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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 26, 1998
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)
Registrant's telephone number: (802) 244-5621
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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
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(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, 1998 was approximately
$8,675,000 based upon the closing price of such stock on that date.
As of December 10, 1998, 3,499,743 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 26, 1999 have been incorporated by reference
into Part III of this report. The registrant will file the definitive Proxy
Statement by January 25, 1999.
GREEN MOUNTAIN COFFEE, Inc.
Annual Report on Form 10-K
Table of Contents
Page
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Part I
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Item 1. Business.................................................... 4
Item 2. Properties.................................................. 16
Item 3. Legal Proceedings........................................... 16
Item 4. Submission of Matters to a Vote of Security Holders......... 16
Executive Officers of the Registrant........................ 17
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Part II
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Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 19
Item 6. Selected Financial Data..................................... 20
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 20
Item 7A Quantitative and Qualitative Disclosures about Market Risk.. 29
Item 8. Financial Statements and Supplementary Data................. 30
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures................................... 30
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Part III
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Item 10. Directors and Executive Officers of the Registrant.......... 31
Item 11. Executive Compensation...................................... 31
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 31
Item 13. Certain Relationships and Related Transactions.............. 31
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Part IV
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Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K................................................. 32
Certain statements contained herein are not based on historical fact
and are "forward-looking statements" within the meaning of the applicable
securities laws and regulations. In addition, the Company's representatives may
from time to time make oral forward-looking statements. Forward-looking
statements provide current expectations of future events based on certain
assumptions and include any statements that do not directly relate to any
historical or current fact. Words such as "anticipates", "believes", "expects",
"estimates", "intends", "plans", "projects", and similar expressions, may
identify such forward-looking statements. Owing to the uncertainties inherent in
forward-looking statements, actual results could differ materially from those
set forth in forward-looking statements. Factors that could cause actual results
to differ materially from those in the forward-looking statements include, but
are not limited to, business conditions in the coffee industry and food industry
in general, the impact of the loss of a major customer, 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
products, the impact of a tighter job market, Year 2000 issues, weather and
special or unusual events, as well as other risk factors described in Item 1 of
this report on Form 10-K for the year ended September 26, 1998 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
Green Mountain Coffee, Inc. ("the Company" or "Green Mountain") roasts
over 25 high-quality arabica coffees to produce over 60 varieties of coffee
which it sells through a coordinated dual-channel distribution network
consisting of wholesale and direct mail operations. This distribution network is
designed to maximize brand 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 over 5,000
wholesale customer accounts located primarily in the northeastern United States.
The wholesale operation serves supermarket, specialty food store, convenience
store, food service, hotel, restaurant, 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. ("Roasters"), a
Vermont corporation 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 1998", "fiscal 1997" or "fiscal 1996" represent
the 52-week periods ended September 26, 1998, 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.GreenMountainCoffee.com.
The Product
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 "appropriate 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. The Company 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 some 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
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 and trains, at convenience stores on the way to work, at the office,
in restaurants, in supermarkets, at the movie theatre, 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 customers who sell its coffee by the cup.
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.
In the direct mail area, the Company focuses solicitations on catalog
customers who buy regularly from the Company, in 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
Customers
During fiscal 1998, the Company continued to expand the distribution of
Green Mountain Coffee among a number of existing and new customers that
provided the Company with an increase in sales volume as well as excellent brand
exposure. The growth was particularly strong in the convenience store,
supermarket, and office coffee distributor categories, as illustrated in the
following examples:
As of December 1998, over 1,100 Mobil Corporation convenience stores
were selling cups of Green Mountain Coffee. During the fall of 1998, Mobil
introduced Green Mountain's Organic House Blend in a national promotional effort
for its Mobil On the Run(TM) convenience stores. This is believed to be the
first certified organic coffee marketed and sold by a national convenience store
company. In addition, in August 1998, Convenience Store Decisions magazine
awarded its "Best Coffee Presentation" concept award to Mobil On the Run
convenience stores featuring Green Mountain Coffee.
During fiscal 1998, the Company substantially strengthened its position
as the supermarket specialty coffee leader in the Northeast. In May 1998, Shaw's
Supermarkets, Inc. substantially increased the distribution of Green Mountain
Coffee, bringing the total to over 100 stores. In December of 1997, Hannaford
Brothers Company signed a three-year agreement to continue its distribution of
Green Mountain Coffee, placing Green Mountain Coffee in 21 additional stores,
and bringing the total distribution of Green Mountain Coffee to approximately
120 Hannaford Food & Drug and Shop`n Save supermarkets.
In January of 1998, Stop & Shop Supermarkets expanded the serving of
cups of Green Mountain Coffee to bakery department customers. The expansion of
the in-store coffee beverage program, from 20 supermarkets to approximately 150
by early December 1998, includes a display in each participating Stop & Shop
location that features a selection of one-pot, ready-to-brew-at-home packages of
Green Mountain Coffee in the same varieties offered by the cup.
In August of 1998, Green Mountain entered into a five year exclusive
agreement with American Skiing Company to provide all nine alpine resorts with
Green Mountain Coffee. During the first year, Green Mountain will supply
American Skiing Company's six eastern resorts, with distribution to all nine
resorts beginning in the second half of fiscal 1999. Resorts include
Sugarloaf/USA and Sunday River in Maine; Attitash Bear Peak in New Hampshire;
Killington, Mount Snow and Sugarbush in Vermont; Steamboat in Colorado; Heavenly
in California/Nevada; and The Canyons in Park City, Utah.
During fiscal 1998, the Company continued to develop its relationship
with Poland Springs Natural Spring Water Company ("Poland Springs"), a
subsidiary of The Perrier Group of America. Fiscal 1998 was the first full year
of a five year agreement with Poland Springs. This relationship is a significant
contributor to Green Mountain's continuing growth in the office coffee service
category. At September 26, 1998, Poland Springs was Green Mountain's third
largest customer in pounds sold, after Mobil and Hannaford Brothers,
respectively. In addition, Poland Springs has become an important marketing
partner for Green Mountain. As an example, by the end of December 1998, over 200
Perrier trucks that deliver Poland Springs water and Green Mountain Coffee to
offices throughout the Northeast are expected to be carrying full-size Green
Mountain Coffee imagery on the back of the truck, further promoting the Green
Mountain Coffee brand.
Although Green Mountain increased its coffee pounds sold in continuing
operations by approximately 1.5 million in fiscal 1998 to over 7.7 million
pounds, one notable lost customer near the end of fiscal 1998 was The Coffee
Station, Inc. which ordered approximately 109,000 pounds of coffee during the
1998 fiscal year.
Products
In the spring of 1998, Green Mountain expanded its line of certified
organic coffees to five coffees. The Company believes that the growing interest
in organic food products provides a potentially significant market opportunity
for the sale of high quality certified organic coffees. In addition, the
production and marketing of these coffees is consistent with the Company's
environmental vision.
In response to growing consumer demand for specialty coffee, Green
Mountain has developed a comprehensive in-room coffee service program for the
hospitality industry. The program brings added value to hotel guest stays by
providing a memorable, high-quality amenity. The program includes Green
Mountain's Hospitality Filterpacks, which feature freshly roasted, ready-to-brew
Green Mountain Coffee, within a filter. In addition, to enhance the overall
coffee experience, specially designed ceramic Hospitality Mugs and Condiment
Packs are available, along with an easy-to-use four-cup Hamilton Beach Coffee
Brewer.
During fiscal 1998, Green Mountain began distributing the new single
cup Keurig(R) Premium Coffee System to Office Coffee Service and Food Service
providers. Green Mountain and Keurig, Inc. are selling the system through select
distribution channels. The System features the single cup Keurig brewer and
eight varieties of Green Mountain coffee including blends, flavored, decafs, and
estate coffees. The coffees have been specially packaged by Green Mountain, in
patented Keurig K-Cups(TM) to guarantee that each cup of coffee is as fresh as
"the first cup of every pot." Green Mountain holds a minority investment of less
than 5% in Keurig, Inc.
World Wide Web
In November of 1998, Green Mountain introduced a refined web site location
(www.GreenMountainCoffee.com) to provide Internet users with secure on-line
ordering and up-to-date information about the Company.
www.GreenMountainCoffee.com incorporates the look of the Company's new
packaging, as it provides an inviting site to browse, "Sip and Relax... on Green
Mountain Time"(TM). The site features a history of the Company, the Company's
current quarterly newsletter Fresh From the Roaster, press releases, financial
reports, catalog highlights, employment opportunities, environmental
initiatives, and an e-mail link to Green Mountain. In addition, the Company has
secure on-line ordering available, enabling customers to conveniently place
catalog orders for themselves or as gifts. This Web site has already proven to
be an effective channel for the acquisition of new customers to Green Mountain's
direct mail operation.
Discontinued Operations
On May 29, 1998, the Company announced that, consistent with its
long-term growth strategy, it was planning to sell or close its remaining eleven
company-owned retail stores, to focus its resources on developing its rapidly
growing specialty wholesale business. In fiscal 1997, the Company was operating
twelve company-owned retail stores in Vermont, Connecticut, Illinois, Maine,
Massachusetts, New Hampshire and New York, which made up approximately 10% of
total revenues. However, for the first twenty-eight weeks ended April 11, 1998,
sales had fallen to 6% of total net sales. Reasons for the decrease included
the elimination of the Plattsburgh, New York store (for which the lease had
expired in the first half of fiscal 1998), the temporary closing of two stores
due to relocation, as well as overall flat sales in the other company-owned
retail stores. Furthermore, the stores did not generate positive cash flows,
nor did they contribute positively to the Company's net income.
Since 1981, the company-owned stores had been an important part of the
Company's strategy of getting consumers to sample Green Mountain Coffee by the
cup. However, in fiscal 1998, with over 4,500 wholesale customers serving Green
Mountain Coffee by the cup, the strategic value of the company-owned stores was
greatly diminished. Green Mountain wholesale customers include restaurants,
convenience stores, office coffee distributors, travel industry companies
(airlines, trains, hotels), as well as supermarket bakery and/or deli
departments, all of which provide Green Mountain Coffee by the cup. This allows
consumers an opportunity to develop a taste for the Company's coffee, which
subsequently supports the demand for the Company's whole bean coffees in
supermarkets, specialty food stores, or through direct mail.
At December 18, 1998, the Company had sold or closed nine of its retail
stores and is planning to close its remaining two stores in the first half of
fiscal 1999.
Internal systems and infrastructure
In early fiscal 1997, the Company began a complete overhaul of its business
information systems with the implementation of an enterprise-system from
PeopleSoft, Inc. ("PeopleSoft"). Once completely deployed, this new software
is expected to help Green Mountain better serve its customers, and grow more
efficiently and effectively. At September 26, 1998, the Company had implemented
most of the key software modules: General Ledger, Purchasing, Accounts Payable,
Production Management, Bills & Routings, Cost Management, Inventory, Accounts
Receivable, Order Management, Billing, and Production Planning, in order of
completion. The Human Resources Management, Assets Management, Budgeting and
Enterprise Planning modules are all scheduled to be implemented in fiscal 1999.
