<PAGE>
As filed with the Securities and Exchange Commission on October 13, 2000
Registration No. 333-
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--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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PEET'S COFFEE & TEA, INC.
(Exact name of registrant as specified in its charter)
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<TABLE>
<CAPTION>
Washington 2095 91-0863396
<S> <C> <C>
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
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1400 Park Avenue
Emeryville, California 94608-3520
(510) 594-2100
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
----------------
Christopher P. Mottern
President and Chief Executive Officer
Peet's Coffee & Tea, Inc.
1400 Park Avenue
Emeryville, California 94608-3520
(510) 594-2100
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
<TABLE>
<S> <C>
Kenneth L. Guernsey, Esq. Robert S. Townsend, Esq.
David P. Horne, Esq. C. Matthew Burns, Esq.
Gian-Michele a Marca, Esq. Donald C. Hunt, Esq.
Alannah M. Link, Esq. Linda K. Lee, Esq.
Cooley Godward LLP Morrison & Foerster LLP
One Maritime Plaza 425 Market Street
San Francisco, CA 94111 San Francisco, CA 94105
(415) 693-2000 (415) 268-7000
</TABLE>
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
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If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
Proposed
Maximum
Title of Each Class of Aggregate Proposed Maximum Aggregate Amount of
Securities to be Amount to be Offering Price Offering Registration
Registered Registered(1) Per Share(2) Price(2) Fee
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<S> <C> <C> <C> <C>
Common Stock, no par
value................. 3,795,000 $14.00 $53,130,000.00 $14,026.32
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</TABLE>
(1) Includes 495,000 shares to be issued upon the exercise of the underwriters'
over-allotment option.
(2) Estimated solely for the purpose of calculating the amount of the
registration fee.
----------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+ not sell these securities until the registration statement filed with the +
+ Securities and Exchange Commission is effective. This prospectus is not an +
+ offer to sell these securities and is not soliciting an offer to buy these +
+ securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED OCTOBER 13, 2000
PEET'S COFFEE & TEA, INC.
[LOGO OF PEET'S COFFEE & TEA, INC.]
3,300,000 Shares
of Common Stock
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This is our initial public offering and no public market currently exists for
our shares. We expect that the public offering price will be between $10.00 and
$14.00 per share. This price may not reflect the market price of our shares
after this offering.
<TABLE>
<CAPTION>
THE OFFERING PER SHARE TOTAL
-------------------------------------------------------------
<S> <C> <C>
Public Offering Price $ $
Underwriting Discount $ $
Proceeds to Peet's $ $
Proceeds to Selling Shareholders $ $
</TABLE>
We have granted the underwriters the right to purchase up to 182,623 additional
shares from us and 312,377 additional shares from the Selling Shareholders
within 30 days to cover any over-allotments. The underwriters expect to deliver
shares of common stock to purchasers on , 2000.
Proposed Nasdaq National Market Symbol: PEET
--------------------------------------------------------------------------------
OPENIPO: The method of distribution being used by the underwriters in this
offering differs somewhat from that traditionally employed in firm commitment
underwritten public offerings. In particular, the public offering price and
allocation of shares will be determined primarily by an auction process
conducted by the underwriters and other securities dealers participating in this
offering. A more detailed description of this process, known as an OpenIPO, is
included in "Plan of Distribution."
--------------------------------------------------------------------------------
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD PURCHASE SHARES ONLY
IF YOU CAN AFFORD A COMPLETE LOSS OF YOUR INVESTMENT.
SEE "RISK FACTORS" BEGINNING ON PAGE 5.
--------------------------------------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
WR HAMBRECHT + CO
Pacific Growth Equities, Inc.
The date of this prospectus is , 2000
<PAGE>
INSIDE FRONT COVER GRAPHICS
[description of inside cover graphics]
<PAGE>
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of our common stock only in jurisdictions where offers and sales
are permitted. The information contained in this prospectus is accurate only as
of the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 1
The Offering............................................................. 3
Summary Consolidated Financial Data...................................... 4
Risk Factors............................................................. 5
Cautionary Note on Forward-Looking Statements............................ 13
Use of Proceeds.......................................................... 14
Dividend Policy.......................................................... 14
Capitalization........................................................... 15
Dilution................................................................. 16
Selected Consolidated Financial Data..................................... 17
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 18
Business................................................................. 27
Management............................................................... 38
Certain Relationships and Related Transactions........................... 48
Principal and Selling Shareholders....................................... 49
Description of Capital Stock............................................. 51
Shares Eligible for Future Sale.......................................... 53
Plan of Distribution..................................................... 55
Legal Matters............................................................ 61
Experts.................................................................. 61
Where You Can Get More Information....................................... 61
Index to Consolidated Financial Statements............................... F-1
</TABLE>
----------------
Our logo is our registered trademark. Other service marks, trademarks and
trade names referred to in this prospectus are the property of their respective
owners.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the financial statements and notes appearing elsewhere in this
prospectus. This summary may not contain all of the information that you should
consider before investing in our common stock. You should read the entire
prospectus carefully. All information in this prospectus gives effect to a two-
for-one stock split, which will be effected before the closing of this
offering.
Peet's Coffee & Tea
Overview
Peet's is a specialty coffee roaster and marketer of branded fresh roasted
whole bean coffee sold under strict freshness standards through multiple
channels of distribution. Since our founding in 1966 by Dutch immigrant Alfred
Peet, we have remained committed to a simple idea: purchase only high quality
Arabica beans, deep roast them for full flavor using an artisan process and
ship them within 24 hours of roasting to ensure freshness. We sell our fresh
roasted coffee, hand selected tea and related items in several distribution
channels, including specialty grocery and gourmet food stores, online and mail
order, office and restaurant accounts and 57 company-owned stores in four
states.
Peet's primary business is the sale of fresh roasted whole bean coffee. In
1999, approximately 60% of our total revenue was generated from the sale of
whole bean coffee and related items and approximately 40% of our total revenue
was generated from the sale of prepared beverages and pastry items. We are well
established in the San Francisco Bay Area, and we believe we have developed a
loyal customer base and growing brand awareness across the United States.
Over the past three years, we have begun a strategic expansion into select
channels of distribution, such as specialty grocery and gourmet food stores,
offices and restaurants. We have continued to develop our mail order channel,
including the addition of online ordering capability through our websites,
peets.com and coffee.com, and opened new retail outlets in four regions. We
have begun to reposition Peet's from a regional retailer that operates its own
outlets into a national coffee brand. Our expansion strategy has allowed us to
grow in a controlled manner to ensure that we continue to enhance our brand's
image and quality reputation.
The combination of our established brand, a differentiated product
positioning based on our quality and freshness standards and our strategic
expansion into select channels of distribution creates significant potential
opportunities for growth.
Competitive Strengths
Our objective is to become the leading brand of whole bean specialty coffee.
To achieve this objective, we intend to leverage the following strengths:
. Differentiated Product--Peet's has been at the forefront in the
development of specialty coffee in the United States. We use a signature
deep-roasting process, hand roast to order six days a week in small
batches and ship coffee to our stores or customers within 24 hours of
roasting. Roasted coffee is a perishable product and its freshness is
dependent upon the time it takes to get the coffee from the roaster to
the consumer. We believe this fact is not yet well understood by
consumers, and consequently, we believe we have a potential opportunity
to change consumer perceptions about fresh coffee.
. Growing Market For Specialty Coffee--The growth in specialty coffee sales
during the 1990s has created a marketplace for higher quality and
differentiated products that can be priced at a premium in
1
<PAGE>
the marketplace. We believe that our competitors' focus on convenience,
beverage sales or commodity products is creating the opportunity for a
premium brand alternative that delivers recognizable product benefits
such as freshness and artisan-roasted coffee.
. Proven Business Model--Since inception, Peet's core business has been the
sale of fresh whole bean coffee for home, office and restaurant
consumption. To support our roasting operation, we have developed a
network of company-owned retail stores in the San Francisco Bay Area. In
the last three years, we believe we have demonstrated our business model
by expanding our operations to new geographic regions and entering new
distribution channels.
. Scalable Infrastructure--We have made capital investments to improve our
roasting, packaging and fulfillment infrastructure to support the
production and distribution of large quantities of fresh whole bean
coffee. At present, we are operating at approximately 50% of our annual
roasting capacity. In addition, we have installed software and technology
to provide high quality customer service and deliver professional
customer relationship management.
. Strong Company Culture--Our employees, known affectionately as
"Peetniks," are dedicated to the vision and mission of Peet's, which is
to produce high quality products and establish long term customer
relationships.
Growth Strategy
We believe that significant growth opportunities exist for us in several
distribution channels. We expect revenue in our underdeveloped distribution
channels (specialty grocery and gourmet food stores, online and mail order and
office and restaurant accounts) to increase as a percent of total revenue. The
key strategies to drive Peet's growth include the following four initiatives:
. Expand our presence in specialty grocery and gourmet food stores--We
intend to expand availability of our brand through a controlled network
of distribution to specialty grocery and gourmet food stores. Within
these stores, our coffee will be displayed in Peet's branded kiosks or
racks in or near the bakery section.
. Continue to grow our online and mail order business--Peet's has built a
significant mail order and online business by marketing to customers who
enjoy the convenience of receiving fresh coffee at their homes or
offices. We have recently initiated a marketing program to attract new
customers who are not familiar with Peet's coffee.
. Expand office and restaurant distribution--We currently operate with a
select group of office coffee distributors in nine markets. We have been
highly selective with our restaurant distribution. We believe we have
expansion opportunities within these channels.
. Open new stores in "flagship" locations--Peet's operates 57 retail
specialty stores, 38 of which are located in Northern California. We
believe that limited and selective additions of new store sites, rather
than broad scale site development, will better support our brand position
and will make better use of our financial resources. We view retail
stores as an important component of our growth strategy, providing a
physical presence in selected markets for product trial, marketing and
general brand-building.
We were incorporated in Washington in 1971. Our executive offices are located
at 1400 Park Avenue, Emeryville, California 94608-3520 and our telephone number
is (510) 594-2100. Our website address is http://www.peets.com. The information
contained in our website is not a part of this prospectus.
2
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Common stock offered by Peet's............... 2,500,000 shares
Common stock offered by the selling
shareholders................................ 800,000 shares
Common stock to be outstanding after this
offering.................................... 7,958,214 shares
Selling shareholders......................... Gerald A. Baldwin, Vincent L.
Borcich, Steven R. Donovan,
Terry S. Heckler, Daniel J.
Lafond, James A. Reynolds and
Diane S. Sengstock.
Use of proceeds.............................. We expect to use the net
proceeds from this offering for
debt reduction, marketing and
related expenditures to
implement our business
strategy, capital expenditures,
opening additional retail
stores and working capital and
other general corporate
purposes.
Proposed Nasdaq National Market symbol....... PEET
</TABLE>
The common stock to be outstanding after this offering is based on 5,458,214
shares outstanding as of October 1, 2000, after giving effect to:
. The conversion of our outstanding shares of Series A preferred stock into
942,612 shares of common stock upon the closing of this offering; and
. The two-for-one stock split, which will occur before the closing of this
offering.
The common stock to be outstanding after this offering excludes:
. 182,623 shares that could be sold by us to the underwriters upon exercise
of their option to purchase additional shares to cover over-allotments;
. 1,527,612 shares of common stock issuable as of October 1, 2000 upon the
exercise of outstanding stock options issued under our 1993 Stock Option
Plan, 1994 California Stock Option Plan and 1997 Equity Incentive Plan at
a weighted average exercise price of $5.77 per share;
. 200,000 shares of common stock issuable as of October 1, 2000 upon the
exercise of an outstanding warrant; and
. 64,794 shares of common stock reserved for future issuance as of October
1, 2000 under our 1997 Equity Incentive Plan and the shares of common
stock that we plan to reserve for issuance under our 2000 Equity
Incentive Plan, 2000 Non-Employee Director Plan and 2000 Employee Stock
Purchase Plan, each of which we will adopt before the closing of this
offering.
This offering will be made through the OpenIPO process, in which the
allocation of shares and the public offering price are primarily based on an
auction in which prospective purchasers are required to bid for the shares.
This process is described under "Plan of Distribution." Except as otherwise
indicated, the information in this prospectus assumes no exercise of the
underwriters' over-allotment option.
3
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table summarizes the consolidated financial data and operating
data of our business. The pro forma shares used in calculation of net income
(loss) per share reflect the two-for-one stock split, which will occur before
the closing of this offering, and include the effect of options granted since
October 12, 1999. Our fiscal year is based on a 52 or 53 week year and ends on
the Sunday closest to the last day in December. The pro forma as adjusted
shares used in the calculation of net loss per share reflect the conversion of
all outstanding shares of preferred stock into common stock.
<TABLE>
<CAPTION>
Six Months
Fiscal Year Ended
--------------------------------------- ---------------
July 4, July 2,
1995 1996 1997 1998 1999 1999 2000
------- ------- ------- ------- ------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data
Total revenue.................. $33,252 $40,137 $50,732 $58,685 $67,807 $31,194 $39,171
Income (loss) from operations.. 558 2,242 986 1,119 857 687 (2,404)
Net income (loss).............. 362 1,147 341 168 (144) 141 (2,478)
Pro forma net income (loss) per
share:
Basic........................ 0.09 0.27 0.08 0.04 (0.03) 0.03 (0.53)
Fully diluted................ 0.07 0.21 0.06 0.03 (0.03) 0.02 (0.53)
Pro forma shares used in
calculation of net income
(loss) per share:
Basic........................ 4,358 4,362 4,498 4,548 4,634 4,608 4,665
Fully diluted................ 5,496 5,594 5,644 5,960 4,634 5,950 4,665
------- ------- ------- ------- ------- ------- -------
Pro forma as adjusted basic and
diluted net loss per share.... $ (0.03) $ (0.44)
Pro forma as adjusted shares
used in calculation of basic
and diluted net loss per
share......................... 5,576 5,608
</TABLE>
The following table summarizes our balance sheet data and certain operating
data as of July 2, 2000 (the end of our second fiscal quarter in 2000). This
balance sheet data is presented on an actual basis and on an as adjusted basis
to give effect to:
. The conversion of all outstanding shares of our Series A preferred stock
into an estimated 942,612 shares of our common stock upon the closing of
this offering; and
. The sale of the shares of common stock in this offering at the assumed
initial public offering price of $12.00 per share, after deducting the
estimated underwriting discounts and commissions and offering expenses,
and the repayment of certain indebtedness with the proceeds from this
offering.
<TABLE>
<CAPTION>
As of July 2, 2000
--------------------
Actual As Adjusted
------- -----------
(in thousands)
<S> <C> <C>
Cash and cash equivalents............................................... $ 1,216 $16,813
Working capital (deficit)............................................... (9,445) 16,589
Total assets............................................................ 35,982 51,579
Current portion of long term debt....................................... 2,820 1,400
Long term debt, less current portion.................................... 6,066 5,600
Series A preferred stock................................................ 4,537 --
Total shareholders' equity.............................................. 8,816 35,316
</TABLE>
4
<PAGE>
RISK FACTORS
You should carefully consider the following factors and other information in
this prospectus before deciding to invest in shares of our common stock. We
have included a discussion of each material risk that we have identified as of
the date of this prospectus. However, additional risks and uncertainties not
presently known to us or that we currently deem immaterial may also impair our
business operations. If any of the following risks actually occur, our
business, financial condition or operating results could suffer. As a result,
our common stock's trading price could decline and you could lose all or part
of the money you paid to buy our common stock.
Risk Factors Affecting Peet's Coffee & Tea
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 involves expanding our non-retail distribution channels
(including specialty grocery and gourmet food stores, online and mail order,
and office and restaurant accounts) while maintaining our current retail store
locations and opening new retail stores in "flagship" locations outside the San
Francisco Bay Area to increase brand awareness and build customer loyalty. This
business strategy represents a shift from our historic business strategy, which
largely emphasized the opening and operation of retail stores. Our ability to
implement this business strategy is dependent on our ability to:
. Market our products on a national or international scale and over the
internet;
. Increase our brand recognition on a national and international scale;
. Enter into distribution and other strategic arrangements with third party
retailers;
. Identify and lease strategic locations suitable for new stores; and
. Manage growth in administrative overhead and distribution costs likely to
result from the planned expansion of our retail and non-retail
distribution channels.
We do not know whether we will be able to successfully implement our business
strategy or whether our business strategy will be successful. In assessing our
ability to meet these challenges, you should take into account:
. The lack of brand recognition and word-of-mouth advertising outside the
regions where we currently operate;
. Our management's relative inexperience in online and mail order marketing
and operations and with office and restaurant distribution channels;
. The regional differences in consumer tastes;
. The competitive conditions existing in our industry; and
. General economic conditions and consumer discretionary spending habits.
Our future growth is largely dependent on our ability to successfully
implement our business strategy. Our revenues may be adversely affected if we
fail to implement our business strategy or if we divert resources to a business
strategy that ultimately proves unsuccessful.
5
<PAGE>
If we fail to continue to develop and maintain our brand, our business could
suffer.
We believe that maintaining and developing our brand is critical to our
success and that the importance of brand recognition may increase as a result
of competitors offering products similar to our products. We intend to increase
our marketing expenditures to create and maintain brand loyalty as well as
increase awareness of our brand. If our brand-building strategy is
unsuccessful, these expenses may never be recovered, we may be unable to
increase our future revenue and our business may be harmed.
Our success in promoting and enhancing the Peet's brand will also depend on
our ability to provide customers with high quality products and customer
service. Although we take measures to ensure that we sell only fresh roasted
whole bean coffee and our retail employees correctly prepare our coffee
beverages, we have no control over our whole bean coffee products once
purchased by customers. Accordingly, customers may prepare coffee from our
whole bean coffee incorrectly, store our whole bean coffee for longer periods
of time or resell our whole bean coffee without our consent, in each case,
potentially affecting the quality of the coffee prepared from our products. If
customers do not perceive our products and service to be of high quality, then
the value of our brand may be diminished and, consequently, our ability to
implement our business strategy may be adversely affected.
Because our business is centered on a single product, specialty coffee, if the
demand for specialty coffee decreases, our business could suffer.
Sales of specialty coffee constituted 83.5% of our 1999 operating revenue and
84.1% of our revenue for the first six months of 2000. Demand for our products
is affected by:
. Consumer tastes and preferences;
. National, regional and local economic conditions;
. Demographic trends;
. Consumer traffic trends at our individual retail stores; and
. The type, number and location of competing stores.
Because we are highly dependent on a single product--specialty coffee, a
decrease in consumer demand for coffee would harm our business more than if we
had more diversified product offerings, as do many of our competitors. If
customer demand for specialty coffee decreases, our business would suffer.
Our roasting methods are not proprietary, and therefore, competitors may be
able to copy them, which would harm our business.
We consider our roasting methods essential to the flavor and richness of our
roasted whole bean coffee, and therefore, essential to our brand. Because we do
not hold any patents for our roasting methods, it may be difficult for us to
prevent competitors from copying our roasting methods. In addition, we trained
the roasters at Quartermaine Coffee Roasters in Washington D.C., a small coffee
roasting business previously owned by us. If our competitors copy our roasting
methods or if Quartermaine Coffee Roasters begins to actively compete with us
on a national scale, the value of our brand may be diminished and business may
suffer. In addition, competitors may be able to develop roasting methods that
are more advanced than our roasting methods, which may also harm our business.
We depend on the expertise of key personnel. If these individuals leave, our
operations could suffer.
Our management is dependent to a large degree on the services of Christopher
P. Mottern, Chief Executive Officer and President, and James A. Reynolds, Vice
President, Coffee and Tea. In addition, we depend to a large degree on the
expertise of our coffee roasters and purchasers. Our operations could suffer if
we lost the services of any of these individuals.
6
<PAGE>
Because we are dependent on retail stores in California, a worsening of
economic conditions, a decrease in consumer spending or a change in the
competitive conditions in this market may substantially decrease our revenue
and may adversely impact our ability to implement our business strategy.
Our California retail stores generated 81.0% of our 1999 revenue and 76.6% of
our revenue for the first six months of 2000. We expect that our retail
operations will continue to generate a substantial portion of our revenue. In
addition, our retail stores provide us with a means for increasing brand
awareness, building customer loyalty and creating a premium specialty coffee
brand. As a result, an economic downturn or other decrease in consumer spending
in California may not only lead to a substantial decrease in revenue, but may
also adversely impact our ability to market our brand, build customer loyalty,
or otherwise implement our business strategy.
If we are unable to continue leasing our retail locations or obtain leases for
new stores, our operations may be adversely affected.
All of our 57 retail locations are on leased premises. Three of the leases
for these premises expire within three years and do not contain options to
renew the leases. If we are unable to renew these leases, our revenue and
profits could suffer. In addition, we intend to lease other premises in
connection with the planned expansion of our retail locations. Because we
compete with other retailers and restaurants for store sites and some landlords
may grant exclusive locations to our competitors, we may not be able to obtain
new leases or renew existing leases on acceptable terms. This could adversely
impact our revenue growth and brand-building strategy.
We may not be able to hire additional management and other personnel as our
business grows, which 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 business may suffer if:
. We are unable to recruit or retain a sufficient number of qualified
employees;
. The costs of employee compensation or benefits increase substantially; or
. The costs of outsourcing certain tasks to third party providers increase
substantially.
In addition, we expend significant resources in training our retail managers
and employees. During the past few years, retail employee turnover has
increased to approximately 75% per year. While we believe we can still find
qualified retail employees and control our training costs, if turnover
continues to increase, we may incur additional recruiting and training costs
and our business may suffer.
Our employees are not unionized. If they were organized by labor unions, our
labor costs may increase, perhaps significantly.
7
<PAGE>
We are subject to various federal, state and local government laws and
regulations, which could affect our business and operations.
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. If we encounter
difficulties in obtaining any necessary licenses or complying with these laws
and regulations:
. The opening of new retail locations could be delayed;
. The operation of existing retail locations or our coffee roasting
operations could be interrupted; or
. Our product offerings could be limited.
Because we rely heavily on common carriers to ship our coffee on a daily basis,
any disruption in their services or increase in shipping costs could adversely
affect our business.
We rely on a number of common carriers to deliver coffee to our customers and
retail stores. We consider roasted coffee a perishable product and we rely on
these common carriers to deliver fresh roasted coffee on a daily basis. We have
no control over these common carriers and the services provided by them may be
interrupted as a result of labor shortages, contract disputes and other
factors. If we experience an interruption in these services, we may be unable
to ship our coffee in a timely manner. A delay in shipping could:
. Have an adverse impact on the quality of the coffee shipped, and thereby
adversely affect our brand and reputation;
. Result in the disposal of an amount of coffee that could not be shipped
in a timely manner; and
. Require us to contract with alternative, and possibly more expensive,
common carriers.
Any significant increase in shipping costs could lower our profit margins or
force us to raise prices, which could cause our revenue and profits to suffer.
We have a significant amount of indebtedness, which imposes significant
restrictions on our operations and may limit our ability to raise additional
capital or implement our business plan.
As of October 1, 2000, we had a significant amount of indebtedness, including
separate $7.0 million and $8.0 million term loans and a revolving credit
facility from General Electric Capital Corporation. Our total indebtedness was
approximately $20.7 million. Although we will repay a portion of our
indebtedness with the proceeds from this offering, we will continue to have a
significant amount of debt, which may:
. Require that a substantial portion of our cash flow from operations be
dedicated to service our debt;
. Limit our ability to obtain additional capital; and
. Generally limit our flexibility to implement our business strategy or
react to changes in our industry or economic conditions.
Our loan agreement with General Electric Capital Corporation contains
financial and negative covenants that place restrictions on our operations,
including:
. Limiting the number of stores we can open per fiscal year to three (with
some exceptions);
. Limiting our ability to make capital expenditures, incur additional
indebtedness and lease obligations, make investments, pay dividends or
make other distributions to our shareholders and acquire or retire our
common stock;
. Requiring us to maintain financial ratios on a monthly basis; and
. Prohibiting us from forming or acquiring subsidiaries, merging with or
into other companies or selling all or substantially all of our assets.
8
<PAGE>
These restrictions could adversely impact our ability to implement our
business plan or raise additional capital, if needed.
Our quarterly results may fluctuate and could fall below expectations of
securities analysts and investors due to seasonality and other factors,
resulting in a decline in our stock price following this offering.
Our quarterly and yearly results have varied in the past, and we believe that
our quarterly operating results will vary in the future. For this reason, you
should not rely upon our quarterly operating results as indications of future
performance. In some future periods, our operating results may fall below the
expectations of securities analysts and investors. This could cause the trading
price of our common stock to fall.
We face potential disruption from natural hazards.
Our only coffee roasting and distribution facility and most of our stores are
located near major earthquake faults. The impact of a major earthquake on our
facilities, infrastructure and overall operations is difficult to predict and
an earthquake could seriously disrupt our entire business process. We are
uninsured for business disruptions caused by an earthquake or other natural
disaster.
Risk Factors Relating to Specialty Coffee Industry
Fluctuations in the availability, quality and cost of Arabica coffee beans
could affect our revenue and profits.
We depend on outside coffee brokers and our relationships with coffee
exporters and growers for the supply of our primary raw material, high quality
Arabica coffee beans. Coffee is a trade commodity and, in general, its price
can fluctuate depending on:
. Weather patterns in coffee-producing countries;
. Economic and political conditions affecting coffee-producing countries;
. Foreign currency fluctuations; and
. The ability of coffee-producing countries to agree to export quotas.
Although no multilateral export quotas are currently in place, historically,
coffee-producing countries, through organizations such as the International
Coffee Organization or the Association of Coffee Producing Countries, have
attempted to increase coffee prices through agreements to establish export
quotas.
Arabica coffee beans are substantially more expensive than Robusta coffee
beans. Arabica coffee beans of the quality we purchase are not readily
available on the commodity markets. As a result, in addition to the above
factors, the price, quality and availability of high quality Arabica coffee
beans also depend on our relationships with coffee brokers, exporters and
growers.
In the past we have been able to pass along increases in costs of Arabica
coffee beans to our customers without an apparent loss in sales volume or gross
margin. However, given the increasing competition for specialty coffees, we may
not be able to pass along these costs to our customers in the future, in which
case, our profits would suffer.
Because we roast Arabica coffee beans from many different regions to produce
33 types and blends of coffee, if Arabica coffee beans from a region become
unavailable or prohibitively expensive, we may be forced to discontinue
particular coffee types and blends or substitute coffee beans from other
regions in our blends. Frequent substitutions and changes in our coffee product
lines may lead to cost increases, customer alienation and fluctuations in our
gross margins. Furthermore, a worldwide supply shortage of the high quality
Arabica coffee beans we purchase could have a material adverse effect on our
business.
9
<PAGE>
We mitigate the risks associated by fluctuations in coffee prices by entering
into fixed price commitments and hedging agreements for a portion of our
unroasted coffee requirements. These fixed price commitments and hedging
agreements may not adequately protect us from price fluctuations and, if coffee
prices drop significantly, they may result in us having to pay substantially
more for our coffee than we would absent these arrangements.
Competition in the specialty coffee market is intense and could affect our
profitability.
The whole bean specialty coffee category is highly fragmented. Our primary
competitors in whole bean specialty coffee sales include Gevalia, Green
Mountain, Illy Cafe, Millstone, Seattle's Best and Starbucks. There are an
estimated 500 smaller and regional brands that also compete in this category.
