Diedrich Coffee Inc. (Nasdaq:DDRX), one of the nation’s largest specialty coffee retailers, today reported results from operations for the third fiscal quarter ended March 7, 2001.

Revenues

Total revenues for the 12 weeks ended March 7, 2001 decreased 5.3% to $15.8 million, versus revenues of $16.7 million for the 12 weeks ended March 8, 2000. This decrease was attributable entirely to lower wholesale revenues and lower franchise revenues. Retail sales, which represent approximately 71% of total revenue, increased by 0.8% from the comparable quarter in the prior year.

Wholesale and other revenue for the third fiscal quarter decreased by 14.1% to $3.0 million from $3.5 million in the prior year period. The decrease in wholesale and other revenue is primarily attributable to two factors. First, a significant percentage of wholesale revenues represent purchases by Gloria Jean’s franchisees and, as previously reported, a number of underperforming Gloria Jean’s franchise units have closed since the prior year period. Second, Diedrich Coffee recently began outsourcing the distribution of low-margin non-coffee items which it previously sold directly to Gloria Jean’s franchisees.

Franchise revenues decreased 22.9% to $1.6 million for the 12 weeks ended March 7, 2001 from $2.1 million for the 12 weeks ended March 8, 2000. This decrease resulted from the lower number of Gloria Jean’s franchise units and the fact that the company was not offering Gloria Jean’s franchises during the first three fiscal quarters. The company has recently resumed offering Gloria Jean’s franchises for sale.

Total revenues for the 36 weeks ended March 7, 2001 increased 0.4% to $52.1 million from $51.9 million for the 36 weeks ended March 8, 2000. As with the results for the 12-week period, retail sales increased while wholesale revenue and franchise revenue decreased. Retail sales for the 36 weeks ended March 7, 2001 increased 4.0%, while wholesale and other revenue decreased 4.3% and franchise revenue decreased 8.8%, each when compared to the prior year period.

Profitability

Excluding the provision for asset impairment and restructuring costs, the company reported net income of $148,000, or $0.01 per share, for the 12 weeks ended March 7, 2001 compared to net income of $79,000, or $.01 per share, for the 12 weeks ended March 8, 2000. The provision for asset impairment and restructuring costs of $780,000 consisted of the projected cost of terminating the leases for four underperforming locations, writing down the associated asset values for these stores, and severance costs associated with the elimination of 31 administrative support positions and the relocation of Gloria Jean’s home office. Including this charge, the company reported a net loss of $632,000, or ($.05) per share.

Same Store Sales

As previously announced, management continues to focus on employee training and other operational issues to address the decline in same store sales. Same store sales at Diedrich Coffee coffeehouses open at least one year decreased 1.2% for the quarter, as compared with the same period last year. Third quarter same store sales at the company’s Coffee People and Coffee Plantation coffeehouses declined 10.0% and 9.2%, respectively.

System wide same store sales at Gloria Jean’s units declined 0.6% during the third quarter compared with the same period last year.

Franchise Development Agreements

Diedrich Coffee currently has two franchise area development agreements in effect to develop 84 Diedrich Coffee brand coffeehouses. The company anticipates the termination of one of these agreements in the current fiscal year, which would reduce the number of franchised coffeehouses committed to be developed pursuant to existing area development agreements to 40.

Other Developments

As previously announced, Diedrich Coffee will hold a Special Meeting of Stockholders on May 7, 2001 to seek approval of an increase in the company’s authorized shares, an equity investment transaction and a one-for-four reverse stock split. Stockholders of record at the close of business on March 26, 2001 will receive notice of and be entitled to vote at this Special Meeting. The equity investment involves the sale of 8 million shares of common stock at $0.75 per share for an aggregate investment of $6 million and the issuance of warrants to purchase 2 million additional shares at $1.20 per share. If the proposals are approved at the Special Meeting, the company anticipates completing the equity investment and effecting the reverse stock split within one to two days after the Special Meeting.