Besides the functionality enhancements that this new system provides, the
Peoplesoft enterprise system is also expected to take care of most Year 2000
issues. There can be no assurance, however, that the implementation will be
completed on time.
In the first half of fiscal 1998, the Company completed a 45,000 square
foot expansion of its central production and distribution facility in Waterbury,
Vermont. This addition, which doubled the space available, is currently used
primarily for warehousing and distribution. The Company believes that this
expansion was necessary to support its growth rate, and that the current
facilities will be adequate through fiscal 1999.
Corporate Philosophy
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 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 and regional distribution centers which helps
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, multi-category 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." This one to two-day intensive training covers growing and harvesting;
coffee tasting and cupping; grinding, filtering, and brewing; roasting and
packaging; and preparing coffee beverages. Approximately one thousand
employees of Green Mountain's customers attended coffee college in fiscal 1998.
In fiscal 1997, Green Mountain Coffee Roasters also began hosting Specialty
Coffee Association of America ("SCAA") Espresso Lab training sessions. The
Company's direct mail catalog and Web site 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. The Company
believes that educational 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 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 January of 1998, the company sponsored a Coffee Kids micro-lending
program in Huatusco, Mexico, to encourage the development of small family
businesses. By September of 1998, over 270 women in the Huautsco area were
participating in the program. In early December, the Company agreed to provide
Coffee Kids with additional funds to support a similar project in mountain
villages of Oaxaca, Mexico which is the region where the Company's Organic
Mexican Select(TM) coffee is grown. In addition, through customer and employee
contributions, the Company has funded two Coffee Kids 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 the
fall of 1997 the Company provided funding to assist 100 small farmers in
Indonesia become certified as organic coffee producers. This coffee is marketed
as Green Mountain's Organic Sumatran Reserve(TM). 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 1997, 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. Green Mountain introduced four additional certified
organic coffees in fiscal 1998. 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 ("CI") and the
Rainforest Alliance, which work to preserve the world's rain forests. In 1998,
the relationship with CI was strengthened. The Company is providing financial
support to CI for its efforts in sourcing and endorsing coffees used by the
Company that have been grown in an environmentally sound manner.
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 wholesale customers who bag Green Mountain
Coffee on their premises.
Wholesale Operations
During fiscal 1998, 1997 and 1996, approximately 94%, 93% and 91%,
respectively, of Green Mountain's sales from continuing operations were 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 coffee pounds sold during fiscal 1998 by
wholesale customer category was approximately: 28% to supermarkets, 27% to
convenience stores, 17% to restaurants, 14% to office coffee service
distributors, 11% to other food service establishments such as hotels,
universities, and airlines, and 3% to other retail establishments such as
specialty food stores.
Notable accounts include:
Supermarkets
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Hannaford Brothers - 120 stores
Shaw's - 100 stores
Stop & Shop - 150 stores (coffee by the cup program)
Roche Brothers - 13 stores
Restaurants
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Aureole Restaurant, NYC
The Harvard Club, NYC
New England Culinary Institute
Culinary Institute of America
Other Food Services
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Amtrak - northeast corridor
Delta Express and Delta Shuttle
American Skiing Company
Smuggler's Notch Resort
Stowe Mountain Resort
Office Coffee Services
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Perrier's Poland Springs
Vermont Pure Springs
Bunn Coffee Service
Convenience Stores
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Mobil convenience stores - over 1,100 stores
Orloski Quik Marts - over 35 stores
Other Retail
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L.L. Bean
By geographic region, the Company's wholesale coffee pound sales in
fiscal 1998 were approximately as follows: 38% in northern New England states,
23% in southern New England states, 20% in mid-Atlantic states, 5% in South
Atlantic states, 2% in the Midwest, 2% in western states, 1% internationally,
and 9% which is sold through customers which sell across one or more regions.
Through the wholesale operation, Green Mountain has 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 1998,
approximately 1% of wholesale pounds were sold internationally.
Wholesale operations are coordinated from the Company's headquarters in
Waterbury, Vermont and, in geographies in which the density of customer accounts
so warrants, 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 Company uses third party carriers such as Federal
Express and the United States Postal Service for shipping to customers not
supported by a regional distribution center.
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 stockers who ensure that supermarket displays
are clean, appropriately stocked, and have promotional items to maximize sales.
Most large, consumer goods multinationals who own coffee companies do not
provide such on-site specialized sales support to their supermarket customers.
The wholesale operation has over 30 area sales managers assigned to
geographic territories, reporting to a national sales manager. 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, a national
convenience store sales manager, and an international/food service sales
manager, to help provide more focused category management.
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 customers 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.
Direct Mail Operations
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. Sales from direct mail
accounted for approximately 6%, 7% and 9% of total sales from continuing
operations in fiscal 1998, 1997, and 1996, respectively. 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 1998, approximately 37% 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 the same period, catalog
sales from non-Coffee Club individual consumers accounted for approximately 42%
of direct mail revenue.
In addition to its direct mail program targeted at the individual
consumer, Green Mountain also uses its direct mail channel to cater to small
businesses, such as bed and breakfast establishments, small retail stores and
offices. These "business to business" sales contributed approximately 19% of
total direct mail revenues in fiscal 1998.
The balance of the direct mail sales in fiscal 1998 were derived from
Corporate Gifting and World Wide Web efforts. The Green Mountain Web site
(www.GreenMountainCoffee.com) has been featuring products sold through the
direct mail channel since the beginning of fiscal 1998. Starting in November
1998, secure online ordering was made available at this Web address.
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
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. In 1997, the variations in the "C" price of coffee (the
price per pound quoted by the Coffee, Sugar and Cocoa Exchange) were
particularly large, as it rose from $1.17 in January 1997 to a record high of
$3.14 on May 29, 1997. This was caused by 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.
Since May 1997, the "C" price has been decreasing overall, and at
December 15, 1998 the "C" price was $1.20. It is largely expected that coffee
prices and differentials will remain volatile in the coming years. 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 26, 1998, the Company had approximately $5.1 million (for 3.4 million
pounds) in fixed-price purchase commitments. These commitments represent
approximately 38% of the Company's estimated coffee requirements through
September 25, 1999, the end of its 1999 fiscal year.
In addition, the Company does from time to time purchase coffee futures
contracts and coffee options to provide additional protection when it is not
able to enter into coffee purchase commitments. The gains from such contracts
realized in fiscal 1998 were not material.
The Company generally tried to pass on coffee price increases and
decreases to its customers. Since coffee has come down from its 1997 highs, the
Company has decreased prices three times (in the first quarter of fiscal 1998,
fourth quarter of 1998 and first quarter of fiscal 1999), the cumulative
decrease being on average $0.70 per pound. In general, there can be no assurance
that the Company will be successful in passing on green coffee price increases
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 and purchase commitments. Because Green Mountain roasts over 25
different types of green coffee beans to produce its more than 60 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 increased the percentage of the coffee it buys from
specifically identified farms in fiscal 1998 to approximately 15%. The Company
believes its "farm direct" 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 9.9% of sales from continuing operations in fiscal 1998. In
December 1997, the Company renewed its contract with Hannaford for three years.
The extensive network of Mobil convenience stores, owned by Mobil
Corporation or by independent franchisees, accounted for approximately 14.4% of
sales from continuing operations in fiscal 1998, 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, rather than by franchisees, make
up less than 10% of the Company's revenues. It is currently not known whether or
not the planned acquisition of Mobil Corporation by Exxon Corporation will have
an impact on the Mobil coffee program.
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 roasters, to the extent that it is also trying
to "upsell" consumers to the specialty coffee segment. A number of large,
consumer goods multinationals 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 many supermarkets
nationwide, which may serve as alternatives to Green Mountain's coffee. In the
office coffee, convenience store and food service arena, General Foods, Sara Lee
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 competitor is Starbucks, a leading independent specialty coffee
retailer with a growing wholesale operation. In September 1998, Starbucks signed
a distribution agreement with Phillip Morris/ Kraft Foods that will place
Starbucks coffee in supermarkets across the United States, along side of Maxwell
House coffee. This is Starbucks third attempt at entering the supermarket
category.
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 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, multi-category distribution network of wholesale and direct mail
operations and its dual cup/whole bean strategy, 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), Tapestry Blend Dark(R), Autumn
Harvest Blend(R), Mocha Almond Chiller(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 an irrevocable, perpetual, royalty-free license to use
the name Earth-Friendly Coffee Filters(TM) in connection with coffee filters.
The Company also has a limited license to use the names Kona Mountain Coffee(TM)
and Kona Mountain Coffee Company(TM) in connection with coffee worldwide
(excluding Hawaii), all subject to the terms of agreements under which licenses
are granted.
The Company believes that these trademarks, service marks and licenses
will continue to be important to its success.
Employees
As of September 26, 1998, the Company had approximately 321 full-time
employees and 80 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 which
includes a 30,000 square foot mezzanine area. This space also includes 45,000
square feet that were added in November 1997 for the plant expansion which was
completed during the first half of fiscal 1998. The lease on this building
expires in 2007. The Company's other facilities, all of which are leased, are as
follows:
- -------------- --------------------------------- ------------- --------------
Approximate Expiration
Type Location Square Feet of Lease
- -------------- --------------------------------- ------------- --------------
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
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 2001
Company-Owned Latham, NY(1) 2,300 2007
Retail Stores Naperville, IL 2,330 2004
(Discontinued Portland, ME(2) 2,300 2002
Operations) Portsmouth, NH(2) 2,700 1999
So. Portland, ME 1,270 2007
Waitsfield, VT(2) 2,360 2000
Waterbury, VT (Factory Outlet)(1) 1,100 month-to-month
West Hartford, CT(2) 1,820 1999
- -------------- --------------------------------- ------------- --------------
(1) As of December 18, 1998, the Waterbury Factory Outlet and the Latham stores
were the only two stores in operation.
(2)The Company has this entire space subleased as of December 18, 1998.
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 above, all but four
of the retail stores have been subleased or the lease has been terminated. The
Company is actively pursuing opportunities to sublease or terminate leases on
all its company-owned retail 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 26, 1998.
Executive Officers of the Registrant
Certain biographical information regarding each director and executive
officer of the Company is set forth below:
Executive
Name Age Position Officer Since
- --------------------- ----- ---------------------------------------- -------------
Robert P. Stiller 55 Chairman of the Board, President 1993
and Chief Executive Officer
Robert D. Britt 43 Director, Chief Financial Officer, 1993
Vice President Treasurer and Secretary
Stephen J. Sabol 37 Director and Vice President 1993
Jonathan C. Wettstein 50 Director and Vice President 1993
Paul Comey 48 Vice President 1993
Dean E. Haller 46 Vice President 1997
James K. Prevo 45 Vice President 1997
William L. Prost 44 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 Vice President 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 the Registrant's 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. Before that, the Company's
Common stock was traded on the Nasdaq SmallCap Market and on the Boston Stock
Exchange. The following table sets forth the high and low sales prices as
reported by NASDAQ for the periods indicated.
