UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
__________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended September 28, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
Commission file number 000-32233
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)
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 whether the registrant is an accelerated filer (as
defined in Securities Exchange Act Rule 12b-2). Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock, no par value 12,915,270
(Class) (Outstanding at November 4, 2003)
1
PEET'S COFFEE & TEA, INC.
-------------------------
INDEX
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PART I. FINANCIAL INFORMATION 3
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Item 1. Financial Statements 3
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10
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Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
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Item 4. Controls and Procedures 18
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PART II OTHER INFORMATION 19
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Item 1. Legal Proceedings 19
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Item 6. Exhibits and Reports on Form 8-K 19
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Signatures 20
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2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PEET'S COFFEE & TEA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE AMOUNTS)
SEPTEMBER 28, 2003 DECEMBER 29, 2002
------------------- ------------------
ASSETS
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . $ 27,175 $ 19,672
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . 2,831 2,210
Income tax receivable. . . . . . . . . . . . . . . . . . . . . . . . 300 1,117
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,058 11,007
Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . 3,710 1,803
------------------- ------------------
Total current assets. . . . . . . . . . . . . . . . . . . . 47,074 35,809
Property and equipment, net. . . . . . . . . . . . . . . . . . . . . . 31,860 27,929
Intangible and other assets, net . . . . . . . . . . . . . . . . . . . 2,962 3,305
Long-term U.S. Government and Agency securities. . . . . . . . . . . . 24,956 28,102
------------------- ------------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 106,852 $ 95,145
=================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,963 $ 6,463
Accrued compensation and benefits. . . . . . . . . . . . . . . . . . 3,875 3,741
Other accrued liabilities. . . . . . . . . . . . . . . . . . . . . . 5,240 2,638
Current portion of long-term borrowings. . . . . . . . . . . . . . . 444 468
------------------- ------------------
Total current liabilities . . . . . . . . . . . . . . . . . 14,522 13,310
Long-term borrowings, less current portion . . . . . . . . . . . . . . 90 424
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . 32 181
Deferred lease credits . . . . . . . . . . . . . . . . . . . . . . . . 828 726
------------------- ------------------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . 15,472 14,641
------------------- ------------------
Shareholders' equity:
Common stock, no par value; authorized 50,000,000 shares; issued and
outstanding: 12,900,000 and 12,103,000 shares . . . . . . . . . . 86,621 78,014
Accumulated other comprehensive income, net of tax . . . . . . . . . 36 265
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . 4,723 2,225
------------------- ------------------
Total shareholders' equity. . . . . . . . . . . . . . . . . . 91,380 80,504
------------------- ------------------
Total liabilities and shareholders' equity . . . . . . . . . . . . . . $ 106,852 $ 95,145
=================== ==================
See notes to condensed consolidated financial statements.
3
PEET'S COFFEE & TEA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
SEPT. 28, 2003 SEPT. 29, 2002 SEPT. 28, 2003 SEPT. 29, 2002
---------------- --------------- --------------- ---------------
Net revenue . . . . . . . . . . . . . . . . . . . . . . . . $ 28,833 $ 25,366 $ 85,311 $ 74,711
---------------- --------------- --------------- ---------------
Operating expenses:
Cost of sales and related occupancy expenses. . . . . . . 13,308 11,651 39,297 34,719
Operating expenses. . . . . . . . . . . . . . . . . . . . 9,426 8,182 28,183 24,100
Marketing and advertising expenses. . . . . . . . . . . . 958 1,161 3,357 3,431
General and administrative expenses . . . . . . . . . . . 4,860 1,403 7,722 5,434
Depreciation and amortization expenses. . . . . . . . . . 1,228 1,160 3,547 3,390
---------------- --------------- --------------- ---------------
Total operating costs and expenses . . . . . . . 29,780 23,557 82,106 71,074
---------------- --------------- --------------- ---------------
Income (loss) from operations . . . . . . . . . . . . . . . (947) 1,809 3,205 3,637
Investment income, net. . . . . . . . . . . . . . . . . . . 499 220 972 307
---------------- --------------- --------------- ---------------
Income (loss) before income taxes . . . . . . . . . . . . . (448) 2,029 4,177 3,944
Income tax provision (benefit). . . . . . . . . . . . . . . (125) 750 1,679 1,459
---------------- --------------- --------------- ---------------
Net income (loss) . . . . . . . . . . . . . . . . . . . . . $ (323) $ 1,279 $ 2,498 $ 2,485
================ =============== =============== ===============
Net income (loss) per share:
Basic. . . . . . . . . . . . . . . . . . . . . . . . . $ (0.03) $ 0.11 $ 0.20 $ 0.24
Diluted. . . . . . . . . . . . . . . . . . . . . . . . $ (0.03) $ 0.10 $ 0.19 $ 0.22
Shares used in calculation of net income (loss) per share:
Basic. . . . . . . . . . . . . . . . . . . . . . . . . 12,778 11,992 12,472 10,541
Diluted. . . . . . . . . . . . . . . . . . . . . . . . 12,778 12,673 13,155 11,272
See notes to condensed consolidated financial statements.