In addition, we compete indirectly against all other coffee brands on the
market. A number of nationwide coffee manufacturers, such as Kraft Foods,
Procter & Gamble and Nestle, are distributing premium coffee brands in
supermarkets. These premium coffee brands may serve as substitutes for our
whole bean coffee. If we do not succeed in effectively differentiating
ourselves from our competitors or our competitors adopt our strategies, then
our market position will be weakened and our business could suffer.
Despite competing in a fragmented product category, whole bean specialty
coffee brands are being established across multiple distribution channels.
Several competitors are aggressive in obtaining distribution in specialty
grocery and gourmet food stores, through online and mail order and in office
and restaurant locations. We have only recently begun to penetrate these
channels. Other competitors may have an advantage over us based on their
earlier entry into these distribution channels.
Competition in the specialty coffee market is becoming increasingly intense
as relatively low barriers to entry encourage new competitors to enter the
specialty coffee market. Many of these new market entrants may have
substantially greater financial, marketing and operating resources than us. In
addition, many of our existing competitors have substantially greater
financial, marketing and operating resources than us.
Adverse public or medical opinion about caffeine may harm our business.
Our specialty coffee contains significant amounts of caffeine and other
active compounds, the health effects of some of which are not fully understood.
Although some research studies suggest that no significant health risks are
associated with moderate coffee consumption, 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 and sleeplessness. 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.
10
<PAGE>
Risks Related to this Offering
Our directors, executive officers and significant shareholders will retain
considerable control over the Company, which may lead to conflicts with other
shareholders over corporate governance.
Following the completion of this offering, our directors, executive officers
and current holders of 5% or more of our outstanding common stock will
beneficially own approximately 29.7% (26.0% if the underwriters exercise their
over-allotment option in full) of our outstanding common stock. Gerald A.
Baldwin will own approximately 15.0% (12.3% if the underwriters exercise their
over-allotment option in full) of our outstanding common stock after this
offering. These shareholders, acting together, and Mr. Baldwin, acting alone,
will be able to significantly influence all matters requiring shareholder
approval, including the election of directors and significant corporate
transactions, such as mergers or other business combination transactions. This
control may delay or prevent a third party from acquiring or merging with us.
Our stock price may be volatile because of factors beyond our control and you
may lose all or a part of your investment.
Our stock may be volatile because our shares have not previously been
publicly traded. Following this offering, the market price of our common stock
may experience a substantial decline. The market price of our common stock may
fluctuate significantly in response to a number of factors, most of which are
beyond our control, including:
. Changes in securities analysts' estimates of our financial performance;
. Fluctuations in stock market prices and volumes;
. Discussion of our company or stock price in online investor communities
such as chat rooms;
. Changes in market valuations of similar companies;
. Announcements by us or our competitors of significant contracts, new
products, acquisitions, commercial relationships, joint ventures or
capital commitments;
. Variations in our quarterly operating results;
. The closure of retail locations, loss of major customers or failure to
perform significant commercial contracts;
. Additions or departures of key personnel; and
. General economic conditions, especially a recession or economic downturn,
which may adversely affect the retail industry in general.
An active public market for our common stock may not develop or be sustained
after this offering. Although the initial public offering price will be
determined partially as a result of the "OpenIPO" auction process, it may not
be indicative of prices that will prevail in the trading market. As a result,
you may be unable to sell your shares of common stock at or above the offering
price.
Before the closing of this offering, we will implement anti-takeover provisions
which could discourage or prevent a takeover, even if an acquisition would be
beneficial to our shareholders.
Provisions of our amended and restated certificate of incorporation and
bylaws, as well as provisions of Washington law, could make it more difficult
for a third party to acquire us, even if doing so would be beneficial to our
shareholders. These provisions include:
. Establishing a classified board of directors requiring that members of
the board be elected in different years;
. Authorizing the issuance of "blank check" preferred stock that could be
issued by our board of directors to increase the number of outstanding
shares or change the balance of voting control and thwart a takeover
attempt;
11
<PAGE>
. Prohibiting cumulative voting in the election of directors, which would
otherwise allow less than a majority of shareholders to elect director
candidates;
. Limiting the ability of shareholders to call special meetings of
shareholders;
. Prohibiting shareholder action by written consent and requiring all
shareholder actions to be taken at a meeting of our shareholders; and
. Establishing advance notice requirements for nominations for election to
the board of directors and for proposing matters that can be acted upon
by shareholders at shareholder meetings.
In addition, Chapter 23B.19 of the Washington Business Corporation Act and
the terms of our incentive stock plans may discourage, delay or prevent a
change in control.
There may be sales of substantial amounts of our common stock after this
offering, which could cause our stock price to fall.
Our current shareholders hold a substantial number of shares, which they will
be able to sell in the public market in the near future. After this offering,
7,958,214 shares of common stock will be outstanding assuming no exercise of
the underwriters' over-allotment option and no exercise of options or warrants.
All of the shares sold in this offering will be freely tradable. The remaining
shares of common stock outstanding after this offering will be restricted as a
result of securities laws or lock-up agreements. Of these remaining shares,
will be available for sale in the public market as of the date of this
prospectus; will be available for sale in the public market 90 days after
the date of this prospectus; will be available for sale in the public
market 180 days after the date of this prospectus; and will be available
for sale in the public market at various times thereafter. However, it is
possible that the underwriters could waive the 180 day lock-up period, if, for
example, the underwriters determine that the market price of our common stock
has reached a sufficiently stable point that it could bear the sale of shares
subject to the lock-ups. Sales of a substantial number of shares of our common
stock within a short period of time after this offering could cause our stock
price to fall. In addition, the sale of these shares could impair our ability
to raise capital through the sale of additional stock.
12
<PAGE>
CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS
Some of the matters discussed under the captions "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and elsewhere in this prospectus include
forward-looking statements. We have based these forward-looking statements on
our current expectations and projections about future events, including, among
other things:
. Implementing our business strategy;
. Attracting and retaining customers;
. Obtaining and expanding our market presence in new geographic regions;
. The availability of high quality Arabica coffee beans;
. Consumers tastes and preferences; and
. Competition in our market.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "could," "predict," "potential," "continue,"
"expect," "anticipate," "future," "intend," "plan," "believe," "estimate" and
similar expressions (or the negative of such expressions). These statements are
based on our current beliefs, expectations and assumptions and are subject to a
number of risks and uncertainties. Actual results, levels of activity,
performance, achievements and events may vary significantly from those implied
by the forward-looking statements. A description of risks that could cause our
results to vary appears under the caption "Risk Factors" and elsewhere in this
prospectus. These forward-looking statements are made as of the date of this
prospectus.
13
<PAGE>
USE OF PROCEEDS
We estimate that we will receive net proceeds from the sale of shares of our
common stock in this offering of approximately $26.5 million, and $28.7 million
if the underwriters exercise their over-allotment option in full, based upon an
assumed offering price of $12.00 per share and after deducting estimated
underwriting discounts and commissions and offering expenses. The principal
purposes of this offering are to obtain additional capital and to create a
public market for our common stock. We expect to use the net proceeds from this
offering:
. To prepay our $8.0 million term loan and repay approximately $2.9 million
of revolving credit advances outstanding under our term loan and
revolving credit facility;
. For marketing and related expenditures to increase our brand awareness
and to support the implementation of our business strategy;
. To open new retail stores;
. For capital expenditures; and
. For working capital and other general corporate purposes.
We may use a portion of the net proceeds to acquire complementary products or
businesses; however, we currently have no commitments or agreements relating to
any of these types of transactions. We will have significant discretion in the
use of the net proceeds of this offering. Investors will be relying on the
judgment of our management regarding the application of the proceeds of this
offering. Pending use of the net proceeds as discussed above, we intend to
invest these funds in short-term, interest-bearing, investment-grade
obligations.
Pursuant to the terms of our term loan and revolving credit facility, we are
required to use the proceeds of this offering to prepay our $8.0 million term
loan and repay our outstanding revolving credit advances. Our $8.0 million term
loan matures on February 28, 2002 and bears interest at either the Index rate
(the higher of prime or 50 basis points over the average of rates for overnight
federal funds transactions) plus 5.25% or the London Interbank Offered Rate
(LIBOR) plus 7.00%. As of October 1, 2000, the interest rate is 14.0%. Our
revolving credit facility expires on August 31, 2005 and the advances
thereunder bear interest at either the Index rate plus 1.25% or LIBOR plus
3.00%. As of October 1, 2000, the interest rate is 10.0%. A more complete
discussion of the terms of our term loan and revolving credit facility is
included in "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
DIVIDEND POLICY
We have not declared or paid any dividends on our capital stock since 1990.
We expect to retain any future earnings to fund the development and expansion
our business. Therefore, we do not anticipate paying cash dividends on our
common stock in the foreseeable future.
14
<PAGE>
CAPITALIZATION
The following table shows, as of July 2, 2000, our cash and cash equivalents,
short term debt, and capitalization, both actual and as adjusted. The
adjustment gives effect to:
. The conversion of all outstanding shares of our Series A preferred stock
into an estimated 942,612 shares of common stock upon the closing of this
offering;
. The sale of the shares of common stock by us in this offering at the
assumed initial public offering price of $12.00 per share, after
deducting the estimated underwriting discounts and commissions and
offering expenses, and the repayment of certain indebtedness with the
proceeds from this offering; and
. The replacement of our old credit facility with a new term loan and
revolving credit facility on September 1, 2000.
<TABLE>
<CAPTION>
July 2, 2000
------------------
Actual Pro Forma
------- ---------
(in thousands,
except share
data)
<S> <C> <C>
Cash and cash equivalents.............................................. $ 1,216 $16,813
======= =======
Short term debt:
Short term borrowings................................................ $ 9,017
Current maturities of long term debt................................. 2,820 $ 1,400
------- -------
Total short term debt.............................................. $11,837 $ 1,400
======= =======
Long term debt, excluding current maturities........................... $ 6,066 $ 5,600
Shareholders' equity:
Preferred stock, no par value; authorized 10,000,000 shares;
issued and outstanding 942,612 shares of Series A
(assuming two-for-one stock split), liquidation preference of
4,828............................................................... $ 4,537
Common stock, no par value; authorized 50,000,000 shares;
issued and outstanding: (assuming two-for-one stock split):
actual, 4,515,124; pro forma, 7,957,736............................. 8,069 $39,106
Accumulated deficit.................................................. (3,790) (3,790)
------- -------
Total shareholders' equity......................................... 8,816 35,316
------- -------
Total capitalization............................................... $14,882 $40,916
======= =======
</TABLE>
The previous information should be read together with our consolidated
financial statements and the related notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" appearing elsewhere
in this prospectus.
The shares of common stock outstanding in the pro forma as adjusted columns
exclude:
. 1,532,252 shares of common stock issuable as of July 2, 2000, upon the
exercise of outstanding stock options issued under our 1993 Stock Option
Plan, 1994 California Stock Option Plan and 1997 Equity Incentive Plan at
a weighted average exercise price of $5.77 per share;
. 200,000 shares of common stock issuable as of July 2, 2000 upon the
exercise of an outstanding warrant; and
. 61,228 shares of common stock reserved for issuance as of July 2, 2000
under our 1997 Equity Incentive Plan, and the shares of common stock that
we plan to reserve for issuance under our 2000 Equity Incentive Plan,
2000 Non-Employee Director Plan and 2000 Employee Stock Purchase Plan,
each of which we intend to adopt before the closing of this offering.
15
<PAGE>
DILUTION
Our pro forma net tangible book value as of July 2, 2000 was approximately
$7.7 million, or $1.41 per share of common stock. Pro forma net tangible book
value per share represents the amount of total tangible assets less total
liabilities, divided by 5,457,736, the number of shares of common stock treated
as outstanding on a pro forma basis after giving effect to the two-for-one
stock split and the conversion of our Series A preferred stock. After giving
effect to the sale of the shares of common stock offered in this offering at
the assumed public offering price, net of offering expenses, our pro forma net
tangible book value at July 2, 2000 would have been $34.2 million, or $4.29 per
share of common stock. This represents an immediate increase in net pro forma
tangible book value to existing shareholders of $2.88 per share and an
immediate dilution of $7.71 per share to new investors. The following table
illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share........................ $12.00
Net tangible book value per share as of July 2, 2000........... $1.41
Increase attributable to the sale of shares offered hereby..... 2.88
-----
Adjusted net tangible book value after this offering........... 4.29
------
Dilution in the net tangible book value to new investors....... $ 7.71
======
</TABLE>
The following table summarizes on a pro forma basis, after giving effect to
the two-for-one stock split, the conversion of our Series A preferred stock,
the total number of shares of common stock purchased from us, the total
consideration paid to us and the average price per share paid by existing
shareholders and by new investors, in each case based upon the number of shares
of common stock and Series A preferred stock outstanding as of July 2, 2000.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
----------------- ------------------- Price
Number Percent Amount Percent per Share
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing Shareholders........ 5,457,736 69% $12,606,000 30% $ 2.31
New Investors................ 2,500,000 31% 30,000,000 70% 12.00
--------- --- ----------- --- ------
Total...................... 7,957,736 100% $42,606,000 100% $ 5.35
========= === =========== === ======
</TABLE>
Taking into account the sales by the selling shareholders, the number of
shares held by existing shareholders will be 4,657,736, or approximately 58.5%
of the total shares of common stock outstanding, and the number of shares held
by new investors will be 3,300,000, or approximately 41.5% of the total shares
of common stock outstanding.
If the underwriters' over-allotment option is exercised in full, the number
of shares of common stock held by existing shareholders will be reduced to
4,345,359 or 53.4% of the total number of shares of common stock to be
outstanding after this offering and the number of shares of common stock held
by new investors will increase to 3,795,000 shares, or 46.6% of the total
number of shares of common stock to be outstanding immediately after this
offering.
The foregoing discussions and tables assume no exercise of any outstanding
stock options or warrants. As of July 2, 2000, there were options outstanding
to purchase 1,532,252 shares of common stock at a weighted average exercise
price of $5.77 per share. As of July 2, 2000, there was a warrant outstanding
to purchase 200,000 shares of common stock at an adjusted exercise price of
$7.50 per share. If all of these options and the warrant were exercised on July
2, 2000 (assuming no exercise of the underwriters' over-allotment options), our
pro forma net tangible book value as of that date would have been $44.5
million, or $4.60 per share of common stock, and this offering would represent
an immediate dilution of $7.40 per share to new investors.
16
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The table below shows selected consolidated financial data for our last five
fiscal years and for the six month periods ended July 2, 2000 and July 4, 1999.
The statement of operations data for each of the three fiscal years in the
period ended January 2, 2000 and the balance sheet data at January 2, 2000 and
January 3, 1999 are derived from our audited financial statements included
elsewhere in this prospectus. The statement of operations data for the fiscal
years in the two-year period ended December 29, 1996 and the balance sheet data
at December 28, 1997 are derived from our audited financial statements not
included in this prospectus. The statement of operations data for the six
months ended July 2, 2000 and July 4, 1999 and the balance sheet data at July
2, 2000 are derived from our unaudited financial statements included elsewhere
in this prospectus. Such unaudited interim financial statements have been
prepared on the same basis as the audited financial statements and reflect all
adjustments (consisting only of normal recurring accruals) necessary for a fair
presentation of the financial information, in accordance with generally
accepted accounting principles. Our fiscal year is based on a 52 or 53 week
year and ends on the Sunday closest to the last day in December.
The following selected consolidated financial data should be read in
conjunction with our consolidated financial statements and related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus. The pro forma shares used in
calculation of net income (loss) per share reflect the two-for-one stock split,
which will occur before the closing of the offering, and include the effect of
options granted since October 12, 1999. The pro forma as adjusted shares used
in the calculation of net loss per share reflect the conversion of all
outstanding shares of preferred stock into common stock.
<TABLE>
<CAPTION>
Six Months Ended
------------------
Fiscal Year
------------------------------------------ July 4, July 2,
1995 1996 1997 1998 1999 1999 2000
------- ------- ------- ------- ------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statements of Operations Data:
Total revenue......................... $33,252 $40,137 $50,732 $58,685 $67,807 $ 31,194 $ 39,171
Cost of sales and related occupancy
expenses............................. 17,870 21,526 26,530 28,749 31,923 14,799 18,389
Operating expenses.................... 8,545 11,247 14,767 17,969 21,902 9,696 13,320
Marketing and advertising expenses.... 719 810 2,278 2,176 3,491 1,498 4,255
General and administrative expenses... 3,974 2,522 3,961 5,961 6,230 3,006 3,420
Depreciation and amortization
expenses............................. 1,586 1,790 2,210 2,711 3,404 1,508 2,191
------- ------- ------- ------- ------- -------- --------
Income (loss) from operations......... 558 2,242 986 1,119 857 687 (2,404)
Interest expense, net, and other...... 325 244 396 709 985 451 726
------- ------- ------- ------- ------- -------- --------
Income (loss) before income taxes..... 233 1,998 590 410 (128) 236 (3,130)
Provision (benefit) for income taxes.. (129) 851 249 242 16 95 (652)
------- ------- ------- ------- ------- -------- --------
Net income (loss)..................... $ 362 $ 1,147 $ 341 $ 168 $ (144) $ 141 $ (2,478)
======= ======= ======= ======= ======= ======== ========
Pro forma net income (loss) per share
Basic............................... $ 0.08 $ 0.26 $ 0.08 $ 0.04 $ (0.03) $ 0.03 $ (0.53)
Fully diluted....................... 0.07 0.21 0.06 0.03 (0.03) 0.02 (0.53)
Pro forma shares used in calculation
of net income (loss) per share
Basic............................... 4,358 4,362 4,498 4,548 4,634 4,608 4,665
Fully diluted....................... 5,496 5,594 5,640 5,960 4,634 5,950 4,665
Pro forma as adjusted basic and
diluted net loss per share........... $ (0.03) $ (0.44)
Pro forma as adjusted shares used in
calculation of basic and diluted net
loss per share....................... 5,576 5,608
Balance Sheet Data
Cash and cash equivalents............. $ 334 $ 2,156 $ 888 $ 873 $ 1,074 $ 1,047 $ 1,216
Working capital....................... 2,402 2,230 (2,301) (1,333) (5,486) (2,391) (9,445)
Total assets.......................... 22,293 22,637 25,724 29,864 34,650 33,328 35,982
Current portion of long term debt..... 870 1,810 3,470 1,701 2,816 2,238 2,820
Long term debt, less current
maturities........................... 4,900 4,882 3,412 5,962 7,240 6,944 6,066
Series A preferred stock.............. 5,482 5,482 4,537 4,537 4,537 4,537 4,537
Total shareholders' equity............ 10,006 11,173 10,318 10,791 11,191 11,331 8,816
</TABLE>
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with our
consolidated financial statements and related notes included elsewhere in this
prospectus. Except for historical information, the discussion in this
prospectus contains certain forward-looking statements that involve risks and
uncertainties. The principal factors that could cause or contribute to
differences in our actual results are discussed in the section titled "Risk
Factors."
Company Overview and Industry Outlook
Peet's is a specialty coffee roaster and marketer of branded fresh roasted
whole bean coffee sold through multiple channels of distribution. Since our
founding in 1966, we have established a customer base and brand recognition in
the San Francisco Bay Area. In recent years, we have begun to expand our brand
nationally.
We expect the specialty coffee industry to continue to grow. We believe that
this growth will be fueled by continued consumer interest in high quality
coffee and related products, as well as the continued expansion of specialty
coffee retail chains.
Our operations are vertically integrated. We purchase Arabica coffee beans
from countries around the world, apply our artisan-roasting techniques and ship
fresh coffee daily to customers within 24 hours of roasting. Control of
purchasing, roasting, packaging and distribution of our coffee allows us to
maintain our unique freshness proposition and is cost efficient, enhances our
margins and maximizes our profit potential.
Our coffee and related items are sold through multiple distribution channels
which are considered segments under Statement of Financial Accounting Standards
No. 131, "Disclosures About Segments of an Enterprise and Related Information."
These channels are selected in order to provide broad market exposure to
potential purchasers of fresh roasted whole bean coffee. We sell coffee beans
and related items through three reportable segments: our company-owned retail
outlets, online and mail order and specialty sales, which consist of offices,
restaurants, specialty grocery and gourmet food stores.
We intend to increase sales by focusing on expansion in specialty sales, as
well as through continued growth of our online and mail order channel. Although
our expansion into new distribution channels is accelerating, it is disciplined
and focused, only penetrating new markets and channels that can support the
sale of specialty coffee. We also intend to open new stores in flagship
locations and explore potential opportunities for franchising and licensing in
international markets.
Business Categories
In order to facilitate an understanding of the results of operations for each
period presented, we have included a general overview along with a discussion
and analysis of business categories within our segment activities.
We measure our business by monitoring the volume and revenue of whole bean
coffee sales for home, office and restaurant consumption, as well as coffee
beans used for beverage sales at our retail outlets. For fiscal 1999, the sale
of whole bean coffee and related products for home, office and restaurant
consumption represented 60% of our total revenue and 78% of all whole bean
coffee pounds roasted. Accordingly, we monitor sales separately through two
distinct business categories:
. Whole bean coffee and related products; and
. Beverages and pastries.
We operate our stores and record sales through these two categories. Our
stores are primarily designed to facilitate the sale of whole bean coffee. The
format of our stores replicates that of a specialty grocer. Beans are scooped
from under the counter bins, weighed on counter top scales and hand packed into
branded bags. In
18
<PAGE>
addition, each store has a beverage bar that is dedicated to the sale of
prepared beverages and pastries for on-site consumption.
Our two business categories within a store mature at different rates. When we
open a store, the initial sales are primarily beverage related. The distance a
consumer will travel for beverages is short (usually one to three miles),
representing a convenience purchase. Consequently, the beverage business
matures rapidly. The trade area for whole bean coffee is much larger (usually
three to five miles), representing destination shopping. Consequently, whole
bean sales from stores mature more slowly (typically three to five years).
Therefore, sales at newer stores have a much higher beverage component and
shift to a higher whole bean percentage as the store matures. The dynamics of
opening many new stores over the past few years has resulted in a higher
beverage percentage within our total revenue, a trend that should change as
stores mature.
The following chart demonstrates category mix for retail store sales in the
fiscal month ended October 1, 2000, expressed as a percent of total store
revenue.
<TABLE>
<CAPTION>
Open less than Open more than
2 years Open 2 to 5 years 5 years
-------------- ----------------- --------------
<S> <C> <C> <C>
Whole bean coffee and
related products......... 42.0% 45.3% 51.9%
Beverages and pastries.... 58.0% 54.7% 48.1%
</TABLE>
Results of Operations
The following discussion on results of operations should be read in
conjunction with "Selected Financial Data," the consolidated financial
statements and accompanying notes and the other financial data included
elsewhere in this prospectus. Our fiscal year is based on a 52 or 53 week year.
The fiscal year ends on the Sunday closest to the last day of December.
The following table sets forth certain financial data for the fiscal periods
indicated, expressed as a percent of total revenue.
<TABLE>
<CAPTION>
Fiscal Year Six Months Ended
---------------------------------- -------------------
July 4, July 2,
1995 1996 1997 1998 1999 1999 2000
----- ----- ----- ----- ----- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Statements of Operations Data:
Total revenue............................ 100.0 % 100.0% 100.0% 100.0% 100.0 % 100.0% 100.0 %
Cost of sales and related occupancy
expenses................................ 53.7 % 53.6% 52.3% 49.0% 47.1 % 47.4% 46.9 %
Operating expenses....................... 25.7 % 28.0% 29.1% 30.6% 32.3 % 31.1% 34.0 %
Marketing and advertising expenses....... 2.2 % 2.0% 4.5% 3.7% 5.1 % 4.8% 10.9 %
General and administrative expenses...... 12.0 % 6.3% 7.8% 10.2% 9.2 % 9.6% 8.7 %
Depreciation and amortization expenses... 4.8 % 4.5% 4.4% 4.6% 5.0 % 4.8% 5.6 %
----- ----- ----- ----- ----- -------- --------
Income (loss) from operations............ 1.6 % 5.6% 1.9% 1.9% 1.3 % 2.2% (6.1)%
Interest expense and other............... 1.0 % 0.6% 0.8% 1.2% 1.5 % 1.4% 1.9 %
----- ----- ----- ----- ----- -------- --------
Income (loss) before income taxes........ 0.6 % 5.0% 1.1% 0.7% (0.2)% 0.8% (8.0)%
Provision (benefit) for income taxes..... (0.4)% 2.1% 0.5% 0.4% 0.0 % 0.3% (1.7)%
----- ----- ----- ----- ----- -------- --------
Net income (loss)........................ 1.0 % 2.9% 0.6% 0.3% (0.2)% 0.5% (6.3)%
===== ===== ===== ===== ===== ======== ========
</TABLE>
19
<PAGE>
Six Months Ended July 2, 2000 Compared With Six Months Ended July 4, 1999
Revenue
Total revenue increased $8.0 million, or 25.6%. Revenue from the sale of
whole bean coffee and related products increased to $22.6 million from $18.3
million, or 23.5%, while sales of beverages and pastries increased to $16.5
million from $12.8 million, or 28.9%.
Retail store revenue increased to $32.6 million from $26.4 million, or 23.5%.
Whole bean coffee and related products sales increased by $2.6 million, or
18.8%. The revenue growth was primarily due to increased pounds of whole bean
coffee sold from maturing stores, the addition of new stores and a price
increase in August 1999. Beverages and pastries sales increased by $3.7
million, or 28.8%. This increase was primarily due to the addition of new
stores and the rapid maturity of the beverage and pastry category within these
stores.
Online and mail order revenue increased to $4.4 million from $3.8 million, or
15.8%. The revenue growth was primarily due to growth in our customer base
resulting from increased direct mail and online marketing.
Revenue from specialty sales increased to $2.1 million from $1.0 million, or
110%. The revenue growth was primarily due to new sales initiatives in this
channel generated from our newly formed sales staff and the roll-out of our
national program for office and restaurant accounts.
Cost of sales and related occupancy expenses
As a result of the addition of new stores and increased volume of whole bean
coffee sales, cost of sales and related occupancy expenses increased $3.6
million, or 24.2%. Cost of sales and related occupancy expenses decreased as a
percent of total revenue to 46.9% from 47.4%, due primarily to our price
increase and reduced green coffee bean costs, partially offset by higher
occupancy costs for new stores opened in Boston and the increase in specialty
sales, which have a lower gross margin than sales through our other channels.
Operating expenses
Operating expenses increased $3.6 million, or 37.4%, and also increased as a
percent of total revenue to 34.0% from 31.1%.
Retail store operating expenses increased to $12.1 million from $9.0 million,
an increase of 34.4%. Operating expenses as a percent of segment revenue
increased to 37.2% from 34.1% in the prior year. The increased retail store
operating expenses as a percent of segment revenue was primarily due to the
increased costs of entering into new markets as well as increased labor costs
in California.
Operating expenses for online and mail order increased to $1.0 million from
$0.6 million, or 66.7%. As a percent of segment revenue, operating expenses
increased to 22.1% from 15.3% in the prior year. The increase in operating
expenses as a percent of segment revenue was primarily due to the increased
spending on information systems necessary to support higher volume and online
presence.
