PART I
Item 1. Business
Peets Coffee & Tea is a specialty coffee roaster and marketer of fresh
roasted whole bean coffee. We sell our coffee under strict freshness standards through multiple channels of distribution including grocery stores, home delivery, office, restaurant and foodservice accounts and Company-owned and operated stores in
six states.
Since we believe that roasted coffee is a perishable product, we pursue distribution channels that are consistent with our
strict freshness standards. For instance, our distribution to grocery stores emphasizes the use of a direct store delivery (DSD) system whereby our employees or agents deliver fresh goods to our grocery partners. We roast to order and
ship coffee directly from our roasting facility to our home delivery customers. Our goal is to ensure that customers receive coffee within days of roasting.
We have expanded from a retailer that operates its own outlets to a premium coffee brand available through multiple channels of distribution. We signed our first office coffee distribution agreement in 1997 and have
since added a number of restaurants, foodservice accounts and office coffee distributors in select markets. We added online ordering capability to our website in 1997 to complement our existing mail order home delivery business and have since
invested in marketing programs designed to support our home delivery channel. In 1998, we initiated a strategic expansion into specialty grocery and gourmet food stores. This expansion was further developed to include distribution to mainstream
grocers as we expanded our grocery accounts from 130 to 5,800 stores. We believe our expansion strategy emphasizes disciplined growth and enhancement of our brands image and quality reputation. We operate our business through two reportable
segments: retail and specialty sales. See Note 10, Segment Information to the Notes to Consolidated Financial Statements included elsewhere in this report.
Our website is located at www.peets.com. Our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, as well as any
amendments or exhibits to those reports, are available free of charge through our website at www.peets.com as soon as reasonably practicable after we file them with, or furnish them to, the Securities and Exchange Commission (SEC). The
content on any website referred to in this annual report on Form 10-K is not incorporated by reference into this annual report on Form 10-K unless expressly noted. The Company was organized as a Washington corporation in 1971.
Company Retail Stores
As of December 30, 2007
we operated 166 retail stores in six states through which we sell whole bean coffee, beverages and pastries, tea, and other related items. Our stores are designed to facilitate the sale of fresh whole bean coffee and to encourage customer trial of
our coffee through coffee beverages. Each store has a dedicated staff person at the bean counter to take orders and assist customers with questions on coffee origins and on home brewing. Upon order, beans are scooped and ground to the
customers specific requirements. At our beverage counter, we rotate and sell freshly-brewed coffees and coffee-based beverages to promote customer familiarity, sampling, and sales of whole-bean coffees. To ensure that our
freshness standards are consistently met, it is our policy not to serve brewed coffee that is more than 30 minutes old and every espresso based drink is made to order using freshly pulled shots of espresso and freshly steamed milk. See Item 2.
Properties for further discussion about our retail stores.
Specialty Sales
Grocery
In addition to sales through
our retail stores, we have expanded the availability of our products through a network of grocery stores, including Safeway, Albertsons, Ralphs and Whole Foods Market. To support this expansion, we have developed a DSD sales and
distribution system. Peets DSD route sales representatives
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deliver directly to their stores anywhere between one to three times per week, properly shelve the product, resolve pricing discrepancies, rotate to ensure
freshness, sell and erect free-standing displays and forge store-level selling relationships. We currently have 46 company-operated DSD route sales representatives, and approximately 135 independent distributors or multi-liners who will continue to
support the expansion into new grocery accounts in the western United States and our existing grocery customers.
Home Delivery
In the home delivery channel, we provide points of contact to our customers for coffee ordering and coffee knowledge through a dedicated
website and customer service representatives. Our website features an Express Buy function for registered customers for speed and ease, special coffee and tea programs and a coffee and tea selector to assist the customer in choosing a product based
upon certain characteristics. Peets.com also features a proprietary tool that allows customers to manage the timing and delivery of their recurring orders. We reward our most loyal home delivery customers who maintain regular, ongoing deliveries of
coffee or tea through our Peetnik Loyalty Program. This program has proven to be successful in growing our home delivery business online by encouraging our most loyal customers to establish regular deliveries of fresh roasted coffee or tea. In
addition to our website, we have a team of customer service representatives who assist customers in placing customer orders, choosing a gift item, providing product information and resolving customer issues. Customer service representatives are
regularly trained on Peets product offerings through weekly coffee and tea tastings.
Foodservice and Office
In the foodservice and office business, we have a staff of sales and account managers who make sales calls to potential accounts and conduct
quality audits at our existing accounts. Additionally, we have established relationships with foodservice and office distributors to expand our account base in select markets and channels. These distributors have their own sales and
account management resources. We have two models for servicing our foodservice accounts and distributing our products: We Proudly Brew (WPB) accounts and Licensing accounts. WPB accounts are foodservice
accounts where Peets supplies the equipment and product to brew and resell our products. Licensing accounts involve the creation of a full Peets beverage store within another location such as an airport, grocery store or college
campus. The license partner is responsible for the build-out and management of the unit and we provide training and operations oversight. The office coffee channel is a distributor based business where we sell to specialty distributors who
in turn sell our products for brewing to individual offices.
Our Coffee
Coffee Beans
Coffee is an
agricultural crop that undergoes quality changes and price fluctuation depending on weather, economic and political conditions in coffee producing countries. We purchase only
arabica
coffee beans, which are considered superior to beans traded
in the commodity market. Thus, the
arabica
beans purchased by us tend to trade on a negotiated basis at a substantial premium above commodity coffee prices, depending upon the supply and demand at the time of purchase. Our access to high
quality
arabica
beans depends on our relationships with coffee brokers, exporters and growers, with whom we have built long-term relationships to ensure a steady supply of coffee beans. We believe that, as a result of our reputation that has
been built over 40 years, we have access to some of the highest quality coffee beans from the finest estates and growing regions around the world and we are occasionally presented with opportunities to purchase unique and special coffees.
Unlike roasted coffee beans, green coffee beans are not highly perishable. We generally turn our inventory of green coffee beans two to
three times per year. We typically carry approximately $11 million to $17 million worth of green coffee beans in our inventory. 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.
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Our Roasting Method
Our roasting method was first developed by Alfred Peet and further honed by our talented and skilled roasting personnel. We roast by hand in small batches, and we rely on the skills and training of each roaster to
maximize the flavor and potential in our beans. Our roasters undergo an extensive apprenticeship program to learn our roasting method and to gain the skills necessary to roast coffee at Peets and make a long-term commitment to our artisan
craft.
Coffee Types and Blends
Beyond sourcing and roasting, we have developed a reputation for expert coffee blending. Our
blends, such as Major Dickasons Blend
®
, are well regarded by our customers for their uniqueness, consistency and special flavor characteristics. We sell approximately 32 types of
coffee as regular menu items, including approximately 21 blends and 11 single origin coffees such as Colombia, Guatemala, Sumatra and Kenya. We also offer a line of high-end reserve coffees including JR Reserve Blend
®
and Kona, and we have also featured seasonal reserve coffees such as Jamaica Blue Mountain and Panama Esmeralda. We are active in seeking, roasting and selling unique special lot and one-time coffees. On average, we
offer four to six such coffees every year, including our Anniversary Blend and Holiday Blend.
Tea, Food and Merchandise
Peets 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, California. 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, but we carry them in retail stores and offer them through home delivery as a means to reinforce our commitment to premium home-brewed coffee and tea.
Competitive Positioning
The specialty coffee
category is competitive, but it is dominated by one company that is larger than all the competitors combined. Our primary competitors in whole bean specialty coffee sales include Starbucks, Green Mountain Coffee, Illy Caffé, Millstone
(Procter & Gamble), Seattles Best (Starbucks) and Dunkin Donuts. There are numerous smaller, regional brands that also compete in this category. Premium coffee brands may serve as substitutes for our whole bean coffee and we
also compete indirectly against all other coffee brands on the market.
In addition to competing with other distributors of whole bean
coffee, we compete with retailers of prepared beverages, including coffee house chains, particularly Starbucks, and to a lesser degree, Coffee Bean and Tea Leaf, Dunkin Donuts and Caribou Coffee, numerous convenience stores, restaurants, coffee
shops and street vendors.
We believe that our customers choose among specialty coffee brands based upon quality, variety, 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 focus on product freshness and roast-dating in the same manner as
Peets. 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.