High Low
--------- --------
Fiscal 1997 16 weeks ended January 21, 1997............ $ 7.25 $ 5.875
12 weeks ended April 12, 1997.............. $ 9.00 $ 6.00
12 weeks ended July 5, 1997................ $ 8.75 $ 5.50
12 weeks ended September 27, 1997.......... $ 12.25 $ 7.625
Fiscal 1998 16 weeks ended January 17, 1998............ $ 10.375 $ 6.625
12 weeks ended April 11, 1998.............. $ 8.25 $ 7.00
12 weeks ended July 4, 1998................ $ 7.50 $ 5.75
12 weeks ended September 26, 1998.......... $ 6.875 $ 4.25
Fiscal 1999 September 27, 1998 to December 10, 1998.... $ 6.375 $ 3.875
(b) Number of Equity Security Holders
The Company believes that the number of record holders of common stock
as of December 10, 1998 was 663.
(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 Years Ended
---------------------------------------------------------
Sept. 26, Sept. 27, Sept. 28, Sept.30, Sept. 24,
1998 1997 1996 1995(1) 1994
--------- --------- --------- -------- ---------
(In thousands, except per share data)
Coffee pounds sold(2)......................................... 7,739 6,239 5,108 4,229 3,353
Net sales from continuing operations.......................... $ 55,825 $ 42,908 $ 33,377 $ 28,918 $ 18,060
Income (loss) from continuing operations...................... $ 340 $ 1,539 $ 1,429 $ 30 $ (1,883)
Income (loss) per share from continuing operations- diluted... $ 0.10 $ 0.44 $ 0.42 $ 0.01 $ (0.56)
Total assets.................................................. $ 24,563 $ 23,544 $ 17,243 $ 15,565 $ 13,918
Long-term obligations......................................... $ 10,191 $ 5,965 $ 3,563 $ 4,280 $ 3,022
(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 through the Company's discontinued company-owned retail
stores.
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
Certain statements contained herein are not based on historical fact
and are "forward-looking statements" within the meaning of the applicable
securities laws and regulations. In addition, the Company's representatives may
from time to time make oral forward-looking statements. Forward-looking
statements provide current expectations of future events based on certain
assumptions and include any statements that do not directly relate to any
historical or current fact. Words such as "anticipates", "believes", "expects",
"estimates", "intends", "plans", "projects", and similar expressions, may
identify such forward-looking statements. Owing to the uncertainties inherent in
forward-looking statements, actual results could differ materially from those
set forth in forward-looking statements. Factors that could cause actual results
to differ materially from those in the forward-looking statements include, but
are not limited to, business conditions in the coffee industry and food industry
in general, fluctuations in availability and cost of green coffee, the impact of
the loss of a major customer, economic conditions, prevailing interest rates,
the management challenges of rapid growth, variances from budgeted sales mix and
growth rate, consumer acceptance of the Company's new products, the impact of a
tighter job market, Year 2000 issues, weather and special or unusual events, as
well as other risk factors described in Item 1 of this report and other factors
described from time to time in the Company's filings with the Securities and
Exchange Commission. Forward-looking statements reflect management's analysis as
of the date of this document. The Company does not undertake to revise these
statements to reflect subsequent developments.
Overview
- --------
Green Mountain Coffee, Inc., a leader in the specialty coffee industry,
roasts over 25 high quality arabica coffees to produce over 60 varieties of
coffee that it sells under the Green Mountain Coffee Roasters(R) and Green
Mountain Coffee(R) brands. For the year ended September 26, 1998, Green
Mountain's wholesale operation contributed approximately 94.4% of its net sales
from continuing operations. Green Mountain's wholesale operation 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 a direct mail operation serving customers nationwide from its
Waterbury, Vermont headquarters, which accounted for approximately 5.6% of net
sales from continuing operations in fiscal 1998.
On May 29, 1998, Green Mountain announced that it had adopted a plan to
discontinue its company-owned retail stores operations. As of December 18, 1998,
the Company had sold or closed nine of its retail stores and is planning to
close its remaining two stores prior to the end of the Company's second fiscal
quarter of 1999.
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, freight and delivery expenses.
Selling and operating expenses consist of expenses that directly support the
sales of the Company's wholesale and 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 1998, fiscal 1997 and fiscal 1996
represent the 52 week-periods ended September 26, 1998, September 27, 1997 and
September 28, 1996, respectively.
Coffee Prices, Availability and General Risk Factors
- ----------------------------------------------------
Green coffee commodity prices are subject to substantial price
fluctuations, generally caused by multiple factors including weather, political
and economic conditions in certain coffee-producing countries and other
supply-related concerns. During fiscal 1997, worldwide green coffee commodity
prices increased significantly and remained high relative to historical levels
through the second fiscal quarter of 1998. In response to these fluctuations,
the Company increased coffee sales prices several times during 1997, and then
decreased prices in the first fiscal quarter of fiscal 1998, in the fourth
quarter of fiscal 1998 and in the first quarter of fiscal 1999. The Company
believes that the "C" price of coffee (the price per pound quoted by the Coffee,
Sugar and Cocoa Exchange) will remain highly volatile in future fiscal years. In
addition to the "C" price, coffee of the quality sought by Green Mountain also
tends to trade on a negotiated basis at a substantial premium or "differential"
above the "C" price. These differentials are also subject to significant
variations. 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 60 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 fixed coffee purchase commitments in an attempt
to secure an adequate supply of quality coffees. To further reduce its exposure
to rising coffee costs, the Company, from time to time, enters into futures
contracts and buys options to hedge price-to-be-established coffee purchase
commitments. The specific risks associated with these activities are described
below in Item 7A "Quantitative and Qualitative Disclosures about Market Risk."
The Company expects to face increasing competition in all its markets,
as competitors improve the quality of their coffees to make them more comparable
to Green Mountain's. In addition, specialty coffee is now more widely available
and a number of competitors benefit from substantially larger promotional
budgets following, among other factors, the acquisition of specialty coffee
companies by large, consumer goods multinationals. The Company expects that the
continued high quality and wide availability of its coffee across a large array
of distribution channels 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.
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:
Fiscal years ended
---------------------------------------------
September 26, September 27, September 28,
1998 1997 1996
------------- ------------- -------------
Net Sales:
Wholesale................................... 94.4 % 93.3 % 90.9 %
Direct mail................................. 5.6 % 6.7 % 9.1 %
------------- ------------- -------------
Net sales........................................ 100.0 % 100.0 % 100.0 %
Cost of sales.................................... 65.5 % 63.3 % 61.8 %
------------- ------------- -------------
Gross profit................................ 34.5 % 36.7 % 38.2 %
Selling and operating expenses................... 24.7 % 24.1 % 22.2 %
General and administrative expenses.............. 7.5 % 7.9 % 9.4 %
Loss on abandonment of equipment ................ - % 0.5 % - %
------------- ------------- -------------
Operating income............................ 2.3 % 4.2 % 6.6 %
Other income (expense)........................... 0.1 % 0.0 % (0.1)%
Interest expense................................. (1.4)% (1.2)% (1.3)%
------------- ------------- -------------
Income from continuing operations
before income taxes......................... 1.0 % 3.0 % 5.2 %
Income tax benefit (expense)..................... (0.4)% 0.6 % (0.9)%
------------- ------------- -------------
Income from continuing operations .......... 0.6 % 3.6 % 4.3 %
------------- ------------ -------------
Discontinued operations:
Loss from discontinued operations, net of tax
benefits......................................... (0.5)% (0.5)% (0.5)%
Loss on disposal, net of tax benefits............ (2.3)% - % - %
------------- ------------- -------------
Net income (loss)........................... (2.2)% 3.1 % 3.8 %
============= ============= =============
Fiscal 1998 versus Fiscal 1997
- ------------------------------
Net sales from continuing operations increased by $12,917,000 or 30.1%
from $42,908,000 in fiscal 1997 to $55,825,000 in fiscal 1998. Coffee pounds
sold increased by approximately 1,500,000 pounds or 24.0% from 6,239,000 pounds
in fiscal 1997 to 7,739,000 pounds in fiscal 1998. The difference between the
percentage increase in net sales and the percentage increase in coffee pounds
sold primarily relates to higher average selling prices of Green Mountain's
coffee during fiscal 1998, following the increases in the "C" price of coffee in
fiscal 1997.
The year-to-year increase in net sales from continuing operations
occurred primarily in the wholesale area in which net sales increased by
$12,673,000 or 31.7% from $40,037,000 in fiscal 1997 to $52,710,000 in fiscal
1998. The wholesale net sales increase resulted primarily from the growth of
certain large accounts in the office coffee service, convenience store and
supermarket categories. Direct mail sales increased $244,000 or 8.5% from
$2,871,000 in fiscal 1997 to $3,115,000 in fiscal 1998.
Green Mountain's gross profit from continuing operations increased by
$3,540,000 or 22.5% from $15,727,000 in fiscal 1997 to $19,267,000 in fiscal
1998. Gross profit as a percentage of net sales decreased 2.2 percentage points
from 36.7% in fiscal 1997 to 34.5% in fiscal 1998. 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. Expressed in dollars per
coffee pound sold, gross profit remained relatively stable, at $2.50 in fiscal
1998 versus $2.52 in fiscal 1997. Green coffee prices have generally declined
over the course of fiscal 1998. Consequently, the Company decreased its selling
prices in the first quarter of fiscal 1998, in the fourth quarter of fiscal 1998
and in the first quarter of fiscal 1999. Although the last two cuts will impact
gross profit in the first fiscal quarter of 1999, gross profit in fiscal 1999
overall, expressed as a percentage of sales, is not expected to drop below
fiscal 1998 levels.
Selling and operating expenses from continuing operations increased by
$3,477,000 or 33.7% from $10,328,000 in fiscal 1997 to $13,805,000 in fiscal
1998, and increased 0.6 percentage points as a percentage of net sales from
24.1% in fiscal 1997 to 24.7% in fiscal 1998. This was primarily caused by
increased sales and sales support personnel expenditures ($1,600,000),
promotional expenses ($900,000) and a $406,000 year-over-year increase in the
Company's bad debt expense related to the Company's recent systems conversion.
At September 26, 1998, the majority of the process problems that caused the
increased write-offs had been resolved. The Company currently intends to
continue ramping up sales support and marketing efforts in fiscal 1999,
although, as a percentage of sales, selling and operating expenses are not
expected to increase.
