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<SEC-DOCUMENT>0000929624-01-000532.txt : 20010409
<SEC-HEADER>0000929624-01-000532.hdr.sgml : 20010409
ACCESSION NUMBER: 0000929624-01-000532
CONFORMED SUBMISSION TYPE: 10-K405
PUBLIC DOCUMENT COUNT: 3
CONFORMED PERIOD OF REPORT: 20001231
FILED AS OF DATE: 20010402
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: PEETS COFFEE & TEA INC
CENTRAL INDEX KEY: 0000917968
STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS FOOD PREPARATIONS & KINDRED PRODUCTS [2090]
IRS NUMBER: 910863396
FILING VALUES:
FORM TYPE: 10-K405
SEC ACT:
SEC FILE NUMBER: 000-32233
FILM NUMBER: 1589067
BUSINESS ADDRESS:
STREET 1: 1400 PARK AVE
CITY: EMERYVILLE
STATE: CA
ZIP: 94608
BUSINESS PHONE: 5105942147
MAIL ADDRESS:
STREET 1: 1400 PARK AVE
CITY: EMERYVILLE
STATE: CA
ZIP: 94608
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K405
<SEQUENCE>1
<FILENAME>0001.txt
<DESCRIPTION>FORM 10-K405
<TEXT>
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
for the fiscal year ended December 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-32233
PEET'S COFFEE & TEA, INC.
(Exact name of Registrant as specified in its charter)
----------------
<TABLE>
<S> <C>
Washington 91-0863396
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
</TABLE>
1400 Park Avenue
Emeryville, California 94608-3520
(Address of principal executive offices) (Zip code)
(510) 594-2100
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
----------------
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
The approximate aggregate market value of the voting stock held by non-
affiliates of the Registrant based on the closing price of the Common Stock on
March 20, 2001 as reported by the Nasdaq National Market, as of March 20, 2001
was $51,904,933. Shares of Common Stock held by each officer and director and
each person known to the Company to hold 5% or more of the outstanding Common
Stock have been excluded as such persons may be deemed to be affiliates of the
Company. Such determination of affiliate status is not necessarily a
conclusive determination for other purposes. As of March 20, 2001, 8,147,682
shares of Registrant's Common Stock were outstanding.
Items 11, 12 and 13 of Part III incorporate information by reference from
the Registrant's definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on May 24, 2001.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
PART I
Item 1. Business...................................................... 1
Item 2. Properties.................................................... 4
Item 3. Legal Proceedings............................................. 5
Item 4. Submission of Matters to a Vote of Security Holders........... 5
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters....................................................... 6
Item 6. Selected Financial Data....................................... 6
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 8
Item 7A. Quantitative and Qualitative Disclosure About Market Risk..... 15
Item 8. Financial Statements and Supplementary Data................... 22
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure...................................... 22
PART III
Item 10. Directors and Executive Officers of the Registrant............ 23
Item 11. Executive Compensation........................................ 24
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................... 24
Item 13. Certain Relationships and Related Transactions................ 24
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K........................................................... 25
Signatures.............................................................. S-1
</TABLE>
i
<PAGE>
Some of the matters discussed under the captions "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this report include forward-looking
statements. We have based these forward-looking statements on our current
expectations and assumptions about future events, including, among other
things:
. Implementing our business strategy;
. Attracting and retaining new customers;
. Obtaining and expanding our market presence in new geographic regions;
. The availability of high quality Arabica coffee beans;
. Consumers tastes and preferences; and
. Competition in our market.
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 results, levels of activity,
performance, achievements and events may vary significantly from those implied
by the forward-looking statements. A description of risks that could cause our
results to vary appears under the caption "Risk Factors" and elsewhere in this
report.
PART I
Item 1. Business
Overview
Peet's Coffee & Tea, Inc. ("Peet's" or the "Company") is a specialty coffee
roaster and marketer of branded fresh roasted whole bean coffee sold under
strict freshness standards. We sell our fresh roasted coffee, hand selected
tea and related items in several distribution channels including specialty
grocery and gourmet food stores, online and mail order, offices and restaurant
accounts and 59 company-owned stores in four states.
We started as Starbuck's Coffee Company, a Washington corporation, in 1971.
By the 1980s, we owned and operated several retail stores and a coffee
roasting plant in Seattle. In 1984, we purchased Peet's Coffee and Tea, Inc.,
the successor to Alfred Peet's business, from Sal Bonavita who purchased the
business from Alfred Peet in 1979. To consolidate our operations in the San
Francisco Bay Area, we sold our Seattle-based assets, including the Starbuck's
brand, the roasting plant and several retail stores, to Il Giornale Coffee
Company in 1987 and shifted our focus to Peet's Coffee & Tea.
Over the past five years, we have begun to reposition Peet's from a
regional retailer that operates its own outlets into a national coffee brand
available through select channels of distribution.
Competitive Positioning
The whole bean specialty coffee category can be characterized as highly
fragmented. Our primary competitors in whole bean specialty coffee sales
include Gevalia, Green Mountain, Illy Caffe, Millstone, Seattle's Best and
Starbucks. There are an estimated 500 smaller and regional brands that also
compete in this category. In addition, we compete indirectly against all other
coffee brands on the market. A number of nationwide coffee marketers, such as
Kraft Foods, Procter & Gamble and Nestle, are distributing premium coffee
brands in supermarkets. These premium coffee brands may serve as substitutes
for our whole bean coffee.
Despite competing in a fragmented category, specialty coffee brands are
being established across multiple distribution channels. Several competitors
are aggressive in obtaining distribution in specialty grocery and
1
<PAGE>
gourmet food stores, and in office and restaurant locations. We have only
recently begun to penetrate these channels.
We believe that our customers choose among specialty coffee brands based
upon quality, convenience, and to a lesser extent, price. Although consumers
may differentiate coffee brands based on freshness (as an element of coffee
quality), to our knowledge, few significant competitors are as focused on
product freshness and roast-dating in the same manner as Peet's. It is a
common industry practice to use a "sell by" date for pre-packaged beans and to
monitor roasted bean age in open-air bulk bins. Therefore, the key benefit of
freshness and the perishable nature of coffee is being largely overlooked. We
believe that our market share in the specialty category is based on a solidly
differentiated position built on our freshness standards and artisan-roasting
style. Because of the fragmented nature of the specialty coffee market, we
cannot accurately estimate our market share. However, many of our existing
competitors have significantly greater financial, marketing and operating
resources than us.
Our roasted coffee is priced within a range of $8.95 to $16.95 per pound to
the consumer, which we believe is priced at a premium to many other coffee
brands.
Our Coffee
Our Coffee Beans
Only high quality Arabica coffee beans can produce the flavor and richness
of Peet's coffee. With our reputation that has been built over 34 years, we
have gained access to some of the highest quality green coffee beans from the
finest estates and growing regions around the world. We have built long term
relationships with growers and brokers to ensure a steady supply of green
coffee beans.
Coffee is an agricultural crop that undergoes price fluctuation and quality
differences depending on weather, economic and political conditions in coffee
producing countries. High quality Arabica coffee beans are generally more
expensive than Robusta beans. As a result, in addition to the above factors,
the price, quality and availability of green coffee beans also depend on our
relationships with coffee brokers, exporters and growers.
We generally turn our inventory of green coffee beans two to three times
per year. Unlike roasted coffee beans, green coffee beans are not highly
perishable. We generally carry approximately $4.3 to $6.3 million worth of
green coffee beans in inventory. If Arabica coffee beans from a region become
unavailable or prohibitively expensive, we may be forced to discontinue
particular coffee types and blends or substitute coffee beans from other
regions in our blends. We mitigate the risks associated by fluctuations in
coffee prices by entering into fixed price commitments and hedging agreements
for a portion of our unroasted coffee requirements.
Coffee Types and Blends
Beyond sourcing and roasting, Peet's has developed a reputation for expert
coffee blending. Our blends, such as our Major Dickason's Blend, are well
regarded by our customers for their uniqueness, consistency and special flavor
characteristics. Currently, we sell 33 types of coffee as regular items.
Included in this figure are approximately 17 blends with the balance being
single origin coffees from countries such as Colombia, Guatemala and Kenya.
Peet's is also active in seeking out, roasting and selling unique special lot
and one-time coffees. On average, we offer four to six such coffees every
year.
Customers and Marketing
Peet's marketing and distribution strategies are designed to appeal to a
customer base that falls within one of the most economically favorable
demographic groups in the United States. Based on surveys we commissioned of
our customers, we believe our customers tend to be over 35 years in age and
well-educated with an average household income of over $50,000 per year. We
have a regional skew to our customer base that
2
<PAGE>
mimics the geographic development of the specialty coffee industry. Our
customers are concentrated on the west and east coasts and in select
metropolitan areas in the central United States.
Tea, Food, Merchandise and Related Items
Peet's offers a line of hand selected whole leaf and bagged tea. Our
quality standards for tea are very high. We purchase tea directly from
importers and brokers and store and pack the tea at our facility in
Emeryville.
We offer a limited line of specialty food items such as jellies, jams and
candies. These products are carefully selected for quality and uniqueness.
Our merchandise program consists of items such as brewing equipment for
coffee and tea, paper filters and brewing accessories and branded and non-
branded cups, saucers, travel mugs and serveware. We do not emphasize these
items, and we carry them in retail stores, online and through mail order as a
means to reinforce our authenticity in coffee and tea.
Intellectual Property
We regard intellectual property and other proprietary rights as important
to our success. We own several trademarks and service marks that have been
registered with the United States Patent and Trademark Office, including
Peet's, Peet's Coffee & Tea, Peets.com, Blend 101, Pride of the Port, Maduro
Blend, Major Dickason's Blend, Sierra Dorada Blend and Garuda Blend. We also
have registered trademarks on our stylized logo. In addition, we have
applications pending with the United States Patent and Trademark Office for a
number of additional marks, including Top Blend, Gaia Organic Blend,
Pumphrey's Blend and Xiao's Blend.
We own registered trademarks for our name and logo in Canada, Chile, the
European Community, Hong Kong, Japan, Singapore and Taiwan. We have filed
additional applications for trademark protection in Argentina, Brazil, Chile,
China, the European Community, Hong Kong, Japan, South Korea, Philippines,
Paraguay, Singapore, Thailand and Taiwan. In addition to peets.com and
coffee.com, we own several other domain names relating to coffee, Peet's and
our roasting process.
In addition to registered and pending trademarks, we consider the packaging
for our coffee beans (consisting of dark brown coloring with African-style
motif and lettering with a white band running around the lower quarter of the
bag) and the design of the interior of our stores (comprising of dark wood
fixtures, classic lighting, granite countertops and understated color) to be
strong identifiers of our brand. Although we consider our packaging and store
design to be essential to our brand identity, we have not applied to register
these trademarks and trade dress, and thus cannot rely on the legal
protections afforded by trademark registration.
