FORM 10-Q

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

(Mark One)

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

For the sixteen weeks ended January 17, 2004

OR

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

For the transition period from __________ to ____________

Commission file number 1-12340

GREEN MOUNTAIN COFFEE ROASTERS, INC. (Exact name of registrant as specified in its charter)
Delaware		03-0339228
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
33 Coffee Lane, Waterbury, Vermont 05676
(Address of principal executive offices) (zip code)
(802) 244-5621
(Registrants' telephone number, including area code)

 

---

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

Indicate by check mark whether the registrant has (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES [ Ö ] NO [ ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

YES [ ] NO [ Ö ]

 

As of February 20, 2004, 7,027,337 shares of common stock of the registrant were outstanding.

Part I. Financial Information
Item 1. Financial Statements

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

	January 17,  2004		September 27,      2003
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$     391		$     502
Receivables, less allowances of $780 and $439 at January 17, 2004 and September 27, 2003, respectively	13,365		12,708
Inventories	7,955		7,465
Other current assets	1,204		905
Income taxes receivable	-		276
Deferred income taxes, net	779		756
Total current assets	23,694		22,612
Fixed assets, net	25,448		22,313
Investment in Keurig, Incorporated	13,033		13,364
Goodwill	1,446		1,446
Other long-term assets	246		255
	$ 63,867		$ 59,990
	====		====
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt	$    3,088		$    3,123
Accounts payable	7,771		6,352
Accrued compensation costs	1,952		2,056
Income taxes payable	1,287		-
Accrued expenses	2,338		1,823
Total current liabilities	16,436		13,354
Long-term debt	6,715		8,558
Long-term line of credit	-		350
Deferred income taxes	2,601		2,460
Other long-term liabilities	99		120
Commitments and contingencies
Stockholders' equity:
Common stock, $0.10 par value: Authorized - 20,000,000 shares; Issued - 8,180,371 and 8,156,491 shares at January 17, 2004 and September 27, 2003, respectively	818		816
Additional paid-in capital	21,887		21,669
Retained earnings	23,513		20,914
Accumulated other comprehensive (loss)	(20)		(69)
ESOP unallocated shares, at cost - 31,181 shares	(846)		(846)
Treasury shares, at cost - 1,157,554 shares	(7,336)		(7,336)
Total stockholders' equity	38,016		35,148
	$ 63,867		$ 59,990
	====		====

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

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

	Sixteen weeks ended
	January 17, 2004		January 18, 2003
Net sales	$        43,285		$        36,567
Cost of sales	26,008		20,843
Gross profit	17,277		15,724
Selling and operating expenses	9,430		8,922
General and administrative expenses	2,710		2,565
Operating income	5,137		4,237
Other income	21		57
Interest expense	(107)		(195)
Income before income taxes	5,051		4,099
Income tax expense	(2,121)		(1,701)
Income before equity in net earnings of Keurig,    Incorporated	2,930		2,398
Equity in net earnings of Keurig, Incorporated	(331)		(84)
Net income	$           2,599		$           2,314
	=====		=====
Basic income per share:
Weighted average shares outstanding	6,978,601		6,798,204
Net income	$            0.37		$            0.34
Diluted income per share:
Weighted average shares outstanding	7,410,917		7,189,839
Net income	$            0.35		$            0.32

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

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

	Sixteen weeks ended
		January 17, 2004		January 18, 2003
Net income		$       2,599		$    2,314
Other comprehensive income, net of tax:
Deferred gains (losses) on derivatives designated as cash flow hedges		40		(13)
Losses/ (gains) on derivatives designated as cash flow hedges included in net income		9		3
Other comprehensive income/ (loss)		49		(10)
Comprehensive income		$       2,648		$     2,304
		====		====

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

 

GREEN MOUNTAIN COFFEE ROASTERS, INC.
Unaudited Consolidated Statement Of Changes In Stockholders' Equity
For the Period Ended January 17, 2004
(Dollars in thousands)

	Common stock		Additional paid-in capital	Retained earnings	Accumulated other compre-hensive (loss)	Treasury stock		ESOP unallocated shares		Stockholders' equity
	Shares	Amount				Shares	Amount	Shares	Amount
Balance at September 27, 2003	8,156,491	$ 816	$ 21,669	$ 20,914	$ (69)	(1,157,554)	$(7,336)	(31,181)	$(846)	$ 35,148
Options exercised	23,880	2	102	-	-	-	-	-	-	104
Tax benefit from exercise of options	-	-	90	-	-	-	-	-	-	90
Deferred compensation and stock compensation expense	-	-	26	-	-	-	-	-	-	26
Other comprehensive income,     net of tax	-	-	-	-	49	-	-	-	-	49
Net income	-	-	-	2,599	-	-	-	-	-	2,599
Balance at January 17, 2004	8,180,371	$ 818	$ 21,887	$ 23,513	$ (20)	(1,157,554)	$(7,336)	(31,181)	$(846)	$ 38,016
	====	===	====	====	===	====	====	===	====	====

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

 

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

	Sixteen weeks ended
	January 17, 2004		January 18, 2003
Cash flows from operating activities:
Net income	$      2,599		$      2,314
Adjustments to reconcile net income to net cash    provided by operating activities:
Depreciation and amortization	1,368		1,385
(Gain) on disposal of fixed assets	(12)		(56)
Provision for doubtful accounts	409		311
Change in fair value of interest rate swap	(21)		122
Change in fair value of futures derivatives	(54)		(78)
Change in accumulated other comprehensive income	49		-
Tax benefit from exercise of non-qualified options	90		57
Equity in loss of Keurig, Incorporated	331		84
Deferred income taxes	118		143
Deferred compensation and stock compensation	26		10
Changes in assets and liabilities:
Receivables	(1,066)		(1,628)
Inventories	(490)		(301)
Income tax payable (receivable)	1,563		1,222
Other current assets	(248)		(524)
Other long-term assets, net	9		(94)
Accounts payable	1,419		4
Accrued compensation costs	(104)		806
Accrued expenses	518		157
Net cash provided by operating activities	6,504		3,934
Cash flows from investing activities:
Capital expenditures for fixed assets	(4,584)		(2,162)
Proceeds from disposals of fixed assets	93		432
Net cash used for investing activities	(4,491)		(1,730)
Cash flows from financing activities:
Proceeds from issuance of common stock	104		268
Purchase of treasury shares	-		(286)
Repayment of long-term debt	(1,878)		(1,568)
Net change in revolving line of credit	(350)		(940)
Net cash used for financing activities	(2,124)		(2,526)
Net (decrease) in cash and cash equivalents	(111)		(322)
Cash and cash equivalents at beginning of period	502		800
Cash and cash equivalents at end of period	$        391		$        478
	====		====

