UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
|
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended September 27, 2009
OR
|
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the transition period from ______________to __________________
Commission
file number: 0-32233
PEET’S
COFFEE & TEA, INC.
(Exact
Name of Registrant as Specified in Its Charter)
|
Washington
|
|
91-0863396
|
|
(State
or Other Jurisdiction of
Incorporation
or Organization)
|
|
(I.R.S.
Employer
Identification
No.)
|
1400
Park Avenue
Emeryville,
California 94608-3520
(Address
of Principal Executive Offices)(Zip Code)
(510)
594-2100
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes
x
No
o
.
|
|
Indicate
by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any,
every
|
Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such
files). Yes
o
No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See the definitions of “large accelerated filer”,
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act:
|
Large
Accelerated Filer
o
|
Accelerated
Filer
x
|
|
Non-Accelerated
Filer
o
|
Smaller
reporting company
o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Exchange
Act Rule 12b-2). Yes
o
No
x
As of
October 30, 2009 12,995,078 shares of registrant’s Common Stock were
outstanding.
|
|
INDEX
|
Page
|
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|
|
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PART
I
|
FINANCIAL
INFORMATION
|
|
|
|
|
|
|
Item
1.
|
Consolidated
Financial Statements
|
3
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
13
|
|
Item
3.
|
Quantitative
and Qualitative Disclosure About Market Risk
|
19
|
|
Item
4.
|
Controls
and Procedures
|
19
|
|
|
|
|
|
PART
II
|
OTHER
INFORMATION
|
|
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
20
|
|
Item
1A.
|
Risk
Factors
|
20
|
|
Item
6.
|
Exhibits
|
21
|
|
|
Signatures
|
22
|
PART
I – FINANCIAL INFORMATION
ITEM
1. CONSOLIDATED FINANCIAL STATEMENTS
PEET’S
COFFEE & TEA, INC.
CONSOLIDATED
BALANCE SHEETS
(Unaudited,
in thousands, except share amounts)
|
|
|
September 27,
|
|
|
December 28,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
16,966
|
|
|
$
|
4,719
|
|
|
Short-term
marketable securities
|
|
|
4,232
|
|
|
|
8,600
|
|
|
Accounts
receivable, net
|
|
|
10,682
|
|
|
|
11,924
|
|
|
Inventories
|
|
|
30,564
|
|
|
|
26,124
|
|
|
Deferred
income taxes - current
|
|
|
2,907
|
|
|
|
2,922
|
|
|
Prepaid
expenses and other
|
|
|
8,029
|
|
|
|
7,193
|
|
|
Total
current assets
|
|
|
73,380
|
|
|
|
61,482
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
106,900
|
|
|
|
107,914
|
|
|
Deferred
income taxes - non current
|
|
|
3,146
|
|
|
|
3,059
|
|
|
Other
assets, net
|
|
|
2,764
|
|
|
|
3,897
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
186,190
|
|
|
$
|
176,352
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
Accounts
payable and other accrued liabilities
|
|
$
|
8,811
|
|
|
$
|
9,858
|
|
|
Accrued
compensation and benefits
|
|
|
9,568
|
|
|
|
8,852
|
|
|
Deferred
revenue
|
|
|
4,759
|
|
|
|
6,350
|
|
|
Total
current liabilities
|
|
|
23,138
|
|
|
|
25,060
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
lease credits
|
|
|
7,264
|
|
|
|
6,645
|
|
|
Other
long-term liabilities
|
|
|
950
|
|
|
|
740
|
|
|
Total
liabilities
|
|
|
31,352
|
|
|
|
32,445
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity
|
|
|
|
|
|
|
|
|
|
Common
stock, no par value; authorized 50,000,000 shares;
|
|
|
|
|
|
|
|
|
|
issued
and outstanding:12,983,000 and 13,174,000 shares
|
|
|
88,320
|
|
|
|
90,123
|
|
|
Accumulated
other comprehensive income
|
|
|
3,838
|
|
|
|
34
|
|
|
Retained
earnings
|
|
|
62,680
|
|
|
|
53,750
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
shareholders' equity
|
|
|
154,838
|
|
|
|
143,907
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders' equity
|
|
$
|
186,190
|
|
|
$
|
176,352
|
|
See notes
to consolidated financial statements.
PEET’S
COFFEE & TEA, INC.
CONSOLIDATED
STATEMENTS OF INCOME
(Unaudited,
in thousands, except per share amounts)
|
|
|
Thirteen weeks ended
|
|
|
Thirty-nine weeks ended
|
|
|
|
|
September 27,
|
|
|
September 28,
|
|
|
September 27,
|
|
|
September 28,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
stores
|
|
$
|
47,863
|
|
|
$
|
45,911
|
|
|
$
|
144,686
|
|
|
$
|
136,829
|
|
|
Specialty
sales
|
|
|
26,042
|
|
|
|
22,575
|
|
|
|
74,889
|
|
|
|
68,847
|
|
|
Net
revenue
|
|
|
73,905
|
|
|
|
68,486
|
|
|
|
219,575
|
|
|
|
205,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales and related occupancy expenses
|
|
|
34,291
|
|
|
|
32,249
|
|
|
|
99,812
|
|
|
|
96,478
|
|
|
Operating
expenses
|
|
|
26,052
|
|
|
|
24,715
|
|
|
|
76,804
|
|
|
|
72,934
|
|
|
General
and administrative expenses
|
|
|
5,770
|
|
|
|
5,237
|
|
|
|
17,782
|
|
|
|
16,233
|
|
|
Depreciation
and amortization expenses
|
|
|
3,962
|
|
|
|
3,150
|
|
|
|
11,200
|
|
|
|
9,395
|
|
|
Total
costs and expenses from operations
|
|
|
70,075
|
|
|
|
65,351
|
|
|
|
205,598
|
|
|
|
195,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
3,830
|
|
|
|
3,135
|
|
|
|
13,977
|
|
|
|
10,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
(expense) income, net
|
|
|
(15
|
)
|
|
|
130
|
|
|
|
111
|
|
|
|
636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
3,815
|
|
|
|
3,265
|
|
|
|
14,088
|
|
|
|
11,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax provision
|
|
|
1,346
|
|
|
|
1,247
|
|
|
|
5,158
|
|
|
|
4,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
2,469
|
|
|
$
|
2,018
|
|
|
$
|
8,930
|
|
|
$
|
7,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.19
|
|
|
$
|
0.15
|
|
|
$
|
0.69
|
|
|
$
|
0.52
|
|
|
Diluted
|
|
$
|
0.19
|
|
|
$
|
0.15
|
|
|
$
|
0.67
|
|
|
$
|
0.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
used in calculation of net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
12,976
|
|
|
|
13,603
|
|
|
|
12,977
|
|
|
|
13,825
|
|
|
Diluted
|
|
|
13,343
|
|
|
|
13,899
|
|
|
|
13,267
|
|
|
|
14,111
|
|
See notes
to consolidated financial statements.
PEET’S
COFFEE & TEA, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited,
in thousands)
|
|
|
Thirty-nine weeks ended
|
|
|
|
September 27,
|
|
|
September 28,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
8,930
|
|
|
$
|
7,145
|
|
|
Adjustments
to reconcile net income to net cash provided by
|
|
|
|
|
|
|
|
|
|
operating
activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
12,790
|
|
|
|
11,025
|
|
|
Amortization
of interest purchased
|
|
|
36
|
|
|
|
157
|
|
|
Stock-based
compensation
|
|
|
2,277
|
|
|
|
1,962
|
|
|
Excess
tax benefit from exercise of stock options
|
|
|
(275
|
)
|
|
|
(384
|
)
|
|
Tax
benefit from exercise of stock options
|
|
|
119
|
|
|
|
246
|
|
|
Loss
on disposition of assets and asset impairment
|
|
|
184
|
|
|
|
216
|
|
|
Deferred
income taxes
|
|
|
(72
|
)
|
|
|
366
|
|
|
Changes
in other assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
|
1,242
|
|
|
|
(1,355
|
)
|
|
Inventories
|
|
|
(4,440
|
)
|
|
|
(5,215
|
)
|
|
Prepaid
expenses and other current assets
|
|
|
(836
|
)
|
|
|
(5,521
|
)
|
|
Other
assets
|
|
|
185
|
|
|
|
(81
|
)
|
|
Accounts
payable, accrued liabilities and deferred revenue
|
|
|
(1,904
|
)
|
|
|
872
|
|
|
Deferred
lease credits and other long-term liabilities
|
|
|
829
|
|
|
|
1,605
|
|
|
Net
cash provided by operating activities
|
|
|
19,065
|
|
|
|
11,038
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Purchases
of property, plant and equipment
|
|
|
(11,908
|
)
|
|
|
(20,430
|
)
|
|
Proceeds
from sales of property, plant and equipment
|
|
|
-
|
|
|
|
67
|
|
|
Changes
in restricted investments
|
|
|
878
|
|
|
|
-
|
|
|
Proceeds
from sales and maturities of marketable securities
|
|
|
8,507
|
|
|
|
5,597
|
|
|
Purchases
of marketable securities
|
|
|
(371
|
)
|
|
|
(917
|
)
|
|
Net
cash used in investing activities
|
|
|
(2,894
|
)
|
|
|
(15,683
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Net
proceeds from issuance of common stock
|
|
|
2,365
|
|
|
|
2,855
|
|
|
Purchase
of common stock
|
|
|
(6,564
|
)
|
|
|
(10,017
|
)
|
|
Excess
tax benefit from exercise of stock options
|
|
|
275
|
|
|
|
384
|
|
|
Net
cash used in financing activities
|
|
|
(3,924
|
)
|
|
|
(6,778
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in cash and cash equivalents
|
|
|
12,247
|
|
|
|
(11,423
|
)
|
|
Cash
and cash equivalents, beginning of period
|
|
|
4,719
|
|
|
|
15,312
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, end of period
|
|
$
|
16,966
|
|
|
$
|
3,889
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
investing activities:
|
|
|
|
|
|
|
|
|
|
Capital
expenditures incurred, but not yet paid
|
|
$
|
716
|
|
|
$
|
1,135
|
|
|
Other
cash flow information:
|
|
|
|
|
|
|
|
|
|
Cash
paid for income taxes
|
|
|
5,023
|
|
|
|
7,670
|
|
See notes
to consolidated financial statements.