4
PEET'S COFFEE & TEA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
THIRTY-NINE WEEKS ENDED
SEPT. 28, 2003 SEPT. 29, 2002
---------------- ----------------
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,498 $ 2,485
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,199 3,899
Amortization of investment interest purchased. . . . . . . . . . . . . . . . . . . . . . . 84 0
Amortization of stock based compensation, including tax benefit of stock options exercised 3,118 223
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,413) 338
Reclassification of hedging losses (gains) from OCI. . . . . . . . . . . . . . . . . . . . (21) 389
Ineffective portion of hedges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 (41)
Gain on disposition of assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) (2)
Gain on sale of long-term investments. . . . . . . . . . . . . . . . . . . . . . . . . . . (296) 0
Changes in other assets and liabilities:
Receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196 (253)
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,051) (2,072)
Prepaid expenses and other current assets. . . . . . . . . . . . . . . . . . . . . . . . . (537) (227)
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189 (1,662)
Accounts payable, accrued liabilities and other liabilities. . . . . . . . . . . . . . . . 1,338 2,368
---------------- ----------------
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . 7,303 5,445
---------------- ----------------
Cash flows from investing activities:
Purchases of property and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,979) (4,986)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 (35)
Purchases of long term U.S. government & agency securities . . . . . . . . . . . . . . . . . (27,713) (27,726)
Proceeds from sale of long-term U.S. government & agency securities. . . . . . . . . . . . . 30,758 0
---------------- ----------------
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . (4,931) (32,747)
---------------- ----------------
Cash flows from financing activities:
Repayments of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (357) (2,355)
Net proceeds from issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . 5,488 44,411
---------------- ----------------
Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . 5,131 42,056
---------------- ----------------
Change in cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,503 14,754
Cash and cash equivalents, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . 19,672 2,718
---------------- ----------------
Cash and cash equivalents, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 27,175 $ 17,472
================ ================
See notes to condensed consolidated financial statements.
5
PEET'S COFFEE & TEA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of Peet's
Coffee & Tea, Inc. and its subsidiaries (collectively, the "Company") for the
thirteen and thirty-nine weeks ended September 28, 2003 and September 29, 2002
are unaudited and, in the opinion of management, contain all adjustments
(consisting only of normal recurring items) necessary to present fairly the
financial position and results of operations for such periods. The condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and related notes contained in the Company's
Annual Report on Form 10-K for the year ended December 29, 2002. The results of
operations for the thirteen and thirty-nine weeks ended September 28, 2003 are
not necessarily indicative of the results expected for the full year.
The balance sheet information as of December 29, 2002, presented herein,
has been derived from the audited consolidated financial statements of the
Company included in the Annual Report on Form 10-K for the year ended December
29, 2002.
Certain reclassifications of prior year balances have been made to conform
to the current presentation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
STOCK BASED COMPENSATION
The Company accounts for stock-based awards to employees using the
intrinsic value method in accordance with Accounting Principle Board No. 25
("APB No. 25"), "Accounting for Stock Issued to Employees." Accordingly, no
compensation cost has been recognized for the stock option awards granted at
fair market value. Through 2001, the Company granted options at 85% of fair
value and recorded compensation expense equal to the intrinsic value over the
vesting period. Statement of Financial Accounting Standards No. 123 ("SFAS No.
123"), "Accounting for Stock-Based Compensation", requires the disclosure of pro
forma net income (loss) and earnings (loss) per share as if the Company had
adopted the fair value method. Had compensation cost for the Company's stock
option plans and employee stock purchase plan been determined based on the fair
value at the grant date consistent with the provisions of SFAS No. 123, the
Company's net income (loss) would have been reduced to the pro forma amounts
indicated below (in thousands):
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
-------------------- -----------------------
SEPT. 28, 2003 SEPT. 29, 2002 SEPT. 28, 2003 SEPT. 29, 2002
--------------- ---------------- ---------------- ----------------
Net income (loss) - as reported . . . . . . . . . ($323) $ 1,279 $ 2,498 $ 2,485
Stock-based employee compensation included in
reported net income (loss) , net of tax. . . 70 41 93 141
Stock-based compensation expense determined
under fair value based method, net of tax. . (784) (939) (2,734) (2,387)
--------------- ---------------- ---------------- ----------------
Net income (loss) - pro forma . . . . . . . . . . ($1,037) $ 381 ($143) $ 239
=============== ================ ================ ================
Basic net income (loss) per share - as reported . ($0.03) $ 0.11 $ 0.20 $ 0.24
Basic net income (loss) per share - pro forma . . ($0.08) $ 0.03 ($0.01) $ 0.02
Diluted net income (loss) per share - as reported ($0.03) $ 0.10 $ 0.19 $ 0.22
Diluted net income (loss) per share - pro forma . ($0.08) $ 0.03 ($0.01) $ 0.02
6
The Company uses the Black-Scholes option-pricing model for determining the
fair value of options, which requires the input of certain estimates that may
affect the determination of fair value. The existing model may not necessarily
provide a reliable single measure of the value of its stock options. Management
will continue to evaluate alternative methodologies that may more appropriately
reflect pro forma compensation expense.
The fair value of each option grant and ESPP award is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
assumptions:
OPTIONS GRANTED FOR THE PERIOD ENDED
------------------------------------
SEPT. 28, 2003 SEPT. 29, 2002
--------------- ---------------
Expected dividend rate . 0.00% 0.00%
Expected volatility
- Options . . . . . . . 49.81% 68.10%
- ESPP awards . . . . . 49.81% 68.10%
Risk free interest rate
- Options . . . . . . . 3.41% 3.79%
- ESPP awards . . . . . 1.26% 1.87%
Expected lives (years)
- Options . . . . . . . 5.00 5.00
- ESPP awards . . . . . 0.50 0.50
COMPREHENSIVE INCOME
For the thirteen week period ended September 28, 2003 and September 29,
2002, comprehensive income (loss) was ($520,000) and $1,475,000, respectively.