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Our roasted coffee is priced in tiers. Our regular menu coffees are currently priced in our retail
locations within a range of $9.95 to $18.95 per pound. Our line of high-end reserve coffees is priced between $49.90 and $79.90 per pound. In the grocery channel, we sell our coffee in 12 ounce packages at prices established by the grocery store.
Most grocery stores sell our product at a price between $8.99 and $11.99 for a 12 ounce bag.
Intellectual Property
We regard intellectual property and other proprietary rights as important to our success. We place
high value on our Peets trade name, and we own several trademarks and service marks that have been registered with the United States Patent and Trademark Office, including Peets
®
, Peets Coffee & Tea
®
, peets.com
®
, Peets Deep-Roast
®
, Peets Deep-Roasted
®
, Peets Deep-Roasting
®
, Blend 101
®
, eCup
®
, Espresso Forte
®
, Fresh Fridays
®
, Gaia Organic Blend
®
, Garuda Blend
®
, JR Reserve Blend
®
, Major Dickasons Blend
®
, Peetniks
®
, Pride of the Port
®
, Pumphreys Blend
®
, Summer House
®
, Snow Leopard
®
, and Vine Street Blend
®
. We also have registered trademarks on our stylized logo and our P-mug design. In addition, we have applications pending with the
United States Patent and Trademark Office for a number of additional marks including Coffee Handmade Daily, Freddo, and Blended Freddo. We own registered trademarks for our name and logo in Argentina, Australia, Canada, Chile,
China, the European Union, Hong Kong, Japan, Paraguay, Singapore, South Korea, Taiwan and Thailand. We have filed additional applications for trademark protection in Brazil and the Philippines. In addition to peets.com and coffee.com, we own several
other domain names relating to coffee, Peets 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 (consisting 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 Peets are used to manage our operations and increase the productivity of our workforce. We
have a retail point-of-sale system that we believe increases store productivity, provides a higher level of service to our customers and maintains timely information for performance evaluation. Our registers have touch screen components and full
point-of-sale capability. In 2002, during the rollout of our DSD system in the grocery channel, we implemented a grocery order entry and invoice system with handheld capability that allows our route sales representatives to provide service and
information on the spot. In 2003, we implemented business intelligence software to better support and analyze our business in all channels. In 2004, we deployed an integrated labor and scheduling system in our retail stores to improve productivity
and customer service. In 2007, we tested a new inventory management system in our retail stores and in 2008 we plan to complete the implementation in all stores. In 2008, we will also design and develop a new enterprise system that we plan to
implement in 2009.
Our website, peets.com, is hosted at our corporate headquarters in Emeryville, California. All website
applications are built on Microsoft ASP with in-house development. We offer full-functioning e-commerce and our website is integrated with our call center for access to orders placed at both locations. Online delivery confirmation is
provided by United Parcel Service and the United States Postal Service. Our website contains several customer-centered functions. Manage Deliveries is an application which enables consumers to schedule
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recurring deliveries including choosing specific coffees and teas to be delivered at the frequency of their choice. Other important customer functions
include a coffee and tea selector, Express Buy and multiple ship-to capability on a single bill. Additionally, customers with Peets cards can check their balance as well as reload their card online. We designed our
website to provide fast, easy and effective operation when navigating and shopping on our website. We have dedicated information technology employees and marketing staffers for website maintenance, improvement, development and performance.
Employees
As of March 2, 2008,
we employed a workforce of 3,678 people, approximately 687 of whom work approximately 40 hours per week and are considered full-time employees. We consider our relationship with our employees to be good. Since 1979, we have provided full benefits to
all employees who work at least 21 hours per week and have worked at least 500 total hours for the Company. We believe we 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 regulations. If we encounter difficulties in obtaining any necessary licenses or complying with these laws and regulations, then:
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The opening of new retail locations could be delayed;
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The operation of existing retail locations or our coffee roasting operations could be interrupted; or
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Our product offerings could be limited.
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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.
Executive Officers of the Registrant
Set forth below is information with respect to the names, ages, positions and offices of our executive officers as of March 2, 2008.
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Name
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Age
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Position
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Patrick J. ODea
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46
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Chief Executive Officer, President and Director
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Thomas P. Cawley
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47
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Chief Financial Officer, Vice President and Secretary
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James E. Grimes
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52
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Vice President, Operations and Information Systems
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Kay L. Bogeajis
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53
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Vice President, Retail Operations
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Patrick J. ODea
has served as Chief Executive Officer, President and as a director
since May 2002. From April 1997 to March 2001, he was CEO of Archway/Mothers Cookies and Mothers Cake & Cookie Company. From 1995 to 1997, Mr. ODea was the Vice President and General Manager of the Specialty Cheese
Division of Stella Foods. From 1984 to 1995, he was with Procter & Gamble, where he marketed several of the companys snack and beverage brands.
Thomas P. Cawley
has served as Chief Financial Officer since July 2003. From August 2000 to June 2003, he was at Gap, Inc. serving as Chief Financial Officer, Gap Brand. From 1986 to August 2000,
Mr. Cawley was at PepsiCo/Yum Brands (formerly Tricon Global Restaurants), holding various positions such as Director of Finance, Vice PresidentController, and Chief Financial Officer of Pizza Hut. Previous to 1986, Mr. Cawley was
with The Quaker Oats Company and General Foods.
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James E. Grimes
has served as Vice President of Operations and Information Systems since July
2002. In August 2001, Mr. Grimes founded Supply Chain Consulting, where he provided supply chain management expertise. From 1998 to 2001, he was Senior Vice President of Operations at Archway/Mothers Cookies. Previously, Mr. Grimes
held various positions at Mothers Cake and Cookie Company, Frito Lay and Procter & Gamble.
Kay L. Bogeajis
joined
the Company in October 2007. From January 2003 to October 2007, Ms. Bogeajis served as Vice President, Western Operations for Taco Bell Corporation, a Yum Brand company, where she was responsible for more than 1,400 stores and approximately
$1.4 billion in system-wide sales. From October 2001 to January 2003, she was Vice President Systemwide Operations for Taco Bell. Previously, she held prominent retail operations and sales positions with Taco Bell, Frito-Lay, Inc., a PepsiCo
company, and Burger King Corporation.
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 expansion through multiple channels of distribution. Our ability to implement this business strategy is dependent on our ability to:
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Market our products on a national scale and over the internet;
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Enter into distribution and other strategic arrangements with third party retailers and other potential distributors of our coffee;
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Increase our brand recognition on a national scale;
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Identify and lease strategic locations suitable for new stores; and
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Manage growth in administrative overhead and distribution costs likely to result from the planned expansion of our retail and non-retail distribution channels.
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We do not know whether we will be able to successfully implement our business strategy or whether our business strategy
will be successful. Our revenue 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.
Because our business is highly dependent on a single product, specialty coffee, if the demand for specialty coffee decreases, our business could suffer.
Sales of specialty coffee constituted nearly 83% of our 2007 net revenue and 84% of our 2006 and 2005 net revenue. Demand for specialty
coffee is affected by many factors, including:
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Consumer tastes and preferences;
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National, regional and local economic conditions;
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Demographic trends; and
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Perceived or actual health benefits or risks.
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Because we are highly dependent on consumer demand for specialty coffee, a shift in consumer preferences away from specialty coffee would harm our business more than if we had more diversified product offerings. If
customer demand for specialty coffee decreases, our sales would decrease accordingly.
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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 ours. Because the majority of our retail stores are located on the West Coast, primarily in California, our brand recognition remains largely regional. Our brand building initiative involves increasing the
availability of our products and opening new stores to increase awareness of our brand and create and maintain brand loyalty. If our brand building initiative is unsuccessful, we may never recover the expenses incurred in connection with these
efforts and we may be unable to increase our future revenue or implement our business strategy.
Our success in promoting and enhancing the
Peets 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 that 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 inconsistent with our standards, store our whole bean coffee for
long periods of time or resell our whole bean coffee without our consent, which in each case, potentially affects 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.
Increases in the
cost and decreases in availability of high quality Arabica coffee beans could impact our profitability and growth of our business.
