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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
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(Mark One)
[ X ] Annual Report Pursuant To Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended September 27, 1997
OR
[ ] 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
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(State or other jurisdiction (IRS employer identification no.)
of incorporation or organization
33 Coffee Lane, Waterbury, Vermont 05676
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(Address of principal executive offices) (Zip code)
(802) 244-5621
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Registrant's telephone number
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $.10 par value per share
(Title of class)
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 past 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. [ X ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the voting stock of the registrant held by
non-affiliates of the registrant on December 10, 1997 was approximately
$8,645,000 based upon the closing price of such stock on that date.
As of December 10, 1997, 3,530,818 shares of common stock of the registrant were
outstanding. See "Market for Common Equity and Related Stockholder Matters."
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the registrant's Annual Meeting
of Shareholders to be held on March 20, 1998 have been incorporated by reference
into Part III of this report. The registrant will file the definitive Proxy
Statement by January 26, 1998.
GREEN MOUNTAIN COFFEE
Annual Report on Form 10-K
Table of Contents
Page
Part I
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Item 1. Business...................................................... 3
Item 2. Properties.................................................... 15
Item 3. Legal Proceedings............................................. 15
Item 4. Submission of Matters to a Vote of Security Holders........... 15
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Part II
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Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 18
Item 6. Selected Financial Data....................................... 19
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 19
Item 8. Financial Statements and Supplementary Data................... 25
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures........................ 25
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Part III
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Item 10. Directors and Executive Officers of the Registrant............ 26
Item 11. Executive Compensation........................................ 26
Item 12. Security Ownership of Certain Beneficial Owners
and Management.............................................. 26
Item 13. Certain Relationships and Related Transactions................ 26
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Part IV
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Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K................................................. 27
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. 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, business conditions in the coffee industry and food industry in
general, fluctuations in availability and cost of green coffee, economic
conditions, prevailing interest rates, competition, the management challenges of
rapid growth, variances from budgeted sales mix and growth rate, consumer
acceptance of the Company's new package design and sizes, weather and special or
unusual events, as well as other risk factors described in Item 1 of the
Company's Annual Report on Form 10-K for the year ended September 27, 1997 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.
PART I
Item 1. Business
The Company
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Green Mountain Coffee, Inc. ("the Company" or "Green Mountain") roasts over
25 high-quality arabica coffees to produce over 50 varieties of coffee which it
sells through a coordinated multi-channel distribution network consisting of
wholesale, company-owned stores, and direct mail operations. This distribution
network is designed to maximize brand name recognition and product availability.
The Company is one of the leading specialty coffee companies in its established
markets.
The majority of Green Mountain's revenue is derived from its over 5,000
wholesale customer accounts located primarily in the northeastern United States.
The wholesale operation serves fine dining, supermarket, specialty food store,
convenience store, food service, hotel, university, travel and office coffee
service customers. Wholesale customers resell the coffee in whole bean or ground
form for home consumption and/or brew and sell coffee beverages at their place
of business.
The Company is a Delaware holding company formed in July 1993, whose only
asset is the stock of Green Mountain Coffee Roasters, Inc., a Vermont
corporation ("Roasters") formed in 1981. As used herein, unless the context
otherwise requires, references to "the Company" or "Green Mountain" include the
Company, Roasters and Roasters' inactive subsidiary, Green Mountain Coffee
Roasters Franchising Corporation, a Delaware corporation formed in 1990.
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, into the fiscal year. As used herein, unless the context otherwise
requires, references to "fiscal 1997" or "fiscal 1996" represent the 52-week
periods ended September 27, 1997 and September 28, 1996, respectively.
The Company's corporate offices are located at 33 Coffee Lane, Waterbury,
Vermont 05676. The Company's telephone number is (802) 244-5621, its fax number
is (802) 244-5436, and its email address for investor information is
investor.services@gmcr.com. The address of the Company's Internet web site is
www.gmcr.com.
The Product
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Green Mountain is committed to providing the highest quality arabica
coffees available from around the world. To achieve this goal, Green Mountain
carefully selects the finest coffees and then custom roasts the coffees to
maximize their taste and flavor differences.
The Company roasts its coffee in small batches to ensure consistency. Green
Mountain varies both the degree of roast and the roasting profile (i.e., roast
time and temperature) to maximize a particular coffee's taste characteristics.
The Company utilizes state-of-the-art roasting software which enables it to more
exactly duplicate specific roasts, ensuring Green Mountain's ability to offer
consistent taste profiles.
Green Mountain's roasting process is designed to maximize the flavors
inherent in the coffee itself, without letting the flavor of roasting overshadow
a particular coffee's taste subtleties. Green Mountain believes that its
distinctive roasting methods enable it to provide the same coffees at different
roasting degrees to maximize their flavors and thereby satisfy varying consumer
preferences.
The Company uses convection air roasters, which it believes offer a higher
degree of flexibility than other commercially available roasters. In addition,
the Company has developed specific roasting programs for each bean type to
establish a Green Mountain "signature" for that bean type, which the Company
calls its "appropriate roast"(TM). The Company believes that this roasting
process distinguishes it from other specialty coffee companies and has resulted
in strong customer brand loyalty.
Green Mountain, unlike many of its competitors, also offers flavored
coffees. The Company believes that flavoring its coffee during the production
process, rather than providing flavor additives after brewing, provides its
customers with taste consistency, convenience and economy.
The Company nitrogen flushes its packaged coffee and employs one-way valve
bag packaging technology which provides a minimum shelf life of six months for
the Company's coffees. This technology enables the Company to expand its
distribution while maintaining its high standards for quality and freshness.
Growth strategy
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In recent years, the primary growth in the coffee industry has come from
the specialty coffee segment, driven by the wider availability of high quality
coffee, the emergence of upscale coffee shops throughout the country, and the
general level of consumer education. Green Mountain has been benefiting from the
overall market trend plus some distinctive advantages over its competitors.
The presence of the Green Mountain Coffee Roasters(R) brand crosses over
many different distribution channels and customer categories in its primary
geographic market, the northeastern United States, thereby providing widespread
exposure to the brand in a variety of settings, ease of access to the products,
and many tasting opportunities for consumer trial. Green Mountain's coffee is
widely available throughout the day, at home in the morning, in hotels, on
airplanes, at convenience stores on the way to work, at the office, in
restaurants, in supermarkets and at home again at the end of the day.
The Company believes that its coffee's convenient availability for consumer
trial through convenience stores, restaurants and office coffee services is a
significant advantage and a key component of its growth strategy. The Company
believes that potential customers who sample its products by the cup are likely
to develop a taste for Green Mountain coffee and seek it out through other
available distribution channels. It has been the Company's experience that
consumer trial of Green Mountain coffee at one level of distribution often leads
to a subsequent purchase at another level of distribution. As brand awareness
increases through trial by consumers of the Company's coffee by the cup, demand
for whole bean sales of the Company's coffee for home consumption also
increases. The National Coffee Association of USA, Inc. in its Coffee
Consumption Trends and Outlook, 1997 Winter Coffee Study, states that "76% of
all coffee is consumed at home." It further stated that 71% of all coffee
consumed at home is purchased at supermarkets. As brand equity is built,
wholesale expansion typically continues through customers such as supermarkets
and specialty food stores, who in turn, sell the Company's whole bean coffee to
consumers. This expansion process capitalizes upon this cup/whole bean
inter-relationship and is designed to further increase Green Mountain's market
share in geographic areas in which it already operates in order to increase
sales density and drive operational and brand-equity efficiencies.
The Company also seeks to introduce Green Mountain coffee in selected new
markets across the United States and internationally, principally utilizing the
Company's wholesale distribution channel. In recent years, Green Mountain has
generally entered new territories and begun to develop brand awareness through
the regional or national networks of its major customers, such as the Mobil
convenience store network.
The Company will continue to focus on increasing wholesale sales of its
products to retailers of whole bean coffee to facilitate its expansion.
Similarly, the Company will strive to identify other potential wholesale
customers in each of its markets, such as office coffee services, hotel chains,
food distributors and both chain and independent convenience stores and
restaurants which the Company believes not only provide an additional source of
revenues, but also facilitate consumer trial of Green Mountain Coffee. In
addition, the Company will evaluate other potential marketing channels for both
its established and new territories.
The Company has not added any new company-owned retail stores in recent
years as it has found that it has achieved acceptable levels of consumer
sampling of Green Mountain Coffee and higher return on investment through its
wholesale accounts. In the direct mail area, the Company focuses solicitations
on catalog customers who buy regularly from the Company, in the the corporate
gift-giving, bed-and-breakfast and small office market segments, and from
members of the Company's "Coffee Club", a continuity program with customized
standing orders for automatic re-shipment.
Recent Developments
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Much was accomplished in 1997 to re-focus and unify the Green Mountain
brand. The Company introduced its new packaging in mid-1997, giving the product
a more appropriate upscale look and building strongly on Vermont imagery. The
new design, with the logo "Sit back, sip and relax, you're on Green Mountain
Time"TM is now featured on coffee packages, point of purchase promotional
material, delivery trucks, coffee mugs and disposable cups. The packaging
re-design was also an opportunity to decrease the array of available package
sizes, to improve operational efficiency and to change the standard package size
from one pound to the more traditional 12 ounce bag, thus enabling the Company
to price its coffee more in line with competitors' brands.
In the Fall of 1997, the Company introduced its first limited edition
coffee, Autumn Harvest Blend(TM). A unique label, also based on a classic
Vermont theme, was applied on the coffee package as well as a variety of
promotional items, including thermal travel mugs and T-shirts. This campaign
proved very effective to provide existing customers with unique opportunities to
promote the brand and increase sales.
Since March 1996, the Company has more than doubled the size of its
wholesale sales staff, adding sixteen area sales managers, as well as national
supermarket and national office coffee service sales managers. Fiscal 1997 was
largely devoted to the training of this new staff and the re-design of the sales
process. Nevertheless, the Company has already started to reap the benefits of
its major investment in wholesale sales and marketing.
Green Mountain enjoyed good penetration into the office coffee service
("OCS") market, which is important to provide tasting opportunities to new
consumers. Starting the year with only five OCS distributors, the Company ended
the year with over 25 distributors taking Green Mountain coffee throughout the
eastern and mid-western United States. One major alliance is a five-year
agreement entered into in September 1997 with the Perrier Group, which now
distributes Green Mountain Coffee to workplaces along with its Poland Spring
Natural Spring Water. In November 1997, the Company also began providing Green
Mountain coffees in the New York metropolitan area to Bunn Coffee Service, Inc.,
the largest independent OCS sales organization in the United States. Another
result of the OCS focus was commencing sales to Staples Office Products
Superstores, which now offers Green Mountain's coffee in nearly 600 outlets in
North America as well as through their catalog.
The Company was also successful in its effort to acquire and expand major
accounts in the transportation sector. Consumers can now enjoy Green Mountain
coffee while traveling with Delta Express, the Delta Shuttle, Midway Airlines,
AirTran Airways, Business Express and Amtrak.
In January 1997, Green Mountain became the exclusive supplier of coffee to
The Coffee Station, Inc., an operator of coffee shops with impressive locations
such as Rockefeller Center and the World Trade Center in New York City, and the
CNN Center in Atlanta.
The Company's relationship with Mobil is also expanding, with Green
Mountain coffee now served in over 900 Mobil convenience stores. In June 1997,
the Company signed a five-year agreement to supply all Mobil "On The Run"(SM)
convenience stores of which approximately 200 (included in the 900 referenced
above) are currently in operation. The sales focus in supermarkets has also
continued with the addition in fiscal 1997 of 14 Big V supermarkets in New York,
18 Grand Union supermarkets in Vermont, and the testing in 20 Stop 'n Shop
supermarkets in Connecticut and Massachusetts.
Finally, in fiscal 1997, the Company has made great strides in its
preparation for future growth. The Company started a complete overhaul of its
information systems, with the implementation in record time of seven PeopleSoft
enterprise system software components. The implementation of the balance of the
key modules is expected to be completed in fiscal 1998. Once completely
deployed, this new software is expected to help Green Mountain better serve its
customers, and grow more efficiently and effectively. The Company's landlord
also began construction in 1997 to double the size of Green Mountain's central
production and distribution facility in Waterbury, Vermont. Management believes
that both improvement projects are necessary to enable the Company to increase
its growth rate. However, there can be no assurance that the Company will be
able to generate enough revenue growth to support increases in operational
expenses from these major infrastructure improvements.
Corporate Philosophy
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Green Mountain's objective is to be the leading specialty coffee company by
providing the highest quality coffee and having the largest market share in its
targeted markets while maximizing company value. The Company intends to achieve
this objective through a corporate philosophy designed to differentiate and
reinforce the Green Mountain brand and to engender a high degree of customer
loyalty. The essential elements of this philosophy include:
Highest Quality Coffee. Green Mountain buys only the highest quality arabica
beans available from the world's coffee-producing regions and uses a roasting
process that maximizes each coffee's individual taste and aroma. Green Mountain
believes that its coffees are among the highest quality coffees sold in the
world.
Customer Service. To ensure a high level of customer contact, the Company has
established regional distribution centers to supply coffee to its wholesale
customers and from which customer service calls are dispatched. The Company has
an on-line inventory system for its central distribution center's inventory and
uses hand-held computers on its Vermont-originated delivery routes. Both of
these enhancements help to better serve the Company's customers and to improve
the Company's direct-store-delivery process and capability. In addition, the
Company's wholesale area sales managers are equipped with laptop computers to
speed new customer setup, enhance the Company's telemarketing efforts and field
communications, and help provide customers with sales history, forecasting and
merchandising data.