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

Green Mountain Coffee Roasters, Inc.
Notes to Consolidated Financial Statements

1. Basis of Presentation

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

In the opinion of management, all adjustments considered necessary for a fair presentation of the interim financial data have been included. Results from operations for the sixteen week period ended January 17, 2004 are not necessarily indicative of the results that may be expected for the fiscal year ending September 25, 2004.

For further information, refer to the consolidated financial statements and the footnotes included in the annual report on Form 10-K for Green Mountain Coffee Roasters, Inc. for the fiscal year ended September 27, 2003.

2. Inventories

Inventories consisted of the following at:

	January 17,      2004		September 27, 2003
Raw materials and supplies	$     4,088,000		$     4,337,000
Finished goods	3,867,000		3,128,000
	$    7,955,000		$     7,465,000
	=====		=====

 

Inventory values above are presented net of $172,000 and $148,000 of obsolescence reserves at January 17, 2004 and September 27, 2003, respectively.

At January 17, 2004, the Company had approximately $13,927,000 in green coffee purchase commitments, of which approximately 87% had a fixed price. These commitments extend through 2009. The value of the variable portion of these commitments was calculated using an average "C" price of coffee of $0.69 per pound and a price of $11 per pound for Kona Mountain Estate^TM coffee. The Company believes, based on relationships established with its suppliers, that the risk of non-delivery on such purchase commitments is remote.

 3. Earnings Per Share

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

	Sixteen weeks ended
	January 17, 2004		January 18, 2003
Numerator - basic and diluted earnings    per share : Net income	$ 2,599		$ 2,314
Denominator:	====		====
Basic earnings per share - weighted    average shares outstanding	6,978,601		6,798,204
Effect of dilutive securities - stock    options	432,316		391,635
Diluted earnings per share - weighted    average shares outstanding	7,410,917		7,189,839
	====		====
Basic earnings per share	$ 0.37		$ 0.34
Diluted earnings per share	$ 0.35		$ 0.32

 For the sixteen weeks ended January 17, 2004 and January 18, 2003, options to purchase 61,000 and 259,000 shares of common stock, respectively, were outstanding but were not included in the computation of diluted income per share because the options' exercise price was greater than the market price of the common shares subject to the options.

4. Derivative Instruments and Hedging Activities

The Company regularly enters into coffee futures contracts to hedge price-to-be-established purchase commitments of green coffee and therefore designates these contracts as cash flow hedges. At January 17, 2004, the Company held outstanding futures contracts with a fair market value of $51,000. These futures contracts are hedging coffee purchase commitments that take place in the next six months and the related gains and losses will be reflected in cost of sales in the next three fiscal quarters when the related finished goods inventory is sold. At September 27, 2003, the Company held futures contracts with a total fair market value of $(3,000).

At January 17, 2004, deferred gains on futures contracts designated as cash flow hedges amounted to $66,000 ($38,000 net of taxes). These deferred gains are classified in accumulated other comprehensive income. In the sixteen weeks ended January 17, 2004, total losses on futures contracts (gross of tax) included in cost of sales amounted to $15,000. In the sixteen week period ended January 18, 2003, total losses on futures (gross of tax) included in cost of sales amounted to $6,000.

The Company entered into an interest rate swap agreement with Fleet Bank ("Fleet") effective January 1, 2003, in order to fix the interest rate on a portion of its term loan. The swap had an original notional amount of $5,000,000 and a maturity date of July 1, 2007. The notional amount at January 17, 2004 was $3,889,000. The effect of the swap is to limit the interest rate exposure to a fixed rate of 3.495% 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 calculated is greater based on the 30-day LIBOR rate, Fleet 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. For sixteen weeks ended January 17, 2004, the Company paid $34,000 in additional interest expense pursuant to the swap agreement. 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 market 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 January 17, 2004, the Company estimates it would have paid $99,000 (gross of tax) to terminate the agreement. Green Mountain designates the swap agreement as a cash flow hedge and the fair value of the swap is classified in accumulated other comprehensive income.

5. 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 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. As of January 17, 2004 and September 27, 2003, the shares of Common Stock owned by the Company represent approximately 49.7% of Keurig's outstanding Common Stock and the total acquired shares (Preferred Stock and Common Stock) represent approximately 41.8% of Keurig's common equivalent shares. The Company adopted the equity method of accounting to report its investment in Keurig, Incorporated in its third fiscal quarter of 2002.

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. The Company recorded in cost of sales royalties in the amount of $2,119,000 and $1,355,000 for the fiscal quarters ended January 17, 2004 and January 18, 2003, respectively. At January 17, 2004 and September 27, 2003, the Company had royalties payable to Keurig of  $471,000 and $462,000, respectively. Keurig also purchases coffee products from the Company. For the sixteen weeks ended January 17, 2004 and January 18, 2003, the Company sold $184,000 and $28,000 worth of coffee products to Keurig, Incorporated, respectively. In addition, the Company purchases brewer equipment from Keurig, Incorporated. For the sixteen weeks ended January 17, 2004 and January 18, 2003, the Company purchased $1,093,000 and $123,000 of brewers and associated equipment from Keurig, Incorporated, respectively. The Company has properly eliminated the effect of these related party transactions for which the earnings process has not been completed.