Our ability to differentiate our brand from those of our competitors
depends, in part, on the strength and enforcement of our trademarks. We must
constantly protect against any infringement by competitors. If a competitor
infringes on our trademark rights, we may have to litigate to protect our
rights, in which case, we may incur significant expenses and divert
significant attention from our business operations.
Information Systems
The information systems installed at Peet's are used to manage our
operations and increase the productivity of our workforce. We have recently
implemented an advanced point-of-sale system to increase store productivity,
provide a higher level of service to our customers and maintain timely
information for performance evaluation. Our new registers are touch screen
components with full point-of-sale capability. We also operate a Peet's debit
card system in all retail stores. These cards carry cash balances and may be
used in lieu of cash at our retail locations. In addition, over the next few
months, we will be installing a new human resource and payroll system.
Our online and mail order system has been customized to allow us to respond
and adapt quickly to customer and marketing demands. We have installed several
new software tools to help us analyze customer information.
3
<PAGE>
Our website is hosted at AboveNet in San Jose, California. All website
applications are built on Microsoft ASP with in-house development. We offer
full-functioning e-commerce and our site is integrated with our call center
for access to orders placed at both locations. Online delivery confirmation is
provided by United Parcel Service and United States Postal Service. Our
peets.com site contains several customer-centered functions such as Express
Buy (which stores customer-specific lists of favorite coffee and items),
multiple "ship-to" capability on a single bill to order and extensive coffee
search and product matching. Website and call center system functionality are
designed to accommodate the need for customers to place repeat orders or
automatic orders delivered on a pre-set schedule.
We design our websites to provide fast, easy and effective operation when
navigating and shopping on our site. We have dedicated information technology
employees and marketing staffers to website maintenance, improvement,
development and performance.
Employees
As of March 20, 2001, Peet's employed a workforce of 1,315 people,
approximately 298 of whom are considered full-time employees. None of the
Company's employees is represented by a labor union. Peet's considers its
relationship with its employees to be good. Since 1979, Peet's has provided
full benefits to all employees who work at least 21 hours per week. We
continue to offer competitive benefits packages to attract and retain valuable
employees.
Government Regulation
Our coffee roasting operations and our retail stores are subject to various
governmental laws, regulations, and licenses relating to customs, health and
safety, building and land use, and environmental protection. Our roasting
facility is subject to state and local air-quality and emissions regulation.
If we encounter difficulties in obtaining any necessary licenses or complying
with these laws and regulations, then:
. The opening of new retail locations could be delayed;
. The operation of existing retail locations or our coffee roasting
operations could be interrupted; or
. Our product offerings could be limited.
We believe that we are in compliance in all material respects with all such
laws and regulations and that we have obtained all material licenses that are
required for the operation of our business. We are not aware of any
environmental regulations that have or that we believe will have a material
adverse effect on our operations.
Item 2. Properties
Peet's headquarters are located in Emeryville, California, where the
Company leases approximately 60,000 square feet of office and production
space, including roasting and direct delivery fulfillment facilities. Our
lease expires in 2005 and we have an option to extend the lease for an
additional ten years.
We operate 59 retail stores in four states. Our retail locations are all
company operated in leased facilities. Our store size averages 1,500 square
feet. Our stores are typically located in urban neighborhoods, suburban
shopping centers (usually consisting of grocery, specialty and service stores)
and high-traffic streets.
4
<PAGE>
The following table lists the number of retail stores we have in each
location as of March 20, 2001:
<TABLE>
<CAPTION>
Location Number
-------- ------
<S> <C>
San Francisco Bay Area, California................................ 33
San Jose, California.............................................. 3
Sacramento, California............................................ 2
Santa Cruz, California............................................ 1
Santa Barbara, California......................................... 1
Greater Los Angeles, California................................... 7
Orange County, California......................................... 1
San Diego, California............................................. 2
Chicago, Illinois................................................. 2
Portland, Oregon.................................................. 2
Boston, Massachusetts............................................. 5
---
Total........................................................... 59
===
</TABLE>
Item 3. Legal Proceedings
In the ordinary course of our business, we may from time to time become
involved in certain legal proceedings. As of the date of this report, we are
not a party to any pending material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
Before the initial public offering of the Company's Common Stock in January
2001 (the "IPO"), a special meeting of shareholders of the Company was held on
October 30, 2000 to consider an amendment to the Company's Restated Articles
of Incorporation then in effect to provide for shareholder action by non-
unanimous written consent. 1,761,085 shares out of a total of 2,257,801 issued
and outstanding shares of Common Stock were represented in person or by proxy
at the meeting. 1,761,085 votes were cast for, 0 votes were cast against or
withheld, and 0 abstained with respect to the matter. 309,789 shares out of a
total of 471, 306 issued and outstanding shares of Series A Preferred Stock
were represented in person or by proxy at the meeting. 309,789 votes were cast
for, 0 votes were cast against or withheld, and 0 abstained with respect to
the matter.
By action by written consent effective November 17, 2000, the Company's
shareholders approved (i) the Articles of Amendment to Restated Articles of
Incorporation to effect a two-for-one stock split immediately before the IPO;
(ii) the amendment and restatement of the Company's Restated Articles of
Incorporation upon the closing of the IPO; (iii) the 2000 Equity Incentive
Plan; (iv) the 2000 Employee Stock Purchase Plan; and (v) the 2000 Non-
Employee Director Stock Option Plan. The shareholders also ratified (i) the
amendment and restatement of the Company's Restated Bylaws and (ii) a form of
Indemnification Agreement to be entered into by the Company with the Company's
directors and executive officers. 2,117,126 shares out of a total of
2,257,801 issued and outstanding shares of Common Stock and 276,611 shares out
of a total of 471,306 issued and outstanding shares of Series A Preferred
Stock consented to the action.
5
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Market for the Registrant's Stock
The Company's common stock commenced regular trading on the NASDAQ National
Market System under the symbol "PEET" on January 25, 2001. Prior to such date,
there was no public market for the Company's common stock. As of February 27,
2001, there were approximately 6,800 registered holders of record of the
Company's common stock.
We have not declared or paid any dividends on our capital stock since 1990.
We expect to retain any future earnings to fund the development and expansion
our business. Therefore, we do not anticipate paying cash dividends on our
common stock in the foreseeable future. Our current credit facility restricts
our ability to pay dividends. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
Recent Sales of Unregistered Securities
Since January 2, 2000, we have issued options to purchase an aggregate of
280,750 shares of common stock under the 1993 Stock Option Plan, the 1994
California Stock Option Plan and the 1997 Equity Incentive Plan, of which
2,924 have been exercised at exercise prices ranging from $6.38 to $10.20 per
share.
There were no underwriters employed in connection with any of these
issuances. These issuances were deemed exempt from registration under the
Securities Act in reliance on Section 4(2) or Rule 701 promulgated thereunder
as transactions pursuant to compensatory benefit plans and contracts relating
to compensation. The recipients in each such issuance represented their
intention to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof and appropriate
legends were affixed to the share certificates and other instruments issued in
such transactions. All recipients either received adequate information about
Peet's or had access, through employment or other relationships, to such
information.
Use of Proceeds from Sales of Registered Securities
We completed our initial public offering in January and February 2001
pursuant to a Registration Statement on Form S-1 initially filed on October
13, 2000, as subsequently amended (the "Registration Statement") (File No.
333-47597). The managing underwriters of the public offering were W.R.
Hambrecht + Co. and Pacific Growth Equities, Inc. In the offering, we sold an
aggregate of 2,682,623 shares of our common stock for at an price of $8.00 per
share.
The aggregate proceeds to us from the offering were $21.5 million. We paid
expenses of approximately $3.6 million, of which approximately $1.4 million
represented underwriting discounts and commissions and approximately $2.2
million represented expenses related to the offering. Net proceeds from the
offering were $17.9 million. None of the net proceeds had been received as of
December 31, 2000. Of the net proceeds, as of March 20, 2001, approximately
$16.0 million had been used for debt reduction. At March 20, 2001, the
remainder of the net proceeds was invested in short-term, interest-bearing,
investment grade securities. None of the net proceeds of the initial public
offering were paid directly or indirectly to any director, officer, general
partner of the Company or their associates, persons owning 10% or more of any
class of equity securities of the Company, or an affiliate of the Company. We
expect that our use of proceeds from the offering will conform to the intended
use of proceeds as described in our initial public offering prospectus dated
January 25, 2001, except that we used an additional $6.5 million of the net
proceeds to repay our Term A Loan.
Item 6. Selected Financial Data
The table below shows selected consolidated financial data for our last
five fiscal years. Our fiscal year is based on a 52 or 53 week year and ends
on the Sunday closest to the last day in December.
6
<PAGE>
The following selected consolidated financial data should be read in
conjunction with our consolidated financial statements and related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this report.
Selected Consolidated Financial Data
(in thousands, except per share data)
<TABLE>
<CAPTION>
Fiscal Year
------------------------------------------
1996 1997 1998 1999 2000
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data
Total revenues.................... $41,037 $51,720 $59,787 $69,059 $84,302
Cost of sales and related
occupancy expenses............... 22,426 27,518 29,851 33,175 40,194
Operating expenses................ 11,247 14,767 17,969 21,902 27,776
Marketing and advertising
expenses......................... 810 2,278 2,176 3,491 6,069
General and Administrative
expenses......................... 2,522 3,961 5,961 6,230 6,651
Depreciation and Amortization
expenses......................... 1,790 2,210 2,711 3,404 4,576
------- ------- ------- ------- -------
Income (loss) from operations..... 2,242 986 1,119 857 (964)
Interest expense, net, and other.. 244 396 709 985 1,907
------- ------- ------- ------- -------
Income (loss) before income
taxes............................ 1,998 590 410 (128) (2,871)
Provision (benefit) for income
taxes............................ 851 249 242 16 (596)
------- ------- ------- ------- -------
Net Income (loss)................. $ 1,147 $ 341 $ 168 $ (144) $(2,275)
======= ======= ======= ======= =======
Net income (loss) per share
Basic........................... $ 0.27 $ 0.08 $ 0.04 $ (0.03) $ (0.50)
Diluted......................... 0.21 0.06 0.03 (0.03) (0.50)
Shares used in calculation of net
income (loss) per share
Basic........................... 4,212 4,348 4,397 4,489 4,515
Diluted......................... 5,444 5,448 5,710 4,489 4,515
Balance Sheet Data
Cash and cash equivalent.......... $ 2,156 $ 888 $ 873 $ 1,074 $ 1,598
Working capital................... 2,230 (2,301) (1,333) (5,486) (2,853)
Total assets...................... 22,637 25,724 29,864 34,650 39,613
Current portion of long-term
debt............................. 1,810 3,470 1,701 2,816 2,037
Long-term debt, less current
maturities....................... 4,882 3,412 5,962 7,240 14,544
Series A preferred stock.......... 5,482 4,537 4,537 4,537 4,537
Total shareholders' equity........ 11,173 10,318 10,791 11,191 9,167
</TABLE>
7
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Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
You should read the following discussion and analysis in conjunction with
our consolidated 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.