Green Mountain views the quality of customer interaction by its employees as a
major long-term success factor. Employees throughout Green Mountain are trained
and encouraged to exceed customer expectations. The Company also believes that
coffee is a convenience purchase and utilizes its multi-channel distribution
network to make its coffee widely and easily available to consumers for home or
away-from-home consumption.
Customer Coffee Education. The Company educates its wholesale customers and
employees about the origin and preparation of coffee through a course comprised
of a series of on-site training, tours, manuals, and hands-on learning
experiences known as "Coffee College." The two-day intensive training covers
growing and harvesting; coffee tasting and cupping; grinding, filtering, and
brewing; roasting and packaging; and preparing coffee beverages. During fiscal
1997, Green Mountain Coffee Roasters was also selected to host a Specialty
Coffee Association of America ("SCAA") Espresso Lab training session. The
Company's direct mail catalog provides an overview of the differences between
the various coffees from around the world, the various degrees of roast, as well
as proper grinding and brewing guidelines. Green Mountain's company-owned retail
stores offer in-store roasting demonstrations, and coffee tastings, as well as
coffee preparation demonstrations. The Company believes that activities such as
these help to create advocates for its coffee and thereby engender a loyal
customer base.
Employee Development. Through a variety of educational workshops, seminars and
other programs, the Company provides employees with educational opportunities
that enhance their ability to offer Green Mountain customers a level of service
and quality that fosters long-term relationships. The Company believes that its
dedication to employee training attracts and retains highly qualified and
motivated employees.
Community Involvement. Green Mountain contributes coffee and coffee equipment to
support non-profit organizations in local communities. These organizations
include the United Way, the Salvation Army, the Ronald McDonald House, The Hole
in the Wall Gang, as well as libraries, religious organizations, schools,
counseling centers and soup kitchens in markets where the Company operates.
Since 1993, the Company has allowed employees to volunteer on company time for
up to 2.5% of their total hours worked at Green Mountain, to encourage and
support volunteer work for non-profit and community-based organizations. Through
its support of Coffee Kids(R), the Company seeks to improve the quality of life
of children and families in coffee-growing communities around the world. In
addition, through customer and employee contributions, the Company has funded
two village banks located in Guatemala and Mexico which have made low interest
rate loans available for women to start small businesses to broaden their
family's sources of income. In addition, the Company has funded the construction
of a coffee processing facility and hydroelectric plant in Villa Rica, Peru,
which was proposed and completed by 16 farmers to help process the Company's
Organic Peruvian Select(TM) coffee. The Company believes that the support of
local and global organizations furthers the causes the Company believes in and
generates goodwill.
Environmental Leadership. Green Mountain is dedicated to both the preservation
of the environment and minimization of its environmental impact, and seeks to
achieve these objectives in various ways. The Company encourages sustainability
through its Stewardship(R) Program, through which a portion of its coffee is
purchased from farms and cooperatives where herbicide and pesticide use is
limited and soil erosion controls are in place. In fiscal 1996, Green Mountain
introduced its first organic coffee, a farm-direct coffee from Peru, and the
Company's roasting and packaging facility was certified as organic by Quality
Assurance International of San Diego, California. Since 1990, Green Mountain has
sold, under the licensed name Earth-Friendly Coffee Filters(TM), a line of
dioxin- and chlorine-free paper coffee filters. Further, the Company provides
financial support to environmental organizations such as Conservation
International and the Rainforest Alliance, which work to preserve the world's
rain forests.
Green Mountain also seeks to minimize its environmental impact through
responsible operational practices, from purchasing to waste management. Since
1989, the Company has had a volunteer Employee Environmental Committee, which
investigates a broad range of issues. In 1994, Green Mountain joined the
national BuyRecycled! Alliance, pledging to document and increase its purchases
of recycled goods annually. The Company's corporate letterhead consists of 25%
post- and 25% pre-consumer recycled content by sheet weight. Green Mountain uses
chemical-free cornstarch-based foam peanuts, which decompose in water, to
protect products during shipping. It also stores and ships products in either
reusable or recyclable totes and containers. The Company makes every attempt to
divert its manufacturing waste out of the landfill. For example, the burlap bags
which contain green coffee beans are given away after they are emptied, for use
in gardens, as animal beds, or for craft supplies. Chaff, a highly compostable
coating on the coffee bean which separates during the roasting process, is made
available to local farmers and gardeners. The Company also has an active on-site
recycling program, established in 1989, which the Company believes has enabled
it to reduce its landfill refuse volumes by approximately 38%. In 1997, the
Company won a 3M Scotchban(TM). Innovation Award for the development of a
biodegradable coffee bag used by Company-owned retail stores and wholesale
customers who bag Green Mountain Coffee on their premises.
Wholesale Operations
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Approximately 84% of Green Mountain's revenue and approximately 93% of its
coffee pounds sold are derived from its wholesale operation which services
accounts located primarily in the northeastern United States. Wholesale
customers resell the coffee in whole bean or ground form for home consumption
and/or brew and sell coffee beverages at their place of business. Unlike most of
its competitors, Green Mountain's wholesale operation services a large variety
of establishments. This strategy enables a deeper penetration in a given
geographic market, exposing consumers to the brand throughout the day in a
variety of contexts. This strategy also has the advantage of limiting the
dependency of the Company on a single distribution channel. The distribution of
wholesale pounds sold during fiscal 1997 by wholesale customer category was
approximately: 28% to supermarkets, 25% to convenience stores, 20% to
restaurants, 15% to other food service establishments such as hotels,
universities, and airlines, 8% to office coffee service distributors, and 4% to
other retail establishments such as specialty food stores.
Notable accounts include:
Supermarkets
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Roche Brothers - 13 upscale supermarkets
Kings Supermarkets - 22 stores
Hannaford Brothers - 95 supermarkets
Convenience stores
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Mobil convenience stores - over 900 stores
Office Coffee Services
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Bunn Coffee Service
Perrier's Poland Springs
Restaurants
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Aureole Restaurant, NYC
The Harvard Club, NYC
New England Culinary Institute
Culinary Institute of America
The Coffee Station
Other Retail
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L.L. Bean
Other Food Services
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Amtrak - northeast corridor
Delta Express
Delta Shuttle
Midway Airlines
Massachusetts Insstitute of Technology
Stowe Mountain Resort
University of Vermont
Geographically, the Company's wholesale coffee pound sales in fiscal 1997
were approximately as follows: 44% in northern New England states, 22% in
southern New England states, 19% in mid-Atlantic states, 6% in southern Atlantic
states, and 8% elsewhere in the United States.
Through the wholesale operation, Green Mountain has also initiated an
international sales effort, principally through distributors, initially
targeting nations where there exists either a tradition of coffee consumption or
a recent trend indicating the appreciation of specialty coffee. In fiscal 1997,
approximately 1% of wholesale pounds were sold internationally.
Wholesale operations are coordinated from the Company's headquarters in
Waterbury, Vermont and regional distribution centers in Biddeford, Maine;
Latham, New York, a suburb of Albany; Woburn, Massachusetts; and Southington,
Connecticut. Distribution facilities are located within a two-hour radius of
most customers to expedite delivery. The wholesale operation primarily uses
in-house sales people. However, in certain markets, such as the office coffee
service and food service sectors, the Company utilizes the services of
independent distributors who purchase coffee from the Company for resale to
wholesale customers. The Company believes that the use of such distributors
provides access to certain wholesale customers whose size or geographic location
makes it economically inefficient for the Company to service directly.
The Company generally provides wholesale customers with brewing, grinding
and related equipment and product displays ("loaner equipment") at no charge,
which are usually installed on the customer's premises by the Company's internal
or contracted service personnel. A customer is also assigned a service
technician who services, repairs and provides preventive maintenance and
emergency service on such equipment. Additionally, for supermarket customers,
Green Mountain employs a team of over 29 part-time stockers who ensure that
supermarket displays are clean, appropriately stocked, and have promotional
items to maximize sales in supermarkets. Most large food conglomerates who own
coffee companies do not provide such on-site specialized sales support to their
supermarket customers.
As of December 1997, the wholesale operation had 31 area sales managers
assigned to geographic territories, up from 15 area sales managers as of
February 1996. The wholesale area sales territories are concentrated in the
northeastern corner of the United States, with an additional presence in
Illinois, Florida, Michigan and Arizona. In addition to geographic sales people,
the Company has a national supermarket sales manager, a national office coffee
service sales manager, an international sales manager, and a special national
sales accounts manager to help provide more focused category management in these
market segments.
The Company's sales process includes: the use of mapping software to
identify desirable customer prospects and potential new expansion territories;
tradeshows; outbound telemarketing to target and qualify prospects for the
Company's area sales managers; and the use of laptop computers by area sales
managers to speed new customer setup, enhance the Company's telemarketing
efforts and field communications, and to help provide customers with sales
history, forecasting and merchandising data. In addition to the above, the
Company actively pursues referrals from existing customer to shorten the sales
process in the acquisition of new business. The Company also has an active "VIP"
free coffee sampling program targeted to prospects.
Company-Owned Stores
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Green Mountain operates twelve retail stores located in Vermont,
Connecticut, Illinois, Maine, Massachusetts, New Hampshire and New York. The
Company's retail stores provide an opportunity for direct contact with consumers
and help build the credibility of the Green Mountain Coffee Roasters(R)brand for
its specialty wholesale business. The stores offer a variety of high-quality
whole bean arabica coffees, specialty coffee beverages including cappuccinos and
lattes, and a variety of cold coffee drinks. In addition, the stores offer
freshly baked pastries, a selection of brewing equipment and accessories,
coffee-related gifts and packaged foods.
Company-owned store operations made up approximately 10% of total revenues
in fiscal 1997 and are presently not a principal growth channel of the Company.
Rather, they are used primarily to help support growth in the wholesale sector
by adding visibility to the brand and providing consumers with a high-quality
coffee experience. Eight of the present twelve stores have in-store roasters. In
October 1997, the Company relocated its South Portland, Maine retail store to a
new location and modified its retail design concept to include a "slice of
Vermont", a relaxing and inviting family orientation, and an emphasis on
specialty coffee beverages and their creation.
Direct Mail Operations
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The Company publishes catalogs that market over 50 coffees, coffee-related
equipment and accessories, as well as gift assortments and gourmet food items
covering a wide range of price points. Revenues from direct mail accounted for
approximately 6% of total revenues in fiscal 1997. Green Mountain's
telemarketing service representatives fulfill the individual coffee needs of
direct mail customers by educating and consulting with customers about the
various attributes of different coffee varieties. Representatives also suggest
custom blends, handle special delivery requests, offer special products in an
"upsell" program and contact customers via outbound telephone to offer products
and special items targeted to their previous buying patterns.
In fiscal 1997, approximately 55% of the Company's direct mail revenue was
derived from over 4,000 members of its "Coffee Club", a continuity program with
customized standing orders for re-shipment.
In addition to its direct mail program targeted at the individual consumer,
Green Mountain also uses its direct mail system to target corporate gift-giving
programs and bed-and-breakfast and small office establishments that it believes
are well served via the convenient direct mail channel.
The Company's direct mail operations also provide special promotional
direct mail offers and product shipments to wholesale "VIP" customers and
prospects. Moreover, the Company's catalog and direct marketing efforts provide
market testing opportunities, build brand awareness, and support the entry of
the wholesale operation into new geographic markets through targeted mailings.
Green Coffee Cost and Supply
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The Company utilizes a combination of outside brokers and direct
relationships with estates for its supply of green coffees, with outside brokers
providing the larger amount. Coffee is the world's second largest traded
commodity and its supply and price are subject to high volatility. Although most
coffee trades in the commodity market, coffee of the quality sought by the
Company tends to trade on a negotiated basis at a substantial premium or
"differential" above commodity coffee pricing, depending upon the supply and
demand at the time of purchase. Supply and price can be affected by multiple
factors, such as weather, politics and economics in the producing countries.
Cyclical swings in commodity markets, based upon supply and demand, are not
at all uncommon. The "C" price (the price per pound quoted by the Coffee, Sugar
and Cocoa Exchange) of green coffee was at relatively high levels throughout
fiscal 1995, from $2.26 at the beginning of the fiscal year to a low of $1.15
near the end of the fiscal year, as a result of frosts and droughts in 1994 in
the coffee producing region of Brazil, the world's largest producer of coffee.
Although Green Mountain does not buy any of its coffee from Brazil, virtually
all coffee prices were adversely affected by the weather in Brazil. In fiscal
1996, the average "C" price was less than in fiscal 1995, and ranged from a high
of $1.32 to a low of $0.91.
In December 1996, the "C" price of coffee started to rise again due to a
variety of factors including reports of domestic coffee supplies at twenty-year
lows, forecasts of smaller crops in Central America and the fear of frost in
Brazil. In May 1997, the "C" price reached a record high of over $3.00. It has
decreased since then (to $1.83 at December 10, 1997), but remains highly
unstable.
Prior to the two 1994 frosts in Brazil, the differential payable by the
Company for its coffees could add up to $0.70 per pound over the published
commodity price for high-quality arabica coffees. Since then, some of these
differentials have risen dramatically, adding further to the overall cost of
coffee.
It is largely expected that coffee prices will remain volatile in the
coming years. Differentials and premiums continue to remain at high levels. In
addition, a number of factors, such as pest damage and weather-related crop
failure could cause coffee prices to climb. Furthermore, the Company believes
that the low coffee price ranges experienced during the early 1990s are not high
enough to support proper farming and processing practices, impacting the overall
supply of the top grade coffees. With the growth of the specialty coffee
segment, it is important that prices remain high enough to support the world
consumption of the top grades of coffees.
