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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
COMMISSION FILE NUMBER 0-21203
DIEDRICH COFFEE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0086628
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
2144 MICHELSON DRIVE
IRVINE, CALIFORNIA 92612
(Address of Principal Executive Offices including Zip Code)
(714) 260-1600
(Registrant's Telephone Number including Area Code)
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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 September 10, 1997, there were 5,391,650 shares of common stock of
the registrant outstanding.
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DIEDRICH COFFEE, INC.
INDEX
PAGE NO.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets.............................................................3
Condensed Statements of Operations...................................................4
Condensed Statements of Cash Flows...................................................5
Notes to Condensed Financial Statements..............................................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................9
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders............................14
Item 6. Exhibits and Reports on Form 8-K...............................................15
Signatures.............................................................................15
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3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DIEDRICH COFFEE, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)
JULY 30, 1997 JANUARY 29, 1997
------------- ----------------
ASSETS
Current Assets:
Cash $ 571,752 $ 2,071,904
Accounts receivable 178,256 210,363
Inventories (Note 2) 1,572,795 1,615,145
Prepaid expenses 340,195 185,063
Other current assets 202,419 285,072
------------ ------------
Total current assets 2,865,417 4,367,547
Property and equipment, net 10,323,525 11,962,752
Costs in excess of net assets acquired, net 403,350 796,178
Other assets 351,370 344,942
------------ ------------
Total assets $ 13,943,662 $ 17,471,419
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,498,357 $ 1,800,292
Accrued compensation 418,640 417,028
Accrued expenses 316,397 201,487
Note Payable 1,250,000
Restructuring liabilities 1,483,073 --
------------ ------------
Total current liabilities 4,966,467 2,418,807
Deferred rent 160,238 154,384
------------ ------------
Total liabilities 5,126,705 2,573,191
------------ ------------
Stockholders' Equity:
Preferred stock -- --
Common stock 53,917 53,917
Additional paid-in capital 15,882,046 15,882,046
Accumulated deficit (7,119,006) (1,037,735)
------------ ------------
Total stockholders' equity 8,816,957 14,898,228
------------ ------------
Commitments and contingencies
Total liabilities and stockholders' equity $ 13,943,662 $ 17,471,419
============ ============
See accompanying Notes to condensed financial statements.
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DIEDRICH COFFEE, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
THIRTEEN THIRTEEN TWENTY-SIX TWENTY-SIX
WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED
JULY 30, 1997 JULY 31, 1996 JULY 30, 1997 JULY 31, 1996
------------- ------------- -------------- -------------
Net Sales:
Retail $ 5,258,780 $ 4,269,206 $ 10,643,405 $ 8,171,203
Wholesale and other 551,742 398,155 1,034,837 770,888
----------- ----------- ------------ -----------
Total 5,810,522 4,667,361 11,678,242 8,942,091
----------- ----------- ------------ -----------
Cost and Expenses:
Cost of sales and related
occupancy costs 2,860,893 2,135,990 5,902,708 3,908,882
Store operating expenses 2,126,728 1,872,544 4,506,955 3,607,423
Other operating expenses 75,764 63,265 140,089 122,585
Depreciation and amortization 439,077 210,626 886,516 364,551
Provision for store closings
and restructuring costs -- -- 4,550,068 --
General and administrative
expenses 969,554 310,085 1,743,879 647,460
----------- ----------- ------------ -----------
Total 6,472,016 4,592,510 17,730,215 8,650,901
----------- ----------- ------------ -----------
Operating income (loss) (661,494) 74,851 (6,051,973) 291,190
Interest expense (21,651) (69,891) (21,651) (108,732)
Interest and other income
(expense) (12,417) 742 (4,757) 2,006
----------- ----------- ------------ -----------
Income (loss) before income
taxes (695,562) 5,702 (6,078,381) 184,464
Provision for income taxes 2,890 -- 2,890 71,649
----------- ----------- ------------ -----------
Net income (loss) $ (698,452) $ 5,702 $ (6,081,271) $ 112,815
=========== =========== ============ ===========
Per share information:
Net income (loss) per share $ (.13) $ .00 $ (1.13) $ .03
=========== =========== ============ ===========
Weighted average
shares outstanding 5,391,650 3,903,000 5,391,650 3,903,000
=========== =========== ============ ===========
See accompanying Notes to condensed financial statements.