Peet’s
Coffee & Tea, Inc.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
The
accompanying consolidated financial statements of Peet’s Coffee & Tea, Inc.
and its subsidiaries (collectively, the “Company” or “Peet’s”) as of September
27, 2009 and for the thirteen and thirty-nine weeks ended September 27, 2009 and
September 28, 2008 are unaudited and, in the opinion of management, contain all
adjustments, consisting only of normal recurring items necessary to present
fairly the financial position and results of operations for such periods.
The information
included in this Quarterly Report on Form 10-Q (this “Form 10-Q”) should be read
in conjunction with the Company’s annual consolidated financial statements in
Peet’s Annual Report on Form 10-K for the year ended December 28, 2008 (the
“2008 Form 10-K”).
The
results of operations for the thirteen and thirty-nine weeks ended September 27,
2009 are not necessarily indicative of the results expected for the full
year.
We
evaluated all subsequent events that occurred after the balance sheet date
through the date and time our financial statements were issued on November 6,
2009. See Note 9.
Recently Adopted Accounting
Pronouncements:
The FASB
Accounting Standards Codification became the source of authoritative GAAP
recognized by the FASB to be applied by nongovernmental entities effective for
financial statements that cover interim and annual periods ending after
September 15, 2009. Rules and interpretive releases of the SEC under authority
of federal securities laws are also sources of authoritative GAAP for SEC
registrants. The Codification supersedes all then-existing non-SEC accounting
and reporting standards. This standard did not have a material impact on our
consolidated financial statements upon adoption.
On June
29, 2009, we adopted authoritative guidance issued by the Financial Accounting
Standards Board (“FASB”) on business combinations. The guidance retains the
fundamental requirements that the acquisition method of accounting (previously
referred to as the purchase method of accounting) be used for all business
combinations, but requires a number of changes, including changes in the way
assets and liabilities are recognized and measured as a result of business
combinations. It also requires the capitalization of in-process research and
development at fair value and requires the expensing of acquisition-related
costs as incurred. The adoption of this SFAS did not have a material impact on
our consolidated financial statements.
Comprehensive Income
For the
thirteen weeks ended September 27, 2009 and September 28, 2008, comprehensive
income was $2,052,000 and $1,951,000, respectively. For the
thirty-nine weeks ended September 27, 2009 and September 28, 2008, comprehensive
income was $12,735,000 and $7,112,000, respectively. Comprehensive income
consists of net income and net unrealized gains and losses on
investments.
Net Income per Share
Basic net
income per share is computed as net income divided by the weighted average
number of common shares outstanding for the period. Diluted net income per share
reflects the potential dilution that could occur from common shares issued
through stock options. Anti-dilutive shares of 1,234,399 and 1,311,586 have been
excluded from diluted weighted average shares outstanding for the thirteen week
periods ended September 27, 2009 and September 28, 2008, respectively, and
1,389,932 and 1,226,647 for the thirty-nine week periods,
respectively.
The
number of incremental shares from the assumed exercise of stock options was
calculated by applying the treasury stock method. The following table summarizes
the differences between basic weighted average shares outstanding and diluted
weighted average shares outstanding used to compute diluted net income per share
(in thousands):
|
|
|
Thirteen weeks
|
|
|
Thirty-nine weeks
|
|
|
|
|
September 27,
|
|
|
September 28,
|
|
|
September 27,
|
|
|
September 28,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted average shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding
|
|
|
12,976
|
|
|
|
13,603
|
|
|
|
12,977
|
|
|
|
13,825
|
|
|
Incremental
shares from assumed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
exercise
of stock options
|
|
|
367
|
|
|
|
296
|
|
|
|
290
|
|
|
|
286
|
|
|
Diluted
weighted average shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding
|
|
|
13,343
|
|
|
|
13,899
|
|
|
|
13,267
|
|
|
|
14,111
|
|
|
2.
|
Fair
Value Measurements
|
The
Company adopted a single authoritative definition of fair value, a framework for
measuring fair value and expanded disclosure of fair value measurements for
financial assets and liabilities as of the beginning of the 2008 fiscal
year. The impact of adoption was not significant. Effective December
29, 2008, the Company adopted the remaining provisions of the authoritative
guidance relating to nonfinancial assets and liabilities. The adoption of the
remaining provisions as it relates to nonfinancial assets and liabilities did
not have a material impact on our financial position or results of
operations.
Assets and Liabilities
Measured at Fair Value on a Recurring Basis
Financial
assets and liabilities are categorized based on the inputs used to calculate
their fair values as follows:
Level 1
- Quoted prices in
active markets for identical assets or liabilities.
Level 2 -
Inputs other than
quoted prices included within Level 1 that are either directly or indirectly
observable.
Level 3
- Unobservable inputs
that are supported by little or no market activity, therefore requiring an
entity to develop its own assumptions about the assumptions that market
participants would use in pricing.
The
Company uses the market approach, as defined as Level 1 in the fair value
hierarchy, to measure fair value for its financial assets and
liabilities. The market approach uses prices and other relevant
information generated by market transactions involving identical or comparable
assets or liabilities. Assets measured at fair value on a recurring
basis are summarized below (in thousands):
|
|
|
September
27,
|
|
|
|
|
2009
|
|
|
Short-term
available-for-sale securities
|
|
$
|
4,232
|
|
|
Restricted
cash (included in other assets, net)
|
|
|
2,448
|
|
|
|
|
$
|
6,680
|
|
Short-term
available-for-sale securities include equity securities and interest-bearing,
U.S. government, agency, and municipal securities. Unrealized gains or losses on
marketable securities are recorded in accumulated other comprehensive income at
each measurement date.
Assets and Liabilities
Measured at Fair Value on a Non-Recurring Basis
The
Company measures certain non-financial assets and liabilities, including
long-lived assets, at fair value on a non-recurring basis. During the 13 weeks
ended September 27, 2009, the Company recorded a charge of approximately
$130,000 related to the impairment of assets at an under-performing store. The
fair market value of these assets was determined using the income approach and
Level 3 inputs, which required management to make estimates about future cash
flows. Management estimates the amount and timing of future cash
flows based on its experience and knowledge of the retail market in which each
store operates. This impairment charge is included in operating
expenses in the accompanying consolidated statements of income. The
Company was not required to measure any other significant non-financial assets
and liabilities at fair value.
The
Company’s inventories consist of the following (in thousands):
|
|
|
September
27,
|
|
|
December
28,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Green
coffee
|
|
$
|
20,188
|
|
|
$
|
17,732
|
|
|
Other
inventory
|
|
|
10,376
|
|
|
|
8,392
|
|
|
Total
|
|
$
|
30,564
|
|
|
$
|
26,124
|
|
|
4.
|
Stock
Purchase Program
|
On
September 6, 2006, the Company's Board of Directors authorized the Company to
purchase up to one million shares of Peet’s common stock, with no expiration,
and the Company announced its plan on September 12, 2006 on Form
8-K. No share purchases were made during the thirteen weeks ended
September 27, 2009. During the thirty-nine weeks ended September 27, 2009, the
Company purchased and retired 58,759 shares of common stock, at an average price
of $20.38, in accordance with this stock purchase program. No shares
remain available for purchase under this stock purchase program.
On
October 27, 2008, the Board of Directors approved another stock purchase program
providing for the additional purchase of up to one million shares of the
Company’s common stock, with no deadline for completion and the Company
announced its plan on October 28, 2008 on Form 8-K. No share
purchases were made during the thirteen weeks ended September 27, 2009. During
the thirty-nine weeks ended September 27, 2009, the Company purchased and
retired 264,112 shares of common stock, at an average price of $20.32 in
accordance with this stock purchase program. 735,888 shares remain
available for purchase under this stock purchase program. Purchases under this
stock purchase program would be made from time to time on the open market at
prevailing market prices or in negotiated transactions off the
market.
|
5.
|
Stock-Based
Compensation
|
Stock
Option Plans
The
Company maintains several equity incentive plans under which it may currently
grant non-qualified stock options to employees and non-employee
directors.
