Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 27, 2009

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________to __________________

Commission file number: 0-32233

PEET’S COFFEE & TEA, INC.

(Exact Name of Registrant as Specified in Its Charter)

Washington		91-0863396
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

1400 Park Avenue

Emeryville, California 94608-3520

(Address of Principal Executive Offices)(Zip Code)

(510) 594-2100

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o .

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every

Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

Large Accelerated Filer o	Accelerated Filer x
Non-Accelerated Filer o	Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes o No x

As of October 30, 2009 12,995,078 shares of registrant’s Common Stock were outstanding.

	INDEX	Page

PART I	FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosure About Market Risk	19
Item 4.	Controls and Procedures	19

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	20
Item 1A.	Risk Factors	20
Item 6.	Exhibits	21
	Signatures	22

PART I – FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

PEET’S COFFEE & TEA, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands, except share amounts)

	September 27,		December 28,
	2009		2008

ASSETS

Current assets
Cash and cash equivalents	$	16,966	$	4,719
Short-term marketable securities		4,232		8,600
Accounts receivable, net		10,682		11,924
Inventories		30,564		26,124
Deferred income taxes - current		2,907		2,922
Prepaid expenses and other		8,029		7,193
Total current assets		73,380		61,482

Property, plant and equipment, net		106,900		107,914
Deferred income taxes - non current		3,146		3,059
Other assets, net		2,764		3,897

Total assets	$	186,190	$	176,352

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities
Accounts payable and other accrued liabilities	$	8,811	$	9,858
Accrued compensation and benefits		9,568		8,852
Deferred revenue		4,759		6,350
Total current liabilities		23,138		25,060

Deferred lease credits		7,264		6,645
Other long-term liabilities		950		740
Total liabilities		31,352		32,445

Shareholders' equity
Common stock, no par value; authorized 50,000,000 shares;
issued and outstanding:12,983,000 and 13,174,000 shares		88,320		90,123
Accumulated other comprehensive income		3,838		34
Retained earnings		62,680		53,750

Total shareholders' equity		154,838		143,907

Total liabilities and shareholders' equity	$	186,190	$	176,352

See notes to consolidated financial statements.

PEET’S COFFEE & TEA, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited, in thousands, except per share amounts)

	Thirteen weeks ended					Thirty-nine weeks ended
	September 27,			September 28,		September 27,		September 28,
	2009			2008		2009		2008

Retail stores	$	47,863		$	45,911	$	144,686	$	136,829
Specialty sales		26,042			22,575		74,889		68,847
Net revenue		73,905			68,486		219,575		205,676

Cost of sales and related occupancy expenses		34,291			32,249		99,812		96,478
Operating expenses		26,052			24,715		76,804		72,934
General and administrative expenses		5,770			5,237		17,782		16,233
Depreciation and amortization expenses		3,962			3,150		11,200		9,395
Total costs and expenses from operations		70,075			65,351		205,598		195,040

Income from operations		3,830			3,135		13,977		10,636

Interest (expense) income, net		(15	)		130		111		636

Income before income taxes		3,815			3,265		14,088		11,272

Income tax provision		1,346			1,247		5,158		4,127

Net income	$	2,469		$	2,018	$	8,930	$	7,145

Net income per share:
Basic	$	0.19		$	0.15	$	0.69	$	0.52
Diluted	$	0.19		$	0.15	$	0.67	$	0.51

Shares used in calculation of net income per share:
Basic		12,976			13,603		12,977		13,825
Diluted		13,343			13,899		13,267		14,111

See notes to consolidated financial statements.

PEET’S COFFEE & TEA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

	Thirty-nine weeks ended
	September 27,			September 28,
	2009			2008

Cash flows from operating activities:
Net income	$	8,930		$	7,145
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization		12,790			11,025
Amortization of interest purchased		36			157
Stock-based compensation		2,277			1,962
Excess tax benefit from exercise of stock options		(275	)		(384	)
Tax benefit from exercise of stock options		119			246
Loss on disposition of assets and asset impairment		184			216
Deferred income taxes		(72	)		366
Changes in other assets and liabilities:
Accounts receivable, net		1,242			(1,355	)
Inventories		(4,440	)		(5,215	)
Prepaid expenses and other current assets		(836	)		(5,521	)
Other assets		185			(81	)
Accounts payable, accrued liabilities and deferred revenue		(1,904	)		872
Deferred lease credits and other long-term liabilities		829			1,605
Net cash provided by operating activities		19,065			11,038

Cash flows from investing activities:
Purchases of property, plant and equipment		(11,908	)		(20,430	)
Proceeds from sales of property, plant and equipment		-			67
Changes in restricted investments		878			-
Proceeds from sales and maturities of marketable securities		8,507			5,597
Purchases of marketable securities		(371	)		(917	)
Net cash used in investing activities		(2,894	)		(15,683	)

Cash flows from financing activities:
Net proceeds from issuance of common stock		2,365			2,855
Purchase of common stock		(6,564	)		(10,017	)
Excess tax benefit from exercise of stock options		275			384
Net cash used in financing activities		(3,924	)		(6,778	)

Increase (decrease) in cash and cash equivalents		12,247			(11,423	)
Cash and cash equivalents, beginning of period		4,719			15,312

Cash and cash equivalents, end of period	$	16,966		$	3,889

Non-cash investing activities:
Capital expenditures incurred, but not yet paid	$	716		$	1,135
Other cash flow information:
Cash paid for income taxes		5,023			7,670

See notes to consolidated financial statements.

Peet’s Coffee & Tea, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

1.	Basis of Presentation

The accompanying consolidated financial statements of Peet’s Coffee & Tea, Inc. and its subsidiaries (collectively, the “Company” or “Peet’s”) as of September 27, 2009 and for the thirteen and thirty-nine weeks ended September 27, 2009 and September 28, 2008 are unaudited and, in the opinion of management, contain all adjustments, consisting only of normal recurring items necessary to present fairly the financial position and results of operations for such periods. The information included in this Quarterly Report on Form 10-Q (this “Form 10-Q”) should be read in conjunction with the Company’s annual consolidated financial statements in Peet’s Annual Report on Form 10-K for the year ended December 28, 2008 (the “2008 Form 10-K”).

The results of operations for the thirteen and thirty-nine weeks ended September 27, 2009 are not necessarily indicative of the results expected for the full year.

We evaluated all subsequent events that occurred after the balance sheet date through the date and time our financial statements were issued on November 6, 2009. See Note 9.

Recently Adopted Accounting Pronouncements:

The FASB Accounting Standards Codification became the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities effective for financial statements that cover interim and annual periods ending after September 15, 2009. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The Codification supersedes all then-existing non-SEC accounting and reporting standards. This standard did not have a material impact on our consolidated financial statements upon adoption.

On June 29, 2009, we adopted authoritative guidance issued by the Financial Accounting Standards Board (“FASB”) on business combinations. The guidance retains the fundamental requirements that the acquisition method of accounting (previously referred to as the purchase method of accounting) be used for all business combinations, but requires a number of changes, including changes in the way assets and liabilities are recognized and measured as a result of business combinations. It also requires the capitalization of in-process research and development at fair value and requires the expensing of acquisition-related costs as incurred. The adoption of this SFAS did not have a material impact on our consolidated financial statements.

