FORM 10-Q
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the twelve weeks ended July 4, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from __________ to ____________
Commission file number 1-12340
GREEN MOUNTAIN COFFEE, INC.
(Exact name of registrant as specified in its charter)
Delaware 03-0339228
----------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
33 Coffee Lane, Waterbury,
Vermont 05676 (Address of principal
executive offices) (zip code)
(802) 244-5621
-----------------------------------------------------
(Registrant's 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 [ X ] NO [ ]
As of August 15, 1998, 3,530,818 shares of common stock of the registrant
were outstanding.
<PAGE>
Part I. Financial Information
Item I. Financial Statements
GREEN MOUNTAIN COFFEE, INC.
Consolidated Balance Sheet
(Dollars in thousands)
<TABLE>
July 4, September 27,
1998 1997
--------------- ---------------
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents............................................ $ 359 $ 831
Receivables, less allowances of $173 at July 4, 1998
and $116 at September 27, 1997................................. 5,292 4,119
Inventories.......................................................... 5,923 5,224
Other current assets................................................. 432 376
Deferred income taxes, net........................................... 879 865
-------- --------
Total current assets........................................... 12,885 11,415
Fixed assets,net........................................................ 11,246 11,258
Other long-term assets.................................................. 327 385
Deferred income taxes, net.............................................. 713 486
-------- --------
$ 25,171 $ 23,544
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt.................................... $ 253 $ 943
Current portion of obligation under capital lease.................... 47 132
Accounts payable..................................................... 3,967 4,954
Accrued losses and other costs of discontinued operations, net....... 47 -
Accrued payroll...................................................... 716 616
Accrued expenses..................................................... 414 279
-------- --------
Total current liabilities....................................... 5,444 6,924
-------- --------
Long-term debt.......................................................... 5,091 1,968
-------- --------
Obligation under capital lease.......................................... - 12
-------- --------
Long-term line of credit................................................ 5,500 3,985
-------- --------
Stockholders' equity:
Common stock, $0.10 par value:
Authorized - 10,000,000 shares; issued and outstanding -
3,530,818 shares at July 4, 1998 and September 27, 1997............ 353 353
Additional paid-in capital........................................... 12,954 12,954
Accumulated deficit.................................................. (4,171) (2,652)
-------- --------
Total stockholders' equity........................................... 9,136 10,655
-------- --------
$ 25,171 $ 23,544
======== ========
<FN>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these financial statements.
</FN>
</TABLE>
<PAGE>
GREEN MOUNTAIN COFFEE, INC.
Consolidated Statement of Operations
(Dollars in thousands except per share data)
<TABLE>
Twelve weeks ended
----------------------------------
July 4, 1998 July 5, 1997
--------------- ---------------
(unaudited)
<S> <C> <C>
Net sales .................................................................. $ 12,675 $ 9,772
Cost of sales .............................................................. 8,090 6,302
----------- -----------
Gross profit............................................................ 4,585 3,470
Selling and operating expenses ............................................. 3,209 2,495
General and administrative expenses ........................................ 1,017 749
----------- -----------
Operating income ....................................................... 359 226
Other income ............................................................... 13 15
Interest expense........................................................... (241) (119)
----------- -----------
Income before income taxes ............................................. 131 122
Income tax expense ......................................................... (52) (46)
----------- -----------
Income from continuing operations .................................... 79 76
----------- -----------
Discontinued operations - Note 3:
Loss from discontinued retail stores operations to May 29, 1998, net
of income tax benefits of $37 and $46 for 1998 and 1997, respectively...... (56) (75)
Loss on disposal of retail stores, including provision of $342
for operating losses during the phase-out period, net of
income tax benefits of $834 ................................................ (1,259) -
----------- -----------
Net income (loss) ............................................. $ (1,236) $ 1
=========== ===========
Net income per share - continuing operations ............................. $ 0.02 $ 0.02
Net loss per share - discontinued operations ............................. $ (0.37) $ (0.02)
----------- -----------
Net income (loss) per share - basic and diluted .......................... $ (0.35) $ 0.00
=========== ===========
Weighted average shares .................................................. 3,530,818 3,424,035
=========== ===========
<FN>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these financial statements.
</FN>
</TABLE>
<PAGE>
GREEN MOUNTAIN COFFEE, INC.