Changes
in stock options were as follows:
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Aggregate
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Contractual
|
|
|
Value
|
|
|
|
|
Outstanding
|
|
|
Per Share
|
|
|
Life (Years)
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 28, 2008
|
|
|
2,696,019
|
|
|
$
|
21.68
|
|
|
|
5.82
|
|
|
$
|
8,753
|
|
|
Granted
|
|
|
382,014
|
|
|
|
26.28
|
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
(100,223
|
)
|
|
|
25.34
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(80,784
|
)
|
|
|
17.52
|
|
|
|
|
|
|
|
|
|
|
Oustanding
at September 27, 2009
|
|
|
2,897,026
|
|
|
$
|
22.28
|
|
|
|
5.74
|
|
|
$
|
16,883
|
|
|
Vested
or expected to vest, September 27, 2009
|
|
|
2,738,769
|
|
|
$
|
22.11
|
|
|
|
5.61
|
|
|
$
|
16,511
|
|
|
Exercisable
at September 27, 2009
|
|
|
1,918,009
|
|
|
$
|
20.07
|
|
|
|
4.41
|
|
|
$
|
15,231
|
|
Stock-Based
Compensation
Stock-based
compensation expense consists of and was recognized in the consolidated
statements of income as follows (in thousands):
|
|
|
Thirteen weeks ended
|
|
|
Thirty-nine weeks ended
|
|
|
|
|
September 27,
|
|
|
September 28,
|
|
|
September 27,
|
|
|
September 28,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense
|
|
$
|
731
|
|
|
$
|
577
|
|
|
$
|
2,125
|
|
|
$
|
1,767
|
|
|
Employee
Stock Purchase Plan expense
|
|
|
37
|
|
|
|
88
|
|
|
|
152
|
|
|
|
195
|
|
|
Total
|
|
$
|
768
|
|
|
$
|
665
|
|
|
$
|
2,277
|
|
|
$
|
1,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
benefit
|
|
$
|
305
|
|
|
$
|
271
|
|
|
$
|
924
|
|
|
$
|
800
|
|
The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
|
|
|
Stock
Options
|
|
|
|
|
September
27,
2009
|
|
|
September
28,
2008
|
|
|
Expected
term (in years)
|
|
|
5.7
|
|
|
|
5.2
|
|
|
Expected
stock price volatility
|
|
|
37.6
|
%
|
|
|
34.3
|
%
|
|
Risk-free
interest rate
|
|
|
2.9
|
%
|
|
|
3.7
|
%
|
|
Expected
dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
fair value per option granted
|
|
$
|
10.57
|
|
|
$
|
8.82
|
|
On
November 26, 2008, the Company entered into a credit agreement with Wells Fargo
Bank, National Association ( “Wells Fargo”). The credit agreement
provides for a $25 million revolving line of credit, the proceeds of which may
be used in the general course of business, including to fund working capital,
capital expenditures, share repurchases and other needs of the
Company.
Through
September 27, 2009, there were no borrowings under this agreement. Total unused
borrowing capacity under the credit agreement was $25.0 million as of September
27, 2009. See Note 9.
On July
14, 2008, a complaint was filed against Peet’s Coffee & Tea, Inc. in
California Superior Court, Alameda County, by three former employees on behalf
of themselves and all other California store managers. The complaint
alleges that store managers based in California were not paid overtime wages,
were not provided meal or rest periods, were not provided accurate wage
statements and were not reimbursed for business expenses. The
plaintiffs seek injunctive relief, monetary damages, penalties, costs and
attorneys’ fees, and prejudgment interest. On October 8, 2008, the
Company filed an answer denying the allegations set forth in the complaint and
asserting a number of affirmative defenses thereto. On November
12, 2008, the plaintiffs filed an amended complaint asserting an additional
claim for penalties. On November 26, 2008, the Company filed an
answer thereto denying the allegations in the first amended complaint and
asserting a number of affirmative defenses thereto. At this time, it
is not feasible to predict the outcome of or a range of loss, should a loss
occur, from this proceeding. The Company intends to vigorously defend
against the litigation.
We may
from time to time become involved in certain legal proceedings in the ordinary
course of business. The Company is not a party to any other legal
proceedings that management believes may have a material adverse effect on the
financial position or results of operations of the Company.
The
Company operates in two reportable segments: retail and specialty
sales. Retail store operations consist of sales of whole bean coffee,
beverages, tea and related products through Company-operated retail
stores. Specialty sales consist of whole bean coffee sales through
three operating segments: grocery, home delivery, foodservice and
office.
Management
evaluates segment performance primarily based on revenue and segment operating
income. The following table presents certain financial information
for each segment. Segment income before taxes excludes unallocated
marketing expenses and general and administrative
expenses. Unallocated assets include cash, coffee inventory in the
warehouse, corporate headquarter assets and intangible and other assets (dollars
in thousands).
|
|
|
Retail
|
|
|
Specialty
|
|
|
Unallocated
|
|
|
Total
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
|
of Net
|
|
|
|
|
|
of Net
|
|
|
|
|
|
|
|
|
of Net
|
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the thirteen weeks ended September 27, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
47,863
|
|
|
|
100.0
|
%
|
|
$
|
26,042
|
|
|
|
100.0
|
%
|
|
|
|
|
$
|
73,905
|
|
|
|
100.0
|
%
|
|
Cost
of sales and occupancy
|
|
|
21,179
|
|
|
|
44.2
|
%
|
|
|
13,112
|
|
|
|
50.3
|
%
|
|
|
|
|
|
34,291
|
|
|
|
46.4
|
%
|
|
Operating
expenses
|
|
|
20,488
|
|
|
|
42.8
|
%
|
|
|
5,564
|
|
|
|
21.4
|
%
|
|
|
|
|
|
26,052
|
|
|
|
35.3
|
%
|
|
Depreciation
and amortization
|
|
|
2,907
|
|
|
|
6.1
|
%
|
|
|
463
|
|
|
|
1.8
|
%
|
|
$
|
592
|
|
|
|
3,962
|
|
|
|
5.4
|
%
|
|
Segment
operating income
|
|
|
3,289
|
|
|
|
6.9
|
%
|
|
|
6,903
|
|
|
|
26.5
|
%
|
|
|
(6,362
|
)
|
|
|
3,830
|
|
|
|
5.2
|
%
|
|
Interest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15
|
)
|
|
|
(15
|
)
|
|
|
|
|
|
Income
before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,815
|
|
|
|
|
|
|
Total
assets
|
|
|
54,955
|
|
|
|
|
|
|
|
4,428
|
|
|
|
|
|
|
|
47,517
|
|
|
|
106,900
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
1,464
|
|
|
|
|
|
|
|
98
|
|
|
|
|
|
|
|
1,493
|
|
|
|
3,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the thirteen weeks ended September 28, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
45,911
|
|
|
|
100.0
|
%
|
|
$
|
22,575
|
|
|
|
100.0
|
%
|
|
|
|
|
|
$
|
68,486
|
|
|
|
100.0
|
%
|
|
Cost
of sales and occupancy
|
|
|
21,130
|
|
|
|
46.0
|
%
|
|
|
11,119
|
|
|
|
49.3
|
%
|
|
|
|
|
|
|
32,249
|
|
|
|
47.1
|
%
|
|
Operating
expenses
|
|
|
19,940
|
|
|
|
43.4
|
%
|
|
|
4,775
|
|
|
|
21.2
|
%
|
|
|
|
|
|
|
24,715
|
|
|
|
36.1
|
%
|
|
Depreciation
and amortization
|
|
|
2,357
|
|
|
|
5.1
|
%
|
|
|
372
|
|
|
|
1.6
|
%
|
|
$
|
421
|
|
|
|
3,150
|
|
|
|
4.6
|
%
|
|
Segment
operating income
|
|
|
2,484
|
|
|
|
5.4
|
%
|
|
|
6,309
|
|
|
|
27.9
|
%
|
|
|
(5,658
|
)
|
|
|
3,135
|
|
|
|
4.6
|
%
|
|
Interest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
130
|
|
|
|
130
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,265
|
|
|
|
|
|
|
Total
assets
|
|
|
59,800
|
|
|
|
|
|
|
|
14,854
|
|
|
|
|
|
|
|
106,667
|
|
|
|
181,321
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
2,204
|
|
|
|
|
|
|
|
621
|
|
|
|
|
|
|
|
2,663
|
|
|
|
5,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the thirty-nine weeks ended September 27, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
144,686
|
|
|
|
100.0
|
%
|
|
$
|
74,889
|
|
|
|
100.0
|
%
|
|
|
|
|
|
$
|
219,575
|
|
|
|
100.0
|
%
|
|
Cost
of sales and occupancy
|
|
|
62,930
|
|
|
|
43.5
|
%
|
|
|
36,882
|
|
|
|
49.2
|
%
|
|
|
|
|
|
|
99,812
|
|
|
|
45.5
|
%
|
|
Operating
expenses
|
|
|
60,417
|
|
|
|
41.8
|
%
|
|
|
16,387
|
|
|
|
21.9
|
%
|
|
|
|
|
|
|
76,804
|
|
|
|
35.0
|
%
|
|
Depreciation
and amortization
|
|
|
8,449
|
|
|
|
5.8
|
%
|
|
|
1,325
|
|
|
|
1.8
|
%
|
|
$
|
1,426
|
|
|
|
11,200
|
|
|
|
5.1
|
%
|
|
Segment
operating income
|
|
|
12,890
|
|
|
|
8.9
|
%
|
|
|
20,295
|
|
|
|
27.1
|
%
|
|
|
(19,208
|
)
|
|
|
13,977
|
|
|
|
6.4
|
%
|
|
Interest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
111
|
|
|
|
111
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,088
|
|
|
|
|
|
|
Total
assets
|
|
|
54,955
|
|
|
|
|
|
|
|
4,428
|
|
|
|
|
|
|
|
47,517
|
|
|
|
106,900
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
5,235
|
|
|
|
|
|
|
|
828
|
|
|
|
|
|
|
|
5,845
|
|
|
|
11,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the thirty-nine weeks ended September 28, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
136,829
|
|
|
|
100.0
|
%
|
|
$
|
68,847
|
|
|
|
100.0
|
%
|
|
|
|
|
|
$
|
205,676
|
|
|
|
100.0
|
%
|
|
Cost
of sales and occupancy
|
|
|
62,191
|
|
|
|
45.5
|
%
|
|
|
34,287
|
|
|
|
49.8
|
%
|
|
|
|
|
|
|
96,478
|
|
|
|
46.9
|
%
|
|
Operating
expenses
|
|
|
58,791
|
|
|
|
43.0
|
%
|
|
|
14,143
|
|
|
|
20.5
|
%
|
|
|
|
|
|
|
72,934
|
|
|
|
35.5
|
%
|
|
Depreciation
and amortization
|
|
|
7,244
|
|
|
|
5.3
|
%
|
|
|
1,029
|
|
|
|
1.5
|
%
|
|
$
|
1,122
|
|
|
|
9,395
|
|
|
|
4.6
|
%
|
|
Segment
operating income
|
|
|
8,603
|
|
|
|
6.3
|
%
|
|
|
19,388
|
|
|
|
28.2
|
%
|
|
|
(17,355
|
)
|
|
|
10,636
|
|
|
|
5.2
|
%
|
|
Interest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
