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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 March 7, 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
Incorporation or Organization) Identification No.)
2144 MICHELSON DRIVE
IRVINE, CALIFORNIA 92612
(Address of Principal Executive Offices including Zip Code)
(949) 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 April 19, 2001, there were 12,645,370 shares of common stock of
the registrant outstanding.
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DIEDRICH COFFEE, INC.
INDEX
PART I - FINANCIAL INFORMATION PAGE NO.
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Item 1 Financial Statements
Condensed Consolidated Balance Sheets.......................... 3
Condensed Consolidated Statements of Operations................ 4
Condensed Consolidated Statements of Cash Flows................ 5
Notes to Condensed Consolidated Financial Statements........... 6
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 12
Item 3 Quantitative and Qualitative Disclosures About Market Risk....... 18
PART II - OTHER INFORMATION
Item 5 Other Information................................................ 19
Item 6 Exhibits and Reports on Form 8-K................................. 19
Signatures....................................................... 24
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PART I - FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
DIEDRICH COFFEE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 7, 2001 JUNE 28, 2000
------------- -------------
(UNAUDITED)
ASSETS
Current Assets:
Cash $ 893,128 $ 2,943,554
Accounts receivable 2,659,940 2,359,015
Inventories (Note 2) 3,126,762 4,327,011
Prepaid expenses 789,483 382,193
Income taxes receivable -- 16,232
------------ ------------
Total current assets 7,469,313 10,028,005
Property and equipment, net 12,746,684 15,458,807
Costs in excess of net assets acquired, net 13,625,565 14,181,306
Other assets 788,291 661,736
------------ ------------
Total assets $ 34,629,853 $ 40,329,854
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current installments of obligations under capital lease $ 268,469 $ 390,699
Current installments of long-term debt (Note 3) 2,386,900 1,075,000
Accounts payable 3,031,468 6,464,169
Accrued compensation 2,513,629 2,150,918
Accrued expenses 1,377,733 1,462,868
Franchisee deposits 665,452 656,634
Deferred franchise fee income 931,853 796,500
Provision for store closure (Note 4) 1,027,304 1,246,920
------------ ------------
Total current liabilities 12,202,808 14,243,708
Obligations under capital lease, excluding current installments 758,857 659,865
Long-term debt, excluding current installments (Note 3) 7,355,101 9,591,667
Deferred rent 772,139 713,025
------------ ------------
Total liabilities 21,088,905 25,208,265
------------ ------------
Stockholders' Equity:
Common stock 126,169 126,169
Additional paid-in capital 52,552,412 52,552,412
Accumulated deficit (39,137,633) (37,556,992)
------------ ------------
Total stockholders' equity 13,540,949 15,121,589
------------ ------------
Commitments and contingencies
Total liabilities and stockholders' equity $ 34,629,853 $ 40,329,854
============ ============
See accompanying notes to condensed consolidated financial statements.
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DIEDRICH COFFEE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THIRTY-SIX THIRTY-SIX
TWELVE WEEKS TWELVE WEEKS WEEKS WEEKS
ENDED MARCH 7, ENDED MARCH 8, ENDED MARCH 7, ENDED MARCH 8,
2001 2000 2001 2000
-------------- -------------- -------------- --------------
Revenues:
Retail sales $ 11,204,895 $ 11,114,489 $ 33,443,921 $ 32,158,365
Wholesale and other 3,036,796 3,535,944 13,839,589 14,460,641
Franchise revenue 1,595,953 2,070,282 4,826,549 5,295,376
------------ ------------ ------------ ------------
Total 15,837,644 16,720,715 52,110,059 51,914,382
------------ ------------ ------------ ------------
Cost and Expenses:
Cost of sales and related occupancy costs 7,799,081 7,594,543 25,726,011 25,141,724
Store operating expenses 4,114,049 4,494,663 13,374,246 12,627,884
Operations management 919,088 1,322,083 3,506,636 4,016,474
Depreciation and amortization 1,081,390 997,815 3,185,793 2,847,632
General and administrative expenses 1,281,097 1,982,055 5,873,622 6,206,448
Provision for asset impairment and
restructuring costs (Note 4) 779,891 -- 779,891 --
(Gain) loss on disposition of assets 167,886 3,600 199,898 (1,400)
------------ ------------ ------------ ------------
Total 16,142,482 16,394,759 52,646,097 50,838,762
------------ ------------ ------------ ------------
Operating income (loss) (304,838) 325,956 (536,038) 1,075,620
Interest expense (316,861) (297,448) (1,031,583) (931,873)
Interest and other income, net 6,178 50,955 23,508 162,788
------------ ------------ ------------ ------------
Income (loss) before income tax provision (615,521) 79,463 (1,544,113) 306,535
Income tax provision 16,233 -- 36,528 17,535
------------ ------------ ------------ ------------
Net income (loss) $ (631,754) $ 79,463 $ (1,580,641) $ 289,000
============ ============ ============ ============
Basic net income (loss) per share: $ (0.05) $ 0.01 $ (0.12) $ 0.02
============ ============ ============ ============
Diluted net income (loss)per share: $ (0.05) $ 0.01 $ (0.12) $ 0.02
============ ============ ============ ============
Weighted average shares outstanding:
Basic 12,645,370 12,616,871 12,645,370 12,418,313
Diluted 12,645,370 13,026,042 12,645,370 13,043,435
See accompanying notes to condensed consolidated financial statements.
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DIEDRICH COFFEE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THIRTY-SIX WEEKS THIRTY-SIX WEEKS
ENDED MARCH 7, 2001 ENDED MARCH 8, 2000
------------------- -------------------
Cash flows from operating activities:
Net income (loss) $(1,580,641) $ 289,000
Adjustments to reconcile net income (loss) to cash
provided by operating activities:
Depreciation and amortization 3,185,793 2,847,632
Amortization of loan fees 193,685 38,976
Impairment charge 317,000 --
Restructuring charge - store closure 165,000 --
(Gain) loss on disposition of assets 199,898 (1,400)
Changes in assets and liabilities:
Accounts receivable (300,926) (732,853)
Inventories 1,200,249 99,738
Prepaid expenses (407,290) (194,719)
Income taxes receivable 16,232 --
Other assets (322,654) (94,922)
Accounts payable (3,432,700) 446,913
Accrued compensation 362,711 46,499
Accrued expenses and provision for store closings and
restructuring costs (325,580) (2,819,601)
Deferred rent 59,114 3,330
----------- ------------
Net cash (used in) provided by operating activities (670,109) (71,407)
----------- ------------
Cash flows from investing activities:
Capital expenditures for property and equipment (970,066) (2,102,785)
Disposals of property and equipment 717,654 1,400
Cash paid for acquisition, net -- (22,956,607)
----------- ------------
Net cash used in investing activities (252,412) (25,057,992)
----------- ------------
Cash flows from financing activities:
Proceeds from issuance of common stock -- 25,350,799
Proceeds from the issuance of note payable, net
of fees paid -- 11,603,181
Repayment of long-term debt (924,666) (7,808,357)
Repayment of capital lease obligations (203,239) (499,670)
----------- ------------
Net cash (used in) provided by financing activities (1,127,905) 28,645,953
----------- ------------
Net increase (decrease) in cash (2,050,426) 3,516,554
Cash at beginning of period 2,943,554 552,124
----------- ------------
Cash at end of period $ 893,128 $ 4,068,678
=========== ============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 907,058 $ 610,580
=========== ============
Income taxes $ 20,295 $ 21,141
=========== ============
Non-cash transactions:
Issuance of common stock to acquire Coffee People $ -- $ 8,415,000
=========== ============
Investment in property and equipment under
capital leases $ 180,000 $ --
=========== ============
See accompanying notes to condensed consolidated financial statements.
