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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
__________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
Commission file number 000-32233
PEET'S COFFEE & TEA, INC.
(Exact Name of Registrant as Specified in Its Charter)
Washington 91-0863396
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1400 Park Avenue
Emeryville, California 94608-3520
(Address of Principal Executive Offices) (Zip Code)
(510) 594-2100
(Registrant's Telephone Number, Including Area Code)
Indicate by check whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock, no par value 12,019,386
(Class) (Outstanding at August 5, 2002)
1
PEET'S COFFEE & TEA, INC.
INDEX
PART I - FINANCIAL INFORMATION 3
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II - OTHER INFORMATION 16
Item 2. Change in Securities and Use of Proceeds 16
Item 6. Exhibits and Reports on Form 8-K 17
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PEET'S COFFEE & TEA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE AMOUNTS)
JUNE 30, DECEMBER 30,
2002 2001
---------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 46,146 $ 2,718
Accounts receivable (net of allowance of $89 and $58) 969 1,371
Inventories 9,468 8,945
Deferred income taxes 288 288
Prepaid expenses and other 994 1,100
---------- --------------
Total current assets 57,865 14,422
Property and equipment, net 23,910 23,629
Deferred income taxes 1,059 1,305
Intangible and other assets, net 3,778 2,053
---------- --------------
Total assets $ 86,612 $ 41,409
========== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,173 $ 4,166
Accrued compensation and benefits 3,143 2,355
Other accrued liabilities 1,784 2,105
Short-term borrowings 1,968
Current portion of long-term borrowings 507 513
---------- --------------
Total current liabilities 10,607 11,107
Long-term borrowings, less current portion 646 895
Deferred lease credits 635 637
---------- --------------
Total liabilities 11,888 12,639
---------- --------------
Shareholders' equity:
Common stock, no par value; authorized 50,000,000 shares; issued and
outstanding: 11,962,000 and 8,272,000 shares 75,983 31,609
Accumulated other comprehensive loss, net of tax (34) (407)
Accumulated deficit (1,225) (2,432)
---------- --------------
Total shareholders' equity 74,724 28,770
---------- --------------
Total liabilities and shareholders' equity $ 86,612 $ 41,409
========== ==============
See notes to condensed consolidated financial statements.
3
PEET'S COFFEE & TEA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
JUNE 30, 2002 JULY 1, 2001 JUNE 30, 2002 JULY 1, 2001
---------------- ------------- ---------------- --------------
Net revenue $ 24,889 $ 22,727 $ 49,345 $ 45,295
---------------- ------------- ---------------- --------------
Operating expenses:
Cost of sales and related occupancy expenses 11,384 10,729 22,848 21,515
Operating expenses 7,863 7,495 15,770 14,902
Marketing and advertising expenses 1,246 1,282 2,270 2,834
General and administrative expenses 2,239 1,800 4,398 3,697
Depreciation and amortization expenses 1,133 1,263 2,230 2,497
---------------- ------------- ---------------- --------------
Total operating costs and expenses 23,865 22,569 47,516 45,445
---------------- ------------- ---------------- --------------
Income (loss) from operations 1,024 158 1,829 (150)
Interest (income) expense, net (117) 52 (87) 249
---------------- ------------- ---------------- --------------
Income (loss) before income taxes 1,141 106 1,916 (399)
Income tax provision (benefit) 423 42 709 (159)
---------------- ------------- ---------------- --------------
Net income (loss) $ 718 $ 64 $ 1,207 $ (240)
================ ============= ================ ==============
Net income (loss) per share:
Basic $ 0.06 $ 0.01 $ 0.12 $ (0.03)
Diluted $ 0.06 $ 0.01 $ 0.11 $ (0.03)
Shares used in calculation of net income (loss) per share:
Basic 11,155 8,164 9,831 7,640
Diluted 11,922 8,556 10,587 7,640
See notes to condensed consolidated financial statements.
4
PEET'S COFFEE & TEA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
TWENTY-SIX WEEKS ENDED
JUNE 30, 2002 JULY 1, 2001
--------------- --------------
Cash flows from operating activities:
Net income (loss) $ 1,207 $ (240)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization 2,568 2,841
Tax benefit from exercise of stock options and amortization of discounted stock options 158 162
Deferred income taxes 237 (44)
Reclassification of hedging losses in OCI 356 174
Ineffective portion of hedges (49) (153)
Gain on disposition of assets (2) (4)
Changes in other assets and liabilities:
Accounts receivable 402 (127)
Inventories (523) (1,549)
Prepaid expenses and other 106 (135)
Other assets (1,813) (255)
Accounts payable, accrued liabilities and other liabilities 1,547 (545)
--------------- --------------
Net cash provided by operating activities 4,194 125
--------------- --------------
Cash flows from investing activities:
Purchases of property and equipment (2,724) (2,307)
Proceeds from sale of property and equipment 5
Additions to intangible assets (35) (158)
--------------- --------------
Net cash used in investing activities (2,759) (2,460)
--------------- --------------
Cash flows from financing activities:
Repayments of debt (2,223) (16,427)
Net proceeds from issuance of common stock 44,216 19,285
--------------- --------------
Net cash provided by financing activities 41,993 2,858
--------------- --------------
Change in cash and cash equivalents 43,428 523
Cash and cash equivalents, beginning of period 2,718 1,598
--------------- --------------
Cash and cash equivalents, end of period $ 46,146 $ 2,121
=============== ==============
See notes to condensed consolidated financial statements.