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 our
founding in 1966, we have established a customer base and brand recognition in
the San Francisco Bay Area. In recent years, we have begun to expand our brand
nationally.
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. Control of
purchasing, roasting, packaging and distribution of our coffee allows us to
maintain our unique freshness proposition and is cost efficient, enhances our
margins and maximizes our profit potential.
Our coffee and related items are sold through multiple distribution
channels which are considered segments under Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information." These channels are selected in order to provide broad market
exposure to potential purchasers of fresh roasted whole bean coffee. We sell
coffee beans and related items through three reportable segments: our company-
owned retail outlets, online and mail order and specialty sales, which consist
of offices, restaurants, specialty grocery and gourmet food stores.
We intend to increase sales by focusing on expansion in specialty sales, as
well as through continued growth of our online and mail order channel.
Although our expansion into new distribution channels is accelerating, it is
disciplined and focused, only penetrating new markets and channels that can
support the sale of specialty coffee. We also intend to open a limited number
of new stores in strategic locations that meet our demographic profile, and
explore potential opportunities for franchising and licensing in international
markets.
Business Categories
In order to facilitate an understanding of the results of operations for
each period presented, we have included a general overview along with a
discussion and analysis of business categories within our segment activities.
We measure our business by monitoring the volume and revenue growth of
whole bean coffee sales for home, office and restaurant consumption, as well
as coffee beans used for beverage sales at our retail outlets. For fiscal
2000, the sale of whole bean coffee and related products for home, office and
restaurant consumption represented 60% of our total revenue and 79% of all
whole bean coffee pounds roasted. As a result, we monitor sales separately
through two distinct business categories:
. Whole bean coffee and related products; and
. Beverages and pastries.
We operate our stores and record sales through these two categories. Our
stores are primarily designed to facilitate the sale of whole bean coffee. The
format of our stores replicates that of a specialty grocer. Beans are scooped
from under the counter bins, weighed on counter top scales and hand packed
into branded bags. In addition, each store has a beverage bar that is
dedicated to the sale of prepared beverages and pastries for on-site
consumption.
8
<PAGE>
Our two business categories within a store mature at different rates. When
we open a store, the initial sales are primarily beverage related. The
distance a consumer will travel for beverages is short (usually one to three
miles), representing a convenience purchase. Consequently, the beverage
business matures rapidly. The trade area for whole bean coffee is much larger
(usually three to five miles), representing destination shopping.
Consequently, whole bean sales from stores mature more slowly (typically three
to five years). Therefore, sales at newer stores have a much higher beverage
component and shift to a higher whole bean percentage as the store matures.
The dynamics of opening many new stores over the past few years has resulted
in a higher beverage percentage within our total revenue, a trend that should
change as stores mature.
The following chart demonstrates category mix for retail store sales in the
fiscal year ended December 31, 2000, expressed as a percent of total store
revenue.
<TABLE>
<CAPTION>
Open less than Open Open more than
2 years 2 to 5 year 5 years
-------------- ----------- --------------
<S> <C> <C> <C>
Whole bean coffee, tea, and
related products............... 42.9% 47.3% 53.7%
Beverages and pastries.......... 57.1% 52.7% 46.3%
</TABLE>
Results of Operations
The following discussion on results of operations should be read in
conjunction with "Selected Consolidated Financial Data," the consolidated
financial statements and accompanying notes and the other financial data
included elsewhere in this report. Our fiscal year is based on a 52 or 53 week
year. The fiscal year ends on the Sunday closest to the last day of December.
The following table sets forth certain financial data for the periods
indicated.
<TABLE>
<CAPTION>
Fiscal Year
--------------------
1998 1999 2000
----- ----- -----
<S> <C> <C> <C>
Statement of Operations Data as a percent of
revenue:
Total revenue...................................... 100.0% 100.0 % 100.0 %
Cost of sales and related occupancy expenses....... 49.9% 48.0 % 47.7 %
Operating expenses................................. 30.1% 31.7 % 32.9 %
Marketing and advertising expenses................. 3.6% 5.1 % 7.2 %
General and administrative expenses................ 10.0% 9.0 % 7.9 %
Depreciation and amortization expenses............. 4.5% 5.0 % 5.4 %
----- ----- -----
Income (loss) from operations...................... 1.9% 1.2 % (1.1)%
Interest expense, net, and other................... 1.2% 1.4 % 2.3 %
----- ----- -----
Income (loss) before income taxes.................. 0.7% (0.2)% (3.4)%
Provision (benefit) for income taxes............... 0.4% 0.0 % (0.7)%
----- ----- -----
Net income (loss)................................ 0.3% (0.2)% (2.7)%
===== ===== =====
Selected Operations Data:
Number of Stores in Operation:
Beginning of the period............................ 39 43 53
Store openings..................................... 5 11 5
Store closure...................................... 1 1 0
End of the period.................................. 43 53 58
Pounds of whole bean coffee sold................... 3,350 3,546 4,213
</TABLE>
9
<PAGE>
Year Ended December 31, 2000 Compared with Year Ended January 2, 2000
Revenues
Total revenue increased $15.2 million, or 22.1%. Revenue from the sale of
whole bean coffee and related products increased to $50.3 million from $41.8
million, or 20.3%, while sales of beverages and pastries increased to $34.0
million from $27.2 million, or 24.8%.
Retail store revenue increased to $68.3 million from $57.2 million, or
19.5%. Whole bean coffee and related products sales increased by $4.4 million,
or 14.7%. The $4.4 million increase in revenue primarily consisted of $2.8
million from the addition of new stores, $1.0 million from a 5.6% price
increase in August 1999 and $0.6 million from additional pounds of whole bean
coffee sold through maturing stores. Beverages and pastries sales increased by
$6.8 million, or 24.8%. The $6.8 million increase in revenue primarily
consisted of $4.2 million from the addition of new stores, $1.6 million from
existing stores and $1.0 million from the August price increase.
Online and mail order revenue increased to $11.1 million from $9.4 million,
or 17.8%. The revenue growth was primarily due to growth in our customer base
resulting from increased direct mail and online marketing.
Revenue from specialty sales increased to $4.9 million from $2.5 million,
or 96.7%. The $2.4 million of revenue growth was primarily due to new sales
initiatives in this channel. The expansion of our office coffee program
represented $1.2 million of the increase and wholesale and restaurant accounts
represented $1.1 million.
Cost of sales and related occupancy expenses
Primarily as a result of the addition of seven new stores and increased
volume of 20.3% in whole bean coffee sales, cost of sales and related
occupancy expenses increased $7.0 million, or 21.2%. Cost of sales and related
occupancy expenses decreased as a percent of total revenue to 47.7% from
48.0%, due primarily to the August price increase and the reduction in our
average green coffee bean cost by $0.29 per pound. These benefits were
partially offset by higher occupancy costs for new stores opened in Boston.
Operating expenses
Operating expenses increased $5.9 million, or 26.8%, and also increased as
a percent of total revenue to 32.9% from 31.7%.
Retail store operating expenses increased to $24.9 million from $20.4
million, an increase of 21.8%. Operating expenses as a percent of segment
revenue increased to 36.4% from 35.7% in the prior year. The increased retail
store operating expenses as a percent of segment revenue was mainly due to the
increased costs of entering into new markets, the additional expense incurred
for the implementation of a new store-wide electronic point of sale system and
increased labor costs in California. Retail store operating expenses in new
markets averaged 65% of revenue due mainly to lower per store revenue in non-
mature locations, compared to 28% of revenue for mature locations. These
increased costs in connection with entering new markets contributed
approximately $1.3 million to the overall increase in retail store operating
expenses. The increase in retail store operating expenses also consisted of
$0.6 million from the implementation of the point of sale system and
$0.5 million from increased labor costs in California, with the remaining
increase caused by the required support for revenue growth in retail
operations.
Operating expenses for online and mail order increased to $2.1 million from
$1.3 million, or 64%. As a percent of segment revenue, operating expenses
increased to 18.8% from 13.5% in the prior year. The increase in operating
expenses as a percent of segment revenue was primarily due to the increased
spending on information systems necessary to support higher volume and online
presence.
Operating expenses for specialty sales increased to $0.8 million from $0.2
million, or 270%. As a percent of segment revenue, operating expenses
increased to 17.1% from 9.1% in the prior year. The $0.6 million
10
<PAGE>
increase in operating expenses as a percent of segment revenue was primarily
due to the hiring of new sales staff and the costs of the expanded program for
office and restaurant accounts.
Marketing and advertising
Marketing and advertising expenses increased $2.6 million, or 73.8%.
Marketing and advertising expenses as a percent of total revenue increased to
8.9% from 6.1% in the prior year. Marketing and advertising expenses increased
significantly over the prior year due to new store additions in Boston,
Chicago and Portland and increased online and mail order programs, as well as
increased marketing efforts for office and restaurant accounts.
General and administrative
General and administrative expenses increased $0.4 million, or 6.8%, as a
result of the hiring of additional administrative personnel. As a percent of
total revenue, general and administrative expenses decreased to 9.7% from
10.9% in the prior year. The decrease as a percent of revenue was primarily
due to higher sales.
Depreciation and amortization
Depreciation and amortization expenses increased $1.2 million, or 34.4%.
Depreciation and amortization expenses as a percent of total revenue increased
to 5.4% from 4.9% in the prior year. The increase in depreciation and
amortization was primarily the result of capital expenditures for new retail
stores and system upgrades.
Interest expense, net, and other
Net interest expense increased $0.9 million, or 93.6%. The increase was
primarily due to the additional borrowings under our credit facility to fund
and support expansion and additional working capital needs.
Provision for income taxes
Taxes on income for fiscal 2000 reflect a benefit of $0.6 million resulting
from recognition of the future tax benefit of the fiscal year loss. The
effective tax rate of 20.8% reflects the establishment of a valuation
allowance on charitable contribution carryforwards and the California
disallowance of 50% of the current year tax net operating loss carryforward.
Year Ended January 2, 2000 Compared With Year Ended January 3, 1999
Revenue
Total revenue increased $9.3 million, or 15.5%. Revenue from the sale of
whole bean coffee and related products increased to $41.8 million from $37.2
million, or 12.3%, while sales of beverages and pastries increased to $27.2
million from $22.6 million, or 20.4%.