Green coffee is our largest single cost of sales. We do not purchase coffee on the commodity markets, but price movements in the trading of coffee do impact the price we pay. Coffee is a trade commodity and, in general, its price can
fluctuate depending on:
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Weather patterns in coffee-producing countries;
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Economic and political conditions affecting coffee-producing countries;
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Foreign currency fluctuations;
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The ability of coffee-producing countries to agree to export quotas; and
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General economic conditions that make commodities more or less attractive investment options.
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Over the past two years, the commodity cost for coffee has risen above the range it was trading in for the prior three to four years. We expect our costs
to continue to rise in 2008. If we are unable to pass along increased coffee costs, our margin will decrease and our profitability will suffer accordingly. If we are not able to purchase sufficient quantities of high quality Arabica beans due to any
of the above factors, we many not be able to fulfill the demand for our coffee, our revenue may decrease and our ability to expand our business may also suffer.
Civil litigation relating to our stock option granting practices could have a material adverse effect on the Company.
We
and certain of our directors and current and former officers are defendants in two shareholder derivative actions relating to our stock option granting practices. See Note 9, Commitments and Contingencies, Legal Proceedings in the
Notes to Consolidated Financial Statements for a more detailed description of these proceedings. These actions are in their preliminary stages, and we intend to take all appropriate steps in the defense of these cases. These lawsuits
could divert management time and attention from day-to-day operations, result in significant legal expenses, and result in an outcome that could have a material adverse effect on our business, financial condition, results of operations and cash
flows.
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Because our business is based primarily 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 60% of our 2007 and 2006 net revenue and a substantial portion of the revenue from our other distribution channels
is generated in California. We expect that our California operations will continue to generate a substantial portion of our revenue. In addition, our California retail stores provide us with 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.
Labor conditions in the grocery business could negatively impact our
grocery business.
There have been grocery strikes in the past that have negatively impacted our grocery business and it is possible
that future grocery strikes in places where we have large distribution may adversely impact our grocery business.
Government mandatory healthcare
requirements could adversely affect our profits.
The Company offers healthcare benefits to all employees who work
at least 21 hours a week and meet service eligibility requirements. In the past, some states, including California, have unsuccessfully proposed legislation mandating that employers pay healthcare premiums into a
state run fund for all employees immediately upon hiring. If legislation similar to this were to be enacted in the states we do business, it could have an adverse affect on the Companys profits.
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 166 retail locations as of year-end 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 operations. 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 initiatives.
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 or 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:
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Have an adverse impact on the quality of the coffee shipped, and thereby adversely affect our brand and reputation;
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Result in the disposal of an amount of coffee that could not be shipped in a timely manner; and
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Require us to contract with alternative, and possibly more expensive, common carriers.
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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.
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We depend on the expertise of key personnel. If these individuals leave or change their role within our Company
without effective replacements, our operations may suffer.
The success of our business is dependent to a large degree on our management
and our coffee roasters and purchasers. If members of our management leave without effective replacements, our ability to implement our business strategy could be impaired. If we lost the services 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. In either case, our business and operations could be adversely affected.
We may not be able to hire or retain additional management and other personnel and our recruiting and training costs may increase as a result of turnover, 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:
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We are unable to recruit or retain a sufficient number of qualified employees;
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The costs of employee compensation or benefits increase substantially; or
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The costs of outsourcing certain tasks to third party providers increase substantially.
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Because we have only one roasting facility, a significant interruption in the operation of our roasting and distribution facilities could potentially disrupt our
operations.
We have only one roasting and distribution facility. A significant interruption in the operation of this facility, whether
as a result of a natural disaster 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 facilities 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.
Our earthquake insurance covers net income, continuing normal operating expenses and extra expenses incurred during the period of restoration once the large deductible has been exceeded. However, in the event of a
catastrophic earthquake, our coverage is limited and would not cover all of our expenses and losses caused by an earthquake.
We have a high deductible
workers compensation insurance program and more claims and higher costs from these claims may adversely affect our profits.
Our
2007 workers compensation insurance program is a modified self-insured program with a high deductible with an overall program ceiling to limit exposure. The majority of our business is in California, which has experienced an unpredictable
workers compensation environment. Therefore, we are highly exposed to this environment. Additionally, we have had to estimate our liability for existing claims whose outcome is uncertain. While we believe our reserve methodology on these
claims is appropriate, should a greater amount of claims occur or the settlement costs increase beyond what was anticipated, our expenses could increase and our profitability may decrease. For the policy year effective March 1, 2008, we have
purchased a guaranteed cost policy and therefore our self-insured claims exposure is limited to incidents prior to March 1, 2008.
Our roasting
methods are not proprietary, so competitors may be able to duplicate them, which could 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
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for us to prevent competitors from copying our roasting methods. If our competitors copy our roasting methods, 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.
Competition in the specialty coffee market is intense and could affect our profits.
The specialty coffee category is competitive, but it is dominated by one company that is larger than all the competitors combined. Our primary competitors in whole bean specialty coffee sales include Starbucks, Green
Mountain Coffee, Illy Caffé, Millstone (Procter & Gamble), Seattles Best (Starbucks) and Dunkin Donuts. There are numerous smaller, regional brands that also compete in this category. Premium coffee brands may serve as
substitutes for our whole bean coffee and we also compete indirectly against all other coffee brands on the market. In addition to competing with other distributors of whole bean coffee, we compete with retailers of prepared beverages, including
coffee house chains, particularly Starbucks, and to a lesser degree, Coffee Bean and Tea Leaf, Dunkin Donuts and Caribou Coffee, numerous convenience stores, restaurants, coffee shops and street vendors.
Despite competing in a fragmented product category, whole bean specialty coffee brands are being established across multiple distribution channels.
Several competitors have been aggressive in obtaining distribution in specialty grocery and gourmet food stores, through online, and in office, restaurant and foodservice locations. Other competitors may have an advantage over us based on their
earlier entry into these distribution channels. In addition, many of our competitors may have substantially greater financial, marketing and operating resources than we do.
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.
Adverse publicity regarding customer complaints may harm
our business.
We may be the subject of complaints or litigation from customers alleging beverage and food-related illnesses, injuries
suffered on the premises or other quality, health or operational concerns. Adverse publicity resulting from such allegations may materially adversely affect us, regardless of whether such allegations are true or whether we are ultimately held
liable.
Item 1B.
|
Unresolved Staff Comments
|
Not Applicable.
Peets headquarters are located in
Emeryville, California. As of December 30, 2007, the Company was in the process of converting our former roasting and distribution facility into office space. As a result, we continued to lease approximately 103,000 square feet in four
locations. The lease for what will be our main office space devoted to general corporate and retail overhead and a call center for the home delivery business is approximately 60,000 square feet and extends to October 2015 with two five year
extension options. In addition, we will be retaining a second office and warehouse space totaling approximately 8,000 square feet that we are currently leasing on a month-to-month basis. We plan to vacate approximately 33,000 square feet of office
and former production space related to two leases that expire on March 15, 2008 and April 30, 2008.
11
In December 2006 we purchased approximately 460,000 square feet of land and a 138,000 square foot
building with related site improvements in Alameda, California for the purpose of operating a new roasting and distribution facility. The final purchase price of the facility and the land was $18.6 million. We transitioned our operations to this
facility during the first and second quarter of 2007 and were effectively at full production capability by May 2007.
In 2007, we opened 30
new stores. Our retail locations are all company-owned and operated in leased facilities. Our stores are typically located in urban neighborhoods, suburban shopping centers (usually consisting of grocery, specialty and service stores) and on
high-traffic streets.
The following table lists the number of retail locations as of December 30, 2007:
|
|
|
Location
|
|
Number
|
Northern California
|
|
106
|
Southern California
|
|
34
|
Illinois
|
|
2
|
Oregon
|
|
8
|
Massachusetts
|
|
6
|
Washington
|
|
6
|
Colorado
|
|
4
|
|
|
|
Total
|
|
166
|
|
|
|
Item 3.
|
Legal Proceedings
|
In November 2006, a complaint
styled as a shareholder derivative action was filed, purportedly on behalf of Peets, against certain of our present and former directors and officers. The complaint alleges that the defendants caused or allowed improprieties in connection with
certain stock option grants since at least 2001 and thereby breached their fiduciary duties to Peets and violated specified provisions of the California Corporations Code. The complaint also alleges that certain of our present and former
directors and officers were unjustly enriched as a result. Purportedly on behalf of Peets, the complaint seeks, among other things, damages, restitution and corporate governance reforms. This complaint and a similar one have been filed in the
Superior Court for Alameda County, California and a third was filed in February 2007 in the United States District Court for the Northern District of California.