The Company generally fixes the price of its coffee contracts two to six
months prior to delivery so that it can adjust its sales prices to the market.
Green Mountain believes that this is the best way to provide its customers with
a fair price for its coffee. The Company believes that there is significant risk
in fixing prices further in the future, since the true available supply of green
coffee from around the world is not readily known. At September 27, 1997, the
Company had approximately $4 million in fixed price purchase commitments.
In addition, the Company does from time to time purchase coffee future
contracts to provide additional protection when it is not able to enter into
coffee purchase commitments. The gains from such contracts realized in fiscal
1997 were not material.
In fiscal 1997, the Company passed on to its customers most of the green
coffee price increase through two consecutive price increases in March 1997 and
June 1997 (the total increase averaged $0.80 per pound). There can be no
assurance that the Company will be successful in passing on further green coffee
price fluctuations to the customers without losses in sales volume or gross
margin. 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 50 different varieties of coffee, 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, in a blend or
temporarily remove that particular coffee from its product line. However, a
worldwide supply shortage of the high-quality arabica coffees the Company
purchases could have an adverse impact on the Company.
Green Mountain intends to increase the percentage of the coffee it buys
from specifically identified farms in fiscal 1998 and beyond, as it believes
this strategy will result in improved product quality, product differentiation,
long-term supply and pricing stability. In addition, the Company believes that
its efforts will have a positive impact on the living and working environment of
farm workers and their families.
Significant Customers
- ---------------------
Hannaford Brothers Company, a supermarket chain, accounted for
approximately 10.4%, 12.1% and 10.4% of revenues in the years ended September
27, 1997, September 28, 1996 and September 30, 1995, respectively. In December
1997, the Company renewed its contract with Hannaford for three years. This new
contract also provides access to an additional 21 stores in New York State.
The extensive network of Mobil convenience stores, owned by Mobil
Corporation or by independent franchisees, accounted for approximately 15.5% of
sales in fiscal 1997, and is a key component of the Company's growth strategy as
it provides sampling opportunities for a large number of potential new consumers
throughout the country. Mobil convenience stores owned and operated by Mobil
Corporation alone, however, do not make up 10% of the Company's revenues. In
fiscal 1997, the Company announced a five-year agreement to exclusively supply
Mobil On The Run(SM) convenience stores. Presently, the Company serves
approximately 200 of such stores and Mobil presently expects to open 1,200 Mobil
On-The-Run(SM) convenience stores by 2002.
Although the Company believes that it has strong mutually-beneficial
business relationships with Hannaford Brothers Company and Mobil Corporation,
there can be no assurance that it will continue to have such relationships, and
the loss of such accounts would likely have a material adverse effect on the
Company's results.
Competition
- -----------
The specialty coffee market is highly competitive, and Green Mountain
competes against all sellers of specialty coffee. Additionally, the Company also
competes with "commercial" coffee vendors, to the extent that it is also trying
to "upsell" consumers to the specialty coffee segment. A number of large
international food conglomerates have divisions or subsidiaries selling
specialty coffees, a significant portion of them having been developed through
the acquisition of independent brands. Procter & Gamble and Nestle distribute
the premium coffee products Millstone and Sarks, respectively, in supermarkets
nationwide, which may serve as alternatives to Green Mountain's coffees. In the
office coffee and food service arena, General Foods and Procter & Gamble are
large competitors. In the direct mail area, the Company competes with
established suppliers such as Gevalia, a division of General Foods Corporation,
as well as with other direct mail companies. Another well-established player is
Starbucks, a leading independent specialty coffee retailer with a limited
wholesale operation.
The Company expects intense competition, both within its primary geographic
territory, the northeast United States, and in other regions of the United
States, as it expands from its current territories. The specialty coffee market
is expected to become even more competitive as regional companies expand and
attempt to build brand awareness in new markets.
The Company competes primarily by providing fresh, high quality coffee,
easy access to its products and superior customer service. The Company believes
that its ability to provide a convenient network of outlets from which to
purchase coffee is an important factor in its ability to compete. Through its
multi-channel distribution network of wholesale, retail and direct mail
operations and its focus on the sale of coffee in all forms, rather than coffee
beverages alone, the Company believes it differentiates itself from many of its
larger competitors, who specialize in only one of the wholesale, retail and
direct mail channels of distribution. The Company also believes that one of the
distinctive features of its business is that it is one of the few coffee
companies that roasts its coffees individually, varying both the degree and
timing of the roast to maximize a coffee's particular taste characteristics.
Finally, the Company believes that being an independent roaster allows it to be
better focused and in tune with its customers' needs than its larger diversified
competitors. While the Company believes it currently competes favorably with
respect to these factors, there can be no assurance that it will be able to
compete successfully in the future.
Seasonality
- -----------
Historically, the Company has experienced significant variations in sales
from quarter to quarter due to the peak November-December 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.
Intellectual Property
- ---------------------
The Company holds federal registrations in the United States for the
trademarks Green Mountain Coffee(R), Green Mountain Coffee Roasters(R), Green
Mountain Filters(R), Stewardship Coffee(R), Stewardship(R), Nantucket Blend(R),
Rain Forest Nut(R), Vermont Country Blend(R), and Cafe Vermont(R), and for the
service marks Green Mountain Coffee Roasters(R) and Stewardship(R), and related
design marks. Federal trademark and service mark registrations must be renewed
every 10 years. Some of the Company's registered marks, including Green Mountain
Coffee(R) and Green Mountain Coffee Roasters(R), will require renewal in 2001.
The Company believes it will obtain renewal of these marks. The Company also has
several federal applications pending for registration of additional trademarks
and service marks. The Company does not hold any patents.
The Company has irrevocable, perpetual, royalty-free licenses to use the
names Earth-Friendly Coffee Filters(TM) in connection with coffee filters, and
Columbian LaCapilla(TM), Kona Mountain Coffee(TM) and Kona Mountain Estate(TM)
in connection with coffee worldwide (excluding Hawaii), all subject to the terms
of the agreements under which these licenses were granted.
The Company believes that these trademarks, service marks and licenses will
continue to be important to its success.
Employees
- ---------
As of September 27, 1997, the Company had approximately 310 full-time
employees and 100 part-time employees. The Company supplements its workforce
with temporary workers from time to time, especially in the first quarter of
each fiscal year to service increased customer demand during the peak
November-December holiday season. The Company believes that it maintains good
relations with its employees.
Item 2. Properties
The Company leases one principal manufacturing, warehousing and
distribution facility located at Pilgrim Park in Waterbury, Vermont. The
facility has in total approximately 90,000 square feet of usable space,
including a 30,000 square foot mezzanine area, and its lease expires in 2007.
This includes 40,000 square feet that were added in November 1997 for plant
expansion to be completed by the end of the second fiscal quarter of 1998. The
Company's other facilities, all of which are leased, are as follows:
Approximate Expiration
Type Location Square Feet of Lease
--------------- --------------------------------------------- -------------
Company-Owned Latham, NY 2,300 2007
Retail Stores Naperville, IL 2,330 2004
Newton Highlands, MA 1,820 2004
Plattsburgh, NY 1,440 1998
Portland, ME(2) 2,300 2002
Portsmouth, NH(1) 2,700 1999
So. Portland, ME 1,270 2007
Waitsfield, VT 2,360 2000
Waterbury, VT (Factory Outlet) 1,100 month-to-month
Waterbury Center, VT 500 1998
West Hartford, CT 1,820 1999
Winooski, VT 1,500 1998
-------------- --------------------------------------------- --------------
Administrative Coffee Lane, Waterbury, VT 4,000 month-to-month
Offices Main Street, Waterbury, VT 8,680 1999
Pilgrim Park II, Waterbury, VT 3,000 month-to-month
Pilgrim Park II, Waterbury, VT 8,000 2010
--------------- --------------------------------------------- -------------
Warehouse/ Woburn, MA 10,580 2001
Distribution/ Southington, CT 11,200 2001
Service Space Waterbury, VT 3,000 month-to-month
Biddeford, ME 10,000 2001
Latham, NY 7,500 2002
--------------- --------------------------------------------- -------------
(1)Lease also covers 2,000 square feet of space which the Company has
subleased as of December 10, 1997
(2)Lease also covers 2,024 square feet of space which the Company has
subleased as of December 10, 1997
The Company believes that its facilities are generally adequate for its
current needs and that suitable additional production and administrative space
will be available as needed on favorable terms. As indicated in the table above,
a number of company-owned retail stores leases are coming to their term in the
next couple of years. There can be no assurance that the expiring leases will be
renewed or whether the Company will be able to secure adequate sites at
acceptable rent levels if and when it decides to relocate these stores.
Item 3. Legal Proceedings
The Company is not currently party to any material pending legal
proceeding.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fiscal
quarter ended September 27, 1997.
Executive Officers of the Registrant
- ------------------------------------
Certain biographical information regarding each director and executive
officer of the Company is set forth below:
Executive
Officer
Name Age Position Since
- -------------------- ---- -------------------------------------- ---------
Robert P. Stiller 54 Chairman of the Board, President 1993
and Chief Executive Officer
Robert D. Britt 42 Director, Chief Financial Officer, 1993
Vice President, Treasurer and Secretary
Stephen J. Sabol 36 Director and Vice President 1993
Jonathan C. Wettstein 49 Director and Vice President 1993
Paul Comey 47 Vice President 1993
Dean E. Haller 45 Vice President 1997
James K. Prevo 44 Vice President 1997
William L. Prost 43 Vice President 1997
Robert P. Stiller, founder of Roasters, has served as its President and a
director since its inception in July 1981. In September 1971, Mr. Stiller
co-founded Robert Burton Associates, a company engaged in the development and
sale of E-Z Wider cigarette papers and served as its President and director
until June 1980.
Robert D. Britt has served as Chief Financial Officer of Roasters since May
1993. From July 1992 to April 1993, Mr. Britt served as Chief Financial Officer
for Engineered Coatings, Inc., a manufacturer engaged in the design and
application of high temperature metallic and ceramic coatings to metal parts.
Mr. Britt is a Certified Public Accountant and holds a Master of Business
Administration from the Wharton School at the University of Pennsylvania.
Stephen J. Sabol has served as Vice President of Sales of Roasters since
September 1996. Mr. Sabol served as Vice President of Branded Sales of Roasters
from August 1992 to September 1996. From September 1986 to August 1992, Mr.
Sabol was the General Manager of Roasters responsible for overall performance of
the wholesale division in Maine and New Hampshire.
Jonathan C. Wettstein has served as Vice President of Operations of Roasters
since April 1993. From June 1974 to April 1993, Mr. Wettstein was employed by
Digital Equipment Corporation in a variety of positions including Plant Manager,
Order Administration Manager, Marketing Manager, Business and Materials Manager
and Product Line Controller. Mr. Wettstein holds a Master of Business
Administration from the Harvard Business School.
Paul Comey has served as Executive Director of Facilities and Process
Engineering of Roasters since June 1993. From March 1986 to May 1993, Mr. Comey
was the owner and principal consultant of Baseline Solutions, a company engaged
in providing consulting services to the coffee industry, including the Company.
Dean E. Haller has served as Vice President of Administration of Roasters since
November 1996. From October 1990 to November 1996, Mr. Haller was employed by
IDX Systems Corporation as Director of Human Resources.
James K. Prevo has served as Chief Information Officer of Roasters since March
1993. Mr. Prevo worked for Digital Equipment Corporation from November 1979
through March 1993. There he held positions as a Software Engineer, Project
Manager (New Product Introduction), Program Manager (Computer Products
Manufacturing and VAXcluster Systems Engineering) and Business Manager (Systems
Integration Services).
William L. Prost has served as Vice President of Marketing for Roasters since
January 1997. Prior to this time, Mr. Prost was co-owner and co-founder of
Promark Professional Marketing Services, a marketing consulting firm established
in San Antonio, Texas in 1982. In addition, Mr. Prost owned and operated Lucky
Star Coffee, a San Antonio coffee distributor. Mr. Prost holds a Master of
Business Administration from the University of Texas.
Officers are elected annually and serve at the discretion of the Board of
Directors. None of the Company's directors or officers has any family
relationship with any other director or officer, except for Robert P. Stiller
and one of the Company's directors, Jules A. del Vecchio, whose wives are
sisters.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
(a) Price Range of Securities
The Company's common stock has been trading on the NASDAQ National Market
under the symbol GMCR since March 19, 1997. Prior to March 19, the Company's
Common stock was traded on the Nasdaq SmallCap Market under the symbol GMCR and
on the Boston Stock Exchange under the symbol GMR. The following table sets
forth the high and low sales prices as reported by NASDAQ for the periods
indicated.
High Low
---- -----
Fiscal 1996 16 weeks ended January 20, 1996........... $ 8 $ 5 3/4
12 weeks ended April 13, 1996............. $ 7 7/8 $ 5
12 weeks ended July 6, 1996............... $ 7 3/4 $ 5 5/8
12 weeks ended September 28, 1996......... $ 7 5/8 $ 5 1/2
Fiscal 1997 16 weeks ended January 21, 1997........... $ 7 1/4 $ 5 7/8
12 weeks ended April 12, 1997............. $ 9 $ 6
12 weeks ended July 5, 1997............... $ 8 3/4 $ 5 1/2
12 weeks ended September 27, 1997......... $ 12 1/4 $ 7 5/8
Fiscal 1998 September 28, 1997 to December 10, 1997... $ 10 1/2 $ 6 7/8
(b) Approximate Number of Equity Security Holders
The Company believes that the number of record holders of common stock as
of December 10, 1997 was approximately 653.
