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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 25, 1999
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
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GREEN MOUNTAIN COFFEE, INC.
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(Exact name of registrant as specified in its charter)
Delaware 03-0339228
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(State or other jurisdiction of (IRS employer identification no.)
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. [ ]
The aggregate market value of the voting stock of the registrant held by
non-affiliates of the registrant on November 30, 1999 was approximately
$14,394,000 based upon the closing price of such stock on that date.
As of November 30, 1999, 3,464,433 shares of common stock of the registrant were
outstanding. See "Market for the Registrant's 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 9, 2000 have been incorporated by reference
into Part III of this report. The registrant will file the definitive Proxy
Statement by January 24, 2000.
GREEN MOUNTAIN COFFEE, INC.
Annual Report on Form 10-K
Table of Contents
Page
Part I
Item 1. Business................................................... 4
Item 2. Properties................................................. 15
Item 3. Legal Proceedings.......................................... 15
Item 4. Submission of Matters to a Vote of Security Holders........ 15
Executive Officers of the Registrant....................... 16
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters........................................ 18
Item 6. Selected Financial Data.................................... 19
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 19
Item 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
Part III
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
Part IV
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 25, 1999 and other factors
described from time to time in the Company's filings with the Securities and
Exchange Commission. Forward-looking statements reflect management's analysis as
of the date of this document. The Company does not undertake to revise these
statements to reflect subsequent developments.
PART I
Item 1. Business
The Company
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Green Mountain Coffee, Inc. ("the Company" or "Green Mountain" or
"Green Mountain Coffee") roasts over 25 high-quality arabica coffees to produce
over 60 varieties of coffee which it sells through a coordinated multi-channel
distribution network in its 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 6,000
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" or "Green Mountain
Coffee" include the Company and Roasters.
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 1999", "fiscal 1998" or "fiscal 1997" represent
the 52-week periods ended September 25, 1999, September 26, 1998 and September
27, 1997, 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
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Green Mountain is committed to providing the highest quality arabica
coffees available from around the world. To achieve this goal, Green Mountain
carefully selects its coffee beans and then "appropriate roasts(R)" 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". 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
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Green Mountain Coffee is focused on building the brand and profitably
growing its business. At present, management believes that it can continue to
grow sales internally over the next few years at a rate similar to its
historical five-year average growth rate (in the range of 25 to 30 percent). At
the same time, management is working at growing earnings at least as fast as
revenue. These statements are forward-looking, and subject to the risks and
uncertainties outlined in "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and under the heading, "Forward-looking
information," beginning on page 19.
In recent years, the primary growth in the coffee industry has come
from the specialty coffee category, 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 carefully developed and 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. In the Northeast, the Company also has a special events vehicle
that can be seen at ski races, festivals and other venues. The vehicle along
with many other special event activities provide great sampling opportunities
and visibility to the brand.
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 National Coffee Drinking Trends through 1999 study states that "over
75% of all coffee is consumed at home." 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.
In addition to its efforts to boost sales in its core geographic
markets, the Company also seeks to introduce Green Mountain coffee in selected
new markets across the United States, principally utilizing the Company's office
coffee and convenience store channels. Flagship customers with a nationwide
presence, such as Exxon Mobil Corporation and American Skiing Company, are also
key to the Company's geographic expansion strategy, as they provide great
visibility and sampling opportunities.
In the direct mail area, the Company focuses solicitations on catalog
customers who buy regularly from the Company, bed-and-breakfasts and other small
businesses, and from members of the Company's "Coffee Club", a continuity
program with customized standing orders for automatic re-shipment. Recently, a
large portion of the Company's efforts in the direct mail segment have been
directed towards increasing traffic on its Web site
(www.GreenMountainCoffee.com), which is intended to build brand awareness
nationwide and boost direct sales to consumers.
Recent Developments
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NEW PRODUCTS. The Company's partnership with Keurig, Inc. developed into an
important growth driver in fiscal 1999, as the unique Keurig(R) one-cup brewing
system gained significant momentum in the marketplace. Green Mountain Coffee now
produces 12 coffee varieties in K-Cup(TM) portion packs designed for the Keurig
Premium Coffee System(TM). Although the Company does not have exclusive rights,
at present Green Mountain is the only coffee available for this unique system.
The success with the Keurig system also helped Green Mountain develop
relationships with a number of office coffee distributors, providing it an
opportunity to also sell its traditional line of products through these
distributors. In fiscal 1999, the Company doubled its number of office coffee
distributors to nearly 200 at September 25, 1999, and coffee pounds sold through
that channel grew 39.1% over the previous year. The Company's successful
partnership with Perrier's Poland Springs operation remains the Company's
largest customer in this channel. The Company intends to complete its nationwide
coverage of its office coffee products in fiscal 2000.
In September 1999, the Company introduced a new line of frozen granita
and hot cappuccino beverages, two high-growth areas of the specialty beverage
market. These products, which are marketed under the Monte Verde(TM) brand,
complement the traditional line of specialty coffees and make Green Mountain a
full-service provider to certain channels, such as convenience stores, which is
expected to be an important competitive advantage.
Green Mountain Coffee also enhanced its traditional line of coffees in
fiscal 1999 by introducing a new regional Colombian coffee from the Popayan
region of Colombia, three new flavored coffees (Belgian Chocolate Nut,
Creme Brulee and Chocolate Truffle Cream), as well as a new Organic
House Blend(TM) Decaf to expand its offering of quality organic products.
CUSTOMERS. In addition to the strong gains in the office coffee channel
described above, the Company continued to focus on other key channels of its
wholesale business in fiscal 1999 and built stronger relationships with its
major customers.
Pounds sold through the supermarket channel grew 19.6% in fiscal 1999.
Green Mountain coffee can now be purchased at over 570 supermarket locations.
The increase in coffee pounds sold was especially strong in two large chains in
the Northeast, Shaw's Supermarkets, Inc. and Stop & Shop Supermarkets. Sales to
Hannaford Bros. Co., which remains the Company's largest supermarket customer,
grew 10% in fiscal 1999.
Growth in the convenience store channel was equally strong, with pounds
sold up 18.4% year-over-year. Mobil convenience stores, including approximately
320 Mobil On the Run(TM) stores, continue to be Green Mountain's largest
customer in the convenience store channel, with a total of approximately 1,290
locations (accounts) at September 25, 1999. Other chains such as Orloski Quik
Marts and RL Vallee Inc., dba Maplefields, posted strong gains as well.
Other notable new wholesale customers whose sales of Green Mountain
coffee are expected to give further visibility to the brand include Hershey
Park, the New Jersey Aquarium and the Susse Chalet chain of hotels. The
Company's relationship with American Skiing Company, another important marketing
partner, now enters its second season and has been expanded to the customer's
Western resorts: Steamboat in Colorado, Heavenly in California/Nevada, and The
Canyons in Utah.
INFRASTRUCTURE. In 1999, the Company completed the three year implementation of
key software modules from the PeopleSoft enterprise system. All of the Company's
critical business applications are now on a single information management
platform, supporting its continued growth with state-of-the-art technology.
In August of 1999, Green Mountain Coffee became the first company in
the U.S. to implement PeopleSoft's eStore application, and the revamped Green
Mountain Coffee Web site (www.GreenMountainCoffee.com) was prominently featured
at the national PeopleSoft's Users Conference in August 1999.
The Company believes that it has production capacity with its current
equipment of approximately 12 million roasted coffee pounds assuming its current
product mix. The Company sold approximately nine million pounds of coffee in
fiscal 1999.
Corporate Philosophy
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Green Mountain's objective is to be the leading specialty coffee
company by providing the highest quality coffee and having the largest market
share in its targeted markets while maximizing company value. The Company
intends to achieve this objective through a corporate philosophy designed to
differentiate and reinforce the Green Mountain brand and to engender a high
degree of customer loyalty. The essential elements of this philosophy include:
HIGHEST QUALITY COFFEE. Green Mountain buys 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 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. Over one
thousand employees of Green Mountain's customers attended Coffee College in
fiscal 1999, primarily at the Company's Java University located in Waterbury,
Vermont. 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 provide an overview of
the differences between the various coffees from around the world and the
various degrees of roast. The Company believes that educational initiatives 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 opportunities that enhance
their ability to offer Green Mountain customers a level of service and quality
that fosters long-term relationships. In addition, through its Educational
Assistance Plan, Green Mountain provides financial support to employees seeking
to improve their skills through continuing education. The Company believes that
its dedication to employee training and professional development attracts and
retains highly qualified and motivated employees.
COMMUNITY INVOLVEMENT. Green Mountain believes that doing well financially can
go hand in hand with giving back to the community. In fiscal 1999, the Company
donated approximately 5% of its pre-tax income to various non-profit
organizations in the U.S. and in coffee-producing countries, in the form of
cash, products and paid employee time. Organizations benefiting from cash or
coffee product donations in 1999 included Conservation International, Rainforest
Alliance, the American Red Cross, Coffee Kids(R), and the United Way, as well as
libraries, religious organizations, schools, counseling centers and soup
kitchens in markets where the Company operates. In addition to cash and product
donations, the Company encourages its employees to perform volunteer work for
non-profit and community-based organizations on company time for up to 2.5% of
their total hours worked at the Company.
The Company is committed to improving the quality of life in
coffee-producing countries, and therefore supports projects that foster
self-sufficiency, which it believes yield the best results. For example, since
January of 1998, Green Mountain has been sponsoring a very successful Coffee
Kids micro-lending program in Huatusco, Mexico, to encourage the development of
small family businesses. The program now has over 550 participants. In fiscal
1999, the Company agreed to provide Coffee Kids with additional funds to support
a similar project in mountain villages in Oaxaca, Mexico, where the Company's
Organic Mexican Select(TM) coffee is grown. Another ongoing program in the
Oaxaca region of Mexico is a women's health care project for the early detection
of cervical cancer, which has been funded jointly with Ben & Jerry's Homemade
Inc. and Coffee Enterprises. The project funds the cost of sending medical
personnel to the region. Additionally, the Company has offered funding for
computers and libraries in communities where its Stewardship(R) coffees are
produced.
Another highlight of fiscal 1999 was the visit to Green Mountain's
Vermont headquarters by 95-year-old Professor Manuel Sedas Rincon, founder and
patriarch of Union Regional de Pequenos Productores de Cafe (Regional Union of
Small Coffee Producers) of Huatusco, Veracruz. In addition to being the largest
worker-owned coffee cooperative in Mexico with over 5,000 members, this
cooperative is Green Mountain Coffee Roasters' largest single identified source
of coffee. Professor Sedas has been a strong advocate for the cooperative
movement in Mexico, and is known throughout Latin America for his work in this
important area of economic and community development and worker empowerment.
