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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 September 29, 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 12,085,829
(Class) (Outstanding at November 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 9
- ------- ------------------------------------------------------------------------------------- --
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
- ------- ------------------------------------------------------------------------------------- --
Item 4. Controls and Procedures 17
- ------- ------------------------------------------------------------------------------------- --
PART II OTHER INFORMATION 17
- ------- ------------------------------------------------------------------------------------- --
Item 2. Change in Securities and Use of Proceeds 17
- ------- ------------------------------------------------------------------------------------- --
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)
SEPTEMBER 29, DECEMBER 30,
2002 2001
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 5,472 $ 2,718
Short term investments 12,000 ---
Accounts receivable (net of allowance of $106 and $58) 1,624 1,371
Inventories 11,017 8,945
Deferred income taxes 288 288
Prepaid expenses and other 1,327 1,100
-------------- --------------
Total current assets 31,728 14,422
Property and equipment, net 24,903 23,629
Deferred income taxes 941 1,305
Intangible and other assets, net 3,565 2,053
Investments 27,863 ---
-------------- --------------
Total assets $ 89,000 $ 41,409
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,498 $ 4,166
Accrued compensation and benefits 2,536 2,355
Other accrued liabilities 2,780 2,105
Short-term borrowings --- 1,968
Current portion of long-term borrowings 487 513
-------------- --------------
Total current liabilities 11,301 11,107
Long-term borrowings, less current portion 535 895
Deferred lease credits 705 637
-------------- --------------
Total liabilities 12,541 12,639
-------------- --------------
Shareholders' equity:
Common stock, no par value; authorized 50,000,000 shares; issued and
outstanding: 12,027,000 and 8,272,000 shares 76,244 31,609
Accumulated other comprehensive income (loss), net of tax 162 (407)
Retained earnings (accumulated deficit) 53 (2,432)
-------------- --------------
Total shareholders' equity 76,459 28,770
-------------- --------------
Total liabilities and shareholders' equity $ 89,000 $ 41,409
============== ==============
See notes to condensed consolidated financial statements.
3
PEET'S COFFEE & TEA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
SEPTEMBER 29, SEPTEMBER 30, SEPTEMBER 29, SEPTEMBER 30,
2002 2001 2002 2001
---------------- -------------- --------------- --------------
Net revenue $ 25,366 $ 22,715 $ 74,711 $ 68,010
---------------- -------------- --------------- --------------
Operating expenses:
Cost of sales and related occupancy expenses 11,651 11,084 34,719 32,818
Operating expenses 8,182 7,546 24,100 22,538
Marketing and advertising expenses 1,161 721 3,431 3,555
General and administrative expenses 1,403 1,254 5,434 4,642
Depreciation and amortization expenses 1,160 1,288 3,390 3,785
---------------- -------------- --------------- --------------
Total operating costs and expenses 23,557 21,893 71,074 67,338
---------------- -------------- --------------- --------------
Income from operations 1,809 822 3,637 672
Interest (income) expense, net (220) 108 (307) 357
---------------- -------------- --------------- --------------
Income before income taxes 2,029 714 3,944 315
Income tax provision 750 284 1,459 125
---------------- -------------- --------------- --------------
Net income $ 1,279 $ 430 $ 2,485 $ 190
================ ============== =============== ==============
Net income per share:
Basic $ 0.11 $ 0.05 $ 0.24 $ 0.02
Diluted $ 0.10 $ 0.05 $ 0.22 $ 0.02
Shares used in calculation of net income per share:
Basic 11,992 8,234 10,541 7,823
Diluted 12,673 8,480 11,272 8,082
See notes to condensed consolidated financial statements.