On February 12, 2008, the United States District Court granted our motion for dismissal of the federal shareholder derivative action. The court also granted the plaintiff leave to file an amended complaint, and
ordered that any amended complaint be filed by February 29, 2008. Counsel for the plaintiffs in this case subsequently informed our attorneys that they did not intend to file an amended complaint, and no amended complaint was filed on or before
February 29, 2008. The actions filed in the Alameda County Superior Court remain pending.
These actions could result in substantial
costs and divert managements attention and resources. These actions are at a preliminary stage, and we are not in a position to determine whether a loss is probable or estimate a range of amount of loss.
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 would have a material adverse effect on the financial position or results of operations of the Company.
Item 4.
|
Submission of Matters to a Vote of Security Holders
|
No matters were submitted to a vote of our shareholders during the quarter ended December 30, 2007.
12
PEETS COFFEE & TEA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Organization
Peets Coffee & Tea, Inc., a Washington corporation (the
Company), sells fresh roasted coffee, hand selected tea, and related merchandise in several distribution channels, including grocery, home delivery, foodservice and office accounts and company-operated retail stores. At December 30,
2007 and December 31, 2006, the Company operated 166 and 136 retail stores, respectively, in California, Colorado, Illinois, Oregon, Massachusetts and Washington.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany transactions have been eliminated in consolidation.
Year End
The Companys fiscal year end is the Sunday closest to December 31. The fiscal years ended
December 30, 2007, December 31, 2006, and January 1, 2006 included 52 weeks.
Use of Estimates
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
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 coffee beans. Finished goods include roasted coffee,
tea, accessory products, spices, and packaged foods. All products are valued at the lower of cost or market using the first-in, first-out method, except green bean and roasted coffee, which are valued at the average cost.
Property, plant and equipment
Property, plant 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 40 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, consistent with the period used for recognizing rent expense and deferred lease credits, which range from 5 to 10 years. Repairs and maintenance costs are expensed as incurred.
Intangible and other assets
Intangible and other assets include lease rights, contract acquisition costs, deposits, and restricted
cash. Lease rights represent payments made to lessors and others to secure retail locations and are amortized on the straight-line method over the life of the related lease from 5 to 10 years. The cost of intangible assets, primarily lease rights,
subject to amortization was $1,066,000 at December 30, 2007 and December 31, 2006. The related accumulated amortization was $802,000 and $708,000 at December 30, 2007 and December 31, 2006, respectively. Amortization expense for
2007, 2006, and 2005 was $94,000, $121,000, and $135,000, respectively. Future amortization expense for 2008 through 2012 is estimated at $87,000, $83,000, $33,000, $15,000 and $11,000, respectively.
Restricted cash of $3,239,000 and $3,085,000 as of December 30, 2007 and December 31, 2006, respectively, represents collateral for the
Companys high deductible workers compensation policy and is classified in intangible and other assets, net on the consolidated balance sheets.
F-7
PEETS COFFEE & TEA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Investments
Marketable securities are classified as available-for-sale and are
recorded at fair value. Any unrealized gains and losses are recorded in other comprehensive income. Gains and losses are due to fluctuations in interest rates and are considered temporary impairments as management has the intent and ability to hold
the securities to recovery.
Impairment of Long-Lived Assets
When facts and circumstances indicate that the carrying of
long-lived assets may be impaired, an evaluation of recoverability is performed by comparing the carrying values of the assets to projected future cash flows in addition to other quantitative and qualitative analyses. Upon indication that the
carrying values of such assets may not be recoverable, the Company recognizes an impairment loss by a charge against current operations for an amount equal to the difference between the carrying value and the assets fair value. The fair value
of the retail net asset is estimated using the discounted cash flows of the assets. Property, plant and equipment assets are grouped at the lowest level for which there are identifiable cash flows when assessing impairment. Cash flows for retail net
assets are identified at the individual store level. Impairment losses for underperforming stores of $460,000, $0 and $311,000 were recorded during 2007, 2006, and 2005, respectively, which were classified as operating expenses on the consolidated
statements of income.
Accrued Compensation and Benefits
The Company records an estimated liability for the self-insured
portion of workers compensation claims. The liability is determined based on information received from the Companys insurance adjuster including claims paid, filed and reserved for, as well as using historical experience and other
actuarial assumptions. As of December 30, 2007 and December 31, 2006, the Company had $3,067,000 and $2,616,000, respectively, accrued for workers compensation.
Revenue Recognition
Net revenue is recognized at the point of sale at our Company-operated retail stores. Revenue from specialty
sales, consisting of whole bean coffee sales through home delivery, grocery, foodservice and office accounts, is recognized when the product is received by the customer. Revenue from stored value cards, gift certificates and home delivery advanced
payments is recognized upon redemption or receipt of product by the customer. Cash received in advance of product delivery is recorded in deferred revenue on the accompanying consolidated balance sheets. All revenues are recognized net of any
discounts. Net revenue is presented net of any taxes collected from customers and remitted to government entities. Net revenue includes an allowance for grocery sales returns for coffee exceeding our freshness standards based on historical
experience and current trends. The Company establishes an allowance for estimated doubtful accounts based on historical experience and current trends.
A summary of the allowance for doubtful accounts is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
Beginning
of Year
|
|
Additions
Charged to
Expense
|
|
Write-offs
and Other
|
|
|
Balance
at end
of Year
|
Allowance for doubtful accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 30, 2007
|
|
$
|
67
|
|
$
|
7
|
|
$
|
(2
|
)
|
|
$
|
72
|
Year ended December 31, 2006
|
|
|
145
|
|
|
|
|
|
(78
|
)
|
|
|
67
|
Year ended January 1, 2006
|
|
|
89
|
|
|
57
|
|
|
(1
|
)
|
|
|
145
|
The Company records shipping revenue in net revenue. The Company recorded shipping revenue of
$2,718,000, $2,532,000, and $2,090,000 related to home delivery sales in 2007, 2006, and 2005, respectively.
Cost of sales and
related occupancy expenses
Cost of sales and related occupancy expenses consist primarily of coffee and other product costs. It also includes plant manufacturing (including depreciation), freight and distribution costs. Occupancy
expenses include rent and related expenses such as utilities.
F-8
PEETS COFFEE & TEA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Operating expenses
Operating expenses consist of both retail store and specialty
operating costs, such as employee labor and benefits, repairs and maintenance, supplies, training, travel and banking and card processing fees.
Preopening costs
Costs incurred in connection with the start-up and promotion of new store openings are expensed as incurred.
Fair Value of Financial Instruments
The carrying value of cash and equivalents, receivables and accounts payable approximates fair value. Marketable securities are recorded at fair value.
Advertising costs
Advertising costs are expensed as incurred. Advertising expense was $4,260,000, $4,543,000, and
$3,748,000 in 2007, 2006, and 2005, respectively.
Operating leases
Certain of the Companys lease agreements
provide for tenant improvement allowances, rent holidays, scheduled rent increases and/or contingent rent provisions during the term of the lease. For purposes of recognizing incentives and minimum rental expenses, rent is expensed on a
straight-line basis, and the Company records the difference between the recognized rental expense and accounts payable under the lease to deferred lease credits and other long-term liabilities, over the lease term, which may or may not coincide with
the commencement of the lease. Tenant improvement allowances are amortized as a reduction in rent expense over the term of the lease. If the original lease term is less than the Companys anticipated rental period, one or more stated option
terms are included in the straight-line computation. Certain leases provide for contingent rents, which are determined as a percentage of gross sales in excess of specified levels. The Company records a contingent rent liability in accounts payable
on the consolidated balance sheets and the corresponding rent expense when specified levels have been achieved or when management determines that achieving the specified levels during the fiscal year is probable.
Gift Cards
The Company sells gift cards in its retail stores and through its web site. Our gift cards do not have an expiration date.