Comprehensive Income

For the thirteen weeks ended September 27, 2009 and September 28, 2008, comprehensive income was $2,052,000 and $1,951,000, respectively. For the thirty-nine weeks ended September 27, 2009 and September 28, 2008, comprehensive income was $12,735,000 and $7,112,000, respectively. Comprehensive income consists of net income and net unrealized gains and losses on investments.

Net Income per Share

Basic net income per share is computed as net income divided by the weighted average number of common shares outstanding for the period. Diluted net income per share reflects the potential dilution that could occur from common shares issued through stock options. Anti-dilutive shares of 1,234,399 and 1,311,586 have been excluded from diluted weighted average shares outstanding for the thirteen week periods ended September 27, 2009 and September 28, 2008, respectively, and 1,389,932 and 1,226,647 for the thirty-nine week periods, respectively.

The number of incremental shares from the assumed exercise of stock options was calculated by applying the treasury stock method. The following table summarizes the differences between basic weighted average shares outstanding and diluted weighted average shares outstanding used to compute diluted net income per share (in thousands):

	Thirteen weeks				Thirty-nine weeks
	September 27,		September 28,		September 27,		September 28,
	2009		2008		2009		2008

Basic weighted average shares
outstanding		12,976		13,603		12,977		13,825
Incremental shares from assumed
exercise of stock options		367		296		290		286
Diluted weighted average shares
outstanding		13,343		13,899		13,267		14,111

2.	Fair Value Measurements

The Company adopted a single authoritative definition of fair value, a framework for measuring fair value and expanded disclosure of fair value measurements for financial assets and liabilities as of the beginning of the 2008 fiscal year. The impact of adoption was not significant. Effective December 29, 2008, the Company adopted the remaining provisions of the authoritative guidance relating to nonfinancial assets and liabilities. The adoption of the remaining provisions as it relates to nonfinancial assets and liabilities did not have a material impact on our financial position or results of operations.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Financial assets and liabilities are categorized based on the inputs used to calculate their fair values as follows:

Level 1 - Quoted prices in active markets for identical assets or liabilities.

Level 2 - Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable.

Level 3 - Unobservable inputs that are supported by little or no market activity, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing.

The Company uses the market approach, as defined as Level 1 in the fair value hierarchy, to measure fair value for its financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. Assets measured at fair value on a recurring basis are summarized below (in thousands):

	September 27,
	2009
Short-term available-for-sale securities	$	4,232
Restricted cash (included in other assets, net)		2,448
	$	6,680

Short-term available-for-sale securities include equity securities and interest-bearing, U.S. government, agency, and municipal securities. Unrealized gains or losses on marketable securities are recorded in accumulated other comprehensive income at each measurement date.

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

The Company measures certain non-financial assets and liabilities, including long-lived assets, at fair value on a non-recurring basis. During the 13 weeks ended September 27, 2009, the Company recorded a charge of approximately $130,000 related to the impairment of assets at an under-performing store. The fair market value of these assets was determined using the income approach and Level 3 inputs, which required management to make estimates about future cash flows. Management estimates the amount and timing of future cash flows based on its experience and knowledge of the retail market in which each store operates. This impairment charge is included in operating expenses in the accompanying consolidated statements of income. The Company was not required to measure any other significant non-financial assets and liabilities at fair value.

3.	Inventories

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

	September 27,		December 28,
	2009		2008
Green coffee	$	20,188	$	17,732
Other inventory		10,376		8,392
Total	$	30,564	$	26,124

4.	Stock Purchase Program

On September 6, 2006, the Company's Board of Directors authorized the Company to purchase up to one million shares of Peet’s common stock, with no expiration, and the Company announced its plan on September 12, 2006 on Form 8-K. No share purchases were made during the thirteen weeks ended September 27, 2009. During the thirty-nine weeks ended September 27, 2009, the Company purchased and retired 58,759 shares of common stock, at an average price of $20.38, in accordance with this stock purchase program. No shares remain available for purchase under this stock purchase program.

On October 27, 2008, the Board of Directors approved another stock purchase program providing for the additional purchase of up to one million shares of the Company’s common stock, with no deadline for completion and the Company announced its plan on October 28, 2008 on Form 8-K. No share purchases were made during the thirteen weeks ended September 27, 2009. During the thirty-nine weeks ended September 27, 2009, the Company purchased and retired 264,112 shares of common stock, at an average price of $20.32 in accordance with this stock purchase program. 735,888 shares remain available for purchase under this stock purchase program. Purchases under this stock purchase program would be made from time to time on the open market at prevailing market prices or in negotiated transactions off the market.

5.	Stock-Based Compensation

Stock Option Plans

The Company maintains several equity incentive plans under which it may currently grant non-qualified stock options to employees and non-employee directors.

Changes in stock options were as follows:

						Weighted Average		Aggregate
				Weighted Average		Remaining		Intrinsic
	Options			Exercise Price		Contractual		Value
	Outstanding			Per Share		Life (Years)		(in thousands)

Outstanding at December 28, 2008		2,696,019		$	21.68		5.82	$	8,753
Granted		382,014			26.28
Canceled		(100,223	)		25.34
Exercised		(80,784	)		17.52
Oustanding at September 27, 2009		2,897,026		$	22.28		5.74	$	16,883
Vested or expected to vest, September 27, 2009		2,738,769		$	22.11		5.61	$	16,511
Exercisable at September 27, 2009		1,918,009		$	20.07		4.41	$	15,231

Stock-Based Compensation

Stock-based compensation expense consists of and was recognized in the consolidated statements of income as follows (in thousands):

	Thirteen weeks ended				Thirty-nine weeks ended
	September 27,		September 28,		September 27,		September 28,
	2009		2008		2009		2008

Stock-based compensation expense	$	731	$	577	$	2,125	$	1,767
Employee Stock Purchase Plan expense		37		88		152		195
Total	$	768	$	665	$	2,277	$	1,962

Tax benefit	$	305	$	271	$	924	$	800

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

	Stock Options
	September 27, 2009			September 28, 2008
Expected term (in years)		5.7			5.2
Expected stock price volatility		37.6	%		34.3	%
Risk-free interest rate		2.9	%		3.7	%
Expected dividend yield		0	%		0	%

Estimated fair value per option granted	$	10.57		$	8.82

6.	Line of Credit

On November 26, 2008, the Company entered into a credit agreement with Wells Fargo Bank, National Association ( “Wells Fargo”). The credit agreement provides for a $25 million revolving line of credit, the proceeds of which may be used in the general course of business, including to fund working capital, capital expenditures, share repurchases and other needs of the Company.

Through September 27, 2009, there were no borrowings under this agreement. Total unused borrowing capacity under the credit agreement was $25.0 million as of September 27, 2009. See Note 9.

7.	Legal Proceedings

On July 14, 2008, a complaint was filed against Peet’s Coffee & Tea, Inc. in California Superior Court, Alameda County, by three former employees on behalf of themselves and all other California store managers. The complaint alleges that store managers based in California were not paid overtime wages, were not provided meal or rest periods, were not provided accurate wage statements and were not reimbursed for business expenses. The plaintiffs seek injunctive relief, monetary damages, penalties, costs and attorneys’ fees, and prejudgment interest. On October 8, 2008, the Company filed an answer denying the allegations set forth in the complaint and asserting a number of affirmative defenses thereto. On November 12, 2008, the plaintiffs filed an amended complaint asserting an additional claim for penalties. On November 26, 2008, the Company filed an answer thereto denying the allegations in the first amended complaint and asserting a number of affirmative defenses thereto. At this time, it is not feasible to predict the outcome of or a range of loss, should a loss occur, from this proceeding. The Company intends to vigorously defend against the litigation.