In March 1999, Green Mountain Coffee was given a Social Assessment
Rating of "excellent", the highest possible rating, by Trillium Asset
Management, a socially responsible research and investment advisory firm
headquartered in Boston, Massachusetts.
ENVIRONMENTAL LEADERSHIP. Green Mountain is committed to actions consistent with
an environmental and social responsibility in all aspects of its business
operations. Consistent with this commitment, the Company has created and
supported a variety of innovative environmental programs and incentives.
Green Mountain encourages sustainable farming practices through its
Stewardship Program, through which a portion of the coffees purchased are from
farms and cooperatives where herbicide and pesticide use is limited and soil
erosion controls are in place. Additionally, these farms and cooperatives
demonstrate higher standards of support for their workers by providing housing,
medical assistance, and an interest in the welfare of the individual worker. As
a continuation and expansion of the Stewardship Program, in fiscal 1997 Green
Mountain introduced its first organic coffee, a farm-direct coffee from Peru.
The Company's roasting and packaging facility was certified as organic by
Quality Assurance International of San Diego, California, paving the way for the
introduction of four additional certified organic coffees including a
decaffeinated coffee in fiscal 1998 and 1999. Quality Assurance International
has renewed the Company's organic certification annually since 1997.
Since 1990, Green Mountain has sold, under the licensed name
Earth-Friendly Coffee Filters(TM), a line of dioxin-free and chlorine-free paper
coffee filters, helping to raise consumer awareness of chlorine-free processing.
In another innovative approach to product design, in 1997, the Company won the
3M Scotchban(R) Innovation Award for the development of a biodegradable coffee
bag used by wholesale customers who bag Green Mountain Coffee on their premises.
In 1994, Green Mountain joined the national BuyRecycled! Alliance, pledging to
increase its purchases of recycled content paper annually. As part of this
pledge, the Company's corporate letterhead now consists of 30% post- and 70%
pre-consumer recycled content by sheet weight.
The Company's most recent new initiative, to reduce its use of
non-renewable energy sources and the impact on the environment, is the planned
installation of a 95 kilowatt cogeneration unit in its roasting facility by the
end of December 1999. The unit is designed to capture heat from the power
generating process to heat and power the Company's building, reducing its use of
both propane for heating and also externally-generated electricity. The unit is
expected to help reduce the Company's operating expenses as a percent of sales
over time. The unit has the added benefit of reducing the risk of fire, created
by power outages, which can occur when the roasters, which operate at very high
temperatures, suddenly lose power.
Through responsible operational practices, from purchasing to waste
management, Green Mountain strives to minimize its environmental impact. The
Company uses chemical-free, biodegradable, cornstarch-based foam peanuts and
100% recycled kraft-style (Geoami) paper to protect products during shipping, as
well as recycled content chip-board containers and reusable containers to store
and ship coffee. In addition, Green Mountain makes every attempt to divert its
manufacturing waste from landfills. For example, the burlap bags which contain
green coffee beans are recycled or donated for use in gardens and crafts, and
pallets used in the production and distribution centers are routinely repaired
and re-used. In 1989, the Company established an on-site recycling program
which, over the last three years, resulted in 458 tons of material being
recycled and an average annual landfill refuse volume reduction of 47%.
Wholesale Operations
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During fiscal 1999, 1998 and 1997, approximately 95%, 94% and 93%,
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 1999 by
wholesale customer category was approximately: 29% to supermarkets, 27% to
convenience stores, 16% to office coffee service distributors, 14% to
restaurants, 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:
Convenience Stores Restaurants Other Food Service
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Exxon Mobil convenience stores Aureole Restaurant, NYC Amtrak - Northeast corridor
Orloski Quik Marts Culinary Institute of America American Skiing Company
RL Vallee Inc. dba Maplefields New England Culinary Institute Delta Express and Delta Shuttle
The Harvard Club, NYC Midway Airlines
Office Coffee Services New Jersey State Aquarium
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Bostonbean Coffee Company Supermarkets Smuggler's Notch Resort
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Bunn Coffee Service Hannaford Bros.- 120 stores Stowe Mountain Resort
Lyons Coffee Roche Brothers - 13 stores
Northeast Merchandising Shaw's - 110 stores
Perrier's Poland Springs Stop & Shop - 185 stores
(primarily coffee by the cup)
Vermont Pure Springs
By geographic region, the Company's wholesale coffee pound sales in
fiscal 1999 were approximately as follows: 37% in northern New England states,
24% in southern New England states, 21% in mid-Atlantic states, 5% in South
Atlantic states, 2% in the Midwest, 1% 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 1999,
approximately 1% of wholesale pounds were sold internationally.
Wholesale operations are coordinated from the Company's headquarters in
Waterbury, Vermont, and supplemented by regional distribution centers in
geographies in which the density of customer accounts so warrants. Regional
distribution centers are located 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 competitors of Green Mountain in the wholesale segment do not provide such
high levels of sales and equipment service support.
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 personnel, the Company has a national
supermarket sales manager, a national office coffee service sales manager, a
national convenience store sales manager, a national travel and hospitality
sales manager and an international/food service sales manager, along with
account executives for major customers, to help provide more focused channel
management.
The Company's sales process includes participation in tradeshows and
outbound telemarketing to target and qualify prospects for the Company's area
sales managers. Laptop computers are used by area sales managers to speed new
customer setup, enhance the Company's telemarketing efforts and field
communications, and, through the Company's intranet, 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.
Direct Mail Operations
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The Company publishes catalogs and maintains an Internet Web site to
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 5%, 6% and 7% of total sales
from continuing operations in fiscal 1999, 1998, and 1997, respectively. Green
Mountain's telemarketing service representatives fulfill the individual coffee
needs of direct mail customers by not only taking orders, but also educating and
consulting with customers about the various attributes of different coffee
varieties.
In fiscal 1999, approximately 38% 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 38%
of direct mail revenue, and another 3% were derived from the Company's Corporate
Gifting program.
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 17% of
total direct mail revenues in fiscal 1999.
The Green Mountain Web site (www.GreenMountainCoffee.com) generated 4%
of total direct mail revenue in fiscal 1999. In August 1999, Green Mountain
Coffee's Web site, which runs on PeopleSoft eStore, was prominently featured at
PeopleSoft's 10th Annual User Conference. PeopleSoft eStore allows Green
Mountain Coffee to leverage the Internet, phone, email and mail to provide the
best possible customer service.
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
common. In the last two years, the "C" price of coffee (the price per pound
quoted by the Coffee, Sugar and Cocoa Exchange) has been volatile but generally
on the decline, as it dropped from $3.14 on May 29, 1997 to $1.00 on October 29,
1999. 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 generally
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 approach is the best way to provide
its customers with a fair price for its coffee. The Company believes 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 25, 1999, the Company had approximately $7.7 million (for 6.4 million
pounds) in coffee purchase commitments, of which less than half had a fixed
price. These commitments represent approximately 48% of the Company's estimated
coffee requirements through September 30, 2000, the end of its 2000 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 or when the price of a
significant portion of committed contracts has not been fixed.
The Company generally tries to pass on coffee price increases and
decreases to its customers. Since coffee has come down from its 1997 highs, the
Company has decreased its prices several times. In general, there can be no
assurance that the Company will be successful in passing on green coffee price
increases to 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 purchased approximately 19% of its coffee from
specifically identified farms in fiscal 1999. The Company believes its "farm
direct" strategy will result in improved product quality, product
differentiation, and 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
- ---------------------
The extensive network of Mobil convenience stores, now owned by Exxon
Mobil Corporation, or by independent franchisees, accounted for approximately
18.6% of sales from continuing operations in fiscal 1999, 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. Convenience
stores owned and operated by Exxon Mobil Corporation, rather than by
franchisees, made up less than 10% of the Company's revenues in fiscal 1999.
It is currently not known to what extent the recent acquisition of
Mobil Corporation by Exxon Corporation will affect the Mobil coffee program.
Although the Company believes that it has a strong mutually beneficial business
relationship with Exxon Mobil Corporation, there can be no assurance that it
will continue to have such a relationship, especially in light of the post
acquisition integration of Mobil and Exxon. The loss of all or a significant
portion of such an account 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. For example, Procter & Gamble distributes the
premium coffee products Millstone and Brothers in many supermarkets nationwide,
which may serve as alternatives to Green Mountain's coffee. In the office
coffee, convenience store and food service arenas, 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 to place Starbucks
coffee in supermarkets across the United States, along with Maxwell House
coffee. Starbucks has recently entered several supermarkets selling Green
Mountain coffee in the Northeast.
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 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's trademarks include Green Mountain Coffee(R), Green
Mountain Filters(R), Green Mountain Coffee Roasters(R), Nantucket Blend(R),
Rainforest Nut(R), Stewardship(R), Green Mountain Coffee and Design(R), Green
Mountain Coffee Roasters and Design (R), Stewardship Coffee and Design(R),
Vermont Country Blend(R), Cafe Vermont(R), Mocha Almond Chiller(R), You're
following the leader(R), Tapestry Blend Dark(R), Appropriate Roast(R), Autumn
Harvest Blend(R), Fresh From the Roaster(R), Monte VerdeTM, Sip and Relax,
You're on Green Mountain TimeTM, It's a jungle out there, let's keep it that
wayTM, Farm DirectTM, and The Ultimate Office CoffeeTM.
Trademarks and service marks registered with the United States Patent
and Trademark Office are subject to periodic maintenance filings, including
renewals every ten years. The Company anticipates maintaining the registrations
appearing above with the United States Patent and Trademark Office. In addition,
the Company has registered the mark Green Mountain Coffee Roasters in the United
Kingdom. The Company has pending applications for registration in the United
Kingdom for Green Mountain Coffee, and in Canada for Green Mountain Coffee and
Green Mountain Coffee Roasters. The Company has applied for United States
registration of certain of the marks appearing above. The Company does not hold
any patents.
The Company has a limited, royalty-free license to reproduce a painting
by artist Corliss Blakely on its labels and marketing materials. The Company has
an irrevocable, perpetual royalty-free license to use the mark Earth-Friendly
Coffee Filters in connection with coffee filters. The Company also has a limited
license to use the marks Kona Mountain Coffee and Kona Mountain Estate(TM) in
connection with coffee worldwide (excluding Hawaii), all subject to the terms of
the agreements under which these licenses are granted.
