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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended December 12, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from ___________ to ____________
Commission File Number 0-21203
DIEDRICH COFFEE, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 33-0086628
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
2144 MICHELSON DRIVE
IRVINE, CALIFORNIA 92612
(Address of Principal Executive Offices)
(949) 260-1600
(Registrant's Telephone Number, including Area Code)
----------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
As of January 23, 2002 there were 5,161,273 shares of common stock of the
registrant outstanding.
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DIEDRICH COFFEE, INC.
INDEX
PAGE
NUMBER
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited) 1
Condensed Consolidated Statements of Operations (Unaudited) 2
Condensed Consolidated Statements of Cash Flows (Unaudited) 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 24
i
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
DIEDRICH COFFEE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
December 12, 2001 June 27, 2001
----------------- -------------
ASSETS
Current assets:
Cash $ 2,081,000 $ 3,063,000
Accounts receivable, less allowance for
doubtful accounts of $1,832,000 at
December 12, 2001, and $2,007,000 at
June 27, 2001 2,621,000 1,718,000
Current portion of notes receivable (Note 2) 243,000 --
Inventories (Note 3) 3,069,000 2,843,000
Assets held for sale (Note 2) 160,000 1,694,000
Prepaid expenses 470,000 233,000
------------ ------------
Total current assets 8,644,000 9,551,000
Property and equipment, net 8,680,000 9,364,000
Costs in excess of net assets acquired, net of
amortization of $1,422,700 at June 27, 2001(Note 8) 12,250,000 12,250,000
Notes receivable (Note 2) 265,000 --
Other assets 560,000 726,000
------------ ------------
TOTAL ASSETS $ 30,399,000 $ 31,891,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of obligations under
capital leases $ 252,000 $ 272,000
Current installments of long-term debt (Note 4) 4,208,000 2,040,000
Accounts payable 2,619,000 2,239,000
Accrued compensation 1,516,000 1,954,000
Accrued expenses 670,000 1,141,000
Franchise deposits 587,000 648,000
Deferred franchise fee income 635,000 704,000
Provision for store closure (Note 5) 1,129,000 1,372,000
------------ ------------
Total current liabilities 11,616,000 10,370,000
Obligations under capital leases, excluding
current installments 825,000 716,000
Long term debt, excluding current installments
(Note 4) -- 3,503,000
Deferred rent 610,000 689,000
------------ ------------
Total liabilities 13,051,000 15,278,000
------------ ------------
Stockholders' Equity:
Common stock, $0.01 par value; authorized
8,750,000 shares; issued and outstanding
5,161,000 shares at December 12, 2001
and June 27, 2001 52,000 52,000
Additional paid-in capital 58,051,000 58,106,000
Accumulated deficit (40,755,000) (41,545,000)
------------ ------------
Total stockholders' equity 17,348,000 16,613,000
Commitments and contingencies -- --
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 30,399,000 $ 31,891,000
============ ============
See accompanying notes to condensed consolidated financial statements.
1
DIEDRICH COFFEE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Twelve Twelve Twenty-Four Twenty-Four
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
December 12, December 13, December 12, December 13,
2001 2000 2001 2000
---- ---- ---- ----
Net Revenue:
Retail sales $ 8,751,000 $ 11,573,000 $ 18,361,000 $ 22,239,000
Wholesale and other 5,471,000 6,074,000 8,773,000 10,803,000
Franchise revenue 1,770,000 1,753,000 2,999,000 3,230,000
------------ ------------ ------------ ------------
Total 15,992,000 19,400,000 30,133,000 36,272,000
------------ ------------ ------------ ------------
Cost and Expenses:
Cost of sales and related occupancy costs 8,118,000 9,642,000 15,108,000 18,261,000
Operating expenses 3,630,000 5,008,000 8,389,000 10,049,000
Depreciation and amortization 539,000 1,065,000 1,210,000 2,104,000
General and administrative expenses 2,312,000 3,120,000 4,416,000 6,057,000
Provision for asset impairment 22,000 -- 22,000 --
(Gain)/Loss on asset disposals (99,000) 32,000 (97,000) 32,000
------------ ------------ ------------ ------------
Total 14,522,000 18,867,000 29,048,000 36,503,000
------------ ------------ ------------ ------------
Operating income (loss) 1,470,000 533,000 1,085,000 (231,000)
Interest expense (132,000) (357,000) (304,000) (715,000)
Interest and other income, net 14,000 5,000 26,000 17,000
------------ ------------ ------------ ------------
Income (loss) before income tax provision 1,352,000 181,000 807,000 (929,000)
Income tax provision 17,000 17,000 17,000 20,000
------------ ------------ ------------ ------------
Net income (loss) $ 1,335,000 $ 164,000 $ 790,000 $ (949,000)
============ ============ ============ ============
Net income (loss) per share
- basic and diluted $ .26 $ 0.05 $ .15 $ (0.30)
============ ============ ============ ============
Weighted average shares outstanding
- basic and diluted 5,161,000 3,161,000 5,161,000 3,161,000
============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements.
2
DIEDRICH COFFEE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Twenty-Four Twenty-Four
Weeks Ended Weeks Ended
December 12, December 13,
2001 2000
---- ----
Cash flows from operating activities:
Net income (loss) $ 790,000 $ (949,000)
Adjustments to reconcile net income (loss) to
cash used in operating activities:
Depreciation and amortization 1,210,000 2,104,000
Amortization of loan fees 87,000 130,000
Provision for bad debt (175,000) 268,000
Provision for asset impairment 22,000 --
(Gain)/Loss on disposal of assets (99,000) 32,000
Changes in operating assets and liabilities:
Accounts receivable (728,000) (2,413,000)
Inventories (390,000) 531,000
Prepaid expenses (237,000) (394,000)
Other assets 13,000 (149,000)
Accounts payable 380,000 (814,000)
Accrued compensation (438,000) 1,114,000
Accrued expenses (468,000) (94,000)
Provision for store closure (243,000) (61,000)
Deferred franchise income and franchisee deposits (144,000) 187,000
Deferred rent 14,000 31,000
----------- -----------
Net cash used in operating activities (406,000) (477,000)
----------- -----------
Cash flows from investing activities:
Principal payments received on notes receivable 7,000 --
Capital expenditures for property and equipment (607,000) (603,000)
Proceeds from disposal of property and equipment 1,551,000 --
----------- -----------
Net cash provided by (used in) investing activities 951,000 (603,000)
----------- -----------
Cash flows from financing activities:
Stock issuance costs (56,000) --
Payments on long-term debt (1,335,000) (667,000)
Payments on capital lease obligations (136,000) (103,000)
----------- -----------
Net cash used in financing activities (1,527,000) (770,000)
----------- -----------
Net decrease in cash (982,000) (1,850,000)
Cash at beginning of period 3,063,000 2,944,000
----------- -----------
Cash at end of period $ 2,081,000 $ 1,094,000
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 205,000 $ 579,000
=========== ===========
Income taxes $ 18,000 $ 20,000
=========== ===========
Non-cash transactions
Issuance of notes receivable $ 515,000 $ --
=========== ===========
Asset purchased under capital lease $ 225,000 $ --
=========== ===========
See accompanying notes to consolidated financial statements.
3
DIEDRICH COFFEE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 12, 2001
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The unaudited condensed consolidated financial statements of Diedrich
Coffee, Inc. (the "Company") and its subsidiaries have been prepared in
accordance with generally accepted accounting principles, as well as the
instructions to Form 10-Q and Article 10 of Regulation S-X. These condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the year ended June 27, 2001.
In the opinion of management, all adjustments (consisting of normal,
recurring adjustments and accruals) considered necessary for a fair presentation
have been included. Operating results for interim periods are not necessarily
indicative of the results expected for a full year.
Reclassifications
Certain reclassifications have been made to the December 13, 2000
consolidated financial statements to conform to the December 12, 2001
presentation.
2. NOTES RECEIVABLE
In October 2001 the Company sold eight of its coffeehouses in Phoenix,
Arizona for $1,382,000 in cash and $515,000 in notes receivable. Under the terms
of this sale, the buyers also assumed operation of four additional coffeehouses
on a sublease basis, with an option to purchase them in the future at a
predetermined price. Another term of the transaction provided the Company the
right to continue to use the Coffee Plantation trademarks and trade name on a
royalty-free basis for the Company's five remaining Company operated locations.
