UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-QSB
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 1996
[ ] 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 0-21397
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Coffee People, Inc.
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(Exact name of registrant as specified in its charter)
Oregon 93-1073218
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(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
3259 NW 29th Avenue, Portland, Oregon 97210
(503) 223-7714
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 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 [ ] No [ x ]
As of September 30, 1996, there were 3,228,020 shares of the registrant's Common
Stock outstanding.
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COFFEE PEOPLE, INC.
INDEX
PART I. FINANCIAL INFORMATION
No. Page
- ------ ----
Item 1. Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
COFFEE PEOPLE, INC.
BALANCE SHEETS
(Dollars in thousands)
ASSETS
September 30, December 31,
1996 1995
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(Unaudited)
Current assets:
Cash and cash equivalents $ 13,207 $ 260
Accounts receivable 21 9
Inventories 198 264
Prepaid expenses 107 112
Deferred tax assets 14 13
Other current assets 30 -
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Total current assets 13,577 658
Property and equipment, net 2,650 2,155
Other assets 61 23
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Total assets $ 16,288 $ 2,836
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt
and capital lease obligations $ 131 $ 147
Line of credit - 175
Accounts payable 544 775
Accrued liabilities 319 196
Income taxes payable 53 55
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Total current liabilities 1,047 1,348
Deferred tax liability 66 66
Long-term debt and capital lease
obligations 475 567
Stockholders' equity:
Preferred stock, no par value; authorized
10,000,000 shares, none issued or outstanding - -
Common stock, no par value; authorized,
$50,000,000 shares; issued, 3,228,020, and
1,936,233 shares; outstanding, 3,228,020
and 1,405,044 shares 14,608 1,476
Stock subscription notes receivable (275) (341)
Retained earnings 367 187
Treasury stock - (467)
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Total stockholders' equity 14,700 855
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Total liabilities and stockholders' equity $ 16,288 $ 2,836
========= =========
See accompanying notes to financial statements.
COFFEE PEOPLE, INC.
STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
Three Months Ended Nine Months Ended
------------------------ ------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1996 1995 1996 1995
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(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues:
Retail sales $ 3,107 $ 2,984 $ 8,885 $ 8,131
Wholesale and other 41 50 142 148
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Total revenues 3,148 3,034 9,027 8,279
Cost of sales and related
occupancy expenses 1,542 1,465 4,324 3,996
Store operating expenses 976 939 2,745 2,556
Other operating expenses 5 16 44 46
Depreciation and amortization 132 104 364 271
General and administrative
expenses 443 387 1,323 1,106
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Income from operations 50 123 227 304
Other income 49 8 132 28
Interest expense (22) (36) (65) (95)
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Income before provision
for income taxes 77 95 294 237
Provision for income taxes (30) (32) (113) (82)
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Net income $ 47 $ 63 $ 181 $ 155
======== ========= ========= =========
Earnings per share $ 0.02 $ 0.04 $ 0.09 $ 0.10
======== ========= ========= =========
Shares used in computing
earnings per share 2,134,929 1,507,687 2,066,253 1,498,541
See accompanying notes to financial statements.
COFFEE PEOPLE, INC.
STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Nine Months Ended
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Sept. 30, Sept. 30,
1996 1995
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(Unaudited) (Unaudited)
Cash flows from operating activities:
Net income $ 181 $ 155
Adjustments to reconcile net income
to net cash provided by operating
activities -
Depreciation and amortization 364 271
Deferred provision for income taxes - (1)
Interest income on stock subscription notes (18) (18)
Changes in operating assets and liabilities:
(Increase) in accounts receivable (12) (3)
Decrease (increase) in inventories 66 (71)
Decrease in prepaid expenses 5 25
(Increase) decrease in other current assets (30) 3
(Decrease) in accounts payable (231) (159)
Increase in accrued liabilities 121 20
(Decrease) increase in income taxes payable (2) 59
(Decrease) in other current liabilities - (22)
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Net cash provided by operating activities 444 259
Cash flows from investing activities:
Purchase of property and equipment (859) (885)
(Increase) decrease in other assets (38) 74
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Net cash used in investing activities (897) (811)
Cash flows from financing activities:
Proceeds from long-term debt and capital
lease obligations - 748
Repayment of debt and capital lease obligations (271) (186)
Repayment of related party debt (12) (226)
Issuance of common stock, net 13,599 1
Proceeds from payment on stock subscription note 84 -
Dividends - (56)
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Net cash provided by financing activities 13,400 281
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Increase (decrease) in cash 12,947 (271)
Cash, beginning of the period 260 472
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Cash, end of the period $ 13,207 $ 201
========== ========
See accompanying notes to financial statements.