636
|
|
|
|
636
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,272
|
|
|
|
|
|
|
Total
assets
|
|
|
59,800
|
|
|
|
|
|
|
|
14,854
|
|
|
|
|
|
|
|
106,667
|
|
|
|
181,321
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
10,057
|
|
|
|
|
|
|
|
1,605
|
|
|
|
|
|
|
|
8,769
|
|
|
|
20,431
|
|
|
|
|
|
On
November 2, 2009, the Company, Marty Acquisition Sub, Inc., a Delaware
corporation and a wholly-owned subsidiary of the Company (“Acquisition Sub”),
and Diedrich Coffee, Inc., a Delaware corporation (“Diedrich”), entered into a
definitive Agreement and Plan of Merger (the “Merger Agreement”) that
contemplates the acquisition by the Company, through Acquisition Sub, of all of
the outstanding common stock of Diedrich for a total purchase price of $214.0
million, including approximately $70.0 million in Peet’s common stock and $144.0
million in cash, of which approximately $124.0 million is expected to be funded
with debt. The Merger Agreement contemplates a two-step transaction comprised of
a combination cash and stock exchange offer for all of the issued and
outstanding shares of Diedrich common stock (the “Offer”), followed by a merger
of Acquisition Sub with and into Diedrich (the “Merger”). In the Offer, the
Company will deliver a combination of $17.33 in cash (the “Cash Component”) and
a fraction of a share of the Company’s common stock having a numerator equal to
$8.67 and a denominator equal to the Parent Average Stock Price (as defined in
the Merger Agreement), provided that in no event will such fraction of a share
exceed 0.315 of a share of the Company’s common stock, all of the foregoing cash
and stock in exchange for each share of Diedrich common stock validly tendered
in the Offer (and not withdrawn), subject to adjustment for stock splits, stock
dividends and similar events. In addition, upon the acquisition by Acquisition
Sub of shares of Diedrich common stock tendered in the Offer, all outstanding
warrants and options to acquire Diedrich common stock will be converted into a
combination of cash and shares of the Company’s common stock based on formulae
set forth in the Merger Agreement, and certain of the options will vest in full
as a result of the transactions contemplated by the Merger
Agreement. (Pursuant to the Merger Agreement Peet’s is defined as the
“Parent”.)
The
Merger Agreement provides that Acquisition Sub will use commercially reasonable
efforts to commence the Offer as promptly as practicable after the date of the
Merger Agreement. The obligation of Acquisition Sub to accept for
exchange and deliver consideration for shares of Diedrich common stock validly
tendered in the Offer (and not withdrawn) is subject to a number of conditions
set forth in the Merger Agreement, including (i) that more than 50% of the
outstanding shares of Diedrich common stock (determined on a fully-diluted basis
based on a formula set forth in the Merger Agreement) have been validly tendered
(and not withdrawn) in the Offer and (ii) other conditions set forth in Exhibit
B to the Merger Agreement. The obligation under the Merger Agreement of
Acquisition Sub to accept for exchange and deliver consideration for shares of
Diedrich common stock validly tendered in the Offer (and not withdrawn) is not
subject to a financing condition.
The
Merger Agreement further provides that, following the consummation of the Offer
(and if necessary, the adoption of the Merger Agreement by Diedrich’s
stockholders) and subject to the satisfaction or waiver of certain conditions
set forth in the Merger Agreement, Acquisition Sub will be merged with and into
Diedrich, and Diedrich will become a wholly-owned subsidiary of the Company, and
that upon consummation of the Merger, each then-outstanding share of Diedrich
common stock held by persons other than the Company and Acquisition Sub, and
stockholders of Diedrich who have properly preserved their appraisal rights
under applicable law, will be converted into the right to receive the same
combination of cash and fraction of a share of the Company’s common stock
delivered in the Offer.
The
respective boards of directors of the Company and Diedrich have approved the
Merger Agreement, the Offer and the Merger, and the Diedrich board of directors
has agreed to recommend that Diedrich’s stockholders tender all of their
outstanding shares of Diedrich common stock into the Offer and if necessary,
vote in favor of the adoption of the Merger Agreement.
The
Merger Agreement may be terminated by either the Company and Diedrich under
certain circumstances set forth in the Merger Agreement, including the failure
of the Offer to be consummated on or before March 31, 2010 and the failure of
the minimum tender condition to the Offer. If the Merger Agreement is
terminated (a) in certain circumstances following the receipt by Diedrich of an
alternative acquisition proposal, or (b) as a result of the Diedrich board of
directors changing its recommendation in favor of the Offer and the Merger,
Diedrich will be obligated to pay a termination fee to the Company.
Also on
November 2, 2009, the Company entered into a commitment letter with Wells Fargo
and Wells Fargo Securities, LLC (“WFS”), setting forth the material terms and
conditions of: (a) a senior secured revolving credit facility in an
aggregate amount up to $40.0 million to be provided by Wells Fargo and a
syndicate of financial institutions and other institutional lenders (the
“Lenders”) to the Company, as borrower; and (b) one or more tranches of term
loans in an aggregate amount up to $100.0 million to be provided by the Lenders
to the Company, each of which is to be guaranteed by all existing and future
subsidiaries of the Company. Wells Fargo and WFS have committed to provide the
financing described in the commitment letter through the earliest to occur of
(a) consummation of the Offer, (b) termination of the Merger Agreement, (c)
April 1, 2010, if the Offer has not been consummated on or prior to March 31,
2010, (d) April 15, 2010, unless the commitment letter is terminated earlier by
the Company. The commitment letter provides that the revolving credit facility
and term loans would mature five years after the closing of the
financing.
The
Company intends to use the proceeds from the senior secured credit facilities,
together with cash on hand at the Company to finance the Offer and Merger (and
may also use the cash on hand at Diedrich to finance the Merger), the costs and
expenses related to the Offer and the Merger and the ongoing working capital and
other general corporate purposes of the combined organization after consummation
of the Merger. The senior credit facilities are subject to the negotiation of
mutually acceptable credit or loan agreements and other mutually acceptable
definitive documentation, which are expected to include customary
representations and warranties, affirmative and negative covenants, provisions
for security, mandatory prepayments upon the occurrence of certain events,
financial covenants (including maximum total leverage ratio, minimum fixed
charged coverage ratio and minimum net income tests) and provisions for events
of default. The Lenders’ obligations to provide the financing are subject to the
satisfaction of specified conditions, including that more than 50% of the shares
of Diedrich common stock (determined on a fully-diluted basis based on a formula
set forth in the Merger Agreement) have been validly tendered (and not
withdrawn), no material adverse effect having occurred with respect to Diedrich,
the absence of debt other than certain permitted debt, the accuracy of specified
representations and warranties, compliance with a minimum earnings before
interest, taxes, depreciation and rent (“EBITDAR”), requirement and a maximum
total leverage ratio after giving effect to the Offer, and other customary
conditions. The Company expects the $25 million revolving line of
credit discussed in Note 6 to be terminated upon closing of this credit
facility.
Item 2.
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
You
should read the following discussion and analysis in conjunction with our
financial statements and related notes included elsewhere in this report. Except
for historical information, the discussion in this report contains certain
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. In some cases, you can identify forward-looking
statements by terminology, such as “may,” “should,” “could,” “predict,”
“potential,” “continue,” “expect,” “anticipate,” “future,” “intend,” “plan,”
“believe,” “estimate,” “forecast” and similar expressions (or the negative of
such expressions). The forward-looking statements in this Form 10-Q
include, but are not limited to, statements regarding our expectations for the
growth of the specialty coffee industry; our planned geographic expansion of our
retail presence; our plans to open new retail stores; our plans to expand into
new grocery markets; and our expectations for future revenue, margins, expenses,
operating results, inventory levels and capital expenditures; and our
anticipated working capital needs and the adequacy of our capital resources.