We recognize income from gift cards when the likelihood of the gift card being redeemed by the customer is remote (gift card breakage) and we determine that we do not have a legal obligation to remit the unredeemed gift cards to the relevant
jurisdictions. We determine the gift card breakage rate based upon our historical redemption patterns. We apply an estimated gift card breakage rate after the card has been dormant for 24 months, when based on historical information, we determine
the likelihood of redemption becomes remote. Gift card breakage income of $332,000, $206,000, and $217,000 in 2007, 2006, and 2005, respectively, is included in operating expenses in the consolidated statements of income.
Income Taxes
Income taxes are accounted for using the asset and liability method, under which deferred tax assets and liabilities are
determined based on the difference between the financial statements and tax bases of assets and liabilities using enacted tax rates currently in effect.
Stock-Based Compensation
On January 2, 2006, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards No. 123(R), Share-Based
Payment, (SFAS 123(R)), using the modified-prospective-transition method. The fair value of each stock award is estimated on the grant date using the Black-Scholes option-pricing model based on assumptions for volatility, risk-free
interest rates, expected life of the option, and dividends (if any). Such amounts have been reduced by the Companys estimate of forfeitures of all unvested awards. The expected term of the options represents the estimated period of time from
date of option grant until exercise and is based on historical experience of similar awards, giving consideration to the contractual terms, vesting schedules and expectations of future employee behavior. For grants prior to July 3, 2006
expected stock price volatility was estimated using only the historical volatility of the Companys stock. Beginning with the period ended October 1, 2006, expected stock price volatility is based on a
F-9
PEETS COFFEE & TEA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
combination of historical volatility and the implied volatility of the Companys traded options. The risk-free interest rate is based on the implied
yield available on U.S. Treasury zero-coupon issues with an equivalent term. The Company has not paid dividends in the past and does not plan to pay dividends in the near future. Additional disclosure requirements of SFAS 123(R) are set forth in
Note 8, Stock Options, Employee Purchase and Deferred Compensation Plans.
Stock-based compensation expense recognized in the
consolidated statements of income related to stock options was $2,814,000, $4,022,000, and $44,000 for 2007, 2006 and 2005, respectively. The related total tax benefit was $1,147,000, $1,641,000, and $19,000 for 2007, 2006 and 2005, respectively.
Stock-based compensation expense was recognized as follows in the consolidated statements of income (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
Cost of sales and related occupancy expenses
|
|
$
|
234
|
|
$
|
466
|
|
$
|
2
|
Operating expenses
|
|
|
986
|
|
|
1,292
|
|
|
19
|
General and administrative expenses
|
|
|
1,594
|
|
|
2,264
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,814
|
|
$
|
4,022
|
|
$
|
44
|
|
|
|
|
|
|
|
|
|
|
Prior to January 1, 2006, the Company accounted for stock-based awards to employees and
non-employee directors using the intrinsic value method in accordance with Accounting Principles Board, (APB) No. 25, Accounting for Stock Issued to Employees. The following table shows the effect on net income and net income per
share for 2005 had compensation cost been recognized based upon the estimated fair value on the grant date of stock options and ESPP awards (in thousands, except net income per share):
|
|
|
|
|
|
|
2005
|
|
Net incomeas reported
|
|
$
|
10,775
|
|
Stock-based employee compensation included in reported net income, net of tax
|
|
|
25
|
|
Stock-based compensation expense determined under fair value based method, net of tax
|
|
|
(4,085
|
)
|
|
|
|
|
|
Net incomepro forma
|
|
$
|
6,715
|
|
|
|
|
|
|
Basic net income per shareas reported
|
|
$
|
0.78
|
|
Basic net income per sharepro forma
|
|
$
|
0.49
|
|
Diluted net income per shareas reported
|
|
$
|
0.74
|
|
Diluted net income per sharepro forma
|
|
$
|
0.46
|
|
The fair value of each option grant and ESPP award is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
|
ESPP
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Expected term (in years)
|
|
|
5.5
|
|
|
|
5.4
|
|
|
|
3.8
|
|
|
|
0.5
|
|
|
|
0.5
|
|
|
|
0.5
|
|
Expected stock price volatility
|
|
|
30.1
|
%
|
|
|
34.1
|
%
|
|
|
37.8
|
%
|
|
|
25.1
|
%
|
|
|
27.8
|
%
|
|
|
26.6
|
%
|
Risk-free interest rate
|
|
|
4.7
|
%
|
|
|
5.0
|
%
|
|
|
3.9
|
%
|
|
|
4.9
|
%
|
|
|
5.0
|
%
|
|
|
3.3
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Estimated fair value per option granted
|
|
$
|
9.92
|
|
|
$
|
11.83
|
|
|
$
|
9.03
|
|
|
$
|
5.86
|
|
|
$
|
7.16
|
|
|
$
|
6.86
|
|
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 841,277,
578,424, and 28,828 have been excluded from diluted weighted average shares outstanding in 2007, 2006, and 2005, respectively.
F-10
PEETS COFFEE & TEA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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):
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
Basic weighted average shares outstanding
|
|
13,724
|
|
13,733
|
|
13,801
|
Incremental shares from assumed exercise of stock options
|
|
396
|
|
469
|
|
668
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding
|
|
14,120
|
|
14,202
|
|
14,469
|
|
|
|
|
|
|
|
Recently Issued Accounting Standards
In July 2006, the FASB issued Financial Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB
Statement No. 109, (FIN 48), which clarifies the accounting for uncertainty in tax positions. FIN 48 requires that the Company recognize in its financial statements the impact of a tax position, if that position is more likely than
not of being sustained on audit, based on the technical merits of the position. The Company adopted the provisions of FIN 48 on January 1, 2007. See Note 5 for additional information.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157), which defines fair value,
establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. Early adoption is permitted. The Company will adopt these new requirements beginning December 31, 2007. The Company does not believe the adoption of SFAS 157 will have a
material effect on its financial position or results of operations.
In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an amendment of FASB Statement No. 115 (SFAS 159). SFAS 159 permits entities to elect to measure financial instruments and certain other items at
fair value. Upon adoption of SFAS 159, an entity may elect the fair value option for eligible items that exist at the adoption date. Subsequent to the initial adoption, the election of the fair value option can only be made at initial recognition of
the asset or liability or upon a re-measurement event that gives rise to new-basis accounting. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company does not believe the adoption of SFAS 159 will have a material
effect on its financial position or results of operations.
2. Inventories
The Companys inventories consist of the following at year end 2007 and 2006 (in thousands):
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
Green coffee
|
|
$
|
15,421
|
|
$
|
11,535
|
Other inventory
|
|
|
9,062
|
|
|
7,998
|
|
|
|
|
|
|
|
Total
|
|
$
|
24,483
|
|
$
|
19,533
|
|
|
|
|
|
|
|
F-11
PEETS COFFEE & TEA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
3. Property, Plant and Equipment
Property, plant and equipment consist of the following at year end 2007 and 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
Leasehold improvements
|
|
$
|
59,125
|
|
|
$
|
46,791
|
|
Furniture, fixtures and equipment
|
|
|
61,472
|
|
|
|
52,950
|
|
Plant equipment
|
|
|
17,729
|
|
|
|
11,601
|
|
Building
|
|
|
13,949
|
|
|
|
12,752
|
|
Land
|
|
|
8,902
|
|
|
|
8,209
|
|
Construction in progress
|
|
|
6,334
|
|
|
|
9,745
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
167,511
|
|
|
|
142,048
|
|
Less: Accumulated depreciation
|
|
|
(68,280
|
)
|
|
|
(59,601
|
)
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
99,231
|
|
|
$
|
82,447
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense was $12,767,000 in 2007, $10,128,000 in 2006 and $8,508,000 in 2005.
Construction in progress includes retail stores under construction and related fixtures, manufacturing plant equipment, and other capital projects not yet placed in service.