(c) Dividends
The Company has never paid a cash dividend on its common stock and
anticipates that for the foreseeable future any earnings will be retained for
use in its business and, accordingly, does not anticipate the payment of cash
dividends.
Under a current loan agreement the Company has with the Vermont Economic
Development Authority, the Company may not pay any dividends with respect to its
capital stock, whether in cash or in stock, without the prior approval of the
Vermont Economic Development Authority.
Item 6. Selected Financial Data
Fiscal Year Ended
Sept. 27, 1997 Sept. 28, 1996 Sept. 30,1995(1) Sept. 24, 1994 Sept. 25, 1993
-------------- -------------- ---------------- -------------- --------------
In thousands, except per share data
Coffee pounds sold(2)................. 6,399 5,272 4,408 3,534 2,577
Net sales............................. $ 47,834 $ 38,347 $ 34,024 $ 22,082 $ 15,651
Net income (loss)..................... $ 1,325 $ 1,262 $ (218) $ (2,358) $ (2,292)
Net income (loss) per share........... $ 0.38 $ 0.37 $ (0.06) $ (0.70) $ (0.99)
Total assets.......................... $ 23,544 $ 17,243 $ 15,565 $ 13,918 $ 18,874
Long-term obligations(3).............. $ 5,965(4) $ 3,563(4) $ 4,280(4) $ 3,022 $ 2,387
1 The fiscal year ended September 30, 1995 is a 53-week year.
All other fiscal years represented are 52-week years.
2 Excludes pounds sold as beverages through the Company's retail stores.
3 Excludes the current portion of long-term obligations.
4 Includes long-term line of credit.
There were no cash dividends paid during the past five fiscal years.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
- --------
Green Mountain Coffee, Inc., a leader in the specialty coffee industry,
roasts over 25 high quality arabica coffees to produce over 50 varieties of
coffee that it sells under the Green Mountain Coffee Roasters(R) and Green
Mountain Coffee(R) brands. For the year ended September 27, 1997, Green Mountain
derived approximately 83.7% of its net sales from its wholesale operation, which
sells coffee to retailers and food service concerns including supermarkets,
restaurants, convenience stores, specialty food stores, office coffee
distributors, and other food service providers such as hotels, universities and
airlines. The Company also operates twelve company-owned retail stores and a
direct mail operation serving customers nationwide from its Waterbury, Vermont
headquarters, which accounted for approximately 10.3% and 6.0% of net sales,
respectively, in fiscal 1997.
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, company-owned retail stores or direct mail 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, into the fiscal year. Fiscal 1997 and fiscal 1996 represent the
years ended September 27, 1997 and September 28, 1996, respectively, and
consisted of 52 weeks. Fiscal 1995 represents the year ended September 30, 1995
and consisted of 53 weeks with the fiscal fourth quarter having 13 weeks instead
of the normal 12 weeks.
Coffee Prices, Availability and General Risk Factors
- ----------------------------------------------------
Twenty-year lows in reported domestic coffee supplies combined with
forecasts of smaller crops in Central America, labor actions and reports of
adverse growing conditions in certain coffee growing countries, among other
factors, have caused a dramatic increase since December 1996 in the "C" price of
coffee (the price per pound quoted by the Coffee, Sugar and Cocoa Exchange).
Since July 1997, when, among other factors, it appeared that there would be no
frost endangering the Brazil crop, the "C" price of coffee has somewhat
declined, but remains highly volatile. In addition to the "C" price, coffee of
the quality sought by Green Mountain also tends to trade on a negotiated basis
at a substantial premium or "differential" above the "C" price. Since December
1996, differentials have also been volatile and generally rising. The Company
believes that the cost of green coffee will continue to be volatile in fiscal
1998. There can be no assurance that the Company will be successful in passing
these fluctuations on to the customers without losses in sales volume or gross
margin. 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 50 varieties of coffee, 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, in a blend or
temporarily remove that particular coffee from its product line. 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.
The Company enters into coffee purchase commitments in an attempt to secure
an adequate supply of quality coffees. In addition, the Company's objective is
to fix its raw material costs two to six months in advance to allow for time to
adjust its sales prices. This is achieved through the fixing of costs on green
coffee purchase commitments, as well as through the use of hedging instruments
such as coffee futures contracts and coffee options. In fiscal 1997, the cost
and fair value of such futures contracts and options were not material.
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 food conglomerates. The Company expects that the continued high quality
and wide availability of its coffee across a large array of distribution
channels, and 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. 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, business conditions in the coffee industry and food industry in
general, fluctuations in availability and cost of green coffee, economic
conditions, prevailing interest rates, competition, the management challenges of
rapid growth, variances from budgeted sales mix and growth rate, consumer
acceptance of the Company's new package design and sizes, weather and special or
unusual events, as well as other risk factors described in Item 1 of the
Company's Annual Report on Form 10-K for the year ended September 27, 1997 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 from Operations
- -----------------------
The following table sets forth certain financial data of the Company
expressed as a percentage of net sales for the periods denoted below:
Year Ended
-------------------------------------------
September 27, September 28, September 30,
1997 1996 1995
------------ ------------- -------------
Statement of Operations Data:
Net sales:
Wholesale...................... 83.7 % 79.1 % 74.9 %
Company-owned retail stores.... 10.3 % 13.0 % 15.0 %
Direct mail.................... 6.0 % 7.9 % 10.1 %
----------- ----------- -----------
Net sales......................... 100.0 % 100.0 % 100.0 %
Cost of sales..................... 61.5 % 59.5 % 63.9 %
----------- ----------- -----------
Gross profit....................... 38.5 % 40.5 % 36.1 %
Selling and operating expenses..... 28.0 % 27.3 % 28.0 %
General and administrative expenses 7.1 % 8.2 % 7.6 %
Loss on abandonment of equipment... 0.4 % - -
----------- ----------- -----------
Income from operations............. 3.0 % 5.0 % 0.5 %
Interest expense................... (1.1) % (1.1) % (1.2) %
----------- ----------- ------------
Income (loss) before income taxes.. 1.9 % 3.9 % (0.7) %
Income tax benefit (expense)....... 0.8 % (0.6) % 0.1 %
----------- ----------- -----------
Net income (loss).................. 2.7 % 3.3 % (0.6) %
=========== =========== =============
Fiscal 1997 versus Fiscal 1996
- ------------------------------
Net sales increased by $9,487,000 or 24.7% from $38,347,000 in fiscal 1996
to $47,834,000 in fiscal 1997. Coffee pounds sold, excluding those sold as
beverages through the Company's retail stores, increased by approximately
1,127,000 pounds or 21.4% from 5,272,000 pounds in fiscal 1996 to 6,399,000
pounds in fiscal 1997. The difference between the percentage increase in net
sales and the percentage increase in coffee pounds sold primarily relates to
increases in Green Mountain's selling prices for coffee during fiscal 1997 as a
result of higher green coffee costs.
The year-to-year increase in net sales occurred primarily in the wholesale
area in which net sales increased by $9,697,000 or 32.0% from $30,340,000 in
fiscal 1996 to $40,037,000 in fiscal 1997. This increase resulted primarily from
the year-over-year growth in the number of wholesale accounts.
Retail sales decreased $44,000 or 0.9% from $4,970,000 in fiscal 1996 to
$4,926,000 in fiscal 1997. The Company has not added new stores since 1994 and
is in the process of re-assessing the role of its retail operation in the
context of its overall growth strategy. Direct mail sales declined $166,000 or
5.5% from $3,037,000 in fiscal 1996 to $2,871,000 in fiscal 1997. Direct mail
sales are expected to be stable in fiscal 1998.
Green Mountain's gross profit increased by $2,884,000 or 18.6% from
$15,530,000 in fiscal 1996 to $18,414,000 in fiscal 1997. As a percentage of net
sales, this represents a decline of 2.0 percentage points from 40.5% in fiscal
1996 to 38.5% in fiscal 1997. The decrease of gross profit as a percentage of
sales was primarily attributable to the mathematical impact of higher green
coffee costs and higher sales prices. Total gross profit per pound sold declined
by $0.07 per pound, from $2.95 in fiscal 1996 to $2.88 in fiscal 1997. The
principal reason for this decrease is higher delivery costs related to the
expansion and start-up of regional warehouses in Massachusetts and Connecticut,
the higher percentage of deliveries outside of New England, and the impact of
various measures taken to improve speed of delivery and customer service.
Selling and operating expenses increased by $2,900,000 or 27.7% from
$10,471,000 in fiscal 1996 to $13,371,000 in fiscal 1997, and increased 0.7
percentage points as a percentage of net sales from 27.3% in fiscal 1996 to
28.0% in fiscal 1997. Approximately $1,200,000 of the increase is related to the
addition of a national supermarket sales manager, a national office coffee
service and food service sales manager, and 16 people to the Company's direct
sales force in the Greater Boston, Rhode Island, Connecticut, New York,
Michigan, Florida, Arizona and the Greater Philadelphia markets. In addition to
this direct sales force increase, the Company also increased sales support and
marketing expenditures by a similar amount during fiscal 1997. The Company
currently intends to continue ramping up sales support and marketing efforts in
fiscal 1998, although, as a percentage of sales, selling and operating expenses
are expected to decrease.
General and administrative expenses increased by $259,000 or 8.3% from
$3,132,000 in fiscal 1996 to $3,391,000 in fiscal 1997. As a percentage of net
sales, this change represents a 1.1 percentage point decrease from 8.2% in
fiscal 1996 to 7.1% in fiscal 1997.
During the second quarter of fiscal 1997, Green Mountain commenced the
expansion of its central production and distribution facility located in
Waterbury in preparation for expected future growth and after the approval of a
Federal Community Development Block Grant to the Town of Waterbury, Vermont
which is expected to indirectly benefit the Company through reduced occupancy
costs. The 45,000 square-foot addition to its central facility is expected to be
completed by the end of the first quarter of fiscal 1998 and will first be used
for expanded warehousing and distribution space with roasting and packaging
machinery being added as needed. There were no material increases in occupancy
costs in fiscal 1997 due to this expansion. However, as a result of the
demolition of an old, adjacent office building occupied by the Company, and the
immediate redesign of the production flow to be used in the expanded facility,
the Company recorded a loss on abandonment of equipment of $218,000 during the
second quarter of fiscal 1997. The additional occupancy costs of approximately
$400,000 annually for the expanded facility will impact income from operations
starting in fiscal 1998. There can be no assurance that the Company's revenue
growth will be sufficient to absorb these added facility costs, and earnings in
future periods may be negatively impacted.
As a result of the foregoing, income from operations decreased by $493,000
or 25.6% from $1,927,000 in fiscal 1996 to $1,434,000 in fiscal 1997, and
decreased 2.0 percentage points as a percentage of sales from 5.0% in fiscal
1996 to 3.0% in fiscal 1997.
Green Mountain is presently implementing an enterprise information system
which it expects to use to facilitate growth and improve operations and customer
service. This new enterprise information system also is expected to address most
"Year 2000" issues in a complete and timely manner. The additional project
related personnel, depreciation and software maintenance expenses (of
approximately $1,000,000 for fiscal 1998) is expected to impact cost of goods
sold as well as operating expenses. However, there can be no assurance that
future sales increases will be adequate to cover these additional costs, and
earnings in future periods may be negatively impacted.
Interest expense increased $99,000 or 23.5%, from $422,000 in fiscal 1996
to $521,000 in fiscal 1997 and is expected to continue to increase, as the
Company plans to continue financing its growth through additional borrowings.
The income tax expense recognized under SFAS 109 was $222,000 in fiscal
1996 compared to an income tax benefit of $395,000 in fiscal 1997. The Company
has been profitable for nine consecutive fiscal quarters and, based on the
weight of available evidence, as prescribed in SFAS 109, of the amount of
deferred tax assets which more likely than not will be realized, significantly
reduced its deferred tax assets valuation allowance during the second quarter of
fiscal 1997, thereby resulting in a substantial tax benefit. It is expected that
the Company's effective tax rate in future periods will approximate 40%.
Fiscal 1996 versus Fiscal 1995
- ------------------------------
Net sales increased by $4,323,000 or 12.7% from $34,024,000 in fiscal 1995
(a 53-week period) to $38,347,000 in fiscal 1996 (a 52-week period). On a
52-week to 52-week comparative basis, sales are estimated to have increased by
15.0% in fiscal 1996. Coffee pounds sold, excluding those sold as beverages
through the Company's retail stores, increased by approximately 864,000 pounds
or 19.6% from 4,408,000 pounds in fiscal 1995 to 5,272,000 pounds in fiscal
1996. On a 52-week to 52-week comparative basis, coffee pounds sold are
estimated to have increased 22.0% in fiscal 1996. The difference between the
percentage increase in net sales and the percentage increase in coffee pounds
sold primarily relates to reductions in Green Mountain's selling prices for
coffee during fiscal 1996 as a result of lower green coffee costs.
The year-to-year increase in net sales occurred primarily in the wholesale
area in which net sales increased by $4,856,000 or 19.1% from $25,484,000 in
fiscal 1995 to $30,340,000 in fiscal 1996. This increase resulted primarily from
the year-over-year growth in the number of wholesale accounts.