COFFEE PEOPLE, INC.
NOTES TO FINANCIAL STATEMENTS
For the Three Months and Nine Months Ended September 30, 1996 and 1995
(Unaudited)
NOTE 1. FINANCIAL STATEMENT PRESENTATION:
The interim financial data is unaudited; however, in the opinion of management,
the interim data includes all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of the results for the interim
periods. The financial statements included herein have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures included herein
are adequate to make the information presented not misleading.
The organization and business of the Company, the accounting policies followed
by the Company and other information are contained in the notes to the Company's
financial statements filed as part of the Company's registration statement on
Form SB-2, as filed with the Securities and Exchange Commission, effective
September 25, 1996.
NOTE 2. PERFORMANCE WARRANTS:
In connection with the Private Placement, the Company issued warrants to certain
investors entitling the holders thereof to purchase an aggregate of 131,250
shares of Common Stock at $0.0067 per share (the "Performance Warrants"). The
Performance Warrants have been cancelled pursuant to the Company's initial
public offering effective September 25, 1996 and are therefore not considered
Common Stock equivalents for the purposes of calculating earnings per share at
September 30, 1996 and 1995.
NOTE 3. STOCK SUBSCRIPTION NOTES RECEIVABLE:
In connection with the Company's initial public offering effective September 25,
1996, a key employee sold 25,000 shares of Common Stock. A portion of the
proceeds were applied to pay all accrued interest and the principal balance of
the portion of a stock subscription note attributable to the shares sold in the
offering.
NOTE 4. INITIAL PUBLIC OFFERING:
Effective September 25, 1996, the Company completed an initial public offering
in which it sold 1,225,000 shares of Common Stock at a price of $9.00 per share.
The Company's proceeds from the initial public offering included in the
financial statements are net of offering costs.
NOTE 5. FACILITIES:
One of the Company's stores is operated at a location for which there is
currently no term lease in effect. The lessor at such location, therefore, could
at any time demand that the Company vacate the premises on 30 days prior written
notice. The Company is negotiating with the lessor for a long-term lease. There
can be no assurance, however, that a lease for such location will be obtainable
on commerically reasonable terms, or at all. Another of the Company's stores is
operated pursuant to a lease which expires on December 31, 1996. There can be no
assurance that the Company will be able to renew its lease for such location.
The loss of either of such locations would have a material adverse effect on the
Company.
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion contains forward-looking statements within the meaning
of the federal securities laws and involves a number of risks and uncertainties.
Actual future results and trends may differ materially from the statements
contained in this discussion depending on a variety of factors. Such factors
include, but are not liminted to, the price and availability of green coffee and
other raw materials, successful execution of the Company's expansion plans, the
ability of the Company to manage growth, the impact of competition, acceptance
of the Company's products and image outside of Oregon and other risks detailed
in the Company's Registration Statement on Form SB-2, as amended, filed with the
Securities and Exchange Commission.
OVERVIEW
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Coffee People sells coffee beverages, coffee beans, cookies, pastries, ice
cream, shakes, and coffee related merchandise. The first Coffee People store
opened in 1983. As of September 30, 1996, the Company operated 19 stores.