These statements involve known and unknown risks, uncertainties and other
factors that may cause our actual results, performance or achievements to be
materially different from any future results, performance or achievements
expressed or implied by the forward-looking statements. Forward-looking
statements reflect our current views with respect to future events, are based on
assumptions, and are subject to risks, uncertainties and other important
factors. Given these risks, uncertainties and other important factors, you
should not place undue reliance on these forward-looking statements. Also,
forward-looking statements represent our estimates and assumptions only as of
the date of this report. Except as required by law, we assume no obligation to
update any forward-looking statements publicly, or to update the reasons actual
results could differ materially from those anticipated in any forward-looking
statements, even if new information becomes available in the
future. Important factors that could cause actual results to differ
materially include, but are not limited to, the following:
|
|
·
|
The current recession or a
worsening of the United States and global economy could materially
adversely affect our business.
Our
revenues and performance depend significantly on consumer confidence and
spending, which have recently deteriorated due to the recession and may
remain depressed for the foreseeable future. Some of the factors that
could influence the levels of consumer confidence and spending include,
without limitation, continuing conditions in the residential real estate
and mortgage markets, access to credit, labor and healthcare costs,
increases in fuel and other energy costs, consumer confidence and other
macroeconomic factors affecting consumer spending behavior. These and
other economic factors could have a material adverse effect on demand for
our products and on our financial condition and operating
results.
|
|
|
·
|
Increases in the cost and
decreases in availability of high quality
Arabica
coffee beans could impact our
profitability and growth of our business.
Although we do not
purchase coffee on the commodity markets, price movements in the commodity
trading of coffee impact the prices we pay. 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; the ability of
coffee-producing countries to agree to export quotas; and general economic
conditions that make commodities more or less attractive investment
options. If costs increase and we are unable to pass along increased
coffee costs, our margin will decrease and our profitability will decrease
accordingly. In addition, if we are not able to purchase sufficient
quantities of high quality
Arabica
beans due to
any of the above factors, we may not be able to fulfill the demand for our
coffee, our revenue may decrease and our ability to expand our business
may be negatively impacted.
|
|
|
·
|
Because we have only one
roasting facility, a significant interruption in the operation of our
roasting and distribution facility could potentially disrupt our
operations.
A significant interruption in the operation of our
roasting and distribution facility, whether as a result of a natural
disaster, pandemic or other causes, could significantly impair our ability
to operate our business. Since we only roast our coffee to order, we do
not carry inventory of roasted coffee in our roasting plant. Therefore, a
disruption in service in our roasting facility would impact our sales in
our retail and specialty channels almost immediately. Moreover, our
roasting and distribution facility and most of our stores are located near
several 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.
|
|
|
·
|
Complaints or claims by
current, former or prospective employees or governmental agencies could
adversely affect us.
We are subject to a variety of laws and
regulations which govern such matters as minimum wages, overtime and other
working conditions, various family leave mandates and a variety of other
laws enacted, or rules and regulations promulgated, by federal, state and
local governmental authorities that govern these and other employment
matters. We have been, and in the future may be, the subject of complaints
or litigation from current, former or prospective employees or
governmental agencies. In addition, successful complaints against our
competitors may spur similar lawsuits against us. For instance, in 2003,
two lawsuits (which have since been settled) were filed against the
Company alleging misclassification of employment position and sought
damages, restitution, reclassification and attorneys’ fees and costs. In
addition, on July 14, 2008, a complaint was filed alleging that store
managers based in California were not paid overtime wages, were not
provided meal or rest periods, were not provided accurate wage statements
and were not reimbursed for business expenses. These types of claims and
litigation involving current, former or prospective employees could divert
our management’s time and attention from our business operations and might
potentially result in substantial costs of defense, settlement or other
disposition, which could have a material adverse effect on our results of
operations in one or more fiscal
periods.
|
For a
discussion of additional material risks and uncertainties that the Company
faces, see the discussion in the 2008 Form 10-K titled “Risk Factors.” In
addition, we may face additional risks in connection with our pending
acquisition of Diedrich Coffee, Inc. For a discussion of the risks in connection
with the pending acquisition, see the additional risk factors set forth in Item
1A of this quarterly report on Form 10-Q.
Company
Overview and Industry Outlook
Peet’s is
a specialty coffee roaster and marketer of fresh,
deep-roasted whole bean coffee and tea sold through multiple channels
of distribution for home and away-from-home enjoyment. Founded in
Berkeley, California in 1966, Peet's has established a loyal customer base with
strong brand awareness in California. Our growth strategy is based on
the sale of whole bean coffee, tea and high-quality beverages in multiple
channels of distribution including our own retail stores, grocery, home
delivery, and foodservice and office accounts throughout the United
States.
As we
grow, we expect our operations to continue to be vertically integrated, allowing
us to control the quality of our product at all stages. We purchase high
quality Arabica coffee beans from countries around the world, and we use our
artisan-roasting technique to bring out the distinctive flavor of our coffees.
Because roasted coffee is perishable, we are committed to delivering our coffee
under the strictest freshness standards. As a result, we do not stock or
inventory roasted coffee. We roast to order and ship fresh coffee daily to our
stores and customers. Control of purchasing, roasting, packaging and
distribution of our coffee allows us to maintain our commitment to freshness, is
cost effective, and enhances our margins and profit potential.
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. We believe that by offering high-quality products to
consumers throughout the country, we will attract the same loyal customer base
that we have attracted in California.
We
believe growth opportunities exist in all of our distribution channels. We
believe that our specialty sales can expand to geographies where we do not have
a retail presence. Our first priority has been to develop primarily in the
western U.S. markets where we already have a presence and have higher customer
awareness. We expect to continue to open new retail stores in strategic west
coast locations that meet our demographic profile and partner with distributors
and companies who share our passion for quality and freshness and are willing
and able to execute accordingly in the foodservice and office environment. In
grocery, we expect to continue to expand into new markets although the full
extent of our penetration will depend upon the development of specialty coffee
as a category in many markets. In addition to the Peet’s brand, we recently
entered into a licensing agreement with privately held Godiva
®
Chocolatier, Inc. to sell and
distribute a premium line of Godiva brand coffees in the grocery channel. We
began selling Godiva coffee in the last week of the third quarter of
2009.
Coffee
commodity costs began to decline in July 2008 after over four years of increases
above the prior three to four year range. We expect the commodity market to
continue to be volatile as worldwide demand, the strength of the dollar, and
weather will continue to cause uncertainty in the market.
Our net
revenues depend significantly on consumer confidence and spending, which have
recently deteriorated due to the recession and may remain depressed for the
foreseeable future. The current recession or a worsening of the United States
and global economy could materially adversely affect our business as our
revenues depend significantly on consumer confidence and spending. We believe
that the current recession negatively impacted our rate of growth in 2008 and
the first three quarters of 2009. Despite the recession, we have been able to
grow our revenues by opening new retail stores, adding new foodservice accounts,
and growing our business in our current grocery customer base. In addition, we
were able to increase our net earnings per share by 27% and 31% for the thirteen
and thirty-nine week periods ended September 27, 2009, respectively, over the
same periods last year primarily by leveraging our infrastructure investments
and diligently managing our costs. We plan to open one new store for the
remainder of 2009, in addition to the seven new stores we opened in the first
three quarters of 2009.
Pending
Acquisition of Diedrich
On
November 2, 2009, the Company, Acquisition Sub and Diedrich entered into the
Merger Agreement that contemplates the acquisition by the Company, through
Acquisition Sub, of all of the outstanding common stock of Diedrich for a total
purchase price of $214.0 million, including approximately $70.0 million in
Peet’s common stock and $144.0 million in cash, of which approximately $124.0
million is expected to be funded with debt. The Merger Agreement contemplates a
two-step transaction comprised of a combination cash and stock exchange offer
for all of the issued and outstanding shares of Diedrich common stock (the
“Offer”), followed by a merger of Acquisition Sub with and into Diedrich (the
“Merger”). In the Offer, the Company will deliver a combination of $17.33 in
cash and a fraction of a share of the Company’s common stock having a numerator
equal to $8.67 and a denominator equal to the Parent Average Stock Price (as
defined in the Merger Agreement), provided that in no event will such fraction
of a share exceed 0.315 of a share of the Company’s common stock, all of the
foregoing cash and stock in exchange for each share of Diedrich common stock
validly tendered in the Offer (and not withdrawn), subject to adjustment for
stock splits, stock dividends and similar events. In addition, upon the
acquisition by Acquisition Sub of shares of Diedrich common stock tendered in
the Offer, all outstanding warrants and options to acquire Diedrich common stock
will be converted into a combination of cash and shares of the Company’s common
stock based on formulae set forth in the Merger Agreement, and certain of the
options will vest in full as a result of the transactions contemplated by the
Merger Agreement. See Note 9 “Subsequent Events” to the Consolidated Financial
Statements.