Consolidated Statement of Operations
(Dollars in thousands except per share data)
<TABLE>
Forty weeks ended
---------------------------------
July 4, 1998 July 5, 1997
-------------- -------------
(unaudited)
<S> <C> <C>
Net sales.................................................................. $ 42,479 $ 31,393
Cost of sales.............................................................. 28,255 19,524
----------- -----------
Gross profit........................................................... 14,224 11,869
Selling and operating expenses............................................. 10,404 7,653
General and administrative expenses........................................ 3,228 2,487
Loss on abandonment of fixed assets ....................................... - 218
----------- -----------
Operating income....................................................... 592 1,511
Other income............................................................... 53 13
Interest expense........................................................... (647) (370)
----------- -----------
Income (loss) before income taxes...................................... (2) 1,154
Income tax benefit......................................................... 39 307
----------- -----------
Income from continuing operations...................................... 37 1,461
----------- -----------
Discontinued operations - Note 3:
Loss from discontinued retail stores operations to May 29, 1998, net
of income tax benefits of $196 and $100 for 1998 and 1997, respectively.... (297) (159)
Loss on disposal of retail stores, including provision of $342
for operating losses during the phase-out period, net of
income tax benefits of $834 .............................................. (1,259) -
----------- -----------
Net income (loss)...................................................... $ (1,519) $ 1,302
=========== ===========
Net income per share - continuing operations ............................ $ 0.01 $ 0.43
Net loss per share - discontinued operations............................. $ (0.44) $ (0.05)
----------- -----------
Net income (loss) per share - basic and diluted.......................... $ (0.43) $ 0.38
=========== ===========
Weighted average shares.................................................. 3,530,818 3,419,349
=========== ===========
<FN>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these financial statements.
</FN>
</TABLE>
<PAGE>
GREEN MOUNTAIN COFFEE, INC.
Consolidated Statement of Cash Flows
(Dollars in thousands)
<TABLE>
Forty weeks ended
----------------------------------
July 4, 1998 July 5, 1997
--------------- --------------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss).................................................... (1,519) 1,302
Net loss from discontinued operations ............................... 1,556 159
---------- ----------
Net income from continuing operations ............................... 37 1,461
Adjustments to reconcile net income to net cash
provided by operating activities - continuing operations:
Depreciation and amortization................................... 1,992 1,728
Loss (gain)on disposal of fixed assets......................... (42) 237
Provision for doubtful accounts................................. 273 112
Deferred income taxes........................................... (45) (349)
Changes in assets and liabilities:
Receivables.................................................. (1,446) (744)
Inventories.................................................. (852) (1,365)
Other current assets......................................... (83) (18)
Other long-term assets, net.................................. 6 (98)
Accounts payable............................................. (987) 536
Accrued payroll.............................................. 100 30
Accrued expenses............................................. 135 207
---------- ----------
Net cash provided by (used for) operating activities -
continuing operations........................................ (912) 1,737
---------- ----------
Net cash used for operating activities -
discontinued operations ..................................... (440) (124)
---------- ----------
Cash flows from investing activities - continuing operations:
Expenditures for fixed assets........................................ (2,902) (3,997)
Proceeds from disposals of fixed assets.............................. 119 65
---------- ----------
Net cash used for investing activities -
continuing operations........................................ (2,783) (3,932)
---------- ----------
Net cash used for investing activities -
discontinued operations ..................................... (188) (2)
---------- ----------
Cash flows from financing activities:
Issuance of common stock ............................................ - 64
Issuance of long-term debt........................................... 4,500 -
Repayment of long-term debt.......................................... (2,067) (768)
Principal payments under capital lease obligation.................... (97) (94)
Net change in revolving line of credit............................... 1,515 2,928
---------- ----------
Net cash provided by financing activities.................... 3,851 2,130
---------- ----------
Net decrease in cash and cash equivalents................................ (472) (191)
Cash and cash equivalents at beginning of period......................... 831 551
---------- ----------
Cash and cash equivalents at end of period............................... 359 360
========== ==========
<FN>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these financial statements.
</FN>
</TABLE>
<PAGE>
Green Mountain Coffee, 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 statement of the interim financial data have been included.
Results from operations for the twelve week period ended July 4, 1998
are not necessarily indicative of the results that may be expected for
the fiscal year ending September 26, 1998.
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, Inc. ("Green Mountain") for the year ended September
27, 1997.
Basic net income per share is computed based upon the weighted average
number of common shares outstanding during the period.