About Diedrich Coffee

Diedrich Coffee, Inc. is the nation’s second largest retailer in the specialty coffee market with annual system-wide revenues in excess of $150 million through 370 retail locations in 37 states and ten foreign countries. The company’s primary brands are Diedrich Coffee brand coffeehouses and Gloria Jean’s Coffees, the nation’s leading chain of mall-based coffee stores.

Headquartered in Irvine, Calif., Diedrich Coffee specializes in sourcing and custom roasting the world’s highest quality coffees and offering them to customers through its coffeehouses and mall stores and via wholesale, mail order and its website. For more information about Diedrich Coffee, call 800/354-5282, or visit the company’s website at www.diedrich.com.

Forward Looking Statements

Statements in this news release that relate to future plans, financial results or projections, events or performance are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and fall under the safe harbor. Actual results and financial position could differ materially from those anticipated in the forward-looking statements as a result of a number of factors, including but not limited to, the successful management of Diedrich Coffee’s growth strategy, impact of competition, the availability of working capital and other risks and uncertainties described in detail under “Risk Factors and Trends Affecting Diedrich Coffee and its Business” in the Company’s annual report on form 10-K for the fiscal year ended June 28, 2000.

                         DIEDRICH COFFEE, INC.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
(In thousands, except per share amounts)

OPERATIONS DATA: Twelve Twelve
Weeks Ended Weeks Ended
March 7, 2001 March 8, 2000
——— ———
Retail revenues $ 11,205 $ 11,114
Wholesale and other revenues 3,037 3,536
Franchise revenues 1,596 2,070
——— ———
Total revenues $ 15,838 $ 16,721
——— ———

Cost of sales and related occupancy costs $ 7,799 $ 7,595
Store operating expenses 4,114 4,495
Operations management 919 1,322
Depreciation and amortization 1,082 998
General & administrative expenses 1,281 1,982
Asset impairment and restructuring costs 780 –
(Gain) loss on disposition of assets 168 4
——— ———
Total expenses $ 16,143 $ 16,395
——— ———

Operating loss $ (306) $ 326
Interest expense (317) (297)
Interest and other income 6 51
——— ———

Loss before income taxes $ (616) $ 79
Income tax provision 16 –
——— ———
Net loss $ (632) $ 79
========= =========
Basic net loss per share: $ (0.05) $ 0.01
========= =========
Diluted net loss per share: $ (0.05) $ 0.01
========= =========
Weighted average shares outstanding:
Basic 12,645 12,617
Diluted 12,645 13,026

Thirty-Six Thirty-Six
Weeks Ended Weeks Ended
March 7, 2001 March 8, 2000
——— ———
Retail revenues $ 33,444 $ 32,158
Wholesale and other revenues 13,840 14,461
Franchise revenues 4,826 5,295
——— ———
Total revenues $ 52,110 $ 51,914
——— ———

Cost of sales and related occupancy costs $ 25,726 $ 25,142
Store operating expenses 13,375 12,628
Operations management 3,506 4,016
Depreciation and amortization 3,186 2,848
General & administrative expenses 5,873 6,207
Asset impairment and restructuring costs 780 –
(Gain) loss on disposition of assets 200 (1)
——— ———
Total expenses $ 52,646 $ 50,840
——— ———

Operating loss $ (536) $ 1,076
Interest expense (1,032) (932)
Interest and other income 24 163
——— ———

Loss before income taxes $ (1,544) $ 307
Income tax provision 37 18
——— ———

Net loss $ (1,581) $ 289
========= =========
Basic net loss per share: $ (0.12) $ 0.02
========= =========
Diluted net loss per share: $ (0.12) $ 0.02

Weighted average shares outstanding:
Basic 12,645 12,418
Diluted 12,645 13,043

BALANCE SHEET DATA:
March 7, 2001 June 28, 2000
————– ————–
Cash and equivalents $ 893 $ 2,944
Accounts receivable 2,660 2,359
Other assets 31,077 35,027
————– ————–
Total assets $ 34,630 $ 40,330
============== ==============

Current liabilities $ 12,203 $ 14,244
Other liabilities 8,886 10,964
Stockholder’s equity 13,541 15,122
————– ————–
Total liabilities and
stockholder’s equity $ 34,630 $ 40,330
============== ==============