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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 March 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
Commission file number 000-32233
PEET'S COFFEE & TEA, INC.
(Exact Name of Registrant as Specified in Its Charter)
Washington 91-0863396
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1400 Park Avenue
Emeryville, California 94608-3520
(Address of Principal Executive Offices) (Zip Code)
(510) 594-2100
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Securities Exchange Act Rule 12b-2). Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock, no par value 12,339,805
(Class) (Outstanding at May 8, 2003)
1
PEET'S COFFEE & TEA, INC.
-------------------------
INDEX
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PART I FINANCIAL INFORMATION 3
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Item 1. Financial Statements 3
- ------- ------------------------------------------------------------------------------------- --
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10
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Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
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Item 4. Controls and Procedures 16
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PART II OTHER INFORMATION 17
- ------- ------------------------------------------------------------------------------------- --
Item 1. Legal Proceedings 17
- ------- ------------------------------------------------------------------------------------- --
Item 6. Exhibits and Reports on Form 8-K 17
- ------- ------------------------------------------------------------------------------------- --
Signatures 18
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2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PEET'S COFFEE & TEA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE AMOUNTS)
MARCH 30, DECEMBER 29,
2003 2002
---------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 21,094 $ 19,672
Accounts receivable 2,320 2,210
Income tax receivable 297 1,117
Inventories 9,309 11,007
Deferred income taxes 461 461
Prepaid expenses and other 1,529 1,342
---------- -------------
Total current assets 35,010 35,809
Property and equipment, net 28,989 27,929
Intangible and other assets, net 3,688 3,305
Long-term U.S. Government and Agency securities 27,328 28,102
---------- -------------
Total assets $ 95,015 $ 95,145
========== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,045 $ 6,463
Accrued compensation and benefits 2,867 3,741
Other accrued liabilities 2,554 2,638
Current portion of long-term borrowings 449 468
---------- -------------
Total current liabilities 10,915 13,310
Long-term borrowings, less current portion 313 424
Deferred income taxes 144 181
Deferred lease credits 729 726
---------- -------------
Total liabilities 12,101 14,641
---------- -------------
Shareholders' equity:
Common stock, no par value; authorized 50,000,000 shares; issued and
outstanding: 12,277,000 and 12,103,000 shares 79,203 78,014
Accumulated other comprehensive income, net of tax 204 265
Retained earnings 3,507 2,225
---------- -------------
Total shareholders' equity 82,914 80,504
---------- -------------
Total liabilities and shareholders' equity $ 95,015 $ 95,145
========== =============
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
MARCH 30, MARCH 31,
2003 2002
---------------------- ----------
Net revenue $ 27,398 $ 24,456
---------------------- ----------
Operating expenses:
Cost of sales and related occupancy expenses 12,716 11,575
Operating expenses 9,211 7,978
Marketing and advertising expenses 1,110 1,024
General and administrative expenses 1,369 1,977
Depreciation and amortization expenses 1,138 1,097
---------------------- ----------
Total operating costs and expenses 25,544 23,651
---------------------- ----------
Income from operations 1,854 805
Interest (income) expense, net (248) 31
---------------------- ----------
Income before income taxes 2,102 774
Income tax provision 820 286
---------------------- ----------
Net income $ 1,282 $ 488
====================== ==========
Net income per share:
Basic $ 0.10 $ 0.06
====================== ==========
Diluted $ 0.10 $ 0.05
====================== ==========
Shares used in calculation of net income per share:
Basic 12,227 8,508
========== ==========
Diluted 12,814 9,263
========== ==========
See notes to condensed consolidated financial statements.