2. Inventories
Inventories consist of the following:
<TABLE>
July 4, September 27,
1998 1997
--------------- --------------
<S> <C> <C>
Raw materials and supplies......... $ 3,143,000 $ 2,148,000
Finished goods........................ 2,780,000 3,076,000
------------- -------------
$ 5,923,000 $ 5,224,000
============= =============
</TABLE>
3. Discontinued company-owned retail store operations
On May 29, 1998, Green Mountain announced that it had adopted a plan to
discontinue its Company-owned retail store operations. The Company is
planning to sell or close all of its retail stores by September 26,
1998, or as soon as practical thereafter. Accordingly, the retail
stores are reported as discontinued operations for all periods
presented. Under generally accepted accounting principles, the
operating results of such operations are being segregated from the
continuing operations and reported separately on the statement of
operations. A provision for anticipated losses on discontinued
operations through disposal date is based on management's best
estimates and is included in the current period.
The estimated loss on disposal of the retail store operations is
$1,259,000 (net of a tax benefit of $834,000). The pre-tax loss on
disposal of $2,093,000 consists of an estimated loss on disposal of the
business of $1,751,000 and a provision of $342,000 for anticipated
losses from May 29, 1998 (the measurement date) until disposal. The
loss on disposal includes provisions for estimated lease termination
costs, write-off of leasehold improvements and other fixed assets,
severance, and employee benefits.
Net sales from the retail store operations for the twelve weeks ended
July 4, 1998 and July 5, 1997 were $700,000 and $1,045,000,
respectively. Net sales from the retail store operations for the forty
weeks ended July 4, 1998 and July 5, 1997 were $3,033,000 and
$3,899,000, respectively.
The assets and liabilities of the discontinued retail operations at
July 4, 1998 are reflected as a net current liability in the
accompanying consolidated balance sheet. The net liabilities of the
discontinued operations in the July 4, 1998 balance sheet are
summarized as follows:
<PAGE>
(In thousands)
- - --------------------------------------------------------------------------------
Current assets $ 127
Fixed assets, net 892
Long-term deferred tax assets, net 834
Other long-term assets 52
Less provision for losses on assets (996)
------
Net realizable value of assets from discontinued operations 909
Estimated accrued costs on disposal of discontinued operations (956)
------
Net accrued losses and other costs of discontinued operations $ (47)
======
4. Line of credit and long-term debt
On February 20, 1998, the Company amended its credit facility with
Fleet Bank - NH ("Fleet"). Under the revised facility, the line of
credit has been increased from $6,000,000 to $9,000,000 (the
availability of which is subject to the Company's accounts receivable
and inventory levels) and the term was extended to March 31, 2001.
Under the amended facility, the Company was also able to borrow up to
$4,500,000 in term debt with a maturity of March 31, 2003. Borrowings
under this term revolver do not require principal repayments until
October 31, 1999, at which time monthly principal payments of $75,000
will commence. Interest rates for the entire facility will be equal to
the lower of Fleet's base rate or a margin added to LIBOR rates based
on a performance pricing structure. At July 4, 1998, the outstanding
balances on the line of credit and on the term revolver were $5,500,000
and $4,500,000, respectively. The Company's agreement with Fleet
contains various financial covenants. At July 4, 1998, the Company was
in compliance with these covenants.
On May 29, 1998, the Company entered into a standard International Swap
Dealers Association Inc. interest rate swap agreement with Fleet
National Bank in order to limit the effect of increases in the interest
rates on its floating debt. Under such agreement, any interest
differential is accrued as an interest rate change and is recorded in
interest expense. This agreement with a notional amount of $6 million
expires in May 2001. The effect of this agreement is to limit the
interest rate exposure to 5.84% (versus the 30-day LIBOR rate) plus a
margin based on a performance pricing structure on $4.5 million of the
Company's long-term revolver and $1.5 million of its line of credit.
Interest expense was not materially impacted by this agreement in the
twelve weeks ended July 4, 1998.
<PAGE>
5. Earnings per share
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 (SFAS 128),
"Earnings per Share". SFAS 128 establishes new standards for computing
and presenting earnings per share and was effective beginning with the
Company's first 1998 fiscal quarter. SFAS 128 replaces primary and
fully diluted earnings per share with basic and diluted earnings per
share and requires restatement of all previously reported earnings per
share data that are presented. For the periods presented in the
consolidated statement of operations, basic and diluted earnings per
share are the same.
