Securities And Exchange Commission
Washington, D.C. 20549
--------------------------------------------------
Form 10-QSB
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Transition Period From _____ to _____
Commission File Number 0-21397
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---------------------------------------------------
Coffee People, Inc.
(Exact name of registrant as specified in its charter)
Oregon 93-1073218
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
15100 SW Koll Parkway, Suite J, Beaverton, OR 97006
(503) 672-9603
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
As of March 31, 1998, there were 3,268,718 shares of the registrant's Common
Stock outstanding.
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<PAGE>
COFFEE PEOPLE, INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 1
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 6
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 12
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
COFFEE PEOPLE, INC.
BALANCE SHEETS
(Dollars in thousands)
ASSETS
March 31 December 31
1998 1997
----------- -----------
(Unaudited)
Current assets:
Cash and cash equivalents $ 2,597 $ 2,545
Accounts receivable 377 227
Inventories 565 632
Prepaid expenses 226 205
Income taxes receivable 149 157
Other current assets - 20
------- ------
Total current assets 3,914 3,786
Property and equipment, net 7,091 7,338
Goodwill, net 5,681 5,781
Other assets 116 118
------- -------
Total assets $16,802 $17,023
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and capital
lease obligations $ 1,276 $ 1,285
Current portion of long-term debt to related
parties 20 22
Line of credit 400 -
Accounts payable 1,118 1,011
Accrued liabilities 479 560
Provision for store closures and restructuring 1,339 1,434
------- -------
Total current liabilities 4,632 4,312
Long-term debt and capital lease obligations 3,980 4,298
Long-term debt to related parties 134 137
Stockholders' equity:
Common Stock, no par value; authorized,
50,000,000 shares; 3,268,718 and 3,263,872
shares issued and outstanding 14,574 14,563
Stock subscription notes receivable (308) (302)
Retained earnings (accumulated deficit) (6,210) (5,985)
------- -------
Total stockholders' equity 8,056 8,276
------- -------
Total liabilities and stockholders' equity $16,802 $17,023
======= =======
See accompanying notes to financial statements.
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<PAGE>
COFFEE PEOPLE, INC.
STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
(Unaudited)
Three Months Ended
-----------------------
March 31 March 31
1998 1997
---------- ----------
Revenues:
Retail sales $ 5,544 $ 3,160
Wholesale and other 82 33
------- -------
Total revenues 5,626 3,193
Cost of sales and related occupancy expenses 2,773 1,559
Store operating expenses 1,951 1,134
Other operating expenses 1 -
Depreciation and amortization 421 203
General and administrative expenses 608 717
------ ------
Income (loss) from operations (128) (420)
Other income, net 33 126
Interest expense (130) (15)
------ ------
Income (loss) before benefit (provision)
for income taxes (225) (309)
Benefit (provision) for income taxes - 119
------ ------
Net income (loss) $ (225) $ (190)
====== ======
Earnings (loss) per share - basic and diluted $(0.07) $(0.06)
====== ======
Shares used in computing earnings per share -
basic and diluted 3,268,610 3,271,184
See accompanying notes to financial statements.
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<PAGE>
COFFEE PEOPLE, INC.
STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Three Months Ended
-----------------------
March 31 March 31
1998 1997
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (225) $ (190)
Adjustments to reconcile net income (loss)
to net cash (used in) provided by operating
activities-
Depreciation and amortization 421 203
Interest income on stock subscriptions (6) (5)
Provision for store closures and restructuring (95) -
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (150) 2
Decrease (increase) in inventories 67 (53)
Increase in prepaid expenses (21) (47)
(Decrease) increase in income taxes receivable 8 (110)
Decrease in other current assets 20 31
Increase in accounts payable 107 189
(Decrease) increase in accrued liabilities (81) 183
Decrease in income taxes payable - (47)
------- -------
Net cash provided by operating activities 45 156
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment, net (74) (2,030)
Decrease (increase) in other assets 2 (14)
Construction accounts payable - 50
------- -------
Net cash used in investing activities (72) (1,994)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt and capital lease obligations (327) (35)
Repayment of debt to related parties (5) (5)
Proceeds from line of credit 400 -
Issuance of common stock, net 11 4
------- -------
Net cash provided (used)by financing
activities 79 (36)
------- -------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS 52 (1,874)
CASH AND CASH EQUIVALENTS, beginning of the period 2,545 10,274
------- -------
CASH AND CASH EQUIVALENTS, end of the period $ 2,597 $ 8,400
======= =======
See accompanying notes to financial statements.