Comprehensive income was $2,269,000 and $3,054,000 for the thirty-nine weeks
ended September 28, 2003 and September 29, 2002, respectively. Comprehensive
income (loss) consists of net income or loss, the effect of accounting for
hedges under SFAS No. 133, and net unrealized gains on investments. See Notes 4
and 5.
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):
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
SEPT. 28, 2003 SEPT. 29, 2002 SEPT. 28, 2003 SEPT. 29, 2002
-------------- -------------- -------------- --------------
Basic weighted average shares outstanding . 12,778 11,992 12,472 10,541
Incremental shares from assumed exercise
of stock options 681 683 731
-------------- -------------- -------------- --------------
Diluted weighted average shares outstanding 12,778 12,673 13,155 11,272
============== ============== ============== ==============
For the thirteen weeks ended September 28, 2003, basic net loss equals
diluted net loss per share as the effect of options would be antidilutive in a
loss period.
The number of incremental shares from the assumed exercise of stock options
was calculated applying the treasury stock method.
Options with an exercise price greater than the average market price of
common shares were 0 and 1,075,431 for the thirteen week period ended September
28, 2003 and September 29, 2002, respectively, and 98,663 and 474,979 for the
thirty-nine week period ended September 28, 2003 and September 29, 2002,
respectively, and were not included in the computation of diluted earnings per
share.
7
3. BORROWINGS
The Company maintains a credit facility with General Electric Capital
Corporation that expires in September 2005 and provides for a revolving line of
credit of up to $15,000,000, including the issuance of up to $3,000,000 in
letters of credit. Total availability under the revolving line of credit is
determined by subtracting the Company's funded debt from its trailing twelve
month earnings before interest, taxes, depreciation and amortization, or EBITDA,
multiplied by 2.5. As of September 28, 2003, there was no outstanding balance
and $14,410,000 was available under the Company's revolving 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.
4. 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 increase and designates these derivative
instruments as cash-flow hedges of its 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." The Company does not hold or issue
derivative instruments for trading purposes.
As of September 28, 2003, there were no open futures contracts. Other
comprehensive loss related to hedging activities for prior quarters, net of tax,
was $6,000 as of September 28, 2003, all of which is expected to be reclassified
into cost of goods sold over the next 12 months as the related inventory is
sold. For the period ended September 29, 2002, the other comprehensive loss
related to hedging activities, net of tax was $25,000. During the thirteen and
thirty-nine weeks ended September 28, 2003, respectively, $5,000 (net of $3,000
tax) of coffee futures gains and $21,000 (net of $15,000 tax) of coffee futures
gains, included in other comprehensive income (loss), were reclassified into
cost of goods sold. For the same prior year periods, $31,000 (net of $21,000
tax) and $387,000 (net of $257,000), of coffee futures losses included in other
comprehensive loss were reclassified into cost of goods sold.
5. INVESTMENTS
The Company invests in U.S. government and agency securities. At September
28, 2003, the Company maintained long-term investments classified as available
for sale of $24,956,000. The long-term investments are comprised of United
States Treasury notes and bonds and federal agency notes and bonds that mature
within five years. Gross unrealized holding gains of $48,000 ($30,000 net of
tax) at September 28, 2003 were attributable to long-term investments.
During the thirteen and thirty-nine weeks ended September 28, 2003, the
Company sold securities for net proceeds of $23,056,000 and $30,758,000,
respectively, and realized gains of $284,000 and $296,000 computed using the
specific identification method. For the thirteen and thirty-nine weeks ended
September 28, 2003, net unrealized losses of $194,000 (net of $130,000 tax) and
net unrealized losses of $188,000 (net of $125,000 tax), respectively, were
recorded in other comprehensive income. For the prior year thirteen and
thirty-nine week periods ended September 29, 2002, there was a net unrealized
gain of $217,000.
8
6. SEGMENT INFORMATION
The Company operates in two reportable segments: retail and specialty
sales. Retail store operations consist of sales of whole bean coffee,
beverages, tea and related products through Company-operated retail stores.
Specialty sales consists of online and mail order sales of whole bean coffee
shipped directly to the consumer and whole bean coffee sales through grocery,
restaurant and foodservice and office coffee accounts.
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.