General and administrative expenses from continuing operations
increased by $778,000 or 22.9% from $3,391,000 in fiscal 1997 to $4,169,000 in
fiscal 1998. As a percentage of net sales, this change represents a 0.4
percentage point decrease from 7.9% in fiscal 1997 to 7.5% in fiscal 1998. The
dollar increase is primarily due to increased systems depreciation, software
maintenance and personnel expenses related to the implementation of the
Company's new enterprise information system.
The total expenses related to the new enterprise information system,
which impact selling and operating expenses, general and administrative
expenses, and to a lesser extent, cost of goods sold, amounted to approximately
$900,000 in fiscal 1998.
During the second quarter of fiscal 1997, Green Mountain commenced the
expansion of its central production and distribution facility located in
Waterbury. The Company recorded a loss on abandonment of equipment of $218,000
during fiscal 1997 due to the demolition of an old, adjacent office building and
the redesign of the production flow to be used in the expanded facility. The
45,000 square foot expansion, which was completed in the first half of fiscal
1998, carries additional occupancy costs of approximately $400,000 annually.
For the reasons outlined above, operating income decreased by $497,000
or 27.8% from $1,790,000 in fiscal 1997 to $1,293,000 in fiscal 1998. As a
percentage of sales, operating income declined 1.9 percentage points from 4.2%
in fiscal 1997 to 2.3% in fiscal 1998.
Interest expense from continuing operations increased $300,000 or 57.6%
from $521,000 in fiscal 1997 to $821,000 in fiscal 1998 due to the increase in
the Company's long-term debt.
Income tax expense from continuing operations increased $451,000 from a
tax benefit of $253,000 in fiscal 1997 to a tax expense of $198,000 in fiscal
1998. During fiscal 1997, based primarily upon estimates of future taxable
income, the deferred tax asset valuation allowance was reduced by $1,112,000,
resulting in a substantial tax benefit. Although realization is not assured,
management believes that the net deferred tax asset represents management's best
estimate, based upon the weight of available evidence as prescribed by SFAS 109,
of the amount which is more likely than not to be realized. It is expected that
the Company's effective tax rate in future periods will approximate 38% to 40%.
For the reasons outlined above, income from continuing operations
decreased $1,199,000 or 77.9% from $1,539,000 in fiscal 1997 to $340,000 in
fiscal 1998.
During the third quarter of fiscal 1998, the Company recorded a loss of
$1,259,000 (net of a tax benefit of $834,000) on disposal of its retail stores.
This loss includes provisions for estimated lease termination costs, write-off
of leasehold improvements and other fixed assets, severance and employee
benefits, as well as a pre-tax provision of $401,000 for anticipated losses from
May 29, 1998 (the measurement date) through disposal date. As of December 18,
1998, the Company had sold or closed nine of its retail stores and is planning
to close the remaining two prior to the end of the Company's second fiscal
quarter.
Net income decreased $2,541,000 from a net income of $1,325,000 in
fiscal 1997 to a net loss of $1,216,000 in fiscal 1998.
Fiscal 1997 versus Fiscal 1996
- ------------------------------
Net sales from continuing operations increased by $9,531,000 or 28.6%
from $33,377,000 in fiscal 1996 to $42,908,000 in fiscal 1997. Coffee pounds
sold increased by approximately 1,131,000 pounds or 22.1% from 5,108,000 pounds
in fiscal 1996 to 6,239,000 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 from continuing operations
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. Direct mail sales declined $166,000 or 5.5% from
$3,037,000 in fiscal 1996 to $2,871,000 in fiscal 1997.
Green Mountain's gross profit from continuing operations increased by
$2,987,000 or 23.4% from $12,740,000 in fiscal 1996 to $15,727,000 in fiscal
1997. As a percentage of net sales, this represents a decline of 1.5 percentage
points from 38.2% in fiscal 1996 to 36.7% 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 increased by $0.03 per pound, from $2.49 in fiscal 1996 to $2.52
in fiscal 1997.
Selling and operating expenses from continuing operations increased by
$2,905,000 or 39.1% from $7,423,000 in fiscal 1996 to $10,328,000 in fiscal
1997, and increased 1.9 percentage points as a percentage of net sales from
22.2% in fiscal 1996 to 24.1% 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.
General and administrative expenses from continuing operations
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 1.5
percentage point decrease from 9.4% in fiscal 1996 to 7.9% in fiscal 1997.
Operating income decreased by $395,000 or 18.1% from $2,185,000 in
fiscal 1998 to $1,790,000 in fiscal 1997. As a percentage of sales, operating
income declined 2.4 percentage points from 6.6% in fiscal 1996 to 4.2% in fiscal
1997.
Interest expense from continuing operations increased $99,000 or 23.5%,
from $422,000 in fiscal 1996 to $521,000 in fiscal 1997, as the Company financed
its growth through additional borrowings.
The income tax expense from continuing operations recognized under SFAS
109 was $313,000 in fiscal 1996 compared to an income tax benefit of $253,000 in
fiscal 1997. Based on recent profitability and estimates of future taxable
income, the deferred tax asset valuation allowance was reduced by $1,112,000,
resulting in a substantial tax benefit in fiscal 1997.
Income from continuing operations increased $110,000 or 7.7% from
$1,429,000 in fiscal 1996 to $1,539,000 in fiscal 1997. Net income increased
$63,000 or 5.0% from $1,262,000 in fiscal 1996 to $1,325,000 in fiscal 1997.
Liquidity and Capital Resources
- -------------------------------
Net working capital amounted to $7,852,000 at September 26, 1998 and
$4,491,000 at September 27, 1997. The increase is primarily the result of lower
current debt due to the Company's refinancing of its debt with Fleet Bank- NH
("Fleet") in fiscal 1998 and lower accounts payable. Accounts payable were high
at September 27, 1997 due to high green coffee payables (both in terms of pounds
and cost per pound) and payables related to the expansion of the distribution
and production facility. Under the revised Fleet facility, the Company increased
the limit of the revolving line of credit from $6,000,000 to $9,000,000 (subject
to a borrowing base formula) and extended its term to March 31, 2001. Under the
amended facility, the Company was also able to borrow up to $4,500,000 in term
debt with a maturity of March 31, 2003. Borrowings under the term debt do not
require principal repayments until October 31, 1999, at which time monthly
principal payments of $75,000 will commence. At September 26, 1998, the amount
available under the line of credit was $1,309,000 and the amount outstanding on
the term debt was $4,500,000. The new credit facility is subject to certain
quarterly covenants, and the Company was in compliance with these covenants at
September 26, 1998.
In fiscal 1998, Green Mountain Coffee made capital expenditures related
to continuing operations of $3,375,000, which primarily included $1,458,000 for
equipment on loan to customers; $1,366,000 for leasehold improvements,
production equipment and fixtures; and $485,000 for computer hardware and
software.
During fiscal 1997, Green Mountain Coffee made capital expenditures of
$5,277,000 related to continuing operations, 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.
Green Mountain is presently implementing an enterprise information
system which it expects to use to facilitate growth and improve operations and
customer service. At September 26, 1998, the Company had implemented eleven
software modules and is currently planning to implement another six modules in
fiscal 1999. Management believes that the substantial investment in computer
hardware and software in fiscal 1997 and the expansion of its central production
and distribution center during fiscal years 1997 and 1998 was necessary for the
Company to efficiently and effectively grow.
Cash used to fund capital expenditures in fiscal 1998 was obtained from
the amended Fleet credit facility. Net cash provided by operating activities
reflects a $2,893,000 decrease as compared to fiscal 1997, which resulted
primarily from the Company's lower net income and lower accounts payable.
The Company currently plans to make capital expenditures in fiscal 1999
of approximately $2,500,000. 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, and
available borrowings under its credit facility 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.
Year 2000
- ---------
The Year 2000 problem concerns the inability of information systems and
systems with embedded chip technology to properly recognize and process
date-sensitive information beyond December 31, 1999. The Company is in the
continuing process of assessing its Year 2000 readiness and has identified its
Year 2000 risk in three broad categories: internal business software;
manufacturing, facilities and embedded chip technology; and external
noncompliance by customers and suppliers.
Company state of readiness
Internal business software
In early fiscal 1997, the Company began a Company-wide business systems
replacement project with an enterprise-system from PeopleSoft, Inc.
("PeopleSoft"). The new system, which is expected to make approximately 90%
of the Company's business computer systems Year 2000 compliant, is approximately
75% complete and on schedule. Implementation is scheduled to be completed by
the end of June 1999. The primary motivation to implement PeopleSoft was to reap
the benefits of its enhanced functionality and features to improve operations
and customer service as the Company grows. Besides the implementation of
Peoplesoft, there were no other significant information technology projects (IT)
planned. Therefore, the Year 2000 project has not caused delays in other IT
projects.
Besides the enterprise-wide information system, software upgrades which
take place in the normal course of business are expected to tend to the majority
of the Year 2000 problems related to internal business software. The Company
plans to either upgrade the business software used by its direct mail channel or
migrate it to the PeopleSoft system by the end of June 1999.
Manufacturing, facilities and embedded chip technology
The Company has completed the inventory of its computer hardware,
manufacturing, security and communication systems which are vital to its daily
operations and could present a Year 2000 risk. All PC hardware susceptible to
fail after the Year 2000 was replaced in the normal course of business over the
past three years. Major vendors of manufacturing equipment, security equipment,
and communication systems have been contacted and the Company is presently
compiling information on replacement costs of non-compliant equipment. This
information gathering phase is expected to be completed by the end of March
1999.
External noncompliance by customers and suppliers
The Company is in the process of identifying and contacting its
critical suppliers and service providers to determine the extent to which the
Company is vulnerable to those third parties' failure to remedy their own Year
2000 issues. It is expected that all major suppliers will have been contacted by
the end of April 1999. To the extent that responses to Year 2000 readiness are
unsatisfactory, the Company intends to change suppliers to those who have
demonstrated Year 2000 readiness but cannot be assured that it will be
successful in finding such compliant suppliers and service providers. The
Company does not currently have any formal information concerning the Year 2000
status of its major customers, although it has received indications that major
customers are working on Year 2000 compliance. The Company will contact and
attempt to assess the Year 2000 readiness of its customers by the end of April
1999.
Actual and anticipated costs
The total cost associated with required modifications to become Year
2000 compliant is not expected to be material to the Company's financial
position. The estimated total cost of the Year 2000 Project is approximately
$125,000, excluding internal costs consisting primarily of payroll and benefits
of employees working on Year 2000 issues. This estimate does not include the
conversion to PeopleSoft, since those replacement costs were not due to, or
accelerated by, the Year 2000 Project. Through September 26, 1998, the Company
has not incurred expenses directly related to the Year 2000 Project. The
estimated future costs of the Year 2000 Project is $125,000, of which
approximately (1) $100,000 relates to the replacement costs of manufacturing,
security and communication equipment and (2) $25,000 relates to replacement
costs of non-compliant software.
