SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
______________
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 28, 2003
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:
COMMON STOCK, NO PAR VALUE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
________________________
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 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.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes No
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 June 29, 2003 (the registrant's most recently completed second quarter) and
February 27, 2004 as reported by the Nasdaq National Market, was $204,043,391
and $255,352,259, respectively.
1
Shares of Common Stock held by each officer and director and each person known
to the Company to hold 10% 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 27, 2004, 13,146,328 shares of registrant's
Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement related to the registrant's 2004 annual
meeting of stockholders, which proxy statement will be filed under the
Securities Exchange Act of 1934 within 120 days of the end of the registrant's
fiscal year ended December 28, 2003, are incorporated by reference into Part III
of this Form 10-K.
2
TABLE OF CONTENTS
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PAGE
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PART I
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Item 1.. Business 4
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Item 2.. Properties 9
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Item 3.. Legal Proceedings 9
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Item 4.. Submission of Matters to a Vote of Security Holders 10
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PART II
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Item 5.. Market for Registrant's Common Equity and Related Stockholder Matters 10
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Item 6.. Selected Financial Data 11
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Item 7.. Management's Discussion and Analysis of Financial Condition and Results of Operations 12
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Item 7A. Quantitative and Qualitative Disclosure About Market Risk 21
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Item 8 . Financial Statements and Supplementary Data 27
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Item 9 . Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 27
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Item 9A. Controls and Procedures 27
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PART III
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Item 10. Directors and Executive Officers of the Registrant 27
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Item 11. Executive Compensation 28
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Item 12. Security Ownership of Certain Beneficial Owners and Management 28
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Item 13. Certain Relationships and Related Transactions 28
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Item 14. Principal Accounting Fees and Services 28
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PART IV
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Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 28
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Signatures 32
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3
FORWARD-LOOKING STATEMENTS
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. 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 customers;
- - Obtaining and expanding our market presence in new geographic regions;
- - The availability 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. Forward-looking statements speak only as of the date of this report and
we assume no obligation to update any forward-looking statements.
PART I
ITEM 1. BUSINESS
Peet's is a specialty coffee roaster and marketer of branded fresh roasted
whole bean coffee. We sell our fresh roasted coffee under strict freshness
standards through multiple channels of distribution including grocery stores,
online and mail order, office, restaurant and food service accounts and 76
company-operated stores in seven 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 grocery stores 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. Our goal is to ensure that customers
receive coffee within days of roasting.
Over the past seven years, we have expanded 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, Boston in 1999, and Seattle,
Denver, and Austin in 2003. We signed our first office coffee distribution
agreement in 1997 and have since added a number of restaurants, food service
accounts, 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. During the last two years, this
expansion was further developed to include distribution to mainstream grocers;
as we expanded our grocery accounts from 130 to over 2,700 stores. We believe
our expansion strategy emphasizes disciplined growth and enhancement of our
brand's image and quality reputation. See Note 13, "Segment Information" to the
"Notes to Consolidated Financial Statements", included elsewhere in this report.
Our website is located at www.peets.com. Our annual report on Form 10-K,
quarterly reports on Form 10-Q and current reports on Form 8-K, as well as any
amendments or exhibits to those reports, are available free of charge through
our website at http://investor.peets.com/edgar.cfm as soon as reasonably
practicable after we file them with, or furnish them to, the SEC. Peet's was
organized as a Washington corporation in 1971.
4
COMPANY RETAIL STORES
We operate 76 retail stores in seven states through which we sell whole
bean coffee, beverages and pastries, tea, and other related items. Our stores
are designed to facilitate the sale of fresh whole bean coffee and to encourage
customer trial of our coffee through coffee beverages. Each store has a
dedicated staff person at the bean counter to take orders and assist customers
with questions and issues. Upon order, beans are scooped and ground to the
customer's specific requirement. To ensure that the freshest beans are sold to
customers, we implemented a policy to not sell beans beyond ten days from
roasting and we train our store managers to order and replenish coffee. Our
beverage counter features coffee based beverages that promote the sale of whole
bean coffee with a standard rotation of coffee brewed from each category of
coffees we sell. It is our policy to brew a new batch of coffee every 30
minutes and not re-heat milk in espresso based drinks to ensure freshness. See
"Item 2. Properties" for further discussion about our retail stores.
SPECIALTY SALES
In addition to sales through our retail stores, we have expanded the
availability of our products through a network of grocery stores, including
Safeway Inc., Albertson's, Ralph's and Whole Foods Market. To support this
expansion, we have developed a direct store delivery ("DSD") sales and
distribution system. Peet's DSD route sales representatives deliver to their
stores weekly, properly shelve the product, work to resolve pricing
discrepancies, rotate to ensure freshness, sell and erect free-standing
displays, and forge store-level selling relationships. We currently have
approximately 50 DSD route sales representatives in 2004, of which approximately
34 will be full-time Peet's employees, to support the expansion into new grocery
accounts in the western United States as well as existing grocery stores. In
the food service and office business, we have a staff of sales and account
managers who 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. In the online and mail order channel, we have a dedicated website
and customer service representatives that provide points of contact to our
customers for coffee ordering and coffee knowledge. Our website features an
Express Buy function for registered customers for speed and ease, special coffee
and tea programs, and a coffee and tea selector to assist the customer in
choosing a product based upon certain characteristics. In addition to our
website, we have a team of mail order customer service representatives who
assist customers in placing customer orders, choosing a gift item, providing
product information, and resolving customer issues. Customer service
representatives are regularly trained on Peet's product offerings through weekly
coffee and tea tastings.
OUR COFFEE
Coffee Beans
Coffee is an agricultural crop that undergoes price fluctuation and quality
differences depending on weather, economic and political conditions in coffee
producing countries. We purchase only Arabica coffee beans, which are
considered superior to the Robusta coffee beans traded in the commodity market.
Arabica beans usually grow at high elevations, absorb little moisture and mature
slowly. Thus, although most coffee trades in the commodity market, the Arabica
beans purchased by us tend to trade on a negotiated basis at a substantial
premium above commodity coffee prices, depending upon the supply and demand at
the time of purchase. Our access to high quality Arabica beans depends on our
relationships with coffee brokers, exporters and growers, with whom we have
built long-term relationships to ensure a steady supply of coffee beans. In
2003, we purchased over half of our coffee beans through one broker. We believe
that, as a result of our reputation that has been built over 37 years, we have
access to some of the highest quality coffee beans from the finest estates and
growing regions around the world and we are occasionally presented with
opportunities to purchase unique and special coffees.
Unlike roasted coffee beans, green coffee beans are not highly perishable.
We generally turn our inventory of green coffee beans two to three times per
year. 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 with
fluctuations in coffee prices by entering into fixed price commitments and
hedging agreements for a portion of our green coffee bean requirements.
5
Our Roasting Method
Our roasting method was first developed by Alfred Peet and further honed 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 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, we have developed a reputation for expert
coffee blending. Our blends, such as Major Dickason's Blend(R), 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(R). We are active
in seeking, roasting and selling unique special lot and one-time coffees. On
average, we offer four to six such coffees every year, including our Anniversary
Blend and Holiday Blend.
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 (Starbucks) 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.
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. 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
6
pound. We believe our higher quality and freshness standards allow us to charge
a higher price for our coffee products.
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(R), Peet's Coffee & Tea(R), peets.com(R), Blend 101(R), Espresso
Forte(R), Gaia Organic Blend(R), Garuda Blend(R), JR Reserve Blend(R), Maduro
Blend(R), Major Dickason's Blend(R), Pride of the Port(R), Pumphrey's Blend(R),
Sierra Dorada Blend(R), Summer House(R), Top Blend(R), and Vine Street Blend(R).
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 Fresh Days(TM) and Fresh Fridays(TM).
We own registered trademarks for our name and logo in Argentina, Australia,
Brazil, 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 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.
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 believe our
advanced point-of-sale system increases store productivity, provides a higher
level of service to our customers and maintains timely information for
performance evaluation. Our registers have touch screen components and full
point-of-sale capability. In 2002, we implemented a Peet's cash card in our
retail stores and website that will, in the future, allow us to implement
customer loyalty programs. In 2002, during the rollout of our direct store
delivery system in the grocery channel, we implemented a grocery order entry and
invoice system with handheld capability that allows our route representatives to
provide service and information on the spot. In 2003, we implemented business
intelligence software to better support and analyze our business in all
channels. Currently, we are in the process of deploying an integrated labor and
scheduling system in our retail stores that we believe will improve productivity
as well as provide better customer service.
Our website, www.peets.com, is hosted at our corporate headquarters in
Emeryville, 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 the United
States Postal Service. Our 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 February 27, 2004, we employed a workforce of 1,751 people,
approximately 371 of whom are considered full-time employees. None of our
employees are represented by a labor union. We consider our
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relationship with our employees to be good. Since 1979, we have 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.
OUR EXECUTIVE OFFICERS
Set forth below is information with respect to the names, ages, positions
and offices of our executive officers as of February 27, 2004.
NAME AGE POSITION
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Patrick J. O'Dea. . 42 Chief Executive Officer, President and Director
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Thomas P. Cawley. . 43 Chief Financial Officer, Vice President, and Secretary
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Michael J. Cloutier 49 Vice President, Information Technology
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James E. Grimes . . 48 Vice President, Operations and Information Systems
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William M. Lilla. . 48 Vice President, Strategic Partners
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Peter B. Mehrberg . 45 Vice President, Business Development, General Counsel & Assistant Secretary
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James A. Reynolds . 65 Vice President, Coffee and Tea
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Bruce E. Schroder . 44 Vice President, Specialty
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Patrick J. O'Dea has served as Chief Executive Officer, President and as a
director since May 2002. From April 1997 to March 2001, he was CEO of
Archway/Mother's Cookies and Mother's Cake & Cookie Company. From 1995 to 1997,
Mr. O'Dea was the Vice President and General Manager of the Specialty Cheese
Division of Stella Foods. From 1984 to 1995, he was with Procter & Gamble,
where he marketed several of the company's snack and beverage brands.
Thomas P. Cawley has served as Chief Financial Officer since July 2003. From
August 2000 to June 2003, he was at Gap, Inc. serving in various positions
within the organization from Senior Vice President - Finance to Chief Financial
Officer, Gap Brand. From 1986 to August 2000, Mr. Cawley was at Pepsico/Yum
Brands (formerly Tricon Global Restaurants), holding various positions such as
Senior Treasury Analyst, Director of Finance, Vice President - Controller, and
Chief Financial Officer; Pizza Hut. Previous to 1986, Mr. Cawley was with The
Quaker Oats Company and General Foods.
Michael J. Cloutier has served as Vice President, Information Technology since
August 1999. He was our Systems Manager 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.
James E. Grimes has served as Vice President of Operations and Information
Systems since July 2002. In August 2001, Mr. Grimes founded Supply Chain
Consulting, where he provided supply chain management expertise. From January
2001 through August 2001, Mr. Grimes was Senior Vice President of Strategic
Planning-Operations at Parmalat Bakery Division, North America. From 1998 to
2001, he was Senior Vice President of Operations at
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Archway/Mother's Cookies.Previously, Mr. Grimes held various positions at
Mother's Cake and Cookie Company. Before joining Mother's, he was at Frito Lay
and Procter & Gamble.
