1 The fiscal year ended September 30, 2000 was 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.
³ Earnings from continuing operations before the impact of net earnings of Keurig, Incorporated, interest, taxes, depreciation and amortization.

There were no cash dividends paid during the past five fiscal years.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Certain statements contained herein are not based on historical fact and are "forward-looking statements" within the meaning of the applicable securities laws and regulations. In addition, the Company's representatives may from time to time make oral forward-looking statements. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statements that do not directly relate to any historical or current fact. Words such as "anticipates," "believes," "expects," "will," "feels," "estimates," "intends," "plans," "projects," and similar expressions, may identify such forward-looking statements. Owing to the uncertainties inherent in forward-looking statements, actual results could differ materially from those set forth in forward-looking statements. Factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, fluctuations in availability and cost of high-quality green coffee, competition, organizational changes, the impact of a weaker economy, business conditions in the coffee industry and food industry in general, the impact of the loss of one or more major customers, delays in the timing of adding new locations with existing customers, Green Mountain's level of success in continuing to attract new customers, variances from budgeted sales mix and growth rate, and weather and special or unusual events, as well as other risks described in this report and other factors described from time to time in the Company's filings with the Securities and Exchange Commission. In addition, the Company has an equity investment in Keurig, Incorporated, a small high-growth private company. Keurig, Incorporated can have significant quarterly operating income fluctuations and its results can differ materially from expectations set in forward-looking statements. Further, there is a high degree of uncertainty around investment spending for the launch of the Keurig Single-Cup Brewer for the home and results could materially vary depending on Keurig, Incorporated's success in entering the home brewer market. 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., is a leader in the specialty coffee industry. The Company roasts high-quality arabica coffees and offers over 90 coffee selections, including single-origins, estates, certified organics, Fair Trade, proprietary blends, and flavored coffees that it sells under the Green Mountain Coffee Roasters® and Newman's Own® Organics brands. Green Mountain sells its coffees to retailers including supermarkets, convenience stores, and specialty food stores; food service enterprises including restaurants, hotels, universities and business offices; and directly to individual consumers.

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

The Company's fiscal year ends on the last Saturday in September. The Company's fiscal year normally consists of 13 four-week periods with the first, second and third "quarters" ending 16 weeks, 28 weeks and 40 weeks, respectively, into the fiscal year. Fiscal 2002 and fiscal 2001 represent the 52 week-periods ended September 28, 2002, and September 29, 2001, respectively. Fiscal 2000 represents the 53 week-period ended September 30, 2000, with the fourth fiscal quarter of fiscal 2000 consisting of 13 weeks instead of the usual 12 weeks.

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

In the past, the Company generally has been able to pass increases in green coffee costs to its customers. However, there can be no assurance that the Company will be successful in passing such fluctuations on to customers without losses in sales volume or gross margin in the future. Similarly, rapid sharp decreases in the cost of green coffee could also force the Company to lower sales prices before realizing cost reductions in its green coffee inventory. Because Green Mountain roasts over 30 different types of green coffee beans to produce its more than 100 coffee selections, if one type of green coffee bean were to become unavailable or prohibitively expensive, management believes Green Mountain could substitute another type of coffee of equal or better quality, meeting a similar taste profile. However, frequent substitutions could lead to cost increases and fluctuations in gross margins. Furthermore, a worldwide supply shortage of the high-quality arabica coffees the Company purchases could have an adverse impact on the Company and its profitability.

The Company enters into fixed coffee purchase commitments in an attempt to secure an adequate supply of quality coffees. To further reduce its exposure to rising coffee costs, the Company, 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 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, combined with the added-value of its customer service processes, will enable Green Mountain to successfully compete in this environment, although there can be no assurance that it will be able to do so.

The following table sets forth certain financial data of the Company expressed as a percentage of net sales for the periods denoted below:

Net sales increased by $4,424,000, or 4.6%, from $95,576,000 in fiscal 2001 to $100,000,000 in fiscal 2002. Coffee pounds shipped increased by approximately 1,096,000 pounds, or 8.8%, from 12,408,000 pounds in fiscal 2001 to 13,504,000 pounds in fiscal 2002. The difference between coffee pounds growth and dollar sales growth was due primarily to sales mix (including the successful expansion of the Company's business with ExxonMobil convenience stores, which carry lower sales prices but also lower costs) and increased sales rebates to newly acquired and existing customers. Coffee pounds shipped growth came primarily from the supermarket channel (+603,000 lbs.) and the convenience store channel (+400,000 lbs.). The office coffee service channel, a major growth driver in prior years, grew by only 24,000 lbs. in fiscal 2002, due to the weaker economy and reduced sales to two major office coffee distributors. Though the consumer direct channel is small, it contributed a healthy pounds growth of 108,000 lbs. in fiscal 2002.

Due primarily to recent customer acquisitions and, to a lesser extent, a recently announced small sales price increase, management anticipates higher growth rates in fiscal 2003. For the first quarter of fiscal 2003, year-over-year growth in pounds shipped and dollar sales is expected to be in the range of 9% to 13%. For fiscal year 2003 as a whole, management anticipates growth in coffee pounds shipped and dollar sales in the range of 10% to 15%.

Interest expense decreased $253,000, or 47.5%, from $533,000 in fiscal 2001 to $280,000 in fiscal 2002 due to successive reductions in interest rates throughout the year. The average effective interest rate was 3.5% in fiscal 2002. During fiscal 2002, $135,000 of interest expense was capitalized as part of the Waterbury plant capacity expansion project.