Risks
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers and customers,
the Company is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on the Company's results of
operations, liquidity or financial condition. The Company's efforts are expected
to significantly reduce the Company's level of uncertainty about the Year 2000
problem. The Company believes that, with the completion of the implementation of
PeopleSoft and the completion of the plan identified above, the possibility of
significant interruptions of normal operations should be reduced. Readers are
cautioned that forward-looking statements contained in this Year 2000 update
should be read in conjunction with the Company's disclosures under the heading:
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" beginning on page 20.
Contingency plans
As of December 10, 1998, the Company has not developed a contingency
plan related to Year 2000. The Company is planning on developing a contingency
plan by the end of June 1999.
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
and the discontinuation of the company-owned retail stores in fiscal 1998.
Item 7A - Quantitative and Qualitative Disclosures about Market Risk
Market risks relating to the Company's operations result primarily from
changes in interest rates and commodity prices (the "C" price of coffee). To
address these risks, the Company enters into hedging transactions as described
below. The Company does not use financial instruments for trading purposes.
For purposes of specific risk analysis, the Company uses sensitivity
analysis to determine the impacts that market risk exposures may have on the
Company's financial position or earnings.
Interest rate risks.
At September 26, 1998, the Company had $9,845,000 of long-term debt
subject to variable interest rates (the lower of Fleet Bank's prime rate and
LIBOR rates for maturities up to one year). On May 29, 1998, the Company entered
into a standard International Swap Dealers Association Inc. interest rate swap
agreement with Fleet National Bank in order to limit the effect of increases in
the interest rates on $6 million of its floating debt. The effect of this
agreement, which expires in May 2001, is to convert underlying variable-rate
debt based on LIBOR to fixed rate debt with an interest rate of 5.84% plus a
margin based on a performance price structure (between 250 and 275 basis points
at September 26, 1998). At September 26, 1998, this leaves the Company with
$3,845,000 of variable-rate debt, of which $650,000 varied with the prime rate
and the remainder with LIBOR. A hypothetical 100 basis points increase in the
LIBOR rate and prime rate would result in additional interest expense of $38,000
on an annualized basis.
The fair value of the interest rate swap is the estimated amount that
the Company would receive or pay to terminate the agreement at the reporting
date, taking into account current interest rates and the credit worthiness of
the counterparty. At September 26, 1998, the Company estimates it would have
paid $68,000 to terminate the agreement. A 10% decrease in interest rates would
decrease the fair value of the interest rate swap by approximately $82,000.
Commodity price risks.
Green coffee prices are subject to substantial price fluctuations,
generally caused by multiple factors including weather, political and economic
conditions in certain coffee-producing countries and other supply-related
concerns. The Company's gross profits are significantly impacted by changes in
the price of green coffee. The Company enters into fixed coffee purchase
commitments in an attempt to secure an adequate supply of coffee. These
agreements are tied to specific market prices (defined by both the origin of the
coffee and the time of delivery) but the Company has significant flexibility in
selecting the date of the market price to be used in each contract. 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. At September 26,
1998, the Company had approximately $5.1 million (for 3.4 million pounds) in
fixed-price purchase commitments. These commitments represent approximately 38%
of the Company's estimated coffee requirements through September 25, 1999, the
end of its 1999 fiscal year.
In addition, from time to time, the Company uses commodity-based
financial instruments to hedge price-to-be-established coffee purchase
commitments with the objective of minimizing cost risk due to market
fluctuations. Gains and losses relating to qualifying hedges of anticipated
inventory transactions or firm commitments are deferred in current assets and
are included in the basis of the underlying transactions. At September 26, 1998,
the Company held both options and futures contracts, with maturity dates between
December 1998 and September 1999. The options held at September 26, 1998 covered
1,312,500 pounds of green coffee and had exercise prices from $1.75 to $2.00 per
pound. At September 26, 1998, the "C" price of coffee was $1.05. If the price of
coffee remains under $1.75 when these options come to term, the loss incurred
will be approximately $74,000. In addition, at September 26, 1998, the Company
had futures contracts outstanding of approximately $714,000 covering 637,500
pounds. A hypothetical decrease of ten cents per pound in the price of green
coffee would result in additional cost of goods sold expense of approximately
$64,000. However, such losses in the fair value of these financial instruments,
if realized, would be offset by lower costs of coffee purchased during 1999.
Item 8. Financial Statements and Supplementary Data
See Index to Consolidated 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 26, 1999, 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 26, 1998 (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 will be 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 will be 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 will be 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 consolidated financial statements are filed as part of this
report:
Page
----
Index to Consolidated Financial Statements............................................ F-1
Report of Independent Accountants..................................................... F-2
Consolidated Financial Statements:
Consolidated Balance Sheet at September 26, 1998 and September 27, 1997............... F-3
Consolidated Statement of Operations for the three years ended September 26, 1998..... F-4
Consolidated Statement of Changes in Stockholders' Equity for the three years
ended September 26, 1998.......................................................... F-5
Consolidated Statement of Cash Flows for the three years ended September 26, 1998..... F-6
Notes to Consolidated Financial Statements............................................ F-7
(a) 2. Financial Statement Schedules
The following financial statement schedule is filed as part of this report:
Schedule II: Valuation and Qualifying Accounts...................................... F-22
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 Inc., Investor Services,
33 Coffee Lane, Waterbury, VT 05676.
Exhibit No. Exhibit Title
- ----------- --------------------------------------------------------------
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 - NH(1)
(h) Landlord's Consent and Waiver, dated August 4, 1993,
executed by Pilgrim Partnership(1)
(i) Consent of Lessor executed by Pilgrim Partnership and
Fleet Bank - NH(1)
(y) Seventh Amendment and First Restatement of Commercial Loan
Loan Agreement, dated April 12, 1996, among Green
Mountain Coffee Roasters, Inc., as borrower, and Fleet
Bank - NH as lender(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)
(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(15)
(gg) Eleventh Amendment to Commercial Loan Agreement, dated
February 20, 1998, from Green Mountain Coffee Roasters,
Inc., to Fleet Bank - NH(17)
(hh) Replacement Revolving Line of Credit Promissory Note,
dated February 20, 1998, from Green Mountain Coffee
Roasters, Inc., to Fleet Bank - NH(17)
(ii) Revolving Line of Credit/Term Promissory Note, dated
February 20, 1998, from Green Mountain Coffee Roasters,
Inc., to Fleet Bank - NH(17)
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 VEDA1
(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)
(i) Amendment to Loan Agreement, dated August 25, 1998, among
VEDA, as lender, and Green Mountain Coffee Roasters,
as borrower
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 April 28, 1993(1)
(b) Lease Amendment dated August 16, 1993(4)
(c) Letter Agreement dated July 30, 1997(16)
10.36 1993 Stock Option Plan of the Company, as revised(13)
10.37 1998 Employee Stock Purchase Plan with Form of Participation
Agreement
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)*
10.68 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(14)*
10.72 Employment Agreement, as of January 1, 1997, between the Company
and William L. Prost(14)*
10.73 Stock Option Agreement, dated November 19, 1996, between the
Company and Dean E. Haller(14)*
10.74 Stock Option Agreement, dated May 19, 1997 between the Company
and William L. Prost(14)*
10.75 Stock Option Agreement, dated July 31, 1997 between the Company
and James K. Prevo(16)*
10.76 Stock Option Agreement, dated October 21, 1997 between the
Company and Robert D. Britt(17)*
10.77 Stock Option Agreement, dated October 21, 1997 between the
Company and Paul Comey(17)*
10.78 Stock Option Agreement, dated October 21, 1997 between the
Company and Jonathan C. Wettstein(17)*
10.79 Stock Option Agreement, dated October 21, 1997 between the
Company and William L. Prost(17)*
10.80 Stock Option Agreement, dated October 21, 1997 between the
Company and Stephen J. Sabol(17)*
21 List of Subsidiaries of the Company
23 Consent of PricewaterhouseCoopers LLP
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 26, 1998.
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 exhibit to schedule 14A filed on
February 28, 1997
14. Incorporated by reference to the corresponding exhibit number in the
Quarterly Report on Form 10-Q for the 12 weeks ended April 12, 1997
15. Incorporated by reference to the corresponding exhibit number in the
Quarterly Report on Form 10-Q for the 12 weeks ended July 5, 1997
16. Incorporated by reference to the corresponding exhibit number in the
Annual Report on Form 10-K for the fiscal year ended September 27, 1997
17. Incorporated by reference to the corresponding exhibit number in the
Quarterly Report on Form 10-Q for the 16 weeks ended January 17, 1998
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the Registrant 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 the Securities and 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 18, 1998
/s/ Robert D. Britt Chief Financial Officer, Treasurer,
- ------------------- Secretary and Director (Principal
ROBERT D. BRITT Financial and Accounting Officer) December 18, 1998
STEPHEN J. SABOL* Director December 18, 1998
JONATHAN C. WETTSTEIN* Director December 18, 1998
WILLIAM D. DAVIS* Director December 18, 1998
JULES A. DEL VECCHIO* Director December 18, 1998
DAVID E. MORAN* Director December 18, 1998
*By: /s/ Robert P. Stiller
-----------------------------------
Robert P. Stiller, Attorney-in-fact
GREEN MOUNTAIN COFFEE, INC.
Index to Consolidated Financial Statements
Page
----
Report of Independent Accountants ....................................................... F-2
Consolidated Financial Statements:
Consolidated Balance Sheet at September 26, 1998 and September 27, 1997.............. F-3
Consolidated Statement of Operations for the three years ended September 26, 1998.... F-4
Consolidated Statement of Changes in Stockholders' Equity for the three years ended
September 26, 1998............................................................... F-5
Consolidated Statement of Cash Flows for the three years ended September 26, 1998.... F-6
Notes to Consolidated Financial Statements........................................... F-7
F-1
Report of Independent Accountants
November 18, 1998
To the Board of Directors and Stockholders of Green Mountain Coffee, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows present fairly, in all material respects, the financial position of Green
Mountain Coffee, Inc. and its subsidiary at September 26, 1998 and September 27,
1997, and the results of their operations and their cash flows for each of the
three years in the period ended September 26, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits 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/ PricewaterhouseCoopers LLP
Boston, Massachusetts
F-2
Green Mountain Coffee, Inc.
