UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: December 31, 1996
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: 0-21397
COFFEE PEOPLE, INC.
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(Name of small business issuer in its charter)
Oregon 93-1073218
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(State of incorporation) (I.R.S. Employer
Identification No.)
15100 SW Koll Parkway, Suite J
Beaverton, Oregon 97006
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(Address of principal executive offices)
Issuer's telephone number: (503) 672-9603
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, without par value
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 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 /X/ No / /
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this Form 10-KSB, and no disclosure will 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-KSB
or any amendment to this Form 10-KSB. /X/
State issuer's revenues for its most recent fiscal year: $12,281,000
State the aggregate market value of the voting stock held by nonaffiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within 60 days prior
to the date of filing: $16,917,290 aggregate market value as of March 14, 1997,
based on the price at which the stock was sold.
Indicate the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 3,241,591 shares of Common
Stock, without par value, on March 14, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Form 10-KSB incorporates information from the issuer's
definitive proxy statement for the annual meeting of shareholders to be held on
April 24, 1997.
Transitional Small Business Disclosure Format (Check One): Yes / /; No /X/
<PAGE>
PART I
ITEM 1: BUSINESS
GENERAL
Coffee People, Inc. ("Coffee People" or the "Company") sells coffee
beverages, coffee beans, cookies, pastries, ice cream, shakes and coffee related
merchandise. The Company's objective is to be a leading national specialty
coffee retailer and coffee house operator through a program of geographic
expansion and consistent profitability.
The Company distributes products through its Company-owned retail stores,
including neighborhood coffee houses, drive-through espresso bars and specialty
kiosks. Coffee People plans to open approximately 27 retail stores during 1997
in selected midwestern and western states, and to continue further expansion
thereafter. As of March 15, 1997, the Company operated 26 stores in three
states: Oregon (23, with 22 in the Portland Metropolitan area), Denver, Colorado
(2) and Southern California (1). As of that date, the Company also had entered
into leases for the opening of 7 additional stores in Chicago (2), southern
California (2) and Oregon (3).
The specialty coffee retail business in the United States is growing
rapidly and is disproportionately concentrated in the Pacific Northwest,
particularly Washington and Oregon. Industry sources estimate that total retail
sales of specialty coffee through all distribution channels will grow to $5.0
billion by 1999 from an estimated $1.5 billion in 1989 and that coffee cafes,
including espresso carts and kiosks, will be the fastest growing distribution
channel. It is estimated that the number of coffee cafes, espresso bars and
espresso carts will increase from approximately 3,000 in 1995 to approximately
10,000 by 1999.
The Company believes it can be a leading specialty coffee retailer in its
selected markets by differentiating itself from other coffee houses. The Company
believes it can achieve this differentiation by being more customer focused than
the competition, by providing superior coffee and service and by being
constantly innovative. The Company believes its stores offer an atmosphere that
welcomes customers in a friendly and inviting setting designed to encourage a
feeling of customer "ownership" and provide a community focus that fosters brand
recognition and consumer loyalty. Central to the Coffee People approach is its
experienced management team, its focus on operational excellence, its strong
unit economics and its site selection processes.
<PAGE>
The Company was incorporated as an Oregon corporation on November 7, 1991.
Prior to that time, Coffee People was operated as a partnership. The first
Coffee People store opened in Portland, Oregon on December 1, 1983.
THE COFFEE PEOPLE STRATEGY
The Company's objective is to be a leading national specialty coffee
retailer and coffee house operator through a program of geographic expansion and
consistent profitability. The key elements of the Company's strategy include:
CULTIVATE CUSTOMERS' SENSE OF OWNERSHIP. Coffee People strives to foster
long-term loyalty and a sense of ownership in its customers by being continually
receptive to evolving customer desires. The Company is dedicated to providing
its customers with the highest quality of service emphasizing speed, consistency
and courtesy in stores designed to welcome customers in a friendly, relaxing and
inviting atmosphere.
OFFER INNOVATIVE PRODUCTS AND EXTENSIVE MENU. Coffee People offers
innovative products and an extensive menu that appeals to a diverse blend of
people. The Company has developed proprietary brands that foster a high degree
of market differentiation and customer loyalty. For example, the Company has
expanded the Black Tiger brand from an espresso beverage to include ice cream
and shakes, a breakfast cereal and a sparkling coffee drink, making Black Tiger
one of the Company's top-selling brands.
ACHIEVE OPERATIONAL EXCELLENCE. Coffee People's senior management team has
extensive experience in the specialty coffee industry, from selecting the beans
to serving the cup. The Company believes that its training and incentive
programs create knowledgeable and loyal employees. Coffee People strives to
achieve exceptional financial results from each of its stores by closely
managing sales, costs and customer satisfaction.
FOCUS ON SUPERIOR SITE SELECTION AND RAPID NATIONAL EXPANSION. Coffee
People uses extensive marketing and demographic research to select store sites
it believes show a high likelihood of financial success. The Company intends to
open multiple stores in new markets where it can strive to become a leading
specialty retailer.
COFFEE PEOPLE PRODUCTS AND SUPPLIERS
PRODUCTS. The Company offers a broad product line including specialty
coffees, coffee beans, pastries and cookies, ice cream and shakes and coffee
related merchandise. Caffeinated and decaffeinated coffee and espresso-based
drinks are offered at all of the Company's stores, as are pastries. The
Company's neighborhood stores also sell whole coffee beans, teas and
accessories, mugs and other merchandise. Sales of coffee beverages comprise
approximately two-thirds of the Company's revenues, with bakery and ice cream
products accounting for approximately one-fifth of the Company's revenues.
<PAGE>
SUPPLIERS
COFFEE. Coffee People's supplier purchases coffee from a variety of coffee
producing countries. The Company believes that its contacts in the coffee
producing countries will ensure a continued supply of the high-quality beans
used in its products. The Company does not roast any of its coffee beans because
of the ready availability of high-quality roasters in the United States. The
Company buys its coffee from Coffee Bean International, Inc. ("CBI"), a
Portland, Oregon based roaster that uses Coffee People's proprietary roasting
specifications. The Company believes CBI has adequate capacity to fulfill the
Company's needs for the foreseeable future.
BAKERY GOODS AND ICE CREAM. The Company obtains bakery goods and ice cream
from local vendors with reputations for superior quality. Cookies are made based
on recipes developed by Coffee People. By offering alternative selections such
as ice cream and non-coffee beverages for people who do not drink coffee, Coffee
People believes it creates an inclusive, welcoming setting for all to enjoy its
products.
DISTRIBUTION STRATEGY AND STORE TYPES
The Company's principal distribution channel is retail stores, including
neighborhood coffee houses, drive-through espresso bars, airport stores and
specialty kiosks. The objective of each of the Company's stores is to provide
the "Coffee People Experience" to customers in a relaxed, friendly and inviting
setting. Coffee People may seek to develop other distribution points such as
mail order catalogs, airlines and co-developed stores that feature coffee and
other complementary products. Coffee People also intends to enter into one or
more licensing agreements with ice cream manufacturers for the distribution of
ice cream under the Company's brand names in supermarkets and other grocery
outlets.
The Company has four store types:
NEIGHBORHOOD COFFEE HOUSE. Neighborhood coffee houses are located in both
urban and suburban neighborhoods and business districts which offer a complete
line of Coffee People products and roasted coffee beans. As of March 15, 1997,
the Company had twelve neighborhood coffee houses: eight in the Portland, Oregon
area; one in Eugene, Oregon; one in Huntington Beach, California; and two in
Denver, Colorado.
<PAGE>
DRIVE-THROUGH ESPRESSO BAR. The second type of store is the drive-through
espresso bar that operates under the Motor Moka(R) brand. As of March 15, 1997,
the Company operated seven of these stores in Portland, Oregon, one of which has
indoor seating. The Company intends to provide indoor seating in all stores of
this type where feasible. Drive-through stores without indoor seating generally
will have a walk-up window. These stores are designed to maximize customer
convenience by eliminating the need to park a car and walk into a store.
AIRPORT STORE. The third type of store is designed for major airports. The
Company has six of these stores at Portland International Airport operating
under the Aero Moka(TM) brand. These stores include quick grab-and-go kiosks,
coffee bars and a sit-and-relax cafe. The Company believes these types of stores
provide visibility and increase brand recognition.
SPECIALTY KIOSK. The fourth type of Coffee People store is a specialty
kiosk for placement in high-traffic locations such as supermarkets and office
building lobbies. The Company has one of these store types and intends to add
more as attractive opportunities arise.
The Company's expansion strategy is to open multiple stores in new markets
where it believes it can become a leading specialty coffee retailer. The Company
intends to open approximately 27 new retail stores during 1997 and to continue
its national expansion thereafter. In 1996, the Company opened one new store in
Oregon and two new stores in the Denver, Colorado area. As of March 15, 1997,
the Company had opened four new stores in 1997, one neighborhood coffee house in
Huntington Beach, California, and three Motor Mokas in the Portland, Oregon
metropolitan area. Coffee People will also seek to acquire specialty coffee
retailers as opportunities arise that satisfy the Company's economic,
site-selection and other strategic criteria.
The cost of opening a new store depends upon the type of store, the nature
of any improvements that already exist at the site, the availability of tenant
improvement allowances and other factors. The Company estimates that the average
cost of opening a new neighborhood coffee house store will be approximately
$325,000.
<PAGE>
MARKETING STRATEGY
Coffee People's central marketing strategy is to offer quality products and
service that create customer loyalty in a satisfying environment. To effect this
strategy, Coffee People markets the Coffee People Experience.
The Company believes it addresses its customers in a distinctive tone of
voice. For example, the Company's paper cups feature Coffee People's Bill of
Rights, which expresses concerns about the issues of the day, creates a
fictional history that gives the Company a sense of depth and gently pokes fun
at itself and its obsession with coffee. This voice forms a character that the
Company uses to create a strong sense of personality and brand recognition.
The Company seeks to create new brands and products associated with the
brand. Black Tiger(R), for example, is a name Coffee People developed in 1987
for a high-caffeine coffee with a rustic Italian taste. It was first served as
brewed hot coffee and as a distinctive line of espresso drinks. Later, ice cream
featuring Black Tiger coffee was developed. The ice cream was combined with
espresso and the Black Tiger milkshake was created. The Company has expanded the
product line to include Black Tiger Sparkling Coffee, Black Tiger granola, a
breakfast cereal, and ancillary products.
Black Tiger products now account for a significant amount of the Company's
total revenues. The Company believes that this kind of branded expansion line
has been successful in attracting the Company's customers to new products and in
building sales. The Company also seeks ways to weave its branded products themes
into the architectural elements in its stores, creating an atmosphere of
immersion into the Coffee People culture.
COMPETITION
The specialty coffee market is intensely competitive and is becoming more
so. Many of the Company's competitors have greater financial and marketing
resources, brand name recognition and a larger customer base than the Company.
The specialty coffee industry is currently characterized by a small number of
large, well-capitalized companies and a large number of small companies and
single-unit operators. The activities of large companies such as Starbucks are
increasing the appreciation and awareness of specialty coffee across the
country. At the same time, the national press has focused attention on the
growth opportunities associated with operating coffee stores and espresso carts.
This attention, combined with relative ease of entry into this business, has
resulted in a rapid increase in the number of small independent specialty coffee
companies and single-unit operators.
<PAGE>
Coffee People competes against virtually all coffee sellers. A number of
nationwide coffee manufacturers, such as Kraft General Foods, Proctor and
Gamble, and Nestle, distribute coffee products in supermarkets and convenience
stores, which may serve as substitutes for Coffee People coffees. Other
specialty coffee companies, such as Starbucks, Millstone Coffee, Seattle's Best
Coffee and Green Mountain Coffee Roasters, sell whole bean coffees in
supermarkets and variety and discount stores.
In the retail area, the Company competes for whole bean and beverage sales
with national and regional chains, franchise operators and local specialty
coffee stores. There are a large number of competing specialty coffee retailers,
many of whom have significantly more retail outlets than the Company. In
addition, Coffee People competes with and will continue to compete with local
competitors in the specialty coffee business.
