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FORM 10-Q

U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

(Mark One)

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

For the twelve weeks ended July 6, 2002

OR

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

For the transition period from __________ to ____________

Commission file number 1-12340

GREEN MOUNTAIN COFFEE, INC.
(Exact name of registrant as specified in its charter)

Delaware

 

03-0339228

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

33 Coffee Lane, Waterbury, Vermont 05676

(Address of principal executive offices) (zip code)

(802) 244-5621

(Registrants' telephone number, including area code)

 


(Former name, former address and former fiscal year, if changed since last report.)


Indicate by check mark whether the registrant has (1) 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 [ Ö ] NO [ ]

As of August 6, 2002, 6,766,924 shares of common stock of the registrant were outstanding.

Part I. Financial Information
Item 1. Financial Statements

GREEN MOUNTAIN COFFEE, INC.
Consolidated Balance Sheets
(Dollars in thousands)

July 6,
2002

September 29,
2001

Assets

(unaudited)

Current assets:

   Cash and cash equivalents

$          426  

$             979  

   Receivables, less allowances of $382 at July 6, 2002 and $492
      at September 29, 2001

8,992 


9,142 

   Inventories

5,578 

6,059 

   Other current assets

894 

524 

   Income tax receivable

319 

743 

   Deferred income taxes, net

             363 

               738 

Total current assets

16,572 

18,185 

Fixed assets, net

17,636 

14,397 

Investment in Keurig, Incorporated

14,734 

151 

Goodwill and other intangibles

1,484 

1,546 

Other long-term assets

118 

144 

Deferred income taxes, net

                 - 

               73 

Total assets

$        50,544 

$        34,496 

====

====

Liabilities and Stockholders' Equity

Current liabilities:

   Current portion of long-term debt

$          2,690 

$             195 

   Accounts payable

5,335 

6,099 

   Accrued compensation costs

1,364 

1,682 

   Accrued expenses

            1,536 

           1,664 

        Total current liabilities

          10,925 

           9,640 

Long-term debt

             1,978 

              256 

Long-term line of credit

           12,340 

           6,000 

Deferred tax liability

                  72 

                  -  

Commitments and contingencies

Stockholders' equity:

   Common stock, $0.10 par value:
   Authorized - 20,000,000 shares; Issued - 7,904,677 and 7,804,647       shares at July 6, 2002 and September 29, 2001, respectively



791 



780 

   Additional paid-in capital

19,369 

18,390 

   Retained earnings

13,691 

8,678 

   Accumulated other comprehensive (loss), net of tax

(47)

(219)

ESOP unallocated shares, at cost - 56,266 and 73,800 shares at July 6,    2002 and September 29, 2001, respectively

(1,525)

(2,000)

Treasury shares, at cost - 1,138,273 and 1,137,506 shares at July 6,    2002 and September 29, 2001, respectively


          (7,050)


          (7,029)

   Total stockholders' equity

          25,229 

          18,600 

Total liabilities and stockholders' equity

$        50,544 

$        34,496 

====

====

The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.



GREEN MOUNTAIN COFFEE, INC.
Consolidated Statements of Operations
(Dollars in thousands except per share data)

 

 

Twelve weeks ended

 

July 6,
2002

 

  July 7,
  2001

 

(unaudited)

     

Net sales

$        22,989 

$        21,447 

Cost of sales

        13,221 

         12,135 

 Gross profit

9,768 

9,312 

     

Selling and operating expenses

5,438 

 

5,299 

General and administrative expenses

          1,852 

 

          1,710 

   Operating income

2,478 

2,303 

       

Other (expense) income

(47)

 

21 

Interest expense

             (92)

 

            (96)

   Income before income taxes

2,339 

2,228 

       

Income tax expense

            (877)

 

            (886)

   Income before equity in net earnings of Keurig, Incorporated

          1,462 

1,342 

       

Equity in net earnings of Keurig, Incorporated

            (21)

 

            -       

   Net income

$          1,441 

$          1,342 

 

=====

 

=====

   Basic income per share:

     

   Weighted average shares outstanding

6,700,782 

 

6,469,931 

   Net income

$            0.22 

 

$            0.21 

       

   Diluted income per share:

     

   Weighted average shares outstanding

7,303,450 

 

7,268,547 

   Net income

$            0.20 

 

$            0.18 



The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.



GREEN MOUNTAIN COFFEE, INC.
Consolidated Statements of Operations
(Dollars in thousands except per share data)

 

 

Forty weeks ended

 

July 6,
2002

 

  July 7,
  2001

 

(unaudited)

     

Net sales

$       78,359 

$    75,093 

Cost of sales

        44,350 

       43,843 

   Gross profit

34,009 

31,250 

     

Selling and operating expenses

19,598 

 

18,176 

General and administrative expenses

          5,788 

 

         5,318 

   Operating income

8,623 

7,756 

       

Other (expense) income

(54)

 

36 

Interest expense

           (187)

 

           (440)

   Income before income taxes

8,382 

7,352 

       

Income tax expense

        (3,348)

 

        (2,977)

   Income before equity in net earnings of Keurig, Incorporated

          5,034 

          4,375 

       

Equity in net earnings of Keurig, Incorporated

            (21)

 

            -      

   Net income

$        5,013 

$        4,375 

 

====

 

====

   Basic income per share:

     

   Weighted average shares outstanding

6,666,043 

 

6,352,628 

   Net income

$          0.75 

 

$          0.69 

       

   Diluted income per share:

     

   Weighted average shares outstanding

7,283,448 

 

7,163,293 

   Net income

$          0.69 

 

$         0.61 




The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.


GREEN MOUNTAIN COFFEE, INC.
Unaudited Condensed Consolidated Statements of Comprehensive Income
(Dollars in thousands)

 

Twelve weeks ended

 

Forty weeks ended

 

July 6, 2002

 

July 7, 2001

 

July 6, 2002

 

July 7, 2001

Net income

$       1,441

 

$       1,342 

 

$       5,013 

 

$       4,375 

Other comprehensive income, net of tax:

Deferred losses on derivatives designated    as cash flow hedges

(34)

(63)

(83)

(248)

Losses on derivatives designated as cash    flow hedges included in net income

            88 

 

           107 

 

           255 

 

           171 

Other comprehensive income (loss)

            54 

 

             44 

 

          172 

 

          (77)

Comprehensive income

$       1,495 

$       1,386 

$  5,185 

$       4,298 

 

====

 

====

 

====

 

====



The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.