SPECIALTY
RETAIL SALES UNALLOCATED TOTAL
------- ------- ------------- ---------
THIRTEEN WEEKS ENDED SEPTEMBER 28, 2003
Net revenue . . . . . . . . . . . . . . . $20,706 $ 8,127 $ 28,833
Operating expenses. . . . . . . . . . . . 7,420 2,006 9,426
Depreciation and amortization . . . . . . 849 239 $ 140 1,228
Segment operating income (loss) . . . . . 2,861 2,100 (5,908) (947)
Investment income, net 499 499
Income (loss) before income taxes (448)
Total assets. . . . . . . . . . . . . . . 20,959 7,156 78,737 106,852
THIRTEEN WEEKS ENDED SEPTEMBER 29, 2002
Net revenue . . . . . . . . . . . . . . . $18,702 $ 6,664 $ 25,366
Operating expenses. . . . . . . . . . . . 6,702 1,480 8,182
Depreciation and amortization . . . . . . 804 235 $ 121 1,160
Segment operating income (loss) . . . . . 2,581 1,870 (2,642) 1,809
Investment income, net 220 220
Income before income taxes 2,029
Total assets. . . . . . . . . . . . . . . 20,425 4,496 64,079 89,000
THIRTY-NINE WEEKS ENDED SEPTEMBER 28, 2003
Net revenue . . . . . . . . . . . . . . . $61,794 $23,517 $ 85,311
Operating expenses. . . . . . . . . . . . 22,015 6,168 28,183
Depreciation and amortization . . . . . . 2,486 694 $ 367 3,547
Segment operating income (loss) . . . . . 9,017 5,471 (11,283) 3,205
Investment income, net 972 972
Income before income taxes 4,177
Capital expenditures. . . . . . . . . . . 4,839 1,354 1,786 7,979
THIRTY-NINE WEEKS ENDED SEPTEMBER 29, 2002
Net revenue . . . . . . . . . . . . . . . $56,975 $17,736 $ 74,711
Operating expenses. . . . . . . . . . . . 20,172 3,928 24,100
Depreciation and amortization . . . . . . 2,396 659 $ 335 3,390
Segment operating income (loss) . . . . . 8,156 4,557 (9,076) 3,637
Investment income, net 307 307
Income before income taxes 3,944
Capital expenditures. . . . . . . . . . . 2,244 645 2,097 4,986
9
7. CONTINGENCIES
During the thirteen weeks ended September 28, 2003, the Company recorded a
charge of $3.4 million to settle litigation and for severance. On February 25,
2003 and March 7, 2003, two lawsuits were filed against the Company entitled
Brian Taraz, et al vs. Peet's Coffee & Tea, Inc., and Tracy Coffee, et al. vs.
Peet's Coffee & Tea, Inc. Each was filed in Superior Court of the State of
California, County of Orange, and sought class action certification. These
suits were filed by one former and one current store manager alleging
misclassification of employment position and sought damages, restitution,
reclassification and attorneys' fees and costs. On October 27, 2003, the
Company announced that it had reached an agreement in principle to settle the
lawsuits to fully resolve all claims brought by the plaintiffs. The Company
recorded a charge during the third quarter for the estimated payment of claims
to eligible class members, attorneys' fees and costs, costs to a third-party
claims administrator, as well as applicable employer payroll taxes, which is
included in "General and administrative expenses" on the accompanying condensed
consolidated statements of operations for the thirteen and thirty-nine weeks
ended September 28, 2003. The settlement is subject to the court's final
approval and the Company's right to terminate if more than 10% of the settlement
class opts out of the settlement.
In addition to the lawsuits described above, we may from time to time
become involved in certain legal proceedings in the ordinary course of business.
Currently, the Company is not party to any other legal proceedings that
management believes would have a material adverse effect on the financial
position or results of operations of the Company.
8. RECENT ACCOUNTING PRONOUNCEMENTS
During April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under
Statement 133. SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003 and for hedging relationships designated after June 30,
2003. The guidance should be applied prospectively. The adoption of SFAS No.
149 did not have a significant impact on our operating results or financial
position.
During May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity."
SFAS No. 150 clarifies the accounting for certain financial instruments with
characteristics of both liabilities and equity and requires that those
instruments be classified as liabilities in statements of financial position.
Previously, many of those financial instruments were classified as equity. SFAS
No. 150 is effective for financial instruments entered into or modified after
May 31, 2003 and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have
a significant impact on our operating results or financial position.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with
our financial statements and related notes included elsewhere in this report.
Except for historical information, the discussion in this report contains
certain forward-looking statements that involve risks and uncertainties. We
have based these forward-looking statements on our current expectations and
assumptions about future events. 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 future results and trends may differ materially depending
on a variety of factors including but not limited to, coffee and other raw
material prices and availability, successful execution of strategies and plans
for expansion, competition, general economic conditions, economic or political
instability related to recent or potential terrorist attacks, the popularity of
specialty coffee due to consumer trends, labor relations, health factors or
other issues, as well as other risk factors as described more fully in our
Annual Report on Form 10-K for the year ended December 29, 2002.
Forward-looking statements speak only as of the date of this report and we
assume no obligation to update any forward-looking statements.
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 through multiple channels of distribution. We are
indifferent as to where our consumers purchase our coffees, and we believe that
growth opportunities exist in all of these channels, which consists of retail
stores, online and mailorder, grocery stores, restaurants and foodservice and
office coffee accounts.
10
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 customers within 24 hours of roasting. We believe that
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.
Our coffee and related items are sold through two segments as defined under
Statement of Financial Accounting Standards No. 131 ("SFAS No. 131"),
"Disclosures About Segment of Enterprise and Related Information." These
segments are Company-operated retail outlets and specialty sales (consisting of
online and mail order, grocery, food service, and office). We evaluate segment
performance primarily based on revenue and segment operating income.
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 our 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 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 in our Annual Report on Form
10-K for the year ended December 29, 2002. We have identified the following
critical accounting policies:
- -Inventory. Raw materials consist primarily of green bean coffee. Finished
goods consist primarily of 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.
- -Intangibles and other assets. During 2002, we entered into a contractual
agreement with Safeway Inc., a national grocery chain, to sell Peet's coffee
through its grocery stores. We began shipping during the third quarter of 2002.
The agreement included an upfront payment to Safeway Inc. that we recorded in
intangibles and other assets and is being amortized as a reduction of revenue
based upon estimated sales during the contract period.
- -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.