5
PEET'S COFFEE & TEA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of Peet's
Coffee & Tea, Inc. and subsidiaries (the "Company") for the 13 and 26 weeks
ended June 30, 2002 and July 1, 2001 are unaudited and, in the opinion of
management, contain all adjustments (consisting only of normal and recurring
items) necessary to present fairly the financial position and results of
operations for such periods. The condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
related notes contained in the Company's Annual Report on Form 10-K for the year
ended December 30, 2001. The results of operations for the 13 and 26 weeks
ended June 30, 2002 are not necessarily indicative of the results expected for
the full year.
The balance sheet information as of December 30, 2001, presented herein,
has been derived from the audited consolidated financial statements of the
Company included in the Annual Report on Form 10-K for the year ended December
30, 2001.
Certain reclassifications of prior year balances have been made to conform
to the current presentation.
2. BORROWINGS
In September 2000, the Company entered into a credit facility with General
Electric Capital Corporation. The facility expires in September 2005 and
provides for a revolving line of credit of up to $15,000,000, including the
issuance of up to $3,000,000 in letters of credit. It also provided for a Term
A Loan for $7,000,000 and a Term B Loan for $8,000,000, both of which were
repaid in 2001 upon the closing of the Company's initial public offering. Total
availability under the revolving line of credit is determined by subtracting the
Company's funded debt from its trailing twelve month earnings before interest,
taxes, depreciation and amortization, or EBITDA, multiplied by 3.75 for the
period before September 1, 2001, 3.5 for the period between September 1, 2001
and September 1, 2002, and 2.5 after September 1, 2002. As of June 30, 2002,
there was no outstanding balance and $13,800,000 was available under the
Company's revolving line of credit.
Borrowings under the credit facility are secured by a lien on substantially
all of the Company's assets. The credit facility contains covenants restricting
the Company's ability to make capital expenditures, incur additional
indebtedness and lease obligations, open retail stores, make restricted
payments, merge into or with other companies and sell all or substantially all
of its assets and requiring the Company to meet certain financial tests. The
credit facility was amended on June 29, 2001 and March 1, 2002 (effective
December 2001) to increase the Company's flexibility under (a) the financial
covenants, and (b) certain other negative covenants (including the relaxation of
restrictions on the number of retail stores the Company may open per year). In
addition, interest rates on the revolving line of credit have been reduced. The
credit facility was further amended on April 23, 2002 allowing for the
completion of the Company's secondary public offering. See Note 4.
3. HEDGING ACTIVITIES
The Company is exposed to price risk related to price-to-be-fixed coffee
purchase commitments and anticipated coffee purchases. The Company uses coffee
futures and options to manage price increase and designates these derivative
instruments as cash-flow hedges of its price-to-be-fixed coffee purchase
commitments and anticipated coffee purchases. These derivative instruments
qualify for hedge accounting under Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities." The Company does not hold or issue derivative instruments for
trading purposes.
6
In the thirteen week period ended June 30, 2002, the effective portion of
the cash-flow hedges was a loss of $17,000 (net of $9,000 tax benefit) and was
recorded in other comprehensive income/(loss). The ineffective portion of the
hedges was a loss of $49,000 and recorded in net income during the period. Other
comprehensive loss, net of tax, was $34,000 as of June 30, 2002, all of which is
expected to be reclassified into cost of goods sold over the next 12 months as
the related inventory is sold. During the thirteen weeks and twenty-six weeks
ended June 30, 2002, respectively, $90,000 (net of $60,000 tax) and $356,000
(net of $236,000 tax), of coffee futures losses was included in other
comprehensive loss were reclassified into cost of goods sold. The fair value of
the open futures contracts as of June 30, 2002 was a net liability of $38,000
and is reflected in other liabilities.
4. PUBLIC OFFEREING
On April 19, 2002 the Company issued 2,650,000 shares of stock at $14.00
per share in a public offering of its common stock and received net proceeds of
$34,707,000. On April 26, 2002, the underwriters exercised their over-allotment
option and the Company sold an additional 487,500 shares for net proceeds of
$6,450,000. Net proceeds from the offering were $41,157,000, including the
underwriters' fees and other related public offering expenses.
5. COMPREHENSIVE INCOME / (LOSS)
Comprehensive income / (loss) was $1,173,000 and ($936,000) for the
twenty-six weeks ended June 30, 2002 and July 1, 2001, respectively.