Net retail sales decreased by $136,000 or 2.7% from $5,106,000 in fiscal
1995 to $4,970,000 in fiscal 1996, principally due to the closing of three
espresso carts located at supermarkets during the second quarter of fiscal 1995,
and the closing of an espresso cart located in Albany, New York in the first
quarter of fiscal 1996. The three supermarket espresso cart locations were
converted to wholesale supermarket accounts with pre-bagged, bulk and/or
self-service coffee beverage displays. On a 52-week to 52-week comparative
basis, retail same-store sales are estimated to have increased 3.3% in fiscal
1996.
Net direct mail sales decreased by $397,000 or 11.6% from $3,434,000 in
fiscal 1995 to $3,037,000 in fiscal 1996. This decrease resulted primarily from
a shift in strategy whereby the Company focused its mail order solicitations on
catalog customers who more regularly buy from the Company, and decreased the
number of low-margin product promotions.
Green Mountain's gross profit increased by $3,244,000 or 26.4% from
$12,286,000 in fiscal 1995 to $15,530,000 in fiscal 1996. Gross profit increased
by 4.4 percentage points as a percentage of net sales from 36.1% in fiscal 1995
to 40.5% in fiscal 1996. These increases were primarily attributable to the
impact of lower green coffee costs.
Selling and operating expenses increased by $942,000 or 9.9% from
$9,529,000 in fiscal 1995 to $10,471,000 in fiscal 1996, but decreased .7
percentage points as a percentage of net sales from 28.0% in fiscal 1995 to
27.3% in fiscal 1996. The increase in selling and operating expense includes
approximately $420,000 in expenses related to the addition in fiscal 1996 of a
national supermarket sales manager, a national food service and office coffee
services sales manager, and eight people to the Company's direct sales force in
the Boston, Connecticut and Florida markets, as well as the addition of an
advertising manager and designer to the Company's corporate marketing
department.
General and administrative expenses increased by $554,000 or 21.5% from
$2,578,000 in fiscal 1995 to $3,132,000 in fiscal 1996 and increased .6
percentage points as a percentage of net sales from 7.6% in fiscal 1995 to 8.2%
in fiscal 1996. Significant general and administrative expense increases during
fiscal 1996 include: increased MIS personnel and other computer-related expenses
of approximately $130,000; increased training and human resource department
costs of approximately $75,000; and increased investor relations related
expenses of approximately $67,000.
As a result of the foregoing, income from operations increased by
$1,748,000 or 975.6% from $179,000 in fiscal 1995 to $1,927,000 in fiscal 1996,
and increased 4.5 percentage points as a percentage of sales from 0.5% in fiscal
1995 to 5.0% in fiscal 1996. The income tax benefit recognized under SFAS 109
was $26,000 in fiscal 1995 compared to income tax expense of $222,000 in fiscal
1996. The Company's effective tax rate increased from 11% in fiscal 1995 to 15%
in fiscal 1996, primarily as a result of non-deductible items being a greater
percentage of the net loss in fiscal 1995 compared to the percentage of net
income in fiscal 1996. Net income increased by $1,480,000 from a net loss of
$218,000 in fiscal 1995 to net income of $1,262,000 in fiscal 1996.
Liquidity and Capital Resources
- -------------------------------
Net working capital amounted to $4,491,000 and $2,941,000 at September 27,
1997 and September 28, 1996, respectively. The increase is primarily the result
of higher inventories, stemming primarily from the higher cost of green coffee,
and higher accounts receivable attributable to increased sales.
During fiscal 1997, Green Mountain Coffee had capital expenditures of
$5,367,000, which included $760,000 for equipment on loan to wholesale
customers, $1,341,000 for production equipment, and $2,607,000 for computer
hardware and software. Cash used for capital expenditures aggregated $2,519,000
during fiscal 1996, and included $884,000 for equipment loaned to wholesale
customers, $633,000 for production equipment, and $499,000 for computer hardware
and software.
Green Mountain is presently implementing an enterprise information system
which it expects to use to facilitate growth and improve operations and customer
service. Management believes that the substantial investment in fiscal 1997 in
computer hardware and software and the expansion of its central production and
distribution center for fiscal 1998 occupancy is necessary for the Company to
efficiently and effectively grow.
The new enterprise information system also is expected to address most
"Year 2000" issues in a complete and timely manner. Additional efforts are
underway to ensure that the Company's embedded manufacturing and distribution
software, telecommunication systems, networks and personal computers are capable
of handling dates properly after 1999.
Cash used to fund the capital expenditures in fiscal 1997 was obtained from
the $3,477,000 increase in the line of credit and $2,693,000 of net cash
provided by operating activities. Net cash provided by operating activities
reflects a $441,000 decrease as compared to fiscal 1996, which resulted
primarily from the Company's higher levels of inventories and accounts
receivable, and was partially offset by accounts payable increases.
During fiscal 1997, the Company amended its credit facility with Fleet Bank
- - NH. Under the revised facility, the Company increased the limit of the
revolving line of credit from $3,000,000 to $6,000,000 and extended its term to
February 28, 1999. The amount available under the revolving line of credit at
September 27, 1997 was $2,015,000. This line of credit is subject to certain
covenants, including quarterly tests on funded debt to EBIDA, debt service
coverage, senior debt to capital base ratios and rolling annual net income. The
interest paid on this line of credit, as well as other Fleet Bank borrowings,
varies with the prime and LIBOR interest rates, the fluctuations of which may
impact future earnings.
The Company currently plans to make capital expenditures in fiscal 1998 of
approximately $4,500,000. However, management continuously reviews capital
expenditure needs and actual amounts expended may differ from these estimates.
Management believes that cash flow from operations, existing cash,
available borrowings under its credit facility and additional borrowings will
provide sufficient liquidity to pay all liabilities in the normal course of
business, fund capital expenditures and service debt requirements for the next
twelve months. It is currently not known whether the additional borrowings will
come from an expansion of the existing credit facility or from new sources.
Deferred Income Taxes
- ---------------------
The Company had net deferred tax assets of $1,351,000 at September 27,
1997. These assets are reported net of a deferred tax asset valuation allowance
at that date of $2,391,000 (related primarily to a Vermont investment tax
credit). The Company had income before taxes of $930,000 and $1,484,000 in
fiscal 1997 and in fiscal 1996, respectively, and has been profitable in its
last nine consecutive fiscal quarters. 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.
Factors affecting quarterly performance
- ---------------------------------------
Historically, the Company has experienced significant variations in sales
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. Year over year quarterly earnings comparisons will also
show significant variations due to the release in the second quarter of fiscal
1997 of a large portion of the Company's deferred tax asset valuation allowance.
Item 8. Financial Statements
See Index to Financial Statements on Page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Except for information regarding the Company's executive officers, the
information called for by this Item is incorporated in this report by reference
to the Company's definitive Proxy Statement for the Company's Annual Meeting of
Stockholders to be held on March 20, 1998, which will be filed with the
Securities and Exchange Commission not later than 120 days after the close of
the Company's fiscal year ended September 27, 1997 (the "Definitive Proxy
Statement").
For information concerning the executive officers of the Company, see
"Executive Officers of the Registrant" under Part I of this report.
Item 11. Executive Compensation
The information required by this item is incorporated herein by reference
to the information contained in the Definitive Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated herein by reference
to the information contained in the Definitive Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated herein by reference
to the information contained in the Definitive Proxy Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements
The following financial statements are filed as a part of this report:
Page
Report of Independent Accountants......................................... F-2
Financial Statements:
Consolidated balance sheet at September 27, 1997
and September 28, 1996................................................ F-3
Consolidated statement of operations for the three years
ended September 27, 1997.............................................. F-4
Consolidated statement of changes in stockholders' equity
for the three years ended September 27, 1997.......................... F-5
Consolidated statement of cash flows for the three years
ended September 27, 1997.............................................. F-6
Notes to Consolidated Financial Statements.............................. F-7
(a) 2. Financial Statement Schedules
The following financial statement schedule is filed as a part of this
report
Schedule II: Valuation and Qualifying Accounts........................ 34
All other schedules are omitted because they are not required or the required
information is shown in the financial statements or notes thereto.
(a) 3. Exhibits
The exhibits listed below are filed as part of, or incorporated by
reference into, this report. The Company shall furnish copies of exhibits
for a reasonable fee (covering the expense of furnishing copies) upon
request in writing to Green Mountain Coffee, Investor Relations, 33 Coffee
Lane, Waterbury, VT 05676.
Exhibit Exhibit Title
No.
3.1 Certificate of Incorporation of the Company(1)
3.2 Bylaws of the Company(1)
10.1 Form of Underwriter's Warrant Agreement between Green Mountain Coffee,
Inc. and Gilford Securities Incorporated(with form of warrant
attached)(1)
10.2 (b) Term Loan Promissory Note, dated August 11, 1993, from Green
Mountain Coffee Roasters, Inc. to Fleet Bank - NH(1)
(f) Collateral Assignment of Leasehold Interest, dated August 11, 1993,
between Green Mountain Coffee Roasters, Inc. and Fleet Bank - NH1
(h) Landlord's Consent and Waiver, dated August 4, 1993, executed by
Pilgrim Partnership1
(i) Consent of Lessor executed by Pilgrim Partnership and
Fleet Bank - NH(1)
(m) Term Promissory Notes, dated August 31, 1993, from Green Mountain
Coffee Roasters, Inc. to Fleet Bank - NH(1)
(q) Subordination and Standby Agreement, dated April 7, 1994, from Robert
Stiller to Fleet Bank - NH, consented to by each of the subsidiaries
of the Company(2)
(w) Replacement Term Promissory Note, dated March 31, 1995, from Green
Mountain Coffee Roasters, Inc. to Fleet Bank - NH(7)
(x) Term Promissory Note Tied to Equipment Line of Credit, dated April 3,
1995, from Green Mountain Coffee Roasters, Inc., to Fleet Bank - NH(7)
(y) Seventh Amendment and First Restatement of Commercial Loan Agreement,
dated April 12, 1996, among Green Mountain Coffee Roasters, Inc., as
borrower, and Fleet Bank - NH as lender(10)
(z) Term Promissory Note, dated April 12, 1996, From Green Mountain Coffee
Roasters, Inc., to Fleet Bank - NH(10)
(aa) Note Modification Agreement, dated April 12, 1996, to modify Term
Promissory Note dated August 11, 1993, from Green Mountain Coffee
Roasters, Inc. to Fleet Bank - NH(10)
(bb) Eighth Amendment to Commercial Loan Agreement, dated February 19,
1997, among Green Mountain Coffee Roasters, Inc., as borrower, and
Fleet Bank - NH as lender(12)
(cc) Replacement Revolving Line of Credit Promissory Note, dated February
19, 1997, from Green Mountain Coffee Roasters, Inc., to Fleet Bank -
NH(12)
(ee) Ninth Amendment to Commercial Loan Agreement, Fleet Bank, dated June
9, 1997 among Green Mountain Coffee Roasters, Inc. as borrower, and
Fleet Bank - NH, as lender(14)
(ff) Replacement Revolving Line of Credit Promissory Note, dated June 9,
1997, from Green Mountain Coffee Roasters, Inc., to Fleet Bank -
NH(14)
10.10(g) First Restatement of Security Agreement, dated April 12, 1996,
between Green Mountain Coffee Roasters, Inc. and Fleet Bank - NH(10)
10.14 Collateral Assignment of Leasehold Interests by Green Mountain Coffee,
Inc. to Fleet Bank - NH(1)
10.15 Assignment of Trademarks from Green Mountain Coffee, Inc. in
connection with the Fleet Bank - NH financing(1)
10.19 Financing Agreement executed 6/18/93 (Lease Agreement No. 413165254
Master Agreement No. 4131-65254) between Green Mountain Coffee, Inc.,
dba Green Mountain Coffee Roasters, and Hewlett Packard Company(1)
10.20 Financing Agreement executed 6/18/93 (Lease Agreement No.413165256
Master Agreement No. 4131-65254) between Green Mountain Coffee, Inc.,
dba Green Mountain Coffee Roasters, and Hewlett Packard Company(1)
10.21 Resolution adopted by The Vermont Economic Development Authority
("VEDA")on June 25, 1993 with respect to proposed $300,000 loan to
Green Mountain Coffee, Inc. together with Letter dated 6/29/93 from
VEDA to Green Mountain Coffee, Inc. and Letter dated 7/2/93 from
Green Mountain Coffee, Inc. to VEDA relating thereto(1)
(a) Loan Agreement, dated August 11, 1993, between VEDA and Green Mountain
Coffee Roasters, Inc.1 (b) Note, dated August 11, 1993, from Green
Mountain Coffee Roasters, Inc. to VEDA(1)
(c) Security Agreement, dated August 11, 1993, between VEDA and Green
Mountain Coffee Roasters, Inc.(1)
(d) Guaranty Agreements, dated August 11, 1993, between VEDA and (i)
Robert Stiller and Christine Stiller, (ii) Green Mountain Coffee of
Maine, Inc., (iii) Green Mountain of Champlain, Inc., (iv) Green
Mountain Coffee Roasters Franchising Corporation, Inc., (v) Green
Mountain Filters, Inc. and (vi) Green Mountain Coffee Roasters of
Connecticut, Inc.(1)
(e) Subordination Agreement, dated August 11, 1993, between VEDA and
Robert Stiller(1)
(f) Form of Escrow Agreement among VEDA, Fleet Bank - NH and Green
Mountain Coffee Roasters, Inc.(1)
(g) Collateral Assignment of Lease, dated August 11, 1993, between VEDA
and Green Mountain Coffee Roasters, Inc.(1)
(h) Agreement to Assignment, Consent and Disclaimer, dated August 4, 1993,
executed by Pilgrim Partnership(1)
(i) Mortgage Deed, dated August 11, 1993, executed by Green Mountain
Coffee Roasters, Inc.(1)
(j) Mortgagee's Consent, Non-Disturbance and Waiver, dated August 11,
1993, between Howard Bank, N.A. and VEDA(1)
(k) Form of Intercreditor Agreement between VEDA and Fleet Bank - NH(1)
10.22 U.S. Small Business Administration ("SBA") Authorization and Debenture
Guaranty relating to proposed $766,000 loan to Green Mountain Coffee,
Inc. together with Letters dated 7/14/93 and 7/19/93 from SBA to
Central Vermont Economic Development Corporation relating thereto(1)
(a) Small Business Administration Guaranty dated September 30, 1993 from
Robert P. Stiller to Central Vermont Economic Development Corporation
(4)
(b) Assignment, dated September 30, 1993, by Central Vermont Economic
Development Corporation to Small Business Administration of Small
Business Administration Guaranty dated September 30, 1993 from Robert
P. Stiller to Central Vermont Economic Development Corporation(4)
(c) Mortgage, dated September 30, 1993, between Green Mountain Coffee
Roasters, Inc. and Central Vermont Economic Development Corporation(4)
(d) Assignment, dated September 30, 1993, by Central Vermont Economic
Development Corporation to Small Business Administration of Mortgage,
dated September 30, 1993, between Green Mountain Coffee Roasters, Inc.