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DIEDRICH COFFEE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 7, 2001
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The unaudited condensed consolidated financial statements of Diedrich
Coffee, Inc. (the "Company") and subsidiaries have been prepared in accordance
with generally accepted accounting principles, the instructions to Form 10-Q and
Article 10 of Regulation S-X. Information relating to periods ending prior to
July 7, 1999 included in this report relates to the historical operations of
Diedrich Coffee, Inc. and, except as otherwise indicated, does not reflect the
operations of Coffee People, Inc., which the Company acquired on July 7, 1999.
These 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 28, 2000.
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.
Costs in Excess of Net Assets Acquired
In the fourth quarter of fiscal year 2000, the Company recorded a $14.8
million impairment charge against costs in excess of net assets acquired, and
management changed the related amortization period from 40 years to 30 years for
the Gloria Jean's division and from 40 years to 10 years for both the Coffee
People and Coffee Plantation divisions. Such revised amortization periods, which
became effective in the first quarter of fiscal year 2001, reflect management's
best estimate of the underlying periods of recoverability of the costs in excess
of net assets acquired. The change in amortization periods resulted in
additional amortization of $101,000 for the twelve weeks ended March 7, 2001 and
$304,000 for the thirty-six weeks ended March 7, 2001.
Reclassifications
Certain reclassifications have been made to the prior year consolidated
financial statements to conform to the March 7, 2001 presentation.
2. INVENTORIES
Inventories consist of the following:
MARCH 7, 2001 JUNE 28, 2000
------------- -------------
Green coffee (raw materials) $ 650,342 $1,371,009
Roasted coffee (finished goods) 885,525 789,816
Accessory and specialty items 544,041 750,667
Other food, beverage and supplies 1,046,854 1,415,519
---------- ----------
$3,126,762 $4,327,011
========== ==========
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DIEDRICH COFFEE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 7, 2001
(UNAUDITED)
3. LONG-TERM DEBT
Long-term debt consists of the following:
MARCH 7, 2001 JUNE 28, 2000
------------- -------------
BANKBOSTON, N.A. (FLEET NATIONAL BANK)
Note payable bearing interest at a
rate of 8.53% on $9.333 million and
8.38% on $.409 million as of
March 7, 2001. Due September 1,
2002. Note is secured by the
assets of the Company and its
subsidiaries' stock. $9,742,001 $10,666,667
---------- -----------
Less: current installments 2,386,900 1,075,000
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Long-term debt, excluding current
installments $7,355,101 $ 9,591,667
========== ===========
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 Company used the proceeds of the term loan to repay existing indebtedness
and to pay expenses related to the acquisition of Coffee People. The term loan
originally 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 established the revolving
credit facility for future flexibility to remodel existing company-owned
coffeehouses, develop new company coffeehouses, and for general corporate
purposes. The Company did not draw down any borrowings under the revolving
credit facility, although it presently has $210,000 of outstanding Letters of
Credit backed by the revolving credit facility. 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 March 7, 2001, the
applicable index for the $9.333 million balance was 5.53% and the applicable
index for the $.409 million balance was 5.38%.
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 the Credit Agreement because of its
inability to meet certain financial covenants. The Company simultaneously
announced that on June 27, 2000, it had entered into a Letter Agreement with
Fleet National Bank under which the bank agreed to extend the due date of the
June 30, 2000 quarterly principal payment until 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 the July 31, 2000
principal payment as required on the extended due date, and 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 a First Amendment to
Credit Agreement with Fleet National Bank to amend certain terms of the original
Credit Agreement. The First Amendment to Credit Agreement provides, among other
things, for a significant reduction in 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 parties as to certain
assets intended to be sold as well as the allocation of future net asset sale
proceeds between the Company and the bank, an additional event of default under
the Credit Agreement, a reduction in the overall amount of the revolving credit
facility and certain new restrictions governing use of the facility, and a
modification of the financial covenants and the Company's ability to obtain new
third party debt going forward.
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DIEDRICH COFFEE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 7, 2001
(UNAUDITED)
Specifically, under the terms of the First Amendment to Credit
Agreement, no further scheduled principal payments on the term loan were
required from August 1, 2000 through January 31, 2001. Beginning February 1,
2001, the Company was required to begin making scheduled principal payments of
$25,000 per month, which will increase to $100,000 per month beginning July 1,
2001, 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 to
scheduled principal payments, the Company and the bank identified certain assets
that could be sold without interfering with the Company's growth strategy,
including two pieces of owned real property under existing company retail
locations which would be leased back from the buyer, a third parcel of owned
real property, presently undeveloped, and certain company operated coffeehouses
outside of its 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 such asset sales. A sale of one of the three owned
properties referred to above was completed in late December 2000. The net
proceeds received totaled $415,000, of which 50% was paid to the bank, resulting
in a $208,000 principal repayment to the bank in early January 2001. The other
two properties continue to be listed for sale. The computation of the interest
rate and the timing of interest payments under the original Credit Agreement
remain unchanged under the First Amendment to Credit Agreement. To date, the
Company has made all required interest and principal payments.
The amendment also introduced an additional event of default under the
Agreement. The 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 defined as 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 included a reduction in the revolving credit
facility, which the Company had previously been unable to access because of the
covenant defaults, from a $3,000,000 limit to $1,293,000, and a restriction that
the reduced 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 such ratios in
the financial covenants as contained in the original Credit Agreement, the
parties agreed to a new covenant under the First Amendment to Credit Agreement
which commits the Company to achieving 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: $283,000 by March 31, 2001; $708,000 by June 30,
2001; and $1,619,900 by September 30, 2001. Such incremental principal
repayments (above the scheduled minimum monthly amounts described above) are
anticipated to be generated primarily from the net proceeds to be paid to the
bank from the issuance of new debt or equity, future asset sales or a
combination of these sources. The Company has met its repayment obligation with
respect to the $283,000 that was due by March 31, 2001.
4. PROVISION FOR ASSET IMPAIRMENT AND RESTRUCTURING COSTS
The Company recorded a charge of $779,891 during its third quarter of
fiscal 2001 for asset impairment and restructuring costs. This charge
represented severance costs of $297,891 associated with the relocation of the
administrative support center for the Company's Gloria Jean's division to its
home office in Irvine, California, plus the elimination of a number of
administrative positions, estimated lease termination costs of $165,000 for the
planned closure of four underperforming company operated locations during the
next 12 months, and related asset impairment charges of $317,000.
