----------- ------------ ----------- -----------
Balance, January 31, 1996 318,867 (52,030) -- 3,304,481
Initial public offering net 12,563,452 -- -- 12,579,452
Conversion of Series A and
B preferred stock 2,999,727 -- -- --
Net loss for the year -- (985,705) -- (985,705)
----------- ------------ ----------- -----------
Balance, January 29, 1997 15,882,046 (1,037,735) -- 14,898,228
Common stock issued 1,046,500 -- -- 1,050,000
Net loss for the year -- (9,112,761) -- (9,112,761)
----------- ------------ ----------- -----------
Balance, January 28, 1998 $16,928,546 $(10,150,496) $ -- $ 6,835,467
=========== ============ =========== ===========
See accompanying notes to financial statements.
F-6
31
DIEDRICH COFFEE, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED YEAR ENDED YEAR ENDED
JANUARY 28, 1998 JANUARY 29, 1997 JANUARY 31, 1996
---------------- ---------------- ------------
Cash flows from operating activities:
Net (loss) income $ (9,112,761) $ (985,705) $ 185,644
Adjustments to reconcile net (loss) income
to cash (used in) provided by operating activities:
Depreciation and amortization 1,785,271 1,053,770 353,840
Deferred income taxes -- 48,192 (8,218)
Restructuring charge 987,590 -- --
Impairment on long-lived assets 2,203,217 -- --
Changes in assets and liabilities:
Accounts receivable 28,735 (75,790) (68,031)
Inventories 150,804 (969,652) (345,390)
Prepaid expenses 27,670 (78,696) (35,614)
Income taxes receivable 242,544 (272,182) 13,095
Other assets 26,637 (121,881) (12,768)
Accounts payable (595,926) 1,164,864 218,371
Accrued compensation 186,971 232,137 83,505
Accrued expenses 1,562,055 136,250 4,572
Income taxes payable -- (51,235) (37,042)
Deferred rent 17,847 33,240 10,766
------------ ------------ ------------
Net cash (used in) provided by
operating activities (2,489,346) 113,312 362,730
------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures for property and equipment (1,724,397) (7,813,263) (2,673,634)
Acquisition of coffeehouses -- (1,916,000) --
------------ ------------ ------------
Net cash (used in) investing activities (1,724,397) (9,729,263) (2,673,634)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from notes payable -- 10,000 --
Payments on notes payable -- (49,398) --
Proceeds from line of credit -- 4,100,000 --
Payments on line of credit -- (4,100,000) --
Proceeds from long-term debt 4,500,000 1,622,520 580,000
Principal payments on long-term debt (2,000,000) (2,569,378) (179,134)
Proceeds from issuance of common stock, net of
fees paid 1,050,000 12,579,452 --
Proceeds from sale of preferred stock -- -- 2,225,813
Repurchase of common stock -- -- (280,000)
------------ ------------ ------------
Net cash provided by financing activities 3,550,000 11,593,196 2,346,679
------------ ------------ ------------
Net (decrease) increase in cash (663,743) 1,977,245 35,775
Cash at beginning of year 2,071,904 94,659 58,884
------------ ------------ ------------
Cash at end of year $ 1,408,161 $ 2,071,904 $ 94,659
============ ============ ============
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 154,999 $ 164,140 $ 50,187
============ ============ ============
Income taxes $ 800 $ 108,773 $ 89,458
============ ============ ============
Non-cash Transactions
Equipment Purchased under Capital Leases $ 498,513 $ -- $ --
============ ============ ============
See accompanying notes to financial statements.
F-7
32
DIEDRICH COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 28, 1998, JANUARY 29, 1997 AND JANUARY 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Diedrich Coffee, Inc. (the "Company") operates a chain of
coffeehouses located in Southern California, Colorado and Texas, which sell
coffee beverages made with its own freshly roasted coffee. In addition, the
Company sells light food items and whole bean coffee through its coffeehouses.
The Company also operates a wholesale and mail order business in Southern
California, which sells whole bean coffee and related supplies and equipment.
Change in Fiscal Year
Effective February 1, 1996, the Company changed its year-end from
January 31 to a fiscal year ending on the Wednesday nearest January 31.
Inventories
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out method for all inventories.
Property and Equipment
Property and equipment are stated at cost. Depreciation is
calculated using the straight-line method over estimated useful lives of five to
seven years. Property and equipment held under capital leases and leasehold
improvements are amortized straight-line over the shorter of their estimated
useful lives or the term of the related leases.
Major renewals and improvements are capitalized. Maintenance and
repairs that do not improve or extend the life of the respective assets are
charged to expense as incurred.
Store Pre-opening Costs
Certain direct and incremental costs incurred prior to the
opening of a coffeehouse location are expensed as incurred.