The Company believes these trademarks, service marks and licenses will
continue to be important to its success.
Employees
- ---------
As of September 25, 1999, the Company had approximately 342 full-time
employees and 46 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. 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
Waterbury, VT (Factory Outlet) 1,100 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 2001
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 Portland, ME(1) 2,300 2002
(Discontinued So. Portland, ME(1) 1,270 2007
Operations)
- ----------
(1) The Company has this entire space subleased as of December 1, 1999.
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 over the next twelve months.
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 25, 1999.
Executive Officers of the Registrant
Certain biographical information regarding each executive officer of
the Company is set forth below:
Executive
Name Age Position Officer Since
- --------------------- ----- --------------------------------------- -------------
Robert P. Stiller 56 Chairman of the Board, President and 1993
Chief Executive Officer
Robert D. Britt 44 Director, Chief Financial Officer, Vice 1993
President, Treasurer and Secretary
Paul Comey 49 Vice President 1993
Agnes M. Cook 53 Vice President 1999
Kevin G. McBride 44 Vice President 1999
James K. Prevo 46 Vice President 1997
Stephen J. Sabol 38 Director and Vice President 1993
Jonathan C. Wettstein 51 Director and Vice President 1993
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 products and served as its President and director until June
1980, when Robert Burton Associates was sold.
Robert D. Britt has served as Chief Financial Officer of Roasters since May
1993. Prior to May 1993, Mr. Britt held financial, managerial and/or consulting
positions at Engineered Coatings, Inc., FCR, Inc., Ernst & Young, CIGNA
Corporation, and KPMG Peat Marwick. Mr. Britt is a Certified Public Accountant
and holds a Master of Business Administration from the Wharton School at the
University of Pennsylvania.
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.
Agnes M. Cook has served as Vice President of Human Resources of Roasters since
May 1999. From November 1992 to May 1999, Ms. Cook was Roasters' Director of
Human Resources. Prior to her employment with the Company, Ms. Cook was a
Training Consultant for Dale Carnegie and Associates.
Kevin G. McBride has served as Vice President of Marketing for Roasters since
August 1999. Prior to this, from March 1998 until May 1999, Mr. McBride was
President of BGC Acquisition Corporation, a private investment company. From
January 1997 until December 1997, he was employed by Sunbeam Corporation as Vice
President of Marketing and Product Development. From January 1994 until June
1996, Mr. McBride was Vice President of Consumer Marketing of Circle K Stores,
Incorporated.
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).
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.
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 outside 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 trades on the NASDAQ National Market under
the symbol GMCR. The following table sets forth the high and low sales prices as
reported by NASDAQ for the periods indicated.
High Low
--------- --------
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 16 weeks ended January 16, 1999........... $ 6.375 $ 3.875
12 weeks ended April 10, 1999............. $ 7.625 $ 5.875
12 weeks ended July 3, 1999............... $ 8.125 $ 5.875
12 weeks ended September 25, 1999........ $ 8.375 $ 6.469
Fiscal 2000 September 26, 1999 to November 30, 1999... $ 9.50 $ 7.00
(b) Number of Equity Security Holders
As of November 30, 1999, the number of record holders of the Company's
common stock was 680.
(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. 25, Sept. 26, Sept. 27, Sept. 28, Sept.30,
1999 1998 1997 1996 1995(1)
--------- --------- --------- --------- --------
(In thousands, except per share data)
Coffee pounds sold(2)........ 9,004 7,739 6,239 5,108 4,229
Net sales from continuing
operations(2)................ $ 64,881 $ 55,825 $ 42,908 $ 33,377 $ 28,918
Income from
continuing operations(2)..... $ 2,247 $ 340 $ 1,539 $ 1,429 $ 30
Income per share from
continuing operations -
diluted(2)................... $ 0.64 $ 0.10 $ 0.44 $ 0.42 $ 0.01
Total assets................. $ 23,878 $ 24,563 $ 23,544 $ 17,243 $ 15,565
Long-term obligations........ $ 4,964 $ 10,191 $ 5,965 $ 3,563 $ 4,280
- ----------
(1) The fiscal year ended September 30, 1995 is a 53-week year. All other fiscal
years represented are 52-week years.
(2) Excludes results of the Company's discontinued company-owned retail stores
operation.
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
Forward-looking information
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 high quality arabica coffees to produce over 60 varieties of coffee that
it sells under the Green Mountain Coffee Roasters(R) brand. For the year ended
September 25, 1999, Green Mountain's wholesale operation contributed 94.7% 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 5.3% of
net sales from continuing operations in fiscal 1999.
On May 29, 1998, Green Mountain announced that it had adopted a plan to
discontinue its company-owned retail store operations. The Company had sold or
closed all of its retail 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 1999, fiscal 1998 and fiscal 1997
represent the 52 week-periods ended September 25, 1999, September 26, 1998 and
September 27, 1997, 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. Since May 1997, commodity prices have generally
declined and the Company responded by decreasing its sales prices several times
in the past two years. 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. In the past, the
Company has generally been able to pass increases in green coffee costs to its
customers. However, there can be no assurance that the Company will be
successful in passing such fluctuations on to the customers without losses in
sales volume or gross margin in the future. Similarly, rapid sharp decreases in
the cost of green coffee could also force the Company to lower sales prices
before realizing cost reductions in its green coffee inventory. Because Green
Mountain roasts over 25 different types of green coffee beans to produce its
more than 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 25, September 26, September 27,
1999 1998 1997
------------- ------------ --------------
Net Sales:
Wholesale................................... 94.7 % 94.4 % 93.3 %
Direct mail................................. 5.3 % 5.6 % 6.7 %
------------- ------------ --------------
Net sales........................................ 100.0 % 100.0 % 100.0 %
Cost of sales.................................... 60.5 % 65.5 % 63.3 %
------------- ------------ --------------
Gross profit................................ 39.5 % 34.5 % 36.7 %
Selling and operating expenses................... 25.2 % 24.7 % 24.1 %
General and administrative expenses.............. 7.2 % 7.5 % 7.9 %
Loss on abandonment of equipment ................ 0.4 % - 0.5 %
------------- ------------ -------------
Operating income............................ 6.7 % 2.3 % 4.2 %
Other income ................. .................. 0.0 % 0.1 % 0.0 %
Interest expense................................. (1.1)% (1.4)% (1.2)%
------------- ------------ -------------
Income from continuing operations
before income taxes......................... 5.6 % 1.0 % 3.0 %
Income tax benefit (expense)..................... (2.1)% (0.4)% 0.6 %
------------- ------------ -------------
Income from continuing operations .......... 3.5 % 0.6 % 3.6 %
------------- ------------ -------------
Discontinued operations:
Loss from discontinued operations, net of tax
benefits......................................... - (0.5)% (0.5)%
Income (loss) on disposal, net of tax benefits... 0.3 % (2.3)% -
------------- ------------ -------------
Net income (loss)........................... 3.8 % (2.2)% 3.1 %
============= ============ =============
Fiscal 1999 versus Fiscal 1998
Net sales from continuing operations increased by $9,056,000 or 16.2%
from $55,825,000 in fiscal 1998 to $64,881,000 in fiscal 1999. Coffee pounds
sold increased by approximately 1,265,000 pounds or 16.3% from 7,739,000 pounds
in fiscal 1998 to 9,004,000 pounds in fiscal 1999. The percentage increase in
net sales and the percentage increase in coffee pounds sold were very similar,
as the decrease in average selling prices of Green Mountain's coffee during
fiscal 1999 was offset by increased sales of convenience coffee products with
higher sales prices per pound.
The year-over-year increase in net sales from continuing operations
occurred primarily in the wholesale area in which net sales increased by
$8,708,000 or 16.5% from $52,710,000 in fiscal 1998 to $61,418,000 in fiscal
1999. The wholesale net sales increase resulted primarily from the growth of
certain accounts in the office coffee service, supermarket and convenience store
channels. Direct mail sales increased $348,000 or 11.2% from $3,115,000 in
fiscal 1998 to $3,463,000 in fiscal 1999.
Green Mountain Coffee remains focused on building its brand and
profitably growing its business. At present, management believes the Company can
grow sales internally in fiscal 2000 at an annual rate of 25 to 30 percent.
Green Mountain's gross profit from continuing operations increased by
$6,353,000 or 33.0% from $19,267,000 in fiscal 1998 to $25,620,000 in fiscal
1999. Gross profit as a percentage of net sales increased 5.0 percentage points
from 34.5% in fiscal 1998 to 39.5% in fiscal 1999. Expressed in dollars per
coffee pound sold, gross profit increased 14.0% to $2.85 in fiscal 1999 from
$2.50 in fiscal 1998. The increase of gross profit as a percentage of sales was
primarily attributable to sharply lower green coffee costs, which was partially
offset by decreases in average sales prices. Due to anticipated competitive
pressures and product sales mix changes, full-year gross profit as a percentage
of sales is expected to decrease in fiscal 2000.
Selling and operating expenses from continuing operations increased by
$2,576,000 or 18.7% from $13,805,000 in fiscal 1998 to $16,381,000 in fiscal
1999, and increased 0.5 percentage points as a percentage of net sales from
24.7% in fiscal 1998 to 25.2% in fiscal 1999. This was primarily caused by
increased wholesale sales and sales support personnel expenditures ($1,086,000)
and advertising and promotional expenses ($838,000). The Company currently
intends to continue ramping up sales, sales support and marketing efforts in
fiscal 2000, although, as a percentage of sales, full-year selling and operating
expenses are expected to decline.
General and administrative expenses from continuing operations
increased by $492,000 or 11.8% from $4,169,000 in fiscal 1998 to $4,661,000 in
fiscal 1999. As a percentage of net sales, this change represents a 0.3
percentage point decrease from 7.5% in fiscal 1998 to 7.2% in fiscal 1999. The
dollar increase is primarily due to increased management consulting and
personnel expenses. It is anticipated that general and administrative expenses
as a percentage of sales will decrease in fiscal 2000.
In fiscal 1999, the Company recorded a $229,000 loss on abandonment of
loaner equipment. As part of a thorough review of its brewing and other
equipment on loan to wholesale customers, the Company identified a small portion
of its old equipment that would never be retrieved from customers sites and was
in effect given away to customers.