The buyers also executed a seven year exclusive supply agreement which provides,
among other things, that the Company will supply roasted coffee to the units
noted above (and any other new Coffee Plantation units they may acquire or
develop during the term of the agreement), and committing the buyers to purchase
certain minimum levels of coffee annually.
Notes receivable at December 12, 2001 consist of the following:
Current Portion Long-Term Portion
Notes receivable from a corporation: Notes
receivable bearing interest at rates from
0.0% to 10.0%, payable in monthly
installments varying between $3,333.34 and
$25,000.00. Due between December 31, 2001
and October 5, 2006. Notes are secured by the
assets purchased under the Asset Purchase
and Sale Agreement. $ 243,000 $ 265,000
========== ==========
4
All of the net assets relating to these stores were classified as Assets
Held for Sale as of June 27, 2001. In addition, Assets Held for Sale includes a
parcel of land located in Oregon, which the Company currently has listed for
sale.
December 12, 2001 June 27, 2001
----------------- -------------
Phoenix assets held for sale $ -- $1,534,000
Oregon assets held for sale 160,000 160,000
----------- ----------
Total assets held for sale $ 160,000 $1,694,000
=========== ==========
3. INVENTORIES
Inventories consist of the following:
December 12, 2001 June 27, 2001
----------------- -------------
Unroasted coffee $ 999,000 $ 717,000
Roasted coffee 784,000 733,000
Accessory and specialty items 360,000 316,000
Other food, beverage and
supplies 926,000 1,077,000
---------- ----------
$3,069,000 $2,843,000
========== ==========
4. LONG-TERM DEBT
Long-term debt consists of the following:
December 12, 2001 June 27, 2001
----------------- -------------
FLEET NATIONAL BANK
Note payable bearing interest
at a rate of 5.08% as of
December 12, 2001 and payable
in monthly installments of
$100,000. Due September 1,
2002. Note is secured by the
assets of the Company and its
subsidiaries' stock. $4,208,000 $5,543,000
Less: current installments (4,208,000) (1,200,000)
Less: 50% of proceeds from
planned asset sales, which
are reflected as current
installments -- (840,000)
---------- ----------
Long-term debt, excluding
current installments $ -- $3,503,000
========== ==========
On July 7, 1999, the Company entered into a Credit Agreement with
BankBoston, N.A. (subsequently merged into Fleet National Bank) secured by
pledges of all of the Company's assets and its subsidiaries' stock and which
provided for a $12 million term loan and a $3 million revolving credit facility.
The term loan provided for principal repayment based upon a five-year
amortization, with quarterly principal payments of $666,667 and quarterly
interest payments based upon a formula described below. The Company has not
drawn down any borrowings under the revolving credit facility since it was
established, although the credit facility currently backs $177,500 of
outstanding Letters of Credit. Amounts outstanding under the Credit Agreement
bear interest, at the Company's option, at Fleet's base rate plus 1.25% or an
adjusted Eurodollar rate plus 3.0%. At December 12, 2001, the applicable
interest rate was 5.08%, which was based on the Eurodollar rate at the time.
Due to various problems encountered in the year subsequent to the
acquisition of Coffee People, Inc., including the closure of 39 Gloria Jean's
locations, six of which were company operated, the Company announced on June 29,
2000 that it expected to be in default under its Credit Agreement because of the
Company's inability to satisfy certain financial covenants. The Company
simultaneously announced that
5
on June 27, 2000, it had entered into a Letter Agreement with Fleet under which
the bank agreed to extend the due date of the June 30, 2000 quarterly principal
payment to July 31, 2000, and to forbear until July 31, 2000 from exercising any
of its rights and remedies arising from financial covenant defaults. The Company
subsequently made its July 31, 2000 principal payment on the extended due date.
On August 17, 2000, the Company entered into an extension of the June 27, 2000
Letter Agreement, which extended through September 30, 2000 the bank's
forbearance from exercising any of its default remedies.
On September 26, 2000, the Company entered into the First Amendment to
Credit Agreement with Fleet to amend certain terms of the original Credit
Agreement. The First Amendment to Credit Agreement provides for, among other
things: a significant reduction in the required minimum principal amortization
payments going forward, an acceleration in the maturity date of all amounts owed
under the Credit Agreement, an agreement between the Company and the bank about
certain assets that the Company intends to sell and about the payment of future
sale proceeds to the bank, the introduction of an additional event of default, a
reduction in the overall amount of the revolving credit facility, new
restrictions governing use of the facility and a modification of the financial
covenants going forward. The interest rate and the timing of quarterly interest
payments under the original Credit Agreement remained unchanged under the First
Amendment to Credit Agreement.
Specifically, under the terms of the First Amendment to Credit Agreement,
no further principal payments on the term loan were required from August 1, 2000
until January 31, 2001. The Company began making principal payments of $25,000
per month on February 1, 2001, which payment amount increased to $100,000 per
month on July 1, 2001. Minimum monthly payments of $100,000 are required until
all amounts owed under the Credit Agreement are repaid. The First Amendment to
Credit Agreement accelerates the maturity date of all remaining amounts owed
under the Credit Agreement to September 1, 2002. In addition, the Company and
the bank identified certain assets that could be sold without interfering with
the Company's core business, including two pieces of company owned real property
under existing retail locations and a parcel of company owned real property that
is presently undeveloped. The Company and the bank also identified certain
company-operated coffeehouses outside of the Company's core southern California
market that could be refranchised. Under the terms of the First Amendment to
Credit Agreement, the bank is to receive 50% of the net proceeds from any of the
Company's asset or equity sales. In January 2001, two of the aforementioned
pieces of real property were sold in a sale-leaseback transaction for $415,000.
$208,000 of the proceeds of the transaction was remitted to Fleet. In May 2001,
three company-operated coffeehouses in Texas were sold for an aggregate of
$1,025,000. $448,500 of the proceeds of the sale was remitted to Fleet. Also in
May 2001, the Company sold 2,000,000 shares (post-split) of Company common stock
in a private sale. $3,600,000 of the proceeds from the sale was remitted to
Fleet. In October 2001, twelve company-operated coffeehouses in Arizona were
sold for an aggregate of $1,382,000 in cash and $515,000 in notes receivable.
One-half of the cash payment, $596,000, was remitted to Fleet. In December 2001,
a parcel of real property and a building were sold in a sale-leaseback
transaction for $325,000. $140,000 of the proceeds from this sale was remitted
to Fleet. The proceeds from all five sales discussed above were applied solely
to the Company's principal note payable balance.
The First Amendment to Credit Agreement also introduced an additional
event of default under the Credit Agreement. The First Amendment specifies that
a materially adverse change in the financial condition of the Company or any of
its subsidiaries, as determined by the bank in its sole and exclusive
discretion, is an event of default. Under any event of default, the bank may
declare all amounts owed immediately due and payable. Additional changes under
the terms of the First Amendment to Credit Agreement include a reduction in the
maximum amount available under the revolving credit facility, a portion of which
the Company had previously been unable to access because of the covenant
defaults, from $3,000,000 to $1,293,000, and a restriction that the credit
facility be used only to back up existing and future standby Letters of Credit.
The First Amendment to Credit Agreement preserves the Company's ability to
obtain third party financing for capital projects and maintenance capital, and
increases its flexibility to obtain subordinated debt as a source of additional
working capital. Under the First Amendment to Credit Agreement, the bank waived
the previous financial covenant defaults and agreed to new financial covenant
ratios going forward based upon updated financial information and projections
prepared by the Company. In addition to resetting the ratios in the financial
covenants, the parties agreed to a new covenant under the First Amendment to
Credit Agreement that requires the Company to achieve
6
certain predetermined minimum levels of cumulative principal repayments in
addition to amounts already paid to date in fiscal 2001 or reflected in the new
go forward minimum monthly principal payment obligations discussed above:
$283,333 by March 2001; $708,333 by June 30, 2001; and $1,619,900 by September
30, 2001. All such incremental principal repayment obligations due prior to the
accelerated maturity date have been met as of December 12, 2001, and were
generated primarily from the net proceeds paid to the bank from the above
mentioned asset sales and stock issuance.