Operating expenses for specialty sales increased to $0.4 million from $0.1
million, or 300.0%. As a percent of segment revenue, operating expenses
increased to 21.1% from 10.3% in the prior year. The increase in operating
expenses as a percent of segment revenue was primarily due to the hiring of our
newly formed sales staff and the costs of the expanded program for office and
restaurant accounts.
Marketing and advertising
Marketing and advertising expenses increased $2.8 million, or 184.0%.
Marketing and advertising expenses as a percent of total revenue increased to
10.9% from 4.8% in the prior year. Marketing and advertising expenses increased
significantly over the prior year due to new store additions in Boston, Chicago
and Portland and increased online and mail order, as well as increased
marketing efforts for office and restaurant accounts.
20
<PAGE>
General and administrative
General and administrative expenses increased $0.4 million, or 13.8%, as a
result of the hiring of additional administrative personnel. As a percent of
total revenue, general and administrative expenses decreased to 8.7% from 9.6%
in the prior year. The decrease as a percent of revenue was primarily due to
greater leverage from higher sales.
Depreciation and amortization
Depreciation and amortization expenses increased $0.7 million, or 45.3%.
Depreciation and amortization expenses as a percent of total revenue increased
to 5.6% from 4.8% in the prior year. The increase in depreciation and
amortization was primarily due to capital expenditures for new retail stores,
manufacturing and systems upgrades.
Interest expense, net, and other
Net interest expense increased to $0.7 million, or 61.0%. The increase was
primarily due to the additional borrowings under our credit facility to fund
and support expansion and additional working capital needs.
Provision for income taxes
Taxes on income for the six months ended July 2, 2000 reflect a benefit of
$0.7 million resulting from recognition of the future tax benefit of the six-
month loss. The effective tax rate of 20.8% reflects the establishment of a
valuation allowance on charitable contribution carryforwards and the California
disallowance of 50% of the current year's tax net operating loss carryforward.
Year Ended January 2, 2000 Compared With Year Ended January 3, 1999
Revenue
Total revenue increased $9.1 million, or 15.5%. Revenue from the sale of
whole bean coffee and related products increased to $40.6 million from $36.1
million, or 12.5%, while sales of beverages and pastries increased to $27.2
million from $22.6 million, or 20.4%.
Retail store revenue increased to $57.2 million from $49.4 million, or 15.8%.
Whole bean coffee and related products sales increased by $3.1 million, or
11.5%. This increase was primarily due to an increase in whole bean coffee
pounds sold in existing stores, the addition of new stores and a price increase
in August 1999. Beverages and pastries sales increased $4.7 million, or 20.7%.
The increase was primarily due to a price increase on beverages in August 1999,
the addition of new stores and rapid maturity of the beverage and pastry
category within new stores.
Online and mail order revenue increased to $8.2 million, or 14.2%. The
revenue growth was primarily due to increased customers in new and existing
markets generated, in part, by targeted direct mail test programs.
Revenue from specialty sales increased to $2.5 million, or 15.5%, due to our
expanded office coffee program.
Cost of sales and related occupancy expenses
As a result of the addition of new stores and increased volume of whole bean
coffee sales, cost of sales and related occupancy expenses increased $3.2
million, or 11.1%. This represented a decrease as a percent of total revenue to
47.1% from 49.0%. The resulting increase in margin was primarily due to reduced
coffee costs and the result of a price increase in whole bean coffee and
beverages in August 1999.
21
<PAGE>
Operating expenses
Operating expenses increased $3.9 million, or 21.9%, which represented an
increase as a percent of total revenue to 32.3% from 30.6%.
Retail store operating expenses increased to $20.4 million from $16.7
million, an increase of 22.2%. Operating expenses as a percent of segment
revenue increased to 35.7% from 33.9% in the prior year. The increase in retail
store operating expenses as a percent of segment revenue was primarily due to
the increased costs of expanding into Boston, Chicago and Portland.
As a result of increased volume in whole bean coffee sales, operating
expenses for online and mail order increased to $1.3 million from $1.1 million,
or 18.2%. As a percent of segment revenue, operating expenses increased to
15.6% from 15.3% in the prior year. This increase was primarily due to higher
labor costs.
Operating expenses for specialty sales increased to $0.2 million from $0.1
million, or 100%. As a percent of segment revenue, operating expenses increased
to 9.1% from 6.9% in the prior year. The resulting increase is attributable to
the higher start-up cost of the office coffee program.
Marketing and advertising
Marketing and advertising expenses increased $1.3 million, or 60.4%.
Marketing and advertising expenses as a percent of total revenue increased to
5.1% from 3.7% in the prior year. The higher marketing and advertising expenses
were the result of promoting Peet's brand in new markets and the
standardization of our brand identity for store signs, packaging, marketing
materials, logo, and other corporate branding elements. Additionally, we
incurred incremental marketing expenses when we transitioned our website from
purely informational to functional e-commerce.
General and administrative
General and administrative expenses increased $0.3 million, or 4.5%. As a
percent of total revenue, general and administrative expenses decreased to 9.2%
from 10.2% in the prior year. The decrease as a percent of revenue was
primarily due to higher sales.
Depreciation and amortization
Depreciation and amortization expenses increased $0.7 million, or 25.6%. As a
percent of total revenue, depreciation and amortization expenses increased to
5.0% from 4.6% in the prior year. The increase in depreciation and amortization
was primarily due to capital expenditures for new retail stores, manufacturing
and systems upgrades.
Interest expense, net, and other
Net interest expense increased $0.3 million, or 38.9%. The increase was
primarily due to additional borrowings under our credit facility to fund and
support expansion and additional working capital needs.
Provision for income taxes
Taxes on income for the year ended January 2, 2000 reflect an expense of
$16,000. The expense in a loss year is the result of the effect of certain non-
deductible items including the California disallowance of 50% of the current
tax net operating loss.
Year Ended January 3, 1999 Compared With Year Ended December 28, 1997
Revenue
Total revenue increased $8.0 million, or 15.7%. Revenue from the sale of
whole bean coffee and related products increased to $36.1 million from $33.7
million, or 7.1%, while sales of beverages and pastries increased to $22.6
million from $17.0 million, or 32.9%.
22
<PAGE>
Retail store revenue increased to $49.4 million from $40.5 million, or 22.0%.
Whole bean coffee and related products sales increased by $3.4 million, or
14.5%. The revenue growth was primarily due to the continuing growth of the
Southern California stores and price increases in March and July 1997. Beverage
and pastry sales increased by $5.5 million, or 32.5%. The increase was
primarily due to a price increase in March 1997 and the addition of new stores.
Online and mail order revenue from whole bean coffee and related products
increased to $7.1 million from $6.1 million, or 16.4%. The revenue growth was
primarily due to an increase in whole bean coffee sold, generated, in part, by
the initiation of catalog and print media marketing programs.
Revenue from specialty sales decreased to $2.2 million from $4.1 million, or
46.3%. The decrease in revenue was primarily due to the termination of a supply
agreement with Au Bon Pain Co., Inc. in the first quarter of 1998. Excluding
the revenue from Au Bon Pain Co., Inc. in both periods, segment revenue in
fiscal 1998 increased 61.3% mainly because we expanded our office coffee
program.
Cost of sales and related occupancy expenses
As a result of the addition of new stores and increased volume of whole bean
coffee sales, cost of sales and related occupancy expenses increased $2.2
million, or 8.4%, which represented a decrease as a percent of total revenue to
49.0% from 52.3%. The increased margin is primarily due to reduced coffee costs
and the result of the price increases.
Operating expenses
Operating expenses increased $3.2 million, or 21.7%, which represented an
increase as a percent of total revenue to 30.6% from 29.1%.
Retail store operating expenses increased to $16.7 million from $13.2
million, or 26.5%. Operating expenses as a percent of segment revenue increased
to 33.9% from 32.8% in the prior year. The increase in retail store operating
expenses as a percent of segment revenue was primarily due to the high cost of
operating in the new Southern California region.
Operating expenses for online and mail order decreased to $1.1 million from
$1.3 million, or 15.4%. As a percent of segment revenue, operating expenses
decreased to 15.3% from 21.3% in the prior year. The decrease in operating
expenses was due to cost savings from workflow and process improvements.
Operating expenses for specialty sales decreased to $0.1 million from $0.2
million, or 50.0%. As a percent of segment revenue, operating expenses
increased to 6.9% from 4.8% in the prior year. The decreased operating expenses
are primarily attributable to the discontinuation of a supply agreement with Au
Bon Pain Co., Inc.
Marketing and advertising
Marketing and advertising expenses decreased $0.1 million, or 4.5%. Marketing
and advertising expenses as a percent of total revenue decreased to 3.7% from
4.5% in the prior year.
General and administrative
General and administrative expenses increased $2.0 million, or 50.5%. As a
percent of revenue, general and administrative expenses increased to 10.2% from
7.8% in the prior year. The increase as a percent of total revenue was
primarily due to hiring of corporate and administrative personnel to support
growth.
Depreciation and amortization
Depreciation and amortization expenses increased $0.5 million, or 22.7%.
Depreciation and amortization expenses as a percent of total revenue increased
to 4.6% from 4.4% in the prior year. The increase in
23
<PAGE>
depreciation and amortization was primarily due to capital expenditures for new
retail stores, manufacturing, and systems upgrades.
Interest expense, net, and other
Net interest expense increased $0.3 million, or 79.0%. The increase in net
interest expense was primarily due to the additional borrowings under our
credit facility to fund and support expansion and additional working capital
needs.
Provision for income taxes
Taxes on income for the year ended January 3, 1999 reflect an expense of $0.2
million. The effective tax rate of 59% in 1998 is the result of the California
disallowance of 50% of the current year's tax net operating loss and the
establishment of a valuation allowance on charitable contribution
carryforwards.
Liquidity and Capital Resources
We funded our capital requirements for fiscal 1997, 1998 and 1999 and for the
six months ended July 2, 2000 primarily through cash flow generated from
operations and borrowings under our line of credit and term loan facility.
Net cash flow provided by (used in) from operations was $2.5 million in
fiscal 1997, $2.9 million in fiscal 1998, $6.3 million in fiscal 1999 and
($0.2) million for the six months ended July 2, 2000. The trend of improved
operating cash flow through fiscal 1999 resulted from better utilization of
coffee inventories and increased sales. Net cash flow decreased in the first
six months of 2000 due to the increased net loss.
Net cash used in investing activities was $5.8 million in fiscal 1997, $6.2
million in fiscal 1998, $10.1 million in fiscal 1999 and $2.4 million in the
six months ended July 2, 2000. Investing activities primarily consist of
capital expenditures for property and equipment. These capital expenditures
primarily relate to expenditures to support store expansion, manufacturing
plant capacity expansion, information technology support systems and website
development.
Net cash provided by financing activities was $2.1 million in fiscal 1997,
$3.3 million in fiscal 1998, $4.0 million in fiscal 1999 and $2.3 in the six
months ended July 2, 2000. Financing activities in fiscal 1997 consisted of
borrowings under our credit facility and the repurchase of all-outstanding
Series B preferred stock and warrants. Financing activities during fiscal 1998
and fiscal 1999 consisted primarily of borrowings under our credit facility and
repayment of notes payable. Financing activities during the first six months of
fiscal 2000 consisted primarily of repayment of amounts outstanding on our
credit facility.
At July 2, 2000, we had a $20.0 million credit facility with a bank. The
facility provided for a revolving line of credit, a term loan facility and a
standby letter of credit. At July 2, 2000, we had $9.0 million of outstanding
borrowings under the revolving line of credit, $6.7 million of outstanding
borrowings under the term loan and $2.2 million of outstanding borrowings under
the industrial development revenue bond. We were not in compliance with all of
the debt covenants under our credit facility as of January 2, 2000 and secured
a waiver from our bank.
On September 1, 2000, we entered into a new credit facility with General
Electric Capital Corporation. This new credit facility has a five-year term and
provides for a line of credit up to $15.0 million, a Term A loan for $7.0
million amortized for five years and a Term B loan for $8.0 million interest
only for eighteen months with principle due at February 28, 2002. The revolving
line of credit also provides for the issuance of up to $3.0 million in letters
of credit obligations. Total availability under this revolving line of credit
is determined by subtracting our funded debt (less the outstanding balance on
its Term B loan) from our trailing twelve month Earnings Before Interest,
Taxes, Depreciation and Amortization ("EBITDA") multiplied by 3.75 for the
period before September 1, 2001, 3.5 for the period after September 1, 2001 and
before September 1, 2002, and 3.25 thereafter.
24
<PAGE>
Outstanding advances under the Term A loan and revolving credit facility bear
interest at either, at our option, (i) "LIBOR", a floating rate based on the
reserve adjusted London Interbank Offered Rate for the one, two or three month
period selected plus 3.00%, or (ii) an "Index" rate, a floating rate based on
the higher of prime or 50 basis points over the average of the rates on
overnight federal funds transactions plus 1.25%. The Term B loan has the same
interest alternatives; however, the spread is 7.00% for the LIBOR alternative
and 5.25% for the Index rate alternative. LIBOR interest on advances under the
term loans and revolving line of credit is payable upon the last day of the
applicable LIBOR period and Index rate interest on advances under the term
loans and revolving line of credit is payable monthly. Borrowings under the
credit facility are secured by substantially all of our assets. The credit
facility contains monthly, quarterly and annual financial covenants which
require us to maintain a minimum EBITDA and fixed charge coverage ratio. In
addition, the credit facility contains restrictions on our ability to make
capital expenditures, incur additional indebtedness and lease obligations, pay
dividends and make other distributions to shareholders, acquire and retire our
common stock and make investments. The credit facility prohibits us from
forming or acquiring subsidiaries, merging with or into other companies or
selling all or substantially all of our assets.
The credit facility also limits the number of retail stores we are allowed to
open. No new stores will be opened during the period that the Term B loan is
outstanding. Up to three stores per fiscal year will be allowed to be opened
once the Term B loan has been repaid with an additional two stores if funded
from private placements. Pursuant to the terms of the credit facility, we must
repay the Term B loan upon the closing of this offering. We intend to
renegotiate the credit terms upon funding from this offering.
In the next five years, we will use cash primarily for the following
activities:
. Repayment of borrowings;
. Marketing and related expenditures;
. Selective opening of additional stores;
. Capital expenditures; and
. Expenditures for general corporate purposes, including working capital
needs.
Our capital requirements for the items outlined above may be significant.
These capital requirements will depend on many factors including our overall
performance, the pace of store expansion and store remodelings and the
requirements for infrastructure needs for both personnel and facilities. To
date, we have primarily relied on cash flow generated from operations and our
line of credit to fund our capital needs. We believe that the proceeds from
this offering, cash flow generated from operations and our borrowing capacity
under our line of credit will be sufficient to meet our capital needs for the
remainder of fiscal 2000 and for fiscal 2001. If additional capital is needed,
we may raise such capital through public or private equity or debt financings,
subject to limitations imposed by our loan agreement. However, there can be no
assurance that additional capital will be available on satisfactory terms.
We conduct some of our corporate and store operations from leased facilities
and lease certain equipment under operating leases. Generally, these have
initial lease periods of three to ten years, and contain provisions for renewal
options of five to ten years.
Inflation
We do not believe that inflation has had a material impact on our results of
operations in recent years. However, we cannot predict what effect inflation
may have on our results of operations in the future.
Seasonality
Our business is subject to seasonal fluctuations. Significant portions of our
net revenue and profits are realized during the fourth quarter of our fiscal
year, which includes the December holiday season. In addition,
25
<PAGE>
the timing of opening of new stores and our growth may conceal the impact of
other seasonal influences. Because of the seasonality of our business, results
for any interim period are not necessarily indicative of the results that may
be achieved for the full fiscal year.
Quantitative And Qualitative Disclosure About Market Risks
We are exposed to market risk from changes in interest rates on our
outstanding bank debt. Our revolving line of credit bears interest at either
the Index rate (the higher of prime or 50 basis points over the average of
rates for overnight federal funds transactions) plus 1.25% or a rate equal to
LIBOR plus 3.00%. We elect the rate on a monthly basis for Index rate advances
and at the end of the applicable LIBOR period for LIBOR rate advances.
Additionally, our $7.0 million Term Loan A bears interest under the same method
as our revolving line of credit and our $8.0 million Term Loan B bears interest
at either the Index Rate plus 5.25% or LIBOR plus 7.00%. The interest cost of
our bank debt is affected by changes in either prime, federal funds rates, or
LIBOR. Such changes could adversely impact our operating results.
We use coffee futures and options to hedge price increases in price-to-be-
fixed coffee purchase commitments and anticipated coffee purchases. These
derivative instruments qualify for hedge accounting and the gains and losses
are accounted for as inventory costs and are recorded as expenses or income
when the related coffee is sold. We do not hold or issue derivative instruments
for trading purposes.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS
No. 133"), which defined derivatives, requires that all derivatives be carried
at fair value, and provides for hedge accounting when certain conditions are
met. We will adopt ("SFAS No. 133") as required by SFAS No. 137, Deferral of
the Effective Date of the FASB Statement No. 133" in fiscal 2001. We have not
fully assessed the implications of adopting this new standard.
26
<PAGE>
BUSINESS
Overview
Peet's is a specialty coffee roaster and marketer of branded fresh roasted
whole bean coffee sold under strict freshness standards. We sell our fresh
roasted coffee, hand selected tea and related items in several distribution
channels including specialty grocery and gourmet food stores, online and mail
order, offices and restaurant accounts and 57 company-owned stores in four
states. In 1999, approximately 60% of our total revenue was generated from the
sale of fresh whole bean coffee and approximately 40% of our total revenue was
generated from the sale of prepared beverages and pastry items. We are well
established in the San Francisco Bay Area, and we believe we have developed a
loyal customer base and growing brand awareness across the United States.
In order to deliver the signature flavor and richness of our roasted coffee,
we have strict quality and production standards. Since our founding in 1966 by
Dutch immigrant Alfred Peet, we have remained committed to a simple idea:
purchase only high quality Arabica beans, deep roast them for full flavor using
an artisan process and ship them within 24 hours of roasting to ensure
freshness. We believe that roasted coffee is a perishable product and we pursue
distribution channels that are consistent with our strict freshness standards.
Over the past three years, we have begun to reposition Peet's from a regional
retailer that operates its own outlets into a national coffee brand available
through select channels of distribution. We have begun a strategic expansion
into specialty grocery and gourmet food stores as well as offices and
restaurants. We have continued to develop our mail order channel, including the
addition of online ordering capability through our websites, peets.com and
coffee.com, and opened new retail outlets in four regions. Our expansion
strategy has allowed us to grow in a controlled manner to ensure that we
continue to enhance our brand's image and quality reputation.
The combination of our established brand, a differentiated product
positioning based on our quality and freshness standards and our strategic
expansion into select channels of distribution creates significant potential
opportunities for growth.
Competitive Strengths
Our objective is to become the leading brand of whole bean specialty coffee.
To achieve this objective, we intend to leverage the following strengths:
Differentiated Product--Peet's has been at the forefront in the development
of fresh, specialty coffee in the United States. We use a signature deep-
roasting process, hand roast to order six days a week in small batches and ship
coffee to our stores or customers within 24 hours of roasting. We believe the
freshness of roasted coffee is dependent upon the time it takes to get the
coffee from the roaster to the consumer. We believe this fact is not yet well
understood by consumers, and consequently, we have a potential opportunity to
change consumer perceptions about fresh coffee. We reinforce our quality and
freshness standards by roast-dating every package that leaves the roastery,
whereas our competitors typically use "sell by" dates ranging from three to
nine months after roasting.
Peet's focus on product quality and freshness encompasses most of what we do
at the roasting facility, within our retail stores and in managing our multiple
channels of distribution. We are dedicated to meeting strict standards and
believe that these standards are unsurpassed in the industry. Here are a few of
the steps we take to ensure a high quality product:
. Purchase only high quality Arabica coffee beans;
. Request a ten year commitment from our roasters in order to ensure that
they learn how to roast coffee the Peet's way;
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<PAGE>
. Roast only enough coffee each day to meet the previous day's orders--no
roasted coffee is stored as inventory;
. Taste virtually every batch of coffee that we roast;
. Use advanced package technology to ensure freshness;
. Roast-date every bag that leaves the roastery;
. Rotate coffee in retail stores so that no whole bean coffee is sold more
than ten days after roasting; and
. Brew coffee fresh in our stores every 30 minutes, or less.
Growing Market For Specialty Coffee--The growth in specialty coffee sales
during the 1990s has created a marketplace for higher quality and
differentiated products that can be priced at a premium in the marketplace. We
believe that our competitors' focus on convenience, beverage sales or commodity
products is creating the opportunity for a premium brand alternative that
delivers recognizable product benefits such as freshness and artisan-roasted
coffee.
We believe that the success of brands such as Starbucks and Millstone has
increased consumer awareness of specialty coffee and has helped create a unique
opportunity for us to capture significant market share within the whole bean
specialty coffee market. In our view, consumer demand is shifting towards
darker, fresher and more flavorful coffee. This development, we believe, bodes
well for our product offerings.
Proven Business Model--Since inception, Peet's core business has been the
sale of fresh whole bean coffee for home, office and restaurant consumption. We
have developed a network of company-owned retail stores in the San Francisco
Bay Area, which has helped us build brand awareness and customer loyalty. In
the last three years, we believe we have demonstrated our business model by
expanding our operations to new geographic regions and entering new
distribution channels.
We demonstrated the customer appeal of our coffee's deep roast flavor through
the opening of new stores in Southern California, Portland, Chicago and Boston.
Our per-store average is approximately $1.2 million in annual sales, which
reflects the attraction of our stores for coffee bean customers.
In 1990, Peet's established a mail order catalog program in response to
customer demand. In 1996, we added online ordering capability to our mail order
business. Today, we ship whole bean coffee to customers in all 50 states and
numerous foreign countries. In 1999, this direct delivery program accounted for
approximately 12% of total sales.
We have expanded our presence within specialty grocery and gourmet food
stores. Peet's coffee is now distributed in 25 specialty grocery and gourmet
food stores, using either Peet's branded coffee kiosks or freestanding racks
located in or near the bakery departments of these outlets.
Scalable Infrastructure--We have made capital investments to improve our
roasting, packaging and fulfillment infrastructure to support the production
and distribution of large quantities of fresh whole bean coffee. At present, we
are operating at approximately 50% of our annual roasting capacity. In
addition, we have installed software and technology to provide high quality
customer service and deliver professional customer relationship management. We
have been fulfilling orders in-house for mail order customers for many years
and have the infrastructure to grow this and the online part of the business.
Although our production process is artisan in nature and requires highly
skilled employees, we continue to believe that substantial volume growth can be
accommodated within the existing manufacturing asset base. We do not expect to
spend extensively on equipment, plant or facilities to support our expected
near-term volume growth. Future capital investments in the production area will
be targeted to improve efficiency, customer service and green coffee bean
inventory management.
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Strong Company Culture--Our employees, known affectionately as "Peetniks,"
are dedicated to the vision and mission of Peet's. Our culture is centered on
producing high quality products and establishing long term customer
relationships. We are focused on performance and committed to strong employee
and community relationships. We believe that we have established the values,
and continue to attract the employees, to contribute to our future growth.
Industry Overview
Specialty coffee, or what is sometimes called gourmet coffee, is coffee
roasted using mainly high quality Arabica beans. The Arabica bean is widely
considered superior to its more common counterpart, the Robusta, which is used
mainly in non-specialty coffee. High quality Arabica beans usually grow at high
elevations, absorb little moisture and mature slowly. These factors result in
beans with a mild aroma and a bright, pleasing flavor that is suitable for
specialty coffee.
The specialty coffee industry consists of two distinct business segments:
whole bean, including ground, coffee sales (for home, office and restaurant
consumption) and coffee beverage sales. Based on industry data, we estimate
that sales of specialty whole bean and ground coffee in grocery and specialty
retailers for home, office and restaurant consumption exceeded $2.8 billion in
1999. Aiding this growth has been the increase in the number of specialty
coffeehouses, which grew from 500 units in 1991 to over 12,000 in 2000, as
reported by the Specialty Coffee Association of America.
Consumers have a strong interest in purchasing whole bean specialty coffee
for home consumption. According to the 1999 Gallup Survey on Coffee
Consumption, nearly 61% of all respondents stated that they purchased specialty
whole bean coffee for home consumption over the past three month period. In the
same survey, consumers stated that 33% of these whole bean purchases were made
at a retail price per pound of over $7.00, reflecting the interest in high
quality, premium-priced coffee.
Consumers favor the supermarket or grocery store for the purchase of whole
bean specialty coffee. According to the 1999 Gallup Survey, 57% of those
consumers who had purchased such products did so most frequently in a
supermarket or grocery store. Other important purchase locations included
specialty coffee stores (14%), mail order catalogs or clubs (4%) and gourmet
food stores (2%).
Competitive Positioning
The whole bean specialty coffee category can be characterized as highly
fragmented. Our primary competitors in whole bean specialty coffee sales
include Gevalia, Green Mountain, Illy Cafe, Millstone, Seattle's Best and
Starbucks. There are an estimated 500 smaller and regional brands that also
compete in this category. In addition, we compete indirectly against all other
coffee brands on the market. A number of nationwide coffee manufacturers, such
as Kraft Foods, Procter & Gamble and Nestle, are distributing premium coffee
brands in supermarkets. These premium coffee brands may serve as substitutes
for our whole bean coffee.
Despite competing in a fragmented category, specialty coffee brands are being
established across multiple distribution channels. Several competitors are
aggressive in obtaining distribution in specialty grocery and gourmet food
stores, through online and mail order, and in office and restaurant locations.
We have only recently begun to penetrate these channels.
We believe that our customers choose among specialty coffee brands based upon
quality, convenience, and to a lesser extent, price. Although consumers may
differentiate coffee brands based on freshness (as an element of coffee
quality), to our knowledge, no significant competitor is as focused on product
freshness and roast-dating in the same manner as Peet's. It is a common
industry practice to use a "sell by" date for pre-packaged beans and to monitor
roasted bean age in open-air bulk bins. Therefore, a key benefit, freshness and
the perishable nature of coffee, is being largely overlooked. We believe that
our market share strength in the specialty category is based on a solidly
differentiated position built on our freshness standards and artisan-roasting
style.
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Our roasted coffee is priced within a range of $8.95 to $16.95 per pound to
the consumer, which we believe is priced at a premium to many other coffee
brands.
Growth Strategy
We believe that significant growth opportunities exist for us in several
distribution channels across both domestic and international markets. We have
begun to reposition Peet's from a regional retailer that operates its own
outlets into a national coffee brand available through select channels of
distribution. We expect revenue in our underdeveloped distribution channels
(specialty grocery and gourmet food stores, online and mail order and office
and restaurant accounts) to increase as a percent of our total revenue. The key
strategies to drive Peet's growth include the following initiatives:
Expand our presence in specialty grocery and gourmet food stores--We will
expand availability of our brand through a controlled network of distribution
to specialty grocery and gourmet food stores. We are identifying these
locations as "Authorized Peet's Coffee Retailers." We believe that
approximately 10,000 retail points of distribution across the United States fit
the profile of potential Authorized Peet's Coffee Retailers.