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<PAGE>
COFFEE PEOPLE, INC.
NOTES TO FINANCIAL STATEMENTS
For the Three Months Ended March 31, 1998 and 1997
(Unaudited)
NOTE 1. FINANCIAL STATEMENT PRESENTATION:
The interim financial data is unaudited; however, in the opinion of
management, the interim data includes all adjustments, consisting only of normal
recurring adjustments, necessary for a fair statement of the results for the
interim periods. The financial statements included herein have been prepared by
the Company pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures included herein
are adequate to make the information presented not misleading. These financial
statements should be read in conjunction with the annual financial statements
and notes thereto included in the Company's 1997 Annual Report on Form 10-KSB.
NOTE 2. PROVISION FOR STORE CLOSURES AND RESTRUCTURING:
During the second quarter of 1997, the Company took a $5,500,000 charge to
provide for the closure of seven stores outside its primary Oregon and Arizona
markets and for related restructuring. The charge included the write-down of
$3,157,000 in fixed assets, $36,000 in prepaid assets, and $73,000 in other
assets, and established a current liability of $2,234,000 as a provision for
store closures and restructuring costs. The primary portion of the liability
established by the Company relates to payments under existing lease agreements
for closed stores, net of anticipated recoveries, and employee severance
payments and related exit costs. As of March 31, 1998, the Company had incurred
approximately $1,095,000 in expenditures, net of recoveries, which had been
charged to the provision.
The stores identified for closure consisted of two stores located in
Denver, Colorado, three stores located in southern California, and two stores
located in Chicago, Illinois. As of December 31, 1997, Coffee People had closed
the three stores in southern California and the two stores in Chicago, Illinois,
but continued making payments on the lease obligations with respect to such five
stores. In February 1998, the Company sold two of the stores in southern
California, and assigned the leases with respect to such stores. In April 1998,
the Company sold one of the stores located in Chicago, Illinois, and assigned
the lease with respect to that store. The two stores in Denver, Colorado
continue to operate. The Company continues to work with local real estate
brokers to market, re-lease or sublease the remaining four stores located
outside Oregon and Arizona.
NOTE 3. MERGER WITH GLORIA JEAN'S INC.:
On November 13, 1997, the Company entered into a definitive agreement with
The Second Cup Inc. (Second Cup), a wholly-owned subsidiary of The Second Cup
Ltd., which provides for the merger of the Company with Gloria Jean's Inc.
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<PAGE>
(Gloria Jean's), a wholly-owned subsidiary of Second Cup. Under the agreement,
the Company will issue approximately 7,500,000 shares of the Company's common
stock to Second Cup in exchange for 100% of the outstanding common stock of
Gloria Jean's.
The merger requires shareholder approval. The shareholder vote on the
merger transaction is currently scheduled for May 19, 1998. Upon consummation of
the merger, Second Cup will own 69.5% of the outstanding common stock of the
Company.
The Company's bank loan includes a provision which requires the bank's
consent to any combination in which there is a change of control. Currently, the
bank has not consented to the merger; however, the Company believes the bank's
consent is forthcoming.
For accounting purposes, the merger will be accounted for as a reverse
merger. The historical records of Gloria Jean's will become the historical
records of the Company, and the purchase method of accounting will be applied to
the Coffee People assets acquired and liabilities assumed which will be recorded
at their fair values on the books of Gloria Jean's. The results of operations of
the Company will be included with those of Gloria Jean's beginning on the
acquisition date.
The combined company will continue as Coffee People, Inc. The combined
company is expected to change the Coffee People year-end to a fiscal year ending
the last Saturday in June.