Keurig is on a calendar year-end. The Company has included in its income for the sixteen week period ended January 17, 2004 the Company's equity interest in the fourth calendar fiscal quarter of Keurig's earnings (October 1, 2003 through December 31, 2003), without giving effect to the differences between the duration of the Company's second fiscal quarter (16 weeks) and Keurig's fourth calendar quarter (13 weeks). During the sixteen weeks ended January 17, 2004, the net equity impact of Keurig's earnings was ($331,000). The equity in earnings in the investment of Keurig represents the Company's portion of Keurig's earnings for the period relative to the Company's ownership of Common Stock in Keurig for that period including certain adjustments. These adjustments include the amortization of assigned intangible assets, the accretion of Preferred Stock dividends and redemption rights, as well as depreciation differences between the Company's equity in the fair value of certain fixed assets as compared to Keurig's historical cost basis.

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


Income Statement Information  for the Three Months ended December 31, 2003 Dollars in thousands
Revenues	$  8,994
Cost of goods sold	$  5,126
Selling, general, and administrative expenses	$  4,702
Operating income	$   (834)
Net income	$   (998)

Financial Position Information as of December 31, 2003 Dollars in thousands
Current assets	$   9,290
Property, plant and equipment, net	$   5,226
Other assets	$      349
Total assets	$ 14,865
Current liabilities	$   4,332
Noncurrent liabilities	$      68
Redeemable preferred stock	$ 17,838
Shareholders' equity (deficit)	$  (7,373)

 

 

6. Recent Pronouncements

 In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46").  This interpretation of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," addresses consolidation by business enterprises of variable interest entities, which possess certain characteristics.  FIN 46 requires that if a business enterprise has a controlling financial interest in a variable interest entity, the assets, liabilities, and results of the activities of the variable interest entity must be included in the consolidated financial statements with those of the business enterprise. In December 2003, the issuance of FASB staff position 46-6 "Effective Date of FASB Interpretation No. 46", deferred the effective date of FIN 46 until no later than fiscal periods ending after March 31, 2004 for interests held by public entities in variable interest or potential variable interest entities created before February 1, 2003.  The Company is currently evaluating the effects of the recent pronouncement, including the Company's investment in Keurig, Incorporated. The Company's maximum exposure related to Keurig is the current carrying value of the investment.  

7. Compensation Plans

The Company accounts 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 a grant to outside consultants and one grant to an officer at an exercise price below fair market value, 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"), as amended by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure". 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 123, the Company's net income and net income per share for the sixteen weeks ended January 17, 2004 would have decreased to the pro forma amounts indicated below:

 

The fair value of each stock option is estimated on the date of the grant using the Black-Scholes option-pricing model with the following assumptions: an expected life averaging 4 years and 5 years; an average volatility of 70% and 61%; no dividend yield; and a risk-free interest rate averaging 2.85% and 2.97%, for the grants issued during the sixteen weeks ended January 17, 2004 and January 18, 2003, respectively. The weighted-average fair values of options granted during the sixteen weeks ended January 17, 2004 and January 18, 2003 are $11.65 and $8.06, respectively.

The Company maintains an Employee Stock Ownership Plan (the "ESOP"). The ESOP is qualified under sections 401(a) and 4975(e)(7) of the Internal Revenue Code. In each of the sixteen week periods ended January 17, 2004 and January 18, 2003, the Company recorded compensation costs of $62,000, to accrue for anticipated stock distributions under the ESOP. On January 17, 2004, the ESOP held 31,181 unearned shares at an average cost of $27.10.

The Company also maintains a Deferred Compensation Plan, which is not subject to the qualification requirements of Section 401(a) of the Internal Revenue Code and which allows participants to defer compensation until a future date. Only non-employee directors and certain highly compensated employees of the Company selected by the Company's Board of Directors are eligible to participate in the Plan. In each of the sixteen week periods ended January 17, 2004 and January 18, 2003, $8,000 of compensation expense has been recorded under this Plan.

8. Income Taxes

The Company benefits from a manufacturer's investment tax credit from the State of Vermont expiring in at the end of fiscal 2004. At January 17, 2004, the deferred tax asset of $143,000 is reported net of a valuation allowance amounting to $1,426,000. During the sixteen weeks ended January 17, 2004, the Company reduced the valuation allowance on the deferred tax asset arising from its Vermont tax credit by $32,000, based primarily upon estimates of future taxable income; the percentage of income that is allocable to the State of Vermont and; the number of disqualifying dispositions of stock options.

9. Related party transactions

The Company uses travel services provided by Heritage Flight, a charter air services company owned by Mr. Stiller, the CEO of Green Mountain Coffee Roasters. During the sixteen weeks ended January 17, 2004 and January 18, 2003, Heritage Flight billed the Company the amount of $86,000 and $67,000, respectively, for various travel services.

10. Subsequent event

On January 22, 2004 the Vermont Economic Progress Council (VEPC) approved an application from Green Mountain Coffee Roasters for payroll and capital investment tax credits. The total incentives authorized are $2,090,500 over a five year period beginning in fiscal year 2004. These incentives are expected to reduce the Company's Vermont income tax rate. The capital investment tax credits are $1,843,728 of the total authorization and are contingent upon reaching annual minimum capital investments of $4,900,000, $3,000,000, $10,900,000, $5,800,000 and $4,700,000 in 2004, 2005, 2006, 2007 and 2008, respectively. All credits are also subject to recapture and disallowance provisions due to curtailment of trade or business, as defined in the agreement.

