Human Capital & Careers

Board: No Fraud Brewing at Peet’s

An internal investigation clears coffeehouse chain of deliberately manipulating options grants. But errors will force the company to restate.
Marie LeoneFebruary 22, 2007

An internal review of options granting practices at Peet’s Coffee and Tea Inc. may leave executives with a bitter after taste, but nothing more. A special board committee charged with examining the coffeehouse chain’s granting practices said on Thursday that while errors were made, no intentional wrongdoing occurred.

The board, as well as independent counsel Shartsis Friese, and KPMG, which was hired as an independent consultant, found no evidence that company officers or directors deliberately backdated options. Backdating involves using hindsight to assign a stock-option contract an earlier date than its actual grant date. By pushing the date into the past, to a time when the underlying stock traded at a lower price than it did the day the grant was issued, the option holder is, in effect, being given the promise of cash, or what is called an “in-the-money” options grant.

The company did, however, incorrectly apply measurement dates with respect to certain stock options grants made between 2001 through 2006, said the company in a press statement. Peet’s, which was founded in Berkley, California, in 1966, launched its initial public offering in 2001. Those errors will cost the company. Peet’s announced that it will book a non-cash, pre-tax compensation expense of $1.7 million. All but $95,000 of the total adjustment relates to grants made prior to June 2002, said the company.

The company, which has delayed its most recent quarterly filing, expects to recognize $2.4 million of pre-tax expense related to conducting the investigation. Approximately $1.8 million will be booked in its 2006 fiscal fourth quarter, and $600,000 will be accounted for during the first quarter of 2007. In addition, the company noted that no current executive received an option that will be included in the restatement

The committee also revealed that other isolated instances of “inaccurate accounting for stock option grants” were found during the same period, and that the company lacked documentation and internal controls related to the stock administration, especially between the years of 2001 and 2003.

As previously announced, several current and former company directors and officers have been named as defendants in stockholder derivative lawsuits linked to past option granting practices. The company noted that the costs and potential liabilities that result from the lawsuits have not been included in the restatement charges.

The committee’s report has been discussed with the Peet’s independent auditor, Deloitte & Touche, and the company plans to file its Form 10-K for fiscal year ended December 31, by April 2. The annual report will reflect the restatement. The company will also file its amended Forms 10-Q for the first two quarters of 2006, and its delayed Form 10-Q for the third quarter of 2006, by the same date.