5. PROVISION FOR STORE CLOSURE
The estimated cost associated with closing under-performing stores is
accrued in the period in which the store is identified for closure by management
under a plan of termination. Such costs primarily include the estimated cost to
terminate a lease.
AMOUNTS
BEGINNING CHARGED TO CASH
BALANCE EXPENSE PAYMENTS END BALANCE
------- ------- -------- -----------
Year ended June 27, 2001 $1,387,000 $ 947,000 $ (962,000) $1,372,000
Twenty-four weeks ended
December 12, 2001 $1,372,000 $ 123,000 $ (366,000) $1,129,000
6. EARNINGS PER SHARE
The Company computes basic net income (loss) per share based on the
weighted average number of common shares outstanding during the periods
presented. Diluted net income (loss) per share is computed based on the weighted
average number of common and dilutive potential common shares outstanding during
the periods presented. The Company has granted certain stock options and
warrants, which have been treated as potential common shares.
The following table sets forth the computations of basic and diluted net
income (loss) per share:
Twelve Twelve Twenty-Four Twenty-Four
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
December 12, December 13, December 12, December 13,
2001 2000 2001 2000
---- ---- ---- ----
NUMERATOR:
Net income (loss) $1,335,000 $ 164,000 $ 790,000 $ (949,000)
========== ========== ========== ==========
DENOMINATOR:
Basic weighted average
common shares outstanding
5,161,000 3,161,000 5,161,000 3,161,000
Effect of dilutive securities -- -- -- --
---------- ---------- ---------- ----------
Diluted weighted average
common shares outstanding
5,161,000 3,161,000 5,161,000 3,161,000
========== ========== ========== ==========
Basic and diluted income
(loss) per share $ .26 $ 0.05 $ .15 $ (0.30)
========== ========== ========== ==========
All 490,592 options outstanding and all of the 730,000 warrants to
purchase shares of common stock outstanding during the twelve and the
twenty-four weeks ended December 12, 2001 were excluded from the calculation of
diluted net income (loss) per share as their inclusion would have been
anti-dilutive. All 680,835 outstanding options and all of the 230,000 warrants
to purchase shares of common stock outstanding during the twelve and the
twenty-four weeks ended December 13, 2000 were excluded from the calculation of
diluted net income (loss) per share as their inclusion would have been
anti-dilutive.
7
7. SEGMENT AND RELATED INFORMATION
The Company has three reportable segments: retail operations, wholesale
operations and franchise operations. The Company evaluates performance of its
operating segments based on income before provision for asset impairment and
restructuring costs, income taxes, interest expense, depreciation and
amortization, and general and administrative expenses.
Summarized financial information concerning the Company's reportable
segments is shown in the following table. The total assets for the "Other"
segment consist of corporate cash, corporate property,plant and equipment. The
other component of segment profit before tax includes corporate general and
administrative expenses, provision for asset impairment and restructuring
costs, depreciation and amortization expense and interest expense.
RETAIL WHOLESALE FRANCHISE
OPERATIONS OPERATIONS OPERATIONS OTHER TOTAL
---------- ---------- ---------- ----- -----
TWELVE WEEKS ENDED
DECEMBER 12, 2001
Total Revenue $ 8,751,000 $ 5,471,000 $ 1,770,000 $ -- $15,992,000
Interest expense 14,000 -- 13,000 105,000 132,000
Depreciation and
amortization 355,000 104,000 -- 80,000 539,000
Segment profit (loss)
before tax 361,000 1,458,000 1,945,000 (2,412,000) 1,352,000
Total assets as of
December 12, 2001 $11,203,000 $12,201,000 $ 3,247,000 $ 3,748,000 $30,399,000
RETAIL WHOLESALE FRANCHISE
OPERATIONS OPERATIONS OPERATIONS OTHER TOTAL
---------- ---------- ---------- ----- -----
TWELVE WEEKS ENDED
DECEMBER 13, 2000
Revenue $11,573,000 $ 6,074,000 $ 1,753,000 $ -- $19,400,000
Interest expense 16,000 -- 18,000 323,000 357,000
Depreciation and
amortization 586,000 197,000 -- 282,000 1,065,000
Segment profit (loss)
before tax 1,124,000 1,344,000 1,464,000 (3,751,000) 181,000
Total assets as of
December 13, 2000 $18,545,000 $14,571,000 $ 3,851,000 $ 2,007,000 $38,974,000
RETAIL WHOLESALE FRANCHISE
OPERATIONS OPERATIONS OPERATIONS OTHER TOTAL
---------- ---------- ---------- ----- -----
TWENTY-FOUR WEEKS
ENDED DECEMBER
12, 2001
Total Revenue $18,361,000 $ 8,773,000 $ 2,999,000 $ -- $30,133,000
Interest expense 30,000 -- 32,000 242,000 304,000
Depreciation and
amortization 710,000 340,000 -- 160,000 1,210,000
Segment profit (loss)
before tax 744,000 1,812,000 3,011,000 (4,760,000) 807,000
8
RETAIL WHOLESALE FRANCHISE
OPERATIONS OPERATIONS OPERATIONS OTHER TOTAL
---------- ---------- ---------- ----- -----
TWENTY-FOUR WEEKS
ENDED DECEMBER
13, 2000
Revenue $22,239,000 $10,803,000 $ 3,230,000 $ -- $36,272,000
Interest expense 34,000 -- 44,000 637,000 715,000
Depreciation and
amortization 1,192,000 371,000 -- 541,000 2,104,000
Segment profit (loss)
before tax 1,445,000 2,221,000 2,654,000 (7,249,000) (929,000)
8. INTANGIBLE ASSETS
Effective June 28, 2001, the Company adopted Statements of Financial
Accounting Standards (SFAS) Nos. 141 and 142, "Business Combinations" and
"Goodwill and Other Intangible Assets," respectively, which require that the
Company prospectively cease amortization of goodwill and instead conduct
periodic tests of goodwill for impairment. The Company has completed a
transitional test for goodwill impairment, and has determined that no goodwill
impairment was indicated as of June 28, 2001. The following table shows, on a
pro-forma basis, what earnings and earnings per share would have been if the new
accounting standards had been applied for the periods indicated:
TWELVE TWENTY-FOUR
WEEKS ENDED WEEKS ENDED
DECEMBER 13, DECEMBER 13,
2000 2000
---- ----
Reported net income (loss) $ 164,000 $ (949,000)
Add back: goodwill amortization 197,000 370,000
----------- -----------
Adjusted net income (loss) $ 361,000 $ (579,000)
=========== ===========
Per share information:
Basic and Diluted:
Reported net income (loss) $ 0.05 $ (0.30)
Goodwill amortization 0.06 0.12
----------- -----------
Adjusted net income (loss) $ 0.11 $ (0.18)
=========== ===========
SFAS Nos. 141 and 142 also require that we disclose the following
information related to our intangible assets still subject to amortization and
our goodwill. The following table details the balances of our amortizable
intangible assets as of December 12, 2001:
GROSS NET
CARRYING ACCUMULATED CARRYING
AMOUNT AMORTIZATION AMOUNT
------ ------------ ------
Leasehold interests $ 3,000 $ 2,000 $ 1,000
Leasehold rights $ 23,000 $ 20,000 $ 3,000
Trademarks $ 32,000 $ 5,000 $ 27,000
The weighted average amortization period for the intangible assets is
approximately 25 years. The following table shows the estimated amortization
expense for these assets for each of the five succeeding fiscal years:
9
FISCAL YEAR:
2002 $ 3,000
2003 $ 3,000
2004 $ 1,000
2005 $ 1,000
2006 $ 1,000
Changes in the carrying amount of goodwill for the twenty-four weeks ended
December 12, 2001 are summarized as follows:
Balance as of June 27, 2001 $ 12,250,000
Goodwill acquired --
Impairment losses --
------------
Balance as of December 12, 2001 $ 12,250,000
============
9. SUBSEQUENT EVENT
Consistent with the Company's ongoing efforts to reduce overhead and
allocate resources to address its current business strategy, which includes a
reduction in the number of company operated retail locations, the Company
restructured certain administrative support functions and eliminated a number of
such positions in January 2002. An aggregate of 15 positions have been
eliminated during the current fiscal year. The Company expects to incur a third
quarter charge of approximately $0.3 to $0.4 million as a result of these
actions.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
A WARNING ABOUT FORWARD LOOKING STATEMENTS.
