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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
for the fiscal year ended December 30, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-32233
PEET'S COFFEE & TEA, INC.
(Exact Name of Registrant as Specified in Its Charter)
Washington 91-0863396
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1400 Park Avenue
Emeryville, California 94608-3520
(Address of Principal Executive Offices)(Zip Code)
(510) 594-2100
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
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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. [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not 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-K or any
amendment to this Form 10-K. [_]
The approximate aggregate market value of the voting stock held by
non-affiliates of the registrant based on the closing price of the Common Stock
on $14.79 as reported by the Nasdaq National Market, as of February 28, 2002
was $80,537,525. Shares of Common Stock held by each officer and director and
each person known to the Company to hold 5% or more of the outstanding Common
Stock have been excluded as such persons may be deemed to be affiliates of the
Company. Such determination of affiliate status is not necessarily a conclusive
determination for other purposes. As of February 28, 2002, 8,486,204 shares of
registrant's Common Stock were outstanding.
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TABLE OF CONTENTS
Page
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PART I
Item 1. Business................................................................................. 1
Item 2. Properties............................................................................... 6
Item 3. Legal Proceedings........................................................................ 6
Item 4. Submission of Matters to a Vote of Security Holders...................................... 6
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.................... 7
Item 6. Selected Financial Data.................................................................. 7
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.... 9
Item 7A. Quantitative and Qualitative Disclosure About Market Risk................................ 18
Item 8. Financial Statements and Supplementary Data.............................................. 26
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure..... 26
PART III
Item 10. Directors and Executive Officers of the Registrant....................................... 27
Item 11. Executive Compensation................................................................... 29
Item 12. Security Ownership of Certain Beneficial Owners and Management........................... 33
Item 13. Certain Relationships and Related Transactions........................................... 35
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................... 36
Some of the matters discussed under the captions "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operation," "Business" and elsewhere in this report include forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934. We have based these forward-looking statements on our current
expectations and assumptions about future events, including, among other things:
. Implementing our business strategy;
. Attracting and retaining new customers;
. Obtaining and expanding our market presence in new geographic regions;
. The availability and cost of high quality Arabica coffee beans;
. Consumers tastes and preferences; and
. Competition in our market.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "could," "predict," "potential," "continue,"
"expect," "anticipate," "future," "intend," "plan," "believe," "estimate" and
similar expressions (or the negative of such expressions). These statements are
based on our current beliefs, expectations and assumptions and are subject to a
number of risks and uncertainties. Actual results, levels of activity,
performance, achievements and events may vary significantly from those implied
by the forward-looking statements. A description of risks that could cause our
results to vary appears under the caption "Risk Factors" and elsewhere in this
report.
PART I
Item 1. Business
Peet's is a specialty coffee roaster and marketer of branded fresh roasted
whole bean coffee sold under strict freshness standards. We sell our fresh
roasted coffee, hand selected tea and related items in multiple channels of
distribution including specialty grocery and gourmet food stores, online and
mail order, office, restaurant and food service accounts and 60
company-operated stores in four states.
We believe that roasted coffee is a perishable product and we pursue
distribution channels that are consistent with our strict freshness standards.
For instance, our distribution to specialty grocery and gourmet food accounts
emphasizes the use of an existing network of distributors who deliver fresh
goods to our targeted accounts. Our online and mail order customers are shipped
coffee directly from our facility and we roast to order. This method ensures
that customers receive coffee within days of roasting.
We are expanding Peet's from a regional retailer that operates its own
outlets into a national coffee brand available through multiple channels of
distribution. We extended our retail presence to Southern California in 1997,
Chicago and Portland in 1998 and Boston in 1999. We signed our first office
coffee distribution agreement in 1997 and have since added a number of
restaurant and office coffee distributors in select markets. We added online
ordering capability to our website in 1997 to complement our existing mail
order business and have since invested in marketing programs designed to
support our online and mail order channel. In 1998, we initiated a strategic
expansion into specialty grocery and gourmet food stores and we expanded this
program significantly in 2000. Since 1999, we have expanded our distribution to
food service accounts. In 2001, we continued to expand our reach into specialty
groceries and gourmet food stores by increasing the number of stores from 25 to
over 130 and we entered into an agreement to distribute our coffee in Japan.
Our expansion strategy emphasizes disciplined growth and enhancement of our
brand's image and quality reputation.
1
We believe that the combination of our established brand, a differentiated
product positioning based on our quality and freshness standards and our
strategic expansion into select channels of distribution creates significant
opportunities for growth.
History
Alfred Peet opened the first Peet's Coffee store in 1966. The original store
on Vine Street is still one of our most popular and successful locations. Mr.
Peet opened his first store with a simple business plan: he would roast coffee
in the store every day, use a deep-roasting process that he learned in his
travels and from his family, who were in the coffee business, and give
customers of his freshly roasted beans a free small cup of coffee with their
purchase. Peet's soon became the coffee of choice among the food conscious
residents of the Berkeley "gourmet ghetto." As customers left the San Francisco
Bay Area, they would often ask for Peet's coffee to be mailed to them in cities
throughout the United States and the world.
We started as Starbuck's Coffee Company, a Washington corporation, in 1971.
By the 1980s, we owned and operated several retail stores and a coffee roasting
plant in Seattle. In 1984, we purchased Peet's Coffee and Tea, Inc., the
successor to Alfred Peet's business, from Sal Bonavita, who purchased the
business from Alfred Peet in 1979. To consolidate our operations in the San
Francisco Bay Area, we sold our Seattle-based assets, including the Starbuck's
brand, the roasting plant and several retail stores, to Il Giornale Coffee
Company in 1987 and shifted our focus to Peet's.
Our Coffee
Coffee Beans
Only high quality Arabica coffee beans can produce the flavor and richness
of Peet's coffee. With our reputation that has been built over 35 years, we
have gained access to some of the highest quality green coffee beans from the
finest estates and growing regions around the world. We have built long term
relationships with growers and brokers to ensure a steady supply of green
coffee beans. In 2001, we purchased over half of our green coffee beans through
one broker.
Coffee is an agricultural crop that undergoes price fluctuation and quality
differences depending on weather, economic and political conditions in coffee
producing countries. High quality Arabica coffee beans are generally more
expensive than Robusta beans. As a result, in addition to the above factors,
the price, quality and availability of green coffee beans also depend on our
relationships with coffee brokers, exporters and growers.
At Peet's, we sample every lot of coffee before and after we make a
purchase. This process protects our quality standard, and provides our buyers
with the knowledge to ensure that every coffee and blend can have a consistent
flavor. We are occasionally presented with opportunities to purchase unique and
special coffees based on our relationships and reputation.
We generally turn our inventory of green coffee beans two to three times per
year. Unlike roasted coffee beans, green coffee beans are not highly
perishable. We generally carry approximately $4 million to $8 million worth of
green coffee beans in our inventory. If Arabica coffee beans from a region
become unavailable or prohibitively expensive, we may be forced to discontinue
particular coffee types and blends or substitute coffee beans from other
regions in our blends. From time to time, we mitigate the risks associated by
fluctuations in coffee prices by entering into fixed price commitments and
hedging agreements for a portion of our green coffee bean requirements.
Our Roasting Method
Our roasting method was first developed by Alfred Peet and perfected by our
talented and skilled roasting personnel. We roast by hand in small batches, and
we rely on the skills and training of each roaster to maximize
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the flavor and potential in our beans. Our roasters undergo a two year
apprenticeship program to learn our roasting method and to gain the skills
necessary to roast coffee at Peet's.
Coffee Types and Blends
Beyond sourcing and roasting, Peet's has developed a reputation for expert
coffee blending. Our blends, such as Major Dickason's Blend, are well regarded
by our customers for their uniqueness, consistency and special flavor
characteristics. We sell approximately 32 types of coffee as regular menu
items. Included in this figure are approximately 21 blends with the balance
being single origin coffees from countries such as Colombia, Guatemala and
Kenya. In 2001, we introduced a line of high-end reserve coffees, such as Kona,
Jamaica Blue Mountain, Aged Moka Java, and JR Reserve Blend. Peet's is active
in seeking out, roasting and selling unique special lot and one-time coffees.
On average, we offer four to six such coffees every year.
Sales and Distributor Relationships
Peet's has developed a staff of nine sales professionals to support our
specialty sales business. These sales and account managers make sales calls to
potential and existing accounts and manage our distributor network.
Additionally, we have established relationships with office, restaurant and
food service distributors to expand our account base in select markets. These
distributors have their own sales and account management resources. We expect
to hire additional employees within the sales and account manager group as we
continue to grow this segment of our business.
Customers and Marketing
Peet's marketing and distribution strategies are designed to appeal to a
customer base that falls within one of the more economically attractive
demographic groups in the United States. Based on customer surveys we
conducted, we believe our customers tend to be over 35 years in age and
well-educated with an average household income of over $50,000 per year. We
have a regional skew to our customer base that mimics the geographic
development of the specialty coffee industry as well as our brand development.
Our customers are concentrated on the west and east coasts and in select
metropolitan areas in the central United States.
Tea, Food and Merchandise
Peet's offers a line of hand selected whole leaf and bagged tea. Our quality
standards for tea are very high. We purchase tea directly from importers and
brokers and store and pack the tea at our facility in Emeryville. We offer a
limited line of specialty food items, such as jellies, jams and candies. These
products are carefully selected for quality and uniqueness.
Our merchandise program consists of items such as brewing equipment for
coffee and tea, paper filters and brewing accessories and branded and
non-branded cups, saucers, travel mugs and serveware. We do not emphasize these
items, but we carry them in retail stores and offer them through online and
mail order as a means to reinforce our authenticity in coffee and tea.
Competitive Positioning
The specialty coffee market can be characterized as highly fragmented. Our
primary competitors in whole bean specialty coffee sales include Gevalia (Kraft
Foods), Green Mountain Coffee, Illy Caffe, Millstone (Procter & Gamble),
Seattle's Best (AFC Enterprises) and Starbucks. There are numerous smaller,
regional brands that also compete in this category. We also compete indirectly
against all other coffee brands on the market. A number of nationwide coffee
marketers, such as Kraft Foods, Procter & Gamble and Nestle, are distributing
premium coffee brands in supermarkets. These premium coffee brands may serve as
substitutes for our whole bean coffee.
3
In addition to competing with other distributors of whole bean coffee, we
compete with retailers of prepared beverages, including coffee house chains,
particularly Starbucks, numerous convenience stores, restaurants, coffee shops
and street vendors.
Despite competing in a fragmented category, increased consumer demand has
resulted in specialty coffee brands being established across multiple
distribution channels. Several competitors are aggressive in obtaining
distribution in specialty grocery and gourmet food stores, and in office,
restaurant and food service locations. We have only recently begun to penetrate
these channels.
We believe that our customers choose among specialty coffee brands based
upon quality, variety, convenience, and to a lesser extent, price. Although
consumers may differentiate coffee brands based on freshness (as an element of
coffee quality), to our knowledge, few significant competitors focus on product
freshness and roast-dating in the same manner as Peet's. It is a common
industry practice to use a "sell by" date for pre-packaged beans and to store
roasted beans in open-air bulk bins. Therefore, the key benefit of freshness
and the perishable nature of coffee is being largely overlooked. We believe
that our market share in the specialty category is based on a solidly
differentiated position built on our freshness standards and artisan-roasting
style. Because of the fragmented nature of the specialty coffee market, we
cannot accurately estimate our market share. However, many of our existing
competitors have significantly greater financial, marketing and operating
resources than us.
Our roasted coffee is priced in tiers. Our regular menu coffees are priced
within a range of $8.95 to $17.95 per pound. Our line of high-end reserve
coffees, which we introduced in 2001, is priced between $49.90 and $79.90 per
pound. We believe our higher quality and freshness standards allow us to charge
a higher price for our coffee products.
Seasonality
Our business is subject to seasonal fluctuations. Significant portions of
our profits are realized during the fourth quarter of our fiscal year, which
includes the December holiday season.
Intellectual Property
We regard intellectual property and other proprietary rights as important to
our success. We own several trademarks and service marks that have been
registered with the United States Patent and Trademark Office, including
Peet's, Peet's Coffee & Tea, peets.com, Blend 101, Pride of the Port, Maduro
Blend, Top Blend, Major Dickason's Blend, Sierra Dorada Blend and Garuda Blend.
We also have registered trademarks on our stylized logo. In addition, we have
applications pending with the United States Patent and Trademark Office for a
number of additional marks, including JR Reserve Blend, Gaia Organic Blend, and
Pumphrey's Blend.
We own registered trademarks for our name and logo in Australia, Canada,
Chile, China, the European Community, Hong Kong, Japan, Paraguay, Singapore,
South Korea, Taiwan, and Thailand. We have filed additional applications for
trademark protection in Argentina, Brazil, and the Philippines. In addition to
peets.com and coffee.com, we own several other domain names relating to coffee,
Peet's and our roasting process.
In addition to registered and pending trademarks, we consider the packaging
for our coffee beans (consisting of dark brown coloring with African-style
motif and lettering with a white band running around the lower quarter of the
bag) and the design of the interior of our stores (consisting of dark wood
fixtures, classic lighting, granite countertops and understated color) to be
strong identifiers of our brand. Although we consider our packaging and store
design to be essential to our brand identity, we have not applied to register
these trademarks and trade dress, and thus cannot rely on the legal protections
afforded by trademark registration.
4
Our ability to differentiate our brand from those of our competitors
depends, in part, on the strength and enforcement of our trademarks. We must
constantly protect against any infringement by competitors. If a competitor
infringes on our trademark rights, we may have to litigate to protect our
rights, in which case, we may incur significant expenses and divert significant
attention from our business operations.
Information Systems
The information systems installed at Peet's are used to manage our
operations and increase the productivity of our workforce. We have recently
implemented an advanced point-of-sale system to increase store productivity,
provide a higher level of service to our customers and maintain timely
information for performance evaluation. Our new registers have touch screen
components and full point-of-sale capability. We also operate a Peet's debit
card system in most retail stores. These cards carry cash balances and may be
used in lieu of cash at our retail locations. In addition, we are currently in
the process of installing a new human resource and payroll system.
Our online and mail order system has been customized to allow us to respond
and adapt quickly to customer and marketing demands. We have installed several
new software tools to help us analyze customer information.
Our website is hosted at AboveNet in San Jose, California. All website
applications are built on Microsoft ASP with in-house development. We offer
full-functioning e-commerce and our site is integrated with our call center for
access to orders placed at both locations. Online delivery confirmation is
provided by United Parcel Service and United States Postal Service. Our
peets.com site contains several customer-centered functions such as Express Buy
(which stores customer-specific lists of favorite coffee and items), multiple
''ship-to'' capability on a single bill and extensive coffee search and product
matching. Website and call center system functionality are designed to
accommodate the need for customers to place repeat orders or automatic orders
delivered on a pre-set schedule. We designed our website to provide fast, easy
and effective operation when navigating and shopping on our site. We have
dedicated information technology employees and marketing staffers for website
maintenance, improvement, development and performance.
Employees
As of March 1, 2002, Peet's employed a workforce of 1,455 people,
approximately 191 of whom are considered full-time employees. None of our
employees are represented by a labor union. Peet's considers its relationship
with its employees to be good. Since 1979, Peet's has provided full benefits to
all employees who work at least 21 hours per week. We continue to offer
competitive benefits packages to attract and retain valuable employees.
Government Regulation
Our coffee roasting operations and our retail stores are subject to various
governmental laws, regulations, and licenses relating to customs, health and
safety, building and land use, and environmental protection. Our roasting
facility is subject to state and local air-quality and emissions regulation. If
we encounter difficulties in obtaining any necessary licenses or complying with
these laws and regulations, then:
. The opening of new retail locations could be delayed;
. The operation of existing retail locations or our coffee roasting
operations could be interrupted; or
. Our product offerings could be limited.
We believe that we are in compliance in all material respects with all such
laws and regulations and that we have obtained all material licenses that are
required for the operation of our business. We are not aware of any
environmental regulations that have or that we believe will have a material
adverse effect on our operations.
5
Item 2. Properties
Peet's headquarters are located in Emeryville, California, where we lease
approximately 66,000 square feet of office, production and storage space,
including roasting and direct delivery fulfillment facilities. Within these
facilities, we have 15,000 square feet devoted to general corporate and retail
overhead and a call center for the direct delivery business. Our lease expires
in 2005 and we have an option to extend the lease for an additional ten years.
We operate 60 retail stores in four states. Our retail locations are all
company operated in leased facilities. Our store size averages 1,500 square
feet. Our stores are typically located in urban neighborhoods, suburban
shopping centers (usually consisting of grocery, specialty and service stores)
and high-traffic streets.
The following table lists the number of retail stores we have in each
location as of March 1, 2002:
Markets Stores
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San Francisco Bay Area, California 33
San Jose, California.............. 3
Sacramento, California............ 2
Santa Cruz, California............ 1
Santa Barbara, California......... 1
Greater Los Angeles, California... 7
San Diego, California............. 2
Orange County, California......... 1
Chicago, Illinois................. 2
Portland, Oregon.................. 2
Boston, Massachusetts............. 6
--
Total.......................... 60
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Item 3. Legal Proceedings
In the ordinary course of business, we may from time to time become involved
in certain legal proceedings. As of the date of this report, we are not a party
to any pending material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of our security holders during the
quarter ended December 30, 2001.