Income tax expense from continuing operations increased $293,000, or 7.6%, from $3,845,000 in fiscal 2001 to $4,138,000 in fiscal 2002. The Company's effective tax rate remained flat in 2002, at 39.9% of income before taxes. The Company recorded reductions totaling $170,000 in the deferred tax asset valuation allowance on its manufacturer's investment tax credit from the State of Vermont during fiscal 2002. These reductions were based upon management's best estimate of future taxable income and that portion which is expected to be allocable to Vermont on which the credit could be applied.

It is expected that the Company's effective tax rate in future periods will approximate 41%. However, there is uncertainty around the amount of the Vermont manufacturer's tax credit that will ultimately be realized (see footnote 5). Use of the credit is dependent on many factors, including how much taxable income the Company generates, how much of that income is allocable to Vermont, and how many shares issued from the exercise of stock options are sold within one year from the date of the exercise.

The Company adopted the equity method of accounting for its investment in Keurig, Incorporated ("Keurig") in the third quarter of fiscal 2002 period as its Common Stock ownership percentage grew from under 10% to 49.93% during that quarter. The Company's percentage ownership of the total common stock equivalent shares of Keurig was 41.9% at September 28, 2002. Keurig is effectively controlled by MD Co. (controlled by MDT Advisors, Inc., an institutional investment company) which owns approximately 23% of Keurig's capital stock, as a result of contractual limitations and restrictions agreed to by the Company.  MD Co. has the ability to elect a majority of Keurig's Board of Directors, cause certain types of amendments to Keurig's Certificate of Incorporation, and approve or reject a sale of Keurig's business.

The equity in the net earnings of Keurig in fiscal 2002 was a loss of $262,000, net of tax. The Company currently expects the negative impact of Keurig earnings to range from $750,000 to $1,100,000 for fiscal 2003. Results from Keurig could be materially different from this estimate. Keurig is a small high-growth private company which can have significant quarterly operating income fluctuations. Further, there will be a high degree of uncertainty around investment and product development spending given Keurig's strategic launch of the Keurig Single-Cup Brewer for the home.

For the reasons outlined above, income from continuing operations increased $188,000, or 3.3%, from $5,782,000 in fiscal 2001 to $5,970,000 in fiscal 2002.

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. In the fourth quarter of fiscal 2001 and fiscal 2000, the Company reduced its estimate by another $199,000 ($118,000 net of tax) and $100,000 ($60,000 net of tax), respectively, due to lower than expected lease termination costs. The Company does not anticipate incurring any material additional costs related to the disposal of the company-owned retail stores.

Net income increased $70,000, or 1.2%, from $5,900,000 in fiscal 2001 to $5,970,000 in fiscal 2002.

Net sales from continuing operations increased by $11,575,000, or 13.8%, from $84,001,000 in fiscal 2000 to $95,576,000 in fiscal 2001. Coffee pounds shipped increased by approximately 1,535,000 pounds, or 14.1%, from 10,873,000 pounds in fiscal 2000 to 12,408,000 pounds in fiscal 2001. It is estimated that without the extra week in the 2000 fiscal year, the year-over-year increases in sales dollars and coffee pounds shipped would have been 16.0% and 16.4%, respectively. The difference between coffee pounds growth and dollar sales growth was due primarily to the successful expansion of the Company's business with ExxonMobil convenience stores, which under a new agreement involves lower sales prices but also lower costs. Coffee pounds shipped growth came primarily from the convenience store channel (+692,000 lbs), office coffee channel (+440,000 lbs), and the supermarket channel (+268,000 lbs).

Green Mountain's gross profit from continuing operations increased by $7,205,000, or 21.7%, from $33,166,000 in fiscal 2000 to $40,371,000 in fiscal 2001. Gross profit as a percentage of net sales increased 2.7 percentage points from 39.5% in fiscal 2000 to 42.2% in fiscal 2001. The gross profit increase was primarily due to lower green coffee costs and was partially offset by increased sales of products with lower gross margins, such as the single-cup Keurig line of coffees.

Selling and operating expenses from continuing operations increased by $2,901,000, or 14.2%, from $20,377,000 in fiscal 2000 to $23,278,000 in fiscal 2001, and remained unchanged at 24.3% of net sales. The dollar increase was primarily a function of supporting the Company's increased revenues. Specifically, the increase in selling and operating was due to increased sales, sales support and marketing personnel expenditures ($1,259,000), as well as an increase in bad debt expense ($469,000).

General and administrative expenses from continuing operations increased by $1,085,000, or 18.4%, from $5,887,000 in fiscal 2000 to $6,972,000 in fiscal 2001. As a percentage of net sales, this change represents a 0.3 percentage point increase from 7.0% in fiscal 2000 to 7.3% in fiscal 2001. The increase is primarily due to higher compensation and benefits expenses, travel, recruiting and relocation costs.

For the reasons outlined above, operating income increased by $3,354,000, or 49.6%, from $6,767,000 in fiscal 2000 to $10,121,000 in fiscal 2001. As a percentage of sales, operating income increased 2.6 percentage points from 8.0% in fiscal 2000 to 10.6% in fiscal 2001.

Interest expense from continuing operations decreased $50,000, or 8.6%, from $583,000 in fiscal 2000 to $533,000 in fiscal 2001 due to successive reductions in interest rates throughout the year.