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<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion contains forward looking statements within the
meaning of the federal securities laws and involves a number of risks and
uncertainties. Actual 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 Company's ability to control costs
associated with planned store closures; the price and availability of green
coffee; timely consummation of the merger with Gloria Jean's Inc.; the impact on
the Company if the merger is not consummated; effects of competition;
availability of additional capital; and changes in applicable government
regulations and other risks detailed in the Company's annual reports on Form
10-KSB for 1997 and 1996 and its Registration Statement on Form S-4, filed with
the Securities and Exchange Commission on April 24, 1998. The shareholder vote
on the merger transaction with Gloria Jean's is currently scheduled for May 19,
1998. The timing of the closing of the merger transaction, however, is subject
to uncertainty due to several factors outside the Company's control, including
obtaining the required shareholder vote, obtaining governmental approvals,
obtaining the consent of various third parties to the transaction and the
satisfaction of other conditions to closing contained in the Agreement and Plan
of Merger, dated February 19, 1998, a copy of which was filed with the
Securities and Exchange Commission as an exhibit to its Registration Statement
on Form S-4.
OVERVIEW
Coffee People sells coffee beverages, coffee beans, cookies, pastries and
coffee related merchandise through retail specialty coffee stores. The first
Coffee People store opened in 1983. As of March 31, 1998, the Company operated
41 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. At the time of its initial public offering,
the Company operated 19 stores, all of which were located in Oregon. During the
period from October 1996 through June 30, 1997, the Company opened 14 stores -
two in Denver, Colorado, three in southern California, seven in the Portland,
Oregon metropolitan area, and two in Chicago, Illinois. The Company closed one
store in Portland, Oregon, in April 1997, as anticipated, upon expiration of the
store lease.
On May 21, 1997, the Company acquired 15 Coffee Plantation stores in
Phoenix and Tucson, Arizona for cash consideration of approximately $8,651,000.
The transaction was an acquisition of assets, accounted for under the purchase
method of accounting. Assets acquired included property and equipment, leases,
inventories, prepaid expenses, wholesale business assets and intangible assets.
Of the total purchase price, $6,000,000 was financed with proceeds from a
five-year term loan from the Company's principal bank. One of the Coffee
Plantation stores was closed at the end of August 1997, as anticipated, upon
expiration of the store lease.
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<PAGE>
During the second quarter of 1997, Coffee People took a charge of
$5,500,000 relating to the anticipated closure or sale of the seven stores
located outside its primary Oregon and Arizona markets and for related
restructuring. Such stores consisted of the two stores located in Denver,
Colorado, the three stores located in southern California, and the two stores
located in Chicago, Illinois. Coffee People has endeavored to dispose of the
stores as expeditiously as possible while working to maximize the amount of
store value and to minimize Coffee People's total future cash outlays. As of
December 31, 1997, Coffee People had closed the three stores in southern
California and the two stores in Chicago, Illinois, but continued making
payments on the lease obligations with respect to such five stores. In February
1998, the Company sold two of the stores in southern California, and assigned
the leases with respect to such stores. In April 1998, the Company sold one of
the stores located in Chicago, Illinois, and assigned the lease with respect to
that store. The two stores in Denver, Colorado continue to operate. The Company
continues to work with local real estate brokers to market, re-lease or sublease
the remaining four stores located outside Oregon and Arizona.
The Company's decision to dispose of or close the seven stores was made
because sales at these stores had not developed as anticipated and because the
stores were incurring significant operating losses. The Company believes that by
disposing of these stores, by focusing on its core markets, and by making
substantial reductions in general and administrative overhead expense, it can
return itself to profitability. Due in part to reductions in general and
administrative overhead expense, the Company did achieve profitable results in
the fourth quarter of 1997. The Company was unable, however, to sustain
profitable operations in the first quarter of 1998. There can be no assurance
that the actions taken by the Company to dispose of underperforming stores and
to reduce general and administrative expenses will result in profitable
operations in future periods.
After the closure or disposition of the seven stores outside Oregon and
Arizona, the Company will have a total of 39 stores -- 25 stores in Oregon and
14 in Arizona.