William M. Lilla has served as Vice President since April 1998. He has served
the Company in several roles, including Vice President, Marketing and Strategy
and Vice President, Food Service/Office and New Business Development, and Vice
President, Strategic Partners. 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.
Peter B. Mehrberg has served as Vice President since 1997. He has served the
Company in several roles, including Vice President, Business Development and
Vice President, Real Estate. Mr. Mehrberg has also served as General Counsel
since September 1994. From July 1994 to June 1997, Mr. Mehrberg was our
Director of Real Estate.
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. Mr. Reynolds joined Peet's in 1984.
Bruce E. Schroder has served as Vice President, Specialty since June 2003. From
December 2001 through May 2003, he was CEO for HomeGain.com, Inc. an Internet
based real estate company. Prior to that, Mr. Schroder spent a combined total
of nearly 16 years with PepsiCo, in finance, sales, marketing and general
management roles for Pepsi Bottling Group, Taco Bell, Pepsi Fountain Beverage,
The North American Coffee Partnership and SoBe. Mr. Schroder began his career
as a CPA with Arthur Andersen & Co and also served as Executive Vice President
of Retail Marketing for Wells Fargo Bank.
ITEM 2. PROPERTIES
Peet's headquarters are located in Emeryville, California, where the
Company leases approximately 60,000 square feet of office and production 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 76 retail stores in seven states. Our retail locations are all
company operated in leased facilities. Our store size averages approximately
1,800 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 February 27, 2004:
LOCATION NUMBER
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Northern California . 47
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Southern California . 14
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Chicago, Illinois . . 2
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Portland, Oregon. . . 4
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Boston, Massachusetts 6
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Seattle, Washington . 1
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Austin, Texas . . . . 1
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Denver, Colorado. . . 1
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TOTAL . . . . . . . . 76
- --------------------- ======
ITEM 3. 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 March 4, 2004,
the Superior Court granted preliminary approval of a settlement of the suits and
conditional certification of the class for settlement purposes. The Company
recorded a charge of $2.7 million during the third quarter for the estimated
payment of claims to
9
eligible class members, attorneys' fees and costs, costs to a third-party claims
administrator, as well as applicable employer payroll taxes. This charge is
included in "General and administrative expenses" in the Company's consolidated
statement of income for 2003. The settlement is subject to the court's final
approval, the Company's right to terminate if more than 10% of the settlement
class opts out of the settlement, and the plaintiffs' right to terminate if
claims by class members in the aggregate exceed more than 10% of the number of
work weeks specified in the settlement agreement.
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 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 28, 2003.
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 is traded on the Nasdaq National Market System
under the symbol ''PEET''. 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 for each quarter during the last two fiscal years.
HIGH LOW
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FISCAL YEAR ENDED DECEMBER 28, 2003
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Fourth Quarter . . . . . . . . $20.93 $15.45
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Third Quarter. . . . . . . . . $23.14 $17.47
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Second Quarter . . . . . . . . $18.60 $15.48
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First Quarter. . . . . . . . . $16.74 $12.95
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FISCAL YEAR ENDED DECEMBER 29, 2002
- -----------------------------------
Fourth Quarter . . . . . . . . $16.24 $10.80
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Third Quarter. . . . . . . . . $17.03 $12.00
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Second Quarter . . . . . . . . $18.89 $12.88
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First Quarter. . . . . . . . . $16.15 $10.85
- ----------------------------------- ------ ------
As of February 27, 2004, there were approximately 295 registered holders of
record of the Company's common stock. On February 27, 2004, the last sale price
reported on the Nasdaq National Market System for the common stock was $20.48
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 of
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 ''Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources.''
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, as subsequently amended (the ''Registration Statement'')
(File No. 333-47597). As of February 27, 2004, $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.
10
We completed our secondary public offering of our common stock in April
2002 pursuant to a Registration Statement on Form S-3 initially filed on March
27, 2002, as subsequently amended (the "Registration Statement" (File No.
333-85085). The aggregate proceeds to us from the offering were $43.9 million.
We paid expenses of approximately $2.9 million, of which approximately $2.4
million represented expenses related to underwriters' fees. Net proceeds from
the offering were $41.0 million. As of February 27, 2004, all of the net
proceeds were invested in short-term and long-term, United States Government and
Agency securities. We expect that our use of proceeds from the offering will
conform to the intended use of proceeds as described in our prospectus dated
April 19, 2002, except that the proceeds have been invested in short-term and
long-term, interest-bearing United States Government and Agency securities until
required for working capital purposes.
SHARE REPURCHASE
On February 11, 2004, the Company's Board of Directors authorized the
company to repurchase up to 1.0 million shares of Peet's common stock. The
repurchases will be made from time to time on the open market at prevailing
market prices or in negotiated transactions off the market. The repurchases are
expected to continue through the end of 2004 unless extended or shortened by the
Board of Directors.
ITEM 6. SELECTED FINANCIAL DATA
The table below shows selected consolidated financial data for our last
five fiscal 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.
The following selected consolidated financial data should be read in
conjunction with our consolidated financial statements and related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this report.
11
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
YEAR
-------------------------------------------------
1999 2000 2001 2002 2003
-------- -------- -------- --------- ---------
STATEMENT OF OPERATIONS DATA:
Net revenue . . . . . . . . . . . . . . . . . . . . . . . . $69,059 $84,302 $94,400 $104,073 $119,816
Cost of sales and related occupancy expenses. . . . . . . . 33,641 40,655 45,357 48,146 54,961
Operating expenses. . . . . . . . . . . . . . . . . . . . . 22,115 28,073 30,617 33,221 38,751
Marketing and advertising expenses. . . . . . . . . . . . . 3,491 6,069 4,812 4,554 4,525
General and administrative expenses . . . . . . . . . . . . 5,551 5,893 6,243 6,732 9,193
Depreciation and amortization expenses. . . . . . . . . . . 3,404 4,576 5,038 4,568 4,890
-------- -------- -------- --------- ---------
Income (loss) from operations . . . . . . . . . . . . . . . 857 (964) 2,333 6,852 7,496
Interest income (expense), net. . . . . . . . . . . . . . . (985) (1,907) (429) 540 1,163
-------- -------- -------- --------- ---------
Income (loss) before income taxes . . . . . . . . . . . . . (128) (2,871) 1,904 7,392 8,659
Income tax (provision) benefit. . . . . . . . . . . . . . . (16) 596 (749) (2,735) (3,481)
-------- -------- -------- --------- ---------
Net income (loss) . . . . . . . . . . . . . . . . . . . . . $ (144) $(2,275) $ 1,155 $ 4,657 $ 5,178
======== ======== ======== ========= =========
Net income (loss) per share:
Basic. . . . . . . . . . . . . . . . . . . . . . . . . $ (0.03) $ (0.50) $ 0.15 $ 0.43 $ 0.41
======== ======== ======== ========= =========
Diluted. . . . . . . . . . . . . . . . . . . . . . . . $ (0.03) $ (0.50) $ 0.14 $ 0.40 $ 0.39
======== ======== ======== ========= =========
Shares used in calculation of net income (loss) per share:
Basic. . . . . . . . . . . . . . . . . . . . . . . . . 4,489 4,515 7,941 10,919 12,589
======== ======== ======== ========= =========
Diluted. . . . . . . . . . . . . . . . . . . . . . . . 4,489 4,515 8,212 11,627 13,236
======== ======== ======== ========= =========
BALANCE SHEET DATA:
Cash and cash equivalents . . . . . . . . . . . . . . . . . $ 1,074 $ 1,598 $ 2,718 $ 7,572 $ 30,263
Working capital (deficit) . . . . . . . . . . . . . . . . . (5,486) (2,853) 3,315 22,499 44,485
Total assets. . . . . . . . . . . . . . . . . . . . . . . . 34,650 39,721 41,409 95,145 110,455
Borrowings under line of credit . . . . . . . . . . . . . . 5,600 4,246 1,968 - -
Current portion of long-term borrowings . . . . . . . . . . 2,816 2,037 513 468 3
Long-term borrowings, less current portion. . . . . . . . . 7,240 14,544 895 424 -
Total shareholders' equity. . . . . . . . . . . . . . . . . 11,191 9,167 28,770 80,504 95,234
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 below contains
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934.
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 strong 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. Currently,
our expansion strategy is focused in the western United States, where we have
more physical presence and higher customer awareness.
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.
12
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 periodically 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 "Summary of
Significant Accounting Policies" 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. 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.
- -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 workers' 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 the self-insured portion of the workers' compensation claims. The
liability of $1.1 million recorded as of December 28, 2003 is determined based
on information received from our insurance carrier including claims paid, filed
and reserved for, as well as using historical experience. Should a greater
amount of claims occur compared to what is estimated or the settlement costs
increase beyond what was anticipated, the recorded liability may not be
sufficient.
- -Accrued litigation. During 2003, two lawsuits were filed against us alleging
misclassification of employment position. The lawsuits sought class action
status in addition to damages, restitution, reclassification, and attorneys'
fees and costs. The Superior Court of the State of California, County of
Orange, granted preliminary approval of the proposed settlement of the lawsuits
that, subject to the Court's final approval, would fully resolve all claims
brought by the plaintiffs. A charge of $2.7 million was recorded in the third
quarter of 2003 for the estimated payment of claims to eligible class members,
attorneys' fees, costs to a third-party claims administrator, and applicable
employer payroll taxes. The liability recorded as of December 28, 2003 of $2.3
million is an estimate and should a greater amount of claims occur or if the
court does not certify the settlement, the recorded liability may not be
sufficient.
13
- -Income taxes. In establishing deferred income tax assets and liabilities, we
make judgments and interpretations based on enacted tax laws and published tax
guidance applicable to its operations. We record deferred tax assets and
liabilities and evaluate the need for valuation allowances to reduce deferred
tax assets to realizable amounts. Changes in our valuation of the deferred tax
assets or changes in the income tax provision may affect its annual effective
income tax rate.
- -Hedge accounting. We have in the past used 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.
If these derivative instruments did 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 12 "Hedging Activities" 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 under 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 2
"Summary of Significant Accounting Policies" and Note 10 "Stock Option and
Employee Purchase Plans" in 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. Historically, we have operated
in three reportable segments: retail, online and mail order and specialty
sales. Management evaluates segment performance primarily based on revenue and
segment operating income. Effective at the beginning of the second quarter of
2002, due to the nature of cross-channel marketing and consumer purchase
behavior from our multi-channel selling strategy, we have had an organizational
change, combining the online and mail order segment and the specialty sales
segment. We are indifferent as to where consumers purchase our coffees and
teas, so we have aggregated these individual sales channels into one reportable
segment. Company-operated retail stores operations remain a separate channel
due to the beverage component of this business and the percent of overall
revenues it represents. Therefore, we currently have two reportable segments,
consisting of:
- - Our retail stores; and
- - Specialty sales, which consist of sales to online and mail order
customers, and sales to grocery stores, restaurant and food service companies,
and office accounts.