and Central Vermont Economic Development Corporation(4)
(e) "504" Note, dated September 30, 1993, in the amount of $766,000, from
Green Mountain Coffee Roasters, Inc. to Central Vermont Economic
Development Corporation, as amended, including Servicing Agent
Agreement among Green Mountain Coffee Roasters, Inc. and Colson
Services Corp.(5)
(f) Assignment, dated September 30, 1993, by Central Vermont Economic
Development Corporation to Small Business Administration of "504"
Note, dated September 30, 1993, in the amount of $766,000, from Green
Mountain Coffee Roasters, Inc. to Central Vermont Economic Development
Corporation(4)
(g) Security Agreement from Green Mountain Coffee Roasters, Inc. to
Central Vermont Economic Development Corporation(4)
(h) Assignment, dated September 30, 1993, by Central Vermont Economic
Development Corporation to Small Business Administration of Security
Agreement from Green Mountain Coffee Roasters, Inc. to Central Vermont
Economic Development Corporation(4)
(i) Letter Agreement, dated October 1, 1993, among Central Vermont
Economic Development Corporation, Green Mountain Coffee Roasters, Inc.
and Small Business Administration, amending the Authorization and
Debenture Guaranty among Small Business Administration, Central
Vermont Economic Development Corporation, and Green Mountain Coffee
Roasters, Inc.(4)
(j) Development Company 504 Debenture, issued October 14, 1993, for
principal amount of as Trustee(4)
10.33 Lease Agreement, dated 4/28/93, between Pilgrim Partnership and
Green Mountain Coffee, Inc.(1)
(a) Addendum to Lease Agreement, dated 4/28/93(1)
(b) Lease Amendment dated August 16, 1993(4)
(c) Letter Agreement dated July 30, 1997
10.36 1993 Stock Option Plan of the Company, as revised, with Form of
Incentive Stock Option(1)*
10.37 Employee Stock Purchase Plan with Form of Participation Agreement(1)*
10.38 Stock Award Plan, as revised, with form of Stock Award Agreement(1)*
10.39 Employment Agreement of Robert P. Stiller dated July 1, 1993(1)*
(a) Letter, dated August 1, 1993, amending Employment Agreement(1)*
10.40 Employment Agreement of Robert D. Britt dated March 26, 1993(1)*
10.41 Employment Agreement of Stephen J. Sabol dated as of July 1, 1993(1)*
10.42 Employment Agreement of Paul Comey dated as of July 1, 1993(1)*
10.44 Employment Agreement of Jonathan C. Wettstein dated as of July 1,
1993(1)*
10.45 Stock Option Agreement, dated July 21, 1993, between the Company and
Robert D. Britt(1)*
10.46 Stock Option Agreement, dated July 21, 1993, between the Company and
Agnes M. Cook(1)*
10.48 Stock Option Agreement, dated July 21, 1993, between the Company and
Paul Comey(1)*
10.50 Stock Option Agreement, dated July 21, 1993, between the Company and
James K. Prevo(1)*
10.51 Stock Option Agreement, dated July 21, 1993, between the Company and
Stephen J. Sabol(1)*
10.52 Stock Option Agreement, dated July 21, 1993, between the Company and
Jonathan C. Wettstein(1)*
10.59 Stock Option Agreement, dated July 22, 1994, between the Company and
William D. Davis(8)*
10.60 Stock Option Agreement, dated July 22, 1994, between the Company and
Jules A. del Vecchio(8)*
10.61 Stock Option Agreement, dated July 22, 1994, between the Company and
Ian W. Murray(8)*
10.62 Stock Option Agreement, dated December 30, 1994, between the Company
and Robert D. Britt(9)*
10.63 Stock Option Agreement, dated December 30, 1994, between the Company
and Stephen J. Sabol(9)*
10.64 Stock Option Agreement, dated December 30, 1994, between the Company
and Jonathan C. Wettstein(9)*
10.65 Stock Option Agreement, dated December 30, 1994, between the Company
and Paul Comey(9)*
10.66 Stock Option Agreement, dated November 27, 1995, between the Company
and David E. Moran(11)*
10.67 First Amendment to the Green Mountain Coffee, Inc. 1993 Stock Option
Plan(11)*
10.68 First Amendment to Stock Option Agreement, dated July 21, 1993 between
the Company and Robert D. Britt(11)*
10.69 First Amendment to Stock Option Agreement, dated July 21, 1993 between
the Company and Paul Comey(11)*
10.70 First Amendment to Stock Option Agreement, dated July 21, 1993 between
the Company and Jonathan C. Wettstein(11)*
10.71 Employment Agreement, as of November 19, 1996, between the Company
and Dean E. Haller(13)*
10.72 Employment Agreement, as of January 1, 1997, between the Company and
William L. Prost(13)*
10.73 Stock Option Agreement, dated November 19, 1996, between the Company
and Dean E. Haller(13)*
10.74 Stock Option Agreement, dated May 19, 1997 between the Company and
William L. Prost(13)*
10.75 Stock Option Agreement, dated July 31, 1997 between the Company and
James K. Prevo*
11 Computation of Earnings Per Share
21 List of Subsidiaries of the Company
24 Powers of Attorney
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September 28, 1997.
- ---------------------------------------------
Notes to exhibits listed above
* Management contract or compensatory plan
1. Incorporated by reference to the corresponding exhibit number in the
Registration Statement on Form SB-2 (Registration No. 33-66646) filed on
July 28, 1993 and declared effective on September 21, 1993
2. Incorporated by reference to the corresponding exhibit number in the
Quarterly Report on Form 10-QSB for the 12 weeks ended April 9, 1994, filed
on May 24, 1994
3. Incorporated by reference to the corresponding exhibit number in the Annual
Report on Form 10-KSB for the fiscal year ended September 24, 1994, filed
on December 8, 1994
4. Incorporated by reference to the corresponding exhibit number in the Annual
Report on Form 10-KSB for the fiscal year ended September 25, 1993, filed
on December 23, 1993
5. Incorporated by reference to the corresponding exhibit number in the
Quarterly Report on Form 10-QSB for the 16 weeks ended January 15, 1994,
filed on February 25, 1994
6. Incorporated by reference to the corresponding exhibit number in the
Quarterly Report on Form 10-QSB for the 16 weeks ended January 14, 1995,
filed on February 25, 1995
7. Incorporated by reference to the corresponding exhibit number in the
Quarterly Report on Form 10-QSB for the 12 weeks ended April 8, 1995, filed
on May 23, 1995
8. Incorporated by reference to the corresponding exhibit number in Amendment
No. 1 to the Annual Report on Form 10-KSB/A for the fiscal year ended
September 24, 1994, filed on December 16, 1994
9. Incorporated by reference to the corresponding exhibit number in the Annual
Report on Form 10-KSB for the fiscal year ended September 30, 1995
10. Incorporated by reference to the corresponding exhibit number in the
Quarterly Report on Form 10-QSB for the 12 weeks ended April 13, 1996
11. Incorporated by reference to the corresponding exhibit number in the Annual
Report on Form 10-KSB for the fiscal year ended September 28, 1996
12. Incorporated by reference to the corresponding exhibit number in the
Quarterly Report on Form 10-Q for the 16 weeks ended January 18, 1997
13. Incorporated by reference to the corresponding exhibit number in the
Quarterly Report on Form 10-Q for the 12 weeks ended April 12, 1997
14. Incorporated by reference to the corresponding exhibit number in the
Quarterly Report on Form 10-Q for the 12 weeks ended July 5, 1997
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.
GREEN MOUNTAIN COFFEE, INC.
By: /s/ Robert P. Stiller
-------------------------------------
ROBERT P. STILLER
Chairman of the Board of Directors,
President and Chief Executive Officer
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date
- ---------------------- -------------------------------------- ----------------
/s/ Robert P. Stiller Chairman of the Board of Directors,
- --------------------- President and Chief Executive Officer
ROBERT P. STILLER (Principal Executive Officer) December 24, 1997
/s/ Robert D. Britt Chief Financial Officer, Treasurer,
- -------------------- Secretary and Director (Principal
ROBERT D. BRITT Financial and Accounting Officer) December 24, 1997
STEPHEN J. SABOL* Director December 24, 1997
JONATHAN C. WETTSTEIN* Director December 24, 1997
WILLIAM D. DAVIS* Director December 24, 1997
JULES A. DEL VECCHIO* Director December 24, 1997
DAVID E. MORAN* Director December 24, 1997
IAN W. MURRAY* Director December 24, 1997
*By: /s/ Robert P. Stiller
------------------------------
Robert P. Stiller, Attorney-in-fact
Schedule II - Valuation and Qualifying Accounts
for the fiscal years ended
September 27, 1997, September 28, 1996, and September 30, 1995
Column A Column B Column C Column D Column E
Additions
Description Balance at Charged to Charged to Balance at
Beginning Costs and Other Accounts Deductions End of Period
of Period Expenses
Allowance for
doubtful accounts:
Fiscal 1997.......... $ 80,000 $ 207,000 - $ 171,000 $ 116,000
Fiscal 1996.......... $ 63,000 $ 173,000 - $ 156,000 $ 80,000
Fiscal 1995......... $ 57,000 $ 163,000 - $ 157,000 $ 63,000
Deferred tax asset
valuation allowance:
Fiscal 1997......... $3,503,000 - - $1,112,000 $2,391,000
Fiscal 1996......... $1,225,000 $2,605,000 - $ 327,000 $3,503,000
Fiscal 1995........... $1,195,000 $ 30,000 - - $1,225,000
GREEN MOUNTAIN COFFEE, INC.
Index to Consolidated Financial Statements
Page
----
Report of Independent Accountants......................................... F-2
Financial Statements:
Consolidated balance sheet at September 27, 1997
and September 28, 1996................................................ F-3
Consolidated statement of operations for the three years
ended September 27, 1997.............................................. F-4
Consolidated statement of changes in stockholders equity
for the three years ended September 27, 1997.......................... F-5
Consolidated statement of cash flows for the three years
ended September 27, 1997.............................................. F-6
Notes to Consolidated Financial Statements.............................. F-7
-----------------------------------------------------------
F-1
Report of Independent Accountants
To the Board of Directors and Stockholders of Green Mountain Coffee, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of changes in stockholders equity and of
cash flows present fairly, in all material respects, the financial position of
Green Mountain Coffee, Inc. and its subsidiary at September 27, 1997 and
September 28, 1996, and the results of their operations and their cash flows for
each of the three years in the period ended September 27, 1997, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Companys management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
Boston, Massachusetts
November 11, 1997
F-2
GREEN MOUNTAIN COFFEE, INC.