On November 13, 1997, Coffee People entered into a definitive agreement
that provides for the combination of Coffee People with Gloria Jean's Inc., a
wholly-owned subsidiary of The Second Cup Ltd. The merger agreement is subject
to the satisfaction or waiver of certain conditions to closing. Because the
merger will be treated for accounting purposes as a reverse acquisition of
Coffee People by Gloria Jean's, the historical financial statements of Gloria
Jean's will, after consummation of the merger, become the historical financial
statements of Coffee People.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
Revenues. Total revenues increased 76.2% to $5,626,000 for the three months
ended March 31, 1998 from $3,193,000 for the same period in 1997. Retail sales
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<PAGE>
increased 75.4% to $5,544,000 for the 1998 period from $3,160,000 for the 1997
period.
Comparable store sales for the 19 stores open for the full three months
ended March 31, 1998 and 1997 declined 6.8%. Comparable store sales during the
quarter were adversely affected by a 21.3% decline in sales at one of the
Company's stores located in a shopping center that is undergoing redevelopment
and by a 4.9% decline in sales at the Company's stores at Portland International
Airport. Incremental sales from the 16 stores opened or acquired since the first
quarter of 1997 accounted for the entirety of the increase in retail sales.
Wholesale and other sales increased 148.4% to $82,000 for the three months
ended March 31, 1998 from $33,000 for the same period in 1997. The increase was
due to sales from the wholesale business acquired as part of the Coffee
Plantation acquisition. Sales from the Arizona wholesale business accounted for
$50,000 of the total wholesale and other sales for the quarter. The Company
anticipates a reduction in wholesale and other sales due to a change in the
relationship with its primary Arizona customer.
Costs and expenses. Cost of sales and related occupancy expenses as a
percentage of total revenues increased to 49.2% for the three months ended March
31, 1998 from 48.8% for the same period in 1997. The primary components were an
increase of 0.7% in cost of sales and a decrease of 0.3% in occupancy costs.
Store operating expenses as a percentage of retail sales remained
relatively flat at 35.2% for the three months ended March 31, 1997 as compared
to 35.8% for the same period in 1996.
Depreciation and amortization as a percentage of total revenues increased
to 7.5% for the three months ended March 31, 1998 from 6.4% for the same period
in 1996, due primarily to the amortization of goodwill associated with the
acquisition of the Coffee Plantation stores in Arizona.
General and administrative expenses decreased to $608,000 for the three
months ended March 31, 1998 from $717,000 for the same period in 1997 due
primarily to general and administrative cost reduction actions taken in the
third quarter of 1997. As a percentage of total revenues, general and
administrative expenses decreased to 10.8% for the three months ended March 31,
1997 from 22.5% for the same period in 1997.
Average store sales and store contribution margin. For the three months
ended March 31, 1998, the Company's 26 neighborhood and drive-through stores
open for the full period achieved average store sales of $164,000 and an average
store contribution margin of 10.4% compared to $151,000 and 14.3%, respectively,
for the 15 stores open during the full three month period of 1997. The increase
in average store sales is primarily due to the average store sales associated
with the Company's Coffee Plantation stores acquired in May 1997. The decline in
store contribution margins is due both to a decline in the store contribution
margins of the Company's Oregon stores as compared with the first quarter of
1997 as well as the effect of the Company's Coffee Plantation stores in Arizona
which have lower average store contribution margins than the Company's Oregon
stores. The six airport stores and seven kiosk stores open for the full three
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<PAGE>
month period achieved average store sales of $98,000 and an average store
contribution margin of 13.1%, respectively, compared to $112,000 and 15.6% for
six airport stores and one kiosk open for the full three month period of 1997.
The decrease in average store sales for the Company's airport and kiosk stores
was due to the decline in sales at the Company's airport stores and to lower
average sales volumes at the four kiosk and two cart units located in Arizona.
The decrease in store contribution margins at the Company's airport and kiosk
stores is due primarily to higher operating costs and lower unit contributions
at the airport stores.
Other income. Other income as a percentage of total revenues decreased
to 0.6% for the three months ended March 31, 1998 from 3.9% for the same period
in 1997, as a result of reductions in interest-bearing investments due to the
use of resources for operations and expansion.