Fair Value of Financial Instruments
The carrying amounts of cash, accounts receivable, accounts
payable and accrued expenses approximate fair value because of the short-term
maturity of these financial instruments. The Company believes the carrying
amounts of the Company's notes payable and long-term debt approximate fair value
because the interest rates on these instruments are subject to change with, or
approximate, market interest rates.
Rent Expense
Certain of the Company's lease agreements provide for scheduled
rent increases during the lease terms or for rental payments commencing on a
date other than the date of initial occupancy. Rent expense is recorded on a
straight-line basis over the respective terms of the leases.
F-8
33
DIEDRICH COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Net Income (Loss) per Common Share
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share." SFAS No. 128 specifies new standards designed to improve the earnings
per share ("EPS") information provided in financial statements by simplifying
the existing computational guidelines, revising the disclosure requirements and
increasing the comparability of EPS data on an international basis. Some of the
changes made to simplify the EPS computations include: (a) eliminating the
presentation of primary EPS and replacing it with basic EPS, with the principal
difference being that the common stock equivalents are not considered in
computing basic EPS, (b) eliminating the modified treasury stock method and the
three percent materiality provision and (c) revising the contingent share
provisions and the supplemental EPS data requirements. SFAS No. 128 also makes a
number of changes to existing disclosure requirements. SFAS No. 128 is effective
for financial statements issued for periods ending after December 15, 1997,
including interim periods. Basic earnings per share are presented for the fiscal
years ended January 28, 1998 and January 29, 1997; diluted earnings per share
are the same as basic as losses were incurred in those years.
Pro Forma Net Income per Share
Pro forma net income per share for fiscal 1996 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.
Costs in Excess of Net Assets Acquired
Costs in excess of net assets acquired are amortized on a
straight-line basis over the expected periods to be benefited, generally 15
years. The Company assesses the recoverability of this intangible asset by
determining whether the amortization of the goodwill balance over its remaining
life can be recovered through undiscounted future operating cash flows of the
acquired operations. The amount of goodwill impairment, if any, is measured
based on projected discounted future operating cash flows using a discount rate
reflecting the Company's average cost of funds. The assessment of the
recoverability of goodwill will be impacted if estimated future operating cash
flows are not achieved.
F-9
34
DIEDRICH COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Stock Option Plans
Prior to February 1, 1996, the Company accounted for its stock
option plans in accordance with the provisions of Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. As such, compensation expense would be recorded on the date of
grant only if the current market price of the underlying stock exceeded the
exercise price. On February 1, 1996, the Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation," which permits entities to recognize
as expense over the vesting period the fair value of all stock-based awards on
the date of the grant. Alternatively, SFAS No. 123 also allows entities to
continue to apply the provisions of APB Opinion No. 25 and provide pro forma net
income and pro forma earnings per share disclosures for employee stock option
grants made in fiscal 1996 and future years as if the fair-value-based method
defined in SFAS No. 123 had been applied. The Company has elected to continue to
apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure
provisions of SFAS No. 123.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company adopted the provisions of SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," on February 1, 1996. This statement requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amounts of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. The Company recorded an impairment provision of $2,203,000 in fiscal 1998.
Advertising and Promotion Costs
Advertising costs are expensed as incurred. Promotion costs are
charged to income in the period of the promotional event. General and
administrative expenses include advertising and promotion costs of approximately
$377,000 for the year ended January 28, 1998 and $157,000 for the year ended
January 29, 1997. Advertising and promotion costs were insignificant for the
year ended January 31, 1996.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
Revenue is recognized at the point of sale.
Reincorporation
In connection with the Company's September 1996 IPO, the Company
reincorporated in Delaware thereby changing its common stock from no par value
to $.01 par value per share. All stockholders' equity and share data have been
retroactively adjusted to give effect to the reincorporation.
F-10
35
DIEDRICH COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. INVENTORIES
Inventories consist of the following:
JANUARY 28, 1998 JANUARY 29, 1997
---------------- ----------------
Unroasted coffee $ 535,885 $ 357,255
Roasted coffee 67,965 90,536
Accessory and specialty
items 230,502 454,946
Other food, beverage and supplies 540,767 712,408
---------- ----------
$1,375,119 $1,615,145
========== ==========
3. PROPERTY AND EQUIPMENT
Property and equipment, net, consist of the following:
JANUARY 28, 1998 JANUARY 29, 1997
---------------- ----------------
Leasehold improvements $ 7,017,125 $ 7,528,844
Equipment 4,047,109 4,085,947
Furniture and fixtures 2,022,252 2,121,702
Construction in progress 250,716 144,068
Assets under capital lease 498,513 --
------------ ------------
13,835,715 13,880,561
Accumulated depreciation
and amortization (3,730,872) (1,917,809)
------------ ------------
$ 10,104,843 $ 11,962,752
============ ============
4. 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.
On December 18, 1996, the Company purchased substantially all of the
assets of one coffeehouse located in Orange County, California from an unrelated
third party for cash consideration of $116,000.