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DIEDRICH COFFEE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 7, 2001
(UNAUDITED)
Activity in the provision for store closure for the thirty-six weeks
ended March 7, 2001 is summarized as follows:
Balance at June 28, 2000 $1,246,920
Charges to operations 382,489
Disbursements as costs incurred (384,616)
Reduction in provision (217,489)
----------
Balance at March 7, 2001 $1,027,304
==========
Charges to operations include amounts reserved during the current fiscal
year for lease terminations, including $165,000 of restructuring charges in the
third fiscal quarter as previously noted. During the year, the Company was able
to settle three other leases on terms more favorable than originally
anticipated, and therefore reduced the provision for store closure.
Activity in the accrued severance account, which is included as a
component of accrued compensation in the accompanying condensed consolidated
balance sheets, for the thirty-six weeks ended March 7, 2001 is summarized as
follows:
Balance at June 28, 2000 $ 548,346
Charges to operations 297,891
Disbursements as costs incurred (510,136)
---------
Balance at March 7, 2001 $ 336,101
==========
5. EARNINGS PER SHARE
The Company computed 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 was 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 which have been treated as dilutive potential common shares.
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DIEDRICH COFFEE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 7, 2001
(UNAUDITED)
The following table sets forth the computations of basic and diluted net
income (loss) per share:
TWELVE TWELVE THIRTY-SIX THIRTY-SIX
WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED
MARCH 7, 2001 MARCH 8, 2000 MARCH 7, 2001 MARCH 8, 2000
------------- ------------- ------------- -------------
NUMERATOR:
Net income (loss) $ (631,754) $ 79,463 $ (1,580,641) $ 289,000
DENOMINATOR:
Denominator for basic net income (loss)
per share - weighted average shares 12,645,356 12,616,871 12,645,356 12,418,313
Dilutive potential common shares using
treasury stock method -- 409,171 -- 625,122
---------- ---------- ---------- ----------
Denominator for diluted net income (loss)
per share 12,645,356 13,026,042 12,645,356 13,043,435
============ =========== ============ ============
BASIC NET INCOME (LOSS) PER SHARE: $ (0.05) $ 0.01 $ (0.12) $ 0.02
============ =========== ============ ===========
DILUTED NET INCOME (LOSS) PER SHARE: $ (0.05) $ 0.01 $ (0.12) $ 0.02
============ =========== ============ ===========
All 2,688,667 outstanding options plus 920,000 warrants to purchase
shares of common stock during the twelve weeks and thirty-six weeks ended March
7, 2001 were excluded from the calculation of diluted net income (loss) per
share as their inclusion would have been anti-dilutive.
Options and warrants to purchase 1,915,725 and 1,386,725 shares of
common stock were excluded from the calculation of diluted net income per share
for the twelve weeks and thirty-six weeks ended March 8, 2000, as their
inclusion would have been anti-dilutive.
6. SEGMENT AND RELATED INFORMATION
The Company has three reportable segments which include 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 tables. The other total assets consist of corporate cash, costs in
excess of net assets acquired and 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.
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DIEDRICH COFFEE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 7, 2001
(UNAUDITED)
RETAIL WHOLESALE FRANCHISE
OPERATIONS OPERATIONS OPERATIONS OTHER TOTAL
---------- ---------- ---------- ------------ -------------
Twelve Weeks Ended March 7, 2001
Revenue $11,204,895 $3,036,796 $1,595,953 $ -- $ 15,837,644
Interest expense 17,019 -- 17,454 282,388 316,861
Depreciation & amortization 476,225 202,438 -- 402,727 1,081,390
Segment profit (loss) before tax 1,087,209 120,793 1,007,844 (2,831,367) (615,521)
Total assets as of March 7, 2001 $12,098,193 $2,425,712 $ 825,827 $ 19,280,121 $34,629,853
RETAIL WHOLESALE FRANCHISE
OPERATIONS OPERATIONS OPERATIONS OTHER TOTAL
---------- ---------- ---------- ------------ -------------
Twelve Weeks Ended March 8, 2000
Revenue $11,114,489 $3,535,944 $2,070,282 $ -- $16,720,715
Interest expense 14,402 -- 19,894 263,152 297,448
Depreciation & amortization 447,399 153,279 - 397,137 997,815
Segment profit (loss) before tax 804,837 299,972 1,451,211 (2,476,557) 79,463
Total assets as of June 28, 2000 $13,684,507 $1,897,706 $ 649,713 $ 24,097,928 $40,329,854
RETAIL WHOLESALE FRANCHISE
OPERATIONS OPERATIONS OPERATIONS OTHER TOTAL
---------- ---------- ---------- ------------ -------------
Thirty-Six Weeks ended March 7, 2001
Revenues $33,443,921 $13,839,589 $4,826,549 $ -- $ 52,110,059
Interest expense 50,686 -- 61,736 919,161 1,031,583
Depreciation & amortization 1,403,875 573,898 -- 1,208,020 3,185,793
Segment profit (loss) before tax 2,054,043 2,168,853 2,669,928 (8,436,937) (1,544,113)
Total assets as of March 7, 2001 $12,098,193 $2,425,712 $ 825,827 $ 19,280,121 $ 34,629,853
RETAIL WHOLESALE FRANCHISE
OPERATIONS OPERATIONS OPERATIONS OTHER TOTAL
---------- ---------- ---------- ------------ -------------
Thirty-Six Weeks ended March 8, 2000
Revenues $32,158,365 $14,460,641 $5,295,376 $ -- $51,914,382
Interest expense 46,589 -- 92,967 792,317 931,873
Depreciation & amortization 1,295,867 451,722 -- 1,100,043 2,847,632
Segment profit (loss) before tax 2,713,581 2,580,010 2,749,602 (7,736,658) 306,535
Total assets as of June 28, 2000 $13,684,507 $ 1,897,706 $ 649,713 $ 24,097,928 $40,329,854
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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.
Additionally, 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:
o the financial and operating performance of our retail operations;
o our ability to maintain profitability over time;
o our ability to perform within the terms of our amended credit
agreement;
o the successful execution of our growth strategies;
o the impact of competition; and
o the availability of working capital.
Foreseeable risks and uncertainties are described elsewhere in this
report and in detail under "Risk Factors and Trends Affecting Diedrich Coffee
and Its Business" in our Annual Report on Form 10-K for the fiscal year ended
June 28, 2000 and in other reports that we file with the Securities and Exchange
Commission.
GENERAL
The first retail store operating under the name of Diedrich Coffee
commenced operations in 1972. We are one of the largest specialty coffee
retailers in the United States with annual system-wide sales of more than $150
million. At March 7, 2001, Diedrich Coffee owned and operated 90 retail
locations and had 280 franchised retail locations in 37 states and ten foreign
countries. Our primary brands are Diedrich Coffee coffeehouses and Gloria
Jean's, the nation's largest chain of mall-based coffee stores. We also own and
operate Coffee People and Coffee Plantation coffeehouses. We sell brewed
specialty coffee and espresso-based beverages such as cappuccinos, lattes,
mochas and espressos and various blended drinks as well as a wide variety of
whole bean coffees through these company-owned and franchised locations. To
complement beverage sales, we also sell light food items and other merchandise
at our retail locations. In addition, we have a wholesale division that markets
our products directly to businesses through office coffee systems as well as to
food service establishments. Our products are also sold directly to customers
through our website and through mail order.