 

Item 2. 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," "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 private company. Keurig, Incorporated can have significant quarterly operating income fluctuations and its results can differ materially from expectations set forth in forward-looking statements. Keurig is currently operating at a loss. Further, there is a high degree of uncertainty with respect to Keurig's 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 and its ability to secure adequate financing to support this launch. 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 Roasters, Inc. ("Green Mountain") sells coffee to retailers including supermarkets, convenience stores, specialty food stores; food service enterprises including restaurants, hotels, universities and business offices; and directly to individual consumers.

Cost of sales consists of the cost of raw materials including coffee beans, flavorings and packaging materials, a portion of 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 for Green Mountain's wholesale or consumer direct channels, including media and advertising expenses, a portion of 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 rental expense and the salaries and related expenses of personnel not elsewhere categorized.

Green Mountain's fiscal year ends on the last Saturday in September. Our fiscal year normally consists of four quarterly periods with the first, second and third "quarters" ending 16 weeks, 28 weeks and 40 weeks, respectively, after the commencement of the fiscal year.

Results of Operations

	Sixteen weeks ended
	January 17, 2004		January 18, 2003
Net sales	100.0 %		100.0 %
Cost of sales	60.1 %		57.0 %
Gross profit	39.9 %		43.0 %
Selling and operating expenses	21.8 %		24.4 %
General and administrative expenses	6.2 %		7.0 %
Operating income	11.9 %		11.6 %
Other income (expense)	0.0 %		0.1 %
Interest expense	(0.2)%		(0.5)%
Income before taxes	11.7 %		11.2 %
Income tax expense	(4.9)%		(4.7)%
Income before equity in net earnings of Keurig, Incorporated	6.8 %		6.5 %
Equity in net earnings of Keurig, Incorporated	(0.8)%		(0.2)%
Net income	6.0 %		6.3 %
	===		===

 

GREEN MOUNTAIN COFFEE ROASTERS, INC.
Total Company Coffee Pounds Shipped by Sales Channel - Unaudited

Channel	Q1 16 wks. ended 1/17/04	Q1 16 wks. ended 1/18/03	Q1 Y/Y lb. Increase	Q1 % Y/Y lb. Increase
Supermarkets	1,823	1,479	344	23.3%
Convenience Stores	1,564	1,519	45	3.0%
Office Coffee Service Distributors	1,201	1,019	182	17.9%
Food Service	787	699	88	12.6%
Consumer Direct	181	170	11	6.5%
Totals	5,556	4,886	670	13.7%

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

 

Coffee Pounds Shipped by Geographic Region - Unaudited

Region	Q1 16 wks. ended 1/17/04	Q1 16 wks. ended 1/18/03	Q1 Y/Y lb. Increase	Q1 % Y/Y lb. Increase
New England	2,420	2,320	100	4.3%
Mid-Atlantic	1,693	1,437	256	17.8%
South	866	666	200	30.0%
Midwest	239	193	46	23.8%
West	283	236	47	19.9%
International	55	34	21	61.8%
Totals	5,556	4,886	670	13.7%

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

 

Sixteen weeks ended January 17, 2004 versus sixteen weeks ended January 18, 2003

Net sales increased by $6,718,000, or 18.4%, to $43,285,000 for the sixteen weeks ended January 17, 2004 (the "2004 period"), as compared to the sixteen weeks ended January 18, 2003 (the "2003 period"). Coffee pounds shipped increased by approximately 670,000 pounds, or 13.7%, to approximately 5,556,000 pounds in the 2004 period. The difference between the dollar sales and pounds shipped growth rates is due to significantly higher sales of Keurig K-Cups^® which carry a higher sales price per pound, and sales of Celestial Seasonings^® Teas in K-Cups, which are not included in the coffee pounds shipped data. The pounds increase was strongest in the supermarket channel, which increased 344,000 pounds, primarily due to strong shipments to two customers, Costco and Publix Supermarkets, a new customer of the Company. Sales to the Office Coffee Service ("OCS") channel were also very strong, with a quarter-over-quarter growth of 182,000 lbs driven by growth in K-Cup sales. Key contributors to growth in K-Cup sales were the continued rollout of K-Cups to ARAMARK, sales of Celestial Seasonings teas in K-Cups, and strong sales to existing OCS distributors in conjunction with the roll-out of the new B-100 Keurig brewer for the home and small offices.

Gross profit increased by $1,553,000, or 9.9%, to $17,277,000 for the 2004 period. As a percentage of net sales, gross profit decreased 3.1 percentage points to 39.9% for the 2004 period. This decline is primarily due to higher coffee prices and higher sales of certain products with lower gross margins (Keurig K-Cups, and certain Fair Trade and organic products sold to supermarkets)

Selling, general and administrative expenses increased by $653,000, or 5.7%, to $12,140,000 for the 2004 period. As a percentage of sales, selling, general and administrative expenses decreased 3.4 percentage points to 28.0% of sales. This improvement was the result of leveraging selling and organizational resources on a higher sales base and lower severance costs related to management changes in the 2003 period, partially offset by an increase in the allowance for doubtful accounts and an increase in employment benefits costs.

As a result of the foregoing, operating income increased by $900,000, or 21.2%, to $5,137,000 for the 2004 period.

Interest expense decreased by $88,000 to $107,000 for the 2004 period. This decrease is due to lower debt balances, as the Company used its strong operating cash flows to pay down its debt over the course of the last year. In the 2004 period and the 2003 period, the Company capitalized $22,000 and $37,000, respectively, of interest expense associated with investments in production equipment currently classified as construction in progress.

Income tax expense increased $420,000, or 24.7%, to $2,121,000 for the 2004 period. The effective tax rate for the 2004 period was 42.0%, up slightly from 41.5% in the 2003 period.

The Company adopted the equity method of accounting for its investment in Keurig, Incorporated ("Keurig") in the third fiscal quarter of 2002 as the Company's Common Stock ownership percentage grew from under 10% to 49.93% in the course of that period. Green Mountain's percentage ownership of the total common stock equivalent shares of Keurig was 41.8% at January 17, 2004 and September 27, 2003. Keurig is effectively controlled by MD Co. (controlled by MDT Advisors, a division of Harris Bretall Sullivan and Smith, an institutional investment company), which owns approximately 23% of Keurig's capital stock, as a result of contractual limitations and restrictions agreed to by Green Mountain.