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.
F-11
36
DIEDRICH COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. DEBT
Long-term debt consists of the following:
JANUARY 28, 1998 JANUARY 29, 1997
---------------- ----------------
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 $--
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 16, 2002 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 --
---------- ---
$2,500,000 $--
========== ===
In March 1997, the Company received a commitment for a $1 million line
of credit on arms-length terms from a significant stockholder of the Company.
On May 27, 1997, the Company made a promissory note (the "Note") for the
benefit of The Palm Trust of which Paul Heeschen, a director, is a trustee. Mr.
Heeschen has no beneficial interest in the Palm Trust. The Note provided for
borrowings by the Company up to $1,500,000 with interest accruing at the prime
rate plus 3 1/2%. All outstanding principal and accrued interest was due and
payable on January 27, 1998 or promptly after the closing of any new debt or
equity financing in an amount exceeding $1,500,000. This indebtedness was fully
paid and discharged on October 20, 1997 with the proceeds of borrowing from the
Ocean and Grandview Trusts described below.
On August 19, 1997, the Company entered into a promissory note, term
loan agreement, and security agreement with the Virginia R. Cirica Trust (the
"Cirica Trust") (collectively the "Cirica Trust Loan Documents"). That trust is
controlled by Ms. Cirica, who is the spouse of Lawrence Goelman, then Chairman
and Interim Chief Executive Officer of the Company.
Shortly before the Cirica Trust entered into the Cirica Trust Loan
Documents, Mr. Goelman loaned Ms. Cirica approximately $250,000. Some of those
funds were transferred by Ms. Cirica to the Cirica Trust and advanced to the
Company pursuant to the Cirica Trust Loan Documents. The loan was secured by the
assets of the Company and provided for borrowings up to $500,000 with interest
accruing at the prime rate plus 3 1/2 %. As of October 29, 1997 the Company
borrowed the entire $500,000 available.
In connection with the Cirica Trust Loan Documents, the Company issued a
warrant to the Cirica Trust to purchase up to 85,000 shares of the Company's
common stock if the loan was repaid in full within 120 days of closing, or up to
170,000 shares of the Company's common stock if the loan was not repaid within
120 days, all at a price of $2.25 a share. The warrants are exercisable
immediately and expire on the later of August 19, 2003 or one year following
payment in full of the loan. Mr. Goelman disclaims any pecuniary interest in the
loan to the Company and any beneficial interest in the Cirica Trust, except to
the extent to which Mr. Goelman is a contingent beneficiary under the terms of
the Cirica Trust. The loan was repaid in full and discharged on December 17,
1997.
F-12
37
DIEDRICH COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
On September 30, 1997 the Company entered into a promissory note, term
loan agreement and security agreement with Nuvrty, Inc., a Colorado corporation
controlled by Amre Youness, a former director of the Company (the "Nuvrty Loan
Documents"). All outstanding principal and accrued interest is due and payable
on September 30, 2002. The loan is secured by the assets of the Company and
provides for borrowings up to $1,000,000 with interest accruing and paid monthly
at the prime rate plus 3 1/2%. The Company borrowed the full amount under the
loan.
In connection with the Nuvrty Loan Documents, the Company issued a
warrant to Nuvrty to purchase up to 170,000 shares of the Company's common stock
if the Loan was repaid in full within 120 days of closing and up to 340,000
shares of the Company's common stock if the loan was not repaid within 120 days,
all at a price of $2.25 per share. The warrants are exercisable immediately and
expire on the later of September 30, 2003 or one year following payment in full
of the loan.
On October 16, 1997 the Company entered into parallel promissory notes,
term loan agreements and security agreements with the Ocean and Grandview Trusts
on terms identical to those entered into with the Cirica Trust and Nuvrty, Inc.
(the "Ocean Trust Loan Documents" and the "Grandview Trust Loan Documents",
respectively). The Ocean Trust Loan Documents and the Grandview Trust Loan
Documents provide for borrowing up to $750,000 from each Trust. Each loan is
secured by the assets of the Company. Interest on advances is accrued and
payable monthly at the prime rate plus 3 1/2%. The Company borrowed $750,000
under each facility. All outstanding principal and accrued interest is due and
payable to each of the Ocean and Grandview Trusts on October 16, 2002.
In connection with the Ocean Trust Loan Documents and the Grandview
Trust Loan Documents the Company issued warrants to each Trust respectively to
purchase up to 127,500 shares each of the Company's common stock if the loans
were repaid in full within 120 days of closing, or up to 255,000 shares
respectively of the Company's common stock if the loans were not repaid in full
within 120 days of closing, all at a price of $2.25 per share. The warrants are
exercisable immediately and expire on the later of October 16, 2003 or one year
following payment in full of the respective loans. The Company used the proceeds
from the Ocean Trust and Grandview Trusts Loans to pay off and discharge the
outstanding indebtedness to the Palm Trust.