4
PEET'S COFFEE & TEA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
THIRTY-NINE WEEKS ENDED
SEPTEMBER 29, 2002 SEPTEMBER 30, 2001
-------------------- --------------------
Cash flows from operating activities:
Net income $ 2,485 $ 190
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 3,899 4,307
Tax benefit from exercise of stock options and amortization of
discounted stock options 223 234
Deferred income taxes 338 394
Reclassification of hedging losses in OCI 389 407
Ineffective portion of hedges (41) (276)
Loss (gain) on disposition of assets (2) 12
Changes in other assets and liabilities:
Accounts receivable (253) (288)
Inventories (2,072) (2,913)
Prepaid expenses and other (227) (524)
Other assets (1,662) (349)
Accounts payable, accrued liabilities and other liabilities 2,368 (89)
-------------------- --------------------
Net cash provided by operating activities 5,445 1,105
-------------------- --------------------
Cash flows from investing activities:
Purchases of property and equipment (4,986) (3,520)
Proceeds from sale of property and equipment --- 5
Additions to intangible assets (35) (215)
Purchase of short term investments, net (12,000) ---
Purchase of long term investments, net (27,726) ---
-------------------- --------------------
Net cash used in investing activities (44,747) (3,730)
-------------------- --------------------
Cash flows from financing activities:
Repayments of debt (2,355) (16,006)
Net proceeds from issuance of common stock 44,411 19,471
-------------------- --------------------
Net cash provided by financing activities 42,056 3,465
-------------------- --------------------
Change in cash and cash equivalents 2,754 840
Cash and cash equivalents, beginning of period 2,718 1,598
-------------------- --------------------
Cash and cash equivalents, end of period $ 5,472 $ 2,438
==================== ====================
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 39 weeks
ended September 29, 2002 and September 30, 2001 are unaudited and, in the
opinion of management, contain all adjustments (consisting only of normal
recurring items) necessary to present fairly the financial position and results
of operations for such periods. The condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
related notes contained in the Company's Annual Report on Form 10-K for the year
ended December 30, 2001. The results of operations for the 13 and 39 weeks
ended September 29, 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
The Company maintains a credit facility with General Electric Capital
Corporation that expires in September 2005 and provides for a revolving line of
credit of up to $15,000,000, including the issuance of up to $3,000,000 in
letters of credit. Total availability under the revolving line of credit is
determined by subtracting the Company's funded debt from its trailing twelve
month earnings before interest, taxes, depreciation and amortization, or EBITDA,
multiplied by 3.5 for the period between September 1, 2001 and September 1,
2002, and 2.5 after September 1, 2002. As of September 29, 2002, there was no
outstanding balance and $13,900,000 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 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.
In the thirteen week period ended September 29, 2002, the effective portion
of the cash-flow hedges was a gain of $28,000 (net of $16,000 tax) and was
recorded in other comprehensive income/(loss). The ineffective portion of the
hedges was a loss of $8,000 and recorded in the net income during the period.
Other comprehensive gain, net of tax, was $25,000 as of September 29, 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
thirty-nine weeks ended September 29, 2002, respectively, $31,000 (net of
$21,000 tax) and $387,000 (net of $257,000 tax), of coffee futures losses
included in other comprehensive loss were reclassified into cost of goods sold.
The fair value of the open futures contracts as of September 29, 2002 was a net
liability of $2,000 and is reflected in other liabilities.
6
4. PUBLIC OFFERING
In April 2002 the Company sold 3,137,500 shares of stock at $14.00 per
share in a public offering and received net proceeds of $41,030,000, including
the underwriters' fees and other related expenses.
5. INVESTMENTS
The Company invested the proceeds of the secondary public offering in April
2002 in investment grade securities. At September 29, 2002, the Company
maintained short and long term investments classified as available for sale of
$12,000,000 and $27,863,000, respectively. The short term portion of
investments is comprised of cash and corporate debt (student loans fully backed
by the government), maturing within 90 days. The long term investments are
comprised of United States Treasury Notes and Bonds and Federal Agency notes and
bonds and mature within five years. Gross unrealized holding gains of $217,000
for the thirteen and thirty-nine weeks ended September 29, 2002 were
attributable to the long term investments, of which $166,000 related to U.S.