Comprehensive income/(loss) consists of net income and the effect of accounting
for hedges under SFAS No. 133. See Note 3.
6. SEGMENT INFORMATION
Historically, the Company has operated in three reportable segments:
retail, online and mail order and specialty sales. Retail store operations
consist of sales of whole bean coffee, beverages, tea and related products
through Company-operated retail stores. Online and mail order operations
consisted primarily of sales of whole bean coffee shipped directly to the
consumer. Specialty sales consisted of whole bean coffee sales through grocery,
wholesale and office coffee accounts. 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, combined the online and mail
order segment and the specialty sales segment, which are now under common
management. 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 store operations remain a separate channel due
to the beverage component of this business and the percent of overall revenues
it represents. Therefore, our reportable segments now consist of
Company-operated retail store operations and specialty sales (consolidating
online and mail order into specialty sales) and are reflected as such in all
management reports.
The following table presents certain financial information for each
segment. Prior year segment information has been restated to conform to current
reportable segments. 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.
7
SPECIALTY
RETAIL SALES UNALLOCATED TOTAL
-------- -------- ------------- --------
TWENTY-SIX WEEKS ENDED JUNE 30, 2002
Net revenue $38,273 $11,072 $49,345
Depreciation and amortization (1,593) (424) $(213) (2,230)
Segment operating income (loss) 5,847 2,782 (6,800) 1,829
Interest income, net 87 87
Income before income taxes 1,916
Total assets 18,280 3,361 64,971 86,612
Capital expenditures 1,103 270 1,351 2,724
TWENTY-SIX WEEKS ENDED JULY 1, 2001
Net revenue $36,380 $ 8,915 $45,295
Depreciation and amortization (1,858) (345) $(294) (2,497)
Segment operating income (loss) 4,136 2,471 (6,757) (150)
Interest expense, net (249) (249)
Loss before income taxes (399)
Total assets 18,375 2,668 20,366 41,409
Capital expenditures 1,533 247 527 2,307
7. NET INCOME (LOSS) PER SHARE
The following table summarizes the differences between basic weighted
average shares outstanding and diluted weighted average shares outstanding used
to compute diluted net income (loss) per share (in thousands):
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
JUNE 30, 2002 JULY 1, 2001 JUNE 30, 2002 JULY 1, 2001
------------- ------------ ------------- ------------
Basic weighted average shares outstanding 11,155 8,164 9,831 7,640
Incremental shares from assumed exercise of stock options and warrants 767 392 756 0
------------- ------------ ------------- ------------
Diluted weighted average shares outstanding 11,922 8,556 10,587 7,640
============= ============ ============= ============
The number of incremental shares from the assumed exercise of stock options
and warrants was calculated applying the treasury stock method.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with
our financial statements and related notes included elsewhere in this report.
Except for historical information, the discussion in this report contains
certain forward-looking statements that involve risks and uncertainties. We
have based these forward-looking statements on our current expectations and
assumptions about future events. In some cases, you can identify
forward-looking statements by terminology, such as "may," "will," "should,"
"could," "predict," "potential," "continue, " expect," "anticipate," "future,"
"intend," "plan," "believe," "estimate" and similar expressions (or the negative
of such expressions). These statements are based on our current beliefs,
expectations and assumptions and are subject to a number of risks and
uncertainties. Actual future results and trends may differ materially depending
on a variety of factors including but not limited to, coffee and other raw
material prices and availability, successful execution of strategies and plans
for expansion, competition, general economic conditions, economic or political
instability related to recent or potential terrorist attacks, the popularity of
specialty coffee due to consumer trends, health factors or other issues, as well
as other risk factors as described more fully in our Annual Report of Form 10-K
for the year ended December 30, 2001.
8
COMPANY OVERVIEW AND INDUSTRY OUTLOOK
Peet's is a specialty coffee roaster and marketer of branded fresh roasted
whole bean coffee sold through multiple channels of distribution. Since the
founding of our business in 1966, we have established a customer base and brand
recognition in California. Our national expansion strategy is based on the sale
of whole bean coffee through multiple channels of distribution. While we intend
to continue the sale of whole bean coffee through strategically located retail
stores, we expect to derive an increasing portion of our revenue through our
other distribution channels, which we refer to collectively as specialty sales
and which consists of specialty grocery and gourmet food stores, online and mail
order and office, restaurant and food service accounts. We are also expanding
internationally through strategic relationships.
We expect the specialty coffee industry to continue to grow. We believe
that this growth will be fueled by continued consumer interest in high quality
coffee and related products.
Our operations are vertically integrated. We purchase Arabica coffee beans
from countries around the world, apply our artisan-roasting techniques and ship
fresh coffee daily to customers within 24 hours of roasting. We believe that
control of purchasing, roasting, packaging and distribution of our coffee allows
us to maintain our commitment to freshness, is cost effective and enhances our
margins and profit potential.