Retail store revenue increased to $57.2 million from $49.4 million, or
15.8%. Whole bean coffee and related products sales increased by $3.1 million,
or 11.5%. The $3.1 million increase in revenue primarily consisted of $1.5
million from the addition of new stores, $0.6 million from a price increase in
August 1999 and $0.5 million from additional pounds of whole bean coffee sold
through maturing stores. Beverages and pastries sales increased $4.7 million,
or 20.7%. The $4.7 million increase in revenue primarily consisted of $2.6
million from existing stores, $1.6 million from the addition of new stores and
$0.5 million from the August 1999 price increase.
Online and mail order revenue increased to $9.4 million, or 14.2%. The
revenue growth was primarily due to increased customers in new and existing
markets generated, in part, by targeted direct mail test programs.
Revenue from specialty sales increased to $2.5 million, or 15.5%, due to
our expanded office coffee program.
11
<PAGE>
Cost of sales and related occupancy expenses
As a result of the addition of new stores and increased volume of whole
bean coffee sales, cost of sales and related occupancy expenses increased $3.3
million, or 11.1%. This represented a decrease as a percent of total revenue
to 48.0% from 49.9%. The resulting increase in margin was primarily due to the
reduction in our average green coffee bean cost by $0.21 per pound and the
result of the August 1999 price increase.
Operating expenses
Operating expenses increased $3.9 million, or 21.9%, which represented an
increase as a percent of total revenue to 31.7% from 30.1%.
Retail store operating expenses increased to $20.4 million from $16.7
million, an increase of 22.2%. Operating expenses as a percent of segment
revenue increased to 35.7% from 33.9% in the prior year. The increase in
retail store operating expenses as a percent of segment revenue was primarily
due to the increased costs of expanding into Boston, Chicago and Portland.
As a result of increased volume in whole bean coffee sales, operating
expenses for online and mail order increased to $1.3 million from $1.1
million, or 18.2%. As a percent of segment revenue, operating expenses
increased to 13.5% from 13.3% in the prior year. This increase was primarily
due to higher labor costs.
Operating expenses for specialty sales increased to $0.2 million from $0.1
million, or 100%. As a percent of segment revenue, operating expenses
increased to 9.1% from 6.9% in the prior year. The resulting increase is
attributable to the higher start-up cost of the office coffee program.
Marketing and advertising
Marketing and advertising expenses increased $1.3 million, or 60.4%.
Marketing and advertising expenses as a percent of total revenue increased to
5.1% from 3.6% in the prior year. The higher marketing and advertising
expenses were the result of promoting Peet's brand in new markets and the
standardization of our brand identity for store signs, packaging, marketing
materials, logo, and other corporate branding elements. Additionally, we
incurred incremental marketing expenses when we transitioned our website from
purely informational to functional e-commerce.
General and administrative
General and administrative expenses increased $0.3 million, or 4.5%. As a
percent of total revenue, general and administrative expenses decreased to
9.0% from 10.0% in the prior year. The decrease as a percent of revenue was
primarily due to higher sales.
Depreciation and amortization
Depreciation and amortization expenses increased $0.7 million, or 25.6%. As
a percent of total revenue, depreciation and amortization expenses increased
to 5.0% from 4.5% in the prior year. The increase in depreciation and
amortization was primarily due to capital expenditures for new retail stores,
manufacturing and systems upgrades.
Interest expense, net, and other
Net interest expense increased $0.3 million, or 38.9%. The increase was
primarily due to additional borrowings under our credit facility to fund and
support expansion and additional working capital needs.
12
<PAGE>
Provision for income taxes
Taxes on income for the year ended January 2, 2000 reflect an expense of
$16,000 with an effective rate of (12.5)%. The expense and rate have been
largely impacted by the limitations on California net operating loss
carryforwards as well as the California manufacturers investment credit.
California limits the amount of net operating losses that may be carried
forward to 50% of the current year loss. This has increased the tax expense
for the year ended January 2, 2000 and, because we had a pretax loss, lowered
the effective rate. The California limitation on net operating losses had a
material impact on the rate due to the relatively large net carryforward
limitation compared to the pretax loss.
California allows a manufacturers investment tax credit for 6% of qualified
costs. The effect of the credit is to decrease tax expense and, because we had
a pretax loss, increase the rate for the year ended January 2, 2000.
Valuation allowances were established in prior years for some deferred tax
assets, including charitable contribution carryforwards discussed below. For
the year ended January 2, 2000, no new valuation allowances were established.
Charitable contributions are deductible up to 10% of adjusted taxable
income. Amounts not deductible due to the 10% limitation may be carried
forward for five years before expiring. We plan to continue our charitable
activity, and it is possible that valuation allowances will be needed in the
future for charitable contribution carryforwards.
Liquidity and Capital Resources
We funded our capital requirements in 2000 primarily through cash flows
from operations and borrowings under our line of credit and term loan
facilities.
Net cash flow provided by operations was $2.7 million in fiscal 2000.
Operating cash flows have been impacted by fluctuations in net income (loss),
exclusive of depreciation and changes in working capital, primarily inventory.
Net cash used in investing activities was $5.8 million in fiscal 2000.
Investing activities primarily consist of capital expenditures for property,
plant and equipment. These capital expenditures primarily relate to
expenditures to support store expansion, manufacturing plant capacity
expansion, information technology support systems and website development.
Net cash provided by financing activities was $3.6 million in fiscal 2000.
Financing activities in fiscal 2000 consisted primarily of refinancing our
credit facility with a new lender.
At December 31, 2000, we had a $30.0 million credit facility with General
Electric Capital Corporation, which replaced a previous credit facility of
$21.0 million. The current facility has a five-year term and provides for a
revolving line of credit up to $15.0 million and a Term A Loan for $7.0
million amortized over five years. The Term A Loan was repaid upon the closing
of the IPO. The Term B Loan for $8.0 million interest only for 18 months with
principal due on February 28, 2002 was repaid upon the closing of the IPO. The
revolving line of credit also provides for the issuance of up to $3.0 million
in letters of credit. Total availability under this facility is determined by
subtracting our funded debt (less the outstanding balance on its Term B Loan)
from our trailing twelve month earnings before interest, taxes, depreciation
and amortization, or (EBITDA), multiplied by 3.75 for the period before
September 1, 2001, 3.5 for the period after September 1, 2001 and before
September 1, 2002, and 3.25 thereafter. As of December 31, 2000, $4.2 million
was outstanding under the line of credit.
Outstanding advances under the revolving line of credit bears interest, at
our option, at either (i) "LIBOR," a floating rate based on the reserve
adjusted London Interbank Offer Rate in U.S. Dollars for the one, two or three
month period selected, plus 3.00%, or (ii) an "Index" rate, a floating rate
based on the higher of prime or
13
<PAGE>
50 basis points over the overnight Federal funds rate, plus 1.25%. Interest on
advances under the revolving line of credit under the LIBOR option is payable
and adjusted on the last day of the applicable LIBOR period. Interest under
the Index rate option is payable monthly in arrears and is adjusted on each
change of the Index rate.
Borrowings under the credit facility are secured by substantially all of
our assets. The credit facility contains monthly, quarterly and annual
financial covenants which require us to maintain a minimum EBITDA and fixed
charge coverage ratio. In addition, the credit facility contains restrictions
on our ability to make capital expenditures, incur additional indebtedness and
lease obligations, pay dividends and make other distributions to shareholders,
acquire and retire common stock and make investments. With the significant
repayment of debt from the IPO proceeds, we are in the process of
substantially renegotiating the covenants under this facility.
On December 1, 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 $0.4 million is payable annually each December 1. As
of December 31, 2000 all available amounts have been utilized. As of December
31, 2000, we have an outstanding standby letter of credit for $2.3 million
backing the development bonds. The reducing standby letter of credit bears an
interest charge of 1.5% payable annually on each December 1.
The repayment of outstanding amounts under our credit facility resulted in
increased borrowing capacity. We do not intend to use this increased capacity.
Our on-going credit needs will be to finance short-term working capital, in
particular the seasonal fluctuations in coffee purchasing.
In the next five years, we will use cash primarily for the following
activities:
. Repayment of borrowings;
. Marketing and related expenditures;
. Selective opening of additional stores;
. Capital expenditures; and
. Expenditures for general corporate purposes, including working capital
needs.
In addition, for 2001, we are committed to make lease payments of
approximately $0.2 million with respect to two new stores, one in southern
California and one in Massachusetts. Estimated related capital expenditures in
respect of such new stores are approximately $1.0 million. We have no
significant current commitments for marketing and related expenditures or for
general corporate purposes. Because we cannot predict whether or not our
business strategy will be successful or what the market conditions will be in
the future, we are currently unable to provide a more accurate estimate of how
much cash each of these activities will require.
Our capital requirements for the items outlined above may be significant.
These capital requirements will depend on many factors including our overall
performance, the pace of store expansion and store remodels and the
requirements for infrastructure needs for both personnel and facilities. To
date, we have primarily relied on cash flow generated from operations and our
line of credit to fund our capital needs. The cash flow generated from
operations and our borrowing capacity under our line of credit were sufficient
to meet our capital needs for fiscal 2000. Our current commitment for capital
expenditures is approximately $1.2 million (including capital expenditures in
connection with the opening of new stores). If additional capital is needed,
we may raise such capital through public or private equity or debt financing,
subject to limitations imposed by our loan agreement. However, there can be no
assurance that additional capital will be available on satisfactory terms.
We conduct some of our corporate and store operations from leased
facilities and lease certain equipment under operating leases. Generally,
these have initial lease periods of three to ten years, and contain provisions
for renewal options of five to ten years.
14
<PAGE>
Inflation
California is currently experiencing an energy crisis. As a result, energy
costs in California, including natural gas and electricity, may rise
significantly over the next several months relative to the rest of the United
States. In addition, portions of California have been experiencing, and may
continue to experience, rolling black-outs, which may cause disruptions to our
business operations. We are unable to predict the extent and impact of any
such price increases or disruptions.
We do not believe that inflation has had a material impact on our results
of operations in recent years. However, we cannot predict what effect
inflation (including the potential increase in energy prices) may have on our
results of operations in the future.
Seasonality
Our business is subject to seasonal fluctuations. Significant portions of
our net revenue and profits are realized during the fourth quarter of our
fiscal year, which includes the December holiday season. In addition, the
timing of opening of new stores and our growth may conceal the impact of other
seasonal influences.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk from changes in interest rates on our
outstanding bank debt. Our revolving line of credit bears interest at either
the Index rate (the higher of prime or 50 basis points over the average of
rates for overnight federal funds transactions) plus 1.25% or a rate equal to
LIBOR plus 3.00%. We elect the rate on a monthly basis for Index rate advances
and at the end of the applicable LIBOR period for LIBOR rate advances. 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 operating
results.
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 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.