4
PEET'S COFFEE & TEA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
THIRTEEN WEEKS ENDED
MARCH 30, 2003 MARCH 31, 2002
---------------- ----------------
Cash flows from operating activities:
Net income $ 1,282 $ 488
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 1,315 1,266
Tax benefit from exercise of stock options and amortization of discounted stock options 40 94
Deferred income taxes (7) 462
Reclassification of hedging losses in OCI (12) 266
Ineffective portion of hedges 21
Gain on disposition of assets (2)
Changes in other assets and liabilities:
Accounts receivable 710 49
Inventories 1,698 1,601
Prepaid expenses and other (217) (130)
Other assets (446) 23
Accounts payable, accrued liabilities and other liabilities (2,412) 57
---------------- ----------------
Net cash provided by operating activities 1,972 4,174
---------------- ----------------
Cash flows from investing activities:
Purchases of property and equipment (2,315) (794)
Proceeds from sale of property and equipment 2
Purchase of long term U.S. Government & Agency securities, net 745
---------------- ----------------
Net cash used in investing activities (1,568) (794)
---------------- ----------------
Cash flows from financing activities:
Repayments of debt (130) (1,647)
Net proceeds from issuance of common stock 1,148 1,953
---------------- ----------------
Net cash provided by financing activities 1,018 306
---------------- ----------------
Change in cash and cash equivalents 1,422 3,686
Cash and cash equivalents, beginning of period 19,672 2,718
---------------- ----------------
Cash and cash equivalents, end of period $ 21,094 $ 6,404
================ ================
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 weeks ended March
30, 2003 are unaudited and, in the opinion of management, contain all
adjustments (consisting only of normal recurring items) necessary to present
fairly the financial position and results of operations for such periods. The
condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and related notes contained in the
Company's Annual Report on Form 10-K for the year ended December 29, 2002. The
results of operations for the 13 weeks ended March 30, 2003 are not necessarily
indicative of the results expected for the full year.
The balance sheet information as of December 29, 2002, presented herein,
has been derived from the audited consolidated financial statements of the
Company included in the Annual Report on Form 10-K for the year ended December
29, 2002.
Certain reclassifications of prior year balances have been made to conform
to the current presentation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
STOCK BASED COMPENSATION
The Company accounts for stock-based awards to employees using the
intrinsic value method in accordance with Accounting Principle Board, (APB), No.
25, Accounting for Stock Issued to Employees. Accordingly, no compensation cost
has been recognized for the stock option awards granted at fair market value.
Through 2001, the Company granted options at 85% of fair value and recorded
compensation expense equal to the intrinsic value over the vesting period.
Statement of Financial Accounting Standards, (SFAS), No. 123, Accounting for
Stock-Based Compensation, requires the disclosure of pro forma net income and
earning per share as if the Company had adopted the fair value method. Had
compensation cost for the Company's stock option plans and employee stock
purchase plan been determined based on the fair value at the grant date
consistent with the provisions of SFAS No. 123, the Company's net income would
have been reduced to the pro forma amounts indicated below (in thousands):
MARCH 30, 2003 MARCH 31, 2002
---------------- ----------------
Net income - as reported $ 1,282 $ 488
Stock-based employee compensation included in
reported net income, net of tax 24 56
Stock-based compensation expense determined
under fair value based method, net of tax (765) (616)
---------------- ----------------
Net income (loss) - pro forma $ 541 ($72)
================ ================
Basic net income per share - as reported $ 0.10 $ 0.06
Basic net income (loss) per share - pro forma $ 0.04 ($0.01)
Diluted net income per share - as reported $ 0.10 $ 0.05
Diluted net income (loss) per share - pro forma $ 0.04 ($0.01)
6
The Company uses the Black-Scholes option-pricing model for determining the
fair value of options, which requires the input of certain estimates that may
affect what is deemed fair value. The existing model may not necessarily provide
a reliable single measure of the value of its stock options. Management will
continue to evaluate alternative methodologies that may more appropriately
reflect pro forma compensation expense.
COMPREHENSIVE INCOME
Comprehensive income was $1,343,000 and $401,000 for the thirteen weeks
ended March 30, 2003 and March 31, 2002, respectively. Comprehensive income
consists of net income, the effect of accounting for hedges under SFAS No. 133,
and net unrealized gains of investments. See Notes 4 and 5.