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DIEDRICH COFFEE, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
TWENTY-SIX TWENTY-SIX
WEEKS ENDED WEEKS ENDED
JULY 30, 1997 JULY 31, 1996
------------- -------------
Cash flows from operating activities:
Net income (loss) $(6,081,271) $ 112,815
Adjustments to reconcile net income (loss) to cash
(used in) provided by operating activities:
Depreciation and amortization 886,516 364,551
Restructuring charge 2,329,113 --
Impairment on long-lived assets 2,220,955 --
Increase (decrease) from changes in:
Accounts receivable 32,107 (16,580)
Inventories (27,043) (307,143)
Prepaid expenses (155,132) (64,634)
Other current assets 82,653 (118,387)
Other assets (6,428) (316,668)
Accounts payable (301,935) 1,059,666
Accrued compensation (96,183) 100,990
Accrued expenses 114,910 99,422
Income taxes payable -- (24,916)
Deferred rent 5,854 6,546
----------- -----------
Net cash provided by (used in) operating activities (995,884) 895,662
----------- -----------
Cash flows from investing activities:
Capital expenditures for property and equipment (1,150,095) (3,609,893)
Property disposition (604,173) --
Acquisition of coffeehouses -- (1,800,000)
----------- -----------
Net cash provided by (used in) investing activities (1,754,268) (5,409,893)
----------- -----------
Cash flows from financing activities:
Checks issued against future deposits -- 204,145
Proceeds from notes payable -- 10,000
Proceeds from line of credit -- 3,386,530
Proceeds from long-term debt 1,250,000 1,422,520
Principal payments on long-term debt -- (546,565)
----------- -----------
Net cash provided by financing activities 1,250,000 4,476,630
----------- -----------
Net decrease in cash (1,500,152) (37,601)
Cash at beginning of period 2,071,904 94,659
----------- -----------
Cash at end of period $ 571,752 $ 57,058
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ -- $ 86,021
Income taxes $ 2,890 $ 62,500
See accompanying Notes to condensed financial statements.
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DIEDRICH COFFEE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
JULY 30, 1997
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The unaudited condensed financial statements of Diedrich Coffee,
Inc. (the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information. In the
opinion of management, all adjustments (consisting of normal, recurring
adjustments and accruals) considered necessary for a fair presentation
of the Company's financial position at July 30, 1997 and the results of
operations and cash flows for the twenty-six weeks ended July 30, 1997
and July 31, 1996 have been included. Results for the interim periods
are not necessarily indicative of the results for an entire year. This
information should be read in conjunction with the financial statements
and the notes thereto included in the Company's Annual Report on Form
10-K for the year ended January 29, 1997.
In June 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 130,
Reporting Comprehensive Income, which establishes standards for
reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general-purpose
financial statements. SFAS No. 130 is effective for financial statements
issued for periods beginning after December 15, 1997. The Company has
not determined the impact of SFAS No. 130 on its consolidated financial
statements.
In June 1997, the FASB issued SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. SFAS No. 131
establishes standards for the way that public business enterprises
report information about operating segments in annual financial
statements and requires that those enterprises report information about
operating segments in annual financial statements and requires that
those enterprises report selected information about operating segments
in interim financial reports issued to shareholders. SFAS No. 131 is
effective for financial statements issued for periods beginning after
December 15, 1997. The Company has not determined the impact of SFAS No.
131 on its consolidated financial statements.