For the reasons outlined above, operating income increased by
$3,056,000 or 236.4% from $1,293,000 in fiscal 1998 to $4,349,000 in fiscal
1999. As a percentage of sales, operating income increased 4.4 percentage points
from 2.3% in fiscal 1998 to 6.7% in fiscal 1999.
Interest expense from continuing operations decreased $85,000 or 10.4%
from $821,000 in fiscal 1998 to $736,000 in fiscal 1999 due to the reduction in
the Company's long-term debt made possible by strong cash flows from operations
in fiscal 1999. At present, the Company expects interest expense in fiscal 2000
to be approximately $200,000 lower than in fiscal 1999 due to lower average debt
balances.
Income tax expense from continuing operations increased from $198,000
in fiscal 1998 to $1,376,000 in fiscal 1999. The increase in the Company's
effective tax rate, to 38% for fiscal 1999 from 37% for fiscal 1998, is
attributable to c hanges in certain permanent differences. It is expected
that the Company's effective tax rate in future periods will approximate 40%.
For the reasons outlined above, income from continuing operations
increased $1,907,000 or 560.9% from $340,000 in fiscal 1998 to $2,247,000 in
fiscal 1999.
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 company-owned
retail stores operation. During the second quarter of fiscal 1999, after having
sold or closed all of its stores, the Company revised its estimated pre-tax loss
on disposal and reversed $300,000 ($186,000 net of tax) of the original
estimate, primarily due to larger than expected proceeds from the sale of fixed
assets and lower lease termination costs.
Net income increased $3,649,000 from a net loss of $1,216,000 in fiscal
1998 to a net income of $2,433,000 in fiscal 1999.
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-over-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 channels. 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.
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.
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.
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 included 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.
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.
Liquidity and Capital Resources
Net working capital amounted to $6,052,000 at September 25, 1999 and
$7,852,000 at September 26, 1998. The decrease is primarily due to higher
accounts payable, resulting from the timing of large green coffee purchases near
the end of the fiscal year. The decrease is secondarily due to a higher current
portion of long-term debt in fiscal 1999, since the term debt portion of the
Fleet Bank ("Fleet") credit facility, which was issued in fiscal 1998, did not
require any principal payments until October 31, 1999. The higher current
liabilities at September 25, 1999 were partially offset by higher accounts
receivable resulting from increased sales near the end of the fiscal year.
Net cash provided by operating activities from continuing operations
increased by $6,378,000, from $206,000 in fiscal 1998 to $6,584,000 in fiscal
1999. This increase was primarily due to the net income increase, as well as the
increase in accounts payable and the decrease of deferred tax assets. Cash flows
from operations were partially used to fund capital expenditures in fiscal 1999.
In fiscal 1999, Green Mountain Coffee made capital expenditures related
to continuing operations of $2,655,000, which included $1,605,000 for equipment
on loan to customers; $533,000 for leasehold improvements, production equipment
and fixtures; $389,000 for computer hardware and software; and $128,000 for
vehicles.
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.
The Company currently plans to make capital expenditures in fiscal 2000
of approximately $3,600,000. However, management continuously reviews capital
expenditure needs and actual amounts expended may differ from these estimates.
Green Mountain Coffee used a large portion of its cash flows from
operations to reduce its debt in fiscal 1999. In fiscal 1998, the Company
borrowed $4,500,000 in term debt from Fleet, which required no principal
repayment until October 31, 1999 and matures in March 31, 2003. However, Green
Mountain Coffee elected to pay back $2,000,000 of this term debt during fiscal
1999. Starting on October 31, 1999, the Company is making monthly $75,000
principal payments on this term debt. The Company also maintains a revolving
line of credit with Fleet which expires in March 31, 2001. At September 25,
1999, the amount outstanding under the line of credit was $3,056,000 and the
amount available, based on a borrowing base formula, was $4,584,000. At
September 26, 1998, the outstanding balance on the line of credit was
$5,150,000. This credit facility is subject to certain quarterly covenants, and
the Company was in compliance with these covenants at September 25, 1999.
In fiscal 1999, the Company also used $617,000 of its cash flow from
operations to repurchase 93,259 of its outstanding shares. As Management
believes that the market is still undervaluing the Company's stock, Green
Mountain Coffee is planning to continue repurchasing over $800,000 worth of its
outstanding shares in the first half of fiscal 2000.
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 has assessed
its Year 2000 readiness and 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 implementation of the new system is
complete and management therefore believes that its internal business software
is substantially compliant. 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. Other than 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.
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. Based on
the information received from major vendors of manufacturing equipment, security
equipment, and communication systems, the Company assessed these vendors to be
Year 2000 compliant or in the process of becoming compliant before the end of
the calendar year. In the first quarter of fiscal 2000, the Company replaced its
existing voice mail and telephone switching system, primarily to improve
customer service but also to ensure Year 2000 compliance. The Company is
planning to install in December 1999 a generator that will provide continuous
power to its roasters, emergency backup power for the plant, and auxiliary heat
for the process water and building heating. Although this project is primarily
motivated by safety concerns in the event of power interruptions in general, it
also will enable the Company to continue limited production in the event of
power supply problems specifically related to the Year 2000. In addition, this
co-generation project is anticipated to lower plant operating costs over time.
There can be no assurance that this project will be completed by December 31,
1999.
External noncompliance by customers and suppliers. The Company has
contacted 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. As of July 1, 1999, all key suppliers had given the
Company reasonable assurances that they were Year 2000 compliant or in the
process of becoming compliant before the end of the calendar year. The Company
currently does not expect to have to change vendors or substantially increase
its raw materials inventory in late 1999 because of Year 2000 issues with its
existing vendors.
The Company also contacted its key customers in an attempt to assess
their Year 2000 readiness. Although it received indications that major customers
were working on Year 2000 compliance, the Company received few formal responses
from its customers and a complete assessment of customer Year 2000 readiness is
currently deemed impracticable.
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. In fiscal 1999, the Company spent approximately $84,000 on a telephone
switching and voice mail system replacement project, which was accelerated
because of the Year 2000 Project. This project will require approximately
another $16,000 of expenditures in fiscal 2000 to be completed. Additionally,
Green Mountain Coffee spent $23,000 in fiscal 1999 on the power co-generation
project described above. This last project is estimated to cost an additional
$227,000 in fiscal 2000, including equipment and installation costs.
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. Besides the
different preventive actions described above, the Company has contingency plans
applicable to possible disruptions of normal operations (such as power
interruptions or fire), which it believes are adequate for Year 2000 specific
events. 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: "Forward-looking information" beginning on page 19.
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 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 25, 1999, the Company had $5,657,000 of long-term debt
subject to variable interest rates (the lower of Fleet Bank's prime rate or
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 up to $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 175 and 200 basis points
at September 25, 1999). At September 25, 1999, this agreement leaves the Company
with no variable-rate debt and therefore no interest rate risk.
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 25, 1999, the Company estimates it would have
paid $14,000 to terminate the agreement. A 100 basis points decrease in interest
rates would decrease the fair value of the interest rate swap by approximately
$97,000.
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 profit margins can be 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 25,
1999, the Company had approximately $7.7 million (for 6.4 million pounds) in
purchase commitments, of which less than half had a fixed price. These
commitments represent approximately 48% of the Company's estimated coffee
requirements through September 30, 2000, the end of its 2000 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 25, 1999,
the Company held option contracts with maturity dates in December 1999. These
options covered 862,500 pounds of green coffee and had exercise prices from
$1.80 to $2.00 per pound. At September 25, 1999, the "C" price of coffee was
$0.84. If the price of coffee remains under $1.80 when these options come to
term, the loss incurred will be approximately $48,000. However, this loss, if
realized, would be offset by lower costs of coffee purchased during fiscal 2000.