Income tax expense from continuing operations increased $1,766,000, or 84.9%, from $2,079,000 in fiscal 2000 to $3,845,000 in fiscal 2001. The increase in the Company's effective tax rate, from 33% for fiscal 2000 to 40% for fiscal 2001, is due to a reduction during the fourth quarter of fiscal 2000 of the deferred tax asset valuation allowance previously recorded on the manufacturer's investment tax credit from the State of Vermont. The reduction was based upon management's best estimate of future taxable income and that portion which is expected to be allocable to Vermont on which the credit could be applied.

For the reasons outlined above, income from continuing operations increased $1,629,000, or 39.2%, from $4,153,000 in fiscal 2000 to $5,782,000 in fiscal 2001.

After the income from discontinued operations referenced above, net income increased $1,687,000, or 40.0%, from $4,213,000 in fiscal 2000 to $5,900,000 in fiscal 2001.

Working capital decreased $2,640,000 to $5,905,000 at September 28, 2002, from $8,545,000 at September 29, 2001. This decrease is primarily due to an increase in short-term debt, and was offset by decreases in accrued expenses. Although sales grew 4.6% in fiscal 2002, accounts receivable and inventory levels remained unchanged year-over-year.

Net cash provided by operating activities increased by $139,000, or 1.2%, from $11,738,000 in fiscal 2001 to $11,877,000 in fiscal 2002. Cash flows from operations were used to fund capital expenditures in fiscal 2002.

In fiscal 2002, the Company purchased 628,450 shares of Preferred Stock and 1,642,854 shares of Common Stock of Keurig, Incorporated ("Keurig") from third parties for approximately $14,602,000. In order to finance the Keurig investment, the Company extended its existing $15,000,000 line of credit with Fleet National Bank (Fleet) by one year to March 31, 2004 and entered into a $5,000,000 term loan agreement with Fleet during its second quarter of fiscal 2002.

As of August 30, 2002, the Company and its parent, Green Mountain Coffee, Inc., entered into a new syndicated credit facility with Fleet as agent, and Fleet and Banknorth N.A. as participating lenders. The new credit facility includes a $15 million five-year term loan that was used to repay the Company's term loan and to pay down most of the Company's existing credit line. The new credit facility also includes an equipment line of credit of up to $5 million and a revolving line of credit of up to $12.5 million, which is subject to a borrowing base formula, and matures on March 31, 2005. The credit facility is secured by all of the Company's assets, including a pledge of the capital stock of Keurig, Incorporated owned by the Company.

The interest paid on the credit facility varies with prime, LIBOR and Banker's Acceptance rates, plus a margin based on a performance price structure. The Company also has entered into a $5 million amortizing interest swap agreement effective January 1, 2003, in order to fix the interest rate on a portion of the term loan. The interest rate on this swap agreement is 3.495% plus a margin based on performance. The $15 million term loan is to be paid back in quarterly installments of $750,000, beginning on September 30, 2002, and ending on June 30, 2007. At September 28, 2002, the outstanding balance on the Fleet line of credit was $3,130,000 and, based upon the revolving line of credit's borrowing base formula, the remaining amount available was $10,741,000 (including the $5,000,000 specific equipment line). The Fleet credit facility is subject to certain quarterly covenants, and the Company was in compliance with these covenants at September 28, 2002.

In fiscal 2002, Green Mountain had capital expenditures of $11,042,000, comprised of $7,580,000 for production and distribution equipment, $1,532,000 for equipment on loan to wholesale customers, $517,000 in leasehold improvements, $1,045,000 for computer equipment and software, and $368,000 for furniture and fixtures.

The production equipment expenditure included the purchase of five K-Cup packaging lines and related maintenance parts from Keurig, Incorporated, for $2,613,000. Since the beginning of the fourth quarter of fiscal 2002, the Company pays a reduced royalty rate to Keurig on the sale of each Green Mountain Coffee K-Cup as a result of this equipment purchase.

The fiscal 2002 production equipment expenditures also included installation costs amounting to $1,460,000 for two roasters purchased at auction in fiscal 2001. Once the installation of these two new roasters is completed, the Company's annual roasting capacity in Waterbury, Vermont, is expected to increase from approximately 15 million pounds to 40 to 50 million pounds of roasted coffee. The installation of the first roaster and related equipment was completed in September 2002. The second roaster is expected to be ready for use in the third quarter of fiscal 2003. The related equipment consists primarily of a green coffee inventory storage system and a new green coffee transport system.

On June 5, 2001, the Company acquired the assets related to the coffee business of Frontier Natural Products Co-op of Norway, Iowa, in a cash transaction totaling approximately $2,474,000, including transaction costs estimated at $34,000. The allocation of the purchase price of $2,440,000 was as follows: $601,000 of inventory, $271,000 of fixed assets, $125,000 of intangible assets and $1,443,000 of goodwill. Cash used to fund this acquisition was obtained from the Company's then existing line of credit with Fleet.

In fiscal 2001, besides the acquisition of Frontier's assets, Green Mountain had capital expenditures of $6,666,000, including $2,938,000 for production and distribution equipment (including the purchase at auction and transportation costs of the two roasters referenced above amounting to approximately $1,257,000), $1,875,000 for equipment on loan to wholesale customers, $725,000 in leasehold improvements and $709,000 for computer equipment and software.

The Company currently plans to make capital expenditures in fiscal 2003 in the range of $6,000,000 to $7,000,000. Approximately $3.5 million will be invested in its Waterbury, Vermont, roasting facility to complete different projects including the installation of the second of two roasters purchased in fiscal 2001 and the related new roasted bean storage bin system, as well as the addition of three new packagers. However, management continuously reviews capital expenditure needs, and actual amounts expended may differ from these estimates. Depreciation expense is expected to be in the range of $4.8 million to $4.9 million in fiscal 2003.