The equity in the net earnings of Keurig in the 2004 period was a loss of $331,000 or $0.04 per diluted share. This Keurig loss is primarily due to the ramp-up of sales and marketing expenditures related to the Keurig^® Single-Cup Brewer for the home. In the 2003 period, the equity in Keurig's net earnings was a loss of $84,000.

Net income increased by $285,000, or 12.3%, to $2,599,000 in the 2004 period. Earnings per diluted share were $0.35 in the 2004 period as compared to $0.32 in the 2003 period.

 Liquidity and Capital Resources

Working capital decreased $2,000,000 to $7,258,000 at January 17, 2004 from $9,258,000 at September 27, 2003. This decrease is primarily due to increased accounts payable and income taxes payable, partially offset by an increase in accounts receivable. The increase in accounts payable was due to the timing of certain large green coffee purchases and capital expenditures. The increase in accounts receivable was due to an increase in day sales outstanding, primarily related to certain supermarket accounts.

Net cash provided by operating activities increased by $2,570,000, or 65.3%, to $6,504,000 in the 2004 period. Cash flows from operations were used to fund capital expenditures and repay long-term debt in the 2004 period.

During the 2004 period, Green Mountain had capital expenditures of $4,584,000, including $2,743,000 for equipment, $1,101,000 for leasehold improvements and fixtures, $489,000 for loaner equipment, $244,000 for computer equipment and software, and $7,000 for vehicles. During the 2003 period, Green Mountain had capital expenditures of $2,162,000, including $936,000 for production equipment, $592,000 for computer equipment and software, $565,000 for loaner equipment, and $69,000 for leasehold improvements and fixtures.

At January 17, 2004, the balance of fixed assets classified as construction in progress and therefore not being depreciated in the current period amounted to $5,958,000. This balance primarily includes expenditures related to the installation of the bowl roasters and related conveyance and storage equipment, as well as initial expenditures related to the construction of a new distribution center. The bowl roaster and related equipment is expected to be ready for production use by the end of the third quarter of fiscal 2004 and the distribution center is expected to be in service by the end of the fourth quarter of fiscal 2004.

In the first fiscal quarter of 2003, Green Mountain repurchased 19,281 of its own common shares at a cost of $286,000.

Green Mountain has a syndicated credit facility with Fleet Bank N.A. ("Fleet") and Banknorth N.A. This facility includes an equipment line of credit of up to $5,000,000 and a revolving line of credit of up to $12,500,000 which matures in March 2005. On January 17, 2004, no amounts were outstanding under this credit facility and the entire $17,500,000 was available (including the $5,000,000 specific equipment line). The credit facility is subject to quarterly covenants and Green Mountain was in compliance with these covenants at January 17, 2004. Also part of this credit facility is a $15,000,000 term loan that is being paid back in minimum quarterly installments of $750,000 and expires in 2007. The outstanding balance on the term loan at January 17, 2004 was $9,690,000.

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 entered into an amortizing interest rate swap agreement effective January 1, 2003, in order to fix the interest rate on a portion of the term loan. The effect of the swap is to limit the interest rate exposure to a fixed rate of 3.495% versus the 30-day LIBOR rate. The notional amount of the swap at January 17, 2004 was $3,889,000.

Management believes that cash flow from operating activities, existing cash and the currently available credit facility will provide sufficient liquidity to pay all liabilities in the normal course of business, fund capital expenditures and service debt requirements through fiscal 2004. It is likely that the Company will seek additional borrowings to specifically finance the construction of the new warehousing and distribution facility, although no assurances can be made that the Company will be able to secure such financing.

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:

Fiscal Year	Long-Term Debt	Lease Commitments	Green Coffee Purchase Commitments	Total
2004, remaining	$1,558,000	$1,012,000	$12,027,000	$14,597,000
2005	3,035,000	1,390,000	1,460,000	5,885,000
2006	3,020,000	1,074,000	110,000	4,204,000
2007	2,190,000	765,000	110,000	3,065,000
2008	-	616,000	110,000	726,000
Thereafter	-	2,667,000	110,000	2,777,000
Total	$ 9,803,000	$ 7,524,000	$ 13,927,000	$31,254,000

 

Outlook

The Company expects net sales growth in the range of 13% to 17% and coffee pounds growth of 9% to 11% in the second quarter of fiscal 2004. The Company anticipates its operating margin will be in the range of 8.8% to 9.1%. The Company believes its tax rate for fiscal 2004 will be in the range of 41.0% to 42.0%. Income prior to equity in the net earnings of Keurig is expected to increase in the range of 3% to 8% over the second quarter in fiscal 2003. The Company expects that the recognition of its share of Keurig's loss for the second quarter of 2004 will reduce diluted earnings per share by $0.02 to $0.04. Based on all of these factors, the Company anticipates its fully diluted earnings per share for the second quarter of fiscal 2004 will be in the range of $0.17 to $0.20 per share.

For fiscal year 2004 as a whole, net sales are anticipated to increase in the range of 13% to 18% on coffee pounds growth of 9% to 12%. The Company expects that its operating margin will be in the range of 10.9% to 11.2%. Income prior to equity in the net earnings of Keurig is expected to increase in the range of 12% to 17% over fiscal 2003. The Company expects that the recognition of its share of Keurig's loss for fiscal 2004 will reduce diluted earnings per share by $0.07 to $0.12. The Company anticipates its fully diluted earnings per share for fiscal 2004 to be in the range of $1.02 to $1.09 per share.