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 9, 2000, 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 25, 1999 (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 25, 1999 and
September 26, 1998.................................................. F-3
Consolidated Statement of Operations for each of the
three years in the period ended September 25, 1999.................. F-4
Consolidated Statement of Changes in Stockholders' Equity for
each of the three years in the period ended September 25, 1999...... F-5
Consolidated Statement of Cash Flows for each of the three
years in the period ended September 25, 1999........................ 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
Report of Independent Accountants on Financial Statement Schedules.. F-24
Schedule II: Valuation and Qualifying Accounts..................... F-25
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)
10.2 (b) Term Loan Promissory Note, dated August 11, 1993, from
Green Mountain Coffe 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)
(y) Seventh Amendment and First Restatement of Commercial Loan
Agreement, dated April 12, 1996, among Green Mountain
Coffee Roasters, Inc., as borrower, and Fleet Bank - NH as
lender(10)
(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) Eigth 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(13)
(gg) Eleventh Amendment to Commercial Loan Agreement, dated
February 20, 1998, from Green Mountain Coffee Roasters,
Inc., to Fleet Bank - NH(14)
(hh) Replacement Revolving Line of Credit Promissory Note, dated
February 20, 1998, from Green Mountain Coffee Roasters,
Inc., to Fleet Bank - NH(14)
(ii) Revolving Line of Credit/Term Promissory Note, dated
February 20, 1998, from Green Mountain Coffee Roasters,
Inc., to Fleet Bank - NH(14)
10.10 (g) First Restatement of Security Agreement, dated April 12,
1996, between Green Mountain Coffee Roasters, Inc. and
Fleet Bank - NH(10)
10.15 Assignment of Trademarks from Green Mountain Coffee, Inc. in
connection with the Fleet Bank - NH financing(1)
10.21 Resolution adopted by The Vermont Economic Development Authority
("VEDA") on J une 25, 1993 with respect to $300,000 loan to Green
Mountain Coffee, Inc. together with Letter dated 6/29/93 from VEDA
to Green Mountain Coffee, Inc. and Letter dated 7/2/93 from Green
Mountain Coffee, Inc. to VEDA relating thereto(1)
(a) Loan Agreement, dated August 11, 1993, between VEDA and
Green Mountain Coffee Roasters, Inc.(1)
(b) Note, dated August 11, 1993, from Green Mountain Coffee
Roasters, Inc. to VEDA(1)
(c) Security Agreement, dated August 11, 1993, between VEDA
and Green Mountain Coffee Roasters, Inc.(1)
(d) Guaranty Agreements, dated August 11, 1993, between VEDA
and (i) Robert Stiller and Christine Stiller, (ii) Green
Mountain Coffee of Maine, Inc., (iii) Green Mountain of
Champlain, Inc., (iv) Green Mountain Coffee Roasters
Franchising Corporation, Inc., (v) Green Mountain Filters,
Inc. and (vi) Green Mountain Coffee Roasters of
Connecticut, Inc.(1)
(e) Subordination Agreement, dated August 11, 1993, between
VEDA and Robert Stiller(1)
(f) Form of Escrow Agreement among VEDA, Fleet Bank - NH and
Green Mountain Coffee Roasters, Inc.(1)
(g) Collateral Assignment of Lease, dated August 11, 1993,
between VEDA and Green Mountain Coffee Roasters, Inc.(1)
(h) Agreement to Assignment, Consent and Disclaimer, dated
August 4, 1993, executed by Pilgrim Partnership(1)
(i) Mortgage Deed, dated August 11, 1993, executed by Green
Mountain Coffee Roasters, Inc.(1)
(j) Mortgagee's Consent, Non-Disturbance and Waiver, dated
August 11, 1993, between Howard Bank, N.A. and VEDA(1)
(k) Form of Intercreditor Agreement between VEDA and Fleet Bank
- NH(1)
(i) Amendment to Loan Agreement, dated August 25, 1998, among
VEDA, as lender, and Green Mountain Coffee Roasters, as
borrower(17)
10.22 U.S. Small Business Administration ("SBA") Authorization and
Debenture Guaranty relating to $766,000 loan to Green Mountain
Coffee, Inc. together with Letters dated 7/14/93 and 7/19/93 from
SBA to Central Vermont Economic Development Corporation relating
thereto(1)
(a) Small Business Administration Guaranty dated September 30,
1993 from Robert P. Stiller to Central Vermont Economic
Development Corporation(4)
(b) Assignment, dated September 30, 1993, by Central Vermont
Economic Development Corporation to Small Business
Administration of Small Business Administration Guaranty
dated September 30, 1993 from Robert P. Stiller to Central
Vermont Economic Development Corporation(4)
(c) Mortgage, dated September 30, 1993, between Green Mountain
Coffee Roasters, Inc. and Central Vermont Economic
Development Corporation(4)
(d) Assignment, dated September 30, 1993, by Central Vermont
Economic Development Corporation to Small Business
Administration of Mortgage, dated September 30, 1993,
between Green Mountain Coffee Roasters, Inc. and Central
Vermont Economic Development Corporation(4)
(e) "504" Note, dated September 30, 1993, in the amount of
$766,000, from Green Mountain Coffee Roasters, Inc. to
Central Vermont Economic Development Corporation, as
amended, including Servicing Agent Agreement among Green
Mountain Coffee Roasters, Inc. and Colson Services Corp.(5)
(f) Assignment, dated September 30, 1993, by Central Vermont
Economic Development Corporation to Small Business
Administration of "504" Note, dated September 30, 1993, in
the amount of $766,000, from Green Mountain Coffee
Roasters, Inc. to Central Vermont Economic Development
Corporation(4)
(g) Security Agreement from Green Mountain Coffee Roasters,
Inc. to Central Vermont Economic Development Corporation(4)
(h) Assignment, dated September 30, 1993, by Central Vermont
Economic Development Corporation to Small Business
Administration of Security Agreement from Green Mountain
Coffee Roasters, Inc. to Central Vermont Economic
Development Corporation(4)
(i) Letter Agreement, dated October 1, 1993, among Central
Vermont Economic Development Corporation, Green Mountain
Coffee Roasters, Inc. and Small Business Administration,
amending the Authorization and Debenture Guaranty among
Small Business Administration, Central Vermont Economic
Development Corporation, and Green Mountain Coffee
Roasters, Inc.(4)
(j) Development Company 504 Debenture, issued October 14, 1993,
for principal amount of as Trustee(4)
10.33 Lease Agreement, dated 4/28/93, between Pilgrim Partnership and
Green Mountain Coffee, Inc.(1)
(a) Addendum to Lease Agreement, dated 4/28/93(1)
(b) Lease Amendment dated August 16, 1993(4)
(c) Letter Agreement dated July 30, 1997(16)
10.36 1993 Stock Option Plan of the Company, as revised(15)*
10.37 1998 Employee Stock Purchase Plan with Form of Participation
Agreement(17)*
10.38 1999 Stock Option Plan of the Company(18)*
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)*
10.75 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(14)*
10.77 Stock Option Agreement, dated October 21, 1997 between the Company
and Paul Comey(14)*
10.78 Stock Option Agreement, dated October 21, 1997 between the Company
and Jonathan C. Wettstein(14)*
10.80 Stock Option Agreement, dated October 21, 1997 between the Company
and Stephen J. Sabol(14)*
10.81 Stock Option Agreement, dated January 8, 1999 between the Company
and Robert D. Britt(18)*
10.82 Stock Option Agreement, dated January 8, 1999 between the Company
and Paul Comey(18)*
10.83 Stock Option Agreement, dated January 8, 1999 between the Company
and Paul Comey(18)*
10.84 Stock Option Agreement, dated January 8, 1999 between the Company
and Jonathan C. Wettstein(18)*
10.85 Stock Option Agreement, dated January 8, 1999 between the Company
and Jonathan C. Wettstein(18)*
10.87 Stock Option Agreement, dated January 8, 1999 between the Company
and Stephen J. Sabol(18)*
10.89 Stock Option Agreement, dated January 8, 1999 between the Company
and James K. Prevo(18)*
10.90 Stock Option Agreement, dated January 8, 1999 between the Company
and James K. Prevo(18)*
10.91 Stock Option Agreement, dated April 13, 1999 between the Company
and David E. Moran(19)*
10.92 Stock Option Agreement, dated April 13, 1999 between the Company
and William D. Davis(19)*
10.93 Stock Option Agreement, dated April 13, 1999 between the Company
and Jules A. delVecchio(19)*
10.94 Stock Option Agreement, dated April 13, 1999 between the Company
and Hinda Miller(19)*
10.95 Stock Option Agreement, dated September 13, 1999 between the
Company and Kevin G. McBride*
10.96 Stock Option Agreement, dated November 1, 1999 between the
Company and Agnes M. Cook*
10.97 Promissory note from Robert P. Stiller to the Company, dated
September 24, 1999
10.98 Promissory note from Robert P. Stiller to the Company, dated
October 18, 1999
10.99 Promissory note from Robert P. Stiller to the Company, dated
November 3, 1999
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 25, 1999.
Notes to exhibits listed above
* Management contract or compensatory plan
1. Incorporated by reference to the corresponding exhibit number in the
Registration Statement on Form SB-2 (Registration No. 33-66646) filed on
July 28, 1993 and declared effective on September 21, 1993
2. Incorporated by reference to the corresponding exhibit number in the
Quarterly Report on Form 10-QSB for the 12 weeks ended April 9, 1994,
filed on May 24, 1994
3. Incorporated by reference to the corresponding exhibit number in the
Annual Report on Form 10-KSB for the fiscal year ended September 24,
1994, filed on December 8, 1994
4. Incorporated by reference to the corresponding exhibit number in the
Annual Report on Form 10-KSB for the fiscal year ended September 25,
1993, filed on December 23, 1993
5. Incorporated by reference to the corresponding exhibit number in the
Quarterly Report on Form 10-QSB for the 16 weeks ended January 15, 1994,
filed on February 25, 1994
6. Incorporated by reference to the corresponding exhibit number in the
Quarterly Report on Form 10-QSB for the 16 weeks ended January 14, 1995,
filed on February 25, 1995
7. Incorporated by reference to the corresponding exhibit number in the
Quarterly Report on Form 10-QSB for the 12 weeks ended April 8, 1995,
filed on May 23, 1995
8. Incorporated by reference to the corresponding exhibit number in
Amendment No. 1 to the Annual Report on Form 10-KSB/A for the fiscal
year ended September 24, 1994, filed on December 16, 1994
9. Incorporated by reference to the corresponding exhibit number in the
Annual Report on Form 10-KSB for the fiscal year ended September 30,
1995
10. Incorporated by reference to the corresponding exhibit number in the
Quarterly Report on Form 10-QSB for the 12 weeks ended April 13, 1996
11. Incorporated by reference to the corresponding exhibit number in the
Annual Report on Form 10-KSB for the fiscal year ended September 28,
1996
12. Incorporated by reference to the corresponding exhibit number in the
Quarterly Report on Form 10-Q for the 16 weeks ended January 18, 1997
13. Incorporated by reference to the corresponding exhibit number in the
Quarterly Report on Form 10-Q for the 12 weeks ended April 12, 1997
14. Incorporated by reference to the corresponding exhibit number in the
Quarterly Report on Form 10-Q for the 12 weeks ended July 5, 1997
15.. Incorporated by reference to the corresponding exhibit number in the
Annual Report on Form 10-K for the fiscal year ended September 27, 1997
16. Incorporated by reference to the corresponding exhibit number in the
Quarterly Report on Form 10-Q for the 16 weeks ended January 17, 1998
17. Incorporated by reference to the corresponding exhibit number in the
Annual Report on Form 10-K for the fiscal year ended September 26, 1998
18. Incorporated by reference to the corresponding exhibit number in the
Quarterly Report on Form 10-Q for the 16 weeks ended January 18, 1999
19. Incorporated by reference to the corresponding exhibit number in the
Quarterly Report on Form 10-Q for the 12 weeks ended July 3, 1999
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 21, 1999
/s/Robert D. Britt Chief Financial Officer, Treasurer,
- ------------------ Secretary and Director (Principal
Robert D. Britt Financial and Accounting Officer) December 21, 1999
STEPHEN J. SABOL* Director December 21, 1999
JONATHAN C. WETTSTEIN* Director December 21, 1999
WILLIAM D. DAVIS* Director December 21, 1999
JULES A. DEL VECCHIO* Director December 21, 1999
HINDA MILLER* Director December 21, 1999
DAVID E. MORAN* Director December 21, 1999
* By:/s/ Robert P. Stiller
-----------------------------------
Robert P. Stiller, Attorney-in-fact
F-1
GREEN MOUNTAIN COFFEE, INC.