6. Derivative instruments and hedging activities
On June 15, 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133 (SFAS 133),
"Accounting for Derivative Instruments and Hedging Activities". SFAS
133 is effective for all fiscal quarters of all fiscal years beginning
after June 15, 1999 (September 25, 1999 for the Company). SFAS 133
requires that all derivative instruments be recorded on the balance
sheet at their fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction. Management of
the Company anticipates that, due to its limited use of derivative
instruments, the adoption of SFAS 133 will not have a significant
effect on the Company's results of operations or its financial
position.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Green Mountain Coffee, Inc. (the "Company" or "Green Mountain"), a leader in the
specialty coffee industry, roasts over 25 high quality arabica coffees to
produce over 60 varieties of coffee that it sells under the Green Mountain
Coffee Roasters(R) brand. For the forty weeks ended July 4, 1998, Green
Mountain's wholesale operation contributed approximately 94.2% of net sales from
continuing operations. Green Mountain's wholesale operation sells coffee to
retailers and food service concerns including supermarkets, restaurants,
convenience stores, specialty food stores, hotels, universities and business
offices. The Company also has a direct mail operation serving customers
nationwide from its Waterbury, Vermont headquarters, which accounted for
approximately 5.8% of net sales from continuing operations during the same
period.
On May 29, 1998, Green Mountain announced that it had adopted a plan to
discontinue its company-owned retail stores operations. The Company is planning
to sell or close all of its retail stores by September 26, 1998, or as soon as
practical thereafter.
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 direct mail channels, including media and advertising
expenses, a portion of the Company's rental expense, and the salaries and
related expenses of employees directly supporting sales. General and
administrative expenses consist of expenses incurred for corporate support and
administration, including a portion of the Company's rental expense and the
salaries and related expenses of personnel not elsewhere categorized.
The Company's fiscal year ends on the last Saturday in September. The Company's
fiscal year normally consists of 13 four-week periods with the first, second and
third "quarters" ending 16 weeks, 28 weeks and 40 weeks, respectively, into the
fiscal year.
Coffee Prices, Availability and General Risk Factors
Green coffee commodity prices are subject to substantial price fluctuations
caused by multiple factors. During fiscal 1997, the "C" price of coffee (the
price per pound quoted by the Coffee, Sugar and Cocoa Exchange) increased
dramatically. In May 1997, the "C" price reached a high of over $3.00, up from
$1.04 on December 6, 1996. Since then, the "C" price of coffee has generally
declined, but remains high relative to historical levels. At July 31, 1998, the
"C" price of coffee for September delivery was $1.29. In addition to the "C"
price, coffee of the quality sought by Green Mountain also tends to trade on a
negotiated basis at a substantial premium or "differential". Since December
1996, differentials have been volatile and generally rising.
The Company believes that the cost of green coffee will continue to be volatile
throughout fiscal 1998. Because Green Mountain holds coffee inventories and
fixes the price of some of its green coffee in advance, the effect of "C" price
fluctuations on the Company's cost of goods is generally delayed. There can be
no assurance that the Company will be successful in passing increases in the
cost of green coffee on to customers without losses in sales volume or gross
margin. Similarly, rapid sharp decreases in the cost of green coffee could also
force the Company to lower sales prices before realizing cost reductions in its
green coffee inventory. Because Green Mountain roasts over 25 different types of
green coffee beans to produce its more than 60 varieties of coffee, if one type
of green coffee bean were to become unavailable or prohibitively expensive,
management believes Green Mountain could substitute another type of coffee of
equal or better quality, meeting a similar taste profile, in a blend or
temporarily remove that particular coffee from its product line. However,
frequent substitutions could lead to cost increases and fluctuations in gross
margins. Furthermore, a worldwide supply shortage of the high-quality arabica
coffees the Company purchases could have an adverse impact on the Company.
Certain statements contained herein are not based on historical fact and are
"forward-looking statements" within the meaning of the applicable securities
laws and regulations. Owing to the uncertainties inherent in forward-looking
statements, actual results could differ materially from those set forth in
forward-looking statements. Factors that could cause actual results to differ
materially from those in the forward-looking statements include, but are not
limited to, business conditions in the coffee industry and food industry in
general, the loss of a major customer, fluctuations in availability and cost of
green coffee, economic conditions, prevailing interest rates, competition, the
management challenges of rapid growth, variances from budgeted sales mix and
growth rate, consumer acceptance of the Company's new products, the impact of a
tighter job market, weather and special or unusual events, as well as other risk
factors described in the Company's Annual Report on Form 10-K for the year ended
September 27, 1997 and other factors described from time to time in the
Company's filings with the Securities and Exchange Commission. Forward-looking
statements reflect management's analysis as of the date of this document. The
Company does not undertake to revise these statements to reflect subsequent
developments.