GREEN MOUNTAIN COFFEE, INC.
Unaudited Consolidated Statement Of Changes In Stockholders' Equity

For the Period Ended July 6, 2002
(Dollars in thousands)

 

Common stock

Additional
paid-in capital

Retained earnings

Accumulated other compre-hensive (loss)

Treasury stock

ESOP unallocated shares


Stockholders' equity

 

Shares

Amount

Shares

Amount

Shares

Amount

 
                     

Balance at September 29, 2001

7,804,647

$ 780

$ 18,390

$8,678 

$ (219)

(1,137,506)

$(7,029)

(73,800)

$(2,000)

$ 18,600 

Issuance of common stock under    employee stock purchase plan

14,566

1

256

-  

-

257 

Options exercised

85,464

10

336

(767)

(21)

325 

Tax benefit from exercise of options

-

-

457

-  

-

457 

Allocation of employee stock ownership plan shares

-

-

(70)

-  

-

17,534 

475 

405 

Other comprehensive income,
    net of tax

-

-

-

 172 

-  

-

172 

Net income

             -

        -

           -

  5,013 

       - 

               -  

           -

            - 

           - 

   5,013 

                     

Balance at July 6, 2002

7,904,677

$ 791

$ 19,369

$13,691 

$ (47)

(1,138,273)

$(7,050)

(56,266)

$(1,525)

$ 25,229 

 

=====

===

====

====

===

=====

====

====

====

====

 

GREEN MOUNTAIN COFFEE, INC.
Consolidated Statements of Cash Flows
(Dollars in thousands)

 

Forty weeks ended

 

July 6,
2002

 

July 7,
2001

 

(unaudited)

   

Cash flows from operating activities:

     

   Net income

$      5,013 

 

$      4,375 

   Adjustments to reconcile net income to net cash
      provided by operating activities:

     

        Depreciation and amortization

3,076 

 

2,756 

        Gain on disposal and abandonment of fixed assets

(11)

 

(21)

        Provision for doubtful accounts

275 

 

690 

        Tax benefit from exercise of non-qualified options

457 

 

2,704 

        Deferred income taxes

520 

 

205 

        Equity in net earnings of Keurig, Incorporated

21 

 

-  

        Changes in assets and liabilities:

     

            Receivables

(125)

 

(2,807)

            Inventories

481 

 

337 

            Income tax payable (receivable)

424 

 

    (1,697)

            Other current assets

(370)

 

121 

            Other long-term assets, net

26 

 

51 

            Accounts payable

(764)

 

(587)

            Accrued compensation costs

82 

 

691 

            Accrued expenses

          44 

 

        1,480 

               Net cash provided by operating activities

     9,149 

       8,298 

       

Cash flows from investing activities:

     

   Investment in Keurig, Incorporated

(14,604)

 

   Capital expenditures for fixed assets

(6,780)

 

(5,018)

   Proceeds from disposals of fixed assets

         538 

 

         166 

   Payment for Frontier acquisition

              - 

 

    (2,480)

               Net cash used for investing activities

   (20,846)

    (7,332)

       

Cash flows from financing activities:

     

   Purchase of treasury shares

(21)

 

   Sale (purchase) of unallocated ESOP shares

 

(1,867)

   Proceeds from issuance of common stock

603 

 

1,696 

   Proceeds from issuance of long-term debt

5,000 

 

196 

   Repayment of long-term debt

(783)

 

(122)

   Net change in revolving line of credit

      6,340 

 

     (510)

               Net cash provided by (used for) financing activities

    11,144 

     (607)

       

Net increase in cash and cash equivalents

(553)

 

359 

Cash and cash equivalents at beginning of period

         979 

 

         559 

Cash and cash equivalents at end of period

$      426 

$       918 

====

====

Non cash activities - release of ESOP shares to participants

$ 400 



The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.

 

Green Mountain Coffee, Inc.
Notes to Consolidated Financial Statements

1. Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information, the instructions to Form 10-Q, and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete consolidated financial statements.

In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement of the interim financial data have been included. Results from operations for the twelve week and forty week periods ended July 6, 2002 are not necessarily indicative of the results that may be expected for the fiscal year ending September 28, 2002.

For further information, refer to the consolidated financial statements and the footnotes included in the Annual Report on Form 10-K for Green Mountain Coffee, Inc. for the fiscal year ended September 29, 2001.

2. Inventories

                    Inventories consisted of the following:

 

      July 6,
     2002

 

September 29,
2001

Raw materials and supplies

$    3,157,000

$     3,097,000

Finished goods

     2,421,000

 

     2,962,000

$    5,578,000

$     6,059,000

 

=====

 

=====

Inventory values above are presented net of $183,000 and $149,000 of obsolescence reserves at July 6, 2002 and September 29, 2001, respectively.

3. Earnings Per Share

The following table illustrates the reconciliation of the numerator and denominator of basic and diluted income per share computations as required by SFAS No. 128 (dollars in thousands, except per share data):

 

Twelve weeks ended

Forty weeks ended

 

July 6, 2002

 

July 7, 2001

 

July 6, 2002

 

July 7, 2001

Numerator - basic and diluted earnings    per share :
Net income

$ 1,441

 

$ 1,342

 

$ 5,013

 

$ 4,375

Denominator:

=====

 

=====

 

=====

 

=====

Basic earnings per share - weighted    average shares outstanding

6,700,782

 

6,469,931

 

6,666,043

6,352,628

Effect of dilutive securities - stock    options

   602,668

 

   798,616

 

   617,405

 

   810,665

Diluted earnings per share - weighted    average shares outstanding

7,303,450

 

7,268,547

 

7,283,448

 

7,163,293

 

=====

 

=====

 

=====

 

=====

Basic earnings per share

$ 0.22

 

$ 0.21

 

$ 0.75

 

$ 0.69

Diluted earnings per share

$ 0.20

 

$ 0.18

 

$ 0.69

 

$ 0.61

For the twelve weeks and forty weeks ended July 6, 2002, options to purchase 69,800 (at exercise prices ranging from $23.95 to $26.83 per share) were outstanding but were not included in the computation of diluted income per share because the options' exercise price was greater than the market price of the common shares.

For the twelve and forty weeks ended July 7, 2001, all outstanding options had an exercise price less than the market price of the common shares and were therefore included in the computation of diluted income per share under the treasury stock method.

  1. Derivative Instruments and Hedging Activities
  2. The Company regularly enters into coffee futures contracts to hedge price-to-be-established purchase commitments of green coffee and therefore designates these contracts as cash flow hedges. At July 6, 2002, the Company held outstanding futures contracts with a fair market value of $(83,000). These futures contracts are hedging coffee purchase commitments that take place in the next ten months and the related gains and losses will be reflected in cost of sales in the next four fiscal quarters when the related finished goods inventory is sold. At September 29, 2001, the Company held futures contracts with a total fair market value of $(369,000).

    At July 6, 2002, deferred losses on futures contracts designated as cash flow hedges amounted to $78,000 ($47,000 net of taxes). These deferred losses are classified as accumulated other comprehensive losses.

    In the twelve and forty week periods ended July 6, 2002, total losses on futures (gross of tax) included in cost of sales amounted to $150,000 and $434,000, respectively.

  3. Investment in Keurig, Incorporated
  4. During the twenty-eight weeks ended April 13, 2002, the Company purchased 586,350 shares of Preferred Stock and 317,969 shares of Common Stock of Keurig, Incorporated ("Keurig") for approximately $5,921,000 from third-party investors in Keurig. During the twelve weeks ended July 6, 2002, the Company purchased an additional 1,324,885 shares of Common Stock and 3,925 shares of Preferred Stock of Keurig from third party investors for approximately $8,683,000. Prior to January 8, 2002, the Company had an investment in the Preferred Stock of Keurig of $151,000. The shares of Common Stock owned by the Company as of July 6, 2002 represent approximately 49.93% of Keurig's outstanding Common Stock and the total acquired shares (Preferred Stock and Common Stock) represent approximately 42.1% of Keurig's voting shares. As a result, in its third fiscal quarter of 2002, the Company adopted the equity method of accounting to report its investment in Keurig. Due to the timing of the Company's investme nt in common stock of Keurig for the twelve weeks ended April 13, 2002, the retroactive application of equity method accounting to the results of the Company would not be material.

