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Diedrich Coffee of Irvine to Issue 1st Public Offering

Securities: Family-owned chain hopes to aggressively expand with proceeds from stock sale, according to SEC filing.


IRVINE — Diedrich Coffee said Tuesday that it will sell 2.2 million shares of common stock for $15.6 million and use the proceeds to aggressively expand the family-owned chain.

Coffeehouse industry observers had been expecting Irvine-based Diedrich to make a public stock offering in order to remain competitive with larger, fast-growing competitors.

While the company's Securities and Exchange Commission filing on Tuesday gave observers their first inside glimpse of the chain's recent history, it offers few details about the "aggressive growth strategy" that Diedrich will use to push beyond its Orange County stronghold.

Diedrich, which had just three Orange County locations in 1993, has rapidly expanded to 36 locations in Southern California, Colorado and Texas, according to the filing.

With the planned public offering, Diedrich would join several competitors, including industry leader Starbucks Corp. in Seattle and Second Cup Ltd. in Toronto, that are publicly held.

Although its filing suggests that Diedrich would move quickly to expand its out-of-town presence, it's also chock full of cautionary notes about the hotly contested coffee business.

Diedrich executives acknowledge that, unlike market leader Starbucks, their chain lacks a readily identifiable name outside of Southern California. And they acknowledge that the company might need to seek additional financing or make an additional stock offering.

Diedrich also describes the market for prepared specialty coffee beverages as "fragmented and highly competitive . . . and competition is expected to continue to increase substantially."

Most of the heat is being generated by competitors such as Starbucks, but Diedrich also is bumping up against marketing giants such as Kraft General Foods, Procter & Gamble Co. and Nestle S.A., which are aggressively expanding their own gourmet coffee lines.

Diedrich, which opened its first store in 1972, generated a $186,000 net profit on $10.2 million in revenue for the fiscal year ended Jan. 31, according to the filing.

Those totals, however, don't include additional revenue generated by 19 coffeehouses in Denver and Texas that Diedrich acquired in February. The filing notes that Diedrich also has signed leases to open six more shops.

The initial public stock offering would be priced at about $11.50 per share and would raise about $25 million. Existing shareholders would retain $6.9 million, leaving $15.6 million for the company after costs of doing the offering.

About $4 million of the proceeds would be used to reduce debt.

Existing shareholders would retain 59.3% of the 5.4 million shares that would be outstanding if the offering is completed. Diedrich's filing also notes that the company might, at some point, sell an additional 2.2 million shares.

The filing also notes that company Chairman Martin R. Diedrich is in the second year of a three-year employment agreement that calls for an annual base salary of $100,000, along with periodic performance bonuses. The contract also notes that Diedrich "shall not be required to relocate outside of Orange County."

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