Franchise Area Development Agreements And Franchising Activities
Diedrich Coffee is currently seeking multi-unit franchisees interested
in developing a defined geographic area for the sale of Diedrich Coffee brand
coffee products through a variety of non-mall retail venues. We currently have
two franchise area development agreements to develop a total of 84 Diedrich
Coffee brand coffeehouses. We anticipate that one of these agreements will be
terminated during this fiscal year, resulting in a remaining development
commitment of 40 Diedrich Coffee brand coffeehouses.
The franchising strategy for our Gloria Jean's brand is to seek
franchise candidates interested in either single unit or multi-unit development
of Gloria Jean's coffee stores, as well as candidates interested in developing
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kiosks and/or carts. The primary venue for Gloria Jean's is regional malls. We
are continuing to franchise Gloria Jean's internationally.
Restructuring Charge
At the time of our second quarter earnings announcement, we indicated
that we would take a charge of approximately $1.8 million to $2 million during
our third fiscal quarter. This charge represented estimated costs associated
with the relocation of the administrative support center for our Gloria Jean's
division to the company's home office in Irvine, California, severance expenses
resulting from the elimination of 31 administrative positions, and the closure
of certain underperforming company operated locations during the remainder of
the fiscal year. On February 28, 2001, we revised our estimated third quarter
charge to between $700,000 and $900,000, as a result of fewer planned store
closings.
The relocation of the Gloria Jean's support center and the headcount
reductions are now completed, and we have determined that four company operated
Gloria Jean's units should be closed. During the third fiscal quarter we
recorded a charge of $462,891 to reflect the severance costs associated with the
headcount reductions and the estimated costs of exiting the leases for the four
locations to be closed. We also recorded an asset impairment charge of $317,000
to write off the remaining book value for closing these locations.
Changes In Board Membership
Paul C. Heeschen, a member of the board of directors of Diedrich Coffee
since 1996, was named Chairman of the Board in February 2001. Mr. Heeschen is a
Principal with Heeschen & Associates, a private investment firm. Mr. Heeschen
replaces John E. Martin who resigned from the board of directors in February.
Mr. Martin became Chairman of the Board in November of 1997 and transitioned
from an executive to non-executive Chairman in October of 2000.
Mr. Heeschen will not receive any additional compensation for serving as
Diedrich Coffee's non-executive Chairman. Mr. Heeschen was an early investor in
Diedrich Coffee and led the first group of private investors in Diedrich Coffee
in 1992. He continues to be a significant stockholder.
Nasdaq Notification
As previously announced, we received notification that our securities
were subject to delisting from The Nasdaq National Market for failure to meet
the minimum net tangible assets and minimum bid price continued listing
requirements. On March 22, 2001, Diedrich Coffee representatives appeared before
a Nasdaq Hearing Panel in Washington, D.C. to request that our stock not be
delisted. On April 18, 2001, we received notification from the Hearing Panel
that we were granted an extension of time to meet all applicable listing
requirements, and will remain listed in the interim.
Specifically, we must attain a closing bid price of at least $1.00 per
share on or before May 14, 2001 and, immediately thereafter, a closing bid price
of at least $1.00 per share for a minimum of ten consecutive trading days. In
addition, we must demonstrate compliance with the net tangible assets
requirement by June 14, 2001. The longer period for compliance with the net
tangible assets requirement is due to recently proposed policy changes by Nasdaq
that would ease this requirement.
If the stockholders approve the reverse stock split described below and
the investment transaction described below is completed as planned, we believe
that we should regain compliance with the requirements for continued listing on
The Nasdaq National Market prior to the deadlines established by the Hearing
Panel.
Investment Agreement and Reverse Stock Split
As previously reported, we have entered into a definitive agreement with
several investment funds to raise a total of $6 million through a placement of
newly-issued shares of our common stock. $3.6 million of the net
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proceeds of this private offering will be used to reduce bank debt and, based
upon estimated transaction costs of $400,000, approximately $2.0 million of
remaining net proceeds will be used for general working capital purposes.
The sale of stock, which is subject to stockholder approval and various
conditions as described in detail in the Proxy Statement dated April 10, 2001
for the Special Meeting of Stockholders to be held on May 7, 2001, is expected
to close in May 2001. Under the terms of the agreement, we have agreed to issue
and sell to 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.
(collectively referred to as the "Investors") a total of 8,000,000 shares of our
common stock at a purchase price of $0.75 per share. In addition, we have agreed
to issue to the Investors warrants to purchase an additional 2,000,000 shares of
our common stock at an initial exercise price of $1.20 per share. Our Chairman,
Paul C. Heeschen, is the sole general partner of Sequoia Enterprises, L.P.
We filed the proxy statement on April 12, 2001 to provide formal notice
of the special meeting of stockholders to be held on May 7, 2001, and to solicit
stockholder approval of the transaction. At this special meeting stockholders
will also be asked to approve an increase in the number of our authorized shares
of common stock by 10 million shares and a one-for-four reverse stock split.
Seasonality And Quarterly Results
Our business is subject to seasonal fluctuations as well as economic
trends that affect retailers in general. Historically, our net revenues have not
been realized proportionately in each quarter, with net revenues being the
highest during the second fiscal quarter, which includes the December holiday
season. Hot weather tends to reduce revenues.
Quarterly results are affected by the timing of the opening of new
stores, which may not occur as anticipated due to events outside our control. As
a result of these factors, and of the other contingencies and risk factors
described elsewhere in this report and our Annual Report on Form 10-K, the
financial results for any individual quarter may not be indicative of the
results that may be achieved in a full fiscal year.
RESULTS OF OPERATIONS
Twelve And Thirty-Six Weeks Ended March 7, 2001 Compared With The
Twelve And Thirty-Six Weeks Ended March 8, 2000
Total revenues. Total revenues for the twelve weeks ended March 7, 2001
decreased (5.3%) to $15,837,644 from $16,720,715 for the twelve weeks ended
March 8, 2000. Total revenues for the thirty-six weeks ended March 7, 2001
increased 0.4% to $52,110,059 from $51,914,382 for the thirty-six weeks ended
March 8, 2000. During this most recent quarter, we derived 70.7% of total
revenues from our retail coffeehouse operations. Wholesale and mail order
revenue accounted for 19.2% of total revenues and franchise revenues accounted
for 10.1% of total revenues.