The Company expects intense competition both within its primary geographic
territory, the Pacific Northwest, and in new geographic locations across the
United States in which the Company will seek to expand. In all of these markets,
national and regional competitors as well as local companies have established
themselves as strong competitors with loyal customer followings. The specialty
coffee business is expected to become even more competitive as local and
regional companies expand and attempt to build brand awareness in new markets.
Coffee People also competes against other specialty retailers and
restaurants for suitable sites for new retail stores. There can be no assurance
that management will be able to secure suitable sites at acceptable rent levels.
INTELLECTUAL PROPERTY
The Company does not own any patents. The Company's principal United States
trademarks include Coffee People(R), Black Tiger(R), Good Coffee No Backtalk(R),
Java Noir(R), Black Tiger Sparking Coffee(TM) and Human Being Organic
Espresso(TM). The Company's principal United States service mark registrations
include Coffee People(R), Motor Moka(R) and Motorist's Espresso Bar(R). The
Company has an application pending in the United States to register the name
Aero Moka(TM). The Company has applied for trademark and service mark protection
for the name Coffee People in Canada and Japan.
<PAGE>
GOVERNMENT REGULATION
The food service industry is subject to extensive federal, state and local
government regulation relating to the development and operation of food service
outlets, including laws and regulations relating to building and seating
requirements, the preparation and sale of food, cleanliness, safety in the
workplace, accommodations for the disabled and the Company's relationship with
its employees, such as minimum wage requirements, anti-discrimination laws,
overtime and working conditions and citizenship requirements. The failure to
obtain or retain necessary food licenses, substantial increases in the minimum
wage or substantial increases in payroll taxes to fund mandatory health-care or
employee benefit programs could have a material adverse effect on the Company.
In November 1996, Oregon voters passed a ballot initiative to raise the State's
minimum wage law over a three year period from $4.75 per hour to $6.50 per hour.
The Company does not expect the 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 continued expansion outside of
Oregon. See "Management's Discussion and Analysis or Plan of Operation -- Coffee
Prices and Other Expenses and Risks."
FORWARD-LOOKING INFORMATION
Some of the information in this Form 10-KSB, including anticipated store
openings, planned expansions into new markets and trends in the Company's
operations, are forward-looking statements which are subject to certain risks
and uncertainties. Actual future results may differ significantly because of a
variety of factors, including the Company's ability to find optimal store
locations at favorable lease rates, increased competition within the specialty
coffee industry, the Company's ability to hire, train and retain qualified
personnel and the Company's continued ability to obtain adequate capital to
finance its planned expansion, and other risks detailed in the Company's
Registration Statement on Form SB-2, as amended, filed with the Securities and
Exchange Commission.
ITEM 2: FACILITIES
The Company currently owns the land and buildings at which two of its Motor
Moka facilities are operated, a total of approximately 1,600 square feet of
retail space. In addition, the Company owns the buildings, and leases the
underlying lands, for five additional facilities, a total of approximately 3,750
square feet of retail space. As of March 15, 1997, the Company leased facilities
for the operation of 30 retail stores, 24 of which were in operation. The
Company's retail stores range from 150 to 2,850 square feet with lease rates
ranging from approximately $1,200 to $7,100 per month. The monthly lease rate
for certain stores is based on that store's monthly sales revenue. Certain of
the Company's leases expire in the near future. There can be no assurance that
specific leases can be renewed on terms acceptable to the Company, or at all.
<PAGE>
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 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
commercially reasonable terms, or at all. The loss of this store location would
adversely affect the Company's earnings.
As a requirement of its lease with the Port of Portland for the six Aero
Moka stores at Portland International Airport, the Company is required to enter
into a joint venture with a certified disadvantaged business enterprise for one
of the Company's stores at Portland International Airport. Upon entry into the
joint venture, the Company will have a 49% ownership in that store. The Company
has had continuing discussions with the Port of Portland to discuss ways in
which this requirement can be met.
One of the Company's stores is leased from the owner by certain affiliates
of the Company. The Company is permitted to operate at such location and makes
all rental payments under the lease agreement. However, the Company has no
written sublease relating to the store.
The Company occupies approximately 9,400 square feet for its corporate
offices under a lease which expires February 2004. The Company believes that the
terms of the office lease are favorable.
EMPLOYEES
As of January 28, 1997, the Company had 358 employees. None of the
Company's employees are covered by a collective bargaining agreement. The
Company believes its employee relations are good.
ITEM 3: LEGAL PROCEEDINGS
The Company is not involved in any material litigation or proceeding and is
not aware of any material litigation or proceeding threatened against it.
ITEM 4: SUBMISSION OF MATTERS TO VOTE OF SECURITIES' HOLDERS
None.
<PAGE>
PART II
ITEM 5: MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock began trading on September 25, 1996 on the
Nasdaq National Market under the symbol "MOKA". As reported in Nasdaq's monthly
Summary of Activity Reports, the following table sets forth the range of high
and low closing price information for the Company's Common Stock. These
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions.
FISCAL YEAR ENDED
COMMON STOCK (MOKA) DECEMBER 31, 1996
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High Low
---- ---
First Quarter N/A N/A
Second Quarter N/A N/A
Third Quarter 9.375 7.5
Fourth Quarter 9.125 6.25
The closing price of the Common Stock on March 14, 1997 was $7.625. At
March 14, 1997, the approximate number of holders of record of Common Stock was
512.
The Company did not declare any dividends on its Common Stock during the
last two fiscal years. The Company intends to retain all earnings for use in its
business and therefore does not anticipate paying any cash dividends in the
foreseeable future. The Company's bank credit agreement prohibits the payment of
cash dividends.
<PAGE>
ITEM 6: 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 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 limited 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
Coffee People sells coffee beverages, coffee beans, cookies, pastries and
coffee related merchandise. The first Coffee People store opened in 1983. As of
December 31, 1996, the Company operated 22 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 an initial
public offering in which it raised net proceeds of $9,717,000 from the sale of
1,225,000 shares of Common Stock. The Company intends to use the net proceeds
from the public offering and the private placement to build or acquire stores.
During 1995, the Company opened two new stores as it concentrated on
raising capital and prepared for its expansion into new markets. The Company
devoted the first three quarters of 1996 to building its management team,
developing its infrastructure, developing its new retail store prototype,
selecting new markets and identifying sites within those markets. In the fourth
quarter of 1996, the Company opened three new stores -- one in Oregon and two in
Colorado. The Colorado stores were the first stores outside Oregon. The Company
intends to open approximately 27 new stores in existing or new markets during
1997. This is a forward-looking statement. Actual results may differ depending
upon a variety of factors, including the Company's ability to find optional
store locations at favorable lease rates and the ability to construct new stores
within budgeted amounts.
New stores typically incur higher than normal operating costs and lower
than normal revenues during the first few months of store operation. Based on
its overall experience, on average the Company expects a store to break even at
the store level by the third month of operation and to make a profit after
allocation of corporate general and administrative expenses by the sixth month
of operation. The three stores opened during the fourth quarter of 1996,
however, continue to incur operating losses at the store level. There can be no
assurance that future stores will meet the Company's expectations for
profitability.
<PAGE>
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 is expected to 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 from stores in that market 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
1996 COMPARED TO 1995
REVENUES. Total revenues increased 9.1% to $12,281,000 for the year ended
December 31, 1996 from $11,257,000 for the year ended December 31, 1995. Retail
sales increased 9.6% to $12,104,000 in 1996 from $11,045,000 in 1995.
Comparable store sales for the 17 stores open for the full year ended
December 31, 1996 and 1995 increased 2.0% primarily due to increased transaction
volumes, particularly at the Company's airport stores, and a price increase on
coffee beverages effected in September 1996 which resulted in an overall price
increase of approximately 4.0%. Comparable store sales during 1996 were
adversely affected by a 19.9% decline in sales at one of the Company's stores
located in a shopping center that is undergoing redevelopment and by a 18.3%
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 19.6% of the overall
increase in sales. Incremental sales from the stores opened during 1995
contributed 69.9% of the increase in retail sales and incremental sales from the
stores opened during 1996 contributed 10.5% of the increase.
Wholesale and other sales decreased 16.5% to $177,000 in 1996 from $212,000
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. These
sales primarily represent sales made to the outside firm at a fixed mark-up over
cost.
<PAGE>
COSTS AND EXPENSES. Cost of sales and related occupancy expenses as a
percentage of total revenues remained relatively stable at 47.7% in 1996 as
compared to 47.9% in 1995. The primary components were a decrease of 0.5% in
cost of sales and an increase of 0.3% in occupancy costs. The decrease in cost
of sales as a percentage of total revenues was due primarily to the effect of
the price increase effected in September 1996 which helped absorb increases in
the costs of milk, chocolate and pastry. The increase in occupancy expenses as a
percentage of total revenues was due primarily to the percentage rent paid on
sales generated at the Company's stores at Portland International Airport and to
the effect of occupancy expenses at the three new stores opened in the fourth
quarter of 1996.
Store operating expenses as a percentage of retail sales increased to 32.0%
in 1996 from 31.2% in 1995. The increase is primarily due to operating expenses
associated with the three new stores opened in the fourth quarter.
Depreciation and amortization as a percentage of total revenues increased
to 4.3% in 1996 from 3.5% in 1995, due primarily to the impact of higher design
and build-out costs for the stores opened in 1995 and 1996. These stores carry
higher depreciation expense as a percentage of total revenues than stores opened
prior to 1995.
General and administrative expenses increased to $1,868,000 in 1996 from
$1,550,000 in 1995 due primarily to the addition of key management personnel,
and other costs necessary to achieve the Company's growth plans. As a percentage
of total revenues, general and administrative expenses increased to 15.2% in
1996 from 13.8% in 1995.
AVERAGE STORE SALES AND STORE CONTRIBUTION MARGIN. For 1996, the Company's
12 neighborhood and drive-through stores open for the full year achieved average
store sales of $729,000 and an average store contribution margin of 20.0%
compared to $736,000 and 20.5%, respectively, for the 11 stores open during the
full year of 1995. The six airport stores and one kiosk store open for the full
year achieved average store sales of $464,000 and an average store contribution
margin of 13.1%, respectively, compared to $417,000 and 13.9% for five airport
stores and one kiosk open for the full year of 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.
<PAGE>
OTHER INCOME. Other income as a percentage of total revenues increased to
2.4% for the year ended December 31, 1996 from 0.4% for the same period in 1995
due to interest earned on the proceeds from the Company's initial public
offering in September 1996 and the private placement completed in January 1996.
INTEREST EXPENSE. Interest expense as a percentage of total revenues
decreased to 0.6% for the year ended December 31, 1996 from 1.2% 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.
1995 COMPARED TO 1994
REVENUES. Revenues increased 46.0% to $11,257,000 for the year ended
December 31, 1995 from $7,708,000 for the year ended December 31, 1994. Retail
sales increased 45.6% to $11,045,000 in 1995 from $7,588,000 in 1994.
Comparable stores sales for the seven stores open for the full years of
1995 and 1994 decreased 8.7% due to the Company's decision to open new stores in
close proximity to existing units. Although this decision resulted in a decrease
in comparable store sales, the Company believes that it was able to increase
market share, enhance its brand recognition and better serve customers in the
Portland, Oregon metropolitan area. Incremental sales from the new stores opened
in 1994 and 1995 accounted for the entire increase in retail sales which was
partially offset by the decline in comparable store sales.
COSTS AND EXPENSES. Cost of sales and related occupancy costs as a
percentage of total revenues decreased to 47.9% in 1995 from 49.1% in 1994 due
primarily to a decrease in cost of sales offset by an increase in occupancy
expenses. The decrease in cost of sales was due to lower coffee prices achieved
in 1995 as a result of a new supply contract negotiated in October 1994. The
increase in occupancy expenses as a percentage of total revenues was due
primarily to the percentage rent paid on sales generated at the Company's stores
at Portland International Airport.
<PAGE>
Store operating expenses as a percentage of retail sales increased to 31.2%
in 1995 from 30.5% in 1994 primarily because of the impact of higher labor costs
incurred at the Company's units at Portland International Airport.