Consolidated Balance Sheet
(Dollars in thousands)
September 26, September 27,
1998 1997
----------------- ------------------
Assets
Current assets:
Cash and cash equivalents......................................... $ 777 $ 831
Receivables, less allowances of $378 at September 26, 1998
and $116 at September 27, 1997.................................... 4,789 4,119
Inventories....................................................... 5,636 5,224
Other current assets.............................................. 489 319
Loans to officers................................................. 185 57
Deferred income taxes, net........................................ 880 865
----------- -----------
Total current assets.......................................... 12,756 11,415
Fixed assets, net.................................................... 10,800 11,258
Other long-term assets............................................... 270 385
Deferred income taxes, net........................................... 737 486
----------- -----------
$ 24,563 $ 23,544
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt................................. $ 249 $ 943
Current portion of obligation under capital lease................. 12 132
Accounts payable.................................................. 3,131 4,954
Accrued payroll................................................... 827 616
Accrued expenses.................................................. 507 279
Accrued losses and other costs of discontinued operations, net.... 178 -
----------- -----------
Total current liabilities................................... 4,904 6,924
----------- -----------
Long-term debt....................................................... 5,041 1,968
----------- -----------
Obligation under capital lease....................................... - 12
----------- -----------
Long-term line of credit............................................. 5,150 3,985
----------- -----------
Commitments and contingencies (Note 13)
Stockholders' equity:
Common stock, $0.10 par value:
Authorized - 10,000,000 shares; Issued - 3,545,841 shares and
3,530,818 shares at September 26, 1998 and September 27, 1997,
respectively...................................................... 355 353
Additional paid-in capital........................................ 13,018 12,954
Accumulated deficit............................................... (3,868) (2,652)
Treasury shares, at cost, 7,350 shares at September 26, 1998..... (37) -
----------- -----------
Total stockholders' equity........................................ 9,468 10,655
----------- -----------
$ 24,563 $ 23,544
=========== ===========
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 26, September 27, September 28,
1998 1997 1996
---------------- ----------------- -----------------
Net sales.............................. $ 55,825 $ 42,908 $ 33,377
Cost of sales.......................... 36,558 27,181 20,637
----------- ----------- ------------
Gross profit...................... 19,267 15,727 12,740
Selling and operating expenses......... 13,805 10,328 7,423
General and administrative expenses.... 4,169 3,391 3,132
Loss on abandonment of equipment....... - 218 -
----------- ------------ ------------
Operating income.................. 1,293 1,790 2,185
Other income (expense)................. 66 17 (21)
Interest expense....................... (821) (521) (422)
----------- ------------ ------------
Income from continuing operations
before income taxes............... 538 1,286 1,742
Income tax benefit (expense)........... (198) 253 (313)
----------- ------------ ------------
Income from continuing operations. 340 1,539 1,429
Discontinued operations:
Loss from discontinued retail stores
operations, net of income tax benefits
of $196, $142 and $91 for the years
ended September 26, 1998, September
27, 1997 and September 28, 1996,
respectively........................... (297) (214) (167)
Loss on disposal of retail stores,
including provision on a pre-tax
basis of $401 for operating losses
during phase-out period and net of
income tax benefits of $834............ (1,259) - -
----------- ------------ ------------
Net income (loss)...................... $ (1,216) $ 1,325 $ 1,262
=========== ============ ============
Basic income (loss) per share:
Weighted average shares outstanding.... 3,530,657 3,433,929 3,399,795
Income from continuing operations...... $ 0.10 $ 0.45 $ 0.42
Loss from discontinued operations...... $ (0.44) $ (0.06) $ (0.05)
Net income (loss)...................... $ (0.34) $ 0.39 $ 0.37
Diluted income (loss) per share:
Weighted average shares outstanding.... 3,539,231 3,467,932 3,427,610
Income from continuing operations...... $ 0.10 $ 0.44 $ 0.42
Loss from discontinued operations...... $ (0.44) $ (0.06) $ (0.05)
Net income (loss)...................... $ (0.34) $ 0.38 $ 0.37
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 26, 1998, September 27, 1997
and September 28, 1996
(Dollars in thousands)
Common stock Additional Accumulated Treasury stock Total
paid-in deficit stockholders'
Shares Amount capital Shares Amount equity
---------- ----------- ------------- -------------- ---------- ---------- --------------
Balance at October 1, 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 - - - 349
Net income..................... - - - 1,325 - - 1,325
---------- ----------- ------------- -------------- ---------- ---------- --------------
Balance at September 27, 1997.. 3,530,818 353 12,954 (2,652) - - 10,655
Issuance of common stock
under employee stock
purchase plan................ 15,023 2 64 - - - 66
Purchase of treasury shares.... - - - - (7,350) (37) (37)
Net loss....................... - - - (1,216) - - (1,216)
---------- ----------- ------------- -------------- ---------- ---------- --------------
Balance at September 26,1998... 3,545,841 $ 355 $ 13,018 $ (3,868) (7,350) $ (37) $ 9,468
========== =========== ============= ============== ========== ========== ==============
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 26, September 27, September 28,
1998 1997 1996
------------- ------------- -------------
Cash flows from operating activities:
Net income (loss).................................. $ (1,216) $ 1,325 $ $ 1,262
Adjustments to reconcile net income (loss) to net
cash provided by (used for) operating activities:
Loss from discontinued operations............. 297 214 167
Loss on disposal of discontinued operations... 1,259 - -
Depreciation and amortization................. 2,754 2,311 1,813
Loss on disposal of fixed assets.............. 63 240 47
Provision for doubtful accounts............... 577 171 156
Deferred income taxes......................... (70) (308) 279
Changes in assets and liabilities:
Receivables................................... (1,247) (1,512) (274)
Inventories................................... (565) (1,948) (510)
Other current assets.......................... (325) 251 (250)
Other long-term assets........................ 63 9 (180)
Accounts payable.............................. (1,823) 1,952 251
Accrued payroll............................... 211 136 310
Accrued expenses.............................. 228 15 108
------------- ------------- -------------
Net cash provided by continuing operations............ 206 2,856 3,179
Net cash used for discontinued operations............. (406) (163) (45)
------------- ------------- -------------
Net cash provided by (used for) operating activities.. (200) 2,693 3,134
------------- ------------- -------------
Cash flows from investing activities:
Expenditures for fixed assets....................... (3,375) (5,277) (2,494)
Capital expenditures for discontinued operations.... (208) (90) (25)
Proceeds from disposals of fixed assets............. 170 80 59
Proceeds from disposal of discontinued operations... 118 - -
------------- ------------- -------------
Net cash used for investing activities................ (3,295) (5,287) (2,460)
------------- ------------- -------------
Cash flows from financing activities:
Proceeds from issuance of common stock............. 66 458 89
Purchase of treasury shares........................ (37) - -
Proceeds from issuance of long-term debt........... 4,500 - 1,509
Repayment of long-term debt........................ (2,121) (947) (729)
Principal payments under capital lease obligation.. (132) (114) (90)
Net change in revolving line of credit............. 1,165 3,477 (1,212)
------------- ------------- -------------
Net cash provided by (used for) financing activities.. 3,441 2,874 (433)
------------- ------------- -------------
Net increase (decrease) in cash and cash
equivalents........................................ (54) 280 241
Cash and cash equivalents at beginning of year........ 831 551 310
------------- ------------- -------------
Cash and cash equivalents at end of year.............. $ 777 $ 831 $ 551
============= ============= =============
Supplemental disclosures of cash flow information:
Cash paid for interest............................. $ 786 $ 507 $ 401
Cash paid for income taxes......................... $ 56 $ 46 $ 5
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 restaurants, 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.
The Company's fiscal year ends on the last Saturday in September. Fiscal
1998, fiscal 1997 and fiscal 1996 represent the years ended September 26,
1998, September 27, 1997 and September 28, 1996, respectively, and consist
of 52 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. Inventories consist
primarily of green and roasted coffee, packaging materials and purchased
finished goods.
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. Risks arise from the possible
inability of counterparties to meet the terms of their contracts and from
movements in the price of green coffee. The overall exposure to credit
risk is considered to be minimal.
The Company had futures contracts outstanding of approximately $714,000
and $610,000 at September 26, 1998 and September 27, 1997, respectively.
The fair market value of these futures at September 26, 1998 and
September 27, 1997 was $670,000 and $599,000, respectively. In addition,
at September 26, 1998 the Company held options covering an aggregate of
1,312,500 pounds of green coffee bean which are exercisable in
fiscal 1999 at prices ranging from $1.75 to $2.00 per pound. At
September 27,1997, the Company held options covering an aggregate of
375,000 pounds of coffee which were exercisable in fiscal 1998 at a price
of $2.00 per pound. The fair market value of these options were not
material at September 26, 1998 and September 27, 1997. The fair market
value for the futures and options was obtained from a major financial
institution based on the market value of those financial instruments at
September 26, 1998 and September 27, 1997. At September 26, 1998 and
September 27, 1997, $112,000 and $19,000, respectively, of deferred
hedging losses were included in the value of the inventory in the
accompanying consolidated balance sheet.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). This pronouncement will
require the Company to recognize derivatives on its balance sheet at fair
value. Changes in the fair value of derivatives are recorded each period
in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the
type of hedge transaction. The Company expects that this new standard will
not have a significant effect on its results of operations. SFAS 133 is
effective for fiscal years beginning after June 15, 1999, which is fiscal
year 2000 for the Company.
Other long-term assets
Other long-term assets consist of deposits, debt issuance costs and a
minority investment in Keurig, Inc. Debt issuance costs represent those
costs incurred in connection with the issuance of debt. Amortization is
calculated using the straight-line method over the respective original
lives of the applicable issue. Amortization calculated using the straight-
line method is not materially different from amortization that would have
resulted from using the interest method. Debt issuance costs included in
other long-term assets in the accompanying consolidated balance sheet at
September 26, 1998 and September 27, 1997 were $48,000 and $85,000,
respectively. The minority investment, which represents less than a 5%
interest, is accounted for under the cost method. The balance in the
investment in Keurig, Inc. included in other long-term assets in the
accompanying consolidated balance sheet at September 26, 1998 and
September 27, 1997 is $151,000 and $130,000, respectively.
Advertising costs
The Company expenses the costs of advertising the first time the
advertising takes place. At September 26, 1998 and September 27, 1997,
prepaid advertising costs of $184,000 and $54,000, respectively, were
recorded in other current assets in the accompanying consolidated balance
sheet. Advertising expense totaled $2,791,000, $1,991,000 and $1,427,000
for the years ended September 26, 1998, September 27, 1997 and September
28, 1996, respectively.
Fixed assets
Fixed assets are carried at cost, net of accumulated depreciation.
Expenditures for maintenance, repairs and renewals of minor items are
charged to expense as incurred. Depreciation is calculated using the
straight-line method over the assets' estimated useful lives. The cost and
accumulated depreciation for fixed assets sold, retired, or otherwise
disposed of are relieved from the accounts, and the resultant gains and
losses are reflected in income.
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. These assets are also carried at cost, net of
accumulated depreciation.
Revenue recognition
Revenue from wholesale and direct mail sales is recognized upon product
shipment.
Income taxes
The Company utilizes the asset and liability method of accounting for
income taxes, as set forth in Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" ("SFAS109"). 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
In February 1997 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
128"). This pronouncement supersedes the previous methodology for the
calculation of earnings per share as promulgated under APB Opinion No. 15.