- -Accrued compensation. In March 2002, we modified our workers' compensation
insurance policy to a high deductible insurance program with an overall program
ceiling to minimize exposure. We began recording an estimated liability for
self-insured portion of the workers' compensation claims in our condensed
consolidated financial statements. The self-insurance liability is determined
actuarially, based on claims paid, filed and reserved for, and projected using
an industry loss development factor, as well as using historical experience
ratings. Should a greater amount of claims occur compared to what is estimated
or the medical costs increase beyond what was anticipated, the recorded
liability may not be sufficient.
11
- -Litigation settlement costs. In February and March 2003, two lawsuits were
filed against the Company. One former and one current store manager alleging
misclassification of employment position filed these two suits and sought class
action certification. The suit also sought damages, restitution,
reclassification, and attorneys' fees. In October 2003, the Company announced
an agreement in principle to settle the lawsuits to fully resolve all claims
brought by the plaintiffs without engaging in protracted litigation. As of
September 28, 2003, we recorded a charge for the estimated payment of claims to
eligible class members, attorneys' fees and costs, costs to a third-party claims
administrator, as well as applicable payroll taxes. This accrual makes certain
assumptions regarding the estimated liability, including but not limited to the
percentage of class member that participate in the class, the degree to which
eligible claimants participate, and associated fees and taxes.
- -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 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. As of September 28, 2003, we have no outstanding hedging
contracts. See "Item 3. Quantitative and Qualitative Disclosures about Market
Risk" and Note 4 in the "Notes to Condensed Consolidated Financial Statements,"
included elsewhere in this report.
We have also chosen certain accounting policies when options are available,
including the intrinsic value method in accordance with Accounting Principles
Board Opinion No. 25 ("APB 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.
12
RESULTS OF OPERATIONS
The following discussion of results of operations should be read in
conjunction with our financial statements and accompanying notes and other
financial data included elsewhere in this report. The following table sets
forth certain financial data for the periods indicated.
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
SEPT. 28, 2003 SEPT. 29, 2002 SEPT. 28, 2003 SEPT. 29, 2002
--------------- --------------- --------------- ---------------
STATEMENT OF OPERATIONS DATA AS A PERCENT OF NET REVENUE:
Net revenue. . . . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0%
Cost of sales and related occupancy expenses . . . . . . . 46.1 45.9 46.1 46.5
Operating expenses . . . . . . . . . . . . . . . . . . . . 32.7 32.3 33.0 32.2
Marketing and advertising expenses . . . . . . . . . . . . 3.3 4.6 3.9 4.6
General and administrative expenses. . . . . . . . . . . . 16.9 5.5 9.1 7.3
Depreciation and amortization expenses . . . . . . . . . . 4.2 4.6 4.1 4.5
--------------- --------------- --------------- ---------------
Income (loss) from operations. . . . . . . . . . . . . . . (3.2) 7.1 3.8 4.9
Investment income, net . . . . . . . . . . . . . . . . . . (1.7) (0.9) (1.1) (0.4)
--------------- --------------- --------------- ---------------
Income (loss) before income taxes. . . . . . . . . . . . . (1.5) 8.0 4.9 5.3
Income tax provision (benefit) . . . . . . . . . . . . . . (0.4) 3.0 2.0 2.0
--------------- --------------- --------------- ---------------
Net income (loss). . . . . . . . . . . . . . . . . . . . . (1.1)% 5.0% 2.9% 3.3%
=============== =============== =============== ===============
PERCENT OF NET REVENUE BY BUSINESS SEGMENT:
Retail stores. . . . . . . . . . . . . . . . . . . . . . . 71.8% 73.7% 72.4% 76.3%
Specialty sales. . . . . . . . . . . . . . . . . . . . . . 28.2 26.3 27.6 23.7
PERCENT OF NET REVENUE BY BUSINESS CATEGORY:
Whole bean coffee and related products . . . . . . . . . . 57.8% 59.4% 58.8% 58.6%
Beverages and pastries . . . . . . . . . . . . . . . . . . 42.2 40.6 41.2 41.4
OPERATING EXPENSES AS A PERCENT OF SEGMENT REVENUE:
Retail stores. . . . . . . . . . . . . . . . . . . . . . . 35.8% 35.8% 35.6% 35.4%
Specialty sales. . . . . . . . . . . . . . . . . . . . . . 24.7 22.2 26.2 22.1
PERCENT INCREASE (DECREASE) FROM PRIOR YEAR:
Net revenue. . . . . . . . . . . . . . . . . . . . . . . . 13.7% 14.2%
Retail stores . . . . . . . . . . . . . . . . . . . . 10.7 8.5
Specialty sales . . . . . . . . . . . . . . . . . . . 22.0 32.6
Cost of sales and related occupancy expenses . . . . . . . 14.2 13.2
Operating expenses . . . . . . . . . . . . . . . . . . . . 15.2 16.9
Marketing and advertising expenses . . . . . . . . . . . . (17.5) (2.2)
General and administrative expenses. . . . . . . . . . . . 246.4 42.1
Depreciation and amortization expenses . . . . . . . . . . 5.9 4.6
SELECTED OPERATING DATA:
Number of retail stores in operation:
Beginning of the period . . . . . . . . . . . . . . . 69 60 65 60
Store openings. . . . . . . . . . . . . . . . . . . . 3 1 7 1
--------------- --------------- --------------- ---------------
End of period . . . . . . . . . . . . . . . . . . . . 72 61 72 61
=============== =============== =============== ===============
13
THIRTEEN WEEKS ENDED SEPTEMBER 28, 2003 COMPARED TO THIRTEEN WEEKS ENDED
SEPTEMBER 29, 2002
NET REVENUE
Net revenue for the thirteen weeks ended September 28, 2003 increased
versus the same prior year period primarily as a result of the continued
expansion of our retail and specialty sales segments. Whole bean and related
sales increased 10.5%, to $16.7 million and beverage and pastry sales increased
18.3%, to $12.1 million.