The Company announced in October 2002 that its Board had authorized the repurchase of up to $3 Million of its outstanding common stock over the following three months. Assuming no stock repurchases, the Company intends to pay down its debt by $4.0 to $5.0 million in fiscal 2003. Earnings before the impact of Keurig, interest, taxes, depreciation and amortization should increase to $17.0 to $18.0 million in fiscal 2003, up from $14.7 million in fiscal 2002.

Management believes that cash flow from operating activities, existing cash, the currently available credit facility and additional borrowings, if available, will provide sufficient liquidity to pay all liabilities in the normal course of business, fund capital expenditures and service debt requirements in the next twelve months.

However, a decrease in operating cash flows, due to a decline in earnings or other factors, may impact the Company's ability to self-fund capital expenditures and other investments, or service debt requirements, and may require the Company to seek additional borrowings or undertake an equity offering as sources of funding.

A summary of the Company's cash requirements related to its outstanding long-term debt, future minimum lease payments and green coffee purchase commitments is as follows:

Historically, the Company has experienced 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.

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

In December 2001, the Securities and Exchange Commission ("SEC") requested that all registrants list their critical accounting policies in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of their Form 10-K. The SEC defined a critical accounting policy as one which is important to the portrayal of the company's financial condition and results of operations and requires management's subjective or complex judgments. In accordance with this request, the Company has described its critical accounting policies below.

Provision for Doubtful Accounts

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

Deferred Tax Valuation Allowance

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

Impairment of Long-Lived Assets

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

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.

At September 28, 2002, the Company had $18,130,000 of debt subject to variable interest rates (Fleet Bank's prime rate, Banker's Acceptance or LIBOR rates) plus a margin based on a performance price structure. A 100 basis point increase in interest rates would increase annual interest expense by approximately $181,000.

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 28, 2002, the Company had approximately $15.0 million in purchase commitments, of which approximately 88% had a fixed price. Approximately 59% of the Company's estimated coffee requirements through September 27, 2003, the end of its 2003 fiscal year, had been contracted for as of September 28, 2002. Some of the fixed coffee purchase commitments entered into in fiscal 2002 extend through calendar 2005, as the Company made a decision to enter into long-term contracts with specific coffee sources to ensure a consistent supply of high quality coffee.

In addition, the Company regularly 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. These hedges generally qualify as cash flow hedges. Gains and losses are deferred in other comprehensive income until the hedged inventory sale is recognized in earnings, at which point they are added to cost of sales. At September 28, 2002, the Company held outstanding coffee futures contracts with a fair value of ($14,000). The corresponding deferred losses of ($14,000), or ($8,000) net of tax, were classified as other comprehensive income. At September 28, 2002, the average settlement price used to calculate the fair value of the contracts outstanding was $0.59. If the settlement price drops on average by 10%, the additional loss incurred will be approximately $64,000 gross of tax. However, this loss, if realized, would be offset by lower costs of coffee purchased during fiscal 2003.

See Index to Consolidated Financial Statements on Page F-1.

In accordance with rule 3-09, the Company will file audited financial statements of its equity method investee Keurig, Incorporated for the calendar year ending December 31, 2002, which meets the significant subsidiary tests, within 90 days of the equity investee's year end.

None.

Except for the information regarding the Company's executive officers, the information called for by this Item is incorporated by reference in this report to the Company's definitive Proxy Statement for the Company's Annual Meeting of Stockholders to be held on March 20, 2003, which will be filed not later than 120 days after the close of the Company's fiscal year ended September 28, 2002 (the "Definitive Proxy Statement").

For information concerning the executive officers of the Company, see "Executive Officers of the Registrant."

The information required by this item will be incorporated by reference to the information contained in the Definitive Proxy Statement.

The information required by this item will be incorporated by reference to the information contained in the Definitive Proxy Statement.

The information required by this item will be incorporated by reference to the information contained in the Definitive Proxy Statement.

Within 90 days of the filing of this report, the Company's Chief Executive Officer and Chief Financial Officer have conducted an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-14 and 15d-14. Based on that evaluation, Green Mountain's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective to make known to them in a timely fashion material information related to the Company required to be filed in this report. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation.

While management believes the present design of disclosure controls and procedures is effective to make known to the Company's senior management in a timely fashion all material information concerning its business, management will continue to improve the design and effectiveness of disclosure controls and procedures at Green Mountain to the extent necessary in the future to provide senior management with timely access to such material information, and to correct any deficiencies that may be discovered in the future.

PART IV

On September 6, 2002, the Company filed a Current Report on Form 8-K which reported that on August 30, 2002, its wholly-owned subsidiaries, Green Mountain Coffee Roasters, Inc. ("GMCR") and Green Mountain Coffee Roasters Franchising Corporation, Inc. ("GMCRF") entered into a new syndicated credit facility with Fleet National Bank ("Fleet"), as agent, and Fleet and Banknorth N.A. ("Banknorth" and together with Fleet, the "Lenders"), as participating lenders. The new credit facility includes a $15,000,000 five-year term loan which was immediately used to repay the Company's existing term loan of $4,375,000 and to pay down most of the Company's then current credit line. The new credit facility also includes an equipment line of credit of up to $5,000,0000 and a revolving line of credit of up to $12,500,000 which is subject to a borrowing base formula, and matures on March 31, 2005. The credit facility is secured by all of the Company's assets, including a pledge of the capital stock of Keurig, Incorporated owned by the Company.