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
MARCH 30, 2003 MARCH 31, 2002
-------------------- --------------
Basic weighted average shares outstanding 12,227 8,508
Incremental shares from assumed exercise of stock options 587 755
-------------------- --------------
Diluted weighted average shares outstanding 12,814 9,263
==================== ==============
Options with an exercise price greater than the average market price of
common shares for the period were 1,119,172 and 0 for the period ended March 30,
2003 and March 31, 2002, respectively, and were not included in the computation
of diluted earnings per share.
The number of incremental shares from the assumed exercise of stock options
was calculated applying the treasury stock method.
3. BORROWINGS
The Company maintains a credit facility with General Electric Capital
Corporation that expires in September 2005 and provides for a revolving line of
credit of up to $15,000,000, including the issuance of up to $3,000,000 in
letters of credit. Total availability under the revolving line of credit is
determined by subtracting the Company's funded debt from its trailing twelve
month earnings before interest, taxes, depreciation and amortization, or EBITDA,
multiplied by 2.5. As of March 30, 2003, there was no outstanding balance and
$14,188,000 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 most recently in February 2003 to relax financial
covenants, reflecting our current cash and capital requirements.
4. HEDGING ACTIVITIES
The Company is exposed to price risk related to price-to-be-fixed coffee
purchase commitments and anticipated coffee purchases. The Company uses coffee
futures and options to manage price increase and designates these derivative
instruments as cash-flow hedges of its price-to-be-fixed coffee purchase
commitments and anticipated coffee purchases. These derivative instruments
qualify for hedge accounting under 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.
7
During the thirteen week periods ended March 30, 2003 and March 31, 2002,
the effective portion of the cash-flow hedges amounted to a loss of $20,000 (net
of $12,000 tax) and a gain of $53,000 (net of $31,000 tax benefit),
respectively, and was recorded in other comprehensive income (loss). The
ineffective portion of the hedges of $21,000 was recorded in cost of goods sold
during the period ended March 30, 2003. There was no ineffectiveness in the same
period of the prior year. Other comprehensive income (loss) related to hedging,
net of tax, was $5,000 and ($87,000) as of March 30, 2003 and March 31, 2002,
respectively, 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 ended March 30, 2003, and March 31, 2002, $12,000 (net of $7,000
tax) of coffee futures gains and $266,000 (net of $176,000 tax) of coffee
futures losses, respectively, included in other comprehensive income (loss),
were reclassified into cost of goods sold. The fair value of the open futures
contracts as of March 30, 2003 and March 31, 2002, was a net liability of
$21,000 and $27,000, respectively and reflected in other liabilities.
5. INVESTMENTS
The Company invests in U.S. Government and Agency securities. At March 30,
2003, the Company maintained long term investments classified as available for
sale of $27,328,000. 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 $312,000 at March 30, 2003 were
attributable to long term investments.
During the thirteen week period ended March 30, 2003, the Company sold
securities for net proceeds of $16,802,000 and realized a gain of $12,000,
computed using the specific identification method. During the thirteen weeks
ended March 30, 2003, net unrealized losses of $29,000 (net of $19,000 tax) was
recorded in other comprehensive income.
6. SEGMENT INFORMATION
The Company operates in two reportable segments: retail and specialty
sales. Retail store operations consist of sales of whole bean coffee,
beverages, tea and related products through Company-operated retail stores.
Specialty sales consists of online and mail order sales of whole bean coffee
shipped directly to the consumer and whole bean coffee sales through grocery,
wholesale and office coffee accounts.
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.