Our coffee and related items are sold through multiple distribution
channels, which are considered segments under Statement of Financial Accounting
Standards ("SFAS") No. 131, "Disclosures About Segment of Enterprise and Related
Information." These channels are selected in order to provide broad market
exposure to potential purchasers of fresh roasted whole bean coffee. We sell
coffee beans and related items that have historically been reported through
three segments: Company-operated retail outlets, online and mail order and
specialty sales, which consisted of offices, restaurants, specialty grocery and
gourmet food stores. Management evaluates segment performance primarily based on
revenue and segment operating income. Effective 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 combined the online and mail order
segment into the specialty sales segment. We are indifferent as to where
consumers purchase our coffees and teas, and we have aggregated these individual
sales channels into one reportable segment. Company-operated retail store
operations remain a separate channel due to the beverage component of this
business and the percent of overall revenues it represents. Therefore, our
reportable segments now consist of Company-operated retail store operations and
specialty sales (consolidating online and mail order into specialty sales).
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the appropriate application of certain
accounting policies, many of which require us to make estimates and assumptions
about future events and their impact on amounts reported in our financial
statements and related notes. Since future events and their impact cannot be
determined with certainty, the actual results will inevitably differ from our
estimates. Such differences could be material to the financial statements.
We believe our application of accounting policies, and the estimates
inherently required therein, are reasonable. These accounting policies and
estimates are constantly reevaluated, and adjustments are made when facts and
circumstances dictate a change. Historically, we have found our application of
accounting policies to be appropriate, and actual results have not differed
materially from those determined using necessary estimates.
Our accounting policies are more fully described in Note 2 in the "Notes to
the Consolidated Financial Statements," included in our Annual Report on Form
10-K for the year ended December 30, 2001. We have identified the following
critical accounting policies:
- -Inventory. Raw materials consist primarily of green bean coffee and finished
goods include roasted coffee, tea, accessory products, spices and packaged
foods. All products are valued at the lower of cost or market using the
first-in, first-out method, except green bean and roasted coffee, which is
valued at the average cost. We continually evaluate the composition of our
coffee related merchandise and mark down such inventory as needed. Our
historical inventory write-offs have been immaterial.
9
- -Intangibles and other assets. During the thirteen weeks ended June 30, 2002,
we entered into a contractual agreement with Safeway Inc., a national grocery
chain, to sell coffee. The agreement covers the full distribution throughout
its chain and included an upfront payment that is recorded in intangibles and
other assets and will be 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.
- -Income taxes. We have significant federal and state net operating loss
carryforwards and charitable contribution carryforwards. The utilization of
these carryforwards is dependent on future income. We have established a
valuation allowance for the portion of the carryforwards that we do not expect
to utilize. Although we believe the valuation allowance is appropriate, if
future taxable income were to differ significantly from the amounts estimated,
the valuation allowance would need to be adjusted.
- -Hedge accounting. We use coffee futures and options to hedge price increases
in price-to-be-fixed coffee purchase commitments and anticipated coffee
purchases. These derivative instruments qualify for hedge accounting under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." Hedge
accounting is permitted if the hedging relationship is expected to be highly
effective. Effectiveness is determined by how closely the changes in the fair
value of the derivative instrument offset the changes in the fair value of the
hedged item. If the derivative is determined to qualify for hedge accounting,
the effective portion of the change in the fair value of the derivative
instrument is recorded in other comprehensive income and recognized in earnings
when the related hedged item is sold. The ineffective portion of the change in
the fair value of the derivative instrument is recorded directly to earnings.
If these derivative instruments do not qualify for hedge accounting, we would
have to record the changes in the fair value of the derivative instruments
directly to earnings. See "Item 3. Quantitative and Qualitative Disclosures
about Market Risk" and Note 3 in the "Notes to Condensed Consolidated Financial
Statements," included elsewhere in this report.
We have also chosen certain accounting policies when stock options are
available, including the intrinsic value method or Accounting Principles Board
("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.
RESULTS OF OPERATIONS
The following discussion of results of operations should be read in
conjunction with our financial statements and accompanying notes and other
financial data included elsewhere in this report. The following table sets
forth certain financial data for the periods indicated.