We have two primary models for distribution in these channels. The first is a
stand-alone Peet's branded coffee kiosk (or an end of the aisle open bin
display) usually staffed by the store with an employee who scoops freshly
roasted beans into Peet's branded bags. The stores must agree to our strict
freshness standards and will receive coffee that has been shipped directly from
our roasting facility. We have deployed this model at a chain of 13 specialty
grocery stores in Southern California.
In our second model, we ship pre-packaged coffee to local distributors who
specialize in items with limited shelf life and visit stores on a daily, or
frequent basis, to deliver product and restock shelves. We supply our
distributor partners with a branded, free-standing rack for placement at the
stores. We are targeting placement of the rack in or near the bakery section in
these stores to avoid competing for shelf space in the crowded coffee aisle and
to reinforce our freshness positioning. This model has been deployed in 12
retail locations.
Continue to grow our online and mail order business--Peet's has built a
significant mail order and online business by marketing to our customers, who
enjoy the convenience of receiving fresh coffee at their homes or offices. In
addition, we have initiated a marketing program to attract new customers who
are not familiar with Peet's coffee. Our primary goal with respect to this
distribution channel is to build a high frequency of purchase by individual
consumers. We approach this goal with programs, incentives and order methods
that influence consumers to receive coffee via the mail on an automatic, or
pre-set, schedule.
To support this business, we operate our own call center with a highly
trained employee base that can take orders, answer questions and educate
customers on the intricacies of coffee enjoyment. Our primary website is
peets.com, and we own and operate the coffee.com website as a marketing tool.
We may explore additional business development opportunities for coffee.com in
the future.
We have developed an in-house database and customer management system using
the E.piphany e.4 software package to market to current customers and build
loyalty. Our database currently contains the names and addresses of over
150,000 people and 45,000 e-mail names, and we have the ability to segment this
database and generate outbound marketing programs.
In addition to our online and mail order direct business, we have
distribution arrangements within several online accounts such as America Online
and Webvan. We intend to expand this type of distribution over the course of
the next year.
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Expand office and restaurant distribution--We currently operate with a select
group of office coffee distributors in nine domestic markets. We have been
highly selective with our restaurant distribution. We believe we have expansion
opportunities in new and existing markets.
In markets that we have selected to penetrate, we have relationships with
distributors that meet our delivery standards for freshness. A full service
office coffee distributor will deliver coffee, coffee brewing equipment and
condiments to an office coffee account. We believe that developing a market
exclusive arrangement with one distributor per market provides us with the best
opportunity to gain a substantial position in a market. We believe that this
strategy helps build our business in a highly fragmented market.
Peet's coffee has historically been in demand in restaurants, hotel and food
service accounts. We believe our coffee enjoys a reputation for high quality
within the food service industry and we plan to expand our presence in this
channel. For example, our coffee is served at such high profile west coast
restaurants such as Aqua in Las Vegas, Farallon in San Francisco, Oritalia in
Portland, and Spago in Beverly Hills. In the hotel market, our coffee is served
at the Chateau Marmont in Los Angeles, Claremont Hotel in Berkeley and the Ritz
Carlton in Phoenix.
We have established a relationship with Marriott Host for the operation of
four kiosks in prominent locations within the San Francisco International
Airport, and we are working with major food service companies and corporate
catering companies. As a result, Peet's is now served at several major
corporate dining halls.
In addition, we are finding success with university food service providers.
Our coffee is served on the Harvard University campus and the Stanford
University campus.
Open new stores in "flagship" locations--Peet's operates 57 retail specialty
stores, 38 of which are located in Northern California. We intend to open new
stores in strategic markets and locations over the next few years. We believe
that limited and selective additions of new store sites, rather than broad
scale site development, will better support our brand position and will make
better use of our financial resources. We view retail stores as an important
component of our growth strategy, providing a physical presence in selected
markets for product trial, marketing and general brand-building. While we are
not seeking significant numbers of new store sites, we continue to look for
locations that fit our strategic growth goals.
Expand Internationally--We are exploring potential opportunities for
licensing and franchising our products in international markets. We seek to
develop relationships with partners who are interested in building our brand
through multiple distribution channels.
History
Alfred Peet opened the first Peet's Coffee store in 1966. The original store
on Vine Street is still one of our most popular and successful locations. Mr.
Peet opened his first store with a simple business plan: he would roast coffee
in the store every day, use a deep-roasting process that he learned in his
travels and from his family, who were in the coffee business, and give
customers of his freshly roasted beans a free small cup of coffee with their
purchase. Peet's soon became the coffee of choice among the food conscious
residents of the Berkeley "gourmet ghetto." As customers left the San Francisco
Bay Area, they would often ask for Peet's coffee to be mailed to them in cities
throughout the United States and the world.
We started as Starbuck's Coffee Company, a Washington corporation, in 1971.
By the 1980s, we owned and operated several retail stores and a coffee roasting
plant in Seattle. In 1984, we purchased Peet's Coffee and Tea, Inc., which was
the successor to Alfred Peet's business. We sold the Starbuck's Seattle-based
assets to Il Giornale Coffee Company in 1987 and shifted our focus to Peet's
Coffee & Tea.
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Our Coffee
Our Coffee Beans
Only high quality Arabica coffee beans can produce the flavor and richness of
Peet's coffee. With our reputation that has been built over 34 years, we have
gained access to some of the highest quality green coffee bean from the finest
estates and growing regions around the world. We have built long term
relationships with growers and brokers to ensure a steady supply of great
coffee beans.
Coffee is an agricultural crop that undergoes price fluctuation and quality
differences depending on weather, economic and political conditions in coffee
producing countries. High quality Arabica coffee beans are generally more
expensive than Robusta beans. As a result, in addition to the above factors,
the price, quality and availability of green coffee beans also depend on our
relationships with coffee brokers, exporters and growers.
At Peet's, we sample every lot of coffee before and after we make a purchase.
This process protects our quality standard, and provides our buyers with the
knowledge to ensure that every coffee and blend can have a consistent flavor.
We are occasionally presented with opportunities to purchase unique and special
coffees based on our relationships and reputation.
We generally turn our inventory of green coffee beans two to three times per
year. Unlike roasted coffee beans, green coffee beans are not highly
perishable. We generally carry approximately $4.3 to $6.3 million worth of
green coffee beans in inventory. If Arabica coffee beans from a region become
unavailable or prohibitively expensive, we may be forced to discontinue
particular coffee types and blends or substitute coffee beans from other
regions in our blends. We mitigate the risks associated by fluctuations in
coffee prices by entering into fixed price commitments and hedging agreements
for a portion of our unroasted coffee requirements.
Our Roasting Methods
Our roasting method was first developed by Alfred Peet and perfected by our
talented and skilled roasting personnel, whom we call "Roasters". 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 a two
year apprenticeship program to learn our roasting method and to gain the skill
necessary to roast coffee at Peet's.
Coffee Types and Blends
Beyond sourcing and roasting, Peet's has developed a reputation for expert
coffee blending. Our blends, such as our Major Dickason's Blend, are well
regarded by our customers for their uniqueness, consistency and special flavor
characteristics. Currently, we sell 33 types of coffee as regular items.
Included in this figure are approximately 17 blends with the balance being
single origin coffees from countries such as Colombia, Guatemala and Kenya.
Peet's is also active in seeking out, roasting and selling unique special lot
and one-time coffees. On average, we offer four to six such coffees every year.
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Peet's Coffee Menu
<TABLE>
<CAPTION>
Decaffeinated
Peet's Blends Single Origin Coffee
<S> <C> <C>
House Blend Panama Sierra Dorada Blend
Blend 101(R) Guatemala House Blend
Arabian Mocha-Java Costa Rica Special Blend
Maduro Blend(R) Colombia French Roast
Top Blend(TM) Ethiopian Fancy Sumatra
Major Dickason's Blend(R) Arabian Mocha Sanani Aged Indonesia
Sierra Dorada Blend(R) Kenya Colombia
Garuda Blend(R) New Guinea Mocca-Java
Gaia Organic Blend(TM) Java
Viennese Blend Sumatra Peet's Dark Roasts
Fair Trade Blend Sulawesi-Kalosi French Roast
Aged Java Italian Roast
</TABLE>
Facilities
Packaging and Distribution
We have invested in packaging and distribution infrastructure to prepare for
growth in multiple distribution channels. Our growth initiatives require the
efficient and quality packaging of eight, twelve and sixteen ounce and five
pound pre-packed coffee (whole bean and ground). We intend to add a 2.5 ounce
package size in the near future. After roasting, whole bean coffee is
automatically conveyed to the packaging staging area where it is packed in
ground or whole bean form, roast-dated and shipped.
We automatically pre-form shipping containers and attach invoice and shipping
information to every box. Whole bean coffee that is designated for delivery to
our retail stores is packaged in five pound bags. We use a third party freight
service to deliver coffee to our west coast retail stores on an overnight
basis. Deliveries to our Chicago and Boston stores are air-freighted and then
distributed to our retail stores by local delivery services.
Fulfillment and Facilities
Peet's headquarters are located in Emeryville, California, where the Company
leases approximately 60,000 square feet of office and production space,
including roasting and direct delivery fulfillment facilities. Within these
facilities, we have 15,000 square feet devoted to general corporate and retail
overhead and a call center for the direct delivery business. Our lease expires
in 2006 and we have an option to extend the lease for an additional ten years.
Retail Location and Operations
We operate 57 retail stores in four states. Our retail locations are all
company operated in leased facilities. Our store size averages 1,500 square
feet. Our stores are typically located in urban neighborhoods, shopping centers
(usually consisting of grocery, specialty and service stores) and high-traffic
downtown streets. We have a comprehensive and detailed site selection process
to ensure that we choose the best sites for our stores. We identify target
markets, areas and neighborhoods before evaluating sites. Our process includes
analyzing demographic, psychographic, daytime traffic and shopping patterns and
environmental factors.
Our store design is based on the presentation of a whole bean "selling zone"
that presents Peet's as a specialty food store/grocer with adequate space
designated for prepared beverages and food. We believe that the emphasis on
whole bean sales within the store design contributes to our strong sales of
coffee beans.
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Our "selling zone" represents a significant difference in presentation at our
retail stores versus competitors' locations. Peet's stores are all designed
with dark wood fixtures, classic lighting, granite countertops and understated
colors to avoid a chain-like appearance. This presentation supports the
serious, authentic coffee-culture impression that we desire to make with
consumers.
Our retail operation and culture is heavily oriented toward the presentation
and selling of fresh whole bean coffee. Each store always has a staff person
available at the bean counter to take orders and assist customers with
questions and issues. Beans are scooped upon order at every store, and we will
grind beans to a customer's specific requirement after we weigh-out the
appropriate amount. We will blend different coffees based on customer requests.
Beans are never sold beyond ten days from roasting. Our store managers are
trained to order and rotate coffee to ensure that only the freshest beans are
sold to customers. Our carefully selected coffee-related merchandise is
displayed to communicate our authenticity and seriousness about whole bean
coffee.
Our beverage bar operation is designed to deliver the highest quality drip
coffee, espresso drinks, prepared teas and coffee-based iced and flavored
drinks. We brew fresh coffee every 30 minutes in open top brewing machines.
Because the water quality and composition is critical to a great cup of coffee,
our water is carefully filtered via carbon filtration, or undergoes a reverse
osmosis process to obtain the correct mineral balance before brewing. Milk for
espresso drinks is always freshly steamed upon order and not reused, and our
espresso systems are the best available based on our internal testing process.
We sell only high quality pastries and treats, supplied daily by local
bakeries. These local bakeries must use all-natural ingredients, butter and
classic baking methods. We constantly monitor pastry quality and search for the
best suppliers in each market in which we operate.
The following table lists the number of retail stores we have in each
location as of October 1, 2000:
<TABLE>
<CAPTION>
Location Number
-------- ------
<S> <C>
San Francisco Bay Area, California.................................. 32
San Jose, California................................................ 3
Sacramento, California.............................................. 2
Santa Cruz, California.............................................. 1
Santa Barbara, California........................................... 1
Greater Los Angeles, California..................................... 6
Orange County, California........................................... 1
San Diego, California............................................... 2
Chicago, Illinois................................................... 2
Portland, Oregon.................................................... 2
Boston, Massachusetts............................................... 5
---
Total............................................................. 57
===
</TABLE>
Customers and Marketing
Peet's marketing and distribution strategies are designed to appeal to a
customer base that falls within one of the most economically favorable
demographic groups in the United States. Our customers tend to be over 35 years
in age and well-educated with an average household income of over $50,000 per
year. We have a regional skew to our customer base that mimics the geographic
development of the specialty coffee industry. Our customers are concentrated on
the west and east coasts and in select metropolitan areas in the central United
States. The typical Peet's customer has an affinity for fine food and wine, an
interest in domestic and foreign travel and a tendency to be active within the
cultural arts. Our typical customer also owns a computer and regularly uses the
internet.
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We believe that a sophisticated, intelligent and understated marketing
approach is most attractive to the target audience. Historically, we have
relied upon word-of-mouth advertising to expand awareness of our brand.
Recently, we have begun to employ new marketing strategies to grow our
business, including:
Direct Mail and Relationship Marketing--To date, the key marketing tactic to
support online and mail order sales, direct store distribution and retail
operations has been direct mail. We believe that the ability to target the
right consumer demographics through direct marketing makes this tool effective
and efficient. Direct mail tools include prospecting pieces, postcards,
personalized letters, newsletters, e-mails, catalogs and announcements that are
directed to consumers' homes and places of business.
Advertising and Promotion--Historically, we have not used traditional mass
media in our marketing efforts, although we have used local radio and print
advertising sparingly to support the retail store segment as well as the online
and mail order segment. For example, we sponsor public radio and television in
the San Francisco Bay Area to receive promotional announcements and
recognition. We believe that mass media should play a role in the future
development of our brand. Recently, we have executed a print advertising
campaign in targeted publications such as Bon Appetit, Cooking Light and
Smithsonian.
Public Relations--Peet's recognizes an opportunity to generate awareness and
understanding of its brand through local, regional and national public
relations. Our story and history and our commitment to quality and freshness
create a rich template for media interest and attention.
Online Marketing--The peets.com and coffee.com websites are supported with
targeted marketing efforts online. We will continue to use banner advertising,
selective portal placement, such as America Online and Microsoft Network, and
programs under affiliate program relationships. For example, we established
"Coffee Freshness Week" to promote the freshness position of our brand. This
integrated program consisting of advertising, public relations and online
promotion has generated a significant number of new customers.
Event Sponsorships and Sampling--Event sponsorships that link Peet's to the
local community help create and maintain neighborhood relationships for our
stores. In addition, local events and community involvement are important
components of Peet's culture and value system. Sampling has been used to expose
and develop new customers in markets where Peet's has a retail presence. We
conduct coffee tasting events at our stores to attract aficionados of coffee.
On a local level, this tactic is useful in generating store traffic and
attracting online and mail order customers.
Employee Training and Development
Peet's has developed a comprehensive program to train employees in
leadership, customer service, operations and product knowledge. Our general
categories of training include: product training and customer service for all
employees, store operations for our retail personnel and management and
leadership training.
Product Training and Customer Service--Our employees are exposed to a high
level of product training. We believe that our personnel must be able to
educate customers and provide information on the products we offer. Employees
are trained to taste coffee and tea and recognize the characteristics and
quality of these products and to properly prepare our beverages. In addition,
we believe that customer service training and awareness is critical to our
success. We reinforce the importance of training on a daily basis in our retail
locations.
Store Operations--In addition to product training, we train our retail
employees in general store operations to achieve and maintain a high level of
quality and customer service.
Management and Leadership Training--Management personnel are required to
participate in special training sessions on such subjects as accounting,
customer service and employee relations. We also offer advanced training
sessions in coffee and tea for our key personnel. Our retail managers and
assistants are also required to participate in training sessions on the
operation of our retail stores.
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Customer Service and Product Quality
We take great pride in maintaining strict standards for coffee beverage
quality and customer service. We use high quality coffee brewing equipment, and
our employees are trained to operate this equipment in the traditional methods
used in European coffeehouses. Customer service standards are set to satisfy
busy customers, yet never become so speed sensitive as to inhibit the delivery
of the highest quality beverage and whole bean experience. To monitor our
standards in customer service, we visit stores frequently to determine if our
standards are met and we utilize "secret shopper" programs to monitor retail
store performance.
In addition, employee quality specialists frequent stores to ensure product
standards are being met. These employees conduct taste tests, equipment checks
and water filtration checks. They are trained to fix and adjust equipment and
consult with store personnel on brewing techniques and standards.
Tea, Food, Merchandise and Related Items
Peet's offers a line of hand selected whole leaf and bagged tea. Our quality
standards for tea are very high. We purchase tea directly from importers and
brokers and store and pack the tea at our Emeryville facility.
We offer a limited line of specialty food items such as jellies, jams and
candies. These products are carefully selected for quality and uniqueness.
Our merchandise program consists of items such as brewing equipment for
coffee and tea, paper filters and brewing accessories and branded and non-
branded cups, saucers, travel mugs and serveware. We do not emphasize these
items, and we carry them in retail stores, online and through mail order as a
means to reinforce our authenticity in coffee and tea.
Intellectual Property
We regard intellectual property and other proprietary rights as important to
our success. We own several trademarks and service marks that have been
registered with the United States Patent and Trademark Office, including
Peet's, Peet's Coffee & Tea, Peets.com, Blend 101, Pride of the Port, Maduro
Blend, Major Dickason's Blend, Sierra Dorada Blend and Garuda Blend. We also
have registered trademarks on our stylized logo. In addition, we have
applications pending with the United States Patent and Trademark Office for a
number of additional marks, including Top Blend, Gaia Organic Blend, Pumphrey's
Blend, Vine Street Blend and Xiao's Blend.
We own registered trademarks for our name and logo in Canada, Chile, the
European Community, Hong Kong, Japan, Singapore and Taiwan. We have filed
additional applications for trademark protection in Argentina, Brazil, Chile,
China, the European Community, Hong Kong, Japan, South Korea, Philippines,
Paraguay, Singapore, Thailand and Taiwan. In addition to peets.com and
coffee.com, we own several other domain names relating to coffee, Peet's and
our roasting process.
In addition to registered and pending trademarks, we consider the packaging
for our coffee beans (consisting of dark brown coloring with African-style
motif and lettering with a white band running around the lower quarter of the
bag) and the design of the interior of our stores (comprising of dark wood
fixtures, classic lighting, granite countertops and understated color) to be
strong identifiers of our brand. Although we consider our packaging and store
design to be essential to our brand identity, we have not applied to register
these trademarks and trade dress, and thus cannot rely on the legal protections
afforded by trademark registration.
Our ability to differentiate our brand from those of our competitors depends,
in part, on the strength and enforcement of our trademarks. We must constantly
protect against any infringement by competitors. If a competitor infringes on
our trademark rights, we may have to litigate to protect our rights, in which
case, we may incur significant expenses and divert significant attention from
our business operations.
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Information Systems
The information systems installed at Peet's are used to manage our operations
and increase the productivity of its workforce. We are currently implementing
an advanced point-of-sale system to increase store productivity, provide a
higher level of service to our customers and maintain timely information for
performance evaluation. Our new registers are touch screen components with full
point-of-sale capability. We also operate a Peet's debit card system in all
retail stores. These cards carry cash balances and may be used in lieu of cash
at our retail locations. In addition, over the next few months, we will be
installing a new human resource and payroll system.
Our online and mail order system has been customized to allow us to respond
and adapt quickly to customer and marketing demands. We have installed several
new software tools to help us analyze customer information.
Our website is hosted at AboveNet in San Jose, California. All website
applications are built on Microsoft ASP with in-house development. We offer
full-functioning e-commerce and our site is integrated with our call center for
access to orders placed at both locations. Online delivery confirmation is
provided by United Parcel Service and United States Postal Service. Our
peets.com site contains several customer-centered functions such as Express Buy
(which stores customer-specific lists of favorite coffee and items), multiple
"ship-to" capability on a single bill to order and extensive coffee search and
product matching. Website and call center system functionality are designed to
accommodate the need for customers to place repeat orders or automatic orders
delivered on a pre-set schedule.
We design our websites to provide fast, easy and effective operation when
navigating and shopping on our site. We have dedicated information technology
employees and marketing staffers to website maintenance, improvement,
development and performance.
Employees
As of October 1, 2000, Peet's employed a workforce of 1,502 people,
approximately 272 of whom are considered full-time employees. None of the
Company's employees is represented by a labor union. Peet's considers its
relationship with its employees to be good. Since 1979, Peet's has provided
full benefits to all employees who work at least 21 hours per week. We continue
to offer competitive benefits packages to attract and retain valuable
employees.
Government Regulation
Our coffee roasting operations and our retail stores are subject to various
governmental laws, regulations, and licenses relating to customs, health and
safety, building and land use, and environmental protection. If we encounter
difficulties in obtaining any necessary licenses or complying with these laws
and regulations, then:
. The opening of new retail locations could be delayed;
. The operation of existing retail locations or our coffee roasting
operations could be interrupted; or
. Our product offerings could be limited.
We believe that we are in compliance in all material respects with all such
laws and regulations and that we have obtained all material licenses that are
required for the operation of our business. We are not aware of any
environmental regulations that have or that we believe will have a material
adverse effect on our operations.
Legal Proceedings
In the ordinary course of our business, we may from time to time become
involved in certain legal proceedings. As of the date of this prospectus, we
are not a party to any pending material legal proceedings.
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MANAGEMENT
Directors and Executive Officers
The following table sets forth information with respect to our directors and
executive officers:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Christopher P. Mottern........ 56 Chief Executive Officer, President and Director
Mark N. Rudolph............... 42 Chief Financial Officer, Vice President and Assistant Secretary
Peter B. Mehrberg............. 42 Vice President, Business Development and General Counsel
James A. Reynolds............. 62 Vice President, Coffee and Tea, and Secretary
Deborah McGraw................ 59 Vice President, Retail Operations
William M. Lilla.............. 44 Vice President, Marketing and Strategy
Bruce A. MacLaren............. 54 Vice President, Direct Delivery
Michael J. Cloutier........... 46 Chief Information Officer and Vice President, Information Systems
Gerald A. Baldwin............. 57 Chairman of the Board
Gordon A. Bowker.............. 57 Director
H. William Jesse, Jr. ........ 48 Director
Laurence B. Mindel............ 62 Director
</TABLE>
Christopher P. Mottern has served as President and Chief Executive Officer
and as a director since May 1997. From 1992 to 1996, Mr. Mottern served as
President of Heublein, Inc., a subsidiary of United Distillers & Vintners Ltd.
From 1986 through 1991, he served as President and Chief Executive Officer of
Capri Sun, Inc., one of the largest single-service juice drink manufacturers in
the United States. He currently serves as a director, member of the
compensation committee and chairman of the audit committee of Valley Media,
Inc.
Mark N. Rudolph has served as Chief Financial Officer since September 1988.
He was appointed Vice President and Assistant Secretary in 1994.
Peter B. Mehrberg has served as Vice President, Business Development since
1999 and as General Counsel since 1994. Mr. Mehrberg served as Vice President,
Real Estate from June 1997 to 1999 and as Director of Real Estate from July
1994 to June 1997.
James A. Reynolds has served as Vice President, Coffee and Tea since February
1994, and as Secretary since February 1988. He also served as a director from
1985 to 1997. He joined Peet's in 1984.
Deborah McGraw has served as Vice President, Retail Operations since October
1995. She has worked for Peet's in various capacities since 1985. Ms. McGraw
became a store manager in 1989 and was promoted to district manager in March
1989, to regional director in January 1994, and to director in September 1994.
William M. Lilla has served as Vice President, Marketing and Strategy since
April 1998. Before joining Peet's, Mr. Lilla was employed by Heublein, Inc. as
Vice President of Strategy from October 1997 to April 1998, Vice President of
Marketing from September 1994 to October 1997, and Director of Marketing from
September 1993 to September 1994.
Bruce A. MacLaren has served as Vice President, Direct Delivery since July
1999. From 1993 until February 1999, he served as Director of Information
Systems for United Distillers and Vintners Ltd., the successor to International
Distillers & Vintners North America, Inc. and the U.S.-based wine and spirits
division of Diageo plc.
Michael J. Cloutier has served as Vice President, Information Systems since
December 1999. He was a Systems Manager for Peet's from August 1999 to December
1999. Before joining Peet's in August 1999, Mr. Cloutier founded and ran two
computer consulting businesses. From 1993 to 1996, Mr. Cloutier was the Deputy
Business and Strategic Planning Officer at the Mare Island Naval Shipyard.
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Gerald A. Baldwin has served as a director of the Company since 1971 and as
Chairman of the Board since 1994. From 1971 until 1984, Mr. Baldwin was
President of Starbuck's Coffee Company, which he co-founded in 1971.
Gordon A. Bowker has served as a director of the Company from 1971 to 1987
and from 1994 to present. Mr. Bowker has 20 years of experience in growing
publicly traded and private companies as an investor, founder, director and
marketing advisor. He co-founded Starbuck's Coffee Company, Redhook Ale
Brewery, Incorporated and Seattle Weekly.
H. William Jesse, Jr. has served as a director of the Company since 1998. Mr.
Jesse is Chairman of Jesse.Hansen&Co, strategic and financial advisors to high-
growth consumer companies. He founded the firm in 1986, and served as its
President and Chief Executive Officer through March 1998. Since 1988, Mr. Jesse
has served as Chairman and Chief Executive Officer of Vineyard Properties
Corporation. In 1998, he also served as interim Chairman and Chief Executive
Officer of Food.com, Inc. Mr. Jesse currently serves as a director of the 3DO
Company.
Laurence B. Mindel has been a director of the Company since 1997. Mr. Mindel
has been Chairman of the Board of Il Fornaio (America) Corporation since 1987.
He served as its President from 1987 until 1995 and as its Chief Executive
Officer from 1987 until 1998.
Classified Board and Term of Offices
There are currently five directors on the board. Our board is divided into
three classes of directors:
Class I consists of Messrs. Mottern and Mindel and their term of office ends
at the next annual meeting of shareholders.
Class II consists of Messrs. Jesse and Bowker and their term of office ends
at the annual meeting of shareholders in 2002.
Class III consists of Mr. Baldwin and his term of office ends at the annual
meeting of shareholders in 2003.
At each succeeding annual meeting of shareholders, successors to the class of
directors whose term expires at that annual meeting will be elected to a three-
year term.
Our articles of incorporation do not, and, after their amendment and
restatement before the closing of the offering, will not, provide for
cumulative voting; therefore, our shareholders representing a majority of the
shares of common stock outstanding will be able to elect all of the directors.
The classification of the board of directors and lack of cumulative voting will
make it more difficult for our existing shareholders to replace the board of
directors or for another party to obtain control of our company by replacing
the board of directors. Because the board of directors has the power to retain
and discharge our officers, these provisions could also make it more difficult
for existing shareholders or another party to effect a change in our
management.
Four of our current directors were nominated pursuant to the terms of a
Restated Shareholders Agreement, dated as of October 28, 1994 and amended as of
September 23, 1997, among some of our shareholders. This agreement provides,
among other things, that Mr. Baldwin may nominate three candidates for the
board, and Mr. Bowker may nominate one candidate for the board. Accordingly,
Mr. Baldwin nominated himself, Mr. Bowker and Mr. Jesse, and Mr. Bowker
nominated Mr. Mottern. We intend to terminate this agreement before the closing
of this offering.