8
SPECIALTY
RETAIL SALES UNALLOCATED TOTAL
------- ---------- ------------- --------
THIRTEEN WEEKS ENDED MARCH 30, 2003
Net revenue $20,031 $ 7,367 $27,398
Depreciation and amortization 804 224 $ 110 1,138
Operating expenses 7,220 1,991 9,211
Segment operating income (loss) 2,806 1,583 (2,535) 1,854
Interest income, net 248 248
Income before income taxes 2,102
Total assets 19,819 5,670 69,526 95,015
Capital expenditures 1,547 312 456 2,315
THIRTEEN WEEKS ENDED MARCH 31, 2002
Net revenue $19,090 $ 5,366 $24,456
Depreciation and amortization 781 211 $ 105 1,097
Operating expenses 6,729 1,249 7,978
Segment operating income (loss) 2,699 1,171 (3,065) 805
Interest expense, net (31) (31)
Income before income taxes 774
Total assets 18,092 3,966 20,531 42,589
Capital expenditures 520 89 185 794
7. CONTINGENCIES
In the ordinary course of our business, we may from time to time become
involved in certain legal proceedings. On February 25, 2003 and March 7, 2003,
two lawsuits were filed against the Company entitled Brian Taraz, et al vs.
Peet's Coffee & Tea, Inc., and Tracy Coffee, et al. vs. Peet's Coffee & Tea,
Inc. Each was filed in Superior Court of the State of California, County of
Orange, and seeks class action certification. These suits were filed by one
former and one current store manager alleging misclassification of employment
position and seeking damages, restitution, reclassification and attorneys fees
and costs. We are investigating and intend to vigorously defend this
litigation, but because the cases are in their early stages, the financial
impact to the Company, if any, cannot be predicted.
8. RECENT ACCOUNTING PRONOUNCEMENTS
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.
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. FIN 45 elaborates on the
disclosures to be made by the guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued.
It also requires that a guarantor recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The initial recognition and measurement provisions of this
interpretation are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002; while, the provisions of the disclosure
requirements are effective for financial statements of interim or annual periods
ending after December 15, 2002. The adoption of the measurement provisions of
FIN 45 did not have a material impact on our financial position or results of
operations.
In January 2003, FIN No. 46 Consolidation of Variable Interest Entities was
issued. This interpretation requires a company to consolidate variable interest
entities ("VIE") if the enterprise is a primary beneficiary (holds a majority of
the variable interest) of the VIE and the VIE possess specific characteristics.
It also requires additional disclosure for parties involved with VIEs. The
provisions of this interpretation will not have a material effect on the
Company's financial statements.
9
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 on Form 10-K
for the year ended December 29, 2002. Forward-looking statements speak only as
of the date of this report and we assume no obligation to update any
forward-looking statements.
COMPANY OVERVIEW AND INDUSTRY OUTLOOK
Peet's is a specialty coffee roaster and marketer of branded fresh roasted
whole bean coffee sold through multiple channels of distribution. Since the
founding of our business in 1966, we have established a customer base and brand
recognition in California. Our national expansion strategy is based on the sale
of whole bean coffee through multiple channels of distribution. While we intend
to continue the sale of whole bean coffee through strategically located retail
stores, we expect to revenue in our other distribution channels, namely grocery
stores, online and mail order and office, restaurant and food service accounts,
to increase at a more rapid rate.
We expect the specialty coffee industry to continue to grow. We believe
that this growth will be fueled by continued consumer interest in high quality
coffee and related products.
Our operations are vertically integrated. We purchase Arabica coffee beans
from countries around the world, apply our artisan-roasting techniques and ship
fresh coffee daily to customers within 24 hours of roasting. We believe that
control of purchasing, roasting, packaging and distribution of our coffee allows
us to maintain our commitment to freshness, is cost effective and enhances our
margins and profit potential.
Our coffee and related items are sold through two segments as defined under
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures About
Segment of Enterprise and Related Information." These segments are
Company-operated retail outlets and specialty sales (consisting of online and
mail order, grocery, food service, and office). We evaluate segment performance
primarily based on revenue and segment operating income.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the appropriate application of certain
accounting policies, many of which require us to make estimates and assumptions
about future events and their impact on amounts reported in our financial
statements and related notes. Since future events and their impact cannot be
determined with certainty, the actual results will inevitably differ from our
estimates. Such differences could be material to our financial statements.