    Notwithstanding the Company's acquisition of shares of capital stock of Keurig, as a result of contractual limitations and restrictions agreed to by the Company, MD Co., which owns approximately 23% of Keurig's capital stock, effectively controls Keurig - having the ability to elect a majority of Keurig's Board of Directors, cause certain types of amendments to Keurig's Certificate of Incorporation, and approve or reject a sale of Keurig's business.

    The allocation of the equity investment in Keurig includes the assignment of $2,554,000 to identifiable technology intangible assets that are being amortized on a straight-line basis over their estimated useful lives, which range from 7 to 10 years. In addition, the Company allocated $2,308,000 to certain fixed assets of Keurig to approximate the estimated fair value of such assets. As the transaction was effected through the purchase of currently outstanding stock of Keurig, the historical tax basis of Keurig continues and a deferred tax liability and offsetting intangibles assets of $1,482,000 were recorded. The allocation of purchase price is preliminary and is subject to change as appraisals are completed and more facts become known.

    Due to the differing year and quarter ends of Keurig and Green Mountain Coffee, the Company included in its earnings the results of Keurig's calendar fiscal quarter (April 1, 2002 through June 30, 2002) without giving effect for the differences between the duration of the Company's fiscal quarter and Keurig's calendar fiscal quarter.

    During the twelve weeks ended July 6, 2002, the equity impact of Keurig's earnings was $(21,000). The equity in earnings in the investment of Keurig represents the Company's portion of Keurig's earnings for the period relative to the Company's ownership of Common Stock in Keurig for that period including certain adjustments. These adjustments include the amortization of assigned intangible assets, the accretion of Preferred Stock dividends, as well as depreciation differences between the Company's equity in the fair value of certain fixed assets as compared to Keurig's historical cost basis.

    Summarized financial information for Keurig (which is on a calendar fiscal year) is as follows:

    Income Statement Information for the Six Months ended June 30, 2002
    Dollars in thousands

       

    Revenues

    $10,166   

    Cost of goods sold

    $  4,302   

    Selling, general, and administrative

    $  5,197   

    Operating income

    $     667   

    Net income

    $     455   

    Financial Position Information as of June 30, 2002
    Dollars in thousands

       

    Current assets

    $12,350   

    Property, plant and equipment, net

    $  6,685   

    Other assets

    $  1,004   

    Total assets

    $20,039   

    Current liabilities

    $  3,836   

    Noncurrent liabilities

    $  1,813   

    Total shareholders' equity

    $14,390   

     

     

     

    The following selected unaudited pro forma consolidated results of operations are presented as if the investment had occurred as of the beginning of the periods presented. The pro forma results give effect to certain adjustments including the additional funds borrowed to consummate the investment at interest rates consistent with those for each respective period and the related income tax effects.

    Dollars in thousands

    Twelve weeks ended July 6, 2002

       

    Forty weeks ended July 6, 2002

    Net sales

    $  22,989 

    $  78,359 

    Operating income

    $    2,478 

    $    8,623 

    Income before equity in net    earnings of Keurig, Incorporated

    $    1,462 

    $    4,875 

    Equity in net earnings of Keurig, Incorporated

        $        (21)

          $         82 

    Net income

    $    1,441 

    $    4,957 

    Basic income per share

    $      0.22 

    $      0.74 

    Diluted income per share

    $      0.20 

    $      0.68 

     

    Dollars in thousands

    Twelve weeks ended July 7, 2001

       

    Forty weeks ended July 7, 2001

    Net sales

    $  21,447 

    $  75,093 

    Operating income

    $    2,303 

    $    7,756 

    Income before equity in net    earnings of Keurig, Incorporated

    $    1,222 

    $    3,937 

    Equity in net earnings of Keurig, Incorporated

    $     (261)

    $     (471)

    Net income

    $       961 

    $    3,466 

    Basic income per share

    $      0.15 

    $      0.52 

    Diluted income per share

    $      0.13 

    $      0.48 

     

  5. Amendment of Credit Facility and new Term Loan
  6. On April 3, 2002, the Company entered into the Fourteenth Amendment to the Fleet National Bank ("Fleet") Commercial Loan Agreement and Loan Documents (the "Credit Facility"), pursuant to which the Company refinanced its existing $15,000,000 revolving line of credit extending the maturity date one year to March 31, 2004.

    In addition, the Company entered into a $5,000,000 two-year term loan (the "Term Loan") with Fleet under the Credit Facility. The Company is making quarterly principal repayments in the amount of $625,000, beginning on June 30, 2002 until March 31, 2004. Interest is paid monthly at LIBOR rates plus 1.75%.

    A substantial portion of the line of credit and all the proceeds from the Term Loan were used to finance the purchase of Keurig shares. The Credit Facility is secured by all the assets of the Company, including a pledge of the Keurig shares. There were no changes to the covenants of the Credit Facility except the Company was able to increase the allowable net capital expenditures it could make in fiscal 2002 from $7.5 million to $10 million. The amount of allowable net capital expenditures was reduced to $6 million in subsequent fiscal years. The Company was in compliance with all covenants of the Credit Facility at July 6, 2002.

    At July 6, 2002, $12,340,000 and $4,375,000 were outstanding under the Credit Facility and the Term Loan, respectively.

  7. Recent Pronouncements

During 2000, the Financial Accounting Standards Board's Emerging Issues Task Force (EITF) addressed various issues which impact the income statement classification of certain promotional payments. In May 2000, the EITF reached a consensus on Issue 00-14 "Accounting for Certain Sales Incentives." EITF Issue 00-14 provides guidance relating to the income statement classification of certain sales incentives. In April 2001, the EITF reached a consensus on EITF Issue 00-25 "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products or Services." EITF Issue 00-25 addresses when certain consideration from a vendor to a reseller should be classified in the vendor's income statement as a reduction of revenue. Issue 00-14 and Issue 00-25 were effective for the second quarter of fiscal 2002 for the Company.

The Company has evaluated the impact of adopting these pronouncements on its consolidated financial statements and has reclassified a portion of free goods provided to its customers from selling and operating expenses to cost of sales. For the twelve weeks ended July 6, 2002 and July 7, 2001, the increase in cost of sales (and corresponding decrease in selling and operating expenses) was $131,000 and $105,000, respectively. For the forty weeks ended July 6, 2002 and July 7, 2001, the increase in cost of sales (and corresponding decrease in selling and operating expenses) was $470,000 and $368,000, respectively. The impact on revenues from the reclassification of considerations paid to resellers (primarily in the form of payments for certain cooperative advertisement programs) was immaterial.