Board Committees
We have established an audit committee and a compensation committee.
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Audit Committee. The audit committee consists of Messrs. Mindel, Jesse and
Bowker. The audit committee reviews our internal accounting procedures and
considers and reports to the board of directors with respect to other auditing
and accounting matters, including the selection of our independent auditors,
the scope of annual audits, the fees to be paid to our independent auditors and
the performance of our independent auditors.
Compensation Committee. The compensation committee consists of Messrs. Mindel
and Jesse. The compensation committee reviews and recommends to the board of
directors the salaries, benefits and stock option grants for all employees,
consultants, directors and other individuals compensated by us. The
compensation committee also has authority to administer our stock incentive and
benefit plans.
Director Compensation
Directors who are also our officers or employees do not receive any
compensation for their services as directors. Each nonemployee director
receives $1,000 per meeting, plus expenses. The Company also grants to each
non-employee director upon election options to purchase 30,000 shares (adjusted
for the two-for-one stock split) of common stock, one third of which options
vest per year.
Executive Compensation
Summary of Compensation. The following table shows the compensation paid by
us during our fiscal year ended January 2, 2000 to our Chief Executive Officer
and our other four most highly compensated executive officers whose total
salary and bonus exceeded $100,000. We refer to these executive officers as our
"named executive officers" in other parts of this prospectus.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
----------------------------------------
Other Annual
Name and Principal Position Salary ($)(1) Bonus ($) Compensation ($)
--------------------------- ------------- --------- ----------------
<S> <C> <C> <C>
Christopher P. Mottern ............................ $257,742 -- $12,742(2)
President and Chief Executive Officer
Gerald A. Baldwin ................................. $258,464 $75,000 $13,464(3)
Chairman
Mark N. Rudolph ................................... $153,101 $31,621 $ 6,787(4)
Chief Financial Officer and Assistant Secretary
James A. Reynolds ................................. $145,417 $31,708 $12,052(5)
Vice President, Coffee and Tea
William M. Lilla .................................. $182,754 -- $ 2,275(6)
Vice President, Marketing and Strategy
</TABLE>
--------
(1) Includes amounts deferred at the election of the named executive officer
pursuant to a plan established under Section 401(k) of the Internal Revenue
Code.
(2) Includes $6,812 paid for disability insurance, $5,000 in matching 401(k)
plan contributions and $930 for automobile expenses.
(3) Includes $8,059 paid for disability insurance, $5,000 in matching 401(k)
plan contributions and $405 for automobile expenses.
(4) Includes $1,642 paid for disability insurance, $3,828 in matching 401(k)
plan contributions and $1,305 for automobile expenses.
(5) Includes $7,787 paid for disability insurance, $3,635 in matching 401(k)
plan contributions and $630 for automobile expenses.
(6) Reflects matching 401(k) plan contributions.
Option Grants in Last Fiscal Year
We did not grant any options to our named executive officers in fiscal 1999.
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OPTION EXERCISES IN 1999 AND 1999 YEAR-END OPTION VALUES
The following table sets forth information concerning option exercises and
the aggregate value of unexercised options for the year ended January 2, 2000,
held by each named executive officer. No named executive officer exercised any
stock options during the year ended January 2, 2000.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options at Options at
January 2, 2000 January 2, 2000
Name Exercisable/Unexercisable Exercisable/Unexercisable
---- ------------------------- -------------------------
<S> <C> <C>
Christopher P. Mottern..... 75,000/235,000 $450,000/$1,410,000
Gerald A. Baldwin.......... -- --
Mark N. Rudolph............ 82,098/ 18,114 $592,060/$ 106,579
James A. Reynolds.......... 98,826/ 18,114 $746,099/$ 106,579
William M. Lilla........... 35,000/ 25,000 $210,000/$ 150,000
</TABLE>
Pre-2000 Stock Plans
Before this offering, Peet's granted options pursuant to various stock plans
to purchase shares of its common stock. As of the date of this offering,
options remain outstanding under our 1993 Stock Option Plan, 1994 California
Stock Option Plan and 1997 Equity Incentive Plan. Although no further options
will be granted under our 1993 Stock Option Plan and 1994 California Stock
Option Plan, options currently outstanding under those plans will continue in
effect under the terms of those plans until such outstanding options are
exercised or terminated in accordance with their terms. The 1997 Equity
Incentive Plan will terminate on May 22, 2007, unless it is terminated earlier
by the Board of Directors.
The plans provide for the grant of stock awards, which are:
. Incentive stock options, as defined under the Internal Revenue Code of
1986, as amended (the "Code"), which may be granted solely to employees
(including officers); and
. Nonstatutory stock options, restricted stock purchase awards and stock
bonuses, which may be granted to employees (including officers), non-
employee directors and consultants.
Plan Administration. Each of the plans is administered by the Board of
Directors or a committee to which the board has delegated the authority to
administer the plan. Subject to the terms of each plan, the Board of Directors
or its authorized committee determines recipients, the numbers and types of
stock awards to be granted, and the terms and conditions of the stock awards
including the period of their exercisability and vesting. Subject to the
limitations set forth below, the Board of Directors or its authorized committee
also determines, for each of the plans, the exercise price of options granted
and, with respect to the 1997 Equity Incentive Plan, the right to purchase
restricted stock.
Stock Options. Stock options are granted under the plans pursuant to stock
option agreements. The exercise price for an incentive stock option cannot be
less than 100% of the fair market value of the common stock on the date of
grant. The exercise price for a nonstatutory stock option cannot be less than
85% of the fair market value of the common stock on the date of grant. Options
vest at the rates specified in the option agreements. With respect to the 1993
Stock Option Plan, unless the option agreement provides otherwise, options
granted under the plan are 60% vested on the date of grant, and vest as to an
additional 20% on each of the two anniversary dates next following the grant
date if the optionee's continuous service has not then terminated.
In general, the term of stock options granted under the plans may not exceed
ten years. Unless the terms of an optionee's stock option agreement provide for
earlier termination, if an optionee's service relationship with us, or any
affiliate of ours, ceases (i) due to disability, the optionee (or his or her
beneficiary) generally may exercise any vested options for up to 12 months
(under the 1993 Stock Option Plan), six months (under the
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1994 California Stock Option Plan), or 12 months (under the 1997 Equity
Incentive Plan), after the date such service relationship ends, or (ii) due to
death, the optionee (or his or her beneficiary) generally may exercise any
vested options for up to 12 months (under the 1993 Stock Option Plan and 1994
California Stock Option Plan), or 18 months (under the 1997 Equity Incentive
Plan), after the date such service relationship ends. If an optionee's
relationship with us, or any affiliate of ours, ceases for any reason other
than disability or death, the optionee may (unless the terms of the stock
option agreement provide for earlier termination) exercise any vested options
for up to three months (under the Stock Option Plan 1993 and 1994 California
Stock Option Plan), or 30 days (under the 1997 Equity Incentive Plan), from
cessation of service.
Acceptable consideration for the purchase of common stock issued under each
of the plans is determined by the Board of Directors or the authorized
committee and may include cash, common stock previously owned by the optionee,
a deferred payment arrangement and other legal consideration approved by the
Board of Directors or committee.
Generally, an optionee may not transfer a stock option other than by will or
the laws of descent or distribution unless the optionee holds a nonstatutory
stock option that provides otherwise. However, an optionee may designate a
beneficiary who may exercise the option following the optionee's death.
Tax Limitations on Stock Option Grants. Incentive stock options may be
granted only to our employees. The aggregate fair market value, determined at
the time of grant, of shares of our common stock with respect to incentive
stock options that are exercisable for the first time by an optionee during any
calendar year under all of our stock plans may not exceed $100,000. No stock
option was granted to any person who, at the time of the grant, owned or was
deemed to own stock possessing more than 10% of the total combined voting power
of Peet's or any affiliate unless the following conditions were satisfied:
. The option exercise price was at least 110% of the fair market value of
the stock subject to the option on the date of grant; and
. The term of any incentive stock option award did not exceed five years
from the date of grant.
Section 162(m). When we become subject to the requirements of Section 162(m)
of the Code (which denies a deduction to publicly held corporations for certain
compensation paid to specified employees in a taxable year to the extent that
the compensation exceeds $1.0 million), no person may be granted options under
the 1997 Equity Incentive Plan covering more than 155,000 shares of common
stock in any calendar year.
Restricted Stock and Stock Bonus Awards. With respect to the 1997 Equity
Incentive Plan, the purchase price for each restricted stock award granted must
be at least 85% of the fair market value of the stock subject to the award on
the date of the award. Rights to acquire shares pursuant to a stock bonus or
restricted stock bonus agreement may not be transferred other than by will or
by the laws of descent and distribution and are exercisable during the life of
the optionee only by the optionee.
Corporate Transaction or Change in Control. With respect to the 1993 Stock
Option Plan and 1994 California Stock Option Plan, in the event of the
occurrence of certain corporate transactions that result in the receipt by
Peet's shareholders of capital stock of another corporation in exchange for or
in connection with their shares of common stock of Peet's, then, in the sole
discretion of Peet's and the other corporation, all outstanding options to
purchase share of Peet's may be converted to options to purchase an equivalent
number of shares of the surviving entity, in which case the converted options
under the 1993 Stock Option Plan shall be fully vested whether or not the
vesting requirements specified in the option agreements have been satisfied,
and the options outstanding under the 1994 California Stock Option Plan shall
continue to be subject to the vesting schedule established on the grant date
unless accelerated by the Board of Directors. If Peet's and the other
corporation determine not to convert shares subject to outstanding options
pursuant to such transaction, or in the event of certain other corporate
transactions that result in the receipt by Peet's shareholders of cash, stock
or other property in exchange for or in connection with their shares of common
stock of Peet's, then (i) with respect to the 1993 Stock Option Plan, optionees
may exercise their options in whole or in part,
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<PAGE>
whether or not the vesting requirements specified in the option agreements have
been satisfied, and any options not exercised immediately before such
transaction shall terminate, and (ii) with respect to the 1994 California Stock
Option Plan, optionees shall have the right, immediately before such
transaction, to exercise their options to the extent they are vested under the
terms of the stock option agreements, and any options not exercised immediately
before such transaction shall terminate.
With respect to the 1997 Equity Incentive Plan, in the event of certain
changes in control (which may include certain of the previously corporate
transactions), all outstanding options either will be assumed or substituted
for by any surviving entity. If the surviving entity determines not to assume
or substitute for such awards, the vesting provisions of stock awards held by
optionees then performing services for Peet's shall be accelerated, and all
stock awards will be terminated upon the change in control if not previously
exercised.
Authorized Shares. Before their termination, an aggregate of 831,600 shares
of common stock of Peet's were reserved for issuance under the 1993 Stock
Option Plan and 1994 California Stock Option Plan. A total of 1,280,000 shares
of common stock of Peet's is reserved for issuance under the 1997 Equity
Incentive Plan.
Shares subject to stock options granted under the 1997 Equity Incentive Plan,
that have expired or otherwise terminated without having been exercised in full
again become available for the grant of awards under that plan. Shares issued
under the plans may be previously unissued shares or reacquired shares bought
on the market or otherwise.
2000 Equity Incentive Plan
The Board of Directors intends to adopt a 2000 Equity Incentive Plan that
will become effective upon the closing of this offering. The plan will
terminate ten years after its adoption, unless it is terminated earlier by the
Board of Directors. The plan provides for the grant of stock awards, which are:
. Incentive stock options, as defined under the Code, which may be granted
solely to employees (including officers); and
. Nonstatutory stock options, restricted stock purchase awards and stock
bonuses which may be granted to employees (including officers), non-
employee directors and consultants.
Plan Administration. The plan will be administered by the Board of Directors.
The Board of Directors may delegate authority to administer the plan to a
committee. Subject to the terms of the plan, the Board of Directors or its
authorized committee determines recipients, the numbers and types of stock
awards to be granted and the terms and conditions of the stock awards including
the period of their exercisability and vesting. Subject to the limitations set
forth below, the Board of Directors or its authorized committee will also
determine the exercise price of options granted and the purchase price for
rights to purchase restricted stock.
Stock Options. Stock options are granted pursuant to stock option agreements.
The exercise price for an incentive stock option cannot be less than 100% of
the fair market value of the common stock on the date of grant. The exercise
price for a nonstatutory stock option cannot be less than 85% of the fair
market value of the common stock on the date of grant. Options granted under
the plan vest at the rate specified in the option agreement.
In general, the term of stock options granted under the plan may not exceed
ten years. Unless the terms of an optionee's stock option agreement provide for
earlier termination, if an optionee's service relationship with us, or any
affiliate or ours, ceases due to disability or death, the optionee (or his or
her beneficiary) may exercise any vested options up to 12 months (18 months in
the event of death) after the date such service relationship ends. If an
optionee's relationship with us, or any affiliate of ours, ceases for any
reason other than disability or death, the optionee may exercise any vested
options up to three months from cessation of service (unless the terms of the
stock option agreement provide for earlier or later termination).
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<PAGE>
Acceptable consideration for the purchase of common stock issued under the
plan will be determined by the Board of Directors and may include cash, common
stock previously owned by the optionee, a deferred payment arrangement and
other legal consideration approved by the Board of Directors.
Generally, an optionee may not transfer a stock option other than by will or
the laws of descent and distribution unless the optionee holds a nonstatutory
stock option that provides otherwise. However, an optionee may designate a
beneficiary who may exercise the option following the optionee's death.
Tax Limitations on Stock Option Grants. Incentive stock options may be
granted only to our employees. The aggregate fair market value, determined at
the time of grant, of shares of our common stock with respect to incentive
stock options that are exercisable for the first time by an optionee during any
calendar year under all of our stock plans may not exceed $100,000. No
incentive stock option (and before our stock being publicly traded, no
nonstatutory stock option) may be granted to any person who, at the time of the
grant, owns or is deemed to own stock possessing more than 10% of the total
combined voting power of Peet's or any affiliate unless the following
conditions are satisfied:
. The option exercise price must be at least 110% of the fair market value
of the stock subject to the option on the date of grant; and
. The term of any incentive stock option award must not exceed five years
from the date of grant.
Section 162(m). When we become subject to the requirements of Section 162(m)
of the Code (which denies a deduction to publicly held corporations for certain
compensation paid to specified employees in a taxable year to the extent that
the compensation exceeds $1 million), no person may be granted options under
the plan covering more than shares of common stock in any calendar
year.
Restricted Stock and Stock Bonus Awards. The purchase price for restricted
stock awards must be at least 85% of the fair market value of the stock subject
to the award on the date of the award or at the time the purchase is
consummated. Rights to acquire shares under a stock bonus or restricted stock
bonus agreement may not be transferred other than by will or by the laws of
descent and distribution and are exercisable during the life of the optionee
only by the optionee.
Changes in Control. In the event of certain changes in control, all
outstanding options under the plan either will be assumed or substituted for by
any surviving entity. If the surviving entity determines not to assume or
substitute for such awards, the vesting provisions of such stock awards will be
accelerated and such stock awards will be terminated upon the change in control
if not previously exercised.
Authorized Shares. An aggregate of shares of common stock of
Peet's will be reserved for issuance under the plan, which amount will be
increased each , beginning , 2002, by the
lesser of shares or % 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.
Shares subject to stock options that have expired or otherwise terminated (or
restricted stock that has not become fully vested in the case of restricted
stock awards) under the plan without having been exercised in full (or vested
with respect to restricted stock awards) again become available for the grant
of awards under the plan. Shares issued under the plan may be previously
unissued shares or reacquired shares bought on the market or otherwise.
2000 Non-Employee Director Plan
The Board of Directors intends to adopt a 2000 Non-Employee Director Plan
that will become effective upon the closing of this offering. The plan will
provide for the automatic grant of nonstatutory stock options to purchase
shares of common stock to our non-employee directors. The aggregate number of
shares of common stock that may be issued pursuant to these options under the
plan is shares.
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Administration and Terms. The Board of Directors administers automatic option
grants to non-employee directors, unless and until it delegates administration
to a committee. Options granted to non-employee directors will generally be
subject to the following terms:
. The exercise price of options granted will be equal to the fair market
value of the common stock on the date of grant;
. The options will have a term of no more than ten years from the date they
are granted;
. Options granted are not transferable other than by will or by the laws of
descent and distribution and are exercisable during the life of the
optionee only by the optionee;
. An optionee may designate a beneficiary who may exercise the option
following the optionee's death; and
. An optionee whose service relationship with Peet's or any affiliate
(whether as a non-employee director of Peet's or subsequently as an
employee, director or consultant of either Peet's or an affiliate) ceases
for any reason may exercise vested options for the term provided in the
option agreement (12 months generally, 18 months in the event of death).
Automatic Grants. Upon the completion of this offering, subject to certain
exceptions, each non-employee director will automatically be granted an option
to purchase shares of common stock. Any individual who becomes a non-
employee director after this offering will automatically receive this
initial grant upon being elected to the Board of Directors. On of each
year, commencing in 2002, any person who is then a non-employee director will
automatically be granted an option to purchase shares of common stock,
provided that in the case of a non-employee director who had not served in that
capacity for the entire period since the preceding , then the number
of shares subject to the annual grant shall be reduced, pro rata, for each full
quarter the person did not serve during the previous period. Initial grants and
annual grants vest over a period of from their date of grant.
2000 Employee Stock Purchase Plan
The Board of Directors intends to adopt a 2000 Employee Stock Purchase Plan
that will become effective upon the closing of this offering, authorizing the
issuance of shares of common stock pursuant to purchase rights
granted to our employees or to employees of any of our affiliates. The plan is
intended to qualify as an employee stock purchase plan within the meaning of
Section 423 of the Code.
Administration. The plan will be administered by the Board of Directors,
which may delegate authority to administer the purchase plan to a committee.
The plan provides a means by which employees may purchase our common stock
through payroll deductions. The plan is implemented by offerings of rights to
eligible employees. Generally, all Peet's employees, including executive
officers, may participate in the plan and may authorize payroll deductions of
up to 15% of their earnings for the purchase of stock under the plan. Under the
plan, we may specify offerings with a duration of not more than 27 months and
may specify shorter purchase periods within each offering. The first offering
will begin on the effective date of this offering and be approximately
months in duration, with purchases occurring every six months.
Unless otherwise determined by the Board of Directors, common stock is
purchased for accounts of employees participating in the plan at a price per
share equal to the lower of:
. 85% of the fair market value of a share of our common stock on the date
of commencement of participation in the offering; or
. 85% of the fair market value of a share of our common stock on the date
of purchase.
Limitations. Eligible employees may be granted rights only if the rights,
together with any other rights granted under employee stock purchase plans, do
not permit such employee's rights to purchase our stock to
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accrue at a rate which exceeds $25,000 of the fair market value of such stock
for each calendar year in which such rights are outstanding. No employee shall
be eligible for the grant of any rights under the plan if immediately after
such rights are granted, such employee has voting power over 5% or more of our
outstanding capital stock (measured by vote or value).
Authorized Shares. The purchase plan will authorize the issuance of
shares of common stock under the plan which amount will be increased each
, beginning , 2002, by the lesser of
shares or % 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.
Other Plans
401(k) Plan
We maintain a retirement and deferred savings plan for our employees. The
retirement and deferred savings plan is intended to qualify as a tax-qualified
plan under Section 401 of the Code. The retirement and deferred savings plan
provides that each participant may contribute up to % of his or her pre-
tax compensation (up to a statutory limit, which is $10,500 in calendar year
2000). Under the plan, each employee is fully vested in his or her deferred
salary contributions. Employee contributions are held and invested by the
plan's trustee. The retirement and deferred savings plan also permits us to
make discretionary contributions and matching contributions, subject to
established limits and a vesting schedule. We make matching contributions equal
to $0.50 for every $1.00 contributed by our employees. To date, we have not
made any discretionary contributions to the retirement and deferred savings
plan on behalf of participating employees.
Change of Control Option Acceleration Plan
In November 1998, we established the Change in Control Option Acceleration
Plan. The plan provides for the acceleration of vesting of shares covered by
outstanding options held by all of our employees in the event of a change in
control of Peet's. Employees shall have the right to exercise their options
immediately before the change in control. If any surviving or acquiring
corporation assumes or substitutes such options, then to the extent the options
are not exercised before the change in control, such assumed or substituted
options shall be fully vested on and after the change of control.
Key Employment Severance Plan
In November 1998, we adopted the Key Employee Severance Benefit Plan to
provide for the payment of severance benefits to our Chairman of the Board and
Chief Executive Officer, all employees holding the position of vice president,
and any other individual designated as an eligible employee under a Key
Employee Agreement. Under the plan, if the employee's employment is, within 12
months after a change of control, involuntary terminated without cause or
voluntarily terminated for good reason (a "change of control termination"), or
the employee's employment is involuntarily terminated without cause at any
other time, the employee will receive severance payments determined based on
the employee's position and terms of service:
. Two years of pay for the Chairman of the Board and the Vice President of
Coffee;
. One year of pay plus up to an additional one year of pay based on the
term of the employee's employment with us (two years of pay in the event
of a change of control termination) for the Chief Executive Officer; and
. Six months of pay plus up to an additional eighteen months of pay based
on the term of the employee's employment with us (one year of pay in the
event of a change of control termination) for each other vice president.
In addition, the employee will receive an amount equal to the target bonus
amount for the employee for the relevant period in which the employee's
termination of employment occurs, prorated on a daily basis through
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the termination date. The Key Employment Severance Plan also provides for
certain other benefits, including medical, disability and life insurance and
participation in outplacement programs.
Employment Agreements
In 1999 and 2000, we entered into Key Employee Agreements with each of our
named executive officers. These agreements provide for an initial base salary
of (i) $250,000 for Messrs. Baldwin and Mottern, (ii) $148,000 for the Mr.
Rudolph, (iii) $155,000 for Mr. Lilla, and (iv) $138,000 for Mr. Reynolds.
These salary amounts will be subject to annual adjustment at the discretion of
the Compensation Committee of the Board of Directors. These agreements also
provide for an annual performance bonus based on the achievement of certain
performance objectives established by Peet's, the amount of which bonus will be
determined by the Board of Directors in its sole discretion.
In addition, the agreements provide that if the executive is involuntarily
terminated by Peet's without cause or if the executive voluntarily terminates
employment due to a "constructive termination," then the vesting of all of the
executive's outstanding options to purchase common stock of Peet's will
accelerate and become fully exercisable upon the executive's termination of
employment. Under the agreements, executives also are entitled to receive
benefits to the extent provided under the Key Employee Severance Benefit Plan
and the Change of Control Option Acceleration Plan.
Compensation Committee Interlocks And Insider Participation
Mr. Jesse, a member of the compensation committee, is also the Chairman of
Jesse.Hansen&Co, which provides strategic and financial advice to the Company
pursuant to an engagement letter dated as of December 9, 1996. We paid
Jesse.Hansen&Co $60,000 ($5,000 per month) in fiscal 1999 for advisory services
rendered. In addition, on May 23, 1997, we issued to Jesse.Hansen&Co a warrant
to purchase up to 200,000 shares of our common stock at an adjusted exercise
price of $7.50 per share.
Mr. Mindel, a member of the compensation committee, is also the Chairman of
Il Fornaio (America) Corporation, from which we purchased during 1999 pastries
and other food products for $333,069.
Limitation On Liabilities And Indemnification Matters
Before the closing of this offering, we will amend and restate both our
articles of incorporation and our bylaws. Our amended and restated articles of
incorporation will limit the liability of directors to the fullest extent
permitted by the Washington Business Corporation Act as it currently exists or
as it may be amended in the future. Consequently, subject to the Washington
Business Corporation Act, no director will be personally liable to us or our
shareholders for monetary damages resulting from his or her conduct as a
director of Peet's, except liability for:
. Acts or omissions involving intentional misconduct or knowing violations
of law;
. Unlawful distributions; or
. Transactions from which the director personally receives a benefit in
money, property or services to which the director is not legally
entitled.
Our amended and restated articles of incorporation will also provide that we
may indemnify any individual made a party to a proceeding because that
individual is or was a director of officer of ours, and this right to
indemnification will continue as to an individual who has ceased to be a
director or officer and will inure to the benefit of his or her heirs,
executors or administrators. Any subsequent repeal of or modification to our
amended and restated articles of incorporation will not adversely affect any
right of a director or officer of ours who is or was a director or officer at
the time of such repeal or modification. To the extent the provisions of our
amended and restated articles of incorporation provide for indemnification of
directors or officers for
47
<PAGE>
liabilities arising under the Securities Act of 1933, those provisions are, in
the opinion of the Securities and Exchange Commission, against public policy as
expressed in the Securities Act and they are therefore unenforceable.
Our amended and restated bylaws will provide that we will indemnify our
directors and officers and may indemnify our other officers and employees and
other agents to the fullest extent permitted by law.
We will enter into agreements to indemnify our directors and executive
officers, in addition to indemnification provided for in our bylaws. These
agreements, among other things, will provide for indemnification of our
directors and executive officers for expenses, judgments, fines and settlement
amounts incurred by any such person in any action or proceeding arising out of
such person's services as a director or executive officer or at our request. We
believe that these provisions and agreements are necessary to attract and
retain qualified persons as directors and executive officers.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Jesse, a member of the compensation committee, is the Chairman of
Jesse.Hansen&Co, a strategic and financial advisor to the Company pursuant to
an engagement letter dated as of December 9, 1996 between Jesse.Hansen&Co and
the Company. We paid Jesse.Hansen&Co $60,000 ($5,000 per month) in fiscal 1999
for advisory services rendered.
Mr. Mindel, a member of the compensation committee, is also the Chairman of
Il Fornaio (America) Corporation, from which we purchased during 1999 pastries
and other food products for $333,069.
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<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table indicates information as of October 1, 2000 regarding the
beneficial ownership of our common stock by:
. Each person known to the board of directors to own beneficially 5% or
more of our common stock;
. Each selling shareholder;
. Each of our directors;
. Each of the named executive officers (identified in the Summary
Compensation table under "Management"); and
. All of our directors and executive officers as a group.
The information has been adjusted to reflect the sale of the common stock in
this offering, the two-for-one stock split to occur before the closing of this
offering and the conversion of all outstanding shares of the Series A preferred
stock upon the closing of this offering. The information assumes no exercise of
the underwriters' over-allotment option.
Information with respect to beneficial ownership has been furnished by each
director, officer or 5% or more shareholder, as the case may be. Except as
otherwise noted below, the address for each person listed on the table is c/o
Peet's Coffee & Tea, Inc., 1400 Park Avenue, Emeryville, California 94608-3520.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission which generally attribute beneficial
ownership of securities to persons who possess sole or shared voting power or
investment power with respect to those securities and includes shares of common
stock issuable pursuant to the exercise of stock options or warrants that are
immediately exercisable or exercisable within 60 days of October 1, 2000. These
shares are deemed to be outstanding and to be beneficially owned by the person
holding those options or warrants for the purpose of computing the percentage
ownership of that person, but are not treated as outstanding for the purpose of
computing the percentage ownership of any other person. Unless otherwise
indicated, the persons or entities identified in this table have sole voting
and investment power with respect to all shares shown as beneficially owned by
them, subject to applicable community property laws.