On October 25, 2002, the Company filed a Current Report on Form 8-K which reported that based on preliminary financial data, the Company expected its fourth quarter and annual sales and earnings results to be lower than it previously anticipated. In addition, the Company reported that it intends to repurchase on the open market up to $3,000,000 of its outstanding shares of common stock over approximately the next three months subject to market conditions and other factors.

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.

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.

CERTIFICATIONS

I, Robert P. Stiller, Chief Executive Officer of Green Mountain Coffee, Inc., certify that:

1. I have reviewed this annual report on Form 10-K of Green Mountain Coffee, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

(a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

(b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and

(c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: December 23, 2002                                                                                 /s/ Robert P. Stiller
                                                                                                                        Robert P. Stiller
                                                                                                                        Chief Executive Officer

I, William G. Hogan, Chief Financial Officer of Green Mountain Coffee, Inc., certify that:

1. I have reviewed this annual report on Form 10-K of Green Mountain Coffee, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

(a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

(b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and

(c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: December 23, 2002                                                                           /s/ William G. Hogan

                                                                                                                William G. Hogan
                                                                                                                Chief Financial Officer

To the Board of Directors and Stockholders of Green Mountain Coffee, Inc.:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, changes in equity, comprehensive income and cash flows present fairly, in all material respects, the financial position of Green Mountain Coffee, Inc. at September 28, 2002 and September 29, 2001 and the results of its operations and its cash flows for each of the three years in the period ended September 28, 2002 in conformity with accounting principles generally accepted in the United States of America. 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 of America, 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 our opinion.

/s/ PricewaterhouseCoopers LLP

Boston, Massachusetts
November 15, 2002

Green Mountain Coffee, Inc.
Consolidated Balance Sheet
(Dollars in thousands)

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 consumer direct operation serving customers nationwide.

The Company's fiscal year ends on the last Saturday in September. Fiscal 2002, fiscal 2001 and fiscal 2000 represent the years ended September 28, 2002, September 29, 2001, and September 30, 2000, respectively. Fiscal 2000 consists of 53 weeks, whereas fiscal 2002 and 2001 consist of 52 weeks each.

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. 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 requires 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 is either 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 is immediately recognized in earnings. The Company adopted SFAS 133 as of October 1, 2000. The adoption of SFAS 133 did not have a material impact on the Company's financial position and results from operations, and did not significantly alter the Company's hedging strategies or cause a significant change in normal business practices.

Other long-term assets

Other long-term assets consist of deposits, debt issuance costs and a minority investment in ChefExpress.net, Inc (see Note 19). 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 28, 2002 and September 29, 2001 were $103,000 and $14,000, respectively. The minority investment in ChefExpress.net, which was written down to zero in fiscal 2002, represented less than a 5% interest and was accounted for under the cost method.

Advertising costs

The Company expenses the costs of advertising the first time the advertising takes place, except for direct mail campaigns targeted directly at consumers, which are expensed over the period during which the catalog is expected to generate sales. At September 28, 2002 and September 29, 2001, prepaid advertising costs of $49,000 and $88,000, respectively, were recorded in other current assets in the accompanying consolidated balance sheet. Advertising expense totaled $4,454,000, $4,392,000, and $4,183,000 for the years ended September 28, 2002, September 29, 2001, and September 30, 2000, 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.

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. Depreciation costs are included in selling and operating expenses.

Revenue recognition

Revenue from wholesale and consumer direct sales is recognized upon product delivery.

In December 1999, the Securities and Exchange Commission ("SEC"), released Staff Accounting Bulletin No. 101 ("SAB 101"), which provides guidance on the recognition, presentation, and disclosure of revenue in financial statements filed with the SEC. In June 2000, the SEC released SAB 101B,which postponed the effective date of SAB 101 to the fourth quarter of fiscal years beginning after December 15, 1999. Green Mountain Coffee was required to be in conformity with the provisions of SAB 101 in the fourth quarter of fiscal 2001. The adoption of SAB 101 did not have a material impact on the Company's financial position or results of operations

Cost of sales

The Company records external shipping and handling expenses in cost of sales. The Company also recorded in cost of sales royalties in the amount of $4,878,000, $5,256,000 and $3,884,000 for the years ended September 28, 2002, September 29, 2001 and September 30, 2000, respectively, to a related party.

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.

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 28, 2002.

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

Since March 2001, under a new distribution agreement with ExxonMobil Corporation ("ExxonMobil"), all corporate-owned locations as well as a number of franchisee-owned locations must purchase their coffee from McLane Company ("McLane"), with McLane becoming the direct customer of Green Mountain Coffee. Net sales to McLane and corporate-owned ExxonMobil convenience stores made up less than 10% of the Company's revenues in the years ended September 28, 2002, September 29, 2001 and September 30, 2000.

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.

Recent pronouncements

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

The Company has evaluated the impact of adopting these pronouncements on its consolidated financial statements and has reclassified a portion of free goods provided to its customers from selling and operating expenses to cost of sales. The increase in cost of sales (and corresponding decrease in selling and operating expenses) was $617,000, $491,000 and $370,000, for fiscal 2002, 2001 and 2000, respectively. The impact on revenues from the reclassification of consideration paid to resellers (primarily in the form of payments for certain cooperative advertisement programs) was immaterial.