Net Income (Loss) per Common Share
The calculation of net income (loss) per share was determined by
dividing the net income (loss) by the weighted average common and common
equivalent shares outstanding when dilutive. In accordance with
Securities and Exchange Commission Staff Accounting Bulletin No. 83,
shares issued and share options granted within one year of the Company's
initial public offering ("IPO") have been included in the calculation of
common share equivalents, using the treasury stock method to determine
the dilutive effect of the issuance's, as if they were outstanding for
all periods presented even if they were antidilutive. The calculation of
common share equivalents assumes that the proceeds of common shares and
share options issued within one year of the IPO were used to repurchase
common shares at the IPO price of $9.50 per share. Primary earnings
(loss) per share approximate fully diluted earnings (loss) per share for
all periods presented.
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7
DIEDRICH COFFEE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
JULY 30, 1997
(UNAUDITED)
In February 1997, the FASB issued 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. SFAS No. 128 is effective for financial
statements issued for periods ending after December 15, 1997, including
interim periods. The Company does not believe the implementation of SFAS
No. 128 will have a material effect on net income (loss) per share.
2. INVENTORIES
Inventories consist of the following:
JULY 30, JANUARY 29,
1997 1997
---------- -----------
Green coffee $ 528,573 $ 357,255
Roasted coffee 72,413 90,536
Accessory and specialty items 446,859 454,946
Other food, beverage and supplies 524,950 712,408
---------- ----------
$1,572,795 $1,615,145
========== ==========
3. DEBT
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%. All outstanding
principal and accrued interest is 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. The amount outstanding as of July 30, 1997
was $1,250,000. On August 19, 1997 the Company borrowed an additional
$250,000 under the facility. The Company is presently negotiating a
possible debt facility with unrelated parties that will replace the
Note. The Company is also exploring possible private placements of
convertible debt or equity.
4. 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 meeting or 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, the Company
recorded an impairment provision and a restructuring charge totaling
approximately $4,600,000 in the first quarter of fiscal 1998. The store
closures, which were undertaken to streamline operations and improve
profitability, began in late March 1997 and are expected to be completed
during fiscal 1998. As of July 30, 1997, the Company had closed nine of
the twelve stores and had a remaining reserve of $1,483,073.
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DIEDRICH COFFEE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
JULY 30, 1997
(UNAUDITED)
5. SUBSEQUENT EVENTS
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 Loan Documents"). That trust is controlled by
Ms. Cirica, who is the spouse of Lawrence Goelman, Chairman. The loan is
secured and provides for borrowings up to $500,000 with interest
accruing at the prime rate plus 3 1/2 %. All outstanding principal and
accrued interest is due and payable on August 19, 2002. In connection
with the Cirica Trust Loan Documents, the Company issued a warrant to
the Cirica Trust to purchase up to 170,000 shares of the Company's
common stock at a price of $2.25 a share.
The Company closed the tenth store under its restructuring plan
and opened a new store, as planned, in Houston, Texas.
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PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
In addition to historical information, management's discussion and
analysis includes certain forward-looking statements, including those related to
the Company's growth and strategies, that involve risks and uncertainties. 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. The Company's actual results and financial
position could differ materially from those anticipated in the forward-looking
statements as a result of a number of factors, such as unexpected delays in
implementing the new systems or in obtaining additional working capital, failure
of the wholesale business to meet targets and volatile world coffee prices. The
need for additional financing and other risks and uncertainties are described
elsewhere in this report and in detail under "Certain Factors and Trends
Affecting Diedrich Coffee and Its Business" in the Company's annual report on
Form 10-K for the fiscal year ended January 29, 1997 and in reports filed by the
Company with the Securities and Exchange Commission.
GENERAL
The Company commenced operations in 1972 as a private company. The
Company went public in September 1996. The Company sells high quality coffee
beverages made with its own freshly roasted coffee. In addition to brewed
coffee, the Company offers a broad range of espresso drinks. To complement
beverage sales, the Company sells light food items and whole bean coffee through
its coffeehouses. At the conclusion of fiscal 1997 (January 29, 1997), the
Company operated forty-seven coffeehouses or carts in operation, located in
California, Colorado and Texas. As of July 30, 1997, the Company operated a
total of thirty-nine coffeehouses as a result of the closure of nine of the
twelve locations identified for closure under the previously announced
restructuring plan (see Note 4 of Notes to Condensed Financial Statements) and
the opening of one new coffeehouse in Houston, Texas in July, 1997.