6
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Market for the Registrant's Stock
The Company's common stock commenced regular trading on the Nasdaq National
Market under the symbol "PEET" on January 25, 2001. Prior to that time, there
was no public market for the Company's common stock. The following table sets
forth, for the periods indicated, the high and low closing prices for our
common stock as reported on the Nasdaq National Market since January 25, 2001.
High Low
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Fiscal Year Ended December 30, 2001
First Quarter (commencing January 25, 2001). $16.125 $6.125
Second Quarter.............................. $10.000 $7.250
Third Quarter............................... $ 9.060 $6.180
Fourth Quarter.............................. $11.500 $7.350
As of March 26, 2002, there were approximately 213 registered holders of
record of the Company's common stock. On March 26, 2002, the last sale price
reported on the Nasdaq National Market System for the common stock was $12.77
per share.
Dividend Policy
We have not declared or paid any dividends on our capital stock since 1990.
We expect to retain any future earnings to fund the development and expansion
our business. Therefore, we do not anticipate paying cash dividends on our
common stock in the foreseeable future. Our current credit facility restricts
our ability to pay dividends. See "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources" for additional information concerning our credit facility.
Use of Proceeds from Sales of Registered Securities
We completed our initial public offering of our common stock in January and
February 2001 pursuant to a Registration Statement on Form S-1 initially filed
on October 13, 2000 (File No. 333-47597), as subsequently amended (the
"Registration Statement"). As of March 1, 2002, $17.4 million of the net
proceeds from the offering had been used for debt reduction, and the remainder
of the net proceeds was invested in short-term, interest-bearing, investment
grade securities.
Item 6. Selected Consolidated Financial Data
The table below shows selected consolidated financial data for our last five
years. Our fiscal year is based on a 52 or 53 week year and ends on the Sunday
closest to the last day in December. Historical results are not necessarily
indicative of future results.
7
The following selected consolidated financial data should be read in
conjunction with our consolidated financial statements and related notes and
"Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this report.
Selected Consolidated Financial Data
(in thousands, except per share data)
Year
-------------------------------------------
1997 1998 1999 2000 2001
------- ------- ------- ------- -------
Statement of Operations Data:
Net revenue............................................... $51,720 $59,787 $69,059 $84,302 $94,400
Cost of sales and related occupancy expenses.............. 27,518 29,851 33,175 40,173 44,935
Operating expenses........................................ 14,767 17,969 21,902 27,853 30,437
Marketing and advertising expenses........................ 2,278 2,176 3,491 6,069 4,812
General and administrative expenses....................... 3,961 5,961 6,230 6,595 6,845
Depreciation and amortization expenses.................... 2,210 2,711 3,404 4,576 5,038
------- ------- ------- ------- -------
Income (loss) from operations............................. 986 1,119 857 (964) 2,333
Interest expense, net..................................... 396 709 985 1,907 429
------- ------- ------- ------- -------
Income (loss) before income taxes......................... 590 410 (128) (2,871) 1,904
Income tax provision (benefit)............................ 249 242 16 (596) 749
------- ------- ------- ------- -------
Net income (loss)...................................... $ 341 $ 168 $ (144) $(2,275) $ 1,155
======= ======= ======= ======= =======
Net income (loss) per share:
Basic.................................................. $ 0.08 $ 0.04 $ (0.03) $ (0.50) $ 0.15
======= ======= ======= ======= =======
Diluted................................................ $ 0.06 $ 0.03 $ (0.03) $ (0.50) $ 0.14
======= ======= ======= ======= =======
Shares used in calculation of net income (loss) per share:
Basic.................................................. 4,348 4,397 4,489 4,515 7,941
======= ======= ======= ======= =======
Diluted................................................ 5,448 5,710 4,489 4,515 8,212
======= ======= ======= ======= =======
Balance Sheet Data:
Cash and cash equivalents................................. $ 888 $ 873 $ 1,074 $ 1,598 $ 2,718
Working capital (deficit)................................. (2,301) (1,333) (5,486) (2,853) 3,315
Total assets.............................................. 25,724 29,864 34,650 39,721 41,409
Borrowings under line of credit........................... 2,871 4,472 5,600 4,246 1,968
Current portion of long-term borrowings................... 3,470 1,701 2,816 2,037 513
Long-term borrowings, less current portion................ 3,412 5,962 7,240 14,544 895
Total shareholders' equity................................ 10,318 10,791 11,191 9,167 28,770
8
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
You should read the following discussion and analysis in conjunction with
our consolidated financial statements and related notes included elsewhere in
this report. Except for historical information, the discussion in this report
contains certain forward-looking statements within the meaning of Section 21E
of the Securities Exchange Act of 1934 that involve risks and uncertainties. We
have based these forward-looking statements on our current expectations and
assumptions about future events, including, among other things:
. Implementing our business strategy;
. Attracting and retaining new customers;
. Obtaining and expanding our market presence in new geographic regions;
. The availability and cost of high quality Arabica coffee beans;
. Consumers tastes and preferences; and
. Competition in our market.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "could," "predict," "potential," "continue,"
"expect," "anticipate," "future," "intend," "plan," "believe," "estimate" and
similar expressions (or the negative of such expressions). These statements are
based on our current beliefs, expectations and assumptions and are subject to a
number of risks and uncertainties. Actual results, levels of activity,
performance, achievements and events may vary significantly from those implied
by the forward-looking statements. A description of risks that could cause our
results to vary appears under the caption "Risk Factors" and elsewhere in this
report.
Company Overview and Industry Outlook
Peet's is a specialty coffee roaster and marketer of branded fresh roasted
whole bean coffee sold through multiple channels of distribution. Since the
founding of our business in 1966, we have established a customer base and brand
recognition in California. Our national expansion strategy is based on the sale
of whole bean coffee in multiple channels of distribution. While we intend to
continue the sale of whole bean coffee through strategically located retail
stores, we expect revenue in our other distribution channels, namely specialty
grocery and gourmet food stores, online and mail order and office, restaurant
and food service accounts, to increase as a percent of our revenue. We are also
expanding internationally through strategic relationships.
We expect the specialty coffee industry to continue to grow. We believe that
this growth will be fueled by continued consumer interest in high quality
coffee and related products.
Our operations are vertically integrated. We purchase Arabica coffee beans
from countries around the world, apply our artisan-roasting techniques and ship
fresh coffee daily to our stores and customers within 24 hours of roasting.
Control of purchasing, roasting, packaging and distribution of our coffee
allows us to maintain our commitment to freshness, is cost effective and
enhances our margins and profit potential.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the appropriate application of certain
accounting policies, many of which require us to make estimates and assumptions
about future events and their impact on amounts reported in our financial
statements and related notes. Since future events and their impact cannot be
determined with certainty, the actual results will inevitably differ from our
estimates. Such differences could be material to the financial statements.
We believe our application of accounting policies, and the estimates
inherently required therein, are reasonable. These accounting policies and
estimates are constantly reevaluated, and adjustments are made when
9
facts and circumstances dictate a change. Historically, we have found our
application of accounting policies to be appropriate, and actual results have
not differed materially from those determined using necessary estimates.
Our accounting policies are more fully described in Note 2 in the "Notes to
the Consolidated Financial Statements," included elsewhere in this report. We
have identified the following critical accounting policies:
. Inventory. Raw materials consist primarily of green bean coffee and
finished goods include roasted coffee, tea, accessory products, spices,
and packaged foods. All products are valued at the lower of cost or
market using the first-in, first-out method, except green bean and
roasted coffee, which is valued at the average cost. We continually
evaluate the composition of our coffee related merchandise and mark down
such inventory as needed. Our historical inventory write-offs have been
immaterial.
. Long-lived assets. In evaluating the fair value and future benefits of
long-lived assets, we perform an analysis of the anticipated undiscounted
future net cash flows of the related long-lived asset and reduce their
carrying value by the excess, if any, of the result of such calculation.
We believe at this time that the long-lived assets' carrying values and
useful lives continue to be appropriate.
. Income taxes. We have significant federal and state net operating loss
carryforwards and charitable contribution carryforwards. The utilization
of these carryforwards is dependent on future income. We have established
a valuation allowance for the portion of the carryforwards that we do not
expect to utilize. Although we believe the valuation allowance is
appropriate, if future taxable income were to differ significantly from
the amounts estimated, the valuation allowance would need to be adjusted.
. Hedge accounting. We use coffee futures and options to hedge price
increases in price-to-be-fixed coffee purchase commitments and
anticipated coffee purchases. These derivative instruments qualify for
hedge accounting under Statement of Financial Accounting Standards (SFAS)
No. 133, "Accounting for Derivative Instruments and Hedging Activities."
Hedge accounting is permitted if the hedging relationship is expected to
be highly effective. Effectiveness is determined by how closely the
changes in the fair value of the derivative instrument offset the changes
in the fair value of the hedged item. If the derivative is determined to
qualify for hedge accounting, the effective portion of the change in the
fair value of the derivative instrument is recorded in other
comprehensive income and recognized in earnings when the related hedged
item is sold. The ineffective portion of the change in the fair value of
the derivative instrument is recorded directly to earnings. If these
derivative instruments do not qualify for hedge accounting, we would have
to record the changes in the fair value of the derivative instruments
directly to earnings. See "Item 7A. Quantitative and Qualitative
Disclosures about Market Risk" and Note 11 in the "Notes to Consolidated
Financial Statements," included elsewhere in this report.
We have also chosen certain accounting policies when options are available,
including the intrinsic value method or APB Opinion No. 25, "Accounting for
Stock Issued to Employees," to account for our stock option awards. These
accounting policies are applied consistently for all years presented. Our
operating results would be affected if other alternatives were used.
Information about the impact on our operating results of using the alternative
of SFAS No. 123, "Accounting for Stock-Based Compensation," is included in Note
9 of the "Notes to Consolidated Financial Statements," included elsewhere in
this report.
Business Segments
Our coffee and related items are sold through multiple channels of
distribution that are considered separate segments under Statement of Financial
Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and
Related Information." These channels provide broad market exposure to potential
purchasers of fresh roasted whole bean coffee. We sell coffee beans and related
items through three reportable segments:
. Our retail stores;
. Online and mail order; and
. Specialty sales, which consist of sales to specialty grocery and gourmet
food stores, restaurant and food service companies, and office accounts.
10
We intend to increase sales by focusing on expansion in specialty sales, as
well as through continued growth of our online and mail order channel. Although
our expansion into new distribution channels is accelerating, we believe it is
disciplined and focused, only penetrating new markets and channels that we
believe can support the sale of specialty coffee. We also intend to open a
limited number of new stores in strategic locations that meet our demographic
profile, and explore potential opportunities for franchising and licensing in
international markets. Our focus on specialty sales and online and mail order
is driven by the higher net margins and lower capital expense in those
segments. In 2001, we derived approximately 21% of our revenue from specialty
sales and online and mail order segments. Our long term objective is to
generate approximately half of our revenue from the specialty sales and online
and mail order channels.
Business Categories
In addition to our reportable segments, we measure our business by
monitoring the volume and revenue growth of two distinct business categories:
. Whole bean coffee and related products; and
. Beverages and pastries.
We believe these business categories are useful in understanding our results
of operations for the periods presented because we operate our stores and
record sales through these two categories. Our stores are primarily designed to
facilitate the sale of whole bean coffee. The format of our stores replicates
that of a specialty grocer. Beans are scooped from under the counter bins,
weighed on counter top scales and hand packed into branded bags. In addition,
each store has a beverage bar that is dedicated to the sale of prepared
beverages and pastries.
In addition, our two business categories within a store mature at different
rates. When we open a store, the initial sales are primarily beverage and
pastry related. The distance a consumer will travel, or trade area, for
beverages and pastries is short (usually one to three miles), representing a
convenience purchase. Consequently, the beverage and pastry business matures
rapidly. The trade area for whole bean coffee is much larger (usually three to
five miles), representing destination shopping. Consequently, whole bean sales
from stores mature more slowly (typically three to five years). Therefore,
sales at newer stores have a much higher beverage and pastry component and
shift to a higher whole bean percentage as the store matures. The dynamics of
opening many new stores over the past few years have resulted in a higher
beverage and pastry percentage within our net revenue.
The following chart demonstrates our business category mix for retail store
sales in 2001, expressed as a percent of retail revenue.
Open less than Open 2 to 5 Open more
2 years years than 5 years
-------------- ----------- ------------
Whole bean coffee and related products...... 38.6% 43.4% 53.5%
Beverages and pastries...................... 61.4% 56.6% 46.5%
Results of Operations
The following discussion on results of operations should be read in
conjunction with "Item 6. Selected Consolidated Financial Data," the
consolidated financial statements and accompanying notes and the other
financial data included elsewhere in this report. Our fiscal year is based on a
52 or 53 week year. The fiscal year ends on the Sunday closest to the last day
of December.
11
The following table sets forth certain financial data for the periods
indicated.
Year
---------------------
1999 2000 2001
----- ----- -----
Statement of operations data as a percent of net revenue:
Net revenue.............................................. 100.0 % 100.0 % 100.0%
Cost of sales and related occupancy expenses............. 48.0 47.7 47.6
Operating expenses....................................... 31.7 33.0 32.2
Marketing and advertising expenses....................... 5.1 7.2 5.1
General and administrative expenses...................... 9.0 7.8 7.3
Depreciation and amortization expenses................... 5.0 5.4 5.3
----- ----- -----
Income (loss) from operations............................ 1.2 (1.1) 2.5
Interest expense, net.................................... 1.4 2.3 0.5
----- ----- -----
Income (loss) before income taxes........................ (0.2) (3.4) 2.0
Income tax provision (benefit)........................... 0.0 (0.7) 0.8
----- ----- -----
Net Income (loss)........................................ (0.2)% (2.7)% 1.2%
===== ===== =====
Percent of net revenue by business segment:
Retail stores............................................ 82.8 % 81.0 % 79.5%
Online and mail order.................................... 13.6 12.5 12.4
Specialty sales.......................................... 3.6 6.5 8.1
Percent of net revenue by business category:
Whole bean coffee and related products................... 60.5 % 59.7 % 59.3%
Beverages and pastries................................... 39.5 40.3 40.7
Operating expenses as a percent of segment revenue:
Retail stores............................................ 35.7 % 36.5 % 35.3%
Online and mail order.................................... 13.5 19.8 18.1
Specialty sales.......................................... 9.1 15.3 23.9
Percent increase (decrease) from prior year:
Net revenue.............................................. 22.1 % 12.0%
Retail stores......................................... 19.5 9.9
Online and mail order................................. 11.8 11.0
Specialty sales....................................... 119.4 40.5
Cost of sales and related occupancy expenses............. 21.1 11.9
Operating expenses....................................... 27.2 9.3
Marketing and advertising expenses....................... 73.8 (20.7)
General and administrative expenses...................... 5.9 3.8
Depreciation and amortization expenses................... 34.4 10.1
Selected operating data:
Number of retail stores in operation:
Beginning of the period............................... 43 53 58
Store openings........................................ 11 5 2
Store closure......................................... 1 0 0
End of the period..................................... 53 58 60
Pounds of whole bean coffee sold (in thousands).......... 3,546 4,213 4,541
12
2001 Compared with 2000
Net revenue
Net revenue for 2001 increased for all three segments and both business
categories as compared to 2000. During 2001, we continued our strategy of
selling through multiple channels of distribution. A key element of our
strategy involves increasing the percentage of revenue from sales of whole bean
coffee and related products, which have a higher net margin than beverages and
pastries. We expect that an increase in the percentage of whole bean and
related product revenue will occur over the long-term due to the slow
maturation of whole bean coffee sales at newer retail stores and the growth of
online and mail order and specialty sales segments. Thus, revenue derived from
the sale of whole bean coffee and related products as a percent of net revenue
actually decreased slightly in 2001 from 59.7% to 59.3%, primarily as a result
of the opening of 18 retail stores over the past three years.
In the retail segment, we continued to increase revenue primarily as a
result of increased sales in existing stores, price increases on whole bean
coffee and beverages and pastries effective in December 2000, the opening of
new retail stores and the introduction of a line of high-end reserve coffees.
During 2001, we opened two new stores compared to five stores opened in 2000.
One was in Studio City, Southern California, and the other was in Wellesley,
Massachusetts. We opened fewer new stores in 2001 because the cost and
availability of real estate was less attractive during 2000 and the first half
of 2001.
The following table sets forth the sources of revenue increases in 2001 by
business category for the retail segment (in millions).
Increased volume and change in mix of whole bean coffee. $1.5
Price increase in December 2000......................... 0.8
----
Total existing stores................................ 2.3
Total new stores..................................... 0.4
----
Total whole bean coffee and related products..... $2.7
====
Increased volume of beverages and pastries.............. $2.2
Price increase in December 2000......................... 1.3
----
Total existing stores................................ 3.5
Total new stores..................................... 0.5
----
Total beverages and pastries..................... $4.0
====
In the online and mail order segment, revenue increased primarily as a
result of selected customer acquisition efforts and customer retention
programs. During 2001, our active customers, or those who had ordered at least
once during the year, increased 13.2% to 86,000 from 76,000 in 2000.
During 2001, we continued our sales initiatives in the specialty sales
segment and increased revenue for that segment by 40.5%. The $2.2 million
increase consisted of $1.5 million in incremental sales to specialty groceries
and gourmet food stores, a $0.6 million increase in sales to restaurants and
food service companies, and $0.1 million in additional sales to office
accounts. We increased the number of specialty grocery and gourmet food stores
from 25 in 2000 to over 130 in 2001, including multi-location chains such as
Von's Pavilion, Beverages & more! and Larry's Markets. In the restaurant and
food service area, we entered into agreements with companies such as The
Wolfgang Puck Fine Dining and Catering Group and Anton Airfoods.