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

The Company early adopted the provisions of SFAS No. 142 and ceased amortizing goodwill during its first quarter of fiscal 2002. The results for 2002 include the effect of adopting SFAS No. 142 "Goodwill and Other Intangible Assets" which resulted in a $ 59,000 reduction in expenses (net of tax). The reduction in amortization expense this year represents the amount of amortization of goodwill that arose from the June 5, 2001 acquisition of the Frontier^® Organic Coffee assets.

If the adoption of SFAS No. 142 had occurred as of the beginning of fiscal 2001, the impact on the consolidated results of the Company would have been to reduce goodwill amortization by $18,000 (net of tax) resulting in an adjusted net income of $5,918,000.

The Company carried $125,000 of intangibles from the Frontier acquisition (primarily a trademark licensing agreement) and related accumulated amortization of $106,000 on its September 28, 2002 balance sheet. These intangibles will be fully amortized by the end of the first quarter of fiscal 2003.

The carrying value of the Company's goodwill was approximately $1,446,000 at September 28, 2002. There have been no changes in this carrying amount since September 29, 2001. The Company completed its impairment testing of goodwill upon adoption of this Standard and at September 28, 2002, concluding that its goodwill is not impaired.

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

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

Reclassifications

Certain reclassifications of prior year balances have been made to conform to the current presentation.

3. Inventories
   Inventories consist of the following:

	September 28, 2002		September 29, 2001
Raw materials and supplies	$          3,332,000		$          2,914,000
Finished goods	2,544,000		2,962,000
	$          5,876,000		$          5,876,000
	========	========

 

Inventory values above are presented net of $ 234,000 and $149,000 of obsolescence reserves at September 28, 2002 and September 29, 2001, respectively.

At September 28, 2002, the Company had approximately $15,047,000 in purchase commitments, of which approximately 88% had a fixed price. These commitments extend through 2005. The value of the variable portion of these commitments was calculated using an average "C" price of coffee of $0.57. The Company believes, based on relationships established with its suppliers, that the risk of non-delivery on such purchase commitments is remote.

4. Fixed Assets

Fixed assets consist of the following:

	Useful Life in Years	September 28,     2002		September 29,     2001
Production equipment	3 - 15	$ 11,040,000		$ 6,510,000
Computer equipment and software	1 - 5	6,160,000		6,135,000
Furniture and fixtures	2 - 10	2,335,000		1,742,000
Equipment on loan to wholesale customers	3 - 5	8,241,000		7,312,000
Vehicles	4 - 5	829,000		845,000
Leasehold improvements	2 - 10 or remaining life of the lease, whichever is less	3,540,000		2,838,000
Construction-in-progress		3,814,000		2,456,000
Total fixed assets		35,959,000		27,838,000
Accumulated depreciation		(15,125,000)		(13,441,000)
		$ 20,834,000		$ 14,397,000
		=======		=======

Total depreciation expense from continuing operations relating to all fixed assets was $4,000,000, $3,619,000, and $2,968,000 for fiscal 2002, 2001, and 2000, respectively.

Assets classified as Construction-in-progress were not depreciated in fiscal 2002, as they were not ready for production use. All assets classified as construction-in-progress on September 28, 2002 are expected to be in production use before the end of fiscal 2003.

During fiscal 2002, $135,000 of interest expense was capitalized as part of the Waterbury plant capacity expansion project. No interest was capitalized in fiscal 2001 and fiscal 2000.

During fiscal 2000, following a thorough review of its production fixed assets, the Company recorded a $135,000 loss on disposal and abandonment of production equipment and software. The original aggregate cost of this equipment was $908,000 and its related accumulated depreciation was $573,000.

 

5. Income Taxes

The provision for income taxes from continuing operations for the years ended September 28, 2002, September 29, 2001, and September 30, 2000 consists of the following:

	September 28,     2002	September 29,     2001	September 30,     2000
Current tax expense:
Federal	$ 2,792,000	$ 2,874,000	$ 2,029,000
State	552,000	906,000	348,000
Benefit of net operating loss    carryforwards	-	-	(272,000)
Total current	3,344,000	3,780,000	2,105,000
Deferred tax expense:
Federal	611,000	(18,000)	217,000
State	332,000	83,000	291,000
Total deferred	943,000	65,000	508,000
Tax asset valuation allowance	(149,000)	-	(534,000)
Total tax expense	$ 4,138,000	$ 3,845,000	$ 2,079,000
	======	======	======

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.

Deferred tax assets (liabilities) consist of the following:

	September 28,     2002	September 29,     2001
Deferred tax assets:
Vermont state manufacturers investment tax credit	$ 2,070,000	$ 2,353,000
Section 263A adjustment	7,000	8,000
Deferred hedging losses	8,000	150,000
Other reserves and temporary differences	285,000	370,000
Gross deferred tax assets	2,370,000	2,881,000
Deferred tax asset valuation allowance	(1,672,000)	(1,821,000)
Deferred tax liability:    Depreciation	(799,000)	(249,000)
Net deferred tax assets (liabilities)	$   (101,000)	$   811,000
	======	======

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 2004. During fiscal 2002, 2001 and 2000, the Company utilized $283,000, $87,000 and $185,000 of this credit, respectively. 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.

During fiscal 2002 and 2000, the deferred tax asset valuation allowance was reduced by $170,000 and $534,000, respectively, based primarily upon estimates of future taxable income and that portion which is expected to be allocable to Vermont on which the credit could be applied. 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.

During fiscal 2002, the deferred tax asset valuation allowance was increased by $21,000 due to the Company incurring a capital loss which it does not expect to utilize.