In January 1996, the Company raised net proceeds of $3,725,000 in a private
placement of Common Stock. In September 1996, the Company completed a public
offering in which it raised approximately $10 million in net proceeds from the
sale of 1,225,000 shares of Common Stock. Coffee People intends to use the net
proceeds from the public offering and the private placement to open at least 30
new stores in two or more new markets by the end of 1997.
The Company opened two new stores in 1995 as it concentrated on raising capital
and prepared for its national expansion. The Company has devoted 1996 to
building its management team, developing its infrastructure, developing its new
retail store prototype, selecting new markets and identifying sites within those
markets. Because of the small number of new stores opened in 1995 and because of
the relatively long lead time to develop new stores, the Company has not
realized significant sales increases in 1996.
New stores typically incur higher than normal operating costs and lower than
normal revenues during the first few months of store operation. For purposes of
planning, the Company projects a store to break even at the store level by the
third month of operation and to make a profit after the allocation of general
and administrative expenses by the sixth month of operation. There can be no
assurance, however, that the Company will be able to achieve these results.
Store opening costs, including employee recruiting and training and new store
marketing and promotion expenses, are expensed by the Company as incurred. The
concentration of these costs in periods when a large number of new stores are
being opened will significantly affect the Company's operating results for such
periods.
As new markets are developed and as new stores mature, the Company expects
average store sales in maturing markets to increase. However, as the Company
strives to build overall market share, annual average store sales and year over
year comparable store sales comparisons may decline as new stores are built in
relatively close proximity to existing stores.
RESULTS OF OPERATIONS
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THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1995
Revenues. Total revenues increased 3.8% to $3,148,000 for the three months ended
September 30, 1996 from $3,034,000 for the same period in 1995. Retail sales
increased 4.1% to $3,107,000 for the 1996 period from $2,984,000 for the 1995
period.
Comparable store sales for the 18 stores open for the full third quarter ended
September 30, 1996 and 1995 decreased 1.8% due primarily to a 21.8% decline in
sales at one of the Company's stores located in a shopping center that is
undergoing redevelopment and by a 19.0% decline in another store located in
close proximity to one of the Company's top producing stores. The lease on the
latter store will expire in the spring of 1997 and is not expected to be
renewed.
Incremental sales from the store that opened after September 30, 1995 offset the
decline in comparable store sales and accounts for the overall increase in
retail sales for the three months ended September 30, 1996.
Wholesale and other sales decreased 18.0% to $41,000 for the three months ended
September 30, 1996 from $50,000 for the same period in 1995. This decrease was
expected due to the Company's decision to turn over the servicing of the
Company's wholesale business to an outside firm. In the future, the Company will
receive a fee based upon the wholesale sales generated by the outside firm.
Costs and expenses. Cost of sales and related occupancy expenses as a percentage
of total revenues increased to 49.0% for the three months ended September 30,
1996 from 48.3% for the same period in 1995. The increase is due primarily to
higher prices for milk, chocolate and pastry. In response to these higher costs,
the Company in September raised prices on certain products which resulted in an
overall price increase of approximately 4.0%. There can be no assurance,
however, that revenues will increase by this amount, or at all.
Store operating expenses as a percentage of retail sales remained relatively
stable at 31.4% for the three months ended September 30, 1996 as compared to
31.5% for the same period in 1995.
Depreciation and amortization as a percentage of total revenues increased to
4.2% for the three months ended September 30, 1996 from 3.4% for the same period
in 1995, due primarily to the impact of higher build-out costs for the stores
opened in 1994 and 1995. These stores carry higher depreciation expense as a
percentage of total revenues than stores opened prior to 1994.
General and administrative expenses increased to $443,000 for the three months
ended September 30, 1996 from $387,000 for the same period in 1995 due primarily
to the addition of key management personnel and other costs necessary to support
the Company's growth plans. As a percentage of total revenues, general and
administrative expenses increased to 14.1% in the 1996 period from 12.8% in the
1995 period.
