Diedrich Coffee Inc. 2008 Annual Report
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DIEDRICH COFFEE INC. 2008 ANNUAL REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K (Mark One) Í ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 25, 2008 OR ‘ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-21203 DIEDRICH COFFEE, INC. (Exact Name of Registrant as Specified in Its Charter) Delaware 33-0086628 (State or Other Jurisdiction (I.R.S. Employer of Incorporation or Organization) Identification No.) 28 Executive Park, Suite 200 Irvine, California 92614 (Address of Principal Executive Offices) Registrant’s telephone number, including area code (949) 260-1600 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, $0.01 par value The NASDAQ Global Market Securities registered pursuant to Section 12(g) of the Act: None (Title of Class) Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X] Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X] Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] (Do not check if a smaller reporting company) Smaller reporting company [X] Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant as of December 12, 2007 was $10,773,450. The number of shares of the registrant’s common stock outstanding, as of September 9, 2008, was 5,468,316. TABLE OF CONTENTS Page A Warning About Forward-Looking Statements .............................................. 1 PART I Item 1. Business ..................................................................... 1 Item 1A. Risk Factors .................................................................. 9 Item 1B. Unresolved Staff Comments ..................................................... 12 Item 2. Properties .................................................................... 12 Item 3. Legal Proceedings ............................................................. 13 Item 4. Submission of Matters to a Vote of Security Holders .................................. 13 PART II Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters ................. 14 Item 6. Selected Financial Data ......................................................... 14 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations .... 14 Item 7A. Quantitative and Qualitative Disclosures About Market Risk ............................ 28 Item 8. Financial Statements and Supplementary Data ....................................... 28 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure .... 28 Item 9A. Controls and Procedures ......................................................... 28 Item 9B. Other Information .............................................................. 29 PART III Item 10. Directors, Executive Officers and Corporate Governance ............................... 29 Item 11. Executive Compensation ........................................................ 33 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters .................................................................... 38 Item 13. Certain Relationships and Related Transactions, and Director Independence ................ 40 Item 14. Principal Accountant Fees and Services ............................................ 41 PART IV Item 15. Exhibits and Financial Statement Schedules ......................................... 42 Signatures .................................................................... 43 Financial Statements ............................................................ F-1 Index to Exhibits .............................................................. S-1 i A WARNING ABOUT FORWARD-LOOKING STATEMENTS We make forward-looking statements in this annual report on Form 10-K that are subject to risks and uncertainties. These forward-looking statements include information about possible or assumed future results of our financial condition, operations, plans, objectives and performance. When we use the words “believe,” “expect,” “anticipate,” “estimate” or similar expressions, we are making forward-looking statements. Many possible events or factors could affect our future financial results and performance. This could cause our results or performance to differ materially from those expressed in our forward-looking statements. You should consider these risks when you review this annual report on Form 10-K, along with the following possible events or factors: • the financial and operating performance of our wholesale operations; • our ability to achieve and/or maintain profitability over time; • the successful execution of our growth strategies; • our franchisees’ adherence to our practices, policies and procedures; • the impact of competition; and • the availability of working capital. Additional risks and uncertainties are described elsewhere in this annual report on Form 10-K and in detail under “Item 1A. Risk Factors.” You are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date of this annual report on Form 10-K. Except where required by law, we do not undertake an obligation to revise or update any forward-looking statements, whether as a result of new information, future events or changed circumstances. Unless the context requires otherwise, the terms “we,” “us,” and “our” refer to Diedrich Coffee, Inc., a Delaware corporation, and its predecessors and subsidiaries. PART I Item 1. Business. Overview Diedrich Coffee, Inc. is a specialty coffee roaster, wholesaler and retailer. Our brands include Diedrich Coffee, Gloria Jean’s, and Coffee People. The majority of our revenue is generated from wholesale customers located across the United States. Our wholesale operation sells a wide variety of whole bean and ground coffee as well as single serve coffee products through a network of office coffee service (“OCS”) distributors, chain and independent restaurants, coffeehouses, other hospitality operators and specialty retailers. We operate a large coffee roasting facility in Castroville, California that supplies freshly roasted coffee to all of our wholesale and retail customers. We also sell brewed, espresso-based and various blended beverages primarily made from our own fresh roasted premium coffee beans, as well as light food items, whole bean coffee and accessories, through our company-operated and franchised retail locations. The critical components for each of our retail locations include high quality, fresh roasted coffee and superior customer service by knowledgeable employees. As of June 25, 2008, we owned and operated 5 retail locations and franchised 118 other retail locations under the brands described above, for a total of 123 retail coffee outlets. Although the retail specialty coffee industry is presently dominated by a single company, which operates over seven thousand domestic retail locations, we are one of the nation’s largest specialty coffee retailers with annual system-wide retail revenues in excess of $54 million. System-wide retail revenues include sales from company-operated and franchise locations. Our retail units are located in 28 states. 1 Company Background Our predecessor company, Carl E. Diedrich & Sons, Inc., commenced operations in Orange County, California in 1972 and changed its name to Diedrich Coffee when its first retail store opened. We incorporated in California in 1985. We remained a small, family operated business with only three retail locations until 1992. We grew rapidly from 1992 to 1996 through construction of new Diedrich Coffee coffeehouses in Orange County and the acquisition of coffeehouses operated under other brands in Houston, Denver and San Diego, all of which were converted into Diedrich Coffee coffeehouses. In August 1996, we reincorporated under Delaware law as Diedrich Coffee, Inc., and completed an initial public offering of our common stock in September 1996. On July 7, 1999, we acquired Coffee People, Inc. The Coffee People, Inc. brands included Gloria Jean’s,