We may from time to time become involved in certain legal proceedings in the ordinary course of business. The Company is not a party to any other legal proceedings that management believes may have a material adverse effect on the financial position or results of operations of the Company.

8.	Segment Information

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

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

	Retail					Specialty					Unallocated			Total
			Percent					Percent									Percent
			of Net					of Net									of Net
	Amount		Revenue			Amount		Revenue						Amount			Revenue

For the thirteen weeks ended September 27, 2009
Net revenue	$	47,863		100.0	%	$	26,042		100.0	%				$	73,905			100.0	%
Cost of sales and occupancy		21,179		44.2	%		13,112		50.3	%					34,291			46.4	%
Operating expenses		20,488		42.8	%		5,564		21.4	%					26,052			35.3	%
Depreciation and amortization		2,907		6.1	%		463		1.8	%	$	592			3,962			5.4	%
Segment operating income		3,289		6.9	%		6,903		26.5	%		(6,362	)		3,830			5.2	%
Interest income												(15	)		(15	)
Income before income taxes															3,815
Total assets		54,955					4,428					47,517			106,900
Capital expenditures		1,464					98					1,493			3,055

For the thirteen weeks ended September 28, 2008
Net revenue	$	45,911		100.0	%	$	22,575		100.0	%				$	68,486			100.0	%
Cost of sales and occupancy		21,130		46.0	%		11,119		49.3	%					32,249			47.1	%
Operating expenses		19,940		43.4	%		4,775		21.2	%					24,715			36.1	%
Depreciation and amortization		2,357		5.1	%		372		1.6	%	$	421			3,150			4.6	%
Segment operating income		2,484		5.4	%		6,309		27.9	%		(5,658	)		3,135			4.6	%
Interest income												130			130
Income before income taxes															3,265
Total assets		59,800					14,854					106,667			181,321
Capital expenditures		2,204					621					2,663			5,487

For the thirty-nine weeks ended September 27, 2009
Net revenue	$	144,686		100.0	%	$	74,889		100.0	%				$	219,575			100.0	%
Cost of sales and occupancy		62,930		43.5	%		36,882		49.2	%					99,812			45.5	%
Operating expenses		60,417		41.8	%		16,387		21.9	%					76,804			35.0	%
Depreciation and amortization		8,449		5.8	%		1,325		1.8	%	$	1,426			11,200			5.1	%
Segment operating income		12,890		8.9	%		20,295		27.1	%		(19,208	)		13,977			6.4	%
Interest income												111			111
Income before income taxes															14,088
Total assets		54,955					4,428					47,517			106,900
Capital expenditures		5,235					828					5,845			11,908

For the thirty-nine weeks ended September 28, 2008
Net revenue	$	136,829		100.0	%	$	68,847		100.0	%				$	205,676			100.0	%
Cost of sales and occupancy		62,191		45.5	%		34,287		49.8	%					96,478			46.9	%
Operating expenses		58,791		43.0	%		14,143		20.5	%					72,934			35.5	%
Depreciation and amortization		7,244		5.3	%		1,029		1.5	%	$	1,122			9,395			4.6	%
Segment operating income		8,603		6.3	%		19,388		28.2	%		(17,355	)		10,636			5.2	%
Interest income												636			636
Income before income taxes															11,272
Total assets		59,800					14,854					106,667			181,321
Capital expenditures		10,057					1,605					8,769			20,431

9.	Subsequent Events

On November 2, 2009, the Company, Marty Acquisition Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of the Company (“Acquisition Sub”), and Diedrich Coffee, Inc., a Delaware corporation (“Diedrich”), entered into a definitive Agreement and Plan of Merger (the “Merger Agreement”) that contemplates the acquisition by the Company, through Acquisition Sub, of all of the outstanding common stock of Diedrich for a total purchase price of $214.0 million, including approximately $70.0 million in Peet’s common stock and $144.0 million in cash, of which approximately $124.0 million is expected to be funded with debt. The Merger Agreement contemplates a two-step transaction comprised of a combination cash and stock exchange offer for all of the issued and outstanding shares of Diedrich common stock (the “Offer”), followed by a merger of Acquisition Sub with and into Diedrich (the “Merger”). In the Offer, the Company will deliver a combination of $17.33 in cash (the “Cash Component”) and a fraction of a share of the Company’s common stock having a numerator equal to $8.67 and a denominator equal to the Parent Average Stock Price (as defined in the Merger Agreement), provided that in no event will such fraction of a share exceed 0.315 of a share of the Company’s common stock, all of the foregoing cash and stock in exchange for each share of Diedrich common stock validly tendered in the Offer (and not withdrawn), subject to adjustment for stock splits, stock dividends and similar events. In addition, upon the acquisition by Acquisition Sub of shares of Diedrich common stock tendered in the Offer, all outstanding warrants and options to acquire Diedrich common stock will be converted into a combination of cash and shares of the Company’s common stock based on formulae set forth in the Merger Agreement, and certain of the options will vest in full as a result of the transactions contemplated by the Merger Agreement. (Pursuant to the Merger Agreement Peet’s is defined as the “Parent”.)

The Merger Agreement provides that Acquisition Sub will use commercially reasonable efforts to commence the Offer as promptly as practicable after the date of the Merger Agreement. The obligation of Acquisition Sub to accept for exchange and deliver consideration for shares of Diedrich common stock validly tendered in the Offer (and not withdrawn) is subject to a number of conditions set forth in the Merger Agreement, including (i) that more than 50% of the outstanding shares of Diedrich common stock (determined on a fully-diluted basis based on a formula set forth in the Merger Agreement) have been validly tendered (and not withdrawn) in the Offer and (ii) other conditions set forth in Exhibit B to the Merger Agreement. The obligation under the Merger Agreement of Acquisition Sub to accept for exchange and deliver consideration for shares of Diedrich common stock validly tendered in the Offer (and not withdrawn) is not subject to a financing condition.

The Merger Agreement further provides that, following the consummation of the Offer (and if necessary, the adoption of the Merger Agreement by Diedrich’s stockholders) and subject to the satisfaction or waiver of certain conditions set forth in the Merger Agreement, Acquisition Sub will be merged with and into Diedrich, and Diedrich will become a wholly-owned subsidiary of the Company, and that upon consummation of the Merger, each then-outstanding share of Diedrich common stock held by persons other than the Company and Acquisition Sub, and stockholders of Diedrich who have properly preserved their appraisal rights under applicable law, will be converted into the right to receive the same combination of cash and fraction of a share of the Company’s common stock delivered in the Offer. The respective boards of directors of the Company and Diedrich have approved the Merger Agreement, the Offer and the Merger, and the Diedrich board of directors has agreed to recommend that Diedrich’s stockholders tender all of their outstanding shares of Diedrich common stock into the Offer and if necessary, vote in favor of the adoption of the Merger Agreement.

The Merger Agreement may be terminated by either the Company and Diedrich under certain circumstances set forth in the Merger Agreement, including the failure of the Offer to be consummated on or before March 31, 2010 and the failure of the minimum tender condition to the Offer. If the Merger Agreement is terminated (a) in certain circumstances following the receipt by Diedrich of an alternative acquisition proposal, or (b) as a result of the Diedrich board of directors changing its recommendation in favor of the Offer and the Merger, Diedrich will be obligated to pay a termination fee to the Company.