Results of Operations
<TABLE>
Twelve weeks ended Forty weeks ended
------------------------------- -----------------------------------
July 4, 1998 July 5, 1997 July 4, 1998 July 5, 1997
-------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Net Sales:
Wholesale............................... 95.0 % 94.1 % 94.2 % 92.7 %
Direct mail............................. 5.0 % 5.9 % 5.8 % 7.3 %
------------- -------------- ------------- --------------
Net sales.................................... 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales................................ 63.9 % 64.5 % 66.5 % 62.2 %
------------- -------------- ------------- --------------
Gross profit............................ 36.1 % 35.5 % 33.5 % 37.8 %
Selling and operating expenses............... 25.3 % 25.5 % 24.5 % 24.4 %
General and administrative expenses.......... 8.0 % 7.7 % 7.6 % 7.9 %
Loss on abandonment of fixed assets.......... - - - 0.7 %
------------- -------------- ------------- --------------
Operating income........................ 2.8 % 2.3 % 1.4 % 4.8 %
Other income................................. 0.1 % 0.2 % 0.1 % 0.1 %
Interest expense............................. (1.9)% (1.2)% (1.5)% (1.2)%
------------- -------------- ------------- --------------
Income (loss) before taxes............... 1.0 % 1.3 % (0.0)% 3.7 %
Income tax benefit (expense)................. (0.4)% (0.5)% 0.1 % 1.0 %
------------- -------------- ------------- --------------
Income from continuing operations........... 0.6 % 0.8 % 0.1 % 4.7 %
------------- -------------- ------------- --------------
Loss from discontinued operations, net of
tax benefits................................. (0.5)% (0.8)% (0.7)% (0.5)%
Loss on disposal, net of tax benefits........ (9.9)% - (3.0)% -
------------- -------------- ------------- --------------
Net income (loss)....................... (9.8)% 0.0 % (3.6)% 4.2%
============= ============== ============= ==============
</TABLE>
Twelve weeks ended July 4, 1998 versus twelve weeks ended July 5, 1997
Net sales from continuing operations increased by $2,903,000, or 29.7%, from
$9,772,000 for the twelve weeks ended July 5, 1997 (the "1997 period") to
$12,675,000 for the twelve weeks ended July 4, 1998 (the "1998 period"). Coffee
pounds sold increased by approximately 404,000 pounds, or 29.1%, from
approximately 1,390,000 pounds in the 1997 period to approximately 1,794,000
pounds in the 1998 period.
The net sales increase is attributable to the wholesale area in which net sales
increased by $2,840,000, or 30.9%, from $9,200,000 for the 1997 period to
$12,040,000 for the 1998 period. The wholesale net sales increase resulted
primarily from the growth of certain large accounts in the office coffee
service, convenience store and supermarket categories.
The Company expects to start lowering prices on some of its coffee products in
the fourth fiscal quarter of 1998 to reflect the recent decrease in the "C"
price of coffee. This could lead to the percentage growth in pounds sold
becoming greater than the percentage growth in dollar sales in future quarters.
Gross profit from continuing operations increased by $1,115,000, or 32.1%, from
$3,470,000 for the 1997 period to $4,585,000 for the 1998 period. As a
percentage of net sales, gross profit increased 0.6 percentage points from 35.5%
for the 1997 period to 36.1% for the 1998 period. This increase is primarily
attributable to a decrease in green coffee costs, which was partially offset by
changes in the wholesale customer category mix with a higher year-over-year
percentage of sales to office coffee service distributors which carry lower
gross margins.
Selling and operating expenses increased by $714,000, or 28.6%, from $2,495,000
for the 1997 period to $3,209,000 for the 1998 period. The increase in selling
and operating expense was primarily due to increased sales and sales support
personnel expenses, as well as increased promotional and marketing expenses.
Selling and operating expenses decreased 0.2 percentage points as a percentage
of sales from 25.5% for the 1997 period to 25.3% for the 1998 period.
General and administrative expenses increased by $268,000, or 35.8%, from
$749,000 for the 1997 period to $1,017,000 for the 1998 period, and increased
0.3 percentage points as a percentage of sales from 7.7% for the 1997 period to
8.0% for the 1998 period. The increase in general and administrative expenses is
primarily related to expenses in support of the implementation of the Company's
new enterprise information system and to higher personnel-related expenses.