We make forward-looking statements in this quarterly report that are
subject to risks and uncertainties. These forward-looking statements include
information about possible or assumed future results of Diedrich Coffee's
financial condition, operations, plans, objectives and performance. When we use
the words "believe," "expect," "anticipate," "estimate" or similar expressions,
we are making forward-looking statements. Many possible events or factors could
affect our future financial results and performance. This could cause our
results or performance to differ materially from those expressed in our
forward-looking statements.
You should consider these risks when you review this document, along with
the following possible events or factors:
- the financial and operating performance of our retail operations
- our ability to maintain profitability over time
- our ability to perform within the terms of our amended credit
agreement
- the successful execution of our growth strategies
- the impact of competition
- the availability of working capital
Foreseeable risks and uncertainties are described elsewhere in this report
and in detail under the caption "Risk Factors and Trends Affecting Diedrich
Coffee and Its Business" in our Annual Report on Form 10-K for the fiscal year
ended June 27, 2001 and in other reports that we file with the Securities and
Exchange Commission.
GENERAL.
Diedrich Coffee, Inc. is a specialty coffee roaster, retailer and
wholesaler. We sell brewed, espresso-based and various blended beverages
primarily made from our own fresh roasted premium coffee beans, as well as light
food items, whole bean coffee and accessories, through our company operated and
franchised retail locations. We also sell whole bean and ground coffees on a
wholesale basis in the Office Coffee Service market and to other wholesale
customers, including restaurant chains and other retailers, through a network of
distributors. We continue to implement our current business strategy of
minimizing our overhead and capital expenditures, while leveraging our
capability to roast and sell specialty grade coffee to our franchise retail
coffee outlets and our traditional wholesale channels. Our brands include
Diedrich Coffee, Gloria Jean's Coffees and Coffee People. We also operate a
limited number of coffeehouses and kiosks under the Coffee Plantation brand
name. As of December 12, 2001, Diedrich Coffee owned and operated 74 retail
locations and franchised 306 other retail locations underthese brands, for a
total of 380 retail coffee outlets. Our retail units are located in 37 states
and 11 foreign countries. We also have approximately 375 wholesale accounts with
Office Coffee Service distributors, chain and independent restaurants and
others. In addition, we operate a large coffee roasting facility in central
California that supplies freshly roasted coffee to our retail locations and
wholesale accounts.
Retail Outlets
Our retail outlet distribution channel can be divided into two
sub-channels, each with its own business model distinguished by differences in
revenue, cost structure, overhead and capital requirements. These two retail
sub-channels are company operated retail outlets and franchised retail outlets.
We view retail outlets as a single distribution channel, despite the differences
noted above, primarily because our retail customers do not make any distinction
between company and franchise operated locations. The
11
critical success factors -- quality of product, service and atmosphere -- are,
therefore, the same for each type of retail location whether company operated or
franchised. The economic model and cost structures are also the same for each
type of location at the retail unit level, notwithstanding their different
direct financial impacts on us as both an operator and franchiser of retail
outlets. Furthermore, the potential contribution of any given outlet, as
measured by the amount of roasted coffee produced through our roasting plant, is
the same.
Our largest brand is Gloria Jean's, and over 94% of our Gloria Jean's
retail units are franchised. Our Diedrich Coffee brand has a higher
concentration of company-operated units, with 70% of retail locations operated
by us. Retail coffee outlets operated under the Coffee People and Coffee
Plantation brands are 100% company operated at this time. A table summarizing
the relative sizes of each of our brands, on a unit count basis, and changes in
unit count for the twenty-four weeks ended December 12, 2001, is set forth
below:
NET TRANSFERS
UNITS AT BETWEEN THE UNITS AT
JUNE 27, COMPANY AND DECEMBER 12,
2001 ACQUIRED OPENED CLOSED FRANCHISE 2001
---- -------- ------ ------ --------- ----
GLORIA JEAN'S BRAND
Company Operated 19 -- -- (1) -- 18
Franchise - Domestic 177 -- 1 (5) -- 173
Franchise - International 95 -- 28 (1) -- 122
---- ---- ---- ---- ---- ----
Subtotal Gloria Jean's 291 -- 29 (7) -- 313
---- ---- ---- ---- ---- ----
DIEDRICH COFFEE BRAND
Company Operated 26 -- -- -- 26
Franchise - Domestic 14 -- 1 (4) -- 11
---- ---- ---- ---- ---- ----
Subtotal Diedrich 40 -- 1 (4) -- 37
---- ---- ---- ---- ---- ----
OTHER BRANDS
Company Operated 42 -- 1 (13) -- 30
---- ---- ---- ---- ---- ----
TOTAL 373 -- 31 (24) -- 380
==== ==== ==== ==== ==== ====
Wholesale Distribution
We presently have approximately 375 wholesale accounts not affiliated with
our retail locations, which purchase coffee from us under both the Diedrich
Coffee and Gloria Jean's brands. Our current wholesale accounts are in the
Office Coffee Supply market, chain restaurants, independent restaurants, other
hospitality industry enterprises and specialty retailers. Additionally, our
franchise agreements require both Diedrich Coffee and Gloria Jean's franchisees
to purchase substantially all of their coffee from us.
Seasonality and Quarterly Results
Historically, we have experienced variations in sales from
quarter-to-quarter due to the peak November-December holiday season, as well as
from a variety of other factors, including, but not limited to, general economic
trends, the cost of green coffee, competition, marketing programs, weather and
special or unusual events.
RESULTS OF OPERATIONS.
TWELVE WEEKS ENDED DECEMBER 12, 2001 COMPARED WITH THE TWELVE WEEKS ENDED
DECEMBER 13, 2000
TOTAL REVENUE. Total revenue for the twelve weeks ended December 12, 2001
decreased by $3,408,000, or 17.6%, to $15,992,000 from $19,400,000 for the
twelve weeks ended December 13, 2000. This decrease was attributable to a
decrease in retail sales and wholesale sales. Each component is discussed below.
It should be noted that, due to the holidays, the Company traditionally records
more revenue in the second fiscal quarter than the other quarters in the fiscal
year. Therefore, total revenue for
12
the twelve weeks ended December 12, 2001 should not viewed as indicative of the
anticipated revenues for the third and fourth quarters of the current fiscal
year.
Retail sales for the twelve weeks ended December 12, 2001 decreased by
$2,822,000, or 24.4%, to $8,751,000 from $11,573,000 for the prior year period.
This decrease represented the combined impact of two factors. First, the number
of company store operating weeks decreased in the current year period versus the
earlier period. This resulted primarily from the closure of nine unprofitable
company locations since the prior year period, six of which were Diedrich Coffee
carts and three of which were Gloria Jean's mall stores, combined with the sale
of three company operated Diedrich coffeehouses to a franchisee, and the sale of
twelve company operated Coffee Plantation coffeehouses. The net impact of the
reduction in retail sales from the closures noted above, slightly offset by
increases in the number of operating weeks from certain other company stores,
was a $2,080,000 decrease in retail sales versus the prior year. The balance of
the $2,822,000 decrease resulted from a 5.8% decrease in comparable store sales
for company operated units during the twelve weeks ended December 12, 2001 as
compared to the prior year period.
Wholesale revenue decreased $603,000, or 9.9%, to $5,471,000 for the
twelve weeks ended December 12, 2001 from $6,074,000 for the prior year period.
This decrease was the net impact of the five factors listed below in declining
order of magnitude:
- a decrease in coffee bean sales to our franchisees
- a favorable quarterly match up in the timing of holiday gift basket
sales to Gloria Jean's franchisees versus the prior year
- the decision to stop distributing most non-coffee products to our
Gloria Jean's franchisees
- an increase in our Keurig "K-cup" and other sales in the Office
Coffee Service market
- a decrease in coffee sales to independent and chain restaurants and
specialty retailers
Coffee bean sales to franchisees. Sales of roasted coffee to our
franchisees decreased $929,000 for the twelve week period ended December 12,
2001 primarily for two reasons. First, there were fewer domestic franchise store
operating weeks in the current year period due primarily to the net closure of
19 domestic franchise operated Gloria Jean's stores since the year ago period.