Retail revenues, which includes company operated locations under the
Diedrich Coffee, Coffee People, Coffee Plantation and Gloria Jean's brands, for
the twelve weeks ended March 7, 2001 increased 0.8% to $11,204,895 from
$11,114,489 for the twelve weeks ended March 8, 2000. This increase was the net
impact of a greater number of reportable unit-weeks in the current year period,
largely offset by a year-over-year decrease in comparable store sales. The
increase in reportable unit-weeks of sales resulted from the opening of new
coffeehouses (net of the impact of closed locations), and the transfer of the
highest volume Gloria Jean's unit from franchise to corporate operations, all
subsequent to the prior year period. In addition, sales of certain company
operated Gloria Jean's units initially identified for closure at the time of the
July 1999 Coffee People acquisition were not included in the results of
operations for the prior year period pursuant to applicable acquisition
accounting rules. As of March 7, 2001, we operated 90 retail locations whereas
on March 8, 2000, we operated 99 retail locations. However, since the operating
results of 11 company operated Gloria Jean's units were not included in
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consolidated operating results in the prior year period, for the reason noted
above, there was actually a greater number of reportable unit-weeks in the
current year period. The percentage decrease in system-wide comparable store
sales for the third fiscal quarter was (1.2%) for the Diedrich Coffee
coffeehouses, (0.6%) for the Gloria Jean's coffee stores, (10.0%) for the Coffee
People coffeehouses (Oregon) and (9.2%) for the Coffee Plantation coffeehouses
(Arizona).
Retail revenues for the thirty-six weeks ended March 7, 2001 increased
4.0% to $33,443,921 from $32,158,365 for the thirty-six weeks ended March 8,
2000. This net increase resulted primarily from the same factors cited above for
the quarterly year-over-year change, but is more favorable than the quarterly
figures because the offsetting negative comparable store sales figures are less
unfavorable on a year-to-date basis. The percentage increase (decrease) in
system-wide comparable store sales during the thirty-six week period ended March
7, 2001 versus the prior year period was 2.0% for the Diedrich Coffee
coffeehouses, (2.1%) for the Gloria Jean's coffee stores, (8.8%) for the Coffee
People coffeehouses (Oregon), and (9.9%) for the Coffee Plantation coffeehouses
(Arizona).
Wholesale and other revenues of $3,036,796 for the most recent quarter
decreased (14.1%) from $3,535,944 for the twelve weeks ended March 8, 2000.
Wholesale and other revenues decreased (4.3%) to $13,839,589 in the thirty-six
weeks ended March 7, 2001 from $14,460,641 for the thirty-six weeks ended March
8, 2000. For both periods, increased sales from expanded wholesale office coffee
service were offset by a decrease versus the applicable prior year period in the
number of Gloria Jean's franchisee units which purchase roasted coffee from us.
Revenues also declined during the current fiscal year because we began
outsourcing the supply of porcelain merchandise and other non-coffee items to
our Gloria Jean's franchisees, and we no longer inventory or sell the majority
of these lower margin non-coffee items.
Franchise revenue decreased to $1,595,953 for the twelve weeks ended
March 7, 2001 from $2,070,282 for the twelve weeks ended March 8, 2000.
Franchise revenue declined to $4,826,549 for the thirty-six weeks ended March 7,
2001, compared to $5,295,377 for the thirty-six weeks ended March 8, 2000.
Franchise revenue consists of initial franchise fees and royalties received on
sales from each franchise location. As of March 7, 2001, we had 11 franchised
Diedrich Coffee coffeehouses and 269 Gloria Jean's franchised mall coffee
stores. The decrease in third quarter franchise revenue is principally due to
the receipt of fewer initial franchise fees and area development fees, as well
as reduced royalties resulting from 21 fewer domestic Gloria Jean's franchise
units versus the prior year.
Cost of Sales and Related Occupancy Costs. Cost of roasted coffee,
dairy, food, paper and bar supplies and accessories (cost of sales) and rent
(related occupancy costs) for the twelve weeks ended March 7, 2001 increased to
$7,799,081 from $7,594,543 for the twelve weeks ended March 8, 2000. As a
percentage of retail sales and wholesale and other revenue, cost of sales and
related occupancy costs increased to 54.8% in the twelve weeks ended March 7,
2001 from 51.8% for the twelve weeks ended March 8, 2000. Cost of sales and
related occupancy costs for the thirty-six weeks ended March 7, 2001 increased
to $25,726,011 from $25,141,724 for the thirty-six weeks ended March 8, 2000. As
a percentage of retail sales and wholesale and other revenue, cost of sales and
related occupancy costs increased to 54.4% in the thirty-six weeks ended March
7, 2001 from 53.9% for the thirty-six weeks ended March 8, 2000. The percentage
increases primarily resulted from rent increases, and the higher relative cost
of Keurig product and license fees as a percentage of the related revenue
component, as compared to retail coffeehouse sales. Also, as previously noted,
prior year results were favorably affected by the exclusion of certain lower
sales volume, company operated Gloria Jean's stores from operating results under
applicable acquisition accounting procedures, whereas certain of these units are
included in current year operating results.
Store Operating Expenses. Store operating expenses decreased to
$4,114,049 for the twelve weeks ended March 7, 2001 from $4,494,663 for the
twelve weeks ended March 8, 2000. As a percentage of retail sales, store
operating expenses decreased to 36.7% in the twelve weeks ended March 7, 2001
from 40.4% in the twelve weeks ended March 8, 2000. This decline is primarily
due to an adjustment resulting from a reduction in employee group benefits and
worker's compensation expenses. During the third quarter of fiscal 2001, we
experienced improvements in our group benefit costs and worker's compensation
insurance premiums versus anticipated levels. Consequently, an adjustment was
made to reverse related excess accruals by $408,000. For the thirty-six weeks
ended March 7, 2001, store operating expenses increased to $13,374,246 from
$12,627,884 for the thirty-six weeks ended March 8, 2000. As a percentage of
retail sales, store operating expenses increased to 40.0% in the thirty-six
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weeks ended March 7, 2001 from 39.3% in the thirty-six weeks ended March 8,
2000. This increase is primarily attributed to higher labor costs, including
higher wage rates and increased staffing levels. Also, as previously noted,
prior year results were favorably affected by the exclusion of certain lower
sales volume, company operated Gloria Jean's stores from operating results under
applicable acquisition accounting procedures, whereas certain of these units are
included in current year operating results.
Operations Management. Operations management decreased to $919,088 for
the twelve weeks ended March 7, 2001 from $1,322,083 for the twelve weeks ended
March 8, 2000. As a percentage of total revenues, operations management
decreased to 5.8% for the twelve weeks ended March 7, 2001 from 7.9% for the
twelve weeks ended March 8, 2000. For the thirty-six weeks ended March 7, 2001,
operations management decreased to $3,506,636 from $4,016,474 for the thirty-six
weeks ended March 8, 2000. As a percentage of total revenues, operations
management decreased to 6.7% for the thirty-six weeks ended March 7, 2001 from
7.7% for the thirty-six weeks ended March 8, 2000. The decrease primarily
resulted from a re-organization in operations management resulting in fewer
employees versus the prior year, as well as the previously mentioned improvement
in group benefit and worker's compensation costs which resulted in an $83,000
reduction in the current year to operations management expense, on both a
quarter and year to date basis.