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<PAGE>
Principal and Selling Shareholders' Table
<TABLE>
<CAPTION>
Percentage of
Number Beneficial
Number of of Ownership
Shares Shares -----------------
Beneficially Being Before After
Name of Beneficial Owner Owned Sold(1) Offering Offering
------------------------ ------------ ------- -------- --------
<S> <C> <C> <C> <C>
Directors and Executive Officers:
Christopher P. Mottern(2)............................... 133,534 2.4% 1.7%
Mark N. Rudolph(3)...................................... 107,136 1.9% 1.3%
James A. Reynolds(4).................................... 244,660 37,751 4.4% 2.6%
William M. Lilla(5)..................................... 70,834 1.3% *
Gerald A. Baldwin....................................... 1,690,794 498,551 31.0% 15.0%
Gordon A. Bowker(6)..................................... 131,566 2.4% 1.6%
H. William Jesse, Jr.(7)................................ 260,804 4.6% 3.2%
Laurence B. Mindel(8)................................... 30,000 * *
All directors and officers as a group (12 persons)(9)... 2,857,870 536,302 45.5% 26.4%
5% Shareholders:
H&Q Peet's II Investors, L.P.(10)....................... 598,216 11.0% 7.5%
Vincent Borcich......................................... 367,558 100,685 6.7% 3.4%
Other Selling Shareholders:
Steven R. Donovan....................................... 120,000 28,767 2.2% 1.1%
Terry S. Heckler........................................ 145,594 42,930 2.7% 1.3%
Daniel J. LaFond........................................ 201,074 59,289 3.7% 1.8%
Diane S. Sengstock...................................... 108,606 32,024 2.0% 1.0%
</TABLE>
--------
* Less than 1%.
(1) Excludes 312,377 additional shares to be sold by the selling shareholders
if the underwriters exercise their over-allotment option in full.
(2) Includes 75,000 shares issuable upon the exercise of vested stock options
and 40,000 shares held by the Mottern Family Trust, in respect of which
Mr. Mottern disclaims beneficial ownership except to the extent of his
pecuniary interest therein.
(3) Includes 99,904 shares issuable upon the exercise of vested stock options.
(4) Includes 116,632 shares issuable upon the exercise of vested stock
options.
(5) Includes 60,834 shares issuable upon the exercise of vested stock options.
(6) Includes 30,000 shares issuable upon the exercise of vested stock options.
(7) Includes 200,000 shares issuable upon the exercise of a warrant and 20,000
shares issuable upon the exercise of vested stock options.
(8) Includes 30,000 shares issuable upon the exercise of vested stock options.
(9) Includes 620,912 shares issuable upon the exercise of vested stock options
and 200,000 shares issuable upon the exercise of a warrant. Also, includes
12,500 shares of Series A preferred stock convertible into 25,000 shares
of common stock.
(10) Includes 12,000 shares of common stock owned by H&Q Peet's Investors, L.P.
50
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following description of our capital stock gives effect to the amendment
and restatement of our articles of incorporation and bylaws and the two-for-one
stock split, each of which will occur before the closing of this offering, and
the conversion of our Series A preferred stock into 942,612 shares of common
stock, which will occur upon the closing of this offering.
Our authorized capital stock consists of 50,000,000 shares of common stock,
no par value per share, and 10,000,000 shares of preferred stock, no par value
per share, all of which will be available for issuance upon completion of this
offering.
As of October 1, 2000, 4,515,602 shares of our common stock were issued. As
of October 1, 2000, there were 183 holders of our common stock.
Common Stock
Voting Rights. Each outstanding share of common stock is entitled to one vote
on all matters submitted to a vote of our shareholders, including the election
of directors. There are no cumulative voting rights, and therefore, the holders
of a plurality of the shares of common stock voting for the election of
directors may elect all of our directors standing for election. However, our
articles of incorporation provide that, following our initial public offering,
actions may only be taken by our shareholders at a duly called meeting, and may
not be taken by written consent.
Dividends. Holders of common stock are entitled to receive dividends at the
same rate when dividends are declared by our board of directors out of assets
legally available for the payment of dividends, subject to preferential rights
of any outstanding shares of preferred stock.
Liquidation. In the event of a liquidation, dissolution or winding up of our
affairs, whether voluntary or involuntary, after payment of our debts or other
liabilities and making provisions for the holders of any outstanding shares of
preferred stock, our remaining assets will be distributed ratably among the
holders of shares of common stock.
Rights And Preferences. Our common stock has no preemptive, redemption,
conversion or subscription rights. The rights, powers, preferences and
privileges of holders of common stock are subject to, and may be adversely
affected by, the rights of the holders of shares of any series of preferred
stock that we may designate and issue in the future.
Fully Paid And Nonassessable. All of our outstanding shares of common stock
are, and the shares of common stock to be issued pursuant to this offering will
be, fully paid and nonassessable.
Preferred Stock
Our board of directors has the authority, without action by our shareholders,
to issue up to an aggregate of 10,000,000 shares of preferred stock in one or
more classes or series. The board may fix or alter the designations,
preferences, rights and any qualifications, limitation or restrictions of the
shares of each such series. The issuance of preferred stock could:
. Restrict dividends on the common stock;
. Dilute the voting power of the common stock;
. Impair the liquidation rights of the common stock; or
. Delay or prevent a change in control without further action by the
shareholders.
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<PAGE>
Washington Anti-Takeover Law
Our amended and restated articles of incorporation provide for the division
of our board of directors into three classes, as nearly as equal in number as
possible. The directors in each class serve for a term of up to three years and
one class is elected each year by our shareholders. The Class I term expires at
the annual meeting of shareholders to be held in 2001; the Class II term
expires at the annual meeting of shareholders to be held in 2002; and the Class
III term expires at the annual meeting of shareholders to be held in 2003. At
each annual meeting of shareholders after the initial classification, the
successors to directors whose terms will then expire will be elected to serve
from the time of election and qualification until the third annual meeting
following election. Because this system of electing and removing directors
generally makes it more difficult for shareholders to replace a majority of the
board of directors, it may discourage a third party from making a tender offer
or otherwise attempting to gain control of our board of directors.
Our amended and restated bylaws provide that, except as otherwise required by
law or by our amended and restated articles of incorporation, special meetings
of the shareholders can only be called pursuant to a resolution adopted by our
board of directors, the chairman of our board or our president. These
provisions of our amended and restated articles of incorporation and amended
and restated bylaws could discourage potential acquisition proposals and could
delay or prevent a change in control. These provisions are intended to enhance
the likelihood of continuity and stability in the composition of the board of
directors and in the policies formulated by the board of directors and to
discourage certain types of transactions that may involve an actual or
threatened change of control. These provisions are designed to reduce our
vulnerability to an unsolicited acquisition proposal and to discourage certain
tactics that may be used in proxy fights. However, such provisions could have
the effect of discouraging others from making tender offers for our shares, and
as a consequence, they also may inhibit increases in the market price of our
shares that could result from takeover attempts. Such provisions also may have
the effect of preventing changes in our management.
Washington law also imposes restrictions on certain transactions between a
corporation and certain significant shareholders. Chapter 23B.19.040 of the
Washington Business Corporation Act prohibits a "target corporation," with
certain exceptions, from engaging in certain significant business transactions
with an "acquiring person," which is defined as a person or group of persons
that beneficially owns 10% or more of the voting securities of the target
corporation, for a period of five years after such acquisition, unless the
transaction or acquisition of shares is approved by a majority of the members
of the target corporation's board of directors before the time of acquisition.
Such prohibited transactions include, among other things:
. A merger or consolidation with, disposition of assets to, or issuance or
redemption of stock to or from, the acquiring person;
. Termination of 5% or more of the employees of the target corporation as a
result of the acquiring person's acquisition of 10% or more of the
shares; or
. Allowing the acquiring person to receive any disproportionate benefits as
a shareholder.
After the five-year period, a "significant business transaction" may occur, as
long as it complies with certain "fair price" provisions of the statute. A
corporation may not "opt out" of this statute. This provision may have the
effect of delaying, deferring or preventing a change in control of our board of
directors or senior management.
Transfer Agent And Registrar
The EquiServe Trust Company, N.A. will serve as transfer agent and registrar
for our common stock.
Listing
We have applied to have our common stock approved for quotation on the Nasdaq
National Market under the trading symbol "PEET."
52
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Before this offering, there has been no public market for our common stock.
Market sales of shares or the availability of shares for sale may decrease the
market price of our common stock prevailing from time to time. Nevertheless,
sales of substantial amounts of common stock in the public market, or the
perception that such sales could occur, could adversely affect the market price
of the common stock and could impair our future ability to raise capital
through the sale of our equity securities.
Future sales of our common stock, and the availability of our common stock
for sale, may depress the market price for our common stock. After this
offering, 7,958,214 shares of common stock will be outstanding assuming no
exercise of the underwriters' over-allotment option and no exercise of options
or warrants. All of the shares sold in this offering will be freely tradable.
Except as set forth below, the remaining shares of common stock outstanding
after this offering will be restricted as a result of securities laws or lock-
up agreements. These remaining shares will be available for sale in the public
market as follows:
<TABLE>
<CAPTION>
Approximate
Number of
Date of availability of sale Shares
---------------------------- -----------
<S> <C>
As of the date of this prospectus..............................
90 days after the date of the prospectus.......................
180 days after the date of this prospectus.....................
At various times afterwards upon expiration of applicable lock-
up agreements and holding period..............................
</TABLE>
Each of our directors and executive officers and additional holders of a
total of approximately shares of our outstanding common stock have agreed
to certain restrictions on his or her ability to sell, offer, contract or grant
any option to sell, pledge, transfer or otherwise dispose of shares of our
common stock for a period of 180 days after the date of this prospectus,
without the prior written consent of WR Hambrecht + Co. WR Hambrecht + Co may
release all or a portion of the shares subject to this lockup agreement at any
time without notice.
In general, under Rule 144 under the Securities Act of 1933, as currently in
effect, a person who has beneficially owned shares of our common stock for at
least one year would be entitled to sell within any three-month period a number
of shares that does not exceed the greater of:
. 1% of the number of shares of our common stock then outstanding, which
will equal approximately 79,582 shares immediately after this offering;
or
. the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to the sale.
Sales under Rule 144 are also subject to manner of sale provisions and notice
requirements and to the availability of current public information about us.
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an affiliate, is
entitled to sell the shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
Rule 701 under the Securities Act of 1933, as currently in effect, permits
resales of shares in reliance upon Rule 144 but without compliance with certain
restrictions, including the holding period requirement, of Rule 144. Most of
our employees, officers, directors or consultants who purchased shares under a
written compensatory plan or contract may be entitled to rely on the resale
provisions of Rule 701. Rule 701 permits affiliates to sell their Rule 701
shares under Rule 144 without complying with the holding period requirements of
Rule 144. Rule 701 further provides that non-affiliates may sell their shares
in reliance on Rule 144 without
53
<PAGE>
having to comply with the holding period, public information, volume limitation
or notice provisions of Rule 144. All holders of Rule 701 shares are required
to wait until 90 days after the date of this prospectus before selling their
shares. However, substantially all Rule 701 shares are subject to lock-up
agreements and will only become eligible for sale at the earlier of the
expiration of the 180-day lock-up agreements or no sooner than 90 days after
the offering upon obtaining the prior written consent of WR Hambrecht + Co.
We intend to file a Registration Statement on Form S-8 registering shares of
common stock subject to outstanding options or reserved for future issuance
under our stock plans. As of October 1, 2000, options to purchase a total of
1,527,612 shares were outstanding under our 1993 Stock Option Plan, 1994
California Stock Option Plan and 1997 Equity Incentive Plan. Common stock
issued upon exercise of outstanding vested options after the filing of this
Registration Statement on Form S-8, other than common stock issued to our
affiliates, will be available for immediate resale in the open market without
restriction.
In addition, we have an outstanding warrant to purchase 200,000 shares of
common stock. Under Rule 144, shares issued on the exercise of the warrant may
be eligible for immediate resale in the open market.
54
<PAGE>
PLAN OF DISTRIBUTION
In accordance with the terms of an underwriting agreement between us, the
selling shareholders and WR Hambrecht + Co and Pacific Growth Equities, Inc.,
as representatives of the underwriters, the underwriters will purchase from us
and the selling shareholders the following respective number of shares of
common stock at the public offering price less the underwriting discounts and
commissions described on the cover page of this prospectus.
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ---------
<S> <C>
WR Hambrecht + Co..................................................
Pacific Growth Equities, Inc. .....................................
---------
Total............................................................ 3,300,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the underwriters
are subject to conditions, including the absence of any material adverse change
in our business, and the receipt of certificates, opinions and letters from us
and our counsel and independent accountants. Subject to those conditions, the
underwriters are committed to purchase all of the shares of our common stock
offered by this prospectus if any of the shares are purchased.
The underwriters propose to offer the shares of our common stock directly to
the public at the offering price set forth on the cover page of this
prospectus, as this price is determined by the OpenIPO process described below,
and to certain dealers at this price less a concession not in excess of $ per
share. Any dealers that participate in the distribution of our common stock may
be deemed to be underwriters within the meaning of the Securities Act, and any
discounts, commissions or concessions received by them and any provided by the
sale of the shares by them might be deemed to be underwriting discounts and
commissions under the Securities Act. After completion of the initial public
offering of the shares, the public offering price and other selling terms may
be changed by the underwriters. The underwriters have informed us that they do
not intend discretionary sales to exceed 5% of the shares of the common stock
offered by this prospectus.
The following table shows the per share and total underwriting discount to be
paid to the underwriters by us and the selling shareholders in connection with
this offering. The underwriting discount has been determined through
negotiations between us, the selling shareholders and the representatives of
the underwriters, and has been calculated as a percentage of the offering
price. These amounts are shown assuming both no exercise and full exercise of
the over-allotment option.
<TABLE>
<CAPTION>
Per No Full
Share Exercise Exercise
----- -------- --------
<S> <C> <C> <C>
Public Offering Price.............................. $ $ $
Underwriting Discounts.............................
Proceeds, before expenses, to us...................
Proceeds, before expenses, to the selling
shareholders......................................
</TABLE>
The expenses of the offering, exclusive of the underwriting discounts, will
be approximately $ million. These fees and expenses are payable entirely by
us. These fees include, among other things, our legal and accounting fees, our
printing expenses, our expenses incurred in connection with meetings with
potential investors, the filing fees of the Securities and Exchange Commission,
and the listing fees of the Nasdaq National Market.
An electronic prospectus is available on the website maintained by WR
Hambrecht + Co. Other than the prospectus in electronic format, the information
on this website is not part of this prospectus and has not been approved or
endorsed by us.
55
<PAGE>
The Auction Process
The method of distribution being used by the underwriters in this offering is
known as the OpenIPO process. It differs from that traditionally employed in
underwritten public offerings. In particular, the public offering price will be
based primarily on an auction conducted by the underwriters. The allocation of
shares of the common stock will be determined entirely by the auction process.
The following describes how WR Hambrecht + Co, other underwriters and selected
dealers will conduct the auction process and confirm bids from prospective
investors:
. Before the registration statement relating to this offering becomes
effective, the underwriters and participating dealers will solicit bids
from prospective investors through the internet, telephone and facsimile.
The bids will specify the number of shares of our common stock the
potential investor proposes to purchase and the price the potential
investor is willing to pay for the shares. These bids may be above or
below the range set forth on the cover page of this prospectus. The
minimum size of any bid is 100 shares.
. The shares offered by this prospectus may not be sold, nor may offers to
buy be accepted, prior to the time that the registration statement filed
with the Securities and Exchange Commission becomes effective. A bid
received by WR Hambrecht + Co involves no obligation or commitment of any
kind prior to the closing of the auction. Bids can be modified or revoked
at any time prior to the closing of the auction.
. Approximately two business days prior to the registration statement being
declared effective, prospective investors will receive, by e-mail, phone
or facsimile, a notice indicating the proposed effective date.
. After the registration statement relating to this offering becomes
effective, potential investors who have submitted bids to WR Hambrecht +
Co will be contacted by e-mail, telephone or facsimile. Potential
investors will be advised that the registration statement has been
declared effective and will be requested to confirm their bids.
. The auction will close after the registration statement becomes effective
at a time agreed to by us, the selling shareholders and WR Hambrecht +
Co. The actual time at which the auction closes will be determined by us,
the selling shareholders and WR Hambrecht + Co based on general market
conditions during the period after the registration statement becomes
effective. After the registration statement has been declared effective,
the public offering price of the common stock may be set at a price that
is outside of the range set forth on the cover of this prospectus.
. All bids that are not confirmed before the time specified by the
underwriters, or if the time is not specified, by the close of the
auction, will be deemed withdrawn.
. Once a potential investor affirmatively confirms its previous bid, the
confirmation will remain valid unless subsequently withdrawn by the
potential investor. Potential investors will be able to withdraw their
bids at any time before the close of the auction by notifying WR
Hambrecht + Co or a participating dealer.
. If the public offering price range is changed before or after a potential
investor affirmatively confirms a bid, or if the public offering price is
outside the public offering range previously provided to the potential
investor in the prospectus, the underwriters and participating dealers
will notify potential investors of the change and that offers will not be
accepted until the potential investor has again reconfirmed its bid
regardless of whether the potential investor's initial bid was above,
below or at the public offering price.
. Following the closing of the auction, WR Hambrecht + Co will determine
the highest price at which all of the shares offered, including shares
that may be purchased by the underwriters to cover any over-allotments,
may be sold to potential investors. This price, which is called the
"clearing price," will be determined based on the results of all valid
bids at the time the auction is closed. The clearing price will
56
<PAGE>
not necessarily be the public offering price, which will be set as
described in "Determination of Public Offering Price" below. The public
offering price will determine the allocation of shares to potential
investors, with all bids submitted at or above the public offering price
receiving a pro rata portion of the shares bid for.
. Once the auction closes and a clearing price is set as described below,
WR Hambrecht + Co will accept the bids from those bidders whose bid is at
or above the public offering price but may allocate to a prospective
investor fewer shares than the number included in the investor's bid.
. WR Hambrecht + Co or a participating dealer will notify successful
bidders by e-mail, phone or fax that the auction has closed and that
their confirmed bids have been accepted. Other bidders will be notified
that their bids have not been accepted.
. Potential investors may at any time expressly request that all, or any
specific, communications between them and the underwriters and
participating dealers be made by specific means of communication,
including telephone and facsimile.
Some underwriters and selected dealers that participate in this offering may
request prospective investors to confirm their bids prior to the effective date
of the registration statement, if that practice is used by these institutions
in connection with initial public offerings that are not conducted using the
OpenIPO process. Bidders should carefully review the procedures of, and
communications from, the institution through which they bid to purchase our
shares. In general, approximately two business days before the registration
statement is declared effective, underwriters and dealers will request
potential investors to reconfirm the bids that they have submitted. If a bid is
not reconfirmed prior to the close of the auction, it will be rejected. If a
bid is reconfirmed, if may still be modified or revoked prior to the auction
closing; however, if the reconfirmed bid is not revoked prior to the
effectiveness of the registration statement and the closing of the auction, it
will be considered a firm bid and may be accepted at the closing of the
auction. These underwriters and dealers will also seek reconfirmation of bids
in the event that the price range of the offering is changed, or if the initial
public offering price is set at a price that is outside the range that has
previously been provided to potential investors.
Determination of Public Offering Price
The public offering price for this offering will ultimately be determined by
negotiation between us, the selling shareholders and the underwriters after the
auction closes and will not necessarily bear any direct relationship to our
assets, current earnings or book value or to any other established criteria of
value, although these factors were considered in establishing the initial
public offering price range. Prior to the offering, there has been no public
market for our common stock. The principal factor in establishing the public
offering price will be the clearing price resulting from the auction.
The clearing price is the highest price at which all of the shares offered,
including the shares that may be purchased by the underwriters to cover any
over-allotments, may be sold to potential investors, based on the valid bids at
the time the auction is run. The shares subject to the underwriters' over-
allotment option will be used to calculate the clearing price whether or not
the option is actually exercised.
Factors considered in determining the initial public offering price range
included an assessment of our management, operating results, capital structure
and business potential and the demand for similar securities of comparable
companies. Changes, if any, in the public offering price range will be based
primarily on the bids received.
The public offering price may be lower, but will not be higher, than the
clearing price based on negotiations between us, the selling shareholders and
the underwriters. The public offering price will always determine the
allocation of shares to potential investors. Therefore, if the public offering
price is below the clearing price, all bids that are at or above the public
offering price will receive a pro rata portion of the
57
<PAGE>
shares bid for. If sufficient bids are not received, or if we do not consider
the clearing price to be adequate, or if we, the selling shareholders and the
underwriters are not able to reach agreement on the public offering price, then
we, the selling shareholders and the underwriters will either postpone or
cancel this offering. Alternatively, we may file a post-effective amendment to
the registration statement in order to conduct a new auction.
The following simplified example illustrates how the public offering price
will be determined through the auction process:
Company X offers to sell 1,000 shares in its public offering through the
auction process. WR Hambrecht + Co, on behalf of Company X, receives five bids
to purchase, all of which are kept confidential until the auction closes.
The first bid is to pay $10 per share for 200 shares. The second bid is to
pay $9 per share for 300 shares. The third bid is to pay $8 per share for 600
shares. The fourth bid is to pay $7 per share for 400 shares. The fifth bid is
to pay $6 per share for 800 shares.
Assuming that all of these bids are confirmed and not withdrawn or modified
before the auction closes, and assuming that no additional bids are received,
the clearing price used to determine the public offering price would be $8 per
share, which is the highest price at which all 1,000 shares offered may be sold
to potential investors who have submitted valid bids. However, the shares may
be sold at a price below $8 per share based on negotiations between Company X,
the selling shareholders and the underwriters.
If the public offering price is the same as the $8 per share clearing price,
the underwriters will confirm bids at or above $8 per share. Because 1,100
shares were bid for at or above the clearing price, each of the three potential
investors who bid $8 per share or more would receive approximately 90% of the
shares for which bids were made. The two potential investors whose bids were
below $8 per share would not receive any shares in this example.
If the public offering price is $7 per share, the underwriters will confirm
bids that were made at or above $7 per share. No bids made at a price of less
than $7 per share will be accepted. The four potential investors with the
highest bids would receive a pro rata portion of the 1,000 shares offered,
based on the 1,500 shares they requested, or two-thirds of the shares for which
bids were made. The potential investor with the lowest bid would not receive
any shares in this example.
The following table illustrates the example described above, assuming that
the initial public offering price is set at $8 per share. The table also
assumes that these bids are the final bids, and that they reflect any
modifications that have been made to reflect any prior changes to the offering
range, and to avoid the issuance of fractional shares.
Initial Public Offering of Company X
<TABLE>
<CAPTION>
Bid Information Auction Results
--------------------------------------------------------------- -------------------------------------
Approximate
Cumulative Allocated
Shares Shares Shares Requested Clearing Amount
Requested Requested Bid Price Allocated Shares Price Raised
--------- ---------- --------- --------- ----------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
200 200 $10.00 180 90% $8.00 $1,440
300 500 $ 9.00 270 90% $8.00 $2,160
Clearing Price (right arrow) 600 1,100 $ 8.00 550 90% $8.00 $4,400
400 1,500 $ 7.00 0 00%
800 2,300 $ 6.00 0 0%
Total: ----- ------
1,000 $8,000
===== ======
</TABLE>
58
<PAGE>
Requirements for Valid Bids
Valid bids are those that meet the requirements, including eligibility,
account status and size, established by the underwriters or participating
dealers. In order to open a brokerage account with WR Hambrecht + Co, potential
investors must deposit $2,000 in their account. This brokerage account will be
a general account subject to WR Hambrecht + Co's customary rules, and will not
be limited to this offering. In addition, once the registration statement
becomes effective and the auction closes, a prospective investor submitting a
bid through a WR Hambrecht + Co brokerage account must have an account balance
equal to or in excess of the amount of its bid or its bid will not be accepted
by WR Hambrecht + Co. However, other than the $2,000 described above,
prospective investors will not be required to deposit any money into their
accounts until after the registration statement becomes effective. No funds
will be transferred to the underwriters, and any amounts in excess of $2,000
may be withdrawn, at any time until the acceptance of the bid and the
subsequent closing of this offering. Conditions for valid bids, including
eligibility standards and account funding requirements of other underwriters or
participating dealers other than WR Hambrecht + Co, may vary.
Sale of Shares to Persons We Designate
The underwriters have reserved up to 100,000 shares of the common stock to be
sold in this offering for sale to individuals who have provided advisory
services to us, including our outside counsel. Offers to purchase shares
received from persons we designate will not be subject to pro rata reduction.
The number of shares used to determine the clearing price will be reduced by
any shares sold to persons we designate. The description of the auction process
assumes that no shares will be sold to persons we designate.
The Closing of the Auction and Allocation of Shares
The auction will close on a date estimated and publicly disclosed in advance
by the underwriters on the website of WR Hambrecht + Co at www.wrhambrecht.com
or www.openipo.com. The 3,300,000 shares offered by this prospectus, or
3,795,000 shares if the underwriters' over-allotment option is exercised in
full, will be purchased from us and the selling shareholders by the
underwriters and sold through the underwriters and participating dealers to
investors who have submitted bids at or higher than the public offering price.
These investors will be notified by e-mail, telephone, voice mail, facsimile or
mail as soon as practicable following the closing of the auction that their
bids have been accepted.
Each participating dealer has agreed with the underwriters to sell the shares
it purchases from the underwriters in accordance with the auction process
described above, unless the underwriters otherwise consent. The underwriters
reserve the right to reject bids that they deem manipulative or disruptive in
order to facilitate the orderly completion of this offering, and they reserve
the right, in exceptional circumstances, to alter this method of allocation as
they deem necessary to ensure a fair and orderly distribution of the shares of
our common stock. For example, large orders may be reduced to ensure a public
distribution and bids may be rejected or reduced by the underwriters or
participating dealers based on eligibility or creditworthiness criteria. In
addition, the underwriters or the participating dealers may reject or reduce a
bid by a prospective investor who has engaged in practices that could have a
manipulative, disruptive or otherwise adverse effect upon the offering.
Price and volume volatility in the market for the common stock may result
from the somewhat unique nature of the proposed plan of distribution. Price and
volume volatility in the market for the common stock after the completion of
this offering may adversely affect the market price of the common stock.
We and the selling shareholders have granted to the underwriters an option,
exercisable no later than 30 days after the date of this prospectus, to
purchase up to an aggregate of 495,000 additional shares of the common stock at
the offering price, less the underwriting discount, set forth on the cover page
of this prospectus. The underwriters may purchase up to 182,623 of these shares
from us and up to 312,377 of these
59
<PAGE>
shares from the selling shareholders. To the extent that the underwriters
exercise this option, the underwriters will have a firm commitment to purchase
the additional shares, and we and the selling shareholders will be obligated to
sell the additional shares to the underwriters. The underwriters may exercise
the option only to cover over-allotments made in connection with the sale of
shares offered. The underwriting agreement provides that we will indemnify the
underwriters against specified liabilities, including liabilities under the
Securities Act, or contribute to payments that the underwriters may be required
to make.