Average store sales and contribution margin. For the three months ended
September 30, 1996, the Company's 12 neighborhood and drive-through stores open
for the full period achieved average store sales of $186,000 and an average
store contribution margin of 18.7% compared to $188,000 and 19.5% in the same
period of 1995. The five airport stores and one kiosk store open for the full
period achieved average store sales of $116,000 and an average store
contribution margin of 12.1% compared to $122,000 and 12.2% for the same period
in 1995. The difference between contribution margins realized on the Company's
neighborhood stores compared to its airport stores is primarily a result of the
percentage rent paid at Portland International Airport on sales generated at the
airport stores.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1995
Revenues. Total revenues increased 9.0% to $9,027,000 for the nine months ended
September 30, 1996 from $8,279,000 for the same period in 1995. Retail sales
increased 9.3% to $8,885,000 for the 1996 period from $8,131,000 for the 1995
period.
Comparable store sales for the 17 stores open for the full nine months ended
September 30, 1996 and 1995 increased 0.9% primarily due to higher transaction
volumes at two of the newly opened stores which were building sales during the
1995 period. Comparable store sales during the 1996 period were adversely
affected by a 21.0% decline in sales at one of the Company's stores located in a
shopping center that is undergoing redevelopment and by a 17.3% decline in a
store located in close proximity to one of the Company's top producing stores.
The lease on the latter store will expire in the spring of 1997 and is not
expected to be renewed. The increase in comparable store sales represents 9.5%
of the overall increase in sales. Incremental sales from the store opened during
the nine months ended September 30, 1995 contributed 31.8% of the increase in
retail sales and incremental sales from the store opened after September 30,
1995 contributed 58.4% of the increase.
Wholesale and other sales decreased 4.1% to $142,000 for the nine months ended
September 30, 1996 from $148,000 for the same period in 1995. The decrease was
expected due to the Company's decision to turn over the servicing of the
Company's wholesale business to an outside firm. For the future, the Company
will receive a fee based upon the wholesale sales generated by the outside firm.
Costs and expenses. Cost of sales and related occupancy expenses as a percentage
of total revenues decreased to 47.9% for the nine months ended September 30,
1996 from 48.3% for the same period in 1995. The decrease is due primarily to
lower green coffee prices.
Store operating expenses as a percentage of retail sales remained relatively
stable at 30.9% for the nine months ended September 30, 1996 as compared to
31.4% for the same period in 1995.
Depreciation and amortization as a percentage of total revenues increased to
4.0% for the period ended September 30, 1996 from 3.3% for the same period in
1995, due primarily to the impact of higher build-out costs for the stores
opened in 1994 and 1995. These stores carry higher depreciation expense as a
percentage of total revenues than stores opened prior to 1994.
General and administrative expenses increased to $1,323,000 for the nine months
ended September 30, 1996 from $1,106,000 for the same period in 1995 due
primarily to the addition of key management personnel, including the Company's
President and Chief Operating Officer, and other costs necessary to support the
Company's growth plans. As a percentage of total revenues, general and
administrative expenses increased to 14.7% in the 1996 period from 13.4% in the
1995 period.
Average store sales and store contribution margin. For the nine months ended
September 30, 1996, the Company's neighborhood and drive-through stores open for
the full period achieved average store sales of $547,000 and an average store
contribution margin of 19.8% compared to $552,000 and 19.4% in the same period
in 1995. The five airport stores and one kiosk store open for the full period
achieved average store sales of $314,000 and an average store contribution
margin of 10.8% compared to $316,000 and 14.4% for the same period in 1995. The
difference between the contribution margins realized on the Company's
neighborhood stores compared to its airport stores is primarily a result of the
percentage rent paid at Portland International Airport on sales generated at the
airport stores. The decline in store contribution margins at the Company's
airport stores is due primarily to higher labor costs and depreciation expenses
incurred at these airport stores.
Other income. Other income as a percentage of total revenues increased to 1.5%
for the nine months ended September 30, 1996 from 0.3% for the same period in
1995 due to interest earned on the proceeds from the Company's private placement
completed in January 1996.