Also on November 2, 2009, the Company entered into a commitment letter with Wells Fargo and Wells Fargo Securities, LLC (“WFS”), setting forth the material terms and conditions of: (a) a senior secured revolving credit facility in an aggregate amount up to $40.0 million to be provided by Wells Fargo and a syndicate of financial institutions and other institutional lenders (the “Lenders”) to the Company, as borrower; and (b) one or more tranches of term loans in an aggregate amount up to $100.0 million to be provided by the Lenders to the Company, each of which is to be guaranteed by all existing and future subsidiaries of the Company. Wells Fargo and WFS have committed to provide the financing described in the commitment letter through the earliest to occur of (a) consummation of the Offer, (b) termination of the Merger Agreement, (c) April 1, 2010, if the Offer has not been consummated on or prior to March 31, 2010, (d) April 15, 2010, unless the commitment letter is terminated earlier by the Company. The commitment letter provides that the revolving credit facility and term loans would mature five years after the closing of the financing.

The Company intends to use the proceeds from the senior secured credit facilities, together with cash on hand at the Company to finance the Offer and Merger (and may also use the cash on hand at Diedrich to finance the Merger), the costs and expenses related to the Offer and the Merger and the ongoing working capital and other general corporate purposes of the combined organization after consummation of the Merger. The senior credit facilities are subject to the negotiation of mutually acceptable credit or loan agreements and other mutually acceptable definitive documentation, which are expected to include customary representations and warranties, affirmative and negative covenants, provisions for security, mandatory prepayments upon the occurrence of certain events, financial covenants (including maximum total leverage ratio, minimum fixed charged coverage ratio and minimum net income tests) and provisions for events of default. The Lenders’ obligations to provide the financing are subject to the satisfaction of specified conditions, including that more than 50% of the shares of Diedrich common stock (determined on a fully-diluted basis based on a formula set forth in the Merger Agreement) have been validly tendered (and not withdrawn), no material adverse effect having occurred with respect to Diedrich, the absence of debt other than certain permitted debt, the accuracy of specified representations and warranties, compliance with a minimum earnings before interest, taxes, depreciation and rent (“EBITDAR”), requirement and a maximum total leverage ratio after giving effect to the Offer, and other customary conditions. The Company expects the $25 million revolving line of credit discussed in Note 6 to be terminated upon closing of this credit facility.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis in conjunction with our financial statements and related notes included elsewhere in this report. Except for historical information, the discussion in this report contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In some cases, you can identify forward-looking statements by terminology, such as “may,” “should,” “could,” “predict,” “potential,” “continue,” “expect,” “anticipate,” “future,” “intend,” “plan,” “believe,” “estimate,” “forecast” and similar expressions (or the negative of such expressions). The forward-looking statements in this Form 10-Q include, but are not limited to, statements regarding our expectations for the growth of the specialty coffee industry; our planned geographic expansion of our retail presence; our plans to open new retail stores; our plans to expand into new grocery markets; and our expectations for future revenue, margins, expenses, operating results, inventory levels and capital expenditures; and our anticipated working capital needs and the adequacy of our capital resources. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Forward-looking statements reflect our current views with respect to future events, are based on assumptions, and are subject to risks, uncertainties and other important factors. Given these risks, uncertainties and other important factors, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our estimates and assumptions only as of the date of this report. Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future. Important factors that could cause actual results to differ materially include, but are not limited to, the following:

The current recession or a worsening of the United States and global economy could materially adversely affect our business. Our revenues and performance depend significantly on consumer confidence and spending, which have recently deteriorated due to the recession and may remain depressed for the foreseeable future. Some of the factors that could influence the levels of consumer confidence and spending include, without limitation, continuing conditions in the residential real estate and mortgage markets, access to credit, labor and healthcare costs, increases in fuel and other energy costs, consumer confidence and other macroeconomic factors affecting consumer spending behavior. These and other economic factors could have a material adverse effect on demand for our products and on our financial condition and operating results.

Increases in the cost and decreases in availability of high quality Arabica coffee beans could impact our profitability and growth of our business. Although we do not purchase coffee on the commodity markets, price movements in the commodity trading of coffee impact the prices we pay. Coffee is a trade commodity and, in general, its price can fluctuate depending on: weather patterns in coffee-producing countries; economic and political conditions affecting coffee-producing countries; foreign currency fluctuations; the ability of coffee-producing countries to agree to export quotas; and general economic conditions that make commodities more or less attractive investment options. If costs increase and we are unable to pass along increased coffee costs, our margin will decrease and our profitability will decrease accordingly. In addition, if we are not able to purchase sufficient quantities of high quality Arabica beans due to any of the above factors, we may not be able to fulfill the demand for our coffee, our revenue may decrease and our ability to expand our business may be negatively impacted.

Because we have only one roasting facility, a significant interruption in the operation of our roasting and distribution facility could potentially disrupt our operations. A significant interruption in the operation of our roasting and distribution facility, whether as a result of a natural disaster, pandemic or other causes, could significantly impair our ability to operate our business. Since we only roast our coffee to order, we do not carry inventory of roasted coffee in our roasting plant. Therefore, a disruption in service in our roasting facility would impact our sales in our retail and specialty channels almost immediately. Moreover, our roasting and distribution facility and most of our stores are located near several major earthquake faults. The impact of a major earthquake on our facilities, infrastructure and overall operations is difficult to predict and an earthquake could seriously disrupt our entire business.

Complaints or claims by current, former or prospective employees or governmental agencies could adversely affect us. We are subject to a variety of laws and regulations which govern such matters as minimum wages, overtime and other working conditions, various family leave mandates and a variety of other laws enacted, or rules and regulations promulgated, by federal, state and local governmental authorities that govern these and other employment matters. We have been, and in the future may be, the subject of complaints or litigation from current, former or prospective employees or governmental agencies. In addition, successful complaints against our competitors may spur similar lawsuits against us. For instance, in 2003, two lawsuits (which have since been settled) were filed against the Company alleging misclassification of employment position and sought damages, restitution, reclassification and attorneys’ fees and costs. In addition, on July 14, 2008, a complaint was filed alleging that store managers based in California were not paid overtime wages, were not provided meal or rest periods, were not provided accurate wage statements and were not reimbursed for business expenses. These types of claims and litigation involving current, former or prospective employees could divert our management’s time and attention from our business operations and might potentially result in substantial costs of defense, settlement or other disposition, which could have a material adverse effect on our results of operations in one or more fiscal periods.

For a discussion of additional material risks and uncertainties that the Company faces, see the discussion in the 2008 Form 10-K titled “Risk Factors.” In addition, we may face additional risks in connection with our pending acquisition of Diedrich Coffee, Inc. For a discussion of the risks in connection with the pending acquisition, see the additional risk factors set forth in Item 1A of this quarterly report on Form 10-Q.

Company Overview and Industry Outlook

Peet’s is a specialty coffee roaster and marketer of fresh, deep-roasted whole bean coffee and tea sold through multiple channels of distribution for home and away-from-home enjoyment. Founded in Berkeley, California in 1966, Peet's has established a loyal customer base with strong brand awareness in California. Our growth strategy is based on the sale of whole bean coffee, tea and high-quality beverages in multiple channels of distribution including our own retail stores, grocery, home delivery, and foodservice and office accounts throughout the United States.