In the retail segment our revenue increased by $2.0 million primarily as a
result of increased sales from the 12 stores we opened since August 2002 and
secondarily from existing stores. Sales of whole bean coffee and related
products in the retail segment increased by 1.2%, to $8.8 million, while sales
of beverages and pastries increased by 19.0% to $11.9 million. The increase in
beverage and pastry sales is primarily due to the introduction, during the
second quarter, of new iced drinks and a revamped bar menu that emphasizes many
of our customer favorites. The slower growth in whole bean and related products
was due to cannibalization of bean sales in retail stores as we increase the
availability of Peet's coffee in grocery stores, and the slower maturation of
whole bean sales in new stores. We opened 3 new stores during this quarter, and
expect to open 3 more stores in the fourth quarter.
In the specialty sales segment, revenue increased as the result of our
continued focus on the grocery and foodservice channel. The $1.5 million
increase consisted primarily of a $1.0 million increase in grocery sales and a
$0.5 million increase in sales to restaurants and foodservice companies. The
increase in the grocery channel sales was primarily due to sales to
approximately 2,400 new stores we added during the last 15 months. The increased
sales were also driven by the transition, during the first quarter, to a direct
store delivery system, where our own route sales representatives deliver to
stores weekly, from warehouse distribution. We believe the direct store delivery
system ensures freshness through proper rotation and weekly delivery, optimizes
store specific item assortments, achieves proper shelf space and improves
free-standing display levels. The increase was offset partially by the initial
pipeline load-in for the introduction of Peet's into 1,200 Safeway stores. In
the restaurant and foodservice area, the sales increase was primarily due to new
accounts added last year and earlier this year such as Omni Hotels.
COST OF SALES AND RELATED OCCUPANCY EXPENSES
Cost of sales and related occupancy expenses consist of product costs,
including hedging costs, and manufacturing costs, rent and other occupancy
costs. Cost of sales as a percent of net revenue increased 0.2% primarily due
to the 12 new stores we opened during the last 14 months. Due to their lower
volume, the new stores have higher occupancy, food and beverage costs as a
percent of sales. Existing stores actually had an improvement in cost of sales
and related occupancy costs due to higher price points generated from new iced
drinks and revamped bar menu. Specialty sales costs were in line with prior
year.
OPERATING EXPENSES
Operating expenses as a percent of net revenue for the current thirteen
week period increased as compared to the same prior year period due to the
higher operating expenses of the direct store delivery system with our own route
sales representatives. Specialty sales operating expenses as a percent of
segment revenue was 24.7% compared to 22.2% in prior year. Retail operating
expenses were in line with prior year as higher operating expenses from new
stores were offset by improved operation of our existing stores.
MARKETING AND ADVERTISING EXPENSES
Marketing and advertising expenses was 3.3% of net revenue, or $0.2 million
less than prior year. The marketing spending level reflects our normal number
of initiatives and within our expected full year spending of 4.0% of net
revenue.
14
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses in the current thirteen week period
were $4.9 million, or 16.9% of revenue compared to $1.4 million, or 5.5% for the
same period last year. The $3.5 million increase was primarily due to the $3.4
million, or 11.8% of net revenue, charge related to the settlement of the wage
and hour lawsuit and severance expenses related to the departure of two
executives. The settlement is subject to risks identified in Note 7 of the
"Notes to Condensed Consolidated Financial Statements."
DEPRECIATION AND AMORTIZATION EXPENSES
Depreciation and amortization expenses increased in the thirteen week
period as compared to the same prior year period due primarily to the 12 stores
we opened during the last 14 months. The expenses were partially offset by
older assets becoming fully depreciated.
INVESTMENT INCOME, NET
We currently invest our secondary public offering proceeds and excess cash
in short-term and long-term interest-bearing, U.S. government and agency
securities. Investment income includes interest income and gains from the sale
of these instruments. We realized $284,000 in investment gains and received
$215,000 in interest income in this quarter compared to $220,000 in interest
income in the same prior year quarter.
PROVISION FOR INCOME TAXES
As a result of reduced taxable income due to the charges taken during this
thirteen week period and the tax benefits from the exercising of options, we do
not expect to have a cash tax liability for this year. Therefore, we can no
longer utilize some charitable contribution carry forwards that were planned to
partially offset our tax liability. Consequently, we expect the tax rate to
increase to 40.2% for the full year. In the current period we adjusted the
year-to-date tax provision to reflect this rate. As a result, our effective tax
rate for the third quarter of 2003 was 27.9% of our operating loss.
THIRTY-NINE WEEKS ENDED SEPTEMBER 28, 2003 COMPARED TO THIRTY-NINE WEEKS ENDED
SEPTEMBER 29, 2002
NET REVENUE
Net revenue for the thirty-nine weeks ended September 28, 2003 increased
14.2% as compared to same period in 2002. Whole bean and related sales
increased 14.5% to $50.1 million and beverage and pastry sales increased 13.8%
to $35.2 million.