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
September 27, September 28,
1997 1996
------------- -------------
Assets
Current assets:
Cash and cash equivalents.................... $ 831 $ 551
Receivables, less allowances of $116 at
September 27, 1997 and $80 at
September 28, 1996......................... 4,119 2,778
Inventories.................................. 5,224 3,276
Other current assets......................... 376 627
Deferred income taxes, net................... 865 516
----------- ----------
Total current assets..................... 11,415 7,748
Fixed assets, net............................ 11,258 8,715
Other long-term assets, net.................. 385 394
----------- ----------
$ 23,544 $ 17,243
=========== ==========
Liabilities and Stockholders Equity
Current liabilities:
Current portion of long-term debt............ $ 943 $ 947
Current portion of obligation
under capital lease........................ 132 114
Accounts payable............................. 4,954 3,002
Accrued payroll.............................. 616 480
Accrued expenses............................. 279 264
----------- ----------
Total current liabilities................ 6,924 4,807
----------- ----------
Long-term debt................................. 1,968 2,911
----------- ----------
Obligation under capital lease................. 12 144
----------- ----------
Long-term line of credit....................... 3,985 508
----------- ----------
Commitments
Stockholders equity:
Common stock, $0.10 par value:
Authorized - 10,000,000 shares;
issued and outstanding-3,530,818 shares
at September 27, 1997 and 3,417,306
shares at September 28, 1996.............. 353 342
Additional paid-in capital..................... 12,954 12,508
Accumulated deficit............................ (2,652) (3,977)
----------- ---------
Total stockholders'equity................ 10,655 8,873
----------- ---------
$ 23,544 $ 17,243
=========== =========
-----------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements
F-3
GREEN MOUNTAIN COFFEE, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in thousands except per share data)
Year Ended
-------------------------------------------
September 27, September 28, September 30,
1997 1996 1995
------------- ------------- -------------
Net sales.......................... $ 47,834 $ 38,347 $ 34,024
Cost of sales...................... 29,420 22,817 21,738
----------- ----------- ----------
Gross profit................. 18,414 15,530 12,286
Selling and operating expenses..... 13,371 10,471 9,529
General and administrative expenses 3,391 3,132 2,578
Loss on abandonment of equipment... 218 - -
----------- ------------ ----------
Income from operations....... 1,434 1,927 179
Other income (expense)............. 17 (21) (24)
Interest expense................... (521) (422) (399)
----------- ----------- ----------
Income (loss) before income taxes.. 930 1,484 (244)
Income tax benefit (expense)....... 395 (222) 26
----------- ----------- ----------
Net income (loss)........ $ 1,325 $ 1,262 $ (218)
=========== =========== ==========
Net income (loss) per share........ $ 0.38 $ 0.37 $ (0.06)
=========== =========== ==========
Weighted average shares outstanding 3,467,932 3,427,610 3,383,529
=========== =========== ==========
-----------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements
F-4
GREEN MOUNTAIN COFFEE, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended
September 27, 1997, September 28, 1996 and September 30, 1995
(Dollars in thousands)
Additional Total
Common paid-in Accumulated stockholders
Shares stock capital deficit equity
---------- --------- ---------- ----------- -------------
Balance at September 24, 1994.... 3,383,485 $ 338 $ 12,350 $ (5,021) $ 7,667
Issuance of common stock under
employee stock purchase plan.... 16,310 2 71 - 73
Net loss......................... - - - (218) (218)
---------- ------- --------- ---------- ----------
Balance at September 30, 1995.... 3,399,795 340 12,421 (5,239) 7,522
Issuance of common stock under
employee stock purchase plan.... 17,511 2 87 - 89
Net income....................... - - - 1,262 1,262
---------- ------- --------- --------- ----------
Balance at September 28, 1996.... 3,417,306 342 12,508 (3,977) 8,873
Issuance of common stock under
employee stock purchase plan.... 17,790 2 106 - 108
Options exercised................ 95,722 9 340 - 350
Net income....................... - - - 1,325 1,325
---------- ------- --------- --------- ---------
Balance at September 27, 1997.... 3,530,818 $ 353 $ 12,954 $ (2,652) $ 10,655
========== ======= ========= ========= =========
-----------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements
F-5
GREEN MOUNTAIN COFFEE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
Year ended
-------------------------------------------
September 27, September 28, September 30,
1997 1996 1995
------------- ------------- -------------
Cash flows from operating activities:
Net income (loss).................. $ 1,325 $ 1,262 $ (218)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization... 2,504 2,026 1,624
Loss on disposal of fixed assets 240 47 15
Provision for doubtful accounts 171 156 157
Deferred income taxes........... (450) 188 (26)
Changes in assets and liabilities:
Receivables..................... (1,512) (274) (1,324)
Inventories..................... (1,948) (510) (359)
Other current assets............ 251 (250) (57)
Other long-term assets, net..... 9 (180) (97)
Accounts payable................ 1,952 251 758
Accrued payroll................. 136 310 (131)
Accrued expenses................ 15 108 (47)
---------- ---------- --------
Net cash provided by
operating activities......... 2,693 3,134 295
---------- ---------- --------
Cash flows from investing activities:
Expenditures for fixed assets.... (5,367) (2,519) (1,602)
Proceeds from disposals of fixed
assets.......................... 80 59 -
---------- ---------- ---------
Net cash used for investing
activities.................... (5,287) (2,460) (1,602)
Cash flows from financing activities:
Proceeds from issuance of
common stock.................... 458 89 73
Proceeds from issuance of
long-term debt.................. - 1,509 286
Repayment of long-term debt..... (947) (729) (594)
Principal payments under
capital lease obligation...... (114) (90) (5)
Net change in revolving line of
credit........................ 3,477 (1,212) 1,720
Repayment of note payable to
stockholder.................. - - (416)
---------- ---------- ---------
Net cash provided by (used for)
financing activities 2,874 (433) 1,064
---------- ---------- ---------
Net increase (decrease) in cash and
cash equivalents................ 280 241 (243)
Cash and cash equivalents at
beginning of year............... 551 310 553
---------- ---------- ---------
Cash and cash equivalents at
end of year..................... $ 831 $ 551 $ 310
========== ========== =========
Supplemental disclosures of
cash flow information:
Cash paid for interest.......... $ 507 $ 401 $ 382
Cash paid for income taxes...... $ 46 $ 5 $ 8
-----------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements
F-6
GREEN MOUNTAIN COFFEE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business and Organization
The accompanying consolidated financial statements include the accounts of
Green Mountain Coffee, Inc. (the "Company") and its wholly-owned subsidiary,
Green Mountain Coffee Roasters, Inc. All significant inter-company transactions
and balances have been eliminated.
The Company purchases high-quality arabica coffee beans for roasting, then
packages and distributes the roasted coffee primarily in the northeastern United
States. The majority of the Company's revenue is derived from its wholesale
operation which serves fine dining, supermarket, specialty food store,
convenience store, food service, hotel, university, travel and office coffee
service customers. The Company also has a direct mail operation serving
customers nationwide, and currently operates twelve company-owned retail stores
in Vermont, Connecticut, Illinois, Maine, Massachusetts, New Hampshire and New
York. The Company's fiscal year ends on the last Saturday in September. Fiscal
1997 and fiscal 1996 represent the years ended September 27, 1997 and September
28, 1996, respectively, and consist of 52 weeks. Fiscal 1995 represents the year
ended September 30, 1995 and consists of 53 weeks.
2. Significant accounting policies
Cash and cash equivalents
- -------------------------
The Company considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents. Cash and cash equivalents include
money market funds which are carried at cost, plus accrued interest, which
approximates market. The Company does not believe that it is subject to any
unusual credit and market risk.
Inventories
- -----------
Inventories are stated at the lower of cost or market, with cost being
determined by the first-in, first-out method.
Hedging
- -------
The Company uses futures and options contracts to hedge the effects of
fluctuations in the price of green coffee beans. These transactions meet the
requirements for hedge accounting, including designation and correlation. To
obtain a proper matching of revenue and expense, gains or losses arising from
open and closed hedging transactions are included in inventory as a cost of the
commodity and reflected in the statement of operations when the product is sold.
The cost and fair values of these contracts were not material.
Advertising
- -----------
The Company expenses the costs of advertising the first time the advertising
takes place. Advertising expense totaled $1,991,000, $1,427,000, and $1,385,000
for the years ended September 27, 1997, September 28, 1996 and September 30,
1995, respectively.
-----------------------------------------------------------
F-7
GREEN MOUNTAIN COFFEE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fixed assets
- ------------
Fixed assets are recorded at cost. Expenditures for maintenance, repairs and
renewals of minor items are charged to expense as incurred. Depreciation of
fixed assets is provided using the straight-line method.
Equipment under capital leases is amortized on the straight-line method over the
shorter of the lease term or the estimated useful life of the equipment.
In order to facilitate sales, the Company follows an industry-wide practice of
purchasing and loaning coffee brewing and related equipment to wholesale
customers.
Revenue Recognition
- -------------------
Revenue from wholesale and mail order sales is recognized upon product shipment.
Revenue from retail sales is recognized upon sale to customers.
Income Taxes
- ------------
The Company utilizes the asset and liability method of accounting for income
taxes, as set forth in Statement of Financial Accounting Standards (SFAS) No.
109, Accounting for Income Taxes. SFAS 109 requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences of
temporary differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates in effect for the
year in which those temporary differences are expected to be recovered or
settled.
Income (Loss) Per Share
- -----------------------
Income (Loss) per share is computed based upon the weighted average number of
common and dilutive common equivalent shares outstanding during the year. Common
equivalent shares represent the net additional shares resulting from the assumed
exercise of outstanding stock options calculated using the treasury stock
method.
In February, 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 (SFAS 128), Earnings per Share. SFAS
128 establishes new standards for computing and presenting earnings per share
and will be effective for the Company's interim and annual periods ending after
December 15, 1997. Early adoption of the Statement is not permitted. SFAS 128
requires restatement of all previously reported earnings per share data that are
presented. SFAS 128 replaces primary and fully diluted earnings per share with
basic and diluted earnings per share, and results in no material difference in
earnings per share information currently presented.
Statement of Cash Flows--Non-Cash Investing and Financing Activities
- --------------------------------------------------------------------
During fiscal 1996, the Company financed approximately $109,000 for the purchase
of five service vehicles. Additionally, capital lease obligations of
approximately $71,000 were incurred when the Company entered into leases for
offices and loaner equipment.
Financial Instruments
- ---------------------
The Company enters into various types of financial instruments in the normal
course of business. Fair values are estimated based on assumptions concerning
the amount and timing of estimated future cash flows and assumed discount rates
reflecting varying degrees of perceived risk. The fair values of cash, cash
equivalents, accounts receivable, accounts payable, accrued expenses and debt
approximate their carrying value at September 27, 1997.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and disclosure of
contingencies at September 27, 1997 and September 28, 1996, and the reported
amounts of revenues and expenses during the three years ended September 27,
1997. Actual results could differ from these estimates.
-----------------------------------------------------------
F-8
GREEN MOUNTAIN COFFEE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Significant Customer and Supply Risk
- ------------------------------------
The Company has one customer which accounted for 10.4%, 12.1% and 10.4% of net
sales in the years ended September 27, 1997, September 28, 1996 and September
30, 1995, respectively. Concentration of credit risk with respect to accounts
receivable is limited due to the large number of customers in various industries
comprising the Company's customer base. Ongoing credit evaluations of customers'
payment history are performed, and collateral is not required. The Company
maintains reserves for potential credit losses and such losses, in the
aggregate, have not exceeded management's expectations.
Reclassifications
- -----------------
Certain reclassifications of prior year balances have been made to conform to
the current presentation.
3. Inventories
Inventories consist of the following:
September 27, 1997 September 28,1996
------------------ -----------------
Raw materials and supplies...... $ 2,148,000 $ 1,291,000
Finished goods.................. 3,076,000 1,985,000
-------------- -------------
$ 5,224,000 $ 3,276,000
As of September 27, 1997, the Company had fixed price inventory purchase
commitments for green coffee totaling approximately $4.0 million. The Company
believes, based on relationships established with its suppliers in the past,
that the risk of non-delivery on such purchase commitments is remote.
4. Fixed assets
Useful Life September 27, September 28,
in Years 1997 1996
----------- ------------- -------------
Leasehold improvements.......... 5 - 10 $ 2,409,000 $ 2,389,000
Production equipment............ 2 - 10 5,310,000 4,456,000
Office equipment................ 3 - 10 5,492,000 3,774,000
Equipment on loan to
wholesale customers............ 3 - 5 5,042,000 4,503,000
Vehicles........................ 2 - 4 319,000 230,000
Construction-in-progress........ 1,590,000 499,000
------------ ------------
Total fixed assets.......... 20,162,000 15,851,000
Accumulated depreciation........ (8,904,000) (7,136,000)
------------ ------------
$ 11,258,000 $ 8,715,000
============ ============
During fiscal 1997, the Company embarked on an expansion of its central
production and distribution facility in order to increase capacity and
streamline operations. In connection with this program, certain equipment with a
net book value of $218,000 was abandoned for no proceeds in the twelve week
period ended April 12, 1997.
-----------------------------------------------------------
F-9
GREEN MOUNTAIN COFFEE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Income taxes
The provision (benefit) for income taxes consists of:
September 27, September 28, September 30,
1997 1996 1995
------------- ------------- -------------
Current tax expense:
Federal...................... $ 354,000 $ 447,000 $ -
State........................ 108,000 120,000 10,000
Benefit of net operating
loss carryforwards......... (408,000) (533,000) (10,000)
----------- ----------- -----------
Total current.................. 54,000 34,000 -
----------- ----------- -----------
Deferred tax expense (benefit)
Federal...................... 395,000 515,000 (52,000)
State........................ 268,000 (2,605,000) (4,000)
----------- ----------- -----------
Total deferred ................ 663,000 (2,090,000) (56,000)
Tax asset valuation allowance.. (1,112,000) 2,278,000 30,000
----------- ----------- -----------
Total tax (benefit) expense.... $ (395,000) $ 222,000 $ (26,000)
=========== =========== ===========
SFAS 109 is an asset and liability approach that requires the recognition
of deferred tax assets and liabilities for the expected future tax consequences
of events that have been recognized in the Company's financial statements or tax
returns. In estimating future tax consequences, SFAS 109 generally considers
expected future events other than enactments of changes in the tax law or rates.
Certain adjustments were made to state deferred tax assets during fiscal
1997 and are reflected in the state deferred tax expense.