Results
of Operations
The
following discussion on results of operations should be read in conjunction with
the consolidated financial statements and accompanying notes and the other
financial data included elsewhere in this report.
|
|
|
Thirteen weeks ended
|
|
|
Thirty-nine weeks ended
|
|
|
|
|
September 27,
|
|
|
September 28,
|
|
|
September 27,
|
|
|
September 28,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement
of income as a percent of net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
Cost
of sales and related occupancy expenses
|
|
|
46.4
|
|
|
|
47.1
|
|
|
|
45.5
|
|
|
|
46.9
|
|
|
Operating
expenses
|
|
|
35.3
|
|
|
|
36.1
|
|
|
|
35.0
|
|
|
|
35.5
|
|
|
General
and administrative expenses
|
|
|
7.8
|
|
|
|
7.6
|
|
|
|
8.1
|
|
|
|
7.9
|
|
|
Depreciation
and amortization expenses
|
|
|
5.4
|
|
|
|
4.6
|
|
|
|
5.1
|
|
|
|
4.6
|
|
|
Income
from operations
|
|
|
5.1
|
|
|
|
4.6
|
|
|
|
6.3
|
|
|
|
5.1
|
|
|
Interest
income
|
|
|
-
|
|
|
|
0.2
|
|
|
|
0.1
|
|
|
|
0.3
|
|
|
Income
before income taxes
|
|
|
5.1
|
|
|
|
4.8
|
|
|
|
6.4
|
|
|
|
5.4
|
|
|
Income
tax provision
|
|
|
1.8
|
|
|
|
1.8
|
|
|
|
2.3
|
|
|
|
2.0
|
|
|
Net
income
|
|
|
3.3
|
%
|
|
|
3.0
|
%
|
|
|
4.1
|
%
|
|
|
3.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
of net revenue by business segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
stores
|
|
|
64.8
|
%
|
|
|
67.0
|
%
|
|
|
65.9
|
%
|
|
|
66.5
|
%
|
|
Specialty
sales
|
|
|
35.2
|
|
|
|
33.0
|
|
|
|
34.1
|
|
|
|
33.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
of net revenue by business category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Whole
bean coffee and related products
|
|
|
52.7
|
%
|
|
|
51.3
|
%
|
|
|
52.6
|
%
|
|
|
52.3
|
%
|
|
Beverages
and pastries
|
|
|
47.3
|
|
|
|
48.7
|
|
|
|
47.4
|
|
|
|
47.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales and related occupancy expenses as a percent of segment
revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
stores
|
|
|
44.2
|
%
|
|
|
46.0
|
%
|
|
|
43.5
|
%
|
|
|
45.5
|
%
|
|
Specialty
sales
|
|
|
50.3
|
|
|
|
49.3
|
|
|
|
49.2
|
|
|
|
49.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses as a percent of segment revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
stores
|
|
|
42.8
|
%
|
|
|
43.4
|
%
|
|
|
41.8
|
%
|
|
|
43.0
|
%
|
|
Specialty
sales
|
|
|
21.4
|
|
|
|
21.2
|
|
|
|
21.9
|
|
|
|
20.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
increase from prior year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Revenue
|
|
|
7.9
|
%
|
|
|
12.5
|
%
|
|
|
6.8
|
%
|
|
|
15.2
|
%
|
|
Retail
stores
|
|
|
4.3
|
|
|
|
10.8
|
|
|
|
5.7
|
|
|
|
12.7
|
|
|
Specialty
sales
|
|
|
15.4
|
|
|
|
16.3
|
|
|
|
8.8
|
|
|
|
20.7
|
|
|
Cost
of sales and related occupancy expenses
|
|
|
6.3
|
|
|
|
10.7
|
|
|
|
3.5
|
|
|
|
13.9
|
|
|
Operating
expenses
|
|
|
5.4
|
|
|
|
14.5
|
|
|
|
5.3
|
|
|
|
16.2
|
|
|
General
and administrative expenses
|
|
|
10.2
|
|
|
|
6.3
|
|
|
|
9.5
|
|
|
|
-
|
|
|
Depreciation
and amortization expenses
|
|
|
25.8
|
|
|
|
20.3
|
|
|
|
19.2
|
|
|
|
18.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected
operating data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of retail stores in operation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
of the period
|
|
|
192
|
|
|
|
179
|
|
|
|
188
|
|
|
|
166
|
|
|
Store
openings
|
|
|
3
|
|
|
|
3
|
|
|
|
7
|
|
|
|
16
|
|
|
Store
closures
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
(1
|
)
|
|
End
of the period
|
|
|
195
|
|
|
|
181
|
|
|
|
195
|
|
|
|
181
|
|
Thirteen
Weeks Ended September 27, 2009 Compared to Thirteen Weeks Ended September 28,
2008
Net
revenue
Net
revenue for the thirteen weeks ended September 27, 2009 increased $5.4 million,
or 7.9%, versus the same period in 2008 as a result of the continued expansion
of our retail and specialty sales segments. Sales of whole bean and related
products increased 10.9% to $39.0 million. Net revenue from beverages and
pastries increased 4.8% to $35.0 million.
In the
retail segment, net revenue increased $2.0 million, or 4.3%, compared to the
same period in 2008 primarily as a result of increased sales from the 14 new
stores we opened in the last 12 months. Sales of whole bean coffee and related
products in the retail segment increased by 3.4% to $13.0 million, while sales
of beverages and pastries increased by 4.6% to $34.9 million.
In the
specialty sales segment, net revenue increased $3.5 million, or 15.4%, compared
to the third quarter of 2008. We expect this performance improvement that we
have experienced over the first half of the year to continue in the fourth
quarter. The increase in grocery was due to new business we added in both the
Western and Eastern U.S. in the last two years. We added approximately 1,200 new
grocery store accounts over the past 12 months, bringing the number of grocery
stores selling Peet’s coffee to approximately 8,400. Net revenue in foodservice
and office coffee sales increased due to new accounts added over the last 12
months. Home delivery is down from last year as we are converting some loyal
mail order customers in the Eastern U.S. to grocery as we increase availability
in grocery stores.
|
|
|
Thirteen weeks ended
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
September 27, 2009
|
|
|
September 28, 2008
|
|
|
Increase/(Decrease)
|
|
|
Grocery
|
|
$
|
14,619
|
|
|
$
|
11,744
|
|
|
$
|
2,875
|
|
|
|
24.5
|
%
|
|
Foodservice
and office
|
|
|
7,769
|
|
|
|
6,871
|
|
|
|
898
|
|
|
|
13.1
|
%
|
|
Home
delivery
|
|
|
3,654
|
|
|
|
3,960
|
|
|
|
(306
|
)
|
|
|
-7.7
|
%
|
|
Total
specialty
|
|
$
|
26,042
|
|
|
$
|
22,575
|
|
|
$
|
3,467
|
|
|
|
15.4
|
%
|
Cost
of sales and related occupancy expenses
Cost of
sales and related occupancy expenses consist of product costs, including
manufacturing costs, rent and other occupancy costs. As a percent of net
revenue, cost of sales decreased from 47.1% in the third quarter of 2008 to
46.4% in the third quarter of 2009. The decrease from last year was due to lower
milk and shipping costs, cost control measures and higher prices in retail
partially offset by higher coffee costs. For the remainder of the year, we
expect continued savings from cost control measures, as well as leverage of the
roasting facility, and neutral commodity costs in aggregate.
Operating
expenses
Operating
expenses consist of both retail and specialty operating costs, such as employee
labor and benefits, repairs and maintenance, supplies, training, travel, banking
and card processing fees. Operating expenses increased to $26.1 million,
compared to $24.7 million for the third quarter of 2008, but decreased as a
percentage of net revenue to 35.3%, compared to 36.1% for the third quarter of
2008.
In the
retail segment, operating expenses as a percent of net revenue decreased from
43.4% for the third quarter of 2008 to 42.8% for the third quarter of 2009
primarily due to lower training, supplies and maintenance expenses, and leverage
of retail overhead costs.
As a
percent of net revenue, specialty operating expenses increased slightly from
21.2% for the third quarter of 2008 to 21.4% for the third quarter of 2009. The
increase was primarily due to growth in the grocery business, which has higher
operating expenses than the other two channels and was largely offset by
leverage of overhead costs.
General
and administrative expenses
General
and administrative expenses increased to $5.8 million compared to $5.2 million
for the same period last year driven by higher payroll related costs and
professional services fees compared to the same prior year period.
Depreciation and amortization
expenses
Depreciation
and amortization expenses increased to $4.0 million, compared to $3.2 million
for the corresponding period last year. The increase was primarily due to the
opening of 14 new retail stores in the last 12 months and the implementation of
a new enterprise resource planning system (ERP) during the quarter.
Interest
income, net
We invest
in U.S. government, agency, municipal and equity securities. Interest income
includes interest income and gains or losses from the sale of these instruments.
Due to low interest rates during the quarter, our earnings were offset by
interest expense on our deferred compensation plan. During the same period last
year we earned $0.1 million.
Income
tax provision
The
effective income tax rate for the third quarter of 2009 is 35.3% compared to
38.2% during the third quarter of 2008 due to increased California enterprise
zone tax credits and normal quarter to quarter rate
fluctuations.
The
Company does not expect unrecognized tax benefits to change significantly within
the next 12 months.
Thirty-nine
Weeks Ended September 27, 2009 Compared to Thirty-nine Weeks Ended September 28,
2008
Net
revenue
Net
revenue for the thirty-nine weeks ended September 27, 2009 increased $13.9
million, or 6.8%, versus the same period in 2008 as a result of continued
expansion of our retail and specialty sales segments. Sales of whole bean and
related products increased 7.3% to $115.0 million. Net revenue from beverages
and pastries increased 6.2% to $104.1 million.
In the
retail segment, net revenue increased $7.9 million, or 5.7%, compared to the
same period in 2008 primarily as a result of increased sales from the 14 new
stores we opened in the last 12 months. During the thirty-nine weeks ending
September 27, 2009, we opened 7 new stores compared to 16 during the same period
in 2008. Sales of whole bean coffee and related products in the retail segment
increased by 5.1% to $40.7 million, while sales of beverages and pastries
increased by 6.0% to $103.9 million.