The warrants associated with all the above debt were accounted for in
accordance with the provisions of APB 14, "Accounting for Convertible Debt and
Debt Issued with Stock Purchase Warrants." In accordance with APB 14, none of
the proceeds from issuance of the debt was allocated to the warrants based on
their relative fair value calculated using both a Cost of Replacement model and
a Monte Carlo simulation of possible warrant exercise and no expense was
recognized.
At January 28, 1998 the prime rate was 8.5%.
6. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
As of January 28, 1998, the Company leases warehouse and office space in
Irvine, California, warehouse space in Denver, Colorado, and thirty-eight
coffeehouse locations in Southern California, Colorado and Texas expiring
through December 2007. The leases for five of the coffeehouse locations are
guaranteed by an officer/director of the Company. Certain of the coffeehouse
leases require the payment of property taxes, normal maintenance and insurance
on the properties and additional rents based on percentages of sales in excess
of various specified retail sales levels. Contingent rent expense was
insignificant for all periods presented.
The Company purchased point-of-sale equipment and other operating
assets under capital leases.
Future minimum lease payments under non-cancelable operating leases as
of January 28, 1998 are as follows:
Year Ending January Non-cancellable
Operating Leases Capital Leases
---------------- --------------
1999 ...................................... $ 1,946,000 $168,139
2000 ...................................... 1,954,000 153,301
2001 ...................................... 1,811,000 153,301
2002 ...................................... 1,502,000 149,485
2003 ...................................... 1,227,000 53,365
Thereafter ................................ 3,146,000 --
----------- --------
$11,586,000 $676,591
=========== ========
Less amount representing interest.......... 191,160
--------
Present value of minimum lease payments.... 485,431
Less current portion....................... 168,139
--------
Long-term portion.......................... $317,292
========
Rent expense under operating leases approximated $2,232,000, $1,772,000,
and $667,000 for the years ended January 28, 1998 and January 29, 1997 and
January 31, 1996, respectively.
F-13
38
DIEDRICH COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
PURCHASE COMMITMENTS
As of January 28, 1998, the Company had entered into fixed price
purchase contracts for unroasted coffee aggregating approximately $451,500. Such
contracts are generally short-term in nature and the Company believes that their
cost approximates fair market value.
CONTINGENCIES
In the ordinary course of its business, the Company may become involved
in legal proceedings from time to time. As of April 20, 1998, the Company was
not party to any material pending legal proceedings.
7. ACCRUED EXPENSES
The following table sets forth details of accrued expenses:
Accrued costs for store/warehouse closures $ 986,000
Other accrued taxes 331,224
Accrued worker's compensation insurance 147,532
Other accrued expenses 332,113
----------
Total accrued expenses $1,796,869
==========
8. STOCKHOLDERS' EQUITY
In June 1995 the Company repurchased 229,787 shares of common stock from
a stockholder for $305,000 which consideration was offset by a $25,000
Stockholder receivable related to the original purchase of the shares.
In June 1995, the Company amended and restated its articles of
incorporation and authorized the issuance of 1,608,568 shares of new preferred
stock designated as Series B Preferred Stock ("Series B"). The amended and
restated articles of incorporation also changed the characteristics of the
previously issued Series A Preferred Stock ("Series A") to conform with that of
the newly authorized Series B, except for the liquidation preference.
In June 1995, the Company entered into a Series B Preferred Stock
Purchase Agreement for the sale of 1,608,568 shares of Series B Preferred Stock
in exchange for an aggregate purchase price of $2,305,000. Issuance costs of
approximately $79,000 have been netted against the proceeds received.
During fiscal 1994, the Company and the original purchaser of the Series
A Preferred Stock (the "Purchaser") acknowledged a purchase price overpayment
and agreed to a post-closing adjustment to the purchase price from the terms of
the original stock purchase. The Company and the Purchaser agreed to reduce the
original purchase price of the Series A by $200,000. Accordingly, the Company
recorded this transaction by reducing the cost basis of the Series A by $200,000
and recording a payable to the stockholder. The Company settled the obligation
by issuing 268,097 shares of common stock in June 1995. Additionally, to address
the dilution resulting from the issuance of shares to the Purchaser, the Company
issued an additional 17,112 shares of common stock to a stockholder.
In June 1995, one executive officer was granted options to purchase
131,350 shares of the Company's common stock at $1.45 per share, the estimated
fair value of the common stock on the grant date. The options become exercisable
upon the occurrence of certain events, including the IPO and a change in control
(as defined). If not exercisable earlier, the options become exercisable in June
2003 and expire 10 years from the date of grant. In May, 1997 the Company and
the executive agreed to terms under which 52,167 options were forfeited and the
expiration date for the remaining 79,183 was changed to March 12, 1999.