Depreciation and Amortization. Depreciation and amortization increased
to $1,081,390 for the twelve weeks ended March 7, 2001 from $997,815 for the
twelve weeks ended March 8, 2000. As a percentage of total revenue, depreciation
and amortization increased to 6.8% in comparison to 6.0% for the twelve weeks
ended March 8, 2000. Depreciation and amortization increased to $3,185,793 for
the thirty-six weeks ended March 7, 2001 from $2,847,632 for the thirty-six
weeks ended March 8, 2000. As a percentage of total revenue, depreciation and
amortization increased to 6.1% for the thirty-six weeks ended March 7, 2001 in
comparison to 5.5% for the thirty-six weeks ended March 8, 2000. The increase is
primarily attributable to the depreciation expense of six new coffeehouses that
opened during the later part of fiscal year 2000 and newly acquired equipment in
our roasting facility. Goodwill amortization is similar for both years, as the
reduction of amortization which resulted from the asset impairment write off of
a significant portion of total goodwill at June 2000 was approximately offset by
an acceleration of the amortization term for the remaining portion.
General and Administrative Expenses. General and administrative expenses
decreased to $1,281,097 for the twelve weeks ended March 7, 2001 from $1,982,055
for the twelve weeks ended March 8, 2000. As a percentage of total revenue,
general and administrative expenses decreased to 8.1% from 11.9%. For the
thirty-six weeks ended March 7, 2001, general and administrative expenses
decreased to $5,873,622 from $6,206,448 for the thirty-six weeks ended March 8,
2000. As a percentage of total revenues, general and administrative expenses
decreased to 11.3% for the thirty-six weeks ended March 7, 2001 from 12.0% for
the thirty-six weeks ended March 8, 2000. In both periods versus prior year, the
decrease in general and administrative expense resulted primarily from our
restructuring efforts to reduce overhead and from the previously mentioned
reduction in group benefit and worker's compensation expenses. This latter
component reduced general and administrative expenses for both the quarter and
year to date by $185,000 versus the prior year.
Interest Expense. Interest expense increased to $316,861 for the twelve
weeks ended March 7, 2001 from $297,448 for the twelve weeks ended March 8,
2000. For the thirty-six weeks ended March 7, 2001, interest expense increased
to $1,031,583 from $931,873 for the thirty-six weeks ended March 8, 2000. The
increase is primarily attributable to accelerated amortization of bank loan
fees, included in interest expense, related to the amended Fleet Bank credit
agreement. This resulted from the acceleration of the maturity date of the term
loan and the reduction in the amount of the revolving line of credit under the
credit agreement amendment.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our capital requirements in recent years principally
through public and private placements of our common stock and long-term debt. We
had a working capital deficit of $4,733,000 as of March 7, 2001 compared to
working capital deficit of $4,216,000 as of June 28, 2000. Cash (used in)
provided by operating activities for the thirty-six weeks ended March 7, 2001
totaled $(670,109) as compared to $(71,407) for the thirty-six weeks ended March
8, 2000. The decrease in cash is primarily attributable to a significant
reduction in accounts payable.
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Net cash (used in) provided by investing activities for the thirty-six
weeks ended March 7, 2001 totaled $(252,412), which was used for property and
equipment expenditures. Net cash used in financing activities for the thirty-six
weeks ended March 7, 2001 totaled $(1,127,905) which consisted of repayment of
long-term debt and capital leases.
Net cash used in investing activities for the thirty-six weeks ended
March 8, 2000 totaled $(25,057,992) which was primarily used for the acquisition
of Coffee People. Net cash provided by financing activities for the thirty-six
weeks ended March 8, 2000 totaled $28,645,953 which consisted of proceeds from
the issuance of common stock and long-term debt, reduced by the $8,308,027
repayment of long-term debt and capital lease obligations.
On July 7, 1999, we completed a public offering of 4,930,000 shares
(including an over-allotment option). All of the shares of common stock were
sold on behalf of Diedrich Coffee, of which 330,000 shares of common stock were
sold pursuant to the exercise of the underwriters' over-allotment option. The
net proceeds of the offering to Diedrich Coffee, after deducting approximately
$4.1 million in underwriters' commissions and related expenses, were
approximately $25.4 million.
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 used the proceeds of the
term loan to repay existing indebtedness and to pay expenses related to the
acquisition of Coffee People. The term loan originally 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. We established the revolving credit facility for future flexibility to
remodel existing company-owned coffeehouses, develop new company coffeehouses,
and for general corporate purposes. We have not drawn down any borrowings under
the revolving credit facility since it was established, although it presently
has $210,000 of outstanding Letters of Credit backed by the revolving credit
facility. 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%.
On September 26, 2000, we entered into a First Amendment to Credit
Agreement with Fleet National Bank to amend certain terms of the original Credit
Agreement. The First Amendment to Credit Agreement provides, among other things,
for a significant reduction in 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 parties as to certain assets
intended to be sold as well as the allocation of future net asset sale proceeds
between us and the bank, an additional event of default, a reduction in the
overall amount of the revolving credit facility and certain new restrictions
governing use of the facility, and a modification of the financial covenants and
our ability to obtain new third party debt going forward.
Specifically, under the terms of the First Amendment to Credit
Agreement, no further scheduled principal payments on the term loan were
required from August 1, 2000 until January 31, 2001. Beginning February 1, 2001,
we were required to begin making scheduled principal payments of $25,000 per
month, which will increase to $100,000 per month beginning July 1, 2001, 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 to scheduled
principal payments, we and the bank identified certain assets that could be sold
without interfering with our growth strategy, including two pieces of owned real
property under existing company retail locations, which would be leased back
from the buyer, a third parcel of owned real property, presently undeveloped,
and 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 is to receive 50% of the net proceeds
from any such asset sales. A sale of one of the three owned properties referred
to above was completed in late December 2000. The net proceeds received totaled
$415,000, of which 50% was paid to the bank, resulting in a $208,000 principal
repayment to the bank in early January 2001. The interest payments under the
original Credit Agreement remain unchanged under the First Amendment to Credit
Agreement. To date, we have made all required interest and principal payments.
The amendment also contains an additional event of default under the
Credit Agreement. The amendment specifies that a materially adverse change in
our financial condition (or any of our subsidiaries), as determined by
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the bank in its sole and exclusive discretion, is defined as 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 revolving credit
facility, which we had previously been unable to access because of the covenant
defaults, from a $3,000,000 limit to $1,293,000, and a restriction that the
reduced 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 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 us. In addition to resetting such ratios in the financial covenants
as contained in the original Credit Agreement, the parties agreed to a new
covenant under the First Amendment to Credit Agreement which commits us to
achieving certain 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: $283,000
by March 31, 2001; $708,000 by June 30, 2001; and $1,619,900 by September 30,
2001. Such incremental principal repayments (above the scheduled minimum monthly
amounts described above) are anticipated to be generated primarily from the net
proceeds to be paid to the bank from the issuance of new debt or equity, future
asset sales or a combination of these sources. We met our payment obligation
with respect to the $283,000 that was due by March 31, 2001.
On February 26, 2001 we entered into a Second Amendment to Credit
Agreement with Fleet National Bank. Pursuant to the original terms of the Credit
Agreement, we are required to pay the bank any net proceeds in excess of
$1,000,000 from the sale of any of our debt or equity securities. Pursuant to
the Second Amendment to Credit Agreement, we are permitted to retain $2,000,000
of the net proceeds from the sale of 8,000,000 shares of our common stock, and
the issuance of warrants to purchase an additional 2,000,000 shares of our
common stock, to Westcliff Capital Management, LLC and other investors for
consideration in the amount of $6,000,000, provided, however, that the payment
to the bank as a result of this transaction shall not be less than $3,600,000.