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
. Coffee futures options
We use coffee futures and coffee futures options to reduce the price risk
of our coffee purchase requirements that we cannot make or have not made on a
contractual basis. 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. During 2000, approximately 38% our
coffee requirements were hedged with coffee futures.
Fixed-Price 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. We seek to maintain a supply of green coffee bean inventory adequate to
satisfy our requirements for at least a three month period, which we determine
based on historical requirements and recent growth trends. These commitments
are made with established coffee brokers and are denominated in U.S. dollars.
As of December 31, 2000, we had approximately $10.6 million in open fixed-
priced
15
<PAGE>
purchase commitments. We believe, based on relationships established with our
suppliers in the past, that the risk of non-delivery on such purchase
commitments is remote.
Coffee Futures
A coffee future is a contract to buy coffee at a contracted price, quantity
and date. The price of coffee traded on the exchange is known as the New York
"C" market price. We buy higher quality coffee that trades at premiums above
the New York "C" market price. During 2000, the prices of approximately 72% of
the Company's coffee purchases were based on the New York "C" market price
plus a fixed premium, which for many types of coffee has been stable over
time. Although this premium varies depending on the supply and demand at the
time of purchase, generally, the price of the coffee we purchase tends to
fluctuate with the New York "C" market price. This allows us to use coffee
futures and coffee futures options to manage our exposure to price
fluctuations.
We use coffee futures to hedge the price of anticipated coffee purchases to
achieve a target gross margin for roasted coffee. We convert this margin
requirement into an equivalent New York "C" market price for green coffee
beans (our "threshold").
When the current New York "C" market price is below our threshold, we
purchase coffee futures to fix the cost of our anticipated needs. Once we
contract to purchase coffee from the supplier at a fixed price, we sell the
related future. If market prices decline, we forego potential additional gross
margin and incur potential cash margin calls. However, we are comfortable with
this cost structure and enjoy the security of reduced risk.
Coffee Futures Options
When the current New York "C" market price is above our threshold, we
purchase coffee futures options to limit the cost exposure for our anticipated
needs.
A coffee futures option is an option to buy a coffee future at a specific
price, otherwise known as a trade price. The cost of the option is based on
the relationship of the trade price to the current New York "C" market price.
When we commit to purchase a specified quantity of green coffee beans and
do not fix a price, we will hedge this "not-yet-priced" purchase commitment by
purchasing a coffee futures option. This coffee futures option locks in a
specific price for the not-yet-priced purchase commitment but does not
obligate us to take delivery on the contract. If market prices rise, we
realize gains on the coffee futures option, which offset the increase in
price. If the market prices decline, we will set the contract price of the
not-yet-priced purchase commitment at the market price and we will let the
option expire, taking advantage of the declining market.
We also use coffee futures options to hedge anticipated coffee purchases.
When the current New York "C" market price is above our threshold, we purchase
coffee futures options to limit the risk that coffee prices will continue to
rise. If market prices rise, the higher prices of our future fixed-price
coffee commitments will be offset by gains from the option. If market prices
decline, our future fixed-price coffee commitments will be set at lower prices
and the option will expire resulting in no further liability or obligation.
The extent of our coffee futures and coffee futures option position at any
given time depends on the amount of coffee we have contracted to purchase and
general market conditions and trends. We anticipate continuing this hedging
strategy in the foreseeable future.
No coffee futures options existed as of December 31, 2000 and no coffee
futures options were entered into during 2000.
Our hedging positions are only placed by the Chief Financial Officer
through one reputable brokerage firm.
16
<PAGE>
The following table reflects the outstanding coffee futures hedging
positions as of December 31, 2000 and January 2, 2000.
<TABLE>
<CAPTION>
Number of Contract Trade Settlement
Contracts Month Price Price Gain/(Loss)
--------- -------- ------- ---------- -----------
<S> <C> <C> <C> <C>
35................................ Mar-01 $126.00 $65.55 $ (793,406)
15................................ Mar-01 103.75 65.55 (214,875)
10................................ May-01 94.25 68.50 (96,563)
25................................ May-01 89.75 68.50 199,219
-----------
Unrealized Gain/(Loss) as of December 31, 2000.................. $(1,304,063)
===========
5................................ May-00 108.00 128.40 38,250
5................................ May-00 106.30 128.40 41,438
5................................ May-00 123.75 128.40 8,719
10................................ May-00 116.65 128.40 44,063
10................................ May-00 105.05 128.40 87,563
5................................ Jul-00 125.00 130.75 10,781
5................................ Jul-00 117.55 130.75 24,750
5................................ Jul-00 106.50 130.75 45,469
5................................ Sep-00 107.50 132.65 47,156
10................................ Sep-00 95.75 132.65 138,375
10................................ Sep-00 96.10 132.65 137,063
-----------
Unrealized Gain as of January 2, 2000........................... $ 623,627
===========
</TABLE>
These derivative instruments qualify for hedge accounting and the gains and
losses are accounted for as inventory costs and are recorded as expenses or
income when the related coffee is sold. We do not hold or issue derivative
instruments for trading purposes.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities. All derivatives, whether designated in hedging relationships or
not, will be required to be recorded in the balance sheet at fair value. If
the derivative is designated in a fair-value hedge, the changes in the fair
value of the derivative and the hedged item will be recognized in earnings. If
the derivative is designated in a cash-flow hedge, changes in the fair value
of the derivative will be recorded in other comprehensive income and will be
recognized in the income statement when the hedged item affects earnings. SFAS
No. 133 defines new requirements for designation and documentation of hedging
relationships as well as ongoing effectiveness assessments in order to use
hedge accounting. For a derivative that does not qualify as a hedge, changes
in fair value will be recognized in earnings. The Company was required to
adopt SFAS No. 133 on January 1, 2001. The initial adoption of these new
accounting standards resulted in cumulative other comprehensive loss of
$785,000, net of tax. This amount will be recorded as additional cost of sales
as the related coffee is sold. The Company will meet the effectiveness tests
for hedge accounting and the Company will begin hedge accounting in the second
quarter of 2001. During the first quarter of 2001, the Company's derivative
instruments (coffee futures) were marked to market through the income
statement, and the impact is not expected to be material.
The Securities and Exchange Commission issued Staff Accounting Bulletin
("SAB") No. 101, Revenue Recognition in Financial Statements, in December
1999. The Company adopted the requirements of SAB 101 as amended by SAB 101A
and B in the fourth quarter of fiscal year ended December 31, 2000 retroactive
to the first quarter of fiscal year 2000.
17
<PAGE>
RISK FACTORS
We may not be successful in the implementation of our business strategy or our
business strategy may not be successful, either of which will impede our
growth and operating results.
Our business strategy emphasizes the expansion of our non-retail
distribution channels (including specialty grocery and gourmet food stores,
online and mail order, and office and restaurant accounts). This business
strategy represents a shift from our historic business strategy, which largely
emphasized the opening and operation of retail stores. We do not know whether
we will be able to successfully implement our business strategy or whether our
business strategy will be successful. Our ability to implement this business
strategy is dependent on our ability to:
. Market our products on a national or international scale and over the
internet;
. Increase our brand recognition on a national and international scale;
. Enter into distribution and other strategic arrangements with third
party retailers;
. Identify and lease strategic locations suitable for new stores; and
. Manage growth in administrative overhead and distribution costs likely
to result from the planned expansion of our retail and non-retail
distribution channels.
Our revenues may be adversely affected if we fail to implement our business
strategy or if we divert resources to a business strategy that ultimately
proves unsuccessful.
If we fail to continue to develop and maintain our brand, our business could
suffer.
We believe that maintaining and developing our brand is critical to our
success and that the importance of brand recognition may increase as a result
of competitors offering products similar to our products. We intend to
increase our marketing expenditures to create and maintain brand loyalty as
well as increase awareness of our brand. If our brand-building strategy is
unsuccessful, these expenses may never be recovered, and we may be unable to
increase our future revenue or implement our business strategy.
Our success in promoting and enhancing the Peet's brand will also depend on
our ability to provide customers with high quality products and customer
service. Although we take measures to ensure that we sell only fresh roasted
whole bean coffee and our retail employees properly prepare our coffee
beverages, we have no control over our whole bean coffee products once
purchased by customers. Accordingly, customers may prepare coffee from our
whole bean coffee incorrectly, store our whole bean coffee for longer periods
of time or resell our whole bean coffee without our consent, in each case,
potentially affecting the quality of the coffee prepared from our products. If
customers do not perceive our products and service to be of high quality, then
the value of our brand may be diminished and, consequently, our ability to
implement our business strategy may be adversely affected.
Because our business is centered on a single product, specialty coffee, if the
demand for specialty coffee decreases, our business could suffer.
Sales of specialty coffee constituted 82.0% of our 1999 operating revenue
and 82.2% of our 2000 operating revenue. Demand for our products is affected
by:
. Consumer tastes and preferences;
. National, regional and local economic conditions;
. Demographic trends;
. Consumer traffic trends at our individual retail stores; and
. The type, number and location of competing stores.
18
<PAGE>
Because we are highly dependent on a single product--specialty coffee, a
decrease in consumer demand for coffee would harm our business more than if we
had more diversified product offerings, as do many of our competitors. If
customer demand for specialty coffee decreases, our sales would decrease
accordingly.
Our roasting methods are not proprietary, and therefore, competitors may be
able to duplicate them, which would harm our competitive position.
We consider our roasting methods essential to the flavor and richness of
our roasted whole bean coffee, and therefore, essential to our brand. Because
we do not hold any patents for our roasting methods, it may be difficult for
us to prevent competitors from copying our roasting methods. In addition, we
trained the roasters at Quartermaine Coffee Roasters in Washington D.C., a
small coffee roasting business previously owned by us. If our competitors copy
our roasting methods or if Quartermaine Coffee Roasters begins to actively
compete with us on a national scale, the value of our brand may be diminished,
and we may lose customers to our competitors. In addition, competitors may be
able to develop roasting methods that are more advanced than our roasting
methods, which may also harm our competitive position.
We depend on the expertise of key personnel. If these individuals leave, our
operations could suffer.
Our management is dependent to a large degree on the services of
Christopher P. Mottern, Chief Executive Officer and President, and James A.
Reynolds, Vice President, Coffee and Tea. In addition, we depend to a large
degree on the expertise of our coffee roasters and purchasers. Our ability to
source and purchase a sufficient supply of high quality coffee beans and roast
coffee beans consistent with our quality standards could suffer if we lost the
services of any of these individuals.
Because we are dependent on retail stores in California, a worsening of
economic conditions, a decrease in consumer spending or a change in the
competitive conditions in this market may substantially decrease our revenue
and may adversely impact our ability to implement our business strategy.