13
Cost of sales and related occupancy expenses
Cost of sales and related occupancy expenses consist of product costs,
including hedging costs, manufacturing costs, rent and other occupancy costs.
Primarily as a result of increased net revenue and the addition of two new
stores, cost of sales increased by 11.9% in 2001. The lower cost of green bean
coffee was partially offset by higher hedging costs. Cost of sales actually
decreased as a percent of net revenue mainly because of:
. The December 2000 price increase, which resulted in a higher average sale
at our retail store beverage bars and a higher price per pound of whole
bean coffee purchased at our retail stores and by online and mail order
customers;
. Sales of high-end reserve coffees, which have a higher margin than
regular menu coffees; and
. Fewer new stores being opened during 2001.
These benefits were partially offset by the increase in revenue from the
specialty sales segment, which has a lower price point than retail and a higher
shipping cost.
Operating expenses
Operating expenses for 2001 increased as compared to 2000 as we grew our
business; however, operating expenses as a percent of net revenue decreased
primarily due to the increase in our net revenue and a payroll reduction
initiative affecting our retail stores. This initiative involved a reduction in
store hours and pay rates and we believe was primarily responsible for the
decrease in operating expenses as a percent of retail revenue.
In addition, we held expenses constant for the online and mail order segment
while growing revenue. The decrease in online and mail order operating expenses
as a percent of segment revenue consisted of decreases from outside service
expense, payroll expense, and order processing expense.
Our focus on growing the specialty sales segment led to an increase in
specialty sales operating expenses as a percent of segment revenue. The factors
contributing to the increase included the payroll expense of new sales staff
for the grocery segment expansion, their travel and related expenses, the
expenses related to distribution, and the pre-opening and startup costs related
to the opening of kiosks in Larry's Markets stores in Seattle.
Marketing and advertising expenses
The decrease in marketing and advertising expenses in 2001 as compared to
2000 is attributable to the leverage gained from marketing across multiple
channels of distribution, a shift from customer acquisition to customer
retention, which is generally more cost effective, and fewer new store openings
in 2001.
General and administrative expenses
We were able to reduce our general and administrative expenses as a percent
of net revenue in 2001 as compared to 2000 primarily by maintaining prior year
employee base levels and lowering recruiting expenses in a less-competitive job
market. Our efforts to reduce general and administrative expenses were
partially offset by higher outside services expenses related to stock plan
administration and public relations activities associated with being a publicly
held company.
Depreciation and amortization expenses
Depreciation and amortization expenses increased in 2001 as compared to 2000
due to the openings of new stores and kiosks and investments in manufacturing
and systems. However, as a percent of net revenue, these expenses decreased
compared to the prior year primarily due to fewer stores being opened as well
as the increase in revenue from the less capital-intensive specialty sales
channel.
14
Interest expense, net
Net interest expense decreased in 2001 as compared to 2000 as a result of
repayment of debt using the net proceeds from our initial public offering in
January 2001.
Income tax provision (benefit)
Taxes on net income in 2001 were $0.7 million, reflecting an effective tax
rate of 39.3%. The increase in the effective rate over the prior year is
attributable to the increase in income and the change in the valuation
allowance of charitable contributions carryforwards.
2000 Compared with 1999
Net revenue
Net revenue in 2000 increased for all three segments and both business
categories as compared to 1999 net revenue. In 2000, we initiated our strategy
of selling through multiple channels of distribution. Because of the 16 retail
stores we opened in 2000 and 1999, revenue derived from the sale of whole bean
coffee and related products as a percent of net revenue decreased slightly in
2000 due to the slower maturation of whole bean coffee sales compared to
beverage and pastry sales. The multi-channel strategy resulted in the increase
in the specialty sales segment as a percent of revenue from 3.6% to 6.5% and
led to the lower percent of net revenue from both the retail segment and the
online and mail order segment.
In the retail segment, we continued to increase revenue primarily as a
result of increased sales in existing stores, price increases on whole bean
coffee and beverages and pastries effective in August 1999 and the opening of
new retail stores. During 2000, we opened five new stores compared to 11 stores
opened in 1999.
The following table sets forth the sources of revenue increases by business
category for the retail segment (in millions).
Increased volume of whole bean coffee................... $0.6
Price increase in August 1999........................... 1.0
----
Total existing stores................................ 1.6
Total new stores..................................... 2.8
----
Total whole bean coffee and related products..... $4.4
====
Increased volume of beverages and pastries.............. $1.6
Price increase in August 1999........................... 1.0
----
Total existing stores................................ 2.6
Total new stores..................................... 4.2
----
Total beverages and pastries..................... $6.8
====
In the online and mail order segment, revenue increased primarily due to the
growth of our customer base as a result of increased direct mail and online
marketing efforts and the August 1999 price increase.
In the specialty sales segment, we launched a new sales initiative, which
resulted in the $3.0 million increase in revenue for this segment. The
expansion of our office coffee program represented $1.8 million of the increase
while restaurant and food service accounts represented $1.2 million.
15
Cost of sales and related occupancy expenses
Cost of sales and related occupancy expenses increased in 2000 as compared
to 1999 primarily as a result of the addition of five new stores and increased
volume of 20.3% in whole bean coffee sales. As a percent of revenue, cost of
sales and related occupancy expenses decreased to 47.7% from 48.0%, mainly
because of the August 1999 price increase and the reduction in our average
green coffee bean cost by $0.29 per pound. These benefits were partially offset
by higher occupancy costs for new stores opened in Boston.
Operating expenses
Operating expenses increased $5.9 million in 2000 as compared to 1999 and
also increased as a percent of net revenue to 33.0% in 2000 from 31.7% in 1999.
The majority of this increase was the result of an increase in retail store
operating expenses, both in absolute terms and as a percent of segment revenue.
The increased retail store operating expenses were mainly due to the increased
costs of entering into new markets, the additional expense incurred for the
implementation of a new store-wide electronic point of sale system and
increased labor costs in California.
Retail store operating expenses in new markets averaged 65% of revenue due
mainly to lower per store revenue in non-mature locations, compared to 28% of
revenue for mature locations. These increased costs in connection with entering
new markets contributed approximately $1.3 million to the overall increase in
retail store operating expenses. The increase in retail store operating
expenses also consisted of $0.6 million from the implementation of the point of
sale system and $0.5 million from increased labor costs in California, with the
remaining increase caused by the required support for revenue growth in retail
operations.
In the online and mail order segment, our operating expenses increased
mainly because of increased spending on information systems necessary to
support higher volume and online presence.
In the specialty sales segment, the increase in operating expenses resulted
from the hiring of new sales staff and the cost of the expanded sales program
for office, restaurant and food service accounts.
Marketing and advertising expenses
Marketing and advertising expenses increased significantly in 2000 over the
prior year due to new store additions in Boston, Chicago and Portland and
increased online and mail order programs, as well as increased marketing
efforts for office and restaurant accounts.
General and administrative expenses
General and administrative expenses increased slightly in 2000 as compared
to 1999 as a result of the hiring of additional administrative personnel but
decreased slightly as a percent of net revenue primarily due to higher sales.
Depreciation and amortization expenses
The increase in depreciation and amortization in 2000 as compared to 1999
was primarily the result of capital expenditures for new retail stores and
system upgrades.
Interest expense, net
The increase in net interest expense in 2000 as compared to 1999 was
primarily due to the additional borrowings under our credit facility to fund
and support expansion and additional working capital needs.
16
Income tax provision (benefit)
Taxes on income for 2000 reflect a benefit of $0.6 million resulting from
recognition of the future tax benefit of the fiscal year loss. The effective
tax rate of 20.8% reflects the establishment of a valuation allowance on
charitable contribution carryforwards and the California disallowance of 50% of
the current year tax net operating loss carryforward.
Liquidity and Capital Resources
At December 30, 2001, we had $2.7 million in cash and cash equivalents. Our
capital requirements in 2001 were funded primarily through cash flows from
operations, borrowings under our line of credit, and proceeds from the initial
public offering of our common stock in January 2001.
Net cash provided by operations was $5.8 million in 2001. Operating cash
flows were positively impacted by increased net income, adjusted for
deprecation and amortization. The increase was partially offset by an increase
in green coffee bean inventory as we increased our purchases in response to
historically low coffee prices.
Net cash used in investing activities was $6.8 million in 2001. Investing
activities primarily consisted of $6.5 million in capital expenditures for
property, plant and equipment, including:
. $2.5 million used for the purchase of equipment that was previously
leased;
. $1.4 million used for the opening of two new stores in Southern
California and Massachusetts and six new kiosks in Larry's Markets in
Washington state;
. $1.1 million used for information technology support systems and website
development;
. $0.9 million used for existing store upgrades; and
. $0.6 million used for manufacturing plant capacity and machinery upgrades.
Net cash provided by financing activities was $2.2 million in 2001.
Financing activities in 2001 consisted primarily of $19.6 million in net
proceeds received from our initial public offering and exercise of stock
options, partially offset by repayments of $17.5 million of outstanding debt.
We have a credit facility with General Electric Capital Corporation, that
provides for a revolving line of credit of $15.0 million and provided for a
Term A Loan for $7.0 million payable over five years and a Term B Loan for $8.0
million with principal due in February 2002. Upon the closing of our initial
public offering, both the Term A and Term B Loans were repaid. At December 30,
2001, we had $11.6 million available under the revolving line of credit after
borrowings of $2.0 million and other senior funded debt of $1.4 million.
Due to the significant repayment of debt from the net proceeds of our
initial public offering, we amended our existing credit facility in June 2001
and March 2002 (effective December 24, 2001) to reflect our updated cash and
capital requirements. The March 2002 amendment includes an increase in the
capital expenditure limit and an increase of the limit on the number of new
stores per year. In addition, interest rates on the revolving line of credit
have been reduced.
Our 2002 capital expenditure requirements consist primarily of expenditures
relating to new store openings, remodeling of existing stores, and the upgrade
of our merchandise ordering and fulfillment system. Our 2002 capital
expenditures are expected to be approximately $6.5 million. Approximately $4.0
million is expected to be used for the opening of five to eight new retail
stores. The remaining $2.5 million in capital expenditures is expected to be
used for the remodeling of existing stores, the upgrade of our ordering and
fulfillment system and the upgrade of other plant and office facilities.
17
The following table set forth below reflects our contractual cash
obligations and our other commercial commitments as of December 30, 2001.
Payments Due by Period
(in thousands)
-------------------------------------------
Less
than After
Contractual Obligations Total 1 year 1-3 years 4-5 years 5 years
- ----------------------- ------- ------- --------- --------- -------
Line of credit.............................. $ 1,968 $ 1,968
Long-term borrowings........................ 1,300 440 $ 720 $ 140
Capital lease obligations................... 114 83 31
Retail store operating leases............... 21,816 4,464 10,626 4,190 $2,536
Fixed-price coffee purchase commitments..... 19,711 9,200 10,223 288
------- ------- ------- ------ ------
Total contractual cash obligations....... $44,909 $16,155 $21,600 $4,618 $2,536
======= ======= ======= ====== ======
In addition, as of December 30, 2001, we have an outstanding standby letter
of credit of $1.4 million backing the long-term borrowings.
We expect cash flows from operations and borrowing capacity under our
current line of credit to be sufficient for our operating requirements for at
least the next twelve months and to meet our contractual obligations as they
come due. However, we may require or desire additional funds to support our
operating expenses and capital requirements or for other purposes, such as
acquisitions or for competitive reasons, and may seek to raise such additional
funds through public or private debt or equity financings. We cannot assure you
that additional financing will be available on satisfactory terms, if at all.
Our future liquidity and cash requirements will depend on numerous factors,
including the implementation and success of our business strategy, competitive
conditions in the specialty coffee market, and general economic conditions.
Please see "Risk Factors" below for a discussion of the risks that may affect
our revenue and operations.
We conduct our corporate and store operations from leased facilities.
Generally, these have initial lease periods of three to ten years, and contain
provisions for renewal options of five to ten years.
Inflation
We do not believe that inflation has had a material impact on our results of
operation in recent years. However, we cannot predict what effect inflation may
have on our results of operation in the future.
Seasonality
Our business is subject to seasonal fluctuations. Significant portions of
our profits are realized during the fourth quarter of our fiscal year, which
includes the December holiday season.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk from changes in interest rates on our
outstanding bank debt. Our revolving line of credit bears interest at certain
applicable margin levels contingent upon our leverage ratio on a quarterly
basis. The interest rate, which is either the Index rate (the higher of prime
or 50 basis points over the average of rates for overnight federal funds
transactions) plus a range from 0.00% to 0.25% or a rate equal to LIBOR plus a
range from 2.00% to 2.50%, increases as our leverage ratio increases.
Adjustments to the applicable margin level are implemented quarterly on a
prospective basis. The interest cost of our bank debt is affected by changes in
either prime, federal funds rates, or LIBOR. Such changes could adversely
impact our cost of borrowing.
18
The supply and price of coffee are subject to significant volatility and can
be affected by multiple factors in the producing countries, including weather,
political and economic conditions. In addition, green coffee bean prices have
been affected in the past, and may be affected in the future, by the actions of
certain organizations and associations that have historically attempted to
influence commodity prices of green coffee beans through agreements
establishing export quotas or restricting coffee supplies worldwide.
Our hedging strategy is intended to limit the cost exposure of the main
commodity used in our business, green coffee beans. We use the following
instruments to manage coffee supply and price risk:
. Fixed-price purchase commitments;
. Coffee futures; and
. Coffee futures options.
We use coffee futures and coffee futures options to reduce the price risk of
our coffee purchase requirements that we cannot make or have not made on a
contractual basis. These coffee futures and coffee futures options are traded
on the New York Coffee, Sugar & Cocoa Exchange. We use these futures and
options solely for financial hedging purposes and never take actual delivery of
the coffee traded on the exchange.
Fixed-Price Purchase Commitments
We enter into fixed-price purchase commitments in order to secure an
adequate supply of quality green coffee beans and fix our cost of green coffee
beans. These commitments are made with established coffee brokers and are
denominated in U.S. dollars. As of December 30, 2001, we had approximately
$19.7 million in open fixed-priced purchase commitments with delivery dates
ranging from January 2002 through November 2006. We believe, based on
relationships established with our suppliers in the past, that the risk of
non-delivery on such purchase commitments is low.
Coffee Futures
A coffee future is a contract to buy 37,500 pounds of green coffee beans at
a contracted price and date. The price of coffee traded on the exchange is
known as the New York "C" market price. We buy higher-quality coffee that
trades at premiums to the New York "C" market price. Although this premium
varies depending on the supply and demand at the time of purchase, generally,
the price of the coffee we purchase tends to fluctuate with the New York "C"
market price. This allows us to use coffee futures and coffee futures options
to manage our exposure to price fluctuations.
We use coffee futures to hedge the price of anticipated coffee purchases to
achieve a target gross margin for roasted coffee. We convert this margin
requirement into an equivalent New York "C" market price for green coffee
beans, which we call our "threshold."
When the current New York "C" market price is below our threshold, we
purchase coffee futures to fix the cost of our anticipated needs. Once we
contract to purchase coffee from the supplier at a fixed price, we sell the
related future. If market prices decline, we forego potential additional gross
margin and incur potential cash margin calls. However, we are comfortable with
this cost structure and enjoy the security of reduced risk.
Coffee Futures Options
When the current New York "C" market price is above our threshold, we
purchase coffee futures options to limit the cost exposure for our anticipated
needs.
A coffee futures option is an option to buy a coffee future at a specific
price, known as a "trade price." The cost of the option is based on the
relationship of the trade price to the current New York "C" market price.
19
When we commit to purchase a specified quantity of green coffee beans and do
not fix a price, we will hedge this ''not-yet-priced'' purchase commitment by
purchasing a coffee futures option. This coffee futures option locks in a
specific price for the not-yet-priced purchase commitment but does not obligate
us to take delivery on the contract. If market prices rise, we realize gains on
the coffee futures option, which offset the increase in price we have to pay
for the coffee beans. If the market prices decline, we will set the contract
price of the not-yet-priced purchase commitment at the market price and we will
let the option expire, taking advantage of the declining market.
We also use coffee futures options to hedge anticipated coffee purchases.
When the current New York ''C'' market price is above our threshold, we
purchase coffee futures options to limit the risk that coffee prices will
continue to rise. If market prices rise, the higher prices of our future
fixed-price coffee commitments will be offset by gains from the option. If
market prices decline, our future fixed-price coffee commitments will be set at
lower prices and the option will expire resulting in no further liability or
obligation.
The extent of our coffee futures and coffee futures options positions at any
given time depends on the amount of coffee we have contracted to purchase and
general market conditions and trends. We anticipate continuing this hedging
strategy for the foreseeable future.
We held no coffee futures options as of December 30, 2001 and we did not
enter into any coffee futures options during 2001 or 2000.
Our hedging positions are only placed by the Chief Financial Officer through
one brokerage firm that we believe to be reputable.
The following table reflects the outstanding coffee futures hedging
positions as of December 30, 2001 and December 31, 2000.