Management believes that cash from operations and asset sales will be
sufficient to satisfy our working capital needs at the anticipated operating
levels, including our obligations under the Credit Agreement modified as
described above, for the next twelve months.
New Accounting Pronouncements.
In March 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101 ("SAB101") "Revenue Recognition in Financial
Statements." This Staff Accounting Bulletin summarizes certain of the staff
views in applying generally accepted accounting principles to revenue
recognition in financial statements. SAB101, as amended, is effective for the
fourth fiscal quarter of the fiscal years beginning after March 15, 1999. We do
not expect the adoption of SAB101 to have a material impact on our consolidated
results of operations.
ITEM 3.
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
DERIVATIVE INSTRUMENTS
We have not used derivative financial instruments for any purpose,
including hedging or mitigating interest rate risk.
MARKET RISK
We did not invest in market risk sensitive instruments in the twelve
weeks ended March 7, 2001. From time to time, however, we enter into agreements
to purchase green coffee in the future that may or may not be fixed as to price,
depending on our assessment of the coffee market. At March 7, 2001, these
commitments totaled $2,627,000. These commitments cover a variety of coffee
types and expected delivery dates. The purchase price for each of these orders
has been fixed.
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Our market risk exposure with regard to financial instruments
outstanding as of March 7, 2001 was to changes in an adjusted Eurodollar
interest rate. We borrowed $12 million on July 7, 1999 in connection with our
acquisition of Coffee People, which amount bears interest at our option at
Fleet's base rate plus 1.25%, or an adjusted Eurodollar interest rate plus 3.0%.
We may convert the interest rate from the Fleet base rate to the adjusted
Eurodollar interest rate at anytime with 3 day's notice. We may convert the
interest rate from the adjusted Eurodollar interest rate to the Fleet base rate
at the end of each calendar quarter. At March 7, 2001, the effective interest
rate was 8.53%. At March 7, 2001, a hypothetical 100 basis point increase in the
rate would result in additional interest expense of $97,000 on an annualized
basis. The estimated increase is based upon the outstanding balance of long-term
debt at March 7, 2001. Substantially all of our business is transacted in U.S.
dollars. Accordingly, foreign exchange fluctuations have never had a significant
impact on us and are not expected to in the foreseeable future.
PART II - OTHER INFORMATION
ITEM 5.
OTHER INFORMATION
MINIMUM ADVANCE NOTICE OF STOCKHOLDER PROPOSALS
Diedrich Coffee stockholders are advised that we must be notified by
June 27, 2001 (120 days prior to the month and day of mailing the last year's
annual meeting proxy statement) of any proposal or solicitation that any
stockholder intends to present at the next annual meeting of stockholders and
which the stockholder has not sought to have included in our proxy statement for
the meeting in accordance with Rule 14a-8 under the Securities Exchange Act of
1934. 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 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 Certificate of Incorporation of the Company(2)
3.2 Bylaws of the Company(2)
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.(2)
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
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EXHIBIT NO. DESCRIPTION
- ----------- -----------
Partners I, L.P.(2)
4.3 Specimen Stock Certificate(2)
4.4 Form of Conversion Agreement in the connection with the conversion
of Series A and Series B Preferred Stock into Common Stock(2)
4.5 Form of Lock-up Letter Agreement among The Second Cup, Ltd. and
Diedrich Coffee, Inc.(3)
4.6 Voting Agreement and Irrevocable Proxy dated as of March 16, 1999
by and among Diedrich Coffee, Inc., D.C.H., L.P., Peter Churm,
Martin R. Diedrich, Lawrence Goelman, Paul C. Heeschen, John E.
Martin, Timothy J. Ryan, and Second Cup USA Holdings Ltd.(3)
10.1 Form of Indemnification Agreement(2)
10.2 Amended and Restated Diedrich Coffee 1996 Stock Incentive Plan(4)
10.3 Diedrich Coffee 1996 Non-Employee Directors Stock Option Plan(2)
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)(2)
10.5 Letter agreement by and between the Company and John E. Martin
appointing Mr. Martin Chairman of the Board, dated as of November
17, 1997(5)
10.6 Stock Option Plan and Agreement by and between the company and John
E. Martin granting Mr. Martin the option to purchase up to 850,000
shares of the Common Stock of the Company, dated as of November 17,
1997(5)
10.7 Common Stock Purchase Agreement by and between the company and John
E. Martin under which Mr. Martin agrees to purchase 333,333 shares
of the Common Stock of the Company, dated as of November 17,
1997(5)
10.8 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)
10.9 Stock Option Plan and Agreement by and between the company and
Timothy J. Ryan granting Mr. Ryan up to 600,000 shares of the
Common Stock of the Company, dated as of November 17,
20
21
EXHIBIT NO. DESCRIPTION
- ----------- -----------
1997(5)
10.10 Common Stock Purchase Agreement by and between the Company and
Timothy J. Ryan under which Mr. Ryan agrees to purchase 16,667
shares of the Common Stock of the Company, dated as of November 17,
1997(5)
10.11 Form of Warrant Agreement made in favor of Nuvrty, Inc., the Ocean
Trust and the Grandview Trust(6)
10.12 Form of Common Stock and Option Purchase Agreement with Franchise
Mortgage Acceptance Company dated as of April 3, 1998(7)
10.13 Employment Agreement with Catherine Saar dated June 11, 1998(8)
10.14 Form of Franchise Agreement(9)
10.15 Form of Area Development Agreement(9)
10.16 Employment Agreement with Martin R. Diedrich dated June 29, 1998(3)
10.17 Credit Agreement, dated as of July 7, 1999, by and among
BankBoston, N.A., Diedrich Coffee and its subsidiaries(10)
10.18 Security Agreement, dated as of July 7, 1999, by and among
BankBoston, N.A., Diedrich Coffee and its subsidiaries(10)
10.19 Securities Pledge Agreement, dated as of July 7, 1999, by and among
BankBoston, N.A., Diedrich Coffee and its subsidiaries(10)
10.20 Trademark Security Agreement, dated as of July 7, 1999, by and
among BankBoston, N.A., Diedrich Coffee and its subsidiaries(10)
10.21 Form of Term Note made in favor of BankBoston, N.A.(10)
10.22 Form of Revolving Note made in favor of BankBoston, N.A.(10)
10.23 Employment Agreement with Matt McGuinness dated effective March 13,
2000 (11)
10.24 Letter Agreement re: employment with Greg MacIsaac dated February
25, 2000 (11)
10.25 First Amendment to Credit Agreement dated as of September 26,
2000(11)
21
22
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.26 Second Amendment to Credit Agreement dated as of February 26, 2001*
10.27 Letter Agreement re: employment with J. Michael Jenkins dated
September 22, 2000 (11)
10.28 Letter Agreement re: employment with Carl Mount dated October 29,
1999 (12)
10.29 Letter Agreement re: employment with Edward A. Apffel dated May 25,
2000 (12)
10.30 Letter Agreement re: employment with Lisa Steere dated June 12,
2000 (12)
10.31 Diedrich Coffee, Inc. 2000 Non-Employee Directors Stock Option Plan
(13)
10.32 Stock Option Plan and Agreement with J. Michael Jenkins, dated
September 22, 2000 (14)
10.33 Diedrich Coffee, Inc. 2000 Equity Incentive Plan (14)
10.34 Common Stock and Warrant Purchase Agreement, dated March 14, 2001
(15)
21.1 List of Subsidiaries (11)
- ------------
* Filed with this Form 10-Q
(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 Registration
Statement on Form S-1 (No. 333-08633), as amended, as declared effective
by the Securities and Exchange Commission on September 11, 1996.