In the
specialty sales segment, net revenue increased $6.0 million, or 8.8%, compared
to the thirty-nine weeks ending September 27, 2008. The increase in grocery was
primarily due to new business we added in both the Western and Eastern U.S. in
the last two years and the price increase in the West in August 2008. We added
approximately 1,200 new grocery store accounts over the past 12 months, bringing
the number of grocery stores selling Peet’s coffee to approximately 8,400. Net
revenue in foodservice and office increased 7.7%, primarily due to new
foodservice accounts. Home delivery is down from last year as we are converting
some loyal mail order customers in the Eastern U.S. to grocery as we increase
availability in grocery stores.
|
|
|
Thirty-nine
weeks ended
|
|
|
|
|
|
|
|
|
(dollars
in thousands)
|
|
September 27, 2009
|
|
|
September 28, 2008
|
|
|
Increase/(Decrease)
|
|
|
Grocery
|
|
$
|
41,841
|
|
|
$
|
36,464
|
|
|
$
|
5,377
|
|
|
|
14.7
|
%
|
|
Foodservice
and office
|
|
|
21,330
|
|
|
|
19,805
|
|
|
|
1,525
|
|
|
|
7.7
|
%
|
|
Home
delivery
|
|
|
11,718
|
|
|
|
12,578
|
|
|
|
(860
|
)
|
|
|
-6.8
|
%
|
|
Total
specialty
|
|
$
|
74,889
|
|
|
$
|
68,847
|
|
|
$
|
6,042
|
|
|
|
8.8
|
%
|
Cost
of sales and related occupancy expenses
Cost of
sales and related occupancy expenses consist of product costs, including
manufacturing costs, rent and other occupancy costs. As a percent of net
revenue, cost of sales decreased from 46.9% in the thirty-nine weeks ended
September 28, 2008 to 45.5% in the same period of 2009. The decrease from last
year was due to lower milk and shipping costs, cost control measures and
leverage of the roasting facility, and higher prices in retail and grocery,
partially offset by higher coffee costs.
For the
remainder of the year, we expect continued savings from cost control measures
and leverage of the roasting facility and neutral commodity costs in
aggregate.
Operating
expenses
Operating
expenses consist of both retail and specialty operating costs, such as employee
labor and benefits, repairs and maintenance, supplies, training, travel, banking
and card processing fees. Operating expenses increased to $76.8 million compared
to $72.9 million for the thirty-nine weeks ended September 28, 2008, but
decreased as a percentage of net revenue to 35.0% compared to 35.5% for the
thirty-nine weeks ended September 28, 2008.
In the
retail segment, operating expenses as a percent of net revenue decreased from
43.0% for the thirty-nine weeks ended September 28, 2008 to 41.8% for the same
period in 2009, primarily due to lower training, supplies and maintenance
expenses and leverage of retail overhead costs.
As a
percent of net revenue, specialty operating expenses increased from 20.5% for
the thirty-nine weeks ended September 28, 2008 to 21.9% for the same period in
2009. The increase was primarily due to higher selling and distribution costs in
grocery to support the expansion of the direct store delivery selling system in
the Eastern U.S.
General
and administrative expenses
General
and administrative expenses increased to $17.8 million compared to $16.2 million
for the same period last year driven by higher payroll related costs,
professional services fees, and marketing expenses compared to the same prior
year period, partially offset by lower recruiting costs.
Depreciation and amortization
expenses
Depreciation
and amortization expenses increased to $11.2 million, compared to $9.4 million
for the corresponding period last year. The increase was primarily due to the
opening of 14 new retail stores in the last 12 months and the implementation of
a new enterprise resource planning system (ERP) during the quarter.
Interest
income, net
We invest
in U.S. government, agency, municipal and equity securities. Interest income
includes interest income and gains or losses from the sale of these instruments.
We earned $0.1 million in interest income in the thirty-nine weeks ended
September 27, 2009 compared to $0.6 million for the same period last year. The
difference was due to lower average cash balances and lower yields during the
thirty-nine weeks ended September 27, 2009 compared to the same period in
2008.
Income
tax provision
The
effective income tax rate for the thirty-nine weeks ended September 27, 2009 and
September 28, 2008 was 36.6%.
The
Company does not expect unrecognized tax benefits to change significantly within
the next 12 months.
Liquidity
and Capital Resources
At
September 27, 2009 we had $17.0 million in cash and cash equivalents and $4.2
million in short-term marketable securities for a total of $21.2 million.
Working capital was $50.2 million as of September 27, 2009.
Net cash
provided by operations was $19.1 million for the thirty-nine weeks ended
September 27, 2009 compared to $11.0 million for the same prior year period.
Operating cash flows were positively impacted by higher net income, net of
depreciation expense, lower federal income tax prepayments, improved accounts
receivable collections, as well as other changes in working
capital.
Net cash
used by investing activities was $2.9 million for the thirty-nine weeks ended
September 27, 2009 compared to a net cash use of $15.7 million in the prior
year. Investing activities primarily relate to purchases of property, plant and
equipment and maturities and purchases of marketable securities. During the
thirty-nine week period ended September 27, 2009, we purchased property, plant
and equipment totaling $11.9 million primarily related to improvements to
existing stores, new stores and information technology support systems and
hardware to support our growing infrastructure and we purchased $0.4 million of
marketable securities. Cash used for purchases of property, plant and equipment
decreased by $8.5 million compared to the same period last year due primarily to
fewer new retail store openings, offset by the ERP costs in the current year.
Proceeds from sales and maturities of marketable securities and from a release
of restricted investments totaled $9.4 million.
Net cash
used by financing activities for the thirty-nine weeks ended September 27, 2009
was $3.9 million compared to $6.8 million for the thirty-nine weeks ended
September 28, 2008, and primarily relates to the repurchase of our common stock,
offset by proceeds from stock option exercises.
The
Company also has $25 million available through a credit agreement entered into
on November 26, 2008 with Wells Fargo Bank, National Association, the proceeds
of which may be used in the general course of business, including to fund
working capital, capital expenditures, share repurchases and other needs of the
Company. The line of credit has a maturity date of December 1, 2009, with an
option by the Company to extend the maturity date to December 1,
2010.
The
credit agreement contains customary affirmative and negative covenants,
including a requirement to maintain the Company’s financial condition in
accordance with certain ratios, such as Current Ratio, Leverage Ratio, EBITDAR
Coverage Ratio, and minimum net income as defined in the agreement. In addition,
events of default that permit the Bank to accelerate the Company’s outstanding
obligations, include nonpayment of principal, interest, fees or other amounts,
violation of covenants, inaccuracy of representations and warranties and upon
the occurrence of bankruptcy and other adverse material change in the Company’s
financial condition. Through September 27, 2009, there were no borrowings
outstanding under this agreement and unused borrowing capacity under the credit
agreement was $25.0 million as of September 27, 2009.
In
connection with the entry into the Merger Agreement and the pending acquisition
of Diedrich, on November 2, 2009, the Company entered into a commitment letter
with Wells Fargo and WFS, setting forth the material terms and conditions of:
(a) a senior secured revolving credit facility in an aggregate amount up to
$40,000,000 to be provided by Wells Fargo and a syndicate of financial
institutions and other institutional lenders to the Company, as borrower; and
(b) one or more tranches of term loans in an aggregate amount up to $100,000,000
to be provided by the lenders to the Company, each of which is to be guaranteed
by all existing and future subsidiaries of the Company. The Company intends to
use the proceeds from the senior secured credit facilities, together with cash
on hand at the Company to finance the Offer and Merger (and may also use the
cash on hand at Diedrich to finance the Merger), the costs and expenses related
to the Offer and the Merger and the ongoing working capital and other general
corporate purposes of the combined organization after consummation of the
Merger. The Company expects the $25 million revolving line of credit discussed
in Note 6 “Line of Credit” to Consolidated Financial Statements to be terminated
upon closing of this credit facility. Subject to the cash requirements for the
pending acquisition of Diedrich, which we expect to finance in part from the
proceeds of the financing contemplated by the above described commitment letter,
for the next twelve months, we expect our cash flows from operations and cash
and marketable securities to be sufficient for our operating and capital
requirements, our existing share purchase program and our contractual
obligations as they come due.
Item
3. Quantitative and Qualitative Disclosures about Market Risk
We invest
excess cash in equity securities and interest-bearing, U.S. government, agency,
and municipal securities. These financial instruments are subject to stock
market volatility and fluctuations of daily interest rates. Therefore our
investment portfolio is exposed to market risk from these changes.
The
supply and price of coffee are subject to significant volatility and can be
affected by multiple factors in the producing countries, including weather,
political and economic conditions. In addition, green coffee bean prices have
been affected in the past, and may be affected in the future, by the actions of
certain organizations and associations that have historically attempted to
influence commodity prices of green coffee beans through agreements establishing
export quotas or restricting coffee supplies worldwide.
We
currently use fixed-price purchase commitments, but in the past have used and
may potentially in the future use coffee futures and coffee futures options to
manage coffee supply and price risk.
Fixed-Price
and Not-Yet-Priced Purchase Commitments
We enter
into fixed-price purchase commitments in order to secure an adequate supply of
quality green coffee beans and fix our cost of green coffee beans. These
commitments are made with established coffee brokers and are denominated in U.S.
dollars. We also enter into “not-yet-priced” commitments based on a fixed
premium over the New York “C” market with the option to fix the price at any
time. As of September 27, 2009, we had approximately $32.3 million in open
fixed-priced purchase commitments and approximately $5.2 million in
not-yet-priced commitments for a total of approximately $37.5 million with
delivery dates ranging from October 2009 through July 2011. We believe, based on
relationships established with our suppliers, that the risk of non-delivery on
such purchase commitments is low.