Contract Trade Settlement
Number of Contracts Month Price Price Gain (Loss)
------------------- -------- ------- ---------- -----------
25 May-02 $ 60.10 $48.15 $ (112,031)
-----------
Unrealized Gain/(Loss) as of December 30, 2001 $ (112,031)
===========
35 Mar-01 $126.00 $65.55 $ (793,406)
15 Mar-01 103.75 65.55 (214,875)
10 May-01 94.25 68.50 (96,563)
25 May-01 89.75 68.50 (199,219)
-----------
Unrealized Gain/(Loss) as of December 31, 2000 $(1,304,063)
===========
These derivative instruments qualify for hedge accounting. The effective
portion of the gains and losses are accounted for as inventory costs and are
recorded as an expense or income when the related coffee is sold. The
ineffective portion is recorded as an expense or income immediately. We do not
hold or issue derivative instruments for trading purposes.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 requires that all business combinations initiated after
June 30, 2001 be accounted for under the purchase method and addresses the
initial recognition and measurement of goodwill and other intangible assets
acquired in a business combination.
20
SFAS No. 142 specifies that goodwill and certain intangible assets will not
be amortized but will instead be subject to periodic impairment testing. We
adopted SFAS No. 142 on December 31, 2001. The adoption of this new standard
did not have a material impact on our financial statements.
In October 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This
statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," and the accounting and
reporting provision of APB Opinion No. 30, "Reporting the Results of
Operations--Reporting the Effects of Disposal of Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for
the disposal of a segment of business. SFAS No. 144 became effective for us on
December 31, 2001. Adoption of this standard did not have a material effect on
our financial position or results of operations.
21
RISK FACTORS
We may not be successful in the implementation of our business strategy or our
business strategy may not be successful, either of which will impede our growth
and operating results.
Our business strategy emphasizes the expansion of our non-retail
distribution channels--including specialty grocery and gourmet food stores,
online and mail order, and office, restaurant and food service accounts. This
business strategy represents a shift from our historic business strategy, which
largely emphasized opening and operating retail stores. Despite the change in
our strategy, our retail stores, which generated nearly 80% of our 2001 net
revenue, continue to be an important element of our business. We do not know
whether we will be able to successfully implement our business strategy or
whether our business strategy will be successful. Our ability to implement this
business strategy is dependent on our ability to:
. Market our products on a national or international scale and over the
internet;
. Enter into distribution and other strategic arrangements with third party
retailers and other potential distributors of our coffee;
. Increase our brand recognition on a national and international scale;
. Identify and lease strategic locations suitable for new stores; and
. Manage growth in administrative overhead and distribution costs likely to
result from the planned expansion of our retail and non-retail
distribution channels.
Our revenue may be adversely affected if we fail to implement our business
strategy or if we divert resources to a business strategy that ultimately
proves unsuccessful.
Because our business is centered on a single product, specialty coffee, if the
demand for specialty coffee decreases, our business could suffer.
Sales of specialty coffee constituted nearly 83% of our 2001 net revenue.
Demand for specialty coffee is affected by many factors, including:
. Consumer tastes and preferences;
. National, regional and local economic conditions; and
. Demographic trends.
Because we are highly dependent on consumer demand for specialty coffee, a
shift in consumer preferences away from specialty coffee would harm our
business more than if we had more diversified product offerings. If customer
demand for specialty coffee decreases, our sales would decrease accordingly.
If we fail to continue to develop and maintain our brand, our business could
suffer.
We believe that maintaining and developing our brand is critical to our
success and that the importance of brand recognition may increase as a result
of competitors offering products similar to ours. Because the majority of our
retail stores are located on the west coast, primarily in California, our brand
recognition remains largely regional. Our brand building initiative involves
increasing the availability of our products, increasing marketing expenditures
and opening new stores in flagship locations to increase awareness of our brand
and create and maintain brand loyalty. If our brand building initiative is
unsuccessful, we may never recover the expenses incurred in connection with
these efforts and we may be unable to increase our future revenue or implement
our business strategy.
22
Our success in promoting and enhancing the Peet's brand will also depend on
our ability to provide customers with high quality products and customer
service. Although we take measures to ensure that we sell only fresh roasted
whole bean coffee and our retail employees properly prepare our coffee
beverages, we have no control over our whole bean coffee products once
purchased by customers. Accordingly, customers may prepare coffee from our
whole bean coffee inconsistent with our standards, store our whole bean coffee
for long periods of time or resell our whole bean coffee without our consent,
which, in each case, potentially affects the quality of the coffee prepared
from our products. If customers do not perceive our products and service to be
of high quality, then the value of our brand may be diminished and,
consequently, our ability to implement our business strategy may be adversely
affected.
We depend on the expertise of key personnel. If these individuals leave or
change their role within our company without effective replacements, our
operations may suffer.
The success of our business is dependent to a large degree on our
management, including Christopher P. Mottern, Chief Executive Officer and
President. If he were to leave Peet's without an effective replacement, our
revenue, operations, profits and growth may suffer. As part of our management
continuity plan, our Board of Directors is in the process of searching for an
additional senior executive to take on the roles of chief executive officer and
president, with Mr. Mottern assuming a more strategic role as Chairman of the
Board. This search is focusing on individuals with extensive experience with
consumer brands and the expertise necessary to continue the implementation of
our multi-channel distribution strategy. We cannot guarantee that we will find
a suitable candidate or that the person we hire will be able to successfully
implement our business strategy. If we hire someone who fails to successfully
implement our business strategy, our revenue, operations, profits and growth
may suffer. See "Item 10. Directors and Executive Officers of the
Registrant--Management Continuity Plan."
In addition, we depend to a large degree on the expertise of our coffee
roasters and purchasers. Our ability to source and purchase a sufficient supply
of high quality coffee beans and roast coffee beans consistent with our quality
standards could suffer if we lost the services of any of these individuals.
Our roasting methods are not proprietary, so competitors may be able to
duplicate them, which could harm our competitive position.
We consider our roasting methods essential to the flavor and richness of our
roasted whole bean coffee and, therefore, essential to our brand. Because we do
not hold any patents for our roasting methods, it may be difficult for us to
prevent competitors from copying our roasting methods. If our competitors copy
our roasting methods, the value of our brand may be diminished, and we may lose
customers to our competitors. In addition, competitors may be able to develop
roasting methods that are more advanced than our roasting methods, which may
also harm our competitive position.
Because our business is based primarily in California, a worsening of economic
conditions, a decrease in consumer spending or a change in the competitive
conditions in this market may substantially decrease our revenue and may
adversely impact our ability to implement our business strategy.
Our California retail stores generated 72% of our 2001 net revenue and a
substantial portion of the revenue from our other distribution channels is
generated in California. We expect that our California operations will continue
to generate a substantial portion of our revenue. In addition, our California
retail stores provide us with a means for increasing brand awareness, building
customer loyalty and creating a premium specialty coffee brand. As a result, an
economic downturn or other decrease in consumer spending in California may not
only lead to a substantial decrease in revenue, but may also adversely impact
our ability to market our brand, build customer loyalty, or otherwise implement
our business strategy.
23
If we are unable to continue leasing our retail locations or obtain leases for
new stores, our existing operations and our ability to expand may be adversely
affected.
All of our 60 retail locations are on leased premises. If we are unable to
renew these leases, our revenue and profits could suffer. In addition, we
intend to lease other premises in connection with the planned expansion of our
retail operations. Because we compete with other retailers and restaurants for
store sites and some landlords may grant exclusive locations to our
competitors, we may not be able to obtain new leases or renew existing leases
on acceptable terms. This could adversely impact our revenue growth and brand
building initiatives.
We may not be able to hire or retain additional management and other personnel
and our recruiting and training costs may increase as a result of turnover,
both of which may increase our costs and reduce our profits and may adversely
impact our ability to implement our business strategy.
The success of our business depends upon our ability to attract and retain
highly motivated, well-qualified management and other personnel, including
technical personnel and retail employees. We face significant competition in
the recruitment of qualified employees. Our ability to execute our business
strategy may suffer if:
. We are unable to recruit or retain a sufficient number of qualified
employees;
. The costs of employee compensation or benefits increase substantially; or
. The costs of outsourcing certain tasks to third party providers increase
substantially.
In addition, we expend significant resources in training our retail managers
and employees. During the past few years, retail employee turnover has
increased to approximately 75% per year. If turnover continues to increase, we
may incur additional recruiting and training costs.
Because we rely heavily on common carriers to ship our coffee on a daily basis,
any disruption in their services or increase in shipping costs could adversely
affect our business.
We rely on a number of common carriers to deliver coffee to our customers
and retail stores. We consider roasted coffee a perishable product and we rely
on these common carriers to deliver fresh roasted coffee on a daily basis. We
have no control over these common carriers and the services provided by them
may be interrupted as a result of labor shortages, contract disputes or other
factors. If we experience an interruption in these services, we may be unable
to ship our coffee in a timely manner. A delay in shipping could:
. Have an adverse impact on the quality of the coffee shipped, and thereby
adversely affect our brand and reputation;
. Result in the disposal of an amount of coffee that could not be shipped
in a timely manner; and
. Require us to contract with alternative, and possibly more expensive,
common carriers.
Any significant increase in shipping costs could lower our profit margins or
force us to raise prices, which could cause our revenue and profits to suffer.
Because we have only one roasting facility, a significant interruption in the
operation of this facility could potentially disrupt our operations.
We have only one coffee roasting and distribution facility. A significant
interruption in the operation of this facility, whether as a result of a
natural disaster or other causes, could significantly impair our ability to
operate our business on a day-to-day basis. Moreover, our roasting and
distribution facility and most of our stores are located near several major
earthquake faults. The impact of a major earthquake on our facilities,
infrastructure and overall operations is difficult to predict and an earthquake
could seriously disrupt our entire business process. Our earthquake insurance
does not cover revenue lost as a result of earthquakes.
24
Increases in the cost of high quality Arabica coffee beans could reduce our
gross margin and profit.
Coffee is a trade commodity and, in general, its price can fluctuate
depending on:
. Weather patterns in coffee-producing countries;
. Economic and political conditions affecting coffee-producing countries;
. Foreign currency fluctuations; and
. The ability of coffee-producing countries to agree to export quotas.
Coffee prices are currently near historical lows and we believe they are
likely to increase in the future. If the cost of our green coffee beans
increases due to any of these or other factors, we may not be able to pass
along those costs to our customers because of the competitive nature of the
specialty coffee industry. If we are unable to pass along increased coffee
costs, our margins will decrease and our profitability will suffer accordingly.
In addition, our hedging policy may not be effective in controlling our coffee
costs and the brokers with whom we have fixed price coffee purchase commitments
may not deliver under those commitments. In either case, our coffee costs may
increase and our profitability may suffer.
Decreased availability of high quality Arabica coffee beans could result in a
decrease in revenue and jeopardize our ability to expand our business.
Arabica coffee beans of the quality we purchase are not readily available on
the commodity markets. We depend on our relationships with coffee brokers,
exporters and growers for the supply of our primary raw material, high quality
Arabica coffee beans. In 2001, we purchased over half of our green coffee beans
through one broker. If our relationships with coffee brokers, exporters and
growers deteriorate, we may be unable to procure a sufficient quantity of high
quality coffee beans. In such case, we may not be able to fulfill the demand of
our existing customers, supply new retail stores or expand other channels of
distribution. A raw material shortage could result in decreased revenue or
could impair our ability to expand our business.
Political instability in coffee growing regions could result in a decrease in
the availability of high quality Arabica coffee beans needed for the continued
operation and growth of our business and an increase in our operating costs.
We roast Arabica coffee beans from many different regions to produce 32
types and blends of coffee. The political situation in many of those regions,
including Africa, Indonesia and Central and South America, can be unstable, and
such instability could affect our ability to purchase coffee from those
regions. If Arabica coffee beans from a region become unavailable or
prohibitively expensive, we may be forced to discontinue particular coffee
types and blends or substitute coffee beans from other regions in our blends.
Frequent substitutions and changes in our coffee product lines may lead to cost
increases, customer alienation and fluctuations in our gross margins.
Furthermore, a worldwide supply shortage of the high quality Arabica coffee
beans we purchase could have a material adverse effect on our business.
Competition in the specialty coffee market is intense and could affect our
profitability.
The specialty coffee market is highly fragmented. Our primary competitors in
whole bean specialty coffee sales include Gevalia (Kraft Foods), Green Mountain
Coffee, Illy Cafe, Millstone (Procter & Gamble), Seattle's Best (AFC
Enterprises) and Starbucks. There are numerous smaller, regional brands that
also compete in this category. In addition, we compete indirectly against all
other coffee brands on the market. A number of nationwide coffee marketers,
such as Kraft Foods, Procter & Gamble and Nestle, are distributing premium
coffee brands in supermarkets. These premium coffee brands may serve as
substitutes for our whole bean coffee. In addition to competing with other
distributors of whole bean coffee, we compete with retailers of prepared
beverages, including coffee house chains, particularly Starbucks, numerous
convenience stores, restaurants,
25
coffee shops and street vendors. If we do not succeed in effectively
differentiating ourselves from our competitors or our competitors adopt our
strategies, then our competitive position will be weakened.
Despite competing in a fragmented product category, whole bean specialty
coffee brands are being established across multiple distribution channels.
Several competitors are aggressive in obtaining distribution in specialty
grocery and gourmet food stores, through online and mail order and in office,
restaurant and food service locations. We have only recently begun to penetrate
these channels. Other competitors may have an advantage over us based on their
earlier entry into these distribution channels.
Competition in the specialty coffee market is becoming increasingly intense
as relatively low barriers to entry encourage new competitors to enter the
specialty coffee market. Many of these new market entrants may have
substantially greater financial, marketing and operating resources than us. In
addition, many of our existing competitors have substantially greater
financial, marketing and operating resources than us.
Adverse public or medical opinion about caffeine may harm our business.
Our specialty coffee contains significant amounts of caffeine and other
active compounds, the health effects of some of which are not fully understood.
A number of research studies conclude or suggest that excessive consumption of
caffeine may lead to increased heart rate, nausea and vomiting, restlessness
and anxiety, depression, headaches, tremors, sleeplessness and other adverse
health effects. An unfavorable report on the health effects of caffeine or
other compounds present in coffee could significantly reduce the demand for
coffee, which could harm our business and reduce our sales and profits.
Adverse publicity regarding customer complaints may harm our business.
We may be the subject of complaints or litigation from customers alleging
beverage and food-related illness, injuries suffered on the premises or other
quality, health or operation concerns. Adverse publicity resulting from such
allegations may materially adversely affect us, regardless of whether such
allegations are true or whether we are ultimately held liable.
Item 8. Financial Statements and Supplementary Data
All information required by this item is included on pages F-1 to F-19 in
Item 14 of this Report and is incorporated in this item by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
26
PART III
Item 10. Directors and Executive Officers of the Registrant
Directors and Executive Officers
The following table sets forth information with respect to our directors and
executive officers:
Name Age Position
---- --- --------
Christopher P. Mottern 58 Chief Executive Officer, President and Director
William M. Lilla...... 46 Executive Vice President
Mark N. Rudolph....... 43 Chief Financial Officer, Vice President, Treasurer and Secretary
Peter B. Mehrberg..... 43 Vice President, Business Development and General Counsel
James A. Reynolds..... 63 Vice President, Coffee and Tea
Deborah McGraw........ 60 Vice President, Retail Operations
Michael J. Cloutier... 47 Chief Information Officer and Vice President, Information Systems
Gerald Baldwin........ 59 Director
Hilary Billings....... 38 Director
Gordon A. Bowker...... 59 Director
H. William Jesse, Jr.. 50 Director and Chairman
Jean-Michel Valette... 41 Director
Christopher P. Mottern has served as Chief Executive Officer since May 1997
and President and as a director since August 1997. From 1992 to 1996, Mr.
Mottern served as President of The Heublein Wines Group, a manufacturer and
marketer of wines and now a subsidiary of United Distillers & Vintners Ltd.
From 1986 through 1991, he served as President and Chief Executive Officer of
Capri Sun, Inc., one of the largest single-service juice drink manufacturers in
the United States. Mr. Mottern has served on the board of Coen, Inc. since 1990.
William M. Lilla has served as Executive Vice President since December 2000.
He served as Vice President, Marketing and Strategy from April 1998 to December
2000. Before joining Peet's, Mr. Lilla was employed by The Heublein Wines Group
as Vice President of Strategy from October 1997 to April 1998, Vice President
of Marketing from September 1994 to October 1997, and Director of Marketing
from September 1993 to September 1994.
Mark N. Rudolph has served as Chief Financial Officer since September 1988.
He was appointed Vice President in September 1994 and Treasurer and Secretary
in May 2001. Mr. Rudolph served as Assistant Secretary from September 1994 to
May 2001.
Peter B. Mehrberg has served as Vice President, Business Development since
October 1999 and as General Counsel since September 1994. Mr. Mehrberg served
as Vice President, Real Estate from June 1997 to 1999 and as Director of Real
Estate from July 1994 to June 1997.
James A. Reynolds has served as Vice President, Coffee and Tea since
February 1994, and served as Secretary from February 1988 to May 2001. He also
served as a director from 1985 to 1997. He joined Peet's in 1984.
Deborah McGraw has served as Vice President, Retail Operations since October
1995. She has worked for Peet's in various capacities since 1983. Ms. McGraw
became a store manager in 1989 and was promoted to District Manager in March
1989, to Regional Director in January 1994, and to Director of Retail
Operations in September 1994.
27
Michael J. Cloutier has served as Vice President, Information Systems since
August 1999. He was a Systems Manager for Peet's from August 1999 to December
1999. Between October 1997 and August 1999, Mr. Cloutier founded two computer
consulting businesses, 1.2.1 Solutions and Pleasanton Partners, Inc. From April
1996 to October 1997, Mr. Cloutier served as Vice President, Operations of M1
Software, Inc., a software development company. From 1993 to April 1996, Mr.