Interest Expense. Interest expense as a percentage of total revenues
increased to 2.3% for the three months ended March 31, 1998, from 0.5% for the
same period in 1997, as a result of interest incurred on the bank loan obtained
to finance part of the Coffee Plantation acquisition in May 1997.
LIQUIDITY AND CAPITAL RESOURCES
With respect to the remaining four of the seven stores identified for
sale, disposition or closure, Coffee People will continue to make cash outlays
for store losses and for such items as rent, utilities and insurance until such
time as it is able to sell the store or until it can negotiate satisfactory
arrangements with landlords for re-leasing the store premises or for otherwise
terminating the lease. There can be no assurance that Coffee People will be
successful at selling its stores or in negotiating with landlords for the
re-leasing of the store premises or for terminating the leases. If Coffee People
is not successful in these efforts, such cash outlays could continue for an
indeterminate period during the term of the store leases. Coffee People is
working with local real estate brokers to market, re-lease or sublease the
remaining stores outside of Oregon and Arizona. The lease terms for the four
remaining stores range from six to nine years with expiration dates ranging from
August 2003 through May 2007. Minimum future rental payments as of March 31,
1998 under the four remaining leases total $1,770,000.
Coffee People suspended its plans to open or acquire new stores, pending
the disposition of its stores outside its core Oregon and Arizona markets,
although Coffee People has committed to build an additional unit at Portland
International Airport during the second quarter of 1998. Upon consummation of
the merger, the Company expects to resume development activities in its core
markets of Oregon and Arizona.
As of March 31, 1998, Coffee People had $2,597,000 in cash and cash
equivalents.
The Company had a working capital deficit of $718,000 as of March 31, 1998,
as compared to a working capital deficit of $526,000 at December 31, 1997.
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<PAGE>
For the three months ended March 31, 1998 and 1997, cash provided by
operating activities was $45,000, and $156,000, respectively.
For the three months ended March 31, 1998, Coffee People had net cash
provided by financing activities of $79,000, as compared to net cash used by
financing activities of $36,000 for the three months ended March 31, 1997.
Coffee People has a line of credit with its primary bank providing for
borrowings through August 1, 1998 of up to $500,000. Borrowings bear interest at
the rate of 0.5% over the bank's prime rate (9.0% as of March 31, 1998) and are
secured by substantially all of Coffee People's assets, including accounts
receivable, inventories, trade fixtures and equipment. As of March 31, 1998,
borrowings of $400,000 were outstanding under the line of credit. In addition,
the sum of $73,000 of the line was reserved for a letter of credit dated August
1, 1997. 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 March 31, 1997, the Company was in compliance with all such
debt covenants. The bank loan agreement also contains a provision which requires
the bank's consent to any combination in which there is a change in control of
the Company. As of the date of this report, the bank has not consented to the
merger with Gloria Jean's; however, the Company believes the bank's consent is
forthcoming.
For the three months ended March 31, 1998, and 1997, net cash used in
investing activities was $72,000 and $1,994,000, respectively. The primary use
of net cash used in investing activities during the first quarter of 1998 was
capital expenditures for improvements to existing stores. The primary use of net
cash used in investing activities during the first quarter of 1997 was for the
development of new retail stores.
Coffee People believes that anticipated cash flow from operations, existing
cash and bank debt will be sufficient to meet the Company's cash requirements
through the end of 1998.
NEW ACCOUNTING STANDARDS
Commencing with the first quarter of 1998, the Company has adopted the
accounting principles prescribed by Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income." The Company did not have any
"comprehensive income" items during the three-month period ended March 31, 1998
which would require reporting pursuant to SFAS 130.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
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<PAGE>
No current Reports on Form 8-K were filed during the period
covered by this report.
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<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Coffee People, Inc.
/s/ Kenneth B. Ross
-----------------------
Kenneth B. Ross
Chief Financial Officer
Signing on behalf of the registrant and
as principal financial officer
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COFFEE
PEOPLE, INC. QUARTERLY REPORT ON FORM 10-QSB AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<PERIOD-END> MAR-31-1998
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