We believe our application of accounting policies, and the estimates
inherently required therein, are reasonable. These accounting policies and
estimates are constantly reevaluated, and adjustments are made when facts and
circumstances dictate a change. Historically, we have found our application of
accounting policies to be appropriate and actual results have not differed
materially from those determined using necessary estimates.
10
Our accounting policies are more fully described in Note 2 in the "Notes to
the Consolidated Financial Statements," included in our Annual Report on Form
10-K for the year ended December 29, 2002. We have identified the following
critical accounting policies:
- -Inventory. Raw materials consist primarily of green bean coffee. Finished
goods consist primarily of roasted coffee, tea, accessory products, spices and
packaged foods. All products are valued at the lower of cost or market using
the first-in, first-out method, except green bean and roasted coffee, which is
valued at the average cost. We continually evaluate the composition of our
coffee related merchandise and mark down such inventory as needed. Our
historical inventory write-offs have been immaterial.
- -Intangibles and other assets. During 2002, we entered into a contractual
agreement with Safeway Inc., a national grocery chain, to sell Peet's coffee
through its grocery stores. We began shipping during the third quarter of 2002.
The agreement included an upfront payment to Safeway Inc. that we recorded in
intangibles and other assets and is being amortized as a reduction of revenue
based upon estimated sales during the contract period.
- -Long-lived assets. In evaluating the fair value and future benefits of
long-lived assets, we perform an analysis of the anticipated undiscounted future
net cash flows of the related long-lived asset and reduce their carrying value
by the excess, if any, of the result of such calculation. We believe at this
time that the long-lived assets' carrying values and useful lives continue to be
appropriate.
- -Accrued compensation. We have a high deductible workers' compensation
insurance policy with an overall program ceiling to minimize exposure. We began
recording an estimated liability for self-insured portion of the workers'
compensation claims in our condensed consolidated financial statements. The
self-insurance liability is determined actuarially, based on claims paid, filed
and reserved for, and projected using an industry loss development factor, as
well as using historical experience ratings. As of March 30, 2003, we had
$753,000 accrued for workers' compensation. 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.
- -Income taxes. We have 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.
11
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
MARCH 30, 2003 MARCH 31, 2002
--------------- ---------------
STATEMENT OF OPERATIONS DATA AS A PERCENT OF NET REVENUE:
Net revenue 100.0% 100.0%
Cost of sales and related occupancy expenses 46.4 47.3
Operating expenses 33.6 32.6
Marketing and advertising expenses 4.0 4.2
General and administrative expenses 5.0 8.1
Depreciation and amortization expenses 4.2 4.5
--------------- ---------------
Income from operations 6.8 3.3
Interest (income) / expense, net (0.9) 0.1
--------------- ---------------
Income before income taxes 7.7 3.2
Income tax provision 3.0 1.2
--------------- ---------------
Net income 4.7% 2.0%
=============== ===============
PERCENT OF NET REVENUE BY BUSINESS SEGMENT:
Retail stores 73.1% 78.1%
Specialty sales 26.9 21.9
PERCENT OF NET REVENUE BY BUSINESS CATEGORY:
Whole bean coffee and related products 59.9% 58.4%
Beverages and pastries 40.1 41.6
OPERATING EXPENSES AS A PERCENT OF SEGMENT REVENUE:
Retail stores 36.0% 35.2%
Specialty sales 27.0 23.3
PERCENT INCREASE (DECREASE) FROM PRIOR YEAR:
Net revenue 12.0%
Retail stores 4.9
Specialty sales 37.3
Cost of sales and related occupancy expenses 9.9
Operating expenses 15.5
Marketing and advertising expenses 8.4
General and administrative expenses (30.8)
Depreciation and amortization expenses 3.7
SELECTED OPERATING DATA:
Number of retail stores in operation:
Beginning of the period 65 60
Store openings 4 0
--------------- ---------------
End of period 69 60
=============== ===============
12
THIRTEEN WEEKS ENDED MARCH 30, 2003 COMPARED TO THIRTEEN WEEKS ENDED MARCH 31,
2002
NET REVENUE
Net revenue for the first 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 our revenue increased by $1.0 million primarily as a
result of increased sales from existing stores and from the five stores we
opened in 2002. We also opened four new stores during the quarter. However, all
four stores were opened during the month of March, with the fourth store opening
on the last day of the quarter, thus having minimal impact on revenue growth.