We and the selling shareholders have agreed not to offer, sell, contract to
sell or otherwise dispose of any shares of common stock, or any options or
warrants to purchase common stock other than the shares of common stock or
options to acquire common stock issued under our stock plans, for a period of
180 days after the date of this prospectus, except with the prior written
consent of WR Hambrecht + Co, or in connection with a merger or an acquisition
transaction. Each of our directors and executive officers and additional
holders of a total of approximately shares of our outstanding common
stock have agreed to restrictions on his or her ability to sell, offer,
contract or grant any option to sell, pledge, transfer or otherwise dispose of
shares of our common stock for a period of 180 days after the date of this
prospectus, without the prior written consent of WR Hambrecht + Co.
In connection with the offering, persons participating in the offering may
purchase and sell shares of common stock on the open market. These transactions
may include short sales, stabilizing transactions in accordance with Rule 104
of Regulation M under the Securities Exchange Act of 1934, as amended, and
purchases to cover positions created by short sales. Short sales involve the
sale by the underwriters of a greater number of shares than they are required
to purchase in the offering, which creates a syndicate short position.
Stabilizing transactions consist of certain bids or purchases made for the
purpose of preventing or retarding a decline in the market price of the common
stock. The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representative has repurchased shares sold
by or for the account of that underwriter in stabilizing or short covering
transactions. These activities by the underwriters may stabilize, maintain or
otherwise affect the market price of the common stock. As a result, the price
of the common stock may be higher than the price that otherwise might exist in
the open market. If these activities are commenced, they may be discontinued by
the underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
WR Hambrecht + Co and Pacific Growth Equities, Inc. currently intend to act
as market makers for the common stock following this offering. However, neither
WR Hambrecht + Co nor Pacific Growth Equities, Inc. is obligated to do so and
may discontinue any market making at any time.
WR Hambrecht + Co is an investment banking firm formed in February 1998. In
addition to this offering, WR Hambrecht + Co has engaged in the business of
public and private equity investing and financial advisory services since its
inception. The manager of WR Hambrecht + Co, William R. Hambrecht, has 40 years
of experience in the securities industry.
60
<PAGE>
LEGAL MATTERS
Cooley Godward LLP, San Francisco, California, will pass upon the validity of
the shares of common stock being offered hereby for us. Morrison & Foerster,
LLP, San Francisco, California, will pass upon certain legal matters in
connection with this offering for the underwriters.
EXPERTS
The financial statements of Peet's Coffee & Tea, Inc. (formerly Peet's
Companies, Inc.), and subsidiaries as of January 2, 2000 and January 3, 1999,
and for the years ended January 2, 2000, January 3, 1999 and December 28, 1997
included in this prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein, and are
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
WHERE YOU CAN GET MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the shares of
common stock being offered. This prospectus does not contain all of the
information described in the registration statement and the related exhibits
and schedules. For further information with respect to us and the common stock
being offered, reference is made to the registration statement and the related
exhibits and schedule. Statements contained in this prospectus regarding the
contents of any contract or any other document to which reference is made are
not necessarily complete, and, in each instance, reference is made to the copy
of the contract or other document filed as an exhibit to the registration
statement, each statement being qualified in all respects by the reference. A
copy of the registration statement and the related exhibits and schedule may be
inspected without charge at the public reference facilities maintained by the
Commission in Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Commission's regional offices located at the Northwestern Atrium Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World
Trade Center, 13th Floor, New York, New York 10048, and copies of all or any
part of the registration statement may be obtained from these offices upon the
payment of the fees prescribed by the Commission. Information on the operation
of the Public Reference Room may be obtained by calling the Commission at 1-
800-SEC-0330. The Commission maintains a website that contains reports, proxy
and information statements and other information regarding registrants that
file electronically with the Commission. The address of the site is
http://www.sec.gov.
We intend to provide our shareholders with annual reports containing combined
financial statements audited by an independent accounting firm and to file with
the Commission quarterly reports containing unaudited combined financial data
for the first three quarters of each year.
61
<PAGE>
PEET'S COFFEE & TEA, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report.............................................. F-2
Consolidated Balance Sheets as of January 3, 1999, January 2, 2000 and
(unaudited) July 2, 2000................................................. F-3
Consolidated Statements of Operations for the Years Ended December 28,
1997, January 3, 1999 and January 2, 2000 and for the (unaudited) Six
Months Ended July 4, 1999 and July 2, 2000............................... F-4
Consolidated Statements of Shareholders' Equity for the Years Ended
December 28, 1997, January 3, 1999 and January 2, 2000 and for the
(unaudited) Six Months Ended July 2, 2000................................ F-5
Consolidated Statements of Cash Flows for the Years Ended December 28,
1997, January 3, 1999 and January 2, 2000 and for the (unaudited) Six
Months Ended July 4, 1999 and July 2, 2000............................... F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Peet's Coffee & Tea, Inc.
We have audited the accompanying consolidated balance sheets of Peet's Coffee
& Tea, Inc. and subsidiaries (the "Company") (formerly Peet's Companies, Inc.)
as of January 3, 1999 and January 2, 2000 and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three fiscal years in the period ended January 2, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Peet's Coffee & Tea, Inc. and
subsidiaries as of January 3, 1999 and January 2, 2000, and the results of
their operations and their cash flows for each of the three fiscal years in the
period ended January 2, 2000, in conformity with accounting principles
generally accepted in the United States of America.
February 25, 2000
(September 1, 2000 as to Note 14)
San Francisco, California
F-2
<PAGE>
PEET'S COFFEE & TEA, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Pro Forma
January 3, January 2, July 2, July 2,
1999 2000 2000 2000
---------- ---------- ------- ---------
(Unaudited)
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents........................... $ 873 $ 1,074 $ 1,216
Accounts receivable (net of allowance of $50, $61,
and $68)........................................... 430 740 678
Inventories (Note 3)................................ 9,007 7,211 8,027
Deferred income taxes............................... 292 170 180
Prepaid expenses and other.......................... 671 998 988
------- ------- -------
Total current assets.............................. 11,273 10,193 11,089
Property and equipment, net (Note 4)................ 16,385 21,780 21,498
Restricted cash .................................... 110 40 30
Deferred income taxes............................... 642 955 1,599
Intangible and other assets, net.................... 1,454 1,682 1,766
------- ------- -------
Total assets...................................... $29,864 $34,650 $35,982
======= ======= =======
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable.................................... $ 4,569 $ 4,353 $ 6,603
Accrued compensation and benefits................... 1,318 1,914 920
Other accrued liabilities........................... 546 996 1,174
Short-term borrowings............................... 4,472 5,600 9,017
Current portion of long term borrowings............. 1,701 2,816 2,820
------- ------- -------
Total current liabilities......................... 12,606 15,679 20,534
Long term borrowings, less current portion............ 5,962 7,240 6,066
Deferred lease credits................................ 505 540 566
------- ------- -------
Total liabilities................................. 19,073 23,459 27,166
------- ------- -------
Commitments and contingencies (Note 10)
Shareholders' equity:
Preferred stock, no par value; authorized 10,000,000
shares; issued and outstanding 471,000 of Series A,
liquidation preference of $4,828................... 4,537 4,537 4,537
Common stock, no par value; authorized 50,000,000
shares; issued and outstanding; 2,204,000,
2,257,000 and 2,258,000 shares..................... 7,422 7,966 8,069 $12,606
Accumulated deficit................................. (1,168) (1,312) (3,790) (3,790)
------- ------- ------- -------
Total shareholders' equity........................ 10,791 11,191 8,816 $ 8,816
------- ------- ------- =======
Total liabilities and shareholders' equity........ $29,864 $34,650 $35,982
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
PEET'S COFFEE & TEA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Six Months
Fiscal Year Ended Ended
---------------------------------- ---------------
December 28, January 3, January 2, July 4, July 2,
1997 1999 2000 1999 2000
------------ ---------- ---------- ------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net sales................................... $50,732 $58,685 $67,807 $31,194 $39,171
------- ------- ------- ------- -------
Operating expenses:
Cost of sales and related occupancy
expenses................................. 26,530 28,749 31,923 14,799 18,389
Operating expenses........................ 14,767 17,969 21,902 9,696 13,320
Marketing and advertising................. 2,278 2,176 3,491 1,498 4,255
General and administrative expenses....... 3,961 5,961 6,230 3,006 3,420
Depreciation and amortization............. 2,210 2,711 3,404 1,508 2,191
------- ------- ------- ------- -------
Total operating costs and expenses...... 49,746 57,566 66,950 30,507 41,575
------- ------- ------- ------- -------
Income (loss) from operations............... 986 1,119 857 687 (2,404)
Interest expense............................ 486 765 1,022 451 726
Other income................................ (90) (56) (37) -- --
------- ------- ------- ------- -------
Income (loss) before income taxes........... 590 410 (128) 236 (3,130)
Income tax provision (benefit).............. 249 242 16 95 (652)
------- ------- ------- ------- -------
Net income (loss)........................... $ 341 $ 168 $ (144) $ 141 $(2,478)
======= ======= ======= ======= =======
Basic net income (loss) per share........... $ 0.15 $ 0.07 $ (0.06) $ 0.06 $ (1.06)
======= ======= ======= ======= =======
Diluted net income (loss) per share......... $ 0.12 $ 0.06 $ (0.06) $ 0.05 $ (1.06)
======= ======= ======= ======= =======
Shares used in calculating basic net income
(loss) per share........................... 2,249 2,274 2,317 2,304 2,333
======= ======= ======= ======= =======
Shares used in calculating diluted net
income (loss) per share.................... 2,822 2,980 2,317 2,975 2,333
======= ======= ======= ======= =======
Pro forma net loss per share:
Basic and Diluted......................... $ (0.05) $ (0.88)
======= =======
Shares used in pro forma calculation:
Basic and Diluted......................... 2,788 2,804
======= =======
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
PEET'S COFFEE & TEA, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Series A Series B
Common Stock Preferred Stock Preferred Stock
------------------ ------------------ ------------------ Total
Shares Shares Shares Accumulated Shareholders'
Outstanding Amount Outstanding Amount Outstanding Amount Deficit Equity
----------- ------ ----------- ------ ----------- ------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 29,
1996................... 2,108 $6,499 471 $4,537 98 $ 945 $ (808) $11,173
Stock options exercised,
including tax benefit.. 83 804 804
Repurchase and
retirement of Series B
preferred stock (Note
11).................... (98) (945) (518) (1,463)
Repurchase of warrants
on common stock (Note
11).................... (537) (537)
Net income.............. 341 341
----- ------ --- ------ --- ----- ------- -------
Balance at December 28,
1997................... 2,191 7,303 471 4,537 -- -- (1,522) 10,318
Stock options exercised,
including tax benefit.. 13 119 119
Tax benefit of
warrants............... 186 186
Net income.............. 168 168
----- ------ --- ------ --- ----- ------- -------
Balance at January 3,
1999................... 2,204 7,422 471 4,537 -- -- (1,168) 10,791
Stock options exercised,
including tax benefit.. 53 544 544
Net loss................ (144) (144)
----- ------ --- ------ --- ----- ------- -------
Balance at January 2,
2000................... 2,257 7,966 471 4,537 -- -- (1,312) 11,191
Stock options exercised,
including tax benefit
(unaudited)............ 1 103 103
Net loss (unaudited).... (2,478) (2,478)
----- ------ --- ------ --- ----- ------- -------
Balance at July 2, 2000
(unaudited)............ 2,258 $8,069 471 $4,537 -- $ -- $(3,790) $ 8,816
===== ====== === ====== === ===== ======= =======
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
PEET'S COFFEE & TEA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Six Months
Fiscal Year Ended Ended
---------------------------------- ----------------
December 28, January 3, January 2, July 4, July 2,
1997 1999 2000 1999 2000
------------ ---------- ---------- ------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................... $ 341 $ 168 $ (144) $ 141 $(2,478)
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation and amortization............. 2,656 3,260 3,958 1,767 2,431
Tax benefit of purchase discount
warrants................................. 186
Tax benefit from exercise of stock options
by employees and directors............... 137 16 115 95
Deferred income taxes..................... 118 142 (191) (70) (655)
Loss on disposition of assets............. 74 220 496 1 11
Changes in other assets and liabilities:
Accounts receivable....................... 96 232 (309) (341) 62
Inventories............................... (2,195) (2,504) 1,797 (83) (816)
Prepaid expenses and other ............... 336 (179) (327) (277) 10
Other assets.............................. 49 33 (17) 115
Accounts payable, accrued liabilities and
other liabilities........................ 849 1,285 865 (659) 1,462
------- ------- -------- ------- -------
Net cash provided by operating
activities.............................. 2,461 2,859 6,260 462 237
------- ------- -------- ------- -------
Cash flows from investing activities:
Purchases of property and equipment......... (5,790) (5,440) (9,665) (4,130) (2,041)
Proceeds from sales of property and
equipment.................................. 15 2 1 1
Acquisition of lease rights................. (753) (416) (216) (320)
------- ------- -------- ------- -------
Net cash used in investing activities.... (5,790) (6,178) (10,079) (4,345) (2,360)
------- ------- -------- ------- -------
Cash flows from financing activities:
Proceeds from borrowings.................... 5,204 10,334 4,031 3,654 2,256
Repayments of notes payable................. (1,810) (7,133) (440)
Proceeds from issuance of common stock...... 667 103 429 403 9
Repurchase of Series B preferred stock...... (1,463)
Repurchase of warrants on common stock...... (537)
------- ------- -------- ------- -------
Net cash provided by financing
activities.............................. 2,061 3,304 4,020 4,057 2,265
------- ------- -------- ------- -------
Change in cash and cash equivalents.......... (1,268) (15) 201 174 142
Cash and cash equivalents, beginning of
year........................................ 2,156 888 873 873 1,074
------- ------- -------- ------- -------
Cash and cash equivalents, end of year....... $ 888 $ 873 $ 1,074 $ 1,047 $ 1,216
======= ======= ======== ======= =======
Supplemental cash flow disclosures:
Cash paid (received) for:
Interest................................... $ 502 $ 813 $ 1,054 $ 437 $ 703
Income taxes............................... 190 (114) (77) (77) 105
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
PEET'S COFFEE & TEA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of July 2, 2000 and for the Six Months Ended
July 4, 1999 and July 2, 2000 is Unaudited)
1. History and Organization
Peet's Coffee & Tea, Inc., (the "Company") (formerly Peet's Companies, Inc.)
sells coffee, tea and related merchandise through retail stores, online and
mail order and other distribution channels. At December 28, 1997, January 3,
1999, January 2, 2000 and July 2, 2000, the Company had 39, 43, 53 and
56 retail stores, respectively, in California, Illinois, Oregon and
Massachusetts.
2. Summary of Significant Accounting Policies
Principles of Consolidation--The consolidated financial statements include
the accounts of the Company and its subsidiaries. All significant intercompany
transactions have been eliminated in consolidation.
Fiscal Year--The Company's fiscal year ends on the Sunday closest to the
last day of December. The last three fiscal years consist of the 52-week period
ended January 2, 2000, the 53-week period ended January 3, 1999 and the 52-week
period ended December 28, 1997.
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 consisting primarily of green coffee beans and
finished goods consisting of roasted coffee beans, tea, accessory products,
spices, packaged foods and packaging are valued at the lower of cost (first-in,
first-out method) or market. Inventory costs include material, labor and
manufacturing overhead, including depreciation.
Property and equipment are stated at cost. Depreciation and amortization are
provided on the straight-line method over the estimated useful lives of the
property and equipment, which range from 3 to 10 years. Leasehold improvements
are amortized using the straight-line method over the term of the related
lease, which range from 3 to 10 years.
Intangible and other assets primarily includes lease rights, deposits,
trademarks and deferred financing costs. Lease rights were $752,000, $877,000
and $827,000 at January 3, 1999, January 2, 2000, and July 2, 2000,
respectively. Intangible assets are amortized on the straight-line method over
10 to 15 years. Accumulated amortization was $1,508,000, $1,178,000 and
$1,298,000 at January 3, 1999, January 2, 2000 and July 2, 2000, respectively.
Amortization expense was $163,000, $192,000 and $187,000 in fiscal years 1997,
1998 and 1999, respectively.
Impairment of Long-Lived Assets--The Company evaluates the recoverability of
its long-lived assets in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of. Whenever events or changes in
circumstances have indicated that the carrying amount of its assets might not
be recoverable, the Company, using its best estimates based on reasonable and
supportable assumptions and projections of future cash inflows provided by the
asset less future cash outflows, has reviewed for impairment the carrying value
of long-lived assets. In fiscal 1998 and 1999, an impairment loss of $182,000
and $490,000, respectively, was recorded in property and equipment related to
leasehold improvements and fixturing of planned store closures. An impairment
loss of $176,000 was recorded for the six months ended July 2, 2000.
Store Closure--The Company accrues an estimate for the costs associated with
closing under-performing stores in the period in which the store is identified
and approved by management under a plan of termination. The plan includes the
method of disposition and the expected date of completion. Costs, which are
considered
F-7
<PAGE>
PEET'S COFFEE & TEA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
to have no future economic benefit, include direct costs to terminate a lease
or sublease a property and the difference between the book value and estimated
recovery of fixed assets. Significant changes to the plan are unlikely. The
operating costs, including depreciation, of stores or other facilities to be
sold or closed are expensed during the period they remain in use.
Revenue Recognition--Net sales are recorded based on purchases by customers
at retail locations or when merchandise is shipped from the warehouse for
direct-to-customer sales. Sales returns are insignificant.
Preopening costs or costs associated with the opening or remodeling of
stores, such as payroll and rent, are charged to expense as incurred.
Hedging activities--The Company uses coffee futures and options to hedge
price increases in price-to-be-fixed coffee purchase commitments and
anticipated coffee purchases. These derivative instruments qualify for hedge
accounting and the gains and losses are accounted for as inventory costs and
are recorded as expense or income when the related coffee is sold. We do not
hold or issue derivative instruments for trading purposes.
Fair Value of Financial Instruments--The carrying value of cash and
equivalents, receivables and accounts payable approximates fair value. The
carrying value of debt approximates the estimated fair value due to floating
interest rates on the debt. The fair value of futures contracts is the amount
at which they could be settled, based on estimates obtained from dealers. Net
unrealized gains on such contracts were $41,000 at January 3, 1999 and $624,000
at January 2, 2000.
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.
Advertising costs are expensed as incurred. Advertising expense was
$1,990,000, $1,496,000 and $2,472,000, in fiscal years 1997, 1998 and 1999,
respectively.
Deferred Lease Credits--Certain of the Company's lease agreements provide for
scheduled rent increases during the term of the lease. Rent is expensed on a
straight-line basis over the term of the lease.
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--The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with APB No. 25,
Accounting for Stock Issued to Employees. The disclosure requirements of SFAS
No. 123, Accounting for Stock-Based Compensation, are set forth in Note 9.
Net Income (loss) 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 (loss) per share reflects the potential dilution
that could occur from common shares issuable through stock options and the
conversion of preferred stock. Diluted net loss per share on January 2, 2000
and July 2, 2000 does not include the common shares issuable through stock
options and the conversion of preferred stock because they are anti-dilutive.
F-8
<PAGE>
PEET'S COFFEE & TEA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Unaudited Pro Forma Information--Upon the closing of the planned initial
public offering, each of the outstanding shares of preferred stock will convert
into one share of common stock. The pro forma balance sheet reflects this
conversion as if it had occurred on July 2, 2000.
Pro Forma Net Loss per Share--Pro forma basic and diluted net income per
share are computed by dividing the net loss by the weighted average common
shares outstanding for the period plus the weighted average number of common
shares resulting from the automatic conversion of outstanding shares of
preferred stock, which will occur upon the closing of the planned public
offering.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles 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.
Unaudited Interim Financial Information--The interim financial information as
of July 2, 2000 and for the six months ended July 4, 1999 and July 2, 2000 is
unaudited and has been prepared on the same basis as the audited financial
statements. In the opinion of management, such unaudited financial information
includes all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the interim information. Operating results
for the six months ended July 2, 2000 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2000.
Recently Issued Accounting Pronouncements--In June 1998, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities". In June 2000, the FASB issued SFAS No. 138, which amends certain
provisions of SFAS 133 to clarify four areas causing difficulties in
implementation. The amendment included expanding the normal purchase and sale
exemption for supply contracts, permitting the offsetting of certain
intercompany foreign currency derivatives and thus reducing the number of third
party derivatives, permitting hedge accounting for foreign-currency denominated
assets and liabilities, and redefining interest rate risk to reduce sources of
ineffectiveness. The Company has not fully assessed the implications of
adopting this statement.
The Securities and Exchange Commission issued Staff Accounting Bulletin
("SAB") No. 101 "Revenue Recognition in Financial Statements" in December 1999.
The Company will adopt the requirements of SAB 101 as amended by SAB 101A and B
in the fourth quarter of fiscal year ended December 31, 2000 retroactive to the
first quarter of fiscal year 2000. The Company does not expect the
implementation of SAB 101 to be material to the financial statements.
3. INVENTORIES
The Company's inventories consist of (in thousands):
<TABLE>
<CAPTION>
January 3, January 2, July 2,
1999 2000 2000
---------- ---------- -----------
(Unaudited)
<S> <C> <C> <C>
Raw materials.............................. $6,225 $4,259 $4,274
Finished goods............................. 2,782 2,952 3,753
------ ------ ------
Total.................................... $9,007 $7,211 $8,027
====== ====== ======
</TABLE>
F-9
<PAGE>
PEET'S COFFEE & TEA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
January 3, January 2, July 2,
1999 2000 2000
---------- ---------- -----------
(Unaudited)
<S> <C> <C> <C>
Leasehold improvements..................... $ 13,236 $ 17,434 $ 18,804
Furniture and fixtures..................... 11,200 15,296 16,128
Equipment and vehicles..................... 2,958 3,347 3,434
Construction in progress................... 1,911 2,252 1,981
-------- -------- --------
Total.................................... 29,305 38,329 40,347
Less accumulated depreciation.............. (12,920) (16,549) (18,849)
-------- -------- --------
Total.................................... $ 16,385 $ 21,780 $ 21,498
======== ======== ========
</TABLE>
Depreciation expense was $2,542,000 in 1997, $3,068,000 in 1998, $3,771,000
in 1999 and $1,668,000 and $2,286,000 for the six-month periods ended July 4,
1999 and July 2, 2000, respectively. The Company capitalized interest on
construction in progress of $53,000 in 1998 and $100,000 in 1999.
5. BORROWINGS
At January 2, 2000, the Company had a $20,000,000 credit facility with a
bank. The facility provides for a revolving line of credit, a term loan
facility, and a standby letter of credit. A revolving line of credit of up to
$8,000,000 is available from April 1 through September 30 of each year and up
to $10,000,000 from October 1 through March 31 of each year, maturing on
December 31, 2000. The term loan facility provides for advances in the minimum
principal amount of $500,000 through December 31, 2000 and an approximate
$2,300,000 reducing standby letter of credit to expire on December 1, 2000 in
favor of the California State Teachers' Retirement System. The Company may
elect certain interest rate options based on various indices and with differing
margins based on the company's leverage ratio. Interest on advances under the
term loan and revolving line of credit are payable monthly. Borrowings under
the credit facility are secured by substantially all of the Company's assets.
The credit facility contains monthly, quarterly and annual financial covenants
which require, among others, profitable operations, a limit on maximum capital
expenditures, minimum tangible net worth, and maintenance of financial ratios,
including leverage and debt service coverage. In addition, the credit facility
contains restrictions on the Company's ability to incur additional indebtedness
and lease obligations, to pay dividends to shareholders, and to acquire and
retire its common stock. The Company was not in compliance with all debt
covenants as of January 2, 2000 and received a series of waivers from its
financial institution covering the period through the refinancing described in
Note 14. At January 2, 2000 and July 2, 2000, the Company had $5,600,000 and
$9,017,000 of outstanding borrowings under the revolving line of credit and
$7,876,000 and $6,688,000 of outstanding borrowings under the term loan.
F-10
<PAGE>
PEET'S COFFEE & TEA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Long term borrowings consist of the following (amounts in thousands):
<TABLE>
<CAPTION>
January 3, January 2, July 2,
1999 2000 2000
---------- ---------- -----------
(Unaudited)
<S> <C> <C> <C>
Term loans, payable to a bank, interest
payable monthly at a rate of 7.8125% at
January 2, 2000 (rate is calculated at
either the Bank's reference rate, or
Eurodollar or the Bank's cost of funds
adjusted for reserve requirements and
FDIC charges plus between 1.75% and 2%
depending on the companies leverage
ratio), principal payable monthly
through December 31, 2003.............. $ 5,043 $ 7,876 $ 6,688
Industrial development revenue bond,
interest at a weekly floating rate
until maturity in 2006 (5.5% at January
2, 2000). Interest payable weekly and
principal of $440,000 payable annually
beginning December 1, 1997. As of
January 2, 2000, $40,000 of bond
proceeds are reported as restricted
cash for interest payments............. 2,620 2,180 2,180
Capital lease obligations............... -- -- 18
------- ------- -------
Total................................. 7,663 10,056 8,886
Less current portion.................... (1,701) (2,816) (2,820)
------- ------- -------
Total................................. $ 5,962 $ 7,240 $ 6,066
======= ======= =======
</TABLE>
Scheduled maturities of the Company's borrowings subsequent to January 2,
2000 are as follows (amounts in thousands):
<TABLE>
<S> <C>
Fiscal year:
2000............................................................... $ 2,816
2001............................................................... 2,816
2002............................................................... 2,816
2003............................................................... 1,188
2004............................................................... 140
Thereafter......................................................... 280
-------
Total............................................................ $10,056
=======
</TABLE>
6. INCOME TAXES
The income tax provision consists of the following (amounts in thousands):
<TABLE>
<CAPTION>
Fiscal Year Ended
----------------------------------
December 28, January 3, January 2,
1997 1999 2000
------------ ---------- ----------
<S> <C> <C> <C>
Current:
Federal................................. $141 $ 36 $ 169
State................................... (10) 64 39
---- ---- -----
Total................................. 131 100 208
---- ---- -----
Deferred:
Federal................................. 53 120 (165)
State................................... 65 22 (27)
---- ---- -----
Total................................. 118 142 (192)
---- ---- -----
Total..................................... $249 $242 $ 16
==== ==== =====
</TABLE>
F-11
<PAGE>
PEET'S COFFEE & TEA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The difference between the effective income tax rate and the United States
federal income tax rate is summarized as follows:
<TABLE>
<CAPTION>
Fiscal Years Ended
----------------------------------
December 28, January 3, January 2,
1997 1999 2000
------------ ---------- ----------
<S> <C> <C> <C>
Statutory federal rate.................. 34.0% 34.0 % 34.0 %
State income taxes less federal
benefit................................ 6.2 5.8 5.8
Restriction on federal charitable
contributions carryforward............. 12.5
Non-deductible items.................... 2.0 (12.2)
California net operating loss
limitation............................. 8.8 (36.0)
California Manufacturer Investment
Credit................................. 2.0 (4.1) (4.1)
---- ---- -----
Total................................. 42.2% 59.0 % (12.5)%
==== ==== =====
</TABLE>
Deferred tax assets (liabilities) consist of the following (amounts in
thousands):
<TABLE>
<CAPTION>
January 3, January 2,
1999 2000
---------- ----------
<S> <C> <C>
Net operating loss carryforwards....................... $ 495 $ 852
Charitable contribution carryforwards.................. 268 372
Credit carryforwards................................... 439 560
Scheduled rent......................................... 142 180
Accrued reserves....................................... 55 70
Accrued compensation................................... 206 198
------ ------
Gross deferred tax assets............................ 1,605 2,232
------ ------
Property and equipment................................. (265) (451)
State taxes............................................ (50) (31)
Other.................................................. (81) (350)
------ ------
Gross deferred tax liabilities....................... (396) (832)
------ ------
Valuation allowance.................................... (275) (275)
------ ------
Net deferred tax assets.............................. $ 934 $1,125
====== ======
</TABLE>
The Company has federal net operating loss carryforwards of $1,148,000, which
expire between 2012 and 2019 and state net operating loss carry-forwards of
$1,856,000, which expire between 2002 and 2004. Certain restrictions apply on
the use of loss carryforwards, charitable contribution carryforwards and
certain tax credits. Section 382 of the Internal Revenue Code and similar
provisions with state agencies place limitations on the ability to utilize net
operating loss carryforwards in a change of control of the Company. A valuation
allowance has been recorded to reduce specific tax attribute carryovers to
amounts that are more likely than not to be realized.