4. Marketable Securities
At December 30, 2007 and December 31,
2006, the Company maintained marketable securities classified as available-for-sale as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Gross Unrealized
Holding Gains (Losses)
|
|
|
Fair
Value
|
December 30, 2007
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency obligations
|
|
$
|
1,000
|
|
$
|
|
|
|
$
|
1,000
|
State and local government obligations
|
|
|
6,911
|
|
|
21
|
|
|
|
6,932
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable securitiesshort-term
|
|
$
|
7,911
|
|
$
|
21
|
|
|
$
|
7,932
|
|
|
|
|
|
|
|
|
|
|
|
State and local government obligations
|
|
$
|
7,765
|
|
$
|
66
|
|
|
$
|
7,831
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable securitieslong-term
|
|
$
|
7,765
|
|
$
|
66
|
|
|
$
|
7,831
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Gross Unrealized
Holding Gains
(Losses)
|
|
|
Fair
Value
|
|
|
|
|
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency obligations
|
|
$
|
3,000
|
|
$
|
(7
|
)
|
|
$
|
2,993
|
State and local government obligations
|
|
|
16,534
|
|
|
(16
|
)
|
|
|
16,518
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable securitiesshort-term
|
|
$
|
19,534
|
|
$
|
(23
|
)
|
|
$
|
19,511
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency obligations
|
|
$
|
6,000
|
|
$
|
(11
|
)
|
|
$
|
5,989
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable securitieslong-term
|
|
$
|
6,000
|
|
$
|
(11
|
)
|
|
$
|
5,989
|
|
|
|
|
|
|
|
|
|
|
|
Gross unrealized holding gains at December 30, 2007 are due to fluctuations in interest
rates. At December 30, 2007, all long-term marketable securities have maturities ranging from one to two years.
F-12
PEETS COFFEE & TEA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
During 2007 and 2006, the Company sold available-for-sale securities for net proceeds from marketable
securities of $31,304,000 and $49,888,000, respectively with no realized gains. Realized gains and losses are determined on the specific identification method. For the year ended December 30, 2007, the Company had unrealized gains $67,000 (net
of $46,000 tax) and for the year ended December 31, 2006, the Company had unrealized gains of $61,000 (net of $59,000 tax), included in accumulated other comprehensive income.
5. Income Taxes
The income tax provision consists of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
5,993
|
|
|
$
|
6,639
|
|
|
$
|
4,464
|
|
State
|
|
|
1,922
|
|
|
|
1,662
|
|
|
|
1,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
7,915
|
|
|
|
8,301
|
|
|
|
6,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(2,648
|
)
|
|
|
(3,266
|
)
|
|
|
908
|
|
State
|
|
|
(592
|
)
|
|
|
(345
|
)
|
|
|
(97
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(3,240
|
)
|
|
|
(3,611
|
)
|
|
|
811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,675
|
|
|
$
|
4,690
|
|
|
$
|
6,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The difference between the effective income tax rate and the United States federal income tax rate
is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Statutory Federal rate
|
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State income taxes less federal benefit
|
|
5.7
|
|
|
5.9
|
|
|
5.8
|
|
Tax-exempt interest
|
|
(1.6
|
)
|
|
(2.4
|
)
|
|
(0.5
|
)
|
Domestic production deduction
|
|
(2.8
|
)
|
|
(1.6
|
)
|
|
(1.2
|
)
|
Other, net
|
|
(0.5
|
)
|
|
0.6
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
35.8
|
%
|
|
37.5
|
%
|
|
38.8
|
%
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets (liabilities) consist of the following at year end 2007 and 2006 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
Charitable contributions
|
|
$
|
|
|
|
$
|
33
|
|
Credit carryforwards
|
|
|
150
|
|
|
|
106
|
|
Scheduled rent
|
|
|
1,996
|
|
|
|
1,308
|
|
Accrued reserves
|
|
|
1,442
|
|
|
|
1,222
|
|
Accrued compensation
|
|
|
633
|
|
|
|
498
|
|
State taxes
|
|
|
457
|
|
|
|
450
|
|
Stock options
|
|
|
2,499
|
|
|
|
1,748
|
|
Other
|
|
|
105
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
7,282
|
|
|
|
5,376
|
|
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
(774
|
)
|
|
|
(1,677
|
)
|
Other
|
|
|
(205
|
)
|
|
|
(496
|
)
|
|
|
|
|
|
|
|
|
|
Gross deferred tax liabilities
|
|
|
(979
|
)
|
|
|
(2,173
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
6,303
|
|
|
$
|
3,203
|
|
|
|
|
|
|
|
|
|
|
F-13
PEETS COFFEE & TEA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The Company adopted the provisions of FIN 48 on January 1, 2007.
The following table summarizes the activity related to unrecognized tax benefits (in thousands):
|
|
|
|
Gross unrecognized tax benefit at January 1, 2007
|
|
$
|
55
|
Gross increases for the current period
|
|
|
30
|
|
|
|
|
Gross unrecognized tax benefit at December 30, 2007
|
|
$
|
85
|
|
|
|
|
The amount of unrecognized tax benefits that would increase the Companys tax rate if
recognized is $85,000. This relates to state exposures from not filing a state tax return. It is the Companys policy to recognize interest and penalties in the tax provision. Related to the unrecognized tax benefits noted above, the Company
accrued penalties and interest of $15,000 during 2007 and in total, as of December 30, 2007, has recognized a liability for penalties and interest of $28,000. We do not expect our unrecognized tax benefits to change significantly over the next
12 months.
The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The Companys
federal income tax returns for the years 2002 through 2004 were effectively settled with the Internal Revenue Service. The Companys federal income tax returns for 2005 and 2006 are open tax years and the 2005 federal income tax return is
currently under audit by the Internal Revenue Service. The Companys returns for the state of California tax for 2004 through 2006 are open tax years. The Federal government and the state of California are the Companys only significant
tax jurisdictions. The Company also files in numerous state jurisdictions with varying statutes of limitations.
No valuation allowance for
deferred tax assets was recorded as management believes it is more likely than not that all of the deferred tax assets will be realized. The Company has California Enterprise Zone credit carryforwards of $150,000 that do not expire.
6. Employee Benefit Plan
The
Companys 401(k) plan covers substantially all employees. Employees may contribute up to 60% of their annual salary up to a maximum of $15,500. The Company matches 50% of amounts contributed by its employees, subject to a maximum of 5% of the
employees eligible compensation contributed to the plan. The Companys contribution was $490,000, $409,000, and $323,000 in 2007, 2006, and 2005, respectively. The plan does not offer investments in Company stock.
7. Stock Purchase Program
In
September 2006, the Board of Directors approved the purchase up to one million shares of the Companys common stock, with no expiration. As of December 30, 2007, no shares have been purchased under this program. During the year ended
December 31, 2006, the Company purchased and retired the remaining 589,504 shares of common stock available for purchase under the February 2004 share purchase program at an average price of $26.99.
8. Stock Option, Employee Purchase and Deferred Compensation Plans
Effective in 2001, the Company adopted a new stock option plan for which the Company has reserved 1,500,000 shares of common stock for issuance pursuant
to the plan. As of each annual meeting of the Companys shareholders, beginning in 2002, and continuing through and including the annual meeting of the
F-14
PEETS COFFEE & TEA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Companys shareholders in 2010, the number of shares of common stock reserved for issuance under the 2000 plan will be increased automatically by the
lesser of (i) five percent (5%) of the total number of shares of common stock outstanding on such date, (ii) five hundred thousand (500,000) shares, or (iii) a number of shares determined by the Board prior to such date,
which number shall be less than (i) and (ii) above. The purchase price of the common stock issuable under this plan is determined by the Board of Directors, however may not be less than 85% of the fair market value of common stock at the
grant date. The term of a granted stock option is 10 years from the grant date. Stock options vest according to a pre-determined vest schedule set at grant date.
Also effective in 2001, the Company adopted the 2000 Non-Employee Director Plan that provides for the automatic grant of nonstatutory stock options to purchase shares of common stock to non-employee directors, which
is administered by the Board of Directors. The aggregate number of shares of common stock that may be issued under the plan is 330,000. As of each annual meeting of the Companys shareholders, beginning in 2002, and continuing through and
including the annual meeting of the Companys shareholders in 2020, the number of shares of common stock reserved for issuance under the 2000 plan will be increased automatically by the lesser of (i) three quarters of one percent (0.75%)
of the total number of shares of common stock outstanding on such date, (ii) sixty thousand (60,000) shares, or (iii) a number of shares determined by the Board prior to such date, which number shall be less than (i) and
(ii) above. The exercise price of options granted will be equal to the fair market value of the common stock on the date of grant and have a term no more than ten years from the date granted. Stock options vest according to a pre-determined
vest schedule set at grant date. In 2007, 2006, and 2005, the Company granted non-employee director options to purchase an aggregate of 73,750, 68,125, and 56,089 shares of common stock, respectively.