Sales of whole bean coffee and related products in the retail segment increased
by 1.2% to $ 0.1 million, while sales of beverages and pastries increased by
8.4% to $0.9 million. The greater increase in beverage and pastry sales is
primarily due to the slow maturation of whole bean coffee sales in newer stores.
The lower growth in whole bean and related products was also due to the
occurrence of the Easter holiday in April this year instead of March as in last
year, during which we typically experience stronger whole bean and related
products sales.
In the specialty sales segment, revenue increased as the result of our
continued focus on the grocery and foodservice channel. The $2.0 million
increase consisted primarily of a $1.3 million increase in grocery sales, a $0.6
million increase in sales to restaurants and foodservice companies, and a $0.1
million increase in other channels such as online and mail order, kiosks and
license partners. The increase in the grocery channel sales was primarily due to
sales to approximately 1,200 Safeway stores, which started in July of last year,
and the addition of approximately 450 new stores during the latter half of this
quarter. The increased sales were also due to the transition to a direct store
delivery system, where our own route sales representatives deliver to stores
weekly, from warehouse distribution during the quarter. We believe the direct
store delivery system ensures freshness through proper rotation and weekly
delivery, optimizes store specific item assortments, achieves proper shelf space
and improves free-standing display levels. In the restaurant and foodservice
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
restaurants and Anton Airfoods.
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 as the result of lower commodity prices of coffee in the world
market.
OPERATING EXPENSES
Operating expenses for the first quarter of 2003 increased as compared to
the same prior year period primarily due to pre-opening costs of the four new
stores and the cost of converting our grocery distribution to the direct store
delivery system with our own route sales representatives. Retail operating
expenses as a percent of retail revenue were 36.0% compared to 35.2% in prior
year. The increase was due to the startup costs of the new stores opened in the
first quarter. Specialty sales operating expenses as a percent of segment
revenue was 27.0% vs. 23.3% in prior year. Of the 3.7% increase from prior
year, 2.0% of the increase was due to the start up costs of transitioning to our
direct store delivery system. The remainder of the 1.7% increase is primarily
due to investment in infrastructure and systems to grow the different channels
within this segment.
MARKETING AND ADVERTISING EXPENSES
Marketing and advertising expenses of 4.0% of revenue were in line with
prior year. The marketing spending level reflects our normal number of
initiatives within each channel. The first quarter spending also falls in line
with our full year marketing spending expectation of 4.0% to 4.5% of revenue.
13
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses in the first quarter of 2003 were $0.6
million lower than the same prior year period. The decrease is primarily due to
lower public company related expenses, such as the in-house administration of
required regulatory filings and the reduced compensation expense related to
stock options granted at a discount in periods prior to becoming a public
company, and the absence of the recruiting expenses relating to the search of
our Chief Executive Officer, which occurred in the same period of the prior
year.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expenses increased in the first quarter as
compared to the same prior year period due primarily to the 9 stores we opened
during the second half of 2002 and during this first quarter.
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, U.S. Government
and Agency securities.
PROVISION FOR INCOME TAXES
Our effective tax rate for the first quarter of 2003 was 39.0% compared to
37.0% in the same prior year period. Management expects the tax rate to remain
at 39.0% for the remainder of fiscal 2003.
