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PEET’S COFFEE & TEA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

 

		Thirteen weeks ended
		April 4,				March 29,
		2010				2009
Cash flows from operating activities:
Net income		$	3,051			$	3,053
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			4,422				4,141
Amortization of interest purchased			-				27
Stock-based compensation			742				643
Excess tax benefit from exercise of stock options			(1,113	)			(28	)
Tax benefit from exercise of stock options			946				17
Loss on disposition of assets and asset impairment			31				7
Deferred income taxes			(5	)			(9	)
Changes in other assets and liabilities:
Accounts receivable, net			2,670				1,809
Inventories			1,697				3,552
Prepaid expenses and other current assets			(618	)			1,694
Other assets			29				177
Accounts payable, accrued liabilities and deferred revenue			(7,354	)			(3,235	)
Deferred lease credits and other long-term liabilities			125				453
Net cash provided by operating activities			4,623				12,301
Cash flows from investing activities:
Purchases of property, plant and equipment			(2,623	)			(3,787	)
Proceeds from sales of property, plant and equipment			13				-
Changes in restricted investments			560				884
Proceeds from sales and maturities of marketable securities			-				3,972
Net cash (used in) provided by investing activities			(2,050	)			1,069
Cash flows from financing activities:
Net proceeds from issuance of common stock			4,732				450
Purchase of common stock			(528	)			(6,564	)
Excess tax benefit from exercise of stock options			1,113				28
Net cash provided by (used in) financing activities			5,317				(6,086	)
Increase in cash and cash equivalents			7,890				7,284
Cash and cash equivalents, beginning of year			47,934				4,719
Cash and cash equivalents, end of year		$	55,824			$	12,003
Non-cash investing activities:
Capital expenditures incurred, but not yet paid		$	118			$	1,548
Other cash flow information:
Cash paid for income taxes			91				21

 

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Peet’s Coffee & Tea, Inc.

Unrealized gains or losses on marketable securities are recorded in accumulated other comprehensive income at each measurement date.

The carrying value of cash and equivalents, restricted cash, receivables and accounts payable approximates fair value.

 

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

 

The Company measures certain non-financial assets and liabilities, including long-lived assets, at fair value on a non-recurring basis, as deemed necessary. As of April 4, 2010, the Company was not required to measure any non-financial assets and liabilities at fair value.

 

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3.	Inventories

The Company’s inventories consist of the following (in thousands):

		April 4,				January 3,
		2010				2010
Green coffee		$	13,930			$	16,228
Other inventory			10,309				9,708
Total		$	24,239			$	25,936

8.	Segment Information

 

The Company operates in two reportable segments:  retail and specialty sales.  Retail store operations consist of sales of whole bean coffee, beverages, tea and related products through Company-operated retail stores.  Specialty sales consist of whole bean coffee sales through three operating segments: grocery, home delivery, foodservice and office.

Management evaluates segment performance primarily based on revenue and segment operating income.  The following table presents certain financial information for each segment.  Segment income before taxes excludes unallocated marketing expenses and general and administrative expenses.  Unallocated assets include cash, coffee inventory in the warehouse, corporate headquarter assets and intangible and other assets (dollars in thousands).

Results of Operations

The following discussion on results of operations should be read in conjunction with the condensed consolidated financial statements and accompanying notes and the other financial data included elsewhere in this report.

		Thirteen weeks ended
		April 4,				March 29,
		2010				2009
Statement of income as a percent of net revenue:
Net revenue			100.0	%			100.0	%
Cost of sales and related occupancy expenses			46.2				45.2
Operating expenses			34.3				34.9
Transaction related expenses			1.0				-
General and administrative expenses			7.8				8.2
Depreciation and amortization expenses			4.8				5.0
Income from operations			5.9				6.7
Interest income			-				0.1
Income before income taxes			5.9				6.8
Income tax provision			2.2				2.6
Net income			3.8	%			4.2	%
Percent of net revenue by business segment:
Retail stores			61.7	%			66.5	%
Specialty sales			38.3				33.5
Percent of net revenue by business category:
Whole bean coffee and related products			55.4	%			51.7	%
Beverages and pastries			44.6				48.3
Cost of sales and related occupancy expenses as a percent of segment revenue:
Retail stores			43.2	%			42.8	%
Specialty sales			51.0				49.9
Operating expenses as a percent of segment revenue:
Retail stores			42.2	%			41.2	%
Specialty sales			21.5				22.4
Percent increase from prior year:
Net Revenue			12.6	%			7.4	%
Retail stores			4.4				7.6
Specialty sales			29.0				7.1
Cost of sales and related occupancy expenses			15.3				1.8
Operating expenses			10.6				7.0
Transaction related expenses			100.0				-
General and administrative expenses			6.1				6.8
Depreciation and amortization expenses			7.5				17.5
Selected operating data:
Number of retail stores in operation
Beginning of the period			192				188
Store openings			1				2
Store closures			-				-
End of the period			193				190