In June 2001, the FASB issued SFAS No. 141 and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. Under SFAS No. 142, goodwill and intangible assets with indefinite lives are no longer amortized, but are reviewed annually at a minimum for potential impairment by comparing the carrying value to the fair value of the reporting unit to which they are assigned. The provisions of SFAS No. 141 apply to goodwill and intangible assets arising from acquisitions completed subsequent to June 30, 2001. SFAS No. 142 is required to be adopted for goodwill and intangible assets arising from acquisitions prior to June 30, 2001.

The Company adopted the provisions of SFAS No. 142 and ceased amortizing goodwill during the sixteen weeks ended January 19, 2002. The results for the twelve and forty weeks ended July 6, 2002 include the effect of adopting SFAS No. 142 "Goodwill and Other Intangible Assets" which resulted in a $ 45,000 reduction in expenses (net of tax). The reduction in amortization expense this year represents the amount of amortization of goodwill that arose from the June 5, 2001 acquisition of the Frontier® Organic Coffee assets.

If the adoption of SFAS No. 142 had occurred as of the beginning of the twelve and forty weeks ended July 7, 2001, the impact on the consolidated results of the Company would have been to reduce goodwill amortization by $5,000 (net of tax) resulting in an adjusted net income of $1,347,000 and $4,380,000 for the twelve and forty weeks ended July 7, 2001, respectively.

The Company carried $125,000 of intangibles from the Frontier acquisition (primarily a trademark licensing agreement) and related accumulated amortization of $87,000 on its July 6, 2002 balance sheet. These intangibles will be fully amortized by the end of the first quarter of fiscal 2003.

The carrying value of the Company's goodwill was approximately $1,446,000 at July 6, 2002. There have been no changes in this carrying amount since September 29, 2001. The Company completed its impairment testing of goodwill upon adoption of this Standard, concluding that its goodwill is not impaired.

In April 2002, the FASB issued Statement No. 145 ("SFAS 145"), "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections," which supersedes FASB issued Statement No. 4, "Reporting Gains and Losses from Extinguishment of Debt," FASB issued Statement No. 44, "Accounting for Intangible Assets of Motor Carriers," and FASB issued Statement No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." This statement also amends FASB issued Statement No. 13, "Accounting for Leases," to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This statement also amends other existing pronouncements to make various technical corrections, clarify meanings or describe the applicability under changed conditions. SFAS 145 requires gains and losses from the extinguishment of debt to b e classified as extraordinary items only if they meet the criteria in Accounting Principal Board Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." This statement also requires lease modifications that have economic effects similar to sale-leaseback transactions to be accounted for in the same manner as sale-leaseback transactions. The provisions in SFAS 145 relating to sale-leaseback transactions are effective as of May 15, 2002. The remaining provisions in SFAS 145 will be effective for the Company beginning in fiscal 2003. The Company does not expect the provisions of SFAS 145 to have a material impact, if any, on the Company's consolidated financial statements.

In June 2002, the Financial Accounting Standards Board ("FASB") issued Statement No. 146 ("SFAS 146"), "Accounting for Costs Associated with Exit or Disposal Activities." This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3 ("EITF 94-3"), "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. EITF 94-3 allowed for an exit cost liability to be recognized at the date of an entity's commitment to an exit plan. SFAS 146 also requires that liabilities recorded in connection with exit plans be initially measured at fair value. The provisions of SFAS 146 are effective for exit or disposal activities that are initiated after December 31, 2002, with early adoption encouraged. The Company is evaluating the effect of the adoption of SFAS 146 and does not expect the adoption of SFAS 146 to have a material impact, if any, on the Company's consolidated financial statements.

  1. Employee Stock Ownership Plan
  2. The Company maintains an Employee Stock Ownership Plan (the "ESOP"). The ESOP is qualified under sections 401(a) and 4975(e)(7) of the Internal Revenue Code. The Board of Directors authorized 17,354 shares to be released to ESOP participants in the sixteen week period ended January 19, 2002. These 17,354 shares had a fair market value of $400,000 and a cost basis of $470,000. The related accrued compensation of $400,000 had been accrued in fiscal year 2001.

    For the forty weeks ended July 6, 2002 and July 7, 2001, the Company recorded compensation costs of $154,000 and $377,000, respectively, to accrue for anticipated stock distributions under the ESOP. On July 6, 2002, the ESOP held 56,266 unearned shares at an average cost of $27.10.

  3. ChefExpress.net, Inc.
  4. During the twelve week period ended April 13, 2002, the Company recorded an impairment charge of $52,000 against its minority investment in ChefExpress.net, Inc., reducing the value of that investment to zero. This was due to the fact that the expected sale of ChefExpress.net was not completed and its operations are being closed down.

  5. Related party transactions
  6. During the first three fiscal quarters of 2002, the Company used travel services provided by Heritage Flight, a company which leases privately-owned airplanes. A portion of those travel fees were for flights on an airplane owned by Sabre Mountain LLC, which is 50% owned by Spirit Too, LLC, a company whose sole owner is Robert P. Stiller, the CEO of Green Mountain Coffee, Inc. The amount of revenues received by Sabre Mountain from trips booked by Green Mountain Coffee amounted to $146,000 in the forty week period ended July 6, 2002.

    Subsequent to the 12 weeks ended July 6, 2002, the Company purchased the Keurig K-Cup production equipment in operation at its Waterbury , VT plant from its equity method investee, Keurig Incorporated.

  7. Income taxes

The Company benefits from a $4,041,000 (gross of tax) manufacturers investment tax credit from the State of Vermont expiring in 2004. The resulting deferred tax asset is reported net of a valuation allowance amounting to $1,617,000 at July 6, 2002. During the twelve and forty weeks ended July 6, 2002, the Company reduced the valuation allowance on the deferred tax asset arising from its Vermont tax credit by $125,000 and $155,000, respectively, based primarily upon estimates of future taxable income; the percentage of income that is allocable to the State of Vermont and; the number of disqualifying dispositions of stock options.

 

 

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

Overview

Green Mountain Coffee, Inc. (the "Company" or "Green Mountain") sells coffee to retailers including supermarkets, convenience stores, specialty food stores; food service enterprises including restaurants, hotels, universities and business offices; and directly to individual consumers.

Cost of sales consists of the cost of raw materials including coffee beans, flavorings and packaging materials, a portion of the Company's rental expense, the salaries and related expenses of production and distribution personnel, depreciation on production equipment and freight and delivery expenses. Selling and operating expenses consist of expenses that directly support the sales of the Company's wholesale or consumer direct channels, including media and advertising expenses, a portion of the Company's rental expense, and the salaries and related expenses of employees directly supporting sales. General and administrative expenses consist of expenses incurred for corporate support and administration, including a portion of the Company's rental expense and the salaries and related expenses of personnel not elsewhere categorized.

The Company's fiscal year ends on the last Saturday in September. The Company's fiscal year normally consists of 13 four-week periods with the first, second and third "quarters" ending 16 weeks, 28 weeks and 40 weeks, respectively, after the commencement of the fiscal year.