We believe growth opportunities exist in all these channels. Our expansion
is focused first in developing the western U.S. existing markets where we
already have a presence and have a higher customer awareness. We will continue
to open new stores in strategic locations that meet our demographic profile in
these markets, make our coffees more broadly and conveniently located in grocery
stores, and partner with distributors and companies who share our passion for
quality and freshness and are willing and able to execute accordingly in the
food service and office environment. We also will penetrate new domestic
markets and channels that we believe can support the sale of specialty coffee,
and continue to explore opportunities internationally.
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
14
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 artisan baked pastries. Moreover, 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. 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. In 2003, whole bean coffee and related products sales from stores
opened for less than 5 years was 38% of net revenue versus 48% for stores opened
for more than 5 years. 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.
15
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.
YEAR
----------------------
2001 2002 2003
------ ------ ------
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 . . . . . . . . . . . . . . . . . 48.1 46.3 45.9
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32.4 31.9 32.3
Marketing and advertising expenses . . . . . . . . . . . . . . . . . . . . . . 5.1 4.4 3.8
General and administrative expenses. . . . . . . . . . . . . . . . . . . . . . 6.6 6.5 7.7
Depreciation and amortization expenses . . . . . . . . . . . . . . . . . . . . 5.3 4.4 4.1
------ ------ ------
Income (loss) from operations. . . . . . . . . . . . . . . . . . . . . . . . . 2.5 6.5 6.2
Interest income (expense), net . . . . . . . . . . . . . . . . . . . . . . . . (0.5) 0.5 1.0
------ ------ ------
Income (loss) before income taxes. . . . . . . . . . . . . . . . . . . . . . . 2.0 7.0 7.2
Income tax (provision) benefit . . . . . . . . . . . . . . . . . . . . . . . . (0.8) (2.6) (2.9)
------ ------ ------
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2% 4.4% 4.3%
====== ====== ======
PERCENT OF NET REVENUE BY BUSINESS SEGMENT:
Retail stores. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79.5% 75.2% 71.6%
Specialty sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.5 24.8 28.4
====== ====== ======
PERCENT OF NET REVENUE BY BUSINESS CATEGORY:
Whole bean coffee and related products . . . . . . . . . . . . . . . . . . . . 59.3% 60.1% 60.1%
Beverages and pastries . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40.7 39.9 39.9
====== ====== ======
COST OF SALES AND RELATED OCCUPANCY EXPENSES AS A PERCENT OF SEGMENT REVENUE:
Retail stores. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47.5% 45.7% 45.3%
Specialty sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50.4 48.0 47.3
OPERATING EXPENSES AS A PERCENT OF SEGMENT REVENUE:
Retail stores. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35.5% 35.2% 35.5%
Specialty sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.4 22.1 24.3
PERCENT INCREASE (DECREASE) FROM PRIOR YEAR:
Net revenue 10.2% 15.1%
Retail stores 4.3 9.5
Specialty sales 33.2 32.1
Cost of sales and related occupancy expenses 6.1 14.2
Operating expenses 8.5 16.6
Marketing and advertising expenses (5.4) (0.6)
General and administrative expenses 7.8 36.6
Depreciation and amortization expenses (9.3) 7.0
SELECTED OPERATING DATA:
Number of retail stores in operation:
Beginning of the period . . . . . . . . . . . . . . . . . . . . . . . . . 58 60 65
Store openings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 5 10
Store closures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 0 0
------ ------ ------
End of the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 65 75
====== ====== ======
16
2003 COMPARED WITH 2002
Net revenue
Net revenue for 2003 increased versus 2002 as a result of continued
expansion of our retail and specialty sales segment, mostly in the western
United States. Sales of whole bean and related products increased 15.0% to
$72.0 million. Sales from beverages and pastries increased 15.3% to $47.8
million. A key element of our multi-channel strategy emphasizes the sales of
whole bean coffee and related products. As a result, we continued to derive a
majority of our net revenue from the sale of whole bean coffee and related
products. For 2003, whole bean coffee and related products as a percent of net
revenue was 60.1%, same as in 2002.
In the retail segment, revenue increased 9.5% compared to 2002 primarily as
a result of increased sales from 15 new stores we opened since August 2002 and
existing stores. Sales of whole bean coffee and related products in the retail
segment increased by 2.8%, to $39.1 million, while sales of beverages and
pastries increased by 15.9% to $46.7 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 emphasized 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 increased the availability
of Peet's coffee in grocery stores, and the slower maturation of whole bean
sales in new stores. During 2003, we opened a total of 10 stores, an increase
of 5 from last year. This focus will continue as we expect to open
approximately 15 to 20 stores in 2004. In the specialty sales segment,
revenue increased as the result of our continued focus on the grocery and food
service channel. The $8.3 million increase consisted primarily of a $5.9
million increase in grocery sales and a $2.1 million increase in sales to
restaurants and food service 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. During the second half of 2002, we added
approximately 1,200 Safeway stores, 860 of them in the western U.S. In 2003, we
added approximately 1,200 points of distribution, primarily in the western U.S.
through multi-location chains such as Albertsons, Ralph's, and Whole Foods
Market. This brought the total number of grocery stores selling Peet's coffee
to over 2,700 at the end of 2003. 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, thus increasing the unit sales in each grocery store. In the restaurant
and food service area, the sales increase was primarily due to new accounts
added last year and earlier this year such as Omni Hotels. Sales to the online,
mail order and office channels grew 4.1% primarily due to more emphasis on
loyalty programs and the stabilizing office population as the job market and the
economy began to recover. Sales to kiosks and licensed partners, representing
1.4% of net revenue, were down 15.1% primarily as our Japan Licensed Partner
ceased its retail operation.
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.
Cost of sales increased by 14.2% primarily as a result of the increase in net
revenue and the addition of 10 new stores. As a percent of net revenue, cost of
sales decreased from 46.3% to 45.9% due higher retail revenue, which benefited
from higher price points generated from new iced drinks and a revamped bar menu.
Specialty sales costs decreased as a percent of net revenue as compared to the
prior year due to favorable sales mix.
Operating expenses
Operating expenses for 2003 increased as compared to 2002 as we grew our
business. Operating expenses as a percent of net revenue increased primarily
due to opening of new stores and the transition to a direct delivery system to
support growth in our grocery channel.
In the retail segment, operating expenses as a percent of sales increased
by 0.3%, to 35.5%. The increase was due to a 0.7% increase from opening 15 new
stores in the last 18 months and was partially offset by 0.4% improvement in our
existing store operation. New stores generally have higher operating expenses
due to lower
17
sales volume and higher startup cost, including more activities to drive sales.
The improvement in existing operation was mainly due to leveraging our sales
growth.
Our focus on growing the specialty sales segment, especially grocery, led to an
increase in specialty sales operating expenses as a percent of segment revenue.
The factors contributing to the increase included the continued upgrade and
addition of sales staff and an increase in distribution costs in the grocery
channel. In the first quarter of 2003, we implemented a direct store delivery
system, or DSD, with dedicated route sales representatives delivering our
product to grocery stores weekly. This increased our operating expenses in the
areas of payroll, the associated commission and vehicle expenses. The startup
phase of this was completed by the second quarter. We currently have
approximately 50 DSD route sales representatives, of which 34 are full-time
Peet's employees. We expect to maintain and leverage this operating structure
as we continue our expansion in the western U.S. market this year.
Marketing and advertising expenses
For 2003, marketing and advertising expenses were essentially in line with
prior year. Our focus this year has been to attract new customers in our new
retail stores and in the grocery channel. We were able to leverage marketing
expenses in other channels.
General and administrative expenses
General and administrative expenses increased 36.5%, or $2.5 million as
compared to 2002. The increase was due to a $2.7 million charge related to the
settlement of a wage and hour lawsuit and $0.7 million in severance expenses
related to the departure of two veteran executives. These charges, taken in the
third quarter, reduced our full year diluted earnings per share by $0.16. The
settlement is subject to risks identified in Note 11 of the "Notes to Condensed
Consolidated Financial Statements." 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.
Depreciation and amortization expenses
Depreciation and amortization expenses increased in 2003 primarily due to
the five stores we opened during the last five months of 2002 and the ten stores
we opened in 2003. This increase was partially offset by certain assets
becoming fully depreciated during the year.
Investment income, net
We currently invest 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. For
2003, investment income increased $0.6 million due to the full year impact of
income earned from the proceeds of our 2002 public offering as compared to seven
months in 2002.
Income tax provision
This year's corporate income tax rate was 40.2% versus 37.0% in the prior
year. Our taxable income was reduced primarily by the tax benefit provided by
the exercise of stock options and acceleration of depreciation of fixed assets
for tax purposes. These tax benefits reduced our ability to release the
valuation allowance on federal and state charitable contribution carryforwards
in the current year, thus, increasing our tax rate.
2002 COMPARED WITH 2001
Net revenue
Net revenue for 2002 increased by 10.2% as compared to 2001. During 2002,
we continued our strategy of selling through multiple channels of distribution.
We accelerated growth in the specialty sales segment, especially in the grocery
and food service channels. Revenue derived from the sale of whole bean coffee
and related products as a percent of net revenue increased from 59.3% in 2001 to
60.1% in 2002.
18
In the retail segment, revenue increased 4.3% compared to 2001 primarily as
a result of increased sales in existing stores and the opening of new retail
stores. The $3.2 million revenue increase consisted of $2.8 million from
existing stores and $0.4 million from new stores. In existing stores, the
revenue increase of $2.0 million was due to increased traffic and $0.8 million
was due to higher average sales transactions. There were no price increases
during the year. During 2002, we opened five new stores compared to two stores
opened in 2001. One store was opened during the third quarter while the
remaining four stores were opened during the fourth quarter. We opened more new
stores in 2002 as we saw the cost and availability of real estate become more
favorable in 2002.
In the specialty sales segment, revenue increased primarily due to sales
initiatives focused in the grocery and food service channels. The $6.4 million
revenue increase consists of $3.5 million in grocery, $1.6 million in food
service, and $1.3 million in all other channels such as online and mail order,
kiosks and license partners, and office coffee sales. The accelerated growth in
grocery was the result of developing relationships with larger multi-location
chains such as Safeway Inc. and Whole Foods Markets. We increased the number of
grocery stores selling Peet's coffee from 130 locations in 2001 to over 1,400 in
2002. In 2002, we entered into an agreement with Safeway to distribute our
coffees to approximately 1,200 Safeway stores across the country. In July 2002,
we rolled out distribution to approximately 860 stores in the western United
States, including California, Colorado, Pacific Northwest, Arizona, and New
Mexico. In September, we rolled out distribution to the remaining 340 stores in
the eastern United States, including Texas, Illinois, and Pennsylvania. In the
food service area, the sales increase was due to the acquisition of new
customers like the Omni Hotel and the full year impact of existing customers
like Wolfgang Puck Fine Dining and Anton Airfoods. In the other channels,
including online and mail order, office coffee, and kiosk operations, the sales
increase was entirely attributable to the full year impact of our kiosk
operations in Larry's Markets.
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 five new
stores, cost of sales increased by 6.1% in 2002. As a percent of net revenue,
cost of sales decreased mainly because of lower coffee costs, lower world
commodity coffee prices and the sales of special lot and seasonal coffees, which
have a higher margin than regular menu coffees. These benefits were partially
offset by the increase in revenue from the specialty sales segment, which has a
lower price point than retail and higher shipping and packaging costs.