Cloutier was the Deputy Business and Strategic Planning Officer at the Mare
Island Naval Shipyard.
Gerald Baldwin has served as one of our directors since 1971 and as Chairman
of the Board from 1994 to January 2001. From 1971 until 1994, Mr. Baldwin was
our President and Chief Executive Officer. He co-founded our company in 1971.
Hilary Billings has served as one of our directors since January 2002.
Currently, Ms. Billings is the Chairman and Chief Marketing Officer of
RedEnvelope Inc., a multi-channel gift company which she joined in May 1999.
From July 1997 to May 1999, Ms. Billings was Senior Vice President of Brand
Development and Design with Starwood Hotels and Resorts, where she helped
develop the W Hotels. Before joining Starwood, she was a vice president with
Pottery Barn catalog and retail group from 1995 to 1997.
Gordon A. Bowker has served as one of our directors from 1971 to 1987 and
from September 1994 to the present. Since 1986, Mr. Bowker has been a principal
and investor of Apanage Inc., a real estate development company. Mr. Bowker has
30 years of experience in growing publicly traded and private companies as an
investor, founder, director and marketing advisor. He co-founded Starbucks
Coffee Company, Redhook Ale Brewery, Incorporated and Seattle Weekly.
H. William Jesse, Jr. has served as our Chairman since January 2001 and as
one of our directors since August 1998. Mr. Jesse is chairman of
Jesse.Hansen&Co, strategic and financial advisors to high-growth consumer
companies. He founded the firm in 1986, and served as its President and Chief
Executive Officer through March 1998. Since 1988, Mr. Jesse has served as
Chairman and Chief Executive Officer of Vineyard Properties Corporation, a
developer of wine grape vineyards. In 1998, he also served as interim Chairman
and Chief Executive Officer of Food.com, Inc. Mr. Jesse currently serves as a
director of The 3DO Company.
Jean-Michel Valette has served as one of our directors since July 2001.
Currently, Mr. Valette is an independent advisor to select branded consumer
companies. From August 1998 to May 2000, Mr. Valette was President and Chief
Executive Officer of Franciscan Estates, a premium wine company. From 1987 to
1998, Mr. Valette held various positions, including managing director, at
Hambrecht & Quist LLC, a San Francisco-based investment bank and venture
capital firm. In 1984, Mr. Valette co-founded Procede Ltd., a London-based
investment and consulting firm, and he served as its managing director from
1984 to 1986. Mr. Valette currently serves as a director of Select Comfort
Corporation and Golden State Vintners, Inc.
Management Continuity Plan
As part of our management continuity plan, our Board of Directors is in the
process of searching for an additional senior executive to take on the roles of
chief executive officer and president. This search is focusing on individuals
with extensive experience with consumer brands and the expertise necessary to
continue the implementation of our multi-channel distribution strategy. The new
president and chief executive officer will assume the duties of running our
day-to-day operations with Mr. Mottern assuming a more strategic role as the
Chairman of the Board. Mr. Jesse will step down as Chairman of the Board but
remain a director. We may expand the number of seats on our Board of Directors
to include the new chief executive officer and president. We cannot guarantee
that we will find a suitable candidate or that the person we hire will be able
to successfully implement our business strategy.
28
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") requires the Company's directors and executive officers, and
persons who own more than ten percent of a registered class of the Company's
equity securities, to file with the SEC initial reports of ownership and
reports of changes in ownership of Common Stock and other equity securities of
the Company. Officers, directors and greater than ten percent shareholders are
required by Securities and Exchange Commission regulation to furnish the
Company with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended December 30, 2001, its
officers, directors and greater than ten percent beneficial owners complied
with all applicable Section 16(a) filing requirements, except that an initial
report of ownership was filed late for Jean-Michel Valette.
Item 11. Executive Compensation
Compensation of Directors
Each non-employee director of the Company receives a fee of $1,000 per
meeting. In the year ended December 30, 2001, the total compensation paid to
non-employee directors was $9,000. The members of the Board of Directors are
also eligible for reimbursement for their expenses incurred in connection with
attendance at Board meetings in accordance with Company policy.
2000 Non-Employee Director Plan
The Board adopted a 2000 Non-Employee Director Plan effective upon the
completion of the Company's initial public offering of its Common Stock. The
plan provides for the automatic grant of nonstatutory stock options to purchase
shares of Common Stock to the Company's non-employee directors. The aggregate
number of shares of Common Stock that may be issued pursuant to these options
under the plan is 330,000 shares.
The Board of Directors administers automatic option grants to non-employee
directors. Options granted to non-employee directors will generally be subject
to the following terms:
. The exercise price of options granted will be equal to the fair market
value of the Common Stock on the date of grant;
. The options will have a term of no more than ten years from the date they
are granted;
. Options granted are not transferable other than by will or by the laws of
descent and distribution and are exercisable during the life of the
optionee only by the optionee;
. An optionee may designate a beneficiary who may exercise the option
following the optionee's death; and
. An optionee whose service relationship with Peet's or any affiliate
(whether as a non-employee director of Peet's or subsequently as an
employee, director or consultant of either Peet's or an affiliate) ceases
for any reason may exercise vested options for the term provided in the
option agreement (12 months generally, 18 months in the event of death).
Upon the completion of the Company's initial public offering, subject to
certain exceptions, each non-employee director was automatically granted an
option to purchase 25,000 shares of Common Stock, which options vest monthly
over 36 months. Any individual who becomes a non-employee director for the
first time also automatically receives an initial option grant to purchase
25,000 shares of Common Stock upon being elected to the Board of Directors. On
the day following each annual meeting of Peet's shareholders, any person who is
then a non-employee director is automatically
29
granted an option to purchase 10,000 shares of Common Stock, provided that in
the case of a non-employee director who has not served in that capacity for the
entire period since the preceding annual meeting, the number of shares subject
to the annual grant is reduced, pro rata, for each full quarter the person did
not serve during the previous period. Initial grants and annual grants vest
over a period of three years from their date of grant.
Prior to the completion of the Company's initial public offering, the
Company from time to time granted options to non-employee directors under its
1993 Stock Option Plan, 1994 California Stock Option Plan and/or 1997 Equity
Incentive Plan. During 2001, in addition to the annual grant of options to the
Company's non-employee directors and an initial option grant to Hilary Billings
upon her election as a director, the Company granted an option to purchase
10,000 shares under the 2000 Equity Incentive Plan to Laurence Mindel, who
resigned as a director in July 2001, at an exercise price of $8.28 per share.
As of February 28, 2002, Mr. Mindel had exercised options to purchase an
aggregate of 65,000 shares granted under the 1997 Equity Incentive Plan, 2000
Equity Incentive Plan and 2000 Non-Employee Director Plan. As of that date, no
current non-employee directors had exercised any options granted under the
Company's stock option plans.
Mr. Jesse, a member of the compensation committee, is the Chairman of
Jesse.Hansen&Co, a strategic and financial advisor to Peet's pursuant to an
engagement letter dated as of December 9, 1996 between Jesse.Hansen&Co and
Peet's. The Company paid Jesse.Hansen&Co $60,000 ($5,000 per month) in fiscal
2001 for advisory services rendered.
Compensation of Executive Officers
Summary of Compensation
The following table shows for 1999, 2000 and 2001, compensation awarded or
paid to, or earned by, the Company's Chief Executive Officer and its other four
most highly compensated executive officers at December 30, 2001, referred to as
the "named executive officers."
Summary Compensation Table
Long Term
Annual Compensation Compensation
------------------- ------------
Securities Other
Fiscal Salary Underlying Compensation
Name and Principal Position Year ($)(2) Bonus ($) Options ($)(3)
--------------------------- ------ -------- --------- ------------ ------------
Christopher P. Mottern........................... 2001 $350,000 -- 143,102 $5,250
President and Chief Executive Officer 2000 $350,000 -- -- $5,250
1999 $257,742 -- -- $5,000
Gerald Baldwin................................... 2001 $149,038 -- -- $4,904
Chairman of the Board(1) 2000 $250,000 -- -- $5,000
1999 $250,000 $63,750 -- $5,000
William M. Lilla................................. 2001 $193,808 $15,000 43,812 $4,550
Executive Vice President 2000 $164,000 -- 20,000 $4,550
1999 $160,712 $29,036 -- $3,635
Mark N. Rudolph.................................. 2001 $161,731 $15,000 30,780 $5,250
Chief Financial Officer, Treasurer and Secretary 2000 $155,000 -- 20,000 $5,250
1999 $150,154 $27,418 -- $3,828
Peter B. Mehrberg................................ 2001 $150,000 -- 29,672 $5,250
Vice President, Business Development and General 2000 $144,803 -- 20,000 $5,250
Counsel 1999 $136,692 $26,737 -- $ 250
- --------
(1) Mr. Baldwin resigned as Chairman of the Board in January 2000 but remains a
director and remains employed in a reduced capacity by the Company.
30
(2) Includes amounts deferred at the election of the named executive officer
pursuant to a plan established under Section 401(k) of the Internal Revenue
Code.
(3) Amounts include matching 401(k) plan contributions. As permitted by rules
promulgated by the SEC, with respect to certain "perquisites," where such
amounts do not exceed the lesser of 10% of bonus plus salary or $50,000.
Stock Option Grants and Exercises
Prior to the completion of the initial public offering, the Company granted
options to its executive officers under its 1993 Stock Option Plan, 1994
California Stock Option Plan and 1997 Equity Incentive Plan. Effective upon the
completion of the initial public offering, the Board adopted the 2000 Equity
Incentive Plan. As of February 28, 2002, options to purchase a total of
2,058,924 shares were outstanding under all of the Company's plans and options
to purchase 26,210 shares and 116,594 shares remain available for grant under
the 1997 Equity Incentive Plan and the 2000 Equity Incentive Plan,
respectively. Although no further options will be granted under the 1993 Stock
Option Plan and 1994 California Stock Option Plan, options currently
outstanding under those plans will continue in effect under the terms of those
plans until such outstanding options are exercised or terminated in accordance
with their terms.
The following tables show for 2001, certain information regarding options
granted to, and held at year end by, the named executive officers. No named
executive officer exercised any stock options during 2001.
Option Grants in Last Fiscal Year
Potential Realizable Value at Assumed
Annual Rates of Stock Price
Individual Grants(1) Appreciation for Option Term(3)
-------------------- -------------------------------------
Number of % of Total
Securities Options
Underlying Granted to Exercise Fair Market
Options Employees or Base Value on Expiration
Name Granted in 2001 Price(2) Grant Date Date 0% 5% 10%
---- ---------- ---------- -------- ----------- ---------- -------- -------- ----------
Christopher P. Mottern 99,999 16.4% $7.23 $8.50 02/25/11 $126,999 $661,554 $1,481,666
43,103 7.1 8.12 8.12 06/05/11 -- 220,111 557,804
Gerald Baldwin........ -- -- -- -- -- -- -- --
-- -- -- -- -- -- -- --
William M. Lilla...... 19,968 3.3 7.23 8.50 02/25/11 25,359 132,100 295,862
18,011 3.0 8.12 8.12 06/05/11 -- 91,975 233,084
Mark N. Rudolph....... 9,984 1.6 7.23 8.50 02/25/11 12,680 66,050 147,931
14,963 2.5 8.12 8.12 06/05/11 -- 76,410 193,639
Peter B. Mehrberg..... 9,984 1.6 7.23 8.50 02/25/11 12,680 66,050 147,931
13,855 2.3 8.12 8.12 06/05/11 -- 70,752 179,300
- --------
(1) All options granted to the named executive officers during 2001 were
non-statutory stock options granted pursuant to the Company's 2000 Equity
Incentive Plan. Messrs. Mottern, Lilla, Rudolph and Mehrberg each received
options to purchase shares at an exercise price of $8.50 per share with
twenty-five percent (25%) of the shares represented by each such grant
vesting on the first anniversary of the grant date, and the remaining
shares vesting monthly over the subsequent three years; provided the
grantee continues to be employed by the Company. Messrs. Mottern, Lilla,
Rudolph and Mehrberg also received bonus options, which are fully vested as
of the date of this report, to purchase shares at an exercise price of
$8.12 per share.
(2) The exercise price per share of each option was equal to at least 85% of
the fair market value of the Common Stock on the date of grant as
determined by the Board of Directors after consideration of a number of
factors, including, but not limited to, the Company's financial
performance, market conditions, the preferred rights and privileges of
shares of equity securities sold to or purchased by outside investors, and
third-party appraisals.
31
(3) The potential realizable value is calculated based on the terms of the
option at its time of grant (10 years). It is calculated assuming that the
fair market value of the Company's Common Stock on the date of grant
appreciates at the indicated annual rate compounded annually for the entire
term of the option is exercised and sold on the last day of its term for
the appreciated stock price.
Fiscal Year End Option Values
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options at Options at
December 30, 2001 December 30, 2001(1)
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
Christopher P. Mottern 310,000 143,102 $1,636,800 $541,201
Gerald Baldwin........ -- -- -- --
William M. Lilla...... 74,167 43,812 386,217 166,368
Mark N. Rudolph....... 114,379 30,780 695,662 116,302
Peter B. Mehrberg..... 74,267 29,672 402,410 112,801
- --------
(1) Value of unexercised in-the-money options is based on the per share deemed
value at year end, determined after the date of grant solely for financial
accounting purposes, less the exercise price payable for such shares.
Employment, Severance and Change of Control Arrangements
Change of Control Option Acceleration Plan
In November 1998, the Company established the Change in Control Option
Acceleration Plan. The plan provides for the acceleration of vesting of shares
covered by outstanding options held by all of the Company's employees in the
event of a change in control of the Company. Employees shall have the right to
exercise their options immediately before the change in control. If any
surviving or acquiring corporation assumes or substitutes such options, then to
the extent the options are not exercised before the change in control, such
assumed or substituted options shall be fully vested on and after the change of
control.
Key Employee Severance Benefit Plan
In November 1998, the Company adopted the Key Employee Severance Benefit
Plan to provide for the payment of severance benefits to the Chairman of the
Board (if employed by the Company) and Chief Executive Officer, all employees
holding the position of vice president, and any other individual designated as
an eligible employee under a key employee agreement. Under the plan, if the
employee's employment is, within 12 months after a change of control,
involuntary terminated without cause or voluntarily terminated for good reason
(a "change of control termination"), or the employee's employment is
involuntarily terminated without cause at any other time, the employee will
receive severance payments determined based on the employee's position and
terms of service:
. Two years of pay for the Chairman of the Board and the Vice President of
Coffee;
. One year of pay plus up to an additional year of pay based on the term of
the employee's employment with the Company (two years of pay in the event
of a change of control termination) for the Chief Executive Officer; and
. Six months of pay plus up to an additional 18 months of pay based on the
term of the employee's employment with the Company (one year of pay in
the event of a change of control termination) for each other vice
president.
32
In addition, the employee will receive an amount equal to the target bonus
amount for the employee for the relevant period in which the employee's
termination of employment occurs, prorated on a daily basis through the
termination date. The Key Employee Severance Benefit Plan also provides for
certain other benefits, including medical, disability and life insurance and
participation in outplacement programs.
Employment Agreements
In 1999 and 2000, the Company entered into key employee agreements with each
of the named executive officers. These agreements provide for an initial base
salary of (i) $250,000 for Messrs. Baldwin and Mottern, (ii) $148,000 for the
Mr. Rudolph, (iii) $155,000 for Mr. Lilla, and (iv) $134,000 for Mr. Mehrberg.
These salary amounts are subject to annual adjustment at the discretion of the
Compensation Committee of the Board of Directors. These agreements also provide
for an annual performance bonus based on the achievement of certain performance
objectives established by the Company, the amount of which bonus will be
determined by the Board of Directors in its sole discretion.
In addition, the agreements provide that if the executive is involuntarily
terminated by the Company without cause or if the executive voluntarily
terminates employment due to a "constructive termination," then the vesting of
all of the executive's outstanding options to purchase Common Stock of the
Company will accelerate and become fully exercisable upon the executive's
termination of employment. Under the agreements, executives also are entitled
to receive benefits to the extent provided under the Key Employee Severance
Benefit Plan and the Change of Control Option Acceleration Plan.
Compensation Committee Interlocks And Insider Participation
As noted above, the Compensation Committee consists of Messrs. Jesse and
Valette. Mr. Jesse is also the Chairman of Jesse.Hansen&Co, which provides
strategic and financial advice to the Company pursuant to an engagement letter
dated as of December 9, 1996. The Company paid Jesse.Hansen&Co $60,000 ($5,000
per month) in fiscal 2001 for advisory services rendered. In addition, on
December 31, 2001, Jesse.Hansen&Co exercised a warrant to purchase 200,000
shares of the Company's Common Stock at an adjusted exercise price of $7.50 per
share.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding the ownership
of the Company's Common Stock as of February 28, 2002 by: (i) each director and
nominee for director; (ii) each of the executive officers named in the Summary
Compensation Table; (iii) all executive officers and directors of the Company
as a group; and (iv) all those known by the Company to be beneficial owners of
more than five percent of its Common Stock.
33
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission which generally attribute beneficial
ownership of securities to persons who possess sole or shared voting power or
investment power with respect to those securities and includes shares of Common
Stock issuable pursuant to the exercise of stock options or warrants that are
immediately exercisable or exercisable within 60 days of February 28, 2002.