As we grow, we expect our operations to continue to be vertically integrated, allowing us to control the quality of our product at all stages. We purchase high quality Arabica coffee beans from countries around the world, and we use our artisan-roasting technique to bring out the distinctive flavor of our coffees. Because roasted coffee is perishable, we are committed to delivering our coffee under the strictest freshness standards. As a result, we do not stock or inventory roasted coffee. We roast to order and ship fresh coffee daily to our stores and customers. Control of purchasing, roasting, packaging and distribution of our coffee allows us to maintain our commitment to freshness, is cost effective, and enhances our margins and profit potential.

We expect the specialty coffee industry to continue to grow. We believe that this growth will be fueled by continued consumer interest in high quality coffee and related products. We believe that by offering high-quality products to consumers throughout the country, we will attract the same loyal customer base that we have attracted in California.

We believe growth opportunities exist in all of our distribution channels. We believe that our specialty sales can expand to geographies where we do not have a retail presence. Our first priority has been to develop primarily in the western U.S. markets where we already have a presence and have higher customer awareness. We expect to continue to open new retail stores in strategic west coast locations that meet our demographic profile and partner with distributors and companies who share our passion for quality and freshness and are willing and able to execute accordingly in the foodservice and office environment. In grocery, we expect to continue to expand into new markets although the full extent of our penetration will depend upon the development of specialty coffee as a category in many markets. In addition to the Peet’s brand, we recently entered into a licensing agreement with privately held Godiva ® Chocolatier, Inc. to sell and distribute a premium line of Godiva brand coffees in the grocery channel. We began selling Godiva coffee in the last week of the third quarter of 2009.

Coffee commodity costs began to decline in July 2008 after over four years of increases above the prior three to four year range. We expect the commodity market to continue to be volatile as worldwide demand, the strength of the dollar, and weather will continue to cause uncertainty in the market.

Our net revenues depend significantly on consumer confidence and spending, which have recently deteriorated due to the recession and may remain depressed for the foreseeable future. The current recession or a worsening of the United States and global economy could materially adversely affect our business as our revenues depend significantly on consumer confidence and spending. We believe that the current recession negatively impacted our rate of growth in 2008 and the first three quarters of 2009. Despite the recession, we have been able to grow our revenues by opening new retail stores, adding new foodservice accounts, and growing our business in our current grocery customer base. In addition, we were able to increase our net earnings per share by 27% and 31% for the thirteen and thirty-nine week periods ended September 27, 2009, respectively, over the same periods last year primarily by leveraging our infrastructure investments and diligently managing our costs. We plan to open one new store for the remainder of 2009, in addition to the seven new stores we opened in the first three quarters of 2009.

Pending Acquisition of Diedrich

On November 2, 2009, the Company, Acquisition Sub and Diedrich entered into the Merger Agreement that contemplates the acquisition by the Company, through Acquisition Sub, of all of the outstanding common stock of Diedrich for a total purchase price of $214.0 million, including approximately $70.0 million in Peet’s common stock and $144.0 million in cash, of which approximately $124.0 million is expected to be funded with debt. The Merger Agreement contemplates a two-step transaction comprised of a combination cash and stock exchange offer for all of the issued and outstanding shares of Diedrich common stock (the “Offer”), followed by a merger of Acquisition Sub with and into Diedrich (the “Merger”). In the Offer, the Company will deliver a combination of $17.33 in cash and a fraction of a share of the Company’s common stock having a numerator equal to $8.67 and a denominator equal to the Parent Average Stock Price (as defined in the Merger Agreement), provided that in no event will such fraction of a share exceed 0.315 of a share of the Company’s common stock, all of the foregoing cash and stock in exchange for each share of Diedrich common stock validly tendered in the Offer (and not withdrawn), subject to adjustment for stock splits, stock dividends and similar events. In addition, upon the acquisition by Acquisition Sub of shares of Diedrich common stock tendered in the Offer, all outstanding warrants and options to acquire Diedrich common stock will be converted into a combination of cash and shares of the Company’s common stock based on formulae set forth in the Merger Agreement, and certain of the options will vest in full as a result of the transactions contemplated by the Merger Agreement. See Note 9 “Subsequent Events” to the Consolidated Financial Statements.

Results of Operations

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

	Thirteen weeks ended						Thirty-nine weeks ended
	September 27,			September 28,			September 27,			September 28,
	2009			2008			2009			2008

Statement of income as a percent of net revenue:
Net revenue		100.0	%		100.0	%		100.0	%		100.0	%
Cost of sales and related occupancy expenses		46.4			47.1			45.5			46.9
Operating expenses		35.3			36.1			35.0			35.5
General and administrative expenses		7.8			7.6			8.1			7.9
Depreciation and amortization expenses		5.4			4.6			5.1			4.6
Income from operations		5.1			4.6			6.3			5.1
Interest income		-			0.2			0.1			0.3
Income before income taxes		5.1			4.8			6.4			5.4
Income tax provision		1.8			1.8			2.3			2.0
Net income		3.3	%		3.0	%		4.1	%		3.4	%

Percent of net revenue by business segment:
Retail stores		64.8	%		67.0	%		65.9	%		66.5	%
Specialty sales		35.2			33.0			34.1			33.5

Percent of net revenue by business category:
Whole bean coffee and related products		52.7	%		51.3	%		52.6	%		52.3	%
Beverages and pastries		47.3			48.7			47.4			47.7

Cost of sales and related occupancy expenses as a percent of segment revenue:
Retail stores		44.2	%		46.0	%		43.5	%		45.5	%
Specialty sales		50.3			49.3			49.2			49.8

Operating expenses as a percent of segment revenue:
Retail stores		42.8	%		43.4	%		41.8	%		43.0	%
Specialty sales		21.4			21.2			21.9			20.5

Percent increase from prior year:
Net Revenue		7.9	%		12.5	%		6.8	%		15.2	%
Retail stores		4.3			10.8			5.7			12.7
Specialty sales		15.4			16.3			8.8			20.7
Cost of sales and related occupancy expenses		6.3			10.7			3.5			13.9
Operating expenses		5.4			14.5			5.3			16.2
General and administrative expenses		10.2			6.3			9.5			-
Depreciation and amortization expenses		25.8			20.3			19.2			18.4

Selected operating data:
Number of retail stores in operation
Beginning of the period		192			179			188			166
Store openings		3			3			7			16
Store closures		-			(1	)		-			(1	)
End of the period		195			181			195			181

Thirteen Weeks Ended September 27, 2009 Compared to Thirteen Weeks Ended September 28, 2008

Net revenue

Net revenue for the thirteen weeks ended September 27, 2009 increased $5.4 million, or 7.9%, versus the same period in 2008 as a result of the continued expansion of our retail and specialty sales segments. Sales of whole bean and related products increased 10.9% to $39.0 million. Net revenue from beverages and pastries increased 4.8% to $35.0 million.

In the retail segment, net revenue increased $2.0 million, or 4.3%, compared to the same period in 2008 primarily as a result of increased sales from the 14 new stores we opened in the last 12 months. Sales of whole bean coffee and related products in the retail segment increased by 3.4% to $13.0 million, while sales of beverages and pastries increased by 4.6% to $34.9 million.