Second, Gloria Jean's system comparable store sales decreased 7.1% versus the
prior year period, thus reducing coffee bean usage.
Holiday gift basket sales. Holiday gift basket sales to Gloria Jean's
franchisees increased $790,000 for the twelve weeks ended December 12, 2001
versus the prior year period due to the timing of the fiscal quarter end. In
fiscal 2001, the majority of holiday sales were recorded in the first quarter,
but in fiscal 2002 the majority of the sales were recorded in the second quarter
of the fiscal year.
Sale of non-coffee products to Gloria Jean's franchisees. Sales of
non-coffee products decreased by $432,000 for the twelve weeks ended December
12, 2001, a 76.6% decrease versus the prior year period. These products include
paper cups, napkins, sweetener packets, coffee stirrers, and coffee related
merchandise such as ceramic mugs and novelties sold in our Gloria Jean's
mall-based coffee stores. We began eliminating most of these lower margin or
lower turnover products during fiscal 2001 in order to increase our focus on our
core coffee operations. Franchisees now purchase these items directly from
outside distributors.
Keurig "K-cup" and other Office Coffee Service sales. Keurig "K-cup" and
other Office Coffee Service sales increased by $361,000 to $1,744,000 for the
twelve weeks ended December 12, 2001, a 26.1% increase over the prior year
period, as we continued to focus on growth in this segment.
Coffee sales to independent and chain restaurants and specialty retailers.
Wholesale coffee sales to independent and chain restaurants and other specialty
retailers decreased $393,000 for the twelve week
13
period ended December 12, 2001 versus the same time period a year ago primarily
due to the loss of two chain restaurant accounts since the year ago period.
Franchise revenue increased slightly by $17,000 to $1,770,000 for the
twelve weeks ended December 12, 2001, a 1.0% increase from the prior year
period. Franchise revenue consists of initial franchise fees, franchise renewal
fees, area development fees, royalties received on sales at franchised locations
and other franchise income including coordination fees received from product
suppliers.
COST OF SALES AND RELATED OCCUPANCY COSTS. Cost of sales and related
occupancy costs for the twelve weeks ended December 12, 2001 decreased 15.8% to
$8,118,000 from $9,642,000 for the prior year period. On a margin basis, cost of
sales and related occupancy costs increased to 50.8% of total revenue for the
twelve weeks ended December 12, 2001 from 49.7% of total revenue for the twelve
weeks ended December 13, 2000. This represents a 1.1 unfavorable margin basis
point change for the twelve weeks ended December 12, 2001 as compared with the
prior period. Approximately 0.7 margin basis points of this negative basis point
change pertained to cost of sales, and 0.4 margin basis points pertained to
occupancy costs. The cost of sales component of the margin basis point change is
primarily due to inefficiencies caused by lower coffee roasting production
versus the prior year period for the reasons noted above. The occupancy cost
component of the margin basis point change resulted from scheduled rent
increases based on the Consumer Price Index in certain of our company
coffeehouses versus the prior year, which also experienced lower comparable
store sales for the quarter. This more than offset the improvement resulting
from the sale and closure of certain under-performing units with high occupancy
costs as a percentage of sales, as discussed in the explanation of the change in
retail sales above.
OPERATING EXPENSES. Operating expenses for the twelve weeks ended December
12, 2001 decreased 27.5% to $3,630,000 from $5,008,000 for the prior year
period, primarily due to a decrease in the number of company store operating
weeks, resulting from the closure of nine locations and the sale of fifteen
locations since the prior year period as noted above. On a margin basis,
operating expenses decreased to 22.7% of total revenue during the twelve-week
period from 25.8% for the year ago quarter. This favorable 3.1 margin basis
point change for the twelve weeks ended December 12, 2001 as compared with the
twelve weeks ended December 13, 2000 resulted from a reduction in wholesale and
franchise bad debt expense this period as compared with the prior year,
primarily due to a significant improvement in our accounts receivable collection
efforts, including a number of new collection policy initiatives implemented
since the prior year period.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased by
$526,000 to $539,000 for the twelve weeks ended December 12, 2001 from
$1,065,000 for the prior year period. $197,000 of this decrease is due to our
adoption of the FASB's Statement No. 142 as of the beginning of the current
fiscal year. As required under Statement No. 142, we have completed a
transitional goodwill impairment test, determined that there is no indication of
goodwill impairment as of the date of adoption, and discontinued periodic
amortization of goodwill. In addition, depreciation decreased due to the closure
of nine locations and the sale of fifteen locations, as discussed above.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased by $808,000, or 25.9%, to $2,312,000 for the twelve weeks ended
December 12, 2001 from $3,120,000 for the prior year period. On a margin basis,
general and administrative expenses decreased to 14.5% of total revenue for the
twelve weeks ended December 12, 2001 from 16.1% of total revenue for the twelve
weeks ended December 13, 2000. The 1.6 margin basis improvement for the twelve
weeks ended December 12, 2001 primarily resulted from our implementation of a
restructuring plan specifically intended to reduce overhead, which began shortly
after the end of the second fiscal quarter last year. Under this restructuring
plan, we consolidated our previously separate support centers for Diedrich
Coffee and Gloria Jean's, closed our retail division field offices in Portland,
Oregon and Phoenix, Arizona, and eliminated 31 support center positions in
California.
INTEREST EXPENSE. Interest expense decreased by $225,000 to $132,000 for
the twelve weeks ended December 12, 2001 from $357,000 for the twelve weeks
ended December 13, 2000. This decrease is
14
primarily due to the reduction in our note payable from $10,000,000 at December
13, 2000 to $4,208,000 at December 12, 2001, and to a lesser degree to a
reduction in our interest rate.
TWENTY-FOUR WEEKS ENDED DECEMBER 12, 2001 COMPARED WITH THE TWENTY-FOUR WEEKS
ENDED DECEMBER 13, 2000
TOTAL REVENUE. Total revenue for the twenty-four weeks ended December 12,
2001 decreased by $6,139,000, or 16.9%, to $30,133,000 from $36,272,000 for the
twenty-four weeks ended December 13, 2000. This decrease was attributable to
decreases in retail sales, wholesale sales, and franchise revenue. Each
component is discussed below.
Retail sales for the twenty-four weeks ended December 12, 2001 decreased
by $3,878,000, or 17.4%, to $18,361,000 from $22,239,000 for the prior year
period. This decrease represented the combined impact of two factors. First, the
number of company store operating weeks decreased in the current year versus the
earlier period. This primarily resulted from the closure of nine unprofitable
company locations since the prior year period, six of which were Diedrich Coffee
carts and three of which were Gloria Jean's mall stores, combined with the sale
of three company operated Diedrich coffeehouses to a franchisee, and the sale of
twelve company operated Coffee Plantation coffeehouses. The net impact of the
reduction in retail sales from the closures noted above, slightly offset by
increases in the number of operating weeks from certain other company stores,
was a $2,813,000 decrease in retail sales versus the prior year. The balance of
the $3,878,000 decrease resulted from a 5.9% decrease in comparable store sales
for company operated units during the twenty-four weeks ended December 12, 2001
as compared to the prior year period.
Wholesale revenue for the twenty-four weeks ended December 12, 2001
decreased by $2,030,000, or 18.8%, to $8,773,000 from $10,803,000 for the prior
year period. This decrease was the net impact of the five factors listed below,
in declining order of magnitude:
- the decision to stop distributing most non-coffee products to our
Gloria Jean's franchisees
- a decrease in coffee bean sales to our franchisees
- an increase in our Keurig "K-cup" and other sales in the Office
Coffee Service market
- a decrease in coffee sales to independent and chain restaurants and
specialty retailers
- a net increase in total holiday gift basket sales to Gloria Jean's
franchisees versus the prior year holiday season
Sale of non-coffee products to Gloria Jean's franchisees. Sales of
non-coffee products decreased by $1,300,000 for the twenty-four weeks ended
December 12, 2001, an 88.6% decrease versus the prior year period. This decrease
was due the fact that we eliminated the sale of these lower margin or lower
turnover products since the prior year period as mentioned above.
Coffee bean sales to franchisees. Sales of roasted coffee to our
franchisees decreased $1,161,000, for the twenty-four week period ended December
12, 2001 for two reasons. First, there were fewer domestic franchise store
operating weeks in the current year period due primarily to the net closure of
19 domestic franchise operated Gloria Jean's stores since the year ago period.