These shares are deemed to be outstanding and to be beneficially owned by the
person holding those options or warrants for the purpose of computing the
percentage ownership of that person, but are not treated as outstanding for the
purpose of computing the percentage ownership of any other person. Unless
otherwise indicated, the persons or entities identified in this table have sole
voting and investment power with respect to all shares shown as beneficially
owned by them, subject to applicable community property laws. Information with
respect to beneficial ownership has been furnished by each director, officer or
five percent or more shareholder, as the case may be. Except as otherwise noted
below, the address for each person listed on the table is c/o Peet's Coffee &
Tea, Inc., 1400 Park Avenue, Emeryville, California 94608-3520. Applicable
percentages are based on 8,468,204 shares outstanding on February 28, 2002,
adjusted as required by the rules promulgated by the Securities and Exchange
Commission.
Principal Shareholders Table
Number of
Shares Percentage of
Beneficially Beneficial
Name of Beneficial Owner: Owned Ownership
------------------------- ------------ -------------
Directors and Executive Officers:
Gerald A. Baldwin.................................... 1,041,697 12.3%
Christopher P. Mottern(1)............................ 438,728 4.9
H. William Jesse, Jr.(2)............................. 153,841 1.8
Gordon A. Bowker(3).................................. 153,038 1.8
Mark N. Rudolph(4)................................... 142,159 1.6
William M. Lilla(5).................................. 114,109 1.3
Peter B. Mehrberg(6)................................. 95,499 1.1
Jean-Michel Valette(7)............................... 17,639 *
Hilary Billings(8)................................... 2,083 *
All directors and officers as a group (13 persons)(9) 2,554,338 26.4
Other 5% Shareholders:
The TCW Group, Inc.(10).............................. 1,025,415 12.1
865 South Figueroa Street
Los Angeles, CA 90017
Scudder Kemper Investments, Inc.(11)................. 586,800 6.9
345 Park Avenue
New York, NY 10154
- --------
* Less than 1%.
(1) Includes 382,269 shares issuable upon the exercise of vested stock options
and 40,000 shares held by the Mottern Family Trust.
(2) Includes 69,565 shares held by Jesse.Hansen&Co and 43,472 shares issuable
upon the exercise of vested stock options.
(3) Includes 51,472 shares issuable upon the exercise of vested stock options.
(4) Includes 133,920 shares issuable upon the exercise of vested stock options.
(5) Includes 99,668 shares issuable upon the exercise of vested stock options.
(6) Includes 92,700 shares issuable upon the exercise of vested stock options.
(7) Includes 7,639 shares issuable upon the exercise of vested stock options.
(8) Includes 2,083 shares issuable upon the exercise of vested stock options.
(9) Includes 1,125,753 shares issuable upon the exercise of vested stock
options.
34
(10) Based upon information contained in Schedule 13G Amendment No. 1 filed
with the Securities and Exchange Commission on February 13, 2002.
(11) Based upon information contained in Schedule 13G filed with the Securities
and Exchange Commission on February 1, 2002.
Item 13. Certain Relationships and Related Transactions
As discussed above under the "Compensation Committee Interlocks and Insider
Participation" and elsewhere in this proxy statement, Mr. Jesse, a member of
the compensation committee, is the Chairman of Jesse.Hansen&Co, to which the
Company paid $60,000 ($5,000 per month) in fiscal 2001 for advisory services
rendered. The Company believes that the terms of the transaction were at least
as favorable as the terms that would have been obtained from an unaffiliated
third party.
The Company has entered into indemnity agreements with certain officers and
directors. These agreements, among other things, provide for indemnification of
the Company's directors and executive officers for expenses, judgments, fines
and settlement amounts incurred by any such person in any action or proceeding
arising out of such person's services as a director or executive officer or at
the Company's request to the full extent permitted by Washington law. The
Company believes that these provisions and agreements are necessary to attract
and retain qualified persons as directors and executive officers.
35
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
The following documents are filed as part of this Form 10-K.
(a)(1) Index to Consolidated Financial Statements.
The following Consolidated Financial Statements of Peet's Coffee &Tea, Inc.
and its subsidiaries are filed as part of this Form 10-K:
Page
----
Independent Auditors' Report........................................................................ F-2
Consolidated Balance Sheets as of December 31, 2000 and December 30, 2001........................... F-3
Consolidated Statement of Operations for the Years ended January 2, 2000, December 31, 2000 and
December 30, 2001................................................................................. F-4
Consolidated Statements of Shareholders' Equity for the Years Ended January 2, 2000, December 31,
2000 and December 30, 2001........................................................................ F-5
Consolidated Statements of Cash Flows for the Years Ended January 2, 2000, December 31, 2000 and and
December 30, 2001................................................................................. F-6
Notes to Consolidated Financial Statements.......................................................... F-7
(a)(2) Index to Financial Statement Schedule.
Schedules are omitted because they are not applicable, not required or
because the required information is included in the Consolidated Financial
Statements or Notes thereto.
(a)(3) Listing of Exhibits
Exhibit Description
- ------- -----------
3.1 Amended and Restated Articles of Incorporation.*
3.2 Amended and Restated Bylaws.*
4.1 Form of common stock certificate.*
10.1 Credit Agreement, dated as of September 1, 2000, among Peet's Coffee and Tea, Inc., Peet's
Companies, Inc., Peet's Trademark Company and General Electric Capital Corporation.*
10.2 Letter Agreement dated October 11, 2000 among Peet's Coffee and Tea, Inc., Peet's Companies, Inc.,
Peet's Trademark Company and General Electric Capital Corporation.*
10.3 First Amendment to Credit Agreement dated as of January 19, 2001 among Peet's Operating
Company, Inc. (formerly Peet's Coffee and Tea, Inc.), Peet's Coffee & Tea, Inc. (formerly Peet's
Companies, Inc.), Peet's Trademark Company and General Electric Capital Corporation.*
10.4 Loan Agreement, dated as of December 1, 1995, by and between California Statewide Communities
Development Authority and Peet's Coffee and Tea, Inc.*
10.5 Amended and Restated 1993 Stock Option Plan.(1)*
10.6 1994 California Stock Option Plan.(1)*
10.7 1997 Equity Incentive Plan and form of Stock Option Agreement.(1)*
10.8 Peet's Operating Company, Inc. Savings and Retirement Plan.(1)*
10.9 2000 Equity Incentive Plan and form of Stock Option Agreement.(1)*
36
Exhibit Description
- ------- -----------
10.10 2000 Non-Employee Director Plan and form of Stock Option Agreement.(1)*
10.11 2000 Employee Stock Purchase Plan and form of Offering.(1)*
10.12 Peet's Operating Company, Inc. Key Employee Severance Benefit Plan.(2)*
10.13 Change of Control Option Acceleration Plan.(1)*
10.14 Warrant to Purchase 100,000 Shares of Common Stock of Registrant issued by Registrant to
Jesse.Hansen&Co (formerly HWJesse & Co.) dated May 23, 1997 (covering 200,000 shares after
giving effect to the two-for-one stock split).*
10.15 Advisory Engagement Letter dated December 9, 1996, between Peet's Operating Company, Inc. and
Jesse.Hansen&Co.*
10.16 Peet's Operating Company, Inc. Key Employment Agreement for Chairman dated as of January 4,
1999.(2)*
10.17 Peet's Operating Company, Inc. Key Employment Agreement for Chief Executive Officer dated as of
May 9, 2000.(2)*
10.18 Peet's Operating Company, Inc. Key Employment Agreement for Vice President, Coffee dated as of
June 6, 2000.(2)*
10.19 Peet's Operating Company, Inc. Key Employment Agreement for Chief Financial Officer dated as of
January 4, 1999.(2)*
10.20 Peet's Operating Company, Inc. Key Employment Agreement for Vice President, Marketing dated as
of January 4, 1999.(2)*
10.21 Form of Indemnity Agreement between the registrant and each of its directors and officers.(2)(3)
10.22 Second Amendment to Credit Agreement, dated as of June 29, 2001, among Peet's Operating
Company, Inc., Peet's Trademark Company, Peet's Coffee & Tea, Inc. and General Electric Capital
Corporation.(4)
10.23 Third Amendment to Credit Agreement, dated as of March 1, 2002, among Peet's Operating
Company, Inc., Peet's Trademark Company, Peet's Coffee & Tea, Inc. and General Electric Capital
Corporation.
21.1 Subsidiaries of the registrant.*
23.1 Consent of Deloitte & Touche LLP.
- --------
* Incorporated by reference. Previously filed as an exhibit to the
Registrant's Information Statement on Form S-1 (File No. 333-47957) filed
on October 13, 2000, as subsequently amended.
(1) Compensatory plan or arrangement.
(2) Management contract.
(3) Incorporated by reference. Previously filed as an exhibit to the
Registrant's annual report on Form 10-K for the year ended December 31,
2000.
(4) Incorporated by reference. Previously filed as an exhibit to Registrant's
quarterly report on Form 10-Q for the quarter ended July 1, 2001.
(b) No reports on Form 8-K were filed by the Company during the quarter
ended December 30, 2001.
37
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report..................................................................... F-2
Consolidated Balance Sheets as of December 31, 2000 and December 30, 2001........................ F-3
Consolidated Statements of Operations for the Years Ended January 2, 2000, December 31, 2000 and
December 30, 2001.............................................................................. F-4
Consolidated Statements of Shareholders' Equity for the Years Ended January 2, 2000, December 31,
2000 and December 30, 2001..................................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended January 2, 2000, December 31, 2000 and
December 30, 2001.............................................................................. F-6
Notes to Consolidated Financial Statements....................................................... F-7
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Peet's Coffee & Tea, Inc.
We have audited the accompanying consolidated balance sheets of Peet's
Coffee & Tea, Inc. and subsidiaries as of December 31, 2000 and December 30,
2001 and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended December
30, 2001. 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 auditing standards generally
accepted in the United States of America. 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 included
examining, on a test basis, evidence supporting the amounts and the 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, such consolidated financial statements present fairly, in
all material respects, the financial position of Peet's Coffee & Tea, Inc. and
subsidiaries as of December 31, 2000 and December 30, 2001 and the results of
their operations and their cash flows for each of the three years in the period
ended December 30, 2001, in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 11 to the financial statements, the Company changed its
method of accounting for derivative financial instruments to conform to
Statement of Financial Accounting Standards No. 133.
/S/ DELOITTE & TOUCHE LLP
San Francisco, California
March 1, 2002
F-2
PEET'S COFFEE & TEA, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
December 31, December 30,
2000 2001
------------ ------------
Assets
- ------
Current assets:
Cash and cash equivalents............................................... $ 1,598 $ 2,718
Accounts receivable (net of allowance of $69 and $58)................... 1,062 1,371
Inventories............................................................. 8,940 8,945
Deferred income taxes................................................... 92 288
Prepaid expenses and other.............................................. 883 1,100
------- -------
Total current assets................................................ 12,575 14,422
Property and equipment, net................................................ 22,595 23,629
Deferred income taxes...................................................... 1,505 1,305
Intangibles and other assets, net.......................................... 3,046 2,053
------- -------
Total assets........................................................ $39,721 $41,409
======= =======
Liabilities and Shareholders' Equity
- ------------------------------------
Current liabilities:
Borrowings under line of credit......................................... $ 4,246 $ 1,968
Accounts payable........................................................ 5,158 4,166
Accrued compensation and benefits....................................... 2,054 2,355
Other accrued liabilities............................................... 1,933 2,105
Current portion of long-term borrowings................................. 2,037 513
------- -------
Total current liabilities........................................... 15,428 11,107
Long-term borrowings, less current portion................................. 14,544 895
Deferred lease credits..................................................... 582 637
------- -------
Total liabilities................................................... 30,554 12,639
------- -------
Commitments and contingencies..............................................
Shareholders' equity:
Preferred stock, no par value; authorized 10,000,000 shares; issued and
outstanding 471,000 of Series A....................................... 4,537
Common stock, no par value; authorized 50,000,000 shares; issued and
outstanding: 4,516,000 shares and 8,272,000........................... 8,217 31,609
Accumulated other comprehensive loss, net of tax........................ (407)
Accumulated deficit..................................................... (3,587) (2,432)
------- -------
Total shareholders' equity.......................................... 9,167 28,770
------- -------
Total liabilities and shareholders' equity.......................... $39,721 $41,409
======= =======
See notes to consolidated financial statements.
F-3
PEET'S COFFEE & TEA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
1999 2000 2001
------- ------- -------
Net revenue............................................... $69,059 $84,302 $94,400
------- ------- -------
Operating expenses:
Cost of sales and related occupancy expenses........... 33,175 40,173 44,935
Operating expenses..................................... 21,902 27,853 30,437
Marketing and advertising expenses..................... 3,491 6,069 4,812
General and administrative expenses.................... 6,230 6,595 6,845
Depreciation and amortization expenses................. 3,404 4,576 5,038
------- ------- -------
Total operating costs and expenses................. 68,202 85,266 92,067
------- ------- -------
Income (loss) from operations............................. 857 (964) 2,333
Interest expense, net..................................... 985 1,907 429
------- ------- -------
Income (loss) before income taxes......................... (128) (2,871) 1,904
Income tax provision (benefit)............................ 16 (596) 749
------- ------- -------
Net income (loss)......................................... $ (144) $(2,275) $ 1,155
======= ======= =======
Net income (loss) per share:
Basic.................................................. $ (0.03) $ (0.50) $ 0.15
======= ======= =======
Diluted................................................ $ (0.03) $ (0.50) $ 0.14
======= ======= =======
Shares used in calculation of net income (loss) per share:
Basic.................................................. 4,489 4,515 7,941
======= ======= =======
Diluted................................................ 4,489 4,515 8,212
======= ======= =======
See notes to consolidated financial statements.
F-4
PEET'S COFFEE & TEA, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
Series A
Preferred Stock Common Stock
------------------- -------------------
Accumulated
Other Total
Shares Shares Accumulated Comprehensive Shareholders' Comprehensive
Outstanding Amount Outstanding Amount Deficit Loss Equity Income/(Loss)
----------- ------- ----------- ------- ----------- ------------- ------------- -------------
Balance at January 3, 1999..... 471 $ 4,537 4,408 $ 7,422 $(1,168) $10,791
Stock options exercised,
including tax benefit......... 106 531 531
Amortization of stock
compensation.................. 13 13
Net loss....................... (144) (144) $ (144)
---- ------- ----- ------- ------- ------- -------
Balance at January 2, 2000..... 471 4,537 4,514 7,966 (1,312) 11,191 $ (144)
=======
Stock options exercised........ 2 13 13
Amortization of stock
compensation.................. 238 238
Net loss....................... (2,275) (2,275) $(2,275)
---- ------- ----- ------- ------- ------- -------
Balance at December 31, 2000... 471 4,537 4,516 8,217 (3,587) 9,167 $(2,275)
=======
Conversion of preferred........
shares....................... (471) (4,537) 943 4,537
Stock sold in initial public
offering, net of expenses..... 2,682 17,793 17,793
Stock options exercised........ 94 507 507
Stock sold in Employee Stock
Purchase Program.............. 37 250 250
Amortization of stock
compensation.................. 305 305
Cumulative effect of accounting
change (FAS 133), net of tax
of $519....................... $(785)
Unrealized losses on cash flow
hedges, net of tax of $195.... (295)
Less: reclassification of net
losses on cash flow hedges to
cost of sales, net of tax of
$269.......................... 673
-----
Other comprehensive loss....... (407) (407) $ (407)
Net income..................... 1,155 1,155 1,155
---- ------- ----- ------- ------- ----- ------- -------
Balance at December 30, 2001... -- $ -- 8,272 $31,609 $(2,432) $(407) $28,770 $ 748
==== ======= ===== ======= ======= ===== ======= =======
See notes to consolidated financial statements.
F-5
PEET'S COFFEE & TEA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
1999 2000 2001
-------- -------- --------
Cash flows from operating activities:
Net income (loss).............................................................. $ (144) $ (2,275) $ 1,155
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization............................................... 3,958 5,210 5,693
Tax benefit from exercise of stock options.................................. 102
Amortization of discounted stock options.................................... 13 238 305
Deferred income taxes....................................................... (191) (472) 273
Loss on disposition of assets............................................... 496 188 6
Changes in other assets and liabilities:
Accounts receivable......................................................... (309) (214) (309)
Inventories................................................................. 1,797 (1,730) (1,309)
Prepaid expenses and other.................................................. (327) 115 (217)
Other assets................................................................ (207) 22
Accounts payable, accrued liabilities and other liabilities................. 865 1,816 164
-------- -------- --------
Net cash provided by operating activities................................ 6,260 2,669 5,783
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment............................................ (9,665) (5,518) (6,511)
Proceeds from sales of property and equipment.................................. 2 4 17
Additions to intangible assets................................................. (416) (276) (350)
-------- -------- --------
Net cash used in investing activities.................................... (10,079) (5,790) (6,844)
-------- -------- --------
Cash flows from financing activities:
Proceeds from borrowings....................................................... 4,031 46,258
Repayments of debt............................................................. (440) (41,544) (17,451)
Payments of stock offering costs (completed in January 2001)................... (1,082)
Net proceeds from issuance of common stock..................................... 429 13 19,632
-------- -------- --------
Net cash provided by financing activities................................ 4,020 3,645 2,181
-------- -------- --------
Change in cash and cash equivalents................................................ 201 524 1,120
Cash and cash equivalents, beginning of period..................................... 873 1,074 1,598
-------- -------- --------
Cash and cash equivalents, end of period........................................... $ 1,074 $ 1,598 $ 2,718
======== ======== ========
Supplemental cash flow disclosures:
Cash paid (received) for:
Interest.................................................................... $ 1,054 $ 1,668 $ 478
Income taxes................................................................ (77) 108 29
NON CASH INVESTING AND FINANCING ACTIVITIES--
Property acquired under capital lease.......................................... $ 476
Conversion of preferred stock to common stock upon IPO......................... $ 4,537
IPO fees accrued at December 31, 2000 applied to proceeds in 2001.............. 1,082
FAS 133 transition adjustment and coffee hedging activities:
Inventory................................................................... (1,304)
Deferred taxes.............................................................. 269
Other comprehensive loss.................................................... 407
Other liabilities........................................................... 628
See notes to consolidated financial statements.