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
JUNE 30, 2002 JULY 1, 2001 JUNE 30, 2002 JULY 1, 2001
-------------- ------------- -------------- -------------
STATEMENT OF OPERATIONS DATA AS A PERCENT OF NET REVENUE:
Net revenue 100.0% 100.0% 100.0% 100.0%
Cost of sales and related occupancy expenses 45.7 47.2 46.3 47.5
Operating expenses 31.6 33.0 32.0 32.9
Marketing and advertising expenses 5.0 5.6 4.6 6.3
General and administrative expenses 9.0 7.9 8.9 8.2
Depreciation and amortization expenses 4.6 5.6 4.5 5.5
-------------- ------------- -------------- -------------
Income (loss) from operations 4.1 0.7 3.7 (0.4)
Interest (income) / expense, net (0.5) 0.2 (0.2) 0.5
-------------- ------------- -------------- -------------
10
Income (loss) before income taxes 4.6 0.5 3.9 (0.9)
Income tax provision (benefit) 1.7 0.2 1.4 (0.4)
-------------- ------------- -------------- -------------
Net income (loss) 2.9% 0.3% 2.4% (0.5)
============== ============= ============== =============
PERCENT OF NET REVENUE BY BUSINESS SEGMENT:
Retail stores 77.1% 80.3% 77.6% 80.3%
Specialty sales 22.9 19.7 22.4 19.7
PERCENT OF NET REVENUE BY BUSINESS CATEGORY:
Whole bean coffee and related products 58.0% 58.0% 58.2% 58.6%
Beverages and pastries 42.0 42.0 41.8 41.4
OPERATING EXPENSES AS A PERCENT OF SEGMENT REVENUE:
Retail stores 34.9% 36.5% 34.9% 36.6%
Specialty sales 20.6 18.7 21.7 17.8
PERCENT INCREASE (DECREASE) FROM PRIOR YEAR:
Net revenue 9.5% 8.9%
Retail stores 5.1 5.2
Specialty stores 27.5 24.2
Cost of sales and related occupancy expenses 6.1 6.2
Operating expenses 4.9 5.8
Marketing and advertising expenses (2.8) (19.9)
General and administrative expenses 24.4 19.0
Depreciation and amortization expenses (10.3) (10.7)
SELECTED OPERATING DATA:
Number of retail stores in operation:
Beginning of the period 60 59 60 58
Store openings 0 1 0 2
Store closure 0 0 0 0
End of period 60 60 60 60
Pounds of whole bean coffee sold (in thousands) 1,184 1,109 2,437 2,217
THIRTEEN WEEKS ENDED JUNE 30, 2002 COMPARED TO THIRTEEN WEEKS ENDED JULY 1, 2001
NET REVENUE
Net revenue for the thirteen weeks ended June 30, 2002 increased for the
specialty sales and retail segments as compared to the thirteen weeks of the
same prior year period. A key element of our strategy involves increasing the
percentage of revenue derived from sales of whole bean coffee and related
products, which have a higher net margin than beverages and pastries. We expect
that an increase in the percentage of whole bean coffee and related product
revenue will occur over the long term due to the slow maturation of whole bean
sales at newer retail stores and the growth of the specialty sales segments.
For the thirteen weeks ended June 30, 2002, revenue derived from the sale of
whole bean coffee and related products as a percent of net revenue was in line
with the same prior year period.
In the retail segment we continued to increase revenue primarily as a
result of increased sales from existing stores, sales from stores we opened in
2001, and the introduction of a line of high-end reserve coffees and new
beverage products. We did not open any new stores during the thirteen weeks
ended June 30, 2002. We have signed leases for seven new locations of which six
are expected to open in 2002 and one in 2003. Sales of whole bean coffee and
related products in the retail segment increased by 3.7% while sales of
beverages and pastries increased by 6.3%. As discussed above, the greater
increase in beverage and pastry sales is primarily due to the slow maturation of
whole bean coffee sales at new stores.
11
The following table sets forth the sources of revenue increases in the
thirteen weeks ended June 30, 2002 by business category for the retail segment
(in thousands):
Increased volume of whole bean coffee $253
Change in mix 35
----
Total existing stores 288
Total new stores 38
----
Total whole bean coffee and related products $326
====
Increased volume of beverages and pastries $341
Change in mix 193
----
Total existing stores 534
Total new stores 72
----
Total beverages and pastries $606
====
During the thirteen weeks ended June 30, 2002, we continued our sales
initiatives in the specialty sales segment and increased revenue 27.5% as
compared to the same prior year period. The increase consisted primarily of a
$0.8 million, or 222.7%, increase in sales to specialty grocery and gourmet food
stores and a $0.3 million, or 69.3%, increase in sales to restaurants and
foodservice companies. We continue to add new accounts in the grocery channel,
including multi-location chains such as Whole Foods and Gourmet Garage. In
addition, we expect grocery sales to be positively impacted, although overall
top line revenue to be marginally impacted, as we begin our relationship with
Safeway Inc. in the third quarter of 2002. We began the distribution of coffee
to Safeway in July and expect to complete the rollout to approximately 1,200
Safeway locations by the fourth quarter of 2002. In the restaurant and food
service area, we are experiencing strong volume growth in accounts such as
Wolfgang Puck's restaurants and Anton Airfoods in the John F. Kennedy
International Airport. Office coffee sales, which represented 3.0% of our
revenue, decreased $0.1, or 11.0%, due to economy-driven office closures and
downsizing.