LIQUIDITY AND CAPITAL RESOURCES
At March 30, 2003, we had $21.1 million in total cash and cash equivalents,
invested in U.S. Government and Agency securities, and $24.1 million in working
capital.
Net cash provided by operations was $2.0 million during the first thirteen
weeks of 2003 compared to $4.2 million in the same prior year period. Operating
cash flows were positively impacted by net income, adjusted for depreciation and
amortization, and a decrease in our inventory. This was offset by a decrease in
accounts payable balance at the end of the period.
Net cash used in investing activities was $1.6 million during the first
thirteen weeks of 2003. Investing activities primarily consisted of the purchase
of $2.3 million of property, plant and equipment for new stores, support systems
upgrades and plant packaging equipment to support the growth in specialty sales.
Net cash provided by financing activities was $1.0 million during the first
thirteen weeks of 2003. Financing activities during the period consisted
primarily of the 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 2.50.
As of March 30, 2003, there was no outstanding balance and we had $14.2 million
available under the revolving line of credit with other senior funded debt of
$0.8 million. The credit facility was last amended on February 2003 allowing
for the relaxation of financial covenants, reflecting 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 March 30, 2003, we have an outstanding standby letter of credit of $0.9
million backing this long term borrowing. The reducing standby letter of credit
bears an annual interest charge of 1.25% payable monthly.
14
Our 2003 capital expenditure requirements consist primarily of expenditures
relating to new store openings, remodeling of existing stores, upgrade of our
packaging system, and continued improvement of our data processing capabilities.
During the first quarter of 2003, we spent $2.3 million. Our remaining 2003
capital expenditures are expected to be between $6.7 and $7.7 million.
Approximately $3.0 million is expected to be used for the opening of the
remaining new retail stores scheduled for 2003 and expenditures for new stores
in progress for 2004. Approximately $1.5 million is expected to be used for
plant capacity upgrades. The remaining $2.5 million is expected to be used for
the remodeling of existing stores, equipment for the grocery channel, and
information technology enhancements.
The following table set forth below reflects our contractual cash
obligations and our other commercial commitments as of March 30, 2003.
PAYMENTS DUE BY PERIOD
(IN THOUSANDS)
--------------
LESS THAN
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS AFTER 5 YEARS
- --------------------------------------- ------- ---------- ---------- ---------- --------------
Industrial development revenue bonds $ 750 $ 440 $ 310
Capital lease obligations 12 9 3
Equipment leases 82 17 35 $ 30
Retail store operating leases 26,345 5,437 9,764 6,362 $ 4,782
Fixed-price coffee purchase commitments 18,791 12,309 6,193 289
------- ---------- ---------- ---------- --------------
Total contractual cash obligations $45,980 $ 18,212 $ 16,305 $ 6,681 $ 4,782
======= ========== ========== ========== ==============
We expect cash flows from operations and the borrowing capacity under our
current line of credit to be sufficient for our operating requirements for at
least the next twelve months and to meet our contractual obligations as they
come due.
RECENT ACCOUNTING PRONOUNCEMENTS
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.
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. FIN 45 elaborates on the
disclosures to be made by the guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued.
It also requires that a guarantor recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The initial recognition and measurement provisions of this
interpretation are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002; while, the provisions of the disclosure
requirements are effective for financial statements of interim or annual periods
ending after December 15, 2002. The adoption of the measurement provisions of
FIN 45 did not have a material impact on our financial position or results of
operations.
In January 2003, FIN No. 46 Consolidation of Variable Interest Entities was
issued. This interpretation requires a company to consolidate variable interest
entities ("VIE") if the enterprise is a primary beneficiary (holds a majority of
the variable interest) of the VIE and the VIE possess specific characteristics.
It also requires additional disclosure for parties involved with VIEs. The
provisions of this interpretation will not have a material effect on the
Company's financial statements.