Depreciation and amortization as a percentage of net sales increased to
3.5% in 1995 from 2.3% in 1994 due to the impact of higher build-out costs for
stores opened in 1994 and 1995. These stores carry higher depreciation expense
as a percentage of sales than stores opened before 1994.
General and administrative expenses as a percentage of total revenues
decreased to 13.8% in 1995 from 15.7% in 1994 as a result of increased total
revenues without a proportionate increase in overhead.
AVERAGE STORE SALES AND STORE CONTRIBUTION MARGIN. For 1995, the Company's
neighborhood and drive-through stores open for the full period achieved average
store sales of $736,000 and an average store contribution margin of 20.5%
compared to $934,000 and 20.6%, respectively, for 1994. The Company's airport
and kiosk stores open for the full period achieved average store sales of
$417,000 and an average store contribution margin of 13.9% as compared to
$222,000 and 22.7%, respectively, for 1994. The increase in average store sales
for the Company's airport and kiosk stores resulted from the opening of several
higher-volume airport stores in late 1994. 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 at these airport stores.
INCOME TAXES. For the period from January 1, 1994 through August 22, 1994,
the Company elected to be taxed under the provisions of Subchapter S of the
Internal Revenue Code. Under those provisions, the Company did not pay federal
or state corporate income tax on its taxable income. Accordingly, no provision
for income taxes was made for that period.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company plans to open approximately 27 new retail stores during 1997.
The Company estimates that the 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, however, that costs of constructing new
stores will not substantially exceed this estimate.
As of December 31, 1996 the Company had $10,274,000 in cash and
equivalents.
Working capital as of December 31, 1996 totaled $9,472,000 as compared to a
working capital deficiency of $690,000 at December 31, 1995.
For the year ended December 31, 1996, and for 1995, cash provided by
operating activities was $458,000 and $416,000, 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 year ended December 31, 1996 the Company had net cash
provided by financing activities of $13,229,000 primarily as a result of the
initial public offering completed in September 1996 which resulted in $9,717,000
in net proceeds and $3,725,000 in net proceeds received from a private placement
of Common Stock completed in January 1996. For the year ended December 31, 1995,
net cash provided by financing activities totaled $232,000.
The Company has a bank line of credit providing for borrowings through
August 1, 1997 of up to $500,000. Borrowings bear interest at the rate of 0.5%
over the bank's prime rate (8.25% as of December 31, 1996) and are secured by
substantially all of the Company's assets, including accounts receivable,
inventories, trade fixtures and equipment. As of December 31, 1996 there were no
borrowings outstanding under the line of credit; however, $73,000 of the line
was reserved for a letter of credit dated September 1996. The line of credit
agreement contains restrictive covenants relating to certain financial ratios as
well as the bank's standard covenants and restrictions. As of December 31, 1996,
the Company was in compliance with all such debt covenants.
For the years ended December 31, 1996 and 1995, net cash used in investing
activities was $3,673,000 and $860,000 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 for 1997 will be
approximately $9.0 million, substantially all of which will be used to develop
or acquire stores.
<PAGE>
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 through the end of 1997.
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.
Coffee prices are volatile and the Company has experienced price
fluctuations for purchased coffee. During the first part of 1997, the
commodities markets have witnessed a significant increase in the price of green
coffee, with prices for coffee climbing from a level in the $1.15 per pound
range in December 1996 to over $2.00 per pound in early March 1997. The
Company's supply agreement provides for the Company to purchase its coffee at a
fixed amount over green cost. As a result, the Company's cost of coffee will
fluctuate with the price of green coffee. The Company believes that its supplier
has sufficient inventories and purchase commitments to maintain some price
stability in the short term. However, if coffee prices remain at their current
levels, the Company will incur substantially higher costs for coffee which it
purchases after existing inventories and commitments are used. 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's earnings.
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. In 1996, the Company paid all employees, other than newly hired
employees participating in a 20-hour training program, above the minimum wage in
effect in 1997. Accordingly, the Company does not expect the new minimum wage to
have a material adverse effect on earnings 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 to some extent, however, by
the Company's planned expansion outside Oregon.
The Company's future results of operations and earnings could also 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.
<PAGE>
ITEM 7: FINANCIAL STATEMENTS
See pages 25 through 40.
ITEM 8: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<PAGE>
PART III
ITEM 9: DIRECTORS AND EXECUTIVE OFFICERS
There is hereby incorporated by reference the information under the caption
"Election of Directors" in the Company's definitive Proxy Statement for the
Company's annual meeting of shareholders to be held on April 24, 1997, to be
filed with the Securities and Exchange Commission within 120 days after the end
of the Company's fiscal year. The required information concerning compliance
with Section 16(a) of the Securities Exchange Act of 1934, as amended, is
incorporated herein by reference to the information under the caption
"Compliance with Section 16(a) of Securities Exchange Act" in the Company's
definitive Proxy Statement to be filed within 120 days after the end of the
Company's fiscal year.
ITEM 10: EXECUTIVE COMPENSATION
There is hereby incorporated by reference the information under the caption
"Executive Compensation" in the Company's definitive Proxy Statement to be filed
with the Securities Exchange Commission within 120 days after the end of the
Company's fiscal year.
ITEMS 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
There is hereby incorporated by reference the information under the caption
"Principal Shareholders" in the Company's definitive Proxy Statement to be filed
with the Securities and Exchange Commission within 120 days after the end of the
Company's fiscal year.
ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There is hereby incorporated by reference the information under the caption
"Certain Transactions" in the Company's definitive Proxy Statement to be filed
with the Securities and Exchange Commission within 120 days after the end of the
Company's fiscal year.
ITEM 13: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
- - ----------- -----------
3.1 Registrant's Restated Articles of Incorporation (Incorporated by
reference to Exhibit 3.1 to the Company's Registration Statement
on Form SB-2, effective September 25, 1996 (Registration No.
333-5376-LA)).
<PAGE>
Exhibit No. Description
- - ----------- -----------
3.2 Registrants' Bylaws, as amended (Incorporated by reference to
Exhibit 3.2 to the Company's Registration Statement on Form SB-2,
effective September 25, 1996 (Registration No. 333-5376-LA)).
4 See Article 2 of Exhibit 3(i) and Article II of Exhibit 3(ii)
10.1* Registrant's 1993 Stock Option Plan (Incorporated by reference to
Exhibit 10.1 to the Company's Registration Statement on Form
SB-2, effective September 25, 1996 (Registration No.
333-5376-LA)).
10.2* Registrant's 1994 Stock Option Plan (Incorporated by reference to
Exhibit 10.2 to the Company's Registration Statement on Form
SB-2, effective September 25, 1996 (Registration No.
333-5376-LA)).
10.3* Registrant's 1995 Stock Option Plan (Incorporated by reference to
Exhibit 10.3 to the Company's Registration Statement on Form
SB-2, effective September 25, 1996 (Registration No.
333-5376-LA)).
10.4* Registrant's 1996 Stock Option Plan (Incorporated by reference to
Exhibit 10.4 to the Company's Registration Statement on Form
SB-2, effective September 25, 1996 (Registration No.
333-5376-LA)).
10.5* Form of Incentive Stock Option Agreement related to 1993, 1994,
1995 and 1996 Stock Option Plans (Incorporated by reference to
Exhibit 10.5 to the Company's Registration Statement on Form
SB-2, effective September 25, 1996 (Registration No.
333-5376-LA)).
10.6* Form of Nonstatutory Stock Option Agreement related to 1993,
1994, 1995 and 1996 Stock Option Plans (Incorporated by reference
to Exhibit 10.6 to the Company's Registration Statement on Form
SB-2, effective September 25, 1996 (Registration No.
333-5376-LA)).
10.7* Registrant's Employee Stock Purchase Plan (Incorporated by
reference to Exhibit 10.7 to the Company's Registration Statement
on Form SB-2, effective September 25, 1996 (Registration No.
333-5376-LA)).
10.8 Supply Agreement dated February 17, 1997 between Registrant and
Coffee Bean International, Inc.**
<PAGE>
Exhibit No. Description
- - ----------- -----------
10.9 Form of Indemnity Agreement (Incorporated by reference to Exhibit
10.9 to the Company's Registration Statement on Form SB-2,
effective September 25, 1996 (Registration No. 333-5376-LA)).
10.10 Business Loan Agreement with Bank of America NT & SA, dated
August 3, 1995, as amended (Incorporated by reference to Exhibit
10.10 to the Company's Registration Statement on Form SB-2,
effective September 25, 1996 (Registration No. 333-5376-LA)).
10.10(a) Security Agreement with Bank of America NT & SA, dated August 3,
1995 (Incorporated by reference to Exhibit 10.10(a)) to the
Company's Registration Statement on Form SB-2, effective
September 25, 1996 (Registration No. 333-5376-LA)).
10.11* Employment Agreement with James L. Roberts, Chairman of the Board
and Chief Executive Officer (Incorporated by reference to Exhibit
10.11 to the Company's Registration Statement on Form SB-2,
effective September 25, 1996 (Registration No. 333-5376-LA)).
10.12* Employment Agreement with Taylor H. Devine, President and Chief
Operating Officer (Incorporated by reference to Exhibit 10.12 to
the Company's Registration Statement on Form SB-2, effective
September 25, 1996 (Registration No. 333-5376-LA)).
10.13* Employment Agreement with Matthew J. Kimble, Vice President--
Human Relations.
10.14* Employment Agreement with Steven P. Crantz, Vice President--
Development (Incorporated by reference to Exhibit 10.14 to the
Company's Registration Statement on Form SB-2, effective
September 25, 1996 (Registration No. 333-5376-LA)).
10.15 Redemption agreement, dated January 4, 1993 between the
Registrant and Gary G. Talboy (Incorporated by reference to
Exhibit 10.15 to the Company's Registration Statement on Form
SB-2, effective September 25, 1996 (Registration No.
333-5376-LA)).
10.15(a) Promissory Note, dated January 4, 1993, payable to Gary G. Talboy
in original principal amount of $245,000 (Incorporated by
reference to Exhibit 10.15(a)) to the Company's Registration
Statement on Form SB-2, effective September 25, 1996
(Registration No. 333-5376-LA)).
<PAGE>
Exhibit No. Description
- - ----------- -----------
10.16 Redemption Agreement, dated January 4, 1993, between the
Registrant and Jeffrey M. Ferguson (Incorporated by reference to
Exhibit 10.16 to the Company's Registration Statement on Form
SB-2, effective September 25, 1996 (Registration No.
333-5376-LA)).
10.16(a) Promissory Note, dated January 4, 1993, payable to Jeffrey M.
Ferguson in original principal amount of $245,000 (Incorporated
by reference to Exhibit 10.16(a)) to the Company's Registration
Statement on Form SB-2, effective September 25, 1996
(Registration No. 333-5376-LA)).
10.17 Security Agreement, dated January 4, 1993, among the Registrant,
Jeffrey M. Ferguson and Gary G. Talboy (Incorporated by reference
to Exhibit 10.17 to the Company's Registration Statement on Form
SB-2, effective September 25, 1996 (Registration No.
333-5376-LA)).
10.18 Food and Beverage Concession Lease Agreement; dated June 10,
1994, between the Registrant and the Port of Portland
(Incorporated by reference to Exhibit 10.18 to the Company's
Registration Statement on Form SB-2, effective September 25, 1996
(Registration No. 333-5376-LA)).
10.19 Common Stock Purchase Agreement, dated as of January 11, 1996,
among the Registrant and certain purchasers (Incorporated by
reference to Exhibit 10.19 to the Company's Registration
Statement on Form SB-2, effective September 25, 1996
(Registration No. 333-5376-LA)).
10.20 Warrant Agreement, dated as of January 23, 1996, between the
Registrant and International Capital Partners, Inc. (Incorporated
by reference to Exhibit 10.20 to the Company's Registration
Statement on Form SB-2, effective September 25, 1996
(Registration No. 333-5376-LA)).
<PAGE>
Exhibit No. Description
- - ----------- -----------
11 Statement Regarding Computation of Per Share Earnings.
23 Consent of Arthur Andersen LLP, Independent Public Accountants.
27 Financial Data Schedule
- - ---------------------------------
* Management contract or compensatory plan or arrangement.
** Confidential treatment requested.
(b) Reports on Form 8-K
None.