Our California retail stores generated 79.6% of our 1999 revenue and 74.0%
of our 2000 revenue. We expect that our California retail operations will
continue to generate a substantial portion of our revenue. In addition, our
retail stores provide us with a means for increasing brand awareness, building
customer loyalty and creating a premium specialty coffee brand. As a result,
an economic downturn or other decrease in consumer spending in California may
not only lead to a substantial decrease in revenue, but may also adversely
impact our ability to market our brand, build customer loyalty, or otherwise
implement our business strategy.
Rising energy costs in California may result in increased operating expenses
and reduced net income.
California is currently experiencing an energy crisis. As a result, energy
costs in California, including natural gas and electricity, may rise
significantly over the next several months relative to the rest of the
United States. Because our coffee roasting facility and most of our stores are
located in California, our operating expenses will increase if this trend
continues. If we cannot pass along these costs to our customers, our margins
will suffer and our net income could decrease. In addition, portions of
California have been experiencing, and may continue to experience, rolling
black-outs, which may cause disruptions to our business operations.
If we are unable to continue leasing our retail locations or obtain leases for
new stores, our existing operations and our ability to expand may be adversely
affected.
All of our 59 retail locations are on leased premises. If we are unable to
renew these leases, our revenue and profits could suffer. In addition, we
intend to lease other premises in connection with the planned expansion of our
retail locations. Because we compete with other retailers and restaurants for
store sites and some landlords may grant exclusive locations to our
competitors, we may not be able to obtain new leases or renew existing leases
on acceptable terms. This could adversely impact our revenue growth and brand-
building strategy.
19
<PAGE>
We may not be able to hire or retain additional management and other personnel
as our business grows and our recruiting and training costs may increase as a
result of turn-over, both of which may increase our costs and reduce our
profits and may adversely impact our ability to implement our business
strategy.
The success of our business depends upon our ability to attract and retain
highly motivated, well-qualified management and other personnel, including
technical personnel and retail employees. We face significant competition in
the recruitment of qualified employees. Our ability to execute our business
strategy may suffer if:
. We are unable to recruit or retain a sufficient number of qualified
employees;
. The costs of employee compensation or benefits increase substantially;
or
. The costs of outsourcing certain tasks to third party providers increase
substantially.
In addition, we expend significant resources in training our retail
managers and employees. During the past few years, retail employee turnover
has increased to approximately 75% per year. If turnover continues to
increase, we may incur additional recruiting and training costs.
Because we rely heavily on common carriers to ship our coffee on a daily
basis, any disruption in their services or increase in shipping costs could
adversely affect our business.
We rely on a number of common carriers to deliver coffee to our customers
and retail stores. We consider roasted coffee a perishable product and we rely
on these common carriers to deliver fresh roasted coffee on a daily basis. We
have no control over these common carriers and the services provided by them
may be interrupted as a result of labor shortages, contract disputes and other
factors. If we experience an interruption in these services, we may be unable
to ship our coffee in a timely manner. A delay in shipping could:
. Have an adverse impact on the quality of the coffee shipped, and thereby
adversely affect our brand and reputation;
. Result in the disposal of an amount of coffee that could not be shipped
in a timely manner; and
. Require us to contract with alternative, and possibly more expensive,
common carriers.
Any significant increase in shipping costs could lower our profit margins
or force us to raise prices, which could cause our revenue and profits to
suffer.
Because we are headquartered, and most of our stores are located, near major
earthquake faults, we face potential disruption from earthquakes.
Our only coffee roasting and distribution facility and most of our stores
are located near major earthquake faults. The impact of a major earthquake on
our facilities, infrastructure and overall operations is difficult to predict
and an earthquake could seriously disrupt our entire business process. We are
uninsured for business disruptions caused by an earthquake.
Increases in the cost of high quality Arabica coffee beans could reduce our
gross margin and profit.
Coffee is a trade commodity and, in general, its price can fluctuate
depending on:
. Weather patterns in coffee-producing countries;
. Economic and political conditions affecting coffee-producing countries;
. Foreign currency fluctuations; and
. The ability of coffee-producing countries to agree to export quotas.
If the cost of our green coffee beans increases due to any of these
factors, we may not be able to pass along those costs to our customers because
of the competitive nature of the specialty coffee industry. If we are unable
to pass along increased coffee costs, our margins will decrease and our
profitability will suffer accordingly.
20
<PAGE>
Decreased availability of high quality Arabica coffee beans could result in a
decrease in revenue and jeopardize our ability to expand our business.
Arabica coffee beans of the quality we purchase are not readily available
on the commodity markets. We depend on our relationships with coffee brokers,
exporters and growers for the supply of our primary raw material, high quality
Arabica coffee beans. If our relationships with coffee brokers, exporters and
growers deteriorate, we may be unable to procure a sufficient quantity of high
quality coffee beans. In such case, we may not be able to fulfill the demand
of our existing customers, supply new retail stores or expand other channels
of distribution. A raw material shortage could result in decreased revenues or
could impair our ability to expand our business.
Political instability in coffee growing regions could result in a decrease in
the availability of high quality Arabica coffee beans needed for the continued
operation and growth of our business and an increase in our operating costs.
We roast Arabica coffee beans from many different regions to produce 33
types and blends of coffee. The political situation in many of those regions,
including Africa, Indonesia and Central and South America, can be unstable,
and such instability could affect our ability to purchase coffee from those
regions. If Arabica coffee beans from a region become unavailable or
prohibitively expensive, we may be forced to discontinue particular coffee
types and blends or substitute coffee beans from other regions in our blends.
Frequent substitutions and changes in our coffee product lines may lead to
cost increases, customer alienation and fluctuations in our gross margins.
Furthermore, a worldwide supply shortage of the high quality Arabica coffee
beans we purchase could have a material adverse effect on our business.
Competition in the specialty coffee market is intense and could affect our
profitability.
The whole bean specialty coffee category is highly fragmented. Our primary
competitors in whole bean specialty coffee sales include Gevalia, Green
Mountain, Illy Cafe, Millstone, Seattle's Best and Starbucks. There are an
estimated 500 smaller and regional brands that also compete in this category.
In addition, we compete indirectly against all other coffee brands on the
market. A number of nationwide coffee marketers, such as Kraft Foods, Procter
& Gamble and Nestle, are distributing premium coffee brands in supermarkets.
These premium coffee brands may serve as substitutes for our whole bean
coffee. If we do not succeed in effectively differentiating ourselves from our
competitors or our competitors adopt our strategies, then our competitive
position will be weakened.
Despite competing in a fragmented product category whole bean specialty
coffee brands are being established across multiple distribution channels.
Several competitors are aggressive in obtaining distribution in specialty
grocery and gourmet food stores, through online and mail order and in office
and restaurant locations. We have only recently begun to penetrate these
channels. Other competitors may have an advantage over us based on their
earlier entry into these distribution channels.
Competition in the specialty coffee market is becoming increasingly intense
as relatively low barriers to entry encourage new competitors to enter the
specialty coffee market. Many of these new market entrants may have
substantially greater financial, marketing and operating resources than us. In
addition, many of our existing competitors have substantially greater
financial, marketing and operating resources than us.
Adverse public or medical opinion about caffeine may harm our business.
Our specialty coffee contains significant amounts of caffeine and other
active compounds, the health effects of some of which are not fully
understood. A number of research studies conclude or suggest that excessive
consumption of caffeine may lead to increased heart rate, nausea and vomiting,
restlessness and anxiety, depression, headaches, tremors, sleeplessness and
other adverse health effects. An unfavorable report on the health effects of
caffeine or other compounds present in coffee could significantly reduce the
demand for coffee, which could harm our business and reduce our sales and
profits.
21
<PAGE>
Our directors, executive officers and significant shareholders have
considerable control over the Company, which may lead to conflicts with other
shareholders over corporate governance.
Our directors, executive officers and significant shareholders may exert
their considerable control over Peet's to advance their interests at the
expense of other shareholders. Our directors, executive officers and current
holders of 5% or more of our outstanding common stock will be able to exert
significant control over all matters requiring shareholder approval, including
the election of directors and significant corporate transactions, such as
mergers or other business combination transactions. Following the completion
of the IPO, these shareholders beneficially own approximately 19.2% of our
outstanding common stock and Gerald Baldwin, our current chairman,
beneficially owns approximately 12.8% of our outstanding common stock. These
shareholders, acting together, and Mr. Baldwin, acting alone, will be able to
significantly influence all matters requiring shareholder approval, and they
may exercise this ability in a manner that advances their best interests and
not necessarily those of other shareholders.
We have implemented anti-takeover provisions which could discourage or prevent
a takeover, even if an acquisition would be beneficial to our shareholders.
Provisions of our amended and restated certificate of incorporation and
bylaws, as well as provisions of Washington law, could make it more difficult
for a third party to acquire us, even if doing so would be beneficial to our
shareholders. These provisions include:
. Establishing a classified board of directors requiring that members of
the board be elected in different years;
. Authorizing the issuance of "blank check" preferred stock that could be
issued by our board of directors to increase the number of outstanding
shares or change the balance of voting control and thwart a takeover
attempt;
. Prohibiting cumulative voting in the election of directors, which would
otherwise allow less than a majority of shareholders to elect director
candidates;
. Limiting the ability of shareholders to call special meetings of
shareholders;
. Prohibiting shareholder action by written consent and requiring all
shareholder actions to be taken at a meeting of our shareholders; and
. Establishing advance notice requirements for nominations for election to
the board of directors and for proposing matters that can be acted upon
by shareholders at shareholder meetings.
In addition, Chapter 23B.19 of the Washington Business Corporation Act and
the terms of our incentive stock plans may discourage, delay or prevent a
change in control.
There may be sales of substantial amounts of our common stock, which could
cause our stock price to fall.
Our current shareholders hold a substantial number of shares, which they
are able to sell in the public market. Sales of a substantial number of shares
of our common stock within a short period of time after the IPO could cause
our stock price to fall. In addition, the sale of these shares could impair
our ability to raise capital through the sale of additional stock.
Item 8. Financial Statements and Supplementary Data
All information required by this item is included on pages F-1 to F- in
Item 14 of this Report and is incorporated to this item by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
22
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
The following table sets forth information with respect to our directors
and executive officers:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Christopher P. Mottern.. 57 Chief Executive Officer, President and Director
Chief Financial Officer, Vice President and
Mark N. Rudolph......... 42 Assistant Secretary
Vice President, Business Development and
Peter B. Mehrberg....... 42 General Counsel
James A. Reynolds....... 62 Vice President, Coffee and Tea, and Secretary
Deborah McGraw.......... 59 Vice President, Retail Operations
William M. Lilla........ 45 Executive Vice President
Bruce A. MacLaren....... 54 Vice President, Direct Delivery
Chief Information Officer and Vice President,
Michael J. Cloutier..... 46 Information Systems
Gerald Baldwin.......... 58 Director
Gordon A. Bowker........ 58 Director
H. William Jesse, Jr. .. 49 Chairman of the Board
Laurence B. Mindel...... 63 Director
</TABLE>
Christopher P. Mottern has served as President and Chief Executive Officer
and as a director since May 1997. From 1992 to 1996, Mr. Mottern served as
President of The Heublein Wines Group, a manufacturer and marketer of wines
and now a subsidiary of United Distillers & Vintners Ltd. From 1986 through
1991, he served as President and Chief Executive Officer of Capri Sun, Inc.,
one of the largest single-service juice drink manufacturers in the United
States. Mr. Mottern currently serves as a director, member of the compensation
committee and chairman of the audit committee of Valley Media, Inc. He has
also served on the board of Coen, Inc. since 1990.