In the specialty sales segment, net revenue increased $3.5 million, or 15.4%, compared to the third quarter of 2008. We expect this performance improvement that we have experienced over the first half of the year to continue in the fourth quarter. The increase in grocery was due to new business we added in both the Western and Eastern U.S. in the last two years. We added approximately 1,200 new grocery store accounts over the past 12 months, bringing the number of grocery stores selling Peet’s coffee to approximately 8,400. Net revenue in foodservice and office coffee sales increased due to new accounts added over the last 12 months. Home delivery is down from last year as we are converting some loyal mail order customers in the Eastern U.S. to grocery as we increase availability in grocery stores.

Specialty Sales

	Thirteen weeks ended
(dollars in thousands)	September 27, 2009		September 28, 2008		Increase/(Decrease)
Grocery	$	14,619	$	11,744	$	2,875		24.5	%
Foodservice and office		7,769		6,871		898		13.1	%
Home delivery		3,654		3,960		(306	)	-7.7	%
Total specialty	$	26,042	$	22,575	$	3,467		15.4	%

Cost of sales and related occupancy expenses

Cost of sales and related occupancy expenses consist of product costs, including manufacturing costs, rent and other occupancy costs. As a percent of net revenue, cost of sales decreased from 47.1% in the third quarter of 2008 to 46.4% in the third quarter of 2009. The decrease from last year was due to lower milk and shipping costs, cost control measures and higher prices in retail partially offset by higher coffee costs. For the remainder of the year, we expect continued savings from cost control measures, as well as leverage of the roasting facility, and neutral commodity costs in aggregate.

Operating expenses

Operating expenses consist of both retail and specialty operating costs, such as employee labor and benefits, repairs and maintenance, supplies, training, travel, banking and card processing fees. Operating expenses increased to $26.1 million, compared to $24.7 million for the third quarter of 2008, but decreased as a percentage of net revenue to 35.3%, compared to 36.1% for the third quarter of 2008.

In the retail segment, operating expenses as a percent of net revenue decreased from 43.4% for the third quarter of 2008 to 42.8% for the third quarter of 2009 primarily due to lower training, supplies and maintenance expenses, and leverage of retail overhead costs.

As a percent of net revenue, specialty operating expenses increased slightly from 21.2% for the third quarter of 2008 to 21.4% for the third quarter of 2009. The increase was primarily due to growth in the grocery business, which has higher operating expenses than the other two channels and was largely offset by leverage of overhead costs.

General and administrative expenses

General and administrative expenses increased to $5.8 million compared to $5.2 million for the same period last year driven by higher payroll related costs and professional services fees compared to the same prior year period.

Depreciation and amortization expenses

Depreciation and amortization expenses increased to $4.0 million, compared to $3.2 million for the corresponding period last year. The increase was primarily due to the opening of 14 new retail stores in the last 12 months and the implementation of a new enterprise resource planning system (ERP) during the quarter.

Interest income, net

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

Income tax provision

The effective income tax rate for the third quarter of 2009 is 35.3% compared to 38.2% during the third quarter of 2008 due to increased California enterprise zone tax credits and normal quarter to quarter rate fluctuations.

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

Thirty-nine Weeks Ended September 27, 2009 Compared to Thirty-nine Weeks Ended September 28, 2008

Net revenue

Net revenue for the thirty-nine weeks ended September 27, 2009 increased $13.9 million, or 6.8%, versus the same period in 2008 as a result of continued expansion of our retail and specialty sales segments. Sales of whole bean and related products increased 7.3% to $115.0 million. Net revenue from beverages and pastries increased 6.2% to $104.1 million.

In the retail segment, net revenue increased $7.9 million, or 5.7%, compared to the same period in 2008 primarily as a result of increased sales from the 14 new stores we opened in the last 12 months. During the thirty-nine weeks ending September 27, 2009, we opened 7 new stores compared to 16 during the same period in 2008. Sales of whole bean coffee and related products in the retail segment increased by 5.1% to $40.7 million, while sales of beverages and pastries increased by 6.0% to $103.9 million.

In the specialty sales segment, net revenue increased $6.0 million, or 8.8%, compared to the thirty-nine weeks ending September 27, 2008. The increase in grocery was primarily due to new business we added in both the Western and Eastern U.S. in the last two years and the price increase in the West in August 2008. We added approximately 1,200 new grocery store accounts over the past 12 months, bringing the number of grocery stores selling Peet’s coffee to approximately 8,400. Net revenue in foodservice and office increased 7.7%, primarily due to new foodservice accounts. Home delivery is down from last year as we are converting some loyal mail order customers in the Eastern U.S. to grocery as we increase availability in grocery stores.

Specialty Sales

	Thirty-nine weeks ended
(dollars in thousands)	September 27, 2009		September 28, 2008		Increase/(Decrease)
Grocery	$	41,841	$	36,464	$	5,377		14.7	%
Foodservice and office		21,330		19,805		1,525		7.7	%
Home delivery		11,718		12,578		(860	)	-6.8	%
Total specialty	$	74,889	$	68,847	$	6,042		8.8	%

Cost of sales and related occupancy expenses

Cost of sales and related occupancy expenses consist of product costs, including manufacturing costs, rent and other occupancy costs. As a percent of net revenue, cost of sales decreased from 46.9% in the thirty-nine weeks ended September 28, 2008 to 45.5% in the same period of 2009. The decrease from last year was due to lower milk and shipping costs, cost control measures and leverage of the roasting facility, and higher prices in retail and grocery, partially offset by higher coffee costs.

For the remainder of the year, we expect continued savings from cost control measures and leverage of the roasting facility and neutral commodity costs in aggregate.

Operating expenses

Operating expenses consist of both retail and specialty operating costs, such as employee labor and benefits, repairs and maintenance, supplies, training, travel, banking and card processing fees. Operating expenses increased to $76.8 million compared to $72.9 million for the thirty-nine weeks ended September 28, 2008, but decreased as a percentage of net revenue to 35.0% compared to 35.5% for the thirty-nine weeks ended September 28, 2008.

In the retail segment, operating expenses as a percent of net revenue decreased from 43.0% for the thirty-nine weeks ended September 28, 2008 to 41.8% for the same period in 2009, primarily due to lower training, supplies and maintenance expenses and leverage of retail overhead costs.

As a percent of net revenue, specialty operating expenses increased from 20.5% for the thirty-nine weeks ended September 28, 2008 to 21.9% for the same period in 2009. The increase was primarily due to higher selling and distribution costs in grocery to support the expansion of the direct store delivery selling system in the Eastern U.S.

General and administrative expenses

General and administrative expenses increased to $17.8 million compared to $16.2 million for the same period last year driven by higher payroll related costs, professional services fees, and marketing expenses compared to the same prior year period, partially offset by lower recruiting costs.

Depreciation and amortization expenses

Depreciation and amortization expenses increased to $11.2 million, compared to $9.4 million for the corresponding period last year. The increase was primarily due to the opening of 14 new retail stores in the last 12 months and the implementation of a new enterprise resource planning system (ERP) during the quarter.

Interest income, net

We invest in U.S. government, agency, municipal and equity securities. Interest income includes interest income and gains or losses from the sale of these instruments. We earned $0.1 million in interest income in the thirty-nine weeks ended September 27, 2009 compared to $0.6 million for the same period last year. The difference was due to lower average cash balances and lower yields during the thirty-nine weeks ended September 27, 2009 compared to the same period in 2008.