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Public Accountants 26
Balance Sheets at December 31, 1996 and 1995 27
Statements of Income for Three Years Ended 28
December 31, 1996
Statements of Changes in Stockholders' Equity 29
(Deficit) for Three Years Ended
December 31, 1996
Statement of Cash Flow for Three Years Ended 30
December 31, 1996
Notes to Financial Statements 31
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Coffee People, Inc.:
We have audited the accompanying balance sheets of Coffee People, Inc. (an
Oregon corporation) as of December 31, 1996 and 1995, and the related statements
of income, changes in stockholders' equity (deficit) and cash flows for each of
the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Coffee People, Inc. as of
December 31, 1996 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Portland, Oregon,
February 6, 1997
<PAGE>
COFFEE PEOPLE, INC.
BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
(Dollars in thousands)
ASSETS
1996 1995
---- ----
CURRENT ASSETS:
Cash and cash equivalents (Note 1) $10,274 $ 260
Accounts receivable 26 9
Inventories (Note 1) 205 264
Prepaid expenses 141 112
Deferred tax assets (Notes 1 and 5) 28 13
Other current assets 96 -
------- ------
Total current assets 10,770 658
Property and equipment, net (Notes 1 and 2) 5,513 2,155
Other assets 129 23
------- ------
Total assets $16,412 $2,836
======= ======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt and capital
lease obligations (Note 4) $ 115 $ 112
Current portion of long-term debt to related
parties (Note 4) 20 35
Line of credit (Note 3) - 175
Accounts payable 533 775
Construction accounts payable 321 -
Accrued liabilities 262 196
Income taxes payable (Notes 1 and 5) 47 55
------ ------
Total current liabilities 1,298 1,348
DEFERRED TAX LIABILITY (Notes 1 and 5) 86 66
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
(Note 4) 267 370
LONG-TERM DEBT TO RELATED PARTIES (Note 4) 159 197
COMMITMENTS (Note 7)
STOCKHOLDERS' EQUITY (Notes 8, 9, 12 and 14):
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, 3,237,432 and
1,936,233 shares; outstanding, 3,237,432
and 1,405,054 shares 14,492 1,476
Stock subscription notes receivable (Note 9) (281) (341)
Warrants outstanding (Note 12) - -
Treasury Stock, at cost; 0 and 531,189 shares - (467)
Retained earnings 391 187
------- ------
Total stockholders' equity 14,602 855
------- ------
Total liabilities and stockholders'
equity $16,412 $2,836
======= ======
The accompanying notes are an integral part of these financial statements.
<PAGE>
COFFEE PEOPLE, INC.
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Dollars in thousands, except per share data)
1996 1995 1994
--------- --------- -----
REVENUES:
Retail sales $ 12,104 $ 11,045 $7,588
Wholesale and other 177 212 120
--------- --------- ------
Total revenues 12,281 11,257 7,708
COST OF SALES and related occupancy
expenses (cost of sales and occupancy
expenses paid to related parties of
$239, $187 and $93) 5,860 5,388 3,788
STORE OPERATING EXPENSES 3,873 3,451 2,314
OTHER OPERATING EXPENSES 44 63 40
DEPRECIATION AND AMORTIZATION 530 391 175
GENERAL AND ADMINISTRATIVE EXPENSES 1,868 1,550 1,210
--------- --------- ------
Income from operations 106 414 181
OTHER INCOME, net 298 43 39
INTEREST EXPENSE (interest expense to
related parties of $20, $35 and $38) (73) (134) (88)
--------- --------- ------
Income before provision for
income taxes 331 323 132
PROVISION FOR INCOME TAXES (Notes 1 and 5) (127) (112) (16)
--------- --------- ------
NET INCOME $ 204 $ 211 $ 116
========= ========= ======
EARNINGS PER SHARE (Note 1) $ 0.09 $ 0.14
========= =========
SHARES USED IN COMPUTING EARNINGS
PER SHARE (Note 1) 2,349,702 1,500,975
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
COFFEE PEOPLE, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Dollars in Thousands)
Stock Retained
Common Stock Subscription Earnings
------------------- Treasury Notes (Accumulated
Shares Amount Stock Receivable Deficit) Total
------ ------ -------- ------------ ------------ -----
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993 1,200,000 $ 434 $(501) $(167) $ 36 $ (198)
Issuance of Treasury
Stock 33,000 98 34 - - 132
Exercise of stock
options
(Notes 8 and 9) 37,500 83 - (83) - -
Interest income on stock
subscription notes at
8.5% per annum, net
(Note 9) - - - (7) - (7)
Direct Public Offering
(Note 12) 107,704 802 - - - 802
Net income - - - - 116 116
Dividends - - - - (176) (176)
--------- ------ ----- ----- ----- ------
BALANCE, December 31, 1994 1,378,204 1,417 (467) (257) (24) 669
Exercise of stock
options
(Notes 8 and 9) 26,850 59 - (58) - 1
Interest income on stock
subscription notes at
8.5% per annum
(Note 9) - - - (26) - (26)
Net income - - - - 211 211
--------- ------ ----- ----- ----- ------
BALANCE, December 31, 1995 1,405,054 1,476 (467) (341) 187 855
Private Placement
(Note 12) 596,250 3,258 467 - - 3,725
Initial public offering
(Note 12) 1,225,000 9,717 - - - 9,717
Exercise of stock
options (Note 8) 11,128 25 - - - 25
Repayment of stock
subscription note and
accrued interest
(Note 9) - - - 84 - 84
Income tax benefit of
disqualifying
dispositions - 16 - - - 16
Interest income on stock
subscription notes at
8.5% per annum
(Note 9) - - - (24) - (24)
Net income - - - - 204 204
--------- ------- ----- ----- ----- -------
BALANCE, December 31, 1996 3,237,432 $14,492 $ - $(281) $ 391 $14,602
========= ======= ===== ===== ===== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
COFFEE PEOPLE, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Dollars in thousands)
1996 1995 1994
--------- --------- -----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 204 $ 211 $ 116
Adjustments to reconcile net income
to net cash provided by operating
activities-
Depreciation and amortization 530 391 175
Deferred provision for income
taxes 5 49 4
Interest income on stock
subscriptions (14) (26) (21)
Changes in operating assets and
liabilities:
Accounts receivable (17) 3 (8)
Inventories 59 (60) (45)
Prepaid expenses (29) (26) (57)
Other current assets (96) 14 (14)
Accounts payable (242) (166) 639
Accrued liabilities 66 16 49
Income taxes payable (8) 43 12
Other current liabilities - (33) 18
------- ----- -------
Net cash provided by operating
activities 458 416 868
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment, net (3,888) (933) (1,368)
(Increase) decrease in other assets (106) 73 (81)
Construction accounts payable 321 - -
------- ----- -------
Net cash used in investing
activities (3,673) (860) (1,449)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt and
capital lease obligations - 682 204
Repayment of debt and capital lease
obligations (275) (168) -
Repayment of debt to related parties (53) (227) (70)
Repayment of stock subscription note
receivable and interest 74 - -
Proceeds from private placement, net 3,725 - -
Proceeds from initial public offering,
net 9,717 - -
Issuance of Common Stock, net 25 1 801
Income tax benefit of disqualifying
dispositions 16 - -
Dividends - (56) (135)
------- ----- -------
Net cash provided by financing
activities 13,229 232 800
------- ----- -------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 10,014 (212) 219
CASH AND CASH EQUIVALENTS, beginning of
the period 260 472 253
------- ----- -------
CASH AND CASH EQUIVALENTS, end of the
period $10,274 $ 260 $ 472
======= ===== =======
The accompanying notes are an integral part of these financial statements.
<PAGE>
COFFEE PEOPLE, INC.
-------------------
NOTES TO FINANCIAL STATEMENTS
------------------------------
(Dollars in thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
------------------------------------------
The Company
- - -----------
Coffee People, Inc. (the Company), an Oregon corporation, sells coffee
beverages, coffee beans, cookies, pastries, ice cream, shakes and coffee related
merchandise. Nineteen of the Company's twenty-two stores are located in
Portland, Oregon with one located in Eugene, Oregon and two located in Denver,
Colorado. A downturn in economic conditions in Oregon could have a material
adverse effect on the Company.
Use of Estimates
- - ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Fair Value of Financial Instruments
- - -----------------------------------
The Company's financial instruments consist of accounts receivable and debt
instruments. At December 31, 1996 and 1995, the fair value of the Company's
receivables and debt under loans approximated the carrying value.
Advertising
- - -----------
Advertising costs are expensed as incurred. For the years ended December 31,
1996, 1995 and 1994, advertising costs were $144, $49 and $69, respectively.
Cash and Cash Equivalents
- - -------------------------
Cash and cash equivalents include cash and short-term investments with original
maturity dates of three months or less.
Inventories
- - -----------
Inventories are stated at the lower of cost (first-in, first-out) or market and
consist of roasted coffee beans, food, beverages, supplies and other merchandise
held for sale.
Property and Equipment
- - ----------------------
Property and equipment is stated at cost. Depreciation on equipment is computed
on the straight-line basis over the estimated useful lives of the assets ranging
from three to seven years. Leasehold improvements are capitalized and amortized
on a straight-line basis over the shorter of the initial lease term or the
estimated useful lives of the assets, generally three to ten years.
Maintenance and repairs are charged to expense as incurred. Major repairs and
improvements are capitalized and depreciated.
<PAGE>
COFFEE PEOPLE, INC.
-------------------
NOTES TO FINANCIAL STATEMENTS (continued)
-----------------------------------------
(Dollars in thousands, except per share data)
Store Opening Costs
- - -------------------
Costs incurred in connection with start-up and promotion of new stores are
expensed as incurred.
Income Taxes
- - ------------
For the period from January 1, 1994 through August 22, 1994, the Company elected
to be taxed under the provisions of Subchapter S of the Internal Revenue Code.
Under those provisions, the Company did not pay federal or state corporate
income taxes on its taxable income. Instead, the stockholders were individually
responsible for federal and state income taxes. Accordingly, no provision for
income taxes was made for the period from January 1, 1994 through August 22,
1994.
Subsequent to August 22, 1994, the Company was subject to federal and state
corporate income taxes. Income taxes were provided for on the basis of earnings
reported for financial reporting purposes. Deferred income taxes are provided
for in accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (SFAS 109). Deferred taxes are determined based on
the estimated future tax effects of differences between the financial statement
and tax bases of assets and liabilities given the provisions of enacted tax laws
and tax rates. Deferred income tax expenses or credits are based on the changes
in the financial statement basis versus the tax basis in the Company's assets or
liabilities from year to year.
Earnings Per Share
- - ------------------
The year ended December 31, 1995 was the first full year that the Company was
subject to federal and state corporate income taxes (see Income Taxes above).
The Securities and Exchange Commission (SEC) guidelines allow earnings per share
data to be presented only when a company converts to a taxable status.
Accordingly, earnings per share data has been presented only for the years ended
December 31, 1996 and 1995.
Earnings per share amounts are based on the average number of shares of Common
Stock and dilutive Common Stock equivalents outstanding, using the treasury
stock method, during the year after giving retroactive effect of a 3-for-2 stock
split declared on July 26, 1996 (see Note 14). Common stock equivalents include
shares issuable upon exercise of outstanding stock options.
Stock-Based Compensation Plans
- - ------------------------------
The Company accounts for its stock-based compensation plans under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25). Effective in 1996, the Company adopted the disclosure option of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation (SFAS 123). SFAS 123 requires that companies which do not choose to
account for stock-based compensation as prescribed by this statement, shall
disclose the pro forma effects on earnings and earnings per share as if SFAS 123
had been adopted. Additionally, certain other disclosures are required with
respect to stock compensation and the assumptions used to determine the pro
forma effects of SFAS 123.
<PAGE>
COFFEE PEOPLE, INC.