Coffee Prices and Availability, and General Risk Factors

Green coffee commodity prices are subject to substantial price fluctuations, generally caused by multiple factors including weather, political and economic conditions in certain coffee-producing countries and other supply-related concerns. In recent years, green coffee prices have been under considerable downward pressures due to oversupply. The Company believes that the "C" price of coffee (the price per pound quoted by the Coffee, Sugar and Cocoa Exchange) will remain highly volatile in future fiscal years. In addition to the "C" price, coffee of the quality sought by Green Mountain tends to trade on a negotiated basis at a substantial premium or "differential" above the "C" price. These differentials also are subject to significant variations. In recent years, while the "C" price has been at or near historic lows, differentials have generally been on the rise. In recent months, green coffee prices have leveled off and, due primarily to a higher percentage o f purchases of higher costing organic and Fair Trade coffees, the average cost of green coffee that the Company purchases is rising.

In the past, the Company generally has been able to pass increases in green coffee costs to its customers. However, there can be no assurance that the Company will be successful in passing such fluctuations on to customers without losses in sales volume or gross margin in the future. Similarly, rapid sharp decreases in the cost of green coffee could also force the Company to lower sales prices before realizing cost reductions in its green coffee inventory. Because Green Mountain roasts over 25 different types of green coffee beans to produce its more than 75 coffee selections, if one type of green coffee bean were to become unavailable or prohibitively expensive, management believes Green Mountain could substitute another type of coffee of equal or better quality, meeting a similar taste profile. However, frequent substitutions could lead to cost increases and fluctuations in gross margins. Furthermore, a worldwide supply shortage of the high-quality arabica coffees the Company purchases could have an adverse impact on the Company and its profitability.

The Company enters into fixed coffee purchase commitments in an attempt to secure an adequate supply of quality coffees. To further reduce its exposure to rising coffee costs, the Company enters into futures contracts to hedge price-to-be-established coffee purchase commitments.

The Company expects to face increasing competition in all its markets, as competitors improve the quality of their coffees to make them more comparable to Green Mountain's. In addition, specialty coffee is now more widely available, and a number of competitors benefit from substantially larger promotional budgets following, among other factors, the acquisition of specialty coffee companies by large, consumer goods multinationals. The Company expects that the continued high quality and wide availability of its coffee across a large array of distribution channels, combined with the added-value of its customer service processes will enable Green Mountain to successfully compete in this environment, although there can be no assurance that it will be able to do so.

Certain statements contained herein are not based on historical fact and are "forward-looking statements" within the meaning of the applicable securities laws and regulations. In addition, the Company's representatives may from time to time make oral forward-looking statements. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statements that do not directly relate to any historical or current fact. Words such as "anticipates," "believes," "expects," "will," "feels," "estimates," "intends," "plans," "projects," and similar expressions, may identify such forward-looking statements. Owing to the uncertainties inherent in forward-looking statements, actual results could differ materially from those set forth in forward-looking statements. Factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, fluctuations in availability and cost of high-quality arabi ca green coffee, competition, terrorist activities and related events, organizational changes, the impact of a weaker economy, business conditions in the coffee industry and food industry in general, the impact of the loss of one or more major customers, delays in the timing of adding new locations with existing customers, the Company's level of success in continuing to attract new customers, Keurig Inc.'s ability to continue to grow in the office coffee service market and success in entering the home brewer market, variances from budgeted sales mix and growth rate, weather and special or unusual events, as well as other risks described in this report and other factors described from time to time in the Company's filings with the Securities and Exchange Commission. Forward-looking statements reflect management's analysis as of the date of this document. The Company does not undertake to revise these statements to reflect subsequent developments.

Results of Operations

 

Twelve weeks ended

Forty weeks ended

 

July 6,
2002

 

July 7,
2001

 

July 6, 2002

 

July 7,
2001

               

Net sales

100.0 %

 

100.0 %

 

100.0 %

 

100.0 %

Cost of sales

  57.5 %

 

   56.6 %

 

  56.6 %

 

   58.4 %

     Gross profit

42.5 %

43.4 %

43.4 %

41.6 %

               

Selling and operating expenses

23.6 %

 

24.7 %

 

25.0 %

 

24.2 %

General and administrative expenses

    8.1 %

 

   8.0 %

 

   7.4 %

 

   7.1 %

     Operating income

10.8 %

10.7 %

11.0 %

10.3 %

               

Other (expense) income

(0.2)%

 

0.1 %

 

(0.1)%

 

0.1 %

Interest expense

   (0.4)%

 

   (0.4)%

 

  (0.2)%

 

   (0.6)%


     Income before taxes


10.2 %

 


10.4 %

 

10.7 %

 


9.8 %

               

Income tax expense

   (3.8)%

 

   (4.1)%

 

  (4.3)%

   (4.0)%

    Income before equity in net earnings of    Keurig, Incorporated

6.4 %

6.3 %

6.4 %

5.8 %

   Equity in net earnings of Keurig,    Incorporated

(0.1)%

         -    

    (0.0)%

         -    

     Net income

6.3 %

6.3 %

6.4 %

5.8 %

===

===

===

===

 

 

GREEN MOUNTAIN COFFEE, INC.
Total Company Coffee Pounds Shipped by Sales Channel - Unaudited
(As a Percent of Total Coffee Pounds Shipped)

Channel

Q3 12 wks. ended 7/6/02

Q3 12 wks. ended 7/7/01

Q3 Y/Y lb. Change

Q3 % Y/Y lb. Change

Q3 YTD 40 wks. Ended 7/6/02

Q3 YTD 40 wks. Ended 7/7/01

Q3 YTD Y/Y lb. Change

Q3 YTD % Y/Y lb. Change

Supermarkets

25.4% 

22.6% 

124,000 

18.7% 

25.6% 

23.6% 

424,000 

18.7% 

Convenience Stores

32.0% 

33.3% 

15,000 

1.5%

30.1% 

29.9% 

283,000 

9.8%

Other Retail

2.6%

1.7%

30,000 

58.8% 

3.2%

1.9%

150,000 

79.8% 

Restaurants

8.6%

9.0%

3,000 

1.1%

8.4%

9.2%

(1,000)

-0.1%

Office Coffee Service Distributors

21.9% 

23.1% 

1,000 

0.1%

22.3% 

24.6% 

(22,000)

-0.9%

Other Food Service

6.9%

8.2%

(24,000)

-10.0%  

7.3%

8.4%

(37,000)

-4.6%

Consumer Direct

2.6%

2.1%

21,000 

34.4% 

3.1%

2.4%

97,000 

42.7% 

Totals

3,105,000

2,935,000

170,000 

5.8%

10,526,000

9,632,000

894,000 

9.3%

Note: Certain prior year customer channel classifications were reclassified to conform to current year classifications.