Deferred tax assets (liabilities) consist of the following:
September 27, September 28,
1997 1996
------------- -------------
Deferred tax assets:
Net operating loss carryforwards........... $ 1,044,000 $ 1,744,000
Federal investment tax credits............. 27,000 54,000
Vermont state manufacturers................
investment tax credit................... 2,627,000 2,627,000
Section 263A adjustment.................... 47,000 91,000
Other reserves and temporary differences... 147,000 107,000
------------ ------------
Gross deferred tax assets.................. 3,892,000 4,623,000
Deferred tax asset valuation allowance..... (2,391,000) (3,503,000)
Deferred tax liability:
Depreciation............................... (150,000) (218,000)
------------ ------------
Net deferred tax assets................... $ 1,351,000 $ 902,000
============ ============
-----------------------------------------------------------
F-10
GREEN MOUNTAIN COFFEE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At September 27, 1997, the Company has net operating loss carry-forwards
and investment tax credits for federal income tax reporting purposes of
$2,458,000 and $27,000, respectively, which will expire between 1998 and 2009.
In addition, in November 1996, the Company received notification from the State
of Vermont that it had approved a $4,041,000 manufacturers investment tax credit
pertaining to certain fixed assets purchased between July 1, 1993 and June 30,
1996, which will expire in 2005. The resulting deferred tax asset, which is
partially offset by a valuation allowance, is reflected in the above table net
of the federal tax effect.
Realization of the net deferred tax assets is dependent on generating
sufficient taxable income prior to the expiration of the loss carry-forwards.
During fiscal 1997, the deferred tax asset valuation allowance was reduced by
$1,112,000, based primarily upon estimates of future taxable income. Although
realization is not assured, management believes that the net deferred tax asset
represents managements best estimate, based upon the weight of available
evidence as prescribed in SFAS 109, of the amount which is more likely than not
to be realized. If such evidence were to change, based upon near-term operating
results and longer-term projections, the amount of the valuation allowance
recorded against the gross deferred tax asset may be decreased or increased.
Also, if certain substantial changes in the Company's ownership should occur,
there would be an annual limitation on the amount of loss carry-forwards which
could be utilized, and restrictions on the utilization of investment tax credit
carry-forwards.
A reconciliation between the amount of reported income tax expense
(benefit) and the amount computed using the U.S. Federal Statutory rate of 34%
for fiscal 1997 and 35% for fiscal 1996 and 1995 is as follows:
September 27, September 28, September 30,
1997 1996 1995
------------- ------------- -------------
Tax at U.S. Federal Statutory rate $ 316,000 $ 519,000 $ (85,000)
Increase (decrease) in rates
resulting from:
Other nondeductible items....... 20,000 22,000 33,000
State taxes, net of federal
benefits...................... 52,000 (2,597,000) (4,000)
Deferred tax asset valuation
allowance and other.......... (783,000) 2,278,000 30,000
----------- ------------ -----------
Tax at effective rates............. $ (395,000) $ 222,000 $ (26,000)
=========== ============ ===========
6. Long-Term Line of Credit
The Company maintains a revolving line of credit agreement under a
comprehensive credit facility ("credit facility") with Fleet Bank - NH
("Fleet"). Borrowings are secured by substantially all of the Company's assets.
During fiscal 1997, the Company amended its credit facility with Fleet Bank -
NH. Under the revised facility, the Company increased the limit of the revolving
line of credit from $3,000,000 to $6,000,000 and extended its term to February
28, 1999. The interest paid on this line of credit, as well as other Fleet Bank
borrowings, varies with the prime and LIBOR interest rates. At September 27,
1997, the interest rate on $3,500,000 of the principal amount outstanding on the
revolving line of credit was at the one-month LIBOR plus 225 basis points or
7.9%, while the interest on the remainder portion was at Fleets base rate or
8.5% at September 27, 1997. The terms of the credit facility also provide for
the maintenance of specified financial ratios and restrict certain transactions,
including the payment of any dividends without prior bank approval. The Company
was in compliance with these covenants at September 27, 1997.
-----------------------------------------------------------
F-11
GREEN MOUNTAIN COFFEE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The principal amounts outstanding on the revolving line of credit at
September 27, 1997 and September 28, 1996 were $3,985,000 and $508,000,
respectively.
7. Long-term debt
September 27, September 28,
1997 1996
------------- -------------
Facility and Equipment Term Loan................ $ 2,100,000 $ 2,827,000
Central Vermont Economic Development
Corporation Debenture....................... 532,000 600,000
Vermont Economic Development Authority
Promissory Note............................. 138,000 182,000
Computer Equipment Installment Loans............ 73,000 153,000
Service Vehicle Installment Loans............... 68,000 96,000
------------ ------------
2,911,000 3,858,000
Less current portion............................ 943,000 947,000
------------ ------------
$ 1,968,000 $ 2,911,000
============ =============
Facility and Equipment Term Loans
- ---------------------------------
As part of the credit facility, the Company has financed fixed asset
purchases under five term loans which are secured by a senior lien on
substantially all of the Company's assets and by a security interest in the
fixed assets for which the borrowings are made. The interest rate on all term
loans under the credit facility is equal to the lesser of 25 basis points
above Fleets variable base rate or 275 basis points above the LIBOR rate for
maturities of up to one year (8.4% at September 27, 1997). The original terms of
the loans range from 56 to 84 months and are being repaid in equal monthly
payments totaling approximately $60,600 plus interest.
Central Vermont Economic Development Corporation Debenture
- ----------------------------------------------------------
The debenture from the Central Vermont Economic Development Corporation
(CVEDC) is guaranteed by the U.S. Small Business Administration. The debenture
term is ten years and requires equal monthly principal and interest payments of
approximately $8,500 and carries a fixed interest rate of 5.812%. The debenture
is secured by a secondary security interest in the related fixed assets and is
guaranteed by the majority stockholder of the Company. Additional guarantees
will be required of any stockholder obtaining more than 20% ownership of the
Company.
Vermont Economic Development Authority Promissory Note
- ------------------------------------------------------
The Vermont Economic Development Authority promissory note is payable in
monthly principal and interest installments of approximately $4,300 over seven
years, with an interest rate of 5.5%. The note is secured by a secondary
security interest in the related fixed assets and contains covenants related to
restrictions on prepayments of certain portions of the Company's remaining
outstanding debt as defined in the underlying agreement. The Company was in
compliance with these covenants at September 27, 1997.
-----------------------------------------------------------
F-12
GREEN MOUNTAIN COFFEE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Computer Equipment Installment Loans
- ------------------------------------
The computer equipment installment loans notes bear interest at 8.69%, and
require monthly installments of principal and interest totaling approximately
$7,600 through September 1998.
Service Vehicle Installment Loans
- ---------------------------------
The service vehicle installment loans represent several loans to financing
institutions for the purchase of service vehicles. The notes bear interest at
rates between 4.8% and 7.4% and require monthly installments of principal and
interest totaling approximately $3,500 through February 2000.
Maturities
- ----------
Maturities of long-term debt for years subsequent to September 27, 1997 are
as follows:
Fiscal Year
-----------
1998........... $ 943,000
1999........... 835,000
2000........... 581,000
2001........... 314,000
2002........... 115,000
Thereafter..... 123,000
-----------
$ 2,911,000
===========
8. Employee Compensation Plans
Stock Option Plans
- ------------------
Prior to the establishment on September 21, 1993 of the employee stock option
plan (the 1993 Plan), the Company granted to certain key management employees,
individual non-qualified stock option agreements to purchase shares of the
Company's common stock. All such options presently outstanding are fully vested
and had an original expiration date after the fifth anniversary following the
date of grant or earlier if employment terminates. Effective July 26, 1996, the
term of 141,440 of such options was extended for an additional five years. The
exercise price of these options exceeded the fair market value of the common
stock at the date of the extension. At September 27, 1997, 141,440 options were
outstanding under these individual agreements.
The 1993 Plan provides for the granting of both incentive and non-qualified
stock options, with an aggregate number of 75,000 shares of common stock to be
made available under the 1993 Plan. Effective July 26, 1996, the total number
of shares of authorized common stock to be made available under the 1993 Plan
was increased to 275,000. The option price for each incentive stock option shall
not be less than the fair market value per share of common stock on the date of
grant, with certain provisions which increase the option price to 110% of the
fair market value of the common stock if the grantee owns in excess of 10% of
the Company's common stock at the date of grant. The option price for each
non-qualified stock option shall not be less than 85% of the fair market value
of the common stock at the date of grant. Options under the Plan become
exercisable over periods determined by the Board of Directors. At September 27,
1997 and September 28, 1996, options for 158,204 and 196,005 shares of common
stock were available for grant under the plan, respectively.
-----------------------------------------------------------
F-13
GREEN MOUNTAIN COFFEE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
No compensation expense was recognized under the Plan for employees during
fiscal 1997 or fiscal 1996. Had compensation cost been determined based on the
fair value of options granted to employees at the grant date consistent with the
provisions of SFAS No. 123, the Company's net income and net income per share
for the years ended September 27, 1997 and September 28, 1996 would have
decreased to the pro forma amounts indicated below:
Fiscal 1997 Fiscal 1996
----------- -----------
Net Income As reported...... $ 1,325 $ 1,262
Pro Forma........ 1,198 1,262
Net income per share As reported...... 0.38 0.37
Pro forma........ 0.35 0.37
The fair value of each stock option is estimated on the date of the grant
using the Black-Scholes option-pricing model with the following assumptions: an
expected life of 6 years, an average volatility of 67%, no dividend yield and a
risk-free interest rate of 6.11% and 6.24% for fiscal 1997 and fiscal 1996
grants respectively.
Option activity is summarized as follows:
Number of Shares Option Price
---------------- --------------
Outstanding at September 24, 1994.......... 288,953 $ 2.55 - 8.02
Granted................................. 59,684 8.50
Exercised............................... -
Canceled................................ (34,248) 8.50
-----------
Outstanding at September 30, 1995.......... 314,389 2.55-8.50
Granted................................. 18,400 6.25-8.50
Exercised............................... -
Canceled................................ (16,627) 8.02-8.50
-----------
Outstanding at September 28, 1996.......... 316,162 2.55-8.50
Granted................................. 46,000 6.125-9.625
Exercised............................... (95,722) 2.55-6.875
Canceled................................ (8,200) 8.50
-----------
Outstanding at September 27, 1997.......... 258,240 $ 6.00-9.625
=========== ==============
As of September 27, 1997, 59,248 of these options were not exercisable.
-----------------------------------------------------------
F-14
GREEN MOUNTAIN COFFEE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Employee Stock Purchase Plan
- ----------------------------
On September 21, 1993, the Company approved the adoption of an Employee
Stock Purchase Plan (the "Purchase Plan"). Under the Purchase Plan, the Company
reserved 75,000 shares of common stock for purchase by eligible employees. The
Purchase Plan provides for five annual offerings of 15,000 shares of common
stock per offering, plus any unissued shares from prior fiscal years. Each
participating employee has the option to purchase a maximum number of shares
equal to 10% of the participant's base pay, divided by 85% of the market value
of the common stock at such time, subject to a pro rata reduction of shares if
the annual aggregate maximum number of shares offered by the Company would
otherwise be exceeded.
For the fiscal 1998 offering there are outstanding options to purchase
18,632 shares under the Purchase Plan at a maximum exercise price of $8.82. The
ultimate purchase price of the underlying shares of common stock is 85% of the
fair market value of the common stock at the beginning or end of the fiscal
year, whichever is less.
The fair value of the employees purchase rights was estimated using the
Black-Scholes model with the following assumptions for fiscal 1997 and fiscal
1996: an expected life of one year, expected volatility of 67%, and a risk-free
interest rate of 5.51% and 5.66%, respectively. The weighted average fair value
of those purchase rights granted in fiscal 1997 and fiscal 1996 was $2.79 and
$2.35 respectively.
9. Defined Contribution Plan
The Company has a defined contribution plan which meets the requirements of
section 401(k) of the Internal Revenue Code. All employees of the Company with
one year or more of service who are at least twenty-one years of age are
eligible to participate in the plan. The plan allows employees to defer a
portion of their salary on a pre-tax basis and the Company contributes 50% of
amounts contributed by employees up to 5% of their salary. Company contributions
to the plan amounted to $96,000, $73,000, and $52,000 for the years ended
September 27, 1997, September 28, 1996 and September 30, 1995, respectively.
10. Warrants
The Company issued warrants for 100,000 shares of the Company's common
stock on September 21, 1993 to its underwriter in conjunction with the Company's
initial public offering. The warrants carry an exercise price of $12 per share
and expire on September 21, 1998. The Company has reserved 100,000 shares of
common stock in connection with these warrants.
11. Commitments
Leases
- ------
The Company leases office and retail space, production, distribution and
service facilities and certain equipment under various noncancelable operating
leases, ranging from one to ten years. Property leases normally require payment
of a minimum annual rental plus a pro-rata share of certain landlord operating
expenses. In addition, a number of the Company's retail space leases require
payment of contingent rentals based upon a percentage of sales in excess of a
specified amount.
-----------------------------------------------------------
F-15
GREEN MOUNTAIN COFFEE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has entered into a capital lease, primarily for loaner and
office equipment. Minimum future lease payments (net of committed sublease
rental receipts of $51,000 for the fiscal years 1998 and 1999, $33,000 for the
fiscal years 2000 and 2001, and $10,936 thereafter) under non-cancelable
operating leases and capital leases, for years subsequent to September 28, 1996
are as follows:
Fiscal Year Operating Leases Capital Lease
----------- ---------------- -------------
1998............................... $ 1,375,000 $ 145,000
1999............................... 1,297,000 12,000
2000............................... 1,098,000 -
2001............................... 1,015,000 -
2002............................... 688,000 -
Thereafter......................... 2,375,000 -
-------------- -----------
Total minimum lease payments........ $ 7,848,000 $ 157,000
==============
Less amount representing interest..................... 13,000
-----------
Present value of obligations under
capital lease (including current
portion of $132,000)............................... $ 144,000
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F-15