The aggregate intrinsic value in the table below is before applicable income taxes, based on the Companys closing stock price as of the last
business day of the year, which would have been received by the optionees had all options been exercised on that date. As of December 30, 2007, total unrecognized stock-based compensation expense related to nonvested stock options was
approximately $4.6 million, which is expected to be recognized over a weighted average period of approximately 40 months. During the year ended December 30, 2007, the total intrinsic value of stock options exercised was $3.8 million.
F-15
PEETS COFFEE & TEA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
As of December 30, 2007, there were 946,341 shares available for grant under the 2000 stock
option plan and 153,100 shares available for grant under the 2000 Non-Employee Director stock option plan. Changes in stock options were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
Outstanding
|
|
|
Weighted Average
Exercise Price Per
Share
|
|
Weighted Average
Remaining
Contractual Life
(Years)
|
|
Aggregate
Intrinsic Value
(in thousands)
|
Outstanding at January 2, 2005
|
|
2,649,073
|
|
|
$
|
15.69
|
|
5.96
|
|
$
|
28,503
|
Granted
|
|
600,440
|
|
|
|
26.77
|
|
|
|
|
|
Canceled
|
|
(161,812
|
)
|
|
|
19.74
|
|
|
|
|
|
Exercised
|
|
(536,395
|
)
|
|
|
12.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2006
|
|
2,551,306
|
|
|
|
18.68
|
|
6.71
|
|
|
29,790
|
Granted
|
|
461,089
|
|
|
|
29.54
|
|
|
|
|
|
Canceled
|
|
(119,464
|
)
|
|
|
25.13
|
|
|
|
|
|
Exercised
|
|
(160,250
|
)
|
|
|
17.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2006
|
|
2,732,711
|
|
|
|
20.33
|
|
6.55
|
|
|
18,147
|
Granted
|
|
333,882
|
|
|
|
26.79
|
|
|
|
|
|
Canceled
|
|
(96,583
|
)
|
|
|
26.00
|
|
|
|
|
|
Exercised
|
|
(390,647
|
)
|
|
|
17.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oustanding at December 30, 2007
|
|
2,579,363
|
|
|
$
|
21.36
|
|
6.40
|
|
$
|
21,028
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest, December 30, 2007
|
|
2,349,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 30, 2007
|
|
1,799,189
|
|
|
$
|
18.54
|
|
5.47
|
|
$
|
19,615
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes stock option information at year end 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of Exercise Prices
|
|
Options Outstanding
|
|
Options Exercisable
|
|
Number of
Options
|
|
Weighted-Average
Remaining
Contractual Life
(Years)
|
|
Weighted-Average
Exercise Price
|
|
Number of
Options
|
|
Weighted-Average
Exercise Price
|
$6.38 to $12.98
|
|
263,036
|
|
4.19
|
|
$
|
11.17
|
|
263,063
|
|
$
|
11.17
|
$15.49 to $15.49
|
|
627,452
|
|
4.40
|
|
|
15.49
|
|
627,452
|
|
|
15.49
|
$15.59 to $22.84
|
|
569,877
|
|
5.78
|
|
|
19.80
|
|
556,300
|
|
|
19.74
|
$23.28 to $26.50
|
|
565,627
|
|
8.27
|
|
|
26.08
|
|
224,738
|
|
|
26.01
|
$27.32 to $35.87
|
|
553,371
|
|
8.44
|
|
|
29.65
|
|
127,663
|
|
|
30.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$6.38 to $35.87
|
|
2,579,363
|
|
6.40
|
|
$
|
21.36
|
|
1,799,216
|
|
$
|
18.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2001, the Company adopted the 2000 Employee Stock Purchase Plan (ESPP), where
eligible employees can choose to have up to 15% of their annual earnings withheld to purchase the Companys common stock. The purchase price of stock is 85% of the lower of the beginning of the offering period or end of the offering period
market price. The Company authorized 200,000 shares of common stock available for issuance under the plan, which will be increased as of each annual meeting of the Companys shareholders, beginning 2002 until 2020, by the least of 200,000
shares or 1.5% of the number of shares of common stock outstanding on that date. However, the Board of Directors has the authority to designate a smaller number of shares by which the authorized number of shares of common stock will be increased on
that date. During 2007, 2006, and 2005,
F-16
PEETS COFFEE & TEA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
employees purchased 25,106, 43,474, and 39,957 shares, respectively, of the Companys common stock under the plan at a weighted-average per share price
of $20.94, $26.99, and 24.07, respectively. At December 30, 2007, 972,162 shares remain available for future issuance.
Effective
December 1, 2003, the Company adopted a Nonqualified Deferred Compensation Plan (the Plan) for certain executive employees. The purpose of the Plan is to offer those employees an opportunity to elect to defer the receipt of
compensation in order to provide termination of employment and related benefits taxable pursuant to section 451 of the Internal Revenue Code of 1986, as amended (the Code). The Plan is intended to be a top-hat plan (i.e., an
unfunded deferred compensation plan maintained for a select group of management or highly-compensated employees) under sections 201(2), 301(a)(3) and 401(a)(1) of the Employee Retirement Income Security Act of 1974 (ERISA). The long-term
liability related to compensation deferrals under the Plan was $317,000 and $222,000 as of December 30, 2007 and December 31, 2006, respectively, which is included in deferred lease credits and other long-term liabilities. The related
asset is classified in cash and cash equivalents on the consolidated balance sheets.
9. Commitments and Contingencies
Leases
The Company leases its Emeryville, California administrative offices and its retail stores and certain
equipment under operating leases that expire from 2008 through 2018. Certain leases contain renewal options for an additional five to fifteen years, and also provide for contingent rents to be paid equal to a stipulated percentage of sales. The
lease agreements also provide for periodic adjustments to the minimum lease payments based on changes in cost of living indices or other scheduled increases.
Future minimum lease payments required under non-cancelable operating leases subsequent to December 30, 2007 are as follows (amounts in thousands):
|
|
|
|
|
|
Leases
|
Years:
|
|
|
|
2008
|
|
$
|
13,933
|
2009
|
|
|
13,153
|
2010
|
|
|
12,283
|
2011
|
|
|
11,622
|
2012
|
|
|
11,100
|
Thereafter
|
|
|
36,340
|
|
|
|
|
Total minimum lease payments
|
|
$
|
98,431
|
|
|
|
|
Rent expense was $12,449,000, $9,955,000 and $8,314,000 for 2007, 2006, and 2005, respectively,
including contingent rents of $120,000, $130,000, and $194,000, respectively.
Purchase Commitments
As of
December 30, 2007, the Company had approximately $37,100,000 of outstanding coffee purchase commitments from 2008 to 2012 with both fixed prices and prices with a fixed premium over the New York C market.
Legal Proceedings
In November 2006, a complaint styled as a shareholder derivative action was filed, purportedly on behalf of
Peets, against certain of our present and former directors and officers. The complaint alleges that the defendants caused or allowed improprieties in connection with certain stock option grants since at least 2001 and thereby breached their
fiduciary duties to Peets and violated specified provisions of the California Corporations Code. The complaint also alleges that certain of our present and former directors and officers were
F-17
PEETS COFFEE & TEA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
unjustly enriched as a result. Purportedly on behalf of Peets, the complaint seeks, among other things, damages, restitution and corporate governance
reforms. This complaint and a similar one have been filed in the Superior Court for Alameda County, California and a third was filed in February 2007 in the United States District Court for the Northern District of California.
On February 12, 2008, the United States District Court granted our motion for dismissal of the federal shareholder derivative action. The court also
granted the plaintiff leave to file an amended complaint, and ordered that any amended complaint be filed by February 29, 2008. Counsel for the plaintiffs in this case subsequently informed our attorneys that they did not intend to file an
amended complaint, and no amended complaint was filed on or before February 29, 2008. The actions filed in the Alameda County Superior Court remain pending.
These actions could result in substantial costs and divert managements attention and resources. These actions are at a preliminary stage, and we are not in a position to determine whether a loss is probable or
estimate a range of amount of loss.
The Company may from time to time become involved in certain legal proceedings in the ordinary course
of business. Currently, the Company is not a party to any other legal proceedings that management believes would have a material adverse effect on the financial position or results of operations of the Company.