Treasury Notes and Bonds and $51,000 related to Federal Agency notes and bonds.
In the thirteen week period ended September 29, 2002, the company sold
securities for net proceeds of $11,144,000 and realized gain of $24,000,
computed using the specific identification method. During the thirteen and
thirty-nine weeks ended September 29, 2002, respectively, net unrealized gains
of $137,000 (net of $80,000 tax) and $0, respectively, were recorded in other
comprehensive income/(loss).
6. COMPREHENSIVE INCOME / (LOSS)
Comprehensive income/(loss) was $2,650,000 and ($461,000) for the
thirty-nine weeks ended September 29, 2002 and September 30, 2001, respectively.
Comprehensive income/(loss) consists of net income, the effect of accounting for
hedges under SFAS No. 133, and unrealized gains of investments. See Notes 3 and
5.
7. SEGMENT INFORMATION
Historically, the Company 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. As the Company continued to
implement its multi-channel distribution strategy, management determined that
the Company's various distribution channels, other than the company-owned retail
stores, have similar operation requirements and thus do not warrant separate
segment reporting. Thus, effective the second quarter of 2002, the Company
combined the operations of the online and mail order segment and the specialty
sales segment, which are also 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 reportable segment 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 reclassified 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
-------- ----------- ------------- --------
THIRTEEN WEEKS ENDED SEPTEMBER 29, 2002
Net revenue $18,702 $ 6,664 $25,366
Depreciation and amortization (804) (235) $ (121) (1,160)
Segment operating income (loss) 2,581 1,870 (2,642) 1,809
Interest income, net 220 220
Income before income taxes 2,029
THIRTEEN WEEKS ENDED SEPTEMBER 30, 2001
Net revenue $18,261 $ 4,454 $22,715
Depreciation and amortization (943) (195) $ (150) (1,288)
Segment operating income (loss) 1,961 952 (2,091) 822
Interest expense, net (108) (108)
Income before income taxes 714
THIRTY-NINE WEEKS ENDED SEPTEMBER 29, 2002
Net revenue $56,975 $ 17,736 $74,711
Depreciation and amortization (2,396) (659) $ (335) (3,390)
Segment operating income (loss) 8,156 4,557 (9,076) 3,637
Interest income, net 307 307
Income before income taxes 3,944
Total assets 20,425 4,496 64,079 89,000
Capital expenditures 2,244 645 2,097 4,986
THIRTY-NINE WEEKS ENDED SEPTEMBER 30, 2001
Net revenue $54,641 $ 13,369 $68,010
Depreciation and amortization (2,800) (540) $ (445) (3,785)
Segment operating income (loss) 5,832 3,380 (8,540) 672
Interest expense, net (357) (357)
Loss before income taxes 315 315
Total assets 18,068 3,333 20,563 41,964
Capital expenditures 1,626 1,072 822 3,520
8. NET INCOME 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 per share (in thousands):
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
SEPTEMBER 29, SEPTEMBER 30, SEPTEMBER 29, SEPTEMBER 30,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Basic weighted average shares outstanding 11,992 8,234 10,541 7,823
Incremental shares from assumed exercise of stock options and warrants 681 246 731 259
------------- ------------- ------------- -------------
Diluted weighted average shares outstanding 12,673 8,480 11,272 8,082
============= ============= ============= =============
Options with an exercise price greater than the average market price of
common shares for the period were 474,979 and 120,750 for the period ended
September 29, 2002 and September 30, 2001, respectively, were not included in
the computation of diluted earnings per share.
The number of incremental shares from the assumed exercise of stock options
and warrants was calculated applying the treasury stock method.
8
9. 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." 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 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. Forward-looking statements speak only as
of the date of this report and we assume no obligation to update any
forward-looking statements.