A reconciliation for continuing operations between the amount of reported income tax expense and the amount computed using the U.S. Federal Statutory rate of 34% is as follows:

 

	September 28,        2002	September 29,        2001	September 30,        2000
Tax at U.S. Federal Statutory rate	$ 3,526,000	$ 3,273,000	$ 2,120,000
Increase (decrease) in rates resulting from:
Other nondeductible items	90,000	(86,000)	42,000
State taxes, net of federal benefit	671,000	658,000	447,000
Deferred tax asset valuation         allowance and other	(149,000)	-	(530,000)
Tax at effective rates	$ 4,138,000	$ 3,845,000	$ 2,079,000
	======	======	======

6. Investment in Keurig, Incorporated

During the first two quarters of fiscal 2002, the Company purchased 586,350 shares of Preferred Stock and 317,969 shares of Common Stock of Keurig, Incorporated ("Keurig") for approximately $5,921,000 from third-party investors in Keurig. During the third fiscal quarter of fiscal 2002, the Company purchased an additional 1,324,885 shares of Common Stock and 3,925 shares of Preferred Stock of Keurig from third party investors for approximately $8,681,000. Prior to January 8, 2002, the Company had an investment in the Preferred Stock of Keurig of $151,000. The shares of Common Stock owned by the Company as of July 6, 2002 and September 28, 2002 represent approximately 49.93% of Keurig's outstanding Common Stock and the total acquired shares (Preferred Stock and Common Stock) represent approximately 41.9% of Keurig's common equivalent shares. As a result, in its third fiscal quarter of 2002, the Company adopted the equity method of accounting to report its investment in Keurig. Due to the timing of the Company's investment in common stock of Keurig in the first two quarters of fiscal 2002, the retroactive application of equity method accounting to the results of the Company would not be material.

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

The allocation of the equity investment in Keurig includes the assignment of $2,554,000 to identifiable technology intangible assets that are being amortized on a straight-line basis over their estimated useful lives, which range from 7 to 10 years. In addition, the Company allocated $1,152,000 to certain fixed assets of Keurig to approximate the estimated fair value of such assets. As the transaction was effected through the purchase of currently outstanding stock of Keurig, the historical tax basis of Keurig continues and the fair value ascribed to identifiable intangible assets and fixed assets are recorded net of a deferred tax liability.

In addition to its investment in Keurig, Incorporated, the Company conducts arms length business transactions with Keurig. Under a license agreement with Keurig, dated June 30, 2002 as amended, the Company pays Keurig a royalty for sales of Keurig licensed products. At September 28, 2002 and September 29, 2001, the Company had royalties payable to Keurig of $595,000 and $758,000, respectively.

Keurig is on a calendar fiscal schedule. The Company has included in its income for the year ended September 28, 2002 the Company's ownership interest of the second and third calendar fiscal quarters of Keurig's earnings (April 1, 2002 through September 30, 2002), without giving effect for the differences between the duration of the Company's third and fourth fiscal quarters (24 weeks) and Keurig's second and third calendar fiscal quarters (26 weeks). During the last two fiscal quarters of 2002, the equity impact of Keurig's earnings was $(262,000), net of tax. The equity in earnings in the investment of Keurig represents the Company's portion of Keurig's earnings for the period relative to the Company's ownership of Common Stock in Keurig for that period including certain adjustments. These adjustments include the amortization of assigned intangible assets, the accretion of Preferred Stock dividends, as well as depreciation differences between the Company's equity in the fair value of certain fixed assets as compared to Keurig's historical cost basis. An additional adjustment was the elimination of Keurig's $720,000 gain on the sale of packaging lines purchased by the Company for a price of $2,613,000 in the fourth quarter of fiscal 2002.

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

Income Statement Information for the Twelve Months ended September 30, 2002 Dollars in thousands
Revenues	$21,560
Cost of goods sold	$  9,809
Selling, general, and administrative expenses	$10,489
Operating income	$  1,262
Net income	$     623

Financial Position Information as of September 30, 2002 Dollars in thousands
Current assets	$12,500
Property, plant and equipment, net	$  5,018
Other assets	$     528
Total assets	$18,046
Current liabilities	$  2,285
Noncurrent liabilities	$  1,237
Redeemable preferred	$17,683
Stockholder's equity	$(3,159)

 

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

Dollars in thousands	Fiscal Year 2002			Fiscal Year 2001	Fiscal Year 2000
Net sales	$100,000			$  95,576	$  84,001
Operating income	$  10,680			$  10,121	$   6,767
Income from continuing operations before equity in net earnings of Keurig, Incorporated	$    6,073			$    5,244	$    5,564
Equity in net earnings of Keurig, Incorporated	$     (159)			$     (661)	$     (805)
Net income	$    5,914			$    4,701	$    2,742
Basic income per share	$      0.89			$      0.73	$      0.43
Diluted income per share	$      0.81			$      0.65	$      0.39




7. Acquisition of Frontier^® Organic Coffee
Organic Coffee

On June 5, 2001, Green Mountain Coffee Roasters purchased the assets related to the coffee business of Frontier Natural Products Co-op of Norway, Iowa for a cash payment of approximately $2,440,000. The allocation of the purchase price was as follows: $601,000 of inventory, $271,000 of fixed assets, $125,000 of intangible assets and $1,443,000 of goodwill. In addition, the Company incurred transactions costs in the amount of $34,000 that are classified as goodwill. This acquisition was recorded as a purchase business combination in accordance with Accounting Principles Board Opinion No. 16 (APB 16), "Business Combinations." Goodwill and other intangible assets recorded associated with this acquisition are being amortized over their estimated useful lives ranging from 1 to 15 years. The Company believes that Frontier's social responsibility positioning, high-quality certified organic coffees combined with its presence in the natural food distribution channel will enhance the Company's strategic position.