F-6
PEET'S COFFEE & TEA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. History and Organization
Peet's Coffee & Tea, Inc., (the "Company") sells fresh roasted coffee, hand
selected tea and related items in several distribution channels, including
specialty grocery and gourmet food stores, online and mail order, office and
restaurant accounts and company-operated retail stores. At December 31, 2000
and December 30, 2001, the Company operated 58 and 60 retail stores,
respectively, in California, Illinois, Oregon, and Massachusetts.
All share and per share data in the accompanying financial statements have
been retroactively adjusted to reflect a two-for-one stock split of the
Company's outstanding common stock which was effective January 22, 2001.
2. Summary of Significant Accounting Policies
Principles of Consolidation--The consolidated financial statements include
the accounts of the Company and its subsidiaries. All significant intercompany
transactions have been eliminated in consolidation.
Reclassifications--Certain reclassifications have been made to prior years'
financial statements in order to conform with the current year's presentation.
Year End--The Company's year end is the Sunday closest to December 31. The
years 2001, 2000, and 1999 included 52 weeks.
Cash and Cash Equivalents--The Company considers all liquid investments with
original maturities of three months or less to be cash equivalents.
Inventories--Raw materials consist primarily of green bean coffee and
finished goods include roasted coffee, tea, accessory products, spices, and
packaged foods. All products are valued at the lower of cost or market using
the first-in, first-out method, except green bean and roasted coffee, which is
valued at the average cost.
Property and equipment are stated at cost. Depreciation and amortization are
recorded on the straight-line method over the estimated useful lives of the
property and equipment, which range from 3 to 10 years. Leasehold improvements
are amortized using the straight-line method over the lesser of the estimated
useful life or the term of the related lease, which range from 3 to 10 years.
Intangibles and other assets primarily includes lease rights, deposits,
trademarks, and deferred financing costs. Prepaid stock offering costs of
$1,082,000 were included at December 31, 2000. Lease rights represent payments
made to lessors and others to secure retail locations and are amortized on the
straight-line method over the life of the related lease from 5 to 15 years.
Lease rights, net of amortization, were $796,000 and $926,000 at December 31,
2000, and December 30, 2001, respectively. Accumulated amortization was
$1,398,000 and $1,636,000 at December 31, 2000 and December 30, 2001,
respectively. Amortization expense was $205,000, $220,000, and $238,000 in
1999, 2000 and 2001, respectively.
Impairment of Long-Lived Assets--The Company evaluates the recoverability of
its long-lived assets in accordance with Statement of Financial Accounting
Standards ("SFAS") No.121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of whenever events or changes in
circumstances have indicated that the carrying amount of its assets might not
be recoverable. If the fair value is less than the carrying amount of the
asset, a loss is recognized for the difference. In 1999 and 2000, impairment
losses of $436,000 and $129,000, respectively, were recorded as general and
administrative expense to write off property related to closed stores. No
impairment loss was recorded in 2001.
Store Closure--The Company accrues an estimate for the costs associated with
closing under-performing stores in the period in which the store is identified
and approved by management under a plan of termination. The plan includes the
method of disposition and the expected date of completion. Costs, which are
considered to have no future economic benefit, include direct costs to
terminate a lease or sublease a property and the difference
F-7
PEET'S COFFEE & TEA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
between the book value and estimated recovery of fixed assets. Significant
changes to the plan are unlikely. The operating costs, including depreciation,
of stores or other facilities to be sold or closed are expensed during the
period they remain in use.
The Company recorded expenses of $482,000 and $456,000 representing the
write off of leasehold improvements, fixed assets and estimated future rental
payments for store closures during 1999 and 2000, respectively. No expense was
recorded in 2001. The Company had an accrual of $48,000, $301,000 and $59,000,
representing estimated future rental payments, at January 2, 2000, December 31,
2000, and December 30, 2001, respectively.
In August 2001, the Company assigned, with the consent of the landlord, the
existing lease for the Naperville location to another entity. The Company
remains liable for rent and other charges under the lease, which expires
December 31, 2008. However, the assignee's parent company has guaranteed the
payment by the assignee of rent and other charges under the lease assignment up
to $313,000 (equivalent to approximately four years of rent due under the
lease). The Company expects that the assignee will make all future rent
payments required under the lease and during 2001 reduced the accrual for
estimated future payments under the lease by $134,000. The remaining accrual at
year end 2001 represents the Company's remaining obligation for rental payments
of seven months during the assignee's construction and rent abatement
period.
A summary of the accrual activity is as follows (excluding write-off of
assets) (in thousands):
Balance at Additions Balance
Beginning Charged to at End of
of Period Expense Deductions Period
---------- ---------- ---------- ---------
Accrual related to store closures:
Year ended January 2, 2000..... $ 35 $ 48 $ (35) $ 48
Year ended December 31, 2000... 48 327 (74) 301
Year ended December 30, 2001... 301 -- (242) 59
Revenue Recognition--Net revenue is recorded based on purchases by customers
at retail locations or when merchandise is shipped from the warehouse for
direct-to-consumer sales, which is substantially the same as recording revenue
when received by the customer. Sales returns are insignificant. The Company
establishes an allowance for estimated doubtful accounts based on historical
experience and current trends, which management believes is appropriate.
The Company records shipping revenue in its net revenue. The Company
recorded shipping revenue of $1,252,000. $1,371,000, and $1,522,000 related to
online and mail order and specialty sales in 1999, 2000, and 2001, respectively.
A summary of the allowance for doubtful accounts is as follows (in
thousands):
Balance at Additions Balance
Beginning Charges to at End of
of Period Expense Writeoffs Period
---------- ---------- --------- ---------
Allowance for doubtful accounts:
Year ended January 2, 2000... $50 $47 $(36) $61
Year ended December 31, 2000. 61 23 (15) 69
Year ended December 30, 2001. 69 30 (41) 58
Preopening costs or costs associated with the opening or remodeling of
stores, such as payroll and rent, are expensed as incurred.
F-8
PEET'S COFFEE & TEA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Hedging Activities--The Company uses coffee futures and options to hedge
price increases in price-to-be- fixed coffee purchase commitments and
anticipated coffee purchases. These derivative instruments qualify for hedge
accounting under SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. See Note 11. Prior to the adoption of SFAS No. 133 on
January 1, 2001, the contracts also qualified for hedge accounting and the
gains and losses were accounted for as inventory costs and were recorded as
expense or income as the related coffee was sold. The Company does not hold or
issue derivative instruments for trading purposes.
Fair Value of Financial Instruments--The carrying value of cash and
equivalents, receivables and accounts payable approximates fair value. The
carrying value of debt approximates the estimated fair value due to floating
interest rates on the debt. The fair value of futures contracts is the amount
at which they could be settled, based on estimates obtained from dealers. Net
unrealized loss on such contracts, reflected in inventory was ($1,304,000) at
December 31, 2000. The fair value of the open futures contracts as of December
30, 2001 was a net liability of $112,000 and is reflected in other liabilities.
See Note 11.
Cost of sales and related occupancy expenses consist primarily of coffee and
other product costs. It also includes plant manufacturing (including
depreciation), freight and distribution costs. Occupancy expenses include rent
and related expenses such as utilities.
Advertising costs are expensed as incurred. Advertising expense was
$2,472,000, $5,158,000, and $3,860,000 in 1999, 2000, and 2001, respectively.
Deferred Lease Credits--Certain of the Company's lease agreements provide
for scheduled rent increases during the term of the lease. Rent is expensed on
a straight-line basis over the term of the lease.
Income Taxes--Income taxes are accounted for using the asset and liability
method, under which deferred tax assets and liabilities are determined based on
the difference between the financial statements and tax bases of assets and
liabilities using enacted tax rates currently in effect.
Stock-Based Compensation--The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with APB No. 25,
Accounting for Stock Issued to Employees. The disclosure requirements of SFAS
No. 123, Accounting for Stock-Based Compensation, are set forth in Note 9.
Net Income (Loss) per Share--Basic net income per share is computed as net
income (loss) divided by the weighted average number of common shares
outstanding for the period. Diluted net income (loss) per share reflects the
potential dilution that could occur from common shares issued through stock
options, warrants and the conversion of preferred stock. Diluted net loss per
share for the year ended January 2, 2000 and December 31, 2000 does not include
the common shares issued through stock options, warrants and the conversion of
preferred stock because they are anti-dilutive. Anti-dilutive shares of 110,750
have been excluded from diluted weighted average shares outstanding in 2001.
Use of Estimates--The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures 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.
Recently Issued Accounting Standards--In June 2001, the Financial Accounting
Standards Board issued SFAS No. 141, Business Combinations, and SFAS No. 142,
Goodwill and Other Intangible Assets. SFAS No. 141 requires that all business
combinations initiated after June 30, 2001 be accounted for under the purchase
method and addresses the initial recognition and measurement of goodwill and
other intangible assets acquired in a business combination.
F-9
PEET'S COFFEE & TEA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SFAS No. 142 specifies that goodwill and certain intangible assets will not
be amortized but will instead be subject to periodic impairment testing. The
Company adopted SFAS No. 142 on December 31, 2001. The adoption of the new
standard will not have a material impact on its financial statements.
In October 2001, the Financial Accounting Standards Board issued SFAS No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets. This
statement supercedes SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of, and the accounting and
reporting provision of APB Opinion No. 30, Reporting the Results of
Operations--Reporting the Effects of Disposal of Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for
the disposal of a segment of business. SFAS No. 144 became effective for the
Company on December 31, 2001. Adoption of this standard will not have a
material effect on the Company's financial position or results of operations.
3. Inventories
The Company's inventories consist of the following at year end 2000 and 2001
(in thousands):
2000 2001
------ ------
Raw materials.......................... $5,795 $5,722
Finished goods......................... 3,145 3,223
------ ------
Total............................... $8,940 $8,945
====== ======
4. Property and Equipment
Property and equipment consists of the following at year end 2000 and 2001
(in thousands):
2000 2001
-------- --------
Leasehold improvements....... $ 20,006 $ 22,007
Furniture and fixtures....... 18,012 21,660
Equipment and vehicles....... 3,876 6,193
Construction in progress..... 2,096 514
-------- --------
Total..................... 43,990 50,374
Less accumulated depreciation (21,395) (26,745)
-------- --------
Total..................... $ 22,595 $ 23,629
======== ========
Depreciation expense was $3,771,000 in 1999, $4,990,000 in 2000, and
$5,455,000 in 2001, respectively. The Company capitalized interest on
construction in progress of $100,000 in 1999, $58,000 in 2000, and $17,000 in
2001.
5. Borrowings
In September 2000, the Company entered into a credit facility with General
Electric Capital Corporation. The facility expires in September 2005 and
provides for a revolving line of credit up to $15,000,000 and the issuance of
up to $3,000,000 in letters of credit, a Term A Loan for $7,000,000 and a Term
B Loan for $8,000,000. The Term A Loan and the Term B Loan were repaid during
2001 upon the closing of the Company's initial public offering. Total
availability under the revolving line of credit is determined by subtracting
our funded debt from our trailing twelve month earnings before interest, taxes,
depreciation and amortization, or
F-10
PEET'S COFFEE & TEA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(EBITDA), multiplied by 3.75 for the period before September 1, 2001, 3.5 for
the period after September 1, 2001 and before September 1, 2002, and 2.5
thereafter. As of December 30, 2001, $1,968,000 was outstanding and $11,572,000
was available under the Company's line of credit.
Borrowings under the credit facility are secured by a lien on substantially
all of the Company's assets. The credit facility contains covenants restricting
the Company's ability to make capital expenditures, incur additional
indebtedness and lease obligations, open retail stores, make restricted
payments, merge into or with other companies and sell all or substantially all
of its assets and requiring the Company to meet certain financial tests. The
credit facility was amended on June 29, 2001 and March 1, 2002 (effective
December 2001) to increase the Company's flexibility under (a) the financial
covenants, and (b) certain other negative covenants (including the relaxation
of restrictions on the number of retail stores the Company may open per year).
In addition, interest rates on the revolving line of credit have been reduced.
Long term borrowings consist of the following at year end 2000 and 2001 (in
thousands):
2000 2001
------- ------
Term loan, payable to financial institution, interest at a monthly floating rate of
9.77% at December 31, 2000, repaid in January 2001............................... $ 6,533
Term loan, payable to financial institution, interest at a monthly floating rate of
13.77% at December 31, 2000, repaid in January 2001.............................. 8,000
Industrial development revenue bond, interest at a weekly floating rate of 1.50%
at December 30, 2001, until maturity in 2006..................................... 1,740 $1,300
Capital lease obligations.......................................................... 308 108
------- ------
Total........................................................................... 16,581 1,408
Less accumulated depreciation...................................................... (2,037) (513)
------- ------
Total........................................................................... $14,544 $ 895
======= ======
Scheduled maturities of the Company's borrowings at December 30, 2001
(excluding capital lease obligations, see Note 10) are as follows (in
thousands):
Year:
2002.......... $ 440
2003.......... 440
2004.......... 140
2005.......... 140
2006.......... 140
Thereafter.... --
------
Total..... $1,300
======
F-11
PEET'S COFFEE & TEA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Income Taxes
The income tax provision (benefit) consists of the following (in thousands):
1999 2000 2001
----- ----- ----
Current:
Federal....... $ 169 $ (66) $467
State......... 39 (58) 9
----- ----- ----
Total..... 208 (124) 476
Deferred:
Federal....... (165) (569) 133
State......... (27) 97 140
----- ----- ----
Total..... (192) (472) 273
----- ----- ----
Total..... $ 16 $(596) $749
===== ===== ====
The difference between the effective income tax rate and the United States
federal income tax rate is summarized as follows:
1999 2000 2001
----- ----- ----
Statutory Federal rate................... 34.0% 34.0% 34.0%
State income taxes less federal benefit.. 5.8 5.8 5.8
Change in valuation allowance............ 0.0 (14.8) 3.7
Non-deductible items..................... (12.2) (0.6) 0.8
California net operating loss limitation. (36.0) (3.6) (2.1)
California Manufacturer Investment Credit (4.1) 0.0 (2.9)
----- ----- ----
Total................................. (12.5)% 20.8% 39.3%
===== ===== ====
Deferred tax assets (liabilities) consist of the following at year end 2000
and 2001 (in thousands):
2000 2001
------- ------
Net operating loss carryforwards..... $ 1,759 $ 153
Charitable contribution carryforwards 424 439
Credit carryforwards................. 493 861
Scheduled rent....................... 190 273
Accrued reserves..................... 124 171
Accrued compensation................. 241 267
------- ------
Gross deferred tax assets......... 3,231 2,164
------- ------
Property and equipment............... (1,073) (238)
State taxes.......................... (5) 43
Other................................ (132) 158
------- ------
Gross deferred tax liabilities.... (1,210) (37)
------- ------
Valuation allowance.................. (424) (534)
------- ------
Net deferred tax assets........... $ 1,597 $1,593
======= ======
The Company has state net operating loss carryforwards of $1,731,000, which
expire between 2002 and 2005. Certain restrictions apply on the use of loss
carryforwards, charitable contribution carryforwards and
F-12
PEET'S COFFEE & TEA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
certain tax credits. A valuation allowance has been recorded to reduce specific
carryovers to amounts that are more likely than not to be realized.
7. Employee Benefit Plan
The Company's 401(k) plan covers substantially all employees. Employees may
contribute up to 15% of their annual salary up to a maximum of $10,500. The
Company matches 50% of amounts contributed by its employees in cash. The
Company contribution was $194,000, $347,000, and $413,000 in 1999, 2000, and
2001 respectively. The plan does not offer investments in Company stock.
8. Shareholders' Equity
On January 25, 2001, the Company issued 2,500,000 shares of stock at $8.00
per share in an initial public offering of its common stock and received net
proceeds of $16,424,000. In February 2001, the underwriters exercised the over
allotment option and the Company sold an additional 182,623 shares for net
proceeds of $1,366,000. Upon the closing of the initial public offering, each
of the outstanding shares of preferred stock converted into shares of common
stock at a conversion rate of one to two. On January 30, 2001, the Company
amended and restated its articles of incorporation, pursuant to which the
Company's authorized capital stock consisted of 50,000,000 shares of common
stock without par value and 10,000,000 shares of preferred stock without par
value. None of the preferred stock has been issued or designated as of December
30, 2001.
Prior to the Company's initial public offering in January 2001, the Company
was authorized to issue 10,000,000 shares of preferred stock without par value,
of which 1,000,000 and 98,000 shares were designated for issuance as Series A
and Series B preferred stock (preferred stock), respectively. The holders of
preferred stock have the same voting privileges as holders of the Company's
common stock. The Series A preferred stock was convertible at any time, at the
option of the holder, into common stock at an initial conversion rate of one
preferred share into one common share (one-to-one), subject to adjustment for
future stock dividends and stock splits.
In May of 1997, the Company issued warrants to a consultant to purchase
200,000 shares of common stock at $7.50 per share. These warrants, which are
exercisable at the option of the holder, were exercised on the first day of
fiscal year 2002.