Index to Consolidated Financial Statements
Page
----
Report of Independent Accountants........................................ F-2
Consolidated Financial Statements:
Consolidated Balance Sheet at September 25, 1999
and September 26, 1998.......................................... F-3
Consolidated Statement of Operations for each of the
three years in the period ended September 25, 1999.............. F-4
Consolidated Statement of Changes in Stockholders' Equity
for each of the three years in the period ended
September 25, 1999.............................................. F-5
Consolidated Statement of Cash Flows for each of the
three years in the period ended September 25, 1999.............. F-6
Notes to Consolidated Financial Statements........................... F-7
Report of Independent Accountants
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, of changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Green Mountain Coffee, Inc. and its subsidiary at September 25, 1999 and
September 26, 1998, and the results of their operations and their cash flows for
each of the three years in the period ended September 25, 1999, in conformity
with accounting principles generally accepted in the United States. 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
auditing standards generally accepted in the United States 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
November 12, 1999
GREEN MOUNTAIN COFFEE, INC.
Consolidated Balance Sheet
(Dollars in thousands)
September 25, September 26,
1999 1998
------------- -------------
Assets
Current assets:
Cash and cash equivalents........................................ $ 415 $ 777
Receivables, less allowances of $190 at September 25, 1999 and
$378 at September 26, 1998....................................... 6,223 4,789
Inventories...................................................... 5,409 5,636
Other current assets............................................. 497 489
Loans to officers................................................ 250 185
Deferred income taxes, net....................................... 490 880
------------- -------------
Total current assets.......................................... 13,284 12,756
Fixed assets, net................................................ 10,183 10,800
Other long-term assets........................................... 250 270
Deferred income taxes, net....................................... 161 737
------------- -------------
$ 23,878 $ 24,563
============= =============
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt................................ $ 1,127 $ 249
Current portion of obligation under capital lease................ - 12
Accounts payable................................................. 4,551 3,131
Accrued payroll.................................................. 1,005 827
Accrued expenses................................................. 357 507
Accrued losses and other costs of discontinued operations, net... 192 178
------------- -------------
Total current liabilities..................................... 7,232 4,904
------------- -------------
Long-term debt...................................................... 1,908 5,041
------------- -------------
Long-term line of credit............................................ 3,056 5,150
------------ -------------
Commitments and contingencies (Note 13)
Stockholders' equity:
Common stock, $0.10 par value:
Authorized - 10,000,000 shares; Issued - 3,615,404 and 3,545,841
shares at September 25, 1999 and September 26, 1998,
respectively..................................................... 362 355
Additional paid-in capital....................................... 13,409 13,018
Accumulated deficit.............................................. (1,435) (3,868)
Treasury shares, at cost - 100,609 and 7,350 shares at September
25, 1999 and September 26, 1998, respectively.................... (654) (37)
------------- -------------
Total stockholders' equity....................................... 11,682 9,468
------------- -------------
$ 23,878 $ 24,563
============= =============
The accompanying Notes to Consolidated Financial Statements are an integral part
of these financial statements.
GREEN MOUNTAIN COFFEE, INC.
Consolidated Statement of Operations
(Dollars in thousands except per share data)
Year Ended
September 25, September 26, September 27,
1999 1998 1997
------------- ------------- -------------
Net sales......................................... $ 64,881 $ 55,825 $ 42,908
Cost of sales..................................... 39,261 36,558 27,181
------------- ------------- -------------
Gross profit................................. 25,620 19,267 15,727
Selling and operating expenses.................... 16,381 13,805 10,328
General and administrative expenses............... 4,661 4,169 3,391
Loss on abandonment of equipment.................. 229 - 218
------------- ------------- -------------
Operating income............................. 4,349 1,293 1,790
Other income (expense)............................ 10 66 17
Interest expense.................................. (736) (821) (521)
------------- ------------- -------------
Income from continuing operations
before income taxes.......................... 3,623 538 1,286
Income tax benefit (expense)...................... (1,376) (198) 253
------------- ------------- -------------
Income from continuing operations............ 2,247 340 1,539
Discontinued operations:
Loss from discontinued retail stores
operations, net of income tax benefits of $196
and $142 for the years ended September 26,
1998 and September 27, 1997, respectively......... - (297) (214)
Income (loss) on disposal of retail stores, net
of income tax expense of $114 and income
tax benefit of $834 for the years ended
September 25, 1999 and September 26,
1998, respectively................................ 186 (1,259) -
------------- ------------- -------------
Net income (loss)................................. $ 2,433 $ (1,216) $ 1,325
============= ============= =============
Basic income (loss) per share:
Weighted average shares outstanding............... 3,503,412 3,530,657 3,433,929
Income from continuing operations................. $ 0.64 $ 0.10 $ 0.45
Income (loss) from discontinued operations........ $ 0.05 $ (0.44) $ (0.06)
Net income (loss)................................. $ 0.69 $ (0.34) $ 0.39
Diluted income (loss) per share:
Weighted average shares outstanding............... 3,547,155 3,539,231 3,467,932
Income from continuing operations................. $ 0.64 $ 0.10 $ 0.44
Income (loss) from discontinued operations........ $ 0.05 $ (0.44) $ (0.06)
Net income (loss)................................. $ 0.69 $ (0.34) $ 0.38
The accompanying Notes to Consolidated Financial Statements are an integral part
of these financial statements.
GREEN MOUNTAIN COFFEE, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended September 25, 1999, September 26, 1998
and September 27, 1997
(Dollars in thousands)
Additional Total
Common stock paid-in Accumulated Treasury stock stockholders'
Shares Amount capital deficit Shares Amount equity
--------- ------ ---------- ----------- --------- ------ -------------
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
Issuance of common stock under
employee stock purchase plan..... 37,263 4 186 - - - 190
Options exercised................... 32,300 3 205 - - - 208
Purchase of treasury shares......... - - - - (93,259) (617) (617)
Net income.......................... - - - 2,433 - - 2,433
--------- ------ ---------- ----------- --------- ------ -------------
Balance at September 25, 1999... 3,615,404 $ 362 $ 13,409 $ (1,435) (100,609) $ (654) $ 11,682
========= ====== ========== =========== ========= ====== =============
The accompanying Notes to Consolidated Financial Statements are an integral part
of these financial statements.
GREEN MOUNTAIN COFFEE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
Year ended
-----------------------------------------------
September 25, September 26, September 27,
1999 1998 1997
------------- ------------- -------------
Cash flows from operating activities:
Net income (loss)..................................... $ 2,433 $ (1,216) $ 1,325
Adjustments to reconcile net income (loss) to net
cash provided by (used for) operating activities:
Loss (income) from discontinued operations....... (186) 1,556 214
Depreciation and amortization.................... 2,943 2,754 2,311
Loss on disposal and abandonment of fixed
assets........................................ 240 63 240
Provision for doubtful accounts.................. 241 577 171
Deferred income taxes............................ 966 (70) (308)
Changes in assets and liabilities:
Receivables...................................... (1,675) (1,247) (1,512)
Inventories...................................... 227 (565) (1,948)
Other current assets............................. (73) (325) 251
Other long-term assets........................... 20 63 9
Accounts payable................................. 1,420 (1,823) 1,952
Accrued payroll.................................. 178 211 136
Accrued expenses................................. (150) 228 15
------------- ------------- -------------
Net cash provided by continuing operations............... 6,584 206 2,856
Net cash provided by (used for) discontinued
operations......................................... 42 (406) (163)
------------- ------------- -------------
Net cash provided by (used for) operating activities..... 6,626 (200) 2,693
------------- ------------- -------------
Cash flows from investing activities:
Expenditures for fixed assets.......................... (2,655) (3,375) (5,277)
Capital expenditures for discontinued operations....... - (208) (90)
Proceeds from disposals of fixed assets................ 89 170 80
Proceeds from disposal of discontinued operations..... 158 118 -
------------- ------------- -------------
Net cash used for investing activities................... (2,408) (3,295) (5,287)
------------- ------------- -------------
Cash flows from financing activities:
Proceeds from issuance of common stock................ 398 66 458
Purchase of treasury shares........................... (617) (37) -
Proceeds from issuance of long-term debt.............. - 4,500 -
Repayment of long-term debt........................... (2,255) (2,121) (947)
Principal payments under capital lease obligation..... (12) (132) (114)
Net change in revolving line of credit................ (2,094) 1,165 3,477
------------- ------------- -------------
Net cash provided by (used for) financing activities..... (4,580) 3,441 2,874
------------- ------------- -------------
Net increase (decrease) in cash and cash
equivalents........................................... (362) (54) 280
Cash and cash equivalents at beginning of year........... 777 831 551
------------- ------------- -------------
Cash and cash equivalents at end of year................. $ 415 $ 777 $ 831
============= ============= =============
Supplemental disclosures of cash flow information:
Cash paid for interest................................ $ 719 $ 786 $ 507
Cash paid for income taxes............................ $ 248 $ 56 $ 46
The accompanying Notes to Consolidated Financial Statements are an integral part
of these financial statements.
GREEN MOUNTAIN COFFEE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. 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 supermarket, specialty food store,
convenience store, food service, hotel, restaurant, 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
1999, fiscal 1998 and fiscal 1997 represent the years ended September 25,
1999, September 26, 1998 and September 27, 1997, 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.
At September 25, 1999, the Company held options covering an aggregate of
863,000 pounds of green coffee beans which are exercisable in fiscal 2000
at prices ranging from $1.80 to $2.00 per pound. At September 26, 1998 the
Company held options covering an aggregate of 1,312,500 pounds of coffee
which were exercisable in fiscal 1999 at prices ranging from $1.75 to
$2.00 per pound. The fair market value of these options were not material
at September 25, 1999 and September 26, 1998. Additionally, the Company
had futures contracts outstanding of approximately $714,000 at September
26, 1998. The fair market value of these futures at September 26, 1998 was
$670,000. 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 25, 1999 and September 26, 1998. At
September 25, 1999 and September 26, 1998, $48,000 and $112,000,
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. Derivatives that are not hedges must be adjusted to fair value
through income. If the derivative is a hedge, depending on the nature of
the hedge, changes in the fair value of derivatives will either be offset
against the change in fair value of the hedged assets, liabilities or firm
commitments through earnings or recognized in other comprehensive income
until the hedged item is recognized in earnings. The ineffective portion
of a derivative's change in fair value will be immediately recognized in
earnings. The Company expects that this new standard will not have a
significant effect on its results of operations. SFAS 137 deferred the
effective date of SFAS 133 to fiscal years beginning after June 15, 2000,
which is fiscal year 2001 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 25, 1999 and September 26, 1998 were $32,000
and $48,000, 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 25, 1999 and
September 26, 1998 is $151,000.