In the first two quarters of the current fiscal year the Company
experienced losses related to underperforming stores and a $4,600,000
restructuring charge. The Company is executing a new business plan designed to
return the Company to profitability by the end of fiscal 1998 (January 28,
1998). The business plan targets significant growth in several markets or
channels of distribution. Achieving these goals depends upon, among other
things, obtaining sufficient working capital, successful implementation of new
systems and of the new store management approach and team.
New management team. A new management team took over following the
resignation of Steven A. Lupinacci, the Company's Chief Executive Officer
("CEO") in March, 1997. In addition to Lawrence Goelman, Chairman and Interim
CEO, Kerry W. Coin, President and Chief Operating Officer, and John Bayley, Vice
President of Finance and Controller, the Company hired in the second quarter
Michael P. Reeves, Vice President of Human Resources and Marketing, Jonathan B.
Eddison, Vice President and General Counsel, Edward A. Apffel, Director of the
Wholesale Division, and Philip R. Williams, Director of Purchasing. The Company
believes that its new senior management team has the skills, experience and
ability to execute the business plan.
New business plan. At the direction of the Board of Directors, the
Company's new management developed and is implementing a new business plan for
renewing and strengthening the Company while attempting to return it to
profitability. As previously announced, the new business plan includes: (1)
closing stores which do not meet the Company's performance standards; (2)
developing new channels of distribution such as "co-branding", franchising,
carts, kiosks, and office coffee service; (3) accelerating growth in wholesale
sales; (4) improved cost controls through installing upgraded software and new
management information and point-of-sale systems; (5) rolling out an enhanced
training and human resources systems so as to strengthen and build the Company's
operating management and staff; and (6) concentrating on building brand
awareness and brand equity.
Progress against the plan. Nine of the twelve stores targeted for
closure were closed by July 30, 1997. Management remains confident that the
remaining stores to be closed will be closed before the end of the fiscal year.
On a period-to-period comparative basis the Company is operating according to
the new business plan since the plan was put into place. The Company's plan
projects operating losses to steadily diminish and end in the fourth quarter if
all targets are met and sufficient working capital is obtained. Retail revenues
are ramping up while controllable operating expenses at the store level are
decreasing. Wholesale sales are increasing. The new business plan emphasizes
growth in wholesale sales.
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Green coffee prices. In the second quarter of fiscal 1998, worldwide
coffee commodity prices were at the highest levels since 1992. The Company
usually pays a premium over the commodity price for the select and high quality
coffee beans that it purchases. As worldwide demand for coffee of all types
remains strong, the Company expects the prices that it pays to remain
comparatively high into the foreseeable future. The Company has so far mitigated
the effect of the green coffee price increases by increasing the wholesale and
retail sales prices of its roasted coffee beans, brewed coffee and related
products in the second quarter. Demand for the Company's coffee was not
adversely affected by the price increase.
Roast capacity and packaging. The Company is actively seeking cost
effective ways to expand its coffee roasting capacity and upgrade its packaging
capabilities. These improvements are needed to enable the Company to expand and
diversify its wholesale business. These steps are to take place following
management's review of the costs and benefits of purchasing or contracting for
these added capabilities.
RESULTS OF OPERATIONS
Thirteen Weeks Ended July 30, 1997 Compared with the Thirteen Weeks Ended
July 31, 1996
Net sales. Net sales for the thirteen weeks ended July 30, 1997,
increased 24.5% to $5,811,000 from $4,667,000 for the thirteen weeks ended July
31, 1996. During this most recent quarter, the Company derived 90.5% of net
sales from its retail coffeehouse operations. The Company's wholesale and mail
order sales accounted for the remainder of net sales. Net retail sales for the
thirteen weeks ended July 30, 1997 increased 23.2% to $5,259,000 from $4,269,000
in the thirteen weeks ended July 31, 1996 primarily due to the increase in the
number of coffeehouses as well as replacing the closed coffeehouses with higher
volume coffeehouses. The Company's ability to continue to increase net sales
depends upon many factors, including existing and emerging competition. There
can be no assurance that the Company's net sales will continue to increase.