In July 1996, the Company adopted the 1996 Stock Incentive Plan (the
"Incentive Plan"), which authorized the granting of a variety of stock-based
incentive awards, including incentive and nonstatutory stock options. A total of
775,000 shares have been reserved for issuance under the Incentive Plan. The
stockholders approved at the 1997 annual meeting of stockholders, an increase of
300,000 shares reserved for issuance pursuant to the Incentive Plan. The
Incentive Plan is administered by a committee of the Board of Directors, who
determine the recipients and terms of the awards granted. Under the Incentive
Plan, options to purchase common stock may be granted with an exercise price
below market value of such stock on the grant date.
In July 1996, the Company adopted the 1996 Non-Employee Directors Stock
Option Plan (the "Directors Plan"), which authorizes the granting of
non-qualified stock options to independent directors. A total of 125,000 shares
have been reserved for issuance under the Directors Plan. Pursuant to the
Directors Plan, each non-employee director receives certain automatic grants of
options, which generally vest over two years. All non-employee director options
have a term of ten years and an exercise price equal to the fair market value of
the Company's common stock on the date of grant.
In August 1996, one executive officer was granted options to purchase
120,000 shares of the Company's common stock at an exercise price equal to the
initial public offering price per share. The options become exercisable as
follows:
F-14
39
DIEDRICH COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(a) 100,000 share options vest monthly over three years at the rate of 30% in
the first year, 30% in the second year and 40% in the third year, (b) 10,000
share options of which 5,000 options vest immediately upon the commencement of
employment and the remaining 5,000 options vest monthly over the first six
months of employment and (c) 10,000 share options which fully vest 65 days after
the commencement of employment. On September 24, 1997 the Company and the
executive agreed to revise the exercise price of these options to $3.00 per
share (the closing price of the Company's stock on that date). In January, 1998
the Company and the executive agreed to terms under which the employee retained
the 62,500 options vested under the foregoing schedule and to grant the right
to an additional 17,500 shares vesting on August 31, 1998. The expiration date
of these options was changed to November 1, 1998. The remaining 40,000 options
listed on the foregoing schedule were canceled.
In September 1996, the holders of the Series A and Series B converted
their shares into shares of common stock on a one-for-one basis.
On September 11, 1996, the Company completed an initial public offering
of 2,530,000 shares (including an over-allotment option). The offering consisted
of 1,600,000 shares of common stock sold on behalf of the Company and 930,000
shares of common stock sold on behalf of certain selling stockholders. The net
proceeds of the offering to the Company, after deducting approximately
$2,621,000 in related expenses, were approximately $12,579,000.
In connection with the IPO, the managing underwriter received warrants
exercisable for 160,000 shares of the Company's common stock at $11.50 per
share. The warrants are exercisable commencing September 1997. The warrants were
repriced to $5.25 pursuant to written agreement on December 10, 1997 and expire
on December 10, 1998.
On April 25, 1997 the Company's Board of Directors approved the 1997
Non-Employee Director's Stock Option Plan under which options for 10,000 shares
each were granted to two non-employee directors. These options have an exercise
price of $2.75, became vested on April 25, 1998 and expire on April 25, 2007.
On November 18, 1997, Mr. John E. Martin joined the Company's Board
of Directors as Chairman, replacing Lawrence Goelman. On November 17,
1997, Mr. Martin entered into a letter agreement with the Company appointing him
Chairman of the Board of the Company. The Company and Mr. Martin after entered
into an agreement under which Mr. Martin would be granted the option to purchase
up to 850,000 shares of the common stock of the Company subject to stockholder
approval. Mr. Martin and the Company also agreed to terms under which Mr. Martin
would purchase 333,333 shares of the Company's common stock at $3.00 per share,
following stockholder approval of the Martin Option Agreement.
On November 18, 1997, Mr. Timothy J. Ryan joined the Company as
President and Chief Executive Officer to replace Lawrence Goelman,
Interim CEO. Subject to stockholder approval, the Company entered into a
performance based Stock Option Plan and Agreement under which Mr. Ryan would be
granted the option to purchase up to 600,000 shares of the common stock of the
Company and Mr. Ryan would purchase 16,667 shares of the Company's stock at
$3.00 per share pursuant to a private sale of restricted stock.
On January 22, 1998 the stockholders of the Company approved the stock
option plans and agreements with John Martin and Timothy Ryan. On January 28,
1998 Messrs. Martin and Ryan completed their respective private purchases of
Company stock of $1,000,000 and $50,000, respectively.