COMPANY OVERVIEW AND INDUSTRY OUTLOOK
Peet's is a specialty coffee roaster and marketer of branded fresh roasted
whole bean coffee sold through multiple channels of distribution. Since the
founding of our business in 1966, we have established a customer base and brand
recognition in California. Our national expansion strategy is based on the sale
of whole bean coffee through multiple channels of distribution. 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
specialty sales channel, including 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.
9
Our coffee and related items are sold through two segments as defined under
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures About
Segment of Enterprise and Related Information." These segments are
Company-operated retail outlets and specialty sales. We have historically
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. We evaluate segment performance
primarily based on revenue and segment operating income. As we continued to
implement our multi-channel distribution strategy, we determined that our
various distribution channels, other than the company-operated retail stores,
have similar operational requirements and thus do not warrant separate segment
reporting. Accordingly, effective the second quarter of 2002, we combined the
operations of the online and mail order segment and specialty sales segment.
Company-operated retail store operations remain a separate reportable segment
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 our financial statements.
We believe our application of accounting policies, and the estimates
inherently required therein, are reasonable. These accounting policies and
estimates are constantly reevaluated, and adjustments are made when facts and
circumstances dictate a change. Historically, we have found our application of
accounting policies to be appropriate and actual results have not differed
materially from those determined using necessary estimates.
Our accounting policies are more fully described in Note 2 in the "Notes to
the Consolidated Financial Statements," included in our Annual Report on Form
10-K for the year ended December 30, 2001. We have identified the following
critical accounting policies:
- -Inventory. Raw materials consist primarily of green bean coffee and finished
goods consist primarily of roasted coffee, tea, accessory products, spices and
packaged foods. All products are valued at the lower of cost or market using
the first-in, first-out method, except green bean and roasted coffee, which is
valued at the average cost. We continually evaluate the composition of our
coffee related merchandise and mark down such inventory as needed. Our
historical inventory write-offs have been immaterial.
- -Intangibles and other assets. During the thirty-nine weeks ended September 29,
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 this year. The agreement included an
upfront payment to Safeway Inc. that we 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 in accordance with the Statement
of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." If the fair value is less than
the carrying amount of the asset, a loss is recognized for the difference. We
believe at this time that the long-lived assets' carrying values and useful
lives continue to be appropriate.
- -Accrued compensation. In March 2002 we began recording an estimated liability
for self-insured workers' compensation claims in our condensed consolidated
financial statements. The self-insurance liability is determined actuarially,
based on claims paid, filed and reserved for, and projected using an industry
loss development factor, as well as using historical experience ratings. Should
a greater amount of claims occur compared to what is estimated or the medical
costs increase beyond what was anticipated, the recorded liability may not be
sufficient.
10
- -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 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 THIRTY-NINE WEEKS ENDED
SEPTEMBER 29, SEPTEMBER 30, SEPTEMBER 29, SEPTEMBER 30,
2002 2001 2002 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 45.9 48.8 46.5 48.3
Operating expenses 32.3 33.2 32.2 33.1
Marketing and advertising expenses 4.6 3.2 4.6 5.2
General and administrative expenses 5.5 5.5 7.3 6.8
Depreciation and amortization expenses 4.6 5.7 4.5 5.6
-------------- -------------- -------------- --------------
Income from operations 7.1 3.6 4.9 1.0
Interest (income) / expense, net (0.9) 0.5 (0.4) 0.5
-------------- -------------- -------------- --------------