Operating expenses
Operating expenses for 2002 increased as compared to 2001 as we grew our
business. However, operating expenses as a percent of net revenue decreased
primarily due to the continued productivity initiative affecting our retail
stores and the revenue increase in our specialty sales segment, which has lower
operating expenses without the intensive labor component of the retail stores.
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 continued upgrade and addition of
specialty sales staff and an increase in consulting and distribution costs in
the grocery channel.
Marketing and advertising expenses
The decrease in marketing and advertising expenses in 2002 as compared to
2001 is attributable to the leverage gained from marketing across multiple
channels of distribution, as well as the shift in spending to improve store
operations, recognizing that stores are our most valuable marketing tool.
General and administrative expenses
General and administrative expenses increased by 7.8% in 2002 as the result
of higher expenses in the areas of stock plan administration, public relations
and proxy related activities, higher insurance coverage for directors and
officers, and our CEO search.
19
Depreciation and amortization expenses
Depreciation and amortization expenses decreased in 2002 due primarily to
certain assets becoming fully depreciated during the year. In addition, while
we opened three more stores than 2001, depreciation expense was minimally
impacted as most of the stores were opened in the fourth quarter.
Interest (income) expense, net
Net interest income was generated in 2002 from the investment of the
proceeds of our April 2002 follow-on public offering of common stock. The
investments are short and long-term interest bearing, U.S. Government and Agency
securities.
Income tax provision
Taxes on net income in 2002 were $2.7 million, reflecting an effective tax
rate of 37.0%. The decrease in the effective rate over the prior year is
attributable to the change in the valuation allowance of charitable
contributions carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
At December 28, 2003, we had a total of $42.6 million in cash and cash
equivalents and short-term investments. Total cash and cash equivalents and
liquid investments totaled $59.2 million. Also, we had $44.5 million of working
capital.
Net cash provided by operations was $16.3 million in 2003 compared to $11.6
million in 2002. Operating cash flows were positively impacted in 2003 by
increased net income and the tax benefit from the increased exercise of stock
options and higher accounts payable balances.
Net cash used in investing activities was $1.2 million in 2003. Investing
activities primarily consisted of the net proceeds of $11.2 million of
short-term investments and long-term U.S. Government and Agency securities, and
$10.0 million in capital expenditures for property, plant and equipment.
Capital expenditures included:
- - $6.3 million used for the buildout of new stores and remodel of existing
stores;
- - $1.6 million used for DSD vans and equipment for specialty sales;
- - $1.5 million used for manufacturing plant capacity and additional
machinery; and
- - $0.5 million used for web development, information technology support
systems, and software to support our growing infrastructure.
Net cash provided by financing activities was $5.2 million in 2003.
Financing activities in 2003 consisted primarily of $6.1 million in exercise of
stock options, offset by $0.9 million of repayment of debt.
We have a credit facility with General Electric Capital Corporation that
provides for a revolving line of credit of $15.0 million that expires in 2005.
At December 28, 2003, there was no outstanding balance and $14.9 million
available under the revolving line of credit after other senior funded debt of
$0.1 million, consisting of capital leases. See Note 6 "Borrowings" in the
"Notes to Consolidated Financial Statements," included elsewhere in this report.
Our 2004 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.
Our 2004 capital expenditures are expected to be between $12.0 and $14.0
million. Approximately $7.0 to $9.0 million is expected to be used for the
opening of 15 to 20 new retail stores scheduled for 2004 and expenditures for
new stores in progress for 2005. Approximately $2.0 million is expected to be
used for purchase of new packaging and roasting equipment. The remaining $3.0
million is expected to be used for the remodeling of existing stores, equipment
for the grocery channel, and information technology enhancements.
20
We are exploring capacity and office space needs as we continue to grow our
business. Our lease for our corporate office and plant facilities expire in
2005 and we have an option to extend the lease for an additional ten years. We
believe that in 2005 we will need additional production and office space that
will exceed our current facilities. We are in the process of exploring
alternatives including but not limited to extending of the existing lease with
additional leasing of production, warehouse, and office spaces.
PAYMENTS DUE BY PERIOD
(IN THOUSANDS)
--------------
LESS THAN
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS AFTER 5 YEARS
- --------------------------------------- ------- ---------- ---------- ---------- --------------
Equipment leases. . . . . . . . . . . . $ 280 $ 69 $ 130 $ 81
Consulting and service agreements . . . 256 232 24
Retail store operating leases . . . . . 28,083 6,206 11,021 6,564 $ 4,292
Fixed-price coffee purchase commitments 16,152 12,116 4,036
------- ---------- ----------
Total contractual cash obligations $44,771 $ 18,623 $ 15,211 $ 6,645 $ 4,292
======= ========== ========== ========== ==============
For the next twelve months, we expect our cash flows from operations and
cash and investments to be sufficient for our operating and capital
requirements, our share repurchase program, and our contractual obligations as
they come due. Other business opportunities or store expansion rates
substantially in excess of those presently planned may require outside funding.
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We invest excess cash in money market accounts, short-term investments and
long-term U.S. Government and Agency securities. These financial instruments
are all subject to fluctuations of daily interest rates. Therefore our
investment portfolio is exposed to market risk from these changes.
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 coffee hedging strategy is intended to limit the cost exposure of the
main commodity used in our business, green coffee beans. We use fixed-price
purchase commitments, coffee futures, and coffee futures options to manage
coffee supply and price risk.
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 28, 2003, we had approximately
$16.2 million in open fixed-priced purchase commitments with delivery dates
ranging from January 2004 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 and Futures Options
We use coffee futures and 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 instruments 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.
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, the
amount of coffee
21
qualified for hedge accounting, and general market conditions and trends. Our
hedging positions are only placed by the Chief Financial Officer through one
brokerage firm that we believe to be reputable. As of December 28, 2003, we held
no coffee futures or futures options.
The following table reflects the outstanding coffee futures hedging
positions as of December 29, 2002. We had no outstanding positions at December
28, 2003.
CONTRACT TRADE SETTLEMENT
NUMBER OF CONTRACTS MONTH PRICE PRICE GAIN/(LOSS)
- ------------------- --------------------------------------- ------ ---------- ------------
25 May-03. . . . . . . . . . . . . . . . . $60.50 63.85 $ 31,410
------------
Unrealized Gain as of December 29, 2002 $ 31,410
============
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 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
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.
In January 2003 the FASB issued FASB Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities and was subsequently revised in
December 2003. FIN 46 clarifies the application of Accounting Research Bulletin
No. 51, explains how to identify variable interest entities, and how an
enterprise should assess its interest in an entity to decide whether to
consolidate such entity. Further, FIN 46 requires existing unconsolidated
entities to be consolidated by their primary beneficiaries if the entities do
not effectively disperse risks among parties involved. The revision of FIN 46
further defines and narrows the scope of the variable interest entity as well as
defers the effective date of the guidance to the first quarter of 2004. The
adoption of FIN 46 is not expected to have an impact on our results of
operations or financial position.
22
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 expansion through multiple channels of
distribution. Currently, our retail stores, which generated nearly 72% of our
2003 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 HIGHLY DEPENDENT ON A SINGLE PRODUCT, SPECIALTY COFFEE,
IF THE DEMAND FOR SPECIALTY COFFEE DECREASES, OUR BUSINESS COULD SUFFER.
Sales of specialty coffee constituted nearly 84% of our 2003 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 and opening new stores 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.
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 that 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.
23
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 63% of our 2003 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 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.
THE GROCERY WORKERS STRIKE IN SOUTHERN CALIFORNIA HAS ENDED, HOWEVER, A SIMILAR
STRIKE IN OTHER REGIONS COULD NEGATIVELY IMPACT OUR GROCERY BUSINESS.
The Southern California grocery workers strike impacted Safeway,
Albertson's, and Ralph's. We sell coffee to each of these supermarkets in the
area as well as in other regions in the Western United States. If a similar
strike were to occur in other regions such as Northern California and the
Pacific Northwest, where we have the majority of our distribution, our grocery
revenue could be negatively impacted.
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 76 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.
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.
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 and our coffee roasters and purchasers. If members of our management
leave without effective replacements, our ability to implement our business
strategy could be impaired. If we lost the services 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. In either case, our business and operations could be
adversely affected.
24
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.
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 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. 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.
Our earthquake insurance covers net income, continuing normal operating
expenses and extra expenses incurred during the period of restoration. However,
in the event of a catastrophic earthquake, our coverage is limited and we would
incur additional expenses.
WE HAVE A HIGH DEDUCTIBLE WORKERS' COMPENSATION INSURANCE PROGRAM AND MORE
CLAIMS AND HIGHER COSTS FROM THESE CLAIMS MAY ADVERSELY AFFECT OUR PROFIT.
Our current workers' compensation insurance program is a modified
self-insured program with a high deductible with an overall program ceiling to
limit exposure. The California workers' compensation environment has been
unpredictable with continually increasing costs in the past five years. The
majority of our business is in California, therefore, we are exposed to the same
increased costs. Additionally, we have had to estimate our liability for
existing claims whose outcome is uncertain. While we believe our reserve
methodology on these claims is appropriate today, unfavorable development in
this area will also affect any open claims that were filed beginning March 2002,
the date we transitioned to a high deductible program. Should a greater amount
of claims occur or the settlement costs increase beyond what was anticipated,
our expenses could increase and our profitability may decrease.
INCREASES IN THE COST AND DECREASES IN AVAILABILITY OF HIGH QUALITY ARABICA
COFFEE BEANS COULD IMPACT OUR PROFITABILITY AND GROWTH OF OUR BUSINESS.
Coffee prices are currently near historical lows and we believe they are
likely to increase in the future. 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.
If the cost of our green coffee beans increases due to any of these or
other factors impacting us negatively, we many 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 margin
will decrease and our profitability will suffer accordingly. If we are not able
to purchase sufficient quantities of high quality Arabica beans due to any
25
of the above factors, we many not be able to fulfill the demand for our coffee,
our revenue may decrease and our ability to expand our business may also suffer.
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.
COMPETITION IN THE SPECIALTY COFFEE MARKET IS INTENSE AND COULD AFFECT OUR
PROFITABILITY.
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. Our whole bean specialty coffee competes with several
major national brands, such as Gevalia (Kraft Foods), Green Mountain Coffee,
Illy Caffe , Millstone (Procter & Gamble), Seattle's Best (Starbucks) and
Starbucks, as well as numerous smaller, regional brands. 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, 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 have been 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.
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.
LAWSUITS AND OTHER CLAIMS AGAINST THE COMPANY MAY ADVERSELY AFFECT OUR
PROFITABILITY.