Mark N. Rudolph has served as Chief Financial Officer since September 1988.
He was appointed Vice President and Assistant Secretary in September 1994.
Peter B. Mehrberg has served as Vice President, Business Development since
October 1999 and as General Counsel since September 1994. Mr. Mehrberg served
as Vice President, Real Estate from June 1997 to 1999 and as Director of Real
Estate from July 1994 to June 1997.
James A. Reynolds has served as Vice President, Coffee and Tea since
February 1994, and as Secretary since February 1988. He also served as a
director from 1985 to 1997. He joined Peet's in 1984.
Deborah McGraw has served as Vice President, Retail Operations since
October 1995. She has worked for Peet's in various capacities since 1983. Ms.
McGraw became a store manager in 1989 and was promoted to District Manager in
March 1989, to Regional Director in January 1994, and to Director of Retail
Operations in September 1994.
William M. Lilla has served as Executive Vice President since December
2000. He served as Vice President, Marketing and Strategy from April 1998 to
December 2000. Before joining Peet's, Mr. Lilla was employed by The Heublein
Wines Group as Vice President of Strategy from October 1997 to April 1998,
Vice President of Marketing from September 1994 to October 1997, and Director
of Marketing from September 1993 to September 1994.
Bruce A. MacLaren has served as Vice President, Direct Delivery since July
1999. From 1993 until February 1999, he served as Director of Information
Systems for The Heublein Wines Group.
Michael J. Cloutier has served as Vice President, Information Systems since
August 1999. He was a Systems Manager for Peet's from August 1999 to December
1999. Between October 1997 and August 1999,
23
<PAGE>
Mr. Cloutier founded and ran two computer consulting businesses, 121 Solutions
and Pleasanton Partners, Inc. From April 1996 to October 1997, Mr. Cloutier
served as Vice President, Operations of M1 Software, Inc., a software
development company. From 1993 to April 1996, Mr. Cloutier was the Deputy
Business and Strategic Planning Officer at the Mare Island Naval Shipyard.
Gerald Baldwin has served as a director of the Company since 1971 and as
Chairman of the Board from 1994 to January 2001. From 1971 until 1994, Mr.
Baldwin was President and Chief Executive Officer of the Company, which he co-
founded in 1971.
Gordon A. Bowker has served as a director of the Company from 1971 to 1987
and from September 1994 to the present. Since 1986, Mr. Bowker has been a
principal and investor of Apanage Inc., a real estate development company. Mr.
Bowker has 20 years of experience in growing publicly traded and private
companies as an investor, founder, director and marketing advisor. He co-
founded Starbuck's Coffee Company, Redhook Ale Brewery, Incorporated and
Seattle Weekly.
H. William Jesse, Jr. has served as Chairman of the Board since January
2001 and as a director of the Company since August 1998. Mr. Jesse is chairman
of Jesse.Hansen&Co, strategic and financial advisors to high-growth consumer
companies. He founded the firm in 1986, and served as its President and Chief
Executive Officer through March 1998. Since 1988, Mr. Jesse has served as
Chairman and Chief Executive Officer of Vineyard Properties Corporation, a
developer of wine grape vineyards. In 1998, he also served as interim Chairman
and Chief Executive Officer of Food.com, Inc. Mr. Jesse currently serves as a
director of the 3DO Company.
Laurence B. Mindel has been a director of the Company since August 1997.
Mr. Mindel has been Chairman of the Board of Il Fornaio (America) Corporation,
an Italian restaurant and bakery chain with locations throughout the United
States, since 1987. He served as its President from 1987 until 1995 and as its
Chief Executive Officer from 1987 until 1998.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended ("Section
16(a)"), requires the Company's directors and executive officers, and persons
who own more than 10 percent of a registered class of the Company's equity
securities, to file with the SEC initial reports of ownership and report of
changes in ownership of common stock and other equity securities of the
Company. Officers, directors and greater than 10 percent stockholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file.
To the Company's knowledge, based solely on review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended December 31, 2000, all
Section 16(a) filing requirements applicable to its directors, officers and
greater than 10 percent beneficial owners were complied with.
Item 11. Executive Compensation
Incorporated by reference from the information under the caption "Executive
Compensation" in our definitive proxy statement for the Annual Meeting of
Shareholders to be held on May 24, 2001.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Incorporated by reference from the information under the caption "Security
Ownership of Certain Beneficial Owners and Management" in our definitive proxy
statement for the Annual Meeting of Shareholders to be held on May 24, 2001.
Item 13. Certain Relationships and Related Transactions
Incorporated by reference from the information under the caption "Certain
Relationships and Related Transactions" in our definitive proxy statement for
the Annual Meeting of Shareholders to be held on May 24, 2001.
24
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
The following documents are filed as part of this Form 10-K.
(a)(1) Index to Consolidated Financial Statements.
The following Consolidated Financial Statements of Peet's Coffee & Tea,
Inc. and its subsidiaries are filed as part of this Form 10-K:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Deloitte & Touche LLP, Independent Auditors................. F-2
Consolidated Balance Sheets as of January 3, 1999, January 2, 2000 and
December 31, 2000.................................................... F-3
Consolidated Statements of Operations for the Years Ended January 3,
1999, January 2, 2000 and December 31, 2000.......................... F-4
Consolidated Statements of Shareholders' Equity for the Years Ended
January 3, 1999, January 2, 2000 and December 31, 2000............... F-5
Consolidated Statements of Cash Flows for the Years Ended January 3,
1999, January 2, 2000 and December 31, 2000.......................... F-6
Notes to Consolidated Financial Statements............................ F-7
</TABLE>
(a)(2) Index to Financial Statement Schedule.
Schedules are omitted because they are not applicable, not required or
because the required information is included in the Consolidated Financial
Statements or Notes thereto.
(a)(3) Listing of Exhibits
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<C> <S>
3.1 Amended and Restated Articles of Incorporation.*
3.2 Amended and Restated Bylaws.*
4.1 Form of common stock certificate.*
10.1 Credit Agreement, dated as of September 1, 2000, among Peet's Coffee
and Tea, Inc., Peet's Companies, Inc., Peet's Trademark Company and
General Electric Capital Corporation.*
10.2 Letter Agreement dated October 11, 2000 among Peet's Coffee and Tea,
Inc., Peet's Companies, Inc., Peet's Trademark Company and General
Electric Capital Corporation.*
10.3 First Amendment to Credit Agreement dated as of January 19, 2001 among
Peet's Operating Company, Inc. (formerly Peet's Coffee and Tea,
Inc.), Peet's Coffee & Tea, Inc. (formerly Peet's Companies, Inc.),
Peet's Trademark Company and General Electric Capital Corporation.*
10.4 Loan Agreement, dated as of December 1, 1995, by and between
California Statewide Communities Development Authority and Peet's
Coffee and Tea, Inc.*
10.5 Amended and Restated 1993 Stock Option Plan.(1)*
10.6 1994 California Stock Option Plan.(1)*
10.7 1997 Equity Incentive Plan and form of Stock Option Agreement.(1)*
10.8 Peet's Operating Company, Inc. Savings and Retirement Plan.(1)*
10.9 2000 Equity Incentive Plan and form of Stock Option Agreement.(1)*
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<C> <S>
10.10 2000 Non-Employee Director Plan and form of Stock Option
Agreement.(1)*
10.11 2000 Employee Stock Purchase Plan and form of Offering.(1)*
10.12 Peet's Operating Company, Inc. Key Employee Severance Benefit
Plan.(2)*
10.13 Change of Control Option Acceleration Plan.(1)*
10.14 Warrant to Purchase 100,000 Shares of Common Stock of Registrant
issued by Registrant to Jesse.Hansen&Co (formerly HWJesse & Co.)
dated May 23, 1997 (covering 200,000 shares after giving effect to
the two-for-one stock split).*
10.15 Advisory Engagement Letter dated December 9, 1996, between Peet's
Operating Company, Inc. and Jesse.Hansen&Co.*
10.16 Peet's Operating Company, Inc. Key Employment Agreement for Chairman
dated as of January 4, 1999.(2)*
10.17 Peet's Operating Company, Inc. Key Employment Agreement for Chief
Executive Officer dated as of May 9, 2000.(2)*
10.18 Peet's Operating Company, Inc. Key Employment Agreement for Vice
President, Coffee dated as of June 6, 2000.(2)*
10.19 Peet's Operating Company, Inc. Key Employment Agreement for Chief
Financial Officer dated as of January 4, 1999.(2)*
10.20 Peet's Operating Company, Inc. Key Employment Agreement for Vice
President, Marketing dated as of January 4, 1999.(2)*
10.21 Form of Indemnity Agreement between the registrant and each of its
directors and officers.(2)
21.1 Subsidiaries of the registrant.*
23.1 Consent of Deloitte & Touche LLP.
</TABLE>
- --------
* Incorporated by reference. Previously filed as an exhibit to the
Registrant's Information Statement on Form S-1 (File No. 333-47957) filed
on October 13, 2000, as subsequently amended.
(1) Compensatory plan or arrangement.
(2) Management contract.
(b) No reports on Form 8-K were filed by the Company during the quarter
ended December 31, 2000.
26
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report.............................................. F-2
Consolidated Balance Sheets as of January 2, 2000 and December 31, 2000... F-3
Consolidated Statements of Operations for the Years Ended January 3, 1999,
January 2, 2000 and December 31, 2000 ................................... F-4
Consolidated Statements of Shareholders' Equity for the Years Ended
January 3, 1999, January 2, 2000 and December 31, 2000 .................. F-5
Consolidated Statements of Cash Flows for the Years Ended January 3, 1999,
January 2, 2000 and December 31, 2000 ................................... F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Peet's Coffee & Tea, Inc.