-------------------
NOTES TO FINANCIAL STATEMENTS (continued)
-----------------------------------------
(Dollars in thousands, except per share data)
2. PROPERTY AND EQUIPMENT:
----------------------
Property and equipment at December 31, consists of the following:
1996 1995
------ ------
Land $ 868 $ -
Leasehold improvements 2,634 1,764
Machinery and equipment 1,842 1,156
Capital leases 116 116
Construction in progress 1,492 28
------ ------
6,952 3,064
Less- Accumulated depreciation (1,439) (909)
------ ------
$5,513 $2,155
====== ======
3. LINE OF CREDIT:
--------------
In September 1996, the Company renewed its line of credit agreement with a bank
in the amount of $500. The interest rate for amounts drawn under the line is
0.5% over the prime rate (8.75% at December 31, 1996). There is no amount
outstanding under the line of credit at December 31, 1996. Out of the $500
credit line, the sum of $73 is reserved for use under a letter of credit dated
September 1996. The line expires in August 1997.
4. DEBT:
----
Debt consists of the following at December 31:
1996 1995
----- -----
Note payable to bank, payable in monthly
installments of $6 each, plus interest at 9%,
commencing September 1, 1995, due August 1, 1998 $ 115 $ 184
Note payable to stockholder, payable in monthly
installments of $3, including interest at 2% over
the prime rate (10.25% at December 31, 1996),
due December 1, 2002 179 197
Note payable to the Port of Portland, payable in
monthly installments of $5, commencing April 8,
1995, including interest at 12%, due March 8, 2003 244 268
----- -----
538 649
Less- Current portion (117) (110)
----- -----
$ 421 $ 539
===== =====
<PAGE>
COFFEE PEOPLE, INC.
-------------------
NOTES TO FINANCIAL STATEMENTS (continued)
-----------------------------------------
(Dollars in thousands, except per share data)
The bank note and line of credit (Note 3) is secured by substantially all of the
Company's assets including accounts receivable, inventories, trade fixtures and
equipment. These debt agreements contain restrictions relating to specified
financial ratios as well as the lender's standard covenants and restrictions. As
of December 31, 1996, the Company was in compliance with all debt covenants. The
proceeds from the bank note were used to pay off a note to a stockholder.
The stockholder note is secured by substantially all of the Company's assets and
is subordinated to the bank note.
The principal payments on long-term debt are as follows at December 31, 1996:
1997 $117
1998 99
1999 60
2000 67
2001 75
Thereafter 120
----
$538
====
The Company has capital leases for certain equipment. Future minimum payments
under the capital leases are as follows at December 31, 1996:
1997 $ 20
1998 6
----
26
Less- Portion representing interest (3)
----
Present value of net minimum lease payments 23
Less- Current portion (18)
----
Long-term obligations under capital leases $ 5
====
5. INCOME TAXES:
------------
The components of the provision for income taxes consist of the following:
1996 1995 1994
---- ---- ----
Current:
Federal $100 $ 59 $ 9
State 22 4 3
---- ---- ----
122 63 12
Deferred 5 49 4
---- ---- ----
Total provision $127 $112 $ 16
==== ==== ====
<PAGE>
COFFEE PEOPLE, INC.
-------------------
NOTES TO FINANCIAL STATEMENTS (continued)
-----------------------------------------
(Dollars in thousands, except per share data)
The reconciliation of the statutory federal income tax rates to the Company's
effective income tax rates is as follows:
1996 1995 1994
------ ------ -----
Federal statutory rate 34.0% 34.0% 34.0%
State income taxes, net of federal benefit 2.3 2.6 5.9
Effect of graduated tax rates - (1.3) (7.7)
Effect of change in tax status (Note 1) - - (18.2)
Other 2.1 (0.6) (1.9)
---- ---- -----
38.4% 34.7% 12.1%
The components of the net deferred tax assets and liabilities consist of the
following at December 31:
1996 1995
---- ----
Current deferred tax assets-
Basis difference in accrued liabilities $ 17 $ 3
Tax deduction carryforwards 11 10
---- ----
Total current deferred tax asset $ 28 $ 13
==== ====
Long-term deferred tax asset-
Tax credit carryforwards $ - $ 32
Long-term deferred tax liability-
Basis difference in property, plant and
equipment (86) (98)
---- ----
Net long-term deferred tax liability $(86) $(66)
==== ====
The Company believes that deferred tax assets will be fully realized based upon
future reversals of existing taxable temporary differences, future earnings or
available tax strategies. Accordingly, there was no valuation allowance on
deferred tax assets at December 31, 1996 and 1995.
6. OPERATING LEASES:
----------------
The Company leases certain retail store, office and warehouse facilities under
operating leases expiring through the year 2013. Most lease agreements contain
renewal options and rent escalation clauses. Certain leases provide for
contingent rentals based upon gross sales.
Rental expense under these lease agreements for the years ended December 31
1996, 1995 and 1994 was as follows:
1996 1995 1994
------ ---- ----
Minimum rentals $1,051 $828 $460
Contingent rentals 69 84 28
------ ---- ----
$1,120 $912 $488
====== ==== ====
<PAGE>
COFFEE PEOPLE, INC.
-------------------
NOTES TO FINANCIAL STATEMENTS (continued)
-----------------------------------------
(Dollars in thousands, except per share data)
Minimum future rental payments under these agreements as of December 31, 1996
are as follows:
1997 $1,040
1998 991
1999 971
2000 877
2001 806
Thereafter 2,926
------
$7,611
======
7. COMMITMENTS:
-----------
The Company has an agreement with a supplier to purchase substantially all of
the Company's coffee requirements through November 1997. Management believes
that other suppliers could provide similar products. Any supplier from whom the
Company might purchase coffee is subject to volatility in the supply and price
of coffee beans. A change in suppliers, however, could impact the terms
currently received by the Company. Such a change could have a negative impact on
operating results.
As a requirement of the lease with the Port of Portland, the Company is
committed to enter into a joint venture with a third party for one of the
Company's stores at Portland International Airport. Once the agreement is
finalized, the Company will have a 49% ownership interest in that store.
8. INCENTIVE PLANS:
---------------
Authorized Stock
- - ----------------
In June 1995, the Company restated its Articles of Incorporation to authorize
50,000,000 shares of no par value Common Stock and 10,000,000 shares of no par
value Preferred Stock.
Stock Option Plans
- - ------------------
At December 31, 1996, the Company had four Stock Option Plans - the 1993 Stock
Option Plan adopted in December 1993, the 1994 Stock Option Plan adopted in
March 1994, the 1995 Stock Option Plan adopted in June 1995, and the 1996 Stock
Option Plan adopted in May 1996 (collectively, the Plans). Under the Plans, key
employees and consultants may be granted either incentive stock options or
nonqualified stock options. Incentive stock options must comply with the
requirements of the Internal Revenue Code (the Code), may be granted only to
employees and may be granted at not less than the fair market value of the stock
at the date of grant. Nonqualified options may be granted to employees and
consultants at not less than 85% of the fair market value of the stock at the
date of grant. Canceled options are available for future grant.
<PAGE>
COFFEE PEOPLE, INC.
-------------------
NOTES TO FINANCIAL STATEMENTS (continued)
-----------------------------------------
(Dollars in thousands, except per share data)
The following table summarizes the activity for the aforementioned stock option
plans:
Number of Price per
Shares Share
-------- --------------
Outstanding at December 31, 1993 150,000 $ 2.22
Granted 105,000 4.00 - 8.00
Exercised (37,500) 2.22
Canceled (12,900) 2.22
-------- --------------
Outstanding at December 31, 1994 204,600 2.22 - 8.00
Granted 196,500 2.22 - 10.00
Exercised (26,850) 2.22
Canceled (22,237) 2.22 - 8.00
-------- --------------
Outstanding at December 31, 1995 352,013 2.22 - 10.00
Granted 197,225 9.00 - 10.00
Exercised (11,128) 2.22
Canceled (115,547) 2.22 - 10.00
-------- --------------
Outstanding at December 31, 1996 422,563 $ 2.22 - 10.00
======== ==============
For all four plans, there were 214,459 shares of unissued Common Stock reserved
for issuance at December 31, 1996. Options to purchase 89,177 shares of Common
Stock were exercisable at December 31, 1996.
Employee Stock Purchase Plan
- - ----------------------------
In June 1994, the Board of Directors adopted and the shareholders approved an
Employee Stock Purchase Plan (the ESPP). Under the ESPP, 150,000 shares of
Common Stock have been reserved for issuance to and purchase by employees of the
Company. All employees with over four months of service who work more than 20
hours per week and who do not own stock and stock options for more than 5% of
the Company's stock are eligible to participate in the ESPP. The ESPP is
intended to qualify as an "employee stock purchase plan" under Section 423 of
the Internal Revenue Code (the Code). Under that section of the Code, employees
may not be granted options if, immediately after the grant, such employee would
own stock or hold options to purchase stock possessing 5% or more of the voting
power or value of all stock of the Company, nor may any participant purchase
Common Stock having a fair market value exceeding $25,000 in any calendar year.
As of December 31, 1996, no shares had been issued or purchased under the ESPP.
Statement Financial Accounting Standards No. 123
- - ------------------------------------------------
During 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 (SFAS 123), which defines a fair
value-based method of accounting for an employee stock option or similar equity
instrument and encourages all entities to adopt that method of accounting for
all of their employee stock compensation plans. However, it also allows an
entity to continue to measure compensation cost for those plans using the method
of accounting prescribed by APB 25. Entities electing to retain the accounting
treatment in APB 25 must make pro forma disclosures of net income and, if
presented, earnings per share, as if the fair value-based method of accounting
defined in SFAS 123 had been applied.
<PAGE>
COFFEE PEOPLE, INC.
-------------------
NOTES TO FINANCIAL STATEMENTS (continued)
-----------------------------------------
(Dollars in thousands, except per share data)
The Company has elected to account for its stock-based compensation plans under
APB 25; however, the Company has computed for pro forma disclosure purposes the
value of all options granted during 1996 and 1995 using the Black-Scholes
option-pricing model as prescribed by SFAS 123 using the following weighted
average assumptions for grants:
1996 1995
------- -------
Average risk-free interest rate 6.36% 6.45%
Expected dividend yield 0.00% 0.00%
Expected lives 5 years 5 years
Expected volatility 63.13% 63.13%
The total value of options granted during 1996 and 1995 was computed as
approximately $994 and $1,025, respectively, which would be amortized on a pro
forma basis over the five-year vesting period of the options. If the Company had
accounted for these plans in accordance with SFAS 123, the Company's net income
and pro forma net income (loss) per share would have been as follows:
1996 1995
------------------------- ---------------------------
As Reported Pro Forma As Reported Pro Forma
----------- --------- ----------- ---------
Net income (loss) $204 $(200) $211 $ 6
Net income (loss)
per share .09 (.09) .14 .00
9. STOCK SUBSCRIPTION NOTES RECEIVABLE:
-----------------------------------
During December 1993, upon exercise of incentive stock options by an officer and
by a key employee, the Company issued 75,000 shares of Common Stock in exchange
for notes. On January 4, 1994, a key employee exercised incentive stock options
for 37,500 shares of Common Stock in exchange for notes. The notes bear interest
at the rate of 8.5% per annum from the dates of exercise, and are due in full on
December 31, 1998.
During January 1995, an officer exercised incentive stock options for 26,250
shares of Common Stock in exchange for notes. The notes bear interest at the
rate of 8.5% per annum from the date of exercise and are due in full on December
31, 1999.
The notes provide that in the event any of the stock is sold before the notes
mature, all accrued interest and a pro rata portion of the principal balance
must be paid. During 1996, the key employee sold 25,000 shares and repaid
$84,000, which represented all accrued interest and the pro rata portion of the
principal balance.
<PAGE>
COFFEE PEOPLE, INC.
-------------------
NOTES TO FINANCIAL STATEMENTS (continued)
-----------------------------------------
(Dollars in thousands, except per share data)
10. RETIREMENT PLAN:
---------------
Effective on May 1, 1994, the Company adopted a tax deferred savings plan (the
401(k) Plan). All employees with over six months service and who work an average
of 30 hours per week or more are eligible to participate in the 401(k) Plan.
Participants who choose to participate may contribute up to 20% of their pretax
compensation to the 401(k) Plan subject to the statutorily prescribed annual
limits. All contributions to the 401(k) Plan, including Company contributions,
are fully vested and nonforfeitable at all times. The Company made contributions
of $16, $10 and $3 during 1996, 1995 and 1994, respectively.