We may from time to time become involved in certain legal proceedings in
the ordinary course of business, such as the two lawsuits filed in 2003 against
us entitled Brian Taraz, et al. vs. Peet's Coffee & Tea, Inc., and Tracy Coffee,
et al. vs. Peet's Coffee & Tea, Inc. In investigating any claims against the
Company or defending any allegations, we may incur legal fees, settlement fees,
damages or remediation expenses that may harm our business, reducing our sales
and adversely affecting our profitability. Further, while the Superior Court
has granted preliminary approval to the settlement of the lawsuits brought by
Taraz et al., the settlement remains subject to the court's final approval, our
right to terminate if more than 10% of the settlement class opts out of the
settlement, and the plaintiffs' right to terminate if claims by class members in
the aggregate exceed more than 10% of the number of work weeks specified in the
settlement agreement, and may therefore never be consummated.
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.
26
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 illnesses, injuries suffered on the premises or other
quality, health or operational 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-20 in
Item 15 of this Form 10-K Report and is incorporated in this item by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our Exchange Act reports is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officers, as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and procedures,
our management recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and our management necessarily is required to apply
its judgment in evaluating the cost-benefit relationship of possible controls
and procedures.
As of December 28, 2003, the end of the period covered by this report, we
carried out an evaluation, under the supervision and with the participation of
our management, including our Chief Executive Officer and our Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures. Based on the foregoing, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and procedures
were effective at the reasonable-assurance level.
There has been no change in our internal controls over financial reporting
during our most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal controls over financial
reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information respecting continuing directors and nominees of the Company is
set forth under the caption "Election of Directors" in the Company's Proxy
Statement relating to its 2004 Annual Meeting of Stockholders and is
incorporated by reference into this Form 10-K Report. The Proxy Statement will
be filed with the Securities and Exchange Commission in accordance with Rule
14a-6(c) promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act."). With the exception of the foregoing information and other
information specifically incorporated by reference into this Form 10-K Report,
the Proxy Statement is not being filed as a part hereof. Information respecting
executive officers of the Company is set forth at Part I of this Report.
Information respecting compliance with Section 16(a) of the Exchange Act is
set forth under the caption "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Proxy Statement and is incorporated by reference into this
Form 10-K Report.
27
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation required by Item 11 is set
forth under the captions "Executive Compensation," "Stock Option Grants and
Exercises," "Employment Agreements" and "Compensation Committee Interlocks" in
the Proxy Statement and is incorporated by reference into this Form 10-K Report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners and
management required by Item 12 is set forth under the caption "Security
Ownership of Certain Beneficial Owners and Management" and "Our Equity Incentive
Plans" in the Proxy Statement and is incorporated by reference into this Form
10-K Report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions
required by Item 13 is set forth under the captions "Employment Agreements" and
"Certain Transactions" in the Proxy Statement and is incorporated by reference
into this Form 10-K Report.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information concerning principal accounting fees and services required by
Item 14 is set forth under the caption "Proposal 2 - Ratification of Selection
of Independent Auditors" in the Proxy Statement and is incorporated by reference
into this Form 10-K Report.
PART IV
ITEM 15. 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 29, 2002 and December 30, 2003 . . . . . . . . . . . F-3
- ----------------------------------------------------------------------------------------------- ----
Consolidated Statements of Operations for the Years Ended December 30, 2001, December 29, 2002,
and December 28, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4
- ----------------------------------------------------------------------------------------------- ----
Consolidated Statements of Shareholders' Equity for the Years Ended December 30, 2001,
December 29, 2002, and December 30, 2003. . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
- ----------------------------------------------------------------------------------------------- ----
Consolidated Statements of Cash Flows for the Years Ended December 30, 2001, December 29, 2002,
and December 28, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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.
28
(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)*
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 Advisory Engagement Letter dated December 9, 1996, between Peet's
Operating Company, Inc. and Jesse.Hansen&Co.*
10.15 Peet's Operating Company, Inc. Key Employment Agreement for Vice
President, Real Estate dated as of January 4, 1999. (2)
10.16 Peet's Operating Company, Inc. Key Employment Agreement for Vice
President of Operations dated as of June 24, 2002. (2)
10.17 Peet's Operating Company, Inc. Key Employment Agreement for Vice
President, Coffee dated as of June 6, 2000. (2)*
10.18 Peet's Operating Company, Inc. Key Employment Agreement for Vice
President of Information Systems dated as of January 20, 2000. (2)
29
10.19 Peet's Operating Company, Inc. Key Employment Agreement for Vice
President, Marketing dated as of January 4, 1999. (2)*
10.20 Form of Indemnity Agreement between the registrant and each of
its directors and officers. (2)
10.21 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.
Incorporated by reference to Exhibit 10.23 to the Company's
quarterly report on Form 10-Q for the quarter ended July 1, 2001.
10.22 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.
Incorporated by reference to Exhibit 10.24 to the Company's annual
filing on Form 10-K for the year ended December 30, 2001.
10.23 Fourth Amendment to Credit Agreement dated as of April 23, 2002 among
Peet's Operating Company, Inc., Peet's Trademark Company, Peet's
Coffee & Tea, Inc. and General Electric Capital Corporation.
Incorporated by reference to Exhibit 10.24 to the Company's
quarterly report on Form 10-Q for the quarter ended March 31, 2002.
10.24 Peet's Coffee & Tea, Inc. Key Employment Agreement for Chief Executive
Officer dated as of May 6, 2002. Incorporated by reference to
Exhibit 10.17 to the Company's quarterly report on Form 10-Q for the
quarter ended June 30, 2002. (2)
10.25 Peet's Coffee & Tea, Inc. Amended and Restated 2000 Non-Employee
Director Stock Option Plan and Form of Stock Option Agreement.
Incorporated by reference to Exhibit 10.10 to the Company's
quarterly report on Form 10-Q for the quarter ended
September 29, 2002. (1)
10.26 Fifth Amendment to Credit Agreement dated as of December 31, 2002
among Peet's Operating Company, Inc., Peet's Trademark Company,
Peet's Coffee & Tea, Inc. and General Electric Capital Corporation.
10.27 Sixth Amendment to Credit Agreement dated as of February 21, 2003
among Peet's Operating Company, Inc., Peet's Trademark Company, Peet's
Coffee & Tea, Inc. and General Electric Capital Corporation.
10.28 Peet's Coffee & Tea, Inc. Key Employment Agreement for Vice President,
Specialty dated as of June 9, 2003. Incorporated by reference to
Exhibit 10.17 to the Company's quarterly report on Form 10-Q for
the quarter ended June 29, 2003. (2)
10.29 Peet's Coffee & Tea, Inc. Key Employment Agreement for Chief Financial
Officer dated as of June 25, 2003. Incorporated by reference to
Exhibit 10.17 to the Company's quarterly report on Form 10-Q for the
quarter ended September 28, 2003. (2)
21.1 Subsidiaries of the registrant.*
30
23.1 Consent of Deloitte & Touche LLP.
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-14(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
32.2 Certification of the Company's Chief Financial Officer, Thomas Cawley,
pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
______________
* Incorporated by reference to Exhibit 10.18 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.
(b) Reports on Form 8-K
Current Report on Form 8-K filed on October 27, 2003 to furnish under Item 12 a
press release guidance dated October 27, 2003
Current Report on Form 8-K filed on October 29, 2003 to furnish under Item 12 a
press release dated October 29, 2003
31
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.
Date: March 12, 2004 PEET'S COFFEE & TEA, INC.
By: /s/ Patrick J. O'Dea
-----------------------
Patrick J. O'Dea
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Patrick J. O'Dea and Thomas P. Cawley 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/ PATRICK J. O'DEA President, Chief Executive Officer March 12, 2004
- ----------------------- and Director (Principal Executive
Patrick J. O'Dea Officer)
/s/ THOMAS P. CAWLEY Vice President, Chief Financial March 12, 2004
- --------------------- Officer, and Secretary (Principal
Thomas P. Cawley Financial and Accounting Officer)
/s/ JEAN-MICHEL VALETTE Chairman March 12, 2004
- -------------------------
Jean-Michel Valette
/s/ GERALD BALDWIN Director March 12, 2004
- --------------------
Gerald Baldwin
/s/ HILARY BILLINGS Director March 12, 2004
- ---------------------
Hilary Billings
/s/ GORDON A. BOWKER Director March 12, 2004
- -----------------------
Gordon A. Bowker
/s/ H. WILLIAM JESSE, JR. Director March 12, 2004
- ----------------------------
H. William Jesse, Jr.
/s/ CHRISTOPHER P. MOTTERN Director March 12, 2004
- ----------------------------
Christopher P. Mottern
32
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
- ----------------------------------------------------------------------------------------------- ----
Consolidated Balance Sheets as of December 29, 2002 and December 28, 2003 . . . . . . . . . . . F-3
- ----------------------------------------------------------------------------------------------- ----
Consolidated Statements of Operations for the Years Ended December 30, 2001, December 29, 2002,
and December 28, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4
- ----------------------------------------------------------------------------------------------- ----
Consolidated Statements of Shareholders' Equity for the Years Ended December 30, 2001,
December 29, 2002, and December 28, 2003. . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
- ----------------------------------------------------------------------------------------------- ----
Consolidated Statements of Cash Flows for the Years Ended December 30, 2001, December 29, 2002
and December 28, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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 29, 2002 and December 28,
2003, and the related consolidated statements of income, shareholders' equity
and cash flows for each of the three years in the period ended December 28,
2003. 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 includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Peet's Coffee & Tea, Inc. and
subsidiaries as of December 29, 2002 and December 28, 2003 and the results of
their operations and their cash flows for each of the three years in the period
ended December 28, 2003, in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 12 to the financial statements, effective January 1,
2001, 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 11, 2004
F - 2
PEET'S COFFEE & TEA, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 29, DECEMBER 28,
2002 2003
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . $ 7,572 $ 30,263
Short-term investments. . . . . . . . . . . . . . . . . . . . . . . . . . 12,100 12,328
Accounts receivable (net of allowance of $75 and $54) . . . . . . . . . . 2,210 3,115
Income tax receivable . . . . . . . . . . . . . . . . . . . . . . . . . . 1,117 340
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,007 10,720
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 461 563
Prepaid expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,342 1,548
------------- -------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . 35,809 58,877
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . 27,929 32,322
Intangible and other assets, net. . . . . . . . . . . . . . . . . . . . . . 3,305 2,684
Long-term U.S. Government & Agency securities . . . . . . . . . . . . . . . 28,102 16,572
------------- -------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 95,145 $ 110,455
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ---------------------------------------------------------------------------
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,463 $ 4,770
Accrued compensation and benefits . . . . . . . . . . . . . . . . . . . . 3,741 4,157
Gift certificates and stored value cards. . . . . . . . . . . . . . . . . 1,200 1,346
Accrued litigation expense 2,343
Other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . 1,438 1,773
Current portion of long-term borrowings . . . . . . . . . . . . . . . . . 468 3
------------- -------------
Total current liabilities. . . . . . . . . . . . . . . . . . . . 13,310 14,392
Long-term borrowings, less current portion. . . . . . . . . . . . . . . . . 424
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 181 10
Deferred lease credits. . . . . . . . . . . . . . . . . . . . . . . . . . . 726 819
------------- -------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,641 15,221
------------- -------------
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value; authorized 10,000,000 shares; none issued
Common stock, no par value; authorized 50,000,000 shares; issued and
outstanding: 12,103,000 shares and 12,983,000 shares . . . . . . . . . 78,014 87,808
Accumulated other comprehensive income, net of tax. . . . . . . . . . . . 265 23
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,225 7,403
------------- -------------
Total shareholders' equity . . . . . . . . . . . . . . . . . . . 80,504 95,234
------------- -------------
Total liabilities and shareholders' equity. . . . . . . . . . . . . . . . . $ 95,145 $ 110,455
============= =============
See notes to consolidated financial statements.