In the retail segment, sales increased by 8.5% primarily due to the sales
from 12 new stores we opened since August 2002 and increased sales from existing
stores resulting from the introduction of new iced drinks and an expanded menu.
In the specialty sales segment, sales increased by 32.6% primarily due to new
accounts added in the grocery channel and strong volume growth in the restaurant
and foodservice areas.
COST OF SALES AND RELATED OCCUPANCY EXPENSES
Cost of sales and related occupancy expenses increased by 13.2% as a result
of opening 12 new stores during the last 14 months. Cost of sales as a percent
of net revenue decreased primarily due to the revamped bar menu and introduction
new ice drinks that resulted in higher price points and better cost management
through standardization of bar coffee rotation.
OPERATING EXPENSES
Operating expenses increased as compared to the same prior year period as
we grew our business. As a percent of net revenue, operating expenses increased
primarily due to the conversion to a direct store delivery method of
distribution for our grocery business and the 12 new stores we opened during the
last 14 months.
15
MARKETING AND ADVERTISING EXPENSES
Marketing and advertising expenses decreased as a percent of revenue by 0.7
percentage points as compared to the same prior year period as we were able to
leverage these costs by holding the spending relatively flat to last year while
sales grew 14.2%.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased 42.1%, or $2.3 million, due
to the litigation settlement and severance expenses related to the departure of
two executives. The increase was partially offset by the restructuring of the
executive bonus program and reduced expenses in the areas of stock plan
administration and proxy related activities.
PROVISION FOR INCOME TAXES
Our effective tax rate for year to date was 40.2% compared to 37.0% in the
same prior year period. The tax rate reflects our loss position for the quarter
as well as a catch-up adjustment for our full year expected tax rate. As a
result of reduced taxable income due to the charge taken this quarter and the
tax benefits from the exercising of options, we do not expect to have a cash tax
liability for this year. Therefore, we can no longer utilize some charitable
contribution carry forwards that we were planned to partially offset our tax
liability. Consequently, we expect the tax rate to increase to 40.2% for the
full year. The prior year's tax rate of 37.0% reflected a 3.0 percentage point
benefit due to the utilization of previous years' carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
At September 28, 2003, we had $27.2 million in total cash and cash
equivalents, of which $15.9 million is invested in short-term U.S. government
and agency securities. We also had $25.0 million of long-term U.S. government
and agency securities. Working capital was $32.6 million at September 28, 2003.
Net cash provided by operations was $7.3 million during the first
thirty-nine weeks of 2003 compared to $5.4 million in the same prior year
period. Operating cash flows were positively impacted by net income adjusted
for depreciation and amortization and the net tax benefit of stock options
exercised during the year.
Net cash used in investing activities was $4.9 million during the
first thirty-nine weeks of 2003 compared to $32.7 million in the same prior year
period, which was primarily due to the purchase of $27.7 million invested in
long-term U.S. government securities. Investing activities primarily consisted
of the purchase of $8.0 million of property, plant and equipment for new stores,
support systems upgrades and plant packaging equipment to support the growth in
specialty sales. This was offset by net proceeds from sale of long-term
investments of $3.1 million.
Net cash provided by financing activities was $5.1 million during the
first thirty-nine weeks of 2003. Financing activities during the period
consisted primarily of the exercise of stock options and sales of our common
stock to our employees through our employee stock purchase plan.
We have a credit facility with General Electric Capital Corporation, which
provides for a revolving line of credit of $15.0 million through September 2005.
Total availability under the revolving line of credit is determined by
subtracting our funded debt from its trailing twelve month earnings before
interest, taxes, depreciation and amortization, or EBITDA, multiplied by 2.50.
As of September 28, 2003, there was no outstanding balance and we had $14.4
million available under the revolving line of credit with other senior funded
debt of $0.5 million.
In December 1995, we obtained financing under industrial development
revenue bonds issued by California Statewide Communities Development Authority.
Outstanding amounts under the bonds bear interest based on a floating rate
determined by prevailing market conditions for comparable tax-exempt obligations
until maturity on December 1, 2006. Interest is payable monthly and principal
of $0.1 million is payable quarterly each February, May, August, and November.
As of September 28, 2003, we have an outstanding standby letter of credit of
$0.9 million backing this long-term borrowing. The reducing standby letter of
credit bears an annual interest charge of 1.25% payable monthly. On October 1,
2003, we have repaid the entire outstanding balance of the bonds and canceled
the standby letter of credit.
16
Our 2003 capital expenditure requirements consist primarily of expenditures
relating to new store openings, remodeling of existing stores, upgrade of our
packaging system and continued improvement of our data processing capabilities.
During the first thirty-nine weeks of 2003, we spent $8.0 million. Our
remaining 2003 capital expenditures are expected to be between $1.0 and $2.0
million. Approximately $1.0 million is expected to be used for the opening of
the remaining new retail stores scheduled for 2003 and expenditures for new
stores in progress for 2004. The remaining $1.0 million is expected to be used
for the remodeling of existing stores and information technology enhancements.
The following table sets forth our contractual cash obligations and
our other commercial commitments as of September 28, 2003.