Wholesale and mail order sales combined increased 38.7% to $552,000 in
the thirteen weeks ended July 30, 1997 from $398,000 in the thirteen weeks ended
July 31, 1996. The increase was due to a more active sales effort, the hiring of
a director of wholesale and continued favorable customer response from new and
existing wholesale accounts. A moderate price increase on roasted whole bean
coffee was implemented during the quarter in response to industry wide cost
pressures resulting from increases in the price of green coffee.
The percentage increase in second quarter of fiscal 1998 comparable
store sales was 0.8%. Due to the remodeling of stores in Denver, only 22 of the
Company's 38 coffeehouses were open for the full period in the second quarter in
fiscal 1997. On average these comparable stores have been open for more than 3.5
years and had sales of approximately $170,000 per store for the thirteen weeks
ended July 30, 1997.
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Net sales for the twenty-six weeks ended July 30, 1997 increased 30.6%
to $11,678,000 from $8,942,000 for the twenty-six weeks ended July 31, 1996. Net
retail sales for the twenty-six weeks ended July 30, 1997 increased 30.3% to
$10,643,000 from $8,171,000 for the twenty-six weeks ended July 31, 1996 due to
an increase in the number of coffeehouses and in coffeehouse sales. Wholesale
and mail order sales for the twenty-six weeks ended July 30, 1997 increased
34.2% to $1,035,000 from $771,000 for the twenty-six weeks ended July 31, 1996.
Cost of sales and related occupancy costs. Cost of roasted coffee,
dairy, food, paper and bar supplies, accessories and clothing (cost of sales)
and rent (related occupancy costs) for the thirteen weeks ended July 30, 1997
increased to $2,861,000 from $2,136,000 for the thirteen weeks ended July 31,
1996. As a percentage of retail net sales, cost of sales and related occupancy
costs increased to 54.4% in the second quarter of fiscal 1998 from 50.0% for the
second quarter of fiscal 1997. These figures include non-recurring expenses of
closing stores, such as continuing lease payments.
Cost of sales and related occupancy costs for the twenty-six weeks ended
July 30, 1997 increased to $5,903,000 from $3,909,000 for the twenty-six weeks
ended July 31, 1996. As a percentage of retail net sales, cost of sales and
related occupancy costs increased to 55.5% for the first two quarters in fiscal
1998 from 47.8% for the first two fiscal quarters in fiscal 1997. This increase
stems from the result of higher green coffee costs that were not entirely offset
by the menu price increase implemented in the second quarter of fiscal 1998.
Additionally, the increase was also attributable to some increases in related
occupancy costs.
Store operating expenses. Store operating expenses increased to
$2,127,000 for the thirteen weeks ended July 30, 1997 from $1,873,000 for the
thirteen weeks ended July 31, 1996. As a percentage of retail net sales, store
operating expenses decreased to 40.4% in the second quarter of fiscal 1998 from
43.9% in the prior fiscal year's second quarter. For the twenty-six weeks ended
July 31, 1997, store operating expenses, as a percentage of retail net sales,
similarly decreased to 42.3% from 44.1% for the twenty-six weeks ended July 31,
1996. These decreases were due to improved sales projection methods and labor
scheduling techniques.
Other operating expenses. Other operating expenses (those associated
with wholesale and mail order sales) increased to $76,000 for the second quarter
of fiscal 1998 from $63,000 in the second quarter of fiscal 1997. These
expenses, as a percentage of the net sales from the wholesale division,
decreased to 13.8% from 15.8%. These decreases are due to an increase in
wholesale sales. For the twenty-six weeks ended July 30, 1997, other operating
expenses, as a percentage of wholesale net sales, decreased to 13.5% from 16.0%
for the twenty-six weeks ended July 31, 1996. These decreases are a result of an
increased in volume and prices, as well as an increase in equipment sales.