11. STATEMENTS OF CASH FLOWS:
------------------------
The Company made the following cash payments:
1996 1995 1994
---- ---- ----
Interest (includes $20, $35 and $40
paid to related parties) $ 75 $134 $71
Taxes 128 32 -
Noncash investing and financing activities are as follows:
1996 1995 1994
---- ---- ----
Issuance of Common Stock $ - $ 58 $ 83
Stock subscription note receivable, net 14 84 89
Issuance of treasury stock to related
parties in satisfaction of dividends
payable and long-term debt obligations - - 132
Reduction of other assets and stock
subscription note receivable interest
in lieu of dividend payments - - 22
12. STOCKHOLDERS' EQUITY:
--------------------
Initial Public Offering
- - -----------------------
On September 25, 1996, the Company completed its initial public offering in
which it raised $11,025 through the issuance of 1,225,000 shares of Common Stock
at $9.00 per share. The Company's proceeds from the initial public offering
included in the financial statements are net of offering costs.
As part of the initial public offering, the Company also issued warrants which
entitles the holders to purchase 122,500 shares of Common Stock at $10.80 per
share. The warrants are exercisable for a period of four years beginning one
year from the date of the initial public offering. The warrants are callable by
the Company upon 90 days notice following the first time when the closing price
of the Common Stock exceeds $15.12 per share for 30 consecutive days.
<PAGE>
COFFEE PEOPLE, INC.
-------------------
NOTES TO FINANCIAL STATEMENTS (continued)
-----------------------------------------
(Dollars in thousands, except per share data)
Private Placement
- - -----------------
In January 1996, the Company completed a private placement of equity securities
in which it raised $3,975 through the issuance of 596,250 shares of Common Stock
at $6.67 per share. The Company's proceeds from the private placement of equity
securities included in the financial statements are net of offering costs. As
part of the private placement, the Company also issued a warrant which entitles
the holder to purchase 135,000 shares of the Company's Common Stock at $8 per
share any time within 10 years; however, the warrant will lapse if not exercised
within one year of the closing date of the Company's initial public offering.
Direct Public Offering
- - ----------------------
During 1994, the Company completed a direct public offering under Regulation A
of the Securities Act of 1933, as amended, in which the Company sold 107,704
shares of Common Stock at $8 per share. The Company's proceeds from the direct
public offering included in the financial statements are net of offering costs.
13. RELATED PARTY TRANSACTIONS:
--------------------------
As of December 31, 1996, the Company had a lease with a stockholder, who is a
director of the Company.
During 1996, the Company purchased approximately $133 of product from a company
that is 50% owned by a stockholder, who is a director and an officer of the
Company.
14. STOCK SPLIT:
-----------
On July 26, 1996, the Board of Directors approved a 3-for-2 stock split. The
effect of this stock split has been retroactively reflected in these financial
statements and notes for all periods presented.
15. SUBSEQUENT EVENTS:
-----------------
In January 1997, the Company opened a new store in Huntington Beach, California.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COFFEE PEOPLE, INC.
Dated March 26, 1997 By: /s/ James L. Roberts
----------------------------
James L. Roberts, Chairman
and Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
/s/ James L. Roberts
Dated March 26, 1997 ------------------------------------
James L. Roberts, Chairman and
Chief Executive Officer and Director
/s/ Taylor H. Devine
Dated March 26, 1997 ------------------------------------
Taylor H. Devine, President and
Chief Operating Officer and Director
/s/ Kenneth B. Ross
Dated March 26, 1997 ------------------------------------
Kenneth B. Ross, Chief Financial
Officer (Principal Financial and
Accounting Officer)
Dated March ___, 1997 ------------------------------------
Douglas L. Ayer, Director
/s/ Jeffrey M. Ferguson
Dated March 26, 1997 ------------------------------------
Jeffrey M. Ferguson, Director
/s/ Gary G. Talboy
Dated March 26, 1997 ------------------------------------
Gary G. Talboy, Director
<PAGE>
EXHIBIT INDEX
(a) Exhibits
Exhibit No. Description Page
- - ----------- ----------- ----
3.1 Registrant's Restated Articles of Incorporation
(Incorporated by reference to Exhibit 3.1 to the
Company's Registration Statement on Form SB-2,
effective September 25, 1996 (Registration No.
333-5376-LA)).
3.2 Registrants' Bylaws, as amended (Incorporated by
reference to Exhibit 3.2 to the Company's Registration
Statement on Form SB-2, effective September 25, 1996
(Registration No. 333-5376-LA)).
4 See Article 2 of Exhibit 3(i) and Article II of Exhibit
3(ii)
10.1* Registrant's 1993 Stock Option Plan (Incorporated by
reference to Exhibit 10.1 to the Company's Registration
Statement on Form SB-2, effective September 25, 1996
(Registration No. 333-5376-LA)).
10.2* Registrant's 1994 Stock Option Plan (Incorporated by
reference to Exhibit 10.2 to the Company's Registration
Statement on Form SB-2, effective September 25, 1996
(Registration No. 333-5376-LA)).
10.3* Registrant's 1995 Stock Option Plan (Incorporated by
reference to Exhibit 10.3 to the Company's Registration
Statement on Form SB-2, effective September 25, 1996
(Registration No. 333-5376-LA)).
10.4* Registrant's 1996 Stock Option Plan (Incorporated by
reference to Exhibit 10.4 to the Company's Registration
Statement on Form SB-2, effective September 25, 1996
(Registration No. 333-5376-LA)).
10.5* Form of Incentive Stock Option Agreement related to
1993, 1994, 1995 and 1996 Stock Option Plans
(Incorporated by reference to Exhibit 10.5 to the
Company's Registration Statement on Form SB-2,
effective September 25, 1996 (Registration No.
333-5376-LA)).
<PAGE>
Exhibit No. Description Page
- - ----------- ----------- ----
10.6* Form of Nonstatutory Stock Option Agreement related to
1993, 1994, 1995 and 1996 Stock Option Plans
(Incorporated by reference to Exhibit 10.6 to the
Company's Registration Statement on Form SB-2,
effective September 25, 1996 (Registration No.
333-5376-LA)).
10.7* Registrant's Employee Stock Purchase Plan (Incorporated
by reference to Exhibit 10.7 to the Company's
Registration Statement on Form SB-2, effective
September 25, 1996 (Registration No. 333-5376-LA)).
10.8 Supply Agreement dated February 17, 1997 between
Registrant and Coffee Bean International, Inc.**
10.9 Form of Indemnity Agreement (Incorporated by reference
to Exhibit 10.9 to the Company's Registration Statement
on Form SB-2, effective September 25, 1996
(Registration No. 333-5376-LA)).
10.10 Business Loan Agreement with Bank of America NT & SA,
dated August 3, 1995, as amended (Incorporated by
reference to Exhibit 10.10 to the Company's
Registration Statement on Form SB-2, effective
September 25, 1996 (Registration No. 333-5376-LA)).
10.10(a) Security Agreement with Bank of America NT & SA, dated
August 3, 1995 (Incorporated by reference to Exhibit
10.10(a)) to the Company's Registration Statement on
Form SB-2, effective September 25, 1996 (Registration
No. 333-5376-LA)).
10.11* Employment Agreement with James L. Roberts, Chairman of
the Board and Chief Executive Officer (Incorporated by
reference to Exhibit 10.11 to the Company's
Registration Statement on Form SB-2, effective
September 25, 1996 (Registration No. 333-5376-LA)).
10.12* Employment Agreement with Taylor H. Devine, President
and Chief Operating Officer (Incorporated by reference
to Exhibit 10.12 to the Company's Registration
Statement on Form SB-2, effective September 25, 1996
(Registration No. 333-5376-LA)).
10.13* Employment Agreement with Matthew J. Kimble, Vice
President--Human Relations.
<PAGE>
Exhibit No. Description Page
- - ----------- ----------- ----
10.14* Employment Agreement with Steven P. Crantz, Vice
President--Development (Incorporated by reference to
Exhibit 10.14 to the Company's Registration Statement
on Form SB-2, effective September 25, 1996
(Registration No. 333-5376-LA)).
10.15 Redemption agreement, dated January 4, 1993 between the
Registrant and Gary G. Talboy (Incorporated by
reference to Exhibit 10.15 to the Company's
Registration Statement on Form SB-2, effective
September 25, 1996 (Registration No. 333-5376-LA)).
10.15(a) Promissory Note, dated January 4, 1993, payable to Gary
G. Talboy in original principal amount of $245,000
(Incorporated by reference to Exhibit 10.15(a)) to the
Company's Registration Statement on Form SB-2,
effective September 25, 1996 (Registration No.
333-5376-LA)).
10.16 Redemption Agreement, dated January 4, 1993, between
the Registrant and Jeffrey M. Ferguson (Incorporated by
reference to Exhibit 10.16 to the Company's
Registration Statement on Form SB-2, effective
September 25, 1996 (Registration No. 333-5376-LA)).
10.16(a) Promissory Note, dated January 4, 1993, payable to
Jeffrey M. Ferguson in original principal amount of
$245,000 (Incorporated by reference to Exhibit
10.16(a)) to the Company's Registration Statement on
Form SB-2, effective September 25, 1996 (Registration
No. 333-5376-LA)).
10.17 Security Agreement, dated January 4, 1993, among the
Registrant, Jeffrey M. Ferguson and Gary G. Talboy
(Incorporated by reference to Exhibit 10.17 to the
Company's Registration Statement on Form SB-2,
effective September 25, 1996 (Registration No.
333-5376-LA)).
10.18 Food and Beverage Concession Lease Agreement; dated
June 10, 1994, between the Registrant and the Port of
Portland (Incorporated by reference to Exhibit 10.18 to
the Company's Registration Statement on Form SB-2,
effective September 25, 1996 (Registration No.
333-5376-LA)).
<PAGE>
Exhibit No. Description Page
- - ----------- ----------- ----
10.19 Common Stock Purchase Agreement, dated as of January
11, 1996, among the Registrant and certain purchasers
(Incorporated by reference to Exhibit 10.19 to the
Company's Registration Statement on Form SB-2,
effective September 25, 1996 (Registration No.
333-5376-LA)).
10.20 Warrant Agreement, dated as of January 23, 1996,
between the Registrant and International Capital
Partners, Inc. (Incorporated by reference to Exhibit
10.20 to the Company's Registration Statement on Form
SB-2, effective September 25, 1996 (Registration No.
333-5376-LA)).
11 Statement Regarding Computation of Per Share Earnings.
23 Consent of Arthur Andersen LLP, Independent Public
Accountants.
27 Financial Data Schedule
EXHIBIT 10.8
SUPPLY AGREEMENT*
This Supply Agreement is dated February 17, 1997, between Coffee People,
Inc., an Oregon corporation ("Coffee People") and Coffee Bean International,
Inc., an Oregon corporation ("CBI").
It is hereby agreed as follows:
1. TERM. The term of this agreement is from December 1, 1996, until
November 30, 1997.
2. PRODUCTS.
(a) COFFEE PRODUCTS NORMALLY STOCKED BY CBI. Coffee Bean will roast
and supply Coffee People with coffee in the same manner and of the same quality
as previously established between the parties. All sales by CBI to Coffee People
shall be in accordance with normal CBI terms of sale except as modified by this
agreement. All roasted coffee supplied by CBI to Coffee People will have been
roasted and vacuum valve-bagged less than 30 days prior to delivery. CBI will
strive for delivery within 2 weeks of the roasting date.
(b) COFFEE VOLUME COMMITMENT. Coffee People agrees to purchase a
minimum of 75,000 pounds of roasted coffee during each quarter.
(c) COFFEE PRODUCTS NOT NORMALLY STOCKED BY CBI. Upon written request
from Coffee People, CBI agrees to purchase and roast coffees not normally
stocked by CBI; provided, however, that at the end of a period to be agreed upon
in each case, Coffee People agrees that it will purchase the balance of such
coffee remaining unsold by CBI. With respect to roasted coffees which Coffee
People is required to purchase at the end of such agreed time period, Coffee
People shall pay for such coffee at the roasted cost plus roaster fee computed
under this agreement. With respect to green coffee which Coffee People is
required to purchase at the end of such agreed time period, Coffee People shall
pay CBI's landed cost for the green coffee. No outstanding requests exist at
this time.