F-15
40
DIEDRICH COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Information regarding the Company's stock option plan is summarized
below:
Weighted 1996 Weighted 1997 Weighted
1995 Average Directors Average Directors Average 1996 Stock
Stock Exercise Stock Exercise Stock Exercise Incentive
Options Price Option Plan Price Option Plan Price Option Plan
------- ----- ----------- ----- ----------- ----- -----------
Shares authorized 131,350 125,000 20,000 775,000
Shares under option
Outstanding at:
January 31, 1995
Granted 131,350 $ 1.45 -- -- -- -- --
Exercised -- -- -- -- -- --
Forfeited -- -- -- -- -- --
Outstanding at:
January 31, 1996 131,250 $ 1.45 30,000 $ 10.00 -- -- --
Granted -- -- 140,000
Exercised -- -- --
Forfeited -- -- --
Outstanding at:
January 29, 1997 131,350 $ 1.45 30,000 $ 10.00 -- 140,000
Granted -- 10,000 2.75 20,000 $ 2.75 405,000
Exercised -- -- -- --
Forfeited 52,167 -- 10,000 $ 10.25 -- -- 140,000
Outstanding at:
January 28, 1998 79,183 $ 1.45 30,000 $ 7.50 20,000 $ 2.75 405,000
Weighted-average
fair value of
options granted
during the fiscal
year:
1995 1.33 -- -- -- -- --
1997 -- -- $ 5.28 -- -- -- $ 5.01
1998 -- -- $ 1.47 -- $ 1.47 -- $ 2.61
Options exercisable:
At January 31, 1996 -- -- -- -- -- --
At January 29, 1997 79,183 -- -- -- -- 31,667
At January 28, 1998 79,183 10,000 -- -- -- 237,500
Weighted Weighted Weighted
Average John E. Average Timothy J. Average
Exercise Martin Exercise Ryan Option Exercise
Price Option Plan Price Plan Price
----- ----------- ----- ---- -----
Shares authorized 850,000 600,000
Shares under option -- --
Outstanding at:
January 31, 1995
Granted -- -- --
Exercised -- -- --
Forfeited -- -- --
Outstanding at:
January 31, 1996 -- -- --
Granted 9.61 -- --
Exercised -- --
Forfeited -- --
Outstanding at:
January 29, 1997
Granted 9.61 -- --
Exercised 5.65 850,000 $ 5.88 600,000 $ 7.15
Forfeited 9.61
Outstanding at:
January 28, 1998 2.90 850,000 $ 5.88 600,000 $ 7.15
Weighted-average
fair value of
options granted
during the fiscal
year:
1995 --
1997 --
1998 -- $ 2.83 $ 2.79
Options exercisable:
At January 31, 1996
At January 29, 1997
At January 28, 1998 550,000 250,000
F-16
41
DIEDRICH COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about stock options
outstanding on January 28, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- ------------------------------------
WEIGHTED
NUMBER OUTSTANDING WEIGHTED AVERAGE NUMBER EXERCISABLE WEIGHTED AVERAGE
AT AVERAGE REMAINING EXERCISE AT EXERCISE
JANUARY 28, 1998 LIFE (YEARS) PRICE JANUARY 28, 1998 PRICE
---------------- ------------- ------ ---------------- -----
$ 1.45 79,183 1.12 $ 1.45 79,183 $ 1.45
$ 2.75 - $ 4.00 935,000 5.54 $ 3.47 737,500 $ 3.58
$ 4.01 - $ 6.00 300,000 9.81 $ 4.88 300,000 $ 4.88
$ 6.01 - $ 9.00 325,000 9.81 $ 8.00 -- --
$ 9.01 - $10.50 345,000 9.74 $ 9.99 10,000 $ 9.88
Pro forma income and pro forma income per share, as if the fair value-based
method has been applied in measuring compensation cost for stock-based awards:
1998
-------------
REPORTED
Net Loss $ (9,112,761)
Basic loss per share $(1.69)
PRO FORMA
Net Loss $(13,588,746)
Basic loss per share $ (2.52)
The pro forma net income (loss) and net income (loss) per share calculated
pursuant to the provisions of SFAS No. 123 for the year ended January 29, 1997
would not be significantly different from amounts reported and therefore are not
included herein.