The Company forecasts its capital expenditures for fiscal 2004 to be in the range of $13 to $15 million and depreciation expenses to be in the range of $5.5 and $6.0 million. In November 2003, Green Mountain Coffee announced plans to build a new distribution and warehousing facility attached to the Company's current plant. This new warehousing and distribution building will incorporate material-handling automation to improve the Company's distribution efficiencies, which the Company anticipates will result in lower overall distribution costs relative to sales over the long-term, as well as allow for increased packaging capacity in the current plant. The capital project is underway and is expected to cost approximately $8.4 million.

 Critical Accounting Policies

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

In December 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 our critical accounting policies below.

Provision for Doubtful Accounts:
Periodically, management 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 Green Mountain estimates specific additional allowances based on indications that a specific customer may be experiencing financial difficulties. Actual bad debt results could differ materially from these 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 a decrease in the Company's income tax expense. Conversely, an increase in the valuation allowance can lead Green Mountain to report its income tax at a higher rate. Since future results may differ materially from those estimates, Green Mountain'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 Green Mountain makes related to the expected useful lives of long-lived assets and its ability 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 Green Mountain to realize a material impairment charge.

Hedge Accounting:
The Company uses coffee futures to hedge price increases in price-to-be-fixed coffee purchase commitments and anticipated coffee purchases. These derivative instruments qualify for hedge accounting under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." Hedge accounting is permitted if the hedging relationship is expected to be highly effective. Effectiveness is determined by how closely the changes in the fair value of the derivative instrument offset the changes in the fair value of the hedged item. If the derivative is determined to qualify for hedge accounting, the effective portion of the change in the fair value of the derivative instrument is recorded in other comprehensive income and recognized in earnings when the related hedged item is sold. The ineffective portion of the change in the fair value of the derivative instrument is recorded directly to earnings. If these derivative instruments do not qualify for hedge accounting, the Company would have to record the changes in the fair value of the derivative instruments directly to earnings. See "Item 3. Quantitative and Qualitative Disclosures about Market Risk" and Note 4 in the "Notes to Condensed Consolidated Financial Statements," included elsewhere in this report.

Risks related to the Company's business

The Company's business, its future performance and forward-looking statements are affected by general industry and market conditions and growth rates, general U.S. and non-U.S. economic and political conditions (including the global economy), competition, interest rate and currency exchange rate fluctuations and other events. The following items are representative of the risks, uncertainties and other conditions that may impact the Company's business, future performance and the forward-looking statements that it makes in this report or that it may make in the future.

Because the Company's business is focused entirely on the sale of specialty coffee, if the demand for specialty coffee decreased, the Company's business could suffer.

Sales of specialty coffee constitute the majority of the Company's net revenues.

Demand for specialty coffee is affected by many factors, including:

- Consumer tastes and preferences;
- International, national, regional and local economic conditions; and
- Demographic trends

Because the Company is highly dependent on consumer demand for specialty coffee, a shift in consumer preferences away from specialty coffee would harm the Company's business more than if the Company had more diversified product offerings. If customer demand for specialty coffee decreases, the Company's sales would decrease accordingly.

Because the Company relies heavily on common carriers to deliver its coffee any disruption in their services or increase in shipping costs could adversely affect the Company's business.

The Company relies on a number of common carriers to deliver coffee to the Company's customers and distribution centers. The Company has no control over these common carriers and the services provided by them may be interrupted as a result of labor shortages, contract disputes or other factors. If the Company experiences an interruption in these services, it may be unable to ship its coffee in a timely manner. A delay in shipping could:

- Have an adverse impact on the quality of the coffee shipped, and thereby adversely affect the Company's brand and reputation;
- Result in the disposal of an amount of coffee that could not be shipped in a timely manner; and
- Require the Company to contract with alternative, and possibly more expensive, common carriers.

Any significant increase in shipping costs could lower the Company's profit margins or force the Company to raise prices, which could cause the Company's revenue and profits to suffer.

The Company depends on the expertise of key personnel. If these individuals leave or change their role within the Company without effective replacements, the Company's operations may suffer.

The success of the Company's business is dependent to a large degree on its management and its coffee roasters and purchasers. If members of the Company's management leave without effective replacements, the Company's ability to implement its business strategy could be impaired. If the Company lost the services of its coffee roasters and purchasers, its ability to source and purchase a sufficient supply of specialty coffee beans and roast coffee beans consistent with the Company's quality standards could suffer. In either case, the Company's business and operations could be adversely affected.

The Company may not be able to hire or retain additional management and other personnel and the Company's recruiting and compensation costs may increase as a result of turnover, both of which may increase the Company's costs and reduce its profits and may adversely impact its ability to implement its business strategy.

The success of the Company's business depends upon its ability to attract and retain highly motivated, well-qualified management and other personnel. The Company faces significant competition in the recruitment of qualified employees. The Company's ability to execute its business strategy may suffer if:

- It's unable to recruit or retain a sufficient number of qualified employees;
- The costs of employee compensation or benefits increase substantially; or
- The costs of outsourcing certain tasks to third party providers increase substantially.

Recently the Company has experienced significant turnover with respect to certain key management positions in the Company, including the position of Chief Financial Officer. This turnover increases expenses incurred as a result of severance arrangements, up-front hiring expenses and recruiting expenses. In addition, the lack of continuity among members of the Company's management team may result in frequent changes to its business strategy or may delay or hinder the effective implementation of the Company's business strategy.

Because the Company has only one roasting facility, a significant interruption in the operation of this facility could potentially disrupt its operations.

The Company has only one coffee roasting facility. A significant interruption in the operation of this facility, whether as a result of a natural disaster or other causes, could significantly impair its ability to operate its business on a day-to-day basis. In addition, because the Company's coffee roasting facility is located in Vermont, its ability to ship coffee and receive shipments or raw materials may be adversely affected during winter months as a result of severe winter conditions and storms.

Increases in the cost of high quality arabica coffee beans could reduce the Company's gross margin and profit.