Interest expense increased by $122,000, or 102.5%, from $119,000 for the 1997
period to $241,000 for the 1998 period as a result of additional borrowings to
fund both working capital needs and capital expenditures to support the
Company's growth.
As a result of the foregoing, income from continuing operations increased by
$3,000, or 3.9%, from $76,000, or $0.02 per share, for the 1997 period to
$79,000, or $0.02 per share, for the 1998 period.
At the beginning of the 1998 fiscal year, the Company started to re-evaluate the
role of its retail operation in the context of its overall growth strategy.
Since the Company's founding in 1981, the company-owned retail stores have been
an important part of the Company's strategy of getting customers to sample Green
Mountain's coffee by the cup. Now, with over 5,000 wholesale customers, most of
which serve Green Mountain's coffee by the cup, the strategic value of the
company-owned retail stores is diminished. Although the retail operation
generates a higher gross profit as a percentage of sales than Green Mountain's
wholesale business, it does not benefit from the same economies of scale in
selling and operating expenses. On May 29, 1998, the Company announced that it
was intending to sell or close its remaining stores by September 26, 1998, or as
soon as practical thereafter.
Due to the phase-out of company-owned retail store operations, net sales from
the discontinued retail operations declined $345,000, or 33.0%, from $1,045,000
in the 1997 period to $700,000 in the 1998 period. The net loss from
discontinued operations decreased by $19,000, or 25.3%, from $75,000 in the 1997
period to $56,000 in the 1998 period through the May 29, 1998 measurement date.
In the 1998 period, the Company also recorded a $1,259,000 loss on disposal, net
of tax benefits of $834,000. The pre-tax $2,093,000 charge includes provisions
for estimated lease termination costs, the write-off of retail fixed assets,
severance and employee benefits, as well as a provision of $342,000 for
anticipated losses from the May 29, 1998 measurement date until final disposal
of each of the stores.
Net income decreased by $1,237,000 from a net income of $1,000, or $0.00 per
share, for the 1997 period to a net loss of $1,236,000, or $0.35 per share, for
the 1998 period.
Forty weeks ended July 4, 1998 versus forty weeks ended July 5, 1997
Net sales from continuing operations increased by $11,086,000, or 35.3%, from
$31,393,000 for the forty weeks ended July 5, 1997 (the "1997 YTD period") to
$42,479,000 for the forty weeks ended July 4, 1998 (the "1998 YTD period").
Coffee pounds sold increased by approximately 1,174,000 pounds, or 25.0%, from
approximately 4,692,000 pounds in the 1997 YTD period to approximately 5,866,000
pounds in the 1998 YTD period. The difference between the percentage increase in
net sales and the percentage increase in coffee pounds relates primarily to net
year-over-year increases in Green Mountain's selling prices for coffee.
The net sales increase is attributable to the wholesale area in which net sales
increased by $10,926,000, or 37.6 %, from $29,091,000 for the 1997 YTD period to
$40,017,000 for the 1998 YTD period. The wholesale net sales increase resulted
primarily from the growth of certain large accounts in the office coffee
service, convenience store and supermarket categories.
Gross profit from continuing operations increased by $2,355,000, or 19.8%, from
$11,869,000 for the 1997 YTD period to $14,224,000 for the 1998 YTD period. As a
percentage of net sales, gross profit declined 4.3 percentage points from 37.8%
for the 1997 YTD period to 33.5% for the 1998 YTD period. The decrease as a
percentage of sales is primarily due to the mathematical impact of higher prices
and higher green coffee costs as well as a change in wholesale customer category
mix.
Selling and operating expenses increased by $2,751,000, or 35.9%, from
$7,653,000 for the 1997 YTD period to $10,404,000 for the 1998 YTD period.
Selling and operating expenses increased 0.1 percentage points as a percentage
of sales from 24.4% for the 1997 YTD period to 24.5% for the 1998 YTD period.
The increase in selling and operating expense was primarily due to added
personnel expenses and promotional expenses in support of the Company's
strategic effort to increase its growth rate.
General and administrative expenses increased by $741,000, or 29.8%, from
$2,487,000 for the 1997 YTD period to $3,228,000 for the 1998 YTD period. This
represented a decrease of 0.3 percentage points as a percentage of sales from
7.9% for the 1997 YTD period to 7.6% for the 1998 YTD period. The increase in
general and administrative expenses was primarily due to added personnel and
expenses related to the implementation of the Company's new enterprise
information system.