Income tax provision

The effective income tax rate for the thirty-nine weeks ended September 27, 2009 and September 28, 2008 was 36.6%.

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

Liquidity and Capital Resources

At September 27, 2009 we had $17.0 million in cash and cash equivalents and $4.2 million in short-term marketable securities for a total of $21.2 million. Working capital was $50.2 million as of September 27, 2009.

Net cash provided by operations was $19.1 million for the thirty-nine weeks ended September 27, 2009 compared to $11.0 million for the same prior year period. Operating cash flows were positively impacted by higher net income, net of depreciation expense, lower federal income tax prepayments, improved accounts receivable collections, as well as other changes in working capital.

Net cash used by investing activities was $2.9 million for the thirty-nine weeks ended September 27, 2009 compared to a net cash use of $15.7 million in the prior year. Investing activities primarily relate to purchases of property, plant and equipment and maturities and purchases of marketable securities. During the thirty-nine week period ended September 27, 2009, we purchased property, plant and equipment totaling $11.9 million primarily related to improvements to existing stores, new stores and information technology support systems and hardware to support our growing infrastructure and we purchased $0.4 million of marketable securities. Cash used for purchases of property, plant and equipment decreased by $8.5 million compared to the same period last year due primarily to fewer new retail store openings, offset by the ERP costs in the current year. Proceeds from sales and maturities of marketable securities and from a release of restricted investments totaled $9.4 million.

Net cash used by financing activities for the thirty-nine weeks ended September 27, 2009 was $3.9 million compared to $6.8 million for the thirty-nine weeks ended September 28, 2008, and primarily relates to the repurchase of our common stock, offset by proceeds from stock option exercises.

The Company also has $25 million available through a credit agreement entered into on November 26, 2008 with Wells Fargo Bank, National Association, the proceeds of which may be used in the general course of business, including to fund working capital, capital expenditures, share repurchases and other needs of the Company. The line of credit has a maturity date of December 1, 2009, with an option by the Company to extend the maturity date to December 1, 2010.

The credit agreement contains customary affirmative and negative covenants, including a requirement to maintain the Company’s financial condition in accordance with certain ratios, such as Current Ratio, Leverage Ratio, EBITDAR Coverage Ratio, and minimum net income as defined in the agreement. In addition, events of default that permit the Bank to accelerate the Company’s outstanding obligations, include nonpayment of principal, interest, fees or other amounts, violation of covenants, inaccuracy of representations and warranties and upon the occurrence of bankruptcy and other adverse material change in the Company’s financial condition. Through September 27, 2009, there were no borrowings outstanding under this agreement and unused borrowing capacity under the credit agreement was $25.0 million as of September 27, 2009.

In connection with the entry into the Merger Agreement and the pending acquisition of Diedrich, on November 2, 2009, the Company entered into a commitment letter with Wells Fargo and WFS, setting forth the material terms and conditions of: (a) a senior secured revolving credit facility in an aggregate amount up to $40,000,000 to be provided by Wells Fargo and a syndicate of financial institutions and other institutional lenders to the Company, as borrower; and (b) one or more tranches of term loans in an aggregate amount up to $100,000,000 to be provided by the lenders to the Company, each of which is to be guaranteed by all existing and future subsidiaries of the Company. The Company intends to use the proceeds from the senior secured credit facilities, together with cash on hand at the Company to finance the Offer and Merger (and may also use the cash on hand at Diedrich to finance the Merger), the costs and expenses related to the Offer and the Merger and the ongoing working capital and other general corporate purposes of the combined organization after consummation of the Merger. The Company expects the $25 million revolving line of credit discussed in Note 6 “Line of Credit” to Consolidated Financial Statements to be terminated upon closing of this credit facility. Subject to the cash requirements for the pending acquisition of Diedrich, which we expect to finance in part from the proceeds of the financing contemplated by the above described commitment letter, for the next twelve months, we expect our cash flows from operations and cash and marketable securities to be sufficient for our operating and capital requirements, our existing share purchase program and our contractual obligations as they come due.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We invest excess cash in equity securities and interest-bearing, U.S. government, agency, and municipal securities. These financial instruments are subject to stock market volatility and fluctuations of daily interest rates. Therefore our investment portfolio is exposed to market risk from these changes.

The supply and price of coffee are subject to significant volatility and can be affected by multiple factors in the producing countries, including weather, political and economic conditions. In addition, green coffee bean prices have been affected in the past, and may be affected in the future, by the actions of certain organizations and associations that have historically attempted to influence commodity prices of green coffee beans through agreements establishing export quotas or restricting coffee supplies worldwide.

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

Fixed-Price and Not-Yet-Priced Purchase Commitments

We enter into fixed-price purchase commitments in order to secure an adequate supply of quality green coffee beans and fix our cost of green coffee beans. These commitments are made with established coffee brokers and are denominated in U.S. dollars. We also enter into “not-yet-priced” commitments based on a fixed premium over the New York “C” market with the option to fix the price at any time. As of September 27, 2009, we had approximately $32.3 million in open fixed-priced purchase commitments and approximately $5.2 million in not-yet-priced commitments for a total of approximately $37.5 million with delivery dates ranging from October 2009 through July 2011. We believe, based on relationships established with our suppliers, that the risk of non-delivery on such purchase commitments is low.

Item 4. Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Securities Exchange Act of 1934, as amended, reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

As of September 27, 2009, the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the quarter covered by this report at the reasonable-assurance level.

There have been no changes in our internal controls over financial reporting during the fiscal quarter ended September 27, 2009 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

Item 1A. Risk Factors

In addition to the risk factors set forth in the Company’s Annual Report on Form 10-K, you should consider the following risk factors relating to our pending acquisition of Diedrich.

We may fail to realize the potential benefits of the pending acquisition of Diedrich.

We are pursuing the acquisition of Diedrich in an effort to realize certain potential benefits, including expansion of the combined businesses and broader market opportunities and operational and cost efficiencies. However, our ability to realize these potential benefits depends on our successfully combining the businesses of Peet’s and Diedrich. The combined company may fail to realize the potential benefits of the merger for a variety of reasons, including the following:

inability or failure to effectively leverage our brands, infrastructure and DSD system to grow Diedrich's current business, including its K-cup single serve business;

inability or failure to effectively coordinate sales and marketing efforts to communicate the capabilities of the combined company;

inability or failure to successfully integrate and harmonize financial reporting and information technology systems of Peet’s and Diedrich;

inability or failure to achieve the expected operational and cost efficiencies; and

loss of key employees.

The actual integration may result in additional and unforeseen expenses or delays. If Peet’s is not able to successfully integrate Diedrich’s business and operations, or if there are delays in combining the businesses, the anticipated benefits of the merger may not be realized fully or at all or may take longer to realize than expected.

If we are unable to obtain sufficient financing, the pending acquisition of Diedrich will not be completed and we may be liable for breaching the Merger Agreement.