We have audited the accompanying consolidated balance sheets of Peet's
Coffee & Tea, Inc. and subsidiaries as of January 2, 2000 and December 31,
2000 and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Peet's Coffee & Tea, Inc. and
subsidiaries as of January 2, 2000 and December 31, 2000, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
San Francisco, California
March 28, 2001
F-2
<PAGE>
PEET'S COFFEE & TEA, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
January 2, December 31,
2000 2000
---------- ------------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents............................ $ 1,074 $ 1,598
Accounts receivable (net of allowance of $61 and
$69)................................................ 740 954
Inventories (Note 3)................................. 7,211 8,940
Deferred income taxes................................ 170 92
Prepaid expenses and other........................... 998 883
------- -------
Total current assets............................... 10,193 12,467
Property and equipment, net (Note 4)................... 21,780 22,595
Deferred income taxes.................................. 955 1,505
Intangible and other assets, net....................... 1,722 3,046
------- -------
Total assets....................................... $34,650 $39,613
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable..................................... $ 4,353 $ 5,158
Accrued compensation and benefits.................... 1,914 2,054
Other accrued liabilities............................ 996 1,825
Short-term borrowings................................ 5,600 4,246
Current portion of long-term borrowings.............. 2,816 2,037
------- -------
Total current liabilities.......................... 15,679 15,320
Long-term borrowings, less current portion............. 7,240 14,544
Deferred lease credits................................. 540 582
------- -------
Total liabilities.................................. 23,459 30,446
------- -------
Commitments and contingencies (Note 10)
Shareholders' equity:
Preferred stock, no par value; authorized 10,000,000
shares; issued and outstanding 471,000 of Series A,
liquidation preference of $4,828.................... 4,537 4,537
Common stock, no par value; authorized 50,000,000
shares; issued and outstanding: 4,514,000 and
4,516,000 shares.................................... 7,966 8,217
Accumulated deficit.................................. (1,312) (3,587)
------- -------
Total shareholders' equity......................... 11,191 9,167
------- -------
Total liabilities and shareholders' equity......... $34,650 $39,613
======= =======
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
PEET'S COFFEE & TEA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
1998 1999 2000
------- ------- -------
<S> <C> <C> <C>
Net sales........................................... $59,787 $69,059 $84,302
------- ------- -------
Operating expenses:
Cost of sales and related occupancy expenses...... 29,851 33,175 40,194
Operating expenses................................ 17,969 21,902 27,776
Marketing and advertising......................... 2,176 3,491 6,069
Depreciation and amortization..................... 2,711 3,404 4,576
General and administrative expenses............... 5,961 6,230 6,651
------- ------- -------
Total operating costs and expenses.............. 58,668 68,202 85,266
------- ------- -------
Income (loss) from operations....................... 1,119 857 (964)
Interest expense, net............................... 709 985 1,907
------- ------- -------
Income (loss) before income taxes................... 410 (128) (2,871)
Income tax provision (benefit)...................... 242 16 (596)
------- ------- -------
Net income (loss)................................... $ 168 $ (144) $(2,275)
======= ======= =======
Basic net income (loss) per share................... $ 0.04 $ (0.03) $ (0.50)
======= ======= =======
Diluted net income (loss) per share................. $ 0.03 $ (0.03) $ (0.50)
======= ======= =======
Shares used in calculating basic net income (loss)
per share.......................................... 4,397 4,489 4,515
======= ======= =======
Shares used in calculating diluted net income (loss)
per share.......................................... 5,710 4,489 4,515
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
PEET'S COFFEE & TEA, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Series A
Preferred Stock Common Stock
------------------ ------------------ Total
Shares Shares Accumulated Shareholders'
Outstanding Amount Outstanding Amount Deficit Equity
----------- ------ ----------- ------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 28,
1997................... 471 $4,537 4,382 $7,303 $(1,522) $10,318
Stock options exercised,
including tax benefit.. 26 119 119
Tax benefit of purchase
discount warrants...... 186 186
Net income.............. 168 168
--- ------ ----- ------ ------- -------
Balance at January 3,
1999................... 471 4,537 4,408 7,422 (1,168) 10,791
Stock options exercised,
including tax benefit.. 106 531 531
Amortization of stock
compensation........... 13 13
Net loss................ (144) (144)
--- ------ ----- ------ ------- -------
Balance at January 2,
2000................... 471 4,537 4,514 7,966 (1,312) 11,191
Stock options
exercised.............. 2 13 13
Amortization of stock
compensation........... 238 238
Net loss................ (2,275) (2,275)
--- ------ ----- ------ ------- -------
Balance at December 31,
2000................... 471 $4,537 4,516 $8,217 $(3,587) $ 9,167
=== ====== ===== ====== ======= =======
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
PEET'S COFFEE & TEA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
1998 1999 2000
------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................... $ 168 $ (144) $ (2,275)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization................. 3,260 3,958 5,210
Tax benefit of purchase discount warrants..... 186
Tax benefit from exercise of stock options.... 16 102
Amortization of discounted stock options...... 13 238
Deferred income taxes......................... 142 (191) (472)
Loss on disposition of assets................. 220 496 188
Changes in other assets and liabilities:
Accounts receivable........................... 232 (309) (214)
Inventories................................... (2,504) 1,797 (1,730)
Prepaid expenses and other.................... (179) (327) 115
Other assets.................................. 33 (207)
Accounts payable, accrued liabilities and
other liabilities............................ 1,285 865 1,816
------- -------- --------
Net cash provided by operating activities... 2,859 6,260 2,669
------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment............. (5,440) (9,665) (5,518)
Proceeds from sales of property and equipment... 15 2 4
Additions to intangible assets.................. (753) (416) (276)
------- -------- --------
Net cash used in investing activities....... (6,178) (10,079) (5,790)
------- -------- --------
Cash flows from financing activities:
Proceeds from borrowings........................ 10,334 4,031 46,258
Repayments of debt.............................. (7,133) (440) (41,544)
Payments of stock offering costs (completed in
January 2001).................................. (1,082)
Proceeds from issuance of common stock.......... 103 429 13
------- -------- --------
Net cash provided by financing activities... 3,304 4,020 3,645
------- -------- --------
Change in cash and cash equivalents............... (15) 201 524
Cash and cash equivalents, beginning of period.... 888 873 1,074
------- -------- --------
Cash and cash equivalents, end of period.......... $ 873 $ 1,074 $ 1,598
======= ======== ========
Supplemental cash flow disclosures:
Cash paid (received) for:
Interest...................................... $ 813 $ 1,054 $ 1,668
Income taxes.................................. (114) (77) 108
NON CASH FINANCING ACTIVITY--
Property acquired under capital lease........... $ 476
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
PEET'S COFFEE & TEA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. History and Organization
Peet's Coffee & Tea, Inc., the ("Company") (formerly Peet's Companies,
Inc.) sells fresh roasted coffee, hand selected tea and related items in
several distribution channels, including specialty grocery and gourmet food
stores, online and mail order, office and restaurant accounts and company-
owned retail stores. At January 2, 2000 and December 31, 2000, the Company had
53 and 58 retail stores, respectively, in California, Illinois, Oregon, and
Massachusetts.
On November 1, 2000, the Board of Directors of the Company approved a two-
for-one stock split of the Company's outstanding common stock which was
effective January 22, 2001. All share and per share data in the accompanying
financial statements have been retroactively adjusted to reflect the stock
split.
2. Summary of Significant Accounting Policies
Principles of Consolidation--The consolidated financial statements include
the accounts of the Company and its subsidiaries. All significant intercompany
transactions have been eliminated in consolidation.
Year End--The Company's year end is the Sunday closest to December 31. The
years 2000 and 1999 included 52 weeks. The year 1998 included 53 weeks.
Cash and Cash Equivalents--The Company considers all liquid investments
with original maturities of three months or less to be cash equivalents.
Inventories--Raw materials consist primarily of green bean coffee and
finished goods which include roasted coffee, tea, accessory products, spices,
packaged foods, and packaging. 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.
Property and equipment are stated at cost. Depreciation and amortization
are recorded on the straight-line method over the estimated useful lives of
the property and equipment, which range from 3 to 10 years. Leasehold
improvements are amortized using the straight-line method over the lesser of
the estimated useful life or the term of the related lease, which range from 3
to 10 years.
Intangible and other assets primarily includes lease rights, deposits,
trademarks, deferred financing costs and prepaid stock offering costs of
$1,082,000 at December 31, 2000 (see Note 15). Lease rights represent payments
made to lessors and others to secure retail locations and are amortized over
the life of the related lease. Lease rights, net of amortization, were
$877,000 and $796,000 at January 2, 2000 and December 31, 2000, respectively.
Intangible assets are amortized on the straight-line method over the estimated
useful lives ranging from 10 to 15 years. Accumulated amortization was
$1,178,000 and $1,398,000 at January 2, 2000 and December 31, 2000,
respectively. Amortization expense was $192,000, $205,000 and $220,000 in
1998, 1999, and 2000, respectively.
Impairment of Long-Lived Assets--The Company evaluates the recoverability
of its long-lived assets in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of whenever events or changes in
circumstances have indicated that the carrying amount of its assets might not
be recoverable.
If the fair value is less than the carrying amount of the asset, a loss is
recognized for the difference. In 1998, 1999 and 2000, impairment losses of
$162,000, $436,000 and $129,000, respectively, were recorded as general and
administrative expense to write off property related to closed stores.
F-7
<PAGE>
PEET'S COFFEE & TEA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Store Closure--The Company accrues an estimate for the costs associated
with closing under-performing stores in the period in which the store is
identified and approved by management under a plan of termination. The plan
includes the method of disposition and the expected date of completion. Costs,
which are considered to have no future economic benefit, include direct costs
to terminate a lease or sublease a property and the difference between the
book value and estimated recovery of fixed assets. Significant changes to the
plan are unlikely. The operating costs, including depreciation, of stores or
other facilities to be sold or closed are expensed during the period they
remain in use.
The Company recorded expenses of $220,000, $482,000 and $456,000
representing the write off of leasehold improvements, fixed assets and
estimated future rental payments for store closures during the periods 1998,
1999 and 2000, respectively. The Company had an accrual of $48,000 and
$301,000 representing estimated future rental payments at January 2, 2000 and
December 31, 2000, respectively. A summary of the accrual activity is as
follows (excluding write-off of assets) (amounts in thousands):
<TABLE>
<CAPTION>
Balance at Additions Balance
Beginning Charges to at End
of Period Expense Deductions of Period
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Accrual related to store closures:
Year ended January 3, 1999........ $ 35 $ 35
Year ended January 2, 2000........ $35 48 $(35) 48
Year ended December 31, 2000...... 48 327 (74) 301
</TABLE>
Revenue Recognition--Net sales are recorded based on purchases by customers
at retail locations or when merchandise is shipped from the warehouse for
direct-to-customer sales. Sales returns are insignificant. The Company
establishes an allowance for estimated doubtful accounts which management
believes are appropriate. A summary of the allowance is as follows (amounts in
thousands):
<TABLE>
<CAPTION>
Balance at Additions Balance
Beginning Charges to at End
of Period Expense Deductions of Period
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended January 3, 1999........ $125 $(75) $50
Year ended