COST OF SALES AND RELATED OCCUPANCY EXPENSES
Cost of sales and related occupancy expenses consist of product costs,
including hedging costs, and manufacturing costs, rent and other occupancy
costs. Primarily as a result of increased sales volume, cost of sales increased
by 6.1%. Cost of sales decreased as a percent of net revenue primarily due to:
- - Leverage gained from capacity utilization in manufacturing;
- - Lower coffee cost due to lower commodity prices of coffee in the world
market; and
- - Lower retail occupancy expenses due to no new store openings in the
current year.
OPERATING EXPENSES
Operating expenses for the thirteen weeks ended June 30, 2002 increased as
compared to the same prior year period as we grew our business. However,
operating expenses as a percent of net revenue decreased primarily due to the
increase in our net revenue, no new store openings and a payroll reduction
initiative affecting our Company-operated retail stores. This payroll reduction
initiative, which involved a reduction in store hours and pay rates, was
primarily responsible for the decrease in operating expenses as a percent of
retail revenue.
Our focus on growing the specialty sales segment led to an increase in
specialty sales operating expense as a percent of segment revenue. The factors
contributing to the increase included the payroll expense of new sales staff for
the grocery segment expansion, their travel and related expenses, expenses
related to distribution and service, and operating costs of Peet's branded
kiosks in Larry's Markets stores in Washington.
MARKETING AND ADVERTISING EXPENSES
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Marketing and advertising expense in the thirteen weeks ended June 30, 2002
as compared to the same prior year period remained relatively constant. As a
percent of net revenue, marketing and advertising expenses decreased due to the
leverage gained from marketing across multiple channels of distribution,
efficient spending and no new store openings.
GENERAL AND ADMINISTRATIVE EXPENSES
The increase in general and administrative expenses in the thirteen weeks
ended June 30, 2002 as compared to the same prior year period is primarily due
to some one time, non-recurring costs and higher expenses associated with an
increasing shareholder base. These expenses are related to the increased volume
of annual reports and proxy statements. The non-recurring expenses were
associated with the hiring of our new president and chief executive officer and
the transitional costs of changing our stock option administrator.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expenses decreased in the thirteen weeks
ended June 30, 2002 as compared to the same prior year period due primarily to
certain assets becoming fully depreciated as of the end of fiscal 2001. In
addition, we did not open any new stores during this thirteen week period in
2002.
INTEREST (INCOME)/EXPENSE, NET
Interest income was generated from the investment of our secondary public
offering proceeds in short-term interest-bearing, investment grade securities.
PROVISION FOR INCOME TAXES
Our effective tax rate for the thirteen weeks ended June 30, 2002 was 37.0%
compared to 39.8% in the same prior year period. Management expects the tax
rate to remain at 37.0% for the remainder of fiscal 2002.
TWENTY-SIX WEEKS ENDED JUNE 30, 2002 COMPARED TO TWENTY-SIX WEEKS ENDED JULY 1,
2001
NET REVENUE
Net revenue for the twenty-six weeks ended June 30, 2002 increased for the
specialty sales and retail segments as compared to same period in 2001. Whole
bean and related sales increased 8.3% and beverage and pastries sales increased
9.9%.
In the retail segment, sales increased by 5.2% primarily as a result of
increased sales from existing stores, sales from stores we opened in 2001, and
the introduction of a line of high-end reserve coffees and new beverage
products. In the specialty sales segment, sales increased by 24.2% primarily due
to new accounts added in the grocery channel and strong volume growth in the
restaurant and foodservice areas. Mail order and online sales increased by 1.0%
due to lower spending in for the acquisition of new customers, and office coffee
sales declined by 10.0% due to economy-driven office closures and downsizing.
COST OF SALES AND RELATED OCCUPANCY EXPENSES
Cost of sales and related occupancy expenses increased by 6.2% as the
result of increased sales volume. Cost of sales as a percent of net revenue
decreased primarily due to the same factors affecting the second quarter of 2002
as discussed above.
OPERATING EXPENSES
Operating expenses increased as compared to the same prior year period as
we grew our business. As a percent of net revenue, operating expenses decreased
primarily due to the increase in our net revenue, no new store
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openings in 2002 and a payroll reduction initiative affecting our Company-
operated retail stores, offset by increased expenses associated with the growth
of our specialty sales segment.
MARKETING AND ADVERTISING EXPENSES
Marketing and advertising expense decreased 19.9% as compared to the same
prior year period. As a percent of net revenue, marketing and advertising
expenses decreased due to the leverage gained from marketing across multiple
channels of distribution, no new store openings in 2002 and no significant
expenditures for the acquisition of new customers.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2002, we had $46.1 million in total cash and cash equivalents
and $47.3 million in working capital.
Net cash provided by operations was $4.2 million during the first
twenty-six weeks of 2002 compared to $0.1 million in the same prior year period.
Operating cash flows were positively impacted by net income, adjusted for
depreciation and amortization, offset by changes in working capital items.
Net cash used in investing activities was $2.8 million during the first
twenty-six weeks of 2002. Investing activities primarily consisted of capital
expenditures related to merchandise display remodels in our existing stores,
information technology support systems upgrades and plant packaging equipment to
support the growth in specialty sales.