Wholesale Coffee Pounds Shipped by Geographic Region - Unaudited
(As a Percentage of Total Wholesale Coffee Pounds Shipped)

Region

Q3 12 wks. ended 7/6/02

Q3 12 wks. ended 7/7/01

Q3 Y/Y lb. Change

Q3 %Y/Y lb. Change

Q3 YTD 40 wks. Ended 7/6/02

Q3 YTD 40 wks. Ended 7/7/01

Q3 YTD Y/Y lb. Change

Q3 YTD % Y/Y lb. Change

Northern New England

29.0% 

29.3% 

36,000 

4.3%

29.2% 

30.3% 

127,000 

4.5%

Southern New England

22.2% 

22.1% 

35,000 

5.5%

22.1% 

23.9% 

4,000 

0.2%

Mid-Atlantic

25.1% 

19.7% 

193,000 

34.0% 

23.9% 

21.3% 

442,000 

22.1% 

South Atlantic

8.7%

9.4%

(8,000)

-3.0%

8.3%

8.4%

54,000 

6.8%

South Central

3.9%

6.6%

(71,000)

-37.6% 

4.2%

3.6%

91,000 

27.2% 

Midwest

2.5%

2.3%

8,000 

12.1% 

2.2%

2.4%

(7,000)

-3.1%

West

2.1%

3.5%

(37,000)

-36.6% 

2.4%

2.4%

24,000 

10.7% 

Multi-Regional

5.7%

6.2%

(5,000)

-2.8%

6.9%

6.6%

83,000 

13.3% 

International

0.8%

0.9%

(2,000)

-8.0%

0.8%

1.1%

(21,000)

-21.0% 

Totals

3,023,000

2,874,000

149,000 

5.2%

10,202,000

9,405,000

797,000 

8.5%

Note 1: Excludes coffee pounds shipped in the Consumer Direct channel.
Note 2: The allocation by region of coffee pounds shipped to certain McLane Company, Inc. warehouses for distribution to ExxonMobil convenience stores has been estimated. Since last quarter, these estimates are based on actual McLane's shipment patterns from each McLane warehouse to ExxonMobil convenience stores.

 

Twelve weeks ended July 6, 2002 versus twelve weeks ended July 7, 2001

Net sales increased by $1,542,000, or 7.2%, from $21,447,000 for the twelve weeks ended July 7, 2001 (the "2001 period") to $22,989,000 for the twelve weeks ended July 6, 2002 (the "2002 period"). Coffee pounds shipped increased by approximately 170,000 pounds, or 5.8%, from approximately 2,935,000 pounds in the 2001 period to approximately 3,105,000 pounds in the 2002 period.

The Company delivered its strongest growth for the quarter in the supermarket channel, where coffee pounds shipped increased 18.7%, due primarily to year-over-year expansion of sales to two customers: Price Chopper Supermarkets and Kings Super Markets, which added the Company's complete bulk, pre-bag and cup coffee program to its 30 locations this past fall. The convenience store channel, usually a steady growth contributor for the Company, grew by only 1.5% due to the inventory build by Mc Lane Company, Inc., the new distributor for ExxonMobil stores, in the 2001 period. The office coffee service channel (OCS) delivered no year-over-year growth in the 2002 period. Management believes this channel continues to be impacted by the slower economy. Management now anticipates full-year fiscal 2002 growth in coffee pounds shipped to be in the range of 9% to 10%, and dollar sales growth in the range of 5% to 6%. Sales growth in fiscal 2003 is expected to be in the range of 10% to 15%, both in pounds sold and do llars.

Gross profit increased by $456,000, or 4.9%, from $9,312,000 for the 2001 period to $9,768,000 for the 2002 period. As a percentage of net sales, gross profit decreased .9 percentage points from 43.4% for the 2001 period to 42.5% for the 2002 period. The decrease in gross profit as a percentage of sales was primarily due to an increase in green coffee costs related to the higher procurement costs of Fair Trade, organic and high quality estate coffees, as well as an increase in supermarket distribution costs. Management expects total fiscal year margins to be in the range of 43% to 44%.

Selling and operating expenses increased by $139,000, or 2.6%, from $5,299,000 for the 2001 period to $5,438,000 for the 2002 period. As a percentage of sales, selling and operating expenses decreased 1.1 percentage points from 24.7% for the 2001 period to 23.6% for the 2002 period. The decrease in selling and operating expense as a percentage of sales was primarily due to reduced marketing expenses and variable compensation costs.

General and administrative expenses increased by $142,000, or 8.3%, from $1,710,000 for the 2001 period to $1,852,000 for the 2002 period. As a percentage of sales, general and administrative expenses increased 0.1 percentage points from 8.0% for the 2001 period to 8.1% for the 2002 period. The increase in general and administrative expenses was primarily due to higher compensation, relocation and training costs, and was offset by lower consulting costs.

As a result of the foregoing, operating income increased by $175,000, or 7.6%, from $2,303,000 for the 2001 period to $2,478,000 for the 2002 period. Management expects selling, general and administrative expenses to be in the range of 32% to 33% of sales for the entire 2002 fiscal year.

Interest expense decreased by $4,000, or 4.2%, from $96,000 for the 2001 period to $92,000 for the 2002 period primarily due to lower interest rates during the 2002 period and due to the capitalization of interest expense. In the 2002 period, the Company capitalized $44,000 of interest expense associated with investments in production equipment currently classified as construction in progress (primarily the installation of the bowl roasters and related conveyance and storage equipment). It is anticipated that interest expense will increase to approximately $150,000 during the fourth quarter due to higher interest rates and a slightly higher borrowing balance.

Income tax expense decreased $9,000, or 1.0%, from $886,000 for the 2001 period to $877,000 for the 2002 period. The decrease in the effective tax rate was due to a $125,000 reduction of the valuation allowance on the Company's Vermont Manufacturer's tax credit in the 2002 period. It is expected that the Company's effective tax rate will approximate 40% to 41% for the fourth quarter of fiscal 2002. This estimate is dependent on the level of book and tax permanent differences and possible further changes in the valuation allowance against the deferred tax asset arising from the Vermont Manufacturer's tax credit. The ultimate amount of this credit that the Company will be able to use is dependent on many factors, including the amount of taxable income being generated; the percentage of income that is allocable to the State of Vermont and; the number of disqualifying dispositions of stock options.

The Company adopted the equity method of accounting for its investment in Keurig, Incorporated ("Keurig") in the 2002 period as its Common Stock ownership percentage grew from under 10% to 49.93% in the course of the period. The Company's percentage ownership of the total voting shares of Keurig was 42.1% at July 6, 2002. Notwithstanding the Company's acquisition of shares of capital stock of Keurig, as a result of contractual limitations and restrictions agreed to by the Company, MD Co., which owns approximately 23% of Keurig's capital stock, effectively controls Keurig - having the ability to elect a majority of Keurig's Board of Directors, cause certain types of amendments to Keurig's Certificate of Incorporation, and approve or reject a sale of Keurig's business.

The equity in the net earnings of Keurig in the 2002 period was a loss of $21,000. The Company currently expects the negative impact of Keurig earnings to range from $75,000 to $150,000 for fiscal 2002 and $500,000 to $750,000 for fiscal 2003. Results from Keurig could be materially different from this estimate. Keurig is a small high-growth private company which can have significant quarterly operating income fluctuations. Further, there will be a high degree of uncertainty around investment spending given Keurig's strategic launch of the Keurig at Home brewer.

Net income increased by $99,000, or 7.4%, from $1,342,000 for the 2001 period to $1,441,000 in the 2002 period. Earnings per diluted share grew from $0.18 in the 2001 period to $0.20 in the 2002 period.