Depreciation and Amortization. Depreciation and amortization increased
to $439,000 for the thirteen weeks ended July 30, 1997 from $211,000 for the
thirteen weeks ended July 31, 1996. As a percentage of net sales, depreciation
and amortization increased to 7.6% from 4.5% for the same period in the prior
year, principally due to depreciable assets related to the addition of the
conversion costs for the acquired locations. Depreciation and amortization
increased to $887,000 for the twenty-six weeks ended July 30, 1997 from $365,000
for the twenty-six weeks ended July 31, 1996.
General and administrative expenses. General and administrative expenses
increased to $970,000 for the second quarter of fiscal 1998 from $310,000 for
the second quarter of fiscal 1997. As a percentage of net sales, general and
administrative expenses increased to 16.7% from 6.6% due to the adding of
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. Similarly, as a
percentage of net sales, general and administrative expenses increased to 14.9%
in the twenty-six weeks ended July 30, 1997 from 7.2% for the twenty-six weeks
ended July 31, 1996. The Company expects to see a reduction in general and
administrative expenses relative to sales over the next several quarters as
revenue flows increase assuming continued successful execution of the new
business plan.
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Provision for store closings and restructuring costs. In response to
lower than expected profitability in certain of its operations the Company
commenced a restructuring program which includes store closures, lease
terminations and the write off of fixed assets. The $4.6 million, or $.84 per
share provision for store closings and restructuring costs reflects anticipated
expenses related to the program. The restructuring charge primarily includes
lease termination and other costs associated with store closures as well as a
provision for the impairment of long-lived assets in accordance with SFAS No.
121.
Interest expense. Interest expense decreased to $22,000 for the thirteen
weeks ended July 30, 1997 from $70,000 for the thirteen weeks ended July 31,
1996.
Operating (loss) income. Operating loss for the thirteen weeks ended
July 30, 1997 was $698,000 compared to operating income of $6,000 for the
thirteen weeks ended July 31, 1996. This change was primarily the result of
increases in cost of sales and related occupancy, depreciation and amortization,
and general and administrative costs as a percentage of sales.
Operating loss for the twenty-six ended July 30, 1997 was $6,081,000
compared to operating income of $113,000 for the twenty-six weeks ended July 31,
1996. This change was principally the result of the restructuring provision
discussed above as well as increases in cost of sales and related occupancy,
depreciation and amortization, and general and administrative costs as a
percentage of sales.
LIQUIDITY AND CAPITAL RESOURCES
The Company had a working capital deficiency of $2,101,000 as of July
30, 1997 compared to working capital of $1,949,000 as of January 29, 1997. The
current period working capital deficiency includes remaining restructuring
liabilities of $1,483,000. Cash used by operating activities for the twenty-six
weeks ended July 30, 1997 totaled $996,000.
On May 27, 1997, the Company made a promissory note to The Palm Trust.
The Note provides for borrowings up to $1,500,000 with interest accruing at the
prime rate plus 3 1/2%. All outstanding principal and accrued interest is due
and payable on January 27, 1998 or promptly after the closing of any new
financing, debt or equity, in an amount exceeding $1,500,000. The amount
outstanding as of July 30, 1997 was $1,250,000. On August 19, 1997 the Company
borrowed an additional $250,000 under the facility.
On August 19, 1997, the Company entered into a promissory note, term
loan agreement, and a security agreement with the Virginia R. Cirica Trust. The
loan provides for borrowings up to $500,000 with interest accruing at the prime
rate plus 3-1/2%. All outstanding principal and accrued interest is due and
payable on August 19, 2002. In connection with the loan, the Company issued a
warrant to the Cirica Trust to purchase up to 170,000 shares of the Company's
common stock at a price of $2.25 a share. The Company borrowed the full amount
of the loan.