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. Management 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 it 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 Green Mountain to lower sales prices before realizing cost reductions in its green coffee inventory. Because Green Mountain roasts over 40 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 Green Mountain 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, Green Mountain enters into futures contracts to hedge price-to-be-established coffee purchase commitments. The specific risks associated with these hedging activities are described in Item 3 "Quantitative and Qualitative Disclosures about Market Risk."

Decreased availability of high quality arabica coffee beans could result in a decrease in revenue and jeopardize the Company's ability to maintain or expand its business.

Arabica coffee beans of the quality the Company purchases are not readily available on the commodity markets. The Company depends on its relationships with coffee brokers, exporters and growers for the supply of its primary raw material, high quality arabica coffee beans.

Green Mountain purchases an increasing amount of green coffee from specifically identified farms, estates, cooperatives and cooperative groups. In fiscal 2003, close to 42% of green coffee purchases were "farm-identified," up from 34% in fiscal 2002. The timing of these purchases is dictated by when the coffee becomes available (after the annual crop), which does not always coincide with the period the Company needs this green coffee to fulfill customer demand. This can lead to higher and more variable inventory levels.

If the Company's relationships with coffee brokers, exporters and growers deteriorate, the Company may be unable to procure a sufficient quantity of high quality coffee beans. In such case, the Company may not be able to fulfill the demand of its existing customers, supply new customers or expand other channels of distribution. A raw material shortage could result in decreased revenue or could impair the Company's ability to maintain or expand the Company's business.

Political instability in coffee growing regions could result in a decrease in the availability of high quality arabica coffee beans needed for the continued operation and growth of the Company's business and an increase in its operating costs.

The Company roasts Arabica coffee beans from many different regions to produce over 100 types and blends of coffee. The political situation in many of those regions, including Africa, Indonesia and Central and South America, can be unstable, and such instability could affect the Company's ability to purchase coffee from those regions. If Arabica coffee beans from a region become unavailable or prohibitively expensive, the Company may be forced to discontinue particular coffee types and blends or substitute coffee beans from other regions in its blends. Frequent substitutions and changes in the Company's coffee product lines may lead to cost increases, customer alienation and fluctuations in its gross margins. Furthermore, a worldwide supply shortage of the high quality Arabica coffee beans the Company purchases could have a material adverse effect on its business.

The Company's roasting methods are not proprietary, so competitors may be able to duplicate them, which could harm the Company's competitive position.

The Company considers its roasting methods essential to the flavor and richness of its coffee and, therefore, essential to its brand. Because the Company's roasting methods cannot be patented, the Company would be unable to prevent competitors from copying its roasting methods if such methods became known. If the Company's competitors copy its roasting methods, the value of the Company's brand may be diminished, and the Company may lose customers to its competitors. In addition, competitors may be able to develop roasting methods that are more advanced than the Company's roasting methods, which may also harm its competitive position.

Competition in the specialty coffee market is intense and could affect the Company's profitability.

The specialty coffee market is highly fragmented. The Company's primary competitors in specialty coffee sales include Gevalia Kaffe (Kraft Foods), Dunkin' Donuts (a subsidiary of Allied Domecq), Peet's Coffee & Tea, Millstone (Procter & Gamble), New England Coffee Company and Starbucks. There are numerous smaller, regional brands that also compete in this category. In addition, the Company competes indirectly against all other coffee brands on the market. A number of nationwide coffee marketers, such as Kraft Foods, Procter & Gamble, Sara Lee and Nestle, are distributing premium coffee brands in supermarkets. These premium coffee brands may serve as substitutes for the Company's coffee. If the Company does not succeed in effectively differentiating itself from its competitors or its competitors adopt the Company's strategies, then its competitive position will be weakened.

Competition in the specialty coffee market is becoming increasingly intense as relatively low barriers to entry encourage new competitors to enter the specialty coffee market. Many of these new market entrants may have greater financial, marketing and operating resources than the Company. In addition, many of the Company's existing competitors have substantially greater financial, marketing and operating resources.

Because a substantial portion of the Company's revenue is related to sales to certain major customers, the loss of one or more of these customers could materially harm the Company's business.

The Company receives a significant portion of its revenues in each fiscal period from a relatively limited number of customers, and that trend is likely to continue. Coffee pounds shipped to the Company's ten largest customers accounted for approximately 41% of its total coffee pounds shipped in fiscal 2003. The loss of one or more of these major customers or a decrease in orders from one of these customers could materially affect its revenue, business and reputation.

In addition, a significant percentage of the Company's total revenues in fiscal 2003 comes from sales of K-Cups^®. If the Company was no longer permitted to manufacture K-Cups or if competitive, business or economic factors had a material negative impact on sales of the Keurig^® single-cup brewing system, the Company's business would be adversely affected.

The Company's substantial equity investment in Keurig, Incorporated, a small, privately-held company, could have a material ongoing negative effect on the Company's net income.

The Company has a substantial equity investment in Keurig, Incorporated, a small private company. Keurig can have significant quarterly operating income/loss fluctuations and its results can differ materially from expectations set forth in forward-looking statements. Keurig is currently operating at a loss and its negative earnings have a direct effect on the Company's net income because the Company's investment in Keurig is accounted for under the equity method of accounting. Further, there is a high degree of uncertainty with respect to Keurig's spending for the launch of the Keurig^® Single-Cup Brewer for the home and results could materially vary depending on Keurig's success in entering the home brewer market and its ability to secure adequate financing to support this launch. Due to contractual agreements between the Company and the other stockholders of Keurig, Incorporated, the Company has very little control over the management, operation or strategic direction of Keurig, Incorporated.

The Company is constructing a new large manufacturing and distribution facility. This project could have an adverse effect on the Company as a result of increased capital needs, possible construction delays and cost overruns, implementation and coordination problems and other unforeseen difficulties associated with a large capital project.