Interest Expense. Interest expense as a percentage of total revenues decreased
to 0.7% for the nine months ended September 30, 1996 from 1.1% for the same
period in 1995, primarily as a result of utilizing portions of the proceeds from
the Company's private placement to reduce interest-bearing obligations.
LIQUIDITY AND CAPITAL RESOURCES
The Company plans to open at least 30 new retail stores by the end of 1997 and
to continue further expansion thereafter. The Company currently estimates that
the average cost of constructing a new neighborhood coffee house based on its
new prototype design, including site selection costs, lease negotiation, store
design, permitting, architectural fees, construction supervision, leasehold
improvements and equipment, will be approximately $325,000. There can be no
assurance that costs of constructing new stores will not exceed such estimate.
As of September 30, 1996 the Company had $13,207,000 in cash and equivalents.
Working capital as of September 30, 1996, totaled $12,530,000, as compared to a
working capital deficiency of $690,000 at December 31, 1995.
For the nine months ended September 30, 1996, and for 1995, cash provided by
operating activities was $444,000 and $259,000, respectively.
Historically, the Company has financed its growth primarily through the sale of
equity securities, the issuance of notes payable and the periodic use of bank
debt. For the nine months ended September 30, 1996 the Company had net cash
provided by financing activities of $13,400,000, primarily as a result of the
recent initial public offering which resulted in approximately $10,183,000 in
net proceeds before offering costs and $3,725,000 in net proceeds received from
a private placement of Common Stock completed in January 1996.
For the nine months ended September 30, 1996 and 1995, net cash used in
investing activities was $897,000 and $811,000 respectively. The primary use of
net cash used in investing activities is capital expenditures for new retail
stores. The Company currently estimates that capital expenditures through the
end of 1997 will be approximately $10.0 million, substantially all of which will
be used to develop new stores.
The Company believes that anticipated cash flow from operations and existing
cash will be sufficient to meet the Company's anticipated capital requirements
for planned expansion for at least the next 12 months.
COFFEE PRICES AND OTHER EXPENSES AND RISKS
The Company believes that it has adequate sources of supply of high-quality
specialty coffee to meet its expansion needs for the foreseeable future.
However, coffee prices can be volatile. Supply and price can be affected by many
factors, such as weather, politics and economic conditions in the producing
countries. The Company's ability to raise prices in response to rising coffee
prices may be limited by competitive pressures if other major specialty coffee
retailers do not raise prices. The Company's inability to pass through higher
coffee prices in the form of higher retail prices for beans and beverages could
have a material adverse effect on the Company. Alternatively, if coffee prices
remain too low, there could be adverse impacts on the level of supply and
quality of coffee available from producing countries, which could have a
material adverse effect on the Company.
On November 5, 1996, Oregon voters passed a ballot initiative which will raise
the state minimum wage over a three-year period from $4.75 per hour to $6.50 per
hour. The Company currently pays all employees, other than newly hired employees
participating in a 20-hour training program, above the minimum wage that will be
in effect in 1997. Accordingly, the Company does not expect the new minimum wage
to have a material adverse effect in 1997. It is uncertain what impact, if any,
the minimum wage increase will have on the Company's operating results beyond
1997; any impact is expected to be mitigated, however, by the Company's planned
expansion outside of Oregon.
In addition, the Comapny believes that in the future its results of operations
and earnings could be significantly affected by other factors, such as the
Company's ability to find optimal store locations at favorable lease rates,
increased competition within the specialty coffee industry, the Company's
continued ability to hire, train and retain qualified personnel and the
Company's continued ability to obtain adequate capital to finance its planned
expansion.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11 Statement Regarding Computation of Per Share Earnings
27 Financial Data Schedule
(b) Report on Form 8-K
No current Reports on Form 8-K were filed during the period covered
by this report.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Coffee People, Inc.
/s/ Kenneth B. Ross
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Kenneth B. Ross
Chief Financial Officer
Signing on behalf of the registrant and
as principal financial officer