Second, Gloria Jean's system comparable store sales decreased 5.4% versus the
prior year period, thus reducing coffee bean usage.
Keurig "K-cup" and other Office Coffee Service sales. Keurig "K-cup" and
other Office Coffee Service sales increased by $945,000 to $2,988,000 for the
twenty-four weeks ended December 12, 2001, a 46.3% increase over the prior year
period, which was our first period that included K-cup sales.
15
Coffee sales to independent and chain restaurants and specialty retailers.
Wholesale coffee sales to independent and chain restaurants and other specialty
retailers decreased $793,000 for the twenty-four week period ended December 12,
2001 versus the same time period a year ago primarily due to the loss of two
chain restaurant accounts since the year ago period.
Holiday gift basket sales. Holiday gift basket sales increased $279,000,
or 45.6%, for the twenty-four weeks ended December 12, 2001 versus the prior
year period due to a change in the gift basket program. During the prior year,
we sold only the roasted coffee component of the holiday gift baskets to a
distributor, who purchased the remaining components of the gift baskets and sold
the finished product to our franchisees. During the current year we purchased
all non-coffee components, and sold the finished gift baskets directly to our
franchisees.
Franchise revenue decreased $231,000 to $2,999,000 for the twenty-four
weeks ended December 12, 2001, a 7.2% decrease from the prior year period, which
was the net impact of three factors. Initial franchise fees and franchise
renewal fees decreased $194,000 for the twenty-four weeks ended December 12,
2001 versus the prior year, as a result of fewer franchise agreements signed.
Supplier coordination fees increased $91,000 for the twenty-four weeks ended
December 12, 2001 over the prior year period due primarily to the timing of such
payments. Franchise royalties decreased by $129,000 for the twenty-four weeks
ended December 12, 2001 versus the prior year period, due to the closure of 19
domestic franchise stores noted above, as well as a comparable store sales
decrease in our franchised units.
COST OF SALES AND RELATED OCCUPANCY COSTS. Cost of sales and related
occupancy costs for the twenty-four weeks ended December 12, 2001 decreased
17.3% to $15,108,000 from $18,261,000 for the prior year period. On a margin
basis, cost of sales and related occupancy costs decreased to 50.1% of total
revenue for the twenty-four weeks ended December 12, 2001 from 50.3% of total
revenue for the twenty-four weeks ended December 13, 2000. This represents a 0.2
margin basis point improvement for the twenty-four weeks ended December 12, 2001
as compared with the prior year period, which is the net impact of an
approximately 0.7 margin basis point decrease in cost of sales, and a partially
offsetting 0.5 margin point increase in occupancy costs. The cost of sales
improvement resulted from the favorable margin impact of discontinuing the sale
of lower margin non-coffee products and the closure of several unprofitable
company operated locations since the prior year period as noted above. The
occupancy cost component of the margin basis point change resulted from
scheduled rent increases based on the Consumer Price Index in certain of our
company coffeehouses versus the prior year, which also experienced lower
comparable store sales during the current year. This more than offset the
improvement resulting from the sale and closure of certain under-performing
units with high occupancy costs as a percentage of sales, as discussed in the
explanation of the change in retail sales above.
OPERATING EXPENSES. Operating expenses for the twenty-four weeks ended
December 12, 2001 decreased 16.5% to $8,389,000 from $10,049,000 for the prior
year period, primarily due to a decrease in the number of company store
operating weeks combined with the closure of nine locations and the sale of
fifteen locations as noted above. On a margin basis, operating expenses
increased to 27.8% of total revenue during the twenty-four week period from
27.7% for the year ago period. The unfavorable 0.1 margin basis point change for
the twenty-four weeks ended December 12, 2001 as compared with the prior year
resulted from several factors. Operating costs for company retail units, most
notably labor, increased on average relative to the retail sales from those
locations because of a $0.50 per hour increase in the federal minimum wage since
the year ago quarter. Also, comparable company store sales decreased by 5.9%
versus the prior year period. Labor, utilities and other operating expenses in a
retail unit are semi-fixed, and therefore represent a higher percentage of
revenue when retail sales in existing locations decline. These increases in
operating expenses as a percentage of revenue were largely offset by a reduction
in wholesale and franchise bad debt expense, which improved significantly as a
result of a number of new collection policy initiatives implemented since the
prior year period.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased by
$894,000 to $1,210,000 for the twenty-four weeks ended December 12, 2001 from
$2,104,000 for the prior year period. $370,000 of this decrease is due to our
adoption of the FASB's Statement No. 142 as of the beginning of
16
the current fiscal year. Depreciation and amortization also decreased due to the
closure of nine locations and the sale of fifteen locations discussed above.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased by $1,641,000, or 27.1%, to $4,416,000 for the twenty-four weeks ended
December 12, 2001 from $6,057,000 for the prior year period. On a margin basis,
general and administrative expenses represent 14.7% of total revenue for the
twenty-four weeks ended December 12, 2001, down from 16.7% of total revenue for
the twenty-four weeks ended December 13, 2000. The 2.0 margin basis point
improvement for the twenty-four weeks ended December 12, 2001 is primarily due
to the overhead reductions previously discussed for the twelve weeks ended
December 12, 2001.
INTEREST EXPENSE. Interest expense decreased by $411,000, to $304,000, for
the twenty-four weeks ended December 12, 2001 from $715,000 for the twenty-four
weeks ended December 13, 2000 for the same reasons as discussed above for the
twelve weeks ended December 12, 2001.
LIQUIDITY AND CAPITAL RESOURCES.
We had a working capital deficit of $2,972,000 as of December 12, 2001
compared to working capital deficit of $820,000 as of June 27, 2001. Cash used
in operating activities for the twenty-four weeks ended December 12, 2001
totaled $406,000 as compared to $477,000 for the twenty-four weeks ended
December 13, 2000. This decrease in cash used is the net result of many factors
more fully detailed in the unaudited consolidated statement of cash flows in the
accompanying financial statements, including significantly higher net income and
improved accounts receivable collections.
Net cash provided by investing activities for the twenty-four weeks ended
December 12, 2001 totaled $951,000, as compared to the $603,000 in net cash used
in investing activities for the twenty-four weeks ended December 13, 2000.
During the twenty-four weeks ended December 12, 2001, we received $1,551,000 in
proceeds from the sale of assets, including $1,203,000 for the sale of twelve
company operated locations in Arizona, and $307,000 for the sale of land and a
building in Oregon. We also received $7,000 in principal payments on notes
receivable that were issued by the buyer of the twelve locations in Arizona.
These proceeds and notes receivable payments were partially offset by $607,000
in property and equipment expenditures. For the twenty-four weeks ended December
13, 2000, the net cash used in investing activities was used for property and
equipment expenditures.
Net cash used in financing activities for the twenty-four weeks ended
December 12, 2001 totaled $1,527,000, as compared to the $770,000 net cash used
in financing activities for the twenty-four weeks ended December 13, 2000. For
both periods the net cash used in financing activities consisted of repayment of
long-term debt and capital leases. During the twenty-four weeks ended December
12, 2001, net cash used in financing activities also included $56,000 in
payments related to transaction costs associated with our issuance of common
stock during our fiscal year ended June 27, 2001.
On July 7, 1999, we entered into a Credit Agreement with BankBoston, N.A.
(subsequently merged into Fleet National Bank) secured by pledges of all of our
assets and our subsidiaries' stock and which provided for a $12 million term
loan and a $3 million revolving credit facility. We have not drawn down any
borrowings under the revolving credit facility since it was established,
although the credit facility currently backs $177,500 of outstanding Letters of
Credit. Amounts outstanding under the Credit Agreement bear interest, at our
option, at Fleet's base rate plus 1.25% or an adjusted Eurodollar rate plus
3.0%. At December 12, 2001, the applicable interest rate was 5.08%, which was
based on the Eurodollar rate at the time.
On September 26, 2000, we entered into the First Amendment to Credit
Agreement with Fleet to amend certain terms of the original Credit Agreement.