F - 3
PEET'S COFFEE & TEA, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2001 2002 2003
-------- --------- ---------
Net revenue . . . . . . . . . . . . . . . . . . . . $94,400 $104,073 $119,816
-------- --------- ---------
Operating expenses:
Cost of sales and related occupancy expenses. . . 45,357 48,146 54,961
Operating expenses. . . . . . . . . . . . . . . . 30,617 33,221 38,751
Marketing and advertising . . . . . . . . . . . . 4,812 4,554 4,525
Depreciation and amortization . . . . . . . . . . 5,038 4,568 4,890
General and administrative expenses . . . . . . . 6,243 6,732 9,193
-------- --------- ---------
Total operating costs and expenses . . . 92,067 97,221 112,320
-------- --------- ---------
Income from operations. . . . . . . . . . . . . . . 2,333 6,852 7,496
Interest income . . . . . . . . . . . . . . . . . . 47 660 1,251
Interest expense. . . . . . . . . . . . . . . . . . (476) (120) (88)
-------- --------- ---------
Income before income taxes. . . . . . . . . . . . . 1,904 7,392 8,659
Income tax provision. . . . . . . . . . . . . . . . 749 2,735 3,481
-------- --------- ---------
Net income. . . . . . . . . . . . . . . . . . . . . $ 1,155 $ 4,657 $ 5,178
======== ========= =========
Net income per share:
Basic. . . . . . . . . . . . . . . . . . . . . $ 0.15 $ 0.43 $ 0.41
======== ========= =========
Diluted. . . . . . . . . . . . . . . . . . . . $ 0.14 $ 0.40 $ 0.39
======== ========= =========
Shares used in calculation of net income per share:
Basic. . . . . . . . . . . . . . . . . . . . . 7,941 10,919 12,589
======== ========= =========
Diluted. . . . . . . . . . . . . . . . . . . . 8,212 11,627 13,236
======== ========= =========
See notes to consolidated financial statements.
F - 4
PEET'S COFFEE & TEA, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
SERIES A RETAINED ACCUMULATED
PREFERRED STOCK COMMON STOCK EARNINGS/ OTHER
--------------- ------------
SHARES SHARES (ACCUMULATED COMPREHENSIVE
OUTSTANDING AMOUNT OUTSTANDING AMOUNT DEFICIT) INCOME/(LOSS)
------------ -------- ------------ ------- -------------- ---------------
Balance at December 31, 2000. . . . . . 471 $ 4,537 4,516 $ 8,217 $ (3,587) $ -
Conversion of preferred shares. . . . . (471) (4,537) 943 4,537
Stock sold in Initial Public Offering 2,682 17,793
Stock options exercised, including
tax benefit 94 507
Stock sold in Employee Stock
Purchase Program 37 250
Amortization of stock compensation 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)
Reclassification of net losses on
cash flow hedges to cost of goods
sold, net of tax of $445 673
---------------
Other comprehensive loss (407)
Net income 1,155
------------ -------- ----- ------- -------------- ---------------
Balance at December 30, 2001. . . . . . - $ - 8,272 $31,609 $ (2,432) $ (407)
Stock sold in public offering 3,138 41,030
Stock options and warrants
exercised, including tax benefit 610 4,517
Stock sold in Employee Stock
Purchase Program 83 568
Amortization of stock compensation 290
Unrealized gains on cash flow
hedges, net of tax of $38 66
Reclassification of net losses on
cash flow hedges to cost of goods
sold, net of tax of $252 379
Net unrealized gain on investments,
net of tax of $133 227
---------------
Other comprehensive income 672
Net income 4,657
------------ -------- ------ ------- -------------- ---------------
Balance at December 29, 2002. . . . . . - $ - 12,103 $78,014 $ 2,225 $ 265
Stock options exercised,
including tax benefit 798 8,876
Stock sold in Employee Stock
Purchase Program 82 727
Amortization of stock compensation 191
Unrealized losses on cash flow
hedges, net of tax of $12 (20)
Reclassification of net losses on cash
flow hedges to cost of goods sold,
net of tax of $14 (21)
Net unrealized loss on investments,
net of tax of $134 (201)
---------------
Other comprehensive loss (242)
Net income 5,178
------------ -------- ------------ ------- -------------- ---------------
Balance at December 28, 2003. . . . . . - $ - 12,983 $87,808 $ 7,403 $ 23
============ ======== ============ ======= ============== ===============
TOTAL
SHAREHOLDERS' COMPREHENSIVE
EQUITY INCOME/(LOSS)
--------------- ---------------
Balance at December 31, 2000. . . . . . $ 9,167
Conversion of preferred shares. . . . . -
Stock sold in Initial Public Offering . 17,793
Stock options exercised, including
tax benefit. . . . . . . . . . . . . 507
Stock sold in Employee Stock
Purchase Program . . . . . . . . . . 250
Amortization of stock compensation. . . 305
Cumulative effect of accounting
change - FAS 133, net of tax of $519
Unrealized losses on cash flow
hedges, net of tax of $195
Reclassification of net losses on
cash flow hedges to cost of goods
sold, net of tax of $445
Other comprehensive loss. . . . . . . . (407) $ (407)
Net income. . . . . . . . . . . . . . . 1,155 1,155
--------------- ---------------
Balance at December 30, 2001. . . . . . $ 28,770 $ 748
===============
Stock sold in public offering . . . . . 41,030
Stock options and warrants
exercised, including tax benefit . . 4,517
Stock sold in Employee Stock
Purchase Program . . . . . . . . . . 568
Amortization of stock compensation. . . 290
Unrealized gains on cash flow
hedges, net of tax of $38
Reclassification of net losses on
cash flow hedges to cost of goods
sold, net of tax of $252
Net unrealized gain on investments,
net of tax of $133
Other comprehensive income. . . . . . . 672 672
Net income. . . . . . . . . . . . . . . 4,657 4,657
--------------- ---------------
Balance at December 29, 2002. . . . . . $ 80,504 $ 5,329
===============
Stock options exercised,
including tax benefit. . . . . . . . 8,876
Stock sold in Employee Stock
Purchase Program . . . . . . . . . . 727
Amortization of stock compensation. . . 191
Unrealized losses on cash flow
hedges, net of tax of $12
Reclassification of net losses on cash
flow hedges to cost of goods sold,
net of tax of $14
Net unrealized loss on investments,
net of tax of $134
Other comprehensive loss. . . . . . . . (242) (242)
Net income. . . . . . . . . . . . . . . 5,178 5,178
--------------- ---------------
Balance at December 28, 2003. . . . . . $ 95,234 $ 4,936
=============== ===============
See notes to consolidated financial statements.
F - 5
PEET'S COFFEE & TEA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
2001 2002 2003
--------- ---------- ---------
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,155 $ 4,657 $ 5,178
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . 5,693 5,251 5,795
Amortization of interest purchased (32) 110
Tax benefit from exercise of stock options 1,253 3,523
Amortization of discounted stock options. . . . . . . . . . . . . 305 290 191
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . 718 1,141 (127)
Reclassification of hedging losses in OCI . . . . . . . . . . . . 673 379 (21)
Ineffective portion of hedges . . . . . . . . . . . . . . . . . . 169 27
Gain on investments (27) (294)
Loss on disposition of assets . . . . . . . . . . . . . . . . . . 6 11 2
Changes in other assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . (309) (1,956) (129)
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,309) (2,062) 287
Prepaid expenses and other. . . . . . . . . . . . . . . . . . . . (217) (211) (237)
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . 22 (1,530) 392
Accounts payable, accrued liabilities and other liabilities . . . (1,123) 4,419 1,639
--------- ---------- ---------
Net cash provided by operating activities. . . . . . . . . 5,783 11,610 16,309
--------- ---------- ---------
Cash flows from investing activities:
Purchases of property and equipment . . . . . . . . . . . . . . . . (6,511) (9,316) (9,963)
Proceeds from sales of property and equipment . . . . . . . . . . . 17 3
Additions to intangible assets. . . . . . . . . . . . . . . . . . . (350) (35)
Proceeds from sales and maturities of investments 229,383 97,915
Purchases of investments (269,166) (86,765)
---------- ---------
Net cash used in investing activities. . . . . . . . . . . (6,844) (49,134) 1,190
--------- ---------- ---------
Cash flows from financing activities:
Repayments of debt. . . . . . . . . . . . . . . . . . . . . . . . . (17,451) (2,484) (888)
Net proceeds from issuance of common stock. . . . . . . . . . . . . 19,632 44,862 6,080
--------- ---------- ---------
Net cash provided by financing activities. . . . . . . . . 2,181 42,378 5,192
--------- ---------- ---------
Change in cash and cash equivalents . . . . . . . . . . . . . . . . . 1,120 4,854 22,691
Cash and cash equivalents, beginning of period. . . . . . . . . . . . 1,598 2,718 7,572
--------- ---------- ---------
Cash and cash equivalents, end of period. . . . . . . . . . . . . . . $ 2,718 $ 7,572 $ 30,263
========= ========== =========
Supplemental cash flow disclosures:
Cash paid for:
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . $ 478 $ 48 $ 8
Income taxes. . . . . . . . . . . . . . . . . . . . . . . . 29 2,050 0
NON CASH INVESTING AND FINANCING ACTIVITIES -
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
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 29, 2002
and December 28, 2003, the Company operated 65 and 75 retail stores,
respectively, in California, Colorado, Illinois, Oregon, Massachusetts, Texas
and Washington.
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.
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.
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 2003, 2002, and 2001 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.
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 include lease rights, contract acquisition
costs, deposits, and restricted cash. 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.
Intangibles, primarily lease rights, net of amortization, were $1,040,000 and
$809,000 at December 29, 2002 and December 28, 2003, respectively. The related
accumulated amortization was $1,882,000 and $1,944,000 at December 29, 2002 and
December 28, 2003, respectively. Amortization expense for 2001, 2002, and 2003
was $238,000, $246,000 and $203,000, respectively. Future amortization expense
for 2004 through 2008 is estimated at $155,000, $134,000, $118,000, $112,000,
and $112,000, respectively. Contract acquisition costs represents a payment
made to a retailer to obtain distribution for a specified period of time and is
being amortized as a reduction of revenue over the contract period.
INVESTMENT POLICY - Investments are classified as available for sale and
are recorded at fair market value. Any unrealized gains and losses are recorded
in other comprehensive income (loss).
F - 7
IMPAIRMENT OF LONG-LIVED ASSETS - The Company evaluates the recoverability
of its long-lived assets 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. No impairment charges were recorded during 2001,
2002, or 2003.
ACCRUED COMPENSATION AND BENEFITS - Beginning in March 2002, the Company
modified its workers' compensation insurance policy to a high deductible program
with an overall program ceiling to minimize exposure. We began recording an
estimated liability for the self-insured portion of the workers' compensation
claims. The liability is determined based on information received from the
Company's insurance adjuster including claims paid, filed and reserved for, as
well as using historical experience. As of December 29, 2002 and December 28,
2003, we had $703,000 and $1,136,000 accrued for workers' compensation.