Forty weeks ended July 6, 2002 versus forty weeks ended July 7, 2001

Net sales increased by $3,266,000, or 4.3%, from $75,093,000 for the forty weeks ended July 7, 2001 (the "2001 YTD period") to $78,359,000 for the forty weeks ended July 6, 2002 (the "2002 YTD period"). Coffee pounds shipped increased by approximately 894,000 pounds, or 9.3%, from approximately 9,632,000 pounds in the 2001 YTD period to approximately 10,526,000 pounds in the 2002 YTD period. The difference between coffee pounds growth and dollar sales growth was due primarily to changes in sales mix, driven by the continued successful expansion of the Company's business with Exxon Mobil Corporation convenience stores (ExxonMobil). The Company's sales agreement with ExxonMobil, effective since February 2001, provides for lower coffee sales prices and a reduction in its direct purchases of accessories such as cups and lids, offset by lower delivery and ordering costs for Green Mountain Coffee.

Coffee pounds shipped increases were strongest in the supermarket and convenience store channels with year-over-year pound increases of 424,000 and 283,000, respectively. Coffee pounds sold through the office coffee service channel decreased by $22,000 year-over-year as this channel is impacted by the slower economy.

Gross profit increased by $2,759,000, or 8.8%, from $31,250,000 for the 2001 YTD period to $34,009,000 for the 2002 YTD period. As a percentage of net sales, gross profit increased 1.8 percentage points from 41.6% for the 2001 YTD period to 43.4% for the 2002 YTD period. The increase in gross profit as a percentage of sales was due primarily to lower green coffee costs through the first half of the 2002 YTD period, a higher percentage of the Company's total sales being coffee compared to allied products such as cups and lids, and from a shift to higher margin coffee products.

Selling and operating expenses increased by $1,422,000, or 7.8%, from $18,176,000 for the 2001 YTD period to $19,598,000 for the 2002 YTD period. As a percentage of sales, selling and operating expenses increased 0.8 percentage points from 24.2% for the 2001 YTD period to 25.0% for the 2002 YTD period. The increase in selling and operating expense was primarily due to increases in wholesale sales force compensation costs and higher consumer direct promotional expenses, offset, in part, by lower bad debt expense.

General and administrative expenses increased by $470,000, or 8.8%, from $5,318,000 for the 2001 YTD period to $5,788,000 for the 2002 YTD period. As a percentage of sales, general and administrative expenses increased 0.3 percentage points from 7.1% for the 2001 YTD period to 7.4% for the 2002 YTD period. The increase in general and administrative expenses was primarily due to higher compensation, recruiting and relocation costs, and training costs.

As a result of the foregoing and including a year-to-date reduction of accruals for non-salesperson bonus and ESOP expenses of approximately $898,000, operating income increased by $867,000, or 11.2%, from $7,756,000 for the 2001 YTD period to $8,623,000 for the 2002 YTD period.

Interest expense decreased by $253,000, or 57.5%, from $440,000 for the 2001 YTD period to $187,000 for the 2002 YTD period primarily due to lower year-over-year average debt balances outstanding through the first two quarters, lower interest rates during the 2002 YTD period and the capitalization of $93,000 of interest in the 2002 YTD period.

Income tax expense increased $371,000, or 12.5%, from $2,977,000 for the 2001 YTD period to $3,348,000 for the 2002 YTD period. The Company reduced the valuation allowance on its Vermont manufacturer's tax credit by $155,000 in the 2002 YTD period. The effective tax rate for the 2002 YTD period was 39.9%. It is expected that the Company's effective tax rate will approximate 40% to 41% for the full fiscal 2002 year. This estimate is dependent on the level of book and tax permanent differences and possible changes in the valuation allowance against the deferred tax asset arising from its Vermont manufacturer's investment tax credit during the remainder of fiscal 2002 as noted above.

Net income increased $638,000, or 14.6%, from $4,375,000 in the 2001 YTD period to $5,013,000 in the 2002 YTD period. Earnings per share increased from $0.61 in the 2001 YTD period to $0.69 in the 2002 YTD period. Full-year earnings per share is now expected to be in the range of $0.88 to $0.91, including a negative impact from Keurig amounting to $0.01 to $0.02 per share.

Liquidity and Capital Resources

Working capital decreased $2,898,000 to $5,647,000 at July 6, 2002 from $8,545,000 at September 29, 2001. This decrease is primarily due to an increase in the current portion of long-term debt (the new Fleet term debt) and a decrease in income tax receivable and inventories.

In the 2002 YTD period, the Company purchased 628,450 shares of Preferred Stock and 1,642,854 shares of Common Stock of Keurig, Incorporated ("Keurig") from third parties for approximately $14,604,000. In order to finance the Keurig investment, the Company extended its existing $15,000,000 line of credit with Fleet Bank (Fleet) by one year to March 31, 2004 and entered into a new $5,000,000 term loan agreement with Fleet during its second quarter of fiscal 2002. The term loan is to be paid back in quarterly installments of $625,000, beginning on June 30, 2002 and ending in March 31, 2004. The interest rate is 175 basis points above LIBOR rates. At July 6, 2002, the outstanding balance on the Fleet line of credit was $12,340,000 and the amount remaining available was $2,660,000. The Fleet credit facility is subject to certain quarterly covenants, and the Company was in compliance with these covenants at July 6, 2002.

During the 2002 YTD period, besides the investment in Keurig, Green Mountain had capital expenditures of $6,780,000, including $4,341,000 for production and distribution equipment, $998,000 for equipment on loan to wholesale customers, $608,000 for computer equipment and software, $475,000 for leasehold improvements, and $358,000 in fixtures. These capital expenditures include installation costs of $1,320,000 for two roasters purchased at auction in fiscal 2001. Once the installation of these two new roasters is completed, the Company's annual roasting capacity in Waterbury, Vermont, is expected to increase from approximately 15 million pounds to 40 to 50 million pounds of roasted coffee. The installation of the roasters and related equipment is expected to be completed in September and October 2002. The related equipment consists primarily of a green coffee inventory storage system and a new green coffee transport system.

During the 2001 period, the Company acquired the assets related to the coffee business of Frontier Natural Products Co-op of Norway, Iowa in a cash transaction totaling approximately $2,480,000, including transaction costs estimated at $40,000. Besides the acquisition of Frontier assets, Green Mountain had capital expenditures of $5,018,000 during the 2001 YTD period, including $2,129,000 for production and distribution equipment (including the purchase at auction and transportation costs of two roasters amounting to approximately $939,000), $1,525,000 for equipment on loan to wholesale customers, $572,000 for computer equipment and software, and $482,000 in leasehold improvements.

On July 10, 2002, the Company purchased the Keurig® K-Cup™ production equipment in operation at its Waterbury, VT plant from Keurig. The cost of the equipment was $2,613,000. The Company pays reduced royalties to Keurig on K-Cup production after the date of the equipment purchase. The Company currently plans to make total net capital expenditures in fiscal 2002 of approximately $10,000,000 to $11,000,000. Fiscal 2003 capital expenditures are expected to be in the range of $6,000,000 to $7,000,000. Management continuously reviews capital expenditure needs and actual amounts expended may differ from these estimates.