ADVERTISING COSTS
The Company expenses the costs of advertising the first time the
advertising takes place. At September 25, 1999 and September 26, 1998,
prepaid advertising costs of $81,000 and $184,000, respectively, were
recorded in other current assets in the accompanying consolidated balance
sheet. Advertising expense totaled $3,499,000, $2,791,000 and $1,991,000
for the years ended September 25, 1999, September 26, 1998 and September
27, 1997, 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" ("SFAS 109"). 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.
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 25, 1999. It was not practicable to estimate the fair value of a
minority investment representing less than 5% of the preferred stock of an
untraded company: that investment is carried at its original cost of
$151,000 at September 25, 1999 and September 26, 1998, 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 extensive network of Mobil convenience stores, now owned by Exxon
Mobil Corporation, or by independent franchisees, accounted for
approximately 18.6%, 17.7% and 17.3% of net sales from continuing
operations in the years ended September 25, 1999, September 26, 1998 and
September 27, 1997. During the same periods, Mobil convenience stores
owned and operated by Exxon Mobil Corporation, rather than by franchisees,
made up less than 10% of the Company's revenues. The Company had one
customer, Hannaford Bros. Co., a supermarket chain, which accounted for
11.6% of net sales from continuing operations in the year ended September
27, 1997. For the years ended September 25, 1999 and September 26, 1998,
Hannaford Bros. Co. accounted for less than 10% of the Company's revenues.
Both Exxon Mobil Corporation and Hannaford Bros. Co. are customers of the
wholesale segment (see footnote 15 on Segment Reporting). 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 channels
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.
SEGMENT REPORTING
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (SFAS 131), became
effective for financial statements issued for annual periods beginning
after December 15, 1997. SFAS 131 supersedes SFAS 14, "Financial Reporting
for Segments of a Business Enterprise" and amends SFAS 94, "Consolidation
of All Majority-Owned Subsidiaries". Under SFAS 131, the Company's
business is comprised of two distinct business segments determined by the
distribution channel. The direct mail segment is comprised of all
consumer-direct sales and sales to small businesses which are solicited
via catalogs and the Company's online store - www.GreenMountainCoffee.com.
The wholesale segment is comprised of sales to customers who resell Green
Mountain coffee either as coffee beans or brewed coffee by the cup, such
as supermarkets, office coffee distributors, convenience stores,
restaurants, and others. Wholesale sales are generated through the
Company's direct sales force and a limited number of distributors.
RECLASSIFICATIONS
Certain reclassifications of prior year balances have been made to conform
to the current presentation.
3. Inventories
Inventories consist of the following:
September 25, 1999 September 26, 1998
Raw materials and supplies.... $ 2,809,000 $ 2,832,000
Finished goods................ 2,600,000 2,804,000
------------------ ------------------
$ 5,409,000 $ 5,636,000
================== ==================
As of September 25, 1999, the Company had inventory purchase commitments
for green coffee totaling approximately $7.7 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 25, September 26,
Years 1999 1998
------- ------------- -------------
Leasehold improvements..................... 5 - 10 $ 2,216,000 $ 2,363,000
Production equipment....................... 2 - 10 5,539,000 5,338,000
Office equipment and software.............. 3 - 10 5,581,000 6,275,000
Equipment on loan to wholesale customers... 3 - 5 4,133,000 5,976,000
Vehicles................................... 2 - 4 512,000 384,000
Construction-in-progress................... 162,000 179,000
------------- -------------
Total fixed assets....................... 18,143,000 20,515,000
Accumulated depreciation..................... (7,960,000) (9,715,000)
------------- -------------
$ 10,183,000 $ 10,800,000
============= =============
Fixed assets include approximately $354,000 of computer and loaner
equipment held under a capital lease at September 26, 1998. At September
26, 1998, related accumulated depreciation on the equipment under capital
leases was approximately $334,000. Total depreciation and amortization
expense from continuing operations relating to all fixed assets was
$2,943,000, $2,754,000 and $2,311,000 for fiscal 1999, 1998 and 1997,
respectively.
During fiscal 1999, the Company disposed of assets with a cost of
$5,012,000 and related accumulated depreciation of $4,683,000 resulting in
a loss on disposal and abandonment of fixed assets of $240,000. As part of
this loss, the Company recorded a $229,000 loss on abandonment of loaner
equipment. This resulted from a thorough review of its brewing and other
equipment on loan to customers, through which it identified a small
portion of its old equipment that would not be retrieved.
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 25, 1999, September 26, 1998, and September 27,
1997 is as follows:
September 25, September 26, September 27,
1999 1998 1997
------------- ------------- -------------
Current tax expense (benefit):
Federal....................................... $ 862,000 $ - $ 355,000
State......................................... 186,000 17,000 114,000
Benefit of net operating loss carryforwards... (948,000) - (408,000)
------------- ------------- -------------
Total current................................. 100,000 17,000 61,000
------------- ------------- -------------
Deferred tax expense (benefit):
Federal....................................... 1,098,000 187,000 514,000
State......................................... 178,000 30,000 284,000
------------- ------------- -------------
Total deferred................................ 1,276,000 217,000 798,000
Tax asset valuation allowance................. - (36,000) (1,112,000)
------------- ------------- -------------
Total tax (benefit) expense................... $ 1,376,000 $ 198,000 $ (253,000)
============= ============= =============
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 25, September 26,
1999 1998
------------- -------------
Deferred tax assets:
Net operating loss carryforwards.................... $ 272,000 $ 1,077,000
Federal investment tax credits...................... 3,000 8,000
Vermont state manufacturers investment tax credit... 2,627,000 2,627,000
Section 263A adjustment............................. 4,000 4,000
Other reserves and temporary differences............ 467,000 916,000
------------- -------------
Gross deferred tax assets........................... 3,373,000 4,632,000
Deferred tax asset valuation allowance.............. (2,355,000) (2,355,000)
Deferred tax liability:
Depreciation........................................ (239,000) (90,000)
------------- -------------
Net deferred tax assets............................. $ 779,000 $ 2,187,000
============ =============
At September 25, 1999, the Company has net operating loss carryforwards
and investment tax credits for federal income tax reporting purposes of
$472,000 and $3,000, respectively, which will expire between fiscal 2000
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% is as follows:
September 25, September 26, September 27,
1999 1998 1997
------------- ------------- -------------
Tax at U.S. Federal Statutory rate.......... $ 1,231,000 $ 183,000 $ 437,000
Increase (decrease) in rates resulting from:
Other nondeductible items............. 28,000 22,000 20,000
State taxes, net of federal benefit... 217,000 42,000 73,000
Deferred tax asset valuation
allowance and other............... (100,000) (49,000) (783,000)
------------- ------------- -------------
Tax at effective rates...................... $ 1,376,000 $ 198,000 $ (253,000)
============= ============= =============
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 all of its retail stores by the end of the second quarter 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.
The estimated loss on disposal of the retail store operations of
$1,259,000 (net of a tax benefit of $834,000) was included in the third
quarter of fiscal 1998 results. The pre-tax loss on disposal of
$2,093,000 recorded in fiscal 1998 consisted 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. During the second quarter of
fiscal 1999, the Company revised its estimated pre-tax loss on disposal
and reversed $300,000 ($186,000 net of tax) of the original estimate,
primarily due to larger than expected proceeds from the sale of fixed
assets and lower lease termination costs.
Net sales from the retail store operations were $207,000, $3,591,000
and $4,926,000 for the years ended September 25, 1999, September 26,
1998 and September 27, 1997, respectively. Net proceeds from the sale
of retail assets totaled $158,000 and $118,000 in fiscal 1999 and
fiscal 1998, respectively.
The assets and liabilities of the discontinued retail operations at
September 25, 1999 and 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 25,
1999 and September 26, 1998 consolidated balance sheet are summarized
as follows:
September 25, September 26,
1999 1998
------------- -------------
Current assets, net........................................ - $ 97,000
Fixed assets, net.......................................... $ 46,000 564,000
Deferred tax assets, net................................... 128,000 570,000
Estimated accrued losses and other costs on disposal of
discontinued operations.................................... (366,000) (1,409,000)
------------- -------------
Net accrued losses and other costs of discontinued
operations................................................. $ (192,000) $ (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 fiscal
1998, the Company was also able to borrow up to $4,500,000 in term debt
with a maturity of March 31, 2003, of which $2,000,000 was voluntarily paid
back in fiscal 1999. Principal payments on the term debt of $75,000 per
month commenced on October 31, 1999. Both the revolving line of credit and
term debt accrue interest daily and pay interest monthly, in arrears.
The principal amounts outstanding on the revolving line of credit at
September 25, 1999 and September 26, 1998 were $3,056,000 and $5,150,000,
respectively. The outstanding balances on the term debt at September 25,
1999 and September 26, 1998 were $2,500,000 and $4,500,000, respectively.
The interest paid on the line of credit and term debt varies with the prime
and LIBOR interest rates. At September 25, 1999, the interest rate on
$2,500,000 of the principal amount outstanding on the revolving line of
credit was at the one-month LIBOR rate plus 175 basis points or 7.11% while
the interest on the remaining portion (equal to $556,000) was at the prime
rate or 8.25%. 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 25, 1999, the interest rate on the
$2,500,000 term debt was equal to LIBOR plus 200 basis points or 7.36%. 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 25, 1999.
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 25, 1999,
the Company paid $43,000 in additional interest expense pursuant to the
swap agreement. 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. At September 25, 1999 and September 26, 1998, the Company estimates
that it would have paid $14,000 and $68,000 respectively to terminate the
agreement.
8. Long-term Debt
September 25, September 26,
1999 1998
------------- -------------
Fleet line of credit (Note 7)............ $ 3,056,000 $ 5,150,000
Fleet term debt (Note 7) .............. 2,500,000 4,500,000
Facility and Equipment Term Loans........ 101,000 195,000
Central Vermont Economic Development
Corporation Debenture................ 382,000 459,000
Vermont Economic Development Authority
Promissory Note...................... 42,000 93,000
Computer Equipment Installment Loans..... - 2,000
Service Vehicle Installment Loans........ 10,000 41,000
------------- --------------
6,091,000 10,440,000
Less current portion..................... 1,127,000 249,000
------------- -------------
$ 4,964,000 $ 10,191,000
============= ==============
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 25, 1999, the remaining facility and
equipment loan bore interest at 8.13%.
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
25, 1999.
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 25, 1999
are as follows:
Fiscal Year
-----------
2000 $ 1,127,000
2001 4,051,000
2002 792,000
2003 96,000
2004 25,000
------------
$ 6,091,000
============
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. In the first and second
quarter of fiscal 1999, the Company repurchased an additional 72,768 shares
for $457,000.