A summary of the accrual activity is as follows (in thousands):
BALANCE AT ADDITIONS BALANCE
BEGINNING CHARGED TO CLAIMS AT END OF
OF PERIOD EXPENSE PAID PERIOD
----------- ----------- ------- ----------
Accrual related to workers' compensation
Year ended December 29, 2002 $ 0 $ 792 ($89) $ 703
Year ended December 28, 2003 703 792 (359) 1,136
STORE CLOSURE - The Company continually reviews the operating performance
of individual stores. An estimate for the costs associated with closing
under-performing stores in the period in which the store is closed. 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 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.
No expense was recorded in 2001, 2002, or 2003. As of December 30, 2001,
the Company had an accrual of $59,000, which was paid during 2002.
In August 2001, the Company assigned, with the consent of the landlord, the
existing lease for a store 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. See Note 11.
REVENUE RECOGNITION - Net revenue is recorded upon purchases by customers at
retail locations or when merchandise is received by customers in the specialty
sales channel. Sales returns are insignificant. The Company establishes an
allowance for estimated doubtful accounts based on historical experience and
current trends, which management believes are appropriate.
The Company records shipping revenue in net revenue. The Company recorded
shipping revenue of $1,522,000, $1,617,000, and $1,726,000 related to online and
mail order and specialty sales in 2001, 2002, and 2003, respectively.
F - 8
A summary of the allowance for doubtful accounts is as follows (in
thousands):
BALANCE AT ADDITIONS BALANCE
BEGINNING CHARGES TO WRITEOFFS AT END OF
OF PERIOD EXPENSE AND OTHER PERIOD
----------- ----------- ---------- ----------
Allowance for doubtful accounts:
Year ended December 30, 2001 $ 69 $ 30 ($41) $ 58
Year ended December 29, 2002 58 162 (145) 75
Year ended December 28, 2003 75 16 (37) 54
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.
PREOPENING COSTS or costs associated with the opening or remodeling of
stores, such as payroll and rent, are expensed as incurred.
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 12. 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.
Investments are recorded at 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. At December 29, 2002 the net unrealized
gain/(loss) on such contracts was $31,000. At December 28, 2003 there were no
open futures contracts. See Note 12.
ADVERTISING COSTS are expensed as incurred. Advertising expense was
$2,773,000, $2,775,000 and $3,136,000 in 2001, 2002, and 2003, 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 Accounting
Principle Board, (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. The Company has recorded compensation expense of
$305,000 in 2001, $290,000 in 2002, and $191,000 in 2003. Statement of
Financial Accounting Standards, (SFAS), 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 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 would have been reduced to
the pro forma amounts indicated below (in thousands):
F - 9
2001 2002 2003
------- -------- --------
Net income - as reported . . . . . . . . . . . . . . . $1,155 $ 4,657 $ 5,178
Stock-based employee compensation included in
reported net income, net of tax effects . . . . . 183 174 115
Stock-based compensation expense determined
under fair value based method, net of tax effects (511) (2,295) (3,286)
------- -------- --------
Net income - pro forma . . . . . . . . . . . . . . . . $ 827 $ 2,536 $ 2,007
======= ======== ========
Basic net income per share - as reported . . . . . . . $ 0.15 $ 0.43 $ 0.41
Basic net income per share - pro forma . . . . . . . . $ 0.10 $ 0.23 $ 0.16
Diluted net income per share - as reported . . . . . . $ 0.14 $ 0.40 $ 0.39
Diluted net income per share - pro forma . . . . . . . $ 0.10 $ 0.22 $ 0.15
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 what is deemed 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.
Additional disclosure requirements of SFAS No. 123, Accounting for
Stock-Based Compensation, are set forth in Note 10.
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:
2001 2002 2003
----- ----- -----
Expected dividend rate . 0% 0% 0%
Expected volatility
Options . . . . . . 77.6% 68.1% 58.0%
ESPP awards . . . . 77.6% 68.1% 58.0%
Risk-free interest rate
Options . . . . . . 4.88% 3.79% 1.94%
ESPP awards . . . . 4.24% 1.87% 1.12%
Expected lives (years)
Options . . . . . . 5 5 3
ESPP awards . . . . 0.5 0.5 0.5
NET INCOME PER SHARE - Basic net income per share is computed as net income
divided by the weighted average number of common shares outstanding for the
period. Diluted net income per share reflects the potential dilution that could
occur from common shares issued through stock options, warrants and the
conversion of preferred stock. Anti-dilutive shares of 110,750, 630,621 and
142,747 have been excluded from diluted weighted average shares outstanding in
2001, 2002 and 2003, respectively.
The following table summarizes the differences between basic weighted
average shares outstanding and diluted weighted average shares outstanding used
to compute diluted net income per share (in thousands):
F - 10
2001 2002 2003
----- ------ ------
Basic weighted average shares outstanding . 7,941 10,919 12,589
Incremental shares from assumed exercise of
stock options and warrants . . . . . . 271 708 647
----- ------ ------
Diluted weighted average shares outstanding 8,212 11,627 13,236
===== ====== ======
The number of incremental shares from the assumed exercise of stock options
and warrants was calculated applying the treasury stock method.
RECENTLY ISSUED ACCOUNTING STANDARDS - 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.
In January 2003 the FASB issued FASB Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities and was subsequently revised in
December 2003. FIN 46 clarifies the application of Accounting Research Bulletin
No. 51, explains how to identify variable interest entities, and how an
enterprise should assess its interest in an entity to decide whether to
consolidate such entity. Further, FIN 46 requires existing unconsolidated
entities to be consolidated by their primary beneficiaries if the entities do
not effectively disperse risks among parties involved. The revision of FIN 46
further defines and narrows the scope of the variable interest entity as well as
defers the effective date of the guidance to the first quarter of 2004. The
adoption of FIN 46 is not expected to have an impact on our results of
operations or financial position.
3. INVENTORIES
The Company's inventories consist of the following at year end 2002 and
2003 (in thousands):
2002 2003
------- -------
Raw materials. $ 7,130 $ 6,144
Finished goods 3,877 4,576
------- -------
Total. . . . . $11,007 $10,720
======= =======
F - 11
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at year end 2002
and 2003 (in thousands):
2002 2003
--------- ---------
Leasehold improvements . . . . . . $ 23,518 $ 27,868
Furniture, fixtures, and equipment 26,050 30,931
Plant equipment. . . . . . . . . . 6,550 8,384
Construction in progress . . . . . 3,216 1,862
--------- ---------
Total. . . . . . . . . . . . . . . 59,334 69,045
Less accumulated depreciation. . . (31,405) (36,723)
--------- ---------
Total. . . . . . . . . . . . . . . $ 27,929 $ 32,322
========= =========
Depreciation expense was $5,455,000 in 2001, $5,005,000 in 2002 and
$5,564,000 in 2003, respectively. Construction in progress includes
manufacturing plant equipment, new store fixtures and other capital projects not
yet placed in service.
5. INVESTMENTS
At December 29, 2002 and December 28, 2003, the Company maintained long
term investments classified as available for sale of $28,102,000 and
$16,572,000. The long term investments are comprised of United States Treasury
Notes and Bonds, and Federal Agency notes and bonds, maturing within five years.
Gross unrealized holding gains were $360,000 and $29,000 and gross unrealized
holding losses were $0 and $4,000 for the period ended December 29, 2002, and
December 28, 2003, respectively. Gross unrealized holding losses at December
28, 2003 are due to fluctuations in interest rates and are only considered as
temporary impairments. There are no securities with unrealized losses aged
greater than twelve months.
During 2002 and 2003, the company sold securities for net proceeds from
investments of $229,383,000 and $97,915,000, and realized gains of $27,000 and
$294,000, respectively. Realized gains and losses are determined on the specific
identification method. For the periods ended December 29, 2002 and December 28,
2003, the Company had net unrealized gains of $227,000 (net of $133,000 tax) and
$16,000 (net of $10,000 tax) respectively, included in accumulated other
comprehensive income (loss).
6. BORROWINGS
The Company maintains 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. 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 (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 28, 2003, there was no outstanding balance and $14,942,000 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.
F - 12
Long term borrowings consist of the following at year end 2002 and 2003 (in
thousands):
2002 2003
------ ------
Industrial development revenue bond, interest at a weekly floating
rate of 1.65% at December 29, 2002.. . . . . . . . . . . . . . . . 860
Capital lease obligations. . . . . . . . . . . . . . . . . . . . . 32 3
------ ------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . 892 3
Less current portion . . . . . . . . . . . . . . . . . . . . . . . (468) (3)
------ ------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 424 $ -
====== ======
7. INCOME TAXES
The income tax provision (benefit) consists of the following (in thousands):
2001 2002 2003
----- ------ -------
Current:
Federal $ 467 $1,470 $2,864
State 9 377 735
----- ------ -------
Total 476 1,847 3,599
----- ------ -------
Deferred:
Federal 133 827 (48)
State 140 61 (70)
----- ------ -------
Total 273 888 (118)
----- ------ -------
Total $ 749 $2,735 $3,481
===== ====== =======
The difference between the effective income tax rate and the United States
federal income tax rate is summarized as follows:
2001 2002 2003
----- ----- -----
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 . . . . . . 3.7 (3.0) 0.6
Other . . . . . . . . . . . . . . . . . . 0.8 1.4 0.8
California net operating loss limitation. (2.1) 0.0 0.0
California Manufacturer Investment Credit (2.9) (1.2) (1.0)
----- ----- -----
Total . . . . . . . . . . . . . . . . . . 39.3% 37.0% 40.2%
===== ===== =====
F - 13
Deferred tax assets (liabilities) consist of the following at year end 2002
and 2003 (in thousands):
2002 2003
-------- --------
Net operating loss carryforwards. . . . . $ 165 $ 165
Charitable contribution carryforwards . . 269 287
Credit carryforwards. . . . . . . . . . . 382 629
Scheduled rent. . . . . . . . . . . . . . 311 351
Accrued reserves. . . . . . . . . . . . . 436 1,027
Accrued compensation. . . . . . . . . . . 319 742
State taxes . . . . . . . . . . . . . . . 68 20
-------- --------
Gross deferred tax assets. . . 1,950 3,221
-------- --------
Property and equipment. . . . . . . . . . (1,207) (2,408)
Other . . . . . . . . . . . . . . . . . . (214) (34)
-------- --------
Gross deferred tax liabilities (1,421) (2,442)
-------- --------
Valuation allowance . . . . . . . . . . . (249) (225)
-------- --------
Net deferred tax assets. . . . $ 280 $ 554
======== ========
The Company has state net operating loss carryforwards of $1,867,000, which
expire between 2006 and 2007.
The utilization of our net operating loss and credit carryforwards may be
subject to a substantial annual limitation due to any future "changes in
ownership," as defined by provisions of the Internal Revenue Code of 1986, as
amended, and similar state provisions. Should we be subject to this annual
limitation, this may result in the expiration of net operating loss and credit
carryforwards before utilization.