 

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Depreciation and amortization expenses

Depreciation and amortization expenses increased to $3.9 million, compared to $3.6 million for the corresponding period last year. The increase was primarily due to the implementation of a new ERP system in the third quarter of 2009.

Interest (expense) income, net

We invest in U.S. government, agency, municipal and equity securities. Interest income includes interest income and gains or losses from the sale of these instruments. Due to lower average balances during the quarter, our earnings were offset by interest expense on our deferred compensation plan. During the corresponding period of 2009 we earned $0.1 million.

Income tax provision

The effective income tax rate for the first quarter of 2010 is 36.6% compared to 37.7% during the first quarter of 2009 due to an increase in the benefit of the domestic production deduction and hiring tax credits.

 

The Company does not expect unrecognized tax benefits to change significantly within the next 12 months.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We invest excess cash in equity securities and interest-bearing, U.S. government, agency, and municipal securities. These financial instruments are subject to stock market volatility and 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.

We currently use fixed-price purchase commitments, but in the past have used and may potentially in the future use coffee futures and coffee futures options to manage coffee supply and price risk.

Fixed-Price and Not-Yet-Priced Purchase Commitments

We enter into fixed-price purchase commitments in order to secure an adequate supply of quality green coffee beans and fix our cost of green coffee beans. These commitments are made with established coffee brokers and are denominated in U.S. dollars. We also enter into “not-yet-priced” commitments based on a fixed premium over the New York “C” market with the option to fix the price at any time. As of April 4, 2010, we had approximately $35.7 million in open fixed-priced purchase commitments and approximately $3.1 million in not-yet-priced commitments for a total of approximately $38.8 million with delivery dates ranging from April 2010 through July 2011. We believe, based on relationships established with our suppliers, that the risk of non-delivery on such purchase commitments is low.

 

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Item 4. Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Securities Exchange Act of 1934, as amended, reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’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 April 4, 2010, 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 as of the end of the quarter covered by this report at the reasonable-assurance level.

 

PART II - OTHER INFORMATION

 

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Item 5. Other Information

On February 4, 2010, based on the Company meeting its 2009 financial and strategic objectives (including the achievement of the maximum funding level on the financial objective), the Committee approved cash bonus payments to Messrs. O’Dea and Cawley and Mses. Bogeajis and Lansing of $360,605, $187,834, $116,623 and $138,099, respectively. These payments represented the maximum 167% of incentive target available and was the same funding percent applied to all participating executives.

 

This disclosure is provided in lieu of disclosure under Item 5.02(e) of Form 8-K.

Item 6. Exhibits

 

Exhibit		Description
3.1		Amended and Restated Articles of Incorporation. Incorporated by reference to Exhibit 3.6 to the Company’s Amendment No. 2 to its Registration Statement on Form S-1 filed with the Securities and Exchange Commission on December 22, 2000 (File. No. 333-47976).
3.2		Amended and Restated Bylaws. Incorporated by reference to Exhibit 3.8 to the Company’s Amendment No. 1 to its Registration Statement on Form S-1 filed with the Securities and Exchange Commission on December 1, 2000 (File. No. 333-47976).
4.1		Form of common stock certificate. Incorporated by reference to Exhibit 4.1 to the Company’s Amendment No. 2 to its Registration Statement on Form S-1 filed with the Securities and Exchange Commission on December 22, 2000 (File. No. 333-47976).
10.1		Nonqualified Supplemental Deferred Compensation Plan Adoption Agreement dated as of December 11, 2009, and related Plan Document.
10.2		Letter Agreement between the Company and P. Christine Lansing, dated as of April 9, 2010.
31.1		Certification of the Company’s Chief Executive Officer, Patrick O’Dea, pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.
31.2		Certification of the Company’s Chief Financial Officer, Thomas Cawley, pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.
32.1		Certification of the Company’s Chief Executive Officer, Patrick O’Dea, pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
32.2		Certification of the Company’s Chief Financial Officer, Thomas Cawley, pursuant to Section 906 of Sarbanes-Oxley Act of 2002.

 

 

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