Income before income taxes 8.0 3.1 5.3 0.5
Income tax provision 3.0 1.2 2.0 0.2
-------------- -------------- -------------- --------------
Net income 5.0% 1.9% 3.3% 0.3
============== ============== ============== ==============
PERCENT OF NET REVENUE BY BUSINESS SEGMENT:
Retail stores 73.7% 80.4% 76.3% 80.3%
Specialty sales 26.3 19.6 23.7 19.7
PERCENT OF NET REVENUE BY BUSINESS CATEGORY:
Whole bean coffee and related products 59.4% 56.8% 58.6% 58.0%
Beverages and pastries 40.6 43.2 41.4 42.0
11
OPERATING EXPENSES AS A PERCENT OF SEGMENT REVENUE:
Retail stores 35.8% 35.7% 35.4% 36.5%
Specialty sales 22.2 23.2 22.1 19.6
PERCENT INCREASE (DECREASE) FROM PRIOR YEAR:
Net revenue 11.7% 9.9%
Retail stores 2.4 4.3
Specialty sales 49.6 32.7
Cost of sales and related occupancy expenses 5.1 5.8
Operating expenses 8.4 6.9
Marketing and advertising expenses 61.0 (3.5)
General and administrative expenses 11.9 17.1
Depreciation and amortization expenses (9.9) (10.4)
SELECTED OPERATING DATA:
Number of retail stores in operation:
Beginning of the period 60 60 60 58
Store openings 1 0 1 2
Store closure 0 0 0 0
End of period 61 60 61 60
Pounds of whole bean coffee sold (in thousands) 1,278 1,079 3,625 3,296
THIRTEEN WEEKS ENDED SEPTEMBER 29, 2002 COMPARED TO THIRTEEN WEEKS ENDED
SEPTEMBER 30, 2001
NET REVENUE
Net revenue for the third quarter increased versus the same prior year
period primarily as a result of the continued expansion of our specialty sales
segment.
In the retail segment we experienced increased revenue primarily as a
result of increased sales from existing stores, sales from stores we opened in
2001, and the introduction of new beverage products. We opened one new store
located in Santa Clarita, California during the third quarter of 2002. In
addition, one store under construction, located in San Jose, California was
scheduled to open during the quarter but is delayed until 2003 due to fire
damage affecting much of the shopping center. We have signed leases for five
additional locations of which four are expected to open in 2002 and one in 2003.
Sales of whole bean coffee and related products in the retail segment increased
by 1.2% while sales of beverages and pastries increased by 3.5%. The greater
increase in beverage and pastry sales is primarily due to the slow maturation of
whole bean coffee sales in newer stores.
During the third quarter of 2002, we continued our sales initiatives in the
specialty sales segment and increased revenue 49.6% as compared to the same
prior year period. The increase consisted primarily of a $1.7 million, or
312.0%, increase in sales to specialty grocery and gourmet food stores and a
$0.3 million, or 56.0%, increase in sales to restaurants and foodservice
companies. Increase in the grocery channel sales was primarily due to the
rollout of whole bean and ground coffee to Safeway during the quarter and the
continuing volume growth in multi-location chains such as Whole Foods and
Gourmet Garage. The rollout to Safeway's approximately 861 west coast stores
occurred in July while the first shipment to the remaining approximately 340
east coast stores took place in late September and is expected to be rolled out
by mid-November. In the restaurant and food service area, sales increase was
primarily due to new accounts such as Omni Hotels, as well as continued 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 2.8% of our revenue, decreased $51,000, or 6.6%, due to
economy-driven office closures and downsizing.
12
COST OF SALES AND RELATED OCCUPANCY EXPENSES
Cost of sales and related occupancy expenses consist of product costs,
including hedging costs, and manufacturing costs, rent and other occupancy
costs. Cost of sales decreased as a percent of net revenue primarily due to:
- - Lower coffee cost due to lower commodity prices of coffee in the world
market;
- - Lower retail occupancy expenses due to only one new store opening in the
current year;
- - Leverage gained from increase use of our manufacturing capacity; and
- - Increased specialty sales.
OPERATING EXPENSES
Operating expenses for the third quarter of 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 and the successful management of new rollout programs such as Safeway
and Omni Hotels. Retail operating expenses were flat as compared to prior year
as the result of our productivity improvement initiative, which involved a
reduction in store hours and pay rates. We are currently evaluating business
intelligence and labor scheduling tools in an effort to further improve retail
productivity and efficiency.