9. Stock Option Plans
In 1994, the Company established two stock option plans, of which one is
inclusive of California residents only, both of which provide for incentive and
nonqualified stock options for the purchase of 831,600 shares of common stock
of the Company. During 1999, the Board of Directors approved a reduction of
208,914 shares available under these plans. Incentive stock options may be
granted to employees of the Company. Nonqualified stock options may be granted
only to employees, directors, officers, agents, consultants or advisors of the
Company. The purchase price of the common stock issuable under the stock option
plans is determined by the Board of Directors and may not be less than the fair
market value of the common stock at the grant date for incentive stock options
and not less than 85% of the fair market value of the common stock at the grant
date for nonqualified stock options. The term of a granted stock option is 10
years from the grant date. Stock options granted through December 30, 1994 vest
20% on each anniversary of the employee's date of hire and, accordingly, are
fully vested and exercisable after five years of employment. Stock options
granted subsequent to December 30, 1994 generally vest over three to four years.
In 1997, the Company adopted a successor equity incentive plan to the
Company's existing stock option plans, which provides a means by which selected
employees, directors, and consultants of the Company may
F-13
PEET'S COFFEE & TEA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
benefit from increased stock value through the granting of incentive and
nonstatutory stock options. The Company has reserved 1,280,000 shares of common
stock for issuance pursuant to the plan. The purchase price of the common stock
issuable under this plan is determined by the Board of Directors, however may
not be less than 85% of the fair market value of common stock at the grant
date. The term of a granted stock option is 10 years from the grant date. Stock
options generally vest over three to four years.
In 2000, the Company adopted a new stock option plan (effective January 24,
2001). The Company has reserved 700,000 shares of common stock for issuance
pursuant to the plan. As of each annual meeting of the Company's shareholders,
beginning in 2002, and continuing through and including the annual meeting of
the Company's shareholders in 2010, the number of shares of common stock
reserved for issuance under the 2000 plan will be increased automatically by
the lesser of (i) three percent (3%) of the total number of shares of common
stock outstanding on such date, (ii) five hundred thousand (500,000) shares, or
(iii) a number of shares determined by the Board prior to such date, which
number shall be less than (i) and (ii) above. The purchase price of the common
stock issuable under this plan is determined by the Board of Directors, however
may not be less than 85% of the fair market value of common stock at the grant
date. The term of a granted stock option is 10 years from the grant date. All
stock options vest at a minimum rate of 20% per year.
The Company also adopted a 2000 Non-Employee Director Plan that provides for
the automatic grant of nonstatutory stock options to purchase shares of common
stock to non-employee directors. The aggregate number of shares of common stock
that may be issued pursuant to these options under the plan is 330,000. The
exercise price of options granted will be equal to the fair market value of the
common stock on the date of grant and have a term no more than ten years from
the date granted. Option grants vest over a period of three years from the date
of grant. In 2001, the company granted non-employee director options to
purchase an aggregate of 120,000 shares of common stock.
As of December 30, 2001, there were 26,210 shares available for grant under
1997 stock option plan, 116,594 shares available for grant under the 2000 stock
option plan, and 210,000 shares available for grant under the 2000 Non-Employee
Director stock option plan. Changes in stock options were as follows:
Weighted-Average
Options Exercise Price Per
Outstanding Share
----------- ------------------
Outstanding at January 3, 1999.. 1,409,128 $5.44
Granted......................... 241,000 6.38
Canceled........................ (197,910) 5.68
Exercised....................... (104,288) 4.12
---------
Outstanding at January 2, 2000.. 1,347,930 5.68
Granted......................... 280,750 7.27
Canceled........................ (37,600) 5.75
Exercised....................... (2,872) 4.64
---------
Outstanding at December 31, 2000 1,588,208 5.96
Granted......................... 729,326 7.69
Canceled........................ (52,601) 6.96
Exercised....................... (94,081) 5.39
---------
Outstanding at December 30, 2001 2,170,852 $6.54
=========
At January 2, 2000, December 31, 2000 and December 30, 2001, 879,566,
1,202,493 and 1,392,087 options, respectively, were exercisable with a weighted
average exercise price of $5.32, $5.54, and $5.93, respectively.
F-14
PEET'S COFFEE & TEA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes stock option information at December 30, 2001:
Options Outstanding Options Exercisable
------------------------------------------- --------------------------
Weighted-Average
Range of Number of Remaining Weighted-Average Number of Weighted-Average
Exercise Prices Options Contractual Life Exercise Price Options Exercise Price
- --------------- --------- ---------------- ---------------- --------- ----------------
$3.85 to $ 4.75 276,486 3.55 years $4.20 276,486 $4.20
$6.00 to $ 6.38 1,128,564 6.54 6.19 1,043,321 6.18
$7.23 to $ 7.25 357,441 9.16 7.23 -- --
$8.00 to $10.20 408,361 9.29 8.50 72,280 9.08
--------- ---------
$3.85 to $10.20 2,170,852 7.11 $6.54 1,392,087 $5.93
========= =========
During 2001, the Company adopted a 2000 Employee Stock Purchase Plan
("ESPP"), where eligible full time employees can choose to have up to 15% of
their annual base earnings withheld to purchase the Company's common stock. The
purchase price of stock is 85% of the lower of the beginning of the offering
period or end of the offering period market price. The Company authorized
200,000 shares of common stock available for issuance under the plan, which
will be increased as of each annual meeting of Peet's shareholders, beginning
2002 until 2020, by the lesser of 200,000 shares or 1.5% of the number of
shares of common stock outstanding on that date. However, the Board of
Directors has the authority to designate a smaller number of shares by which
the authorized number of shares of common stock will be increased on that date.
During 2001, employees purchased 36,789 shares of the Company's common stock
under the plan at a weighted average per share price of $6.80. At December 30,
2001, 163,211 shares remain available for future issuance.
The Company accounts for its stock-based awards using the intrinsic value
method in accordance with Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and its related interpretations.
Accordingly, no compensation cost has been recognized for the stock option
awards granted at fair market value. During 1999 and 2000, the Company granted
options at 85% of fair value and recorded compensation expense equal to the
intrinsic value over the vesting period. The Company has recorded compensation
expense of $13,000 in 1999, $238,000 in 2000 and $305,000 in 2001. Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, requires the disclosure of pro forma net income and earning per
share as if the Company had adopted the fair value method. Had compensation
cost for the Company's stock option plans and ESPP been determined based on the
fair value at the grant date consistent with the provisions of SFAS No. 123,
the Company's net income would have been reduced to the pro forma amounts
indicated below (in thousands):
1999 2000 2001
------ ------- ------
Net income (loss)--as reported.................. $ (144) $(2,275) $1,155
Net income (loss)--pro forma.................... $ (594) $(2,965) $ 827
Basic net income (loss) per share--as reported.. $(0.03) $ (0.50) $ 0.15
Basic net income (loss) per share--pro forma.... $(0.13) $ (0.66) $ 0.10
Diluted net income (loss) per share--as reported $(0.03) $ (0.50) $ 0.14
Diluted net income (loss) per share--pro forma.. $(0.13) $ (0.66) $ 0.10
F-15
PEET'S COFFEE & TEA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The weighted-average fair value of the stock options granted during 1999,
2000, and 2001 was $3.34, $2.91 and $6.56, respectively. The weighted-average
fair value of each 2001 ESPP award was $3.91 per share. The fair value of each
option grant and each ESPP award is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
1999 2000 2001
---- ---- ----
Expected dividend rate. 0% 0% 0%
Expected volatility
Options............. 0% 0% 77.6%
ESPP awards......... 77.6%
Risk-free interest rate
Options............. 6.19% 6.33% 4.88%
ESPP awards......... 4.24%
Expected lives (years)
Options............. 7 5 5
ESPP awards......... 0.5
10. Commitments and Contingencies
Leases--The Company leases its Emeryville, California coffee roasting plant,
distribution center and administrative offices, warehouse, its retail stores
and certain equipment under operating leases that expire from 2002 through
2011. Certain leases contain renewal options for an additional five to fifteen
years, and also provide for contingent rents to be paid equal to a stipulated
percentage of sales. The lease agreements also provide for periodic adjustments
to the minimum lease payments based on changes in cost of living indices or
other scheduled increases.
Future minimum lease payments required under non-cancelable capital and
operating leases subsequent to December 30, 2001 are as follows (amounts in
thousands):
Capital Operating
Leases Leases
------- ---------
Years:
2002.......................................... $ 83 $ 4,464
2003.......................................... 27 4,055
2004.......................................... 4 3,460
2005.......................................... -- 3,111
2006.......................................... -- 2,423
Thereafter.................................... -- 4,303
---- -------
Total minimum lease payments.............. 114 $21,816
=======
Less amounts representing interest............... (6)
----
Present value of net minimum lease payments...... 108
less current obligations...................... (73)
----
Long-term obligations..................... $ 35
====
Rent expense was $3,490,000, $4,329,000, and $4,738,000 for 1999, 2000, and
2001 respectively, including contingent rents of $121,000, $129,000, and
$146,000.
F-16
PEET'S COFFEE & TEA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Purchase Commitments--As of December 30, 2001, the Company had approximately
$19,711,000 of outstanding coffee purchase commitments from 2002 to 2006 with
fixed prices.
Employment Agreements--The Company has agreements with certain officers to
provide severance benefits in the event their employment is terminated under
certain defined circumstances resulting in a contingent liability at December
30, 2001.
The Company is party to various legal proceedings arising from normal
business activities. In the opinion of management, resolution of these matters
will not have a material effect on the financial position, results of
operations, or liquidity.
11. Hedging Activities
The Company is exposed to price risk related to price-to-be-fixed coffee
purchase commitments and anticipated coffee purchases. The Company uses coffee
futures and options to manage price increases and designates these derivative
instruments as cash-flow hedges of its price-to-be-fixed coffee purchase
commitments and anticipated coffee purchases. The Company does not hold or
issue derivative instruments for trading purposes.
On January 1, 2001, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging
Activities. SFAS No. 133, as amended, establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. All derivatives,
whether designated in hedging relationships or not, are required to be recorded
on the balance sheet at fair value. If the derivative is designated in a
fair-value hedge, the changes in the fair value of the derivative and the
hedged item will be recognized in earnings. If the derivative is designated in
a cash-flow hedge, the effective portions of changes in the fair value of the
derivative will be recorded in other comprehensive income and will be
recognized in earnings when the hedged item affects earnings. Ineffective
portions of changes in the fair value of cash-flow hedges are recognized
immediately in earnings.
The adoption of SFAS No. 133 on January 1, 2001 resulted in a liability of
$1,304,000 representing the fair value of the open futures at January 1, 2001,
a deferred tax asset of $519,000 and accumulated other comprehensive loss of
$785,000 net of tax.
During 2001, the effective portion of the cash-flow hedges amounted to a
loss of $295,000 (net of $195,000 tax) and was recorded in other comprehensive
income/(loss). The ineffective portion of the hedges of $169,000 was recorded
as cost of sales during 2001. Other comprehensive loss, net of tax, was
$407,000 as of December 30, 2001, all of which is expected to be recorded as
cost of sales over the next twelve months as the related inventory is sold. The
fair value of the open futures contracts as of December 30, 2001 was a net
liability of $112,000 and is reflected in other liabilities.
F-17
PEET'S COFFEE & TEA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. Segment Information
The Company operates in three reportable segments: retail, online and mail
order and specialty sales. Retail store operations consist of sales of whole
bean coffee, beverages, tea and related products through Company-operated
retail stores. Online and mail order operations consist primarily of sales of
whole bean coffee shipped directly to the consumer. Specialty sales consist of
whole bean coffee sales through grocery, wholesale and office coffee accounts.
Management evaluates segment performance primarily based on revenue and segment
operating income. The following table presents certain financial information
for each segment. Segment income before taxes excludes unallocated marketing
expenses and general and administrative expenses. Unallocated assets include
cash, coffee inventory in the warehouse, corporate headquarter assets and
intangibles and other assets.
Online and
Retail Mail Order Specialty Unallocated Total
------- ---------- --------- ----------- -------
1999
Net revenue.................... $57,164 $ 9,405 $2,490 $69,059
Depreciation and amortization.. (2,766) (182) (83) $ (373) (3,404)
Segment operating income (loss) 6,421 3,809 721 (10,094) 857
Interest expense, net.......... (985) (985)
Loss before income taxes....... (128)
Total assets................... 17,206 975 422 16,047 34,650
Capital expenditures........... 7,032 1,079 60 1,494 9,665
2000
Net revenue.................... $68,322 $10,516 $5,464 $84,302
Depreciation and amortization.. (3,556) (384) (113) $ (523) (4,576)
Segment operating income (loss) 7,393 3,662 994 (13,013) (964)
Interest expense, net.......... (1,907) (1,907)
Loss before income taxes....... (2,871)
Total assets................... 18,547 1,228 403 19,543 39,721
Capital expenditures........... 3,578 750 224 966 5,518
2001
Net revenue.................... $75,055 $11,668 $7,677 $94,400
Depreciation and amortization.. (3,659) (546) (191) $ (642) (5,038)
Segment operating income (loss) 9,480 3,704 1,287 (12,138) 2,333
Interest expense, net.......... (429) (429)
Income before income taxes..... 1,904
Total assets................... 17,676 1,540 2,346 19,847 41,409
Capital expenditures........... 1,882 435 886 3,308 6,511
Net revenue from external customers for the two major product lines are as
follows:
1999 2000 2001
------- ------- -------
Whole bean coffee, tea, and related products $41,811 $50,290 $55,944
Beverages and pastries...................... 27,248 34,012 38,456
------- ------- -------
Total....................................... $69,059 $84,302 $94,400
======= ======= =======
F-18
PEET'S COFFEE & TEA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. Related Party Transactions
A member of the Board of Directors is the Chairman of Jesse.Hansen&Co, a
strategic and financial advisor to the Company pursuant to an engagement letter
dated as of December 9, 1996 between Jesse.Hansen&Co and the Company. The
Company paid Jesse.Hansen&Co $60,000 ($5,000 per month) in fiscal 1999, 2000,
and 2001 for advisory services rendered.
A former member of the Board of Directors was also the chairman of Il
Fornaio (America) Corporation, from which the Company purchased $333,000 and
$262,000 of pastries and other food products in 1999 and 2000, respectively.
14. Net Income (Loss) Per Share
The following table summarizes the differences between basic weighted
average shares outstanding and diluted weighted average shares outstanding used
to compute diluted net income (loss) per share (in thousands):
1999 2000 2001
----- ----- -----
Basic weighted average shares outstanding................................. 4,489 4,515 7,941
Incremental shares from assumed exercise of stock options and warrants.... 0 0 271
----- ----- -----
Diluted weighted average shares outstanding............................... 4,489 4,515 8,212
===== ===== =====
The number of incremental shares from the assumed exercise of stock options
and warrants was calculated applying the treasury stock method.
15. Quarterly Financial Information (Unaudited)
Quarter Ended
--------------------------------------------
April 1, July 1, September 30, December 30,
2001 2001 2001 2001
-------- ------- ------------- ------------
Net revenue............................ $22,568 $22,727 $22,715 $26,390
Income (loss) from operations.......... (308) 158 822 1,661
Net income (loss)...................... (304) 64 430 965
Basic income (loss) per share.......... $ (0.04) $ 0.01 $ 0.05 $ 0.12
Diluted income (loss) per share........ $ (0.04) $ 0.01 $ 0.05 $ 0.11
Quarter Ended
--------------------------------------------
April 2, July 2, October 1, December 31,
2000 2000 2000 2000
-------- ------- ------------- ------------
Net revenue............................ $19,583 $20,196 $20,515 $24,008
Income (loss) from operations.......... (509) (1,895) 274 1,166
Net income (loss)...................... (645) (1,833) (231) 434
Basic income (loss) per share.......... $ (0.14) $ (0.41) $ (0.05) $ 0.10
Diluted income (loss) per share........ $ (0.14) $ (0.41) $ (0.05) $ 0.08
F-19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PEET'S COFFEE & TEA, INC.
Date: March 28, 2002 By: /s/ CHRISTOPHER P. MOTTERN
-------------------------------
Christopher P. Mottern
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Christopher P. Mottern and Mark N. Rudolph and
each of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place, and
stead, in any and all capacities, to sign any and all amendments to this report
and to file the same, with all granting unto said attorneys-in-fact and agents,
and each of them, full power and authority to do and perform each and every act
and thing requisite and necessary to be done in connection therewith, as fully
to all intents and purposes as he might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents, or any of them, or
their or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of 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.
Signature Title Date
--------- ----- ----
/s/ CHRISTOPHER P. MOTTERN President, Chief Executive March 28, 2002
- ----------------------------- Officer and Director
Christopher P. Mottern (Principal Executive
Officer)
/s/ MARK N. RUDOLPH Vice President, Chief March 28, 2002
- ----------------------------- Financial Officer,
Mark N. Rudolph Secretary and Treasurer
(Principal Financial and
Accounting Officer)
/s/ GERALD BALDWIN Director March 28, 2002
- -----------------------------
Gerald Baldwin
/s/ GORDON A. BOWKER Director March 28, 2002
- -----------------------------
Gordon A. Bowker
/s/ H. WILLIAM JESSE, JR. Director March 28, 2002
- -----------------------------
H. William Jesse, Jr.
/s/ JEAN-MICHEL VALETTE Director March 28, 2002
- -----------------------------
Jean-Michel Valette
/s/ HILARY BILLINGS Director March 28, 2002
- -----------------------------
Hilary Billings