The fair values of the options granted were estimated using the Black-Scholes
option-pricing model based on the following weighted average assumptions:
1998
--------------
Risk free interest rate 5.5%
Expected Life 6 years
Expected volatility 128%
Expected dividend yield 0%
9. INCOME TAXES
The components of the income tax provision (benefit) are as follows:
YEAR ENDED YEAR ENDED YEAR ENDED
JANUARY 28, 1998 JANUARY 29, 1997 JANUARY 31, 1996
---------------- ---------------- ----------------
Current:
Federal ... $ -- $(171,284) $ 106,297
State ..... 800 (5,015) 31,132
--------- --------- ---------
800 (176,299) 137,429
--------- --------- ---------
Deferred:
Federal ... -- 40,542 (6,483)
State ..... -- 7,650 (1,735)
--------- --------- ---------
48,192 (8,218)
--------- ---------
$ 800 $(128,107) $ 129,211
========= ========= =========
F-17
42
DIEDRICH COFFEE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting and income tax purposes. The significant components of deferred tax
assets and liabilities are as follows:
JANUARY 28, 1998 JANUARY 29, 1997
---------------- ----------------
Deferred tax assets:
Net operating loss carryforwards ........ $ 2,965,213 $ 317,604
Accrued expenses ........................ 456,844 90,574
Restructure and Store closure Reserves . 410,933 --
AMT credit .............................. 1,069 14,236
----------- -----------
Total deferred tax assets .................... 3,834,059 422,414
----------- -----------
Deferred tax liabilities:
Depreciation and amortization ........... (199,432) (175,006)
State income taxes ...................... -- (14,556)
----------- -----------
Total deferred tax liabilities ............... (199,432) (189,562)
----------- -----------
Total deferred tax assets .................... 3,634,627 232,852
Less: Valuation allowance .................... (3,634,627) (232,852)
----------- -----------
Net deferred tax assets ...................... $ -- $ --
=========== ===========
A reconciliation of the statutory Federal income tax rate with the
Company's effective income tax provision (benefit) rate is as follows:
YEAR ENDED YEAR ENDED YEAR ENDED
JANUARY 28, 1998 JANUARY 29, 1997 JANUARY 31, 1996
---------------- ---------------- ----------------
Federal statutory rate ........................... (34.0)% (34.0)% 34.0%
State income taxes, net of Federal benefit ....... (3.3) 2.6 6.1
Net operating loss carryforward .................. -- -- (2.0)
Other ............................................ (0.1) (1.0) 2.9
Valuation allowance .............................. 37.4 20.9 --
---------------- ---------------- ------------
-- (11.5)% 41.0%
================ ================ ============
As of January 28, 1998, the Company had net operating loss (NOL)
carryforwards of approximately $8,007,000 and $4,160,000 for Federal and state
purposes, respectively. The Federal NOL is available to offset future federal
taxable income through 2013, and the state NOL is available to offset future
state taxable income through 2003. The utilization of certain NOL carryforwards
could be limited due to restriction imposed under Federal and state laws upon a
change in ownership.
A valuation allowance against deferred tax assets of $3,634,627 was
recorded in fiscal 1998 to fully offset NOL carryforwards and other net deferred
tax assets at January 28, 1998.
10. RESTRUCTURING CHARGE
On March 12, 1997, the Company announced that it was reviewing the
performance of all of the Company's coffeehouses to determine which units were
not meeting management's long-term operational expectations. As a result of this
review, twelve stores were identified to be closed. In connection with the store
closures and other related expenses, the Company recorded an impairment
provision and restructuring charge totaling approximately $4.6 million in the
first quarter of fiscal 1998. Eleven of the twelve stores were closed with eight
leases terminated and three locations subleased. In January, the new management
reviewed the progress of all retail operations and determined that one
coffeehouse originally designated for closure would remain open. At year end,
most of the lease terminations provided for in the restructuring had been
completed at less cost than originally anticipated. As a result of these two
factors, management determined that the remaining restructuring reserve could be
reduced by $648,000 to $237,000. The remaining balance is designated for
severance payments and costs related to three closed locations currently
under sublease.
11. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
January 28, 1998 January 29, 1997
---------------- ----------------
NUMERATOR:
Net (loss) income (9,112,761) (985,705)
DENOMINATOR:
Basic weighted average
common shares outstanding 5,392,609 4,414,000
Effect of dilutive securities -- --
Diluted weighted average common
shares outstanding 5,392,609 4,414,000
Basic (loss) earnings per share (1.69) (0.22)
Diluted (loss) earnings per share (1.69) (0.22)
The January 31, 1996 basic and dilutive earnings per share are not
shown due to the noncomparative capital structure.
For the years ended January 28, 1998 and January 29, 1997, employee
stock options of 1,984,183 and 301,350 respectively, were not included in the
computation of diluted earnings per share as losses were incurred in those
years.
12. SUBSEQUENT EVENT (UNAUDITED)
On March 30, 1998 the Company agreed to a private placement of 200,000
shares of the Company's common stock to Franchise Mortgage Acceptance
Company ("FMAC") at a price of $6.375 (the stock's closing sale price for
that day on the Nasdaq National Market). In addition, FMAC also received an
option to purchase 100,000 additional shares of the Company's common stock;
this option may be exercised in increments of 25,000 shares or more and expire
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.
This transaction was completed on April 3, 1998. Mr. John E. Martin, Chairman
of Diedrich Coffee, Inc., serves on the Board of Directors of FMAC.
13. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The results of operations for fiscal 1998 and 1997 were as follows:
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
(in thousands, except per share data)
Fiscal 1998:
Net sales $ 5,868 $ 5,811 $ 5,563 $ 5,740
Operating (loss) (5,390) (661) (654) (2,202)
Net (loss) (5,383) (698) (739) (2,293)
Basic net (loss) per share (1.00) (.13) (.14) (.42)
Fiscal 1997:
Net sales $ 4,275 4,667 5,105 5,765
Operating income (loss) 216 75 82 (1,401)
Net income (loss) 107 6 46 (1,145)
Basic net income (loss) per share .03 -- .01 (.21)
F-18
43
DIEDRICH COFFEE, INC.