During the second fiscal quarter of 1997, Green Mountain commenced the expansion
of its central production and distribution facility in Waterbury, Vermont. The
Company recorded a loss on abandonment of equipment of $218,000 during the 1997
YTD period due to the demolition of an old, adjacent office building and the
redesign of the production flow to be used in the expanded facility. This 45,000
square foot expansion is now complete, and has been used for expanded
warehousing and distribution space since the beginning of the second quarter of
1998, with roasting and packaging machinery being added as needed. It is
estimated that the addition carries incremental annual occupancy costs of
approximately $400,000.
Operating income decreased by $919,000, or 60.8%, from $1,511,000 for the 1997
YTD period to $592,000 for the 1998 YTD period. This decline was primarily due
to increased fixed operating costs related to the Company's recent investments
in its sales and sales support personnel, its information systems infrastructure
and the plant expansion. Green Mountain is in the process of implementing an
enterprise information system which it expects to use to facilitate growth and
improve operations and customer service. This new enterprise information system
also addresses Green Mountain's core "Year 2000" issues. The additional project
related personnel, depreciation and software maintenance expenses (of
approximately $1,000,000 for fiscal 1998) is expected to continue to impact
operating expenses and, to a lesser extent, cost of goods sold.
The income tax benefit recognized under SFAS 109 was $39,000 in the 1998 YTD
period compared to $307,000 for the 1997 YTD period. The Company reduced its
deferred tax asset valuation allowance by $562,000 during the second quarter of
1997 because, based on the weight of available evidence, as prescribed by SFAS
109, Green Mountain was more likely than not to realize a large amount of its
deferred tax assets.
As a results of the foregoing, income from continuing operations decreased by
$1,424,000, from $1,461,000, or $0.43 per share, for the 1997 YTD period to
$37,000, or $0.01 per share, for the 1998 YTD period.
Net sales from the discontinued retail store operations declined $866,000 or
22.2% from $3,899,000 in the 1997 YTD period to $3,033,000 in the 1998 YTD
period. The net loss from discontinued operations increased by $138,000, or
86.8%, from $159,000 in the 1997 YTD period to $297,000 from September 28,1997
until the May 29, 1998 measurement date. In addition, the Company recorded a
$1,259,000 loss on disposal charge in the 1998 YTD period, as discussed above.
Liquidity and Capital Resources
Working capital increased $2,950,000 from $4,491,000 at September 27, 1997 to
$7,441,000 at July 4, 1998. This increase is primarily related to higher
accounts receivable due to customer terms becoming generally longer in
conjunction with the change in wholesale customer mix and certain accounts
receivable system conversion issues; lower accounts payable due to the lower
level of capital expenditures; higher inventories; and the reduction of the
current portion of long-term debt due to the amendment of the Company's credit
facility (see below). The higher inventory results primarily from a Company
decision to keep larger quantities of raw material inventory on hand to ensure a
reliable supply of high quality coffee at reasonable cost.
Cash used for capital expenditures, excluding company-owned retail stores,
aggregated $2,902,000 during the 1998 YTD period, and included $1,244,000 for
equipment on loan to wholesale customers, $789,000 for leasehold improvements,
$318,000 for production equipment, and $425,000 for computer hardware and
software. During the 1997 YTD period, Green Mountain had non-retail stores
capital expenditures of $3,997,000, including $670,000 for equipment on loan to
wholesale customers, $627,000 for production and distribution equipment and
$2,130,000 for computer hardware and software. Cash used to fund capital
expenditures in the 1998 YTD period was obtained from net cash provided by
financing activities.
The Company currently plans to make capital expenditures in fiscal 1998 of
approximately $4,000,000. Management continuously reviews capital expenditure
needs and actual amounts expended may differ from these estimates.
On February 20, 1998, the Company amended its credit facility with Fleet Bank -
NH ("Fleet"). Under the revised facility, the line of credit has been increased
from $6,000,000 to $9,000,000 (the availability of which is subject to the
Company's accounts receivable and inventory levels) and the term was extended to
March 31, 2001. At July 4, 1998, the total availability under the line of credit
was $6,972,000 and the outstanding balance was $5,500,000. Under the amended
facility, the Company was also able to borrow up to $4,500,000 in term debt with
a maturity of March 31, 2003. Borrowings under this term revolver do not require
principal repayments until October 31, 1999, at which time monthly principal
payments of $75,000 will commence. At July 4, 1998, $4,500,000 of this term debt
was outstanding. The Company's agreement with Fleet contains various financial
covenants. At July 4, 1998, the Company was in compliance with all of its
covenants.