Item
4. Controls and Procedures
We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Securities Exchange Act of 1934, as
amended, reports is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission’s rules and forms,
and that such information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required
disclosure.
As of
September 27, 2009, the end of the period covered by this report, we carried out
an evaluation, under the supervision and with the participation of our
management, including our Chief Executive Officer and our Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures. Based on the foregoing, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and procedures
were effective as of the end of the quarter covered by this report at the
reasonable-assurance level.
There
have been no changes in our internal controls over financial reporting during
the fiscal quarter ended September 27, 2009 that have materially affected, or
are reasonably likely to materially affect, our internal controls over financial
reporting.
PART
II - OTHER INFORMATION
Item
1. Legal Proceedings
On July
14, 2008, a complaint was filed against Peet’s Coffee & Tea, Inc. in
California Superior Court, Alameda County, by three former employees on behalf
of themselves and all other California store managers. The complaint alleges
that store managers based in California were not paid overtime wages, were not
provided meal or rest periods, were not provided accurate wage statements and
were not reimbursed for business expenses. The plaintiffs seek injunctive
relief, monetary damages, penalties, costs and attorneys’ fees, and prejudgment
interest. On October 8, 2008, the Company filed an answer denying the
allegations set forth in the complaint and asserting a number of affirmative
defenses thereto. On November 12, 2008, the plaintiffs filed an amended
complaint asserting an additional claim for penalties. On November 26, 2008, the
Company filed an answer thereto denying the allegations in the first amended
complaint and asserting a number of affirmative defenses thereto. At this time,
it is not feasible to predict the outcome of or a range of loss, should a loss
occur, from this proceeding. The Company intends to vigorously defend against
the litigation.
We may
from time to time become involved in certain legal proceedings in the ordinary
course of business. The Company is not a party to any other legal proceedings
that management believes may have a material adverse effect on the financial
position or results of operations of the Company.
Item
1A. Risk Factors
In
addition to the risk factors set forth in the Company’s Annual Report on Form
10-K, you should consider the following risk factors relating to our pending
acquisition of Diedrich.
We
may fail to realize the potential benefits of the pending acquisition of
Diedrich.
We are
pursuing the acquisition of Diedrich in an effort to realize certain potential
benefits, including expansion of the combined businesses and broader market
opportunities and operational and cost efficiencies. However, our ability to
realize these potential benefits depends on our successfully combining the
businesses of Peet’s and Diedrich. The combined company may fail to realize the
potential benefits of the merger for a variety of reasons, including the
following:
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·
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inability
or failure to effectively leverage our brands, infrastructure and DSD
system to grow Diedrich's current business, including its K-cup single
serve business;
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·
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inability
or failure to effectively coordinate sales and marketing efforts to
communicate the capabilities of the combined
company;
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·
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inability
or failure to successfully integrate and harmonize financial reporting and
information technology systems of Peet’s and
Diedrich;
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·
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inability
or failure to achieve the expected operational and cost efficiencies;
and
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The
actual integration may result in additional and unforeseen expenses or delays.
If Peet’s is not able to successfully integrate Diedrich’s business and
operations, or if there are delays in combining the businesses, the anticipated
benefits of the merger may not be realized fully or at all or may take longer to
realize than expected.
If
we are unable to obtain sufficient financing, the pending acquisition of
Diedrich will not be completed and we may be liable for breaching the Merger
Agreement.
We intend
to finance the pending acquisition with debt financing, existing cash balances,
Peet’s stock and cash flow from operations. To this end, we have received
commitments from lenders to provide an aggregate of up to $140.0 million in
financing for the transaction, comprised of a revolving credit facility of $40.0
million and a term loan of $100.0 million. Although we have entered into the
financing commitment letter with Wells Fargo and WFS, the commitment includes
customary conditions to funding, including, without limitation, no material
adverse effect having occurred with respect to Diedrich, the absence of debt
other than certain permitted debt, the accuracy of specified representations and
warranties, compliance with a minimum EBITDAR requirement and a maximum total
leverage ratio after giving effect to the Offer, and other customary conditions.
In the event that the financing described in the financing commitment letter is
not available, other financing may not be available on acceptable terms, in a
timely manner or at all. If other financing becomes necessary and we are unable
to secure such additional financing, the pending acquisition will not be
completed. In the event of a termination of the merger agreement due to our
inability to obtain the necessary financing for the transaction, Diedrich could
seek monetary damages or specific performance.
We
expect to take on substantial debt to finance the merger, which will decrease
our business flexibility and increase our interest expense.
In
connection with the acquisition of Diedrich, we expect to incur up to $140
million of debt. This substantial amount of debt, together with the financial
and negative covenants imposed on us in connection with this debt, will have the
effect, among other things, of reducing our flexibility to respond to changing
business and economic conditions and increasing our interest expense. In
addition, the actual terms and conditions of such debt may not be favorable to
us, and as such, could further increase the cost of the acquisition of Diedrich,
Unfavorable debt financing terms may also adversely affect our financial
results.
The
announcement and pendency of the acquisition of Diedrich could cause disruptions
in the businesses of Peet’s and Diedrich, which could have an adverse effect on
their respective business and financial results, and consequently on the
combined company.
Peet’s
and Diedrich have operated and, until the completion of the Merger, will
continue to operate, independently. Uncertainty about the effect of the
acquisition on employees, customers, distributors, licensors and suppliers may
have an adverse effect on Peet’s and Diedrich and consequently on the combined
company. These uncertainties may impair Peet’s and Diedrich’s ability to retain
and motivate key personnel and could cause customers, distributors, suppliers,
licensors and others with whom each company deals to seek to change existing
business relationships, which may materially and adversely affect their
respective businesses. In addition, the attention of our management and our
employees may be diverted from day-to-day operations as they focus on
consummating the acquisition of Diedrich. Due to the limited termination rights
agreed to by the parties in the Merger Agreement, we may be obligated to
complete theOffer and the Merger in spite of the adverse effects resulting from
the disruption of Peet’s or Diedrich’s ongoing businesses. Furthermore, this
disruption could adversely affect the combined company’s ability to maintain
relationships with customers, distributors, licensors, suppliers and employees
after the acquisition or to achieve the anticipated benefits of the acquisition.
Peet’s and Diedrich could also be subject to litigation related to the
transaction. Each of these events could adversely affect Peet’s and Diedrich in
the near term and the combined company if the acquisition is
completed.
The
integration of Diedrich into Peet’s may result in significant expenses and
accounting charges that adversely affect our operating results and financial
condition.
In
accordance with generally accepted accounting principles, we will account for
the merger using the purchase method of accounting. Our financial results may be
adversely affected by the resulting accounting charges incurred in connection
with the Offer and the Merger. We also expect to incur additional costs
associated with combining the operations of Peet’s and Diedrich, which may be
substantial. Additional costs may include: costs of employee redeployment;
relocation and retention bonuses; accelerated amortization of deferred equity
compensation and severance payments; reorganization or closure of facilities;
taxes; advisor and professional fees; and termination of contracts that provide
redundant or conflicting services. Some of these costs may have to be accounted
for as expenses that would decrease our net income and earnings per share for
the periods in which those adjustments are made. The price of our common stock
could decline to the extent our financial results are materially affected by the
foregoing charges and costs, or if the foregoing charges and costs are larger
than anticipated. The completion of the Offer and the Merger may result in
dilution of future earnings per share to our stockholders. It may also result in
greater net losses or a weaker financial condition compared to that which would
have been achieved by us on a stand-alone basis.
Integrating
Peet’s and Diedrich may divert management’s attention away from the combined
company’s operations.
Successful
integration of Peet’s’s and Diedrich’s operations, products and personnel may
place a significant burden on the combined company’s management and internal
resources. Peet’s may also experience difficulty in effectively integrating the
different cultures and practices of Diedrich. Further, the difficulties of
integrating Diedrich could disrupt the combined company’s ongoing business,
distract its management focus from other opportunities and challenges, and
increase the combined company’s expenses and working capital requirements. The
diversion of management attention and any difficulties encountered in the
transition and integration process could harm the combined company’s business,
financial condition and operating results.
Item
6. Exhibits
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Exhibit
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Description
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3.1
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Amended
and Restated Articles of Incorporation.*
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3.2
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Amended
and Restated Bylaws.*
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4.1
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Form
of common stock certificate.*
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31.1
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Certification
of the Company’s Chief Executive Officer, Patrick O’Dea, pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934, as
amended.
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31.2
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Certification
of the Company’s Chief Financial Officer, Thomas Cawley, pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934, as
amended.
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32.1
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Certification
of the Company’s Chief Executive Officer, Patrick O’Dea, pursuant to
Section 906 of Sarbanes-Oxley Act of 2002.
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32.2
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Certification
of the Company’s Chief Financial Officer, Thomas Cawley, pursuant to
Section 906 of Sarbanes-Oxley Act of
2002.
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*
Incorporated by reference to the Registrant’s Information Statement of Form S-1
(File No. 333-47957) filed on October 13, 2000, as subsequently
amended.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
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PEET’S
COFFEE & TEA, INC.
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Date:
November 6, 2009
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By:
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/s/ Thomas
P. Cawley
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Vice
President, Chief Financial Officer and
Secretary
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Peets Coffee & Tea, Inc. (MM) (NASDAQ:PEET)
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