INDEX TO EXHIBITS
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGES
------ ----------- -----
2.1 Form of Agreement and Plan of Merger (1)
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 Representative's Warrant Agreement (1)
4.4 Specimen Stock Certificate (1)
4.5 Form of Conversions Agreement in connection with the
conversion of Series A and Series B Preferred Stock into
Common Stock (1)
10.1 Martin R. Diedrich Employment Agreement, dated June 29, 1995
(1)
10.2 Steven A. Lupinacci Employment Agreement, dated June 29, 1995
(1)
10.3 Stock Option Plan and Agreement of Steven A. Lupinacci, dated
June 29, 1995 (1)
10.4 Form of Indemnification Agreement (1)
10.5 Diedrich Coffee 1996 Stock Incentive Plan (1)
10.6 Diedrich Coffee 1996 Non-Employee Directors Stock Option Plan
(1)
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 (1)
10.8 Revolving Promissory Note dated May 20, 1996 by Diedrich
Coffee in favor of Redwood Enterprises VII, L.P. (1)
10.9 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)
10.10 Kerry W. Coin Employment Agreement, dated August 26, 1996 (1)
10.11 Letter Agreement between Diedrich Coffee and Lawrence Goelman,
dated April 23, 1997, regarding appointment as Interim
President and Chief Executive Officer (2)
10.12 Separation agreement dated May 13, 1997 between Steven A.
Lupinacci and Diedrich Coffee, Inc. (3)
10.13 Employment Letter to Jonathan B. Eddison dated June 4, 1997
(4)
10.14 Employment Letter John Bayley dated July 21, 1997 (4)
10.15 Employment Letter to Michael Reeves dated May 5, 1997 (4)
10.16 Form of Promissory Note made in favor of the Palm Trust (4)
10.17 Form of Term Loan Agreement made to the Virginia R. Cirica
Trust (4)
10.18 Form of Security Agreement made to the Virginia R. Cirica
Trust (4)
10.19 Form of Warrant Agreement made to the Virginia R. Cirica Trust
(4)
10.20 Form of Promissory Note made in favor of the Virginia R.
Cirica Trust (4)
10.21 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)
10.22 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)
10.23 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)
S-1
44
10.24 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)
10.25 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)
10.26 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)
10.27 Form of Promissory Note made in favor of Nuvrty, Inc., the
Ocean Trust and the Grandview Trust (6)
10.28 Form of Term Loan Agreement made in favor of Nuvrty, Inc., the
Ocean Trust and the Grandview Trust (6)
10.29 Form of Security Agreement made in favor of Nuvrty, Inc., the
Ocean Trust and the Grandview Trust (6)
10.30 Form of Warrant Agreement made in favor of Nuvrty, Inc., the
Ocean Trust and the Grandview Trust (6)
10.31 Form of Intercreditor Agreement made in favor of Nuvrty, Inc.,
the Ocean Trust and the Grandview Trust (6)
10.32 Amendment to Kerry Coin's employment agreement dated September
24, 1997 (6)
10.33 Form of Indemnification Agreement - John Bayley (6)
10.34 Form of Indemnification Agreement - Jonathan B. Eddison (6)
10.35 Form of Indemnification Agreement - John E. Martin (6)
10.36 Form of Indemnification Agreement - Timothy J. Ryan (6)
10.37 Form of Common Stock and Option Purchase Agreement with
Franchise Mortgage Acceptance Company dated as of April 3,
1998
10.38 Separation and Release Agreement dated January 28, 1998 with
Kerry W. Coin
10.39 Separation and Release Agreement dated January 30, 1998 with
Jonathan B. Eddison
11.1 Statement re Computation of Per Share Earnings
27 Financial Data Schedule
- ----------
(1) Incorporated by reference to the exhibit of the same number of
the Company's Registration Statement on Form S-1 (No.
333-08633), as amended, as declared effective by the
Securities and Exchange Commission on September 11, 1996.
(2) Incorporated by reference to the exhibit of the same number to
the Company's annual report on Form 10-K for the fiscal year
ended January 29, 1997.
(3) Incorporated by reference to the exhibit of the same number to
the Company'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.
(4) Incorporated by reference to the exhibit of the same number to
the Company's Quarterly Report on Form 10-Q, for the period
ended July 30, 1997, filed with the Securities and Exchange
Commission on September 12, 1997.
(5) Incorporated by reference to the exhibit of the same number to
the Company's Current Report on Form 8-K, filed with the
Securities and Exchange Commission on November 25, 1997.
(6) Incorporated by reference to the exhibit of the same number to
the Company'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.
S-2