The Company is actively pursuing additional working capital, which may
include additional loans on similar terms, convertible debt or private placement
of securities pursuant to Regulation D of the Securities Act of 1933. The
Company expects this financing to be completed before the end of this year.
The Company believes that cash from operations and these financing
activities, if and when completed, will be sufficient to satisfy the Company's
working capital needs for the remainder of the fiscal year. The Company
anticipates that it will need to seek additional debt or equity financing to
fund new retail locations and additional capital expenditures currently
projected for fiscal 1999.
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GREEN COFFEE AVAILABILITY
The Company believes that it has adequate sources of supply of high
quality green arabica coffee to meet its projected needs for the foreseeable
future. While the Company seeks to carefully anticipate its green coffee needs,
there can be no assurance that supplies and prices will not be affected by
weather in coffee growing regions of the world, unexpected demand or incorrect
forecasts.
SEASONALITY AND QUARTERLY RESULTS
The Company's business is subject to seasonal fluctuations as well as
general economic trends that affect retailers in general. Historically, the
Company's net sales have not been realized proportionately in each quarter, with
net sales being the highest during the last fiscal quarter which includes the
December holiday season. Hot weather tends to reduce sales. Quarterly results
are affected by the timing of the opening of new stores, which may not occur as
anticipated due to factors outside the Company's control. As a result of the
combination of the seasonality of the retail operations, the financial results
for any individual quarter may not be indicative of the results that may be
achieved for a full fiscal year.
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PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on June 26, 1997
at the Disneyland Hotel in Anaheim, California. Lawrence Goelman, Martin
Diedrich, Paul Heeschen, and Peter Churm were elected to the Board of Directors
to serve until the next Annual Meeting. In addition to the election of
directors, the stockholders voted upon the following propositions:
Voting was as follows, as recorded and reported by the inspector of
elections:
For the Board of Directors
ABSTAIN OR BROKER
NAME FOR WITHHELD NON-VOTES
---- --- -------- ---------
Peter Churm 4,498,355 36,505 --
Martin R. Diedrich 4,499,105 35,755 --
Lawrence Goelman 4,500,105 34,755 --
Paul C. Heeschen 4,501,555 33,305 --
Approval of an Amendment to the Diedrich Coffee, Inc. 1996 Stock Incentive Plan
to increase by 300,000 shares the total number of shares of the Company's Common
Stock that may be issued pursuant to such a plan.
AGAINST OR
FOR WITHHELD ABSTAIN BROKER NON-VOTES
--- -------- ------- ----------------
2,847,799 156,561 19,677 1,510,823
Ratification of the Selection of KPMG Peat Marwick LLP as independent
accountants for the company for the fiscal year ending January 28, 1998.
AGAINST OR
FOR WITHHELD ABSTAIN BROKER NON-VOTES
--- -------- ------- ----------------
4,510,150 16,060 8,650 --
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PART II - OTHER INFORMATION
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
----------- -----------
3.1 Certificate of Incorporation of the Company(1)
3.2 Bylaws of the Company(1)
10.13 Employment Letter to Jonathan B. Eddison dated June 4, 1997
10.14 Employment Letter to John Bayley dated July 21, 1997
10.15 Employment Letter to Michael Reeves dated May 5, 1997
10.16 Form of Promissory Note made in favor of the Palm Trust
10.17 Form of Term Loan Agreement made to the Virginia R. Cirica Trust
10.18 Form of Security Agreement made to the Virginia R. Cirica Trust
10.19 Form of Warrant Agreement made to the Virginia R. Cirica Trust
10.20 Form of Promissory Note made in favor of the Virginia R. Cirica Trust
27 Financial data schedule
(1) Incorporated by reference to the exhibit of the same number to 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.
(b) REPORTS ON FORM 8-K
None.
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: September 11, 1997 DIEDRICH COFFEE, INC.
/s/ Lawrence Goelman
----------------------------------------
Lawrence Goelman,
Chairman of the Board and Interim Chief
Executive Officer
/s/ John Bayley
----------------------------------------
John Bayley,
Vice President of Finance and
Controller (principal financial officer)
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