In addition, on May 29, 1998, the Company entered into a standard International
Swap Dealers Association, Inc. interest rate swap agreement with Fleet National
Bank in order to limit the effect of increases in the interest rates on its
floating debt. This agreement with a notional amount of $6 million expires in
May 2001. The effect of this agreement is to limit the interest rate exposure to
5.84% (versus the 30-day LIBOR rate) plus a margin based on a performance
pricing structure on $4.5 million of the Company's long-term revolver and $1.5
million of its line of credit. The interest rate for the remainder of the line
of credit is equal to the lower of LIBOR rates plus a margin and Fleet's base
rate. The margin based on Company performance was 2.5% for the line of credit
and 2.75% for the term debt at July 4, 1998.
Management believes that cash flow from operations, existing cash and available
borrowings under its credit facility and other sources will provide sufficient
liquidity to pay its liabilities in the normal course of business, fund capital
expenditures and service debt requirements for the remainder of calendar 1998.
Year 2000
Management is in the process of completing its assessment of the impact of the
Year 2000 problem on its operational and financial reporting systems and has
developed a plan to correct critical systems before they fail. All of the core
functions of the wholesale operation such as order fulfillment and billing are
now on Peoplesoft, which is Year 2000 compliant. All of the accounting functions
necessary for day-to-day operations and the preparation of financial statements
have also been migrated to Peoplesoft. The Company believes that it has
sufficient time and resources to complete the conversion (or upgrade of the
existing software wherever possible) of the remainder of its core applications
to make them Year 2000 compliant, including human resources, asset management,
service management, and order management for its direct mail operation.
Green Mountain does not expect to encounter major problems with its PC hardware
and operating system, but is still in the process of evaluating other
operational systems, including, but not limited to, the Company's PBX, voice
mail, and roaster automation systems. In addition, while the Company is working
closely with its major suppliers on identifying areas of non-compliance and
resolving them, it has decided that it would be impractical to contact every
supplier to assess the possible effects of Year 2000 software failures on their
internal operations, which could in turn effect the Company's operations.
Management expects to have addressed most issues pertaining to the Year 2000
problem by the end of fiscal 1999. However, the Company can give no assurance
that this will occur, and failure to make appropriate systems changes
successfully could have a material adverse impact on the Company's operations.
Deferred Income Taxes
The Company had net deferred tax assets of $2,426,000 at July 4, 1998, of which
$834,000 is attributable to the loss on disposal of the retail store operations.
These assets are reported net of a deferred tax asset valuation allowance at
that date of $2,335,000 (including $2,306,000 primarily related to a Vermont
investment tax credit). Presently, the Company believes that the deferred tax
assets, net of deferred tax liabilities and the valuation allowance, are
realizable and represent management's best estimate, based on the weight of
available evidence as prescribed in SFAS 109, of the amount of deferred tax
assets which most likely will be realized. However, management will continue to
evaluate the amount of the valuation allowance based on near-term operating
results and longer-term projections.
Factors Affecting Quarterly Performance
Historically, the Company has experienced significant variations in sales from
quarter to quarter due to the holiday season and a variety of other factors,
including, but not limited to, general economic trends, the cost of green
coffee, competition, marketing programs, weather and special or unusual events.
Because of the seasonality of the Company's business, results for any quarter
are not necessarily indicative of the results that may be achieved for the full
fiscal year.
<PAGE>
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
3.1 Certificate of Incorporation (1)
3.2 Bylaws (1)
27 Financial Data Schedule
(b) On June 11, 1998, the Registrant filed a Form 8-K in which was reported,
under Item 5, the plan to close or sell all of the its company-owned retail
stores.
- - ----------
(1)Incorporated by reference to the corresponding exhibit number in the
Registration Statement on Form SB-2 (Registration No. 33-66646) filed on July
28, 1993, and declared effective on September 21, 1993.
<PAGE>
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, INC.
Date: 8/14/98 By: /s/ Robert P. Stiller
---------- ---------------------------------------------------------
Robert P. Stiller,
President and Chief Executive Officer
Date: 8/14/98 By: /s/ Robert D. Britt
---------- ---------------------------------------------------------
Robert D. Britt,
Chief Financial Officer, Treasurer and Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Balance
Sheet dated 7/4/98 and the Statement of Operations for the twelve weeks ended
7/4/98 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> SEP-26-1998
<PERIOD-START> APR-12-1998
<PERIOD-END> JUL-4-1998
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