7. PROFIT-SHARING PLAN
The Company's contributory profit sharing plan covers substantially all
employees. The Company matches 50% of amounts contributed by its employees up
to 5% of their annual salary. Profit sharing plan expense was $127,000,
$149,000 and $194,000 in fiscal years 1997, 1998 and 1999, respectively.
8. SHAREHOLDERS' EQUITY
The Company is authorized to issue 10,000,000 shares of preferred stock
without par value, of which 1,000,000 and 98,000 shares have been designated
for issuance as Series A and Series B preferred stock
F-12
<PAGE>
PEET'S COFFEE & TEA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(preferred stock), respectively. The holders of preferred stock have the same
voting privileges as holders of the Company's common stock. The preferred stock
can be converted at any time, at the option of the holder, into common stock at
an initial conversion rate of one-to-one, subject to adjustment for future
stock dividends and stock splits. In the event of an initial public offering
that raises at least $7.5 million with a per share price of at least $16.00 per
share (adjusted for stock splits), the preferred stock automatically converts
into common at a conversion rate of one-to-one. Dividends are non-cumulative
and payable only at the election of the Board of Directors. In the event of any
liquidation of the Company, holders of preferred stock will be entitled to
receive, prior to any distributions to common shareholders, an amount equal to
$10.25 per share, subject to adjustment for sales of preferred stock at less
than $10.25 per share, plus accrued and unpaid dividends. If funds are
insufficient to pay the full preferential amount, the entire amount of such
funds will be distributed to preferred shareholders in proportion to the
respective amounts which would have been paid had the full preferential amount
been available.
In connection with the Series A preferred stock offering, the Company issued
to the placement agent warrants to purchase 3% of the Series A preferred stock
issue, or 14,139 shares, exercisable at $10.25 per share. These warrants were
deemed to have a nominal value and had not been exercised as of January 2,
2000. The warrants expired on March 31, 2000.
In 1997, the Company purchased Series B preferred stock and the common stock
warrants from the holder. (Note 11).
In May of 1997, the Company issued warrants to a consulting firm to purchase
100,000 shares of common stock at $15 per share. These warrants, which are
exercisable at the option of the holder, expire on December 31, 2001. At the
time of issuance, these warrants were deemed to have a nominal value and had
not been exercised as of January 2, 2000.
9. STOCK OPTION PLANS
In 1994, the Company established two stock option plans, of which one is
inclusive of California residents only, both of which provide for incentive and
nonqualified stock options for the purchase of 415,800 shares of common stock
of the Company. During 1999, the Board of Directors approved a reduction of
104,457 shares available under these plans. Incentive stock options may be
granted to employees of the Company. Nonqualified stock options may be granted
to employees, directors, officers, agents, consultants or advisors of the
Company. The purchase price of the common stock issuable under the stock option
plan is determined by the Board of Directors and may not be less than the fair
market value of the common stock at the grant date for incentive stock options
and not less than 85% of the fair market value of the common stock at the grant
date for nonqualified stock options. The term of a granted stock option is 10
years from the grant date. Stock options granted through December 30, 1994 vest
20% on each anniversary of the employee's date of hire and, accordingly, are
fully vested and exercisable after five years of employment. Stock options
granted subsequent to December 30, 1994 have vesting periods, which range from
100% upon grant to 20% on the anniversary of the grant date and are fully
vested after five years.
In 1997, the Company adopted a successor equity incentive plan to the
Company's existing stock option plans, which provides a means by which selected
employees, directors, and consultants of the Company may benefit from increased
stock value through the granting of incentive and non-statutory stock options.
The Company has reserved 380,000 shares of common stock for issuance pursuant
to the plan. In 1999, the Company authorized an additional 260,000 options. 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
ten years from the grant date. All stock options vest at a minimum rate of 20%
per year.
F-13
<PAGE>
PEET'S COFFEE & TEA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of July 2, 2000, there were 30,616 shares available for grant under 1997
stock option plan. Changes in stock options were as follows:
<TABLE>
<CAPTION>
Outstanding Per Share
----------- ---------
<S> <C> <C>
Outstanding at December 29, 1996............................... 369,385 $ 8.35
Granted........................................................ 342,950 11.99
Canceled....................................................... (27,826) 9.71
Exercised...................................................... (84,298) 7.75
-------
Outstanding at December 28, 1997............................... 600,211 10.45
Granted........................................................ 152,180 12.58
Canceled....................................................... (35,415) 11.34
Exercised...................................................... (12,412) 9.34
-------
Outstanding at January 3, 1999................................. 704,564 10.88
Granted........................................................ 120,500 12.75
Canceled....................................................... (98,955) 11.25
Exercised...................................................... (52,144) 8.24
-------
Outstanding at January 2, 2000................................. 673,965 11.35
Granted (unaudited)............................................ 107,500 12.75
Canceled (unaudited)........................................... (14,354) 11.39
Exercised (unaudited).......................................... (985) 8.92
-------
Outstanding at July 2, 2000 (unaudited)........................ 766,126 $11.55
=======
</TABLE>
At December 28, 1997, January 3, 1999, and January 2, 2000, 259,217, 391,143,
and 437,897 options, respectively, were exercisable with a weighted average
exercise price of $8.84, $10.39, and $10.64, respectively. The options
outstanding at January 2, 2000 had exercise prices ranging from $7.69 to $12.75
and a weighted average remaining contractual life of 7.05 years.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation. Accordingly, no compensation cost has been recognized for the
stock option plans. Had compensation cost for the Company's two stock option
plans been determined based on the fair value at the grant date for awards in
1997, 1998 and 1999 consistent with the provisions of SFAS No. 123, the
Company's net income would have been reduced to the pro forma amounts indicated
below (in thousands):
<TABLE>
<CAPTION>
Fiscal Years Ended
---------------------------------- --- ---
December 28, January 3, January 2,
1997 1999 2000
------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
Net income (loss)--as reported................... $ 341 $ 168 $ (144)
Net income (loss)--pro forma..................... $ 123 $ (234) $ (594)
Basic net income (loss) per share--as reported... $0.15 $ 0.07 $(0.06)
Basic net income (loss) per share--pro forma..... $0.06 $(0.10) $(0.26)
Diluted net income (loss) per share--as
reported........................................ $0.12 $ 0.06 $(0.06)
Diluted net income (loss) per share--pro forma... $0.04 $(0.10) $(0.26)
</TABLE>
F-14
<PAGE>
PEET'S COFFEE & TEA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The weighted average fair value of the stock options granted during 1997,
1998 and 1999 was $4.34, $5.25, and $6.68, respectively. 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:
<TABLE>
<CAPTION>
Fiscal Years Ended
---------------------------------- --- ---
December 28, January 3, January 2,
1997 1999 2000
------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
Expected dividend rate............ 0% 0% 0%
Expected volatility............... 0% 0% 0%
Risk-free interest rate........... 6.40% 5.46% 6.19%
Expected lives (yrs.)............. 7 7 7
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
Leases--The Company leases its Emeryville, California coffee roasting plant,
distribution center and administrative offices, warehouse, its retail stores
and certain equipment under operating leases that expire from 2000 through
2009. 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 these operating leases
subsequent to January 2, 2000 are as follows (amounts in thousands):
<TABLE>
<S> <C>
Fiscal year:
2000............................................................. $ 4,184
2001............................................................. 4,081
2002............................................................. 3,494
2003............................................................. 2,891
2004............................................................. 2,202
Thereafter....................................................... 5,814
-------
Total.......................................................... $22,666
=======
</TABLE>
Rent expense was $2,234,000, $2,740,000, and $3,490,000 for fiscal years
1997, 1998 and 1999, respectively, including contingent rents of $80,000,
$106,000 and $121,000, respectively.
Purchase Commitments--As of January 2, 2000, the Company had approximately
$7,093,000 of outstanding coffee purchase commitments for fiscal year 2000 with
fixed prices.
Employment Agreements--The Company has agreements with certain officers to
provide severance benefits in the event their employment is terminated under
certain defined circumstances resulting in a contingent liability at January 2,
2000.
11. RELATED PARTY TRANSACTIONS
During fiscal years 1997 and 1998, the Company had sales of $3,394,000, and
$962,000, respectively, to an over-the-counter food service operator who was
also the owner of Series B preferred stock. As of January 3, 1999, accounts
receivable included $37,000 related to this agreement.
F-15
<PAGE>
PEET'S COFFEE & TEA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Mr. Jesse, a member of the compensation committee, is the Chairman of
Jesse.Hansen&Co, a strategic and financial advisor to the Company pursuant to
an engagement letter dated as of December 9, 1996 between Jesse.Hansen&Co and
the Company. The Company paid Jesse.Hansen&Co $60,000 ($5,000 per month) in
fiscal 1999 for advisory services rendered.
Laurence B. Mindel, a member of the compensation committee, is also the
chairman of Il Fornaio (America) Corporation, from which we purchased $333,069
of pastries and other food products in 1999.
12. NET INCOME (LOSS) PER SHARE
The following table summarizes the differences between basic weighted average
shares outstanding and diluted weighted average shares outstanding used to
compute diluted net income (loss) per share (in thousands):
<TABLE>
<CAPTION>
Six Months
Fiscal Years Ended Ended
---------------------------------- ---------------
December 28, January 3, January 2, July 4, July 2,
1997 1999 2000 1999 2000
------------ ---------- ---------- ------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Basic weighted average
shares outstanding........ 2,249 2,274 2,317 2,304 2,333
Incremental shares from
assumed exercise of stock
options and warrants...... 102 235 -- 200 --
Incremental shares from
assumed conversion of
preferred stock........... 471 471 -- 471 --
----- ----- ----- ----- -----
Diluted weighted average
shares outstanding........ 2,822 2,980 2,317 2,975 2,333
===== ===== ===== ===== =====
</TABLE>
The number of incremental shares from the assumed exercise of stock options
and warrants was calculated applying the treasury stock method.
Pro forma net loss per share assumes conversion of preferred stock into
common stock.
13. SEGMENT INFORMATION
The Company operates in three reportable segments: retail, online and mail
order and specialty sales. Retail store operations consist of sales of whole
bean coffee, beverages, tea and related products through company-operated
retail stores. Online and mail order operations consists primarily of sales of
whole bean coffee shipped directly to the consumer. Specialty sales consist of
whole bean coffee sales through grocery, wholesale and coffee accounts.
Management evaluates segment performance primarily based on revenue and
earnings from operations. For each segment, income before taxes excludes
unallocated general and administrative expenses, marketing expenses and
interest expense. Identifiable assets by segment are those assets used in the
Company's operations in each segment. Unallocated assets include cash, coffee
inventory in the warehouse, corporate headquarter assets and intangibles and
other assets.
F-16
<PAGE>
PEET'S COFFEE & TEA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table presents information by operating segment (in thousands):
<TABLE>
<CAPTION>
Online and Specialty
Retail Mail order Sales Unallocated Total
------- ---------- --------- ----------- -------
<S> <C> <C> <C> <C> <C>
Year ended December 28, 1997:
Net sales................................... $40,469 $6,132 $4,131 $ $50,732
Income before income taxes.................. 4,957 1,924 475 (6,766) 590
Assets...................................... 11,839 91 282 13,512 25,724
Year ended January 3, 1999:
Net sales................................... 49,389 7,145 2,151 58,685
Income before income taxes.................. 6,145 3,079 337 (9,151) 410
Assets...................................... 13,004 106 373 16,381 29,864
Year ended January 2, 2000:
Net sales................................... 57,164 8,159 2,484 67,807
Income before income taxes.................. 6,421 3,809 721 (11,079) (128)
Assets...................................... 17,206 975 422 16,047 34,650
Six months ended July 4, 1999:
Net sales................................... 26,398 3,807 989 31,194
Income before income taxes.................. 3,405 1,706 262 (5,137) 236
Assets...................................... 13,467 191 401 19,269 33,328
Six months ended July 2, 2000:
Net sales................................... 32,647 4,448 2,076 39,171
Income before income taxes.................. 3,298 1,635 349 (8,412) (3,130)
Assets...................................... 17,597 883 347 17,155 35,982
</TABLE>
14. SUBSEQUENT EVENT
On September 1, 2000, the Company entered into a new credit facility with
General Electric Capital Corporation, which replaced the $20,000,000 credit
facility with a bank. This new credit facility has a five-year term and
provides for a line of credit up to $15,000,000, a Term A Loan for $7,000,000
amortized for five years and a Term B Loan for $8,000,000 interest only for
eighteen months with principle due on February 28, 2002. The revolving line of
credit also provides for the issuance of up to $3.0 million in letters of
credit. Total availability under this facility is determined by subtracting the
Company's funded debt (less the outstanding balance on its Term B loan) from
the Company's trailing twelve month Earnings Before Interest, Taxes,
Depreciation and Amortization ("EBITDA") multiplied by 3.75 for the period
before September 1, 2001, 3.5 for the period after September 1, 2001 and before
September 1, 2002, and 3.25 thereafter. Outstanding advances under the Term A
loan and revolving credit facility bear interest at either, at the Company's
option, (i) "LIBOR," a floating rate based on the reserve adjusted London
Interbank Offered Rate for the one, two, or three month period selected plus
3.00% or (ii) an "Index" rate, a floating rate based on the higher of prime or
50 basis points over the average of the rates on overnight federal funds
transactions plus 1.25%. The Term B loan has the same interest alternatives;
however, the spread is 7.00% for the LIBOR alternative and 5.25% for the Index
rate alternative. LIBOR interest on advances under the term loans and revolving
line of credit is payable on the last day of the applicable LIBOR period and
Index Option interest on advances under the term loans and revolving line of
credit is payable monthly. Borrowings under the credit facility are secured by
substantially all of the Company's assets. The credit facility contains
monthly, quarterly and annual financial covenants which require the Company to
maintain a minimum EBITDA and fixed charge coverage ratio. In addition, the
credit facility contains restrictions on the Company's ability to make capital
expenditures, incur additional indebtedness and lease obligations, pay
dividends and make other distributions to shareholders, and acquire and retire
its common stock and make investments. The credit facility also limits the
number of retail stores the Company is allowed to open.
******
F-17
<PAGE>
[INSIDE BACK COVER]
[description of graphic]
<PAGE>
[LOGO]
Until , 2000 (25 days after the date of this offering), all dealers
that effect transactions in these securities, whether or not participating in
this offering, may be required to deliver a prospectus. This is in addition to
the dealers' obligation to deliver a prospectus when acting as underwriters and
with respect to their unsold allotments or subscriptions.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table indicates the expenses to be incurred in connection with
the offering described in this Registration Statement, all of which will be
paid by us. All amounts are estimates, other than the registration fee, the
NASD filing fee and the Nasdaq National Market listing fee.
<TABLE>
<S> <C>
SEC registration fee............................................. $ 14,026
NASD filing fee.................................................. 5,813
Nasdaq National Market listing fee............................... 64,375
Accounting fees and expenses..................................... 400,000
Legal fees and expenses.......................................... 700,000
Printing and engraving expenses.................................. 300,000
Transfer agent fees and expenses................................. 15,000
Blue sky fees and expenses....................................... 25,000
Miscellaneous fees and expenses.................................. 25,000
----------
Total.......................................................... $1,549,214
==========
</TABLE>
Item 14. Indemnification of Directors and Officers.
Sections 23B.08.500 through 23.B.08.600 of the Washington Business
Corporation Act (the "WBCA") authorize a court to award, or a corporation's
board of directors to grant, indemnification to directors and officers on terms
sufficiently broad to permit indemnification under certain circumstances for
liabilities arising under the Securities Act of 1933, as amended (the
"Securities Act"). The directors and officers of Peet's also may be indemnified
against liability they may incur for serving in that capacity pursuant to a
liability insurance policy maintained by Peet's for such purpose.
Section 23B.08.320 of the WBCA authorizes a corporation to limit a director's
liability to the corporation or its shareholders for monetary damages for acts
or omissions as a director, except in certain circumstances involving
intentional misconduct, knowing violations of law or illegal corporate loans or
distributions, or any transaction from which the director personally receives a
benefit in money, property or services to which the director is not legally
entitled. Section of Peet's Amended and Restated Articles of Incorporation
(Exhibit 3.6 hereto) contains provisions implementing, to the fullest extent
permitted by Washington law, such limitations on a director's liability to
Peet's and its shareholders.
Peet's has entered into certain indemnification agreements with its directors
and certain of its officers. The indemnification agreements provide Peet's
directors and certain of its officers with indemnification to the maximum
extent permitted by the WBCA.
The Underwriting Agreement (Exhibit 1.1 hereto) provides for indemnification
by the Underwriters of Peet's and its executive officers and directors and by
Peet's of the Underwriters, for certain liabilities, including liabilities
arising under the Securities Act, in connection with matters specifically
provided in writing by the Underwriters for inclusion in this Registration
Statement.
Item 15. Recent Sales of Unregistered Securities.
Since October 13, 1997, we have issued options to purchase an aggregate of
827,160 shares of common stock under the 1993 Stock Option Plan, the 1994
California Stock Option Plan and the 1997 Equity Incentive Plan, of which
133,320 have been exercised at exercise prices ranging from $6.00 to $6.38 per
share.
There were no underwriters employed in connection with any of these
issuances. These issuances were deemed exempt from registration under the
Securities Act in reliance on Section 4(2) or Rule 701 promulgated
II-1
<PAGE>
thereunder as transactions pursuant to compensatory benefit plans and contracts
relating to compensation. The recipients in each such issuance represented
their intention to acquire the securities for investment only and not with a
view to or for sale in connection with any distribution thereof and appropriate
legends were affixed to the share certificates and other instruments issued in
such transactions. All recipients either received adequate information about
Peet's or had access, through employment or other relationships, to such
information.
Item 16. Exhibits and Financial Statement Schedules.
a. Exhibits
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.*
3.1 Restated Articles of Incorporation dated September 12, 1994.*
3.2 Articles of Amendment dated October 25, 1994.*
3.3 Articles of Amendment dated November 10, 1994.*
3.4 Articles of Amendment dated October 12, 2000.*
3.5 Articles of Amendment dated October 12, 2000.*
3.6 Form of Amended and Restated Articles of Incorporation.*
3.7 Restated Bylaws.*
3.8 Form of Amended and Restated Bylaws.*
4.1 Specimen common stock certificate.*
5.1 Opinion of Cooley Godward LLP with respect to the common stock being
registered.*
10.1 Credit Agreement, dated as of September 1, 2000, among Peet's Coffee
and Tea, Inc., Peet's Companies, Inc., Peet's Trademark Company and
General Electric Capital Corporation.*
10.2 Letter Agreement dated October 11, 2000 among Peet's Coffee and Tea,
Inc., Peet's Companies, Inc., Peet's Trademark Company and General
Electric Capital Corporation.*
10.3 First Amendment to Credit Agreement dated as of October , 2000 among
Peet's Operating Company, Inc. (formerly Peet's Coffee and Tea,
Inc.), Peet's Coffee & Tea, Inc. (formerly Peet's Companies, Inc.),
Peet's Trademark Company and General Electric Capital Corporation.*
10.4 Loan Agreement, dated as of December 1, 1995, by and between
California Statewide Communities Development Authority and Peet's
Coffee and Tea, Inc.*
10.5 Amended and Restated 1993 Stock Option Plan.*
10.6 1994 California Stock Option Plan.*
10.7 1997 Equity Incentive Plan.*
10.8 Peet's Operating Company, Inc. Savings and Retirement Plan.*
10.9 Form of 2000 Equity Incentive Plan.*
10.10 Form of 2000 Non-Employee Director Plan.*
10.11 Form of 2000 Employee Stock Purchase Plan.*
10.12 Peet's Operating Company, Inc. Key Employee Severance Benefit Plan.*
10.13 Change of Control Option Acceleration Plan.*
10.14 Form of Stock Option Agreement.*
10.15 Warrant to Purchase 100,000 Shares of Common Stock of Registrant
issued by Registrant to Jesse.Hansen&Co. (formerly HWJesse & Co.)
dated May 23, 1997.*
10.16 Advisory Engagement Letter dated December 9, 1996, between Peet's
Operating Company, Inc. and Jesse.Hansen&Co.*
10.17 Peet's Operating Company, Inc. Key Employment Agreement for Chairman
dated as of January 4, 1999.*
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<C> <S>
10.18 Peet's Operating Company, Inc. Key Employment Agreement for Chief
Executive Officer dated as of January , 2000.*
10.19 Peet's Operating Company, Inc. Key Employment Agreement for Vice
President, Coffee dated as of January , 2000.*
10.20 Peet's Operating Company, Inc. Key Employment Agreement for Chief
Financial Officer dated as of January 4, 1999.*
10.21 Peet's Operating Company, Inc. Key Employment Agreement for Vice
President, Marketing dated as of January 4, 1999.*
21.1 Subsidiaries of the registrant.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Cooley Godward LLP (included at Exhibit 5.1).*
24.1 Power of Attorney (included in signature pages).
27.1 Financial Data Schedule.
</TABLE>
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* To be filed by amendment.
Item 17. Undertakings.
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, and controlling persons of the
registrant pursuant to the provisions described in Item 14, or otherwise, the
registrant has been informed that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer, or controlling
person of the registrant in the successful defense of any action, suit, or
proceeding) is asserted by such director, officer, or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against pubic policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant under Rule 424(b)(1) or (4) or 497(h) under
the Securities Act shall be deemed to be part of this registration statement as
of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bonafide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Emeryville, State of
California, on October 13, 2000.
PEET'S COFFEE & TEA, INC.
/s/ Christopher P. Mottern
By: _________________________________
Christopher P. Mottern
President and Chief Executive
Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints
Christopher P. Mottern and Mark N. Rudolph, each acting alone, as his true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all amendments (including post-effective amendments)
to this Registration Statement on Form S-1, and to sign any registration
statement filed under Rule 462 under the Securities Act of 1933 (including
post-effective amendments thereto), and to file the same, with all exhibits
thereto, and all documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorney-in-fact and agent, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact and agent, or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Christopher P. Mottern President, Chief Executive October 13, 2000
______________________________________ Officer and Director
Christopher P. Mottern (Principal Executive Officer)
/s/ Mark N. Rudolph Senior Vice President, Chief October 13, 2000
______________________________________ Financial Officer and
Mark N. Rudolph Assistant Secretary (Principal
Financial and Accounting
Officer)
/s/ Gerald A. Baldwin Director October 13, 2000
______________________________________
Gerald A. Baldwin
/s/ Gordon A. Bowker Director October 13, 2000
______________________________________
Gordon A. Bowker
/s/ Laurence B. Mindel Director October 13, 2000
______________________________________
Laurence B. Mindel
/s/ H. William Jesse, Jr. Director October 13, 2000
______________________________________
H. William Jesse, Jr.
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.*
3.1 Restated Articles of Incorporation dated September 12, 1994.*
3.2 Articles of Amendment dated October 25, 1994.*
3.3 Articles of Amendment dated November 10, 1994.*
3.4 Articles of Amendment dated October 12, 2000.*
3.5 Articles of Amendment dated October 12, 2000.*
3.6 Form of Amended and Restated Articles of Incorporation.*
3.7 Restated Bylaws.*
3.8 Form of Amended and Restated Bylaws.*
4.1 Specimen common stock certificate.*
5.1 Opinion of Cooley Godward LLP with respect to the common stock being
registered.*
10.1 Credit Agreement, dated as of September 1, 2000, among Peet's Coffee
and Tea, Inc., Peet's Companies, Inc., Peet's Trademark Company and
General Electric Capital Corporation.*
10.2 Letter Agreement dated October 11, 2000 among Peet's Coffee and Tea,
Inc., Peet's Companies, Inc., Peet's Trademark Company and General
Electric Capital Corporation.*
10.3 First Amendment to Credit Agreement dated as of October , 2000 among
Peet's Operating Company, Inc. (formerly Peet's Coffee and Tea,
Inc.), Peet's Coffee & Tea, Inc. (formerly Peet's Companies, Inc.),
Peet's Trademark Company and General Electric Capital Corporation.*
10.4 Loan Agreement, dated as of December 1, 1995, by and between
California Statewide Communities Development Authority and Peet's
Coffee and Tea, Inc.*
10.5 Amended and Restated 1993 Stock Option Plan.*
10.6 1994 California Stock Option Plan.*
10.7 1997 Equity Incentive Plan.*
10.8 Peet's Operating Company, Inc. Savings and Retirement Plan.*
10.9 Form of 2000 Equity Incentive Plan.*
10.10 Form of 2000 Non-Employee Director Plan.*
10.11 Form of 2000 Employee Stock Purchase Plan.*
10.12 Peet's Operating Company, Inc. Key Employee Severance Benefit Plan.*
10.13 Change of Control Option Acceleration Plan.*
10.14 Form of Stock Option Agreement.*
10.15 Warrant to Purchase 100,000 Shares of Common Stock of Registrant
issued by Registrant to Jesse.Hansen&Co. (formerly HWJesse & Co.)
dated May 23, 1997.*
10.16 Advisory Engagement Letter dated December 9, 1996, between Peet's
Operating Company, Inc. and Jesse.Hansen&Co.*
10.17 Peet's Operating Company, Inc. Key Employment Agreement for Chairman
dated as of January 4, 1999.*
10.18 Peet's Operating Company, Inc. Key Employment Agreement for Chief
Executive Officer dated as of January , 2000.*
10.19 Peet's Operating Company, Inc. Key Employment Agreement for Vice
President, Coffee dated as of January , 2000.*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<C> <S>
10.20 Peet's Operating Company, Inc. Key Employment Agreement for Chief
Financial Officer dated as of January 4, 1999.*
10.21 Peet's Operating Company, Inc. Key Employment Agreement for Vice
President, Marketing dated as of January 4, 1999.*
21.1 Subsidiaries of the registrant.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Cooley Godward LLP (included at Exhibit 5.1).*
24.1 Power of Attorney (included in signature pages).
27.1 Financial Data Schedule.
</TABLE>
--------
* To be filed by amendment.