Under the terms of the First Amendment to Credit Agreement, we began making
principal payments of $25,000 per month on February 1, 2001, which payment
amount increased to $100,000 per month on July 1, 2001. Minimum monthly payments
of $100,000 are required until all amounts owed under the Credit Agreement are
repaid. The First Amendment to Credit Agreement accelerates the maturity date of
all remaining amounts owed under the
17
Credit Agreement to September 1, 2002. In addition, we and the bank identified
certain assets that could be sold without interfering with our core business,
including two pieces of company owned real property under existing company
retail locations and a parcel of company owned real property that is presently
undeveloped. We and the bank also identified certain company-operated
coffeehouses outside of our core southern California market that could be
refranchised. Under the terms of the First Amendment to Credit Agreement, the
bank receives 50% of the net proceeds from any of our asset or equity sales. In
January 2001, two of the aforementioned pieces of real property were sold in a
sale-leaseback transaction for $415,000. $208,000 of the proceeds from the
transaction was remitted to Fleet. In May 2001, three company-operated
coffeehouses in Texas were sold for an aggregate of $1,025,000. $448,500 of the
proceeds from the sale was remitted to Fleet. Also in May 2001, we sold
2,000,000 shares (post-split) of our common stock in a private sale. $3,600,000
of the proceeds from the sale was remitted to Fleet. In October 2001, twelve
company-operated coffeehouses in Arizona were sold for an aggregate of
$1,382,000 in cash and $515,000 in notes receivable. One-half of the cash
payment, $596,000, was remitted to Fleet. In December 2001, a parcel of real
property and a building were sold for $325,000. $140,000 of the proceeds from
this sale was remitted to Fleet. The proceeds from all five sales discussed
above were applied solely to our principal note payable balance.
The First Amendment to Credit Agreement also introduced an additional
event of default under the Credit Agreement. The First Amendment specifies that
a materially adverse change in our financial condition or any of our
subsidiaries, as determined by the bank in its sole and exclusive discretion, is
an event of default. Under any event of default, the bank may declare all
amounts owed immediately due and payable. Additional changes under the terms of
the First Amendment to Credit Agreement include a reduction in the maximum
amount available under the revolving credit facility, a portion of which we had
previously been unable to access because of the covenant defaults, from
$3,000,000 to $1,293,000, and a restriction that the credit facility be used
only to back up existing and future standby Letters of Credit. The First
Amendment to Credit Agreement preserves our ability to obtain third party
financing for capital projects and maintenance capital, and increases our
flexibility to obtain subordinated debt as a source of additional working
capital. Under the First Amendment to Credit Agreement, the bank waived the
previous financial covenant defaults and agreed to new financial covenant ratios
going forward based upon updated financial information and projections prepared
by us. In addition to resetting the ratios in the financial covenants, we agreed
to a new covenant under the First Amendment to Credit Agreement that required us
to achieve certain predetermined minimum levels of cumulative principal
repayments in addition to amounts already paid to date in fiscal 2001 or
reflected in the new go forward minimum monthly principal payment obligations
discussed above: $283,333 by March 2001; $708,333 by June 30, 2001; and
$1,619,900 by September 30, 2001. All such incremental principal repayment
obligations have been met as of December 12, 2001 and were generated primarily
from the net proceeds paid to the bank from the above mentioned asset sales and
stock issuance.
We believe that cash from operations, debt refinancing and/or asset sales
will be sufficient to satisfy our working capital needs at the anticipated
operating levels, including our obligations under our Credit Agreement, as
amended, for the next twelve months.
NEW ACCOUNTING PRONOUNCEMENTS.
In July 2001, the Financial Accounting Standards Board issued Statement
No. 141, "Business Combinations" and Statement No. 142, "Goodwill and Other
Intangible Assets." Statement No. 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001.
Statement No. 141 also specifies the criteria that intangible assets acquired in
a purchase method business combination must meet to be recognized and reported
apart from goodwill. Statement No. 142 requires that intangible assets with
estimable useful lives be amortized over their respective estimated useful lives
to their estimated residual values, and reviewed for impairment in accordance
with FAS Statement No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of." We adopted the provisions of
Statement No. 141 and Statement No. 142 in the first quarter of fiscal 2002.
18
In connection with the transitional goodwill impairment evaluation,
Statement 142 required the Company to perform an assessment of whether there is
an indication that our unamortized goodwill at June 28, 2001 of $12,250,000 was
impaired as of the date of adoption. To accomplish this, the Company identified
its reporting units and determined the carrying value of each reporting unit by
assigning the assets and liabilities, including the existing goodwill, to those
reporting units as of the date of adoption. The Company then had up to six
months from the date of adoption to determine the fair value of each reporting
unit and compare it to the reporting unit's carrying amount. To the extent a
reporting unit's carrying amount exceeds its fair value, an indication exists
that the reporting unit's goodwill may be impaired and the Company must perform
the second step of the transitional impairment test. In the second step, the
Company must compare the implied fair value of the reporting unit's goodwill,
determined by allocating the reporting unit's fair value to all of its assets
(recognized and unrecognized) and liabilities in a manner similar to a purchase
price allocation in accordance with Statement 141, to its carrying amount, both
of which would be measured as of the date of adoption. This second step is
required to be completed as soon as possible, but no later than the end of the
year of adoption. Any transitional impairment loss will be recognized as the
cumulative effect of a change in accounting principle in the Company's statement
of operations.
As of the date of adoption, we had unamortized goodwill in the amount of
$12,250,000 all of which is subject to the transition provisions of Statement
Nos. 141 and 142. The impact in fiscal year 2002 of adopting Statement No. 142
will be to eliminate the amortization of goodwill. Such goodwill amortization
totaled $803,000 in the fiscal year 2001.
The Company performed an assessment for goodwill impairment in accordance
with Statement 142 in the second quarter of fiscal 2002. Discounted cash flow
models were used for determining reporting unit valuations. The result of the
test showed that the fair value of the Company's reporting units exceeded the
carrying values and, therefore, there was no indication of goodwill impairment.
The Company will perform step two of the impairment test no later than the end
of fiscal 2002.
The Financial Accounting Standards Board issued Statement No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" in October
2001. Statement No. 144 addresses financial accounting and reporting for the
impairment or disposal of long-lived assets, and is effective for fiscal years
beginning after December 15, 2001. This Statement will be effective for our
fiscal year 2003. We have not assessed whether the application of these
standards will have a material effect on our financial position, results of
operation or liquidity.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
MARKET RISK SENSITIVE ITEMS ENTERED INTO FOR TRADING PURPOSES
None.
MARKET RISK SENSITIVE ITEMS ENTERED INTO FOR OTHER THAN TRADING PURPOSES
Interest Rate Risk
We are exposed to market risk from changes in interest rates on our
outstanding bank debt. At December 12, 2001, we had $4,208,000 in bank debt that
was tied to changes in short term interest rates. At the end of our second
fiscal quarter of fiscal 2002, the interest rate was the "adjusted Eurodollar
rate" plus 3%, or 5.8%. The rate can be fixed over periods ranging from one to
six months, at our discretion. At December 12, 2001, a hypothetical 100 basis
point increase in the adjusted Eurodollar rate would result in additional
interest expense of $42,000 on an annualized basis.
19
Commodity Price Risk
Green coffee, the principal raw material for our products, is subject to
significant price fluctuations caused by multiple factors, including weather,
political, and economic conditions. To date, we have not used commodity based
financial instruments to hedge against fluctuations in the price of coffee. To
ensure that we have an adequate supply of coffee, however, we enter into
agreements to purchase green coffee in the future that may or may not be fixed
as to price. At December 12, 2001, we had commitments to purchase coffee through
fiscal year 2005, totaling $5,980,000 for 4,480,000 pounds of green coffee, all
of which were fixed as to price. The coffee scheduled to be delivered to us in
this fiscal year pursuant to these commitments will satisfy approximately 75% of
our anticipated green coffee requirements for this fiscal year. Assuming we
require approximately 1,600,000 additional pounds of green coffee during 2002
for which no price has yet been fixed, each $0.01 per pound increase in the
price of green coffee would likely result in $16,000 of additional cost.
However, because the price we pay for green coffee is negotiated with suppliers,
we believe that the commodity market price for green coffee would have to
increase significantly, by as much as $0.25 per pound, before suppliers would
increase the price they charge us.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In the ordinary course of our business, we may become involved in legal
proceedings from time to time. During the twenty-four week period ending
December 12, 2001, we were not a party to any material legal proceedings.