PAYMENTS DUE BY PERIOD
(IN THOUSANDS)
--------------
LESS THAN
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS AFTER 5 YEARS
- --------------------------------------- ------- ---------- ---------- ---------- --------------
Industrial development revenue bonds. . $ 530 $ 440 $ 90
Equipment leases. . . . . . . . . . . . 296 69 130 $ 97
Retail store operating leases . . . . . 25,654 5,729 10,085 5,758 $ 4,082
Fixed-price coffee purchase commitments 12,877 10,558 2,220 99
------- ---------- ---------- ----------
Total contractual cash obligations $39,357 $ 16,796 $ 12,525 $ 5,954 $ 4,082
======= ========== ========== ========== ==============
On October 1, 2003, we have repaid the entire outstanding balance of the
bonds and canceled the standby letter of credit.
We expect cash flows from operations and the 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.
RECENT ACCOUNTING PRONOUNCEMENTS
During April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under
Statement 133. SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003 and for hedging relationships designated after June 30,
2003. The guidance should be applied prospectively. The adoption of SFAS No.
149 did not have a significant impact on our operating results or financial
position.
During May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity."
SFAS No. 150 clarifies the accounting for certain financial instruments with
characteristics of both liabilities and equity and requires that those
instruments be classified as liabilities in statements of financial position.
Previously, many of those financial instruments were classified as equity. SFAS
No. 150 is effective for financial instruments entered into or modified after
May 31, 2003 and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have
a significant impact on our operating results or financial position.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Although we have no borrowings on our credit facility, if we chose to, our
cost for financing would be exposed to market risk from changes in interest
rates on any 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 the cost of our borrowings.
17
The supply and price of coffee are subject to volatility and can be
affected by multiple factors in the producing countries, including weather,
political and economic conditions. In addition, green coffee 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 through agreements establishing
export quotas or restricting coffee supplies worldwide. With this in mind, we
purchase coffee from three distinct regions and many countries around the world.
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.
From time to time, we may use coffee futures and coffee futures options
depending on market conditions to reduce the price risk of our coffee purchase
requirements that we cannot make or have not made through contractual
commitments to purchase physical lots of coffee. These coffee futures and coffee
futures options are traded on the New York Coffee, Sugar & Cocoa Exchange. We
may use these futures and options solely for financial hedging purposes and
never take actual delivery of the coffee traded on the exchange. We have no
outstanding hedging contracts as of September 28, 2003.
As of September 28, 2003, we had approximately $12.9 million in open
fixed-priced purchase commitments with delivery dates ranging from July 2003
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 remote.
There have been no substantial changes in the nature of our risks since
December 29, 2002. Please refer to our Annual Report on Form 10-K for the year
ended December 29, 2002.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the
participation of the Company's management, including the Chief Executive Officer
(the "CEO") and Chief Financial Officer (the "CFO"), of the effectiveness of the
design and operation of the Company's disclosure controls and procedures (as
defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of
1934, as amended) as of September 28, 2003. Based on that evaluation, the
Company's management, including the CEO and CFO, concluded that the Company's
disclosure controls and procedures were effective. There have been no material
changes in the Company's internal controls or in other factors that could
materially affect internal controls.
18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On February 25, 2003 and March 7, 2003, two lawsuits were filed against the
Company entitled Brian Taraz, et al vs. Peet's Coffee & Tea, Inc., and Tracy
Coffee, et al. vs. Peet's Coffee & Tea, Inc. Each was filed in Superior Court
of the State of California, County of Orange, and sought class action
certification. These suits were filed by one former and one current store
manager alleging misclassification of employment position and sought damages,
restitution, reclassification and attorneys' fees and costs. On October 27,
2003, the Company announced that it had reached an agreement in principle to
settle the lawsuits to fully resolve all claims brought by the plaintiffs
without engaging in protracted litigation. The Company recorded a charge during
the third quarter for the estimated payment of claims to eligible class members,
attorneys' fees and costs, costs to a third-party claims administrator, as well
as applicable employer payroll taxes, which is included in "General and
administrative expenses" on the accompanying condensed consolidated statements
of operations for the thirteen and thirty-nine weeks ended September 28, 2003.
The settlement is subject to the court's final approval and the Company's right
to terminate if more than 10% of the settlement class opts out of the
settlement.
In addition to the lawsuits described above, we may from time to time
become involved in certain legal proceedings in the ordinary course of business.
Currently, the Company is not party to any other legal proceedings that
management believes would have a material adverse effect on the financial
position or results of operations of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit Number Description
- -------------- -------------------------------------------------------------------------
10.17 Peet's Coffee & Tea, Inc. Key Employment Agreement for Chief Financial
Officer dated as of June 25, 2003. (1)
- -------------- -------------------------------------------------------------------------
31.1 Certification of the Company's Chief Executive Officer, Patrick O'Dea,
pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as
amended.
- -------------- -------------------------------------------------------------------------
31.2 Certification of the Company's Chief Financial Officer, Thomas Cawley,
pursuant to Rule 13a-15(a) under the Securities Exchange Act of 1934, as
amended.
- -------------- -------------------------------------------------------------------------
32.1 Certification of the Company's Chief Executive Officer, Patrick O'Dea,
pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
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32.2 Certification of the Company's Chief Financial Officer, Thomas Cawley,
pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
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(1) Management contract.
b. Reports on Form 8-K
Current Report on Form 8-K filed on June 30, 2003 to furnish under Item 12
a press release dated June 30, 2003.
Current Report on Form 8-K filed on July 30, 2003 to furnish under Item 12
a press release dated July 30, 2003.
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SIGNATURES
Pursuant to the requirements 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.
Date: November 12, 2003 PEET'S COFFEE & TEA, INC.
By: /s/ Thomas Cawley
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Thomas Cawley
Vice President, Chief Financial Officer,
and Secretary
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