Net cash provided by financing activities was $42.0 million during the
first twenty-six weeks of 2002. Financing activities during the period consisted
primarily of the proceeds from the secondary public offering of our stock, net
of related expenses, exercise of stock options and purchases of our common stock
by our employees through our employee stock purchase plan.
We have a credit facility with General Electric Capital Corporation, which
provides for a revolving line of credit of $15.0 million through September 2005.
It also provided for a Term A Loan for $7.0 million and a Term B Loan for $8.0
million, both of which were repaid in 2001 upon the closing of our initial
public offering. Total availability under the revolving line of credit is
determined by subtracting our funded debt from its trailing twelve month
earnings before interest, taxes, depreciation and amortization, or EBITDA,
multiplied by 3.75 for the period before September 1, 2001, 3.50 for the period
between September 1, 2001 and September 1, 2002, and 2.50 after September 1,
2002. As of June 30, 2002, there was no outstanding balance and we had $13.8
million available under the revolving line of credit with other senior funded
debt of $1.2 million.
Due to the significant repayment of debt from the net proceeds of our
initial public offering, we amended our existing credit facility in June 2001
and March 2002 (effective December 24, 2001) to reflect our updated cash and
capital requirements. The credit facility was amended to increase the Company's
flexibility under (a) the financial covenants and (b) certain other negative
covenants (including the relaxation of restrictions on the number of retail
stores the Company may open per year). In addition, interest rates on the
revolving line of credit have been reduced. The credit facility was further
amended on April 23, 2002 allowing for the completion of the Company's secondary
public offering.
In December 1995, we obtained financing under industrial development
revenue bonds issued by California Statewide Communities Development Authority.
Outstanding amounts under the bonds bear interest based on a floating rate
determined by prevailing market conditions for comparable tax-exempt obligations
until maturity on December 1, 2006. Interest is payable monthly and principal of
$0.1 million is payable quarterly each February, May, August, and November. As
of June 30, 2002, we have an outstanding standby letter of credit of $1.4
million backing this long term borrowing. The reducing standby letter of credit
bears an interest charge of 1.25% payable monthly.
Our 2002 capital expenditure requirements are expected to be approximately
$6.5 million. Approximately $4.0 million will be used for the opening between
five to seven new retail stores. The remaining $2.5 million in
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capital expenditures is expected to be used for the remodeling of existing
stores, the upgrade of our analytical reporting systems and the upgrade of other
plant and office facilities.
The following table set forth below reflects our contractual cash
obligations and our other commercial commitments as of June 30, 2002.
PAYMENTS DUE BY PERIOD
(IN THOUSANDS)
--------------
LESS THAN
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS AFTER 5 YEARS
- --------------------------------------- ------- ---------- ---------- ---------- --------------
Industrial development revenue bonds $ 1,080 $ 440 $ 640
Capital lease obligations 73 67 6
Retail store operating leases 21,976 4,633 11,369 $ 3,955 $ 2,019
Fixed-price coffee purchase commitments 17,868 11,441 6,279 148
------- ---------- ---------- ---------- --------------
Total contractual cash obligations $40,997 $ 16,581 $ 18,294 $ 4,103 $ 2,019
======= ========== ========== ========== ==============
We expect cash flows from operations, the proceeds from our secondary
public offering and the borrowing capacity under our current line of credit to
be sufficient for our operating requirements for at least the next twelve months
and to meet our contractual obligations as they come due.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 142, which specifies that goodwill and certain intangible assets will
not be amortized but will instead be subject to periodic impairment testing. We
adopted SFAS No. 142 on December 31, 2001. Adoption of this new standard did
not have a material impact on our financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," and the accounting and reporting provision of APB
Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of
Disposal of Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions," for the disposal of a segment of business.
We adopted SFAS No. 144 on December 31, 2001. Adoption of this standard did not
have a material effect on our financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which addresses accounting for
restructuring and similar costs. SFAS No. 146 supersedes previous accounting
guidance, principally Emerging Issues Task Force Issue No. 94-3. We will adopt
the provisions of SFAS No. 146 for restructuring activities initiated after
December 31, 2002. SFAS No. 146 requires that the liability for costs
associated with an exit or disposal activity be recognized when the liability is
incurred. Under Issue 94-3, a liability for an exit cost is recognized at the
date of a company's commitment to an exit plan. SFAS No. 146 also establishes
that the liability should initially be measured and recorded at fair value.
Accordingly, SFAS No. 146 may affect the timing of recognizing future
restructuring costs as well as the amounts recognized.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Although we have no borrowings on our credit facility, if we chose to, our
debt for financing would be exposed to market risk from changes in interest
rates on any outstanding bank debt. Our revolving line of credit bears interest
at certain applicable margin levels contingent upon our leverage ratio on a
quarterly basis. The interest rate, which is either the Index rate (the higher
of prime or 50 basis points over the average of rates for overnight federal
funds transactions) plus a range from 0.00% to 0.25% or a rate equal to LIBOR
plus a range from 2.00% to 2.50%, increases as our leverage ratio increases.