ITEM 5. OTHER INFORMATION.
Minimum Advance Notice of Stockholder Proposals
Diedrich Coffee stockholders are advised that we must be notified by July
1, 2002 (120 days prior to the month and day of mailing the last year's proxy
statement) of any proposal or solicitation that any stockholder intends to
present at the 2002 annual meeting of stockholders and which the stockholder has
not sought to have included in our proxy statement for the meeting in accordance
with Rule 14a-8 under the Securities Exchange Act of 1934, as amended. If a
proponent fails to notify us before the required deadline, management proxies
will be allowed to use their discretionary voting authority when the proposal is
raised at the 2002 annual meeting, without any discussion of the matter in the
proxy statement.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Set forth below is a list of the exhibits included as part of this
quarterly report.
EXHIBIT NO. DESCRIPTION
- ----------- -----------
2.1 Agreement and Plan of Merger dated as of March 16, 1999, by
and among Diedrich Coffee, CP Acquisition Corp., a wholly
owned subsidiary of Diedrich Coffee, and Coffee People (1)
3.1 Restated Certificate of Incorporation of the Company, dated
May 11, 2001 (2)
3.2 Bylaws of the Company (3)
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.
(3)
20
EXHIBIT NO. DESCRIPTION
- ----------- -----------
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. (3)
4.3 Specimen Stock Certificate (3)
4.4 Form of Conversion Agreement in connection with the conversion
of Series A and Series B Preferred Stock into Common Stock (3)
10.1 Form of Indemnification Agreement (3)
10.2 Amended and Restated Diedrich Coffee 1996 Stock Incentive Plan
(4)
10.3 Diedrich Coffee 1996 Non-Employee Directors Stock Option Plan
(3)
10.4 Agreement of Sale dated as of February 23, 1996 by and among
Diedrich Coffee (as purchaser) and Brothers Coffee Bars, Inc.
and Brothers Gourmet Coffees, Inc. (as sellers) (3)
10.5 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)
10.6 Form of Warrant Agreement made in favor of Nuvrty, Inc., the
Ocean Trust and the Grandview Trust (6)
10.7 Form of Common Stock and Option Purchase Agreement with
Franchise Mortgage Acceptance Company dated as of April 3,
1998 (7)
10.8 Employment Agreement with Catherine Saar dated June 11, 1998
(8)
10.9 Form of Franchise Agreement (9)
10.10 Form of Area Development Agreement (9)
10.11 Employment Agreement with Martin R. Diedrich dated June 29,
2001 (10)
10.12 Credit Agreement, dated as of July 7, 1999, by and among
BankBoston, N.A., Diedrich Coffee and its subsidiaries (11)
10.13 Security Agreement, dated as of July 7, 1999, by and among
BankBoston, N.A., Diedrich Coffee and its subsidiaries (11)
10.14 Securities Pledge Agreement, dated as of July 7, 1999, by and
among BankBoston, N.A., Diedrich Coffee and its subsidiaries
(11)
10.15 Trademark Security Agreement, dated as of July 7, 1999, by and
among BankBoston, N.A., Diedrich Coffee and its subsidiaries
(11)
10.16 Form of Term Note made in favor of BankBoston, N.A. (11)
21
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.17 Form of Revolving Note made in favor of BankBoston, N.A. (11)
10.18 Employment Agreement with Matt McGuinness dated effective
March 13, 2000 (12)
10.19 First Amendment to Credit Agreement dated as of September 26,
2000 (12)
10.20 Second Amendment to Credit Agreement dated as of February 26,
2001 (13)
10.21 Letter Agreement re: employment with J. Michael Jenkins dated
September 22, 2000 (12)
10.22 Letter Agreement re: employment with Carl Mount dated October
29, 1999 (14)
10.23 Letter Agreement re: employment with Edward A. Apffel dated
May 25, 2000 (14)
10.24 Diedrich Coffee, Inc. 2000 Non-Employee Directors Stock Option
Plan (15)
10.25 Stock Option Plan and Agreement with J. Michael Jenkins, dated
September 22, 2000 (16)
10.26 Diedrich Coffee, Inc. 2000 Equity Incentive Plan (16)
10.27 Common Stock and Warrant Purchase Agreement by and among
Diedrich Coffee, Inc., Westcliff Partners, L.P., Westcliff
Foundation, Westcliff Long/Short, L.P., Westcliff Small Cap
Fund, L.P., Westcliff Aggressive Growth, L.P., Westcliff
Profit Sharing Plan, Westcliff Master Fund, Ltd., Peninsula
Capital, L.P., Common Sense Partners, L.P. and Sequoia
Enterprises, L.P., dated March 14, 2001 (17)
21.1 List of Subsidiaries (12)
- ----------
(1) Previously filed as Appendix A to Diedrich Coffee's Registration Statement
on Form S-4, filed with the Securities and Exchange Commission on April
23, 1999.
(2) Previously filed as an exhibit to Diedrich Coffee's Current Report on Form
8-K, filed with the Securities and Exchange Commission on May 16, 2001.
(3) Previously filed as an exhibit to Diedrich Coffee's Registration Statement
on Form S-1 (No. 333-08633), as amended, as declared effective by the
Securities and Exchange Commission on September 11, 1996.
(4) Previously filed as an exhibit to Diedrich Coffee's Quarterly Report on
Form 10-Q for the period ended September 22, 1999, filed with the
Securities and Exchange Commission on November 5, 1999.
(5) Previously filed as an exhibit to Diedrich Coffee's Current Report on Form
8-K, filed with the Securities and Exchange Commission on November 25,
1997.
(6) Previously filed as an exhibit to Diedrich Coffee's Quarterly Report on
Form 10-Q for the period ended October 29, 1997, filed with the Securities
and Exchange Commission on December 11, 1997.
22
(7) Previously filed as an exhibit to Diedrich Coffee's Annual Report on Form
10-K for the fiscal year ended January 28, 1998.
(8) Previously filed as an exhibit to Diedrich Coffee's Quarterly Report on
Form 10-Q for the period ended July 29, 1998, filed with the Securities
and Exchange Commission on September 10, 1998.
(9) Previously filed as an exhibit to Diedrich Coffee's Quarterly Report on
Form 10-Q for the period ended April 28, 1999, filed with the Securities
and Exchange Commission on December 11, 1998.
(10) Previously filed as an exhibit to Diedrich Coffee's Annual Report on Form
10-K for the year ended June 27, 2001, filed with the Securities and
Exchange Commission on September 25, 2001.
(11) Incorporated by reference to Diedrich Coffee's Transition Report on Form
10-Q for the period from January 28, 1999 to June 30, 1999, filed with the
Securities and Exchange Commission on August 16, 1999.
(12) Previously filed as an exhibit to Diedrich Coffee's annual report on Form
10-K for the fiscal year ended June 28, 2000.
(13) Previously filed as an exhibit to Diedrich Coffee's Quarterly Report on
Form 10-Q for the period ended March 7, 2001, filed with the Securities
and Exchange Commission on April 23, 2001.
(14) Previously filed as an exhibit to Diedrich Coffee's Report on Form 10-Q
for the period ended September 20, 2000, filed with the Securities and
Exchange Commission on November 6, 2000.
(15) Previously filed as an exhibit to Diedrich Coffee's Registration Statement
on Form S-8, filed with the Securities and Exchange Commission on November
21, 2000.
(16) Previously filed as an exhibit to Diedrich Coffee's Report on Form 10-Q
for the period ended December 13, 2000, filed with the Securities and
Exchange Commission on January 29, 2001.
(17) Previously filed as an exhibit to the Definitive Proxy Statement, filed
with the Securities and Exchange Commission on April 12, 2001.
(b) Reports on Form 8-K.
On December 7, 2001, we filed a Current Report on Form 8-K to report that
Randy Powell and Richard Spencer had joined our board of directors. We also
reported that Mr. Powell would replace Paul Heeschen on our Audit Committee.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: January 28, 2002 DIEDRICH COFFEE, INC.
/s/ J. Michael Jenkins
----------------------------------------
J. Michael Jenkins
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Matthew C. McGuinness
----------------------------------------
Matthew C. McGuinness
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting
Officer)
24