We intend to finance the pending acquisition with debt financing, existing cash balances, Peet’s stock and cash flow from operations. To this end, we have received commitments from lenders to provide an aggregate of up to $140.0 million in financing for the transaction, comprised of a revolving credit facility of $40.0 million and a term loan of $100.0 million. Although we have entered into the financing commitment letter with Wells Fargo and WFS, the commitment includes customary conditions to funding, including, without limitation, no material adverse effect having occurred with respect to Diedrich, the absence of debt other than certain permitted debt, the accuracy of specified representations and warranties, compliance with a minimum EBITDAR requirement and a maximum total leverage ratio after giving effect to the Offer, and other customary conditions. In the event that the financing described in the financing commitment letter is not available, other financing may not be available on acceptable terms, in a timely manner or at all. If other financing becomes necessary and we are unable to secure such additional financing, the pending acquisition will not be completed. In the event of a termination of the merger agreement due to our inability to obtain the necessary financing for the transaction, Diedrich could seek monetary damages or specific performance.

We expect to take on substantial debt to finance the merger, which will decrease our business flexibility and increase our interest expense.

In connection with the acquisition of Diedrich, we expect to incur up to $140 million of debt. This substantial amount of debt, together with the financial and negative covenants imposed on us in connection with this debt, will have the effect, among other things, of reducing our flexibility to respond to changing business and economic conditions and increasing our interest expense. In addition, the actual terms and conditions of such debt may not be favorable to us, and as such, could further increase the cost of the acquisition of Diedrich, Unfavorable debt financing terms may also adversely affect our financial results.

The announcement and pendency of the acquisition of Diedrich could cause disruptions in the businesses of Peet’s and Diedrich, which could have an adverse effect on their respective business and financial results, and consequently on the combined company.

Peet’s and Diedrich have operated and, until the completion of the Merger, will continue to operate, independently. Uncertainty about the effect of the acquisition on employees, customers, distributors, licensors and suppliers may have an adverse effect on Peet’s and Diedrich and consequently on the combined company. These uncertainties may impair Peet’s and Diedrich’s ability to retain and motivate key personnel and could cause customers, distributors, suppliers, licensors and others with whom each company deals to seek to change existing business relationships, which may materially and adversely affect their respective businesses. In addition, the attention of our management and our employees may be diverted from day-to-day operations as they focus on consummating the acquisition of Diedrich. Due to the limited termination rights agreed to by the parties in the Merger Agreement, we may be obligated to complete theOffer and the Merger in spite of the adverse effects resulting from the disruption of Peet’s or Diedrich’s ongoing businesses. Furthermore, this disruption could adversely affect the combined company’s ability to maintain relationships with customers, distributors, licensors, suppliers and employees after the acquisition or to achieve the anticipated benefits of the acquisition. Peet’s and Diedrich could also be subject to litigation related to the transaction. Each of these events could adversely affect Peet’s and Diedrich in the near term and the combined company if the acquisition is completed.

The integration of Diedrich into Peet’s may result in significant expenses and accounting charges that adversely affect our operating results and financial condition.

In accordance with generally accepted accounting principles, we will account for the merger using the purchase method of accounting. Our financial results may be adversely affected by the resulting accounting charges incurred in connection with the Offer and the Merger. We also expect to incur additional costs associated with combining the operations of Peet’s and Diedrich, which may be substantial. Additional costs may include: costs of employee redeployment; relocation and retention bonuses; accelerated amortization of deferred equity compensation and severance payments; reorganization or closure of facilities; taxes; advisor and professional fees; and termination of contracts that provide redundant or conflicting services. Some of these costs may have to be accounted for as expenses that would decrease our net income and earnings per share for the periods in which those adjustments are made. The price of our common stock could decline to the extent our financial results are materially affected by the foregoing charges and costs, or if the foregoing charges and costs are larger than anticipated. The completion of the Offer and the Merger may result in dilution of future earnings per share to our stockholders. It may also result in greater net losses or a weaker financial condition compared to that which would have been achieved by us on a stand-alone basis.

Integrating Peet’s and Diedrich may divert management’s attention away from the combined company’s operations.

Successful integration of Peet’s’s and Diedrich’s operations, products and personnel may place a significant burden on the combined company’s management and internal resources. Peet’s may also experience difficulty in effectively integrating the different cultures and practices of Diedrich. Further, the difficulties of integrating Diedrich could disrupt the combined company’s ongoing business, distract its management focus from other opportunities and challenges, and increase the combined company’s expenses and working capital requirements. The diversion of management attention and any difficulties encountered in the transition and integration process could harm the combined company’s business, financial condition and operating results.

Item 6. Exhibits

Exhibit		Description

3.1		Amended and Restated Articles of Incorporation.*

3.2		Amended and Restated Bylaws.*

4.1		Form of common stock certificate.*

31.1		Certification of the Company’s Chief Executive Officer, Patrick O’Dea, pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.

31.2		Certification of the Company’s Chief Financial Officer, Thomas Cawley, pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.

32.1		Certification of the Company’s Chief Executive Officer, Patrick O’Dea, pursuant to Section 906 of Sarbanes-Oxley Act of 2002.

32.2		Certification of the Company’s Chief Financial Officer, Thomas Cawley, pursuant to Section 906 of Sarbanes-Oxley Act of 2002.

* Incorporated by reference to the Registrant’s Information Statement of Form S-1 (File No. 333-47957) filed on October 13, 2000, as subsequently amended.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	PEET’S COFFEE & TEA, INC.


Date: November 6, 2009	By:	/s/ Thomas P. Cawley
		Thomas P. Cawley
		Vice President, Chief Financial Officer and Secretary

Exhibit 31.1

CEO CERTIFICATION

I, Patrick O’Dea, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Peet’s Coffee & Tea, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 6, 2009	By:	/s/ Patrick J. O’Dea
		Patrick J. O’Dea
		Chief Executive Officer

Exhibit 31.2

CFO CERTIFICATION

I, Thomas Cawley, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Peet’s Coffee & Tea, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

(a)

(b)

(c)

(d)

5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 6, 2009	By:	/s/ Thomas P. Cawley
		Thomas P. Cawley
		Chief Financial Officer

Exhibit 32.1

CEO CERTIFICATION

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Sec. 1350, as adopted), Patrick O’Dea, the Chief Executive Officer of Peet’s Coffee & Tea, Inc. (the “Company”) hereby certifies that, to the best of his knowledge:

1. The Company’s quarterly report on Form 10-Q for the period ended September 27, 2009, to which this Certification is attached as Exhibit 32.1 (the “Periodic Report” ) fully complies with the requirements of section 13(a) or section 15(d) of the Securities Exchange Act of 1934, and

2. The information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

IN WITNESS WHEREOF, the undersigned has set his hand hereto as of the 6th day of November, 2009.

	/s/ Patrick J. O’Dea
	Patrick J. O’Dea
	Chief Executive Officer

This certification accompanies the Form 10-Q to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Peet’s Coffee & Tea, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-Q), irrespective of any general incorporation language contained in such filing.

Exhibit 32.2

CFO CERTIFICATION

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Sec. 1350, as adopted), Thomas Cawley, Chief Financial Officer of Peet’s Coffee & Tea, Inc. (the “ Company”) hereby certifies that, to the best of his knowledge:

1. The Company’s quarterly report on Form 10-Q for the period ended September 27, 2009, to which this Certification is attached as Exhibit 32.2 (the “Periodic Report”) fully complies with the requirements of section 13(a) or section 15(d) of the Securities Exchange Act of 1934, and

2. The information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

IN WITNESS WHEREOF, the undersigned has set his hand hereto as of the 6th day of November, 2009.

	/s/ Thomas P. Cawley
	Thomas P. Cawley
	Chief Financial Officer