MARKETING AND ADVERTISING EXPENSES
Marketing and advertising expense in the third quarter of 2002 as compared
to the same prior year period increased 61.0%. The increase was due primarily
to the introduction of the new Peet's customer card in our retail stores and the
rollout of Omni Hotels. As a percent of net revenue, marketing and advertising
expenses increased to 4.6%, but is in line with our full year planned spending.
GENERAL AND ADMINISTRATIVE EXPENSES
The increase in general and administrative expenses in the third quarter of
2002 as compared to the same prior year period is primarily due to the reversal
of $0.1 million in reserve as a result of the lease assignment of the closed
Naperville location in the prior year. Excluding this item, general and
administrative expenses increased by less than 1.0%.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expenses decreased in the third quarter of
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 only
opened one new store in the latter half of the thirteen week period.
INTEREST (INCOME)/EXPENSE, NET
Interest income was generated from the investment of our secondary public
offering proceeds in short-term and long-term interest-bearing, investment grade
securities.
PROVISION FOR INCOME TAXES
Our effective tax rate for the third quarter of 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.
13
THIRTY-NINE WEEKS ENDED SEPTEMBER 29, 2002 COMPARED TO THIRTY-NINE WEEKS ENDED
SEPTEMBER 30, 2001
NET REVENUE
Net revenue for the thirty-nine weeks ended September 29, 2002 increased
for the specialty sales and retail segments as compared to same period in 2001.
Whole bean and related sales increased 11.1% and beverage and pastries sales
increased 8.2%.
In the retail segment, sales increased by 4.3% primarily as a result of
increased sales from existing stores, sales from stores we opened in 2001, and
new beverage products. In the specialty sales segment, sales increased by 32.7%
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 1.6% due to leverage gained from multi-channel marketing, and
office coffee sales declined by 9.0% due to economy-driven office closures and
downsizing.
COST OF SALES AND RELATED OCCUPANCY EXPENSES
Cost of sales and related occupancy expenses increased by 5.8% as a result
of increased sales volume. Cost of sales as a percent of net revenue decreased
primarily due to the same factors affecting the third 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, one new store opening 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 3.5% 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 and no significant expenditures for the acquisition of
new customers.
GENERAL AND ADMINISTRATIVE EXPENSES
The increase in general and administrative expenses as compared to the same
prior year period is primarily due to transitional costs associated with the
hiring of our new president and chief executive officer and the change of our
stock option administrator. In addition, we had additional expenses related to
the increased volume of annual reports and proxy statements.
LIQUIDITY AND CAPITAL RESOURCES
At September 29, 2002, we had $5.5 million in total cash and cash
equivalents and $20.4 million in working capital.
Net cash provided by operations was $5.4 million during the first
thirty-nine weeks of 2002 compared to $1.1 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 $44.7 million during the
first thirty-nine weeks of 2002. Investing activities primarily consisted of
the purchase of short and long-term investments of the $39.7 million from the
net proceeds from the secondary offering in interest-bearing investment grade
securities. Other uses of cash include capital expenditures related to
merchandise display remodels in our existing stores, preparing and opening new
retail stores, information technology support systems upgrades and plant
packaging equipment to support the growth in specialty sales.
14
Net cash provided by financing activities was $42.1 million during the
first thirty-nine weeks of 2002. Financing activities during the period
consisted primarily of the proceeds from the secondary public offering of our
stock in April 2002, 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.
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 3.50
for the period between September 1, 2001 and September 1, 2002, and 2.50 after
September 1, 2002. As of September 29, 2002, there was no outstanding balance
and we had $13.9 million available under the revolving line of credit with other
senior funded debt of $1.1 million. The credit facility was last amended on
April 23, 2002 allowing for the completion of the Company's secondary public
offering and reflects our updated cash and capital requirements.