15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Although we have no borrowings on our credit facility, if we chose to, our
cost for financing would be exposed to market risk from changes in interest
rates on any outstanding bank debt. Our revolving line of credit bears interest
at certain applicable margin levels contingent upon our leverage ratio on a
quarterly basis. The interest rate, which is either the Index rate (the higher
of prime or 50 basis points over the average of rates for overnight federal
funds transactions) plus a range from 0.00% to 0.25% or a rate equal to LIBOR
plus a range from 2.00% to 2.50%, increases as our leverage ratio increases.
Adjustments to the applicable margin level are implemented quarterly on a
prospective basis. The interest cost of our bank debt is affected by changes in
either prime, federal funds rates, or LIBOR. Such changes could adversely
impact the cost of our borrowings.
The supply and price of coffee are subject to volatility and can be
affected by multiple factors in the producing countries, including weather,
political and economic conditions. In addition, green coffee prices have been
affected in the past, and may be affected in the future, by the actions of
certain organizations and associations that have historically attempted to
influence commodity prices of green coffee through agreements establishing
export quotas or restricting coffee supplies worldwide. With this in mind, we
purchase coffee from three distinct regions and many countries around the world.
Our hedging strategy is intended to limit the cost exposure of the main
commodity used in our business, green coffee beans. We use the following
instruments to manage coffee supply and price risk:
- - Fixed-price purchase commitments;
- - Coffee futures; and
- - Coffee futures options.
From time to time, we may use coffee futures and coffee futures options
depending on market conditions to reduce the price risk of our coffee purchase
requirements that we cannot make or have not made through contractual
commitments to purchase physical lots of coffee. These coffee futures and coffee
futures options are traded on the New York Coffee, Sugar & Cocoa Exchange. We
may use these futures and options solely for financial hedging purposes and
never take actual delivery of the coffee traded on the exchange.
As of March 30, 2003, we had approximately $18.8 million in open
fixed-priced purchase commitments with delivery dates ranging from April 2003
through November 2006. We believe, based on relationships established with our
suppliers in the past that the risk of non-delivery on such purchase commitments
is remote.
There have been no substantial changes in the nature of our risks since
December 29, 2002. Please refer to our Annual Report on Form 10-K for the year
ended December 29, 2002.
ITEM 4. CONTROLS AND PROCEDURES
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.
16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the ordinary course of our business, we may from time to time become
involved in certain legal proceedings. On February 25, 2003 and March 7, 2003,
two lawsuits were filed against the Company entitled Brian Taraz, et al vs.
Peet's Coffee & Tea, Inc., and Tracy Coffee, et al. vs. Peet's Coffee & Tea,
Inc. Each was filed in Superior Court of the State of California, County of
Orange, and seeks class action certification. These suits were filed by one
former and one current store manager alleging misclassification of employment
position and seeking damages, restitution, reclassification and attorneys fees
and costs. We are investigating and intend to vigorously defend this
litigation, but because the cases are in their early stages, the financial
impact to the Company, if any, cannot be predicted.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit Number Description
- -------------- ------------------------------------------------------------------------
99.1 Certification of the Company's Chief Executive Officer, Patrick O'Dea,
pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
- -------------- ------------------------------------------------------------------------
99.2 Certification of the Company's Chief Financial Officer, Mark N. Rudolph,
pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
- -------------- ------------------------------------------------------------------------
_________
b. Reports on Form 8-K
Current Report on Form 8-K filed on April 30, 2003 to furnish under Item 12 a
press release dated April 30, 2003
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: May 13, 2003 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 we 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: May 13, 2003 /s/ Patrick O'Dea
-------------------
Patrick O'Dea
President and Chief Executive Officer
19
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 we 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: May 13, 2003 /s/ Mark N. Rudolph
----------------------
Mark N. Rudolph
Vice President, Chief Financial Officer,
Treasurer and Secretary
20