The Company has begun to construct a new 52,000 square foot facility designated solely for warehousing and distribution. The cost of this project is currently estimated at $8.4 million. The Company anticipates financing a large portion of the project through long-term debt. The increased debt could have a negative impact on the Company and could limit the Company's ability to have access to additional capital sources in the future to pursue other opportunities or make additional capital expenditures. In addition, the increased expense associated with servicing this debt could have an adverse effect on the Company's current cash flow.

As a large-scale construction project, there are inherent risks such as changes in materials costs or availability, inclement weather or other unforeseen events or conditions, that may substantially delay the project's completion or increase its cost. In either case this could have a material adverse effect on the Company and negatively impact its ability to meet its growth expectations.

After the anticipated completion of this facility in September 2004, the Company will have to shift portions of its warehousing and distribution operation to the new facility. Problems implementing and coordinating the new facility into the Company's current operations could cause the Company to fail to realize the expected returns on this project and focus management's attention away from implementing other aspects of the Company's business strategy.

The Company relies on a single third party supplier for its integrated software management system that is integral to the success and operation of the Company.

  The Company relies on PeopleSoft and its employees and subcontractors in connection with its software management system that is essential to the Company's operations, including without limitation accounting, inventory, and sales. If PeopleSoft was to experience financial, operational, or quality assurance difficulties, or if there is any other disruption in the Company's relationship with PeopleSoft, the Company may decide to purchase and/or implement a new software management system, which could have a material adverse effect on the Company.

Because a substantial portion of the Company's business is based in New England, a worsening of the regional New England economy, a decrease in consumer spending or a change in the competitive conditions in this market may substantially decrease the Company's revenue and may adversely impact the Company's ability to implement its business strategy.

Coffee pounds shipped to customers in New England accounted for 49% of the Company's total pounds shipped in 2003. The Company expects that its New England operations will continue to generate a substantial portion of its revenue. In addition, the Company's market share and visibility in New England provides the Company with a means for increasing brand awareness, building customer loyalty and strengthening its premium specialty coffee brand. As a result, an economic downturn or other decrease in consumer spending in New England may not only lead to a substantial decrease in revenue, but may also adversely impact the Company's ability to market its brand, build customer loyalty, or otherwise implement its business strategy and further diversify the geographical concentration of its operations.

Factors Affecting Quarterly Performance

Historically, the Company has experienced variations in sales and earnings from quarter to quarter due to the holiday season and a variety of other factors, including, but not limited to, general economic trends, the cost of green coffee, competition, marketing programs, weather and special or unusual events. Because of the seasonality of the Company's business, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The table below provides information about Green Mountain's debt obligations that are sensitive to changes in interest rates. The table presents principal cash flows and related weighted average interest rates by expected maturity dates.

Expected maturity date	2004, remaining	2005	2006	2007	Thereafter	Total
Long-term debt:
Variable rate (in thousands)	$898	$1,796	$1,796	$1,311	-	$5,801
Average interest rate	2.62%	2.62%	2.62%	2.62%	-	2.62%
Fixed rate (in thousands)	$660	$1,239	$1,224	$879	-	$4,002
Average interest rate	4.91%	4.86%	4.99%	5.00%	-	4.94%

 There have been no material changes in information relating to commodity price risks since the Company's disclosure included in Item 7A of Form 10-K as filed with the Securities and Exchange Commission on December 19, 2003.

At January 17, 2004, the Company had $5,801,000 of debt subject to variable interest rates (the lower of Fleet Bank's prime rate, LIBOR rates for maturities up to one year or Bankers' Acceptance rates). A hypothetical 100 basis point increase in the Bankers' Acceptance, LIBOR and prime rates would result in additional interest expense of $58,000 on an annualized basis.

The Company entered into an interest swap agreement with Fleet Bank ("Fleet") effective January 1, 2003, in order to fix the interest rate on a portion of its term loan. At January 17, 2004, the swap had a notional amount of $3,889,000 and matures on July 1, 2007. The effect of the swap is to convert underlying variable-rate debt based on LIBOR to fixed rate debt with an interest rate of 3.495% plus a margin based on a performance price structure. For the sixteen week periods ended January 17, 2004, the Company paid $34,000 in additional interest expense pursuant to the swap agreement.

The fair market 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 January 17, 2004, the Company estimates it would have paid $99,000 (gross of tax) to terminate the agreement. Green Mountain designates the swap agreement as a cash flow hedge and the fair value of swap is classified in accumulated other comprehensive income.

 

Item 4. Controls and Procedures

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

 

Part II. Other Information

 

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits:

3.1 Certificate of Incorporation, as Amended¹

3.2 Bylaws²

31.1 Principal Executive Officer Certification Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to the Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 Principal Financial Officer Certification Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to the Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 Principal Executive Officer Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2 Principal Financial Officer Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

(b) The Company filed a Form 8-K on November 21, 2003. The Company furnished its fourth quarter 2003 earnings press release as an exhibit under Item 7(c) "Financial Statements, Pro Forma Financial Information and Exhibits" and furnished the information contained in the earnings press release pursuant to Item 12 "Results of Operations and Financial Condition" under Item 9 "Regulation FD Disclosure."

The Company also filed a Form 8-K on November 5, 2003. The Company furnished under Item 5 - Other Events - the information contained in the press release dated November 4, 2003 concerning the construction of a new 52,000 square foot warehousing and distribution facility with an anticipated cost of approximately $8,400,000.

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1 Incorporated by reference to Exhibit 3.1 in the Quarterly Report on Form 10-Q for the 12 weeks ended April 13, 2002.

2 Incorporated by reference to Exhibit 3.2 in the Quarterly Report on Form 10-Q for the 12 weeks ended April 13, 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

                                                                              GREEN MOUNTAIN COFFEE ROASTERS, INC.

Date:	3/2/2004		By:       /s/ Robert P. Stiller
			Robert P. Stiller,
			President and Chief Executive Officer
Date:	3/2/2004		By        /s/ Frances G. Rathke
			Frances G. Rathke,
			Chief Financial Officer