In December 1995, we obtained financing under industrial development
revenue bonds issued by California Statewide Communities Development Authority.
Outstanding amounts under the bonds bear interest based on a floating rate
determined by prevailing market conditions for comparable tax-exempt obligations
until maturity on December 1, 2006. Interest is payable monthly and principal
of $0.1 million is payable quarterly each February, May, August, and November.
As of September 29, 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 annual 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
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 September 29, 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 $ 970 $ 440 $ 530
Capital lease obligations 51 47 4
Retail store operating leases 22,230 4,742 11,616 $ 3,878 $ 1,994
Fixed-price coffee purchase commitments 16,241 10,076 5,827 338
------------------------ ---------- ---------- ---------- --------------
Total contractual cash obligations $ 39,492 $ 15,305 $ 17,977 $ 4,216 $ 1,994
======================== ========== ========== ========== ==============
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.
15
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." 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
cost for financing would be exposed to market risk from changes in interest
rates on any outstanding bank debt. Our revolving line of credit bears interest
at certain applicable margin levels contingent upon our leverage ratio on a
quarterly basis. The interest rate, which is either the Index rate (the higher
of prime or 50 basis points over the average of rates for overnight federal
funds transactions) plus a range from 0.00% to 0.25% or a rate equal to LIBOR
plus a range from 2.00% to 2.50%, increases as our leverage ratio increases.
Adjustments to the applicable margin level are implemented quarterly on a
prospective basis. The interest cost of our bank debt is affected by changes in
either prime, federal funds rates, or LIBOR. Such changes could adversely
impact 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 September 29, 2002, we had approximately $16.2 million in open
fixed-priced purchase commitments with delivery dates ranging from October 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.
16
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the Company's 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 the Company's management, including its
President and Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure.
Management necessarily applied its judgment in assessing the costs and benefits
of such controls and procedures which, by their nature, can provide only
reasonable assurance regarding management's control objectives.
a. Evaluation of Disclosure Controls and Procedures
Based on their evaluation of our disclosure controls and procedures
conducted within 90 days of the date of filing this report on Form 10-Q, our
Chief Executive Officer and the Chief Financial Officer have concluded that our
disclosure controls and procedures (as defined in Rules 13a-14 (c) and 15d-14
(c) promulgated under the Securities Exchange Act of 1934) are effective.
b. Changes in Internal Controls
There were no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation.
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 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 underwriting discounts and commissions and approximately $0.5
million represented expenses related to the offering. Net proceeds from the
offering were $41.0 million. At November 11, 2002, all of the net proceeds were
invested in short-term and long-term, interest-bearing, investment grade
securities. 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit Number Description
- -------------- ------------------------------------------------------------------------
Peet's Coffee & Tea, Inc. Amended and Restated 2000 Non-Employee
10.10 Director Stock Option Plan and Form of Stock Option Agreement.
- -------------- ------------------------------------------------------------------------
Certification of the Company's Chief Executive Officer, Patrick O'Dea,
99.1 pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
- -------------- ------------------------------------------------------------------------
Certification of the Company's Chief Financial Officer, Mark N. Rudolph,
99.2 pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
- -------------- ------------------------------------------------------------------------
__________
b. Reports on Form 8-K
None
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 12, 2002 PEET'S COFFEE & TEA, INC.
-------------------
By: /s/ Mark N. Rudolph
----------------------
Mark N. Rudolph
Vice President, Chief Financial Officer,
Treasurer and Secretary
18
CERTIFICATIONS
I, Patrick O'Dea, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Peet's Coffee
& Tea, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002 /s/ Patrick O'Dea
-------------------
Patrick O'Dea
President and Chief Executive Officer
I, Mark N. Rudolph, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Peet's Coffee
& Tea, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002 /s/ Mark N. Rudolph
----------------------
Mark N. Rudolph
Vice President, Chief Financial Officer,
Treasurer and Secretary
19