3. PRICE.
3.1 PRICE FOR ROASTED COFFEE. For each calendar quarter, for each type
of coffee purchased from CBI, Coffee People shall pay to CBI an amount equal to
CBI's roasted cost per pound plus a roaster fee, as further defined herein. In
- - ------------------------------------
* Certain material contained in this exhibit and indicated by "***" has been
omitted and filed separately with the Securities and Exchange Commission
pursuant to an application for confidential treatment under Rule 24b-2
promulgated under the Securities Exchange Act of 1934, as amended.
<PAGE>
addition, for stores located outside the Portland Metro area, Coffee People
agrees to pay freight costs less a $*** allowance. At the beginning of each
calendar quarter the parties shall establish a base cost (roasted coffee costs
plus a freight factor based upon estimated out of area shipments) for each type
of coffee purchased by Coffee People. This base cost shall serve as a basis for
billing purposes during the quarter. At the end of each calendar quarter, the
parties shall compute the total price for coffee purchased by Coffee People plus
actual net freight costs for shipments outside the Portland Metro area and
determine a final adjustment, as follows:
(a) Determine CBI's green cost. First, the parties shall determine
CBI's green cost. CBI's green cost is CBI's cost of green coffee computed in
accordance with generally accepted accounting principles using a first-in
first-out cost-flow assumption. (For example, assume CBI has in inventory on
November 1, 1995, 100 lbs. of Green Java Estate #1 at an average cost of $2.00
per pound. During the calendar quarter ending December 31, 1996, CBI purchases
400 pounds of Green Java Estate #1 at a total cost of $1,000.00 [$2.50 per pound
average]. Also during the same calendar quarter, CBI sells 300 pounds of Green
Java Estate #1. CBI's green cost is determined as follows:
Quantity Cost/Lb. Total
Beginning inventory 100 lbs $2.00 $ 200.00
Cost of Purchase (Note 1) 400 lbs $2.50 1,000.00
------- ---------
Goods available for sale 500 lbs $2.40 1,200.00
Cost of Product Sold (Note 2) 300 lbs $2.33 (700.00)
------- ---------
Ending Inventory 200 lbs $2.50 $ 500.00
======= =========
Note 1 - Cost of purchases is CBI's cost of green coffee purchased and
received during the calendar quarter and delivered at Portland, Oregon.
Note 2 - 100 lbs at $2.00 = $200 plus 200 lbs. at $2.50 = $500
In this example, CBI's green cost during the calendar quarter ending December
31, 1996 is $2.33 per pound.
(b) DETERMINE THE ROASTED COST. Second, the roasted cost is determined
by applying a *** shrinkage factor to CBI's green cost as determined in section
3.1(a) above. Roasted cost is equal to green cost as determined in section
3.1(a) divided by ***.
<PAGE>
(c) DETERMINE THE PRICE TO COFFEE PEOPLE. The price to Coffee People
is equal to the roasted cost per pound as determined in section 3.1(b) above
plus the roaster fee, the sum of which is multiplied by the number of pounds
delivered to Coffee People during the quarter. The roaster fee shall be as
follows:
If the quantity of roasted coffee Then the roaster fee is
supplied during a particular as follows:
month is in the following range:
*** lbs to 29,999 lbs $*** per lb.
*** lbs to 39,999 lbs $*** per lb.
*** lbs to 49,999 lbs $*** per lb.
*** lbs to 59,999 lbs $*** per lb.
*** lbs to 67,499 lbs $*** per lb.
*** lbs to 74,999 lbs $*** per lb.
*** lbs to 82,499 lbs $*** per lb.
*** lbs or more $*** per lb.
(d) DELIVERY/FREIGHT COSTS. Deliveries to Coffee People locations in
the Portland Metro area shall be without charge to Coffee People. Deliveries to
other locations shall be by UPS or common carrier as directed by Coffee People.
Freight will be charged on all shipments outside the Portland Metro area. Since
CBI will not incur local delivery costs for these orders, a $*** allowance will
be provided as an offset to the freight charges. Will Call orders will also
received a $*** pick-up allowance.
(e) DETERMINE THE QUARTERLY ADJUSTMENT. The quarterly adjustment is
determined by comparing Coffee People's actual price for all coffee delivered
during the calendar quarter plus the actual net freight for out of area orders
to the amount billed for the quarter. If the price to Coffee People exceeds the
amount billed, then Coffee People shall be billed an amount equal to the
difference. If the price to Coffee People is less than the amount billed, then
Coffee People shall receive a credit for the difference.
(f) ADDITIONAL CHARGES. Grinding and flavoring of coffee shall incur
an additional charge equal to $*** per pound for grinding and $*** per pound for
flavoring without nuts and $*** per pound for flavoring with nuts. Coffee People
currently supplies CBI with labels for 5 lb bulk private label coffee products.
Consequently, the label cost is not included in the roaster fee. The additional
cost to supply the label would be $***.
3.2 PRICE FOR GREEN COFFEE. The price for green coffee purchased by
Coffee People shall be CBI's green cost as determined in section 3.1(a) above
plus *** per pound. The minimum order shall be 5 bags assorted, at any one time.
<PAGE>
3.3 PRICE FOR NON COFFEE PRODUCTS. The price for non coffee products
currently purchased from CBI will be based upon CBI's wholesale catalog price
less the following discounts:
CATEGORY DISCOUNT
Filters, paper ***
Filters, Swiss Gold ***
Candy ***
Ground chocolate ***
Torani syrup ***
Panache Cocoa ***
Panache Frozen Latte Mix ***
Xanadu Tea ***
Country Spice Tea ***
For products not addressed in the table above, pricing will be determined on a
case by case basis.
4. ORDERING CHARGE. Coffee People will incur an ordering charge of $*** for
each order in excess of the monthly ordering allowance as defined below:
Order Allowance/Mo. = *** of coffee purchased.
Example:
-------
In November, CBI receives 100 orders for coffee totaling 30,000
pounds. The order allowance for November would be:
Total lbs. in Month Lbs. divisor Monthly allotment Order allowance
[ 30,000 / *** ] x *** = ***
The order charge for November would be:
Orders Order allowance Charge/Order Order Charge
[ 100 - *** ] x $*** = $***
If the order allowance exceeds the actual numbers of orders in a given
month, the difference will be carried forward as a credit against future order
charges. For example, if in a month that Coffee People is entitled to 50 orders,
Coffee People only places 48 orders, then Coffee People would be entitled to
place 52 orders the subsequent month.
5. PAYMENT. Payment terms for goods purchased by Coffee People are net 30
days. Balances from zero to 30 days past due shall be charged with interest at a
rate of the prime interest rate as published in the Oregonian plus 1.75% per
annum. Balances over 30 days past due will be charged with interest at a rate of
the prime interest rate as published in the Oregonian plus 6.75% per annum.
<PAGE>
6. PRODUCT FRESHNESS. CBI agrees to ship all bulk coffee products within 30
days of roasting. In the event Coffee People stores receive product(s) beyond
the 30 day limit, after considering normal transit time, CBI agrees to replace
the product(s) and pay for the transit charges to return the outdated goods to
CBI.
7. CONFIDENTIALITY. Coffee People acknowledges that it may receive
confidential information concerning CBI's product costs, company overhead costs
and proprietary blend recipes.
7.1 All confidential or proprietary information of CBI shall be used
solely for the purposes contemplated by CBI and for no other purpose.
7.2 The terms of this agreement, the evaluation of all confidential
information received by Coffee People, and all confidential or proprietary
information of CBI shall be held in confidence and not disclosed to any third
party without the prior written approval of CBI; provided, however that Coffee
People may disclose the existence of this Supply Agreement itself without
disclosing the specific terms.
7.3 Promptly upon written request from CBI, Coffee People will deliver
to CBI all tangible forms of confidential or proprietary information and all
materials derived from or based in whole or in part on such confidential or
proprietary information including, but not limited to, all memoranda, summaries,
notes, drawings, models, samples and prototypes, without retaining any copies.
7.4 These confidentiality provisions shall not apply to information
which Coffee People can prove was lawfully in its possession prior to disclosure
by CBI or which is or becomes a part of the public domain other than by an act
or omission of Coffee People or which is subsequently disclosed to Coffee People
by a third party having the right to do so.
7.5 The confidentiality provisions of this agreement shall survive the
termination of this agreement.
8. NONSOLICITATION. Coffee People agrees not to solicit CBI customers or
target CBI accounts and agrees to cooperate with CBI with the view that Coffee
People will not be in direct competition with CBI for CBI's wholesale coffee
business. CBI recognizes that Coffee People has the right to provide coffee to
OCS distributors (such as GCC) and retailers (such as Durst's Market,
Guckenheimers @ Nike, etc) without violating this contract.
9. ARBITRATION. In the event any controversy or claim arising out of this
agreement cannot be settled by the parties, such controversy or claim shall be
settled by arbitration in accordance with the then current rules of the American
Arbitration Association and judgment upon the award may be entered in any court
having jurisdiction hereof.
<PAGE>
10. INTERPRETATION. If a provision of this Agreement is void or
unenforceable, then such provision shall be enforced to the fullest extent
allowed by law and all other provisions shall remain fully enforceable.
IN WITNESS WHEREOF, the parties have executed this agreement as of the date
first above written.
COFFEE BEAN INTERNATIONAL, INC., COFFEE PEOPLE, INC., an
an Oregon corporation Oregon corporation
By: \s\ Jim Myers By: \s\ Jim Roberts
----------------------------- -----------------------------
Jim Myers, President Jim Roberts, CEO
By: \s\ Robert Sharp By: \s\ Taylor Devine
----------------------------- -----------------------------
Robert Sharp, CFO Taylor Devine, COO
EXHIBIT 10.13
[COFFEE PEOPLE LOGO]
TO: Matt Kimble
CONFIDENTIAL
FROM: Taylor Devine
DATE: 9 January 1997
SUBJECT: Welcome to Coffee People & Making Record of Some Details
===============================================================================
PURPOSE
The purpose of this note to you is to welcome you to Coffee People and to make
record of compensation and other necessary details relative to you joining us.
INFORMATION
1. Before going any further, Jim, Patty and I want to say how excited we are
about you joining us. We have the opportunity to build on that which has put in
place in the past so as to create an even greater future. The single most
important ingredient in creating the recipe for success is having enough of the
right people on our team. People create success. One (1) of the most key
positions in this creation of success is the position you are going into as our
Vice-President, Human Resources
2. POSITION: Vice-President, Human Resources. As such you will be an officer of
Coffee People, Inc.
3. TIMING: Start Monday, 20 January, 1997
4. BASE COMPENSATION: Base Salary is sixty-five thousand dollars ($65,000)
annually.
5. INCENTIVE COMPENSATION: You will be participating in an Incentive
Compensation Plan that affords you the opportunity to earn up to ten thousand
dollars ($10,000) per year. This plan is broken down into four (4) quarters,
with the Incentive Compensation potential of twenty-five hundred dollars
($2,500) per quarter.
<PAGE>
Relative to the first quarter you are with Coffee People, to be eligible for
that quarters Incentive Compensation, within the first thirty (30) days your are
with us, you will provide me with a list of weighted Objectives (Objectives =
measurable Goals) to be accomplished that first quarter. I reserve the ability
to add or otherwise edit these Objectives to the point where we arrive at a
written plan which I accept. At the end of the first quarter, we will score the
plan in a percentage of completion or attainment sense. That percentage of
attainment or completion will then equal the percentage applied against the
$2,500 quarterly potential amount. Example: If the percentage of completion or
attainment is 95%, the $ amount paid is 95% of $2,500 or $2,375. Amounts not
earned in one quarter are not carried forward into the subsequent quarter.
Relative to the second quarter and subsequent quarters you are with Coffee
People to be eligible for that quarters Incentive Compensation, on or before the
fifteenth (15th) day of the first month of each quarter, you will provide me
with a list of weighted Objectives (Objectives = measurable Goals) to be
accomplished that first quarter. I reserve the ability to add or otherwise edit
these Objectives to the point where we arrive at a written plan which I accept.