A valuation allowance is provided when it is more likely than not that some
portion or all of the deferred tax assets will not be realized.
8. EMPLOYEE BENEFIT PLAN
The Company's 401(k) plan covers substantially all employees. Employees
may contribute up to 60% of their annual salary up to a maximum of $12,000. The
Company matches 50% of amounts contributed by its employees. The Company
contribution was $413,000, $438,000, and $261,000 in 2001, 2002, and 2003
respectively. The plan does not offer investments in Company stock.
9. SHAREHOLDERS' EQUITY
In April 2002, the Company issued 3,137,500 shares of common stock at
$14.00 per share of its common stock in a public offering and received net
proceeds of $41,030,000.
During 2001, the Company issued 2,682,623 shares of stock at $8.00 per
share in an initial public offering of its common stock and received net
proceeds of $17,790,000. 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.
F - 14
10. STOCK OPTION AND EMPLOYEE PURCHASE PLANS
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 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.
Effective in 2001, the Company adopted a new stock option plan for which
the Company has reserved 1,500,000 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) five percent (5%) 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. Stock
options vest according to a pre-determined vest schedule set at grant date.
Also effective in 2001, 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 which is
administered by the Board of Directors. The aggregate number of shares of
common stock that may be issued pursuant under the plan is 330,000. 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 2020,
the number of shares of common stock reserved for issuance under the 2000 plan
will be increased automatically by the lesser of (i) three quarters of one
percent (0.75%) of the total number of shares of common stock outstanding on
such date, (ii) sixty thousand (60,000) 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 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, 2002, and 2003, the Company granted
non-employee director options to purchase an aggregate of 120,000, 110,000 and
60,000 shares of common stock, respectively.
As of December 28, 2003, there were no shares available for grant under
1997 stock option plan, 139,738 shares available for grant under the 2000 stock
option plan, and 160,000 shares available for grant under the 2000 Non-Employee
Director stock option plan. Changes in stock options were as follows:
F - 15
WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE
OUTSTANDING PER SHARE
------------ -----------------
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
Granted. . . . . . . . . . . . . 1,344,719 14.97
Canceled . . . . . . . . . . . . (48,637) 9.81
Exercised. . . . . . . . . . . . (541,162) 6.03
------------
Outstanding at December 29, 2002 2,925,772 10.47
Granted. . . . . . . . . . . . . 869,085 14.79
Canceled . . . . . . . . . . . . (98,460) 13.16
Exercised. . . . . . . . . . . . (798,363) 6.70
------------
Outstanding at December 28, 2003 2,898,034 $ 12.75
============
At December 30, 2001, December 29, 2002, and December 28, 2003, 1,392,087,
1,428,323, and 1,240,306 options, respectively, were exercisable with a
weighted-average exercise price of $5.93, $7.05, and $10.12, respectively.
The following table summarizes stock option information at year end 2003:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -----------------------------
RANGE OF NUMBER OF WEIGHTED-AVERAGE WEIGHTED-AVERAGE NUMBER OF WEIGHTED-AVERAGE
EXERCISE PRICES OPTIONS REMAINING CONTRACTUAL LIFE EXERCISE PRICE OPTIONS EXERCISE PRICE
$ 3.85 to $8.12 753,082 6.19 years $ 6.89 669,604 $ 6.85
$ 8.87 to $14.90 734,665 8.62 12.33 230,506 10.76
$15.49 to $15.49 796,950 8.42 15.49 198,949 15.49
$16.00 to $18.00 613,337 9.14 16.90 141,247 17.00
--------- -------------------------- --------- -----------------
$ 3.85 to $18.00 2,898,034 8.04 $ 12.75 1,240,306 $ 10.12
========= ========================== ========= =================
During 2001, the Company adopted a 2000 Employee Stock Purchase Plan
("ESPP"), where eligible 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 the Company'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, 2002 and
2003, employees purchased 36,789, 82,865 and 81,821 shares, respectively, of the
Company's common stock under the plan at a weighted-average per share price of
$6.80, $6.86 and $8.89, respectively. At December 28, 2003, 364,722 shares
remain available for future issuance.
F - 16
The weighted average fair value of the stock options granted during 2001,
2002 and 2003 was $6.56, $9.42, and $6.85, respectively. The weighted average
fair value of each 2001, 2002 and 2003 ESPP award was $3.91, $3.84, and $4.33,
respectively, per share.
See Note 2 for the pro forma effect of accounting for stock options using
the fair value method.
11. COMMITMENTS AND CONTINGENCIES
LEASES - The Company leases its Emeryville, California coffee roasting
plant, distribution center, administrative offices, and warehouse, its retail
stores and certain equipment under operating leases that expire from 2004
through 2012. 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 operating
leases subsequent to December 28, 2003 are as follows (amounts in thousands):
OPERATING
LEASES
----------
Years:
2004 . . . . . . . . . . . $ 6,272
2005 . . . . . . . . . . . 6,126
2006 . . . . . . . . . . . 5,024
2007 . . . . . . . . . . . 3,956
2008 . . . . . . . . . . . 2,689
Thereafter . . . . . . . . 4,293
----------
Total minimum lease payments $ 28,360
==========
Rent expense was $4,738,000, $5,077,000, and $5,979,000 for 2001, 2002, and
2003 respectively, including contingent rents of $146,000, $139,000, and
$149,000.
As of December 28, 2003, the Company is a guarantor on a lease assigned to
a third party that has $458,000 of remaining lease payments. The Company has a
security deposit of $6,000 and a guarantee from the sublessee's parent for a
maximum amount of $313,000. See Note 2.
PURCHASE COMMITMENTS - As of December 28, 2003, the Company had
approximately $16,152,000 of outstanding coffee purchase commitments from 2004
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.
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 March 4, 2003,
the Superior Court granted preliminary approval of a settlement of the suits and
conditional certification of the class for settlement purposes. During 2003, the
Company recorded a charge of $2.7 million 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
F - 17
accompanying consolidated statements of operations. The settlement is subject to
the court's final approval, the Company's right to terminate if more than 10% of
the settlement class opts out of the settlement and the plaintiffs' right to
terminate if claims by class members in the aggregate exceed more than 10% of
the number of work weeks specified in the settlement agreement.
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.
12. 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, 2002 and 2003, the effective portion of the cash-flow hedges
amounted to a loss of $295,000 (net of $195,000 tax), a gain of $66,000 (net of
$38,000 of tax) and a loss of $20,000 (net of $12,000 of tax), respectively, and
was recorded in other comprehensive income (loss). The ineffective portion of
the hedges of $27,000 and $15,000 was recorded as cost of sales during 2002 and
2003, respectively. Accumulated other comprehensive income (loss) related to
hedging activities, net of tax, was $38,000 and ($3,000) as of December 29, 2002
and December 28, 2003, respectively, all of which is expected to be reclassified
into cost of sales over the next twelve months as the related inventory is sold.
For the years ended December 29, 2002 and December 28, 2003, $379,000 and
($21,000) of coffee futures gains/(losses) included in other comprehensive loss
were reclassified into cost of goods sold. As of December 28, 2003 there were
no open futures contracts. The fair value of the open futures contracts as of
December 29, 2002 was a net asset $31,000.
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13. 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 consist of whole bean coffee sales through online, mail order,
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.
RETAIL SPECIALTY UNALLOCATED TOTAL
------- ---------- ------------- --------
2001
Net revenue . . . . . . . . . . . . . . . . . $75,055 $ 19,345 $ 94,400
Cost of sales and related occupancy expenses. 35,615 9,742 45,357
Operating expenses. . . . . . . . . . . . . . 26,670 3,947 30,617
Depreciation and amortization . . . . . . . . 3,659 750 $ 629 5,038
Segment operating income (loss) . . . . . . . 9,111 4,906 (11,684) 2,333
Interest expense, net 429 429
Income before income taxes 1,904
Total assets. . . . . . . . . . . . . . . . . 17,676 3,886 19,847 41,409
Capital expenditures. . . . . . . . . . . . . 1,882 1,321 3,308 6,511
2002
Net revenue . . . . . . . . . . . . . . . . . $78,300 $ 25,773 $104,073
Cost of sales and related occupancy expenses. 35,778 12,368 48,146
Operating expenses. . . . . . . . . . . . . . 27,523 5,698 33,221
Depreciation and amortization . . . . . . . . 3,193 878 $ 497 4,568
Segment operating income (loss) . . . . . . . 11,806 6,829 (11,783) 6,852
Interest income, net 540 540
Income before income taxes 7,392
Total assets. . . . . . . . . . . . . . . . . 20,753 4,330 70,062 95,145
Capital expenditures. . . . . . . . . . . . . 4,930 1,332 3,090 9,352
2003
Net revenue . . . . . . . . . . . . . . . . . $85,765 $ 34,051 $119,816
Cost of sales and related occupancy expenses. 38,856 16,105 54,961
Operating expenses. . . . . . . . . . . . . . 30,478 8,273 38,751
Depreciation and amortization . . . . . . . . 3,377 971 $ 542 4,890
Segment operating income (loss) . . . . . . . 13,054 8,702 (14,260) 7,496
Interest income, net 1,163 1,163
Income before income taxes 8,659
Total assets. . . . . . . . . . . . . . . . . 22,489 7,321 80,645 110,455
Capital expenditures. . . . . . . . . . . . . 6,312 1,812 1,839 9,963
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Net revenue from external customers for the two major product lines are as
follows:
2001 2002 2003
------- -------- --------
Whole bean coffee, tea, and related products $55,944 $ 62,583 $ 71,991
Beverages and pastries 38,456 41,490 47,825
------- -------- --------
Total $94,400 $104,073 $119,816
======= ======== ========
14. RELATED PARTY TRANSACTIONS
A member of the Board of Directors is the former Chairman and a current
shareholder 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 and
$30,000 in 2001 and 2002, respectively for advisory services. This advisory
relationship was terminated in June 2002.
15. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
QUARTER ENDED
------------------------------------------------
MARCH 30, JUNE 29, SEPTEMBER 28, DECEMBER 28,
2003 2003 2003* 2003
Net revenue. . . . . . . . . . . $ 27,398 $ 29,080 $ 28,833 $ 34,505
Income (loss) from operations. . 1,854 2,298 (947) 4,291
Net income (loss). . . . . . . . 1,282 1,539 (323) 2,680
Basic income (loss) per share. . $ 0.10 $ 0.12 $ (0.03) $ 0.21
Diluted income (loss) per share. $ 0.10 $ 0.12 $ (0.03) $ 0.20
QUARTER ENDED
---------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 29, DECEMBER 29,
2002 2002 2002 2002
Net revenue. . . . . . . . . . . $ 24,456 $ 24,889 $ 25,366 $ 29,362
Income from operations . . . . . 805 1,024 1,809 3,215
Net income . . . . . . . . . . . 488 718 1,279 2,172
Basic income per share . . . . . $ 0.06 $ 0.06 $ 0.11 $ 0.18
Diluted income per share . . . . $ 0.05 $ 0.06 $ 0.10 $ 0.17
* The third quarter includes the effect of a pre-tax charge for litigation
settlement and severance of $3.4 million or $0.16 per share.
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