[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

[ ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

Washington	91-0863396
(State or Other Jurisdiction of	(I.R.S. Employer
Incorporation or Organization)	Identification No.)

Common Stock, no par value		13,376,306
(Class)		(Outstanding at November 2, 2004)

	2

	9

	11

 

Marketing and advertising expenses

Marketing and advertising expenses were $2.6 million, or 2.6% of net revenue, compared to $3.4 million, or 3.9% of net revenue, for the same period last year.

General and administrative expenses

 

General and administrative expenses were $4.7 million, or 4.7% of revenue, compared to $7.7 million, or 9.1%, for the same period last year. The decrease of $3.0 million included $3.4 million related to the wage and hour lawsuit and severance charges recorded last year, $0.5 million for the credit recorded this quarter based on the final settlement, offset by $0.9 million of spending growth. This $0.9 million increase from prior year was primarily due to the people and initiatives in place to support the growth of the company.

 

Investment income, net

Investment income decreased compared to prior year primarily because of the $0.3 million investment gains in the prior year.

Provision for income taxes

As discussed above, we revised our expected full year and year to date effective tax rate to 38.9%.

	14

Liquidity and Capital Resources

At September 26, 2004, we had $3.8 million in cash and cash equivalents, $12.0 million in short-term investments and $40.3 million in long-term investments for a total of $56.1 million. Working capital was $23.2 million as of the end of this quarter.

Net cash provided by operations was $7.5 million during the first thirty-nine weeks of 2004 compared to $7.3 million in the same prior year period. Current year operating cash flows were positively impacted by increased net income and depreciation and amortization compared to the same period last year, mostly offset by increases in inventory due to increased volume and seasonally higher coffee purchases and increased cash deposits required for the self-insured portion of our workers’ compensation policy.

Net cash used in investing activities was $34.3 million during the first thirty-nine weeks of 2004 compared to $4.9 million in the same prior year period. Investing activities primarily relate to the purchases of U.S. government, municipal, and agency securities in addition to purchases of property and equipment.

Net cash provided by financing activities was $0.3 million during the first thirty-nine weeks of 2004. Financing activities during the period consisted primarily of the exercise of stock options and sales of our common stock to our employees through our employee stock purchase plan and the purchase of 208,133 shares of the Company’s common stock.

We have a credit facility with General Electric Capital Corporation that provides for a revolving line of credit of $15.0 million that expires in 2005. At September 26, 2004, there was no outstanding balance and $14.9 million available under the revolving line of credit after other senior funded debt of $0.1 million, consisting of capital leases.

Our 2004 capital requirements consist primarily of expenditures relating to new store openings, remodeling of existing stores, upgrade of our packaging system and continued improvement of our data processing capabilities. During the first thirty-nine weeks of 2004, we spent $10.6 million, of which $5.8 was spent on new stores. Our remaining 2004 capital expenditures are expected to be approximately $3.4 million. We expect to spend approximately $1.4 million for the construction of new retail stores scheduled to open during balance of the year and for new stores in progress for 2005. We expect to use approximately $0.8 million to purchase new packaging and roasting equipment, $0.5 million in equipment and support for the grocery channel and licensed locations, and $0.7 million for the remodeling of existing store s, and information technology enhancements.

We are exploring capacity and office space needs as we continue to grow our business. The lease for our corporate office and plant facilities expires in 2005 and we have an option to extend the lease for an additional ten years. We believe that in 2005 we will need additional production and office space that will exceed our current facilities. We are in the process of exploring alternatives including but not limited to extending the existing lease and leasing additional production, warehouse, and office space.

For the next twelve months, we expect our cash flows from operations and cash and investments to be sufficient for our operating and capital requirements, our share purchase program, and our contractual obligations as they come due. Other business opportunities or store expansion rates substantially in excess of those presently planned may require outside funding.

ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We invest excess cash in money market accounts, short-term investments and long-term U.S. government, municipal, and agency securities. These financial instruments are all subject to fluctuations of daily interest rates. Therefore our investment portfolio is exposed to market risk from these changes.

The supply and price of coffee are subject to significant volatility and can be affected by multiple factors in the producing countries, including weather, political and economic conditions. In addition, green coffee bean prices have been affected in the past, and may be affected in the future, by the actions of certain organizations and associations that have historically attempted to influence commodity prices of green coffee beans through agreements establishing export quotas or restricting coffee supplies worldwide.

Our coffee hedging strategy is intended to limit the cost exposure of the main commodity used in our business, green coffee beans. In the past, we have used fixed-price purchase commitments, coffee futures, and coffee futures options to manage coffee supply and price risk. Currently, we utilize only fixed-price purchase commitments and have no coffee futures or futures options.

As of September 26, 2004, we had approximately $22.3 million in open fixed-priced purchase commitments with delivery dates ranging from October 2004 through July 2007. Those commitments, combined with our current inventory, cover 100% of our inventory needs for the remainder of the year. 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 28, 2003. Please refer to our Annual Report on Form 10-K for the year ended December 28, 2003.

 

	15

ITEM 4.     CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

As of September 26, 2004, the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable-assurance level.

There has been no change in our internal controls over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

PART II - OTHER INFORMATION

ITEM 1.     LEGAL PROCEEDINGS

During the thirteen weeks ended September 26, 2004, the Company substantially completed the payout pursuant to a settlement approved by the Superior Court of the State of California, County of Orange, related to the two lawsuits 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. on February 25, 2003 and March 7, 2003. These suits were filed by one former and one current store manager alleging misclassification of employment position and sought damages, restitution, reclassification and attorneys’ fees and costs. During 2003, the Company recorded a charge of $2.7 million for the estimated payment of claims to eligible class members, attorneys’ fees and costs, costs to a third-party claims administrator, as w ell as applicable employer payroll taxes. Based on the final settlement, fees and costs incurred, the Company reduced general and administrative expenses by $548,000 for the thirteen and thirty-nine weeks ended September 26, 2004.

 

In addition to the lawsuits described above, we may from time to time become involved in certain legal proceedings in the ordinary course of business. Currently, the Company is not party to any other legal proceedings that management believes would have a material adverse effect on the financial position or results of operations of the Company.

ITEM 2.     UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table sets forth all purchases made by us or any “affiliated purchaser” as defined in Rule 10b-18(a)(3) of the Exchange Act of the Company’s common stock during the third quarter of 2004.

Period		(a) Total Number of Shares Purchased			(b) Average Price Paid per Share			(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs			(d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
August 2 - August 29, 2004			84,599		$	21.81			84,599			905,917
August 30 - September 26, 2004			114,050		$	22.53			114,050			791,867
Total			198,649		$	22.23			198,649			791,867

The Company announced its plan to purchase shares on February 12, 2004 on Form 8-K. As of September 26, 2004, and the Company has purchased 208,133 shares.