In the 2002 YTD period, cash flow from financing activities included $603,000 generated from the exercise of employee stock options and the employee stock purchase plan, down from $1,696,000 in the 2001 YTD period. In addition, cash flow from operating activities included a $457,000 tax benefit from the exercise of non-qualified options and disqualifying dispositions of incentive stock options, down from $2,704,000 in the 2001 YTD period. As options granted under the Company's stock option plans are exercised, the Company will continue to receive proceeds and a tax deduction for disqualifying dispositions; however, neither the amounts nor the timing thereof can be predicted.

A summary of the Company's cash requirements related to its outstanding long-term debt (excluding the Company's line of credit which terminates on March 31, 2004), future minimum lease payments and green coffee purchase commitments is as follows:

Fiscal Year

Long-Term Debt

Lease Commitments

Green Coffee Purchase Commitments

Total

2002, remaining

$      46,000

$     347,000

$  4,236,000

$  4,629,000

2003

2,689,000

1,386,000

6,328,000

10,403,000

2004

1,933,000

1,002,000

2,819,000

5,754,000

2005

915,000

1,019,000

1,934,000

2006

758,000

758,000

Thereafter

2,829,000

2,829,000

Total

$ 4,668,000

$ 7,237,000

$14,402,000

$26,307,000


Management believes that cash flow from operating activities, existing cash, the currently available credit facility and additional borrowings, if available, will provide sufficient liquidity to pay all liabilities in the normal course of business, fund capital expenditures and service debt requirements in the next twelve months. However, a decrease in operating cash flows, due to a decline in earnings or other factors, may impact the Company's ability to self-fund capital expenditures and other investments, or service debt requirements, and may require the Company to seek additional borrowings or undertake an equity offering as sources of funding. Management is presently considering expanding its credit facility in order to position the company for small strategic opportunities similar to last year's Frontier acquisition.

Deferred Income Taxes

The Company had net deferred tax assets of $291,000 at July 6, 2002. These assets are reported net of a deferred tax asset valuation allowance at that date of $1,687,000 (including $1,617,000 related to a Vermont investment tax credit). Presently, the Company believes that the deferred tax assets, net of deferred tax liabilities and the valuation allowance, are realizable and represent management's best estimate, based on the weight of available evidence as prescribed in SFAS 109, of the amount of deferred tax assets which most likely will be realized. However, management will continue to evaluate the amount of the valuation allowance based on near-term operating results and longer-term projections.

Factors Affecting Quarterly Performance

Historically, the Company has experienced variations in sales and earnings from quarter to quarter due to the holiday season and a variety of other factors, including, but not limited to, general economic trends, the cost of green coffee, competition, marketing programs, weather and special or unusual events. Because of the seasonality of the Company's business, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year. Results from Keurig, a small high growth privately held company, could vary significantly from quarter to quarter given the investment spending and launch of the Keurig at Home brewer.

Critical Accounting Policies

Green Mountain prepares its consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period (see Note 2 to the Company's Consolidated Financial Statements included in the Annual Report on Form 10-K). Actual results could differ from those estimates.

In December, the Securities and Exchange Commission ("SEC") requested that all registrants list their critical accounting policies in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of their Form 10-K. The SEC defined a critical accounting policy as one which is important to the portrayal of the company's financial condition and results of operations and requires management's subjective or complex judgments. In accordance with this request, the Company has described its critical accounting policies below.

Provision for Doubtful Accounts
Periodically, the Company reviews the adequacy of its provision for doubtful accounts based on historical bad debt expense results and current economic conditions using factors based on the aging of its accounts receivable. In addition, from time-to-time the Company estimates specific additional allowances based on indications that a specific customer may be experiencing financial difficulties. Actual bad debt results could differ materially from the Company's estimates.

Deferred Tax Valuation Allowance
Periodically, management reviews the adequacy of its deferred tax valuation allowance that is primarily related to a Vermont manufacturer's investment tax credit. This review entails estimating: the Company's future taxable income through fiscal 2004; how much of that taxable income will be allocable to Vermont; and, the levels of disqualifying dispositions of stock options, among other factors. A reduction in the valuation allowance can result in the Company reporting its income tax expense at a lower effective Federal and State tax rate. Conversely, an increase in the valuation allowance can result in the Company reporting its income tax at a higher rate. Since future results may differ materially from those estimated by the Company, the Company's estimate of the amount of deferred tax assets that will be ultimately realized could differ materially.

Impairment of Long-Lived Assets
When facts and circumstances indicate that the carrying values of long-lived assets, including fixed assets, investments in other companies and intangibles, may be impaired, an evaluation of recoverability is performed by comparing the carrying value of the assets to projected future cash flows in addition to other quantitative and qualitative analyses. Upon indication that the carrying value of such assets may not be recoverable, the Company recognizes an impairment loss as a charge against current operations. Long-lived assets to be disposed of are reported at the lower of the carrying amount or fair value, less estimated costs to sell. Judgments made by the Company related to the expected useful lives of long-lived assets and the ability of the Company to realize undiscounted cash flows in excess of the carrying amounts of such assets are affected by factors such as the ongoing maintenance and improvements of the assets, changes in economic conditions, and changes in operating performance. As the Comp any assesses the ongoing expected cash flows and carrying amounts of its long-lived assets, these factors could cause the Company to realize a material impairment charge.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in information relating to commodity price risks since the Company's disclosure included in Item 7A of Form 10-K as filed with the Securities and Exchange Commission on December 24, 2001.

At July 6, 2002, the Company had $16,715,000 of debt subject to variable interest rates ( Fleet Bank's prime rate, LIBOR rates for maturities up to one year or Bankers' Acceptance rates). A hypothetical 100 basis point increase in the Bankers' Acceptance, LIBOR and prime rates would result in additional interest expense of $167,000 on an annualized basis.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits:

3.1

Certificate of Incorporation, as Amended (1)

3.2

Bylaws, as Amended and Restated (1)

10.1

Amendment to Lease Agreement dated April 28, 1993 between Pilgrim Partnership, L.L.C. f/k/a Pilgrim Partnership and Green Mountain Coffee Roasters, Inc

10.2

Equipment Purchase Agreement between Keurig, Incorporated and Green Mountain Coffee Roasters, Inc.

   

(1) Incorporated by reference to the corresponding exhibit number in the Quarterly Report on Form 10-Q for the twelve weeks ended April 13, 2002

(b) Reports on Form 8-K:

A report of Form 8-K was filed on April 19, 2002 to report under Item 2 of Form 8-K the exercise by the Company of options to acquire 2,217,859 shares of capital stock of Keurig, Incorporated (including options previously exercised). An amendment to this report was filed on July 1, 2002 to present financial statements of Keurig, Incorporated and pro forma financial information required under Item 7.

 

 

SIGNATURES

Pursuant to the requirements 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.

 

 

     

GREEN MOUNTAIN COFFEE, INC.

       

Date:

8/20/2002

 

By:       /s/ Robert P. Stiller

   

             Robert P. Stiller,

   

              President and Chief Executive Officer

     

Date:

8/20/2002

 

By        /s/ William G. Hogan

     

             William G. Hogan,

     

             Vice President and Chief Financial Officer