On August 24, 1999, 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 25, 1999, the
Company had repurchased 20,491 shares for $160,000.
10. Employee Compensation Plans
STOCK OPTION PLANS
Prior to the establishment on September 21, 1993 of the Company's first
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. At September
25, 1999, 141,444 options were outstanding under these individual
agreements. All such options presently outstanding are fully vested and
expire in April 2003 or earlier if employment terminates.
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. At September 25,
1999 and September 26, 1998, options for 43,611 and 66,631 shares of
common stock were available for grant under the plan, respectively.
On May 20, 1999, the Company registered on Form S-8 the 1999 Stock Option
Plan (the "1999 Plan"). Under this plan, 250,000 shares of common stock
are available for grants of both incentive and non-qualified stock
options. At September 25, 1999, options for 57,321 shares of common stock
were available for grant under the plan.
Under both the 1993 Plan and the 1999 Plan, 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 1993 Plan and the 1999 Plan become
exercisable over periods determined by the Board of Directors.
Option activity is summarized as follows:
Number of Weighted-average
Shares Option Price Exercise Price
--------- --------------- ----------------
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
Granted............................ 290,212 4.375 - 7.625 5.95
Exercised.......................... (32,300) 6.00 - 7.00 6.30
Canceled........................... (74,513) 4.375 - 10.00 7.14
=========
Outstanding at September 25, 1999... 533,212 $ 4.375 - 10.00 7.18
=========
Exercisable at September 25, 1999... 226,854 $ 5.875 - 10.00 $ 8.03
=========
Options outstanding Options exercisable
Number Weighted Weighted Number Weighted
outstanding at average average exercisable at average
Range of September 25, remaining exercise price September 25, exercise price
exercise price 1999 (years) 1999
- -------------- --------------- --------- -------------- -------------- --------------
$ 4.38 - 6.00 176,833 9 $ 5.22 15,000 $ 5.88
6.25 - 7.00 34,905 8 6.66 13,226 6.64
7.44 - 7.63 84,000 10 7.61 3,000 7.50
8.02 141,444 4 8.02 141,444 8.02
8.13 - 8.50 40,030 6 8.46 34,534 8.50
9.63 - 10.00 56,000 8 9.96 19,650 9.94
=============== ==============
533,212 226,854
=============== ==============
EMPLOYEE STOCK PURCHASE PLAN
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.
Prior to the establishment of the 1998 Employee Stock Purchase Plan, the
Company reserved 75,000 shares of common stock for purchase by eligible
employees under the 1993 Employee Stock Purchase Plan (the "1993 Plan").
The 1993 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 participants base pay divided by 85%
of the market value of the common stock at such time, subject to pro rata
reduction of shares in the annual aggregate maximum number of shares
offered by the Company otherwise be exceeded.
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,
except for one grant to an outside consultant in fiscal 1999, no
compensation expense has been recognized for its stock option awards and
its stock purchase plan because the exercise price of the Company's stock
options equals or exceeds the market price of the underlying stock on the
date of the grant. 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 for the Company's stock
option awards and the stock purchase plan been determined based on the
fair value at the grant dates for the awards under those plans, consistent
with the provisions of SFAS No. 123, the Company's net income and net
income per share for the years ended September 25, 1999, September 26,
1998 and September 27, 1997 would have decreased to the pro forma amounts
indicated below:
Fiscal 1999 Fiscal 1998 Fiscal 1997
----------- ----------- -----------
Net income (loss) As reported $ 2,433 $ (1,216) $ 1,325
Pro forma 2,160 (1,336) 1,219
Diluted net income
(loss) per share As reported 0.69 (0.34) 0.38
Pro forma 0.61 (0.38) 0.35
The fair value of each stock option under the 1993 and 1999 Plans are
estimated on the date of the grant using the Black-Scholes option-pricing
model with the following assumptions: an expected life of 7 years, 7 years
and 6 years in fiscal 1999, 1998 and 1997, respectively; an average
volatility of 70%, 64%, and 67% for fiscal 1999, 1998, and 1997
respectively; no dividend yield; and a risk-free interest rate of 6.35%,
4.56% and 6.11% for fiscal 1999, 1998 and 1997 grants, respectively.
The fair value of the employees' purchase rights under the Purchase Plan
was estimated using the Black-Scholes model with the following assumptions
for fiscal 1999, 1998 and 1997: an expected life of six months, one year
and one year respectively; expected volatility of 70%, 64%, and 67%
respectively; and a risk-free interest rate of 5.33%; 4.59% and 5.51%,
respectively. The weighted average fair value of those purchase rights
granted in fiscal 1999, fiscal 1998 and fiscal 1997 was $2.31, $1.98 and
$2.79 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 $204,000, $160,000, and $96,000, for
the years ended September 25, 1999, September 26, 1998, and September 27,
1997, respectively.
12. Loans to Officers
During fiscal 1999 and fiscal 1998, certain executive officers delivered
promissory notes to the Company in the principal amount of $650,000 and
$178,000, 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 1999, the prime rate ranged from 7.75%
to 8.50%. During fiscal 1998, the prime rate was 8.50% throughout the year.
One note in the amount of $250,000, issued September 24, 1999, was
outstanding on September 25, 1999 and is expected to be repaid to the
Company during fiscal 2000. The balance on loans to officers, including
$7,000 of accrued interest, at September 26, 1998 was $185,000.
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 $1,628,000, $1,599,000 and $1,376,000 in fiscal 1999,
1998 and 1997, respectively (net of sublease income of $196,000, $67,000
and $54,000 in fiscal 1999, 1998 and 1997, respectively).
Minimum future lease payments (net of committed sublease agreements of
$137,000 for fiscal year 2000, $132,000 for fiscal 2001, $113,000 for
fiscal 2002, $53,000 for fiscal 2003 and $227,000 thereafter) under
non-cancelable operating leases for years subsequent to September 25, 1999
are as follows:
Fiscal Year Operating Leases
----------- ----------------
2000......................................... $ 1,096,000
2001......................................... 1,037,000
2002......................................... 713,000
2003......................................... 546,000
2004......................................... 491,000
Thereafter................................... 1,224,000
----------------
Total minimum lease payments..................... $ 5,107,000
================
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 25, September 26, September 27,
1999 1998 1997
------------- ------------- -------------
Numerator - basic and diluted
earnings per share :
Net income from continuing
operations.............................. $ 2,247 $ 340 $ 1,539
============= ============= =============
Denominator:
Basic earnings per share - weighted
average shares outstanding.............. 3,503,412 3,530,657 3,433,929
Effect of dilutive securities - stock
options................................. 43,743 8,574 34,003
------------- ------------- -------------
Diluted earnings per share - weighted
average shares outstanding.............. 3,547,155 3,539,231 3,467,932
============= ============= =============
Basic earnings per share................. $ 0.64 $ 0.10 $ 0.45
Diluted earnings per share............... $ 0.64 $ 0.10 $ 0.44
For the fiscal years ended September 25, 1999, September 26, 1998, and
September 27, 1997 anti-dilutive options of 345,967, 341,239, and 289,840
respectively, have been excluded from the calculation of EPS because the
options' exercise price was greater than the market price of the common
shares.
15. Segment Reporting
Business conducted by the Company can be segmented into two distinct areas
determined by the distribution channel. The direct mail segment is
comprised of all consumer-direct sales and sales to small businesses which
are solicited via catalogs and the Company's online store -
www.GreenMountainCoffee.com. The wholesale segment is comprised of all
sales to customers who resell Green Mountain coffee either as coffee beans
or brewed coffee by the cup, such as supermarkets, office coffee
distributors, convenience stores, restaurants, and others. Wholesale sales
are generated through the Company's direct sales force and a limited
number of distributors.
Both segments of the Company sell similar products, although the entire
Company product range is not fully available to both segments, and direct
mail customers do not have access to the same range of equipment service,
delivery and merchandising support as wholesale customers.
Selling and operating costs directly attributable to the direct mail
segment are charged accordingly while all remaining selling, operating,
general and administrative expenses
(including depreciation and amortization) are charged to the wholesale
segment. In fiscal 1997, $84,000 of depreciation was charged to the direct
mail segment. The Company's management does not review assets by segment.
The table below discloses segment net sales and pre-tax income from
continuing operations for fiscal 1999, 1998 and 1997 (in thousands):
1999 1998 1997
---------- ---------- ----------
Net sales from continuing operations
Reportable segments:
Wholesale.............. $ 61,418 $ 52,710 $ 40,037
Direct mail............ 3,463 3,115 2,871
========== ========== ==========
Total net sales........ $ 64,881 $ 55,825 $ 42,908
========== ========== ==========
Pre-tax income from continuing operations
Reportable segments:
Wholesale.............. $ 4,084 $ 1,255 $ 1,710
Direct mail............ 265 38 80
---------- ---------- ----------
Operating income....... 4,349 1,293 1,790
Reconciling items:
Other income........... 10 66 17
Interest expense....... (736) (821) (521)
========== ========== ==========
Pre-tax income......... $ 3,623 $ 538 $ 1,286
========== ========== ==========
Report of Independent Accountants on
Financial Statement Schedules
To the Board of Directors and Stockholders of Green Mountain Coffee, Inc.
Our Audits of the consolidated financial statements referred to in our report
dated November 12, 1999 appearing in this Form 10-K also included an audit of
the financial statement schedules listed in Item 14(a)(2) of this Form 10-K.
In our opinion, these financial statement schedules present fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
November 12, 1999
Schedule II - Valuation and Qualifying Accounts
for the fiscal years ended
September 25, 1999, September 26, 1998 and September 27, 1997
Additions
Balance at Charged to Charged to Balance
Beginning Costs and Other at End
Description of Period Expenses Accounts Deductions of Period
- --------------------------------------- ------------ ------------ ------------- ------------ -----------
Allowance for doubtful accounts:
Fiscal 1999............................ $ 378,000 $ 241,000 - $ 429,000 $ 190,000
Fiscal 1998............................ $ 116,000 $ 577,000 - $ 315,000 $ 378,000
Fiscal 1997............................ $ 80,000 $ 171,000 - $ 135,000 $ 116,000
Deferred tax asset valuation allowance:
Fiscal 1999............................ $ 2,355,000 - - - $ 2,355,000
Fiscal 1998............................ $ 2,391,000 - - $ 36,000 $ 2,355,000
Fiscal 1997............................ $ 3,503,000 - - $ 1,112,000 $ 2,391,000