Adjustments to the applicable margin level are
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implemented quarterly on a prospective basis. The interest cost of our bank debt
is affected by changes in either prime, federal funds rates, or LIBOR. Such
changes could adversely impact our cost of borrowing.
The supply and price of coffee are subject to volatility and can be
affected by multiple factors in the producing countries, including weather,
political and economic conditions. In addition, green coffee prices have been
affected in the past, and may be affected in the future, by the actions of
certain organizations and associations that have historically attempted to
influence commodity prices of green coffee through agreements establishing
export quotas or restricting coffee supplies worldwide. With this in mind, we
purchase coffee from three distinct regions and many countries around the world.
Our hedging strategy is intended to limit the cost exposure of the main
commodity used in our business, green coffee beans. We use the following
instruments to manage coffee supply and price risk:
- - Fixed-price purchase commitments;
- - Coffee futures; and
- - Coffee futures options.
From time to time, we use coffee futures and coffee futures options
depending on market conditions to reduce the price risk of our coffee purchase
requirements that we cannot make or have not made through contractual
commitments to purchase physical lots of coffee. These coffee futures and coffee
futures options are traded on the New York Coffee, Sugar & Cocoa Exchange. We
use these futures and options solely for financial hedging purposes and never
take actual delivery of the coffee traded on the exchange.
As of June 30, 2002, we had approximately $17.9 million in open
fixed-priced purchase commitments with delivery dates ranging from July 2002
through November 2006. We believe, based on relationships established with our
suppliers in the past that the risk of non-delivery on such purchase commitments
is remote.
There have been no substantial changes in the nature of our risks since
December 30, 2001. Please refer to our Annual Report on Form 10-K for the year
ended December 30, 2001.
PART II - OTHER INFORMATION
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
We completed our secondary public offering 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. 333-85082). The
managing underwriters of the public offering were Thomas Weisel Partners LLC,
W.R. Hambrecht + Co. and Pacific Growth Equities, Inc. In the offering, we sold
an aggregate of 3,137,500 shares of our common stock at a price of $14.00 per
share.
The aggregate proceeds to us from the offering were $43.9 million. We paid
expenses of approximately $2.8 million, of which approximately $2.4 million
represented underwriting discounts and commissions and approximately $0.4
million represented expenses related to the offering. Net proceeds from the
offering were $41.2 million. At August 5, 2002, all of the net proceeds were
invested in short-term and long-term, interest-bearing, investment grade
securities. None of the net proceeds of the public offering were paid directly
or indirectly to any director, officer, general partner of the Company or their
associates, persons owning 10% or more of any class of equity securities of the
Company or an affiliate of the company. We expect that our use of proceeds from
the offering will conform to the intended use of the 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 investment grade securities until
required for working capital purposes.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit Number Description
- --------------- -----------
10.17 Peet's Coffee & Tea, Inc. Key Employment Agreement for Chief
Executive Officer dated as of May 6, 2002. (1)
_________________
(1) Management contract.
b. Reports on Form 8-K
On April 8, 2002, we filed a Form 8-K with the Securities Exchange
Commission to report a new agreement we entered into with Safeway Inc.
On May 14, 2002, we filed a Form 8-K with the Securities and Exchange
Commission to report appointment of Patrick O'Dea as our new president and chief
executive officer.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 12, 2002 PEET'S COFFEE & TEA, INC.
----------------
By: /s/ Mark N. Rudolph
----------------------
Mark N. Rudolph
Vice President, Chief Financial Officer,
Treasurer and Secretary
CERTIFICATION (1)
Pursuant to Section 906 of the Public Company Accounting Reform and
Investor Protection Act of 2002 (18 U.S.C. Sec. 1350, as adopted), Patrick
O'Dea, the Chief Executive Officer of Peet's Coffee & Tea, Inc. (the "Company"),
and Mark N. Rudolph, the Chief Financial Officer of the Company, each hereby
certifies that, to the best of his knowledge:
1. The Company's Quarterly Report on Form 10-Q for the period ended June 30,
2002 (the "Periodic Report") fully complies with the requirements of Section
13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Periodic Report fairly presents, in all
material respects, the financial condition of the Company at the end of the
period covered by the Periodic Report and results of operations of the Company
for the period covered by the Periodic Report.
Dated: August 12, 2002
/s/ Patrick O'Dea /s/ Mark N. Rudolph
- ------------------- ----------------------
Patrick O'Dea Mark N. Rudolph
Chief Executive Officer Chief Financial Officer
(1) This certification accompanies the Periodic Report pursuant to Sec. 906 of
the Sarbanes-Oxley Act of 2002 and shall not be deemed "filed" by the Company
for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
18