10. Segment Information
The
Company operates in two reportable segments: retail and specialty sales. Retail store operations consist of sales of whole bean coffee, beverages, tea and related products through Company-operated retail stores. Specialty sales consist of whole bean
coffee sales through grocery, home delivery, foodservice and office coffee accounts. 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.
F-18
PEETS COFFEE & TEA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Segment Information
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
|
Specialty
|
|
|
Unallocated
|
|
|
Total
|
|
|
|
Amount
|
|
|
Percent of
Net Revenue
|
|
|
Amount
|
|
Percent of
Net Revenue
|
|
|
Amount
|
|
|
Amount
|
|
Percent of
Net Revenue
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
168,392
|
|
|
100.0
|
%
|
|
$
|
80,997
|
|
100.0
|
%
|
|
|
|
|
|
$
|
249,389
|
|
100.0
|
%
|
Cost of sales and occupancy
|
|
|
78,412
|
|
|
46.6
|
%
|
|
|
39,977
|
|
49.4
|
%
|
|
|
|
|
|
|
118,389
|
|
47.5
|
%
|
Operating expenses
|
|
|
71,714
|
|
|
42.6
|
%
|
|
|
14,086
|
|
17.4
|
%
|
|
|
|
|
|
|
85,800
|
|
34.4
|
%
|
Depreciation and amortization
|
|
|
8,516
|
|
|
5.1
|
%
|
|
|
1,376
|
|
1.7
|
%
|
|
$
|
1,020
|
|
|
|
10,912
|
|
4.4
|
%
|
Segment operating income (loss)
|
|
|
9,750
|
|
|
5.8
|
%
|
|
|
25,558
|
|
31.6
|
%
|
|
|
(23,702
|
)
|
|
|
11,606
|
|
4.7
|
%
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,446
|
|
|
|
1,446
|
|
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,052
|
|
|
|
Total assets
|
|
|
59,854
|
(b)
|
|
|
|
|
|
13,306
|
|
|
|
|
|
104,387
|
(a)
|
|
|
177,547
|
|
|
|
Capital expenditures
|
|
|
20,218
|
|
|
|
|
|
|
1,361
|
|
|
|
|
|
9,245
|
|
|
|
30,824
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
141,377
|
|
|
100.0
|
%
|
|
$
|
69,116
|
|
100.0
|
%
|
|
|
|
|
|
$
|
210,493
|
|
100.0
|
%
|
Cost of sales and occupancy
|
|
|
65,341
|
|
|
46.2
|
%
|
|
|
33,587
|
|
48.6
|
%
|
|
|
|
|
|
|
98,928
|
|
47.0
|
%
|
Operating expenses
|
|
|
60,201
|
|
|
42.6
|
%
|
|
|
12,071
|
|
17.5
|
%
|
|
|
|
|
|
|
72,272
|
|
34.3
|
%
|
Depreciation and amortization
|
|
|
6,269
|
|
|
4.4
|
%
|
|
|
1,406
|
|
2.0
|
%
|
|
$
|
934
|
|
|
|
8,609
|
|
4.1
|
%
|
Segment operating income (loss)
|
|
|
9,566
|
|
|
6.8
|
%
|
|
|
22,052
|
|
31.9
|
%
|
|
|
(21,568
|
)
|
|
|
10,050
|
|
4.8
|
%
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,456
|
|
|
|
2,456
|
|
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,506
|
|
|
|
Total assets
|
|
|
47,640
|
(b)
|
|
|
|
|
|
12,673
|
|
|
|
|
|
92,692
|
(a)
|
|
|
153,005
|
|
|
|
Capital expenditures
|
|
|
17,901
|
|
|
|
|
|
|
1,045
|
|
|
|
|
|
25,497
|
|
|
|
44,443
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
118,030
|
|
|
100.0
|
%
|
|
$
|
57,168
|
|
100.0
|
%
|
|
|
|
|
|
$
|
175,198
|
|
100.0
|
%
|
Cost of sales and occupancy
|
|
|
53,089
|
|
|
45.0
|
%
|
|
|
27,747
|
|
48.5
|
%
|
|
|
|
|
|
|
80,837
|
|
46.1
|
%
|
Operating expenses
|
|
|
47,986
|
|
|
40.7
|
%
|
|
|
9,893
|
|
17.3
|
%
|
|
|
|
|
|
|
57,879
|
|
33.0
|
%
|
Depreciation and amortization
|
|
|
5,149
|
|
|
4.4
|
%
|
|
|
1,481
|
|
2.6
|
%
|
|
$
|
663
|
|
|
|
7,293
|
|
4.1
|
%
|
Segment operating income (loss)
|
|
|
11,806
|
|
|
10.0
|
%
|
|
|
18,047
|
|
31.6
|
%
|
|
|
(14,004
|
)
|
|
|
15,848
|
|
9.0
|
%
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,769
|
|
|
|
1,769
|
|
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,617
|
|
|
|
Total assets
|
|
|
34,436
|
(b)
|
|
|
|
|
|
11,517
|
|
|
|
|
|
102,799
|
(a)
|
|
|
148,752
|
|
|
|
Capital expenditures
|
|
|
11,525
|
|
|
|
|
|
|
1,223
|
|
|
|
|
|
1,272
|
|
|
|
14,020
|
|
|
|
(a)
|
Unallocated total assets includes cash and marketable securities of $27,995,000, $31,401,000, and $68,704,000 at the end of the years 2007, 2006, and 2005, respectively.
|
(b)
|
Retail total assets includes cash of $3,079,590, $1,791,000, and $1,262,000 at the end of the years 2007, 2006, and 2005, respectively.
|
Net revenue from external customers for the two major product lines is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
Whole bean coffee, tea, and related products
|
|
$
|
134,065
|
|
$
|
117,549
|
|
$
|
101,029
|
Beverages and pastries
|
|
|
115,324
|
|
|
92,944
|
|
|
74,169
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
249,389
|
|
$
|
210,493
|
|
$
|
175,198
|
|
|
|
|
|
|
|
|
|
|
F-19
PEETS COFFEE & TEA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
11. Quarterly Financial Information (Unaudited, in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
April 1,
2007
|
|
July 1,
2007
|
|
September 30,
2007
|
|
December 30,
2007
|
Net revenue
|
|
$
|
57,513
|
|
$
|
60,103
|
|
$
|
60,860
|
|
$
|
70,913
|
Cost of sales and related occupancy expenses
|
|
|
27,190
|
|
|
28,374
|
|
|
29,142
|
|
|
33,683
|
Income from operations
|
|
|
1,837
|
|
|
2,420
|
|
|
2,578
|
|
|
4,771
|
Net income
|
|
|
1,416
|
|
|
1,802
|
|
|
1,836
|
|
|
3,323
|
Basic income per share
|
|
|
0.10
|
|
|
0.13
|
|
|
0.13
|
|
|
0.24
|
Diluted income per share
|
|
|
0.10
|
|
|
0.13
|
|
|
0.13
|
|
|
0.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
April 2,
2006
|
|
July 2,
2006
|
|
October 1,
2006
|
|
December 31,
2006
|
Net revenue
|
|
$
|
49,707
|
|
$
|
49,689
|
|
$
|
50,873
|
|
$
|
60,224
|
Cost of sales and related occupancy expenses
|
|
|
22,815
|
|
|
23,093
|
|
|
24,081
|
|
|
29,939
|
Income from operations
|
|
|
2,967
|
|
|
2,345
|
|
|
1,841
|
|
|
2,897
|
Net income
|
|
|
2,252
|
|
|
1,907
|
|
|
1,479
|
|
|
2,178
|
Basic income per share
|
|
|
0.16
|
|
|
0.14
|
|
|
0.11
|
|
|
0.16
|
Diluted income per share
|
|
|
0.15
|
|
|
0.13
|
|
|
0.10
|
|
|
0.16
|
The quarterly information presented includes legal and other professional fees incurred for the
Companys voluntary stock option review beginning in 2006 and restatement of financial statements and legal fees for the related lawsuits in the following amounts:
|
|
|
|
|
|
|
Pre-tax amount (in thousands)
|
|
2007
|
|
2006
|
First Quarter
|
|
$
|
976
|
|
$
|
|
Second Quarter
|
|
|
64
|
|
|
|
Third Quarter
|
|
|
188
|
|
|
|
Fourth Quarter
|
|
|
135
|
|
|
1,762
|
F-20