SFAS 128 requires presentation of "basic" earnings per share and "diluted"
earnings per share. The Company adopted SFAS 128 in fiscal 1998. The
restatement of all prior periods presented in accordance with SFAS 128 did
not result in any material change in earnings per share information
previously 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. There were no transactions of
this nature during fiscal 1997 and fiscal 1998.
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 26, 1998. It was not practicable to estimate the fair value of
a minority investment representing less than 5% of preferred stock of
an untraded company: that investment is carried at its original cost of
$151,000 and $130,000 at September 26, 1998 and September 27, 1997,
respectively.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect amounts reported in the accompanying consolidated
financial statements. Actual results could differ from those estimates.
Significant customer credit risk and supply risk
The Company has one customer, Hannaford Bros. Co., a supermarket chain,
which accounted for 9.9%, 11.6% and 13.9% of net sales from continuing
operations in the years ended September 26, 1998, September 27, 1997 and
September 28, 1996, respectively. The extensive network of Mobil
convenience stores, owned by Mobil Corporation or by independent
franchisees, accounted for approximately 14.4%, 17.3% and 14.5% of net
sales from continuing operations in the years ended September 26, 1998,
September 27, 1997 and September 28, 1996. During the same periods,
Mobil convenience stores owned and operated by Mobil Corporation, rather
than by franchisees, made up less than 10% of the Company's revenues.
The majority of the Company's customers are located in the northeastern
part of the United States. 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. The
Company does not require collateral from customers as ongoing credit
evaluations of customers' payment history are performed. 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 26, 1998 September 27,1997
------------------ -----------------
Raw materials and supplies................... $ 2,832,000 $ 2,148,000
Finished goods............................... 2,804,000 3,076,000
================== =================
$ 5,636,000 $ 5,224,000
================== =================
As of September 26, 1998, the Company had fixed price inventory purchase
commitments for green coffee totaling approximately $5.1 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
Fixed assets consist of the following:
Useful
Life in September 26, September 27,
Years 1998 1997
------------ ------------- -------------
Leasehold improvements..................... 5 - 10 $ 2,363,000 $ 2,409,000
Production equipment....................... 2 - 10 5,338,000 5,310,000
Office equipment and software.............. 3 - 10 6,275,000 5,492,000
Equipment on loan to wholesale customers... 1 - 5 5,976,000 5,042,000
Vehicles................................... 2 - 4 384,000 319,000
Construction-in-progress................... 179,000 1,590,000
------------- -------------
Total fixed assets....................... 20,515,000 20,162,000
Accumulated depreciation................... (9,715,000) (8,904,000)
------------- -------------
$ 10,800,000 $ 11,258,000
============ =============
Fixed assets includes approximately $354,000 of computer and loaner
equipment held under capital leases at September 26, 1998 and September
27, 1997, respectively. At September 26, 1998 and September 27, 1997,
related accumulated depreciation on the equipment under capital leases was
approximately $334,000 and $216,000, respectively. Total depreciation and
amortization expense from continuing operations relating to all fixed
assets was $2,754,000, $2,311,000 and $1,813,000 for fiscal 1998, 1997 and
1996, respectively.
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.
5. Income Taxes
The provision (benefit) for income taxes from continuing operations for
the years ended September 26, 1998, September 27, 1997 and September 28,
1996 is as follows:
September 26, September 27, September 28,
1998 1997 1996
------------- ------------- -------------
Current tax expense (benefit):
Federal........................... $ - $ 355,000 $ 447,000
State............................. 17,000 114,000 120,000
Benefit of net operating loss
carryforwards.................. - (408,000) (533,000)
------------- ------------- -------------
Total current........................ 17,000 61,000 34,000
------------- ------------- -------------
Deferred tax expense (benefit)
Federal.............................. 187,000 514,000 606,000
State................................ 30,000 284,000 (2,605,000)
------------- ------------- -------------
Total deferred....................... 217,000 798,000 (1,999,000)
Tax asset valuation allowance........ (36,000) (1,112,000) 2,278,000
------------- ------------- -------------
Total tax (benefit) expense.......... $ 198,000 $ (253,000) $ 313,000
============= ============= =============
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), including temporary differences related
to discontinued operations, consist of the following:
September 26, September 27,
1998 1997
------------- -------------
Deferred tax assets:
Net operating loss carryforwards.................... $ 1,077,000 $ 1,044,000
Federal investment tax credits...................... 8,000 27,000
Vermont state manufacturers investment tax credit... 2,627,000 2,627,000
Section 263A adjustment............................. 4,000 47,000
Other reserves and temporary differences............ 916,000 147,000
------------- -------------
Gross deferred tax assets........................... 4,632,000 3,892,000
Deferred tax asset valuation allowance.............. (2,355,000) (2,391,000)
Deferred tax liability:
Depreciation........................................ (90,000) (150,000)
------------- -------------
Net deferred tax assets............................. $ 2,187,000 $ 1,351,000
============= =============
At September 26, 1998, the Company has net operating loss carryforwards
and investment tax credits for federal income tax reporting purposes of
$2,512,000 and $8,000, respectively, which will expire between fiscal 1999
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 substantially 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
carryforwards. 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 management's 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 carryforwards
which could be utilized, and restrictions on the utilization of investment
tax credit carryforwards.
A reconciliation for continuing operations between the amount of reported
income tax expense (benefit) and the amount computed using the U.S.
Federal Statutory rate of 34% for fiscal 1998 and fiscal 1997 and 35% for
fiscal 1996 is as follows:
September 26, September 27, September 28,
1998 1997 1996
------------- ------------- -------------
Tax at U.S. Federal Statutory rate....... $ 183,000 $ 437,000 $ 610,000
Increase (decrease) in rates resulting from:
Other nondeductible items........... 22,000 20,000 22,000
State taxes, net of federal benefit. 42,000 73,000 (2,597,000)
Deferred tax asset valuation
allowance and other............... (49,000) (783,000) 2,278,000
------------- ------------- -------------
Tax at effective rates................... $ 198,000 $ (253,000) $ 313,000
============= ============= =============
6. Discontinued Operations
On May 29, 1998, the Company announced that it had adopted a plan to
discontinue its company-owned retail store operations. The Company has
closed six of its retail stores as of September 26, 1998, and is planning
to close the remaining five stores in the first half of fiscal 1999.
Accordingly, the retail stores are reported as discontinued operations
for all periods presented. Under generally accepted accounting principles,
the operating results of such operations are being segregated from the
continuing operations and reported separately on the statement of
operations. A provision for anticipated losses on discontinued operations
through disposal date is based on management's best estimates and is
included in fiscal 1998.
The estimated loss on disposal of the retail store operations is
$1,259,000 (net of a tax benefit of $834,000). The pre-tax loss on disposal
of $2,093,000 consists of an estimated loss on disposal of the business of
$1,692,000 and a provision of $401,000 for anticipated losses from May 29,
1998 (the measurement date) until disposal. The loss on disposal includes
provisions for estimated lease termination costs, write-off of leasehold
improvements and other fixed assets, severance and employee benefits.
Net sales from the retail store operations were $3,591,000, $4,926,000 and
$4,970,000 for the years ended September 26, 1998, September 27, 1997 and
September 28, 1996, respectively. Net proceeds from the sale of retail
assets totaled $118,000 in fiscal 1998.
The assets and liabilities of the discontinued retail operations at
September 26, 1998 are reflected as a net current liability in the
accompanying consolidated balance sheet. The net liabilities of the
discontinued operations in the September 26, 1998 consolidated balance
sheet are summarized as follows:
Current assets, net................................................. $ 97,000
Fixed assets, net................................................... 564,000
Deferred tax assets, net............................................ 570,000
Other long-term assets.............................................. 51,000
Less provision for losses on assets................................. (643,000)
----------
Net realizable value of assets from discontinued operations......... 639,000
Estimated accrued costs on disposal of discontinued operations...... (817,000)
Net accrued losses and other costs of discontinued operations, net.. $ (178,000)
==========
7. Credit Facility
The Company maintains a credit facility (the "Credit Facility") with Fleet
Bank - NH ("Fleet"). Borrowings are collateralized by substantially all of
the Company's assets. During fiscal 1998, the Company amended its Credit
Facility and increased the limit of the revolving line of credit from
$6,000,000 to $9,000,000 and extended the term to March 31, 2001. In
addition, the Company was also able to borrow up to $4,500,000 in term debt
with a maturity of March 31, 2003. Both the revolving line of credit and
term debt accrue interest daily and pay interest monthly, in arrears.
Principal payments on the term debt of $75,000 per month will commence on
October 31, 1999.
The principal amounts outstanding on the revolving line of credit at
September 26, 1998 and September 27, 1997 were $5,150,000 and $3,985,000,
respectively. The outstanding balance on the term debt at September 26,
1998 was $4,500,000. The proceeds of $4,500,000 were used to pay down
$1,547,000 of outstanding facility and equipment term loans as well as fund
working capital requirements.
The interest paid on the line of credit and term debt varies with the
prime and LIBOR interest rates. At September 26, 1998, the interest rate on
$3,000,000 of the principal amount outstanding on the revolving line of
credit was at the one-month LIBOR rate plus 250 basis points or 8.09%, the
interest rate on $1,500,000 of the line of credit was at LIBOR plus 250
basis points or 8.16%, while the interest on the remaining portion (equal
to $650,000) was at the prime rate or 8.5%. At September 26, 1998, the
interest rate on the $4,500,000 term debt was equal to LIBOR plus 275 basis
points or 8.41%.
The terms of the Credit Facility also provide for the maintenance of
specified financial ratios and restrict certain transactions without prior
bank approval. The Company was in compliance with these covenants at
September 26, 1998.
On May 29, 1998, the Company entered into a standard International Swap
Dealers Association Inc. interest rate swap agreement with Fleet National
Bank to manage the interest rate risk associated with its Credit Facility.
The swap agreement has a notional amount of $6,000,000 and matures in May
2001. The effect of the swap agreement is to limit the interest rate
exposure to a fixed rate of 5.84% (versus the 30-day LIBOR rate). In
accordance with the agreement and on a monthly basis, interest expense is
calculated based on the floating 30-day LIBOR rate and the fixed rate. If
interest expense as calculated is greater based on the 30-day LIBOR rate,
Fleet National Bank pays the difference to the Company; if interest expense
as calculated is greater based on the fixed rate, the Company pays the
difference to Fleet National Bank. For the year ended September 26, 1998,
interest expense was not materially impacted by the swap agreement.
Depending on fluctuations in the LIBOR rate, the Company's interest rate
exposure and its related impact on interest expense and net cash flow may
increase or decrease. The Company is exposed to credit loss in the event of
nonperformance by the other party to the swap agreement; however,
nonperformance is not anticipated.