In July 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141 (FAS 141), "Business Combinations" and No. 142 (FAS 142), "Goodwill and Other Intangible Assets." FAS 141 supercedes APB 16. FAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, and establishes specific criteria for the recognition of intangible assets separately from goodwill. Provisions of FAS 141 will be effective for the Company's business acquisitions that are consummated after July 1, 2001. FAS 142 supercedes Accounting Principles Board Opinion No. 17, "Intangible Assets," and addresses the accounting for goodwill and intangible assets subsequent to their acquisition. Under FAS 142, goodwill and indefinite lived intangible assets will no longer be amortized but will be tested for impairment at least annually at the reporting unit level. In addition, the amortization period of intangible assets with finite lives will no longer be limited to forty years. The Company adopted the provisions of FAS 142 in the first quarter of fiscal 2002, which resulted in the elimination of goodwill amortization in fiscal 2002.

8. Credit Facility

The Company maintains a credit facility (the "Credit Facility") with Fleet National Bank ("Fleet"). In the second quarter of fiscal 2002, in order to finance the Keurig investment, the Company extended its existing $15,000,000 line of credit with Fleet by one year to March 31, 2004 and entered into a $5,000,000 term loan.

On August 30, 2002, the Company entered into a new syndicated credit facility with Fleet as agent, and Fleet and Banknorth N.A. as participating lenders. The new credit facility includes a $15 million five-year term loan that was used to repay the Company's term loan and to pay down most of the Company's existing credit line. The new credit facility also includes an equipment line of credit of up to $5 million and a revolving line of credit of up to $12.5 million, which is subject to a borrowing base formula, and matures on March 31, 2005. The credit facility is secured by all of the Company's assets, including a pledge of the capital stock of Keurig, Incorporated owned by the Company.

The interest paid on the credit facility varies with prime, LIBOR and Banker's Acceptance rates, plus a margin based on a performance price structure. Interest on the Bankers Acceptance loans is paid in advance and amortized over the duration of the loans. Interest on LIBOR loans and the variable portion of the Credit Facility accrues daily and is paid monthly, in arrears.

Interest rates on September 28, 2002 for each portion of the line of credit were as follows: 3.31% (Banker's Acceptance rate plus 150 basis points) on $2,000,000; and 4.75% (prime rate) on $1,130,000. The interest rate on September 28, 2002 on the term loan was 3.57% (LIBOR rate plus 175 basis points).

Interest rates on September 29, 2001 for each portion of the line of credit were as follows: 3.50% plus 110 basis points on $2,000,000; 3.41% plus 110 basis points on $1,500,000; 3.54% plus 110 basis points on $1,500,000; and 2.76% plus 110 basis points on $1,000,000.

The Company also has entered into a $5 million amortizing interest swap agreement effective January 1, 2003, in order to fix the interest rate on a portion of the term loan. The $15 million term loan is to be paid back in quarterly installments of $750,000, beginning on September 30, 2002 and ending on June 30, 2007. At September 28, 2002, the outstanding balance on the Fleet line of credit was $3,130,000 and, based upon the revolving line of credit's borrowing base formula, the amount remaining available was $10,741,000 (including the $5,000,000 specific equipment line). 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 28, 2002.

9. Long-term Debt

	September 28,      2002		September 29,      2001
Fleet line of credit (Note 8)	$ 3,130,000		$ 6,000,000
Fleet and BankNorth Term Debt (Note 8)	15,000,000		-
Central Vermont Economic Development Corporation Debenture	130,000		221,000
Office equipment capital leases	17,000		-
Service vehicle installment loans	125,000		230,000
	18,402,000		6,451,000
Less current portion	3,193,000		195,000
	$ 15,209,000		$ 6,256,000
	=======		=======

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 January 1, 2004 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.


Service Vehicle Installment Loans
The service vehicle installment loans represent several loans to financing institutions for the purchase of service vehicles. At September 28, 2002 and September 29, 2001, the notes bear interest at a rate of varying from 2.9% to 4.9% and require monthly installments of principal and interest totaling approximately $9,300. Maturities vary from January 2003 to May 2004.

Office Equipment Capital Leases
The Company leases fax machines. These leases require monthly installments of principal and interest totaling approximately $800. Maturities vary from March 2004 to September 2004.


Maturities

Maturities of long-term debt for years subsequent to September 28, 2002 are as follows:

Fiscal Year
2003	$  3,193,000
2004	3,079,000
2005	6,130,000
2006	3,000,000
2007	3,000,000
	$ 18,402,000
	======

 

10. Discontinued operations

    During the third fiscal quarter of 1998, the Company announced that it was discontinuing its company-owned retail store operations and estimated its loss on disposal at $1,259,000 (net of a tax benefit of $834,000). The pre-tax loss on disposal of $2,093,000 in 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 included 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. During the fourth quarters of fiscal 2001 and fiscal 2000, the Company further revised its estimated pre-tax loss on disposal and reversed $199,000 ($118,000 net of tax) and $100,000 ($60,000 net of tax) respectively of the original estimate, due to lower lease termination costs. The September 28, 2002 and September 29, 2001 balance sheets do not include any remaining estimated loss on disposal.