(3) Previously filed as an exhibit to Diedrich Coffee's Registration
Statement on Form S-4, filed with the Securities and Exchange Commission
on April 23, 1999.
(4) Previously filed as an exhibit to Diedrich Coffee's Quarterly Report on
Form 10-Q for the period ended 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.
(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.
22
23
(10) 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.
(11) Previously filed as an exhibit to Diedrich Coffee's annual report on
Form 10-K for the fiscal year ended June 28, 2000.
(12) 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.
(13) 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.
(14) 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.
(15) 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 February 16, 2001, we filed a Current Report of Form 8-K reporting
that the board of directors of Diedrich Coffee had named Paul C. Heeschen, a
member of the board of directors of the Company since 1996, its non-executive
Chairman of the Board.
23
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly cause this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: April 23, 2001 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 Officer)
24
25
EXHIBIT INDEX
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 Certificate of Incorporation of the Company(2)
3.2 Bylaws of the Company(2)
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.(2)
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.(2)
4.3 Specimen Stock Certificate(2)
4.4 Form of Conversion Agreement in the connection with the conversion
of Series A and Series B Preferred Stock into Common Stock(2)
4.5 Form of Lock-up Letter Agreement among The Second Cup, Ltd. and
Diedrich Coffee, Inc.(3)
4.6 Voting Agreement and Irrevocable Proxy dated as of March 16, 1999
by and among Diedrich Coffee, Inc., D.C.H., L.P., Peter Churm,
Martin R. Diedrich, Lawrence Goelman, Paul C. Heeschen, John E.
Martin, Timothy J. Ryan, and Second Cup USA Holdings Ltd.(3)
10.1 Form of Indemnification Agreement(2)
10.2 Amended and Restated Diedrich Coffee 1996 Stock Incentive Plan(4)
10.3 Diedrich Coffee 1996 Non-Employee Directors Stock Option Plan(2)
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)(2)
10.5 Letter agreement by and between the Company and John E. Martin
appointing Mr. Martin Chairman of the Board, dated as of November
17, 1997(5)
25
26
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.6 Stock Option Plan and Agreement by and between the company and
John E. Martin granting Mr. Martin the option to purchase up to
850,000 shares of the Common Stock of the Company, dated as of
November 17, 1997(5)
10.7 Common Stock Purchase Agreement by and between the company and
John E. Martin under which Mr. Martin agrees to purchase 333,333
shares of the Common Stock of the Company, dated as of November
17, 1997(5)
10.8 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)
10.9 Stock Option Plan and Agreement by and between the company and
Timothy J. Ryan granting Mr. Ryan up to 600,000 shares of the
Common Stock of the Company, dated as of November 17, 1997(5)
10.10 Common Stock Purchase Agreement by and between the Company and
Timothy J. Ryan under which Mr. Ryan agrees to purchase 16,667
shares of the Common Stock of the Company, dated as of November
17, 1997(5)
10.11 Form of Warrant Agreement made in favor of Nuvrty, Inc., the Ocean
Trust and the Grandview Trust(6)
10.12 Form of Common Stock and Option Purchase Agreement with Franchise
Mortgage Acceptance Company dated as of April 3, 1998(7)
10.13 Employment Agreement with Catherine Saar dated June 11, 1998(8)
10.14 Form of Franchise Agreement(9)
10.15 Form of Area Development Agreement(9)
10.16 Employment Agreement with Martin R. Diedrich dated June 29,
1998(3)
10.17 Credit Agreement, dated as of July 7, 1999, by and among
BankBoston, N.A., Diedrich Coffee and its subsidiaries(10)
10.18 Security Agreement, dated as of July 7, 1999, by and among
BankBoston, N.A., Diedrich Coffee
26
27
EXHIBIT NO. DESCRIPTION
- ----------- -----------
and its subsidiaries(10)
10.19 Securities Pledge Agreement, dated as of July 7, 1999, by and
among BankBoston, N.A., Diedrich Coffee and its subsidiaries(10)
10.20 Trademark Security Agreement, dated as of July 7, 1999, by and
among BankBoston, N.A., Diedrich Coffee and its subsidiaries(10)
10.21 Form of Term Note made in favor of BankBoston, N.A.(10)
10.22 Form of Revolving Note made in favor of BankBoston, N.A.(10)
10.23 Employment Agreement with Matt McGuinness dated effective March
13, 2000 (11)
10.24 Letter Agreement re: employment with Greg MacIsaac dated February
25, 2000 (11)
10.25 First Amendment to Credit Agreement dated as of September 26,
2000(11)
10.26 Second Amendment to Credit Agreement dated as of February 26,
2001*
10.27 Letter Agreement re: employment with J. Michael Jenkins dated
September 22, 2000 (11)
10.28 Letter Agreement re: employment with Carl Mount dated October 29,
1999 (12)
10.29 Letter Agreement re: employment with Edward A. Apffel dated May
25, 2000 (12)
10.30 Letter Agreement re: employment with Lisa Steere dated June 12,
2000 (12)
10.31 Diedrich Coffee, Inc. 2000 Non-Employee Directors Stock Option
Plan (13)
10.32 Stock Option Plan and Agreement with J. Michael Jenkins, dated
September 22, 2000 (14)
10.33 Diedrich Coffee, Inc. 2000 Equity Incentive Plan (14)
10.34 Common Stock and Warrant Purchase Agreement, dated March 14, 2001
(15)
21.1 List of Subsidiaries (11)
- ------------
* Filed with this Form 10-Q
(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 Registration
Statement on Form S-1 (No. 333-08633), as amended, as declared effective
by the Securities and Exchange Commission on September 11, 1996.
27
28
(3) Previously filed as an exhibit to Diedrich Coffee's Registration
Statement on Form S-4, filed with the Securities and Exchange Commission
on April 23, 1999.
(4) Previously filed as an exhibit to Diedrich Coffee's Quarterly Report on
Form 10-Q for the period ended 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.
(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) 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.
(11) Previously filed as an exhibit to Diedrich Coffee's annual report on
Form 10-K for the fiscal year ended June 28, 2000.
(12) 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.
(13) 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.
(14) 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.
(15) Previously filed as an exhibit to the Definitive Proxy Statement, filed
with the Securities and Exchange Commission on April 12, 2001.
28