The fair value of the interest rate swap is the estimated amount that the
Company would receive or pay to terminate the agreement at the reporting
date, taking into account current interest rates and the credit worthiness
of the counterparty. At September 26, 1998, the Company estimates it would
have paid $68,000 to terminate the agreement.
8. Long-term Debt
September 26, September 27,
1998 1997
------------- -------------
Fleet line of credit (Note 7).............................. $ 5,150,000 $ 3,985,000
Fleet term debt (Note 7) ................................ 4,500,000 -
Facility and Equipment Term Loans ......................... 195,000 2,100,000
Central Vermont Economic Development Corporation Debenture. 459,000 532,000
Vermont Economic Development Authority Promissory Note..... 93,000 138,000
Computer Equipment Installment Loans....................... 2,000 73,000
Service Vehicle Installment Loans.......................... 41,000 68,000
------------- -------------
10,440,000 6,896,000
Less current portion....................................... 249,000 943,000
------------- -------------
$ 10,191,000 $ 5,953,000
============= =============
Facility and Equipment Term Loans
As part of the Credit Facility, the Company has financed fixed asset
purchases under five term loans which are collateralized 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 Fleet's variable base rate or 275 basis points above
the LIBOR rate for maturities of up to one year. Four of these loans out
of five were paid down in fiscal 1998 with the proceeds of the new term
debt. The remaining facility and equipment loan matures on October 15,
2000 and has monthly installments of principal and interest payments of
approximately $9,000. At September 26, 1998, the remaining facility and
equipment loan bore interest at 8.38%.
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 matures on October 1, 2003 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 matures on August 11,
2000 and is collateralized by a secondary security interest in the related
fixed assets. 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. The note 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
26, 1998.
Computer Equipment Installment Loans
The computer equipment installment loan notes bear interest at 8.69% and
require monthly installments of principal and interest of approximately
$700 through December 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 a rate of 4.8% and require monthly installments of
principal and interest totaling approximately $2,500 through February
2000.
Maturities
Maturities of long-term debt for years subsequent to September 26,
1998 are as follows:
Fiscal Year
-----------
1999......... $ 249,000
2000......... 1,133,000
2001......... 6,144,000
2002......... 992,000
2003......... 997,000
Thereafter... 925,000
------------
$ 10,440,000
============
9. Treasury Stock
On September 4, 1998, the Board of Directors authorized the repurchase, at
management's discretion, of up to $500,000 worth of outstanding shares of
the Company's common stock at market prices. At September 26, 1998, the
Company had repurchased 7,350 shares for $37,000.
10. 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 26, 1998, 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 26, 1998 and September 27, 1997, options for 66,631 and 158,204
shares of common stock were available for grant under the plan,
respectively.
Option activity is summarized as follows:
Number of Weighted-average
Shares Option Price Exercise Price
--------- -------------- ----------------
Outstanding at October 1, 1995 314,389 $ 2.55-8.50 $ 6.67
Granted 18,400 6.25-8.50 7.30
Exercised - - -
Canceled (16,627) 8.02-8.50 8.16
---------
Outstanding at September 28, 1996 316,162 2.55-8.50 6.63
Granted 46,000 6.125-9.625 6.96
Exercised (95,722) 2.55-6.875 3.66
Canceled (8,200) 8.50 8.50
---------
Outstanding at September 27, 1997 258,240 6.00-9.625 7.73
Granted 100,834 6.375-10.00 9.00
Exercised - - -
Canceled (9,261) 6.25-8.5 7.60
---------
Outstanding at September 26, 1998 349,813 $ 6.00-10.00 $ 8.10
=========
Exercisable at September 26, 1998 221,292 $ 6.00-9.625 $ 7.75
=========
Options outstanding Options exercisable
------------------- -------------------
Number Weighted Weighted Number Weighted
outstanding at average average exercisable at average
Range of September 26, remaining exercise September 26, exercise
exercise price 1998 (years) price 1998 price
- -------------- -------------- --------- --------- -------------- --------
$ 6.00 - 6.63 57,762 6 $ 6.23 26,750 $ 6.08
7.00 - 7.50 36,143 8 7.06 24,000 7.04
8.02 141,444 5 8.02 141,444 8.02
8.50 38,464 6 8.50 27,598 8.50
9.63-10.00 76,000 9 9.97 1,500 9.63
-------------- --------------
349,813 221,292
============== ==============
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.
On October 5, 1998, the Company registered on Form S-8 the 1998 Employee
Stock Purchase Plan. Under this plan, eligible employees may purchase
shares of the Company's common stock, subject to certain limitations, at
not less than 85 percent of the lower of the beginning or ending
withholding period fair market value as defined in the plan. A total of
150,000 shares of common stock have been reserved for issuance under the
plan. There are two six month withholding periods in each fiscal year,
with the first withholding period starting on September 27, 1998.
The Company has chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees". Accordingly, no compensation expense was recognized under the
Plan for employees during fiscal 1998, fiscal 1997 or fiscal 1996. The
Company has adopted the disclosure-only provision of Statement of
Accounting Standards No. 123 "Accounting for Stock Based Compensation"
("SFAS 123"). 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 26, 1998, September 27, 1997 and
September 28, 1996 would have decreased to the pro forma amounts indicated
below:
Fiscal 1998 Fiscal 1997 Fiscal 1996
----------- ----------- -----------
Net income (loss) As reported $ (1,216) $ 1,325 $ 1,262
Pro forma (1,336) 1,219 1,237
Diluted net income (loss) per share As reported (0.34) 0.38 0.37
Pro forma (0.38) 0.35 0.36
The fair value of each stock option under the 1993 Plan is estimated
on the date of the grant using the Black-Scholes option-pricing model with
the following assumptions: an expected life of 7 years, 6 years and 6
years in fiscal 1998, 1997 and 1996, respectively; an average volatility
of 64%, 67%, and 67% for fiscal 1998, 1997, and 1996 respectively; no
dividend yield; and a risk-free interest rate of 4.56%, 6.11% and 6.24%
for fiscal 1998, 1997 and 1996 grants, respectively.
The fair value of the employees' purchase rights was estimated using
the Black-Scholes model with the following assumptions for fiscal 1998,
1997 and 1996: an expected life of one year; expected volatility of 64%,
67%, and 67% respectively; and a risk-free interest rate of 4.59%; 5.51%
and 5.66%, respectively. The weighted average fair value of those purchase
rights granted in fiscal 1998, fiscal 1997 and fiscal 1996 was $1.98,
$2.79 and $2.35 respectively.
11. 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 $160,000, $96,000, and $73,000 for the years ended
September 26, 1998, September 27, 1997 and September 28, 1996, respectively.
12. Loans to Officers
During fiscal 1998 and fiscal 1997, the Company delivered to certain
executive officers promissory notes in the principal amount of $178,000 and
$55,000, respectively. Interest accrues on the unpaid principal at the
prime rate as reported in the Wall Street Journal and is payable upon the
maturity of the note. During fiscal 1998, the prime rate was 8.5%
throughout the year. All notes outstanding at September 26, 1998 are
expected to be repaid to the Company during fiscal 1999. The balance on
these notes, including $7,000 of accrued interest, at September 26, 1998
was $185,000. At September 27, 1997, the balance on loans to officers was
$57,000, including $2,000 of accrued interest.
13. Commitments, Lease Contingencies and Contingent Liabilities
Leases
The Company leases office and retail space, production, distribution and
service facilities and certain equipment under various non-cancelable
operating leases, with terms 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. Total rent expense under all
operating leases was $1,599,000, $1,376,000 ,and $991,000 in fiscal 1998,
1997 and 1996, respectively (net of sublease income of $67,000, $54,000,
and $33,000 in fiscal 1998, 1997 and 1996, respectively).
The Company has entered into a capital lease, primarily for loaner and
office equipment. At the end of the lease term, the Company has the option
to either buy the equipment at fair market value or renew the lease on a
year-to-year basis. Minimum future lease payments (net of committed
sublease agreements of $121,000 for fiscal year 1999, $38,000 for fiscal
year 2000, $33,000 for fiscal year 2001, and $11,000 for fiscal year 2002)
under non-cancelable operating leases and capital leases, for years
subsequent to September 26, 1998 are as follows:
Fiscal Year Operating Leases Capital Lease
----------- ---------------- -------------
1999........................... $ 1,240,000 $ 12,000
2000........................... 1,146,000 -
2001........................... 1,074,000 -
2002........................... 746,000 -
2003........................... 165,000 -
Thereafter...................... 2,280,000 -
---------------- -------------
Total minimum lease payments....... $ 6,651,000 12,000
================
Less amount representing interest.. -
-------------
Present value of obligations under
capital lease ................... $ 12,000
=============
14. Earnings per share
The following table illustrates the reconciliation of the numerator and
denominator of basic and diluted income per share from continuing
operations computations as required by SFAS No. 128 (dollars in thousands,
except share and per share data):
Year ended
-----------------------------------------------------
September 26, September 27, September 28,
1998 1997 1996
------------- ------------- -------------
Numerator - basic and diluted earnings per share:
Net income from continuing operations............................... $ 340 $ 1,539 $ 1,429
============= ============= =============
Denominator:
Basic earnings per share - weighted average shares outstanding...... 3,530,657 3,433,929 3,399,795
Effect of dilutive securities - employee stock options.............. 8,574 34,003 27,815
------------- ------------- -------------
Diluted earnings per share - Weighted average shares outstanding.... 3,539,231 3,467,932 3,427,610
============= ============= =============
Basic earnings per share............................................ $ 0.10 $ 0.45 $ 0.42
Diluted earnings per share.......................................... $ 0.10 $ 0.44 $ 0.42
During fiscal 1998 options to purchase 341,239 shares of common stock at
exercise prices ranging from $6 to $10 per share were outstanding but were
not included in the computation of diluted income per share because the
options' exercise price was greater than the market price of the common
shares. These options were still outstanding at September 26, 1998.
Schedule II - Valuation and Qualifying Accounts
for the fiscal years ended
September 26, 1998, September 27, 1997, and September 28, 1996
Additions
------------------------------------------
Balance at Charged to Charged to
Beginning of Costs and Other Balance at
Description Period Expenses Accounts Deductions End of Period
- ------------------------------------------ ------------ ----------- ---------- ---------- -------------
Allowance for doubtful accounts:
Fiscal 1998............................ $ 116,000 $ 577,000 $ - $ 315,000 $ 378,000
Fiscal 1997............................ $ 80,000 $ 171,000 $ - $ 135,000 $ 116,000
Fiscal 1996............................ $ 63,000 $ 156,000 $ - $ 139,000 $ 80,000
Deferred tax asset valuation allowance:
Fiscal 1998............................ $ 2,391,000 $ - $ - $ 36,000 $ 2,355,000
Fiscal 1997............................ $ 3,503,000 $ - $ - $ 1,112,000 $ 2,391,000
Fiscal 1996............................ $ 1,225,000 $ 2,605,000 $ - $ 327,000 $ 3,503,000