At the end of the quarter, we will score the plan in a percentage of completion
or attainment sense. That percentage of attainment or completion will then equal
the percentage applied against the $2,500 quarterly potential amount. Example:
if the percentage of completion or attainment is 95%, the $ amount paid is 95%
of $2,500 or $2,375. Amounts not earned in one quarter are not carried forward
into the subsequent quarter.
6. HEALTH CARE: This pertains to your medical and dental care. You are eligible
for the standard health care coverage that all officers of the company
participate in.
We are making an exception for you however when it comes to bridging your health
care costs as you move from your current employer to Coffee People. As we have
discussed, your current employer will offer you COBRA coverage for a certain
time period subsequent to your employment with them. We know that you plan to
utilize the COBRA coverage so that you and your family continue medical coverage
between the time you leave your current employer and your insurance with Coffee
People activates. The cost of the premium associated with COBRA needs to be paid
by either you, your current employer or Coffee People. We have said we will pay
your COBRA premium until you become eligible for your Coffee People insurance.
This period of time is thought to be approximately the first full month after
joining us. We will either reimburse you for the premium you pay or we will pay
the premium directly for you. Your choice.
7. SALARY CONTINUANCE. You have asked for salary continuance if you sustain
illness or injury not related to work. We do not currently have such coverage
for anyone in the company and, per our discussion, are not in a position to make
an exception for you. What we will pledge to you, is that should we make this
kind of insurance available to the officer group in the future, as long as you
are an officer of the company, we will extend the same opportunity to you as we
extend to other officers of the company.
<PAGE>
8. LIFE INSURANCE. Our standard coverage is $25,000. This is far cry from the
three (3) times annual salary you currently have. We have agreed that you will
secure the cost of a one hundred thousand dollar ($100,000) term policy. As a
point of reference, we can secure such coverage for approximately $500 per year
premium. Our intent is to "gross up" your base salary so that you can secure a
$100,000 term life insurance policy on your own with the "grossed up" amount of
your base salary taking care of that life insurance premium.
9. VACATION: Our standard vacation is two (2) weeks (equaling 10 days) after one
year of employment. However, in your case, Coffee People will grant you fifteen
(15) days during your first year of employment. Your eligible vacation time will
stay at 15 days until your length of service with Coffee People qualifies you
for additional time under the Coffee People vacation plan program.
10. 401K PLAN: You will become eligible to participate in the 401K Plan within
the same time period as the plan calls for. (We are currently verifying this
timing) We believe that our plan is written such that a person must be with us
six (6) months before they become eligible to participate. Once the six (6)
month tenure is satisfied, we believe that a person can participate beginning
the next full pay period.
11. STOCK PURCHASE PLAN: You will become eligible to participate in our Stock
Purchase Plan as is written into the plan of all participants. After you fulfill
a four (4) month employment, you will be eligible to participate on the next
available enrollment date. Given that you join Coffee People approximately 20
January, 1997, your eligibility would work like:
20 Jan - 20 Feb = 1 month
20 Feb - 20 Mar = 2nd month
20 Mar - 20 Apr = 3rd month
20 Apr - 20 May = 4th month
................. with the next available enrollment date being 1 September
1997.
12. STOCK OPTION GRANT: As we have discussed, the Board of Directors are the
only entity that can legally grant your Stock Option Grant. However, I have
assured you that I will request fifteen thousand (15,000) shares for you,
vesting at the rate of twenty percent (20%) over a five (5) year period. The
price of the stock option grant will be the price of the stock the day the Board
grants you the option.
<PAGE>
I intend to request your option grant as part of the business conducted at our
next regularly scheduled Board meeting on Friday 24 January, 1997. Given
approval, your vesting schedule will be:
- Board approval date, 1998 = 20%
- Board approval date, 1999 = 20%
- Board approval date, 2000 = 20%
- Board approval date, 2001 = 20%
- Board approval date, 2002 = 20%
13. CONFIDENTIALITY OF INFORMATION: You acknowledge that you may receive
confidential information about the Company's blends, recipes, formulas,
processes, business plans, pricing data, supplier relationships, site selection
and marketing information as well as other proprietary information which the
Company has identified as confidential or which in the exercise of reasonable
judgement should be considered confidential. You acknowledge that all such
confidential information is and shall continue to be the property of Coffee
People and agree to exercise the highest degree of care in safeguarding such
information against loss, theft or other inadvertent disclosure.
You agree not to disclose any confidential or proprietary information about
Coffee People, directly or indirectly, under any circumstances or by any means,
to any third person without express written consent of the Board, except as may
be necessary to accomplish the business goals and objectives of Coffee People
over which you have responsibility and authority. You agree that you will not
make any commercial use whatsoever of confidential or proprietary information of
Coffee People, except as may be necessary to accomplish the Coffee People
business goal & objectives.
Upon termination of your employment for any reason or as otherwise requested,
you will promptly return all such confidential or proprietary information to
Coffee People, in whatever form it may be in.
The obligations contained in this section shall survive beyond the date of any
termination of the business relationship between you and Coffee People and shall
continue for as long as you possess any confidential or proprietary information
of Coffee People.
14. COVENANT NOT TO COMPETE: You agree that during the time of your employment
and for a period of four (4) years following the date of termination of your
employment for any reason, you will not directly or indirectly, in any form or
through any entity engage in or assist a business which competes with or may
compete with Coffee People within the United States. For purposes of definition,
competitors are those retail stores which derive fifty percent (50%) or more of
their retail sales from the sale of coffee by the drink and/or bean.
<PAGE>
15. AGREEMENT: This is between Matt Kimble (hereafter the "Employee") and Coffee
People, Inc., (hereafter the "Company") have reached an agreement as set forth
below.
A. Each provision of this Agreement is severable. If any provision of this
Agreement is legally invalid, the remainder of the Agreement remains in full
force and effect.
B. The document sets forth the entire agreement between the parties, and
supersedes all prior agreements, whether written or oral, express or implied.
The Agreement may not be amended, modified or waived except in writing, unless
duly signed by both the Employee and authorized by the President and COO or by
the Board of Directors of the Company.
C. If the Employee and the Company cannot resolve a dispute (whether
arising in the contract or tort or any other legal theory and whether based on
federal, state or local statutes or common law and regardless of the identities
of any other defendants) that in a way relates to, arises out of, or is
connected with the Employee's employment relationship or the termination
thereof, or this Agreement (a "Dispute"), then that Dispute shall be resolved
through binding arbitration in Portland, Oregon. The arbitration shall be
conducted in accordance with the current rules of the United States Arbitration
and Mediation Service (USAMS). The arbitrator selected will be mutually agreed
to by the parties, but if the parties are unable for any reason whatsoever to
mutually agree upon the selection of an arbitrator, then the arbitrator shall be
selected by the USAMS. In the event that a Dispute involves a claim which either
the Employee or the Company seeks to assert against a third party, the parties
further agree that arbitration shall be the exclusive remedy against any such
third party (including, but not limited to, any officer, director, agent,
shareholder, affiliate or advisor of the Company), provided that such third part
consents to participate in and be bound by such arbitration.
The parties filing a claim for arbitration must present it in writing to
the other party and USAMS within six months of the date the party filing the
claim knew or should have known of it or the date of termination, which ever is
earlier. Any claim not brought within the required time period will be waived
forever. Judgment on the award rendered in the arbitration may be entered in any
court having jurisdiction and enforced accordingly.
D. Not withstanding anything herein to the contrary, the Employee's
employment with the Company is terminable at will, with or without cause;
provided, however, that the termination of the Employee's employment shall be
governed in accordance with the terms hereof.
E. If the Employee is terminated by the Company for CAUSE or voluntarily
terminates employment with the Company, then there is no severance benefits or
obligations. If the Employee is terminated by the Company other than for Cause,
then the Employee is entitled to severance as follows:
<PAGE>
a. The Company shall pay the Employee's base salary through the month
during which the termination occurs; plus,
b. The company shall pay a pro-rata share of any earned bonus amount
based upon the Employee's time-in-position and the criteria established under
any bonus plan of the Company in which the Employee is a participant, using a
calculation from the most recent year-to-date figures at the time of
termination; and,
c. The Company shall make monthly severance payment for a period of
six (6) months equal to the Employee's monthly base salary at the time of
termination and shall be equal to the Employee's monthly base salary at the time
of termination. The severance payments will commence in the month following
termination, to be paid with the same frequency as other pay checks are issued
to those still employed with the Company at that time. (ie: every other week,
bi-monthly, monthly or whatever frequency is practice for other salaried people
at that time.); and,
All severance payments herein shall be subject to applicable withholding and
deductions.
Termination by the Company for "Cause" mean termination based on (i) conduct
which is a material violation of Company policy or which is fraudulent or
unlawful or which materially interferes with the Employee's ability to perform
their duties, (ii) misconduct which damages or injures the Company or
substantially damages its reputation, or (iii) gross negligence in the
performance of, or willful failure to perform, the Employee's duties and
responsibilities.
d. The Company shall continue to pay its portion of the health or
dental premium through the date severance pay ends, if the Employee elects
coverage and is not covered under another plan; subject to earlier termination
of coverage at such time as they become eligible to receive medical and/or
dental benefits due to coverage by a new employer.
F. The severance benefits under this Agreement shall not be transferred,
assigned or encumbered in any way, either voluntarily or involuntarily. In the
event the Employee dies during the term of the severance agreement, any further
payments shall be made to the Employee's estate.
G. Any severance benefits contained in this Agreement are expressly
contingent on the execution and delivery to the Company of a full release in a
form satisfactory to the Company at the time of termination with respect to any
and all claims relative to the Employee's employment or the termination of the
employment.
16. "AT-WILL" EMPLOYER: Coffee People, Inc. is an "at-will" employer. The terms
of this offer will not change or modify the Company's at-will relationship.
<PAGE>
Now that we have all the necessary language behind us, we can get on with
continuing to build our company. We all look forward to having you join us.
Best Wishes - Taylor
Dated Signature Lines:
/s/Taylor H. Devine 9 Jan 97 /s/Matt Kimble 1/10/97
- - --------------------------------- -----------------------------
Coffee People, Inc. Matt Kimble, date
Taylor H. Devine, date
attachment
Coffee People, Inc. Stock Option Plan (11 pages)
cc with the Coffee People, Inc. Stock Option Plan (11 pages): K. Ross
cc without the Coffee People, Inc. Stock Option Plan:
J. Roberts
EXHIBIT 11
COFFEE PEOPLE, INC.
CALCULATIONS OF EARNINGS PER SHARE
Twelve Months Ended December 31,
--------------------------------------------------
1996 1995
------------------------ -----------------------
Primary Fully Dil. Primary Fully Dil.
------- ---------- ------- ----------
Fully Diluted
Weighted average shares
outstanding for the
period 2,316,537 2,316,537 1,403,601 1,403,601
Dilutive common stock
options using the
treasury stock method 48,165 46,105 97,374 102,718
Total shares used for per
share calculations 2,349,702 2,347,641 1,500,975 1,506,320
Net income $204,000 $204,0000 $211,000 $211,000
Earnings per share $.09 $.09 $.14 $.14
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated February 6, 1997, included in this Form 10-KSB, into the Company's
previously filed Registration Statement File Nos. 333-14531 and 333-18931 on
Form S-8.
Portland, Oregon
March 31, 1997
/s/ ARTHUR ANDERSEN LLP
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COFFEE
PEOPLE INCORPORATED ANNUAL 1996 10-KSB AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 10,274
<SECURITIES> 0
<RECEIVABLES> 26
<ALLOWANCES> 0
<INVENTORY> 205
<CURRENT-ASSETS> 10,770
<PP&E> 6,951
<DEPRECIATION> 1,438
<TOTAL-ASSETS> 16,412
<CURRENT-LIABILITIES> 1,298
<BONDS> 0
0
0
<COMMON> 14,492
<OTHER-SE> (281)
<TOTAL-LIABILITY-AND-EQUITY> 16,412
<SALES> 12,281
<TOTAL-REVENUES> 12,281
<CGS> 5,860
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<OTHER-EXPENSES> 6,315
<LOSS-PROVISION> 0
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</TABLE>
